THIRD QUARTER FILING ON 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
OCTOBER 30, 1999
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
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(Address of principal executive offices, including zip code)
(518) 452-1242
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(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,
53,039,697 shares outstanding as of November 27, 1999
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Form 10-Q
Page No.
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PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
October 30, 1999, January 30, 1999
and October 31, 1998 2
Condensed Consolidated Statements of Income -
Thirteen Weeks Ended and Thirty-Nine Weeks
Ended October 30, 1999 and October 31, 1998 3
Condensed Consolidated Statements of Cash Flows -
Thirty-Nine Weeks Ended October 30, 1999 and
October 31, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 11
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
(unaudited)
October 30, January 30, October 31,
ASSETS 1999 1999 1998
-----------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 86,682 $ 139,411 $ 24,275
Merchandise inventory 495,744 426,078 471,268
Current deferred tax asset 4,502 633 5,405
Other current assets 18,482 15,182 10,939
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Total current assets 605,410 581,304 511,887
---------- --------- -----------
VIDEOCASSETTE RENTAL INVENTORY, net 1,102 1,238 3,672
DEFERRED TAX ASSET 32,278 29,580 26,524
NET FIXED ASSETS 141,796 139,124 140,178
OTHER ASSETS 43,495 47,364 48,663
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TOTAL ASSETS $ 824,081 $ 798,610 $ 730,924
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 313,516 $ 220,636 $ 243,562
Notes payable --- --- 14,304
Accrued expenses and other 26,024 68,597 29,193
Store closing reserve --- --- 6,580
Current portion of long-term debt
and capital lease obligations 5,072 4,802 7,279
Income taxes payable --- 12,734 709
---------- ---------- -----------
Total current liabilities 344,612 306,769 301,627
---------- ---------- -----------
LONG-TERM DEBT, less current portion --- 20,000 20,000
CAPITAL LEASE OBLIGATIONS, less
current portion 19,666 16,065 15,938
OTHER LIABILITIES 18,541 23,400 20,285
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TOTAL LIABILITIES 382,819 366,234 357,850
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SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value;
5,000,000 shares authorized;
none issued) --- --- ---
Common stock ($.01 par value;
200,000,000 shares authorized;
53,065,264, 52,185,258 and
52,160,259 shares issued, respectively) 531 522 522
Additional paid-in capital 280,152 271,805 262,820
Treasury stock, at cost (104,432,
105,432 and 105,432 shares,
respectively) (386) (390) (390)
Unearned compensation - restricted stock (376) (78) (142)
Retained earnings 161,341 160,517 110,264
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TOTAL SHAREHOLDERS' EQUITY 441,262 432,376 373,074
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 824,081 $ 798,610 $ 730,924
========= ========== ===========
See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------- --------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------------------- --------------------------
Sales $ 275,968 $ 270,706 $ 840,262 $ 784,650
Cost of sales 178,987 169,267 535,767 496,986
---------- ----------- ----------- -----------
Gross profit 96,981 101,439 304,495 287,664
Selling, general and
administrative expenses 90,576 93,656 276,569 268,123
Costs related to the
Camelot merger --- --- 25,721 ---
---------- ----------- ----------- -----------
Income from operations 6,405 7,783 2,205 19,541
Interest expense (income) (108) 1,403 784 2,218
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Income before income taxes 6,513 6,380 1,421 17,323
Income tax expense 2,736 2,637 597 7,845
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NET INCOME $ 3,777 $ 3,743 $ 824 $ 9,478
========== =========== =========== ===========
BASIC EARNINGS
PER SHARE $ 0.07 $ 0.07 $ 0.02 $ 0.19
========== =========== =========== ===========
Weighted average number of
common shares outstanding 52,775 51,901 52,313 50,833
========== =========== =========== ===========
DILUTED EARNINGS
PER SHARE $ 0.07 $ 0.07 $ 0.02 $ 0.18
========== =========== =========== ===========
Adjusted weighted average
number of common shares
outstanding 53,974 53,991 53,177 53,342
========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirty-Nine Weeks Ended
--------------------------
October 30, October 31,
1999 1998
--------------------------
NET CASH USED BY OPERATING ACTIVITIES: ($ 7,680) ($ 83,013)
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INVESTING ACTIVITIES:
Acquisition of property and equipment (37,067) (45,603)
Acquisition of businesses, net of cash acquired --- (100,380)
Disposal of rental inventory, net 136 427
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Net cash used by investing activities (36,931) (145,556)
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FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 77,100
Proceeds from capital lease 8,436 12,608
Payments of long-term debt and capital
lease obligations (24,565) (82,455)
Net increase in revolving line of credit --- 25,000
Proceeds from issuance of common stock --- 36,772
Exercise of stock options 8,011 2,783
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Net cash provided (used) by financing activities (8,118) 71,808
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Net decrease in cash and cash equivalents (52,729) (156,761)
Cash and cash equivalents, beginning of period 139,411 181,036
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Cash and cash equivalents, end of period $ 86,682 $ 24,275
=========== ===========
Supplemental disclosure of non-cash investing
and financing activities:
Income tax benefit resulting from exercise
of stock options $ 1,081 $ 6,155
Issuance of treasury stock under incentive
stock programs 13 13
See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 30, 1999 (unaudited) and October 31, 1998 (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.
On April 22, 1999, the Company acquired all of the issued and outstanding common
stock of Camelot Music Holdings, Inc. ("Camelot") pursuant to the terms of an
Agreement and Plan of Merger, dated October 26, 1998, by CAQ Corporation, a
wholly-owned subsidiary of the Company, with and into Camelot. Upon completion
of the merger, Camelot became a wholly-owned subsidiary of the Company. The
merger was accounted for as a tax-free pooling-of-interests. All financial and
per share information for prior periods has been restated to reflect the results
of the combined company.
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
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 January 30, 1999.
Note 2. Seasonality
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.
Note 3. Depreciation and Amortization
Depreciation and amortization of video cassette rental inventory included in
cost of sales totaled $180,000 and $245,000 for the thirteen week periods ended
October 30, 1999 and October 31, 1998, respectively. Depreciation and
amortization of video cassette rental inventory included in cost of sales
totaled $680,000 and $1.0 million for the thirty-nine week periods ended October
30, 1999 and October 31, 1998, respectively.
Depreciation and amortization of fixed assets for the companies' distribution
centers is included in the condensed consolidated statements of income in cost
of sales and was $410,000 and $407,000 for the thirteen week periods ended
October 30, 1999 and October 31, 1998, respectively. For the thirty-nine week
periods ended October 30, 1999 and October 31, 1998, depreciation and
amortization of fixed assets for the companies' distribution centers included in
the condensed consolidated statements of income in cost of sales was $1.2
million in both periods. Depreciation and amortization for the remaining fixed
assets is included in Selling, General & Administrative expenses and was $9.4
million and $9.7 million for the thirteen week periods ended October 30, 1999
and October 31, 1998, respectively. Depreciation and amortization included
in Selling, General & Administrative expenses was $26.7 million and $23.9
million for the thirty-nine week periods ended October 30, 1999 and October 31,
1998, respectively.
Note 4. Earnings Per Share
The Company discloses basic earnings per share and diluted earnings per share
based on Financial Accounting Standards Board Statement No. 128, "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 average common shares
outstanding plus the weighted average shares that would have been outstanding if
the potentially dilutive common shares had been issued for the Company's common
stock options from the Company's stock option plans. For the thirteen week
periods ended October 30, 1999 and October 31, 1998, the additional potentially
dilutive common shares included in the diluted earnings per share were 1.2
million and 2.1 million, respectively. All stock options to purchase shares of
common stock which were outstanding
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 30, 1999 (unaudited) and October 31, 1998 (unaudited)
(continued)
Note 4. Earnings Per Share (continued)
during the thirteen week periods ended October 30, 1999 and October 31, 1998,
respectively, were included in the computation of diluted earnings per share.
For the thirty-nine week periods ended October 30, 1999 and October 31, 1998,
the additional potentially dilutive common shares included in the diluted
earnings per share calculation were 864,000 and 2.5 million, respectively. All
stock options to purchase shares of common stock which were outstanding during
the thirty-nine week periods ended October 30, 1999 and October 31, 1998,
respectively, were included in the computation of diluted earnings per share.
Note 5. Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," issued in June 1998, as amended
by SFAS No. 137, is effective for all quarters of fiscal years beginning after
June 15, 2000, and will require companies to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Management has evaluated the impact of the new rules
on the Company's consolidated financial statements and concluded that there will
be no impact on its current results of operations or its financial position.
The Accounting Standards Executive Committee's Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998, requires that certain costs of computer software
developed or obtained for internal use be capitalized. The Company adopted SOP
98-1 for the fiscal year beginning January 31, 1999. The application of this
statement to the Company's consolidated financial statements did not have a
material impact on its results of operations or its financial position because a
substantial portion of the Company's software is purchased from outside vendors.
The Accounting Standards Executive Committee's Statement of Position 98-5 ("SOP
98-5"), "Accounting for the Costs of Start-up Activities," issued in April 1998
and effective for fiscal years beginning after December 15, 1998, requires
start-up costs and organization costs to be expensed as incurred. The Company
adopted SOP 98-5 for the fiscal year beginning January 31, 1999. The
application of this statement to the Company's consolidated financial statements
did not have a material impact on its results of operations or its financial
position because such costs are already being expensed as incurred.
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 October 30, 1999 Compared to the Thirteen Weeks Ended
October 31, 1998
Sales. The Company's total sales increased 2% to $276.0 million for the
thirteen week period ended October 30, 1999, compared to $270.7 million for the
same period last year. The increase was primarily attributable to the addition
of new stores and a comparable store sales increase of 1%. Comparable store
sales for the recently acquired Camelot stores decrease 4%, while comparable
store sales excluding the Camelot stores increased 5%.
Gross Profit. Gross profit, as a percentage of sales, decreased to 35.1% for
the thirteen week period ended October 30, 1999 compared to 37.5% for the same
period in 1998. The decrease is primarily due to higher shrink results in the
recently acquired Camelot stores. The Company has taken action to reduce shrink
at the Camelot stores, including implementing policies and procedures which have
successfully kept shrink at reduced levels in the existing Trans World stores.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, expressed as a percentage of sales, decreased from
34.6% to 32.8% in the thirteen week period ended October 30, 1999 when compared
to the same period in 1998. The improvement is primarily due the reduction of
administrative expenses resulting from the acquisition of Camelot.
Interest Expense (Income). Net interest income was $108,000 in the thirteen
week period ended October 30, 1999 compared to net interest expense of $1.4
million in 1998. The improvement in interest is due to the reduction in
long-term debt and increased income from invested cash balances.
Income Tax Expense. The Company's effective tax rate increased to 42.0% for the
thirteen week period ended October 30, 1999 from 41.3% for the thirteen week
period ended October 31, 1998. The increase is due to the Company incurring
non-deductible expenses related to the Camelot acquisition.
Net Income. The Company increased its net income to $3.8 million for the
thirteen weeks ended October 30, 1999 from net income of $3.7 million for the
same period in 1998. The improved bottom line performance is attributable to
the increased sales, reduced S,G&A expenses and improved interest income,
partially offset by the decrease in gross margin.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
RESULTS OF OPERATIONS (continued)
Thirty-Nine Weeks Ended October 30, 1999 Compared to the Thirty-Nine Weeks Ended
October 31, 1998
Sales. The Company's total sales increased 7% to $840.3 million for the
thirty-nine week period ended October 30, 1999 compared to $784.6 million for
the same period last year. Comparable store sales increased 1%. Comparable
store sales for the recently acquired Camelot stores decreased 3%, while the
comparable store sales for the remaining stores excluding Camelot increased 5%.
Gross Profit. Gross profit as a percentage of sales decreased to 36.2% in the
thirty-nine week period ended October 30, 1999 compared to 36.7% for the same
period in 1998. The decrease is due to higher shrink results in the recently
acquired Camelot stores. The Company has taken action to reduce shrink at the
Camelot stores, including implementing policies and procedures which have
succesfully kept shrink at reduced levels in the existing Trans World stores.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, decreased to 32.9%
in the first thirty-nine weeks of 1999 from 34.1% in the first thirty-nine weeks
of 1998. The improvement is primarily due to the leveraging of operating
expenses on higher sales and the reduction of administrative expenses resulting
from the acquisition of Camelot.
Costs related to the Camelot merger. A one-time pre-tax charge of $25.7 million
for costs related to the merger with Camelot was taken in the thirty-nine week
period ended October 30, 1999. The charge includes a write-off of redundant
assets between the two companies of $8 million, investment banking fees and
other professional costs of $10 million, printing and mailing costs for the
joint proxy/prospectus filed on March 29, 1999 of $2 million, system and
integration costs of $2 million and severance costs of $4 million.
Interest Expense. Net interest expense was $784,000 in the thirty-nine week
period ended October 30, 1999 compared to $2.2 million for the thirty-nine week
period ended October 31, 1998. The decrease in interest expense is due to the
reduction in long-term debt and increased income from invested cash balances.
Income Tax Expense. The Company's effective tax rate decreased to 42.0% for the
thirty-nine week period ended October 30, 1999 from 45.3% for the thirty-nine
week period ended October 31, 1998. The Company's 1998 tax rate was impacted by
non-deductible expenses for the issuance of stock options. During 1999, the
Company's effective tax rate was impacted by the non-deductibility of certain
expenses related to the Camelot merger.
Net Income. The Company had net income of $824,000 in the thirty-nine week
period ended October 30, 1999 compared to net income of $9.5 million during the
same period last year. The decrease in net income was caused by the $25.7
million one-time Camelot merger charge. Excluding the one-time merger charge,
the resultant increase in net income is due to the increase in sales and the
leveraging of S,G&A expenses. The after-tax effect of the $25.7 million Camelot
merger charge reduced earnings from $0.29 per diluted share to $0.02 per diluted
share.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Cash generated from operations is the Company's primary source of
liquidity. The Company had unused lines of credit aggregating $100 million at
October 30, 1999.
The Company's working capital at October 30, 1999 was $260.8 million and its
ratio of current assets to current liabilities was 1.8 to 1.0. During the
thirty-nine week period ended October 30, 1999, the Company's net cash used by
operations was $7.9 million, compared to $83.0 million in the same period of
1998. The most significant uses of cash for operating purposes were a $69.7
million increase in inventory and a $42.6 million reduction in accrued expenses,
partially offset by a $92.9 million increase in accounts payable.
Capital Resources. On April 22, 1999, the Company acquired by merger Camelot
Music Holdings, Inc., a Delaware corporation ("Camelot") by issuing 1.9 shares
of the Company's common stock in exchange for each share of Camelot's
outstanding common stock. Upon consummation of the merger, Camelot became a
wholly-owned subsidiary of the Company. The Company gained an additional 483
stores and 2.1 million square feet of selling space, as a result of the merger.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
LIQUIDITY AND CAPITAL RESOURCES(continued)
The merger was accounted for as a tax-free pooling-of-interests. All financial
and per share information for prior periods have been restated to reflect the
results of the combined company.
During the thirty-nine week period ended October 30, 1999, the Company had
capital expenditures of $37.1 million. $8.8 million of the total capital
expenditures made so far this year were for upgrading the point-of-sale register
system in the Camelot stores. During the thirty-nine week period ended October
30, 1999, the Company opened 31 stores, relocated 25 stores and closed 64
stores.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of the business risks related to the
Year 2000 issue. The results of the assessment indicated that:
- awareness of Year 2000 issues is well known throughout the
Company;
- the assessment of Year 2000 sensitive items is complete;
- renovation of the core information technology ("IT") systems has
been completed;
- third-party compliance tracking is complete; and
- verification of embedded chip ("non-IT") system readiness for
Year 2000 compliance is complete.
The Company's Year 2000 issue remediation process included the following phases:
Awareness, Assessment, Renovation, Validation, and Implementation. As indicated
above, all phases are complete. The Awareness phase included establishing an
internal Year 2000 committee, interviewing key Company personnel at all levels,
including those at the stores, distribution center and home office, and vendor
compliance tracking. Activities in the Assessment phase included contacting
merchandise vendors regarding their Year 2000 remediation activities,
discussions with the Company's software vendors and service providers,
identification of all source code and all imbedded chip logic that could contain
date logic, analyzing source codes for the Company systems identifying each
individual occurrence of date logic, and simulating the Year 2000 environment by
rolling forward the date in test files of its principal IT systems. For the
Renovation phase, all core IT system programming modifications have been
completed by the Company's systems development staff. The system programming
modifications included upgrading the distribution, inventory management and
accounting systems and installation of new Year 2000 compliant POS registers and
software. Installation of the new POS system and software in the Trans World
stores was completed during the second quarter of fiscal 1998. This POS system
was installed in the recently acquired Camelot stores during the second quarter
of fiscal 1999. Replacements for the other (non-core) IT systems are being
implemented on schedule. The non-core IT systems being replaced include a
system for tracking the opening of new stores and a system for managing lease
payments. Activities in the Validation and Implementation phases included
formal systems testing for both IT and non-IT systems. The Company processed
daily, weekly and monthly transactions on the main corporate IT systems
platform, IBM AS/400. The compliance testing was completed in a dedicated
environment within the AS/400 to assure acceptance of all transactions in the
year 2000. As a result of the formal systems testing, a minimal amount of
remediation work is required to upgrade or modify programming on non-core
applications. All remaining work is being completed by the Company's system
development staff and will be completed by December 31, 1999.
The Company previously evaluated the pre-merger Year 2000 compliance efforts of
Camelot Music and determined that third party compliance tracking and
verification of non-IT system readiness for Year 2000 compliance needed to be
completed. During the second quarter of fiscal 1999 the Core IT systems,
including inventory management, accounting and POS were replaced by Trans World
systems which were evaluated as part of the Company's Validation and
Implementation phases. Additionally, those Camelot systems that were not
replaced, including the systems used in the Canton distribution center, were
tested to validate the vendor compliance representations.
The Company is exposed to both internal and external Year 2000 risks. Internal
risks exist due to the Company's dependence on its IT and non-IT systems. The
Company is dependent on its IT and non-IT systems for many of its
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
YEAR 2000 COMPLIANCE (continued)
everyday operations including inventory management, merchandise distribution,
cash management, accounting and financial reporting. The Company utilizes a
variety of vendors for its system needs. The Company had discussions with its
vendors and monitored their Year 2000 compliance programs and the compliance of
their merchandise or services with required standards. Although the majority of
these vendors represent that their products are Year 2000 compliant, the Company
performed testing to validate the vendor representations. Contingency plans for
failure of internal systems include implementing manual procedures.
External risks are represented by the fact that the Company utilizes
approximately 2,700 different suppliers in the normal course of its business.
Five major merchandise vendors account for approximately 71% of all purchases.
Additionally, 50 other merchandise vendors account for nearly 15% of purchases.
The Company is also dependent on financial institutions for consolidation of
cash collections, and for cash payments. Although the Company uses its own
trucks for shipment of merchandise to approximately 20% of its stores, the
Company does rely on a number of trucking companies for the remainder of its
merchandise distribution. Evaluation of the Company's vendors' Year 2000
readiness began in the fourth quarter of 1998, and was completed during the
second quarter of fiscal 1999. After completion of the assessment of vendor
readiness, contingency plans were developed for all third parties where Year
2000 compliance appears to be at risk.
The Company presently believes that its most likely worst-case Year 2000
scenarios would relate to the possible failure in one or more geographic regions
of third-party systems over which the Company has no control and for which it
has no ready substitute, such as, but not limited to, power and
telecommunications services. Each store has a "crash kit" which allows it to
operate without power and telecommunications services and includes the ability
to manually process all sales transactions. However, in the event of a power
disruption, it is highly unlikely that a store would be open for business due to
the lack of lighting and the security-related concerns. The Company has in
place a disaster recovery plan that addresses recovery from various kinds of
disasters, including recovery from significant interruptions to data flows and
distribution capabilities at its data systems center and distribution center.
The Company's disaster recovery plan provides specific routines for actions,
personnel assignments and back-up arrangements to ensure effective response to a
disaster affecting key business functions including merchandise replenishment,
cash management and distribution center operations. Common routines and back up
arrangements include off-site storage of information, manual processing of
critical applications and the establishment of a chain of communication for key
personnel. The Company is using that plan to further develop specific Year 2000
contingency plans identified by its third-party assessment phase which will
emphasize locating alternate sources of supply, methods of distribution and ways
of processing information.
The Company's direct costs for its Year 2000 remediation efforts total $721,000
to date, as of October 30, 1999. All costs to address Year 2000 issues
identified as a result of remediation testing have been paid. These costs do
not include expenditures made in the normal course of business, during 1997 and
1998, to upgrade its distribution, inventory management and accounting systems,
or costs to install new Year 2000 compliant POS registers and software.
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.
----------- ----------- --------
10.2 Form of Restricted Stock Agreement dated 12
9/27/99 between the Company and Michael
Madden, President.
27 Financial Data Schedule N/A
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
December 14, 1999 By: /s/ ROBERT J. HIGGINS
----------------------
Robert J. Higgins
Chairman and Chief Executive Officer
(Principal Executive Officer)
December 14, 1999 By: /s/ JOHN J. SULLIVAN
---------------------
John J. Sullivan Senior Vice
President-Finance and Chief Financial Officer
(Principal Accounting Officer)