DRAFT
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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 5, 2001
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
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(Exact name of registrant as specified in its charter)
New York 14-1541629
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
38 Corporate Circle
Albany, New York 12203
----------------------
(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,
42,023,589 shares outstanding as of June 2, 2001
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
Condensed Consolidated Balance Sheets at May 5, 2001 (unaudited),
February 3, 2001 and April 29, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations - Thirteen Weeks Ended
May 5, 2001 (unaudited) and April 29, 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Thirteen Weeks Ended
May 5, 2001 (unaudited) and April 29, 2000 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
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
2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MAY 5, FEBRUARY 3, APRIL 29,
2001 2001 2000
---------------------------------------
(unaudited) (unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 45,732 $ 265,084 $ 113,331
Merchandise inventory 481,578 475,747 421,588
Other current assets 13,223 14,497 10,115
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Total current assets 540,533 755,328 545,034
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NET FIXED ASSETS 148,844 152,741 137,343
DEFERRED TAX ASSET 34,354 34,317 34,899
OTHER ASSETS 59,387 59,616 49,949
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TOTAL ASSETS $ 783,118 $ 1,002,002 $ 767,225
=======================================
LIABILITIES
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CURRENT LIABILITIES:
Accounts payable $ 251,485 $ 430,185 $ 215,769
Income taxes payable 10,253 28,114 8,565
Accrued expenses and other 30,794 37,380 25,279
Deferred taxes 7,711 9,231 12,507
Current portion of capital lease obligations 5,799 5,702 5,330
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Total current liabilities 306,042 510,612 267,450
CAPITAL LEASE OBLIGATIONS, less current portion 12,277 13,767 18,134
OTHER LIABILITIES 28,313 28,801 17,789
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TOTAL LIABILITIES 346,632 553,180 303,373
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SHAREHOLDERS' EQUITY
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Preferred stock ($0.01 par value; 5,000,000
shares authorized; none issued) -- -- --
Common stock ($0.01 par value; 200,000,000 shares
authorized; 53,772,663, 53,676,756 and
53,460,736 shares issued, respectively) 538 537 535
Additional paid-in capital 285,930 285,292 284,026
Unearned compensation - restricted stock (403) (6) (320)
Treasury stock at cost (11,595,432, 10,568,432 and
5,104,432 shares, respectively) (107,675) (97,579) (51,281)
Accumulated other comprehensive loss (1,887) (1,482) --
Retained earnings 259,983 262,060 230,892
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TOTAL SHAREHOLDERS' EQUITY 436,486 448,822 463,852
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 783,118 $ 1,002,002 $ 767,225
=======================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
MAY 5, APRIL 29,
2001 2000
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Sales $ 309,097 $ 310,116
Cost of sales 205,982 199,272
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Gross profit 103,115 110,844
Selling, general and administrative expenses 106,779 97,703
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Income (loss) from operations (3,664) 13,141
Interest income (341) (1,231)
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Income (loss) before income taxes (3,323) 14,372
Income tax expense (benefit) (1,246) 5,390
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NET INCOME (LOSS) $ (2,077) $ 8,982
======================
BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.18
======================
Weighted average number of common shares outstanding - basic 42,513 49,721
======================
DILUTED EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.18
======================
Weighted average number of common shares outstanding - diluted 42,513 50,684
======================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
MAY 5, APRIL 29,
2001 2000
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Net cash used by Operating Activities $(201,855) $(124,397)
----------------------
Cash Flows from Investing Activities:
Purchases of fixed assets (6,089) (1,655)
Disposal (purchase) of videocassette rental inventory, net of purchases 3 (31)
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Net cash used by investing activities (6,086) (1,686)
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Cash Flows from Financing Activities:
Payments of capital lease obligations (1,393) (1,309)
Payments for purchases of treasury stock (10,100) (39,426)
Exercise of stock options 82 123
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Net cash used by financing activities (11,411) (40,612)
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Net decrease in cash and cash equivalents (219,352) (166,695)
Cash and cash equivalents, beginning of year 265,084 280,026
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Cash and cash equivalents, end of period $ 45,732 $ 113,331
======================
Supplemental disclosure of non-cash investing and financing activities:
Income tax benefit resulting from exercises of stock options $ 99 $ 105
Issuance of treasury stock under incentive stock programs 4 --
Issuance of restricted shares under restricted stock plan 403 --
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 5, 2001 AND APRIL 29, 2000 (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.
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 the fair presentation of such financial statements. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to rules
and regulations applicable to interim financial statements.
These unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended February 3, 2001.
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 videocassette rental inventory included in cost
of sales totaled $205,000 and $239,000 for the thirteen weeks ended May 5, 2001
and April 29, 2000, respectively.
Depreciation and amortization of fixed assets for the Company's distribution
centers included in cost of sales totaled $399,000 and $407,000 for the thirteen
weeks ended May 5, 2001 and April 29, 2000, respectively. Depreciation and
amortization for the remaining fixed assets included in Selling, General &
Administrative expenses totaled $8.8 million and $8.2 million in the thirteen
weeks ended May 5, 2001 and April 29, 2000, respectively.
6
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 5, 2001 AND APRIL 29, 2000 (UNAUDITED)
(CONTINUED)
NOTE 4. EARNINGS PER SHARE
Weighted average shares is calculated as follows :
Thirteen Weeks ended
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April 29, May 1,
2000 1999
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(in thousands)
Weighted average common shares outstanding - basic 42,513 49,721
Dilutive effect of employee stock options --- 963
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Weighted average common shares outstanding - diluted 42,513 50,684
========= ========
Unexercised employee stock options to purchase 6.3 million and 2.9 million
common shares as of May 5, 2001 and April 29, 2000, respectively, were not
included in the weighted average shares outstanding calculation because such
options have an antidilutive effect.
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss) was as follows:
Thirteen Weeks Ended
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May 5, April 29,
2001 2000
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Net income (loss) $ (2,077) $ 8,982
Other comprehensive loss:
Unrealized loss on available-for-sale securities $ (405) ---
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Total comprehensive income (loss) $ (2,482) $ 8,982
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NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is required to
be adopted in years beginning after June 15, 2000. As the Company did not
have derivative instruments or arrangements or derivative instruments
embedded in other contracts, management has determined that adoption of SFAS
No. 133 did not have any financial impact on the Company's consolidated
financial statements. The Company will continue to evaluate future
contractual arrangements entered into that may affect this determination.
7
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 5, 2001 AND APRIL 29, 2000 (UNAUDITED)
(CONTINUED)
NOTE 7. LEGAL PROCEEDINGS
On October 16, 2000, the United States District Court for the District of
Delaware issued an opinion in favor of the Internal Revenue Service, in the case
of the IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company. The
case was brought against Camelot by the IRS to challenge the deduction of
interest expense for certain tax years that ended on or before February 1994,
related to corporate-owned life insurance policies held by Camelot. The court
ruled that the interest deductions should not be allowed and the Company is
responsible for interest and penalties. As a result of the ruling, the Company
reserved $11.0 million during 2000, which is reflected in other (long-term)
liabilities in the consolidated balance sheet as of May 5, 2001. The Company has
filed an appeal in the United States Third Circuit Court of Appeals in response
to the decision.
On August 8, 2000, 30 Attorneys General served a complaint against the Company,
the five major music distributors and two other specialty retailers in the U.S.
District Court for the Southern District of New York ("AG's suit"). The
complaint has been subsequently amended to add additional states as plaintiffs
and to reflect the transfer of the case to U.S. District Court in Maine pursuant
to the Multidistrict Litigation Rules. The AG's suit alleges that the
distributors and retailers conspired to violate the anti-trust laws and to fix
prices by requiring retailers to adhere to minimum advertised prices in order to
receive cooperative advertising funds from the labels. The complaint alleges
that consumers were damaged in an unspecified amount and seeks treble damages
and civil penalties. Following the services of the AG's suit, these same
defendants were named as defendants in private class action suits ("Class
Actions"), each with similar allegations as in the AG's suit. The Class Actions
have been consolidated along with the AG's suit in the U.S. District Court in
Maine. It is management's belief that the lawsuit is without merit and the
Company will ultimately prevail in this regard.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is management's opinion, based upon the information available at
this time, that the expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
and financial condition of the Company.
8
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 5, 2001
COMPARED TO THE THIRTEEN WEEKS ENDED APRIL 29, 2000
SALES. The Company's total sales decreased 0.3% to $309.1 million for the
thirteen weeks ended May 5, 2001 compared to $310.1 million for the thirteen
weeks ended April 29, 2000. The decrease was the result of a comparable store
sales decrease of 5%, partially offset by an increase in the number of stores in
operation.
For the thirteen weeks ended May 5, 2001, comparable store sales decreased 5%
for mall stores and 4% for free standing stores. By merchandise category,
comparable store sales decreased 14% in music and increased 33% in video and 23%
in accessories.
GROSS PROFIT. Gross profit as a percentage of sales decreased to 33.4% in the
thirteen weeks ended May 5, 2001 compared to 35.7% in the thirteen weeks ended
April 29, 2000. The decrease was due to more competitive pricing and a shift of
sales to lower margin product categories, including DVD.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, increased to 34.5%
from 31.5% in the thirteen weeks ended May 5, 2001 compared to the thirteen
weeks ended April 29, 2000. The increase in SG&A is due to the combination of
inflationary increases in operational expenses and lower comparable sales, as
well as additional expenses of $3.9 million related to the Company's rebranding
and eWorks initiatives.
INTEREST EXPENSE (INCOME). Net interest income was $341,000 in the thirteen
weeks ended May 5, 2001 compared to $1.2 million for the thirteen weeks ended
April 29, 2000. The decrease in interest income is due to a decrease in
investment income resulting from lower average cash balances.
9
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
INCOME TAX EXPENSE (BENEFIT). The Company's effective tax rate was 37.5% for the
thirteen weeks ended May 5, 2001, which was equal to the rate for the thirteen
weeks ended April 29, 2000.
NET INCOME (LOSS). The Company's net loss was $2.1 million for the thirteen
weeks ended May 5, 2001, compared to net income of $9.0 million for the same
period last year. The decrease in earnings was due to lower gross margin and
higher expenses.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Company's primary sources of working capital are cash flows from
operations and borrowings under its revolving credit facility. The Company had
cash balances of approximately $45.7 million for the quarter ended May 5, 2001,
compared to $265.1 million at the end of fiscal 2000.
Cash used by operating activities was $201.9 million for the thirteen weeks
ended May 5, 2001. The primary uses of cash were a $178.7 million seasonal
reduction of accounts payable and a $17.8 million net reduction in income tax
payable.
Cash used in financing activities was $11.4 million for the thirteen weeks ended
May 5, 2001. The primary use of cash was for the purchase of 1.0 million shares
of common stock under a program authorized by the Board of Directors.
The Company has a three-year $100 million secured revolving credit facility with
Congress Financial Corporation that expires in July 2003 and automatically
renews on a year-to-year basis thereafter with the consent of both parties. The
Revolving Credit Facility contains certain restrictive provisions, including
provisions governing cash dividends and acquisitions, is collateralized by
merchandise inventory and has a minimum net worth covenant. On May 5, 2001, the
Company had no outstanding borrowings under the Revolving Credit Facility, and
$100 million was available.
CAPITAL RESOURCES. During the first quarter of 2001, the Company had capital
expenditures of $6.1 million. The Company plans to spend $56 million, net of
construction allowances, for capital expenditures in fiscal 2001. During the
quarter, the Company opened or relocated 6 stores and closed 11 stores.
On March 19, 2001, the Company announced its strategic plan to re-brand its
mall-based stores and its web site under a single, unified brand, FYE (For Your
Entertainment). The re-branding initiative is the result of an 18-month in-depth
analysis of the changing entertainment marketplace, the technology revolution,
as well as extensive customer research. The unified brand enables the Company to
leverage its strength as the nation's largest music specialty retailer and
differentiate FYE from the
10
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
competition. For the first time, customers nationwide will enjoy a consistent
shopping experience in every store, in every market and in every channel. This
enhanced brand experience, which will include industry-leading product sampling
and selection tools, is designed to cultivate customer loyalty, drive sales and
build market share for the Company. FYE will create a more relevant shopping
experience for consumers, expanding product selection across the entertainment
spectrum. The brand positioning also enables the Company to broaden its customer
base and fully realize the benefits of a multi-market, multi-channel strategy.
The re-branding effort will be rolled out nationally to all stores by the end of
fiscal 2001. The Company's e-commerce site will be re-launched as fye.com in
August 2001 for an unparalleled bricks and clicks presence. Management
anticipates the investment in the branding initiative to be approximately $40
million in 2001, including operating expenses of $19 million including
depreciation.
11
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS -
EXHIBIT NO DESCRIPTION PAGE NO.
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(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
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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 19, 2001 BY: /s/ ROBERT J. HIGGINS
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Robert J. Higgins
Chairman and Chief Executive Officer
(Principal Executive Officer)
June 19, 2001 BY: /s/ JOHN J. SULLIVAN
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John J. Sullivan
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting Officer)
12