DRAFT
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 4, 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
------------------------------------------------------
(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
----------------------
(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, 41,884,765
shares outstanding as of September 1, 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 August 4, 2001 (unaudited),
February 3, 2001 and July 29, 2000 (unaudited) 3
Condensed Consolidated Statements of Income - Thirteen Weeks and Twenty-six
Weeks Ended August 4, 2001 (unaudited) and July 29, 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Twenty-six Weeks Ended
August 4, 2001 (unaudited) and July 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 11
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 16
2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AUGUST 4, FEBRUARY 3, JULY 29,
2001 2001 2000
------------------------------------------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,237 $ 265,084 $ 106,044
Merchandise inventory 429,544 475,747 408,936
Other current assets 14,958 14,497 11,004
---------------------------------------------
Total current assets 496,739 755,328 525,984
---------------------------------------------
NET FIXED ASSETS 148,685 152,741 134,821
DEFERRED TAX ASSET 34,547 34,317 34,899
OTHER ASSETS 63,719 59,616 49,385
---------------------------------------------
TOTAL ASSETS $ 743,690 $ 1,002,002 $ 745,089
=============================================
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 223,804 $ 430,185 $ 199,999
Income taxes payable 8,482 28,114 845
Accrued expenses and other 35,548 37,380 20,386
Deferred taxes 6,623 9,231 12,507
Current portion of capital lease obligations 5,785 5,702 5,350
--------------------------------------------
Total current liabilities 280,242 510,612 239,087
CAPITAL LEASE OBLIGATIONS, less current portion 10,877 13,767 16,781
OTHER LIABILITIES 23,201 28,801 17,992
-------------------------------------------
TOTAL LIABILITIES 314,320 553,180 273,860
-------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000
shares authorized; none issued) --- --- ---
Common stock ($0.01 par value; 200,000,000 shares
authorized; 53,887,197, 53,676,756 and
53,603,249 shares issued, respectively) 539 537 536
Additional paid-in capital 286,324 285,292 284,709
Unearned compensation - restricted stock (370) (6) (298)
Treasury stock at cost (12,006,432, 10,568,432 and
5,104,432 shares, respectively) (111,160) (97,579) (51,277)
Accumulated other comprehensive loss (1,947) (1,482) ---
Retained earnings 255,984 262,060 237,559
--------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 429,370 448,822 471,229
--------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 743,690 $ 1,002,002 $ 745,089
============================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
--------------------------- ----------------------------
Sales $ 294,561 $ 285,510 $ 603,658 $ 595,626
Cost of sales 195,894 181,513 401,876 380,785
--------------------------- ---------------------------
Gross profit 98,667 103,997 201,782 214,841
Selling, general and administrative expenses 104,667 94,052 211,446 191,755
--------------------------- ---------------------------
Income (loss) from operations (6,000) 9,945 (9,664) 23,086
Interest expense (income) 476 (721) 135 (1,952)
--------------------------- ---------------------------
Income (loss) before income taxes (6,476) 10,666 (9,799) 25,038
Income tax expense (benefit) (2,478) 3,999 (3,724) 9,389
--------------------------- ---------------------------
NET INCOME (LOSS) $ (3,998) $ 6,667 $ (6,075) $ 15,649
=========================== ===========================
BASIC EARNINGS (LOSS) PER SHARE $ (0.10) $ 0.14 $ (0.14) $ 0.32
=========================== ===========================
Weighted average number of common shares
outstanding - basic 41,920 48,373 42,216 49,047
=========================== ===========================
DILUTED EARNINGS (LOSS) PER SHARE $ (0.10) $ 0.14 $ (0.14) $ 0.31
=========================== ===========================
Weighted average number of common shares
outstanding - diluted 41,920 49,261 42,216 49,973
=========================== ===========================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
------------------------------
AUGUST 4, JULY 29,
2001 2000
----------------------------
Net cash used by Operating Activities $ (181,457) $(124,584)
----------------------------
Cash Flows from Investing Activities:
Purchases of fixed assets (15,522) (8,057)
Disposal (purchase) of videocassette rental inventory, net of purchases 47 (51)
----------------------------
Net cash used by investing activities (15,475) (8,108)
----------------------------
Cash Flows from Financing Activities:
Payments of capital lease obligations (2,807) (2,641)
Payments for purchases of treasury stock (13,585) (39,421)
Exercise of stock options 477 772
----------------------------
Net cash used by financing activities (15,915) (41,290)
----------------------------
Net decrease in cash and cash equivalents (212,847) (173,982)
Cash and cash equivalents, beginning of year 265,084 280,026
----------------------------
Cash and cash equivalents, end of period $52,237 $ 106,044
============================
Supplemental disclosure of non-cash investing and financing activities:
Income tax benefit resulting from exercises of stock options $202 $ 445
Issuance of treasury stock under incentive stock programs 4 7
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
AUGUST 4, 2001 AND JULY 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 $213,000 and $184,000 for the thirteen weeks ended August 4,
2001 and July 29, 2000, respectively. Depreciation and amortization of
videocassette rental inventory included in cost of sales totaled $419,000 and
$415,000 for the twenty-six weeks ended August 4, 2001 and July 29, 2000,
respectively.
Depreciation and amortization of fixed assets for the Company's distribution
centers included in cost of sales totaled $410,000 and $412,000 for the thirteen
weeks ended August 4, 2001 and July 29, 2000, respectively. For the twenty-six
week periods ended August 4, 2001 and July 29, 2000, depreciation and
amortization of fixed assets for the Company's distribution centers included in
cost of sales totaled $809,000 and $819,000, respectively. Depreciation and
amortization for the remaining fixed assets included in Selling, General &
Administrative ("SG&A") expenses totaled $9.0 million and $8.1 million in the
thirteen weeks ended August 4, 2001 and July 29, 2000, respectively. The
depreciation and amortization included in SG&A was $18.1 and $16.3 million for
the twenty-six week periods ended August 4, 2001 and July 29, 2000,
respectively.
6
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 4, 2001 AND JULY 29, 2000 (UNAUDITED)
(CONTINUED)
NOTE 4. EARNINGS PER SHARE
Weighted average shares are calculated as follows:
Thirteen Weeks ended Twenty-six Weeks ended
-------------------------- ---------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
------------ ---------- ------------ ----------
Weighted average common shares outstanding - basic 41,920 48,373 42,216 49,047
Dilutive effect of employee stock options --- 888 --- 926
------------ ---------- ------------ ----------
Weighted average common shares outstanding - diluted 41,920 49,261 42,216 49,973
============ ========== ============ ==========
Anti dilutive stock options 4,669 2,628 4,633 2,752
============ ========== ============ ==========
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss) was as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------- -----------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
------------- -------------- ------------ ------------
Net income (loss) $ (3,998) $ 6,667 $ (6,075) $ 15,649
Other comprehensive loss:
Unrealized loss on available-for-sale securities (61) --- (465) ---
------------- ----------- ------------ ------------
Total comprehensive income (loss) $ (4,059) $ 6,667 $ (6,540) $ 15,649
============= =========== ============ ============
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 material 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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all
7
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 4, 2001 AND JULY 29, 2000 (UNAUDITED)
(CONTINUED)
NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt the provisions of SFAS No. 141 immediately, and
SFAS No. 142 effective February 4, 2002. Furthermore, any goodwill or intangible
asset determined to have an indefinite useful life that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $42.3 million, which will be subject to the transition provisions
of SFAS Nos. 141 and 142. Amortization expense related to goodwill was $2.3
million and $1.4 million for the year ended February 3, 2001 and the twenty six
weeks ended August 3, 2001, respectively. Because of the extensive effort needed
to comply with adopting SFAS Nos. 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
consolidated financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
8
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 4, 2001 AND JULY 29, 2000 (UNAUDITED)
(CONTINUED)
NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of SFAS No. 143 for
the quarter ending May 3, 2003. To accomplish this, the Company must identify
all legal obligations for asset retirement obligations, if any, and determine
the fair value of these obligations on the date of adoption. The determination
of fair value is complex and will require the Company to gather market
information and develop cash flow models. Additionally, the Company will be
required to develop processes to track and monitor these obligations. Because of
the effort necessary to comply with the adoption of SFAS No. 143, it is not
practicable for management to estimate the impact of adopting this Statement at
the date of this report.
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 August 4, 2001. The case is
pending an appeal by the Company in the United States Third Circuit Court of
Appeals.
On August 8, 2000, 30 Attorneys General served a complaint against the Company,
five major music distributors and two other specialty retailers in the United
States 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 United States District Court in Maine
pursuant to the Multidistrict Litigation Rules. The AG's suit alleges that the
9
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 4, 2001 AND JULY 29, 2000 (UNAUDITED)
(CONTINUED)
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 service 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 United States 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.
10
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 AUGUST 4, 2001
COMPARED TO THE THIRTEEN WEEKS ENDED JULY 29, 2000
SALES. The Company's total sales increased 3% to $294.6 million for the thirteen
weeks ended August 4, 2001 compared to $285.5 million for the thirteen weeks
ended July 29, 2000. The increase was due to an increase in the number of stores
in operation, partially offset by a comparable store sales decrease of 4%.
For the thirteen weeks ended August 4, 2001, comparable store sales decreased 5%
for mall stores and were flat for free standing stores. By merchandise category,
comparable store sales were down 12% in music, and increased 39% in video and
19% in accessories.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 33.5% in the
thirteen weeks ended August 4, 2001 from 36.4% in the thirteen weeks ended July
29, 2000. This decrease relates to more competitive pricing and the continuing
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 35.5%
in the thirteen weeks ended August 4, 2001 from 32.9% in the thirteen weeks
ended July 29, 2000. The increase in SG&A is due to the combination of
inflationary increases in operational expenses and lower comparable store sales
as well as additional expenses of $2.0 million related to the Company's
rebranding and eWorks initiatives (See Liquidity and Capital Resources).
INTEREST EXPENSE (INCOME). Interest expense was $0.5 million in the thirteen
weeks ended August 4, 2001 compared to interest income of $0.7 million for the
thirteen weeks ended July 29, 2000. The decrease in interest income relates to a
decrease in investment income resulting from lower average cash balances.
11
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 increased to
38.3% for the thirteen weeks ended August 4, 2001 from 37.5% for the thirteen
weeks ended July 29, 2000. The increased rate is due to an increase in the
valuation allowance for deferred taxes related to a loss on investments.
NET INCOME (LOSS). The Company's net loss was $4.0 million for the thirteen
weeks ended August 4, 2001, compared to net income of $6.7 million for the same
period last year. The decrease is attributable to a decrease in gross margin and
increased SG&A expenses.
TWENTY-SIX WEEKS ENDED AUGUST 4, 2001
COMPARED TO THE TWENTY-SIX WEEKS ENDED JULY 29, 2000
SALES. The Company's total sales increased 1% to $603.7 million for the
twenty-six weeks ended August 4, 2001 compared to $595.6 million for the
twenty-six weeks ended July 29, 2000. Comparable store sales decreased 5% for
the period.
For the twenty-six weeks ended August 4, 2001, comparable store sales decreased
5% for mall stores and 2% for free standing stores. By merchandise category,
comparable store sales decreased 13% in music and increased 35% in video and 23%
in accessories.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 33.4% in the
twenty-six weeks ended August 4, 2001 from 36.1% in the twenty-six weeks ended
July 29, 2000. This decrease relates to more competitive pricing and the
continuing 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 35.0%
in the twenty-six weeks ended August 4, 2001 from 32.2% in the twenty-six weeks
ended July 29, 2000. The increase in SG&A is due to the combination of
inflationary increases in operational expenses and lower comparable store sales
as well as additional expenses of $5.9 million related to the Company's
rebranding and eWorks initiatives (See Liquidity and Capital Resources).
INTEREST EXPENSE (INCOME). Interest expense was $0.1 million in the twenty-six
weeks ended August 4, 2001 compared to interest income of $2.0 million for the
twenty-six weeks ended July 29, 2000. The decrease in interest income relates to
a decrease in investment income resulting from lower average cash balances.
INCOME TAX EXPENSE (BENEFIT). The Company's effective tax rate increased to
38.0% for the twenty-six weeks ended August 4, 2001 from 37.5% for the
twenty-six weeks ended July 29, 2000. The increased rate is due to an increase
in the valuation allowance for deferred taxes related to a loss on investments.
12
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)
NET INCOME (LOSS). The Company's net loss was $6.1 million for the twenty-six
weeks ended August 4, 2001, compared to net income of $15.6 million for the same
period last year. The decrease is attributable to a decrease in gross margin and
increased SG&A 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 $52.2 million at August 4, 2001, compared to
$265.1 million at the end of fiscal 2000.
Cash used by operating activities was $181.5 million for the twenty-six weeks
ended August 4, 2001. The primary uses of cash were a $206.4 million seasonal
reduction of accounts payable and a $19.3 million net reduction in income taxes
payable. These were partially offset by a $46.2 million reduction in inventory.
Cash used in financing activities was $15.9 million for the twenty-six weeks
ended August 4, 2001. The primary use of cash was $13.6 million for the purchase
of 1.4 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 contains a minimum net worth covenant. On August 4,
2001, the Company had no outstanding borrowings under the Revolving Credit
Facility, and $100 million was available for borrowing.
CAPITAL RESOURCES. During the first twenty-six weeks of 2001, the Company had
capital expenditures of $15.5 million. The Company plans to spend $56 million,
net of construction allowances, for capital expenditures in fiscal 2001. Of
the $56 million, $26 million is associated with the rebranding and eWorks
initiatives. During the first twenty six weeks of 2001, the Company opened or
relocated 10 stores and closed 24 stores.
The Company's strategic plan to re-brand its mall-based stores and its web site
under a single, unified brand, FYE (For Your Entertainment) is on target to be
completed by the end of the third quarter. 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 will enable the Company to leverage its strength as the
nation's largest music specialty retailer and differentiate FYE from the
competition. For the first time,
13
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)
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 exterior signs have been changed
to reflect the new brand for over 300 stores, and the national marketing effort
to support the brand is underway as well. The Company's e-commerce site will be
re-launched as fye.com in October 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, which includes depreciation.
14
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 6, 2001.
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
NAMES OF NOMINEES WITHHELD VOTES FOR
--------------------- ---------------------------
Robert J. Higgins 115,977 32,349,809
Joseph Morone 94,328 32,371,458
15
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.
---------- ----------- --------
(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 18, 2001 BY: /S/ ROBERT J. HIGGINS
--------------------------
Robert J. Higgins
Chairman and Chief Executive Officer
(Principal Executive Officer)
September 18, 2001 BY: /S/ JOHN J. SULLIVAN
------------------------
John J. Sullivan
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
16