<Page>
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 3, 2002
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 such 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,
40,226,601 shares outstanding as of September 1, 2002
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
Form 10-Q
Page No.
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at August 3, 2002 (unaudited),
February 2, 2002 and August 4, 2001(unaudited) 3
Condensed Consolidated Statements of Operations - Thirteen Weeks and Twenty-six
Weeks Ended August 3, 2002 (unaudited) and August 4, 2001(unaudited) 4
Condensed Consolidated Statements of Cash Flows - Twenty-six Weeks Ended
August 3, 2002 (unaudited) and August 4, 2001(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 1 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 16
Certifications 17-18
</Table>
2
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
AUGUST 3, FEBRUARY 2, AUGUST 4,
2002 2002 2001
------------------------------------------------
ASSETS (unaudited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 25,879 $ 254,943 $ 52,237
Merchandise inventory 411,304 409,067 429,544
Other current assets 18,325 15,024 14,958
------------------------------------------------
Total current assets 455,508 679,034 496,739
------------------------------------------------
NET FIXED ASSETS 156,113 160,430 148,685
DEFERRED TAX ASSET 28,804 32,977 34,547
OTHER ASSETS 62,717 62,977 63,719
------------------------------------------------
TOTAL ASSETS $703,142 $ 935,418 $ 743,690
================================================
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $196,352 $ 378,902 $ 223,804
Income taxes payable 1,201 26,003 8,482
Accrued expenses and other 30,972 34,276 29,605
Deferred taxes 6,080 6,160 6,623
Current portion of capital lease obligations 3,196 4,711 5,785
-----------------------------------------------
Total current liabilities 237,801 450,052 274,299
CAPITAL LEASE OBLIGATIONS, less current portion 8,138 9,500 10,877
OTHER LIABILITIES 26,935 27,800 29,144
-----------------------------------------------
TOTAL LIABILITIES 272,874 487,352 314,320
-----------------------------------------------
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; 54,024,005, 53,929,348 and
53,887,197 shares issued, respectively) 540 539 539
Additional paid-in capital 287,153 286,767 286,324
Unearned compensation - restricted stock (198) (280) (370)
Treasury stock at cost (13,647,185, 12,884,752 and
12,006,432 shares, respectively) (123,301) (117,811) (111,160)
Accumulated other comprehensive loss --- --- (1,947)
Retained earnings 266,074 278,851 255,984
-----------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 430,268 448,066 429,370
-----------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $703,142 $ 935,418 $ 743,690
==============================================
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
------------------------------ -------------------------------
Sales $ 267,530 $ 294,561 $ 547,009 $ 603,658
Cost of sales 179,494 195,894 365,352 401,876
------------------------------ -------------------------------
Gross profit 88,036 98,667 181,657 201,782
Selling, general and administrative expenses 99,242 104,667 203,174 211,446
------------------------------ -------------------------------
Loss from operations (11,206) (6,000) (21,517) (9,664)
Interest expense, net 293 476 361 135
------------------------------ -------------------------------
Loss before income taxes (11,499) (6,476) (21,878) (9,799)
Income tax benefit (5,054) (2,478) (9,101) (3,724)
------------------------------ -------------------------------
NET LOSS $ (6,445) $ (3,998) (12,777) $ (6,075)
============================== ===============================
BASIC LOSS PER SHARE $ (0.16) $ (0.10) $ (0.31) $ (0.14)
============================== ===============================
Weighted average number of common shares
outstanding - basic 40,532 41,920 40,636 42,216
============================== ================================
DILUTED LOSS PER SHARE $ (0.16) $ (0.10) $ (0.31) $ (0.14)
============================== ================================
Weighted average number of common shares
outstanding - diluted 40,532 41,920 40,636 42,216
============================== ===============================
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
TWENTY-SIX WEEKS ENDED
AUGUST 3, AUGUST 4,
2002 2001
----------------------------
Net cash used by Operating Activities $ (203,840) $ (174,586)
----------------------------
Cash Flows from Investing Activities:
Purchases of fixed assets (16,944) (15,522)
Purchases of investments in unconsolidated affiliates (860) (6,871)
Disposal of videocassette rental inventory, net of purchases 528 47
----------------------------
Net cash used by Investing Activities (17,276) (22,346)
----------------------------
Cash Flows from Financing Activities:
Payments of capital lease obligations (2,877) (2,807)
Payments for purchases of treasury stock (5,498) (13,585)
Exercise of stock options 427 477
----------------------------
Net cash used by Financing Activities (7,948) (15,915)
----------------------------
Net decrease in cash and cash equivalents (229,064) (212,847)
Cash and cash equivalents, beginning of year 254,943 265,084
----------------------------
Cash and cash equivalents, end of period $25,879 $52,237
============================
Supplemental disclosure of non-cash investing and financing activities:
Income tax benefit resulting from exercises of stock options $571 $202
Issuance of treasury stock under incentive stock programs 8 4
Issuance of restricted shares under restricted stock plan --- 403
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements consist of Trans World
Entertainment Corporation, its wholly owned subsidiary Record Town, Inc.
("Record Town"), Record Town's subsidiaries, all of which are wholly owned and
Second Spin.com, which is majority 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
reflects 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 2, 2002.
Certain reclassifications of the prior year's condensed consolidated financial
statements have been made to conform to the current year presentation.
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 fixed assets for the Company's distribution
centers included in cost of sales totaled $0.6 million and $0.4 million for the
thirteen weeks ended August 3, 2002 and August 4, 2001, respectively. For the
twenty-six week periods ended August 3, 2002 and August 4, 2001, depreciation
and amortization of fixed assets for the Company's distribution centers included
in cost of sales totaled $1.1 million and $0.8 million, respectively.
Depreciation and amortization for the remaining fixed assets included in
Selling, General & Administrative ("SG&A") expenses totaled $9.9 million and
$9.0 million in the thirteen weeks ended August 3, 2002 and August 4, 2001,
respectively. The depreciation and amortization included in SG&A was $19.5 and
$18.1 million for the twenty-six week periods ended August 3, 2002 and August 4,
2001, respectively.
6
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED)
(CONTINUED)
NOTE 4. EARNINGS PER SHARE
Weighted average shares are calculated as follows :
<Table>
<Caption>
Thirteen Weeks ended Twenty-six Weeks ended
------------------------------- -----------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-------------- ------------ ------------ ------------
Weighted average common shares outstanding - basic 40,532 41,920 40,636 42,216
Dilutive effect of employee stock options --- --- --- ---
-------------- ------------ ------------ ------------
Weighted average common shares outstanding - diluted
40,532 41,920 40,636 42,216
============== ============ ============ ============
Anti-dilutive stock options 5,764 4,669 5,022 4,633
============== ============ ============ ============
</Table>
NOTE 5. COMPREHENSIVE LOSS
The Company's total comprehensive loss was as follows:
<Table>
<Caption>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------- -----------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
------------- -------------- ------------- ------------
Net loss $ (6,445) $ (3,998) $ (12,777) $ (6,075)
Other comprehensive loss:
Unrealized loss on available-for-sale securities --- (61) --- (465)
------------- -------------- ------------- ------------
Total comprehensive loss $ (6,445) $ (4,059) $ (12,777) $ (6,540)
============= ============== ============= ============
</Table>
7
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED)
(CONTINUED)
NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective February 3, 2002 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Under the
provisions of SFAS No. 142, goodwill is no longer amortized. Rather, goodwill is
now subject to a periodic impairment test performed, at a minimum, on an annual
basis. SFAS No. 142 required the Company to perform a two-step fair-value based
goodwill impairment test as of the date of adoption. The first step of the test
compared the carrying values of the Company's reporting units to their estimated
fair values. The estimated fair values of the reporting units were determined
using a discounted cash flow model based upon the estimated future cash flows of
the reporting units. The second step of the goodwill impairment test is required
only if the carrying amount of a reporting unit exceeds its fair value, as
determined in the first step, to measure the amount of impairment, if any. Based
upon the impairment test performed by the Company in the first step, the
Company has concluded that no impairment of goodwill exists as a result of
adoption of SFAS No. 142. Prospectively, the Company will perform this
impairment review annually, as required by SFAS No. 142. The Company does not
have any other intangible assets subject to the provisions of SFAS No. 142.
The following table provides a reconciliation of the reported net loss for the
thirteen weeks ended August 4, 2001 and the net loss for the twenty six weeks
ended August 4, 2001 to net loss that would have been reported had SFAS No. 142
been applied as of February 4, 2001:
<Table>
<Caption>
Thirteen weeks ended Twenty-six weeks ended
(Amounts in thousands, except per share amounts) -------------------------- --------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net loss $ (6,445) $ (3,998) $ (12,777) $ (6,075)
Add goodwill amortization, net of tax --- 404 --- 835
-------------------------- --------------------------
Adjusted net loss (6,445) (3,594) (12,777) (5,240)
========================== ==========================
Basic and diluted loss per share:
Reported net loss per share
$ (0.16) $ (0.10) $ (0.31) $ (0.14)
Add goodwill amortization per share, net of tax --- $ 0.01 --- $ 0.02
-------------------------- --------------------------
Adjusted net loss per share $ (0.16) $ (0.09) $ (0.31) $ (0.12)
========================== ==========================
</Table>
8
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 2002 AND AUGUST 4, 2001 (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. SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation that results from the acquisition,
construction, development and (or) normal use of the assets as a liability in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The standard also requires the Company to record a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt SFAS No. 143 for the quarter ending May 3, 2003. The Company is
currently assessing SFAS No. 143 and the impact that adoption will have on the
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires the Company to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently evaluating SFAS No.
146 and the impact that adoption will have on the consolidated financial
statements.
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 ("IRS") in
the case IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company. The
case was brought against CM Holdings Inc. by the IRS to challenge the deduction
of interest expense related to corporate-owned life insurance policies held by
Camelot, a subsidiary of CM Holdings Inc., for certain tax years that ended on
or before February 1994. The court ruled that interest deductions on policy
loans should not be allowed and the Company is responsible for the taxes and
related interest and penalties. As a result of the District Court decision, the
Company accrued $11.0 million during 2000, which is reflected in other
(long-term) liabilities in the consolidated balance sheet as of August 3, 2002,
February 2, 2002, and August 4, 2001. The Company filed an
9
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED)
(CONTINUED)
NOTE 7. LEGAL PROCEEDINGS (CONTINUED)
appeal in response to the decision. On August 16, 2002, the Third Circuit Court
of Appeals affirmed the District Court's decision. As of the date of this
report, the Company is considering its options for further appeals. This recent
decision does not impact the initial reserve which remains accrued as of August
3, 2002.
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 was subsequently amended to add additional states as plaintiffs and to
reflect the transfer of the case to the United States District Court in Maine
pursuant to the Multidistrict Litigation Rules. The AG's suit alleged that the
distributors and retailers conspired to violate certain 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 distributors. The
complaint alleged that consumers were damaged in an unspecified amount and
sought 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 were consolidated along with the AG's suit in the United States
District Court in Maine. The Company believes the lawsuits are without merit and
presented its case at a settlement hearing held on April 30, 2002. In order to
avoid lengthy and costly litigation, the Company tentatively settled with the
plaintiffs without admission of wrongdoing, and accordingly, recorded a reserve
in the quarter ended August 3, 2002.
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
<Page>
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 3, 2002
COMPARED TO THE THIRTEEN WEEKS ENDED AUGUST 4, 2001
SALES. The Company's total sales decreased 9.2% to $267.5 million for the
thirteen weeks ended August 3, 2002 from $294.6 million for the thirteen weeks
ended August 4, 2001. The decrease was due to a reduction in the number of
stores in operation and a comparable store sales decrease of 6.3%.
For the thirteen weeks ended August 3, 2002, comparable store sales decreased
6.2% for mall stores and decreased 6.8% for freestanding stores. By merchandise
category, comparable store sales were down 18.3% in music; increased 35.5% in
home video and video games; and were down 2.3 % in the electronics, accessories
and boutique category.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 32.9% in the
thirteen weeks ended August 3, 2002 from 33.5% in the thirteen weeks ended
August 4, 2001. This decrease relates to the continuing shift of sales to lower
margin product categories, including DVD and video games.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, as a percentage of sales, increased to 37.1%
in the thirteen weeks ended August 3, 2002 from 35.5% in the thirteen weeks
ended August 4, 2001. The increased rate is due to loss of leverage resulting
from lower sales. Total expenses for the quarter were lower by
$5.4 million or 5.2%, versus prior year, due to lower store count and lower
overhead costs.
INTEREST EXPENSE. Interest expense was $0.3 million in the thirteen
weeks ended August 3, 2002 compared to interest expense of $0.5 million for the
thirteen weeks ended August 4, 2001. The decrease in interest expense relates to
higher average cash balances maintained during the quarter and lower interest on
capital leases which were partially offset by lower investment rates.
11
<Page>
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 BENEFIT. The Company's income tax benefit was $5.1 million
for the thirteen weeks ended August 3, 2002, compared to an income tax benefit
of $2.5 million for the thirteen weeks ended August 4, 2001. The Company's
effective tax rate was 43.9% for the thirteen weeks ended August 3, 2002 as
compared to 38.3% for the thirteen weeks ended August 4, 2001. The increase in
rate is due to an increase in the valuation allowance for deferred taxes related
to losses on investments and state net operating losses and a decrease in the
Company's income before income taxes.
NET LOSS. The Company's net loss was $6.4 million for the thirteen
weeks ended August 3, 2002, compared to net loss of $4.0 million for the same
period last year. The higher net loss is attributable to lower sales and the
related loss of margin.
TWENTY-SIX WEEKS ENDED AUGUST 3, 2002
COMPARED TO THE TWENTY-SIX WEEKS ENDED AUGUST 4, 2001
SALES. The Company's total sales decreased 9.4% to $547.0 million for the
twenty-six weeks ended August 3, 2002 compared to $603.7 million for the
twenty-six weeks ended August 4, 2001.
For the twenty-six weeks ended August 3, 2002, comparable store sales decreased
6.3% for both mall and freestanding stores. By merchandise category, comparable
store sales were down 18.0% in music; increased 34.0% in home video and video
games; and were down 3.5% in the electronics, accessories and boutique category.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 33.2% for the
twenty-six weeks ended August 3, 2002 from 33.4% for the twenty-six weeks ended
August 4, 2001. This decrease relates to the continuing shift of sales to lower
margin product categories, including DVD and video games.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, increased to
37.1% for the twenty-six weeks ended August 4, 2002 as compared to 35.0% for
the twenty-six weeks ended August 4, 2001. The increase in SG&A is due to
loss of leverage resulting from lower sales. Total expenses for the
twenty-six weeks ended August 3, 2002 were lower by $8.3 million or 3.9%,
versus prior year, due to lower store count and lower overhead costs.
INTEREST EXPENSE. Interest expense was $0.4 million in the twenty-six
weeks ended August 3, 2002 compared to interest expense of $0.1 million for the
twenty-six weeks ended August 4, 2001. The increase in interest expense relates
to lower investment income due to lower rates on higher average cash balances
maintained during the period and a decrease in interest on capital leases.
12
<Page>
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 BENEFIT. The Company's income tax benefit was $9.1 million
for the twenty-six weeks ended August 3, 2002, compared to an income tax benefit
of $3.7 million for the twenty-six weeks ended August 4, 2002. The Company's
effective tax rate was to 41.6% for the twenty-six weeks ended August 3, 2002
compared to 38.0% for the twenty-six weeks ended August 4, 2001. The increase in
rate is due to an increase in the valuation allowance for deferred taxes related
to loss on investments and state net operating losses and a decrease in the
Company's income before income taxes.
NET LOSS. The Company's net loss was $12.8 million for the twenty-six
weeks ended August 3, 2002, compared to a net loss of $6.1 million for the
twenty-six weeks ended August 4, 2001. The higher net loss is attributable to
lower sales and the related loss on margin.
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 $25.9 million at August 3, 2002, compared to $254.9 million at
the end of fiscal 2001 and $52.2 million at August 4, 2001.
Cash used by operating activities was $203.8 million for the twenty-six weeks
ended August 3, 2002. The primary uses of cash were a $182.5 million seasonal
reduction of accounts payable and a $24.8 million net reduction in income taxes
payable.
Cash used by financing activities was $7.9 million for the twenty-six weeks
ended August 3, 2002. The primary use of cash was $5.5 million for the purchase
of approximately 760,000 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 renews on a
year-to-year basis thereafter upon 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 3,
2002, the Company had no outstanding borrowings under the Revolving Credit
Facility and $100 million was available for borrowing.
CAPITAL RESOURCES. During the twenty-six weeks ended August 3, 2002, the Company
had capital expenditures of $16.9 million. The Company plans to spend between
$40 million and $45 million, net of construction allowances, for capital
expenditures in fiscal 2002. During the twenty-six weeks ended August 3, 2002,
the Company opened or relocated 20 stores and closed 32 stores.
13
<Page>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
On August 16, 2002, the Third Circuit Court of Appeals upheld a United States
District Court's decision in the case IRS vs. CM Holdings Inc., a
wholly-owned subsidiary of the Company, that interest deductions on policy
loans should not be allowed and that the Company is responsible for the taxes
and related interest and penalties (See note 7 to the Condensed Financial
Statements August 3, 2002 and August 4, 2001 (unaudited)). As of the date of
this report, the Company is considering its options for further appeals.
14
<Page>
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 Thursday, June 20, 2002.
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.
<Table>
<Caption>
Column 1 Column 2
Names of Nominees Withheld Votes for
----------------- ----------------------------
George Dougan 1,671,131 35,062,990
Martin Hanaka 1,671,231 35,062,890
Isaac Kaufman 1,676,936 35,057,185
</Table>
C) A proposal to adopt the Trans World Entertainment Corporation 2002 Employee
Stock Option Plan was approved as follows:
FOR- 19,459,545
AGAINST- 6,288,478
ABSTAIN- 335,231
D) A proposal to adopt the Trans World Entertainment Corporation 2002 Bonus
Plan was approved as follows:
FOR- 24,486,735
AGAINST- 1,260,758
ABSTAIN- 335,761
15
<Page>
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.
- ---------- ----------- --------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as 19
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 CEO Certification pursuant to Securities and Exchange 20
Commission Order No. 4-460
99.3 CFO Certification pursuant to Securities and Exchange 21
Commission Order No. 4-460
(B) REPORTS ON FORM 8-K -
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 17, 2002 BY: /S/ ROBERT J. HIGGINS
--------------------------
Robert J. Higgins
Chairman and Chief Executive Officer
(Principal Executive Officer)
September 17, 2002 BY: /S/ JOHN J. SULLIVAN
------------------------
John J. Sullivan
Executive Vice President and Chief
Financial Officer (Principal Financial and
Chief Accounting Officer)
16
<Page>
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Robert J. Higgins, Chairman and Chief Executive Officer of
Trans World Entertainment Corporation, (the "Company") certify that:
(1) I have reviewed this quarterly report on Form 10-Q of the Company;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects, the financial condition, results of operations and
cash flows of the Company as of, and for, the period presented in this
quarterly report.
Dated: September 17, 2002
/s/Robert J. Higgins
Chairman and Chief Executive Officer
Trans World Entertainment Corporation
17
<Page>
CHIEF FINANCIAL OFFICER CERTIFICATION
I, John J. Sullivan, Executive Vice President and Chief Financial Officer of
Trans World Entertainment Corporation, (the "Company") certify that:
(1) I have reviewed this quarterly report on Form 10-Q of the Company;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects, the financial condition, results of operations and
cash flows of the Company as of, and for, the period presented in this
quarterly report.
Dated: September 17, 2002
/s/John J. Sullivan
Executive Vice President and Chief
Financial Officer
Trans World Entertainment Corporation
18