UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
INTRODUCTORY NOTE: Trans World Entertainment Corporation is Amending this
Form 10-Q to provide revised disclosures made to its interim financial
information in connection with its Form S-4 filing on March 30, 1999.
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 2, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
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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 (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
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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,
21,674,012 shares outstanding as of May 30, 1998
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Form 10-Q
Page No.
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at May 2, 1998,
January 31, 1998 and May 3, 1997 3
Condensed Consolidated Statements of Income - Thirteen
Weeks Ended May 2, 1998 and May 3, 1997 5
Condensed Consolidated Statements of Cash Flows - Thirteen
Weeks Ended ended May 2, 1998 and May 3, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 4 - Submission of Matters of Vote of Security Holders 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 16
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANACIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
------------------ ------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $20,275 $94,732 $10,303
Merchandise inventory 189,902 189,394 159,699
Other current assets 6,099 6,224 9,691
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Total current assets 216,276 290,350 179,693
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VIDEOCASSETTE RENTAL INVENTORY, net 4,022 4,099 4,626
DEFERRED TAX ASSET 4,550 4,726 2,576
FIXED ASSETS, net 73,690 72,068 65,394
OTHER ASSETS 2,814 2,776 3,363
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TOTAL ASSETS $301,352 $374,019 $255,652
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $100,243 $162,981 $75,124
Income taxes payable 1,969 11,155 ---
Accrued expenses and other 12,217 17,346 7,729
Store closing reserve 8,221 8,692 11,259
Current deferred taxes 604 1,103 ---
Current portion of long-term debt and capital lease obligations 96 99 4,733
------------------ ------------- -----------
Total current liabilities 123,350 201,376 98,845
------------------ ------------- -----------
LONG-TERM DEBT, less current portion -- 35,000 41,691
CAPITAL LEASE OBLIGATIONS, less current portion 6,389 6,409 6,484
OTHER LIABILITIES 7,142 6,712 6,537
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TOTAL LIABILITIES 136,881 249,497 153,557
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SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000 shares authorized;
none issued) --- --- ---
Common stock ($.01 par value; 50,000,000 shares authorized;
21,423,150, 19,815,357 and 19,630,162 shares issued, respectively) 214 198 196
Additional paid-in capital 62,686 25,386 24,463
Treasury stock, at cost (70,288, 70,788 and 72,788
shares, respectively) (390) (394) (407)
Unearned compensation - restricted stock (158) (175) (228)
Retained earnings 102,119 99,507 78,071
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TOTAL SHAREHOLDERS' EQUITY 164,471 124,522 102,095
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $301,352 $374,019 $255,652
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
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MAY 2, MAY 3,
1998 1997
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Sales $145,062 $109,512
Cost of sales 92,605 70,248
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Gross profit 52,457 39,264
Selling, general and administrative expenses 47,334 38,935
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Income from operations 5,123 329
Interest expense 1,097 1,836
Other expenses (income), net (256) (94)
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Income (loss) before income taxes 4,282 (1,413)
Income tax expense (benefit) 1,670 (551)
----------------- ----------------
NET INCOME (LOSS) $2,612 ($862)
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----------------- ----------------
BASIC EARNINGS (LOSS) PER SHARE $0.13 ($0.04)
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----------------- ----------------
Weighted average number of common shares outstanding 19,827 19,540
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DILUTED EARNINGS (LOSS) PER SHARE $0.12 ($0.04)
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Adjusted weighted average number of common shares outstanding 21,334 19,540
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TRANS WORLD ENTERTAINMENT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
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MAY 2, MAY 3,
1998 1997
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NET CASH USED BY OPERATING ACTIVITIES ($70,861) ($35,678)
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INVESTING ACTIVITIES:
Acquisition of property and equipment (5,965) (1,830)
Disposals of rental inventory, net 77 158
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Net cash used by investing activities (5,888) (1,672)
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FINANCING ACTIVITIES:
Payments of long-term debt and capital lease obligations (35,024) (7,139)
Proceeds from issuance of common stock 36,772 ---
Exercise of stock options 544 21
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Net cash provided (used) by financing activities 2,292 (7,118)
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Net decrease in cash and cash equivalents (74,457) (44,468)
Cash and cash equivalents, beginning of period 94,732 54,771
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Cash and cash equivalents, end of period $20,275 $10,303
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Income tax benefit resulting from exercise of stock options $ 915 $ 34
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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.
These 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 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 31, 1998.
NOTE 2. RESTRUCTURING CHARGE
The Company recorded a pre-tax restructuring charge of $21 million in 1994
to reflect the anticipated costs associated with a program to close 143 stores
and to restructure the Company's debt agreements. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining merchandise after the store was
closed), and employee termination benefits. The charge also included estimated
professional fees related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases.
Inventory-related costs were included in cost of sales.
An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:
CHARGES
BALANCE AT AGAINST REMAINING
JANUARY 28, 1995 RESERVE BALANCE
------------------ --------- -----------
(in thousands)
Lease obligations.................................. $ 4,250 $ 3,436 $ 814
Inventory-related costs............................ 4,249 3,581 668
Termination benefits............................... 200 200 --
Professional fees.................................. 3,986 3,328 658
Other costs........................................ 827 154 673
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Total cash outflows.............................. $ 13,512 $ 10,699 $ 2,813
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------- --------- -----------
The Company completed the 1994 restructuring in 1995, resulting in the
closure of 179 stores (versus an original plan of 143 stores). The remaining
balance in the 1994 restructuring reserve of $2.8 million was credited to
operations in the 4th quarter of 1995.
The Company recorded a second restructuring charge of $33.8 million in
1995 to reflect the anticipated costs associated with a program to close an
additional 163 stores. The components of this
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
second charge were similar to those recorded in 1994, and also included a
provision for exiting the rental video store format, the write-off of
goodwill related to a previous acquisition and a provision for closing the
Company's fixture manufacturing operation.
An analysis of the charges against the 1995 reserve for the thirteen week
period ended May 2, 1998 is as follows:
CHARGES AGAINST
THE RESERVE
BALANCE AT ---------- BALANCE AT
JANUARY 31, 1998 1ST QTR MAY 2, 1998
---------------- ----------- -----------
(in thousands)
Video rental assets...................... $ 3,071 $ 8 $ 3,063
--------- ----- ---------
Non cash write-offs.................... 3,071 8 3,063
--------- ----- ---------
Lease obligations........................ 4,008 149 3,859
Inventory-related costs.................. 610 319 291
Termination benefits..................... 803 -- 803
Professional fees........................ 157 7 150
Other costs.............................. 43 (12) 55
--------- ----- ---------
Cash outflows.......................... 5,621 463 5,158
--------- ----- ---------
Total.................................. $ 8,692 $ 471 $ 8,221
--------- ----- --------
--------- ----- --------
In determining the components of the reserves, management analyzed all
aspects of the restructuring plan and the costs that would be incurred. The
write-off of leasehold improvements and furniture and fixtures represented the
estimated net book value of these items at the forecasted closing date. In
determining the provision for lease obligations, the Company considered the
amount of time remaining on each store's lease and estimated the amount
necessary for either buying out the lease or continued rent payments subsequent
to store closure. Inventory-related costs include the cost to pack and ship the
inventory on hand after the closing of the store as well as the penalty paid to
the vendor for additional product returns resulting from the restructurings.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be paid
to advisors related to the development of the store closing plan ($3.5 million
in total for both plans), and the negotiations with landlords related to the
termination of leases ($2.3 million in total).
The cash outflows for both restructurings were financed from operating cash
flows and the liquidation of merchandise inventory from the stores closed. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements.
The restructuring reserve is included in the accompanying balance sheet
under the caption "store closing reserve."
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
The Company closed 5 stores during the thirteen week period ended
May 2, 1998 that were related to the restructuring reserve. A summary of
store closures related to each restructuring is as follows:
1994 1995
RESTRUCTURING RESTRUCTURING TOTAL
----------------- ----------------- -----
Number of stores originally expected to close............ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through May 2, 1998.............. 179 168 347
--- --- ---
--- --- ---
Number of stores to be closed subsequent to May 2, 1998.. -- 23 23
--- --- ---
--- --- ---
Sales related to stores that were closed were $678,000 (unaudited) and
$1.4 million (unaudited) during the thirteen week period ended May 2, 1998
and May 3, 1997, respectively. Store operating losses related to stores that
were closed were $90,000 (unaudited) and $283,000 (unaudited) during the
thirteen week period ended May 2, 1998 and May 3, 1997, respectively.
The provision for termination benefits was based on the expectation that
338 employees would be terminated in connection with the restructuring
programs. Through May 2, 1998, 75 employees had been terminated and the
Company expects to terminate an additional 23 employees in fiscal 1998.
The Company has not terminated as many employees as originally planned
because higher than normal levels of attrition occurring after the
announcement of the restructurings resulted in a reduced need for involuntary
terminations.
Subsequent to the adoption of the restructuring programs, improving
economic conditions in certain markets, improvement in individual store
performance and the inability to negotiate reasonable lease termination
agreements have led the Company to keep open certain stores that were
originally expected to be closed. During the thirteen week period ended
May 2, 1998, 21 stores were removed from the list of stores expected to be
closed. Conversely, deteriorating economic conditions and store performance
in certain markets have led the Company to close certain stores that were not
originally expected to be closed. In addition, the timing of store closures
has also been affected by the ability or inability to negotiate reasonable
lease termination agreements. The net effect of changes made to the timing of
store closures and the stores to be closed under the 1995 restructuring
program has not been material. Through May 2, 1998, the Company has closed
347 stores in connection with the restructuring programs, compared to the
originally planned closures of 306 stores. During the remainder of 1998, the
Company plans to close an additional 23 stores as it completes the
restructuring programs. Any remaining balance in the restructuring reserve at
January 30, 1999 will be credited to operations.
NOTE 3. SEASONALITY
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.
NOTE 4. DEPRECIATION AND AMORTIZATION
Depreciation and amortization of videocassette rental inventory included
in cost of sales totalled $413,000 and $547,000 for the thirteen week periods
ended May 2, 1998 and May 3, 1997, respectively.
Depreciation and amortization of fixed assets is included in the
condensed consolidated statements of income as follows:
THIRTEEN WEEKS ENDED
------------------------------------
MAY 2, MAY 3,
1998 1997
----------------- -----------------
(in thousands)
Cost of Sales .................................... $ 300 $ 260
-------- --------
-------- --------
Selling, general and administrative expenses...... $ 4,043 $ 3,586
-------- --------
-------- --------
NOTE 5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which was effective for the Company for the fiscal year ended January 31,
1998. This standard requires the Company to disclose basic earnings per share
and diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the sum of
the weighted average shares that would have been outstanding if the dilutive
potential common shares had been issued for the Company's common stock
options from the Company's stock option plans. For the thirteen weeks ended
May 2, 1998 and May 3, 1997 the additional potentially dilutive common
shares included in the diluted earnings per share calculation were 1,507,000
and zero, respectively. Total stock options to purchase zero and 3,236,000
shares of common stock outstanding during the thirteen weeks ended May 2,
1998 and May 3, 1997, respectively, were not included in the computation of
diluted earnings per share because to do so would have been anti-dilutive.
NOTE 6. COMMON STOCK OFFERING
At the end of the first quarter of 1998 the Company sold an additional 1.5
million shares of its Common Stock in a public offering for approximately $37
million net of issuance costs. A portion of the
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997 (CONTINUED)
(UNAUDITED)
NOTE 6. COMMON STOCK OFFERING (CONTINUED)
proceeds was used to repay long-term debt and the balance of the proceeds was
used for general corporate purposes including investments in additional stores,
fixtures and inventory.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", issued in June 1997 and effective for fiscal years ending
after December 15, 1997, establishes standards for reporting and display of the
total net income and the components of all other non-owner changes in equity, or
comprehensive income (loss) in the statement of operations, in a separate
statement of comprehensive income (loss) or within the statement of changes of
stockholder's equity. The Company has no items of other comprehensive income.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, will change the
way companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial Statements
and the new rules will not change its financial presentation.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", issued in June, 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application permitted, requires 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 application of the new rules on the Company's Consolidated
Financial Statements and concluded that there will be no impact on its results
of operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 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 with earlier application permitted, provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. The Company will adopt the statement for the fiscal year
beginning January 31, 1999. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities", issued in April 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
costs and organization costs. The Company will adopt the statement for the
fiscal year beginning January 31, 1999. Management has evaluated the impact of
the application of the new rules on the Company's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but are
not limited to, changes in the competitive environment for the Company's
products, including the entry or exit of non-traditional retailers of the
Company's products to or from its markets; the release by the music industry of
an increased or decreased number of "hit releases", general economic factors in
markets where the Company's products are sold; and other factors discussed in
the Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 2, 1998
COMPARED TO THE THIRTEEN WEEKS ENDED MAY 3, 1997
SALES. The Company's total sales increased 32.5% to $145.1 million for the
thirteen weeks ended May 2, 1998 compared to $109.5 million for the same period
last year. The increase was primarily attributable to a comparable store sales
increase of 10.3%, the acquisition of 90 Strawberries' stores in October 1997,
and the opening of 16 stores partially offset by the closing of 25 stores.
Management attributes the comparable store sales increase, its ninth consecutive
quarter of such increases, primarily to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation.
Comparable store sales in the Company's music stores increased 12.6% while
comparable sales in the video stores increased 3.6%.
GROSS PROFIT. Gross profit as a percentage of sales improved to 36.2% from
35.9% in the thirteen week period ended May 2, 1998 compared to the same period
in 1997. The increase is primarily due to the leveraging of expenses in the
Company's distribution center.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, decreased from
35.6% to 32.6% in the thirteen week period ended May 2, 1998 compared to the
same period in 1997. The improvement is primarily due to a reduction of store
occupancy costs as a percentage of sales. The Company continues to leverage its
depreciation and amortization and operating expenses against sales.
INTEREST EXPENSE. Net interest expense was reduced from $1.8 million in the
thirteen week period ended May 3, 1997 to $1.1 million for the thirteen week
period ending May 2, 1998.
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The decrease is due to a reduction in long-term debt and lower interest rates as
a result of the refinancing completed in fiscal 1997.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INCOME. The Company increased its net income to $2.6 million in the
thirteen weeks ended May 2, 1998 from a net loss of $862 thousand during the
same period last year. The improved bottom line performance can be attributed
to the comparable store sales increase, improved gross margin rates, leverage of
S,G&A expenses and lower interest expense.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND SOURCES OF CAPITAL. At the end of the first quarter of 1998 the
Company sold an additional 1.5 million shares of its Common Stock in a public
offering for approximately $37 million net of issuance costs. A portion of the
proceeds was used to repay long-term debt and the balance of the proceeds, which
is reflected in the $20.3 million of cash and cash equivalents at May 2, 1998,
will be used for general corporate purposes including investments in additional
stores, fixtures and inventory and future acquisition and investment
opportunities. The impact of this issuance of Common Stock had an immaterial
effect on earnings per share in the first quarter.
On July 9, 1997 the Company entered into a $100 million secured revolving credit
facility with Congress Financial Corporation. The Revolving Credit Facility
combined the Company's long-term debt with its revolving credit line to create a
$100 million credit facility with a three year term at interest rates below the
prime rate. The Revolving Credit Facility contains certain restrictive
provisions, including provisions governing cash dividends and acquisitions, is
secured by merchandise inventory and has a minimum net worth convenant. At
quarter end, the Company had unused lines of credit aggregating $100 million.
The Company's working capital at May 2, 1998 was $92.9 million and its ratio of
current assets to current liabilities was 1.8 to 1. During the first three
months of 1998, the Company's net cash used by operations was $70.9 million,
compared to $35.7 million used in the first three months of 1997. The most
significant operating use of cash during the period was $62.7 million in
seasonal reductions of accounts payable. The Company used an additional $35
million for the reduction of long-term debt.
CAPITAL EXPENDITURES
During the first quarter of 1998, the Company had capital expenditures of $6
million out of a total of $47 million, net of construction allowances, planned
for the year. Included in the total for the year is $17 million for a new Point
of Sale register system. Also during the quarter, the Company opened or
relocated 16 new stores and closed 25 stores while total retail selling space
increased slightly. The Company plans on opening approximately the same number
of stores in
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Fiscal 1998 as it closes but anticipates that total retail footage will increase
as the average size of new stores continues to increase.
YEAR 2000 COMPLIANCE
The Company has completed an awareness of the business risks related to the
Year 2000 issue. The results of the awareness indicate that:
- - awareness of Year 2000 issues is well known throughout the Company;
- - assessment of Year 2000 sensitive items will
completed;
- - a list of items and business relationships sensitive to the
Year 2000 issue will be compiled;
- - renovation of the core information
technology ("IT") systems will be completed;
- - third-party compliance tracking will be done; and
- - verification of embedded chip ("non-IT") system readiness for Year 2000
compliance will be done.
The Company's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation. As
indicated above, the Awareness and Assessment 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 will include 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 its 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. Assessment and Renovation
efforts are underway. For the Renovation phase, all core IT system
programming modifications will be completed by its internal systems
development staff. The system programming modifications include upgrading the
distribution, inventory management and accounting systems and converting the
POS registers to a Year 2000 compliant system. Replacements for the other
(non-core) IT systems are being implemented on schedule. The non core IT
Systems being replaced include a product return system, a system for tracking
the opening of new stores and managing lease payments. For the Validation and
Implementation phases, formal systems testing for both IT and non-IT systems
is expected to be completed by the end of the second quarter of fiscal 1999.
In order to complete the Validation and Implementation phases, the Company
will process daily, weekly and monthly transactions on the main corporate IT
systems platform, IBM AS/400. The compliance testing will be completed in a
dedicated environment within the AS/400 to assure acceptance of all
transactions in the year 2000.
The Company is exposed to both internal and external Year 2000 risks.
Internal risks exist due to its dependence on its IT and non-IT systems. The
Company is dependent on its IT and non-IT systems for many of its everyday
operations including inventory management, product distribution, cash
management, accounting and financial reporting. The Company utilizes a
variety of vendors for its system needs and has initiated discussions with
its vendors and monitored their Year 2000 compliance programs and the
compliance of their products or services with required standards. Although
the majority of these vendors represent that their products are Year 2000
compliant, the Company will perform testing to validate the vendor
representations no later than the second quarter of fiscal 1999. In the
normal course of business, the Company will replace its POS register system
with a Year 2000 compliant system during fiscal 1998. Additionally, the
Company plans to replace its product return center's processing system no
later than the end of the second quarter of fiscal 1999. The replacement
system will be Year 2000 compliant. Preliminary contingency plans for failure
of internal systems include implementing manual procedures such as the use of
manual merchandise picking and shipping to replace automated distribution
center equipment.
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External risks are represented by the fact that the Company utilizes
approximately 2,500 different suppliers in the normal course of its business.
Six major merchandise vendors account for more than 60% 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 product to approximately 36% of
its stores, it does rely on a number of trucking companies for the remainder
of its product distribution. Evaluation of its vendors' Year 2000 readiness
will begin in the fourth quarter of fiscal 1998, and is expected to be
completed by the end of the first quarter of fiscal 1999. Upon completion of
the assessment of vendor readiness, contingency plans will be 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 it has no control and for which it
has no ready substitute, such as, but not limited to, power and
telecommunications services. 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 our 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
$100,000 through May 2, 1998. Anticipated future costs include an additional
$1 million to address Year 2000 issues identified as a result of remediation
testing and a new product return center processing system. Future costs will
be funded by cash flows generated from operations.
The Company's estimates of the costs of achieving Year 2000 compliance and
the date by which Year 2000 compliance will be achieved are based on
management's best estimates, which were derived using numerous assumptions
about future events including the continued availability of certain
resources, third party modification plans and other factors. However, there
can be no assurance that these estimates will be achieved, and actual results
could differ materially from these estimates. Specific facts that might cause
such material differences include the availability and cost of personnel
trained in Year 2000 remediation work, the ability to locate and correct all
relevant computer codes, the success achieved by its customers and suppliers
in reaching Year 2000-readiness, the timely availability of necessary
replacement items and similar uncertainties.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A) An Annual Meeting of Shareholders of Trans World Entertainment Corporation
was held on Wednesday, June 3, 1998.
B) In the case of each individual nominee named below, authority to vote was
withheld with respect to the number of shares shown opposite their name in
Column 1, and each nominee received the number of votes set opposite their
name in Column 2 for election as director of the Corporation.
---------------- ---------------
Column 1 Column 2
Name of Nominee Withheld Votes for
------------------------- ------------------- --------------
Robert J. Higgins 100,726 18,750,148
Dean S. Adler 100,560 18,750,314
George W. Dougan 2,822,671 16,028,203
Charlotte G. Fischer 2,822,671 16,028,203
Isaac Kaufman 101,100 18,749,774
Matthew H. Mataraso 100,560 18,750,314
Dr. Joseph G. Morone 2,822,671 16,028,203
C) A proposal to amend Trans World Entertainment Corporation's 1990 Stock
Option Plan for Non-Employee Directors to authorize the Board to award
discretionary option grants, was approved as follows:
FOR- 17,734,130
AGAINST- 1,109,746
ABSTAIN- 6,998
D) A proposal to institute Trans World Entertainment Corporation's 1998
Employee Stock Option Plan, was approved as follows:
FOR- 12,928,411
AGAINST- 3,832,986
ABSTAIN- 5,469
-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.
---------- ----------- --------
10.4 Trans World Entertainment 13
Corporation Employment
Agreement with Robert J.
Higgins
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
March 30, 1999 BY /s/ ROBERT J. HIGGINS
----------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
March 30, 1999 BY: /s/ JOHN J. SULLIVAN
---------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Chief Financial and Accounting Officer)
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