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
OCTOBER 31, 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
-------- ----------
(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,
32,723,572 shares outstanding as of December 4, 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 October 31, 1998, January 31, 1998
and November 1, 1997 3
Condensed Consolidated Statements of Income - Thirteen Weeks Ended
October 31, 1998 and November 1, 1997 and Thirty-Nine Weeks Ended
October 31, 1998 and November 1, 1997 5
Condensed Consolidated Statements of Cash Flows - Thirty-Nine Weeks Ended
October 31, 1998 and November 1, 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 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
-2-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31, NOVEMBER 1,
1998 1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,164 $ 94,732 $ 4,590
Merchandise inventory 228,514 189,394 216,659
Refundable income taxes -- -- 2,338
Other current assets 5,181 6,224 9,844
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Total current assets 266,859 290,350 233,431
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VIDEOCASSETTE RENTAL INVENTORY, net 3,672 4,099 4,060
DEFERRED TAX ASSET 3,787 4,726 3,047
FIXED ASSETS, net 86,549 72,068 72,180
OTHER ASSETS 2,928 2,776 4,111
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TOTAL ASSETS $ 363,795 $ 374,019 $ 316,829
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31, NOVEMBER 1,
1998 1998 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 144,471 $ 162,981 $ 135,454
Notes payable - - 10,707
Income taxes payable 911 11,155 -
Accrued expenses and other 10,914 17,346 9,970
Store closing reserve 6,581 8,692 9,874
Current deferred taxes 2,062 1,103 -
Current portion of long-term debt
and capital lease obligations 2,279 99 96
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Total current liabilities 167,218 201,376 166,101
LONG-TERM DEBT, less current portion - 35,000 35,000
CAPITAL LEASE OBLIGATIONS, less current portion 15,938 6,409 6,435
OTHER LIABILITIES 6,982 6,712 6,554
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TOTAL LIABILITIES 190,138 249,497 214,090
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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; 32,825,552, 29,723,036 and 29,695,434 shares
issued, respectively) 328 297 297
Additional paid-in capital 64,773 25,287 24,812
Treasury stock, at cost (105,432, 106,182 and 106,182
shares, respectively) (390) (394) (394)
Unearned compensation - restricted stock (142) (175) (193)
Retained earnings 109,088 99,507 78,217
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TOTAL SHAREHOLDERS' EQUITY 173,657 124,522 102,739
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 363,795 $ 374,019 $ 316,829
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
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OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
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Sales $ 143,398 $ 114,737 $ 430,658 $329,273
Cost of sales 88,193 71,075 269,532 206,821
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Gross profit 55,205 43,662 161,126 122,452
Selling, general and administrative expenses 47,670 41,000 143,694 119,284
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Income from operations 7,535 2,662 17,432 3,168
Interest expense 665 1,107 2,264 4,505
Other expenses (income), net (200) (38) (541) (151)
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Income (loss) before income taxes 7,070 1,593 15,709 (1,186)
Income tax expense (benefit) 2,757 614 6,126 (470)
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NET INCOME (LOSS) $ 4,313 $ 979 $ 9,583 $ (716)
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BASIC EARNINGS (LOSS) PER SHARE $ 0.13 $ 0.04 $ 0.30 $ (0.02)
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Weighted average number of common shares outstanding 32,703 29,570 31,653 29,443
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DILUTED EARNINGS (LOSS) PER SHARE $ 0.13 $ 0.03 $ 0.29 $ (0.02)
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Adjusted weighted average number of common
shares outstanding 34,245 31,881 33,565 29,443
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-5-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
-------------------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
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NET CASH USED BY OPERATING ACTIVITIES: $ (47,386) $ (26,951)
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INVESTING ACTIVITIES:
Acquisition of property and equipment (30,873) (16,616)
Disposal of rental inventory, net 427 724
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Net cash used by investing activities (30,446) (15,892)
-------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 35,000
Proceeds from capital lease 12,608 ---
Payments of long-term debt and capital lease obligations (35,899) (53,516)
Net increase in revolving line of credit --- 10,707
Proceeds from issuance of common stock 36,772 ---
Exercise of stock options 2,783 471
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Net cash provided (used) by financing activities 16,264 (7,338)
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Net decrease in cash and cash equivalents (61,568) (50,181)
Cash and cash equivalents, beginning of period 94,732 54,771
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-------------------------------------
Cash and cash equivalents, end of period $ 33,164 $ 4,590
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Supplemental disclosure of non-cash investing and financing
activities:
Issuance of treasury stock under incentive stock programs $ 13 $ 4
Income tax benefit resulting from exercise of stock options 6,155 348
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-6-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 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
------- --------- ----------
Total cash outflows.............................. $ 13,512 $ 10,699 $ 2,813
------- --------- ----------
------- --------- ----------
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 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.
7
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
An analysis of the charges against the 1995 reserve for the thirty-nine week
period ended October 31, 1998 is as follows:
CHARGES AGAINST
THE RESERVE
BALANCE AT ------------------------------------ BALANCE AT
JANUARY 31, 1998 1ST QTR 2ND QTR 3RD QTR OCTOBER 31, 1998
---------------- ---------- ----------- ----------- ----------------
(in thousands)
Video rental assets................. $ 3,071 $ 8 $ 352 $ 21 $ 2,690
--------- ----- ---------- ----------- -----------
Non cash write-offs............... 3,071 8 352 21 2,690
--------- ----- ---------- ----------- -----------
Lease obligations................... 4,008 149 408 679 2,772
Inventory-related costs............. 610 319 55 80 156
Termination benefits................ 803 -- -- -- 803
Professional fees................... 157 7 5 6 139
Other costs......................... 43 (12) 33 1 21
--------- ----- ---------- ----------- -----------
Cash outflows..................... 5,621 463 501 766 3,891
--------- ----- ---------- ----------- -----------
Total............................. $ 8,692 $ 471 $ 853 $ 787 $ 6,581
--------- ----- ---------- ----------- -----------
--------- ----- ---------- ----------- -----------
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."
The Company closed 14 stores during the thirty-nine week period ended
October 31, 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 October 31, 1998......... 179 177 356
--- --- ---
--- --- ---
Number of stores to be closed subsequent to October 31,
1998................................................... -- 14 14
--- --- ---
--- --- ---
Sales related to stores that were closed were $3.8 million (unaudited) and
$17.4 million (unaudited) during the thirty-nine week period ended October 31,
1998 and November 1, 1997, respectively. Store operating losses related to
stores that were closed were $278,000 (unaudited) and $209,000 (unaudited)
during the thirty-nine week period ended October 31, 1998 and November 1, 1997,
respectively.
8
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
The provision for termination benefits was based on the expectation that 338
employees would be terminated in connection with the restructuring programs.
Through October 31, 1998, 75 employees had been terminated and the Company
expects to terminate an additional 14 employees in fourth quarter of 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 thirty-nine week period ended October 31, 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
October 31, 1998, the Company has closed 356 stores in connection with the
restructuring programs, compared to the originally planned closures of 306
stores. During the quarter ending January 30, 1999, the Company plans to close
an additional 14 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 $1,602,000 and $1,011,000 for the thirty-nine week
periods ended October 31, 1998 and November 1, 1997, respectively.
Depreciation and amortization of fixed assets is included in the
condensed consolidated statements of income as follows:
THIRTY-NINE WEEKS ENDED
--------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
----------- ------------
(in thousands)
Cost of sales........................................... $ 933 $ 810
----------- ------------
----------- ------------
Selling, general and administrative expenses............ $ 13,282 $ 11,035
----------- ------------
----------- ------------
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 thirty-nine weeks
ended October 31, 1998 and November 1, 1997 the additional potentially
dilutive common shares included in the diluted earnings per share calculation
were 1,912,000 and zero, respectively. Total stock options to purchase zero
and 3,669,000 shares of common stock outstanding during the thirty-nine weeks
ended October 31, 1998 and November 1, 1997, respectively, were not included
in the computation of diluted earnings per share because to do so would have
been anti-dilutive. The quarterly amounts for the thirty-nine weeks ended
November 1, 1997 have been restated to adopt this statement. Share amounts
and per share amounts have been adjusted for the three-for-two stock split
effected as a stock dividend on September 15, 1998.
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
9
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 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.
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 OCTOBER 31, 1998
COMPARED TO THE THIRTEEN WEEKS ENDED NOVEMBER 1, 1997
SALES. The Company's total sales increased 25.0% to $143.4 million for the
thirteen weeks ended October 31, 1998 compared to $114.7 million for the same
period last year. The increase was primarily attributable to a comparable
store sales increase of 6%, the acquisition of 90 Strawberries' stores in
October 1997 and the opening of 57 stores partially offset by the closing of
86 stores since the third quarter of 1997.
Comparable store sales in the Company's music category increased 3.4% while
comparable sales in the video category increased 19.0%.
GROSS PROFIT. Gross profit, as a percentage of sales improved to 38.5% from
38.1% in the thirteen week period ended October 31, 1998 compared to the same
period in 1997. This improvement is due to the continued leveraging of
expenses in the Company's distribution center, an increase in the initial
mark on, and an improvement in inventory shrinkage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, decreased from
35.7% to 33.2% in the thirteen week period ended October 31, 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, and the continued leveraging
of operating expenses against sales.
INTEREST EXPENSE. Net interest expense was reduced from $1.1 million in the
thirteen week period ended November 1, 1997 to $0.7 million for the thirteen
week period ending October 31, 1998. The decrease is due to a reduction in
long-term debt, offset by an increase in capital lease obligations.
NET INCOME. The Company increased its net income to $4.3 million in the thirteen
weeks ended October 31, 1998 from net income of $1.0 million during the same
period last year. The improved bottom line performance is attributable to the
comparable store sales increase, improved gross margin rates, leverage of S,G&A
expenses and lower interest expense.
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
COMPARED TO THE THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997
SALES. The Company's total sales increased 30.8% to $430.7 million for the
thirty-nine weeks ended October 31, 1998 compared to $329.3 million for the
same period last year. The increase in sales is due to an overall improvement
in the music and video specialty retail industry, a comparable store sales
increase of 9%, and the acquisition of 90 Strawberries stores in October
1997. Management attributes the increase comparable store sales primarily to
its focus on customer service, superior retail locations, inventory
management and merchandise presentation.
Comparable store sales in the music category increased 8.3% while comparable
sales in the video category increased 12.3%.
GROSS PROFIT. Gross profit as a percentage of sales improved to 37.4% from 37.2%
in the thirty-nine week period ended October 31, 1998 compared to the same
period in 1997. Management attributes the increase to an improved competitive
environment and the leveraging of expenses in the Company's distribution center.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG & A expenses, as a
percentage of sales, decreased to 33.4% in the first thirty-nine weeks 1998
from 36.2% in the first thirty-nine weeks of 1997. The improvement was
11
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
primarily due to the leveraging of store occupancy, depreciation and
amortization, and operating costs against sales. The Company continues to
leverage expenses against sales.
INTEREST EXPENSE. Net interest expense was to $2.3 million for the
thirty-nine week period ending October 31, 1998 from $4.5 million for the
thirty-nine week period ending November 1, 1997. The decrease is due to a
reduction of long-term debt, offset by an increase in capital lease.
NET INCOME. The Company increased its net income to $9.6 million in the
thirty-nine weeks ended October 31, 1998 from a net loss of $0.7 million 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.
12
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND SOURCES OF CAPITAL
Cash generated from operations continued to be the Company's primary source of
liquidity during the first nine months of the fiscal year. The Company had
unused lines of credit aggregating $100 million at October 31, 1998.
The Company's working capital at October 31, 1998 was $99.6 million and its
ratio of current assets to current liabilities was 1.6 to 1. During the first
nine months of 1998, the Company's net cash used by operations was $47.4
million, compared to $27.0 million used in the first nine months of 1997. The
most significant use of cash during the period was $34.1 million in the normal
reduction of accounts payable.
On September 15, 1998, the Company split its common stock three-for-two in the
form of a stock dividend to shareholders of record on September 1, 1998. All
references throughout this report to the number of shares or per share amounts
of the Company's common stock have been restated to reflect the stock split.
CAPITAL EXPENDITURES
During the thirty-nine weeks ended October 31, 1998, the Company had capital
expenditures of $30.9 million. Included in the total for the year is $10.5
million for a new Point of Sale register system and $2.9 million for the
expansion of the Company's home office in Albany, New York. Also during the
thirty-nine weeks ended October 31, 1998, the Company opened or relocated 42
stores and closed 59 stores while total retail selling space increased slightly.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of the business risks related to the
Year 2000 issue. The results of the assessment indicate that:
- awareness of Year 2000 issues is well known throughout the Company;
- the assessment of Year 2000 sensitive items is complete;
- a list of items and business relationships sensitive to the Year 2000
issue has been compiled;
- renovation of the core information technology ("IT") systems has been
completed;
- third-party compliance tracking has begun; and
- verification of embedded chip ("non-IT") system readiness for Year 2000
compliance is ready to begin.
The Company's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation. As
indicated above, the Awareness and
13
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 included
contacting merchandise vendors regarding their Year 2000 remediation
activities, discussions with its software vendors and service providers,
identification of all source code and all imbedded chip logic that could
contain date logic, analyzing source codes for Company systems identifying
each individual occurrence of date logic, and simulating the Year 2000
environment by rolling forward the date in test files of its principal IT
systems. Renovation and Validation and Implementation efforts are underway.
For the Renovation phase, all core IT system programming modifications have
been completed by the Company's 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 the Company's dependence on its IT and non-IT
systems. The Company is dependent on its IT and non-IT systems for many of its
everyday operations including inventory management, product distribution, cash
management, accounting and financial reporting. The Company utilizes a variety
of vendors for its system needs. The Company 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
replaced 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.
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, the Company
does rely on a number of trucking companies for the remainder of its product
distribution. Evaluation of the Company's vendors' Year 2000 readiness began 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 the Company's data systems center and distribution center.
The Company
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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
$757,000 to date. 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.
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.
---------- ----------- --------
10.1 Lease between Trans World 17
Entertainment Corporation,
Tenant, and Robert J. Higgins,
Landlord, for additional
office space at 38 Corporate
Circle
27 Financial Data Schedule N/A
(electronic filing only)
(B) REPORTS ON FORM 8-K -
The Company filed a report on form 8-K announcing its Merger with
Camelot Music Holdings, Inc., a mall-based music retailer.
Omitted from this part II are items which are not applicable or to which the
answer is negative to the periods covered.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
December 15, 1998 BY /s/ ROBERT J. HIGGINS
-------------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
December 15, 1998 BY: /s/ JOHN J. SULLIVAN
------------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Chief Financial and Accounting Officer)
17