-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O4E00yLMXRlAwcZ6d1E4Qt/WDc7EW02LiW5SSPGyL74po/cZcefIgXzOIPvk3pyo 2jmAjCu97QUCMXjT8aYfWA== 0000795212-99-000026.txt : 19990915 0000795212-99-000026.hdr.sgml : 19990915 ACCESSION NUMBER: 0000795212-99-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000795212 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 141541629 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14818 FILM NUMBER: 99711224 BUSINESS ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 BUSINESS PHONE: 5184521242 MAIL ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD MUSIC CORP DATE OF NAME CHANGE: 19920703 10-Q 1 Second Quarter Filing on Form 10-Q 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 JULY 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ------- TO ------- COMMISSION FILE NUMBER: 0-14818 TRANS WORLD ENTERTAINMENT CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 14-1541629 ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Corporate Circle Albany, New York 12203 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (518) 452-1242 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES_X_NO__ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value, 52,707,405 shares outstanding as of August 28, 1999 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 - July 31, 1999, January 30, 1999 and August 1, 1998 3 Condensed Consolidated Statements of Income - Thirteen Weeks Ended and Twenty-Six Weeks Ended July 31, 1999 and August 1, 1998 4 Condensed Consolidated Statements of Cash Flows - Twenty-Six Weeks Ended July 31, 1999 and August 1, 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 12 Item 6 - Exhibits and Reports on Form 8-K 13 Signatures 13 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION Item 1 - Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except for share amounts) (unaudited)
July 31, January 30, August 1, 1999 1999 1998 --------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 83,797 $139,411 $ 32,486 Merchandise inventory 398,726 426,078 374,212 Current deferred tax asset 4,664 633 --- Other current assets 15,061 15,182 21,424 -------- -------- -------- Total current assets 502,248 581,304 428,122 -------- -------- -------- VIDEOCASSETTE RENTAL INVENTORY, net 1,076 1,238 3,661 DEFERRED TAX ASSET 31,841 29,580 25,127 NET FIXED ASSETS 136,669 139,124 135,182 OTHER ASSETS 44,952 47,364 53,019 -------- ------- ------- TOTAL ASSETS $716,786 $798,610 $645,111 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $206,229 $220,636 $177,301 Accrued expenses and other 31,556 68,597 30,422 Store closing reserve --- --- 7,367 Current portion of long-term debt and capital lease obligations 4,497 4,802 1,709 Income taxes payable --- 12,734 1,515 -------- -------- -------- Total current liabilities 242,282 306,769 218,314 -------- -------- -------- LONG-TERM DEBT, less current portion --- 20,000 25,000 CAPITAL LEASE OBLIGATIONS, less current portion 19,394 16,065 12,051 OTHER LIABILITIES 18,941 23,400 21,770 -------- -------- -------- TOTAL LIABILITIES 280,617 366,234 277,135 -------- -------- -------- SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued) --- --- --- Common stock ($.01 par value; 200,000,000 shares authorized; 52,875,437, 52,185,258 and 52,100,740 shares issued, respectively) 529 522 521 Additional paid-in capital 278,519 271,805 262,292 Treasury stock, at cost (104,432, 105,432 and 105,432 shares, respectively) (386) (390) (394) Unearned compensation - restricted stock (57) (78) (210) Retained earnings 157,564 160,517 105,767 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 436,169 432,376 367,976 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $716,786 $798,610 $645,111 ======== ======== ======== See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended ---------------------- ------------------------ July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---------------------- ------------------------ Sales $277,275 $262,561 $564,294 $513,944 Cost of sales 174,705 166,749 356,780 327,719 --------- --------- ---------- -------- Gross profit 102,570 95,812 207,514 186,225 Selling, general and administrative expenses 92,293 89,369 185,993 174,467 Costs related to the Camelot merger --- --- 25,721 --- --------- --------- ---------- -------- Income (loss) from operations 10,277 6,443 (4,200) 11,758 Interest expense 465 438 892 815 --------- --------- ---------- -------- Income (loss) before income taxes 9,812 6,005 (5,092) 10,943 Income tax expense (benefit) 4,121 2,431 (2,139) 5,208 --------- --------- ---------- -------- NET INCOME (LOSS) $ 5,691 $ 3,574 $ (2,953) $ 5,735 ========= ========= ========== ======== BASIC EARNINGS (LOSS) PER SHARE $ 0.11 $ 0.07 $ (0.06) $ 0.11 ========= ========= ========== ======== Weighted average number of common shares outstanding 52,191 51,704 52,080 50,300 DILUTED EARNINGS (LOSS) PER SHARE $ 0.11 $ 0.07 $ (0.06) $ 0.11 ========== ========= ========== ======== Adjusted weighted average number of common shares outstanding 53,646 54,486 52,080 53,017 See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Twenty Six Weeks Ended ------------------------ July 31, August 1, 1999 1998 ------------------------ NET CASH USED BY OPERATING ACTIVITIES: $(23,079) $(84,439) ------------------------ INVESTING ACTIVITIES: Acquisition of property and equipment (22,346) (131,683) Disposal of rental inventory, net 162 438 ------------------------ Net cash used by investing activities (22,184) (131,245) ------------------------ FINANCING ACTIVITIES: Proceeds from issuance of long-term debt --- 30,750 Proceeds from capital lease 6,407 7,440 Payments of long-term debt and capital lease obligations (23,383) (35,189) Net increase in revolving line of credit --- 24,794 Proceeds from issuance of common stock --- 36,772 Exercise of stock options 6,625 2,567 ------------------------- Net cash provided (used) by financing activities (10,351) 67,134 ------------------------ Net decrease in cash and cash equivalents (55,614) (148,550) Cash and cash equivalents, beginning of period 139,411 181,036 ------------------------ Cash and cash equivalents, end of period $ 83,797 $ 32,486 ======================== Supplemental disclosure of non-cash investing and financing activities: Income tax benefit resulting from exercise of stock options $ 858 $ 5,809 Issuance of treasury stock under incentive stock programs 13 13 See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 31, 1999 and August 1, 1998(unaudited) Note 1. Basis of Presentation The accompanying unaudited financial statements consist of Trans World Entertainment Corporation and its subsidiaries, (the "Company"), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. On April 22, 1999, the Company acquired all of the issued and outstanding common stock of Camelot Music Holdings, Inc. ("Camelot") pursuant to the terms of an Agreement and Plan of Merger, dated October 26, 1998, by CAQ Corporation, a wholly-owned subsidiary of the Company, with and into Camelot. Upon completion of the merger, Camelot became a wholly-owned subsidiary of the Company. The merger was accounted for as a tax-free pooling-of-interests. All financial and per share information for prior periods has been restated to reflect the results of the combined company. These interim condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these condensed consolidated financial statements reflect all normal, recurring adjustments which, in the opinion of management, are necessary for 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 30, 1999. 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 video cassette rental inventory included in cost of sales totaled $263,000 and $354,000 for the thirteen week periods ended July 31, 1999 and August 1, 1998, respectively. Depreciation and amortization of video cassette rental inventory included in cost of sales totaled $499,000 and $767,000 for the twenty-six week periods ended July 31, 1999 and August 1, 1998, respectively. Depreciation and amortization of fixed assets for the companies' distribution centers is included in the condensed consolidated statements of income in cost of sales and was $390,000 and $437,000 for the thirteen week periods ended July 31, 1999 and August 1, 1998, respectively. For the twenty-six week periods periods ended July 31, 1999 and August 1, 1998 depreciation and amortization of fixed assets for the companies' distribution centers included in the condensed consolidated statements of income in cost of sales was $793,000 and $806,000. Depreciation and amortization for the remaining fixed assets is included in Selling, General & Administrative expenses and was $9.0 million and $7.8 million for the thirteen week periods ended July 31, 1999 and August 1, 1998, respectively. Depreciation and amortization included in Selling, General & Administrative expenses was $17.4 million and $14.5 million for the twenty-six week periods ended July 31, 1999 and August 1, 1998, respectively. Note 4. Earnings Per Share The Company discloses basic earnings per share and diluted earnings per share based on Financial Accounting Standards Board Statement No. 128, "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 potential dilutive common shares had been issued for the Company's common stock options from the Company's stock option plans. For the thirteen weeks ended July 31, 1999 and August 1, 1998 the additional potentially dilutive common shares included in the diluted earnings per share calculation were 1,455,000 and 2,782,000, respectively. All stock options to purchase shares of common stock which were outstanding during the thirteen weeks ended July 31, 1999 and August 1, 1998, respectively, were included in the computation of diluted earnings per share. For the twenty-six weeks ended July 31, 1999 and August 1, 1998 the additional potentially dilutive common shares included in the diluted earnings per share calculation were zero and 2,717,000, respectively. Stock options to purchase 5,475,000 and zero shares of common stock which were outstanding during the twenty-six weeks periods ending July 31, 1999 and August 1, 1998, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 31, 1999 and August 1, 1998(unaudited) (continued) Note 5. Recently Issued Accounting Standards SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998, as amended by SFAS No. 137, is effective for all quarters of fiscal years beginning after June 15, 2000, will require 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 new rules on the Company's consolidated financial statements and concluded that there will be no impact on its current results of operations or its financial position. The Accounting Standard's Executive Committee Statement of Position 98-1 ("SOP 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, requires that certain costs of computer software developed or obtained for internal use be capitalized. The Company adopted SOP 98-1 for the fiscal year beginning January 31, 1999. The application of this statement to the Company's consolidated financial statements did not have a material impact on its results of operations or its financial position because a substantial portion of the Company's software is purchased from outside vendors. The Accounting Standard's Executive Committee Statement of Position 98-5 ("SOP 98-5"), "Accounting for the Costs of Start-up Activities," issued in April 1998 and effective for fiscal years beginning after December 15, 1998, requires start-up costs and organization costs to be expensed as incurred. The Company adopted SOP 98-5 for the fiscal year beginning January 31, 1999. The application of this statement to the Company's consolidated financial statements did not have a material impact on its results of operations or its financial position because such costs are already being expensed as incurred. 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 July 31, 1999 Compared to the Thirteen Weeks Ended August 1, 1998 Sales. The Company's total sales increased 5.6% to $277.3 million for the thirteen weeks ended July 31, 1999, compared to $262.6 million for the same period last year. The increase was primarily attributable to the addition of new stores, including Spec's which was acquired in July 1998. Comparable store sales were flat with last year. Comparable store sales for the recently acquired Camelot stores decreased 5%, while the comparable store sales excluding the Camelot stores increased 5%. Gross Profit. Gross profit, as a percentage of sales, improved to 37.0% for the thirteen weeks ended July 31, 1999 compared to 36.5% for the same period in 1998. The improvement is due to improved shrink results and an increase in gross margin for the stores acquired through the Camelot acquisition. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("S,G&A"), expressed as a percentage of sales, decreased from 34.1% to 33.2% in the thirteen week period ended July 31, 1999 when compared to the same period in 1998. The improvement is primarily due to the increased leveraging of operating expenses resulting from higher sales and the reduction of Camelot's administrative expenses. Interest Expense. Net interest expense was $465,000 in the thirteen week period ended July 31, 1999 compared to $438,000 in 1998. Income Tax Expense (Benefit). The Company's effective tax rate increased to 42.0% for the thirteen weeks ended July 31, 1999 from 40.5% for the thirteen weeks ended August 31, 1998. The increase is due to the Company incurring non-deductible expenses related to the Camelot merger. Net Income. The Company increased its net income to $5.7 million for the thirteen weeks ended July 31, 1999 from net income of $3.6 million for the same period in 1998. The improved bottom line performance is attributable to the increased sales and gross margin and the leveraging of S,G&A expenses. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS (continued) Twenty-Six Weeks Ended July 31, 1999 Compared to the Twenty-Six Weeks Ended August 1, 1998 Sales. The Company's total sales increased 9.8% to $564.3 million for the twenty-six weeks ended July 31, 1999 compared to $513.9 million for the same period last year. Comparable store sales increased 2%. Comparable store sales for the recently acquired Camelot stores decreased 3%, while the comparable store sales for the remaining stores excluding Camelot increased 5%. Gross Profit. Gross profit as a percentage of sales improved to 36.8% in the twenty-six weeks ended July 31, 1999 compared to 36.2% for the same period in 1998. The increase in gross margin is due to improved shrink results and an increase in gross margin for the stores acquired through the Camelot acquisition. Selling, General and Administrative Expenses. SG&A expenses, as a percentage of sales, decreased to 32.9% in the first twenty-six weeks of 1999 from 33.9% in the first twenty-six weeks of 1998. The improvement is primarily due to the increased leveraging of operating expenses resulting from higher sales and the reduction of Camelot's administrative expenses. Interest Expense. Net interest expense was $892,000 in the twenty-six week period ended July 31, 1999 compared to $815,000 for the twenty-six week period ending August 1, 1998. The increase is due to additional interest expense related to the capital lease for new point-of-sale equipment installed in 1998. Income Tax Expense (Benefit). The Company's effective tax rate decreased to 42.0% for the twenty-six weeks ended July 31, 1999 from 47.6% for the twenty-six weeks ended August 1, 1998. The Company's 1998 tax rate was impacted by non-deductible amortization expense for the issuance of stock options. During 1999, the Company's effective tax rate was impacted by the non-deductibility of certain expenses related to the Camelot merger, offset by timing differences of asset impairments in accordance with SFAS 121. Costs related to the Camelot merger. A one-time pre-tax charge of $25.7 million for costs related to the merger with Camelot was taken in the twenty-six weeks ended July 31, 1999. The charge includes a write-off of redundant assets between the two companies of $8 million, investment banking fees and other professional costs of $10 million, printing and mailing costs for the joint proxy/prospectus filed on March 29, 1999 of $2 million, system and integration costs of $2 million and severance costs of $4 million. Net Income (Loss). The Company incurred a net loss of $3.0 million in the twenty-six weeks ended July 31, 1999 compared to a net income of $5.7 million during the same period last year. The loss was caused by the $25.7 million one- time Camelot merger charge. Excluding the one-time merger charge, the resultant increase in net income is due to the increase in gross margin and the leveraging of selling, general and administrative expenses. The after-tax effect of the $25.7 million Camelot merger charge reduced earnings from $0.22 per share to a loss of $0.06 per share. LIQUIDITY AND CAPITAL RESOURCES Liquidity. Cash generated from operations is the Company's primary source of liquidity. The Company had unused lines of credit aggregating $100 million at July 31, 1999. The Company's working capital at July 31, 1999 was $260.0 million and its ratio of current assets to current liabilities was 2.1 to 1.0. During the twenty-six weeks ended July 31, 1999, the Company's net cash used by operations was $23.1 million, compared to $84.4 million in the same period of 1998. The most significant uses of cash for operating purposes were $30 million in payments for income taxes and a $24.4 million reduction in accounts payable. Capital Resources. On April 22, 1999, the Company acquired by merger Camelot Music Holdings, Inc., a Delaware corporation ("Camelot") by issuing 1.9 shares of the Company's common stock in exchange for each share of Camelot's outstanding common stock. Upon consummation of the merger, Camelot became a wholly-owned subsidiary of the Company. The Company gained an additional 483 stores and 2.1 million square feet of selling space, as a result of the merger. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES(continued) The merger was accounted for as a tax-free pooling-of-interests. All financial and per share information for prior periods have been restated to reflect the results of the combined company. During the twenty-six weeks ended July 31, 1999, the Company had capital expenditures of $22.3 million. $8.8 million of the total capital expenditures made so far this year were for upgrading the point-of-sale register system in the Camelot stores. During the first half of 1998, the Company opened 10 stores, relocated 10 stores and closed 29 stores. YEAR 2000 COMPLIANCE The Company has completed an assessment of the business risks related to the Year 2000 issue. The results of the assessment indicated 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 is complete; and - verification of embedded chip ("non-IT") system readiness for Year 2000 compliance is complete. The Company's Year 2000 issue remediation process includes the following phases: Awareness, Assessment, Renovation, Validation, and Implementation. As indicated above, all 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 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 the 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. For the Renovation phase, all core IT system programming modifications have been completed by the Company's systems development staff. The system programming modifications included upgrading the distribution, inventory management and accounting systems and installation of new Year 2000 compliant POS registers and software. Installation of the new POS system and software in the Trans World stores was completed during the second quarter of fiscal 1998. This POS system was installed in the recently acquired Camelot stores during the second quarter of fiscal 1999. Replacements for the other (non-core) IT systems are being implemented on schedule. The non-core IT systems being replaced include a system for tracking the opening of new stores and a system for managing lease payments. Activities in the Validation and Implementation phases included formal systems testing for both IT and non-IT systems. The Company processed daily, weekly and monthly transactions on the main corporate IT systems platform, IBM AS/400. The compliance testing was completed in a dedicated environment within the AS/400 to assure acceptance of all transactions in the year 2000. As a result of the formal systems testing, a minimal amount of remediation work is required to upgrade or modify programming on non-core applications. All remaining work will be performed by the Company's system development staff. The Company previously evaluated the pre-merger Year 2000 compliance efforts of Camelot Music and determined that third party compliance tracking and verification of non-IT system readiness for Year 2000 compliance needed to be completed. During the second quarter of fiscal 1999 the Core IT systems, including inventory management, accounting and POS were replaced by Trans World systems which were evaluated as part of the Company's Validation and Implementation phases. Additionally, those Camelot systems that were not replaced, including the systems used in the Canton distribution center, were tested to validate the vendor compliance representations. 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 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) YEAR 2000 COMPLIANCE (continued) everyday operations including inventory management, merchandise distribution, cash management, accounting and financial reporting. The Company utilizes a variety of vendors for its system needs. The Company had discussions with its vendors and monitored their Year 2000 compliance programs and the compliance of their merchandise or services with required standards. Although the majority of these vendors represent that their products are Year 2000 compliant, the Company performed testing to validate the vendor representations. In the normal course of business, the Company replaced its POS register system with a Year 2000 compliant system during 1998. 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 2,700 different suppliers in the normal course of its business. Five major merchandise vendors account for approximately 73% 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 merchandise to approximately 20% of its stores, the Company does rely on a number of trucking companies for the remainder of its merchandise distribution. Evaluation of the Company's vendors' Year 2000 readiness began in the fourth quarter of 1998, and was completed during the second quarter of fiscal 1999. After completion of the assessment of vendor readiness, contingency plans were developed for all third parties where Year 2000 compliance appears to be at risk. All contingency plans developed will be re-evaluated during the third and fourth quarter of fiscal 1999 for reasonableness and revision where necessary. 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 the Company has no control and for which it has no ready substitute, such as, but not limited to, power and telecommunications services. Each store has a "crash kit" which allows it to operate without power and telecommunications services and includes the ability to manually process all sales transactions. However, in the event of a power disruption, it is highly unlikely that a store would be open for business due to the lack of lighting and the security-related concerns. 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 its 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 $568,000 to date, as of July 31, 1999. Anticipated future costs are $153,000 to address Year 2000 issues identified as a result of remediation testing. These costs do not include expenditures made in the normal course of business, during 1997 and 1998, to upgrade its distribution, inventory management and accounting systems, or costs to install new Year 2000 compliant POS registers and software. Future costs will be funded by cash flows generated from operations. The Company's estimate 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 the Company's customers and suppliers in reaching Year 2000 readiness, the timely availability of necessary replacement items and similar uncertainties. 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 9, 1999. 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 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 ----------------------------------------------------------------- George W. Dougan 3,446,955 29,320,488 Isaac Kaufman 3,447,255 29,320,188 Martin Hanaka 3,447,255 29,320,188
C) A proposal to institute Trans World Entertainment Corporation's 1999 Employee Stock Option Plan, was approved as follows: FOR- 16,763,124 AGAINST- 5,862,907 ABSTAIN- 15,998 D) A proposal to amend Trans World Entertainment Corporation's 1990 Restricted Stock Plan to extend the duration through 2009 was approved as follows: FOR- 21,245,005 AGAINST- 1,520,983 ABSTAIN- 19,019 PART II. OTHER INFORMATION TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Item 6 - Exhibits and Reports on Form 8-K (A) Exhibits Exhibit No. Description Page No. ----------- ------------------------ -------- 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 September 14, 1999 By: /s/ ROBERT J. HIGGINS Robert J. Higgins Chairman, President and Chief Executive Officer (Principal Executive Officer) September 14, 1999 By: /s/ JOHN J. SULLIVAN John J. Sullivan Senior Vice President-Finance and Chief Financial Officer (Principal Financial Officer) EX-27 2 ARTICLE 5 FDS FOR QUARTERLY REPORT OF FORM 10-Q
5 THIS SCHEDULE CONTAINS DATE EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000795212 TRANS WORLD ENTERTAINMENT CORPORATION
AMOUNT ITEM DESCRIPTION (IN THOUSANDS, EXCEPT PER SHARE DATA) - ---------------- ------------------------------------- JAN-29-2000 JAN-31-1999 JUL-31-1999 6-MOS 83,797 0 0 0 398,726 502,248 260,867 124,198 716,786 242,282 0 0 0 529 435,640 716,786 564,294 564,294 356,780 356,780 211,714 0 892 (4,200) (2,139) 0 0 0 0 (2,953) (0.06) (0.06)
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