-----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, VVzgOQzo6Wq/2yiiZhdBRN3sKASfdEpnATM01h4thVQM4epsvEF8MgxGci+cTjY+ wALSIbAekjppLLvnOsKBpA== 0000795212-99-000029.txt : 19991215 0000795212-99-000029.hdr.sgml : 19991215 ACCESSION NUMBER: 0000795212-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 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: 99774240 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 THIRD QUARTER FILING ON 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 OCTOBER 30, 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, 53,039,697 shares outstanding as of November 27, 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 October 30, 1999, January 30, 1999 and October 31, 1998 2 Condensed Consolidated Statements of Income - Thirteen Weeks Ended and Thirty-Nine Weeks Ended October 30, 1999 and October 31, 1998 3 Condensed Consolidated Statements of Cash Flows - Thirty-Nine Weeks Ended October 30, 1999 and October 31, 1998 4 Notes to Condensed Consolidated Financial Statements 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 11 Signatures 11 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)
October 30, January 30, October 31, ASSETS 1999 1999 1998 ----------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 86,682 $ 139,411 $ 24,275 Merchandise inventory 495,744 426,078 471,268 Current deferred tax asset 4,502 633 5,405 Other current assets 18,482 15,182 10,939 ---------- --------- ----------- Total current assets 605,410 581,304 511,887 ---------- --------- ----------- VIDEOCASSETTE RENTAL INVENTORY, net 1,102 1,238 3,672 DEFERRED TAX ASSET 32,278 29,580 26,524 NET FIXED ASSETS 141,796 139,124 140,178 OTHER ASSETS 43,495 47,364 48,663 ---------- ---------- ----------- TOTAL ASSETS $ 824,081 $ 798,610 $ 730,924 ---------- ---------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 313,516 $ 220,636 $ 243,562 Notes payable --- --- 14,304 Accrued expenses and other 26,024 68,597 29,193 Store closing reserve --- --- 6,580 Current portion of long-term debt and capital lease obligations 5,072 4,802 7,279 Income taxes payable --- 12,734 709 ---------- ---------- ----------- Total current liabilities 344,612 306,769 301,627 ---------- ---------- ----------- LONG-TERM DEBT, less current portion --- 20,000 20,000 CAPITAL LEASE OBLIGATIONS, less current portion 19,666 16,065 15,938 OTHER LIABILITIES 18,541 23,400 20,285 ---------- ---------- ----------- TOTAL LIABILITIES 382,819 366,234 357,850 ---------- ---------- ----------- SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued) --- --- --- Common stock ($.01 par value; 200,000,000 shares authorized; 53,065,264, 52,185,258 and 52,160,259 shares issued, respectively) 531 522 522 Additional paid-in capital 280,152 271,805 262,820 Treasury stock, at cost (104,432, 105,432 and 105,432 shares, respectively) (386) (390) (390) Unearned compensation - restricted stock (376) (78) (142) Retained earnings 161,341 160,517 110,264 --------- ---------- ----------- TOTAL SHAREHOLDERS' EQUITY 441,262 432,376 373,074 --------- ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 824,081 $ 798,610 $ 730,924 ========= ========== =========== 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 Thirty-Nine Weeks Ended ------------------------- -------------------------- October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ------------------------- -------------------------- Sales $ 275,968 $ 270,706 $ 840,262 $ 784,650 Cost of sales 178,987 169,267 535,767 496,986 ---------- ----------- ----------- ----------- Gross profit 96,981 101,439 304,495 287,664 Selling, general and administrative expenses 90,576 93,656 276,569 268,123 Costs related to the Camelot merger --- --- 25,721 --- ---------- ----------- ----------- ----------- Income from operations 6,405 7,783 2,205 19,541 Interest expense (income) (108) 1,403 784 2,218 ---------- ----------- ----------- ----------- Income before income taxes 6,513 6,380 1,421 17,323 Income tax expense 2,736 2,637 597 7,845 ---------- ----------- ----------- ----------- NET INCOME $ 3,777 $ 3,743 $ 824 $ 9,478 ========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.07 $ 0.07 $ 0.02 $ 0.19 ========== =========== =========== =========== Weighted average number of common shares outstanding 52,775 51,901 52,313 50,833 ========== =========== =========== =========== DILUTED EARNINGS PER SHARE $ 0.07 $ 0.07 $ 0.02 $ 0.18 ========== =========== =========== =========== Adjusted weighted average number of common shares outstanding 53,974 53,991 53,177 53,342 ========== =========== =========== =========== See Notes to Condensed Consolidated Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Thirty-Nine Weeks Ended -------------------------- October 30, October 31, 1999 1998 -------------------------- NET CASH USED BY OPERATING ACTIVITIES: ($ 7,680) ($ 83,013) ----------- ----------- INVESTING ACTIVITIES: Acquisition of property and equipment (37,067) (45,603) Acquisition of businesses, net of cash acquired --- (100,380) Disposal of rental inventory, net 136 427 ----------- ----------- Net cash used by investing activities (36,931) (145,556) ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of long-term debt --- 77,100 Proceeds from capital lease 8,436 12,608 Payments of long-term debt and capital lease obligations (24,565) (82,455) Net increase in revolving line of credit --- 25,000 Proceeds from issuance of common stock --- 36,772 Exercise of stock options 8,011 2,783 ----------- ----------- Net cash provided (used) by financing activities (8,118) 71,808 ----------- ----------- Net decrease in cash and cash equivalents (52,729) (156,761) Cash and cash equivalents, beginning of period 139,411 181,036 ----------- ----------- Cash and cash equivalents, end of period $ 86,682 $ 24,275 =========== =========== Supplemental disclosure of non-cash investing and financing activities: Income tax benefit resulting from exercise of stock options $ 1,081 $ 6,155 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 October 30, 1999 (unaudited) and October 31, 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 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 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 $180,000 and $245,000 for the thirteen week periods ended October 30, 1999 and October 31, 1998, respectively. Depreciation and amortization of video cassette rental inventory included in cost of sales totaled $680,000 and $1.0 million for the thirty-nine week periods ended October 30, 1999 and October 31, 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 $410,000 and $407,000 for the thirteen week periods ended October 30, 1999 and October 31, 1998, respectively. For the thirty-nine week periods ended October 30, 1999 and October 31, 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 $1.2 million in both periods. Depreciation and amortization for the remaining fixed assets is included in Selling, General & Administrative expenses and was $9.4 million and $9.7 million for the thirteen week periods ended October 30, 1999 and October 31, 1998, respectively. Depreciation and amortization included in Selling, General & Administrative expenses was $26.7 million and $23.9 million for the thirty-nine week periods ended October 30, 1999 and October 31, 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 average common shares outstanding plus the weighted average shares that would have been outstanding if the potentially dilutive common shares had been issued for the Company's common stock options from the Company's stock option plans. For the thirteen week periods ended October 30, 1999 and October 31, 1998, the additional potentially dilutive common shares included in the diluted earnings per share were 1.2 million and 2.1 million, respectively. All stock options to purchase shares of common stock which were outstanding TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 30, 1999 (unaudited) and October 31, 1998 (unaudited) (continued) Note 4. Earnings Per Share (continued) during the thirteen week periods ended October 30, 1999 and October 31, 1998, respectively, were included in the computation of diluted earnings per share. For the thirty-nine week periods ended October 30, 1999 and October 31, 1998, the additional potentially dilutive common shares included in the diluted earnings per share calculation were 864,000 and 2.5 million, respectively. All stock options to purchase shares of common stock which were outstanding during the thirty-nine week periods ended October 30, 1999 and October 31, 1998, respectively, were included in the computation of diluted earnings per share. Note 5. Recently Issued Accounting Standards Statement of Financial 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, and 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 Standards Executive Committee's 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 Standards Executive Committee's 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 October 30, 1999 Compared to the Thirteen Weeks Ended October 31, 1998 Sales. The Company's total sales increased 2% to $276.0 million for the thirteen week period ended October 30, 1999, compared to $270.7 million for the same period last year. The increase was primarily attributable to the addition of new stores and a comparable store sales increase of 1%. Comparable store sales for the recently acquired Camelot stores decrease 4%, while comparable store sales excluding the Camelot stores increased 5%. Gross Profit. Gross profit, as a percentage of sales, decreased to 35.1% for the thirteen week period ended October 30, 1999 compared to 37.5% for the same period in 1998. The decrease is primarily due to higher shrink results in the recently acquired Camelot stores. The Company has taken action to reduce shrink at the Camelot stores, including implementing policies and procedures which have successfully kept shrink at reduced levels in the existing Trans World stores. Selling, General and Administrative Expenses. Selling, general and administrative expenses, expressed as a percentage of sales, decreased from 34.6% to 32.8% in the thirteen week period ended October 30, 1999 when compared to the same period in 1998. The improvement is primarily due the reduction of administrative expenses resulting from the acquisition of Camelot. Interest Expense (Income). Net interest income was $108,000 in the thirteen week period ended October 30, 1999 compared to net interest expense of $1.4 million in 1998. The improvement in interest is due to the reduction in long-term debt and increased income from invested cash balances. Income Tax Expense. The Company's effective tax rate increased to 42.0% for the thirteen week period ended October 30, 1999 from 41.3% for the thirteen week period ended October 31, 1998. The increase is due to the Company incurring non-deductible expenses related to the Camelot acquisition. Net Income. The Company increased its net income to $3.8 million for the thirteen weeks ended October 30, 1999 from net income of $3.7 million for the same period in 1998. The improved bottom line performance is attributable to the increased sales, reduced S,G&A expenses and improved interest income, partially offset by the decrease in gross margin. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS (continued) Thirty-Nine Weeks Ended October 30, 1999 Compared to the Thirty-Nine Weeks Ended October 31, 1998 Sales. The Company's total sales increased 7% to $840.3 million for the thirty-nine week period ended October 30, 1999 compared to $784.6 million for the same period last year. Comparable store sales increased 1%. 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 decreased to 36.2% in the thirty-nine week period ended October 30, 1999 compared to 36.7% for the same period in 1998. The decrease is due to higher shrink results in the recently acquired Camelot stores. The Company has taken action to reduce shrink at the Camelot stores, including implementing policies and procedures which have succesfully kept shrink at reduced levels in the existing Trans World stores. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("S,G&A"), as a percentage of sales, decreased to 32.9% in the first thirty-nine weeks of 1999 from 34.1% in the first thirty-nine weeks of 1998. The improvement is primarily due to the leveraging of operating expenses on higher sales and the reduction of administrative expenses resulting from the acquisition of Camelot. 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 thirty-nine week period ended October 30, 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. Interest Expense. Net interest expense was $784,000 in the thirty-nine week period ended October 30, 1999 compared to $2.2 million for the thirty-nine week period ended October 31, 1998. The decrease in interest expense is due to the reduction in long-term debt and increased income from invested cash balances. Income Tax Expense. The Company's effective tax rate decreased to 42.0% for the thirty-nine week period ended October 30, 1999 from 45.3% for the thirty-nine week period ended October 31, 1998. The Company's 1998 tax rate was impacted by non-deductible expenses 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. Net Income. The Company had net income of $824,000 in the thirty-nine week period ended October 30, 1999 compared to net income of $9.5 million during the same period last year. The decrease in net income 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 sales and the leveraging of S,G&A expenses. The after-tax effect of the $25.7 million Camelot merger charge reduced earnings from $0.29 per diluted share to $0.02 per diluted 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 October 30, 1999. The Company's working capital at October 30, 1999 was $260.8 million and its ratio of current assets to current liabilities was 1.8 to 1.0. During the thirty-nine week period ended October 30, 1999, the Company's net cash used by operations was $7.9 million, compared to $83.0 million in the same period of 1998. The most significant uses of cash for operating purposes were a $69.7 million increase in inventory and a $42.6 million reduction in accrued expenses, partially offset by a $92.9 million increase 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 thirty-nine week period ended October 30, 1999, the Company had capital expenditures of $37.1 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 thirty-nine week period ended October 30, 1999, the Company opened 31 stores, relocated 25 stores and closed 64 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; - 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 included 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 is being completed by the Company's system development staff and will be completed by December 31, 1999. 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. Contingency plans for failure of internal systems include implementing manual procedures. 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 71% 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. 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 $721,000 to date, as of October 30, 1999. All costs to address Year 2000 issues identified as a result of remediation testing have been paid. 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. 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. ----------- ----------- -------- 10.2 Form of Restricted Stock Agreement dated 12 9/27/99 between the Company and Michael Madden, President. 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 December 14, 1999 By: /s/ ROBERT J. HIGGINS ---------------------- Robert J. Higgins Chairman and Chief Executive Officer (Principal Executive Officer) December 14, 1999 By: /s/ JOHN J. SULLIVAN --------------------- John J. Sullivan Senior Vice President-Finance and Chief Financial Officer (Principal Accounting Officer) EX-10.2 2 RESTRICTED STOCK AGREEMENT BETWEEN TRANS WORLD ENTERTAINMENT AND MICHAEL MADDEN TRANS WORLD ENTERTAINMENT CORPORATION RESTRICTED STOCK AGREEMENT This RESTRICTED STOCK AGREEMENT, dated as of 9/27/99 (the "Agreement"), is made by and between Trans World Entertainment Corporation, a New York Corporation (the "Company"), and Michael J. Madden (the "Employee"). WHEREAS, the Employee has been designated by the Compensation Committee of the Company's Board of Directors (the "Committee") to participate in the Trans World Entertainment Corporation Amended 1990 Restricted Stock Plan (the "Plan") a copy of which the Employee acknowledges receipt of. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties agree as follows: 1. Award of Shares. Pursuant to the provisions of the Plan, the terms of which are incorporated herein by reference, the Employee is hereby awarded 30,000 shares of Restricted Stock (the "Award") on and made expressly subject to the terms and conditions herein set forth. 2. Terms and Conditions. It is understood and agreed that the Award evidenced hereby is subject to the following terms and conditions: a) Vesting of Award. Subject to the other terms and condition of this Agreement and the Plan, this Award shall become vested in three installments, expressly conditioned on complete years of continuous employment (such yearly periods to be measured beginning September 27, 1999): 10,000 of the shares of Restricted Stock subject to the Award shall become vested September 27, 2002; and additional 10,000 shall become vested on September 27, 2003, and the final 10,000 shall become vested on September 27, 2004; provided, however, that, in accordance with and subject to the Plan, the Committee may in its discretion accelerate the vesting of the Award and/or remove any restrictions relating thereto. b) Vesting on Death or Disability. In the event the Employee's employment with the Company is terminated prior to the lapse of the restrictions on his Award by reason of death, Permanent Disability, or Retirement, the Restricted Stock awarded hereunder shall vest in the name of the Employee as of the date of such termination as to the full number of shares of Restricted Stock awarded hereunder. c) Forfeiture of Unvested Shares. In the event of the termination of the Employee's employment with the Company for any reason whatsoever, all shares of Restricted Stock subject to the Award that have not vested in accordance with Section 2(a) or 2(b) above shall be forfeited by the Employee and become the property of the Company. If the Restricted Stock is forfeited, the Company shall be entitled to have the certificates representing the shares of Restricted Stock redelivered to it out of the escrow provided for in Section 2(d) hereof. d) Certificates. Each certificate issued in respect of Restricted Stock awarded hereunder shall be deposited in escrow with the Company or its designee, selected by the Company in the Company's sole discretion, together with a stock power executed in blank by the Employee, and shall bear a legend disclosing the restrictions on transferability imposed on such Restricted Stock by this Agreement. Upon the vesting of Restricted Stock pursuant to Section 2(a) or 2(b) hereof and the satisfaction of any withholding tax liability pursuant to Section 5 hereof, the certificates evidencing such vested Restricted stock shall be delivered to the Employee. e) Rights of a Shareholder. Subject to Section 3 hereof, prior to the time a share of Restricted Stock is fully vested hereunder, the Employee shall have all the rights of a shareholder of the Company, including the right to vote such shares of Restricted Stock: provided, however, that unless and until the vesting restrictions and other terms and conditions applicable to such Restricted Stock shall be held by the Company for the Employee's account, and interest may be paid on any such dividends, at a rate and subject to such terms as determined by the Committee in its sole and absolute discretion. If Restricted Stock is forfeited pursuant to the terms of this Agreement, the related dividends and interest, if any, shall likewise be forfeited to the Company. f) No Right to Continued Employment. Neither the Plan, this Agreement, this Award nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Employee has a right to continue as an Employee for any period of time, or at any rate of compensation, and shall not in any way interfere with the right of the Company to terminate the Employee's employment at any time. 3. Restrictions on Transfer of Shares. Neither the shares of Restricted Stock delivered hereunder nor any interest in them may be sold, assigned, disposed of, pledged, hypothecated, encumbered or in any other manner transferred, in whole or in part, until the vesting provisions herein and in the Plan have been satisfied, and thereafter only if all of the following conditions have been satisfied: a) The listing, or approval for listing upon notice of issuance, that may be required of such shares on any securities exchange as may at the time be the principal market for the shares; b) Any registration or other qualification of such shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification or an exemption therefrom supported by an opinion of counsel, which the board of directors shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable, including expiration of any requisite holding period under Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"); and c) The obtaining of any other consent, approval or permit for any state or federal governmental agency which the board of directors shall, in its absolute discretion based upon the advice of counsel, determine to be necessary or advisable. 4. Legend on Restricted Stock. All certificates representing shares of Restricted Stock, unless such shares are registered under the Securities Act, shall bear the following legend or such other legend as the Company deems appropriate: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE SUCH REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS AND VESTING CONDITIONS SET FORTH IN A RESTRICTED STOCK AGRTEEMENT MAINTAINED WITH THE SECRETARY OF THE COMPANY. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend or such other legend deemed appropriate by the Company shall also bear such legend unless, in the opinion of counsel for the Company, the securities represented thereby need no longer be subject to the restriction contained herein. The provisions of this Section 4 shall be binding upon all subsequent holders of certificates bearing the above legend. 5. Acquisition for Investment. The Employee represents and warrants that he is acquiring the shares of Restricted stock distributed hereby as an investment and not with a view to distribution thereof. The Company also reserves the right to place legend or other symbol on the share certificates issued or transferred pursuant to this Agreement and the Plan and to furnish any stop transfer or similar instructions to the transfer agent for its share with the Company, in its sole discretion, may deem necessary and proper to ensure compliance with the above representation and warranty. 6. Adjustment Provisions. If the shares of Common Stock outstanding are changed, such that its effect in any fiscal year is greater than 5% of the Company's Common Stock capitalization, in number or class, by reason of a split-up, merger, consolidation, reorganization, reclassification, recapitalization, or any capital adjustment, including a stock dividend, or other similar change is made in the corporate structure, appropriate adjustments shall be made in the aggregate number and kind of shares or the securities or property subject to this Agreement and the Plan. 7. Withholding. The Employee agrees that there shall be deducted from any distribution of Restricted stock under this agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of the Employee. With respect to any distribution of Restricted Stock, the Company shall have the right to sell without notice, such number of shares of the Restricted Stock, distributable to the Employee as will provide funds for the payment of any tax so required to be paid by the Company for the Employee's account, unless prior to such sale, the Employee shall have paid the Company the amount of such tax. Any balance of the proceeds of such sale shall be paid to the Employee. In effecting any such sale, the Company shall be deemed to be acting on behalf, and for the account of, the Employee. 8. Designation of Beneficiary. The Employee may, with the consent of the Committee, designate a person or persons to receive, in the event of his death, any shares of Restricted stock distributable hereunder. Such designation shall be made upon forms supplied by and delivered to the Company and may be revoked in writing. If the Employee fails effectively to designate a beneficiary, then his estate shall be deemed to be his beneficiary. 9. References. References herein to rights and obligations of the Employee shall apply, where appropriate, to the Employees legal representative, designated beneficiary or estate without regard to whether specific reference to such legal representative, designated beneficiary or estate is contained in a particular provision of this Agreement. 10. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or by courier, or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently by similar process give notice of: If to the Company: If to the Employee: Trans World Entertainment Corporation Michael Maddden 38 Corporate Circle 10 Finn Court Albany, NY 12203 Mahwah, NJ 07430 Attn: Secretary 11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its principles regarding conflict of laws. 12. Counterparts. This Agreement may be executed in two counterparts each of which shall constitute one and the same instrument. 13. Severability. If any provision or any term or condition of this Agreement or any application thereof to any person or circumstances is invalid, such provision, term, condition, or application shall to that extent be void (or, in the discretion of the Committee, such provision, term or condition may be amended to avoid such invalidity), and shall not affect other provisions, terms or conditions or applications thereof, and to this extent such provisions, terms and conditions are severable. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. TRANS WORLD ENTERTAINMENT CORPORATION EMPLOYEE By: _________________________ By: _____________________ Robert J. Higgins, Chairman Michael J. Madden and Chief Executive Officer EX-27 3 ARTICLE 5 FDS FOR QUARTERLY REPORT OF FORM 10-Q
5 THIS SCHEDULE CONTAINS DATA 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
AMOUNT ITEM DESCRIPTION (IN THOUSANDS, EXCEPT PER SHARE DATA) - ---------------- ------------------------------------- JAN-29-2000 JAN-31-1999 MAY-01-1999 3-MOS 86,682 0 0 0 495,744 605,410 274,677 132,881 824,081 344,612 0 0 0 531 440,731 441,262 840,262 840,262 535,767 535,767 302,290 0 784 1,421 597 824 0 0 0 824 .02 .02
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