-----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, Lh0ZqG6qQpmCISOd4qHj2u+KWI2iL4w9U78s1e/o72Lub2q31NxxP6yu4/gmvS6u FC91iL2YNDQqyTtVxK5ZOw== 0000912057-01-520331.txt : 20010620 0000912057-01-520331.hdr.sgml : 20010620 ACCESSION NUMBER: 0000912057-01-520331 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010505 FILED AS OF DATE: 20010619 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: 1663023 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 a2051905z10-q.txt 10-Q DRAFT ----- 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 MAY 5, 2001 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 incorporation or organization) (I.R.S. Employer 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, 42,023,589 shares outstanding as of June 2, 2001 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 Condensed Consolidated Balance Sheets at May 5, 2001 (unaudited), February 3, 2001 and April 29, 2000 (unaudited) 3 Condensed Consolidated Statements of Operations - Thirteen Weeks Ended May 5, 2001 (unaudited) and April 29, 2000 (unaudited) 4 Condensed Consolidated Statements of Cash Flows - Thirteen Weeks Ended May 5, 2001 (unaudited) and April 29, 2000 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 12 Signatures 12
2 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MAY 5, FEBRUARY 3, APRIL 29, 2001 2001 2000 --------------------------------------- (unaudited) (unaudited) ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 45,732 $ 265,084 $ 113,331 Merchandise inventory 481,578 475,747 421,588 Other current assets 13,223 14,497 10,115 --------------------------------------- Total current assets 540,533 755,328 545,034 --------------------------------------- NET FIXED ASSETS 148,844 152,741 137,343 DEFERRED TAX ASSET 34,354 34,317 34,899 OTHER ASSETS 59,387 59,616 49,949 --------------------------------------- TOTAL ASSETS $ 783,118 $ 1,002,002 $ 767,225 ======================================= LIABILITIES - ----------- CURRENT LIABILITIES: Accounts payable $ 251,485 $ 430,185 $ 215,769 Income taxes payable 10,253 28,114 8,565 Accrued expenses and other 30,794 37,380 25,279 Deferred taxes 7,711 9,231 12,507 Current portion of capital lease obligations 5,799 5,702 5,330 --------------------------------------- Total current liabilities 306,042 510,612 267,450 CAPITAL LEASE OBLIGATIONS, less current portion 12,277 13,767 18,134 OTHER LIABILITIES 28,313 28,801 17,789 --------------------------------------- TOTAL LIABILITIES 346,632 553,180 303,373 --------------------------------------- SHAREHOLDERS' EQUITY - -------------------- Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) -- -- -- Common stock ($0.01 par value; 200,000,000 shares authorized; 53,772,663, 53,676,756 and 53,460,736 shares issued, respectively) 538 537 535 Additional paid-in capital 285,930 285,292 284,026 Unearned compensation - restricted stock (403) (6) (320) Treasury stock at cost (11,595,432, 10,568,432 and 5,104,432 shares, respectively) (107,675) (97,579) (51,281) Accumulated other comprehensive loss (1,887) (1,482) -- Retained earnings 259,983 262,060 230,892 --------------------------------------- TOTAL SHAREHOLDERS' EQUITY 436,486 448,822 463,852 --------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 783,118 $ 1,002,002 $ 767,225 =======================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THIRTEEN WEEKS ENDED MAY 5, APRIL 29, 2001 2000 ---------------------- Sales $ 309,097 $ 310,116 Cost of sales 205,982 199,272 ---------------------- Gross profit 103,115 110,844 Selling, general and administrative expenses 106,779 97,703 ---------------------- Income (loss) from operations (3,664) 13,141 Interest income (341) (1,231) ---------------------- Income (loss) before income taxes (3,323) 14,372 Income tax expense (benefit) (1,246) 5,390 ---------------------- NET INCOME (LOSS) $ (2,077) $ 8,982 ====================== BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.18 ====================== Weighted average number of common shares outstanding - basic 42,513 49,721 ====================== DILUTED EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.18 ====================== Weighted average number of common shares outstanding - diluted 42,513 50,684 ======================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THIRTEEN WEEKS ENDED MAY 5, APRIL 29, 2001 2000 ---------------------- Net cash used by Operating Activities $(201,855) $(124,397) ---------------------- Cash Flows from Investing Activities: Purchases of fixed assets (6,089) (1,655) Disposal (purchase) of videocassette rental inventory, net of purchases 3 (31) ---------------------- Net cash used by investing activities (6,086) (1,686) ---------------------- Cash Flows from Financing Activities: Payments of capital lease obligations (1,393) (1,309) Payments for purchases of treasury stock (10,100) (39,426) Exercise of stock options 82 123 ---------------------- Net cash used by financing activities (11,411) (40,612) ---------------------- Net decrease in cash and cash equivalents (219,352) (166,695) Cash and cash equivalents, beginning of year 265,084 280,026 ---------------------- Cash and cash equivalents, end of period $ 45,732 $ 113,331 ====================== Supplemental disclosure of non-cash investing and financing activities: Income tax benefit resulting from exercises of stock options $ 99 $ 105 Issuance of treasury stock under incentive stock programs 4 -- Issuance of restricted shares under restricted stock plan 403 --
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 5, 2001 AND APRIL 29, 2000 (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 inter-company accounts and transactions have been eliminated. The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these condensed consolidated financial statements reflect all normal, recurring adjustments which, in the opinion of management, are necessary for the fair presentation of such financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001. 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 videocassette rental inventory included in cost of sales totaled $205,000 and $239,000 for the thirteen weeks ended May 5, 2001 and April 29, 2000, respectively. Depreciation and amortization of fixed assets for the Company's distribution centers included in cost of sales totaled $399,000 and $407,000 for the thirteen weeks ended May 5, 2001 and April 29, 2000, respectively. Depreciation and amortization for the remaining fixed assets included in Selling, General & Administrative expenses totaled $8.8 million and $8.2 million in the thirteen weeks ended May 5, 2001 and April 29, 2000, respectively. 6 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 5, 2001 AND APRIL 29, 2000 (UNAUDITED) (CONTINUED) NOTE 4. EARNINGS PER SHARE Weighted average shares is calculated as follows :
Thirteen Weeks ended --------------------- April 29, May 1, 2000 1999 --------- -------- (in thousands) Weighted average common shares outstanding - basic 42,513 49,721 Dilutive effect of employee stock options --- 963 --------- -------- Weighted average common shares outstanding - diluted 42,513 50,684 ========= ========
Unexercised employee stock options to purchase 6.3 million and 2.9 million common shares as of May 5, 2001 and April 29, 2000, respectively, were not included in the weighted average shares outstanding calculation because such options have an antidilutive effect. NOTE 5. COMPREHENSIVE INCOME (LOSS) The Company's total comprehensive income (loss) was as follows:
Thirteen Weeks Ended -------------------- May 5, April 29, 2001 2000 --------- --------- Net income (loss) $ (2,077) $ 8,982 Other comprehensive loss: Unrealized loss on available-for-sale securities $ (405) --- --------- --------- Total comprehensive income (loss) $ (2,482) $ 8,982 ========= =========
NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is required to be adopted in years beginning after June 15, 2000. As the Company did not have derivative instruments or arrangements or derivative instruments embedded in other contracts, management has determined that adoption of SFAS No. 133 did not have any financial impact on the Company's consolidated financial statements. The Company will continue to evaluate future contractual arrangements entered into that may affect this determination. 7 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 5, 2001 AND APRIL 29, 2000 (UNAUDITED) (CONTINUED) NOTE 7. LEGAL PROCEEDINGS On October 16, 2000, the United States District Court for the District of Delaware issued an opinion in favor of the Internal Revenue Service, in the case of the IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company. The case was brought against Camelot by the IRS to challenge the deduction of interest expense for certain tax years that ended on or before February 1994, related to corporate-owned life insurance policies held by Camelot. The court ruled that the interest deductions should not be allowed and the Company is responsible for interest and penalties. As a result of the ruling, the Company reserved $11.0 million during 2000, which is reflected in other (long-term) liabilities in the consolidated balance sheet as of May 5, 2001. The Company has filed an appeal in the United States Third Circuit Court of Appeals in response to the decision. On August 8, 2000, 30 Attorneys General served a complaint against the Company, the five major music distributors and two other specialty retailers in the U.S. District Court for the Southern District of New York ("AG's suit"). The complaint has been subsequently amended to add additional states as plaintiffs and to reflect the transfer of the case to U.S. District Court in Maine pursuant to the Multidistrict Litigation Rules. The AG's suit alleges that the distributors and retailers conspired to violate the anti-trust laws and to fix prices by requiring retailers to adhere to minimum advertised prices in order to receive cooperative advertising funds from the labels. The complaint alleges that consumers were damaged in an unspecified amount and seeks treble damages and civil penalties. Following the services of the AG's suit, these same defendants were named as defendants in private class action suits ("Class Actions"), each with similar allegations as in the AG's suit. The Class Actions have been consolidated along with the AG's suit in the U.S. District Court in Maine. It is management's belief that the lawsuit is without merit and the Company will ultimately prevail in this regard. The Company is subject to other legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management's opinion, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company. 8 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is an analysis of the Company's results of operations, liquidity and capital resources. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products, including the entry or exit of non-traditional retailers of the Company's products to or from its markets; the release by the music industry of an increased or decreased number of "hit releases;" general economic factors in markets where the Company's products are sold; and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED MAY 5, 2001 COMPARED TO THE THIRTEEN WEEKS ENDED APRIL 29, 2000 SALES. The Company's total sales decreased 0.3% to $309.1 million for the thirteen weeks ended May 5, 2001 compared to $310.1 million for the thirteen weeks ended April 29, 2000. The decrease was the result of a comparable store sales decrease of 5%, partially offset by an increase in the number of stores in operation. For the thirteen weeks ended May 5, 2001, comparable store sales decreased 5% for mall stores and 4% for free standing stores. By merchandise category, comparable store sales decreased 14% in music and increased 33% in video and 23% in accessories. GROSS PROFIT. Gross profit as a percentage of sales decreased to 33.4% in the thirteen weeks ended May 5, 2001 compared to 35.7% in the thirteen weeks ended April 29, 2000. The decrease was due to more competitive pricing and a shift of sales to lower margin product categories, including DVD. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("SG&A"), as a percentage of sales, increased to 34.5% from 31.5% in the thirteen weeks ended May 5, 2001 compared to the thirteen weeks ended April 29, 2000. The increase in SG&A is due to the combination of inflationary increases in operational expenses and lower comparable sales, as well as additional expenses of $3.9 million related to the Company's rebranding and eWorks initiatives. INTEREST EXPENSE (INCOME). Net interest income was $341,000 in the thirteen weeks ended May 5, 2001 compared to $1.2 million for the thirteen weeks ended April 29, 2000. The decrease in interest income is due to a decrease in investment income resulting from lower average cash balances. 9 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAX EXPENSE (BENEFIT). The Company's effective tax rate was 37.5% for the thirteen weeks ended May 5, 2001, which was equal to the rate for the thirteen weeks ended April 29, 2000. NET INCOME (LOSS). The Company's net loss was $2.1 million for the thirteen weeks ended May 5, 2001, compared to net income of $9.0 million for the same period last year. The decrease in earnings was due to lower gross margin and higher expenses. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. The Company's primary sources of working capital are cash flows from operations and borrowings under its revolving credit facility. The Company had cash balances of approximately $45.7 million for the quarter ended May 5, 2001, compared to $265.1 million at the end of fiscal 2000. Cash used by operating activities was $201.9 million for the thirteen weeks ended May 5, 2001. The primary uses of cash were a $178.7 million seasonal reduction of accounts payable and a $17.8 million net reduction in income tax payable. Cash used in financing activities was $11.4 million for the thirteen weeks ended May 5, 2001. The primary use of cash was for the purchase of 1.0 million shares of common stock under a program authorized by the Board of Directors. The Company has a three-year $100 million secured revolving credit facility with Congress Financial Corporation that expires in July 2003 and automatically renews on a year-to-year basis thereafter with the consent of both parties. The Revolving Credit Facility contains certain restrictive provisions, including provisions governing cash dividends and acquisitions, is collateralized by merchandise inventory and has a minimum net worth covenant. On May 5, 2001, the Company had no outstanding borrowings under the Revolving Credit Facility, and $100 million was available. CAPITAL RESOURCES. During the first quarter of 2001, the Company had capital expenditures of $6.1 million. The Company plans to spend $56 million, net of construction allowances, for capital expenditures in fiscal 2001. During the quarter, the Company opened or relocated 6 stores and closed 11 stores. On March 19, 2001, the Company announced its strategic plan to re-brand its mall-based stores and its web site under a single, unified brand, FYE (For Your Entertainment). The re-branding initiative is the result of an 18-month in-depth analysis of the changing entertainment marketplace, the technology revolution, as well as extensive customer research. The unified brand enables the Company to leverage its strength as the nation's largest music specialty retailer and differentiate FYE from the 10 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) competition. For the first time, customers nationwide will enjoy a consistent shopping experience in every store, in every market and in every channel. This enhanced brand experience, which will include industry-leading product sampling and selection tools, is designed to cultivate customer loyalty, drive sales and build market share for the Company. FYE will create a more relevant shopping experience for consumers, expanding product selection across the entertainment spectrum. The brand positioning also enables the Company to broaden its customer base and fully realize the benefits of a multi-market, multi-channel strategy. The re-branding effort will be rolled out nationally to all stores by the end of fiscal 2001. The Company's e-commerce site will be re-launched as fye.com in August 2001 for an unparalleled bricks and clicks presence. Management anticipates the investment in the branding initiative to be approximately $40 million in 2001, including operating expenses of $19 million including depreciation. 11 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. ---------- ----------- -------- (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 June 19, 2001 BY: /s/ ROBERT J. HIGGINS -------------------------- Robert J. Higgins Chairman and Chief Executive Officer (Principal Executive Officer) June 19, 2001 BY: /s/ JOHN J. SULLIVAN ------------------------ John J. Sullivan Senior Vice President and Chief Financial Officer (Chief Financial and Accounting Officer) 12 -----END PRIVACY-ENHANCED MESSAGE-----