-----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, PgFOas8e0XkR4fy0FPzfPTX63xAfBsbxtbRA54IEkT450So5Sc5WYtYiZSPoogdk gMbt0SCqbGB93EgXEcAB4g== 0000912057-02-035720.txt : 20020917 0000912057-02-035720.hdr.sgml : 20020917 20020917121706 ACCESSION NUMBER: 0000912057-02-035720 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020803 FILED AS OF DATE: 20020917 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: 1934 Act SEC FILE NUMBER: 000-14818 FILM NUMBER: 02765611 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 a2089000z10-q.txt 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 AUGUST 3, 2002 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 (I.R.S. Employer of 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 such 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, 40,226,601 shares outstanding as of September 1, 2002 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 August 3, 2002 (unaudited), February 2, 2002 and August 4, 2001(unaudited) 3 Condensed Consolidated Statements of Operations - Thirteen Weeks and Twenty-six Weeks Ended August 3, 2002 (unaudited) and August 4, 2001(unaudited) 4 Condensed Consolidated Statements of Cash Flows - Twenty-six Weeks Ended August 3, 2002 (unaudited) and August 4, 2001(unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations 11 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 14 Item 4 - Submission of Matters to a Vote of Security Holders 15 Item 6 - Exhibits and Reports on Form 8-K 16 Signatures 16 Certifications 17-18
2 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AUGUST 3, FEBRUARY 2, AUGUST 4, 2002 2002 2001 ------------------------------------------------ ASSETS (unaudited) (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 25,879 $ 254,943 $ 52,237 Merchandise inventory 411,304 409,067 429,544 Other current assets 18,325 15,024 14,958 ------------------------------------------------ Total current assets 455,508 679,034 496,739 ------------------------------------------------ NET FIXED ASSETS 156,113 160,430 148,685 DEFERRED TAX ASSET 28,804 32,977 34,547 OTHER ASSETS 62,717 62,977 63,719 ------------------------------------------------ TOTAL ASSETS $703,142 $ 935,418 $ 743,690 ================================================ LIABILITIES CURRENT LIABILITIES: Accounts payable $196,352 $ 378,902 $ 223,804 Income taxes payable 1,201 26,003 8,482 Accrued expenses and other 30,972 34,276 29,605 Deferred taxes 6,080 6,160 6,623 Current portion of capital lease obligations 3,196 4,711 5,785 ----------------------------------------------- Total current liabilities 237,801 450,052 274,299 CAPITAL LEASE OBLIGATIONS, less current portion 8,138 9,500 10,877 OTHER LIABILITIES 26,935 27,800 29,144 ----------------------------------------------- TOTAL LIABILITIES 272,874 487,352 314,320 ----------------------------------------------- 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; 54,024,005, 53,929,348 and 53,887,197 shares issued, respectively) 540 539 539 Additional paid-in capital 287,153 286,767 286,324 Unearned compensation - restricted stock (198) (280) (370) Treasury stock at cost (13,647,185, 12,884,752 and 12,006,432 shares, respectively) (123,301) (117,811) (111,160) Accumulated other comprehensive loss --- --- (1,947) Retained earnings 266,074 278,851 255,984 ----------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 430,268 448,066 429,370 ----------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $703,142 $ 935,418 $ 743,690 ==============================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------- ---------------------- AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4, 2002 2001 2002 2001 ------------------------------ ------------------------------- Sales $ 267,530 $ 294,561 $ 547,009 $ 603,658 Cost of sales 179,494 195,894 365,352 401,876 ------------------------------ ------------------------------- Gross profit 88,036 98,667 181,657 201,782 Selling, general and administrative expenses 99,242 104,667 203,174 211,446 ------------------------------ ------------------------------- Loss from operations (11,206) (6,000) (21,517) (9,664) Interest expense, net 293 476 361 135 ------------------------------ ------------------------------- Loss before income taxes (11,499) (6,476) (21,878) (9,799) Income tax benefit (5,054) (2,478) (9,101) (3,724) ------------------------------ ------------------------------- NET LOSS $ (6,445) $ (3,998) (12,777) $ (6,075) ============================== =============================== BASIC LOSS PER SHARE $ (0.16) $ (0.10) $ (0.31) $ (0.14) ============================== =============================== Weighted average number of common shares outstanding - basic 40,532 41,920 40,636 42,216 ============================== ================================ DILUTED LOSS PER SHARE $ (0.16) $ (0.10) $ (0.31) $ (0.14) ============================== ================================ Weighted average number of common shares outstanding - diluted 40,532 41,920 40,636 42,216 ============================== ===============================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
TWENTY-SIX WEEKS ENDED AUGUST 3, AUGUST 4, 2002 2001 ---------------------------- Net cash used by Operating Activities $ (203,840) $ (174,586) ---------------------------- Cash Flows from Investing Activities: Purchases of fixed assets (16,944) (15,522) Purchases of investments in unconsolidated affiliates (860) (6,871) Disposal of videocassette rental inventory, net of purchases 528 47 ---------------------------- Net cash used by Investing Activities (17,276) (22,346) ---------------------------- Cash Flows from Financing Activities: Payments of capital lease obligations (2,877) (2,807) Payments for purchases of treasury stock (5,498) (13,585) Exercise of stock options 427 477 ---------------------------- Net cash used by Financing Activities (7,948) (15,915) ---------------------------- Net decrease in cash and cash equivalents (229,064) (212,847) Cash and cash equivalents, beginning of year 254,943 265,084 ---------------------------- Cash and cash equivalents, end of period $25,879 $52,237 ============================ Supplemental disclosure of non-cash investing and financing activities: Income tax benefit resulting from exercises of stock options $571 $202 Issuance of treasury stock under incentive stock programs 8 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 AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements consist of Trans World Entertainment Corporation, its wholly owned subsidiary Record Town, Inc. ("Record Town"), Record Town's subsidiaries, all of which are wholly owned and Second Spin.com, which is majority 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 reflects 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 2, 2002. Certain reclassifications of the prior year's condensed consolidated financial statements have been made to conform to the current year presentation. 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 fixed assets for the Company's distribution centers included in cost of sales totaled $0.6 million and $0.4 million for the thirteen weeks ended August 3, 2002 and August 4, 2001, respectively. For the twenty-six week periods ended August 3, 2002 and August 4, 2001, depreciation and amortization of fixed assets for the Company's distribution centers included in cost of sales totaled $1.1 million and $0.8 million, respectively. Depreciation and amortization for the remaining fixed assets included in Selling, General & Administrative ("SG&A") expenses totaled $9.9 million and $9.0 million in the thirteen weeks ended August 3, 2002 and August 4, 2001, respectively. The depreciation and amortization included in SG&A was $19.5 and $18.1 million for the twenty-six week periods ended August 3, 2002 and August 4, 2001, respectively. 6 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED) (CONTINUED) NOTE 4. EARNINGS PER SHARE Weighted average shares are calculated as follows :
Thirteen Weeks ended Twenty-six Weeks ended ------------------------------- ----------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 -------------- ------------ ------------ ------------ Weighted average common shares outstanding - basic 40,532 41,920 40,636 42,216 Dilutive effect of employee stock options --- --- --- --- -------------- ------------ ------------ ------------ Weighted average common shares outstanding - diluted 40,532 41,920 40,636 42,216 ============== ============ ============ ============ Anti-dilutive stock options 5,764 4,669 5,022 4,633 ============== ============ ============ ============
NOTE 5. COMPREHENSIVE LOSS The Company's total comprehensive loss was as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------------------- ----------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 ------------- -------------- ------------- ------------ Net loss $ (6,445) $ (3,998) $ (12,777) $ (6,075) Other comprehensive loss: Unrealized loss on available-for-sale securities --- (61) --- (465) ------------- -------------- ------------- ------------ Total comprehensive loss $ (6,445) $ (4,059) $ (12,777) $ (6,540) ============= ============== ============= ============
7 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED) (CONTINUED) NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS Effective February 3, 2002 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Under the provisions of SFAS No. 142, goodwill is no longer amortized. Rather, goodwill is now subject to a periodic impairment test performed, at a minimum, on an annual basis. SFAS No. 142 required the Company to perform a two-step fair-value based goodwill impairment test as of the date of adoption. The first step of the test compared the carrying values of the Company's reporting units to their estimated fair values. The estimated fair values of the reporting units were determined using a discounted cash flow model based upon the estimated future cash flows of the reporting units. The second step of the goodwill impairment test is required only if the carrying amount of a reporting unit exceeds its fair value, as determined in the first step, to measure the amount of impairment, if any. Based upon the impairment test performed by the Company in the first step, the Company has concluded that no impairment of goodwill exists as a result of adoption of SFAS No. 142. Prospectively, the Company will perform this impairment review annually, as required by SFAS No. 142. The Company does not have any other intangible assets subject to the provisions of SFAS No. 142. The following table provides a reconciliation of the reported net loss for the thirteen weeks ended August 4, 2001 and the net loss for the twenty six weeks ended August 4, 2001 to net loss that would have been reported had SFAS No. 142 been applied as of February 4, 2001:
Thirteen weeks ended Twenty-six weeks ended (Amounts in thousands, except per share amounts) -------------------------- -------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Reported net loss $ (6,445) $ (3,998) $ (12,777) $ (6,075) Add goodwill amortization, net of tax --- 404 --- 835 -------------------------- -------------------------- Adjusted net loss (6,445) (3,594) (12,777) (5,240) ========================== ========================== Basic and diluted loss per share: Reported net loss per share $ (0.16) $ (0.10) $ (0.31) $ (0.14) Add goodwill amortization per share, net of tax --- $ 0.01 --- $ 0.02 -------------------------- -------------------------- Adjusted net loss per share $ (0.16) $ (0.09) $ (0.31) $ (0.12) ========================== ==========================
8 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED) (CONTINUED) NOTE 6. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED) In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation that results from the acquisition, construction, development and (or) normal use of the assets as a liability in the period in which it is incurred if a reasonable estimate of fair value can be made. The standard also requires the Company to record a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 for the quarter ending May 3, 2003. The Company is currently assessing SFAS No. 143 and the impact that adoption will have on the consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating SFAS No. 146 and the impact that adoption will have on the consolidated financial statements. 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 ("IRS") in the case IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company. The case was brought against CM Holdings Inc. by the IRS to challenge the deduction of interest expense related to corporate-owned life insurance policies held by Camelot, a subsidiary of CM Holdings Inc., for certain tax years that ended on or before February 1994. The court ruled that interest deductions on policy loans should not be allowed and the Company is responsible for the taxes and related interest and penalties. As a result of the District Court decision, the Company accrued $11.0 million during 2000, which is reflected in other (long-term) liabilities in the consolidated balance sheet as of August 3, 2002, February 2, 2002, and August 4, 2001. The Company filed an 9 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 3, 2002 AND AUGUST 4, 2001 (UNAUDITED) (CONTINUED) NOTE 7. LEGAL PROCEEDINGS (CONTINUED) appeal in response to the decision. On August 16, 2002, the Third Circuit Court of Appeals affirmed the District Court's decision. As of the date of this report, the Company is considering its options for further appeals. This recent decision does not impact the initial reserve which remains accrued as of August 3, 2002. On August 8, 2000, 30 Attorneys General served a complaint against the Company, five major music distributors and two other specialty retailers in the United States District Court for the Southern District of New York ("AG's suit"). The complaint was subsequently amended to add additional states as plaintiffs and to reflect the transfer of the case to the United States District Court in Maine pursuant to the Multidistrict Litigation Rules. The AG's suit alleged that the distributors and retailers conspired to violate certain 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 distributors. The complaint alleged that consumers were damaged in an unspecified amount and sought treble damages and civil penalties. Following the service 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 were consolidated along with the AG's suit in the United States District Court in Maine. The Company believes the lawsuits are without merit and presented its case at a settlement hearing held on April 30, 2002. In order to avoid lengthy and costly litigation, the Company tentatively settled with the plaintiffs without admission of wrongdoing, and accordingly, recorded a reserve in the quarter ended August 3, 2002. 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. 10 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is an analysis of the Company's results of operations, liquidity and capital resources. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products, including the entry or exit of non-traditional retailers of the Company's products to or from its markets; the release by the music industry of an increased or decreased number of "hit releases;" general economic factors in markets where the Company's products are sold; and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED AUGUST 3, 2002 COMPARED TO THE THIRTEEN WEEKS ENDED AUGUST 4, 2001 SALES. The Company's total sales decreased 9.2% to $267.5 million for the thirteen weeks ended August 3, 2002 from $294.6 million for the thirteen weeks ended August 4, 2001. The decrease was due to a reduction in the number of stores in operation and a comparable store sales decrease of 6.3%. For the thirteen weeks ended August 3, 2002, comparable store sales decreased 6.2% for mall stores and decreased 6.8% for freestanding stores. By merchandise category, comparable store sales were down 18.3% in music; increased 35.5% in home video and video games; and were down 2.3 % in the electronics, accessories and boutique category. GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 32.9% in the thirteen weeks ended August 3, 2002 from 33.5% in the thirteen weeks ended August 4, 2001. This decrease relates to the continuing shift of sales to lower margin product categories, including DVD and video games. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, as a percentage of sales, increased to 37.1% in the thirteen weeks ended August 3, 2002 from 35.5% in the thirteen weeks ended August 4, 2001. The increased rate is due to loss of leverage resulting from lower sales. Total expenses for the quarter were lower by $5.4 million or 5.2%, versus prior year, due to lower store count and lower overhead costs. INTEREST EXPENSE. Interest expense was $0.3 million in the thirteen weeks ended August 3, 2002 compared to interest expense of $0.5 million for the thirteen weeks ended August 4, 2001. The decrease in interest expense relates to higher average cash balances maintained during the quarter and lower interest on capital leases which were partially offset by lower investment rates. 11 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 BENEFIT. The Company's income tax benefit was $5.1 million for the thirteen weeks ended August 3, 2002, compared to an income tax benefit of $2.5 million for the thirteen weeks ended August 4, 2001. The Company's effective tax rate was 43.9% for the thirteen weeks ended August 3, 2002 as compared to 38.3% for the thirteen weeks ended August 4, 2001. The increase in rate is due to an increase in the valuation allowance for deferred taxes related to losses on investments and state net operating losses and a decrease in the Company's income before income taxes. NET LOSS. The Company's net loss was $6.4 million for the thirteen weeks ended August 3, 2002, compared to net loss of $4.0 million for the same period last year. The higher net loss is attributable to lower sales and the related loss of margin. TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 COMPARED TO THE TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 SALES. The Company's total sales decreased 9.4% to $547.0 million for the twenty-six weeks ended August 3, 2002 compared to $603.7 million for the twenty-six weeks ended August 4, 2001. For the twenty-six weeks ended August 3, 2002, comparable store sales decreased 6.3% for both mall and freestanding stores. By merchandise category, comparable store sales were down 18.0% in music; increased 34.0% in home video and video games; and were down 3.5% in the electronics, accessories and boutique category. GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 33.2% for the twenty-six weeks ended August 3, 2002 from 33.4% for the twenty-six weeks ended August 4, 2001. This decrease relates to the continuing shift of sales to lower margin product categories, including DVD and video games. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("SG&A"), as a percentage of sales, increased to 37.1% for the twenty-six weeks ended August 4, 2002 as compared to 35.0% for the twenty-six weeks ended August 4, 2001. The increase in SG&A is due to loss of leverage resulting from lower sales. Total expenses for the twenty-six weeks ended August 3, 2002 were lower by $8.3 million or 3.9%, versus prior year, due to lower store count and lower overhead costs. INTEREST EXPENSE. Interest expense was $0.4 million in the twenty-six weeks ended August 3, 2002 compared to interest expense of $0.1 million for the twenty-six weeks ended August 4, 2001. The increase in interest expense relates to lower investment income due to lower rates on higher average cash balances maintained during the period and a decrease in interest on capital leases. 12 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 BENEFIT. The Company's income tax benefit was $9.1 million for the twenty-six weeks ended August 3, 2002, compared to an income tax benefit of $3.7 million for the twenty-six weeks ended August 4, 2002. The Company's effective tax rate was to 41.6% for the twenty-six weeks ended August 3, 2002 compared to 38.0% for the twenty-six weeks ended August 4, 2001. The increase in rate is due to an increase in the valuation allowance for deferred taxes related to loss on investments and state net operating losses and a decrease in the Company's income before income taxes. NET LOSS. The Company's net loss was $12.8 million for the twenty-six weeks ended August 3, 2002, compared to a net loss of $6.1 million for the twenty-six weeks ended August 4, 2001. The higher net loss is attributable to lower sales and the related loss on margin. 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 $25.9 million at August 3, 2002, compared to $254.9 million at the end of fiscal 2001 and $52.2 million at August 4, 2001. Cash used by operating activities was $203.8 million for the twenty-six weeks ended August 3, 2002. The primary uses of cash were a $182.5 million seasonal reduction of accounts payable and a $24.8 million net reduction in income taxes payable. Cash used by financing activities was $7.9 million for the twenty-six weeks ended August 3, 2002. The primary use of cash was $5.5 million for the purchase of approximately 760,000 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 renews on a year-to-year basis thereafter upon 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 contains a minimum net worth covenant. On August 3, 2002, the Company had no outstanding borrowings under the Revolving Credit Facility and $100 million was available for borrowing. CAPITAL RESOURCES. During the twenty-six weeks ended August 3, 2002, the Company had capital expenditures of $16.9 million. The Company plans to spend between $40 million and $45 million, net of construction allowances, for capital expenditures in fiscal 2002. During the twenty-six weeks ended August 3, 2002, the Company opened or relocated 20 stores and closed 32 stores. 13 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. - Legal Proceedings On August 16, 2002, the Third Circuit Court of Appeals upheld a United States District Court's decision in the case IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company, that interest deductions on policy loans should not be allowed and that the Company is responsible for the taxes and related interest and penalties (See note 7 to the Condensed Financial Statements August 3, 2002 and August 4, 2001 (unaudited)). As of the date of this report, the Company is considering its options for further appeals. 14 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 Thursday, June 20, 2002. B) In the case of each individual nominee named below, authority to vote was withheld with respect to the number of shares shown opposite their name in Column 1, and each nominee received the number of votes set opposite their name in Column 2 for election as director of the Corporation.
Column 1 Column 2 Names of Nominees Withheld Votes for ----------------- ---------------------------- George Dougan 1,671,131 35,062,990 Martin Hanaka 1,671,231 35,062,890 Isaac Kaufman 1,676,936 35,057,185
C) A proposal to adopt the Trans World Entertainment Corporation 2002 Employee Stock Option Plan was approved as follows: FOR- 19,459,545 AGAINST- 6,288,478 ABSTAIN- 335,231 D) A proposal to adopt the Trans World Entertainment Corporation 2002 Bonus Plan was approved as follows: FOR- 24,486,735 AGAINST- 1,260,758 ABSTAIN- 335,761 15 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS - EXHIBIT NO DESCRIPTION PAGE NO. - ---------- ----------- -------- 99.1 Certification pursuant to 18 U.S.C. Section 1350, as 19 Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 99.2 CEO Certification pursuant to Securities and Exchange 20 Commission Order No. 4-460 99.3 CFO Certification pursuant to Securities and Exchange 21 Commission Order No. 4-460 (B) REPORTS ON FORM 8-K - 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 17, 2002 BY: /S/ ROBERT J. HIGGINS -------------------------- Robert J. Higgins Chairman and Chief Executive Officer (Principal Executive Officer) September 17, 2002 BY: /S/ JOHN J. SULLIVAN ------------------------ John J. Sullivan Executive Vice President and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 16 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Robert J. Higgins, Chairman and Chief Executive Officer of Trans World Entertainment Corporation, (the "Company") certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the Company as of, and for, the period presented in this quarterly report. Dated: September 17, 2002 /s/Robert J. Higgins Chairman and Chief Executive Officer Trans World Entertainment Corporation 17 CHIEF FINANCIAL OFFICER CERTIFICATION I, John J. Sullivan, Executive Vice President and Chief Financial Officer of Trans World Entertainment Corporation, (the "Company") certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the Company as of, and for, the period presented in this quarterly report. Dated: September 17, 2002 /s/John J. Sullivan Executive Vice President and Chief Financial Officer Trans World Entertainment Corporation 18 EX-99.1 3 a2089000zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Trans World Entertainment Corporation (the "Company") on Form 10-Q for the period ending August 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Robert J. Higgins, Chairman and Chief Executive Officer of the Company and John J. Sullivan, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. Higgins /s/ John J. Sullivan Robert J. Higgins John J. Sullivan Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer September 17, 2002 September 17, 2002 EX-99.2 4 a2089000zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS I, Robert J. Higgins, state and attest that: (1) To the best of my knowledge, based upon a review of the covered reports of Trans World Entertainment Corporation, and, except as corrected or supplemented in a subsequent covered report: - no covered report contained an untrue statement of a material fact as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed); and - no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed). (2) I have reviewed the contents of this statement with the Company's audit committee. (3) In this statement under oath, each of the following, if filed on or before the date of this statement, is a "covered report": - Report of Trans World Entertainment Corporation on Form 10-K for the year ended February 2, 2002; - all reports on Form 10-Q, all reports on Form 8-K and all definitive proxy materials of Trans World Entertainment Corporation filed with the Commission subsequent to the filing of the Form 10-K identified above; and - any amendments to any of the foregoing. /s/ Robert J. Higgins Subscribed and sworn to Robert J. Higgins before me this 16th day of Chairman and Chief September, 2002. Executive Officer /s/ Heather Hovious Notary Public My Commission Expires: February 11, 2006 EX-99.3 5 a2089000zex-99_3.txt EXHIBIT 99.3 EXHIBIT 99.3 STATEMENT UNDER OATH OF PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS I, John J. Sullivan, state and attest that: (1) To the best of my knowledge, based upon a review of the covered reports of Trans World Entertainment Corporation, and, except as corrected or supplemented in a subsequent covered report: - no covered report contained an untrue statement of a material fact as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed); and - no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed). (2) I have reviewed the contents of this statement with the Company's audit committee. (3) In this statement under oath, each of the following, if filed on or before the date of this statement, is a "covered report": - Annual Report of Trans World Entertainment Corporation on Form 10-K for the year ended February 2, 2002; - all reports on Form 10-Q, all reports on Form 8-K and all definitive proxy materials of Trans World Entertainment Corporation filed with the Commission subsequent to the filing of the Form 10-K identified above; and - any amendments to any of the foregoing. /s/ John J. Sullivan Subscribed and sworn to John J. Sullivan before me this 16th day of Executive Vice President September, 2002. and Chief Financial /s/ Heather Hovious Officer Notary Public My Commission Expires: February 11, 2006 -----END PRIVACY-ENHANCED MESSAGE-----