-----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, R0gwlKY4+6en0oqWvcAzde8fAQ1VxL0Jm4Zy4a97Uf0pc8P1z36TZWWmBHy/Dj6W ll7bejoP14amW+9vD+zgjQ== 0001047469-99-012586.txt : 19990402 0001047469-99-012586.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012586 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19990331 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/A SEC ACT: SEC FILE NUMBER: 000-14818 FILM NUMBER: 99579876 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/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A INTRODUCTORY NOTE: Trans World Entertainment Corporation is amending this Form 10-Q to provide revised disclosures made to its interim financial information in connection with its Form S-4 filing on March 30, 1999. /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER: 0-14818 TRANS WORLD ENTERTAINMENT CORPORATION ------------------------------------------------------ (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, 21,823,982 shares outstanding as of August 29, 1998 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Form 10-Q Page No. ---------- PART 1. FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Condensed Consolidated Balance Sheets - August 1, 1998, January 31, 1998 and August 2, 1997 3 Condensed Consolidated Statements of Income - Thirteen Weeks Ended and Twenty-Six Weeks Ended August 1, 1998 and August 2, 1997 5 Condensed Consolidated Statements of Cash Flows - Twenty-Six Weeks Ended August 1, 1998 and August 2, 1997 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Conditions and Results of Operations 11 PART II. OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 16 Item 6 - Exhibits and Reports on Form 8-K 17 Signatures 18 Page 2 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) August 1, January 31, August 2, 1998 1998 1997 -------- -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 24,267 $ 94,732 $ 9,757 Merchandise inventory 179,592 189,394 151,563 Other current assets 6,542 6,224 10,037 -------- -------- -------- Total current assets 210,401 290,350 171,357 -------- -------- -------- VIDEOCASSETTE RENTAL INVENTORY, net 3,661 4,099 4,203 DEFERRED TAX ASSET 5,779 4,726 3,039 FIXED ASSETS, net 83,086 72,068 64,754 OTHER ASSETS 2,793 2,776 3,179 -------- -------- -------- TOTAL ASSETS $305,720 $374,019 $246,532 ======== ======== ======== See Notes to Condensed Consolidated Financial Statements. Page 3 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) August 1, January 31, August 2, 1998 1998 1997 -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 92,844 $ 162,981 $ 77,684 Notes payable -- -- 1,241 Accrued expenses and other 12,466 17,346 7,073 Store closing reserve 7,368 8,692 10,549 Current portion of long-term debt and capital lease obligations 1,709 99 93 Income Taxes Payable 975 11,155 -- Deferred Tax Liability 1,709 1,103 -- -------- -------- -------- Total current liabilities 117,071 201,376 96,640 LONG-TERM DEBT, less current portion -- 35,000 35,000 CAPITAL LEASE OBLIGATIONS, less current portion 12,051 6,409 6,459 OTHER LIABILITIES 7,444 6,712 6,889 -------- -------- -------- TOTAL LIABILITIES 136,566 249,497 144,988 -------- -------- -------- SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued) -- -- -- Common stock ($.01 par value; 50,000,000 shares authorized; 21,864,022, 19,815,357 and 19,744,764 shares issued, respectively) 219 198 196 Additional paid-in capital 64,702 25,386 24,714 Treasury stock, at cost (70,288, 70,788 and 80,788 shares, respectively) (390) (394) (394) Unearned compensation-restricted stock (154) (175) (210) Retained earnings 104,777 99,507 77,238 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 169,154 124,522 101,544 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $305,720 $374,019 $246,532 ======== ======== ======== See Notes to Condensed Consolidated Financial Statements. Page 4 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Thirteen Weeks Twenty-Six Weeks Ended Ended -------------------- -------------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 -------- -------- -------- -------- Sales $142,198 $105,024 $287,260 $214,536 Cost of sales 88,734 65,497 181,339 135,746 -------- -------- -------- -------- Gross profit 53,464 39,527 105,921 78,790 Selling, general and administrative expenses 48,690 39,351 96,024 78,284 -------- -------- -------- -------- Income from operations 4,774 176 9,897 506 Interest expense 501 1,562 1,599 3,397 Other expenses (income), net (84) (19) (341) (112) -------- -------- -------- -------- Income (loss) before income taxes 4,357 (1,367) 8,639 (2,779) Income tax expense (benefit) 1,699 (533) 3,369 (1,084) -------- -------- -------- -------- NET INCOME (LOSS) $ 2,658 $ (834) $ 5,270 $ (1,695) -------- -------- -------- -------- -------- -------- -------- -------- BASIC EARNINGS (LOSS) PER SHARE $ 0.12 $ (0.04) $ 0.25 $ (0.09) -------- -------- -------- -------- -------- -------- -------- -------- Weighted average number of common shares outstanding 21,690 19,612 20,758 19,576 -------- -------- -------- -------- -------- -------- -------- -------- DILUTED EARNINGS (LOSS) PER SHARE $ 0.12 $ (0.04) $ 0.24 $ (0.09) -------- -------- -------- -------- -------- -------- -------- -------- Adjusted weighted average number of common shares outstanding 23,092 19,612 22,156 19,576 -------- -------- -------- -------- -------- -------- -------- --------
See Notes to Condensed Consolidated Financial Statements. Page 5 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Twenty Six Weeks Ended -------------------- August 1, August 2, 1998 1997 -------- -------- NET CASH USED BY OPERATING ACTIVITIES: $(60,904) $(23,511) -------- -------- INVESTING ACTIVITIES: Acquisition of property and equipment (21,589) (5,102) Disposal of rental inventory, net 438 581 -------- -------- Net cash used by investing activities (21,151) (4,521) -------- -------- FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 35,000 Proceeds from capital lease 7,440 -- Payments of long-term debt and capital lease obligations (35,189) (53,495) Net increase in revolving line of credit -- 1,241 Proceeds from issuance of common stock 36,772 -- Exercise of stock options 2,567 272 -------- -------- Net cash provided (used) by financing activities 11,590 (16,982) -------- -------- Net decrease in cash and cash equivalents (70,465) (45,014) Cash and cash equivalents, beginning of period 94,732 54,771 -------- -------- Cash and cash equivalents, end of period $ 24,267 $ 9,757 -------- -------- -------- -------- Supplemental disclosure of non-cash investing and financing activities: Issuance of treasury stock under incentive stock programs $ 13 $ 4 Income tax benefit resulting from exercise of stock options 5,809 268
See Notes to Condensed Consolidated Financial Statements. Page 6 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 1, 1998 AND AUGUST 2, 1997 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements consist of Trans World Entertainment Corporation and its subsidiaries, (the "Company"), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. NOTE 2. RESTRUCTURING CHARGE The Company recorded a pre-tax restructuring charge of $21 million in 1994 to reflect the anticipated costs associated with a program to close 143 stores and to restructure the Company's debt agreements. The restructuring charge included the write-down of fixed assets, estimated cash payments to landlords for the early termination of operating leases, inventory-related costs (including the cost for returning all remaining merchandise after the store was closed), and employee termination benefits. The charge also included estimated professional fees related to the development of the store closing plan and the negotiations with landlords related to the termination of leases. Inventory-related costs were included in cost of sales. An analysis of the January 28, 1995 balance in the 1994 restructuring reserve and 1995 charges against the reserve is as follows:
CHARGES BALANCE AT AGAINST REMAINING JANUARY 28, 1995 RESERVE BALANCE ------------------ --------- -------------- (in thousands) Lease obligations.................................. $ 4,250 $ 3,436 $ 814 Inventory-related costs............................ 4,249 3,581 668 Termination benefits............................... 200 200 -- Professional fees.................................. 3,986 3,328 658 Other costs........................................ 827 154 673 ------- --------- ----------- Total cash outflows.............................. $ 13,512 $ 10,699 $ 2,813 ------- --------- ----------- ------- --------- -----------
Page 7 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 1, 1998 AND AUGUST 2, 1997 (CONTINUED) (UNAUDITED) NOTE 2. RESTRUCTURING CHARGE (CONTINUED) The Company completed the 1994 restructuring in 1995, resulting in the closure of 179 stores (versus an original plan of 143 stores). The remaining balance in the 1994 restructuring reserve of $2.8 million was credited to operations in the 4th quarter of 1995. The Company recorded a second restructuring charge of $33.8 million in 1995 to reflect the anticipated costs associated with a program to close an additional 163 stores. The components of this second charge were similar to those recorded in 1994, and also included a provision for exiting the rental video store format, the write-off of goodwill related to a previous acquisition and a provision for closing the Company's fixture manufacturing operation. An analysis of the charges against the 1995 reserve for the twenty-six week period ended August 1, 1998 is as follows:
CHARGES AGAINST THE RESERVE BALANCE AT ------------------------ BALANCE AT JANUARY 31, 1998 1ST QTR 2ND QTR AUGUST 1, 1998 ---------------- ----------- ----------- -------------- (in thousands) Video rental assets...................... $ 3,071 $ 8 $ 352 $ 2,711 --------- ----- ----------- ----------- Non cash write-offs.................... 3,071 8 352 2,711 --------- ----- ----------- ----------- Lease obligations........................ 4,008 149 408 3,451 Inventory-related costs.................. 610 319 55 236 Termination benefits..................... 803 -- -- 803 Professional fees........................ 157 7 5 145 Other costs.............................. 43 (12) 33 22 --------- ----- ----------- ----------- Cash outflows.......................... 5,621 463 501 4,657 --------- ----- ----------- ----------- Total.................................. $ 8,692 $ 471 $ 853 $ 7,368 --------- ----- ----------- ----------- --------- ----- ----------- -----------
In determining the components of the reserves, management analyzed all aspects of the restructuring plan and the costs that would be incurred. The write-off of leasehold improvements and furniture and fixtures represented the estimated net book value of these items at the forecasted closing date. In determining the provision for lease obligations, the Company considered the amount of time remaining on each store's lease and estimated the amount necessary for either buying out the lease or continued rent payments subsequent to store closure. Inventory-related costs include the cost to pack and ship the inventory on hand after the closing of the store as well as the penalty paid to the vendor for additional product returns resulting from the restructurings. Termination benefits represented the severance payments expected to be made to terminated employees. Professional fees represented amounts expected to be paid to advisors related to the development of the store closing plan ($3.5 million in total for both plans), and the negotiations with landlords related to the termination of leases ($2.3 million in total). Page 8 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 1, 1998 AND AUGUST 2, 1997 (CONTINUED) (UNAUDITED) NOTE 2. RESTRUCTURING CHARGE (CONTINUED) The cash outflows for both restructurings were financed from operating cash flows and the liquidation of merchandise inventory from the stores closed. The timing of store closures depended on the Company's ability to negotiate reasonable lease termination agreements. The restructuring reserve is included in the accompanying balance sheet under the caption "store closing reserve." The Company closed 10 stores during the twenty-six week period ended August 1, 1998 that were related to the restructuring reserve. A summary of store closures related to each restructuring is as follows:
1994 1995 RESTRUCTURING RESTRUCTURING TOTAL ----------------- ----------------- ----- Number of stores originally expected to close............ 143 163 306 --- --- --- --- --- --- Number of stores closed through August 1, 1998........... 179 173 352 --- --- --- --- --- --- Number of stores to be closed subsequent to August 1, 1998................................................... --- 18 18 --- --- --- --- --- ---
Sales related to stores that were closed were $4.0 million (unaudited) and $15.4 million (unaudited) during the twenty-six week period ended August 1, 1998 and August 2, 1997, respectively. Store operating losses related to stores that were closed were $77,000 (unaudited) and $654,000 (unaudited) during the twenty-six week period ended August 1, 1998 and August 2, 1997, respectively. The provision for termination benefits was based on the expectation that 338 employees would be terminated in connection with the restructuring programs. Through August 1, 1998, 75 employees had been terminated and the Company expects to terminate an additional 18 employees in fourth quarter of fiscal 1998. The Company has not terminated as many employees as originally planned because higher than normal levels of attrition occurring after the announcement of the restructurings resulted in a reduced need for involuntary terminations. Subsequent to the adoption of the restructuring programs, improving economic conditions in certain markets, improvement in individual store performance and the inability to negotiate reasonable lease termination agreements have led the Company to keep open certain stores that were originally expected to be closed. During the twenty-six week period ended August 1, 1998, 21 stores were removed from the list of stores expected to be closed. Conversely, deteriorating economic conditions and store performance in certain markets have led the Company to close certain stores that were not originally expected to be closed. In addition, the timing of store closures has also been affected by the ability or inability to negotiate reasonable lease termination agreements. The net effect of changes made to the timing of store closures and the stores to be closed under the 1995 restructuring program has not been material. Through August 1, 1998, the Company has closed 352 stores in connection with the restructuring programs, compared to the originally planned closures of 306 stores. During the remainder of 1998, the Company plans to close an additional 18 stores as it completes the restructuring programs. Any remaining balance in the restructuring reserve at January 30, 1999 will be credited to operations. NOTE 3. SEASONALITY The Company's business is seasonal in nature, with the highest sales and earnings occurring in the fourth fiscal quarter. NOTE 4. DEPRECIATION AND AMORTIZATION Depreciation and amortization of videocassette rental inventory included in cost of sales totalled $767,000 and $1,129,000 for the twenty-six week periods ended August 1, 1998 and August 2, 1997, respectively. Depreciation and amortization of fixed assets is included in the condensed consolidated statements of income as follows:
Twenty-six Weeks Ended ------------------------- August 1, August 2, 1998 1997 ---------- ----------- (in thousands) > Cost of sales....................................... $ 619 $ 530 Selling, general and administrative expenses........ $ 8,621 $ 7,228
NOTE 5. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which was effective for the Company for the fiscal year ended January 31, 1998. This standard requires the Company to disclose basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is calculated by dividing net income by the sum of the weighted average shares that would have been outstanding if the dilutive potential common shares had been issued for the Company's common stock options from the Company's stock option plans. For the twenty-six weeks ended August 1, 1998 and August 2, 1997 the additional potentially dilutive common shares included in the diluted earnings per share calculation were 1,398,000 and zero, respectively. Total stock options to purchase zero and 2,525,000 shares of common stock outstanding during the twenty-six weeks ended August 1, 1998 and August 2, 1997, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. NOTE 6. COMMON STOCK OFFERING At the end of the first quarter of 1998 the Company sold an additional 1.5 million shares of its Common Stock in a public offering for approximately $37 million net of issuance costs. A portion of the Page 9 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 1, 1998 AND AUGUST 2, 1997 (CONTINUED) (UNAUDITED) NOTE 6. COMMON STOCK OFFERING (CONTINUED) proceeds was used to repay long-term debt and the balance of the proceeds was used for general corporate purposes including investments in additional stores, fixtures and inventory. NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income", issued in June 1997 and effective for fiscal years ending after December 15, 1997, establishes standards for reporting and display of the total net income and the components of all other non-owner changes in equity, or comprehensive income (loss) in the statement of operations, in a separate statement of comprehensive income (loss) or within the statement of changes of stockholder's equity. The Company has no items of other comprehensive income. Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", issued in June 1997 and effective for fiscal years beginning after December 15, 1997, will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial statements. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and the new rules will not change its financial presentation. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", issued in June, 1998 and effective for all fiscal quarters of fiscal years beginning after June 15, 1999, with earlier application permitted, requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and concluded that there will be no impact on its results of operations or its financial position. The Accounting Standards Executive Committee Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", issued in March 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Company will adopt the statement for the fiscal year beginning Janury 31, 1998. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and concluded that there will be no impact on its results of operations or its financial position. The Accounting Standards Executive Committee Statement of Position 98-5, "Accounting for the Costs of Start-up Activities", issued in April 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on the financial reporting of start-up costs and organization costs. The Company will adopt the statement for the fiscal year beginning January 31, 1999. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and concluded that there will be no impact on its results of operations or its financial position. Page 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 thatsuch 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 1, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED AUGUST 2, 1997 SALES. Total sales increased 35% to $142.2 million for the thirteen weeks ended August 1, 1998, compared to $105.0 million for the same period last year. The Company operated 55 more stores in 1998 than in 1997, an increase of approximately 500,000 square feet of retail selling space. The increase is primarily attributable to a comparable store sales increase of 10%, the acquisition of 90 Strawberries' stores in October 1997, and the opening of 53 stores partially offset by the closing of 86 stores since the end of the second quarter 1997. This was the Company's tenth consecutive quarter of increased comparable store sales. Comparable sales in the Company's music category increased 9.2% while comparable sales in the video category increased 15.6%. GROSS PROFIT. Gross profit, as a percentage of sales, was 37.6% for the thirteen week period ended August 1, 1998, the same percentage as in 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("S,G&A"), expressed as a percentage of sales, decreased from 37.5% to 34.2% in the thirteen week period ended August 1, 1998 when compared to the same period in 1997. The improvement is primarily due to a reduction of store occupancy costs as a percentage of sales, and the continued leveraging of depreciation and amortization and operating expenses against sales. INTEREST EXPENSE. Net interest expense was reduced to $501,000 in the thirteen week period ended August 1, 1998 from $1.6 million in 1997. The decrease is due to a reduction in long-term debt. NET INCOME. The Company increased its net income to $2.7 million for the thirteen weeks ended August 1, 1998 from a net loss of $834,000 for the same period in 1997. The improved bottom line performance is attributable to comparable store sales increase, leverage of S,G&A expenses and lower interest expense. Page 11 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TWENTY-SIX WEEKS ENDED AUGUST 1, 1998 COMPARED TO THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 SALES. The Company's total sales increased 34.0% to $287.3 million for the twenty-six weeks ended August 1, 1998 compared to $214.5 million for the same period last year. The increase in sales is due to the acquisition of Strawberries Music stores in October 1997 and an overall improvement in the music and video specialty retail industry. Comparable store sales increased by 10.0%. Management attributes the comparable store sales increase primarily to its focus on customer service, superior retail locations, inventory management and merchandise presentation. Comparable sales in the Company's music category increased approximately 10.9% while comparable sales in the video category increased 8.9%. GROSS PROFIT. Gross profit as a percentage of sales improved to 36.9% from 36.7% in the twenty-six weeks ended August 1, 1998 as compared to the same period in 1997. Management attributes the increase to an improved competitive environment and the leveraging of expenses in the Company's distribution center. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("S,G&A"), as a percentage of sales, decreased to 33.4% in the first twenty-six weeks of 1998 from 36.5% in the first twenty-six weeks of 1997. The improvement is primarily due to the leveraging of store occupancy, depreciation and amortization, and variable costs. The Company continues to leverage expenses against sales. INTEREST EXPENSE. Net interest expense was reduced to $1.6 million in the twenty-six week period ended August 1, 1998 from $3.4 million for the twenty-six week period ending August 2, 1997. The decrease is due to a reduction of long-term debt and lower interest rates as a result of the refinancing completed in fiscal 1997. NET INCOME. The Company increased its net income to $5.3 million in the twenty-six weeks ended August 1, 1998 from a net loss of $1.7 million during the same period last year. The improved bottom line performance can be attributed to the comparable store sales increase, improved gross margin rates, leverage of S,G&A expense and lower interest expense. Page 12 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND SOURCES OF CAPITAL. The Company's working capital at August 1, 1998 was $93.3 million and its ratio of current assets to current liabilities was 1.8 to 1. During the first twenty-six weeks of 1998, the Company's net cash used by operations was $60.9 million, compared to $23.5 million used in the same period in 1997. The most significant uses of cash during the period were $70.1 million in the normal reduction of accounts payable. On July 9, 1997, the Company entered into a $100 million secured revolving credit facility with Congress Financial Corporation. The Revolving Credit Facility combined the Company's long-term debt with its revolving credit line to create a $100 million credit facility with a three year term at interest rates below the prime rate. The Revolving Credit Facility contains certain restrictive provisions, governing cash dividends and acquisitions, is secured by merchandise inventory and has a minimum net worth covenant. On August 1, 1998, the Company had unused lines of credit aggregating $100 million. CAPITAL EXPENDITURES During the twenty-six weeks ended August 1, 1998, the Company had capital expenditures of $21.6 million. $11.3 million of the total capital expenditures made so far this year was for the new Point of Sales register system. During the first half of 1998, the Company has opened or relocated 24 stores and closed 40 stores while total retail selling space has increased slightly. YEAR 2000 COMPLIANCE The Company has completed an assessment of the business risks related to the Year 2000 issue. The results of the assessment indicate that: - awareness of Year 2000 issues is well known throughout the Company; - the assessment of Year 2000 sensitive items is complete; - a list of items and business relationships sensitive to the Year 2000 issue is being compiled; - renovation of the core information technology ("IT") systems will be completed; - third-party compliance tracking will be done; and - verification of embedded chip ("non-IT") system readiness for Year 2000 compliance will be done. The Company's Year 2000 issue remediation process includes the following phases: Awareness, Assessment, Renovation, Validation, and Implementation. As indicated above, the Awareness and Page 13 Assessment phases are complete. The Awareness phase included establishing an internal Year 2000 committee, interviewing Company personnel at all levels, including those at the stores, distribution center and home office, and vendor compliance tracking. Activities in the Assessment phase include 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 its systems identifying each individual occurrence of date logic, and simulating the Year 2000 environment by rolling forward the date in test files of its principal IT systems. Renovation and Validation and Implementation efforts are underway. For the Renovation phase, all core IT system programming modifications will be completed by its internal systems development staff. The system programming modifications include upgrading the distribution, inventory management and accounting systems and converting the POS registers to a Year 2000 compliant system. Replacements for the other (non-core) IT systems are being implemented on schedule. The non core IT Systems being replaced include a product return system, a system for tracking the opening of new stores and managing lease payments. For the Validation and Implementation phases, formal systems testing for both IT and non-IT systems is expected to be completed by the end of the second quarter of fiscal 1999. In order to complete the Validation and Implementation phases, the Company will process daily, weekly and monthly transactions on the main corporate IT systems platform, IBM AS/400. The compliance testing will be completed in a dedicated environment within the AS/400 to assure acceptance of all transactions in the year 2000. The Company is exposed to both internal and external Year 2000 risks. Internal risks exist due to its dependence on its IT and non-IT systems. The Company is dependent on its IT and non-IT systems for many of its everyday operations including inventory management, product distribution, cash management, accounting and financial reporting. The Company utilizes a variety of vendors for its system needs and has initiated discussions with its vendors and monitored their Year 2000 compliance programs and the compliance of their products or services with required standards. Although the majority of these vendors represent that their products are Year 2000 compliant, the Company will perform testing to validate the vendor representations no later than the second quarter of fiscal 1999. In the normal course of business, the Company replaced its POS register system with a Year 2000 compliant system during the second quarter of 1998. Additionally, the Company plans to replace its product return center's processing system no later than the end of the second quarter of fiscal 1999. The replacement system will be Year 2000 compliant. Preliminary contingency plans for failure of internal systems include implementing manual procedures such as the use of manual merchandise picking and shipping to replace automated distribution center equipment. External risks are represented by the fact that the Company utilizes approximately 2,500 different suppliers in the normal course of its business. Six major merchandise vendors account for more than 60% of all purchases. Additionally, 50 other merchandise vendors account for nearly 15% of purchases. The Company is also dependent on financial institutions for consolidation of cash collections, and for cash payments. Although the Company uses its own trucks for shipment of product to approximately 36% of its stores, it does rely on a number of trucking companies for the remainder of its product distribution. Evaluation of its vendors' Year 2000 readiness will begin in the fourth quarter of fiscal 1998, and is expected to be completed by the end of the first quarter of fiscal 1999. Upon completion of the assessment of vendor readiness, contingency plans will be developed for all third-parties where Year 2000 compliance appears to be at risk. The Company presently believes that its most likely worst-case Year 2000 scenarios would relate to the possible failure in one or more geographic regions of third party systems over which it has no control and for which it has no ready substitute, such as, but not limited to, power and telecommunications services. The Company has in place a disaster recovery plan that addresses recovery from various kinds of disasters, including recovery from significant interruptions to data flows and distribution capabilities at its data systems center and distribution center. The Company's Page 14 disaster recovery plan provides specific routines for actions, personnel assignments and back-up arrangements to ensure effective response to a disaster affecting key business functions including merchandise replenishment, cash management and distribution center operations. Common routines and back up arrangements include off-site storage of information, manual processing of critical applications and the establishment of a chain of communication for key personnel. The Company is using that plan to further develop specific Year 2000 contingency plans identified by our third-party assessment phase which will emphasize locating alternate sources of supply, methods of distribution and ways of processing information. The Company's direct costs for its Year 2000 remediation efforts total $200,000 through August 1, 1998. Anticipated future costs include an additional $1 million to address Year 2000 issues identified as a result of remediation testing and a new product return center processing system. Future costs will be funded by cash flows generated from operations. The Company's estimates of the costs of achieving Year 2000 compliance and the date by which Year 2000 compliance will be achieved are based on management's best estimates, which were derived using numerous assumptions about future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. Specific facts that might cause such material differences include the availability and cost of personnel trained in Year 2000 remediation work, the ability to locate and correct all relevant computer codes, the success achieved by its customers and suppliers in reaching Year 2000-readiness, the timely availability of necessary replacement items and similar uncertainties. Page 15 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A) An Annual Meeting of Shareholders of Trans World Entertainment Corporation was held on Wednesday, June 3, 1998. B) In the case of each individual nominee named below, authority to vote was withheld with respect to the number of shares shown opposite their name in Column 1, and each nominee received the number votes set opposite their name in Column 2 for election as director of the Corporation. Column 1 Column 2 Name of Nominee Withheld Votes for --------------- -------- --------- Robert J. Higgins 100,726 18,750,148 Dean S. Adler 100,560 18,750,314 George W. Dougan 2,822,671 16,028,203 Charlotte G. Fischer 2,822,671 16,028,203 Isaac Kaufman 101,100 18,749,774 Matthew H. Mataraso 100,560 18,750,314 Dr. Joseph G. Morone 2,822,671 16,028,203 C) A proposal to amend Trans World Entertainment Corporation's 1990 Stock Option Plan for Non-Employee Directors to authorize the Board to award discretionary option grants was approved as follows: FOR- 17,734,130 AGAINST- 1,109,746 ABSTAIN- 6,998 D) A proposal to institute Trans World Entertainment Corporation's 1998 Employee Stock Option Plan, was approved as follows: FOR- 12,928,411 AGAINST- 3,832,986 ABSTAIN- 5,469 Page 16 PART II. OTHER INFORMATION TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS EXHIBIT NO. DESCRIPTION PAGE NO. ----------- -------------------------------- -------- 27 Financial Data Schedule N/A (electronic filing only) (B) REPORTS ON FORM 8-K - NONE Omitted from this part II are items which are not applicable or to which the answer is negative to the periods covered. Page 17 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 March 30, 1999 By: /s/ Robert J. Higgins -------------------------------------- Robert J. Higgins Chairman, President and Chief Executive Officer (Principal Executive Officer) March 30, 1999 By: /s/ John J. Sullivan -------------------------------------- John J. Sullivan Senior Vice President-Finance and Chief Financial Officer (Principal Financial Officer) Page 18 EX-27 2 FINANCIAL DATA SCHEDULE
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 CORPORATION 1,000 6-MOS JAN-30-1999 FEB-01-1998 AUG-01-1998 24,267 0 0 0 179,592 210,401 184,605 101,519 305,720 117,071 0 0 0 219 168,935 305,720 287,260 287,260 181,339 181,339 96,024 0 1,599 8,639 3,369 0 0 0 0 5,270 .25 .24
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