UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
FORM 10-Q |
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED |
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OR | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM |
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COMMISSION FILE NUMBER: 0-14818
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TRANS WORLD ENTERTAINMENT CORPORATION | ||
(Exact name of registrant as specified in its charter) |
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| New York |
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| 14-1541629 | ||
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(State or other jurisdiction of incorporation or organization) |
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| Identification Number) | |||
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38 Corporate Circle | ||
Albany, New York 12203 | ||
(Address of principal executive offices, including zip code) | ||
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(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. Yesx Noo
Large accelerated filer Accelerated filero Non-accelerated filero Smaller reporting companyx Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox 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, TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES October 30, January 30, October 31, April 30, January 29, May 1, ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,127 $ 71,514 $ 9,136 $ 29,674 $ 75,212 $ 21,275 Merchandise inventory 270,800 266,568 368,958 217,785 234,164 251,279 Other current assets 17,673 15,062 19,781 6,868 8,385 7,718 Total current assets 294,600 353,144 397,875 254,327 317,761 280,272 NET FIXED ASSETS 26,763 33,908 41,576 20,047 21,478 31,398 OTHER ASSETS 9,427 7,514 7,508 9,399 9,485 9,790 TOTAL ASSETS $ 330,790 $ 394,566 $ 446,959 $ 283,773 $ 348,724 $ 321,460 LIABILITIES CURRENT LIABILITIES: Accounts payable $ 115,312 $ 130,549 $ 135,518 $ 71,021 $ 130,007 $ 74,746 Borrowings under line of credit 8,588 — 55,545 — — — Accrued expenses and other current liabilities 27,635 38,701 38,049 25,985 28,025 34,411 Current portion of long-term debt 630 602 593 650 640 611 Current portion of capital lease obligations 700 1,372 2,021 746 723 828 Total current liabilities 152,865 171,224 231,726 98,402 159,395 110,596 LONG-TERM DEBT, less current portion 1,911 2,388 �� 2,541 1,582 1,748 2,231 CAPITAL LEASE OBLIGATIONS, less current portion 3,953 4,486 4,652 3,568 3,763 4,314 OTHER LONG-TERM LIABILITIES 21,621 23,115 25,376 20,861 22,020 22,129 TOTAL LIABILITIES 180,350 201,213 264,295 124,413 186,926 139,270 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; 56,527,519, 56,498,429 and 56,498,429 shares issued, respectively) 565 565 565 Common stock ($0.01 par value; 200,000,000 shares authorized; 56,527,519, 56,527,519 and 56,498,429 shares issued, respectively) 565 565 565 Additional paid-in capital 308,223 307,823 307,615 308,442 308,333 308,074 Treasury stock at cost (25,102,990, 25,102,990 and 25,102,990 shares, respectively) (217,555 ) (217,555 ) (217,555 ) (217,555 ) (217,555 ) (217,555 ) Accumulated other comprehensive income 1,518 1,518 2,396 416 416 1,518 Retained earnings 57,689 101,002 89,643 67,492 70,039 89,588 TOTAL SHAREHOLDERS’ EQUITY 150,440 193,353 182,664 159,360 161,798 182,190 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 330,790 $ 394,566 $ 446,959 $ 283,773 $ 348,724 $ 321,460 See Accompanying Notes to TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Thirteen Weeks Ended Thirteen Weeks Ended Thirty-nine Weeks Ended October 30, October 31, October 30, October 31, April 30, May 1, Net sales $ 128,787 $ 161,387 $ 421,129 $ 518,566 $ 131,496 $ 156,539 Cost of sales 84,870 106,747 279,959 339,404 83,207 105,014 Gross profit 43,917 54,640 141,170 179,162 48,289 51,525 Selling, general and administrative expenses 59,051 76,166 181,783 231,291 49,968 62,178 Loss from operations (15,134 ) (21,526 ) (40,613 ) (52,129 ) (1,679 ) (10,653 ) Interest expense, net 927 698 2,431 2,085 832 688 Loss before income tax (benefit) (16,061 ) (22,224 ) (43,044 ) (54,214 ) Income tax expense (benefit) 55 93 270 (406 ) Loss before income tax expense (2,511 ) (11,341 ) Income tax expense 36 74 Net loss $ (16,116 ) $ (22,317 ) $ (43,314 ) $ (53,808 ) $ (2,547 ) $ (11,415 ) LOSS PER SHARE: Basic and diluted loss per share $ (0.51 ) $ (0.71 ) $ (1.38 ) $ (1.72 ) $ (0.08 ) $ (0.36 ) Weighted average number of common shares outstanding – basic and diluted 31,425 31,395 31,415 31,362 Weighted average number of common shares – basic and diluted 31,425 31,395 See Accompanying Notes to TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Thirty-nine Weeks Ended Thirteen Weeks Ended October 30, October 31, April 30, May 1, Net cash used by operating activities $ (68,126 ) $ (69,796 ) $ (44,821 ) $ (46,779 ) Cash flows from investing activities: Purchases of fixed assets (2,347 ) (3,883 ) (389 ) (747 ) Acquisition of business, net of cash received (1,848 ) — — (1,849 ) Net cash used by investing activities (4,195 ) (3,883 ) (389 ) (2,596 ) Cash flows from financing activities: Proceeds from line of credit 8,588 55,545 — — Payments of long-term debt (449 ) (422 ) (156 ) (148 ) Payments of capital lease obligations (1,205 ) (2,363 ) (172 ) (716 ) Net cash provided by financing activities 6,934 52,760 Net cash used by financing activities (328 ) (864 ) Net decrease in cash and cash equivalents (65,387 ) (20,919 ) (45,538 ) (50,239 ) Cash and cash equivalents, beginning of year 71,514 30,055 Cash and cash equivalents, beginning of period 75,212 71,514 Cash and cash equivalents, end of period $ 6,127 $ 9,136 $ 29,674 $ 21,275 Supplemental disclosure of non-cash investing and financing activities: Issuance of deferred shares $ 160 $ 465 See Accompanying Notes to TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES Note 1. Nature of Operations Trans World Entertainment Corporation and subsidiaries (“the Company”) is one of the largest specialty retailers of entertainment software, including music, video, video games and related products in the United States. The Company operates a chain of retail entertainment stores, primarily under the Liquidity and Cash Flows: The Company recently received notice from a service provider to the Company o Accelerated filero Non-accelerated filerx Smaller reporting companyo31,424,52931,454,529 shares outstanding as of November 27, 2010May 28, 2011
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
2010
2010
2009
2011
2011
2010 Unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
2010
2009
2010
2009
2011
2010 Unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
2010
2009
2011
2010 Unaudited Condensed Consolidated Financial Statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)OctoberApril 30, 20102011 and October 31, 2009May 1, 2010brand namesf.y.e. for your entertainment andSuncoast Motion Pictures,, and operates e-commerce sites, www.fye.com, www.secondspin.comwww.wherehouse.com, and www.wherehouse.comwww.secondspin.com in a single industry segment. As of OctoberApril 30, 2010,2011, the Company operated 533444 stores totaling approximately 3.63.0 million square feet in the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands.
The Company’s primary sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility (see(See Note 7 for further details on the revolving credit facility)details). The Company generated $49.8 million in cash flow from operations in 2009. The Company’s cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns and the related terms on the purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs for at least the next twelve months, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments. Management has considered and implemented many initiatives as part of the development of its operating plan for 20102011 and beyond,beyond; including a focus on the operation of a core base of stores, optimized pricing strategiesimproved product selection based on customer preferences and industry changes, as well as further streamlining of its operations. During Fiscal 2009,2010, management carried out certain strategic initiatives in its efforts to reduce certain operating costs such as the reduction of headcount at the home office, the closureclosing of 157 storesa distribution in center in Carson, CA. and the elimination or curtailment of certain other general and administrative expenses. Also, during the thirty nine weeks ended October 30, 2010, the Company closed an additional 29 stores. During the fourth quarter of Fiscal 2010, management plans to close between 60 and 80closed 73 stores. An additional 17 stores closed in the first quarter of the remaining 533 stores and2011. The Company plans to continue its careful evaluation of store profitability of its remaining stores in consideration of lease terms, conditions and expirations. In addition,plansthat such service provider is being audited by a number of states, the District of Columbia, and Puerto Rico regarding compliance with such jurisdictions’ unclaimed property laws (the “escheat laws”). The issue centers around the retention of funds associated with uncashed rebate checks. State escheat laws generally require entities to closereport and remit to the state abandoned and unclaimed property. While the Company has not received any requests directly from any jurisdiction, the Company intends, through the service provider, to cooperate fully with any such audit. The Company is reviewing its distribution facility in Carson, California duringlegal and contractual positions relating to the Fourth Quarterrelevant escheat laws and its arrangements with such service provider, however, the Company does not believe that any resulting obligations will have a material effect on its results of 2010.
Seasonality:
The Company’s business is seasonal in nature, with the fourth fiscal quarter constituting the Company’s peak selling period. In 2009,2010, the fourth fiscal quarter accounted for approximately 36%35% of annual sales. In anticipation of increased sales activity during these months, the Company purchases additional inventory and hires additional, temporaryseasonal employees to supplement its permanentcore store sales staff. If, for any reason, the Company’s net sales were below seasonal norms during the fourth quarter, (which the Company has experienced during its three most recent fourth quarters), the Company’s
operating results, particularly operating and net income, would be adversely affected. Additionally, quarterly sales results, in general, are affected by the timing of new product releases, store closings and the performance of existing stores.
Note 2: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements consist of Trans World Entertainment Corporation, its wholly-owned subsidiary, Record Town, Inc. (“Record Town”), and Record Town’s subsidiaries, all of which are wholly-owned. All significant intercompany 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 unaudited 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. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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.
The information presented in the accompanying unaudited condensed consolidated balance sheet as of January 30, 201029, 2011 has been derived from the Company’s January 30, 201029, 2011 audited consolidated financial statements. All other information has been derived from the Company’s unaudited condensed consolidated financial statements as of and for the thirteen and thirty-nine weeks ended OctoberApril 30, 20102011 and October 31, 2009.May 1, 2010. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.29, 2011.
The Company’s significant accounting policies are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the fiscal year ended January 30, 2010.29, 2011.
Note 3. Recently Adopted Accounting Pronouncements
There are no recently issuedadopted accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
Note 4. Acquisition
On March 29, 2010 (“Acquisition Date”), the Company acquired certain assets and assumed certain liabilities of the Value Music Concepts, Inc., (“Value Music”) a Georgia Corporation. The purchase included substantially all of the ongoing business of Value Music, which includesincluded five store leases and equipment, inventory and all related trade names and trademarks (the “Acquisition”). The purchase price consideration was $1.8 million.
The Acquisition has been accounted for in accordance with ASC Topic 805, Business Combinations (“ASC Topic 805”). Accordingly, the total purchase price has been allocated on a provisional basis to assets acquired and net liabilities assumed in connection with the Acquisition based on their estimated fair values as of the completion of the Acquisition. These allocations reflect various provisional
estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are finalized.
The fair value of the net assets acquired was approximately $2.2$1.9 million, which exceeds the preliminary estimated purchase price of $1.8 million. Accordingly, the Company recognized the excess of the fair
value of the net assets over the purchase price of approximately $0.4$0.1 million as a gain on bargain purchase. The gain on bargain purchase of $0.4$0.1 million was included as a reduction of SG&A expenses within income from operations in the Consolidated Statements of Operations in the first quarter ofFiscal 2010. The recorded amounts are provisional and subject to change. The Company continues to evaluate the purchase price allocation, including the opening fair value of inventory and accrued liabilities, which may require the Company to adjust the recorded gain.
The Company believes that it was able to acquire Value Music for less than the fair value of its assets because of (i) the seller’s intent to exit its Value Music operations through bankruptcy liquidation and (ii) the Company’s unique position as a market leader in this industry segment.
The following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the Acquisition Date. A single estimate of fair value results from a series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed are not expected to materially impact the Company’s results of operations. Certain estimated values are not yet finalized and are subject to change. The Company will finalize the amounts recognized as information necessary to complete the analyses is obtained. The Company expects to finalize these amounts as soon as possible but no later than one year from the acquisition date. The following are estimated fair value of assets acquired and liabilities assumed as of the Acquisition date (in thousands):
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Cash |
| $ | 11 |
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| $ | 11 |
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Inventory |
| 2,502 |
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| 2,487 |
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Other assets |
| 9 |
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| 9 |
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Other liabilities |
| (312 | ) |
| (552 | ) | ||
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Net assets acquired |
| 2,210 |
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| 1,955 |
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Less: Purchase price |
| 1,860 |
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| 1,860 |
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Gain on bargain purchase |
| $ | 350 |
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| $ | 95 |
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Under ASC 805-10, acquisitionAcquisition related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred. The Company incurred $277,000$274,000 of acquisition related costs, which are included in Selling, General and Administrative expenses in the Statement of Operations. Any additional acquisition expense is expected to be immaterial.
The unaudited pro forma statement of operations of the Company assuming this transaction occurred at February 1, 2009 is as follows:
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(In thousands, except per share amounts) |
| October 30, |
| October 31, |
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Net Sales |
| $ | 128,787 |
| $ | 164,097 |
| $ | 422,553 |
| $ | 527,394 |
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Net Loss |
| $ | (16,116 | ) | $ | (21,938 | ) | $ | (43,338 | ) | $ | (52,431 | ) |
Diluted Loss per Share |
| $ | (0.51 | ) | $ | (0.70 | ) | $ | (1.38 | ) | $ | (1.67 | ) |
The unaudited pro forma financial information is presented for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the beginning of the periods presented, and should not be taken as being representative of the future consolidated results of operations of the Company.
Note 5. Stock Based Compensation
During the thirteen weeks ended October 30, 2010, the Company recognized expense of $0.1 million for stock-based compensation. Total stock-based compensation expense recognized in the condensed consolidated statements of operations for the thirteen weeks ended October 31, 2009April 30, 2011 and May 1, 2010 was $0.6$0.1 million and $0.5 million, respectively, before income taxes. No deferred tax benefit was recorded against stock-based compensation expense for the thirteen weeks ended OctoberApril 30, 20102011 and October 31, 2009.
Total stock-based compensation expense recognized in the condensed consolidated statements of operations for the thirty-nine weeks ended October 30, 2010 and October 31, 2009 was $0.5 million and $2.0 million, respectively, before income taxes. No deferred tax benefit was recorded against stock-based compensation expense for the thirty-nine weeks ended October 30, 2010 and October 31, 2009.May 1, 2010.
As of OctoberApril 30, 2010,2011, there was approximately $0.8$0.9 million of unrecognized compensation cost related to stock award awards that is expected to be recognized as expense over a weighted average period of 1.23.2 years.
As of OctoberApril 30, 2010,2011, stock awards authorized for issuance under the Company’s plans total 20.6 million. Of these awards authorized for issuance, 7.27.3 million were granted and are outstanding, 5.75.6 million of which were vested and exercisable. Awards available for future grants at OctoberApril 30, 20102011 were 2.62.3 million.
The table below outlines the assumptions that the Company used to estimate the fair value of stock based awards granted during the thirty-ninethirteen weeks ended OctoberApril 30, 2010:2011:
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Dividend yield |
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Expected stock price volatility |
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| 76.4 | % |
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| 2.13 | % |
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| 5.45 |
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| $ | 1.37 |
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Dividend yield | 0% | |
Expected stock price volatility | 69.9 – 75.4% | |
Risk-free interest rate | 2.3 – 2.8% | |
Expected award life (in years) | 4.9 – 7.0 | |
Weighted average fair value per share of awards granted during the period | $1.09 - $1.26 |
The following table summarizes stock award activity during the thirty-ninethirteen weeks ended OctoberApril 30, 2010:2011:
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| Employee and Director Stock Award Plans |
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| Employee and Director Stock Award Plans |
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Balance January 30, 2010 |
| 7,770,140 |
| $ | 7.91 |
| 4.0 |
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Balance January 29, 2011 |
| 6,880,955 |
| $ | 6.80 |
| 3.9 |
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Granted |
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| 2.11 |
| 9.5 |
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| 1.74 |
| 9.8 |
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Forfeited |
| (183,356 | ) |
| 3.17 |
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| (11,425 | ) |
| 3.23 |
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| (1,551,150 | ) |
| 9.34 |
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| 8.87 |
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Balance October 30, 2010 |
| 7,186,442 |
| 6.89 |
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Balance April 30, 2011 |
| 7,296,783 |
| $ | 6.68 |
| 4.0 |
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Exercisable at October 30, 2010 |
| 5,629,842 |
| 7.72 |
| 3.0 |
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Exercisable at April 30, 2011 |
| 5,586,007 |
| $ | 7.71 |
| 2.5 |
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| Exercise price ranges exclude the impact of deferred or restricted stock units that were granted at an exercise price of $0. During the |
(2) | Deferred shares are exchangeable for common shares on a 1:1 basis and therefore have an exercise price of $0. |
As of April 30, 2011, the intrinsic value of stock awards outstanding was $802,000 and exercisable was $111,351.
Note 6. Defined Benefit Plans
The Company maintains a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain executive officers of the Company. The SERP provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements.
The Company had previously provided the Board of Directors with a noncontributory, unfunded retirement plan (“(���Director Retirement Plan”) that paid retired directors an annual retirement benefit. Directors who were not yet vested in their retirement benefits as of June 1, 2003 had the present value of benefits already accrued as of the effective date converted to deferred shares of the Company’s Common Stock. Directors that were fully or partially vested in their retirement benefits were given a one time election to continue to participate in the current retirement program or convert the present value of their benefits to deferred shares.
The measurement date for the SERP and Director Retirement Plan is fiscal year end, using actuarial techniques which reflect estimates for mortality, turnover and expected retirement. In addition, management makes assumptions concerning future salary increases. Discount rates are generally established as of the measurement date using theoretical bond models that select high-grade corporate bonds with maturities or coupons that correlate to the expected payouts of the applicable liabilities.
The following represents the components of the net periodic pension cost related to the Company’s SERP and Director Retirement Plan for the respective periods:
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Service cost |
| $ | 33 |
| $ | 49 |
| $ | 99 |
| $ | 147 |
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| $ | 37 |
| $ | 33 |
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Interest cost |
| 163 |
| 200 |
| 489 |
| 600 |
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| 168 |
| 163 |
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Amortization of prior service cost |
| 86 |
| 85 |
| 258 |
| 255 |
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| 86 |
| 86 |
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Amortization of net gain |
| (171 | ) |
| (86 | ) |
| (513 | ) |
| (258 | ) |
| (112 | ) |
| (171 | ) | ||
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Net periodic pension cost |
| $ | 111 |
| $ | 248 |
| $ | 333 |
| $ | 744 |
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| $ | 179 |
| $ | 111 |
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During the thirty-ninethirteen weeks ended OctoberApril 30, 2010,2011, the Company did not make any cash contributions to the SERP or the Director Retirement Plan, and presently expects to pay approximately $69,000$103,000 in benefits relating to the SERP and $29,000$38,000 in benefits relating to the Director Retirement Plan during Fiscal 2010.2011.
Note 7. Line of Credit
In April 2010, the Company entered into a $100 million amended and restated Credit Agreement (“Amended Credit Facility”). The principal amount of all outstanding loans under the Amended Credit Facility together with any accrued but unpaid interest, are due and payable in April 2013, unless otherwise paid earlier pursuant to the terms of the Amended Credit Facility. Payments of amounts due under the Amended Credit Facility are secured by the assets of the Company.
The Amended Credit Facility includes customary provisions, including affirmative and negative covenants, which include representations, warranties and restrictions on additional indebtedness and acquisitions. The Company is compliant with all covenants. The Amended Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. The Amended Credit Facility also contains other terms and conditions, including prohibiting the payment of dividends and covenants around the number of store closings. It also changed the formula for interest rates.
Interest under the Amended Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%. In addition, a commitment fee of 0.75% is also payable on unused commitments.
The availability under the Amended Credit Facility is subject to limitations based on sufficient inventory levels. Based on inventory levels at the end of the quarter, the availability under the credit facility was $90.0$78.8 million as of OctoberApril 30, 2010.2011. As of OctoberApril 30, 2010,2011, the Company had $8.6 million outstanding ondidn’t have any borrowings under the revolving credit facility and had $1.1$0.8 million in outstanding letter of credit obligationsobligations. The Company did not have any borrowings during the quarter.
As of October 31, 2009, the Company had borrowed $55.5 million under the previous Credit Facility, had $3.6 million in outstanding letter of credit obligations under the previous Credit Facility and $90.9
million was available for borrowing. The weighted average interest rate on outstanding borrowings for the thirteen weeks ended October 31, 2009 was 1.33%.
Other accumulated comprehensive income that the Company reports in the condensed consolidated balance sheets represents the excess of accrued pension liability over accrued benefit cost, net of taxes, associated with the Company’s defined benefit plans. Comprehensive loss was equal to net loss for the thirteen and thirty-nine weeks ended OctoberApril 30, 20102011 and October 31, 2009.May 1, 2010.
Note 9. Depreciation and Amortization of Fixed Assets
Depreciation and amortization of fixed assets included in the condensed consolidated statements of operations is as follows:
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| Thirteen Weeks Ended |
| Thirty-nine Weeks Ended |
|
| Thirteen weeks ended |
| ||||||||||||
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|
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|
| |||||||||||||||
|
| October 30, |
| October 31, |
| October 30, |
| October 31, |
|
| April 30, |
| May 1, |
| ||||||
|
|
|
|
|
|
| ||||||||||||||
|
| (in thousands) |
| (in thousands) |
|
| (in thousands) |
| ||||||||||||
Cost of sales |
| $ | 297 |
| $ | 351 |
| $ | 919 |
| $ | 1,106 |
|
| $ | 138 |
| $ | 316 |
|
Selling, general and administrative expenses |
| 2,769 |
| 3,933 |
| 8,420 |
| 11,246 |
|
| 1,715 |
| 2,863 |
| ||||||
|
|
|
|
|
|
|
|
| ||||||||||||
Total |
| $ | 3,066 |
| $ | 4,284 |
| $ | 9,339 |
| $ | 12,352 |
|
| $ | 1,853 |
| $ | 3,179 |
|
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| ||||||||||||
Note 10. Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is computed by dividing net earnings by the sum of the weighted average shares outstanding and additional common shares that would have been outstanding if the dilutive potential common shares had been issued for the Company’s common stock awards from the Company’s Stock Award Plans.
For the thirteen and thirty-nine week periods ended OctoberApril 30, 2010,2011, and October 31, 2009,May 1, 2010, the impact of outstanding stock awards was not considered because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same. Total anti-dilutive stock awards for the thirteen weeks ended OctoberApril 30, 20102011 and October 31, 2009May 1, 2010 were approximately 4.74.8 million and 6.4 million, respectively. Total anti-dilutive stock awards for the thirty-nine weeks ended October 30, 2010 and October 31, 2009 were approximately 4.9 million and 6.95.1 million, respectively.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Management’s Discussion and Analysis of Financial Condition and
Results of OperationsOctoberApril 30, 20102011 and October 31, 2009May 1, 2010
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs, valuation of long-lived assets, income taxes, stock-based compensation and accounting for gift card liability. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Note 1 of Notes to the Consolidated Financial Statements on Form 10-K for the year ended January 30, 2010 includes a summary of the significant accounting policies and methods used by the Company in the preparation of its condensed consolidated financial statements. There have been no material changes or modifications to the policies since January 30, 2010.
At OctoberApril 30, 2010,2011, the Company operated 533444 stores totaling approximately 3.63.0 million square feet in the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The Company’s stores offer predominantly entertainment software, including music video and video games and related products.video. In total, these categories represented 85%79% of the Company’s sales in the thirty-ninethirteen weeks ended OctoberApril 30, 2010.2011. The balance of categories, including software accessories,games, electronics and trend products represented 15%21% of the Company’s sales in the thirty-ninethirteen weeks ended OctoberApril 30, 2010.2011.
The Company’s results have been, and will continue to be, dependentcontingent upon management’s ability to understand general economic and businessindustry trends and to manage the business in response to those trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Sales and Comparable Store Sales:comparable store sales: The Company measures the rate of comparable store sales change. A store is included in comparable store sales calculations at the beginning of its thirteenth full month of operation. Mall stores relocated in the same shopping center after being open for at least thirteen months are considered comparable stores. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The Company further analyzes sales by store format and by product category.
Cost of Sales and Gross Profit: Gross profit is impacted primarily by the mix of products sold, by discounts negotiated with vendors and discounts offered to customers. The Company records its distribution and product shrink expenses in cost of sales. Distribution expenses include those costs associated with purchasing, receiving, shipping, inspecting and warehousing product and costs associated with product returns to vendors. Cost of sales further includes obsolescence chargescosts and is reduced by the benefit of vendor allowances, net of direct reimbursements of expense.
Selling, General and Administrative (“SG&A”) Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations, as disclosed in Note 9 to the condensed consolidated financial statements). SG&A expenses also include asset impairment charges and write-offs, if any, and miscellaneous items, other than interest.
Balance Sheet and Ratios: The Company views cash, net inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended OctoberApril 30, 20102011
Compared to the Thirteen and Thirty-nine Weeks Ended October 31, 2009May 1, 2010
The following table sets forth a period over period comparison of the Company’s net sales by category:
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| April 30, |
| May 1, |
| Change |
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| Comparable |
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| (in thousands except store data) |
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Net sales: |
| $ | 131,496 |
| $ | 156,539 |
| $ | (25,043 | ) |
| (16.0% | ) |
| (1.8 | %) |
As a percentage of net sales: |
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Video |
|
| 42.3 | % |
| 44.4 | % |
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|
|
| (4.5 | %) |
Music |
|
| 36.7 | % |
| 36.2 | % |
|
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|
|
|
| (2.7 | %) |
Electronics |
|
| 8.8 | % |
| 7.4 | % |
|
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|
|
|
| 14.6 | % |
Trend |
|
| 7.0 | % |
| 6.4 | % |
|
|
|
|
|
|
| 8.1 | % |
Video Games |
|
| 5.2 | % |
| 5.6 | % |
|
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|
|
|
|
| (9.5 | %) |
|
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|
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Store Count: |
|
| 444 |
|
| 544 |
|
| (100 | ) |
| (18.4% | ) |
|
|
|
Net sales. The 16% decrease in net sales during the thirteen weeks ended April 30, 2011, as compared to the same period last year, resulted from a comparable store net sales decline of 1.8% along with the decrease in store count of 18%. While the Company believes a meaningful amount of sales was transferred to ongoing stores, there was a reduction of sales from store closings.
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| Thirteen weeks ended |
| Thirty-nine weeks ended |
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|
| October |
| October |
| Change |
| % |
| Comp |
| October |
| October |
| Change |
| % |
| Comp |
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| (in thousands) |
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Net sales |
| $ | 128,787 |
| $ | 161,387 |
| $ | (32,600 | ) |
| (20.2 | )% |
| (4.5 | )% | $ | 421,129 |
| $ | 518,566 |
| $ | (97,437 | ) |
| (18.8 | )% |
| (3.1 | )% |
As a % of sales |
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Music |
|
| 36 | % |
| 37 | % |
|
|
|
|
|
|
| (6.9 | )% |
| 37 | % |
| 37 | % |
|
|
|
|
|
|
| (3.4 | )% |
Home Video |
|
| 44 | % |
| 41 | % |
|
|
|
|
|
|
| 1.8 | % |
| 43 | % |
| 42 | % |
|
|
|
|
|
|
| 1.7 | % |
Video Games |
|
| 5 | % |
| 8 | % |
|
|
|
|
|
|
| (41.0 | )% |
| 5 | % |
| 8 | % |
|
|
|
|
|
|
| (38.1 | )% |
Other |
|
| 15 | % |
| 14 | % |
|
|
|
|
|
|
| 4.7 | % |
| 15 | % |
| 13 | % |
|
|
|
|
|
|
| 3.8 | % |
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Store Count: |
|
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|
|
|
|
| 533 |
|
| 690 |
|
| (157 | ) |
| (22.8 | %) |
|
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|
Net sales.Sales2011. Comp sales in top 50 skus decreased 20% and 19%13% during the quarter. Comp sales excluding the top 50 increased 3%. According to Soundscan, total CD unit sales industry-wide were down 6% during the period corresponding to the Company’s first fiscal quarter. The music category represented 36.7% of total net sales for the thirteen weeks ended April 30, 2011 compared to 36.2% in the comparable quarter last year.
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Gross Profit. The following table sets forth a period over period comparison of the Company’s gross profit:
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| Thirteen weeks ended |
| Change |
| Thirty-nine weeks ended |
| Change |
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|
| October 30, |
| October 31, |
| $ |
| % |
| October 30, |
| October 31, |
| $ |
| % |
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Gross Profit |
| $ | 43,917 |
| $ | 54,640 |
| $ | (10,723 | ) |
| (19.6 | )% | $ | 141,170 |
| $ | 179,162 |
| $ | (37,992 | ) |
| (21.2 | )% |
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As a % of sales |
|
| 34.1 | % |
| 33.9 | % |
|
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|
| 33.5 | % |
| 34.5 | % |
|
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|
|
Gross profit dollars decreased 20% and 21% in the thirteen and thirty-nine weeks ended October 30, 2010, respectively, as compared to the same period last year. The decline is due to the decline in total sales.
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| Thirteen weeks ended |
| Change |
| ||||||||
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|
| April 30, 2011 |
| May 1, 2010 |
| $ |
| % |
| ||||
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| ||||||||
Gross Profit |
| $ | 48,289 |
| $ | 51,525 |
| $ | (3,236 | ) |
| (6.3 | %) |
As a percentage of net sales |
|
| 36.7 | % |
| 32.9 | % |
|
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|
|
|
|
The decreaseincrease in gross profit as a percentage of sales forwas due to higher margin rates in all our product categories and the thirty-nine week periods ended October 30, 2010 reflects lower vendor allowances this year versus last year.leveraging of our distribution and freight costs.
Selling, General & Administrative Expenses (“SG&A”).&A Expenses. The following table sets forth a period over period comparison of the Company’s SG&A:&A expenses:
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| Thirteen weeks ended |
| Change |
| Thirty-nine weeks ended |
| Change |
| ||||||||||||||||
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| ||||||||||||||||||||
|
| October 30, |
| October 31, |
| $ |
| % |
| October 30, |
| October 31, |
| $ |
| % |
| ||||||||
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| |||||||||||||||||||
SG&A |
| $ | 59,051 |
| $ | 76,166 |
| $ | (17,115 | ) |
| (22.5 | )% | $ | 181,783 |
| $ | 231,291 |
| $ | (49,508 | ) |
| (21.4 | )% |
|
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|
|
As a % of sales |
|
| 45.9 | % |
| 47.2 | % |
|
|
|
|
|
|
| 43.2 | % |
| 44.6 | % |
|
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|
| Thirteen weeks ended |
| Change |
| ||||||||
|
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| ||||||||||
|
| April 30, 2011 |
| May 1, 2010 |
| $ |
| % |
| ||||
|
|
|
|
|
| ||||||||
SG&A Expenses |
| $ | 49,968 |
| $ | 62,178 |
| $ | (12,210 | ) |
| (19.6 | %) |
As a percentage of net sales |
|
| 38.0 | % |
| 39.7 | % |
|
|
|
|
|
|
SG&A expenses for the thirteen weeks ended October 30, 2010 decreased $17.1$12.2 million, or 23%19.6% on the net sales decline of 20%16.0%. The decrease is primarily due to lower overhead expenses associated with the decrease in store count, lower depreciation expense due to lower store count and the write-down of fixed assets at underperforming locations during the fourth quarter of 20092010 and lower variable sellingoccupancy expenses onin ongoing stores.
Interest Expense, Net. Net interest expense was $0.8 million during the sales decline.
SG&A expenses for the thirty-ninethirteen weeks ended OctoberApril 30, 2010 decreased $49.52011 compared to $0.7 million or 21% onduring the net sales decline of 19%.thirteen weeks ended May 1, 2010. The decreaseincrease is primarily due to lower overhead expenses associated with the decrease in store count, lower depreciation expense due to lower store count, the write-downamortization of fixed assets at underperforming locations during the fourth quarter of 2009 and lower variable selling expenses on the sales decline. Included in SG&A expenses for the thirty-nine weeks ended October 30, 2010 is a gain on bargain purchase of $0.4 millionloan commitment fees related to the acquisition of five Value Music stores, which is offset by $277,000three year extension we signed in acquisition costs incurred during the thirty-nine week period ofApril 2010.
Interest Expense, net. Interest In addition, interest expense net was $0.9 million and $2.4 million during the thirteen and thirty-nine week periods ended October 30, 2010 comparedalso increased due to $0.7 million and $2.1 million for the thirteen and thirty-nine week periods ended October 31, 2009, respectively. Thea 55 basis point increase in interest expense is due to higher effective interest rates on the Company’s amended credit facility as compared to the previous credit facility.our unused loan commitment fee.
Income Tax Expense (Benefit).As of January 30, 201029, 2011 and January 31, 2009,30, 2010, the Company had incurred cumulative three-year losses. Based on the cumulative three-year losses and other available objective evidence, management concluded that a full valuation allowance should be recorded against the Company’s deferred tax assets. Due to the recognition of a full valuation allowance as of January 30, 2010,29, 2011, the projected net loss for the year ending January 29, 201128, 2012 and the net loss incurred for the thirty-ninethirteen weeks ended OctoberApril 30, 2010,2011, the Company did not provide a current tax benefit for the net loss incurred for this thirteen week period.
For the thirty-ninethirteen weeks ended October 31, 2009, the tax benefit associated with the quarter-specific items is primarily attributed to the net impact of the interest accrual related to uncertain tax positions, the reduction of tax reserves due to a tax examination settlementApril 30, 2011 and state taxes based on modified gross receipts incurred during this period.
For all other periods presented,May 1, 2010, the tax expense associated with the quarter-specific items is primarily attributed to the net impact of the interest accrual related to uncertain tax positions and state taxes based on modified gross receipts incurred during this period.
Net Loss. The following table sets forth a period over period comparison of the Company’s net loss:
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| Thirteen weeks ended |
| Thirty-nine weeks ended |
|
| Thirteen weeks ended |
| ||||||||||||
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| ||||||||||||||||
(in thousands) |
| October 30, |
| October 31, |
| October 30, |
| October 31, |
| |||||||||||
|
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|
|
| April 30, 2011 |
| May 1, 2010 |
| ||||||||||
Loss before income tax |
| $ | (16,061 | ) | $ | (22,224 | ) | $ | (43,044 | ) | $ | (54,214 | ) | |||||||
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| |||||||||||||||||
Loss before income tax expense (benefit) |
| $ | (2,511 | ) | $ | (11,341 | ) | |||||||||||||
Income tax expense (benefit) |
| 55 |
| 93 |
| 270 |
| (406 | ) |
| 36 |
| 74 |
| ||||||
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Net loss |
| $ | (16,116 | ) | $ | (22,317 | ) | $ | (43,314 | ) | $ | (53,808 | ) |
| $ | (2,547 | ) | $ | (11,415 | ) |
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| ||||||||||||
Loss before income tax benefit decreased $6.1 million to $16.1 million for the third quarter of 2010, from $22.2 million last year. For the thirteen weeks ended OctoberApril 30, 2010,2011, the Company’s net loss decreased $6.2$8.9 million to $16.1$2.5 million from $22.3$11.4 million for the thirteen weeks ended October 31, 2009.May 1, 2010. The decrease in the Company’s netdecreased loss for the thirteen weeks ended October 30, 2010 as compared to the prior year iswas due to lowera
higher gross margin percentage and a reduction in SG&A expenses.
Forexpenses partially offset by the thirty-nine weeks ended October 30, 2010, the loss before income taxes decreased $11.2 million to $43.0 milliondecline in gross profit from $54.2 million last year. The Company’s net loss decreased $10.5 million to $43.3 million from $53.8 million for the thirty-nine weeks ended October 31, 2009. The decrease in the Company’s net loss for the thirty nine weeks ended October 30, 2010 as compared to the prior year is due to lower SG&A expenses.sales.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash Flows: The Company’s primary sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility (see(See Note 7 for further details on the revolving credit facility)details). The Company generated $49.8 million in cash flow from operations in 2009. The Company’s cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns and the related terms on the purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs for at least the next twelve months, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments. Management has considered and implemented many initiatives as part of the development of its operating plan for 20102011 and beyond,beyond; including a focus on the operation of a core base of stores, optimized pricing strategiesimproved product selection based on customer preferences and industry changes, as well as further streamlining of its operations. During Fiscal 2009,2010, management carried out certain strategic initiatives in its efforts to reduce certain operating costs such as the reduction of headcount at the home office, the closureclosing of 157 storesa distribution in center in Carson, CA. and the elimination or curtailment of certain other general and administrative expenses. Also, during the thirty nine weeks ended October 30, 2010, the Company closed an additional 29 stores. During the fourth quarter of Fiscal 2010, management plans to close between 60 and 80closed 73 stores. An additional 17 stores closed in the first quarter of the remaining 533 stores and2011. The Company plans to continue its careful evaluation of store profitability of its remaining stores in consideration of lease terms, conditions and expirations. In addition,
Management anticipates any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, discussed hereafter. Cash flows from investing and financing activities during Fiscal 2011 are expected to be comparable with Fiscal 2010. The Company plans to close its distribution facilitydoes not expect any material changes in Carson, California during the Fourth Quartermix (between equity and debt) or the relative cost of 2010.capital resources.
The following table sets forth a summary of key components of cash flow and working capital for each of the thirty-ninethirteen weeks ended OctoberApril 30, 2011 and May 1, 2010, and October 31, 2009:or at those dates:
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| Thirty-nine weeks ended |
| Change |
|
| Thirteen weeks ended |
| Change |
| ||||||||||
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| ||||||||||||||
(in thousands) |
| October 30, |
| October 31, |
| $ |
|
| April 30, |
| May 1, |
| $ |
| ||||||
|
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| |||||||||||||
Operating Cash Flows |
| $ | (68,126 | ) | $ | (69,796 | ) | $ | 1,670 |
|
| $ | (44,821 | ) | $ | (46,779 | ) | $ | 1,958 |
|
Investing Cash Flows |
| (4,195 | ) |
| (3,883 | ) |
| (312 | ) |
| (389 | ) |
| (2,596 | ) |
| 2,207 |
| ||
Financing Cash Flows |
| 6,934 |
| 52,760 |
| (45,826 | ) |
| (328 | ) |
| (864 | ) |
| 536 |
| ||||
Capital Expenditures |
| (2,347 | ) |
| (3,883 | ) |
| 1,536 |
|
| (389 | ) |
| (747 | ) |
| 358 |
| ||
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| ||||||
Cash and Cash Equivalents |
| 6,127 |
| 9,136 |
| (3,009 | ) |
| 29,674 |
| 21,275 |
|
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Merchandise Inventory |
| 270,800 |
| 368,958 |
| (98,158 | ) |
| 217,785 |
| 251,279 |
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Working Capital |
| 141,735 |
| 166,149 |
| (24,414 | ) |
| 155,925 |
| 169,676 |
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The Company had cash and cash equivalents of $6.1$29.7 million at OctoberApril 30, 2010,2011, compared to $71.5$75.2 million at January 30, 201029, 2011 and $9.1$21.3 million at October 31, 2009.May 1, 2010. Merchandise inventory was $76$74 per square foot at OctoberApril 30, 2010,2011, compared to $83$69 per square foot at October 31, 2009.May 1, 2010.
Cash used by operating activities was $68.1$44.8 million for the thirty-ninethirteen weeks ended OctoberApril 30, 2010.2011. The primary usesuse of cash during the thirty-nine weeks ended October 30, 2010 werewas a $59.0 million seasonal reduction of accounts payable, resulting in a $19.5 million increase in net inventory (inventory less accounts payable) and losses from operations.payable. The Company’s merchandise inventory and accounts payable are heavily influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for merchandise inventory sold during the prior year’s holiday season.
Cash used by investing activities, which was $4.2constituted entirely of capital expenditures, was $0.4 million for the thirty-ninethirteen weeks ended OctoberApril 30, 2010. The primary use of cash was $2.3 million in capital expenditures.2011.
Cash providedused by financing activities was $6.9$0.3 million for the thirty-ninethirteen weeks ended OctoberApril 30, 2010. Borrowings on2011 for the company’s line of credit were $8.6 million during the period, which were offset by paymentspayment on long term debt onand capital lease obligations.
In April 2010, the Company entered into a $100 million amended and restated Credit Agreement (“Amended Credit Facility”). The principal amount of all outstanding loans under the Amended Credit Facility together with any accrued but unpaid interest, are due and payable in April 2013, unless otherwise paid earlier pursuant to the terms of the Amended Credit Facility. Payments of amounts due under the Amended Credit Facility are secured by the assets of the Company.
The Amended Credit Facility includes customary provisions, including affirmative and negative covenants, which include representations, warranties and restrictions on additional indebtedness and acquisitions. The Amended Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. The Amended Credit Facility also contains other terms and conditions including prohibiting the payment of dividends and covenants around the number of store closings. It also changed the formula for interest rates.
Interest under the Amended Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%. In addition, a commitment fee of 0.75% is also payable on unused commitments.
The availability under the Amended Credit Facility is subject to limitations based on sufficient inventory levels. Based on inventory levels at the end of the quarter, the availability under the credit facility was $90.0$78.8 million as of OctoberApril 30, 2010.2011. As of OctoberApril 30, 2010,2011, the Company had $8.6 million outstanding ondidn’t have any borrowings under the revolving credit facility and had $1.1$0.8 million in outstanding letter of credit obligationsobligations. The Company did not have any outstanding borrowings on its line of credit during the first quarter.
As of May 1, 2010, the Company didn’t have any borrowings under the revolving credit facility and $80.3had $1.8 million was remained available for borrowing.in outstanding letter of credit obligations. The weighted average interest rate on outstanding borrowings for the thirteen weeks ended OctoberApril 30, 20102011 was 5.42%3.25%.
As of October 31, 2009, the Company had borrowed $55.5 million under the Credit Facility, had $3.6 million in outstanding letter of credit obligations under the Credit Facility and $90.9 million was available for borrowing. The weighted average interest rate on outstanding borrowings for the thirteen weeks ended October 31, 2009May 1, 2010 was 1.33%3.25%.
We believe that cash flows provided by operationssales of merchandise inventory and available borrowing capacity under our credit facility, which expires on April, 2013, will provide us with sufficient liquidity through the expiration of this credit facility.
Capital Expenditures.Resources.During the thirty-ninethirteen weeks ended OctoberApril 30, 2010,2011, the Company made capital expenditures of $2.3$0.3 million. The Company plans to spend less than $5approximately $7.5 million for capital expenditures in 2010.fiscal 2011.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs, valuation of long-lived assets, income taxes and accounting for gift card liability. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K for the year ended January 30, 201029, 2011 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its condensed consolidated financial statements. There have been no material changes or modifications to the policies since January 30, 2010.29, 2011.
Recently Issued Accounting Pronouncements:
The Financial Accounting Standards Board (the “FASB”) has codified a single source of U.S. Generally Accepted Accounting Principles (GAAP), the Accounting Standards Codification™ . Unless needed to clarify a point to readers, we will refrain from citing specific section references when discussing application of accounting principles or addressing new or pending accounting rule changes. There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
To the extent the Company borrows under its Credit Facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its Credit Facility can be variable Interest under the Amended Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%. If interest rates on the Company’s Credit Facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, income before income taxes would be reduced by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 30, 2010. The Company does not currently hold any derivative instruments.
Item 4 – Controls and ProceduresandProcedures
(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of OctoberApril 30, 2010,2011, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and effective and designed to ensure that material(i) information relatingrequired to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companyissuer’s management, including its principal executive and its subsidiaries would be made knownprincipal financial officers, or persons performing similar functions, as appropriate to such officers on aallow timely basis.decisions regarding required disclosure..
(b) Changes in internal controls. There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
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(A) Exhibits - |
| Description | ||
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31.1 |
| Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
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31.2 |
| Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
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32 |
| Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
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
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June 9, |
| By: | /s/ Robert J. Higgins |
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| Robert J. Higgins | ||
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| Chairman and Chief Executive Officer | ||
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| (Principal Executive Officer) |
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| By: | /s/ John J. Sullivan |
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| John J. Sullivan | ||
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| Executive Vice President and Chief Financial Officer (Principal Financial and Chief Accounting Officer) | ||
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