**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                         |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                           |
| ** ** | ** ** | **FOR THE QUARTERLY PERIOD ENDED  APRIL 30, 2005**                                                                                                        |
| ** ** | ** ** | ** **                                                                                                                                                     |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT**                                                                |
|       |       |                                                                                                                                                           |
| ** ** | ** ** | **FOR THE  TRANSITION PERIOD  FROM          TO          ** |

 

**COMMISSION FILENUMBER:  0-14818**

 

**TRANSWORLD ENTERTAINMENT CORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **New  York**                                                   |   | **14-1541629**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**38Corporate CircleAlbany, New York 12203**

(Address ofprincipal executive offices, including zip code)

 

**(518) 452-1242**

(Registrant’stelephone number, including area code)

 

Indicate by a check markwhether the Registrant (1) has filed all reports required to be filed bySections 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes ý  No o 

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes ý  No o 

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

Common Stock, $.01par value,

32,602,579 sharesoutstanding as of June 1, 2005

 

 

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**TRANS WORLD ENTERTAINMENTCORPORATION AND SUBSIDIARIESQUARTERLY REPORT ON FORM 10-QINDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 
| PART 1.  FINANCIAL INFORMATION                                                                                                |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                               |   |
| Item 1 - Financial  Statements                                                                                                     |   |
|                                                                                                                               |   |
| Condensed  Consolidated Balance Sheets (unaudited) at April 30, 2005,  January 29, 2005 and May 1, 2004             |   |
|                                                                                                                               |   |
| Condensed Consolidated  Statements of Operations (unaudited) –  Thirteen Weeks Ended April 30, 2005 and May 1, 2004 |   |
|                                                                                                                               |   |
| Condensed  Consolidated Statements of Cash Flows (unaudited)–  Thirteen Weeks Ended April 30, 2005 and May 1, 2004  |   |
|                                                                                                                               |   |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                  |   |
|                                                                                                                               |   |
| Item  2 - Management’s Discussion and Analysis of Financial  Condition and Results of Operations                              |   |
|                                                                                                                               |   |
| Item 3 – Quantitative and Qualitative  Disclosures about Market Risk                                                          |   |
|                                                                                                                               |   |
| Item 4 – Controls and Procedures                                                                                              |   |
|                                                                                                                               |   |
| PART II. OTHER INFORMATION                                                                                                    |   |
|                                                                                                                               |   |
| Item 2 –  Changes in Securities and Use of Proceeds                                                                           |   |
|                                                                                                                               |   |
| Item 6 - Exhibits and Reports on Form 8-K                                                                                     |   |
|                                                                                                                               |   |
| Signatures                                                                                                                         |   |

 

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**TRANS WORLDENTERTAINMENT CORPORATION AND SUBSIDIARIESPART 1.****FINANCIAL INFORMATION****Item 1 - Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts)(unaudited)**

 
| ** **                                                                                                                         | ** ** | **April 30,  2005** | ** ** | **January 29,  2005** | ** ** | **May 1,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|-----------------------|------------|
| **ASSETS**                                                                                                                         |       |                     |       |                       |       |                  |       |
| CURRENT ASSETS:                                                                                                                    | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                         |       | $                        | 68,005     |                       | $          | 229,768               |       | $ | 89,094 |   |
| Merchandise  inventory                                                                                                             |       | 409,369                  |       | 431,246                    |       | 442,630               |       |
| Deferred taxes                                                                                                                     |       | 14,059                   |       | 15,526                     |       | 8,070                 |       |
| Other current  assets                                                                                                              |       | 12,695                   |       | 13,006                     |       | 10,844                |       |
| Total current  assets                                                                                                              |       | 504,128                  |       | 689,546                    |       | 550,638               |       |
|                                                                                                                               |       |                     |       |                       |       |                  |       |
| NET FIXED ASSETS                                                                                                                   |       | 126,266                  |       | 130,196                    |       | 126,025               |       |
| DEFERRED TAXES                                                                                                                     |       | 27,755                   |       | 25,039                     |       | 39,112                |       |
| OTHER ASSETS                                                                                                                       |       | 14,369                   |       | 14,872                     |       | 14,906                |       |
| TOTAL ASSETS                                                                                                                       |       | $                        | 672,518    |                       | $          | 859,653               |       | $ | 730,681 |   |
|                                                                                                                               |       |                     |       |                       |       |                  |       |
| **LIABILITIES**                                                                                                                    |       |                     |       |                       |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                              |       |                     |       |                       |       |                  |       |
| Accounts payable                                                                                                                   |       | $                        | 184,942    |                       | $          | 358,396               |       | $ | 242,975 |   |
| Income taxes  payable                                                                                                              |       | 2,170                    |       | 8,592                      |       | 15,306                |       |
| Accrued expenses  and other                                                                                                        |       | 36,473                   |       | 43,712                     |       | 42,289                |       |
| Current portion  of long-term debt                                                                                                 |       | 456                      |       | 448                        |       | —                |       |
| Current portion  of capital lease obligations                                                                                      |       | 1,312                    |       | 332                        |       | 407                   |       |
| Total current  liabilities                                                                                                         |       | 225,353                  |       | 411,480                    |       | 300,977               |       |
|                                                                                                                               |       |                     |       |                       |       |                  |       |
| LONG-TERM DEBT,  less current portion                                                                                              |       | 4,943                    |       | 5,060                      |       | —                |       |
| CAPITAL LEASE  OBLIGATIONS, less current portion                                                                                   |       | 11,752                   |       | 6,977                      |       | 7,359                 |       |
| DEFERRED RENT  AND OTHER LIABILITIES                                                                                               |       | 30,795                   |       | 31,813                     |       | 23,866                |       |
| TOTAL  LIABILITIES                                                                                                                 |       | 272,843                  |       | 455,330                    |       | 332,202               |       |
|                                                                                                                               |       |                     |       |                       |       |                  |       |
| **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; 55,429,941, 55,014,598 and  54,385,144 shares issued, respectively) |       | 554                      |       | 550                        |       | 544                   |       |
| Additional  paid-in capital                                                                                                        |       | 296,931                  |       | 292,922                    |       | 288,964               |       |
| Unearned  compensation – restricted stock                                                                                     |       | (41                      | )          | (46                        | )          | (6                    | )          |
| Accumulated other  comprehensive loss                                                                                              |       | (652                     | )          | (1,094                     | )          | —                |       |
| Treasury stock  at cost (22,550,549, 21,988,949 and 18,539,349 shares, respectively)                                               |       | (194,452                 | )          | (186,298                   | )          | (149,930              | )          |
| Retained  earnings                                                                                                                 |       | 297,335                  |       | 298,289                    |       | 258,907               |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                   |       | 399,675                  |       | 404,323                    |       | 398,479               |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                   |       | $                        | 672,518    |                       | $          | 859,653               |       | $ | 730,681 |   |

* *

*See Notes to CondensedConsolidated Financial Statements.*

 

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**TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(unaudited)**

 
| ** **                                                                                             | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                             | ** ** | **April 30,  2005** | ** ** | **May 1,  2004** | ** ** |
| ** **                                                                                             | ** ** | ** **               | ** ** | ** ** | ** ** |
| Sales                                                                                                  |       | $                        | 285,410    |   | $ | 304,483 |   |
| Cost of sales                                                                                          |       | 180,845                  |       | 191,178 |   |
| Gross profit                                                                                           |       | 104,565                  |       | 113,305 |   |
| Selling, general  and administrative expenses                                                          |       | 105,867                  |       | 109,695 |   |
| Income (loss)  from operations                                                                         |       | (1,302                   | )          | 3,610 |   |
| Interest expense                                                                                       |       | 229                      |       | 317 |   |
| Income (loss)  before income taxes and extraordinary gain - unallocated negative goodwill              |       | (1,531                   | )          | 3,293 |   |
| Income tax  expense (benefit)                                                                          |       | (577                     | )          | 1,252 |   |
| Income (loss)  before extraordinary gain - unallocated negative goodwill                               |       | $                        | (954       | ) | $ | 2,041 |   |
| Extraordinary  gain - unallocated negative goodwill, net of income taxes of $0 and $253,  respectively |       | —                   |       | 418 |   |
| Net income  (loss)                                                                                     |       | $                        | (954       | ) | $ | 2,459 |   |
|                                                                                                   |       |                     |       |   |   |
| BASIC INCOME  (LOSS) PER SHARE:                                                                        |       |                     |       |   |   |
| Income (loss)  per share before extraordinary gain -unallocated negative goodwill                      |       | $                        | (0.03      | ) | $ | 0.06 |   |
| Extraordinary  gain - unallocated negative goodwill, net of income taxes of $0 and $253,  respectively |       | —                   |       | 0.01 |   |
| Basic income  (loss) per share                                                                         |       | $                        | (0.03      | ) | $ | 0.07 |   |
|                                                                                                   |       |                     |       |   |   |
| Weighted average  number of common shares outstanding – basic                                     |       | 32,945                   |       | 35,981 |   |
|                                                                                                   |       |                     |       |   |   |
| DILUTED INCOME  (LOSS) PER SHARE:                                                                      |       |                     |       |   |   |
| Income (loss)  per share before extraordinary gain -unallocated negative goodwill                      |       | $                        | (0.03      | ) | $ | 0.06 |   |
| Extraordinary  gain - unallocated negative goodwill, net of income taxes of $0 and $253,  respectively |       | —                   |       | 0.01 |   |
| Diluted income  (loss) per share                                                                       |       | $                        | (0.03      | ) | $ | 0.07 |   |
|                                                                                                   |       |                     |       |   |   |
| Weighted average  number of common shares outstanding – diluted                                   |       | 32,945                   |       | 37,609 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

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**TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**

 
| ** **                                                               | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                               | ** ** | **April 30,  2005** | ** ** | **May 1,  2004** | ** ** |
| Net cash used by  operating activities                                   |       | $                        | (156,410   | ) | $ | (89,309 | ) |
|                                                                     |       |                     |       |   |   |
| Cash flows from  investing activities:                                   |       |                     |       |   |   |
| Purchases of  fixed assets                                               |       | (5,497                   | )          | (9,686 | ) |
| Net cash used by  investing activities                                   |       | (5,497                   | )          | (9,686 | ) |
|                                                                     |       |                     |       |   |   |
| Cash flows from  financing activities:                                   |       |                     |       |   |   |
| Payments of  long-term debt                                              |       | (109                     | )          | — |   |
| Proceeds from  capital leases                                            |       | 5,947                    |       | — |   |
| Payments of  capital lease obligations                                   |       | (192                     | )          | (94 | ) |
| Payments for  purchases of treasury stock                                |       | (8,154                   | )          | (3,875 | ) |
| Proceeds from  the exercise of stock options                             |       | 2,652                    |       | 328 |   |
| Net cash  provided (used) by financing activities                        |       | 144                      |       | (3,641 | ) |
|                                                                     |       |                     |       |   |   |
| Net decrease in  cash and cash equivalents                               |       | (161,763                 | )          | (102,636 | ) |
| Cash and cash  equivalents, beginning of year                            |       | 229,768                  |       | 191,730 |   |
| Cash and cash  equivalents, end of period                                |       | $                        | 68,005     |   | $ | 89,094 |   |
| Supplemental  disclosure of non-cash investing and financing activities: |       |                     |       |   |   |
| Income tax  benefit resulting from exercises of stock options            |       | $                        | 1,363      |   | $ | 364 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

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**TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (unaudited)April 30, 2005 and May 1, 2004**

 

**Note 1.****Nature of Operations**

 

Trans World EntertainmentCorporation and subsidiaries (“the Company”) is one of the largest specialtyretailers of music, video, including DVD and VHS, video games and relatedproducts in the United States.  TheCompany operates a chain of retail entertainment stores and e-commerce sites,www.fye.com, www.coconuts.com, www.wherehouse.com, and www.secondspin.com in asingle industry segment.  As of April 30,2005, the Company operated 804 stores totaling approximately 4.9 million squarefeet in 46 states, the District of Columbia, the Commonwealth of Puerto Ricoand the U.S. Virgin Islands, with a majority of the stores concentrated in theeastern half of the United States.

 

**Note 2: Basis ofPresentation**

The accompanyingunaudited condensed consolidated financial statements consist of Trans WorldEntertainment Corporation, its wholly owned subsidiary Record Town, Inc. (“RecordTown”) and Record Town’s subsidiaries, all of which are wholly owned (“the Company”).   All significant intercompany accounts andtransactions have been eliminated.

 

The interim condensedconsolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  The information furnished in these condensedconsolidated financial statements reflects all normal, recurring adjustmentswhich, in the opinion of management, are necessary for the fair presentation ofsuch financial statements.  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Certain information and footnote disclosures normally included in thefinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to rules and regulations applicable to interim financialstatements.

 

The informationpresented in the accompanying unaudited condensed consolidated balance sheet asof January 29, 2005 has been derived from the Company’s January 29,2005 audited consolidated financial statements. All other information has beenderived from the Company’s unaudited consolidated financial statements as ofand for the thirteen weeks ended April 30, 2005 and May 1, 2004.   These unaudited condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended January 29, 2005. Certain reclassifications havebeen made to prior periods to conform to the current period presentation.

 

The Company’ssignificant accounting policies are the same as those described in Note 1 tothe Company’s Consolidated Financial Statements on Form 10-K for thefiscal year ended January 29, 2005.

 

**Note 3.****Seasonality**

The Company’s business isseasonal in nature, with the fourth fiscal quarter constituting the Company’speak selling period.  In 2004, the fourthfiscal quarter accounted for approximately 38% of annual sales.  In anticipation of increased sales activityduring these months, the Company purchases additional

 

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inventoryand hires additional, temporary employees to supplement its permanent storesales staff.   If, for any reason, theCompany’s net sales were below seasonal norms during the fourth quarter, theCompany’s operating results, particularly operating and net income, could beadversely affected.  Additionally,quarterly sales results, in general, are affected by the timing of new productreleases, new store openings or closings and the performance of existingstores.

 

**Note 4.****Stock Based Compensation**

The Company applies the intrinsic value-based methodof accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations includingFinancial Accounting Standards Board (“FASB”) Interpretation No. 44, *Accounting for Certain Transactions Involving Stock Compensation – AnInterpretation of APB No. 25*, in accounting for its fixed planstock options.  Under this method,compensation expense would be recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price.  Unearned compensation recognized forrestricted stock awards is shown as a separate component of shareholders’equity and is amortized to expense over the vesting period of the stock awardusing the straight-line method. Statement of Financial Accounting Standards (“SFAS”) No. 123,*Accounting for Stock-Based Compensation*, as amended by SFAS No. 148,*Accounting for Stock-Based Compensation –Transition and Disclosure*, established accounting and disclosurerequirements using a fair value-based method of accounting for stock-basedemployee compensation plans.  As allowedby SFAS No. 123, the Company has elected to continue to apply theintrinsic value-based method of accounting described above, and has adopted thedisclosure requirements of SFAS No. 123 and SFAS No.148.

 

The following table illustrates the effect on net income(loss) and income (loss) per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation:

 
| ** **                                                                                                                             | ** **   | **Thirteen  weeks ended**                     | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------------|------------|
| ** **                                                                                                                             | ** **   | **April 30,  2005**                      | ** ** | **May 1,  2004** | ** ** |
|                                                                                                                                   | *** *** | **(in  thousands except per share  amounts)** | ** ** |
| Net income  (loss), as reported                                                                                                        |         | $                                             | (954       | ) | $ | 2,459 |   |
| Add: Stock-based  employee compensation expense included in reported net income (loss), net of  income taxes                           |         | 43                                            |       | 17 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of income taxes |         | (719                                          | )          | (516 | ) |
| Proforma net  income (loss)                                                                                                            |         | $                                             | (1,630     | ) | $ | 1,960 |   |
| Income (loss)  per share:                                                                                                              |         |                                          |       |   |   |
| Basic – as  reported                                                                                                              |         | $                                             | (0.03      | ) | $ | 0.07 |   |
| Basic– proforma                                                                                                                   |         | $                                             | (0.05      | ) | $ | 0.05 |   |
| Diluted – as  reported                                                                                                            |         | $                                             | (0.03      | ) | $ | 0.07 |   |
| Diluted –  proforma                                                                                                               |         | $                                             | (0.05      | ) | $ | 0.05 |   |

 

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**Note 5.****Defined Benefit Plan**

The Company maintains a non-qualified SupplementalExecutive Retirement Plan (“SERP”) for certain executive officers of theCompany.  The SERP, which is unfunded,provides eligible executives defined pension benefits that supplement benefitsunder other retirement arrangements.  Theannual benefit amount is based on salary and bonus at the time of retirementand number of years of service.

 

The Company provides the Board of Directors with anoncontributory, unfunded retirement plan (“Director Retirement Plan”) thatpays a retired director an annual retirement benefit equal to 60% of the annualretainer at the time of retirement plus a 3% annual increase through the finalpayment.  Payments begin at age 62 orretirement, whichever is later, and continue for 10 years or the life of thedirector and his or her spouse, whichever period is shorter.  Partial vesting in the retirement plan beginsafter six years of continuous service. Participants become fully vested after 12 years of continuous service onthe Board. The Company accounts for the SERP and the Director Retirement Planin accordance with the provisions of SFAS No. 87, *Employers’Accounting for Pensions*.

 

Effective June 1, 2003, new directors are nolonger covered by the Director Retirement Plan. Current directors who were not yet vested in their retirement benefits hadthe present value of benefits already accrued as of the effective dateconverted to deferred shares under the Directors Stock Option Plan.  Directors that were fully or partially vestedin their retirement benefits were given a one time election to continue toparticipate in the current retirement program or convert the present value ofbenefits already accrued to deferred shares under the Directors Stock Option Planas of the effective date.

 

During the thirteen weeksended April 30, 2005, the Company did not make any cash contributions tothe SERP and the Director Retirement Plan, and presently expects to pay $35,000in benefits relating to SERP and $15,000 in benefits relating to the DirectorRetirement Plan during fiscal 2005. The following represents the components ofthe net periodic pension cost related to the Company’s SERP and DirectorRetirement Plan for the respective periods:

 
| ** **                          | ** **   | **Thirteen  weeks ended**  | ** **   |
|-------------------------------------|--------------|----------------------------|--------------|
| ** **                          | ** **   | **April 30,  2005**   |         | **May 1,  2004** | ** ** |
|                                | *** *** | **($ in  thousands)** | *** *** |
| Service cost                        |         | $                          | 133          |   | $ | 101 |   |
| Interest cost                       |         | 196                        |         | 157 |   |
| Amortization of  prior service cost |         | 85                         |         | 85 |   |
| Amortization of  net (gain)/loss    |         | 62                         |         | 4 |   |
| Net periodic  pension cost          |         | $                          | 476          |   | $ | 347 |   |

 

**Note 6.****Extraordinary Gain**

The Company acquired substantiallyall the net assets of Wherehouse Entertainment Inc. and CD World Inc. in October 2003for $35.2 million and $1.9 million, respectively. The purchase price wasallocated on a preliminary basis using information available at the time. Inaccordance with SFAS No. 141, *Business Combinations,*the allocation of the purchase price to the assets and liabilities acquired werefinalized during the thirteen weeks ended October 30, 2004, afterobtaining more information regarding asset valuations and liabilitiesassumed.  During the thirteen weeks endedMay 1, 2004, the Company adjusted the purchase price allocation inaccordance with the provisions of SFAS No. 141, resulting in

 

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anextraordinary gain of $0.7 million, net of income taxes of $0.3 million,related to unallocated negative goodwill. The gain represents the excess of thefair value of net assets acquired over the purchase price.

 

**Note 7.****Long-Term Debt and Capital Lease Obligations**

During the thirteen weeksended April 30, 2005, the Company signed an agreement to finance thereplacement of its point-of-sale system through a capital lease of up to $12.0million. When fully drawn, the lease will bear an average interestrate of 5.76% and will be repaid in monthly installments over 5 years. As of April 30,2005, the Company had drawn $5.9 million under the lease agreement andanticipates drawing up to another $6.0 million by July 30, 2005.

 

During 2004, the Companyborrowed $5.8 million under a mortgage loan with South Trust Bank to financethe purchase of real estate. The mortgage loan is repayable in monthlyinstallments of $64 thousand over 10 years with a fixed interest rate of 6.0%and is collateralized by the real estate. The mortgage loan contains a minimumnet worth (shareholders’ equity) covenant of $290 million, excluding theimpact, if any, of certain non-cash charges.

 

**Note 8.****Comprehensive Income (Loss)**

The Company accounts forcomprehensive income (loss) in accordance with SFAS No. 130, *Reporting Comprehensive Income*.  SFAS No. 130 requires only additionaldisclosures in the consolidated financial statements; it does not affect theCompany’s financial position or results of operations.  Items of other comprehensive income that theCompany currently reports are the excess additional minimum pension liabilityover unrecognized prior service cost and unrealized gains and losses on marketablesecurities categorized as available-for-sale.  The Company’s total comprehensive income(loss) for the thirteen weeks ended April 30, 2005 and May 1, 2004 wasas follows:

 
| ** **                                                                                                    | ** **   | **Thirteen  Weeks ended**  | ** **   |
|---------------------------------------------------------------------------------------------------------------|--------------|----------------------------|--------------|
| ** **                                                                                                    | ** **   | **April 30,  2005**   | ** **   | **May 1,  2004** | ** ** |
| *** ***                                                                                                  | *** *** | **($ in  thousands)** | *** *** |
| Net income  (loss)                                                                                            |         | $                          | (954         | ) | $ | 2,459 |   |
|                                                                                                          |         |                       |         |   |   |
| Other  comprehensive income net of income taxes:                                                              |         |                       |         |   |   |
| Change in  unrealized gain on available-for-sale securities, net of income taxes of $306  and 0, respectively |         | 442                        |         | — |   |
| Total  comprehensive income (loss)                                                                            |         | $                          | (512         | ) | $ | 2,459 |   |

 

**Note 9.****Recently Issued Accounting Standards**

In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment: an amendment of FASB Statements No. 123 and 95. Thisstatement requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the fair valueof the award at the grant date (with limited exceptions) and recognize thecompensation cost over the period during which an employee is required toprovide service in exchange for the award. In March 2005, the U.S.Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107(“SAB 107”), which expresses views of the SEC staff regarding the applicationof SFAS No. 123(R). Among other

 

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things, SAB 107 providesinterpretive guidance related to the interaction between SFAS No. 123(R)and certain SEC rules and regulations, and provides the SEC staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. The Company is required to adopt SFAS No. 123(R) in its firstquarter of its next fiscal year. The Company is currently evaluating thepotential effects of this standard on its stock compensation arrangements and relatedeffects on the Company’s condensed consolidated financial statements.

 

In December 2004,the FASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets – Accounting Principles Board Opinion No. 29, Accounting forNonmonetary Transactions*. SFAS No. 153 requires that exchangesshould be recorded and measured at the fair value of the assets exchanged, withcertain exceptions. SFAS No. 153 is effective for nonmonetary exchangesoccurring in fiscal periods beginning after June 15, 2005. The adoption ofSFAS No. 153 is not expected to have a significant impact on the Company’sconsolidated financial position or results of operations. In November 2004,the FASB issued SFAS No. 151*, Inventory Costs, an amendment of ARB No. 43*, Chapter 4.SFAS No. 151 clarifies that abnormal inventory costs such as costs of idlefacilities, excess freight and handling costs, and wasted materials(spoilage) are required to be recognized as current period charges.  The provisions of SFAS No. 151 areeffective for fiscal years beginning after June 15, 2005. The adoption ofSFAS No. 151 is not expected to have a significant impact on the Company’sconsolidated financial position or results of operations.

 

**Note 10.****Depreciation and Amortization**

Depreciation andamortization of fixed assets included in the condensed consolidated statementsof operations is as follows:

 
| ** **    | ** **   | **Thirteen  weeks ended** | ** **   |
|---------------|--------------|---------------------------|--------------|
| ** **    | ** **   | **April 30,  2005**  | ** **   | **May 1,  2004** | ** ** |
| *** ***  | *** *** | **(in  thousands)**       | *** *** |
| Cost of sales |         | $                         | 780          |   | $ | 583 |   |
| SG&A      |         | 8,220                     |         | 8,526 |   |
|          |         |                      |         |   |   |
| Total         |         | $                         | 9,000        |   | $ | 9,109 |   |

 

10

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**Note 11.****Earnings Per Share**

Weighted average sharesare calculated as follows:

 
| ** **                                               | ** ** | **Thirteen  weeks ended** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **April 30,  2005**  | ** ** | **May 1,  2004** | ** ** |
|                                                     |       |                      |       |   |   |
| Weighted average  common shares outstanding – basic |       | 32,945                    |       | 35,981 |   |
| Dilutive effect  of employee stock options               |       | —                    |       | 1,628 |   |
|                                                     |       |                      |       |   |   |
| Weighted average  common shares outstanding–diluted |       | 32,945                    |       | 37,609 |   |
|                                                     |       |                      |       |   |   |
| Anti-dilutive  stock options                             |       | 8,860                     |       | 4,023 |   |

 

For the thirteen weekperiod ended April 30, 2005, the impact of outstanding stock options wasnot considered because the Company reported a net loss and such impact would beanti-dilutive.

 

**Note 12.****Legal Proceedings**

The Company is subject tolegal proceedings and claims that have arisen in the ordinary course of itsbusiness and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition ofthese matters, it is management’s opinion, based upon the information availableat this time, that the expected outcome of these matters, individually or inthe aggregate, will not have a material adverse effect on the results ofoperations and financial condition of the Company.

 

11

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**TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESItem 2 - Management’s Discussion and Analysis ofFinancial Condition andResults of OperationsApril 30, 2005 and May 1, 2004**

 

**Overview**

Management’s Discussionand Analysis of Financial Condition and Results of Operations provides information that the Company’s management believesnecessary to achieve an understanding of its financial statements and resultsof operations.  To the extent that suchanalysis contains statements which are not of a historical nature, such statementsare 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 merchandise, includingthe entry or exit of non-traditional retailers of the Company’s merchandise toor from its markets; releases by the music, video, including DVD and VHS, and videogames industries of an increased or decreased number of “hit releases”; generaleconomic factors in markets where the Company’s merchandise is sold; and otherfactors discussed in the Company’s filings with the Securities and ExchangeCommission.  The following discussion andanalysis of the Company’s financial condition and results of operations shouldbe read in conjunction with the unaudited condensed consolidated financial statementsand related notes included elsewhere in this report and the audited financialstatements included in the Company’s Annual Report on Form 10-K for thefiscal year ended January 29, 2005.

 

At April 30, 2005,the Company operated 804 stores totaling approximately 5.0 million square feetin 46 states, the District of Columbia, the Commonwealth of Puerto Rico and theU.S. Virgin Islands. The Company’s stores offer predominantly entertainmentsoftware, including music, video, including DVD and VHS, and video games.  In total, these categories represented 91% ofthe Company’s sales in the thirteen weeks ended April 30, 2005.  The balance of categories, including softwareaccessories, boutique and electronic products, represented 9% of the Company’ssales in the thirteen weeks ended April 30, 2005.

 

The Company’s success hasbeen, and will continue to be contingent upon management’s ability tounderstand general economic and business trends and to manage the business inresponse to those trends. Management monitors a number of key performanceindicators to evaluate its performance, including:

 

**Sales:**  The Company measures the rate of comparablestore sales change. A store is included in comparable store sales calculationsat the beginning of its thirteenth full month of operation.  Mall stores relocated in the same shoppingcenter after being open for at least thirteen months are considered comparablestores.  Closed stores that were open forat least thirteen months are included in comparable store sales through themonth immediately preceding the month of closing.  The Company further analyzes sales by storeformat (i.e., mall versus freestanding) and by product category.

 

**Cost of Sales andGross Profit:** Gross profit is impacted primarily by the mix of products sold and bydiscounts negotiated with vendors.  TheCompany records its distribution and product shrink expenses in cost of sales. Distributionexpenses include those costs associated with purchasing, receiving, inspectingand warehousing product and costs associated with product returns tovendors.  Cost of sales further includesobsolescence costs and is reduced by the benefit of vendor allowances.

 

12

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**Selling, Generaland Administrative (“SG&A”) expenses:** Included inSG&A expenses are payroll and related costs, occupancy charges,professional and service fees, general operating and overhead expenses anddepreciation charges (excluding those related to distribution operations, asdiscussed in Note 10 to the Condensed Consolidated Financial Statements).  SG&A expenses also include assetimpairment charges and write-offs, if any, and miscellaneous items, other thaninterest.

 

**Balance Sheet and Ratios:** The Company views cash, net inventory investment (inventory lessaccounts payable) and working capital (current assets less current liabilities)as indicators of its financial position. See Liquidity and Capital Resources for further discussion of theseitems.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires that managementapply accounting policies and make estimates and assumptions that affectresults of operations and the reported amounts of assets and liabilities in thefinancial statements.  Managementcontinually evaluates its estimates and judgments including those related tomerchandise inventory and return costs, valuation of long-lived assets, incometaxes, and accounting for vendor allowances. Management bases its estimates and judgments on historical experienceand other factors that are believed to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.   Note 1 of Notes to the ConsolidatedFinancial Statements on Form 10-K for the year ended January 29, 2005includes a summary of the significant accounting policies and methods used bythe Company in the preparation of its condensed consolidated financialstatements. Management believes that of the Company’s significant accountingpolicies, the following may involve a higher degree of judgment or complexity:

 

**Merchandise Inventory and Return Costs:**Inventory is stated at the lower of cost or market as determined by the averagecost method. Inventory valuation requires significant judgment and estimates,including obsolescence, shrink and any adjustments to market value,if market value is lower than cost. The Company records obsolescence and anyadjustments to market value (if lower than cost) based on current andanticipated demand, customer preferences, and market conditions. The provisionfor inventory shrink is estimated as a percentage of sales for the period fromthe last date a physical inventory was performed to the end of the fiscalyear.  Such estimates are based on historical results and trends, and theshrink results from the last physical inventory.  Physical inventories aretaken at least annually for all stores throughout the year, and inventoryrecords are adjusted accordingly.

 

The Company is entitledto return merchandise purchased from major vendors for credit against otherpurchases from these vendors.   Thesevendors often reduce the credit with a merchandise return charge ranging from0% to 20% of the original merchandise purchase price depending on the type ofmerchandise being returned.  The Companyrecords merchandise return charges in cost of sales.

 

13

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**Valuation of Long-LivedAssets: **The Company assesses the potential impairment oflong-lived assets to determine if any part of the carrying values may not berecoverable. Factors that the Company considers when assessing impairmentinclude:

•**        **significant underperformance relative to historicalresults;

•**        **significant changes in the manner of the use ofassets or the strategy for the Company’s overall business;

•**        **significant negative industry or economic trends;

 

If the Company were to determinethat the carrying value of a long-lived asset may not be recoverable based onone or more of the above indicators, the Company would test for impairment todetermine if a write-down is needed.

 

**Income Taxes:** Income taxes are accounted for under theasset and liability method.  Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and taxoperating loss carryforwards.  Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled.  Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in the results of operations in the period that includes theenactment date.  Accounting for incometaxes requires management to make estimates and judgments regarding interpretationof various taxing jurisdictions, laws and regulations as well as the ultimaterealization of deferred tax assets. These estimates and judgments include the generation of future taxableincome, viable tax planning strategies and support of tax filings.  Valuation allowances are recorded againstdeferred tax assets if, based upon management’s estimates of realizability, itis more likely than not that some portion or all of these deferred tax assetswill not be realized.

 

14

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**RESULTS OF OPERATIONS**

 

**Thirteen WeeksEnded April 30, 2005Compared to the Thirteen Weeks Ended May 1, 2004**

 

The following table setsforth a period over period comparison of the Company’s sales by category:

 
| ** **                | ** ** | **Thirteen  weeks ended** | ** **  | ** **            | ** ** | ** **  | ** ** | ** ** | ** **  |
|---------------------------|------------|---------------------------|-------------|-----------------------|------------|-------------|------------|------------|-------------|
| ** **                | ** ** | **April 30,  2005**  | ** **  | **May 1,  2004** | ** ** | **Change**  | ** ** | **%**      | ** **  | **Comp  Store Sales** | ** ** |
| ** **                | ** ** | ** **                | ** **  | **(in  thousands)**   | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Sales**                 | ** ** | **$**                     | **285,410** | ** **            | **$**      | **304,483** | ** ** | **$**      | **(19,073** | **)** | **(6.3** | **)%** | **(1.5** | **)%** |
| As a percentage  of sales |       |                      |        |                  |       |        |       |       |        |   |   |
| Music                     |       | 56                        | %           | 59                    | %          |        |       |       |        | (5.3 | )% |
| Video (VHS/DVD)           |       | 28                        | %           | 28                    | %          |        |       |       |        | (2.6 | )% |
| Video Games               |       | 7                         | %           | 5                     | %          |        |       |       |        | 39.0 | % |
| Other                     |       | 9                         | %           | 8                     | %          |        |       |       |        | 11.0 | % |
|                      |       |                      |        |                  |       |        |       |       |        |   |   |
| **Store  Count:**         |       |                      |        |                  |       |        |       |       |        |   |   |
| Mall                      |       | 556                       |        | 590                   |       | (34         | )          | (5.8       | )%          | (1.5 | )% |
| Freestanding              |       | 248                       |        | 269                   |       | (21         | )          | (7.8       | )%          | (1.4 | )% |
| **Total**                 | ** ** | **804**                   | ** **  | **859**               | ** ** | **(55**     | **)**      | **(6.4**   | )**%**      |   |   |
|                           |            |                           |             |                       |            |             |            |            |             |  |  |  |  |  |

 

**Sales.****  **Thedecrease in sales resulted from a comparable store sales decrease of 1.5% and adecrease in the average number of stores in operation.  The average number of stores in operationdecreased to 807 in the thirteen weeks ended April 30, 2005 from 870 inthe thirteen weeks ended May 1, 2004.

 

15

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***Music:***

The Company’s storesoffer a wide range of compact discs (“CD”), audio cassettes and singles acrossmost music genres, including new releases from current artists as well as anextensive catalog of music from past periods and artists. The Company’s musicsales for the thirteen weeks ended April 30, 2005 decreased 9.6% andcomparable store sales in the CD category decreased 4.3%. The decrease was dueto lower sales of new releases during the quarter versus the prior yearperiod.  During the thirteen weeks ended April 30,2005, industry unit sales of music in the U.S. decreased 9.2% according toSoundscan.

 

***Video:***

The Company offers video,including digital video discs (“DVD”) and videocassettes, in all of its stores. Comparable store sales in the DVDcategory increased 2.4%.  The increase inDVD did not offset the decline in comparable store sales in the videocassettecategory during the quarter.

 

***VideoGames:***

The Company offers videogame hardware and software in most of its stores, with a mix that favorssoftware.  The increase in comparablestore sales of 39.0% in this category was due mostly to the release of Sony’sPSP game system.

 

***Other:***

The Company offers items forthe use, care and storage of entertainment software, along with boutique andelectronic products.  The increase is dueto the  Company’smerchandising initiatives to improve this category, including the introduction ofnew lines, and adding new SKU’s (“stock keeping unit”) to further complementthe core merchandise categories of music, video and video games.

 

**Gross Profit.**  Thefollowing table sets forth a period over period comparison of the Company’sgross profit:

 
| ** **                | *** *** | **Thirteen  weeks ended** | ** ** | **Change**            | ** ** |
|---------------------------|--------------|---------------------------|------------|-----------------------|------------|
| ** **                | ** **   | **(in  thousands)**       | ** ** | ** **            | ** ** |
| ** **                | ** **   | **April 30,  2005**  | ** ** | **May 1,  2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Gross Profit              |         | $                         | 104,565    |                  | $          | 113,305 |   | $ | (8,740 | ) | (7.7 | )% |
| As a percentage  of sales |         | 36.6                      | %          | 37.2                  | %          |   |   |   |   |
|                           |              |                           |            |                       |            |  |  |  |  |  |  |  |

 

## **Thedecrease in the gross profit rate as a percentage of sales was due to a shiftin the mix of the Company’s sales toward the lower margin categories of DVD andgames and higher markdowns in the electronics, accessories and boutiquecategories due to promotions and clearance activity.**

 

16

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**SG&A Expenses. **The following tablesets forth a period over period comparison of the Company’s SG&A expenses:

 
| ** **                | *** *** | **Thirteen  weeks ended** | ** ** | **Change**            | ** ** |
|---------------------------|--------------|---------------------------|------------|-----------------------|------------|
| ** **                | ** **   | **(in  thousands)**       | ** ** | ** **            | ** ** |
| ** **                | ** **   | **April 30,  2005**  | ** ** | **May 1,  2004** | ** ** | **$** | ** ** | **%** | ** ** |
| SG&A Expenses         |         | $                         | 105,867    |                  | $          | 109,695 |   | $ | (3,828 | ) | (3.5 | )% |
| As a percentage  of sales |         | 37.1                      | %          | 36.0                  | %          |   |   |   |   |
|                           |              |                           |            |                       |            |  |  |  |  |  |  |  |

 

## **SG&Aexpenses decreased $3.8 million due to the decrease in the number of stores inoperation. Although variable SG&A expenses decreased due to fewer stores inoperation, fixed expenses remained consistent year over year resulting in theloss of expense leverage as a percentage of sales on the total sales decline of 6.3%.**

 

**Income Tax Expense(Benefit). **Thefollowing table sets forth a period over period comparison of the Company’sincome tax expense (benefit):

 
| ** **                                                                                        |       | **Thirteen  weeks ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                        |       | **(in thousands)**        | ** ** |
| ** **                                                                                        | ** ** | **April 30,  2005**  | ** ** | **May 1,  2004** | ** ** |
| Income tax  expense (benefit) before change in state tax laws                                     |       | $                         | (624       | ) | $ | 1,252 |   |
|                                                                                              |       |                      |       |   |   |   |   |
| Effective tax  rate before impact of change in state tax laws                                     |       | 40.8                      | %          | 38.0 | % |
|                                                                                              |       |                      |       |   |   |
| Effect of  changes in state tax laws enacted during the thirteen weeks ended  April 30, 2005 |       | 47                        |       | — |   |
|                                                                                              |       |                      |       |   |   |
| Income tax  expense (benefit)                                                                     |       | $                         | (577       | ) | $ | 1,252 |   |

 

The increase inthe effective tax rate before the impact of change in state tax laws ascompared to the thirteen weeks ended May 1, 2004, is attributable toprojected higher state deferred taxes resulting from increased utilization ofstate loss carryforwards.  The effectivetax rate including the effect of a change in state tax laws for the thirteenweeks ended April 30, 2005 was 37.7%.

 

**Extraordinary Gain– Unallocated Negative Goodwill.** In October 2003,the Company acquired substantially all of the net assets of WherehouseEntertainment Inc. and CD World Inc. During the thirteen weeks ended May 1,2004, the Company adjusted the purchase price allocation in accordance with theprovisions of SFAS No. 141, *Business Combinations*,resulting in an extraordinary gain of $0.7 million, net of income taxes of $0.3million, related to unallocated negative goodwill. The gain represents theexcess of the fair value of net assets acquired over the purchase price.

 

17

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**Net Income (Loss).**The following table sets forth a period over period comparison of the Company’snet income (loss):

 
| ** **                                                                                                 | *** *** | **Thirteen  weeks ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|--------------|---------------------------|------------|
| ** **                                                                                                 | ** **   | **(in  thousands)**       | ** ** |
| ** **                                                                                                 | ** **   | **April 30,  2005**  | ** ** | **May 1,  2004** | ** ** |
| Income (loss)  before extraordinary gain                                                                   |         | $                         | (954       | ) | $ | 2,041 |   |
|                                                                                                       |         |                      |       |   |   |   |   |
| Extraordinary  gain – unallocated negative goodwill, net of income taxes of $0 and $253  respectively |         | —                    |       | 418 |   |
|                                                                                                       |         |                      |       |   |   |
| Net income  (loss)                                                                                         |         | $                         | (954       | ) | $ | 2,459 |   |

 

The decrease was due tolower sales and gross margins.

 

**LIQUIDITY ANDCAPITAL RESOURCES**

 

**Liquidity.******The Company’s primary sources ofworking capital are cash provided by operations and borrowings under itsrevolving credit facility.  The Company’scash flows fluctuate from quarter to quarter due to various items, includingseasonality of sales and results from operations, inventory purchases and therelated terms on the purchases, tax payments, capital expenditures and stock repurchaseactivity and store acquisitions. Management believes it will have adequate resources to fund its cashneeds for the foreseeable future.

 

The following table setsforth a summary of key components of cash flow and working capital for each ofthe thirteen weeks ended April 30, 2005 and May 1, 2004:

 
| ** **                | ** ** | **Thirteen  weeks ended** | ** ** | **Change**            | ** ** |
|---------------------------|------------|---------------------------|------------|-----------------------|------------|
| **(in thousands)**        | ** ** | **April 30,  2005**  | ** ** | **May 1,  2004** | ** ** | **$** | ** ** |
| Operating Cash Flows      |       | $                         | (156,410   | )                     | $          | (89,309 | ) | $ | (67,101 | ) |
| Financing Cash Flows      |       | 144                       |       | (3,641                | )          | 3,785 |   |
|                      |       |                      |       |                  |       |   |   |
| Capital Expenditures      |       | 5,497                     |       | 9,686                 |       | (4,189 | ) |
|                      |       |                      |       |                  |       |   |   |
| Cash and Cash Equivalents |       | 68,005                    |       | 89,094                |       | (21,089 | ) |
| Inventories               |       | 409,369                   |       | 442,630               |       | (33,261 | ) |
| Working Capital           |       | 278,775                   |       | 249,661               |       | 29,114 |   |
| Inventory turns           |       | 0.4                       |       | 0.5                   |       |   |   |
|                           |            |                           |            |                       |            |  |  |  |  |  |

 

18

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The Company had cashbalances of $68.0 million at April 30, 2005, compared to $229.8 million atJanuary 29, 2005 and $89.4 million at May 1, 2004.  Inventory was $82 per square foot at April 30,2005, compared to $84 per square foot at May 1, 2004.

 

Cash used byoperating activities was $156.4 million for the thirteen weeks ended April 30,2005.  The primary uses of cash were a $173.5million seasonal reduction of accounts payable and a $6.4 million reduction inincome taxes payable, offset by a $21.9 million decrease in merchandiseinventory,. The Company’s inventory and accounts payable are heavily influencedby the seasonality of its business. A significant reduction of accounts payableoccurs annually in the fiscal first quarter, reflecting payments formerchandise inventory sold during the prior year’s holiday season.  Similarly, inventory increases each yearthroughout the fall season and peaks during the holiday selling season.  The seasonality of the Company’s earnings inits fiscal fourth quarter also results in the timing of substantially all ofincome tax payments to be made subsequent to year end. These cash uses areoffset by a significant cash source in the fiscal fourth quarter from theincrease in sales during the holiday season.

 

Cash provided byfinancing activities was $144 thousand for the thirteen weeks ended April 30,2005.  The primary source of cash wasthrough a capital lease transaction of $5.9 million to finance the replacementof the Company’s point-of-sale system and the exercise of stock options of $2.7million. The primary use of cash was $8.2 million for the purchase ofapproximately 560,000 shares of common stock under a stock repurchase programauthorized by the Company’s Board of Directors in May 2003.  The authorized stock repurchase programallows the Company to repurchase 10 million shares of Common Stock from time totime on the open market and has no expiration date. As of May 31, 2005,the Company had 2.2 million remaining shares authorized for repurchase.

 

## **TheCompany has a three-year, $100 million secured revolving credit facility withCongress Financial Corporation that expires in July 2006 and renews on ayear-to-year basis thereafter with the consent of both parties. The revolvingcredit facility contains certain restrictive provisions, including provisionsgoverning cash dividends and acquisitions and is collateralized by merchandiseinventory and other assets. The Company anticipates the amount of the revolvingcredit facility being fully available to the Company through its term, and doesnot anticipate any difficulty in obtaining a similar, replacement facility uponits expiration. As of April 30, 2005, the Company had $0.1million in outstanding letter of credit obligations under the revolving creditfacility, and $99.9 million was available for borrowing. As of May 1,2004, the Company had no borrowings under the revolving credit facility.**

## ** **

During 2004, the Companyborrowed $5.8 million under a mortgage loan with South Trust Bank to financethe purchase of real estate. The mortgage loan is repayable in monthlyinstallments of $64 thousand over 10 years with a fixed interest rate of 6.0%and is secured by the real estate.

 

19

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The revolving creditfacility restricts the amount of dividends that the Company can declare up to10% of its annual net income, excluding certain non-cash gains.  Payment of any dividends is further subjectto levels of availability on the Company’s revolving credit facility. Themortgage loan and the revolving credit facility contain a minimum net worth(shareholders’ equity) covenant of $290 million, excluding the impact, if any,of certain non-cash charges.

 

During the thirteen weeksended April 30, 2005, the Company signed an agreement to finance thereplacement of its point-of-sale system through a capital lease of up to $ 12.0million. When fully drawn, the lease will bear an average interestrate of 5.76% and will be repaid in monthly installments over 5 years. As of April 30,2005, the Company had drawn $5.9 million of the lease and anticipates drawing upto another $6.0 million by July 30, 2005.

 

**CapitalResources. **Duringthe thirteen weeks ended April 30, 2005, the Company made capitalexpenditures of $5.5 million. The Company plans to spend approximately $45million for capital expenditures in fiscal 2005.  During the thirteen weeks ended April 30,2005, the Company opened or relocated 4 stores and closed 10 stores.

 

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**TRANS WORLDENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**PART I –FINANCIAL INFORMATION**

 

**Item 3****- Quantitative and Qualitative Disclosures about MarketRisk**

 

## **Tothe extent the Company borrows under its credit facility, the Company issubject to risk resulting from interest rate fluctuations since interest on theCompany’s borrowings under its credit facility can be variable.  Interest on the revolving credit facility ispayable monthly in arrears at a variable rate of either the prime rate or LIBORplus 1.65%.  If interest rates on theCompany’s credit facility were to increase by 25 basis points, and to theextent borrowings were outstanding, for every $1,000,000 outstanding on thefacility,  incomebefore income taxes would be reduced by $2,500 per year. For a discussion ofthe Company’s accounting policies for financial instruments and furtherdisclosures relating to financial instruments, see “Nature of Operations andSummary of Significant Accounting Policies” in the Notes to Consolidated FinancialStatements in the Company’s Form 10-K for the year ended January 29,2005. The Company does not hold any derivative instruments and does not engagein hedging activities.**

## ** **

**Item 4****– Controls and Procedures**

 

## ** (a)    Evaluationof disclosure controls and procedures.    The Company’sChief  Executive Officer and ChiefFinancial Officer after evaluating the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inthe Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) asof April 30, 2005, have concluded that as of such date the Company’sdisclosure controls and procedures were adequate and effective and designed toensure that material information relating to the Company and its subsidiaries wouldbe made known to such officers on a timely basis.**

## ** **

## ** (b) *   *Changes in internal controls*.*    Therehave been no changes in the Company’s internal controls over financialreporting that occurred during the fiscal quarter covered by this quarterlyreport that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.**

 

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**TRANS WORLD ENTERTAINMENTCORPORATION AND SUBSIDIARIES**

**PART II****- OTHER INFORMATION**

 

## **Item 2 – Changes**in Securities and Use of Proceeds

## ** **

On May 28, 2003, theCompany’s Board of Directors authorized the repurchase of 10 millionoutstanding shares of the Company’s Common Stock from time to time on the openmarket. The program has no expiration date. The Company had repurchased 15 million shares of common stock underpreviously announced programs. As of April 30, 2005 the Company hadpurchased 7.4 million shares, at a total cost of $65.3 million, and 2.6 millionshares remained to be purchased under the current program. The following tableshows the purchase of equity securities purchased under the repurchase programas required by Regulation 229.703 Item 703:

 
| **Period**                                          | ** ** | **Total  Number of  Shares Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total  Number of  Shares Purchased as  Part of Publicly  Announced  Programs** | ** ** | **Maximum  Number  of Shares that May  Yet Be Purchased  Under the Plan** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| January 30, 2005 – February 26, 2005 |       | 20,800                                 |       | $                                  | 13.55      |                                                                                  | 20,800     |                                                                      | 3,096,241  |   |
| February 27, 2005 – March 26, 2005   |       | 490,800                                |       | $                                  | 14.50      |                                                                                  | 490,800    |                                                                      | 2,605,441  |   |
| March 27, 2005 – April 30, 2005      |       | 50,000                                 |       | $                                  | 14.82      |                                                                                  | 50,000     |                                                                      | 2,555,441  |   |
| Total                                               |       | 561,600                                |       | $                                  | 14.52      |                                                                                  | 561,600    |                                                                      | 2,555,441  |   |

 

**Item 6****- Exhibits and Reports on Form 8-K**

 

**(A)****       **Exhibits -****

 

| **Exhibit No.** |   | **Description** |
|----------------------|--------|-----------------|
|                 | 31.1   |            | Chief Executive Officer  certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 |   |            |   |
|                 | 31.2   |            | Chief Financial Officer  certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 |   |            |   |
|                 | 32     |            | Certification pursuant  to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

**(B)****       **Reports on Form 8-K –****

 

A Form 8-K was filedon February 25, 2005, incorporating by reference Trans World Entertainment’sFebruary 24, 2005 press release announcing the Company’s financial resultsfor the quarter and year ended January 29, 2005.

 

A Form 8-K was filedon May 13, 2005 incorporating by reference the Company’s May 12, 2005press release announcing the Company’s financial results for the thirteen weeksended April 30, 2005.

 

Omitted from this Part IIare items which are not applicable or to which the answer is negative to theperiods covered**.**

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

**TRANS WORLDENTERTAINMENT CORPORATION**

 
| June 9, 2005 | **By:** | **/s/ ROBERT J.  HIGGINS**                                                                                |   |
|-------------------|---------|-----------------------------------------------------------------------------------------------------------|--------|
|              |    | Robert J. Higgins                                                                                         |
|              |    | Chairman and Chief  Executive Officer                                                                     |
|              |    | (Principal Executive  Officer)                                                                            |
|              |    |
|              |    |
| June 9, 2005 | **By:** | **/s/ JOHN J.  SULLIVAN**                                                                                 |   |
|              |    | John J. Sullivan                                                                                          |
|              |    | Executive Vice  President and Chief Financial Officer (Principal Financial  and Chief Accounting Officer) |
|                   |         |                                                                                                           |        |  |  |

 

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