UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended September 24, 1996
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( ) Transition Report pursuant to Section 13 or 15 (d) of the Securities
and Exchange Act of 1934 For the transition period from _______ to _______
Commission File Number 0-20498
TOPS APPLIANCE CITY, INC.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3174554
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(State or other jurisdictions of (I.R.S. Employer I.D. No.)
incorporation or organization)
45 Brunswick Avenue, Edison, New Jersey 08818
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(Address of principal executive offices) (Zip Code)
(908) 248-2850
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
( X ) Yes ( ) No
Number of shares outstanding of each of the issuer's classes of common stock,
as of September 24, 1996.
7,265,698 Shares
<PAGE>
<TABLE>
<CAPTION>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 24, 1996 December 26, 1995
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ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,951 $ 8,289
Accounts receivable, net 1,346 1,452
Merchandise inventory 52,172 59,847
Prepaid expenses and other current assets 1,677 2,264
Deferred taxes 156
--------- --------
Total current assets 59,302 71,852
Property, equipment & leasehold improvements, net 32,79 35,616
Deferred taxes 2,753 2,462
Other assets 3,487 3,622
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$ 98,338 $113,552
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,561 $ 13,188
Accrued liabilities and income taxes 1,673 6,134
Sales tax payable 1,093 2,318
Customer deposits 4,438 3,930
Short-term borrowings 12,549 8,900
Current portion of long-term debt 376 645
Due to related parties 1,927 1,927
Deferred taxes 2,698
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Total current liabilities 34,617 39,740
Long-term debt, net of current portion 48,966 49,201
Due to related parties 195 782
Deferred rent 3,122 2,792
Other liabilities 817 938
Shareholders' equity 10,621 20,099
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$ 98,338 $113,552
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 24, 1996 AND SEPTEMBER 26, 1995
(Dollars in thousands except per share data)
(Unaudited)
3rd Quarter 3rd Quarter Nine Months Nine Months
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and service revenues $ 75,804 $119,827 $226,398 $323,358
Cost of sales 60,492 92,052 178,081 248,048
---------- -------- -------- --------
Gross profit 15,312 27,775 48,317 75,310
Selling, general and administrative expenses 19,979 25,685 60,567 74,233
---------- -------- ------- -------
Income (loss) from operations (4,667) 2,090 (12,250) 1,077
Other income 187 303 671 741
Interest expense (1,929) (1,045) (4,254) (3,177)
---------- ------ ------ ------
Income (loss) before provision (benefit)
for income taxes (6,409) 1,348 (15,833) (1,359)
Provision (benefit) for income taxes (2,562) 532 (6,332) (543)
---------- ------ ------ ------
Net income (loss) ($3,847) $816 ($9,501) ($816)
========== ====== ======= ======
Net income (loss) per common share ($0.53) $0.11 ($1.31) ($0.11)
========== ====== ======= ======
Weighted average shares outstanding 7,265,698 7,276,985 7,265,698 7,264,572
========== ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 24, 1996 AND SEPTEMBER 26, 1995
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended
September 24, 1996 September 26, 1995
------------------ ------------------
<S> <C> <C>
Cash flow from operating activities:
Net loss ($9,501) ($816)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 4,641 4,823
Deferred rent 330 395
Amortization of deferred income (73) (162)
Accounts receivable, net 106 259
Inventory 7,675 (9,670)
Prepaid expenses and other current assets 587 1,517
Accounts payable (4,457) (4,182)
Sales tax payable (1,225) (1,618)
Accrued liabilities and income taxes payable (4,461) (870)
Customer deposits 508 (724)
Deferred taxes (3,145) (368)
Other assets (775) (1,859)
Other liabilities (48) 272
------- -------
Net cash (used in) operating activities (9,838) (13,003)
Cash flows from investing activities:
Capital expenditures, net of disposals (910) (1,652)
------- ------
Net cash (used in) investing activities (910) (1,652)
Cash flows from financing activities:
Short-term borrowings 3,649 (6,700)
Cash overdrafts 3,830 3,846
Notes payable (504) (671)
Due to related parties (587) (586)
Proceeds from mortgage payable 9,200
Proceeds from Employee Stock Purchase Plan 22 46
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Net cash provided by financing activities 6,410 5,135
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Decrease in cash & cash equivalents (4,338) (9,520)
Cash & cash equivalents, beginning of period 8,289 12,709
------- ------
Cash & cash equivalents, end of period $3,951 $3,189
====== ======
</TABLE>
See accompanying notes
TOPS APPLIANCE CITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1.
The accompanying condensed consolidated financial statements (unaudited)
should be read in conjunction with the consolidated financial statements and
disclosures included in the Company's 1995 Annual Report on Form 10-K.
The condensed consolidated financial statements (unaudited) include all
adjustments (consisting of normal recurring items) which management considers
necessary to present fairly the financial position and results of operations
of the Company for the three and nine months ended September 24, 1996 and
September 26, 1995.
Included in accounts payable is a cash overdraft balance of $3,830,000 and
$4,398,000 at September 24, 1996 and December 26, 1995, respectively.
The results for the interim periods presented may not be indicative of results
for the full year.
NOTE 2.
The Company purchases product protection plans on a non-recourse basis from a
third party who performs the obligations of the Company under these plans
through factory authorized service centers. The revenues and related costs
associated with the sale of these product protection plans are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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9/24/96 9/26/95 9/24/96 9/26/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 3,233,000 $ 5,496,000 $ 10,110,000 $16,786,000
Costs $ 1,389,000 $ 2,297,000 $ 4,289,000 $ 6,905,000
</TABLE>
TOPS APPLIANCE CITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3.
FASB Statement No. 109, "Accounting for Income Taxes" requires recognition of
deferred income taxes using the liability method, whereby tax rates are
applied to cumulative temporary differences based on when and how they are
expected to affect the tax return. Deferred tax assets and liabilities are
adjusted for tax rate changes. The components of net deferred taxes at
September 24, 1996 were:
<TABLE>
<CAPTION>
<S> <C>
Current deferred tax assets:
Compensation not currently deductible $ 313,000
Inventory 351,000
Accrued liabilities 102,000
Federal and state loss carryforwards 2,376,000
Alternative minimum tax and jobs credit carryforwards 326,000
Warranty 5,000
Other 411,000
Valuation allowance (417,000)
---------
Total current deferred tax assets 3,467,000
Current deferred tax liabilities:
Vendor allowances 2,414,000
Other 897,000
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Total current deferred tax liabilities 3,311,000
Net current deferred tax assets $ 156,000
==========
Non-current deferred tax assets:
Compensation not currently deductible $ 124,000
Rent 1,241,000
Depreciation 1,900,000
Warranty 378,000
Other (100,000)
Valuation allowance (785,000)
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Total non-current deferred tax assets 2,758,000
Non-current deferred tax liabilities-other 5,000
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Net non-current deferred tax assets $2,753,000
==========
</TABLE>
NOTE 4.
In the first quarter of 1996, the Company adopted Statement No. 121, Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of. Based on current
circumstances, the Company believes there is no effect on the financial
statements with the adoption of this accounting standard.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and disclosures included in the Company's
Annual Report on Form 10-K.
Results of Operations
The following table sets forth certain items in the Company's Condensed
Consolidated Statements of Operations expressed as a percentage of net sales
and service revenues:
<TABLE>
<CAPTION>
Percentage of Net Sales and Service Revenues
Three Months Ended Nine Months Ended
9/24/96 9/26/95 9/24/96 9/26/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales and service revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.8 76.8 78.7 76.7
----- ----- ----- -----
Gross profit 20.2 23.2 21.3 23.3
Selling, general and
administrative expenses 26.4 21.4 26.7 23.0
----- ----- ----- -----
Income (loss) from operations (6.2) 1.8 (5.4) 0.3
Other income 0.2 0.2 0.3 0.2
Interest expense (2.5) (0.9) (1.9) (0.9)
----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes (8.5) 1.1 (7.0) (0.4)
Provision (benefit) for income
taxes (3.4) 0.4 (2.8) (0.2)
----- ----- ----- -----
Net income (loss) (5.1)% 0.7% (4.2)% (0.2)%
===== ===== ===== =====
</TABLE>
Three Months Ended September 24, 1996 Compared to the Three Months Ended
September 26, 1995.
Net sales and service revenues for the three months ended September
24, 1996 decreased 36.7% to $75,804,000 from $119,827,000 for the three
months ended September 26, 1995. This decrease is attributable to the
reduced room air conditioner sales due to unseasonably cooler weather during
the quarter. Room air conditioner sales were $20,600,000 or 75.9% less than
last year for the quarter. The highly competitive and continuing slow retail
environment in the Northeast also contributed to the decrease. Total
comparable store sales were 37.3% lower than last year. The decrease in room
air conditioner sales accounted for approximately 50% of the sales decline.
Sales from the commercial division decreased 32.1% or $4,172,000.
Gross revenues from the sale of product protection plans for the three
months ended September 24, 1996 decreased 41.2% to $3,233,000 from $5,496,000
for the three months ended September 26, 1995. Incremental costs related to
these sales totaled $1,389,000 and $2,297,000 respectively, for the comparable
periods.
Gross profit as a percentage of net sales and service revenues for the
three months ended September 24, 1996 decreased to 20.2% from 23.2% last year.
This decrease was due in part to lower sales of higher margined air
conditioners due to the unseasonably cooler weather and gross margin pressure
caused by the generally weak retailing environment in a highly promotional
metro New York / New Jersey marketplace. Gross margins in the commercial sales
division increased to 9.2% from 7.8% for the comparable periods. Gross margins
in the commercial sales division tend to be lower than gross margins on retail
sales.
Selling, general and administrative expenses for the three months ended
September 24, 1996 decreased 22.2% to $19,979,000 from $25,685,000 for the
three months ended September 26, 1995. This net decrease was achieved
primarily by reducing payroll and related expenses, net advertising, other
cost-cutting measures and reduced net variable selling expenses, partially
offset by higher data processing expenses. Selling, general and administrative
expenses as a percentage of net sales and service revenues increased to 26.4%
from 21.4% for the comparable periods. This increase was due primarily to the
decreased sales levels.
Interest expense increased to $1,929,000 from $1,045,000 for the
comparable periods as a result of the write-off of $630,000 of capitalized loan
fees associated with the company's revolving credit facility which was replaced
in October 1996 with a new revolving credit facility with more favorable terms
to the Company. Higher average borrowings on the revolving credit facility
during the quarter also contributed to the increase in interest expense.
The Company's net loss for the three months ended September 24, 1996
was $3,847,000 ($.53 per share) compared to a net income of $816,000 ($.11 per
share) for the three months ended September 26, 1995.
Nine Months Ended September 24, 1996 Compared to the Nine Months Ended
September 26, 1995.
Net sales and service revenues for the nine months ended September 24,
1996 decreased 30.0% to $226,398,000 from $323,358,000 for the nine months
ended September 26, 1995. This decrease is attributable to the highly
competitive and continuing slow retail environment in the Northeast. Room
air conditioner sales declines due to unseasonably cooler weather during the
summer season, also contributed to the decrease. Room air conditioner sales
were approximately 55.0% less than last year. The highly competitive and
continuing slow retail environment in the Northeast also contributed to the
decrease. Total comparable store sales were 30.4% lower than last year. The
decrease in room air conditioner sales accounted for approximately 30% of
the sales decline.
Gross revenues from the sale of product protection plans for the nine
months ended September 24, 1996 decreased 39.8% to $10,110,000 from $16,786,000
for the nine months ended September 26, 1995. Incremental costs related to
these sales totaled $4,289,000 and $6,905,000 respectively, for the comparable
periods.
Gross profit as a percentage of net sales and service revenues for the
nine months ended September 24, 1996 decreased to 21.3% from 23.3% last year.
This decrease was due in part to lower sales of higher margined air conditioners
due to the unseasonably cooler weather and gross margin pressure caused by the
generally weak retailing environment in a highly promotional metro New York /
New Jersey marketplace. Gross margins in the commercial sales division
increased to 9.4% from 8.3% for the comparable periods. Gross margins in the
commercial sales division tend to be lower than gross margins on retail sales.
Selling, general and administrative expenses for the nine months ended
September 24, 1996 decreased 18.4% to $60,567,000 from $74,233,000 for the nine
months ended September 26, 1995. This net decrease was achieved primarily by
reducing payroll and related expenses, net advertising, other cost-cutting
measures and reduced net variable selling expenses, partially offset by higher
data processing expenses. Selling, general and administrative expenses as a
percentage of net sales and service revenues increased to 26.7% from 23.0% for
the comparable periods. This increase was due primarily to the decreased sales
levels.
Interest expense increased to $4,254,000 from $3,177,000 for the
comparable periods as a result of interest in 1996 on the Queens mortgage,
which was entered into in July 1995, and the write-off of $630,000 of
capitalized loan fees associated with the company's revolving credit facility
which was replaced in October 1996 with a new revolving credit facility with
more favorable terms to the Company.
The Company's net loss for the nine months ended September 24, 1996
was $9,501,000 ($1.31 per share) compared to a net loss of $816,000 ($.11 per
share) for the nine months ended September 26, 1995.
Seasonality
Sales and income levels are generally highest in the fourth quarter as
a result of increased demand for consumer electronics during the holiday season
and higher during either the second or third quarter, depending on weather
conditions, as a result of demand for air conditioners during the summer
months. The Company's net sales and service revenues are also generally lowest
in the first quarter and the Company has experienced net losses in the first
quarter of certain years including the first quarters of 1996 and 1995.
Except for 1995, the last half of each fiscal year generally accounts for a
major portion of the Company's annual operating profit. The Company
experiences a buildup of inventory during its first quarter due to the purchase
of room air conditioners in anticipation of the May through August selling
season and the third and fourth quarters in anticipation of the holiday season.
Liquidity and Capital Resources
In the past, the Company has relied primarily upon net cash from
operations, a revolving credit facility with institutional lenders and
inventory floor plan financing to finance its operations and growth. At
September 24, 1996, the Company had working capital of $24,685,000, which
represented a decrease of $7,427,000 from December 26, 1995. During the nine
months ended September 24, 1996, the Company incurred net capital
expenditures of $910,000, decreased inventories by $7,675,000, increased short
term borrowing by $3,649,000 and decreased trade payables by $627,000.
In October 1996, the Company entered into a new $35,000,000 secured
credit facility with more favorable terms to the Company. The secured credit
facility bears interest at the bank's base rate plus 1% and expires in October
1999. All of the Company's unencumbered assets are pledged as collateral for
the new facility. The loan agreement contains no financial covenants. The
outstanding borrowings under the previous credit facility was $12,549,000 at
September 24, 1996.
Short-term trade credit represents a significant source of financing
for inventory. Trade credit arises from the willingness of the Company's
vendors to grant extended payment terms for inventory purchases and is financed
either by the vendor or by third-party floor-planning sources. The Company
utilizes floor-planning companies which in the aggregate at any one time
provide financing for approximately 25% to 45% of the Company's inventory
purchases. Payment terms generally vary up to 150 days, depending upon the
inventory product. The Company typically grants the floor-planning
companies a security interest in those products financed together with the
proceeds from the sales of such products.
The Company believes that its borrowings under existing credit
facilities and inventory floor plan arrangements will be sufficient to fund
the Company's operations.
<PAGE>
Part II
Other Information:
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ITEM 1. Legal Procedures
Not applicable
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Default Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 7, 1996
TOPS APPLIANCE CITY, INC.
BY: /s/ Thomas L. Zambelli
__________________________
Thomas L. Zambelli
Senior Vice President and
Chief Financial Officer
