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 30, 1997
( ) 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3174554
- --------------------------------------------------------------------------------
(State or other jurisdictions of (I.R.S. Employer I.D. No.)
incorporation or organization)
45 Brunswick Avenue, Edison, New Jersey 08818
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(908) 248-2850
- --------------------------------------------------------------------------------
(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 30,1997.
7,284,049 Shares
<PAGE>
<TABLE>
<CAPTION>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current Assets:
Cash and cash equivalents $3,094 $2,147
Accounts receivable, net 934 1,355
Merchandise inventory 51,889 56,184
Prepaid expenses and other current assets 1,966 2,492
------ ------
Total current assets 57,883 62,178
Property, equipment & leasehold improvements, net 27,494 31,858
Deferred taxes 1,737 2,758
Other assets 4,683 4,226
------- ------
$91,797 $101,020
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,634 $9,626
Accrued liabilities and income taxes 4,172 7,061
Sales tax payable 894 1,687
Customer deposits 3,752 4,110
Short-term borrowings 26,660 21,904
Current portion of long-term debt 118 247
Deferred taxes 1,737 2,758
------ -------
Total current liabilities 45,967 47,393
Long-term debt, net of current portion 41,151 48,944
Deferred rent 1,807 3,179
Other liabilities 846 754
Shareholders' equity 2,026 750
------ ------
$91,797 $101,020
====== =======
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
TOPS APPLIANCE CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 24, 1996
(Dollars in thousands except per share data)
(Unaudited)
<S> <C> <C> <C> <C>
3rd Quarter 3rd Quarter Nine Months Nine Months
1997 1996 1997 1996
-------- -------- -------- --------
Net sales and service revenues ............................................ $74,396 $75,804 $217,222 $226,398
Cost of sales ............................................................. 58,161 60,492 169,264 178,081
-------- ------- -------- --------
Gross profit .............................................................. 16,235 15,312 47,958 48,317
Selling, general and administrative expenses .............................. 15,970 19,979 48,468 60,567
-------- ------- -------- --------
Income (loss) from operations before store
closing costs .......................................................... 265 (4,667) (510) (12,250)
Store closing costs ....................................................... (1,500) (1,500)
--------- -------- --------- --------
(Loss) from operations .................................................... (1,235) (4,667) (2,010) (12,250)
Other income .............................................................. 50 187 463 671
Interest expense .......................................................... (1,520) (1,929) (4,870) (4,254)
--------- -------- --------- --------
(Loss) before provision (benefit) for income taxes and
extraordinary gain on early extinguishment of debt ..................... (2,705) (6,409) (6,417) (15,833)
Provision (benefit) for income taxes 1,771 (2,000)
--------- -------- -------- --------
(Loss) before extraordinary gain on
early extinguishment of debt ............................................ (2,705) (8,180) (6,417) (13,833)
Extraordinary gain on early extinguishment of debt ......................... 7,688 7,688
--------- ------- -------- --------
Net income (loss) .......................................................... $4,983 ($8,180) $1,271 ($13,833)
========= ======= ======== ========
(Loss) per common share before extraordinary
gain on early extinguishment of debt ...................................... ($0.37) ($1.12) ($0.88) ($ 1.90)
Gain per common share
on early extinguishment of debt ........................................... 1.05 1.05
-------- -------- -------- --------
Net income (loss) per common share ........................................... $ 0.68 ($ 1.12) $0.17 ($ 1.90)
======== ======== ======== ========
Common shares outstanding .................................................... 7,284,049 7,265,698 7,284,049 7,265,698
========= ========== ========== =========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOPS APPLIANCE CITY, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the Nine Months Ended
September 30, 1997 September 24, 1996
<S> <C> <C>
----------------- -------------------
Cash flow from operating activities:
Net income (loss) $1,271 ($13,833)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,614 4,641
Deferred rent (1,372) 330
Gain on early extinguishment of debt (7,688)
Write-off of fixed assets related to store closing 1,628
Amortization of deferred income (73)
Accounts receivable, net 421 106
Inventory 4,295 7,675
Prepaid expenses and other current assets 526 (313)
Accounts payable 1,958 (4,457)
Sales tax payable (793) (1,225)
Accrued liabilities and income taxes payable (2,302) (2,138)
Customer deposits (358) 508
Deferred taxes (236)
Other assets (741) (775)
Other liabilities 92 (48)
----- ------
Net cash provided by (used in) operating activities 551 (9,838)
Cash flows from investing activities:
Capital expenditures, net of disposals (594) (910)
----- ------
Net cash (used in) investing activities (594) (910)
Cash flows from financing activities:
Short-term borrowings 4,756 3,649
Cash overdrafts (2,950) 3,830
Notes payable (234) (504)
Due to related parties (587) (587)
Proceeds from Employee Stock Purchase Plan 5 22
------ ------
Net cash provided by financing activities 990 6,410
------ ------
Increase (decrease) in cash and cash equivalents 947 (4,338)
Cash and cash equivalents, beginning of period 2,147 8,289
------ -------
Cash and cash equivalents, end of period $3,094 $3,951
====== =======
See accompanying notes
</TABLE>
<PAGE>
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 1996 Annual Report on Form 10-K.
The condensed consolidated financial statements (unaudited) have been prepared
in accordance with generally accepted accounting principles and 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 30, 1997 and September
24, 1996.
Included in accounts payable is a cash overdraft balance of $1,090,000 and
$4,040,000 at September 30, 1997 and December 31, 1996, respectively.
The results for the interim periods presented may not be indicative of results
for the full year.
Certain prior year amounts may have been reclassified to conform to current year
presentation.
The Quarterly Report on Form 10-Q may contain forward-looking statements about
the Company. Many factors may cause the Company's results to differ from those
set forth in any forward looking statements made by the Company. Accordingly,
there can be no assurances that any future results will be achieved.
NOTE2.
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
--------------------------- --------------------------
<S> <C> <C> <C>
9/30/97 9/24/96 9/30/97 9/24/96
---------- ----------- --------- ----------
Revenues $3,531,000 $3,233,000 $10,348,000 $10,110,000
Costs $1,474,000 $1,389,000 $ 4,391,000 $ 4,289,000
</TABLE>
NOTE 3.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.
NOTE 4.
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 30, 1997 were:
Current deferred tax assets:
Compensation not currently deductible ............... $ 87,000
Inventory ........................................... 346,000
Accrued liabilities ................................. 152,000
Other ............................................... 910,000
Valuation allowance ................................. (1,252,000)
-----------
Total current deferred tax assets ................... 243,000
Current deferred tax liabilities:
Vendor allowances ................................... 1,691,000
Other ............................................... 289,000
-----------
Total current deferred tax liabilities .............. 1,980,000
Net current deferred tax liabilities .............. $ 1,737,000
===========
Non-current deferred tax assets:
Federal and state loss carryforwards ................ $ 7,125,000
Alternative minimum tax and jobs credit carryforwards 593,000
Rent ................................................ 259,000
Depreciation ........................................ 2,347,000
Warranty ............................................ 378,000
Valuation allowance ................................. (8,960,000)
-----------
Total non-current deferred tax assets ............... 1,742,000
Non-current deferred tax liabilities - other ........ 5,000
-----------
Net non-current deferred tax assets ................. $ 1,737,000
===========
<PAGE>
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
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
9/30/97 9/24/96 9/30/97 9/24/96
--------- ---------- --------- --------
Net sales and service revenues ................. 100.0 % 100.0 % 100.0 100.0 %
Cost of sales .................................. 78.2 79.8 77.9 78.7
----- ----- ---- -----
Gross profit ................................... 21.8 20.2 22.1 21.3
Selling, general and administrative expenses ... 21.5 26.4 22.3 26.7
----- ---- ---- -----
Income (loss) from operations before
closing costs ................................. 0.3 (6.2) (0.2) (5.4)
Store closing costs (2.0) (0.7)
----- ---- ----- -----
(Loss) from operations ......................... (1.7) (6.2) (0.9) (5.4)
Other income ................................... 0.1 0.2 0.2 0.3
Interest expense ............................... (2.0) (2.5) (2.2) (1.9)
----- ---- ---- -----
(Loss) before provision (benefit) for income
taxes and extraordinary gain on early
extinguishment of debt ........................ (3.6) (8.5) (2.9) (7.0)
Provision (benefit) for income taxes 2.3 (0.9)
----- ---- ---- -----
(Loss) before extraordinary gain on early
extinguishment of debt ....................... (3.6) (10.8) (2.9) (6.1)
Extraordinary gain on early extinguishment
of debt ....................................... 10.3 3.5
----- ----- ---- -----
Net income (loss) .............................. 6.7 % (10.8)% 0.6 % (6.1)%
===== ==== ==== =====
</TABLE>
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 24, 1996.
Net sales and service revenues for the three months ended September 30,
1997 decreased 1.9% to $74,396,000 from $75,804,000 for the three months ended
September 24, 1996. This decrease is attributable to the highly competitive and
continuing slow retail environment in the Northeast. The lack of new products in
the market, high consumer debt levels and retail price deflation in selected
categories also contributed to the decrease. Total comparable store sales
decreased 1.4% for the period compared to a decrease of 37.3% for the same
period last year. Sales from the commercial division decreased 5.0% or $445,000.
Gross revenues from the sale of product protection plans for the three
months ended September 30, 1997 increased 9.2% to $3,531,000 from $3,233,000 for
the three months ended September 24, 1996. Incremental costs related to these
sales totaled $1,474,000 and $1,389,000 respectively, for the comparable
periods.
Continuing the trend reported in the first and second quarters of 1997,
gross profit as a percentage of net sales and service revenues for the three
months ended September 30, 1997 increased to 21.8% from 20.2% last year. This
increase was due in part to the company's focus on higher margin merchandise and
product protection plans. Gross margins in the commercial sales division
increased to 9.5% from 9.2% for the comparable period. 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 30, 1997 decreased 20.1% to $15,970,000 from $19,979,000 for the three
months ended September 24, 1996. This net decrease was achieved primarily by
reducing payroll and related expenses, net advertising, reduced net variable
selling expenses and other cost cutting measures. Selling, general and
administrative expenses as a percentage of net sales and service revenues
decreased to 21.5% from 26.4% for the comparable periods. This decrease was due
to the reduced level of expenses.
The Company's income from operations before store closing costs improved to
$265,000 for the three months ended September 30, 1997 compared to a loss from
operations of $4,667,000 for the three months ended September 24, 1996.
During the quarter the Company announced the closing of the store located
in Westbury, NY effective October 1997. The store's marginal operating
performance was exacerbated by the cost of advertising for the single location.
The Company provided a $1,500,000 reserve during the quarter for costs
associated with the store closing. The Company is not contemplating the closing
of any additional stores.
Interest expense decreased to $1,520,000 from $1,929,000 for the comparable
periods. During the third quarter of last year, the Company wrote-off $630,000
of capitalized loan fees associated with the company's previous 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 and related
interest expense on the revolving credit facility during the current quarter
partially offset the write-off of capitalized loan fees from last year.
During the quarter the Company recorded an extraordinary gain of $7,688,000
($1.05 per share) on early extinguishment of debt relating to the retirement of
$15,375,000 6.5% convertible debentures due in 2003. A new debenture was issued
for 50% of the original face value of the tendered debentures at the same 6.5%
coupon rate with a conversion price of $1.75 per share of Tops stock. The
conversion to stock can not take place prior to February 1999. This debt
restructuring resulted in an immediate reduction of long-term debt by $7,688,000
and will reduce interest expense related to the debentures by $500,000 annually.
The Company did not record an income tax provision for the three months
ended September 30, 1997 compared to an income tax provision of $1,771,000 for
the three months ended September 24, 1996.
The Company's net loss before extraordinary gain on early extinguishment of
debt for the three months ended September 30, 1997 was $2,705,000 ($.37 per
share) compared to a net loss of $8,180,000 ($1.12 per share) for the three
months ended September 24, 1996.
The Company's net income after extraordinary gain on early extinguishment
of debt for the three months ended September 30, 1997 was $4,983,000 ($.68 per
share) compared to a net loss of $8,180,000 ($1.12 per share) for the three
months ended September 24, 1996.
The Quarterly Report on Form 10-Q may contain forward-looking statements
about the Company. Many factors may cause the Company's results to differ from
those set forth in any forward looking statements made by the Company.
Accordingly, there can be no assurances that any future results will be
achieved.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
24, 1996.
Net sales and service revenues for the nine months ended September 30, 1997
decreased 4.1% to $217,222,000 from $226,398,000 for the nine months ended
September 24, 1996. This decrease is attributable to the highly competitive and
continuing slow retail environment in the Northeast. The lack of new products in
the market, high consumer debt levels and retail price deflation in selected
categories also contributed to the decrease. Total comparable store sales
decreased 4.0% for the period compared to a decrease of 30.4% for the same
period last year.
Gross revenues from the sale of product protection plans for the nine
months ended September 30, 1997 increased 2.4% to $10,348,000 from $10,110,000
for the nine months ended September 24, 1996. Incremental costs related to these
sales totaled $4,391,000 and $4,289,000 respectively, for the comparable
periods.
Gross profit as a percentage of net sales and service revenues for the nine
months ended September 30, 1997 increased to 22.1% from 21.3% last year. This
increase was due in part to the company's focus on higher margin merchandise and
product protection plans. Gross margins in the commercial sales division
increased to 9.7% from 9.4% 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 30, 1997 decreased 20.0% to $48,468,000 from $60,567,000 for the nine
months ended September 24, 1996. This net decrease was achieved primarily by
reducing payroll and related expenses, net advertising, reduced net variable
selling expenses and other cost cutting measures. Selling, general and
administrative expenses as a percentage of net sales and service revenues
decreased to 22.3% from 26.7% for the comparable periods. This decrease was due
to the reduced level of expenses.
Interest expense increased to $4,870,000 from $4,254,000 for the comparable
periods. This increase is the result of higher average borrowings during 1997
partially offset by the write-off of $630,000 of capitalized loan fees
associated with the company's previous revolving credit facility which was
replaced in October 1996 with a new revolving credit facility with more
favorable terms to the Company.
During the nine months ended September 30, 1997 the Company recorded an
extraordinary gain of $7,688,000 ($1.05 per share) on early extinguishment of
debt relating to the retirement of $15,375,000 6.5% convertible debentures due
in 2003. A new debenture was issued for 50% of the original face value of the
tendered debentures at the same 6.5% coupon rate with a conversion price of
$1.75 per share of Tops stock. The conversion to stock can not take place prior
to February 1999. This debt restructuring resulted in an immediate reduction of
long-term debt by $7,688,000 and will reduce interest expense related to the
debentures by $500,000 annually.
The Company did not record an income tax provision for the nine months
ended September 30, 1997 compared to an income tax benefit of $2,000,000 for the
nine months ended September 24, 1996.
The Company's net loss before extraordinary gain on early extinguishment of
debt for the nine months ended September 30, 1997 was $6,417,000 ($.88 per
share) compared to a net loss of $13,833,000 ($1.90 per share) for the nine
months ended September 24, 1996.
The Company's net income after extraordinary gain on early extinguishment
of debt for the nine months ended September 30, 1997 was $1,271,000 ($.17 per
share) compared to a net loss of $13,833,000 ($1.90 per share) for the nine
months ended September 24, 1996.
The Quarterly Report on Form 10-Q may contain forward-looking statements
about the Company. Many factors may cause the Company's results to differ from
those set forth in any forward looking statements made by the Company.
Accordingly, there can be no assurances that any future results will be
achieved.
Seasonality
Sales 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
experiences a buildup of room air conditioner inventory during its first quarter
in anticipation of the May through August selling season and consumer
electronics in 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 30,
1997, the Company had working capital of $11,916,000, which represented a
decrease of $2,869,000 from December 31, 1996. During the nine months ended
September 30, 1997, the Company incurred net capital expenditures of $594,000,
decreased inventories by $4,295,000, increased short-term borrowing by
$4,756,000 and increased trade payables by $1,958,000. The outstanding
borrowings under the current credit facility was $26,660,000 at September 30,
1997.
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 20% 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 available credit facilities,
short-term trade credit from vendors and inventory floor plan arrangements,
combined with the impact on operating results of the cost reductions already
implemented and the continued leveling off of comparable same store sales
declines will be sufficient to fund the Company's operations and anticipated
capital expenditures, excluding new stores, of approximately $1 million. No
assurance can be given that such cost reductions will produce the desired
result.
<PAGE>
Part II
Other Information:
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
Report on Form 8-K reporting Item 5, dated August 20, 1997, filed August 26,
1997.
Report on Form 8-K reporting Item 4, dated August 28, 1997, filed September 4,
1997.
Report on Form 8-K reporting Item 5, dated September 1, 1997, filed September 4,
1997.
<PAGE>
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:
TOPS APPLIANCE CITY, INC.
BY: /s/ Thomas L. Zambelli
--------------------------
Thomas L. Zambelli
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-30-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 3,094 3,094
<SECURITIES> 0 0
<RECEIVABLES> 934 934
<ALLOWANCES> 0 0
<INVENTORY> 51,889 51,889
<CURRENT-ASSETS> 57,883 57,883
<PP&E> 27,494 27,494
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 91,797 91,797
<CURRENT-LIABILITIES> 45,967 45,967
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 2,026 2,026
<TOTAL-LIABILITY-AND-EQUITY> 91,797 91,797
<SALES> 217,222 74,396
<TOTAL-REVENUES> 217,222 74,396
<CGS> 169,264 58,161
<TOTAL-COSTS> 169,264 58,161
<OTHER-EXPENSES> 49,968 17,470
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,870 1,520
<INCOME-PRETAX> (6,417) (2,705)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,417) (2,705)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 7,688 7,688
<CHANGES> 0 0
<NET-INCOME> 1,271 4,983
<EPS-PRIMARY> 0.17 0.68
<EPS-DILUTED> 0 0
</TABLE>
