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 July 1, 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 July 1, 1997.
7,284,049 Shares
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 1, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $5,443 $2,147
Accounts receivable, net 1,326 1,355
Merchandise inventory 55,408 56,184
Prepaid expenses and other
current assets 1,674 2,492
------- ------
Total current assets 63,851 62,178
Property, equipment & leasehold
improvements, net 30,112 31,858
Deferred taxes 1,826 2,758
Other assets 4,444 4,226
------- ------
$100,233 $101,020
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $13,583 $9,626
Accrued liabilities and
income taxes 6,172 7,061
Sales tax payable 1,587 1,687
Customer deposits 4,282 4,110
Short-term borrowings 22,565 21,904
Current portion of
long-term debt 152 247
Deferred taxes 1,826 2,758
------- ------
Total current liabilities 50,167 47,393
Long-term debt,
net of current portion 48,871 48,944
Deferred rent 3,346 3,179
Other liabilities 806 754
Shareholders' equity
(deficit) (2,957) 750
-------- -------
$100,233 $101,020
------- -------
------- -------
</TABLE>
See accompanying notes.
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JULY 1, 1997 AND JUNE 25, 1996
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
2nd Quarter 2nd Quarter Six Months Six Months
1997 1996 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales and
service revenues $78,500 $81,923 $142,826 $150,594
Cost of sales 60,580 64,258 111,103 117,589
Gross profit 17,920 17,665 31,723 33,005
Selling, general and
administrative expenses 16,308 20,343 32,498 40,588
------ ------ ------- -------
Income (loss) from
operations 1,612 (2,678) (775) (7,583)
Other income 249 213 413 484
Interest expense (1,720) (1,202) (3,350) (2,325)
----- ------ ------ -----
Income (loss)
before benefit for
income taxes 141 (3,667) (3,712) (9,424)
Benefit for income
taxes (1,478) (3,771)
----------- ---------- ---------- ----------
Net income (loss) $141 ($2,189) ($3,712) ($5,653)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Net income (loss)
per common share $0.02 ($0.30) ($0.51) ($0.78)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Common shares
outstanding 7,284,049 7,265,698 7,284,049 7,265,698
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
See accompanying notes.
</TABLE>
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 1, 1997 AND JUNE 25, 1996
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
July 1, 1997 June 25, 1996
------------ -------------
<S> <C> <C>
Cash flow from operating activities:
Net (loss) ($3,712) ($5,653)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,409 2,651
Deferred rent 167 220
Amortization of deferred income (73)
Accounts receivable, net 29 10
Inventory 776 (4,510)
Prepaid expenses and other current assets 818 823
Accounts payable 4,434 10,833
Sales tax payable (100) (409)
Accrued liabilities and income taxes payable (498) (2,456)
Customer deposits 172 328
Deferred taxes (2,476)
Other assets (407) (641)
Other liabilities 52 (91)
-------- --------
Net cash provided by (used in) operating activities 4,140 (1,444)
Cash flows from investing activities:
Capital expenditures, net of disposals (474) (701)
-------- --------
Net cash (used in) investing activities (474) (701)
Cash flows from financing activities:
Short-term borrowings 661 (3,794)
Cash overdrafts (477) 2,466
Notes payable (168) (332)
Due to related parties (391) (391)
Proceeds from Employee Stock Purchase Plan 5 22
------- -------
Net cash (used in) financing activities (370) (2,029)
Increase (decrease) in cash and cash equivalents ------- --------
3,296 (4,174)
Cash and cash equivalents, beginning of period 2,147 8,289
------- --------
Cash and cash equivalents, end of period $5,443 $4,115
______ ________
------ --------
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)
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 six months ended July 1, 1997 and June 25, 1996.
Due to the loss incurred by the Company in 1996, no benefit for
income taxes was recorded during the first and second quarters of
1997.
Included in accounts payable is a cash overdraft balance of
$3,563,000 and $4,040,000 at July 1, 1997 and December 31, 1996,
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 Six Months Ended
------------------------------ ----------------------------
July 1, 1997 June 25, 1996 July 1, 1997 June 25, 1996
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Revenues $3,865,000 $ 3,629,000 $6,817,000 $ 6,877,000
Costs $1,665,000 $ 1,497,000 $2,917,000 $ 2,901,000
</TABLE>
<PAGE>
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 July 1, 1997
were:
<TABLE>
<S> <C>
Current deferred tax assets:
Compensation not currently deductible $ 175,000
Inventory 369,000
Accrued liabilities 152,000
Other 458,000
Valuation allowance (973,000)
---------------
Total current deferred tax assets 181,000
Current deferred tax liabilities:
Vendor allowances 1,857,000
Other 150,000
---------------
Total current deferred tax liabilities 2,007,000
Net current deferred tax liabilities $ 1,826,000
---------------
---------------
Non-current deferred tax assets:
Federal and state loss carryforwards $ 7,125,000
Alternative minimum tax and jobs credit carryforwards 593,000
Rent 1,362,000
Depreciation 2,231,000
Warranty 371,000
Valuation allowance (9,851,000)
---------------
Total non-current deferred tax assets 1,831,000
Non-current deferred tax liabilities - other 5,000
---------------
Net non-current deferred tax assets $ 1,826,000
---------------
---------------
</TABLE>
<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
Three Months Ended Six Months Ended
7/1/97 6/25/96 7/1/97 6/25/96
------ ------- ------- -------
<S> <C> <C> <C> <C>
Net sales and service revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 77.2 78.4 77.8 78.1
------ ------- ------- -------
Gross profit 22.8 21.6 22.2 21.9
Selling, general and
administrative expenses 20.7 24.8 22.7 26.9
------ ------- ------- -------
Income (loss) from operations 2.1 (3.2) (0.5) (5.0)
Other income 0.3 0.3 0.3 0.3
Interest expense (2.2) (1.5) (2.4) (1.5)
------ ------- ------- -------
Income (loss) before (benefit)
for income taxes 0.2 (4.4) (2.6) (6.2)
Benefit for income taxes (1.7) (2.4)
------ ------- ------- -------
Net income (loss) 0.2 % (2.7)% (2.6)% (3.8)%
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
Three Months Ended July 1, 1997 Compared
to the Three Months Ended June 25, 1996.
Net sales and service revenues for the three months ended July 1,
1997 decreased 4.2% to $78,500,000 from $81,923,000 for the three months ended
June 25, 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 3.4% for the period compared to a decrease of 27.3% for the same
period last year. Sales from the commercial division decreased 9.7% or
$993,000.
Gross revenues from the sale of product protection plans for the three months
ended July 1, 1997 increased 6.5% to $3,865,000 from $3,629,000 for the three
months ended June 25, 1996. Incremental costs related to these sales totaled
$1,665,000 and $1,497,000 respectively, for the comparable periods.
Gross profit as a percentage of net sales and service revenues for the three
months ended July 1, 1997 increased to 22.8% from 21.6% 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 10.0% from 8.6% for the comparable periods. Gross margins in the
commercial sales division tend to be lower than gross margins on retail sales.
Continuing the trend reported in the first quarter, selling, general and
administrative expenses for the three months ended July 1, 1997 decreased
19.8% to $16,308,000 from $20,343,000 for the three months ended June 25,
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 20.7% from 24.8% for
the comparable periods. This decrease was due to the reduced level of expenses.
The Company's income from operations improved to $1,612,000 for the three months
ended July 1, 1997 compared to a loss from operations of $2,678,000 for the
three months ended June 25,1996.
Interest expense increased to $1,720,000 from $1,202,000 for the comparable
period last year primarily as a result of higher average borrowings on
the revolving credit facility during the quarter.
The Company did not record a tax benefit for the three months ended July 1, 1997
compared to a tax benefit at an effective rate of 40% or $1,478,000 for the
three months ended June 25, 1996.
The Company's net income for the three months ended July 1, 1997 was $141,000
($0.02 per share) compared to a net loss of $2,189,000 ($.30 per share) for the
three months ended June 25, 1996.
Six Months Ended July 1, 1997 Compared
to the Six Months Ended June 25, 1996.
Net sales and service revenues for the six months ended July 1, 1997 decreased
5.2% to $142,826,000 from $150,594,000 for the six months ended June 25, 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 5.3% for the period compared to a decrease of 26.4% for the same
period last year. Sales from the commercial division decreased 4.1% or $711,000.
Gross revenues from the sale of product protection plans for the six months
ended July 1, 1997 decreased 0.9% to $6,817,000 from $6,877,000 for the
six months ended June 25, 1996. Incremental costs related to these sales
totaled $2,917,000 and $2,901,000 respectively, for the comparable periods.
Gross profit as a percentage of net sales and service revenues for the six
months ended July 1, 1997 increased to 22.2% from 21.9% 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 9.8% from 9.5% 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 six months ended July
1, 1997 decreased 19.9% to $32,498,000 from $40,588,000 for the six
months ended June 25, 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 22.7% from 26.9% for the comparable periods. This decrease was
due to the reduced level of expenses.
The Company's loss from operations improved 89.8% to $775,000 for the six
months ended July 1, 1997 compared to a loss from operations of $7,583,000
for the six months ended June 25,1996.
Interest expense increased to $3,350,000 from $2,325,000 for the comparable
period last year primarily as a result of higher average borrowings on
the revolving credit facility during the six months ending July 1, 1997.
The Company did not record a tax benefit for the six months ended July 1, 1997
compared to a tax benefit at an effective rate of 40% or $3,771,000 for the six
months ended June 25, 1996.
The Company's net loss for the six months ended July 1, 1997 was $3,712,000
($.51 per share) compared to a net loss of $5,653,000 ($.78 per share) for the
six months ended June 25, 1996.
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 room 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 July 1, 1997, the Company had
working capital of $13,684,000, which represented a decrease of $1,101,000 from
December 31, 1996. During the six months ended July 1, 1997, the Company
incurred net capital expenditures of $474,000, decreased inventories by
$776,000, increased short term borrowing by $661,000 and increased trade
payables by $3,957,000.
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% or for a portion of the loan,
LIBOR plus 3%. The facility expires in October 1999. All of the Company's
unencumbered assets are pledged as collateral for the new facility. The
outstanding borrowings under the current credit facility was $22,565,000 at
July 1, 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, the leveling off of comparable store sales decline and a normal
room air conditioning selling season will be sufficient to fund the Company's
operations and its anticipated capital expenditures, excluding new stores, of
approximately $1 million. No assurance can be given that such cost reductions
will produce the desired result.
This Quarterly Report on Form 10-Q may contain forward-looking information about
the Company. Many factors may cause the Company's actual 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.
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
The registrants' annual meeting of shareholders for 1997 was held on May 23,
1997. At the meeting, the shareholders elected John H. Hollands to
serve as a director through the 2000 meeting. The following directors
continue in office through the annual meeting of the year indicated: Robert G.
Gross (1999), Leslie S. Turchin (1999), Philip M. Schmidt (1998) and Anthony L.
Formica (1998).
The shareholders also ratified the appointment of Ernst & Young, LLP as the
registrants' independent auditors for 1997.
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
Not applicable
<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: ______________________
Thomas L. Zambelli
Senior Vice President
and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-30-1997 DEC-30-1997
<PERIOD-END> JUL-01-1997 JUL-01-1997
<CASH> 5,443 5,443
<SECURITIES> 0 0
<RECEIVABLES> 1,326 1,326
<ALLOWANCES> 0 0
<INVENTORY> 55,408 55,408
<CURRENT-ASSETS> 63,851 63,851
<PP&E> 30,112 30,112
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 100,233 100,233
<CURRENT-LIABILITIES> 50,167 50,167
<BONDS> 48,871 48,871
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (2,957) (2,957)
<TOTAL-LIABILITY-AND-EQUITY> 100,233 100,233
<SALES> 142,826 78,500
<TOTAL-REVENUES> 142,826 78,500
<CGS> 111,103 60,580
<TOTAL-COSTS> 111,103 60,580
<OTHER-EXPENSES> 32,498 16,308
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,350 1,720
<INCOME-PRETAX> (3,712) 141
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,712) 141
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,712) 141
<EPS-PRIMARY> (0.51) 0.02
<EPS-DILUTED> 0 0
</TABLE>
