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 June 30, 1998
( ) 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)
(732) 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 June 30, 1998.
9,573,998 Shares
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 December 30, 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $5,650 $2,368
Accounts receivable, net 1,470 1,101
Merchandise inventory 57,330 53,895
Prepaid expenses and other current assets 3,102 2,080
------------ ------------
Total current assets 67,552 59,444
Property, equipment & leasehold improvements, net 11,555 13,196
Deferred taxes 2,940 2,940
Other assets 3,499 2,530
------------ ------------
$85,546 $78,110
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $15,248 $6,551
Accrued liabilities and income taxes 3,417 3,638
Sales tax payable 1,283 1,477
Customer deposits 4,294 4,276
Short-term borrowings 26,289 23,558
Deferred taxes 2,940 2,940
------------ ------------
Total current liabilities 53,471 42,440
Long-term debt, net of current portion 27,243 30,993
Deferred rent 1,757 1,801
Other liabilities 751 758
Shareholders' equity 2,324 2,118
------------ ------------
$85,546 $78,110
============ ============
</TABLE>
See accompanying notes.
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JULY 1, 1997
(Dollars in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
2nd Quarter 2nd Quarter Six Months Six Months
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales and service revenues $74,465 $78,749 $135,840 $143,239
Cost of sales 57,890 60,580 105,660 111,103
------------- ------------- ------------- ------------
Gross profit 16,575 18,169 30,180 32,136
Selling, general and administrative expenses 15,137 16,308 30,111 32,498
------------- ------------- ------------- ------------
Income (loss) from operations 1,438 1,861 69 (362)
Interest expense (1,188) (1,720) (2,357) (3,350)
------------- ------------- ------------- ------------
Income (loss) before extraordinary item 250 141 (2,288) (3,712)
Extraordinary item - gain on debt extinguishment 113 0 971 0
------------- ------------- ------------- ------------
Net income (loss) per common share $363 $141 ($1,317) ($3,712)
============= ============= ============= ============
Income (loss) per common share (basic) before
extraordinary item $ 0.03 $0.02 $(0.31) $ $(0.51)
Income per common share (basic) attributable to
extraordinary item 0.02 0.00 0.13 0.00
------------- ------------- ------------- ------------
Net income (loss) per common share (basic) $0.05 $0.02 $(0.18) $(0.51)
============= ============= ============= ============
Common shares outstanding 7,352,883 7,284,049 7,333,835 7,284,049
============= ============= ============= ============
</TABLE>
See accompanying notes.
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND JULY 1, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30, 1998 July 1, 1997
<S> <C> <C>
Cash flow from operating activities:
Net (loss) ($1,317) ($3,712)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,977 2,409
Deferred rent (44) 167
Extraordinary gain on debt extinguishment (971)
Accounts receivable, net (369) 29
Inventory (3,435) 776
Prepaid expenses and other current assets (1,022) 818
Accounts payable 6,364 4,434
Sales tax payable (194) (100)
Accrued liabilities and income taxes payable (222) (498)
Customer deposits 18 172
Other assets (1,163) (407)
Other liabilities (7) 52
----------- ---------
Net cash provided by (used in) operating activities (385) 4,140
Cash flows from investing activities:
Capital expenditures, net of disposals (142) (474)
----------- ---------
Net cash (used in) investing activities (142) (474)
Cash flows from financing activities:
Short-term borrowings 2,732 661
Cash overdrafts 2,333 (477)
Notes payable (2,779) (168)
Due to related parties 0 (391)
Proceeds from Debenture Conversion 1,500 0
Proceeds from Exercise of Stock Options 16 0
Proceeds from Employee Stock Purchase Plan 7 5
----------- ---------
Net cash provided by (used in) financing activities 3,809 (370)
----------- ---------
Increase (decrease) in cash and cash equivalents 3,282 3,296
Cash and cash equivalents, beginning of period 2,368 2,147
----------- ---------
Cash and cash equivalents, end of period $5,650 $5,443
=========== =========
</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 1997
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
June 30, 1998 and July 1, 1997.
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 or
1998.
The results for the interim periods presented may not be indicative of
results for the full year.
NOTE 2.
During the second quarter of 1998, the Company repurchased $250,000
face value of 6 1/2% Convertible Subordinated Debentures for a purchase
price of $137,500, resulting in a gain of $112,500.
<PAGE>
TOPS APPLIANCE CITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3.
Earnings Per Share (Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the Quarter Ended June 30 ,1998
--------------------------------------------------
Per Share
Income Shares Amount
<S> <C> <C> <C>
Basic Earnings Per Share
Net Income before extraordinary item $ 250 7,315 $0.03
Diluted Earnings Per Share
Options 351
Conversion of Debt 125 4,393
Diluted Earnings Per Share $ 375 12,059 $0.03
Basic Earnings Per Share
Extraordinary item $ 113 7,315 $0.02
Diluted Earnings Per Share
Options 351
Conversion of Debt 125 4,393
Diluted Earnings Per Share $ 238 12,059 $0.02
Basic Earnings Per Share
Net Income $ 363 7,315 $0.05
Diluted Earnings Per Share
Options 351
Conversion of Debt 125 4,393
Diluted Earnings Per Share $ 488 12,059 $0.04
</TABLE>
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
For the six months ended June 30, 1998 and July 1, 1997 and the quarter
ended July 1, 1997, the effects of the 6.5% convertible subordinated debentures
due 2003 and the Options were not included in the calculation of diluted
earnings per share due to the fact that their conversion would be antidilutive.
<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
6/30/98 7/1/97 6/30/98 7/1/97
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales and service revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 77.7 76.9 77.8 77.6
--------- --------- ---------- ----------
Gross profit 22.3 23.1 22.2 22.4
Selling, general and administrative expenses 20.4 20.7 22.2 22.7
--------- --------- ---------- ----------
Income (loss) from operations 1.9 2.4 0.0 (0.3)
Interest expense (1.6) (2.2) (1.7) (2.3)
--------- --------- ---------- ----------
Income (loss) before extraordinary item 0.3 0.2 (1.7) (2.6)
Extraordinary item - gain on debt extinguishment 0.2 0.0 0.7 0.0
--------- --------- ---------- ----------
Net income (loss) 0.5 % 0.2 % (1.0) % (2.6) %
========= ========= ========== ==========
</TABLE>
<PAGE>
Three Months Ended June 30, 1998 Compared to the Three Months Ended July 1,
1997.
Net sales and service revenues for the three months ended June 30, 1998
decreased 5.4% to $74,465,000 (7 stores) from $78,749,000 (8 stores) for the
three months ended July 1, 1997. This decrease is attributable to the October
1997 closing of the Westbury, Long Island store, partially offset by an increase
of 3.1% in comparable store sales. Sales from the commercial division decreased
0.7% or $67,000.
Gross revenues from the sale of product protection plans for the three
months ended June 30, 1998 decreased 12.8% to $3,371,000 from $3,865,000 for the
three months ended July 1, 1997. This decrease is attributed to operating one
less store during the second quarter of 1998, and a reduction of 6.4% in
comparable store service contract penetration, resulting from the decreased
sales in room air conditioners which has historically had higher service sales.
Incremental costs related to these sales totaled $1,453,000 and $1,665,000
respectively, for the comparable periods.
Gross profit as a percentage of net sales and service revenues for the
three months ended June 30, 1998 decreased to 22.3% from 23.1% last year. This
decrease was due in part to the reduced level of room air conditioner sales
resulting from cooler weather as compared to the second quarter of 1997. Room
air conditioning units typically sell at higher gross margins than other
merchandise categories. Gross margins in the commercial sales division decreased
to 6.9% from 9.7% for the comparable periods, impacted by a decrease in sales in
room air conditioners. Gross margins in the commercial sales division tend to be
lower than gross margins on retail sales.
Continuing the trend first reported in 1997, selling, general and
administrative expenses for the three months ended June 30, 1998 decreased 7.2%
to $15,137,000 from $16,308,000 for the three months ended July 1, 1997. This
decrease was achieved by operating one less store during the second quarter of
1998, combined with reductions in payroll and other net selling expenses.
Selling, general and administrative expenses as a percentage of net sales and
service revenues decreased to 20.4% from 20.7% for the comparable periods. This
decrease was due to the reduced level of expenses.
The Company's income from operations declined 22.7% to $1,438,000 for the
three months ended June 30, 1998 compared to income from operations of
$1,861,000 for the three months ended July 1, 1997.
Interest expense decreased to $1,188,000 from $1,720,000 for the comparable
period last year primarily as a result of having satisfied the Queens mortgage
in November 1997 and average outstanding Debentures of $28,118,000, compared to
$40,000,000 last year, resulting in lower interest on the 6 1/2% Convertible
Subordinated Debentures.
The Company did not record a tax benefit for the three months ended June
30, 1998 or July 1, 1997.
The Company's net income for the three months ended June 30, 1998 was
$363,000 ($0.05 per share) compared to net income of $141,000 ($0.02 per share)
for the three months ended July 1, 1997.
<PAGE>
Six Months Ended June 30, 1998 Compared to the Six Months Ended July 1, 1997.
Net sales and service revenues for the six months ended June 30, 1998
decreased 5.2% to $135,840,000 (7 stores) from $143,239,000 (8 stores) for the
six months ended July 1, 1997. This decrease is attributable to the October 1997
closing of the Westbury, Long Island store, partially offset by an increase of
4.4% in comparable store sales. Sales from the commercial division decreased
3.6% or $587,000.
Gross revenues from the sale of product protection plans for the six months
ended June 30, 1998 decreased 7.7% to $6,291,000 from $6,817,000 for the six
months ended July 1, 1997. This decrease is attributed to operating one less
store during the first half of 1998, partially offset by an increase of 2.3% in
comparable store service contract revenues. Incremental costs related to these
sales totaled $2,778,000 and $2,917,000 respectively, for the comparable
periods.
Gross profit as a percentage of net sales and service revenues for the six
months ended June 30, 1998 decreased to 22.2% from 22.4% last year. This
decrease was primarily due to the reduced sales of higher-margin air
conditioners and product protection plans. Gross margins in the commercial sales
division decreased to 7.0% from 9.8% 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 six months ended June
30, 1998 decreased 7.4% to $30,111,000 from $32,498,000 for the six months ended
July 1, 1997. This decrease was achieved by operating one less store during the
second quarter of 1998, combined with reductions in payroll and other net
selling expenses. Selling, general and administrative expenses as a percentage
of net sales and service revenues decreased to 22.2% from 22.7% for the
comparable periods. This decrease was due to the reduced level of expenses.
The Company's income from operations improved to $69,000 for the six months
ended June 30, 1998 compared to a loss from operations of $362,000 for the six
months ended July 1, 1997.
Interest expense decreased to $2,357,000 from $3,350,000 for the comparable
period last year as a result of having satisfied the Queens mortgage in November
1997, combined with a decrease of $13,750,000 in the outstanding balance of 6
1/2% Convertible Subordinated Debentures.
The Company did not record a tax benefit for the six months ended June 30,
1998 or July 1, 1997.
The Company's net loss for the six months ended June 30, 1998 was
$1,317,000 ($0.18 per share) compared to a net loss of $3,712,000 ($0.51 per
share) for the six months ended July 1, 1997.
<PAGE>
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 second
quarter in anticipation of the May through August selling season and consumer
electronics in the fourth quarter 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 fund its operations and growth. At June 30, 1998, the
Company had working capital of $14,081,000, which represented a decrease of
$2,923,000 from December 30, 1997. During the six months ended June 30, 1998,
the Company incurred net capital expenditures of $142,000, increased inventories
by $3,435,000, increased short term borrowing by $2,732,000 and increased trade
payables by $6,364,000.
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. At June 30,
1998, $26,289,000 was outstanding under this credit facility.
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.
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 improvement of comparable store sales will be
sufficient to fund the Company's operations and its anticipated capital
expenditures, including new stores, of approximately $3 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.
<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
The registrants' annual meeting of shareholders for 1997 was held on June
29, 1998. At the meeting, the shareholders elected Thomas L. Zambelli to serve
as a director through the 2000 meeting and Richard L. Jones and Anthony L.
Formica to serve as directors through the 2001 meeting. The following directors
continue in office through the annual meeting of the year indicated: Robert G.
Gross (1999), Leslie S. Turchin (1999), and John H. Hollands (2000).
The shareholders also ratified the appointment of Arthur Andersen, LLP as
the registrants' independent auditors for 1998.
ITEM 5. Other Information - Subsequent Events
On July 15, 1998 the Company entered into an agreement to sell one million
four hundred thousand authorized and unissued shares of common stock, no par
value, to Bay Harbour Management, L.C.. The purchase price was three dollars and
sixty cents ($3.60) per share for an aggregate amount of five million forty
thousand dollars ($5,040,000). This transaction closed on July 20, 1998.
Attached is a pro-forma balance sheet giving effect for this transaction.
Additionally, on July 15, 1998 Bay Harbour Management, L.C., holders of
$6,090,000 of 6 1/2 % Convertible Subordinated Debentures due 2003 with a $1.75
conversion price of Tops Appliance City ("Debentures"), agreed to convert the
Debentures into common shares. The conversion is subject to shareholder
approval. Leslie S. Turchin and The Westinghouse Pension Plan, who together hold
greater than 51% of the then outstanding Common Stock, delivered to Bay Harbour
letters in which they agreed to vote in favor of such approval. The conversion
will decrease long term debt and increase shareholders equity by $6,090,000.
<PAGE>
ITEM 5. Other Information - Subsequent Events (Continued)
Mr. Robert G. Gross, Chairman and Chief Executive Officer, has entered in
an agreement to purchase, on August 17, 1998, 125,000 shares of Tops Appliance
City, Inc. Common Stock at a price of $4.00 per share from the founder of the
Company, Mr. Leslie S. Turchin.
ITEM 6. Exhibits and Reports on Form 8-K
Report on form 8-K reporting item 5, dated July 14, 1998, filed
July 15, 1998.
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: August 13, 1998
TOPS APPLIANCE CITY, INC.
BY: /s/Thomas L. Zambelli
----------------------------
Thomas L. Zambelli
Executive Vice President and
Chief Financial Officer
<PAGE>
"TOPS APPLIANCE CITY,INC."
PROFORMA BALANCE SHEET
For The Period Ending 06-30-98
<TABLE>
<CAPTION>
ISSUANCE OF
AS REPORTED ADDITIONAL SHARE PRO-FORMA
<S> <C> <C> <C>
CASH & SHORT-TERM INVESTMENTS $5,650,275 $5,040,000 $10,690,275
ACCOUNTS RECEIVABLE ......... $1,470,167 $1,470,167
INVENTORY ................... $57,330,310 $57,330,310
OTHER CURRENT ASSETS ........ $3,101,522 $3,101,522
--------------- ---------------- ---------------
TOTAL CURRENT ASSETS ....... $67,552,274 $5,040,000 $72,592,274
--------------- ---------------- ---------------
FIXED ASSETS, NET ......... $11,555,281 $11,555,281
OTHER ASSETS ................ $6,438,105 $6,438,105
--------------- ---------------- ---------------
TOTAL ASSETS ................ $85,545,660 $5,040,000 $90,585,660
=============== ================ ===============
LIABILITIES
CURRENT LIABILITIES:
CURRENT NOTES PAYABLE ....... $26,289,450 $- $26,289,450
ACCOUNTS PAYABLE ............ $15,248,620 $15,248,620
ACCRUED EXPS & OTHER PAYABLES $7,639,026 $7,639,026
CUSTOMER DEPOSITS PAYABLE ... $4,293,692 $4,293,692
--------------- ---------------- ---------------
TOTAL CURRENT LIABILITIES ... $53,470,788 $- $53,470,788
--------------- ---------------- ---------------
NOTES PAYABLE - NONCURRENT .. $27,242,500 $27,242,500
OTHER LIABILITIES ........... $2,508,495 $2,508,495
--------------- ---------------- ---------------
TOTAL LIABILITIES ........... $83,221,783 $- $83,221,783
--------------- ---------------- ---------------
EQUITY:
PAID IN CAPITAL - REGULAR ... $25,789,370 $5,040,000 $30,829,370
PAID IN CAPITAL - EMPLOYEE .. $524,606 $524,606
PAID IN CAPITAL - OPTIONS ... $15,933 $15,933
RETAINED EARNINGS ........... ($24,006,031) ($24,006,031)
--------------- ---------------- ---------------
TOTAL EQUITY ................ $2,323,877 $5,040,000 $7,363,877
--------------- ---------------- ---------------
TOTAL LIABILITIES AND EQUITY $85,545,660 $5,040,000 $90,585,660
=============== ================ ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-29-1998 DEC-29-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 5,650 5,650
<SECURITIES> 0 0
<RECEIVABLES> 1,470 1,470
<ALLOWANCES> 0 0
<INVENTORY> 57,330 57,330
<CURRENT-ASSETS> 67,552 67,552
<PP&E> 11,555 11,555
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 85,546 85,546
<CURRENT-LIABILITIES> 53,471 53,471
<BONDS> 27,243 27,243
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 2,324 2,324
<TOTAL-LIABILITY-AND-EQUITY> 85,546 85,546
<SALES> 135,840 74,465
<TOTAL-REVENUES> 135,840 74,465
<CGS> 105,660 57,890
<TOTAL-COSTS> 105,660 57,890
<OTHER-EXPENSES> 30,111 15,137
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,357 1,188
<INCOME-PRETAX> (2,238) 250
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,238) 250
<DISCONTINUED> 0 0
<EXTRAORDINARY> 971 113
<CHANGES> 0 0
<NET-INCOME> (1,317) 363
<EPS-PRIMARY> (0.18) 0.05
<EPS-DILUTED> 0 0.04
</TABLE>
