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 March 30, 1999 --------------
( ) 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 March 30, 1999.
15,305,537 Shares
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 30, 1999 December 29, 1998
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,415 $2,672
Accounts receivable, net 2,133 1,849
Merchandise inventory 51,152 62,060
Prepaid expenses and other current assets 2,325 3,128
------------ ------------
Total current assets 59,025 69,709
Property, equipment & leasehold improvements, net 29,346 29,883
Deferred taxes 2,958 2,958
Other assets 4,000 3,663
------------ ------------
Total assets $95,329 $106,213
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $29,183 $30,718
Accounts payable 9,444 12,309
Current portion of capital lease 124 124
Accrued liabilities and taxes payable 2,285 3,994
Customer deposits 3,739 3,236
Deferred taxes 2,958 2,958
------------ ------------
Total current liabilities 47,733 53,339
Long-term debt 20,403 20,403
Capital lease, net of current portion 15,949 15,979
Deferred rent 2,322 2,188
Other liabilities 775 722
Shareholders' equity 8,147 13,582
------------ ------------
Total Liabilities and Shareholders' Equity $95,329 $106,213
============ ============
See accompanying notes.
</TABLE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 1999 AND MARCH 31, 1998
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1st Quarter 1st Quarter
1999 1998
-------------- -------------
<S> <C> <C>
Net sales and service revenues $61,681 $61,373
Cost of sales 49,256 47,770
-------------- -------------
Gross profit 12,425 13,603
Selling, general and administrative expenses 16,118 14,626
-------------- -------------
Loss from operations (3,693) (1,023)
Interest expense (1,649) (1,517)
Equity in loss of joint venture (75) 0
-------------- -------------
Loss before benefit for income taxes
and extradordinary item (5,417) (2,540)
Benefit for income taxes 0 0
-------------- -------------
Loss before extraordinary item (5,417) (2,540)
Extraordinary item - gain on debt extinguishment 0 859
-------------- -------------
Net loss ($5,417) ($1,681)
============== =============
Net loss per common share before
extraordinary item ($0.38) ($0.35)
Income per common share applicable to
extraordinary item 0.00 0.12
-------------- -------------
Basic and diluted net loss per common share ($0.38) ($0.23)
============== =============
Common shares outstanding 14,256,460 7,287,666
============== =============
</TABLE>
See accompanying notes.
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 30, 1999 AND MARCH 31, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 30, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net loss ($5,417) ($1,681)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,036 1,177
Deferred rent 134 (19)
Extraordinary gain on debt extinguishment 0 (859)
Accounts receivable, net (284) 29
Inventory 10,908 1,818
Prepaid expenses and other current assets 803 (664)
Accounts payable (552) 1,837
Sales tax payable (752) (569)
Accrued liabilities and income taxes payable (957) (712)
Customer deposits 503 13
Other assets (414) (43)
Other liabilities 35 36
----------- ----------
Net cash provided by operating activities 5,043 363
Cash flows from investing activities:
Capital expenditures, net of disposals (422) (195)
----------- ----------
Net cash used in investing activities (422) (195)
Cash flows from financing activities:
Short-term borrowings (1,535) 953
Cash overdrafts (2,313) 801
Notes payable (30) (1,141)
----------- ----------
Net cash provided by (used in) financing activities (3,878) 613
----------- ----------
Increase in cash and cash equivalents 743 781
Cash and cash equivalents, beginning of period 2,672 2,368
----------- ----------
Cash and cash equivalents, end of period $3,415 $3,149
=========== ==========
</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 1998 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 months ended March 30, 1999 and March 31, 1998.
Included in accounts payable is a cash overdraft balance of $2,282,000 and
$4,595,000 at March 30, 1999 and December 29, 1998, respectively.
The results for the interim periods presented may not be indicative of
results for the full year.
Certain prior year amounts have been reclassified to conform to current
year presentation.
During the first quarter of 1999, the Company issued 1,573,616 additional
shares of common stock to Bay Harbour Management, L.C. These shares were issued
in connection with the 1998 sale of common stock to Bay Harbour, as provided for
in the agreement.
<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 Revenue
Three Months Ended
March 30, 1999 March 31, 1998
------------------ ----------------
<S> <C> <C>
Net sales and service revenues 100.0 % 100.0 %
Cost of sales 79.9 77.8
--------------- -------------
Gross profit 20.1 22.2
Selling, general and administrative expenses 26.1 23.8
--------------- -------------
Loss from operations (6.0) (1.6)
Interest expense (2.7) (2.5)
Equity in Loss of Joint Venture (0.1) 0.0
--------------- -------------
Loss before benefit for income taxes and (8.8) (4.1)
extraordinary item
Benefit for income taxes 0.0 0.0
--------------- -------------
Loss before extraordinary item (8.8) (4.1)
Extraordinary item - gain on debt extinguishment 0.0 1.4
--------------- -------------
Net Loss (8.8) % (2.7) %
=============== =============
</TABLE>
Three Months Ended March 30, 1999 Compared to the Three Months Ended March
31, 1998.
Net sales and service revenues for the three months ended March 30, 1999
increased 0.5% to $61,681,000 (9 stores) from $61,373,000 (7 stores) for the
three months ended March 31, 1998. This increase is attributable to improved
performance by the commercial division. Total comparable sales were 7.7% lower
than last year. Sales from the commercial division increased 6.3% or $417,000.
Gross revenues from the sale of product protection plans for the three
months ended March 30, 1999 decreased 5.3% to $2,766,000 from $2,920,000 for the
three months ended March 31, 1998. This decrease is attributable to the
reduction in comparable sales, further affected by a decline in the sale of
product protection plans as a percentage of retail merchandise sales.
Incremental costs related to these sales totaled $1,229,000 and $1,325,000
respectively, for the comparable periods.
Gross profit as a percentage of net sales and service revenues for the
three months ended March 30, 1999 decreased to 20.1% from 22.2% last year. The
decrease is due to lower product margins and reduced sales of product protection
plans. Gross margins in the commercial sales division decreased to 6.6% from
8.3% for the comparable period last year. 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
March 30, 1999 increased $1.5 million, or 10.2% to $16,118,000 from $14,626,000
for the three months ended March 31, 1998. This unfavorable change is the result
of the increased level of operating expenses associated with the two new stores
in Manhattan ($1.9 million), as well as increased costs attributable to the new
Tops private-label credit card ($0.5 million), which replaced the previous GECC
Tops Card. The effects of these two factors were partially offset by a continued
focus on cost containment, which resulted in a decrease of all other operating
expenses in the amount of $900,000.
The Company's net loss from operations increased to $3,693,000 for the
three months ended March 30, 1999 compared to a net loss of $1,023,000 for the
three months ended March 31, 1998.
Interest expense increased 8.7% to $1,649,000 from $1,517,000 for the
comparable period last year as a result of increased borrowing on the revolving
credit facility and interest on the Queens capitalized lease, partially offset
by lower interest cost on the 6 1/2% Convertible Subordinated Debentures.
The Company did not record a tax benefit in the first quarter of 1999 or
1998.
The Company's net loss before extraordinary items for the three months
ended March 30, 1999 was $5,417,000 ($0.38 per share) compared to a net loss of
$2,540,000 ($0.35 per share) for the three months ended March 31, 1998.
During the first quarter of 1998, the Company repurchased $2,000,000 face
value of 6 1/2% Original Subordinated Debentures, resulting in a net
extraordinary gain of $859,000. No such transactions took place during the first
quarter of 1999.
The Company's net loss after the extraordinary gain on the early
extinguishment of debt was $5,417,000 ($0.38 per share) compared to a net loss
of $1,681,000 ($0.23 per share) for 1998.
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 March 30, 1999,the
Company had working capital of $11,292,000, which represented a decrease of
$5,078,000 from December 29, 1998. During the three months ended March 30, 1999,
the Company incurred net capital expenditures of $422,000, decreased inventories
by $10,908,000, decreased short term borrowing by $1,535,000 and decreased
payables by $2,865,000.
The Company maintains a $40,000,000 secured credit facility, which bears
interest at the bank's base rate plus 1% or, for a portion of the loan, LIBOR
plus 3%. This facility was recently extended for two years, and now expires in
October 2001. All of the Company's unencumbered assets are pledged as collateral
for the new facility. As of March 30, 1999 $29,183,000 was outstanding and
$2,643,000 was available for borrowings 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 10% 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, the improved performance of recently opened stores 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 achievements will
produce the desired result.
<PAGE>
Year 2000 Compliance
The Company has initiated a program to prepare the Company's computer
systems and applications for the year 2000. This is necessary because computer
programs have been written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process normal business transactions. In addition, many of the Company's
vendors and service providers are also faced with similar issues related to the
year 2000.
In connection with the Company's programs related to year 2000, management
has assessed the Company's information systems, including its hardware and
software systems and embedded systems contained in the Company's stores,
distribution facilities and corporate headquarters. Based on the findings of
this assessment, the Company has commenced a plan to upgrade or replace the
Company's hardware or software for year 2000 readiness as well as to assess the
year 2000 readiness of the Company's vendors and service providers. In addition,
the Company's management is currently formulating contingency plans, which, in
the event that the Company is unable to fully achieve year 2000 readiness in a
timely manner, or any of the Company's vendors or service providers fails to
achieve year 2000 readiness, may be implemented to minimize the risks of
interruptions to the Company's business.
Based on its assessment to date of the year 2000 readiness of the Company's
vendors, service providers and other third parties on which the Company relies
for business operations, the Company believes that its principal vendors,
service providers and other third parties are taking action for year 2000
compliance. However, the Company has limited ability to test and control such
third parties' year 2000 readiness, and the Company cannot provide assurance
that failure of such third parties to address the year 2000 issue will not cause
an interruption of the Company's business.
The Company has committed significant resources in connection with
resolving its year 2000 issues. The Company expects that the principal costs
will be those associated with the replacement and testing of its computer
applications, all of which are expected to be replaced over the next year. The
Company estimates that the total external costs associated with implementing
year 2000 readiness will be approximately $3.0 million, consisting of system
replacement costs of $1.0 million, equipment replacement of $1.0 million and
consulting costs of $1.0 million. During the first quarter of 1999, the Company
incurred $400,000 of consulting and equipment-related expenditures associated
with year 2000 readiness. The Company will finance $2.2 million of the cost of
its year 2000 remediation through a new credit facility with the balance funded
by income generated from operations.
The Company expects to complete its year 2000 remediation by October 1999.
However, the Company's ability to execute its plan in a timely manner may be
adversely affected by a variety of factors, some of which are beyond the
Company's control including turnover of key employees, availability and
continuity of consultants and the potential for unforeseen implementation
problems. The Company's business could be interrupted if the year 2000 plan is
not implemented in a timely manner, if the Company's vendors, service providers
or other third parties are not year 2000 ready or if the Company's contingency
plans are not successful. Based on current available information, and although
no assurance can be given, the Company does not believe that any such
interruptions are likely to have a material adverse effect on the Company's
results of operation, liquidity or financial condition.
This Quarterly Report on Form 10-Q may contain forward-looking information
about the Company. The preceding factors, and others, 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:
ITEM 1. Legal Proceedings
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
<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
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1999
<PERIOD-END> MAR-30-1999
<CASH> 3,415
<SECURITIES> 0
<RECEIVABLES> 2,133
<ALLOWANCES> 0
<INVENTORY> 51,152
<CURRENT-ASSETS> 59,025
<PP&E> 29,346
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,329
<CURRENT-LIABILITIES> 47,733
<BONDS> 20,403
0
0
<COMMON> 0
<OTHER-SE> 8,147
<TOTAL-LIABILITY-AND-EQUITY> 95,329
<SALES> 61,681
<TOTAL-REVENUES> 61,681
<CGS> 49,256
<TOTAL-COSTS> 49,256
<OTHER-EXPENSES> 16,118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,649
<INCOME-PRETAX> (5,417)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,417)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> 0
</TABLE>
