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 29, 1999 -------------
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities
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 29, 1999.
15,334,102 Shares
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
6/29/99 12/29/98
------- --------
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 6,052 $ 2,672
Accounts receivable, net ...................... 3,703 1,849
Merchandise inventory ......................... 48,222 62,060
Prepaid expenses and other current assets ..... 1,623 3,128
-------- --------
Total Current Assets ................. 59,600 69,709
Property, equipment & leasehold improvements, net ...... 28,862 29,883
Deferred taxes ......................................... 2,958 2,958
Other assets ........................................... 4,652 3,663
-------- --------
Total Assets ......................... $ 96,072 $106,213
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings ......................... $ 25,041 $ 30,718
Accounts payable .............................. 12,793 12,309
Current portion of capital lease .............. 124 124
Accrued liabilities and taxes payable ......... 3,786 3,994
Customer deposits ............................. 3,726 3,236
Deferred taxes ................................ 2,958 2,958
-------- --------
Total Current Liabilities ............ 48,428 53,339
Long-term debt ......................................... 20,368 20,403
Capital lease, net of current portion .................. 15,919 15,979
Deferred rent .......................................... 2,291 2,188
Other liabilities ...................................... 801 722
Shareholders' equity ................................... 8,265 13,582
------- -------
Total Liabilities and
Shareholders' Equity ................. $ 96,072 $106,213
======== ========
See accompanying notes.
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 29, 1999 AND JUNE 30, 1998
(Dollars in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
2nd 2nd Six Six
Quarter Quarter Months Ended Months Ended
1999 1998 6/29/99 6/30/98
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales and service revenues ................ $ 73,461 $ 74,465 $ 135,142 $ 135,840
Cost of sales ................................. 55,413 57,890 104,669 105,660
-------- ------- ------------ -----------
Gross profit .................................. 18,048 16,575 30,473 30,180
Selling, general and administrative expenses .. 16,295 14,790 32,413 29,416
-------- ------- ------------ -----------
Income (loss) from operations ................. 1,753 1,785 (1,940) 764
Equity in loss of joint venture ............... (129) -- (204) --
Interest expense .............................. (1,548) (1,535) (3,197) (3,052)
-------- ------- ------------ -----------
Income (loss) before benefit for income taxes
and extraordinary item ...................... 76 250 (5,341) (2,288)
Benefit for income taxes ...................... -- -- -- --
-------- ------- ------------ -----------
Income (loss) before extraordinary item ....... 76 250 (5,341) (2,288)
Extraordinary item-gain on debt extinguishment -- 113 -- 971
Net income (loss) ............................. $ 76 $ 363 $ (5,341) $ (1,317)
======== ======= ============ ===========
Net income (loss) per common share (basic)
before extraordinary item .................. $ 0.00 $ 0.03 $ (0.36) $ (0.31)
Income per common share (basic) attributable to
extraordinary item ......................... 0.00 0.02 0.00 0.13
-------- ------- ------------ -----------
Net income (loss) per common share (basic) .... $ 0.00 $ 0.05 $ (0.36) $ (0.18)
======== ======= ============ ===========
Common shares outstanding ..................... 15,331,247 7,352,550 14,793,854 7,320,108
======== ======= ============ ===========
See accompanying notes.
</TABLE>
<PAGE>
TOPS APPLIANCE CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 29, 1999 AND JUNE 30, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 29, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ........................................ $ (5,341) $ (1,317)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............ 2,082 2,313
Deferred rent ............................ 103 (44)
Extraordinary gain on debt extinguishment -- (971)
Accounts receivable ...................... (1,854) (369)
Inventory ................................ 13,838 (3,435)
Prepaid expenses and other current assets 1,505 (1,022)
Accounts payable ......................... 908 6,364
Accrued liabilities and income taxes pa .. (208) (416)
Customer deposits ........................ 490 18
Other assets ............................. (1,142) (1,163)
Other liabilities ........................ 93 (7)
-------- --------
Net cash provided by (used in) operating activities 10,474 (49)
Cash flows from investing activities:
Capital expenditures, net ................ (908) (478)
-------- --------
Net cash (used in) investing activities ........... (908) (478)
Cash flows from financing activities:
Short-term borrowings .................... (5,677) 2,732
Cash overdrafts .......................... (424) 2,333
Notes Payable ............................ (95) (1,279)
Proceeds from Exercise of Stock Options .. -- 16
Proceeds from Employee Stock Purchase Plan 10 7
-------- --------
Net cash provided by (used in) financing activities (6,186) 3,809
-------- --------
Increase in cash and cash equivalents ............. 3,380 3,282
Cash and cash equivalents, beginning of period ............. 2,672 2,368
-------- --------
Cash and cash equivalents, end of period ................... $ 6,052 $ 5,650
======== ========
Non-Cash Transactions:
Debenture Exchange .......................... $ 35 $ 1,500
</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 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 and six months ended June 29, 1999 and June 30, 1998.
Included in accounts payable is a cash overdraft balance of $4,171,000 and
$4,595,000 at June 29, 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 second quarter of 1999, Bear Stearns converted $35,000 face value of
6 1/2% Convertible Subordinated Debentures due 2003, at a conversion price of
$1.75, to 20,000 shares of Tops Appliance City, Inc. common stock.
<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
6/29/99 6/30/98 6/29/99 6/30/98
------------------------ --------------------
<S> <C> <C> <C> <C>
Net sales and service revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.4 77.7 77.4 77.8
------ ------ ------ ------
Gross profit 24.6 22.3 22.6 22.2
Selling, general and administrative
expenses 22.2 19.9 24.0 21.6
------ ------ ------ ------
Income (loss) from operations 2.4 2.4 (1.4) 0.6
Equity in loss of joint venture (0.2) 0.0 (0.2) 0.0
Interest expense (2.1) (2.1) (2.4) (2.3)
------ ------ ------ ------
Income (loss) before benefit for
Income taxes and extraordinary item 0.1 0.3 (4.0) (1.7)
Benefit for income taxes 0.0 0.0 0.0 0.0
------ ------ ------ ------
Income (loss) before extraordinary item 0.1 0.3 (4.0) (1.7)
Extraordinary item - gain on debt
extinguishment 0.0 0.2 0.0 0.7
------ ------ ------ ------
Net income (loss) 0.1% 0.5% (4.0)% (1.0) %
====== ====== ====== ======
</TABLE>
<PAGE>
Three Months Ended June 29, 1999 Compared to the Three Months Ended June 30,
1998.
Net sales and service revenues for the three months ended June 29, 1999
decreased 1.3% to $73,461,000 from $74,465,000 for the three months ended June
30, 1998. This decrease is attributable to a 7.5% decline in comparable sales
partially offset by revenues generated from the 3 most recently opened stores in
Manhattan and Brooklyn. Excluding personal computers, which are being phased
back, comparable sales decreased 6.0%. Sales from the commercial division
decreased by 8.1% or $749,000.
Gross revenues from the sale of product protection plans for the three
months ended June 29, 1999 decreased 0.4% to $3,356,000 from $3,371,000 for the
three months ended June 30, 1998. This decrease is reflective of the reduction
in merchandise sales. Incremental costs related to these sales totaled
$1,399,000 and $1,453,000, respectively, for the comparable periods.
Gross profit as a percentage of net sales and service revenues for the
three months ended June 29, 1999 increased to 24.6% from 22.3% last year. This
increase is primarily due to improved sales of higher-margin air conditioners,
reduced coupon promotions and the de-emphasis of personal computers. Gross
margins in the commercial sales division increased to 7.1% from 6.9% for the
comparable periods. Gross margins in the commercial division tend to be lower
than gross margins on retail sales.
Selling, general and administrative expenses for the three months ended
June 29, 1999 increased 10.2% to $16,295,000 from $14,790,000 in the three
months ended June 30, 1998. This unfavorable change is the result of the
increased level of operating expenses associated with the three new stores in
New York ($2.1 million) as well as increased costs attributable to the new Tops
private label credit card ($0.5 million) which replaced the previous Tops card.
Additionally, the 1999 results include $200,000 of pre-opening expenses related
to the June, 1999 opening of the Brooklyn store. The effects of these three
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 $1.3
million.
The Company's income from operations decreased 1.8% to $1,753,000 for the
three months ended June 29, 1999 compared to $1,785,000 for the three months
ended June 30,1998.
The Company's 49% interest in Electronics.Net LLC, a joint venture formed
with Cybershop Holding Corp., resulted in incremental costs of $129,000 for the
three months ended June 29, 1999. This partnership commenced operations in
October, 1998.
Interest expense increased 0.8% to $1,548,000 from $1,535,000 for the
comparable period last year as a result of the Queens capitalized lease, offset
in part by reduced borrowings on the revolving credit facility and lower
interest on the 6 1/2% Convertible Subordinated Debentures.
The Company did not record a tax benefit in the second quarter of 1999 or
1998.
The Company's net income before extraordinary items for the three months
ended June 29, 1999 declined to $76,000 ($0.00 per share) compared to $250,000
($0.03 per share) for the three months ended June 30, 1998.
During the second quarter of 1998, the Company repurchased $250,000 face
value of 6 1/2% Original Subordinated Debentures, resulting in a net
extraordinary gain of $113,000. No such transactions took place during the
second quarter of 1999.
The Company's net income after the extraordinary gain on the early
extinguishment of debt was $76,000 ($0.00 per share) compared to $363,000 ($0.05
per share) for 1998.
Six Months Ended June 29, 1999 Compared to the Six Months Ended June 30, 1998.
Net sales and service revenues for the six months ended June 29, 1999
decreased 0.5% to $135,142,000 from $135,840,000 for the six months ended June
30, 1998. This decrease is attributable to a 7.6% decline in comparable sales
partially offset by revenues generated from the three newest stores in New York.
Sales from the commercial division decreased 2.1% or $332,000.
Gross revenues from the sale of product protection plans for the six months
ended June 29, 1999 decreased 2.7% to $6,122,000 from $6,291,000 for the six
months ended June 30, 1998. This decrease is attributable to the shortfall in
merchandise sales. Incremental costs related to these sales totaled $2,628,000
and $2,778,000, respectively, for the comparable periods.
Gross profit as a percentage of net sales and service revenues for the six
months ended June 29, 1999 increased to 22.6% from 22.2% last year. The increase
was primarily due to improved sales of higher-margin air conditioners. Gross
margins in the commercial sales division decreased slightly to 6.9% from 7.0%
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 six months ended June
29, 1999 increased 10.2% to $32,413,000 from $29,416,000 for the six months
ended June 30, 1998. This unfavorable change is the result of the increased
level of operating expenses associated with the three new stores in New York
($4.2 million, including $200,000 related to the opening of the Brooklyn store)
as well as $1.1 million of incremental costs attributable to the new Tops
private label credit card. The effects of these 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 $2.3 million.
The Company experienced a net loss from operations of $1,941,000 for the
six months ended June 29, 1999, compared to a net income of $764,000 for the six
months ended June 30,1998.
The Company's participation in Electronics.Net LLC for the first six months
of 1999 resulted in additional expenses of $204,000. This entity commenced
operations in October, 1998.
Interest expense increased 4.8% to $3,197,000 from $3,052,000 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 for the six months ended June 29,
1999 or June 30, 1998.
The Company's net loss before extraordinary items for the six months ended
June 29, 1999 was $5,341,000 ($0.36 per share) compared to $2,228,000 ($0.31 per
share) for the six months ended June 30, 1998.
During the first six months of 1998, the Company repurchased $2,250,000
face value of 6 1/2% Original Subordinated Debentures, resulting in a net
extraordinary gain of $971,000. No such transactions took place during the
comparable period for 1999.
For the first half of 1999, the Company's net loss after the extraordinary
gain on the early extinguishment of debt was $5,341,000 ($0.36 per share) as
compared to $1,317,000 ($0.18 per share) for the first half of 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 June 29, 1999, the
Company had working capital of $11,172,000, which represented a decrease of
$5,198,000 from December 29, 1998. During the six months ended June 29, 1999,
the Company incurred net capital expenditures of $908,000, decreased inventories
by $13,838,000, decreased short term borrowing by $5,677,000 and increased trade
payables by $484,000.
The Company maintains a $40,000,000 secured credit facility, expiring in
October 2001, which bears interest at the bank's base rate plus 1% or, for a
portion of the loan, LIBOR plus 3%. All of the Company's unencumbered assets are
pledged as collateral for the new facility. As of June 29, 1999, $25,041,000 was
outstanding and $906,000 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 and the improved performance of recently opened stores 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.
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 fail 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 during the current 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 half of 1999, the Company
incurred $900,000 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.
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
The registrant's annual meeting of shareholders for 1998 was
held on May 21, 1999. At the meeting, the shareholders elected three
(3) new members to the Board of Directors: Douglas P. Teitelbaum and
Steven A. Van Dyke were elected to serve as directors through the 2002
meeting and Walter A. Jones was elected to serve as a director through
the 2000 meeting. Additionally, Robert G. Gross was re-elected to serve
until the 2001 meeting. The following directors continue in office
through the annual meeting of the year indicated: Thomas L. Zambelli
(2000), John H. Hollands (2000), Richard L. Jones (2001) and Anthony L.
Formica (2001).
The shareholders also ratified the appointment of Arthur
Andersen, LLP as the registrant's independent auditors for 1999.
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: August 11, 1999
TOPS APPLIANCE CITY, INC.
BY: /s/ Thomas L. Zambelli
-----------------------------
Thomas L. Zambelli
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-28-1999 DEC-28-1999
<PERIOD-END> JUN-29-1999 JUN-29-1999
<CASH> 6,052 6,052
<SECURITIES> 0 0
<RECEIVABLES> 3,703 3,703
<ALLOWANCES> 0 0
<INVENTORY> 48,222 48,222
<CURRENT-ASSETS> 59,600 59,600
<PP&E> 28,862 28,862
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 96,072 96,072
<CURRENT-LIABILITIES> 48,428 48,428
<BONDS> 20,368 20,368
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 8,265 8,265
<TOTAL-LIABILITY-AND-EQUITY> 96,072 96,072
<SALES> 135,142 73,461
<TOTAL-REVENUES> 135,142 73,461
<CGS> 104,669 55,413
<TOTAL-COSTS> 104,669 55,413
<OTHER-EXPENSES> 32,413 16,295
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,197 1,548
<INCOME-PRETAX> (5,341) 76
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,341) 76
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,341) 76
<EPS-BASIC> (0.36) 0.00
<EPS-DILUTED> 0 0
</TABLE>
