UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
OR
[ ] 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 0-21192
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
LOUISIANA 72-0721367
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
109 NORTH PARK BLVD., COVINGTON, LOUISIANA 70433
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(504) 867-5000
--------------------------------------------------
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.
Yes X No
At April 9, 1997, there were 5,566,906 shares of common stock, $.10 par
value, outstanding.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Statements of Operations -
Three and Six Months Ended February 28, 1997
and February 29, 1996 3
Balance Sheets -
February 28, 1997, August 31, 1996 and February
29, 1996 4
Statements of Cash Flows -
Six Months Ended February 28, 1997 and February
29, 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $78,294,573 $89,865,122 $144,057,316 $168,820,602
Cost of sales (Notes 3, 4 & 5) 66,611,690 71,566,894 119,504,605 132,645,138
------------ ----------- ------------ ------------
Gross profit 11,682,883 18,298,228 24,552,711 36,175,464
Selling, general and
administrative expenses 22,316,073 17,182,240 36,114,926 34,279,294
(Notes 3 & 5) ------------ ----------- ------------ ------------
Operating income (loss) (10,633,190) 1,115,988 (11,562,215) 1,896,170
Other income (expense):
Interest expense (511,291) (485,507) (960,807) (978,356)
Interest income 45,080 39,008 64,782 74,015
Other income, net (107,511) 98,807 (48,771) 219,806
------------ ----------- ------------ ------------
(573,722) (347,692) (944,796) (684,535)
------------ ----------- ------------ ------------
Income (loss) before income
taxes (11,206,912) 768,296 (12,507,011) 1,211,635
Income tax expense (Note 6) 3,184,000 300,000 2,690,000 473,000
------------ ----------- ------------ ------------
Net income (loss) ($14,390,912) $468,296 ($15,197,011) $738,635
============ =========== ============ ============
Per share data:
Net income (loss) per share ($2.59) $0.08 ($2.73) $0.13
======= ===== ======= =====
Weighted average number of
common shares outstanding 5,566,906 5,566,906 5,566,906 5,566,906
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
BALANCE SHEETS (UNAUDITED)
February 28, August 31, February 29,
1997 1996 1996
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents 77,647 3,303,822 2,023,172
Investments in marketable
securities 129,831 129,788 148,538
Receivables (net of an allowance
of $4.2 million at February 28,
1997 and $2.9 million at August
31, 1996 and $1.5 million at
February 29, 1996) 11,294,503 14,561,102 18,633,629
Merchandise inventory 51,759,863 56,387,842 52,081,851
Deferred income taxes ----- 3,033,000 3,539,782
Other 862,973 471,399 638,010
------------ ------------ ------------
Total current assets 64,124,817 77,886,953 77,064,982
Property and equipment, net 33,898,224 36,376,959 38,043,566
Deferred income taxes ----- 1,234,000 2,654,518
Intangibles and other 2,975,112 3,535,639 3,666,355
------------ ------------ ------------
$100,998,153 $119,033,551 $121,429,421
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt $ 15,309,731 $ 2,478,179 $ 2,574,351
Short-term borrowings - line
of credit 2,600,000 ----- 9,200,000
Accounts payable 42,862,320 47,793,786 34,551,040
Accrued expenses 10,603,439 7,169,218 7,240,088
Deferred revenue 3,656,857 4,621,294 5,593,217
------------ ------------ ------------
Total current liabilities 75,032,347 62,062,477 59,158,696
------------ ------------ ------------
Long-term debt, less current portion 3,777,870 18,191,371 19,330,665
Deferred revenue 3,066,101 4,650,296 6,722,958
------------ ------------ ------------
6,843,971 22,841,667 26,053,623
------------ ------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 500,000 shares
authorized, no shares issued
or outstanding ----- ----- -----
Common stock, $.10 par value;
20,000,000 shares authorized,
5,566,906 issued and outstanding
at February 28, 1997, August 31,
1996 and February 29, 1996 556,691 556,691 556,691
Paid-in capital 32,373,306 32,373,306 32,373,306
Retained earnings (deficit) (13,808,162) 1,388,849 3,515,544
Less: Unearned compensation ----- ----- (50,625)
Unrealized loss on marketable
securities available for sale ----- (189,439) (177,814)
------------ ------------ ------------
Total shareholders' equity 19,121,835 34,129,407 36,217,102
------------ ------------ ------------
$100,998,153 $119,033,551 $121,429,421
============ ============ ============
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
February 28, February 29,
1997 1996
---- ----
Cash flow from operating activities:
Net income (loss) $(15,197,011) $ 738,635
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 2,438,568 3,205,858
Provision for uncollectible receivables 2,324,243 282,551
Deferred income taxes 4,267,000 1,454,052
Store closure reserve 5,476,247 -----
Write down of assets held for sale 737,605 -----
Loss on disposal of assets 181,850 -----
Stock awards ----- 16,875
(Increase) decrease in assets:
Receivables 942,356 487,495
Merchandise inventory 4,627,979 8,176,556
Other current assets (637,437) 113,199
Increase (decrease) in liabilities:
Accounts payable (4,931,466) (19,752,727)
Accrued expenses (515,318) 20,583
Deferred revenue (2,548,632) (3,649,089)
------------ ------------
Net cash used in operating activites (2,834,016) (8,906,012)
------------ ------------
Cash flow from investing activities:
Purchase of property and equipment (1,484,736) (486,251)
Decrease in other assets 77,079 (78,274)
------------ ------------
Net cash used in investing activities (1,407,657) (564,525)
------------ ------------
Cash flow from financing activities:
Increase (decrease) in long-term debt (1,584,502) (811,611)
Borrowings under line of credit 22,750,000 42,100,000
Repayments under line of credit (20,150,000) (32,900,000)
------------ ------------
Net cash provided by financing
activities 1,015,498 8,388,389
------------ ------------
Net increase in cash and cash equivalents (3,226,175) (1,082,148)
Cash and cash equivalents at beginnning
of period 3,303,822 3,105,320
------------ ------------
Cash and cash equivalents at end of period $ 77,647 $ 2,023,172
============ ============
Cash paid during the period for:
Interest expense $ 1,166,759 $ 696,541
============ ============
Income taxes $ 26,000 $ 84,020
============ ============
Supplemental schedule of non-cash
investing and financial activities:
Assets acquired under capital lease $ 285,701 -----
============ ============
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
The information for the three and six months ended February 28, 1997
and February 29, 1996 is unaudited, but in the opinion of management,
reflects all adjustments, which are of a normal recurring nature, necessary
for a fair presentation of financial position and results of operations for
the interim periods. The accompanying financial statements should be read
in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the fiscal year ended August
31, 1996.
The results of operations for the three and six months ended February
28, 1997 are not necessarily indicative of the results to be expected for
the full fiscal year ending August 31, 1997.
(2) Current portion of long-term debt and short-term borrowings under line
of credit
The Company's term loan and line of credit facility with the banks was
amended in December, 1996 to (i) accelerate the maturity date on both
facilities from August 31, 1998 to September 1, 1997, (ii) decrease the
amount available under the line of credit to $5 million from January 1, 1997
through maturity, (iii) provide waivers of the Company's noncompliance with
certain financial covenants at August 31, 1996 and the first quarter of
fiscal 1997, suspend certain financial covenants through maturity and amend
other financial covenants to be in line with the Company's fiscal 1997
budget and (iv) add certain inventory collateral to secure both facilities.
The Company paid a small fee to secure the waivers and also agreed to an
increase in the quarterly commitment fee payable on unfunded amounts under
the line of credit facility.
As a result of this amendment, it will be necessary for the Company to
secure a replacement line of credit and term loan facility prior to the end
of fiscal 1997. Although management believes it will ultimately be
successful in obtaining a replacement facility, the Company has not yet
secured such facility. In addition, as of February 28, 1997, the Company
was not in compliance with one of the amended financial covenants and on
April 21, 1997 requested a waiver of this covenant from the banks but has
not yet received such a waiver.
The Company's projections indicate that, during the fourth quarter of
fiscal 1997, it will experience periodic cash shortfalls from operations
that will require it to aggressively collect and manage its available cash
resources. Management believes that the Company has sufficient cash and
financial flexibility to overcome the anticipated cash shortfalls prior to
obtaining the replacement credit facility referred to above, but any further
deterioration in the Company's performance could adversely impact the
Company's ability to fulfill its cash obligations.
Management believes that it will not be possible to maintain the
Company's operations at current levels on an ongoing basis unless there is a
reversal in the trend of declining operating performance, and the Company is
successful in obtaining a replacement credit facility providing a line of
credit of at least $10 million. Since the achievement of either of these
objectives cannot be assured, management is evaluating other strategic
options, including further downsizing and additional store closures. In
order for any such downsizing to restore the Company's profitability and
achieve a desirable level of positive cash flow, concessions or consents
from certain of the Company's landlords and lenders would be required. If
the Company determines that corporate downsizing is the most viable
available option, and if it is unsuccessful in obtaining adequate
concessions through direct negotiation or other means, then the Company
would aggressively seek whatever restructuring alternatives are available.
(3) Store closures
As a result of its comprehensive review of operations to restore
profitability, the Company has recorded a charge for the closing of two
stores located in Huntsville, Alabama and Jackson, Mississippi in the amount
of approximately $6.7 million. The charge is to recognize a liability for
future lease payments and losses on disposal of merchandise and fixed assets
located at the two stores, a loss on the write-down to fair value of one of
the Company's warehouses that is under contract for sale and costs
associated with the Company's previous plans to construct a distribution
center.
(4) Allowance for doubtful accounts
The Company has recorded an increase to its allowance for doubtful
accounts in the amount of $1.9 million. The increase in the allowance was
necessary as it has become increasingly difficult to collect from vendors
amounts due on volume rebates, returned merchandise, cooperative advertising
rebates, and invoice price differences and consumer receivables.
(5) Additional charges resulting from technology enhancements
As a result of its comprehensive review of operations to restore
profitability, the Company has recorded a charge in the amount of $700,000
relating to the future lease payments on a computer system that has been
replaced. As a result of the new technology that allows for better
inventory control, the Company identified, and has recorded a charge for,
obsolete and damaged goods in the amount of $1.5 million that the Company
will sell below cost or scrap. Previously, the Company was recognizing
these inventory adjustments through special sales events semi-annually.
(6) Income taxes
The Company has recorded a valuation allowance in the amount of $7.4
million for that portion of the net deferred tax asset that cannot be
realized by carrybacks or offsetting deferred tax liabilities. The
valuation allowance is based upon management's conclusion that sufficient
positive evidence does not exist as defined in Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, regarding the
Company's ability to realize certain deferred tax assets and carryforward
items. As a result of the valuation allowance, income tax expense was
approximately $3.2 million and $2.7 million for the three and six-month
periods ended February 28, 1997.
(7) Subsequent events
On March 24, 1997, Anthony P. Campo stepped down as Chairman and Chief
Executive Officer, and the Board of Directors named Rex O. Corley, Jr.,
President and Chief Operating Officer, as Acting Chairman and Chief
Executive Officer. Mr. Campo will remain a member of the Board of
Directors.
Three new persons have also been added to the Board of Directors -
Donald T. Bollinger, Anthony J. Correro, III, and David Ducote.
Bollinger is the Chairman and Chief Executive Officer of Bollinger
Shipyards and serves on the Boards of Directors of Tidewater, Inc. and
Banc One, Louisiana Corporation. Active in the community, he is a member
of the Dock Board, Port of New Orleans. Correro is a senior partner with
the New Orleans law firm of Correro Fishman Haygood Phelps Weiss Walmsley
& Casteix, L. L .P. He serves on the Boards of Directors of T. L. James
& Co. and Avondale Industries, Inc. Ducote is Chief Executive Officer of
Tchoupitoulas Partners, a private investment firm. He is also a Director
of Southern Parking Systems, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
The Company's comparable store sales declined by 11.3% for the quarter
ended February 28, 1997 as compared to the same period last year, continuing
a trend that began in the third quarter of fiscal 1995. The decline in
comparable store sales reflects the combined impact of the general weakness
in the retail consumer electronics industry, increased competition in many
of the Company's principal markets, a slowdown in the development of new
products in consumer electronic categories and reduced spending levels by
consumers for non-essential goods believed to be due to record high consumer
debt levels.
The relatively soft level of consumer demand within the consumer
electronics and appliance industry has created a highly competitive and
promotional climate, which, in turn, has had a negative impact on the
Company's gross profit margins. Other factors causing the Company's margins
to decline during the quarter ended February 28, 1997 were decreased vendor
rebates due to the Company's lower volume of purchases and an increase in
promotional costs as a percent of sales due to increased use of discounting,
no interest financing and other promotional efforts to maintain sales
volumes in the challenging environment described above.
As previously disclosed, the poor performance of the retail industry
and the Company over an extended period led management during fiscal 1996 to
review the Company's operations and to explore methods to improve
operational efficiency and reduce costs. To that end, the Company
implemented several initiatives designed to improve the Company's
operations. Although management believes that these measures have begun to
have a positive impact, the Company's comparable store sales have continued
to decline as retail industry conditions have continued to deteriorate,
leading management to conclude during the first quarter of fiscal 1997 that
a comprehensive review of the Company's operations was appropriate for the
purpose of developing a long-term strategic plan. This process, which began
in the first quarter of fiscal 1997, continues, and although a comprehensive
strategic plan has not yet been completed, certain measures, including
technological enhancements, have been taken and strategies identified to
improve the Company's performance.
One immediate action that was identified and taken by the Company was
the closure of two unprofitable stores in the second quarter of fiscal 1997,
which required a non-recurring charge associated with these closures. In
addition, during the comprehensive review mentioned above, it became
apparent that other adjustments would be appropriate in the second quarter
as part of certain overall strategic changes to the Company's operations.
The total of these charges in the second quarter of fiscal 1997 was
approximately $16.7 million, consisting of (i) a charge of approximately
$6.7 million associated with the store closures mentioned above, as well as
an increase to the reserve for a previously closed store, (ii) charges of
approximately $2.6 million relating to certain overall strategic changes
made to the Company's operations and (iii) a charge for the establishment of
a deferred tax valuation allowance of $7.4 million, which resulted in an
income tax expense of approximately $3.2 million.
The store closure charge consists primarily of the present value of
future rent payments for the two stores closed and an adjustment of the
reserve for a previously closed store which the Company has been unable to
sublet. Also included in the $6.7 million charge is the write-off of the
associated leasehold improvements and inventory shrinkage related to the
stores closed, which, because such shrinkage was directly related to the
store closures, the Company charged directly to expense in the second
quarter. The rent and leasehold improvements write-off is reflected in
selling, general and administrative expenses and the shrinkage charge is
reported in cost of sales. Finally, the $6.7 million charge also includes a
loss of $511,000 to reflect the sale by the Company of a Company-owned
warehouse, and the write-off of certain capital expenditures incurred during
the initial stages of a study to construct a centralized distribution
facility. The loss on the sale of the warehouse reflects the difference
between the net book value and sale price of the warehouse. The Company
also recorded commission fees and incidental costs of $109,000 related to
this sale in the second quarter of fiscal 1997. These charges are recorded
in selling, general and administrative expenses.
Included in the $2.6 million charges related to overall strategic
changes is a $1.5 million inventory obsolescence reserve as a result of the
Company's conversion to a new inventory management system. The Company has
historically revalued its inventory to reflect obsolescence and other loss
in inventory value through the use of semi-annual warehouse sales. The
Company is now implementing bar-coding technology, which enhances inventory
tracking and valuation. The inventory charge, which is recorded in cost of
sales, is primarily an acceleration of a charge the Company would have
expected to take at a later date if it had continued with its previous
inventory management system. The Company has also recorded a charge in
selling, general and administrative expenses in the amount of $666,000
related to a computer system that has been replaced.
In addition to the store closure charges and charges relating to the
overall strategic changes to the Company's operations discussed above, the
Company increased by $2.3 million its reserve allowances for vendor and
consumer receivables. Approximately $1.9 million of the increase is due to
the deterioration in collections from vendors and consumers.
As discussed in "Liquidity and Capital Resources," the Company is not
in compliance with certain previously amended financial covenants contained
in its financing instruments, nor has the Company replaced its current
credit facility, which expires on September 1, 1997. In addition, the
Company is expected to experience periodic cash shortfalls from operations
during the fourth quarter of fiscal 1997 that will require it to
aggressively collect and manage its available cash resources. Management
believes that the Company has sufficient cash and financial flexibility to
overcome the anticipated cash shortfalls prior to obtaining a replacement
credit facility and is evaluating all of its options and will make a
decision in the third quarter of fiscal 1997 as to the handling of the
expected cash shortfall. See "Liquidity and Capital Resources."
Results of Operations
The following table sets forth, for the periods indicated, the
relative percentages that certain income and expense items bear to net
sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 85.1 79.7 83.0 78.6
----- ----- ----- -----
Gross profit 14.9 20.3 17.0 21.4
Selling, general and
administrative expense 28.5 19.1 25.0 20.3
----- ----- ----- -----
Operating income (loss) (13.6) 1.2 (8.0) 1.1
Interest expense (0.7) (0.5) (0.7) (0.6)
Interest income 0.1 0.0 0.0 0.0
Other income, net (0.1) 0.1 (0.0) 0.1
----- ----- ----- -----
(0.7) (0.4) (0.7) (0.4)
----- ----- ----- -----
Income(loss) before income taxes (14.3) 0.8 (8.7) 0.7
Income tax expense (benefit) 4.1 0.3 1.9 0.3
----- ----- ----- -----
Net income (loss) (18.4)% 0.5% (10.6)% 0.4%
===== ===== ===== =====
</TABLE>
Three Months Ended February 28, 1997 as Compared to Three Months Ended
February 29, 1996
Net sales for the three months ended February 28, 1997 decreased 12.9%
to $78.3 million compared to $89.9 million for the same period in 1996.
Comparable retail store sales for the three months ended February 28, 1997
decreased by 11.3%. The decline in sales reflects the combined impact of
the general weakness in the retail consumer electronics industry, increased
competition in many of the Company's principal markets, a slowdown in the
development of new products in consumer electronic categories and reduced
spending levels by consumers for non-essential goods believed to be due to
record high consumer debt levels.
Extended warranty revenue recognized under the straight-line method
(applicable to those extended warranty contracts sold prior to August 1,
1995) was $1.5 million and $2.2 million for the quarters ended February 28,
1997 and February 29, 1996, respectively. Extended warranty expenses for
these same periods were $886,000 and $1.3 million, respectively, before any
allocation of other selling, general and administrative expenses. Since
August 1, 1995, the Company has sold to an unaffiliated third party all
extended warranty service contracts sold by the Company to customers on or
after such date. The Company records the sale of these contracts, net of
any related sales commissions and the fees paid to the third party, as a
component of net sales and immediately recognizes revenue upon the sale of
such contracts. Although the Company sells these contracts at a discount,
the amount of the discount approximates the cost the Company would incur to
service these contracts, while transferring the full obligation for future
services to a third party. Net revenue from extended warranty contracts
sold to the third party for the quarters ended February 28, 1997 and
February 29, 1996 was $2.3 million and $2.7 million, respectively. The
decline in net revenue from the sale of extended warranties is a direct
result of the reduced level of retail store sales.
Gross profit for the three months ended February 28, 1997 was $11.7
million or 14.9% of net sales as compared to $18.3 million, or 20.3% of net
sales for the comparable period in the prior year. Excluding the charges
described above in the "Overview", gross profit for the three months ended
February 28, 1997 would have been $13.8 million or 17.6% of net sales. The
gross profit percentage decrease was primarily driven by a combination of
soft demand affecting the retail industry generally, increased competition
(both in number of competitors and corresponding increased price
competition) and decreased vendor rebates due to the Company's lower volume
of purchases. The Company also experienced an increase in promotional costs
as a percent of sales due to increased use of discounting, no interest
financing and other promotional efforts to maintain sales volumes in the
challenging environment described above.
Selling, general and administrative expenses were $22.3 million or
28.5% of net sales for the three months ended February 28, 1997 as compared
to $17.2 million, or 19.1% of net sales for the comparable period in the
prior year. Excluding the charges described above in "Overview", selling,
general and administrative expenses would have been $15.4 million or 19.7%
of net sales. This percentage increase was primarily due to decreased
vendor funding to offset advertising expenses. The Company also experienced
a decrease as a percentage of sales in promotional and other fees derived
from the Company's private label credit card program.
The Company's effective income tax rate was (28.4%) and 39.0% for the
three months ended February 28, 1997 and February 29, 1996, respectively.
The effective income tax rate for the three months ended February 28, 1997
resulted from a valuation allowance of $7.4 million, which was recorded
during the second quarter.
Six Months Ended February 28, 1997 as Compared to Six Months Ended
February 29, 1996
Net sales for the six months ended February 28, 1997 decreased 14.7%
to $144.1 million compared to $168.8 million for the same period in 1996.
Comparable retail store sales for the six months ended February 28, 1997
decreased by 13.4%. The decline in sales reflects the combined impact of
the general weakness in the retail consumer electronics industry, increased
competition in many of the Company's principal markets, a slowdown in the
development of new products in consumer electronic categories and reduced
spending levels by consumers for non-essential goods believed to be due to
record high consumer debt levels.
Extended warranty revenue recognized under the straight-line method
(applicable to those extended warranty contracts sold prior to August 1,
1995) was $3.2 million and $4.6 million for the six months ended February
28, 1997 and February 29, 1996, respectively. Extended warranty expenses
for these same periods were $2.0 million and $2.8 million, respectively,
before any allocation of other selling, general and administrative expenses.
Net revenue from extended warranty contracts sold to the third party for the
six months ended February 28, 1997 and February 29, 1996 was $4.2 million
and $5.3 million, respectively. The decline in net revenues from the sale
of extended warranties is a direct result of the reduced level of retail
store sales.
Gross profit for the six months ended February 28, 1997 was $24.6
million or 17.0% of net sales as compared to $36.2 million, or 21.4% of net
sales for the comparable period in the prior year. Excluding the charges
described above in "Overview", gross profit for the six months ended
February 28, 1997 would have been $26.6 million or 18.5% of net sales. The
gross profit percentage decrease was primarily driven by a combination of
soft demand affecting the retail industry generally, increased competition
(both in number of competitors and corresponding increased price competition)
and decreased vendor rebates due to the Company's lower volume of purchases.
Selling, general and administrative expenses were $36.1 million or
25.0% of net sales for the six months ended February 28, 1997 as compared to
$34.3 million, or 20.3% of net sales for the comparable period in the prior
year. Excluding the charges described above in "Overview", selling,
general and administrative expenses would have been $29.2 million or 20.3%
of net sales.
The Company's effective income tax rate was (21.5%) and 39.0% for the
six months ended February 28, 1997 and February 29, 1996, respectively.
The effective income tax rate for the six months ended February 28, 1997
resulted from a valuation allowance of $7.4 million, which was recorded
during the second quarter.
Liquidity and Capital Resources
Net cash used in operating activities were $2.8 million and $8.9
million for the six months ended February 28, 1997 and February 29, 1996
respectively, while net cash provided by financing activities for the same
comparable periods was $1.0 million and $8.4 million, respectively. The
shortfall in cash from operations for both periods reflects the reduced
level of sales by the Company.
As of February 28, 1997, the Company used several "floor plan" finance
companies to finance the majority of its merchandise purchases. The Company
has an aggregate borrowing limit with these finance companies of
approximately $105 million and it collateralizes the outstanding borrowings
with merchandise inventory and certain receivables. Payment terms under
these agreements range from 15 to 120 days. In addition, the Company
finances inventory purchases through open-account arrangements with various
vendors. As of February 28, 1997, the Company was not in compliance with
one of the financial covenants contained in one of its floor plan financing
arrangements and on April 21, 1997 the Company requested a waiver of this
covenant from the floor plan finance company but has not yet received such a
waiver.
The Company's credit facilities as of February 28, 1997 consisted
primarily of two term loans, one with a financial institution and the other
with three banks. The principal balance of the term loan with the financial
institution, which was $4.0 million on February 28, 1997, accrues interest,
payable monthly, at the average weekly yield of 30 day commercial paper plus
1.80% (7.19% at February 28, 1997) with the balance of all outstanding
principal due and payable at maturity on August 30, 2002. A portion of the
furniture, fixtures and equipment of the Company collateralizes outstanding
amounts pursuant to this agreement. The term loan with the banks accrues
interest, payable quarterly, at the prime rate, with the balance of all
outstanding principal due and payable at maturity on September 1, 1997.
Outstanding amounts pursuant to this agreement are collateralized by the
Company's real estate and certain inventory. The outstanding principal and
applicable interest rate on this term loan at February 28, 1997 were $14.5
million and 8.25% (the prime rate), respectively.
As part of the agreement with the banks, as of February 28, 1997 the
Company also has available to it a $5 million line of credit. This line of
credit accrues interest at the same rate as the bank term loan; however,
interest is payable monthly. As of February 28, 1997, the Company had
borrowings of $2.6 million outstanding on the line of credit. During
periods of peak purchasing, the Company uses this line of credit to finance
purchases.
Both of these loan facilities contain certain restrictive covenants,
which require the Company to maintain minimum tangible net worth, as well as
maximum debt to tangible net worth and minimum fixed charge coverage ratios.
The term loan with the banks also contains a provision which prohibits the
Company from paying dividends on its common stock. As stated in the notes to
the financial statements, on December 1, 1996, the term loan and line of
credit facility with the banks was amended, among other things, to (i)
accelerate the maturity date on both facilities from August 31, 1998 to
September 1, 1997, and (ii) decrease the amount available under the line of
credit to $5 million from January 1, 1997 through maturity. As a result of
this amendment, it will be necessary for the Company to secure a replacement
line of credit and term loan facility prior to the end of fiscal 1997.
Although management believes it will ultimately be successful in obtaining
a replacement facility, the Company has not yet secured such facility. As of
February 28, 1997, the Company was not in compliance with one of the
amended covenants contained in the bank credit facility and on April 21,
1997 the Company requested a waiver of this covenant from the banks but has
not yet received such a waiver.
The Company has experienced declining comparable store sales since the
third quarter of fiscal 1995 resulting in the Company's reporting of a net
loss of $1.4 million for fiscal 1996 and a net loss of $15.2 million for the
first six months of fiscal 1997 (after the charges discussed in "Overview"
totaling $16.7 million). In addition, for the six months ended February 28,
1997, net cash used in operating activities by the Company was approximately
$2.8 million, leaving the Company with a cash balance of approximately
$77,000 as of February 28, 1997. Finally, as mentioned above, the amount
available under the Company's revolving line of credit has been reduced to
$5 million and most of the Company's assets have been pledged to secure its
current credit arrangements. As of April 13, 1997, the Company had the full
amount borrowed under such facility, and had a cash balance of approximately
$3.1 million.
The Company's projections indicate that, during the fourth quarter of
fiscal 1997, it will experience periodic cash shortfalls from operations
that will require it to aggressively collect and manage its available cash
resources. Management believes that the Company has sufficient cash and
financial flexibility to overcome the anticipated cash shortfalls prior to
obtaining a replacement credit facility, but any further deterioration in
the Company's performance could adversely impact the Company's ability to
fulfill its cash obligations. Management believes, after consultation with
its tax advisors, that it will be entitled to a federal income tax refund
following the end of the fiscal year, and that it may be possible to pledge
or otherwise use the anticipated refund during the fourth quarter to obtain
cash in an amount that may eliminate the Company's projected cash shortfall.
However, there can be no assurance that the income tax refund will secure
sufficient cash, if any, to cover such shortfall.
As noted above, in the first quarter of fiscal 1997, management
commenced a comprehensive study of the Company's operations for the purpose
of developing a plan to improve the Company's performance and cash
position. Management also implemented several initiatives in fiscal 1997
designed to reduce costs, improve the efficiency of the Company's operations
and increase profit margins, and it closed two clearly unprofitable store
locations in the second quarter of fiscal 1997. Although a comprehensive
plan is not yet complete, management believes that it will not be possible
to maintain the Company's operations at current levels on an ongoing basis
unless there is a reversal in the trend of declining operating performance,
and the Company is successful in obtaining a replacement credit facility
providing a line of credit of at least $10 million. Since the achievement
of either of these objectives cannot be assured, management is evaluating
other strategic options, including further downsizing and additional store
closures. In order for any such downsizing to restore the Company's
profitability and achieve a desirable level of positive cash flow,
concessions or consents from certain of the Company's landlords and lenders
would be required. If the Company determines that corporate downsizing is
the most viable available option, and if it is unsuccessful in obtaining
adequate concessions through direct negotiation or other means, then the
Company would aggressively seek whatever restructuring alternatives are
available.
During the six months ended February 28, 1997 and February 29, 1996
the Company's net cash provided by financing activities was $1.0 million and
$8.4 million, respectively. The primary source of cash during these periods
was borrowing under short-term borrowing arrangements.
The Company incurred capital expenditures of $1.5 million and $486,000
during the six months ended February 28, 1997 and February 29, 1996,
respectively, primarily in connection with equipment purchases and leasehold
improvements funded with short-term borrowings.
Impact of Inflation
In management's opinion, inflation has not had a material impact on
the Company's financial results for the three and six months ended February
28, 1997 and February 29, 1996. Technological advances coupled with
increased competition have caused prices on many of the Company's products
to decline. Those products that have increased in price have in most cases
done so in proportion to current inflation rates. Management does not
anticipate that inflation will have a material impact on the Company's
financial results in the future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments during the three months ended
February 28, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company
(1), as amended by Articles of Amendment dated January 3,
1995(2).
3.2 Composite By-laws of the Company, as of October 4, 1996.(3)
27 Financial Data Schedule
__________
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-56796) filed with
the Commission on January 6, 1993.
(2) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended February 28, 1995.
(3) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended November 30, 1996.
(b) Reports on Form 8-K.
A current report on Form 8-K was filed on January 23, 1997 to
report the closure of two of the Company's stores.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
SIGNATURE
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.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
April 21, 1997 /s/ Rex O. Corley, Jr.
------------------------------------------
Rex O. Corley, Jr.
Acting Chairman of the Board and Chief
Executive Officer, and President
/s/ Wayne J. Usie
------------------------------------------
Wayne J. Usie
Chief Financial Officer and Secretary
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