THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON
JULY 16, 1997 PURSUANT TO A RULE 201 TEMPORARY
HARDSHIP EXEMPTION.
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 May 31, 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 Nine Months
Ended May 31, 1997 and May 31,1996 3
Balance Sheets -
May 31, 1997, August 31, 1996
and May 31, 1996 4
Statements of Cash Flows -
Nine Months Ended May 31, 1997
and May 31, 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 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND MAY 31, 1996
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
Net sales $51,029,642 $60,188,532 $195,086,958 $229,009,134
Cost of sales (Note 3) 42,822,898 47,269,251 162,327,502 179,914,389
Gross profit 8,206,744 12,919,281 32,759,456 49,094,745
Selling, general and 14,213,776 14,745,996 50,328,703 49,025,291
administrative expenses
(Note 3)
Reorganization items 543,591 _ 543,591 _
Operating income
(loss) (6,550,623) (1,826,715) (18,112,838) 69,454
Other income (expense):
Interest expense (810,799) (583,674) (1,771,606) (1,562,030)
Interest income 13,074 12,021 77,856 86,036
Other income
(expense), net (1,154,148) 117,280 (1,202,919) 337,086
(1,951,873) (454,373) (2,896,669) (1,138,908)
Loss before income taxes (8,502,496) (2,281,088) (21,009,507) (1,069,454)
Income tax expense
(benefit) (Note 4) _ (879,000) 2,690,000 (406,000)
Net loss ($8,502,496)($1,402,088) ($23,699,507) ($663,454)
Per share data:
Net income (loss)
per share ($1.53) ($0.25) ($4.26) ($0.12)
Weighted average number of
common shares outstanding 5,566,906 5,566,906 5,566,906 5,566,906
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
BALANCE SHEETS (UNAUDITED)
May 31, August 31, May 31,
1997 1996 1996
ASSETS
Current assets:
Cash and cash
equivalents $1,964,595 $3,303,822 $2,485,028
Investments in
marketable securities 505,161 129,788 215,570
Receivables (net of
an allowance of $4.2
million at May 31, 1997
and $2.9 million at
August 31,1996 and
$806,000 at May 31,
1996) 10,517,161 14,561,102 17,527,247
Merchandise inventory 46,376,942 56,387,842 61,449,046
Deferred income taxes ----- 3,033,000 1,657,377
Other 1,226,338 471,399 720,695
Total current assets 60,590,197 77,886,953 84,054,963
Property and equipment,
net 30,410,500 36,376,959 37,143,490
Deferred income taxes ----- 1,234,000 2,246,169
Intangibles and other 2,385,632 3,535,639 3,600,747
$93,386,329 $119,033,551 $127,045,369
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Liabilities not subject to compromise:
Current portion of
long-term debt $ 124,343 $ 2,478,179 $ 2,450,517
Accounts payable 37,443,979 47,793,786 52,550,713
Accrued expenses 8,336,490 7,169,218 8,052,488
Deferred revenue 3,169,594 4,621,294 5,101,197
49,074,406 62,062,477 68,154,915
Liabilities subject to
compromise:
Current portion of
long-term debt 711,927 - -
Accounts payable 4,105,363 _ _
Accrued expenses 4,765,461 - -
9,582,751 - -
Total current
liabilities 58,657,157 62,062,477 68,154,915
Long-term debt
not subject to
compromise,
less current portion 18,314,145 18,191,371 18,412,684
Deferred revenue 2,443,165 4,650,296 5,612,759
20,757,310 22,841,667 24,025,443
Long-term debt
subject to compromise,
less current portion 3,352,524 - -
Total liabilities 82,766,991 84,904,144 92,180,358
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 May 31, 1997,
August 31, 1996
and May 31, 1996 556,691 556,691 556,691
Paid-in capital 32,373,306 32,373,306 32,373,306
Retained earnings
(deficit) (22,310,659) 1,388,849 2,113,456
Less:
Unearned compensation ----- ----- (42,188)
Unrealized loss on
marketable securities
available for sale ----- (189,439) (136,254)
Total shareholders'
equity 10,619,338 34,129,407 34,865,011
$93,386,329 $119,033,551 $127,045,369
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
May 31, May 31,
1997 1996
Cash flow from operating activities:
Net loss $ (23,699,507) $ (663,454)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,142,822 4,309,845
Provision for uncollectible
receivables 3,049,240 1,523,024
Deferred income taxes (4,633,000) 3,717,654
Valuation allowance for deferred tax
assets 8,900,000 _
Store closure reserve 6,776,247 -
Loss on disposal of investments 305,504 -
Loss on disposal of assets 1,831,364 -
Stock awards - 25,313
(Increase) decrease in assets:
Receivables 994,701 353,405
Merchandise inventory 10,010,902 (1,190,640)
Other current assets (1,050,604) 16,458
Increase (decrease) in liabilities:
Accounts payable (6,244,445) (1,753,055)
Accrued expenses 1,983,192 832,983
Deferred revenue (3,658,831) (5,251,308)
Net cash (used in) provided by
operating activities (1,292,415) 1,920,225
Cash flow investing activities:
Purchase of property and equipment (1,686,512) (630,084)
Purchase of investments (500,000) -
Other 57,517 (57,008)
Net cash used in investing activities (2,128,995) (687,092)
Cash flow from financing activities:
Decrease in long-term debt (1,579,470) (1,746,551)
Decrease in capital lease obligation - (106,873)
Borrowings under line of credit 31,850,000 -
Repayments under line of credit (28,188,347) -
Net cash provided by (used in)
financing activities 2,082,183 (1,853,424)
Net decrease in cash and cash equivalents (1,339,227) (620,291)
Cash and cash equivalents at beginning of
period 3,303,822 3,105,319
Cash and cash equivalents at end of
period 1,964,595 2,485,028
Cash paid during the period for:
Interest expense 1,875,788 1,463,593
Income taxes 26,000 118,240
Supplemental schedule of non-cash
investing and financing 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 nine months ended May 31, 1997 and May
31, 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 financial statements have been prepared in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
The financial statements have been prepared using accounting principles
applicable to a going concern, which assumes realization of assets and
settlement of liabilities in the normal course of business. The
appropriateness of using the going concern basis is dependent upon, among
other things, the ability to comply with debtor in possession financing
agreements, confirmation of a plan of reorganization, the ability to achieve
profitable operations, and the ability to generate sufficient cash flows from
operations to meet its obligations.
The results of operations for the three and nine months ended May 31,
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 June 1997 to defer principal payments for one year until June 1998,
to defer maturity of the facility for three years until August 31, 2000, and
to remove the Company's merchandise inventory as collateral for the facility.
The principal balance under the term note and the line of credit were combined
into a single note with an aggregate principal balance of $17.9 million,
bearing interest at 9% per annum. Until June 1998, interest only is payable
monthly. Thereafter, principal payments are due quarterly, with the first
payment due on September 1, 1998, and interest is due monthly. The amount of
the principal payments is based on a 20 year amortization with a balloon
payment due on August 31, 2000. The note is secured by the Company's real
estate.
Additionally, the Company has obtained a $3 million debtor in possession
line of credit from two of its floor plan lenders. The line of credit matures
in December 1998 and bears interest at prime plus 3% payable monthly, with two
principal payments of $1.5 million each due December 1997 and December 1998.
This line of credit, together with amounts owed under such lenders' floor plan
financing arrangements, is collateralized by inventory and the Company's
anticipated tax refund, as well as by a broad lien on all of the Company's
other assets.
(3) Chapter 11 Bankruptcy Proceedings
On June 4, 1997, the Company voluntarily filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. As part of its reorganization plan,
the Company will close by the end of July 1997 nine of its stores as well as
one distribution center. The facilities that will be closed are (i) one store
each in Tuscaloosa, Alabama; Longview, Texas; Texarkana, Texas; Jackson,
Mississippi; Chattanooga, Tennessee; Alexandria, Louisiana; and Lafayette,
Louisiana, (ii) two stores in Memphis, Tennessee and (iii) the Bessemer,
Alabama warehouse.
In connection with these closures, the Company has recorded non-
recurring charges of (i) $2.0 million expected to be incurred in connection
with the liquidation of inventory below cost and (ii) $1.3 million associated
with the write-off of leasehold improvements at these locations. In addition,
the goodwill associated with the Company's July 1993 acquisition of Shreveport
Refrigeration, Inc. was reduced by $640,000 due to the closure of two
locations that were part of that acquisition.
The Company has obtained the approval of the bankruptcy court to
continue to pay for utility services, certain consumer practices (including
the continuation of service on existing extended warranty contracts), payroll
and employee benefits, and property and liability insurance coverage. These
items are recorded as accrued expenses not subject to compromise.
The Company has secured liabilities, not subject to compromise, owed to
its floor plan lenders and its bank group. The liabilities owed to the floor
plan lenders are secured by the Company's merchandise inventory. The amount
due on the bank note is secured by the Company's real estate holdings.
Unsecured claims are included in the amounts listed as liabilities
subject to compromise.
The Company's projections indicate that, during the fourth quarter of
fiscal 1997, it will have sufficient working capital to maintain its
operations at its current reduced levels. However, inasmuch as the Company's
first fiscal quarter has historically been the quarter during which the
Company builds its inventory levels in advance of the Christmas selling
season, the Company expects that it will require additional cash to fund such
inventory purchases. Efforts are currently underway to arrange for the
provision of the necessary funds through advances from the Company's inventory
vendor community, although no assurance can be given that such efforts will be
successful.
The measures taken by the Company in the third fiscal quarter and June
of 1997 have largely resolved the Company's short-term liquidity problem
discussed in its last Form 10-Q by extending the maturity of its bank credit
facility and obtaining a new line of credit from its floor plan lenders.
However, the Company's cash position continues to be strained and, as
discussed above, the Company will require additional sources of working
capital in order to finance its operations during peak periods. Moreover,
even at its current reduced levels, it would be difficult for the Company to
continue to conduct its operations on an ongoing basis unless it improves its
operating performance and profitability. As discussed above, efforts are
underway to locate sources of additional working capital to fund the Company's
peak inventory purchase requirements. In addition, the Company has recently
hired a new chief executive officer with extensive retail experience who plans
to continue implementing certain previously described initiatives as well as
new ways in which the Campo chain and its products can be differentiated from
its competitors in an effort to increase sales, improve the efficiency of its
operations and increase profit margins.
(4) Income taxes
The Company recorded a valuation allowance in the amount of $7.4 million
in the second quarter and an additional $1.5 million in the third quarter 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 the fact 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 $0 and approximately $2.7 million for the three and nine-month
periods ended May 31, 1997.
(5) Subsequent events
On June 30, 1997, Rex O. Corley, Jr. resigned as President, Chief
Operating Officer and Acting Chairman and Chief Executive Officer, and as a
member of the Board of Directors, of the Company.
William E. Wulfers was named President and Chief Executive Officer and a
member of the Board of Directors. Since 1990, Wulfers has served as the
Regional Vice President of Wal-Mart's operations in Louisiana, Arkansas,
Mississippi, Virginia, North Carolina, South Carolina, Georgia and Florida.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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, if given enough time, would have a positive
impact, the Company's comparable store sales 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. As part of this self-evaluative process, the
Company hired a consulting firm in the third quarter that specializes in
turning around financially troubled companies in consumer retail industries.
After evaluating and discussing with the Board of Directors several different
strategic options, the consulting firm ultimately recommended to the Board a
significant downsizing of the Company's operations; specifically, the closing
of nine stores, in addition to two unprofitable stores that had been closed in
the second quarter, and the closure of one distribution center. In addition,
in order to allow the Company to fully realize the operational benefits from
the closing of these facilities, the consulting firm recommended that the
Company seek the protection of the federal bankruptcy laws, which the Company
did by filing a voluntary petition under Chapter 11 on June 4, 1997. The
Company's use of this strategic tool was primarily to allow the Company to
terminate on a more favorable basis the long-term leases of the facilities
identified for closure. The Chapter 11 filing was undertaken with the full
cooperation and support of the Company's bank group and floor plan lenders.
The Company is proceeding with "Going Out of Business" sales at all of
the nine stores identified for closure in order to allow for the expeditious
and orderly liquidation of the inventory at the highest recovery, and
management expects that the store and warehouse closings will be complete by
the end of July 1997. In connection with these closures, the Company has
recorded non-recurring charges of (i) $2.0 million expected to be incurred in
connection with the liquidation of inventory below cost, which is recorded in
cost of goods sold, and (ii) $1.3 million associated with the write-off of
leasehold improvements at these locations, which is recorded in other income.
In addition, the goodwill associated with the Company's July 1993 acquisition
of Shreveport Refrigeration, Inc. was reduced by $640,000 due to the closure
of two locations that were part of that acquisition, and this charge is
recorded in selling, general and administrative expenses.
As discussed in "Liquidity and Capital Resources," the Company has
amended its bank credit facility to defer principal payments for one year
until June 1998, to defer maturity of the facility for three years until
August 31, 2000, and to remove the Company's merchandise inventory as
collateral for the facility. The Company has also obtained a $3 million line
of credit from certain of its floor plan lenders. The Company's projections
indicate that, during the fourth quarter of fiscal 1997, it will have
sufficient working capital to maintain its operations at its current reduced
levels. However, inasmuch as the Company's first fiscal quarter has
historically been the quarter during which the Company builds its inventory
levels in anticipation of the Christmas selling season, the Company expects
that it will require additional cash to fund such inventory purchases.
Efforts are currently underway to arrange for the provision of the necessary
funds through advances from the Company's inventory vendor community, although
no assurance can be given that such efforts will be successful. See
"Liquidity and Capital Resources."
Immediately following its filing for protection under Chapter 11, the
Company experienced temporary inventory shortages largely attributable to the
disruptive effect that the bankruptcy filing had on its relationships with its
vendors. These inventory shortages had an adverse effect on sales and
customer confidence during the first two months of the fourth quarter. The
Company believes it has successfully restored its relationships with its
vendors and expects that inventory levels will be rebuilt in sufficient
quantities to meet customer demand by early August. In order to restore
customer confidence and stimulate sales, the Company also plans to introduce a
special advertising campaign in August. However, the results of operations
for the fourth quarter will likely be significantly and adversely affected by
this disruption as well as by the "Going out of Business" sales at its nine
closing stores.
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:
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 83.92 78.54 83.21 78.56
Gross profit 16.08 21.46 16.79 21.44
Selling, general and 28.92 24.50 26.08 21.41
administrative expense
Operating income (loss) (12.84) (3.04) (9.29) 0.03
Interest expense (1.59) (0.97) (0.91) (0.68)
Interest income 0.03 0.02 0.04 0.04
Other income, net (2.26) 0.19 (0.62) 0.15
(3.82) (0.76) (1.49) (0.49)
Income (loss) before income (16.66) (3.80) (10.78) (0.46)
taxes
Income tax expense (benefit) 0 (1.46) 1.38 (0.18)
Net income (loss) (16.66)% (2.34)% (12.16)% (0.28)%
Three Months Ended May 31, 1997 as Compared to Three Months Ended May 31, 1996
Net sales for the three months ended May 31, 1997 decreased 15.2% to
$51.0 million compared to $60.2 million for the same period in 1996.
Comparable retail store sales for the three months ended May 31, 1997
decreased by 11.2%. 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 $1.4 million and $2.0 million for the quarters ended May 31, 1997 and May
31, 1996, respectively. Extended warranty expenses for these same periods
were $893,000 and $1.3 million, respectively, before any allocation of other
selling, general and administrative expenses. Since August 1, 1995, all
extended warranty service contracts have been sold by the Company to an
unaffiliated third party. 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 May 31, 1997 and May 31, 1996 was
$1.4 million and $1.6 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 May 31, 1997 was $8.2 million or
16.1% of net sales as compared to $12.9 million, or 21.5% of net sales for the
comparable period in the prior year. Excluding the charges described above in
"Overview," gross profit for the three months ended May 31, 1997 would have
been $10.7 million or 21.0% 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 $14.8 million or 28.9%
of net sales for the three months ended May 31, 1997 as compared to $14.7
million, or 24.5% 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 $14.1 million or 27.7% 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 0% and (38.5%) for the three
months ended May 31, 1997 and May 31, 1996, respectively. No income tax
benefits were recorded in the third quarter based on the fact 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 such benefits.
Nine Months Ended May 31, 1997 as Compared to Nine Months Ended May 31, 1996
Net sales for the nine months ended May 31, 1997 decreased 14.8% to
$195.1 million compared to $229.0 million for the same period in 1996.
Comparable retail store sales for the nine months ended May 31, 1997 decreased
by 12.8%. 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 $4.6 million and $6.6 million for the nine months ended May 31, 1997 and
May 31, 1996, respectively. Extended warranty expenses for these same periods
were $2.9 million and $4.1 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 nine months ended May 31,
1997 and May 31, 1996 was $5.3 million and $6.6 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 nine months ended May 31, 1997 was $32.8 million or
16.8% of net sales as compared to $49.1 million, or 21.4% of net sales for the
comparable period in the prior year. Excluding the charges described above in
"Overview," and charges totaling $16.7 million taken in the second quarter,
gross profit for the nine months ended May 31, 1997 would have been $37.4
million or 20.8% 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 $50.9 million or 26.1%
of net sales for the nine months ended May 31, 1997 as compared to $49.0
million, or 21.4% of net sales for the comparable period in the prior year.
Excluding the charges described above in "Overview," and charges totalling
$16.7 million taken in the second quarter, selling, general and administrative
expenses would have been $43.3 million or 21.0% of net sales.
The Company's effective income tax rate was 12.8% and (38.0%) for the
nine months ended May 31, 1997 and May 31, 1996, respectively. The effective
income tax rate for the nine months ended May 31, 1997 results from a
valuation allowance of $7.4 million that was recorded during the second
quarter and a valuation allowance of $1.5 million that was recorded during the
third quarter.
Liquidity and Capital Resources
Net cash used in operating activities was $1.3 million and ($1.9) million
for the nine months ended May 31, 1997 and May 31, 1996 respectively, while
net cash provided by financing activities for the same comparable periods was
$2.1 million and ($1.9) million, respectively. The excess cash from financing
activities in the current period, which was previously provided by short term
borrowing arrangements, was used by the Company for an investment in a new
primary business system. The shortfall in cash from operations reflects
the reduced level of sales by the Company.
The Company incurred capital expenditures of $1.7 million and $630,000
during the nine months ended May 31, 1997 and May 31, 1996, respectively,
primarily in connection with new computer equipment purchases and leasehold
improvements funded with short-term borrowings.
As of May 31, 1997, the Company used several "floor plan" finance
companies to finance the majority of its merchandise purchases. The Company
has negotiated an aggregate borrowing limit with these finance companies of
approximately $45 million and it collateralizes the outstanding borrowings
with merchandise inventory and certain receivables. The new arrangements with
its floor plan lenders are "pay-as-sold" lending facilities, with the Company
being required to pay down indebtedness on a daily basis as the financed goods
are sold. In addition, the Company finances certain inventory purchases
through open-account arrangements with various vendors.
The Company has also obtained debtor in possession financing from two of
its floor plan lenders in the form of a $3 million line of credit. The line
of credit matures in December 1998 and bears interest at prime plus 3%,
payable monthly, with two principal payments of $1.5 million each due December
1997 and December 1998. The primary use of the line of credit is to fund the
Company's "going out of business" sales for its closing stores and to finance
inventory purchases during peak periods. This line of credit, together with
amounts owed under such lenders' floor plan financing arrangements, is
collateralized by merchandise inventory and the Company's anticipated tax
refund, as well as by a broad lien on all of the Company's other assets.
The Company's bank term loan and line of credit was amended in June 1997
to defer principal payments for one year until June 1998, to defer maturity of
the facility for three years until August 31, 2000, and to remove the
Company's merchandise inventory as collateral for the facility. The principal
balance under the term note and the line of credit were combined into a single
note with an aggregate principal balance of $17.9 million, bearing interest at
9% per annum. Until June 1998, interest only is payable monthly. Thereafter,
principal payments are due quarterly, with the first payment due September 1,
1998, and interest is due monthly. The amount of the principal payments is
based on a 20 year amortization with a balloon payment due on August 31, 2000.
The note is secured by the Company's real estate.
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 $23.7 million for the
first nine months of fiscal 1997 (after the second quarter charges of $16.7
million and the third quarter charges discussed in "Overview" totaling $4.4
million). In addition, for the nine months ended May 31, 1997, net cash used
in operating activities by the Company was approximately $1.3 million, leaving
the Company with a cash balance of approximately $2.0 million as of May 31,
1997.
The Company's projections indicate that, during the fourth quarter of
fiscal 1997, it will have sufficient working capital to maintain its
operations at its current reduced levels. However, inasmuch as the Company's
first fiscal quarter has historically been the quarter during which the
Company builds its inventory levels in advance of the Christmas selling
season, the Company expects that it will require additional cash to fund such
inventory purchases. Efforts are currently underway to arrange for the
provision of the necessary funds through advances from the Company's inventory
vendor community, although no assurance can be given that such efforts will be
successful.
The measures taken by the Company in the third fiscal quarter and June
of 1997 have largely resolved the Company's short-term liquidity problem
discussed in its last Form 10-Q by extending the maturity of its bank credit
facility and obtaining a new line of credit from its floor plan lenders.
However, the Company's cash position continues to be strained and, as
discussed above, the Company will require additional sources of working
capital in order to finance its operations during peak periods. Moreover,
even at its current reduced levels, it would be difficult for the Company to
continue to conduct its operations on an ongoing basis unless it improves its
operating performance and profitability. As discussed above, efforts are
underway to locate sources of additional working capital to fund the Company's
peak inventory purchase requirements. In addition, the Company has recently
hired a new chief executive officer with extensive retail experience who plans
to continue implementing certain previously described initiatives as well as
new ways in which the Campo chain and its products can be differentiated from
its competitors in an effort to increase sales, improve the efficiency of its
operations and increase profit margins.
As is customary when a company files for protection under Chapter 11,
the Company has received a letter from the Nasdaq Stock Market requesting
certain information and evidence that the Company continues to meet all Nasdaq
National Market listing requirements. Although the Company has responded to
Nasdaq's request fully, there can be no assurance that Nasdaq will not
commence delisting proceedings against the Company. If the Company's common
stock were to be delisted, the Company's common shareholders would likely
experience a reduction in the liquidity of their shares.
Impact of Inflation
In management's opinion, inflation has not had a material impact on the
Company's financial results for the three and nine months ended May 31, 1997
and May 31, 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
May 31, 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)
10.1 Severance Agreement and Personal Services Contract and Non-
competition Agreement, dated March 19, 1997, by and between
Campo Electronics, Appliances and Computers, Inc. and Anthony
P. Campo.
10.2 Employment Agreement, dated March 21, 1997, by and between
Campo Electronics, Appliances and Computers, Inc. and Rex O.
Corley, Jr., as terminated by Severance Agreement dated June
19, 1997.
10.3 Employment Agreement, dated March 21, 1997, by and between
Campo Electronics, Appliances and Computers, Inc. and Charles
S. Gibson, Jr., as amended on June 24, 1997.
10.4 Employment Agreement, dated March 21, 1997, by and between
Campo Electronics, Appliances and Computers, Inc. and Wayne J.
Usie, as amended on June 24, 1997.
10.5 Employment Agreement, dated April 14, 1997, by and between
Campo Electronics, Appliances and Computers, Inc. and John K.
Ross.
10.6 Employment Agreement, dated April 23, 1997, by and between
Campo Electronics, Appliances and Computers, Inc. and James B.
Warren.
10.7 Employment Agreement, dated June 15, 1997, by and between Campo
Electronics, Appliances and Computers, Inc. and William E.
Wulfers.
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 June 4, 1997 to report the
Company's filing of a voluntary petition to reorganize under
Chapter 11 of the Federal Bankruptcy Code.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
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.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
July 14, 1997 /s/ WILLIAM E. WULFERS
William E. Wulfers
President and Chief Executive Officer,
/s/ WAYNE J. USIE
Wayne J. Usie
Chief Financial Officer and Secretary