The following items were the subject of a
Form 12b-25 and are included herein:
Items 1 and 2 of Part I and Item 6 of Part II
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1998
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 July 10, 1998, there were 5,604,406 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,
1998 and May 31, 1997 3
Balance Sheets -
May 31, 1998 and August 31, 1997 4
Statements of Cash Flows -
Nine Months Ended May 31, 1998 and
May 31, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 32,522,583 $ 51,029,642 $ 114,452,040 $ 195,086,958
Cost of sales 25,792,487 42,822,898 88,774,582 162,327,502
------------- ------------- ------------- -------------
Gross profit 6,730,096 8,206,744 25,677,458 32,759,456
Selling, general and administrative expenses 8,882,096 14,213,776 28,309,829 50,328,703
------------- ------------- ------------- -------------
Operating loss (2,152,000) (6,007,032) (2,632,371) (17,569,247)
Other income (expense):
Interest expense (639,116) (810,799) (1,555,609) (1,771,606)
Interest income 3,717 13,074 21,566 77,856
Other income (expense), net (405,942) (1,154,148) 28,839 (1,202,919)
------------- ------------- ------------- -------------
(1,041,341) (1,951,873) (1,505,204) (2,896,669)
Loss before income taxes and reorganization items (3,193,341) (7,958,905) (4,137,575) (20,465,916)
Expense from reorganization items (493,378) (543,591) (1,018,950) (543,591)
Income tax expense - - - (2,690,000)
------------- ------------- ------------- -------------
Net loss ($ 3,686,719) ($ 8,502,496) ($ 5,156,525) ($ 23,699,507)
============= ============= ============= =============
Per share data:
Basic and diluted earnings per common share ($0.66) ($1.53) ($0.91) ($4.26)
============= ============= ============= =============
Weighted average number of common
shares outstanding 5,604,406 5,566,906 5,686,824 5,566,906
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
May 31, August 31,
1998 1997
<S>
ASSETS <C> <C>
Current assets:
Cash and cash equivalents $ 880,487 $ 1,640,849
Investments in marketable securities 117,130 421,431
Receivables (net of an allowance of
1.7 million at May 31, 1998 and
$1.6 million at August 31, 1997) 5,792,723 8,603,894
Merchandise inventory 33,899,165 31,951,502
Other 1,002,750 873,200
-------------- --------------
Total current assets 41,692,255 43,490,876
Property and equipment, net 22,250,160 27,741,034
Intangibles and other 2,669,486 2,899,774
-------------- --------------
$ 66,611,901 $ 74,131,684
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt $ 16,352,372 $ 350,438
Short-term borrowings 1,500,000 3,000,000
Accounts payable 245,358 1,045,796
Accounts payable-floor plan 32,359,763 25,819,801
Accrued expenses 5,580,798 6,246,917
Deferred revenue 1,693,940 2,713,040
-------------- --------------
Total current liabilities not
subject to compromise: 57,732,231 39,175,992
-------------- --------------
Long-term debt, less current portion 66,478 18,368,005
Deferred revenue 749,225 1,937,256
-------------- --------------
Total long-term debt not subject to
compromise 815,703 20,305,261
-------------- --------------
Liabilities subject to compromise 13,082,642 14,275,093
-------------- --------------
Total liabilities 71,630,576 73,756,346
-------------- --------------
Commitments and contingencies - -
Shareholders' equity (deficit):
Common stock, $.10 par value; 20,000,000 shares
authorized, 5,604,406 and 5,791,906
issued and outstanding at May 31, 1998
and August 31, 1997, respectively 560,441 579,191
Paid-in capital 32,421,119 32,639,856
Retained earnings (deficit) (38,000,235) (32,843,709)
-------------- --------------
Total shareholders' equity (5,018,675) 375,338
-------------- --------------
$ 66,611,901 $ 74,131,684
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED MAY 31,
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (5,156,525) $ (23,699,507)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,379,559 4,142,822
Provision for uncollectible receivables 1,075,758 3,049,240
Deferred income taxes - (4,633,000)
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 42,183 1,831,364
Cancellation of stock awards (17,187) -
(Increase) decrease in assets:
Receivables 1,735,413 994,701
Merchandise inventory (1,947,663) 10,010,902
Other current assets 33,392 (993,087)
Increase (decrease) in liabilities:
Accounts payable (800,438) (6,527,101)
Accounts payable-floor plan 5,933,822 282,656
Accrued expenses (1,186,673) 1,983,192
Deferred revenue (2,207,131) (3,658,831)
Liabilities subject to compromise 132,812 -
Adjustments due to reorganization items:
(Gain) loss on disposal of assets 31,262 -
Increase in accrued expenses for restructuring items 568,950 -
Payment of restructuring charges (268,696) -
--------------- ---------------
Net cash (used in) provided by operating activities 348,838 (1,234,898)
--------------- ---------------
Cash flow from investing activities:
Purchase of property and equipment (53,779) (1,686,512)
Proceeds from sale of assets 135,856 -
Proceeds from sale of assets due to reorganization 2,466,064 -
Purchase of investments - (500,000)
Redemption of Treasury Bills 309,452 -
--------------- ---------------
Net cash (used in) provided by investing activities 2,857,593 (2,186,512)
--------------- ---------------
Cash flow from financing activities:
Borrowings under long-term debt 191,210 -
Decrease in long-term debt (2,658,003) (1,579,470)
Borrowings under line of credit - 31,850,000
Repayments under line of credit - (28,188,347)
Borrowings under DIP line of credit 2,700,000 -
Repayments under DIP line of credit (4,200,000) -
--------------- ---------------
Net cash (used in) provided by financing activities (3,966,793) 2,082,183
--------------- ---------------
Net decrease in cash and cash equivalents (760,362) (1,339,227)
Cash and cash equivalents at beginning of period 1,640,849 3,303,822
--------------- ---------------
Cash and cash equivalents at end of period 880,487 1,964,595
--------------- ---------------
Cash paid during the period for:
Interest expense $ 1,543,895 $ 1,875,788
--------------- ---------------
Income taxes $ - $ 26,000
--------------- ---------------
Schedule of non-cash investing and financing activities:
Assets acquired under capital lease $ - $ 285,701
--------------- ---------------
Non-cash disposal of property and equipment $ 557,077 $ -
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
The information for the three and nine months ended May 31, 1998 and
May 31, 1997 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/A for the fiscal year ended August 31, 1997.
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. See Note 2.
The results of operations for the three and nine months ended May 31,
1998 are not necessarily indicative of the results to be expected for the full
fiscal year ending August 31, 1998.
(2) Chapter 11 Bankruptcy Proceedings and Restructuring
On June 4, 1997, the Company filed a voluntary petition in the U. S.
Bankruptcy Court for the Eastern District of Louisiana for reorganization
under Chapter 11 of the U. S. Bankruptcy Code (the "Bankruptcy Code"), and is
currently operating its business as debtor-in-possession under the
supervision of the Bankruptcy Court (the "Bankruptcy Court").
As of the petition date, actions to collect pre-petition indebtedness
are stayed and other contractual obligations may not be enforced against the
Company. In addition, under the Bankruptcy Code, the Company may reject
executory contracts, including lease obligations. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. Substantially all liabilities as of the petition
date are subject to settlement under a plan of reorganization to be voted
upon by creditors and equity security holders and approved by the Bankruptcy
Court. The Company has not yet prepared or submitted a plan of
reorganization. As provided by the Bankruptcy Code, the Company has the
exclusive right for a period of time to submit a plan of reorganization. This
period was extended by the Bankruptcy Court to June 22, 1998. The Company
did not seek a further extension of this period due to the costs involved and
the probability that the Bankruptcy Court would not approve such an
extension. Management of the Company is currently working on preparing a
plan of reorganization. To date, no other party has submitted a plan of
reorganization to the Bankruptcy Court.
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 is also allowed to continue normal business practices, including
purchasing inventory and payment of normal operating expenses incurred after
the filing of the bankruptcy petition.
As part of the reorganization process, the Company closed eleven stores
and one distribution center in fiscal 1997. It also closed an additional
distribution center in October, 1997, after its fiscal year-end. It has cut
corporate overhead expenses and store operating expenses, and has initiated
several strategies designed to improve operating performance (as more fully
explained in Item 1 of its Annual Report on Form 10-K for fiscal 1997).
Based upon projections of its operating results, the Company believes that
its existing funds, its operating cash flows, the available debtor in
possession ("DIP") lines of credit discussed in Note 3 to the financial
statements, and the vendor and inventory financing arrangements including the
defaulted payment amounts currently owed to the floor plan lenders as
discussed in Note 3 are sufficient on an overall basis to satisfy expected
cash requirements during the remainder of fiscal 1998. However, as explained
in Note 3 to the financial statements, the Company is in default with its two
floor plan lenders due to lack of ability to pay certain amounts past due.
Also, there is no assurance that the Company's projected operating results
will be achieved during fiscal 1998. The Company will likely require
additional working capital financing in fiscal 1999, and these needs are
currently being discussed with the DIP lenders.
On December 16, 1997, the Company was notified by the Nasdaq Stock
Market, Inc. ("Nasdaq") that the Company does not meet all of the listing
requirements for continued listing on the Nasdaq National Market based upon
its financial statements of August 31, 1997, and that Nasdaq was commencing a
review of the Company's eligibility for continued listing. On January 12,
1998, the Company was notified by Nasdaq that its Common Stock would be
delisted effective January 19, 1998 unless the Company pursued Nasdaq's
procedural remedies. The Company requested a written submission hearing
before the Nasdaq Listing Qualifications Panel, and this hearing took place
on February 19, 1998. On March 9, 1998, the Company was notified of the
results of that hearing and that the Company's Common Stock would be delisted
from Nasdaq effective immediately with the close of business on March 9,
1998. The Company's Common Stock is now traded on the Over the Counter
Bulletin Board.
(3) Debt
See Notes 6 and 7 of the Company's financial statements included in its
Annual Report on Form 10-K/A for the fiscal year ended August 31, 1997 for a
detailed description of the Company's debt arrangements. Long-term debt as
of May 31, 1998 consisted of four term loans, two with a bank group, and the
others with financial institutions. The outstanding principal balance and
applicable interest rate on the first term loan with the banks as of May 31,
1998 were $16.0 million and 9%, respectively. On May 6, 1998, the Company
sold a closed store property and made a $2.4 million principal payment on
these loans from the proceeds of that sale. The bank group has agreed to
defer the quarterly principal payment of $223,000 that was due on June 1,
1998 until the balloon payment due June 27, 2000 subject to the satisfaction
of certain terms and conditions that will be included in a motion to be filed
with the Bankruptcy Court for approval. They also agreed to re-amortize
the loan balance taking into account the property sale discussed above, and
this has resulted in a revised quarterly principal payment of $203,000
beginning September 1, 1998. The agreement was subject to approval by the
Bankruptcy Court of the additional $750,000 line of credit financing by one
of the floor plan lenders discussed below and the payment of certain bank
group legal fees and expenses totaling $57,000. Notes are to be issued for
these legal fees bearing interest at 9.5% and calling for a $10,000 down
payment, $5,000 per month for three months beginning the first month
after Bankruptcy Court approval, and $2,000 per month thereafter with a
balloon payment due June 27, 2000. The second term loan was established by
the bank group on January 1, 1998 covering prior legal fees in the total
amount of $191,000. These notes call for monthly payments of principal and
interest of $2,500 per month from January 1, 1998 through June 1, 1998,
$5,000 per month from July 1, 1998 through June 1, 2000, and a balloon
payment on June 27, 2000. The outstanding principal balance and applicable
interest rate on these additional notes as of May 31, 1998 were $186,000
and 9.5%, respectively.
The first term loan with the banks contains certain reporting
requirements and restrictive covenants which require the Company to maintain
certain minimum annual earnings levels and working capital levels. This term
loan also contains a cross default provision with all other debt instruments
of the Company and a provision which prohibits the Company from paying
dividends on its common stock. As of August 31, 1997, the Company was not in
compliance with certain of the covenants contained in the bank term loan, and
was in default of this agreement due to these violations as well as certain
cross default provisions. However, on December 12, 1997 the Company obtained
the agreement of the lenders to forebear through September 1, 1998 the
enforcement of their rights and remedies under the term loan agreement
contingent upon the approval by the Bankruptcy Court of this forbearance
agreement and an agreement requiring the payment by the Company of certain
professional fees to the banks. The Bankruptcy Court has approved these
agreements. The forbearance agreement also provides that the lenders will
forebear the enforcement of their rights and remedies through September 1,
1998 if the Company were to violate certain financial covenants relating to
minimum annual earnings and working capital levels during that period, which
the Company does not expect to comply with in the upcoming fiscal year. On
January 12, 1998, the Company obtained the agreement of the lenders to extend
the forbearance of their rights and remedies related to the prior defaults
discussed above and the potential future defaults of certain financial
covenants through December 1, 1998.
During the third quarter, due to a cash shortfall, the Company
defaulted on certain of its normal daily payments to the floor plan lenders.
Because of cross default provisions in the first term loan with the banks,
these late payments to floor plan lenders have created a default under this
term loan. The total amount of the defaulted payments to the floor plan
lenders fluctuates on a daily basis based upon cash available for payment.
As of May 31, 1998, the total amount of these defaulted payments was
approximately $2.3 million. Because of the legal and other costs associated
with obtaining further forbearance agreements or waivers from either the
banks or the floor plan lenders, the Board of Directors of the Company and
Management made a decision not to pursue further forbearance agreements,
amendments or waivers. This has resulted in the Company being required by
generally accepted accounting principles to reclassify the entire principal
balance of the bank term loan as a current liability on the May 31, 1998
balance sheet. It should be noted that the banks have taken no actions
against the Company to exercise their rights under the default provisions of
the agreements or to accelerate any of the required payments.
The principal balance of the first of the other term loans was $3.7
million as of May 31, 1998 and this note is carried as a liability subject to
compromise. The secured and unsecured portions of this debt are yet to be
determined, and this debt does not accrue interest while the Company is in
Chapter 11. On March 5, 1998, the Company agreed to pay the lender $5,000
per month effective February 10, 1998 to compensate the lender for the
estimated depreciation in the value of the equipment and fixtures which
secure this loan, and this agreement was approved by the Bankruptcy Court.
At a subsequent Bankruptcy Court hearing, this payment amount was increased
to $6,250 per month effective April 10, 1998. This agreement is subject to
change in a future Bankruptcy Court hearing to determine the secured and
unsecured portions of this debt. The second of the other term loans was
$224,000 as of May 31, 1998, and accrues interest payable monthly at an
annual rate of 9%.
As of May 31, 1998, the Company also uses several "floor plan" finance
companies to finance the majority of its inventory purchases. In addition,
the Company finances some of its inventory purchases through open-account
arrangements with various vendors. The Company has an aggregate borrowing
limit with the floor plan finance companies of approximately $38.0 million.
Each of the floor plan financing agreements contains cross default clauses
with all other debt instruments of the Company. As of August 31, 1997 the
Company was not in compliance with several covenants contained in the floor
plan agreements and was also in default of those floor plan agreements due to
its failure to make certain payments required by the agreements relating to
inventory shortages and obsolescence identified by the Company. The Company
obtained waivers for some of these violations and as of December 11, 1997 had
obtained the agreement of each of the floor plan lenders to forebear their
rights and remedies pursuant to the floor plan agreements subject to: (i)
the Company's payment of approximately $1,654,000 in principal, plus interest
at the prime rate plus 3%, to the floor plan lenders at various dates through
December 15, 1998, and (ii) the approval of these forbearance agreements by
the Bankruptcy Court. The Bankruptcy Court subsequently approved these
forbearance agreements. As previously discussed, beginning in March 1998,
the Company failed to make certain required payments to its floor plan
lenders thereby resulting in a default under the floor plan agreements.
Because of the legal and other costs associated with obtaining further
forbearance agreements or waivers, the Board of Directors and Management of
the Company made a decision not to pursue such forbearance agreements or
waivers. This had no effect upon the classification of the Accounts payable
- - floor plan, as it is ordinarily classified as a current liability.
On April 27, 1998, one of the floor plan lenders issued a default
notice to the Company demanding payment of all past due amounts and
indicating that it would no longer finance future purchases of inventory
under the financing agreement. On May 1, 1998, this floor plan lender
subsequently agreed to finance future inventory purchases on a case by case
basis while one of the other floor plan lenders was pursuing the purchase of
the first floor plan lender's outstanding loans to the Company. On June 19,
1998, the second floor plan lender did purchase these outstanding loans from
the first floor plan lender, and is now providing inventory financing to the
Company for the products in question.
On April 29, 1998, a third floor plan lender issued a default notice to
the Company demanding payment of all past due amounts and return of its
collateral. They subsequently agreed to continue doing business with the
Company while the Company was pursuing additional line of credit financing
and as long as the shortfall payment amount did not exceed a specified level.
This shortfall maximum was maintained through payment subsidies agreed to by
the other floor plan lenders. On June 10, 1998, the other floor plan lenders
notified the Company that they would no longer subsidize payments to the
third floor plan lender, and on June 11, 1998, the third floor plan lender
demanded return of its collateral in accordance with its inventory financing
agreement. The Company has since returned to the floor plan lender an amount
of inventory valued at lower of cost or estimated realizable value that the
Company estimates is adequate to cover the outstanding liability of
approximately $1.3 million. Proceeds from the sale of the remaining
inventory under this floor plan are being segregated in a separate escrow
account pending a final accounting and settlement with this floor plan
lender. The inventory products financed by this floor plan lender comprise a
small portion of the Company's sales, inventory, and floor plan debt, and
Management does not believe that lack of these products will have a material
effect on future results of the Company. Management has also added
additional product models from other manufacturers under existing floor plan
financing agreements to replace the products that were removed. If the
agreements with the remaining two floor plan lenders were terminated, this
would significantly impact the Company's ability to obtain inventory which
would adversely affect operating results.
The Company has also obtained debtor in possession ("DIP") financing
from the two remaining floor plan lenders in the form of a $1.5 million line
of credit which had an outstanding balance of $1.5 million at May 31, 1998.
The line of credit financing agreement contains certain covenants, a cross
default clause with all other debt instruments of the Company, and it
prohibits the Company from spending more than $50,000 per year on capital
expenditures without approval. As of August 31, 1997, the Company was not in
compliance with certain covenants contained in this agreement, but the
Company has obtained the forbearance agreements discussed above. However, as
previously discussed, the default under the floor plan agreements and the
existence of a cross default provision in the line of credit has created a
default under the line of credit. The Board of Directors and Management of
the Company have made a decision not to pursue further forbearance agreements
or waivers. This has had no effect upon the classification of the
outstanding balance on the line of credit, as it is ordinarily classified as
a current liability.
On June 18, 1998, the Company obtained an additional line of credit
totaling $750,000 from one of the DIP lenders, and the proceeds were
immediately used to pay down a portion of the floor plan lender payment
shortfalls. The agreement calls for monthly payments of interest at prime
plus 3%. Monthly principal payments of $25,000 are required beginning August
15, 1998, and the remaining balance is due January 31, 1999.
(4) Income Taxes
The Company's effective income tax rate was 0% for the three months
ended May 31, 1998 and May 31, 1997. These effective tax rates are due to a
valuation allowance recorded by the Company 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.
(5) Earnings Per Share
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128") and
accordingly has included a dual presentation of basic and diluted earnings
per share on its statement of operations. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity, assuming no antidilution. Stock
options issued under the Company's Stock Incentive Plan as of May 31, 1998
and 1997, were not included in the computation of diluted earnings per share
as the effect would have been antidilutive. All prior periods have been
restated in accordance with SFAS No. 128.
(6) Contingencies and Commitments
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operation.
Under Chapter 11, substantially all pending litigation and collection
of outstanding claims against the Company at the date of the filings are
stayed while the Company continues business operations as debtor-in-
possession. As debtor-in-possession under Chapter 11, the Company is
authorized to operate its business, but it may not engage in transactions
outside the ordinary course of business without first complying with the
notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy
Court approval where and when necessary.
During fiscal years 1998 and 1999, the Company's existing computer
software systems will need to be evaluated and computer programs upgraded or
amended to be year 2000 compliant. The cost of this effort has not yet been
determined.
At May 31, 1998, there was a balance of $117,000 in U.S. Treasury Bills
which were pledged to support certain executive employment and severance
agreements.
On July 8, 1998, the Company received notice from its independent
credit card bank that provides financing to customers under the Company's
"Campo" private label credit card program that the bank was terminating its
agreement with the Company effective October 10, 1998. The agreement gave
the bank the right to terminate this agreement at any time with 90 days
notice. The Company is in the process of negotiating with another
independent party to provide financing of a private label credit card
program.
(7) New Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is required to be implemented during the first quarter
of the Company's fiscal year ending August 31, 1999 and Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information," and Statement of Financial Accounting
Standards No. 132 "Employer's Disclosures about Pension and Other
Postretirement Benefits" are required to be implemented during the Company's
fiscal year ending August 31, 1999. Management believes adoption of these
statements will have a financial statement disclosure impact only and will
not have a material effect on the Company's financial position, operations or
cash flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
The Company experienced comparable store sales declines of 16.7% during
the quarter ended May 31, 1998 as compared to the same period last year.
Comparable store sales declined by 21.3% during the nine months ended May 31,
1998 as compared to the same period last year. The decline in comparable
store sales reflects the combined impact of increased competition in many of
the Company's principal markets, a decision by some consumers not to purchase
durable goods from a company in Chapter 11 reorganization, a slowdown in the
development of new products in consumer electronic categories and reduced
spending levels of consumers for non-essential goods. The decrease in net
sales for the three and nine months ended May 31, 1998 is attributable to the
comparable store sales decline together with the closure of 11 stores during
fiscal 1997.
Net loss before income taxes and reorganization items for the three
months ended May 31, 1998 and 1997 was ($3.2 million) or (9.8)% of net sales
and ($8.0 million) or (15.6%) of net sales, respectively. During the third
quarter of 1998 and the third quarter of 1997, the Company recorded certain
non-recurring charges affecting net loss before income taxes and
reorganization items totaling approximately $422,000 and $4.0 million,
respectively. Without the effect of these charges, net loss before income
taxes and reorganization items would have been ($2.8 million) or (8.5%) of
net sales in the third quarter of 1998 and ($4.0 million) or (7.9%) of net
sales in the third quarter of the prior year. The remaining $1.2 million
loss reduction in the third quarter of 1998 compared to the same period of
the prior year was due primarily to an increase in the gross margin percent,
which was offset by increases in selling, general and administrative expenses
and interest expense as a percentage of net sales. See "Results of
Operations" for a further discussion of the increases in these percentages.
Net loss (after income taxes and reorganization items) for the three months
ended May 31, 1998 and May 31, 1997 was ($3.7 million) and ($8.5 million),
respectively. The Company incurred reorganization expenses of $493,000 in
the third quarter of fiscal 1998 and $544,000 in the third quarter of fiscal
1997. The 1998 amount included a $250,000 provision for the write down and
return of inventories of discontinued products to a floor plan lender more
fully explained in Note 3 to the Financial Statements.
Net loss before income taxes and reorganization items for the nine
months ended May 31, 1998 was ($4.1 million) or (3.6%) of net sales and
($20.5 million) or (10.5%) of net sales, respectively. During the second and
third quarters of fiscal 1998 and the same period in fiscal 1997, the Company
recorded certain non-recurring charges affecting net loss before income taxes
and reorganization items totaling approximately $422,000 and $13.3 million,
respectively. Without the effect of these charges, net loss before income
taxes and reorganization items would have been ($3.7 million) or (3.2%) of
net sales for the nine months ended May 31, 1998 and ($7.2 million) or (3.7%)
of net sales for the nine months ended May 31, 1997. The remaining $3.5
million loss reduction in the first three quarters of fiscal 1998 compared to
the same period of the prior year was due primarily to a significant increase
in the gross margin percent, which was partially offset by increases in
selling, general and administrative expenses and interest expense as a
percentage of net sales. See "Results of Operations" for a further
discussion of the increases in these percentages.
Following the filing of its Chapter 11 petition on June 4, 1997, the
Company closed nine stores and one distribution center in July 1997. It also
had previously closed two stores in January 1997. The Shreveport, Louisiana
warehouse was closed in October 1997, and the inventory was moved to a
smaller leased warehouse that is adjacent to the Company's remaining
warehouse located in Harahan (greater New Orleans), Louisiana.
Campo has implemented a number of changes to reduce its variable
expense structure in line with declining sales revenues. The Company has
examined closely its operations at all levels to identify opportunities for
expense reduction and has streamlined its corporate structure through
significant staff reductions in administrative positions. In order to reduce
advertising expenditures, the Company has reduced the number of pages and
frequency of its advertising tabloids. Campo has outsourced functions that
can be handled by a third party more efficiently, such as facilities
management and extended warranty claims administration.
During the first nine months of fiscal 1998, the Company's new
management team implemented a number of cost reduction measures and changes
that should result in significant savings for the Company in the future. The
sales associate commission program and the extended warranty commission
program were changed and reduced to be consistent with the commission plans
offered by the Company's competitors. Store payrolls were put under tighter
control and corporate office payroll was reduced further through additional
position eliminations. Beginning in the third quarter of fiscal 1998, the
Company initiated a total customer satisfaction guarantee strategy that
includes a number of programs designed to improve the Company's image with
its customers and increase sales. In the third quarter of 1998, the Company
also replaced a local outside advertising agency with a larger regional
agency in order to improve the Company's media buying power and gain access
to greater creative resources. The function of television ad creation was
moved from an in-house department, which was eliminated, to this new agency
in order to reduce costs and improve the effectiveness of the resulting ads.
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 Nine Months Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 79.31 83.92 77.56 83.21
------- ------- ------- -------
Gross profit 20.69 16.08 22.44 16.79
Selling, general and administrative expense 27.31 27.85 24.74 25.80
------- ------- ------- -------
Operating loss (6.62) (11.77) (2.30) (9.01)
Interest expense (1.96) (1.59) (1.36) (0.91)
Interest income 0.01 0.02 0.02 0.04
Other income (expense), net (1.25) (2.26) 0.02 (0.61)
------- ------- ------- -------
(3.20) (3.83) (1.32) (1.48)
------- ------- ------- -------
Loss before income taxes and
reorganization items (9.82) (15.60) (3.62) (10.49)
Expense from reorganization items (1.52) (1.06) (0.89) (0.28)
Income tax expense - 0 - (1.38)
------- ------- ------- -------
Net loss (11.34)% (16.66)% (4.51)% (12.15)%
======= ======= ======= =======
</TABLE>
Three Months Ended May 31, 1998 as Compared to Three Months Ended May 31, 1997
Net sales for the three months ended May 31, 1998 decreased 36.3% to
$32.5 million compared to $51.0 million for the same period in 1997.
Comparable retail store sales for the three months ended May 31, 1998
decreased by 16.7%. The decline in sales reflects the combined impact of
increased competition in many of the Company's principal markets, a decision
by some consumers not to purchase durable goods from a company in Chapter 11
reorganization, a slowdown in the development of new products in consumer
electronic categories and reduced spending levels by consumers for non-
essential goods.
Extended warranty revenue recognized under the straight-line method
(applicable to those extended warranty contracts sold prior to August 1, 1995)
was $799,000 and $1.4 million for the quarters ended May 31, 1998 and May 31,
1997, respectively. Extended warranty expenses for these same periods were
$431,000 and $893,000, 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, 1998 and May 31, 1997 was
$1.4 million and $1.6 million, respectively. As a percentage of total net
sales, net revenue from extended warranty contracts sold to the third party
for the three months ended May 31, 1998 and 1997 was 4.4% and 3.2%,
respectively. The increase in this percentage was due to higher sales
volumes, an increase in retail pricing and extended warranty products offered
and a change in the warranty sales commission structure and amounts.
Gross profit for the three months ended May 31, 1998 was $6.7 million
or 20.7% of net sales as compared to $8.2 million, or 16.1% of net sales for
the comparable period in the prior year. During the third quarter of 1997,
the Company recorded certain non-recurring charges that resulted in a
reduction in gross margin of approximately $2.0 million. Without the effect
of these charges, the gross margin percentage would have been 20.0%. The
remaining increase in the gross profit percentage of .7% was caused by several
factors. The raw gross margin percentage (before rebates, discounts and
inventory shrinkage) increased by .1% due primarily to a shift in product mix
sold from lower margin computers to higher margin major appliances and video
products. Vendor rebates and co-operative funds increased by .5% as a
percentage of net sales due to extensive efforts by the Company to pursue and
collect these funds. The gross margin dollars earned as a result of warranty
sales and deferred warranty income discussed above resulted in a 1.3% increase
in the overall gross margin percentage. A physical inventory at the Company's
warehouse and at several stores in the third quarter of 1998 revealed an
increase in inventory shrinkage of .4% of net sales when compared to the same
period last year. The Company also wrote off certain damaged and aged product
during the third quarter of 1998, resulting in an increase in disposed goods
expense of 1.0% of net sales. The remaining .2% net increase in the gross
margin percentage was due primarily to reduced credit card promotions and
expense.
Selling, general and administrative expenses were $8.9 million or 27.3%
of net sales for the three months ended May 31, 1998 as compared to $14.2
million, or 27.9% of net sales for the comparable period in the prior year.
During the third quarter of 1997, the Company recorded certain non-recurring
charges in selling, general and administrative expenses totaling $640,000.
Without the effect of these charges, these expenses would have been
approximately $13.6 million or 26.6% of net sales. The .7% increase in
selling, general and administrative expenses as a percentage of net sales was
caused by the net effect of several items. As a percentage of net sales,
payroll expense declined by 2.0%, advertising costs net of advertising rebates
increased by .6%, credit card income declined by 1.4%, outside delivery
expense increased by .4%, and all other selling, general and administrative
expenses increased by .3%.
Interest expense decreased by approximately $172,000 in the three
months ended May 31, 1998 compared to the same period of the prior year.
Interest expense is net of discount income received from floor plan lenders,
who pass along certain of the vendor discounts on floor plan purchases to the
Company. Interest expense decreased in the third quarter of fiscal 1998 due
to the net effect of a $278,000 decrease in gross interest expense, which was
partially offset by a $106,000 decrease in discount income received from floor
plan lenders. The decrease in gross interest expense was due to the effect of
principal payments made on long term debt prior to the Bankruptcy filing, and
the decrease in discount income was due to the reduced number of stores and
related volume of financed inventory purchases. Other income (expense), net
for the third quarter of fiscal 1998 and 1997 included non-recurring charges
of $422,000 and $1.3 million, respectively. Based upon detailed analysis and
reconciliation work, the Company recorded the $422,000 non-recurring charge in
the third quarter of 1998 to adjust the accounts payable-goods received but
not invoiced account. A portion of this adjustment may relate to prior years.
Without the effect of the non-recurring charges in 1998 and 1997, other income
(expense), net in the third quarter of fiscal 1998 decreased by approximately
$130,000 from the same period last year due to a decrease in rental income and
an increase in loss on disposal of fixed assets.
Reorganization expenses totaled approximately $493,000 for the third
quarter of fiscal 1998 and included a $250,000 provision for the write down
and return of inventories of discontinued products to a floor plan lender
more fully explained in Note 3 to the Financial Statements and $243,000 in
legal and other fees and expenses directly related to the Chapter 11
proceedings.
The Company's effective income tax rate was 0% for the three months
ended May 31, 1998 and May 31, 1997. These effective tax rates are due to a
valuation allowance recorded by the Company 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.
Nine Months Ended May 31, 1998 as Compared to Nine Months Ended May 31, 1997
Net sales for the nine months ended May 31, 1998 decreased 41.3% to
$114.5 compared to $195.1 million for the same period in 1997. Comparable
retail store sales for the nine months ended May 31, 1998 decreased by 21.3%.
The decline in sales reflects the combined impact of increased competition in
many of the Company's principal markets, a decision by some consumers not to
purchase durable goods from a company in Chapter 11 reorganization, a slowdown
in the development of new products in consumer electronic categories and
reduced spending levels by consumers for non-essential goods.
Extended warranty revenue recognized under the straight-line method
(applicable to those extended warranty contracts sold prior to August 1, 1995)
was $2.8 million and $4.6 million for the nine months ended May 31, 1998 and
May 31, 1997, respectively. Extended warranty expenses for these same periods
were $1.5 million and $2.9 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,
1998 and May 31, 1997 was $5.0 million and $5.8 million, respectively. As a
percentage of total net sales, net revenue from extended warranty contracts
sold to the third party for the nine months ended May 31, 1998 and 1997 was
4.3% and 3.0%, respectively. The increase in this percentage was due to
higher sales volumes, an increase in retail pricing and extended warranty
products offered and a change in the warranty sales commission structure and
amounts.
Gross profit for the nine months ended May 31, 1998 was $25.7 million
or 22.4% of net sales as compared to $32.8 million, or 16.8% of net sales for
the comparable period in the prior year. During the second and third quarters
of fiscal 1997, the Company recorded certain non-recurring charges that
resulted in a reduction in gross margin of approximately $4.1 million.
Without the effect of these charges, the overall gross margin percentage would
have been 18.9% of net sales in the prior year, and the increase in the gross
margin percentage would be 3.5% of net sales. The raw gross margin percentage
(before rebates, discounts and inventory shrinkage) increased by .8% due
primarily to a shift in product mix sold from lower margin computers to higher
margin major appliances. Vendor rebates and co-operative funds increased by
1.0% as a percentage of net sales due to extensive efforts by the Company to
pursue and collect these funds. The gross margin dollars earned as a result
of warranty sales and deferred warranty income discussed above resulted in a
1.7% increase in the overall gross margin percentage.
Selling, general and administrative expenses were $28.3 million or
24.7% of net sales for the nine months ended May 31, 1998 as compared to $50.3
million, or 25.8% of net sales for the comparable period in the prior year.
During the second and third quarters of fiscal 1997, the Company recorded
certain non-recurring charges in selling, general and administrative expenses
totaling approximately $7.5 million. Without the effect of these charges,
these expenses would have been approximately $42.8 million or 21.9% of net
sales. The 2.8% increase in selling, general and administrative expenses
as a percentage of net sales was caused by the net effect of several items.
As a percent of net sales, advertising costs net of advertising rebates
increased by 1.2%, credit card income declined by .6%, depreciation expense
increased by .4%, outside delivery expense increased by .2%, and all other
selling, general and administrative expenses increased by .4%.
Other income (expense), net for the nine months ended May 31, 1998 and
May 31, 1997 included non-recurring charges totaling approximately $422,000
and $1.6 million, respectively. Without the effect of these charges in 1998
and 1997, other income (expense), net in the nine months ended May 31, 1998
increased by approximately $54,000 from the same period last year.
Reorganization expenses totaled approximately $1.1 million during the
first nine months of fiscal 1998. These expenses included a $250,000
provision for the write down and return of inventories of discontinued
products to a floor plan lender more fully explained in Note 3 to the
Financial Statements, a $200,000 loss realized on the sale of a closed store,
and $633,000 in legal and other fees and expenses directly related to the
Chapter 11 proceedings.
The Company's effective income tax rate was 0% and (12.8%) for the nine
months ended May 31, 1998 and May 31, 1997, respectively. These effective tax
rates are due to a valuation allowance recorded by the Company 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.
Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity have been from
cash from operations, revolving lines of credit, and from the Company's
initial and secondary public offerings. Net cash provided by operating
activities was $349,000 for the nine months ended May 31, 1998, as compared to
cash used in operating activities of $(1.2) million for the nine months ended
May 31, 1997. The increase in cash provided by operating activities for the
nine months ended May 31, 1998 was due primarily to the net effect of a $5.2
million net loss, $2.4 million in depreciation expense, a $1.1 million
provision for uncollectible receivables, a $1.7 million reduction in accounts
receivable, a $1.9 million increase in inventories, a $5.9 million increase in
accounts payable - floor plan, a $1.2 million decrease in accrued expenses and
a $2.2 million decrease in deferred revenues. The reduction in accounts
receivable was primarily due to collection of $1.5 million in federal and
state income tax receivables. The increase in inventories was due to seasonal
purchases of room air conditioners, and this was financed through accounts
payable - floor plan. Accounts payable - floor plan also increased due to the
timing of disbursements and a cash shortfall and related overdue payments to
the floor plan lenders described in Note 3 to the financial statements.
Accrued expenses decreased because of a reduction in accrued warranties
payable and a reduction in unfinalized sales (to be delivered) at month-end.
The decrease in deferred revenues was caused by normal amortization of
deferred warranty income related to contracts sold prior to August 1, 1995.
The Company incurred capital expenditures of $54,000 and $1.7 million
during the nine months ended May 31, 1998 and 1997, respectively. The
expenditures in 1997 were primarily in connection with new computer equipment
and software purchases and leasehold improvements funded with mostly short-
term borrowings.
Long-term debt as of May 31, 1998 consisted of four term loans, two
with a bank group, and the others with financial institutions. The first loan
agreement with the bank group was amended on June 25, 1997 to consolidate the
note with the outstanding balance on the then existing line of credit, extend
the term of the note to 36 months, and change the interest rate to 9%. The
amendment specified that interest only payments are due quarterly for the
first year, with nine fixed quarterly principal payments of $223,000 plus
accrued interest to begin after one year. A balloon payment is due on the
remaining balance of the note at June 27, 2000. Outstanding amounts pursuant
to this agreement are collateralized by the Company's real estate. On May 6,
1998, the Company sold a closed store property and made a $2.4 million
principal payment on this loan from the proceeds of that sale. The bank group
has agreed to defer the quarterly principal payment of $223,000 that was due
on June 1, 1998 until the balloon payment due June 27, 2000 subject to the
satisfaction of certain terms and conditions that will be included in a motion
to be filed with the Bankruptcy Court for approval. They also agreed to re-
amortize the loan balance taking into account the property sale discussed
above, and this has resulted in a revised quarterly principal payment of
$203,000 beginning September 1, 1998. The agreement was subject to approval
by the Bankruptcy Court of the additional $750,000 line of credit financing by
one of the floor plan lenders discussed below and the payment of certain bank
group legal fees and expenses totaling $57,000. Notes are to be issued for
these legal fees bearing interest at 9.5% and calling for a $10,000 down
payment, $5,000 per month for three months beginning the first month after
Bankruptcy Court approval, and $2,000 per month thereafter with a balloon
payment due June 27, 2000. The outstanding principal balance and applicable
interest rate on the first loan as of May 31, 1998 were $16.0 million and 9%,
respectively. The second term loan was established by the bank group on
January 1, 1998 covering prior legal fees in the total amount of $191,000.
These notes call for monthly payments of principal and interest of $2,500 per
month from January 1, 1998 through June 1, 1998, $5,000 per month from July 1,
1998 through June 1, 2000, and a balloon payment on June 27, 2000. The
outstanding principal balance and applicable interest rate on these additional
notes as of May 31, 1998 were $186,000 and 9.5%, respectively.
The first term loan with the banks contains certain reporting
requirements and restrictive covenants which require the Company to maintain
certain minimum annual earnings levels and working capital levels. This term
loan also contains a cross default provision with all other debt instruments
of the Company and a provision which prohibits the Company from paying
dividends on its common stock. As of August 31, 1997, the Company was not in
compliance with certain of the covenants contained in the bank term loan, and
was in default of this agreement due to these violations as well as certain
cross default provisions. However, on December 12, 1997 the Company obtained
the agreement of the lenders to forebear through September 1, 1998 the
enforcement of their rights and remedies under the term loan agreement
contingent upon the approval by the Bankruptcy Court of this forbearance
agreement and an agreement requiring the payment by the Company of certain
professional fees to the banks. The Bankruptcy Court has approved these
agreements. The forbearance agreement also provides that the lenders will
forebear the enforcement of their rights and remedies through September 1,
1998 if the Company were to violate certain financial covenants relating to
minimum annual earnings and working capital levels during that period, which
the Company does not expect to comply with in the upcoming fiscal year. On
January 12, 1998, the Company obtained the agreement of the lenders to extend
the forbearance of their rights and remedies related to the prior defaults
discussed above and the potential future defaults of certain financial
covenants through December 1, 1998.
During the third quarter, due to a cash shortfall, the Company
defaulted on certain of its normal daily payments to the four floor plan
lenders. Because of cross default provisions in the first term loan with the
banks, these late payments to floor plan lenders have created a default under
this term loan. The total amount of the defaulted payments to the floor plan
lenders fluctuates on a daily basis based upon cash available for payments.
As of May 31, 1998, the total amount of these defaulted payments due was
approximately $2.3 million. Because of the legal and other costs associated
with obtaining further forbearance agreements or waivers from either the banks
or the floor plan lenders, the Board of Directors of the Company and
Management made a decision not to pursue further forbearance agreements,
amendments or waivers. This has resulted in the Company being required by
generally accepted accounting principles to reclassify the entire principal
balance of the bank term loan as a current liability on the May 31, 1998
balance sheet. It should be noted that the banks have taken no actions
against the Company to exercise their rights under the default provisions of
the agreements or to accelerate any of the required payments.
The principal balance of the first of the other term loans was $3.7
million as of May 31, 1998 and this note is carried as a liability subject to
compromise. The secured and unsecured portions of this debt are yet to be
determined, and this debt does not accrue interest while the Company is in
Chapter 11. On March 5, 1998, the Company agreed to pay the lender $5,000 per
month effective February 10, 1998 to compensate the lender for the estimated
depreciation in the value of the equipment and fixtures which secure this
loan, and this agreement was approved by the Bankruptcy Court. At a
subsequent Bankruptcy Court hearing, this payment amount was increased to
$6,250 per month effective April 10, 1998. This agreement is subject to
change in a future Bankruptcy Court hearing to determine the secured and
unsecured portions of this debt. The furniture, fixtures and equipment at
various locations leased by the Company collateralize outstanding amounts
pursuant to this agreement. The second of the other term loans was $224,000
as of May 31, 1998, and accrues interest payable monthly at an annual rate of
9%. The note is divided equally between two instruments, one with a maturity
date of September 1, 1999, and the second with a maturity date of December 1,
1999. The note is secured by certain computer software.
As of May 31, 1998, the Company also uses several "floor plan" finance
companies to finance the majority of its inventory purchases. In addition,
the Company finances some of its inventory purchases through open-account
arrangements with various vendors. The Company has an aggregate borrowing
limit with the floor plan finance companies of approximately $38.0 million
with outstanding borrowings being collateralized with merchandise inventory
and vendor receivables. Payment terms under these agreements are on a "pay as
sold" basis, with the Company being required to pay down indebtedness on a
daily basis as the financed goods are sold. Each of the floor plan financing
agreements contains cross default clauses with all other debt instruments of
the Company. As of August 31, 1997 the Company was not in compliance with
several covenants contained in the floor plan agreements and was also in
default of those floor plan agreements due to its failure to make certain
payments required by the agreements relating to inventory shortages and
obsolescence identified by the Company. The Company obtained waivers for some
of these violations and as of December 11, 1997 had obtained the agreement of
each of the floor plan lenders to forebear their rights and remedies pursuant
to the floor plan agreements subject to: (i) the Company's payment of
approximately $1,654,000 in principal, plus interest at the prime rate plus
3%, to the floor plan lenders at various dates through December 15, 1998, and
(ii) the approval of these forbearance agreements by the Bankruptcy Court.
The Bankruptcy Court subsequently approved these forbearance agreements. As
previously discussed, beginning in March 1998, the Company failed to make
certain of its required payments to its floor plan lenders thereby resulting
in a default under the floor plan agreements. Because of the legal and other
costs associated with obtaining further forbearance agreements or waivers, the
Board of Directors and Management of the Company made a decision not to pursue
such forbearance agreement or waivers. This had no effect upon the
classification of the Accounts payable - floor plan, as it is ordinarily
classified as a current liability.
On April 27, 1998, one of the floor plan lenders issued a default
notice to the Company demanding payment of all past due amounts and indicating
that it would no longer finance future purchases of inventory under the
financing agreement. On May 1, 1998, this floor plan lender subsequently
agreed to finance future inventory purchases on a case by case basis while one
of the other floor plan lenders was pursuing the purchase of the first floor
plan lender's outstanding loans to the Company. On June 19, 1998, the second
floor plan lender did purchase these outstanding loans from the first floor
plan lender, and is now providing inventory financing to the Company for the
products in question.
On April 29, 1998, a third floor plan lender issued a default notice to
the Company demanding payment of all past due amounts and return of its
collateral. They subsequently agreed to continue doing business with the
Company while the Company was pursuing additional line of credit financing and
as long as the shortfall payment amount did not exceed a specified level.
This shortfall maximum was maintained through payment subsidies agreed to by
the other floor plan lenders. On June 10, 1998, the other floor plan lenders
notified the Company that they would no longer subsidize payments to the third
floor plan lender, and on June 11, 1998, the third floor plan lender demanded
return of its collateral in accordance with its inventory financing agreement.
The Company has since returned to the floor plan lender an amount of inventory
valued at lower of cost or estimated realizable value that the Company
estimates is adequate to cover the outstanding liability of approximately $1.3
million. Proceeds from the sale of the remaining inventory under this floor
plan are being segregated in a separate escrow account pending a final
accounting and settlement with this floor plan lender. The inventory products
financed by this floor plan lender comprise a small portion of the Company's
sales, inventory, and floor plan debt, and Management does not believe that
lack of these products will have a material effect on future results of the
Company. Management has also added additional product models from other
manufacturers under existing floor plan financing agreements to replace the
products that were removed. If the agreements with the remaining two floor
plan lenders were terminated, this would significantly impact the Company's
ability to obtain inventory which would adversely affect operating results.
The Company has also obtained debtor in possession ("DIP") financing
from the two remaining floor plan lenders in the form of a $1.5 million line
of credit which had an outstanding balance of $1.5 million at May 31, 1998.
The line of credit matures at December 31, 1998 and bears interest at prime
plus 3%, payable monthly, with one principal payment of $1.5 million due
December 31, 1998. This line of credit, together with amounts owed under such
lenders' floor plan financing arrangements, is collateralized by merchandise
inventory, as well as by a broad lien on all of the Company's other assets.
The line of credit financing agreement contains certain covenants, a cross
default clause with all other debt instruments of the Company, and it
prohibits the Company from spending more than $50,000 per year on capital
expenditures without approval. As of August 31, 1997, the Company was not in
compliance with certain covenants contained in this agreement, but the Company
has obtained the forbearance agreements discussed above. However, as
previously discussed, the default under the floor plan agreements and the
existence of a cross default provision in the line of credit has created a
default under the line of credit. The Board of Directors and Management of
the Company have made a decision not to pursue further forbearance agreements
or waivers. This has had no effect upon the classification of the outstanding
balance on the line of credit, as it is ordinarily classified as a current
liability.
On June 18, 1998, the Company obtained an additional line of credit
totaling $750,000 from one of the DIP lenders, and the proceeds were
immediately used to pay down a portion of the floor plan lender payment
shortfalls. The agreement calls for monthly payments of interest at prime
plus 3%. Monthly principal payments of $25,000 are required beginning August
15, 1998, and the remaining balance is due January 31, 1999.
Net cash used in financing activities was $(4.0) million in the nine
months ended May 31, 1998, compared to $2.1 million provided by financing
activities in the nine months ended May 31, 1997. The primary use of cash in
the 1998 period consisted of principal payments on the DIP line of credit and
on the bank group notes previously discussed. The source of cash in the 1997
period resulted from borrowings under short-term borrowing arrangements.
Since the Company filed for Chapter 11 reorganization, it has closed
nine stores and two warehouses, has cut corporate overhead expenses and store
operating expenses, and has initiated several strategies designed to improve
operating performance (as more fully explained in "General Overview" and in
Item 1 of the Company's Annual Report on Form 10-K for fiscal 1997). Based
upon projections of its operating results, the Company believes that its
existing funds, its operating cash flows, the available DIP lines of credit
discussed in Note 3 to the financial statements, and the vendor and inventory
financing arrangements including the defaulted payment amounts currently owed
to the floor plan lenders as discussed in Note 3 are sufficient on an overall
basis to satisfy expected cash requirements during the remainder of fiscal
1998. However, as explained in Note 3 to the financial statements, the
Company is in default with its two floor plan lenders due to its inability to
pay certain amounts due. Also, there is no assurance that the Company's
projected operating results will be achieved during fiscal 1998. The Company
will likely require additional working capital financing in fiscal 1999, and
these needs are currently being discussed with the DIP lenders.
On December 16, 1997 the Company was notified by the Nasdaq Stock
Market, Inc. ("Nasdaq") that the Company does not meet all of the listing
requirements for continued listing on the Nasdaq National Market based upon
its financial statements at August 31, 1997, and that Nasdaq was commencing a
review of the Company's eligibility for continued listing. On January 12,
1998, the Company was notified by Nasdaq that its Common Stock would be
delisted on January 19, 1998 unless the Company pursued Nasdaq's procedural
remedies. The Company requested a written submission hearing before the
Nasdaq Listing Qualifications Panel, and this hearing took place on February
19, 1998. On March 9, 1998, the Company was notified that the Company's
Common Stock would be delisted from Nasdaq effective immediately with the
close of business on March 9, 1998. The Company's Common Stock is now traded
on the Over the Counter Bulletin Board.
During fiscal years 1998 and 1999, the Company's existing computer
software will need to be evaluated and computer programs upgraded or amended
to be year 2000 compliant. The cost of this effort has not yet been
determined.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is required to be implemented during the first quarter
of the Company's fiscal year ending August 31, 1999 and Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information," and Statement of Financial Accounting Standards No. 132,
"Employer's Disclosures about Pension and Other Postretirement Benefits," are
required to be implemented during the Company's fiscal year ending August 31,
1999. Management believes adoption of these statements will have a financial
statement disclosure impact only and will not have a material effect on the
Company's financial position, operations or cash flows.
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, 1998
and May 31, 1997. 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.
Forward-Looking Statements
This report contains forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) representing the Company's
current expectations, beliefs, estimates or intentions concerning the
Company's future performance and operating results, its products, services,
markets and industry, and/or future events relating to or effecting the
Company and its business and operations. When used in this report, the words
"believes," "estimates," "plans," "expects," "intends," "anticipates," and
similar expressions as they relate to the Company are intended to identify
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results or achievements of the
Company to differ materially from those indicated by the forward-looking
statements include, without limitation, the effectiveness of the Company's
business and marketing strategies, the product mix sold by the Company,
customer demand, availability of existing and new merchandise from, and the
establishment and maintenance of relationships with, suppliers, price
competition for products and services sold by the Company, management of
expenses, gross profit margins, availability and terms of financing to
refinance or repay existing financings or to fund capital needs, the continued
and anticipated growth of the retail home entertainment and consumer
electronics industry, a change in interest rates, exchange rate fluctuations,
the seasonality of the Company's business and the other risks and factors
detailed in this report and in the Company's other filings with the SEC.
These risks and uncertainties are beyond the ability of the Company to
control. In many cases, the Company cannot predict all of the risks and
uncertainties that could cause actual results to differ materially from those
indicated by the forward-looking statements. All forward-looking statements
in this report are expressly qualified in their entirety by the cautionary
statements in this paragraph.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments during the three months ended
May 31, 1998.
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.
No reports on Form 8-K were filed during the three months ended May
31, 1998.
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.
/s/ William E. Wulfers
William E. Wulfers
President and Chief Executive Officer
/s/ Michael G. Ware
Michael G. Ware
Chief Financial Officer and Secretary
July 20, 1998
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