UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 28, 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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, 1998, there were 5,604,406 shares of common stock, $.10 par
value, outstanding.
<PAGE>
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Statements of Operations -
Three and Six Months Ended February 28, 1998 and 1997 3
Balance Sheets -
February 28, 1998 and August 31, 1997 4
Statements of Cash Flows -
Six Months Ended February 28, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, February 28, February 28,
1998 1997 1998 1997
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Sales $ 44,020,174 $ 78,294,573 $ 81,929,457 $ 144,057,316
Cost of Sales 34,082,521 66,611,690 62,982,095 119,504,605
Gross profit 9,937,653 11,682,883 18,947,362 24,552,711
Selling general and 9,986,679 22,316,073 19,427,733 36,114,926
administrative expenses
Operating loss (49,026) (10,633,190) (480,371) (11,562,215)
Other income (expense):
Interest expense (348,059) (511,291) (916,493) (960,807)
Interest income 7,522 45,080 17,849 64,782
Other income, net 255,659 (107,511) 434,781 (48,771)
(84,878) (573,722) (463,863) (944,796)
Loss before income taxes (133,904) (11,206,912) (944,234) (12,507,011)
and reorganization items
Expense from reorganization (371,038) ---- (525,572)
items
Income tax expense --- 3,184,000 --- 2,690,000
Net loss $ (504,942) $(14,390,912) $ (1,469,806) $ (15,197,011)
Per share data:
Basic and diluted loss $ (0.09) $ (2.59) $ (0.26) $ (2.73)
per common share
Weighted averge number 5,664,823 5,566,906 5,728,715 5,566,906
of common shares
outstanding
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
February 28, August 31,
1998 1997
---------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 635,295 $ 1,640,849
Investments in marketable securities 115,690 421,431
Receivables (net of an allowance of $1.9 million at
February 28, 1998 and $1.6 million at August 31, 5,595,210 8,603,894
1997)
Merchandise inventory 32,818,073 31,951,502
Other 1,038,998 873,200
---------------- ---------------
Total current assets 40,203,266 43,490,876
Property and equipment, net 25,638,378 27,741,034
Intangibles and other 2,779,072 2,899,774
---------------- ---------------
$ 68,620,716 $ 74,131,684
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt $ 18,734,345 $ 350,438
Short-term borrowings 1,500,000 3,000,000
Accounts payable 321,947 1,276,895
Accounts payable-floor plan 26,963,318 25,201,687
Accrued expenses 5,003,722 6,246,917
Deferred revenue 1,971,438 2,713,040
---------------- ---------------
Total current liabilities not subject
to compromise 54,494,770 38,788,977
---------------- ---------------
Long-term debt, less current portion 101,634 18,368,005
Deferred revenue 1,094,663 1,937,256
---------------- ---------------
Total long-term liabilities not subject
to compromise 1,196,297 20,305,261
---------------- ---------------
Liabilities subject to compromise 14,261,605 14,662,108
---------------- ---------------
Total liabilities 69,952,672 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 February 28, 1998 and August 31,
1997, respectively 560,441 579,191
Paid-in capital 32,421,119 32,639,856
Retained earnings (deficit) (34,313,516) (32,843,709)
---------------- ---------------
Total shareholders' equity (deficit) (1,331,956) 375,338
---------------- ---------------
$ 68,620,716 $ 74,131,684
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (1,469,806) $ (15,197,011)
Adjustments to reconcile net loss to net cash
provided by (used in)
operating activities:
Depreciation and amortization 1,630,438 2,438,568
Deferred income taxes ---- 4,267,000
Store closure reserve ---- 5,476,247
Write down of assets held for sale ---- 737,605
Provision for uncollectible receivables 595,770 2,324,243
(Gain) loss on disposal of assets (19,770) 181,850
Cancellation of stock awards (17,187) ----
(Increase) decrease in assets:
Receivables 2,412,914 942,356
Merchandise inventory (866,571) 4,627,979
Other assets (111,109) (560,358)
Increase (decrease) in liabilities:
Accounts payable (954,948) (69,800)
Accounts payable - floor plan 1,761,631 (4,861,666)
Accrued expenses (1,636,394) (515,318)
Deferred revenue (1,584,195) (2,548,632)
Liabilities subject to compromise 83,956 ----
Adjustments due to reorganization items:
Loss on disposal of assets 46,391 ----
Increase in accrued expenses for restructuring items 325,571 ----
Payment of restructuring charges (152,672) ----
-------------- --------------
Net cash provided by (used in) operating activities 44,019 (2,756,937)
-------------- --------------
Cash flow from investing activities:
Purchase of property and equipment (1,392) (1,484,736)
Proceeds from sale of assets 83,697 ----
Proceeds from sale of assets due to reorganization 73,117 ----
Redemption of Treasury Bills 310,892 ----
-------------- --------------
Net cash provided by (used in) investing activities 466,314 (1,484,736)
-------------- --------------
Cash flow from financing activities:
Borrowings under long-term debt 191,210 ----
Repayment of long-term debt (207,097) (1,584,502)
Borrowings under line of credit ---- 22,750,000
Repayments under line of credit ---- (20,150,000)
Borrowings under DIP line of credit 2,700,000 ----
Repayments under DIP line of credit (4,200,000) ----
-------------- --------------
Net cash provided by (used in) financing activities (1,515,887) 1,015,498
-------------- --------------
Net decrease in cash and cash equivalents (1,005,554) (3,226,175)
Cash and cash equivalents at beginning of period 1,640,849 3,303,822
-------------- --------------
Cash and cash equivalents at end of period $ 635,295 $ 77,647
============== ==============
Cash paid during the period for:
Interest expense $ 925,960 $ 1,166,759
============== ==============
Income taxes ---- $ 26,000
============== ==============
Supplemental schedule of non-cash investing and financial
activities:
Assets acquired under capital lease ---- $ 285,701
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The information for the three and six months ended February 28, 1998 and
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 obligations. See Note 2.
The results of operations for the three and six months ended February 28,
1998 are not necessarily indicative of the results to be expected for the full
fiscal year ending August 31, 1998.
Certain prior period amounts have been reclassified to conform with the
presentation shown in the financial statements as of February 28, 1998 and for
the three month and six month periods then ended.
(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 has been
extended by the Bankruptcy Court to April 20, 1998, and the Company plans to
file a motion with the Bankruptcy Court seeking approval of a further extension
to June 20, 1998.
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 DIP line of credit
discussed in Note 3 to the financial statements, and the vendor and inventory
financing arrangements discussed in Note 3 are sufficient on an overall basis
to satisfy expected cash requirements in fiscal 1998. However, there may be
short periods of time (one or two business day time periods) where cash needs
temporarily exceed availability, and this may result in a few late required
payments to floor plan and other vendors. This would result in an additional
default which would not be covered by the existing forbearance agreements.
Subsequent to February 28, 1998, a default of this nature did occur as
described in Note 3 to the financial statements. 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 debtor
in possession ("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
February 28, 1998 consisted of three term loans, one with a bank group, and the
others with financial institutions. The outstanding principal balance and
applicable interest rate on the term loan with the banks as of February 28,
1998 were $18.4 million and 9%, respectively. On January 1, 1998, additional
notes were issued to the bank group covering 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 February 28, 1998 were $189,000 and 9.5%, respectively.
The 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.
Subsequent to February 28, 1998, due to a temporary cash shortfall, the
Company defaulted on certain of its normal daily payments to the four floor
plan lenders. These required payments were caught up and paid within one to
two business days of the original due date. Because of cross default provisions
in the term loan with the banks, these late payments to floor plan lenders have
created a default under the term loan. 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 February 28, 1998
balance sheet. It should be noted that the banks and the floor plan lenders
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 February 28, 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 1, 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. 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
$245,000 as of February 28, 1998, and accrues interest payable monthly at an
annual rate of 9%.
As of February 28, 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 $43.5
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, subsequent to February 28, 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 forebearance 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.
The Company has also obtained debtor in possession ("DIP") financing from
two of its floor plan lenders in the form of a $1.5 million line of credit
which had an outstanding balance of $1.5 million at February 28, 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 classificiation of the outstanding balance on the line
of credit, as it is ordinarily classified as a current liability.
(4) INCOME TAXES
The Company's effective income tax rate was 0% and 38% for the three
months ended February 28, 1998 and 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.
(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 February 28, 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 February 28, 1998, there was a balance of $116,000 in U.S. Treasury
Bills which were pledged to support certain executive employment and severance
agreements.
(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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company experienced comparable store sales declines of 23.1% during
the quarter ended February 28, 1998 as compared to the same period last year,
continuing a trend that began in the third quarter of fiscal 1995. Comparable
store sales declined by 23.0% during the six months ended February 28, 1998 as
compared to the same period last year. The decline in comparable store sales
reflects the combined impact of a 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 of consumers for non-essential goods.
The decrease in net sales for three and six months ended February 28, 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 February 28, 1998 and 1997 were $(134,000) and $(11.2 million)
respectively. During the second quarter of 1997, the Company recorded certain
non-recurring charges affecting net loss before income taxes and reorganization
items totaling approximately $9.3 million. Without the effect of these
charges, net loss before income taxes and reorganization items would have been
($1.9 million) in the second quarter of the prior year. The remaining $1.8
million income improvement in the second quarter of 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 an increase in selling,
general and administrative expenses 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 February 28, 1998 and February 28, 1997 were ($505,000) and
($14,391,000), respectively. The Company incurred $371,000 in the second
quarter of fiscal 1998 for reorganization expenses related to the Chapter 11
Bankruptcy proceedings, and this amount included a $200,000 write down in the
book value of a closed store in the process of being sold. Net loss for the
three months ended February 28, 1997 included a charge for the establishment of
a deferred tax valuation allowance that resulted in an income tax expense of
approximately $3.2 million.
Net loss before income taxes and reorganization items for the six months
ended February 28, 1998 and February 28, 1997 were ($944,000) and ($12.5
million), respectively. Without the effect of the non-recurring charges
discussed above, net loss before income taxes and reorganization items would
have been ($3.2 million) for the six months ended February 28, 1997. The $2.3
million reduction in this loss in the first six months of fiscal 1998 compared
to the same period of the prior year was due primarily to a significant
increase in the gross margin percentage, which was partially offset by an
increase 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 six months ended February 28, 1998 and
February 28, 1997 were ($1.5 million) and ($15.2 million), respectively. The
Company incurred $526,000 in the first half of fiscal 1998 for reorganization
expenses related to the Chapter 11 Bankruptcy proceedings, and this amount
included the $200,000 write down in the book value of a closed store discussed
above. Net loss for the six months ended February 28, 1997 included a charge
for the establishment of a deferred tax valuation allowance that resulted in an
income tax expense of approximately $2.7 million.
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 six 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. The Shreveport distribution center was closed, 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.
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 February 28, Six Months ended February 28,
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 77.4 85.1 76.9 83.0
---------- ---------- --------- ---------
Gross profit....................... 22.6 14.9 23.1 17.0
Selling, general and administrative
expense.......................... 22.7 28.5 23.7 25.0
---------- ---------- --------- ---------
Operating loss..................... (0.1) (13.6) (0.6) (8.0)
Interest expense................... (0.8) (0.7) (1.1) (0.7)
Interest income.................... 0.0 0.1 (0.0) 0.0
Other income (expense)............. 0.6 (0.1) 0.5 (0.0)
---------- ---------- --------- ---------
(0.2) (0.7) (0.6) (0.7)
---------- ---------- --------- ---------
Loss before income taxes and
reorganization items.......... (0.3) (14.3) (1.2) (8.7)
Expense from reorganization items.. (0.8) ---- (0.6)
Income tax expense................. ---- 4.1 ---- 1.9
---------- ---------- --------- ---------
Net loss........................... (1.1)% (18.4)% (1.8)% (10.6)%
========== ========== ========= =========
</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1998 AS COMPARED TO
THREE MONTHS ENDED FEBRUARY 28, 1997
Net sales for the three months ended February 28, 1998 decreased 43.8% to
$44.0 million compared to $78.3 million for the same period in 1997.
Comparable retail store sales for the three months ended February 28, 1998
decreased by 23.1%. The decline in sales reflects the combined impact of a
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.
Extended warranty revenue recognized under the straight-line method
(applicable to those extended warranty contracts sold prior to August 1, 1995)
was $904,000 and $1.5 million for the quarters ended February 28, 1998 and
1997, respectively. Extended warranty expenses for these same periods were
$417,000 and $886,000, respectively, before any allocation of other selling,
general and administrative expenses. Since August 1, 1995, the Company has
sold to an unaffiliated third party all extended warranty service contracts
sold by the Company to customers on or after such date. The Company records
the sale of these contracts, net of any related sales commissions and the fees
paid to the third party, as a component of net sales and immediately recognizes
revenue upon the sale of such contracts. Although the Company sells these
contracts at a discount, the amount of the discount approximates the cost the
Company would incur to service these contracts, while transferring the full
obligation for future services to a third party. Net revenue from extended
warranty contracts sold to the third party for the quarters ended February 28,
1998 and 1997 was $1.9 million and $2.3 million, respectively. The decline in
net revenue from the sale of extended warranties is a direct result of the
reduced level of retail store sales.
Gross profit for the three months ended February 28, 1998 was $9.9
million or 22.6% of net sales as compared to $11.7 million, or 14.9% of net
sales for the comparable period in the prior year. During the second quarter
of 1997, the Company recorded certain non-recurring charges that resulted in a
reduction in gross margin of approximately $2.1 million. Without the effect of
these charges, the gross margin percentage would have been 17.6% of net sales.
The remaining increase in the gross profit percentage of 5.0% was caused by
several factors. The raw gross margin percentage (before rebates, discounts
and inventory shrinkage) increased by 1.3% due primarily to the net effect of
several factors. There was a shift in product mix sold from lower margin
computers to higher margin major appliances, the Company added lounge chairs, a
new high margin category added to the stores' home theater presentations, and a
negative inventory account adjustment was recorded in the prior year. These
positive margin effects were partially offset by a decline in the gross margin
percentage earned on the TV/Video product category caused by competitive retail
pricing. Vendor rebates and co-operative funds increased by 1.4% 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. Reduced credit card promotions and
expense resulted in a .4% increase in the overall gross margin percentage. The
remaining .2% net increase in the gross margin percentage was due primarily to
improved margin on car stereo installations and a reduction in inventory write-
offs of returned and damaged goods.
Selling, general and administrative expenses were $10.0 million or 22.7%
of net sales for the three months ended February 28, 1998 as compared to $22.3
million, or 28.5% of net sales for the comparable period in the prior year.
During the second quarter of 1997, the Company recorded certain non-recurring
charges in selling, general and administrative expenses totaling approximately
$6.9 million. Without the effect of these charges, these expenses would have
been approximately $15.4 million or 19.7% of net sales. The 3.0% 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,
advertising costs net of advertising rebates increased by 1.7%, depreciation
expense increased by .4%, credit card income declined by .6%, and all other
selling, general and administrative expenses increased by .3%.
Interest expense decreased by approximately $163,000 in the three months
ended February 28, 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 second quarter of fiscal 1998 due
to the net effect of a $524,000 decrease in gross interest expense, which was
partially offset by a $361,000 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, net increased by
approximately $363,000 due primarily to a gain on sale of fixed assets of
$35,000 realized in the second quarter of fiscal 1998 compared to a loss on
sale of an investment in marketable securities of $306,000 in the same period
of fiscal 1997. The gain resulted from sales of miscellaneous equipment and
fixtures.
Reorganization expenses totaled approximately $371,000 for the second
quarter of fiscal 1998 and included a $200,000 write down in the book value of
a closed store being sold and $171,000 in legal and other fees and expenses
directly related to the Chapter 11 proceedings. The Company currently has a
signed agreement to sell a closed store at a price which is $200,000 less than
book value, and the sale is expected to close in April 1998.
The Company's effective income tax rate was 0% and (28.4)% for the three
months ended February 28, 1998 and 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.
SIX MONTHS ENDED FEBRUARY 28, 1998 AS COMPARED TO
SIX MONTHS ENDED FEBRUARY 28, 1997
Net sales for the six months ended February 28, 1998 decreased 43.1% to
$81.9 million compared to $144.1 million for the same period in 1997.
Comparable retail store sales for the six months ended February 28, 1998
decreased by 23.0%. The decline in sales reflects the combined impact of a
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.
Extended warranty revenue recognized under the straight-line method
(applicable to those extended warranty contracts sold prior to August 1, 1995)
was $1.9 million and $3.2 million for the six months ended February 28, 1998
and 1997, respectively. Extended warranty expenses for these same periods were
$1.0 million and $2.0 million, respectively, before any allocation of other
selling, general and administrative expenses. Net revenue from extended
warranty contracts sold to the third party for the six months ended February
28, 1998 and 1997 was $3.5 million and $4.2 million, respectively. As a
percentage of total net sales, net revenue from extended warranty contracts
sold to the third party for the six months ended February 28, 1998 and 1997 was
4.3% and 2.9%, 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 six months ended February 28, 1998 was $18.9 million
or 23.1% of net sales as compared to $24.6 million, or 17.0% of net sales for
the comparable period in the prior year. During the second quarter of 1997,
the Company recorded certain non-recurring charges that resulted in a reduction
in gross margin of approximately $2.1 million. Without the effect of these
charges, the overall gross margin percentage would have been 18.5% of net sales
in the prior year, and the increase in the overall gross margin percentage
would be 4.6% of net sales. The raw gross margin percentage (before rebates,
discounts and inventory shrinkage) increased by 1.1% due primarily to the net
effect of several factors. There was a shift in product mix sold from lower
margin computers to higher margin major appliances, the Company added lounge
chairs, a new high margin category added to the stores' home theater
presentations, and a negative inventory account adjustment was recorded in
the prior year. These positive margin effects were partially offset by a
decline in the gross margin percentage earned on the TV/Video product category
caused by competitive retail pricing. Vendor rebates and co-operative funds
increased by 1.2% as a percentage of net sales due to extensive efforts by the
Company to pursue and collect these funds. Inventory shrinkage as a percentage
of net sales was .6% during the first six months of fiscal 1998 compared .8%
during the same period of the prior year (excluding the non-recurring charges),
a decrease of .2% of net sales. This was caused by improved control and
monitoring of inventory in the warehouse and stores. The gross margin dollars
earned as a result of warranty sales and deferred warranty income discussed
above resulted in a 1.8% increase in the overall gross margin percentage. The
remaining .3% net increase in the gross margin percentage was due primarily to
improved margin on car stereo installations and a reduction in inventory write-
offs of returned and damaged goods.
Selling, general and administrative expenses were $19.4 million or 23.7%
of net sales for the six months ended February 28, 1998 as compared to $36.1
million, or 25.0% of net sales for the comparable period in the prior year.
During the second quarter of 1997, the Company recorded certain non-recurring
charges in selling, general and administrative expenses totaling approximately
$6.9 million. Without the effect of these charges, these expenses would have
been approximately $29.2 million or 20.3% of net sales. The 3.4% 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,
advertising costs net of advertising rebates increased by 1.5%, depreciation
expense increased by .5%, credit card income declined by .4%, payroll expense
increased by .5%, and all other selling, general and administrative expenses
increased by .5%.
Other income, net increased by approximately $484,000 due primarily to a
gain on sale of fixed assets of $138,000 realized in the first six months of
fiscal 1998 compared to a loss of $357,000 in the same period last year. The
prior year amount included a loss on sale of marketable securities of $306,000
realized in the second quarter of 1997.
Reorganization expenses totaled approximately $526,000 during the first
six months of fiscal 1998 and included a $200,000 write down in the book value
of a closed store being sold and $326,000 in legal and other fees and expenses
directly related to the Chapter 11 proceedings.
The Company's effective income tax rate was 0.0% and (21.5%) for the six
months ended February 28, 1998 and 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
$44,000 for the six months ended February 28, 1998, as compared to cash used in
operating activities of $(2.8) million for the six months ended February 28,
1997. The small increase in cash provided by operating activities for the six
months ended February 28, 1998 was due primarily to the net effect of a $2.4
million reduction in accounts receivable, a $867,000 increase in inventories, a
$1.8 million increase in accounts payable - floor plan, a $1.6 million decrease
in accrued expenses and an $1.6 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 and a reduction in credit
card receivables caused by the timing of the month end on August 31, 1997 (a
Sunday) versus on February 28, 1998 (a Saturday). There were approximately
three days' worth of credit card receivables on August 31, 1997 and two days'
worth of these receivables on February 28, 1998. The increase in inventories
was due to seasonality and an improved in-stock position for computer equipment
and peripherals. The increase in accounts payable - floor plan was due to the
increase in inventories and the timing of month-end discussed above. Accrued
expenses decreased because of a reduction in accrued commissions, payment of
1997 real estate taxes, 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 $1,392 and $1.5 million
during the six months ended February 28, 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 February 28, 1998 consisted of three term loans, one
with a bank group, and the others with financial institutions. The 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%.
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. The outstanding principal balance
and applicable interest rate on this loan as of February 28, 1998 were $18.4
million and 9%, respectively. On January 1, 1998, additional notes were issued
to the bank group covering 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
February 28, 1998 were $189,000 and 9.5% respectively.
The 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.
Subsequent to February 28, 1998, due to a temporary cash shortfall, the
Company defaulted on certain of its normal daily payments to the four floor
plan lenders. These required payments were caught up and paid within one to
two business days of the original due date. Because of cross default provisions
in the term loan with the banks, these late payments to floor plan lenders have
created a default under the term loan. 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 February 28, 1998
balance sheet. It should be noted that the banks and the floor plan lenders
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 February 28, 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 1, 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. 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 $245,000 as
of February 28, 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 February 28, 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 $43.5
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, subsequent to February 28, 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 agreements or waivers. This had no effect upon
the classification of the Accounts payable - floor plan, as it is oridinarily
classified as a current liability.
The Company has also obtained debtor in possession ("DIP") financing from
two of its floor plan lenders in the form of a $3 million line of credit which
had an outstanding balance of $1.5 million at February 28, 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. The Company paid a required $1.5 million payment in December, 1997,
which was partially funded by receipt of a $1.1 million federal income tax
refund that had been previously assigned to these lenders. The primary use of
the line of credit is 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, 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 provison
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.
Net cash used in financing activities was $(1.5) million in the six
months ended February 28, 1998, compared to $1.0 million provided by financing
activities in the six months ended February 28, 1997. The primary use of cash
in the 1998 period consisted of principal payments on the DIP line of credit.
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 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 DIP line of credit discussed in Note 3 to the financial
statements, and the vendor and inventory financing arrangements discussed in
Note 3 are sufficient on an overall basis to satisfy expected cash requirements
in fiscal 1998. However, there may be short periods of time (one or two
business day time periods) where cash needs temporarily exceed availability,
and this may result in a few late required payments to floor plan and other
vendors. This would result in an additional default which would not be covered
by the existing forbearance agreements. Subsequent to February 28, 1998, a
default of this nature did occur as described in Note 3 to the financial
statements. 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 debtor in possession ("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.
IMPACT OF INFLATION
In management's opinion, inflation has not had a material impact on the
Company's financial results for the six months ended February 28, 1998 and
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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments during the three months ended
February 28, 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
February 28, 1998.
<PAGE>
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.
APRIL 14, 1998 /S/ WILLIAM E. WULFERS
--------------------------------------
William E. Wulfers
President and Chief Executive Officer
/S/ MICHAEL G. WARE
-------------------------------------------------
Michael G. Ware
Senior Vice President and Chief Financial Officer
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