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 November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-21192
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(Exact Name of Registrant as Specified in its Charter)
LOUISIANA 72-0721367
(State or Other Jurisdiction of (I.R.S. Employer 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 January 9, 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 3
Statements of Operations -
Three Months Ended November 30, 1997
and 1996 3
Balance Sheets -
November 30, 1997 and August 31, 1997 4
Statements of Cash Flows -
Three Months Ended November 30, 1997
and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED NOVEMBER 30,
1997 1996
Net sales $37,909,283 $65,762,745
Cost of sales 28,899,574 52,892,913
------------- -------------
Gross profit 9,009,709 12,869,832
Selling, general and
administrative expenses 9,441,054 13,798,856
------------- -------------
Operating loss (431,345) (929,024)
Other income (expense):
Interest expense (568,434) (449,516)
Interest income 10,327 19,703
Other income, net 179,122 58,739
------------- -------------
(378,985) (371,074)
Loss before income taxes
and reorganization items (810,330) (1,300,098)
Expense from reorganization items (154,534) ----
Income tax benefit ---- (494,000)
------------- -------------
Net loss $ (964,864) $ (806,098)
------------- -------------
------------- -------------
Per share data:
Net loss per share $ (0.17) $ (0.14)
------------- -------------
------------- -------------
Weighted average number of common
shares outstanding 5,640,605 5,566,906
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
CAMPO ELECTRONICS, APPLIANCES AND COMPUTERS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS (UNAUDITED)
November 30, August 31,
1997 1997
ASSETS
Current assets:
Cash and cash equivalents $ 2,505,525 $ 1,640,849
Investments in marketable securities 426,582 421,431
Receivables (net of an allowance of
$1.7 million at November 30, 1997
and $1.6 million at August 31, 1997) 8,576,261 8,603,894
Merchandise inventory 36,134,480 31,951,502
Other 922,558 873,200
-------------- --------------
Total current assets 48,565,406 43,490,876
Property and equipment, net 26,414,144 27,741,034
Intangibles and other 3,076,558 2,899,774
-------------- --------------
$ 78,056,108 $ 74,131,684
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt $ 586,911 $ 350,438
Short-term borrowings 1,778,630 3,000,000
Accounts payable 1,182,923 1,311,816
Accounts payable-floor plan 30,712,579 23,661,531
Accrued expenses 8,366,054 7,861,586
Deferred revenue 2,303,451 2,713,040
-------------- --------------
Total current liabilities 44,930,548 38,898,411
-------------- --------------
Long-term debt, less current portion 18,091,121 18,368,005
Deferred revenue 1,485,590 1,937,256
-------------- --------------
Total long-term liabilities 19,576,711 20,305,261
-------------- --------------
Liabilities subject to compromise 14,138,375 14,552,674
-------------- --------------
Total liabilities 78,645,634 73,756,346
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.10 par value; 20,000,000
shares authorized, 5,791,906 issued
and outstanding at November 30, 1997
and August 31, 1997 579,191 579,191
Paid-in capital 32,639,856 32,639,856
Retained earnings (deficit) (33,808,573) (32,843,709)
-------------- --------------
Total shareholders' equity (589,526) 375,338
-------------- --------------
$ 78,056,108 $ 74,131,684
-------------- --------------
-------------- --------------
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 THREE MONTHS ENDED NOVEMBER 30,
1997 1996
Cash flow from operating activities:
Net loss $ (964,864) $ (806,098)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 832,161 1,079,062
Deferred income taxes ----- 1,041,010
Provision for uncollectible receivables 429,650 298,626
(Gain) loss on disposal of assets (6,835) 51,051
(Increase) decrease in assets:
Receivables (402,017) (3,229,871)
Merchandise inventory (4,182,978) (16,236,996)
Other assets (268,592) (73,588)
Increase (decrease) in liabilities:
Accounts payable (128,893) 1,035,601
Accounts payable-floor plan 7,051,049 8,679,329
Accrued expenses 491,429 2,029,119
Deferred revenue (861,255) (1,339,674)
Liabilities subject to compromise 185,474 -----
Adjustments due to reorganization items:
(Gain) loss on disposal of assets (101,032) -----
Increase in accrued expenses for
restructuring items 161,642 -----
Payment of restructuring charges (148,603) -----
------------- -------------
Net cash provided by (used in)
operating activities 2,086,336 (7,472,429)
------------- -------------
Cash flow from investing activities:
Purchase of property and equipment (1,330) (670,463)
Proceeds from sale of assets 59,008 -----
Proceeds from sale of assets due to
reorganization 73,216 -----
------------- -------------
Net cash provided by (used in)
investing activities 130,894 (670,463)
------------- -------------
Cash flow from financing activities:
Repayment of long-term debt (131,184) (124,371)
Borrowings under line of credit ----- 17,050,000
Repayments under line of credit ----- (7,800,000)
Borrowings under DIP line of credit 1,200,000 -----
Repayments under DIP line of credit (2,421,370) -----
------------- -------------
Net cash provided by (used in)
financing activities (1,352,554) 9,125,629
------------- -------------
Net increase in cash and cash 864,676 982,737
equivalents
Cash and cash equivalents at beginning
of period 1,640,849 3,303,822
------------- -------------
Cash and cash equivalents at end of
period $ 2,505,525 $ 4,286,559
------------- -------------
------------- -------------
Cash paid during the period for:
Interest expense $ 657,344 $ 386,955
------------- -------------
------------- -------------
Income taxes $ ----- $ 26,000
------------- -------------
------------- -------------
Supplemental schedule of noncash
investing and financial activities:
Assets acquired under capital lease ----- $ 275,368
------------- -------------
------------- -------------
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 months ended November 30,
1997 and 1996 is unaudited, but in the opinion of management,
reflects all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of financial position and results
of operations for the interim periods. The accompanying financial
statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual
Report on Form 10-K/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 months ended
November 30, 1997 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 has been extended by the
Bankruptcy Court to January 15, 1998, and the Company has filed a
motion with the Bankruptcy Court seeking approval of a further
extension to February 15, 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, receipt of state
income tax refunds which are due the Company, and the vendor and
inventory financing arrangements discussed in Note 3 are sufficient
to satisfy expected cash requirements in fiscal 1998. However,
there is no assurance that the Company's projected operating
results will be achieved during fiscal 1998. The Company may
require additional working capital financing in fiscal 1999 when
the balance of the line of credit becomes due on December 31, 1998.
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 pursues
Nasdaq's procedural remedies, which the Company is currently
considering. If the Company's Common Stock is delisted, the
Company's common shareholders will likely experience a reduction in
the liquidity of their shares.
(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 November 30, 1997
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 November 30, 1997 were $18.4 million and 9%,
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 November 30, 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
of this forbearance agreement and an agreement requiring the
payment of certain professional fees to the banks by the Bankruptcy
Court. The Company believes it is probable that the Bankruptcy
Court will approve 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.
The principal balance of the first of the other term loans
was $3.7 million as of November 30, 1997 and accrues interest at
7.19% (the average weekly yield of 30 Day Commercial paper plus
1.8%). The balance on this note is carried as a liability subject
to compromise. The second of the other term loans was $276,000 as
of November 30, 1997, and accrues interest payable monthly at an
annual rate of 9%.
As of November 30, 1997, 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. Management believes that
sufficient liquidity will exist during the upcoming year to fund
these required payments and that it is probable that the Bankruptcy
Court will approve these forbearance agreements.
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
$1,778,630 at November 30, 1997. 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.
(4) Deferred Compensation Plan for Directors
On November 19, 1997 the Board of Directors approved a
Deferred Compensation Plan for Outside Directors (the "Plan") with
an effective date of January 1, 1998. The purpose of the Plan is
(a) to provide for the deferral of the payment of director
compensation to the members of the Company's Board of Directors who
are not full-time employees of the Company (the "Directors") until
the Company is in a better position to pay such fees, (b) to permit
Directors to elect to defer director fees until age 65 or
termination of Board service and (c) to provide deferred stock unit
awards to the Chairman of the Board of Directors.
Beginning January 1, 1998, all compensation which
Directors are entitled to be paid by the Company shall
automatically be deferred until the later of one year from the date
the Plan was adopted or the effective date of the Bankruptcy
Court's confirmation of a plan of reorganization. Each Director
may elect to further defer such compensation until the earlier of
age 65 or termination of Board service and may elect as to whether
such deferral shall be in the form of hypothetical units of the
Company's Common Stock (the "Stock Units") or in a reserve (the
"Reserve"). The value of Stock Units is tied to the quoted fair
market value price of the Company's Common Stock.
Under the Plan, the Company also granted 30,000 Stock
Units to the Chairman of the Board as deferred compensation for
past services provided to the Company. The Plan also provides for
the Chairman to be credited with 5,000 Stock Units as deferred
compensation on the last day of each month for the thirteen months
beginning December 31, 1997 and ending January 31, 1999, provided
he continues to serve as Chairman on such dates.
All amounts credited to Stock Unit or Reserve accounts
will at all times constitute general, unsecured liabilities of the
Company payable exclusively out of its general assets, and under no
circumstances will the Company be required to segregate from its
general assets funds sufficient to pay the amounts credited to
Stock Unit or Reserve accounts.
(5) Income Taxes
The Company's effective income tax rate was 0% and 38% for
the three months ended November 30, 1997 and 1996, respectively.
The November 30, 1997 effective tax rate of 0% is 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.
(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 November 30, 1997, there was a balance of $427,000 in
U.S. Treasury Bills which were pledged to support certain executive
employment and severance agreements. Subsequent to November 30,
1997, a settlement was reached in a dispute with two prior
executives in which they agreed to accept $30,000 and to release
the Company from the pledge against $312,000 of the Treasury Bills.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
The Company experienced comparable store sales declines of
22.9% during the quarter ended November 30, 1997 as compared to the
same period last year, continuing a trend that began in the third
quarter of fiscal 1995. The decline in comparable store sales
reflects the combined impact of the general weakness in the retail
consumer electronics industry, increased competition in many of the
Company's principal markets, a slowdown in the development of new
products in consumer electronic categories and reduced spending
levels of consumers for non-essential goods due to record high debt
levels. The decrease in net sales in the quarter ended November
30, 1997 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 November 30, 1997 and November 30, 1996 were
$810,000 and $1,300,000, respectively. The net loss was lower in
1997 due primarily to a significant increase in the gross margin
percent, which was partially offset by an increase in selling,
general and administrative expenses and interest expense as a
percentage of sales. See "Results of Operations" for a further
discussion of the increases in these percentages. Net loss before
income taxes and reorganization items also included a $103,000 gain
on sale of fixed assets in 1997 compared to a $51,000 loss on sale
of fixed assets in 1996. Net loss (after income taxes and
reorganization items) for the three months ended November 30, 1997
and November 30, 1996 were $965,000 and $806,000, respectively.
The Company incurred $155,000 in the first quarter of fiscal 1998
for reorganization expenses related to the Chapter 11 Bankruptcy
proceedings. In the first quarter of fiscal 1997, the Company
recorded an income tax benefit of $494,00.
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 subsequent to
year-end in October 1997. Inventory at the Shreveport warehouse
was moved to a smaller warehouse leased beginning in October 1997
that is adjacent to the Company's remaining warehouse located in
Harahan, 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. The Company has
streamlined its corporate structure in light of current business
conditions 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 quarter of fiscal 1998, the Company's new management team
implemented a number of cost reduction measures and changes which
should result in significant savings for the Company in the future.
The sales associate commission program and the extended warranty
commission program were reduced to be consistent with the
commission structures offered by the Company's competitors. The
Shreveport distribution center was closed and the Company's
distribution operations were consolidated in the New Orleans
facility. Store payrolls were put under tighter control and
corporate office payroll was reduced further through additional
position eliminations.
Results of Operations
The following table sets forth, for the periods indicated,
the relative percentages that certain income and expense items bear
to net sales:
Three Months Ended
November 30, November 30,
1997 1996
Net sales 100.0% 100.0%
Cost of sales 76.2 80.4
------- -------
Gross profit 23.8 19.6
Selling, general and
administrative expense 24.9 21.0
------- -------
Operating income (loss) (1.1) (1.4)
Interest expense (1.5) (0.6)
Interest income 0.0 0.0
Other income (expense) .5 0.0
------- -------
(1.0) (0.6)
Income (loss) before income
taxes and reorganization items (2.1) (2.0)
Income (expense) from
reorganization item: (0.4) 0.0
Income tax expense (benefit) 0.0 (0.8)
------- -------
Net loss (2.5)% (1.2)%
------- -------
------- -------
Three Months Ended November 30, 1997 as Compared to Three Months
Ended November 30, 1996
Net sales for the three months ended November 30, 1997
decreased 42.4% to $37.9 million compared to $65.8 million for the
same period in 1996. Comparable retail store sales for the three
months ended November 30, 1997 decreased by 22.9%. The decline in
sales reflects the combined impact of the general weakness in the
retail consumer electronics industry, increased competition in many
of the Company's principal markets, a slowdown in the development
of new products in consumer electronic categories and reduced
spending levels of consumers for non-essential goods due to record
high debt levels.
Extended warranty revenue recognized under the straight-
line method (applicable to those extended warranty contracts sold
prior to August 1, 1995) was $1.1 million and $1.7 million for the
quarters ended November 30, 1997 and 1996, respectively. Extended
warranty expenses for these same periods were $791,000 and $1.1
million, respectively, before any allocation of other selling,
general and administrative expenses. Since August 1, 1995, the
Company has sold to an unaffiliated third party all extended
warranty service contracts sold by the Company to customers on or
after such date. The Company records the sale of these contracts,
net of any related sales commissions and the fees paid to the third
party, as a component of net sales and immediately recognizes
revenue upon the sale of such contracts. Although the Company
sells these contracts at a discount, the amount of the discount
approximates the cost the Company would incur to service these
contracts, while transferring the full obligation for future
services to a third party. Net revenue from extended warranty
contracts sold to the third party for the quarters ended November
30, 1997 and 1996 was $1.6 million and $1.9 million, respectively.
Gross profit for the three months ended November 30, 1997
was $9.0 million or 23.8% of net sales as compared to $12.9
million, or 19.6% of net sales for the comparable period in the
prior year. The increase in the gross margin percentage of 4.2%
was caused by the net effect of several factors. 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
and electronic accessories. 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.
Inventory shrinkage as a percentage of net sales was 1.0% in the
first quarter of fiscal 1997 compared to .3% in the first quarter
of fiscal 1998, a decrease of .7% 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
1.9% increase in the overall gross margin percentage. The
remaining .2% net decrease in the gross margin percentage was due
primarily to increased credit card charges.
Selling, general and administrative expenses were $9.4
million or 24.9% of net sales for the three months ended November
30, 1997 as compared to $13.8 million, or 21.0% of net sales for
the comparable period in the prior year. These costs as a
percentage of net sales increased by 3.9% due primarily to
advertising costs, certain fixed payroll costs, depreciation
expense, repairs and maintenance expense, and telecommunications
expense, which did not decline in proportion to the decline in
sales. As a percentage of net sales, gross advertising costs
declined by .7%. However, advertising rebates from vendors
declined by 1.9% of net sales resulting in an increase in net
advertising costs of 1.2% of net sales. As a percentage of net
sales, payroll expense increased by 1.4%, depreciation expense
increased by .6%, repairs and maintenance expense increased by .2%,
telecommunications expense increased by .2%, and all other selling,
general and administrative expenses increased by .3%.
Interest expense increased by approximately $118,000 in
the three months ended November 30, 1997 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 increased in the first quarter of fiscal 1998 due
to the net effect of a $395,000 decrease in gross interest expense,
which was more than offset by a $513,000 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 $120,000 due primarily to a gain on sale
of fixed assets of $103,000 realized in the first quarter of fiscal
1998 compared to a loss of $51,000 in the same period of fiscal
1997. The gain resulted from sales of miscellaneous equipment,
fixtures and trucks. This positive effect was partially offset by
decreases in rental income and vendor compensation earned on sales
tax payments.
Reorganization expenses totaled approximately $155,000 for
the first quarter of fiscal 1998 and were primarily legal expenses
directly related to the Chapter 11 Bankruptcy proceedings.
The Company's effective income tax rate was 0% and 38.0%
for the three months ended November 30, 1997 and 1996,
respectively. The November 30, 1997 effective tax rate of 0% is
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 $2.1 million for the
three months ended November 30, 1997, as compared to cash used in
operating activities of $(7.5) million for the three months ended
November 30, 1996. The increase in cash provided by operating
activities during the three months ended November 30, 1997 was due
primarily to an increase in accounts payable due floor plan lenders
which was not matched by a similar increase in merchandise
inventories because of timing differences. Payments made to floor
plan lenders generally occur two business days after the inventory
is sold. The timing of quarter-end at November 30, 1997 coincided
with heavy sales for the Thanksgiving weekend, and these inventory
sales were not paid for until the first two days after quarter-end.
Also, the Company's purchases of non-floor plan inventories were
kept to a minimum due to tighter cash management. The use of cash
during the three months ended November 30, 1996 was due primarily
to increases in merchandise inventory and receivables which were
not completely offset by the related increase in accounts payable.
During 1996, the Company began increasing inventories for the
Christmas season earlier (prior to Thanksgiving) and in larger
quantities, and there was also one less day of weekend sales after
Thanksgiving in the November, 1996 calendar. Total assets at
November 30, 1997 were $78.1 million, a decrease of $59.7 million
(43.3%) from November 30, 1996. The decrease in assets includes
decreases of $8.9 million in receivables, $36.5 million in
inventories, $2.4 million in deferred tax assets, and $9.5 million
in net property and equipment.
The Company incurred capital expenditures of $1,330 and
$670,000 during the three months ended November 30, 1997 and 1996,
respectively. The expenditures in 1996 were primarily in
connection with new computer equipment and software purchases and
leasehold improvements funded with mostly short-term borrowings.
At November 30, 1997, there was a balance of $427,000 in U.S.
Treasury Bills which were pledged to support certain executive
employment and severance agreements. Subsequent to November 30,
1997, a settlement was reached in a dispute with two prior
executives in which they agreed to accept $30,000 and to release
the Company from the pledge against $312,000 of the Treasury Bills.
Long-term debt as of November 30, 1997, 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 November 30, 1997 were $18.4 million and 9%,
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 November 30, 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
of this forbearance agreement and an agreement requiring the
payment of certain professional fees to the banks by the Bankruptcy
Court. The Company believes it is probable that the Bankruptcy
Court will approve 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.
The principal balance of the first of the other term loans
was $3.7 million as of November 30, 1997 and accrues interest at
7.19% (the average weekly yield of 30 Day Commercial paper plus
1.8%), with the balance of all outstanding principal due and
payable at maturity on August 30, 2002. The furniture, fixtures
and equipment at various locations leased by the Company
collateralize outstanding amounts pursuant to this agreement. The
balance on this note is carried as a liability subject to
compromise. The second of the other term loans was $276,000 as of
November 30, 1997, 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 November 30, 1997, 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. Management believes that sufficient liquidity will exist
during the upcoming year to fund these required payments and that
it is probable that the Bankruptcy Court will approve these
forbearance agreements.
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
$1,778,630 at November 30, 1997. The line of credit matures at
December 31, 1998 and bears interest at prime plus 3%, payable
monthly, with two principal payments of $1.5 million each due
December 31, 1997 and December 31, 1998. The Company paid the
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 forebearance agreements
discussed above.
Net cash used in financing activities was $(1.4) million
in the three months ended November 30, 1997, compared to $9.1
million provided by financing activities in the three months ended
November 30, 1996. The primary use of cash in the 1997 period
consisted of principal payments on the DIP line of credit. The
source of cash in the 1996 period resulted from borrowings under
short-term borrowing arrangement.
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 above, receipt of
state income tax refunds which are due the Company, and the vendor
and inventory financing arrangements discussed above are sufficient
to satisfy expected cash requirements in fiscal 1998. However,
there is no assurance that the Company's projected operating
results will be achieved during fiscal 1998. The Company may
require additional working capital financing in fiscal 1999 when
the balance of the line of credit becomes due on December 31, 1998.
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 pursues Nasdaq's
procedural remedies, which the Company is currently considering. If
the Company's Common Stock is delisted, the Company's common
shareholders will likely experience a reduction in the liquidity of
their shares.
Impact of Inflation
In management's opinion, inflation has not had a material
impact on the Company's financial results for the three months
ended November 30, 1997 and 1996. Technological advances coupled
with increased competition have caused prices on many of the
Company's products to decline. Those products that have increased
in price have in most cases done so in proportion to current
inflation rates. Management does not anticipate that inflation
will have a material impact on the Company's financial results in
the future.
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 November 30, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of
the Company,(1) as amended by Articles of
Amendment dated January 3, 1995.(2)
3.2 Composite By-laws of the Company, as of October
4, 1996.(3)
10.1 Deferred Compensation Plan for Outside Directors
adopted November 19, 1997.
27.1 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 have been filed during the three
months ended November 30, 1997.
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.
January 14, 1997 /s/ WILLIAM E. WULFERS
William F. Wulfers
President and Chief Executive Officer
/s/ MICHAEL G. WARE
Michael G. Ware
Senior Vice President and Chief Financial
Officer
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description of Exhibits Pages
No.
3.1 Amended and Restated Articles of Incorporation of the
Company,(1) as amended by Articles of Amendment dated
January 3, 1995.(2)
3.2 Composite By-laws of the Company, as of October 4,
1996.(3)
10.1 Deferred Compensation Plan for Outside Directors
adopted November 19, 1997.
27.1 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.