<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 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 1-11566
COMPUSA INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2261497
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14951 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 982-4000
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 / /
The registrant had 93,893,059 shares of common stock, $.01 per share
par value, outstanding as of November 5, 1998.
- -------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 26, 1998 (unaudited)
and June 27, 1998...............................................................................3
Consolidated Income Statements for the thirteen weeks
ended September 26, 1998 and September 27, 1997 (unaudited).....................................4
Consolidated Statements of Cash Flows for the thirteen weeks
ended September 26, 1998 and September 27, 1997 (unaudited).....................................5
Notes to Consolidated Financial Statements (unaudited)...................................................6
Separate financial statements relating to the Company's subsidiaries are omitted since all of them are wholly owned and have
each guaranteed the Company's 9 1/2% Senior Subordinated Notes due 2000 on a full, unconditional, and joint and several basis and
the Company does not consider such separate financial statements to be material to investors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................................................12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................21
SIGNATURES..............................................................................................22
EXHIBITS.........................................................................................................23
</TABLE>
2
<PAGE>
COMPUSA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 26, JUNE 27,
1998 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 151,129 $ 151,779
Accounts receivable, net of allowance for doubtful accounts of $5,492
and $3,524 at September 26, 1998 and June 27, 1998, respectively....... 259,540 214,084
Merchandise inventories.................................................. 776,992 520,762
Deferred income taxes - current.......................................... 8,459 9,762
Prepaid expenses and other............................................... 63,578 26,480
------------ -------------
Total current assets................................................. 1,259,698 922,867
Property and equipment, net................................................ 229,279 210,528
Deferred income taxes...................................................... 13,172 18,076
Costs in excess of net assets of acquired businesses....................... 92,967 3,069
Other assets............................................................... 5,424 5,970
------------ -------------
$ 1,600,540 $ 1,160,510
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 755,687 $ 534,620
Accrued liabilities...................................................... 173,415 98,714
Current portion of capital lease obligations............................. 547 666
------------ -------------
Total current liabilities............................................ 929,649 634,000
Capital lease obligations.................................................. 1,729 1,872
Senior Subordinated Notes.................................................. 110,000 110,000
Note payable to Tandy Corporation.......................................... 136,000 --
Commitments and contingencies.............................................. -- --
Stockholders' equity:
Preferred stock, $.01 per share par value, 10,000 shares authorized,
none issued............................................................ -- --
Common stock, $.01 per share par value; 325,000,000 shares authorized
with 93,898,014 and 93,372,545 shares issued at September 26, 1998 and
June 27, 1998, respectively............................................ 939 934
Paid-in capital.......................................................... 278,379 278,000
Retained earnings........................................................ 206,185 198,045
------------ -------------
485,503 476,979
Less: Treasury stock, at cost, 2,507,227 shares at September 26, 1998
and June 27, 1998...................................................... (62,341) (62,341)
------------ -------------
Total stockholders' equity............................................ 423,162 414,638
------------ -------------
$ 1,600,540 $ 1,160,510
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
3
<PAGE>
COMPUSA INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
Net sales........................................... $ 1,392,140 $ 1,191,812
Cost of sales and occupancy costs................... 1,195,786 1,016,213
------------ ------------
Gross profit..................................... 196,354 175,599
Operating expenses.................................. 146,300 109,249
Pre-opening expenses................................ 1,366 1,452
General and administrative expenses................. 32,637 25,615
------------ ------------
Operating income................................. 16,051 39,283
Other expense (income):
Interest expense................................. 4,383 3,055
Other expense (income), net...................... (1,540) (1,918)
------------ ------------
2,843 1,137
------------ ------------
Income before income taxes.......................... 13,208 38,146
Income tax expense.................................. 5,068 14,687
------------ ------------
Net income.......................................... $ 8,140 $ 23,459
------------ ------------
------------ ------------
Basic earnings per share............................ $ 0.09 $ 0.26
Diluted earnings per share.......................... $ 0.09 $ 0.25
Weighted average common shares...................... 91,243 91,659
Weighted average common shares assuming dilution.... 93,041 95,514
</TABLE>
See accompanying notes.
4
<PAGE>
COMPUSA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income............................................................... $ 8,140 $ 23,459
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 15,435 10,706
Deferred income taxes................................................ 6,207 (1,453)
Other non-cash charges............................................... 2,410 --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................................................ 2,859 (4,054)
Merchandise inventories............................................ (81,407) (129,853)
Prepaid expenses and other assets.................................. 6,498 (3,014)
Increase in accounts payable and accrued liabilities................. 124,459 209,739
------------ ------------
Total adjustments................................................ 76,461 82,071
------------ ------------
Net cash provided by operating activities........................ 84,601 105,530
Cash provided by (used in) investing activities:
Capital expenditures..................................................... (12,713) (21,155)
Payment for purchase of Computer City, net of cash acquired.............. (73,341) --
Other.................................................................... 1,152 14
------------ ------------
Net cash used in investing activities............................ (84,902) (21,141)
Cash flows (used in) provided by financing activities:
Proceeds from issuance of common stock................................... 384 1,255
Payments under capital lease obligations................................. (733) (679)
------------ ------------
Net cash (used in) provided by financing activities.............. (349) 576
Net (decrease) increase in cash and cash equivalents....................... (650) 84,965
Cash and cash equivalents at beginning of period........................... 151,779 209,929
------------ ------------
Cash and cash equivalents at end of period................................. $ 151,129 $ 294,894
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
5
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
CompUSA Inc. and its wholly owned subsidiaries (collectively, the "Company").
All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations, and cash flows of the Company for the applicable
interim periods. The results of operations for these periods are not
necessarily comparable to, or indicative of, results of any other interim
period or for the fiscal year as a whole.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete interim financial statements.
Therefore, these financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues, and expenses and the
disclosure of gain and loss contingencies at the date of the consolidated
financial statements. Actual results could differ from those estimates.
2. ACQUISITION OF COMPUTER CITY
On August 31, 1998, the Company completed its acquisition of
Computer City, Inc. ("Computer City") from Tandy Corporation ("Tandy"), for
an initial purchase price of $211 million, payable in a note and cash. The
purchase price is subject to certain post-closing adjustments based on the
completion of an audit of Computer City's balance sheet as of the closing
date. Based upon the preliminary balance sheet of Computer City as of the
closing date, the Company has recorded a receivable of approximately $39
million from Tandy for the excess of the consideration paid at closing over
the purchase price due in accordance with the provisions of the purchase
agreement, resulting in a revised purchase price of approximately $172
million. Such receivable is included in prepaid expenses and other in the
accompanying balance sheet.
In connection with the acquisition of Computer City, the Company
issued a $136 million subordinated promissory note payable to Tandy (the
"Seller Note"). The Seller Note bears interest at a rate of 9.48% per annum
and provides for its repayment in semi-annual installments over a period of
ten years. The first three years of payments are interest only, with the
first principal payment due in December 2001. The Seller Note ranks pari
passu with the Company's 9 1/2% Senior Subordinated Notes due 2000 ("Senior
Subordinated Notes"). The unpaid principal amount of the Seller Note may be
prepaid, in whole or in part, at any time at the option of the Company,
without premium or penalty.
Effective November 1, 1998, the Company sold the seven Canadian
Computer City supercenters acquired by the Company to Future Shop Ltd. for
approximately $12 million in cash and the assumption of certain liabilities.
6
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITION OF COMPUTER CITY (CONTINUED)
The purchase of Computer City has been accounted for under the
purchase method of accounting. Accordingly, the purchase price paid has been
preliminarily allocated to the acquired assets and liabilities based on
estimated fair values as of the acquisition date. The excess of the purchase
price paid over the estimated fair values of the acquired assets and
liabilities of approximately $90 million is being amortized over 20 years on
a straight-line basis. The Company will assess the recoverability of costs in
excess of net assets acquired annually based on existing facts and
circumstances and projected earnings before interest, depreciation, and
amortization, on an undiscounted basis. Should the Company's assessment
indicate an impairment of this asset in the future, an appropriate write-down
will be recorded.
The accompanying income statement for the thirteen weeks ended
September 26, 1998 includes the results of operations from the acquisition
date for the 37 Computer City stores in the United States (excluding two
"small market" stores) that the Company will continue to operate and convert
to CompUSA Computer Superstores(SM). The results of liquidating the 55 Computer
City stores in the United States closed by the Company and the seven Computer
City supercenters in Canada sold by the Company, are not included in the
accompanying income statement but rather represent adjustments to the value
of the related assets acquired and liabilities assumed. The following
proforma combined net sales, net income, and diluted earnings per share data
summarize the results of operations for the first quarter of fiscal 1999 and
1998 as if Computer City had been acquired as of the beginning of fiscal
1998. The proforma results given below are not necessarily indicative of what
actually would have occurred if the acquisition had been in effect during the
periods presented, and are not intended to be a projection of future results
or trends.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales........................................ $ 1,515,407 $ 1,373,098
Net income (loss)................................ (12,711) 13,817
Diluted earnings (loss) per share................ (0.14) 0.14
</TABLE>
3. EQUITY
The Company adopted the provisions of the Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," in the
preparation of the financial statements included in the Quarterly Report on
Form 10-Q for the thirteen weeks December 27, 1997. In accordance with the
provisions of SFAS No. 128, the Company is required to report both "basic"
and "diluted" earnings per share and to restate previously reported earnings
per share amounts to conform to the provisions of SFAS No. 128. Basic
earnings per share has been computed using the weighted average number of
shares of common stock of the Company ("Common Stock") outstanding for each
period presented. The dilutive effect of stock options and other common stock
equivalents is included in the calculation of diluted earnings per share
using the treasury stock method. Earnings per share data for the first
quarter of fiscal 1998 presented herein has been restated to conform with the
provisions of SFAS No. 128.
7
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. EQUITY (CONTINUED)
The calculation of basic and diluted earnings per share is
summarized as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income.................................................. $ 8,140 $ 23,459
Weighted average common shares outstanding.................. 91,243 91,659
------------ ------------
Basic earnings per share.................................... $ 0.09 $ 0.26
------------ ------------
------------ ------------
DILUTED EARNINGS PER SHARE:
Net income.................................................. $ 8,140 $ 23,459
Weighted average common shares outstanding.................. 91,243 91,659
Incremental shares assuming dilution........................ 1,798 3,855
------------ ------------
Weighted average common shares assuming dilution............ 93,041 95,514
------------ ------------
Diluted earnings per share.................................. $ 0.09 $ 0.25
------------ ------------
------------ ------------
</TABLE>
In September 1997, the Company's Board of Directors authorized the
purchase of up to $60 million of Common Stock. As of September 26, 1998, the
Company had purchased 2.2 million shares of Common Stock, to be held as
treasury stock, for approximately $60 million (approximately $27.34 per
share), pursuant to the September 1997 authorization and, as a result, no
additional treasury stock purchases can currently be made by the Company.
4. COMMITMENTS AND CONTINGENCIES
On August 23, 1998, a lawsuit, Hoeck v. CompUSA Inc. et al., was
filed by a stockholder of the Company in the United States District Court for
the Northern District of Texas against the Company and certain of its
officers, seeking class action status on behalf of the purchasers of the
Company's Common Stock and related publicly traded options during the class
period. The action alleges various violations of federal securities laws.
Damages have not been specified. On June 24, 1998, a second stockholder suit
was filed against the Company making virtually the same allegations. On
August 24, 1998, a consolidated amended complaint was filed in the Hoeck case
effectively consolidating the two cases. On September 25, 1998, the Company
filed a motion to dismiss the consolidated complaint and such motion is
currently pending. The Company believes the claims are without merit and
intends to vigorously defend against such charges.
8
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is a defendant from time to time in lawsuits incidental
to its business. Based on currently available information, the Company
believes that resolution of all known contingencies would not have a material
adverse impact on the Company's financial statements. However, there can be
no assurances that future costs would not be material to results of
operations of the Company for a particular future period. In addition, the
Company's estimates of future costs are subject to change as circumstances
change and additional information becomes available during the course of
litigation.
5. SUBSIDIARY GUARANTEES
The Senior Subordinated Notes are guaranteed on a full,
unconditional, and joint and several basis by all of the Company's direct and
indirect subsidiaries, each of which is wholly owned. The combined summarized
information of these subsidiaries is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE
THIRTEEN WEEKS ENDED
-----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Intercompany receivables....................... $ 56,790 $ 12
Other current assets........................... 663,697 449,229
Noncurrent assets.............................. 120,459 156,454
Intercompany payables.......................... 160,586 58,052
Other current liabilities...................... 254,556 189,720
Long-term debt and liabilities................. 1,273 2,161
Net sales...................................... 942,405 822,357
Intercompany revenues.......................... 56,218 46,417
Costs and expenses............................. 937,228 796,760
Intercompany expenses.......................... 38,089 30,925
Net income..................................... 14,333 25,270
</TABLE>
In the preparation of the Company's consolidated financial
statements, all intercompany accounts were eliminated. There are no
restrictions that limit the ability of the Company's subsidiaries to declare
and pay dividends to the Company.
9
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Cash paid (received) during the periods for:
Interest................................................................. $ 253 $ 152
Income taxes............................................................. (7,662) 1,597
Investing activities not affecting cash are as follows:
Additions to property and equipment under capital leases................. $ 471 $ 95
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountant's (the
"AICPA") Accounting Standards Executive Committee has issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. The SOP requires that entities expense start-up costs and
organization costs as they are incurred. The provisions of SOP 98-5 were
adopted by the Company in the preparation of the financial statements
included in this Quarterly Report on Form 10-Q for the thirteen weeks ended
September 26, 1998. The adoption of the provisions of SOP 98-5 had no
material impact on the Company's financial statements.
The AICPA has issued SOP 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for
fiscal years beginning after December 15, 1998. The Company's current policy
falls within the guidelines of SOP 98-1.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No.
130 requires enterprises to report comprehensive income to measure more
effectively all changes in equity of an enterprise that result from certain
recognized transactions and other economic events other than income earned
from the ordinary course of business. SFAS No. 130 is effective for financial
statements for fiscal years beginning after December 15, 1997. The provisions
of SFAS No. 130 were adopted by the Company in the preparation of the
financial statements included in this Quarterly Report on Form 10-Q for the
thirteen weeks ended September 26, 1998. The adoption of the provisions of
SFAS No. 130 had no material impact on the Company's financial statements.
10
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
standards requiring public business enterprises to report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal
years beginning after December 15, 1997, and therefore the Company will adopt
the annual disclosure requirements in the preparation of its Annual Report on
Form 10-K for the fiscal year ending June 26, 1999, while the quarterly
disclosure requirements will be adopted in fiscal year 2000. Management has
not determined the impact of SFAS No. 131 on the Company's financial
statement disclosures.
8. CREDIT AGREEMENT
The Company has an unsecured $300 million credit agreement (the
"Credit Agreement") with a consortium of banks that expires in March 2001.
The funds available under the Credit Agreement may be used for any corporate
purpose, including purchasing or redeeming the Senior Subordinated Notes in
part or in full. The Credit Agreement requires that the Company maintain
certain financial ratios and a minimum net worth. The Credit Agreement
imposes certain limitations on indebtedness, liens, and mergers and
consolidations.
The Company's ability to incur borrowings under the Credit Agreement
is reduced by outstanding letters of credit and, in certain circumstances,
further reduced based upon financial covenants contained in the Credit
Agreement. The Company's ability to incur borrowings under the Credit
Agreement could be further limited in certain circumstances pursuant to the
terms of the Senior Subordinated Notes indenture.
Concurrent with the Company's acquisition of Computer City, the
Credit Agreement was amended with respect to certain of the financial ratios
required to be maintained by the Company and the calculation of amounts
available for future borrowings. As of September 26, 1998, after giving
effect to the issuance of the Seller Note and the revisions to the Credit
Agreement, the Company had $242 million available for future borrowings under
the Credit Agreement, after taking into account the limitations in the Senior
Subordinated Notes indenture.
Borrowings under the Credit Agreement bear interest, at the
Company's option, at either a prime rate (8.5% per annum as of September 26,
1998) or a rate based on the London Interbank Offering Rate (LIBOR) of 5.3%
as of September 26, 1998, plus a specified margin, currently 1.25%. The
Company also pays certain commitment and agent fees. The Company has the
annual option to extend the Credit Agreement for an additional year with the
banks' approval.
The Credit Agreement also limits the Company's ability to pay
dividends and purchase shares of Common Stock. As of September 26, 1998, the
Company had approximately $58.1 million available to pay dividends and
purchase Common Stock pursuant to the provisions of the Credit Agreement. The
Credit Agreement allows the Company to securitize up to $200 million of
certain assets. The indebtedness under the Credit Agreement is guaranteed on
a full, unconditional, and joint and several basis by all the subsidiaries of
the Company. However, the Credit Agreement allows the Company to designate
one or more of its subsidiaries to be free from most of the restrictions
under the Credit Agreement so long as no default will exist and such
subsidiaries do not contribute more than 10% of the Company's consolidated
cash flow or hold more than 10% of the Company's consolidated assets.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
This Quarterly Report on Form 10-Q contains forward-looking
statements about the business, financial condition, and prospects of the
Company, and Year 2000 issues. The actual results of the Company could differ
materially from those indicated by the forward-looking statements because of
various risks and uncertainties, including without limitation changes in
product demand, the availability of products, changes in competition, the
ability of the Company to open new stores in accordance with its plans,
economic conditions, real estate market fluctuations, interest rate
fluctuations, dependence on manufacturers' product development, various
inventory risks due to changes in market conditions, changes in tax and other
governmental rules and regulations applicable to the Company, and other risks
indicated herein and in the Company's filings with the Securities and
Exchange Commission. The Company's entry into the build-to-order market in
the first quarter of fiscal 1998 with its CompUSA PC(TM) brand personal
computers involves significant additional risks, including without limitation
failure to achieve customer acceptance of the new products and substantial
dependence on third parties for product quality and reliability and timely
fulfillment of customer orders. Additionally, the Company's recent
acquisition of Computer City involves certain risks and uncertainties,
including without limitation the ability of the Company to operate the
acquired stores profitably, to dispose of inventories and other assets, as
well as future lease commitments, related to Computer City stores closed, and
to retain Computer City's retail and corporate customers.
All of the foregoing risks and uncertainties are beyond the ability
of the Company to control, and in many cases, the Company cannot predict the
risks and uncertainties that could cause its actual results to differ
materially from those indicated by the forward-looking statements. When used
in this Quarterly Report on Form 10-Q, the words "believes," "estimates,"
"plans," "expects," "anticipates," and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
ACQUISITION OF COMPUTER CITY
On August 31, 1998, the Company completed its acquisition of
Computer City from Tandy for approximately $172 million. See "--Liquidity and
Capital Resources." The purchase price is subject to certain post-closing
adjustments based on the completion of an audit of Computer City's balance
sheet as of the closing date. The acquisition was accounted for under the
purchase accounting method.
The Company has identified 37 Computer City stores in the United
States (excluding two "small market" stores) that the Company intends to
continue to operate and convert to CompUSA Computer Superstores(SM). Such
conversion activities include conversion to CompUSA information systems as
well as the reconfiguration of such stores to the CompUSA format. The
conversion to the CompUSA information systems was completed in these stores
in October 1998. The Company has initiated certain reconfiguration activities
and expects such activities to be completed over a period of time in fiscal
year 1999 and fiscal year 2000. The Company identified 55 Computer City
stores in the United States for closure. Inventory liquidation sales were
conducted at the majority of such stores through mid-October, at which time
the stores were closed and the remaining merchandise inventories were
transferred to other CompUSA Computer Superstores, including former
Computer City stores, for final liquidation. Effective November 1, 1998, the
Company sold the seven Canadian Computer City supercenters acquired by the
Company to Future Shop Ltd. for approximately $12 million in cash and the
assumption of certain liabilities.
12
<PAGE>
The 55 Computer City stores that the Company closed were generally
in closer proximity to, and therefore the Company believes would have been
more directly competitive with, existing CompUSA Computer Superstores than
the 37 Computer City stores in the United States that have remained open as
CompUSA Computer Superstores. Of the 37 stores acquired from Computer City
that have remained open, 29 are located in metropolitan areas in which there
are existing CompUSA Computer Superstores. The Company believes its decision
to continue to operate these 29 stores is consistent with its strategy of
opening additional Computer Superstores in existing markets to increase
market penetration and to provide customers with more convenience and better
service. However, the continued operation of these 29 stores may cause the
rate of comparable store sales growth for the CompUSA Computer Superstores
already in operation in such metropolitan areas to be lower than it would
have been if these 29 Computer City stores had been closed.
GENERAL
All references herein to "fiscal 1999" relate to the fifty-two weeks
ending June 26, 1999, and references to "fiscal 1998" relate to the fifty-two
weeks ended June 27, 1998. In addition, all references herein to "first
quarter of fiscal 1999" relate to the thirteen weeks ended September 26,
1998, and all references to "first quarter of fiscal 1998" relate to the
thirteen weeks ended September 27, 1997.
The following table sets forth certain operating data for the
Company:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------------ -------------------
<S> <C> <C>
Stores open at end of period................................................ 203 134
Acquired Computer City stores (1)........................................... 37 --
Stores opened during the period............................................. 4 5
Stores relocated during the period.......................................... 2 1
Average net sales per gross square foot (2)................................. $ 281 $ 317
Comparable store sales (decrease) increase (3).............................. (1.7%) 6.1%
</TABLE>
- --------------------------------------------------
(1) As of August 31, 1998, the Company acquired 37 Computer City stores that
the Company intends to continue to operate as CompUSA Computer Superstores.
(2) Calculated using net sales divided by gross square footage of Computer
Superstores open at the end of the period, including the 37 acquired
Computer City stores, weighted by the number of months open during the
period. For purposes of calculating average net sales per gross square
foot, net sales are comprised of net sales generated from the Company's
Computer Superstores, including the 37 acquired Computer City stores, as
well as the Company's national accounts group, but exclude mail order
sales.
(3) Comparable store sales are net sales for the Computer Superstores open the
same number of months in both the indicated and previous period, including
stores that were relocated or expanded during either period. For purposes
of calculating the change in comparable store sales, net sales are
comprised of net sales generated from the Company's Computer Superstores,
as well as the Company's national accounts group, but exclude mail order
sales. The sales of the 37 acquired Computer City stores are not included
in the calculation of the change in comparable store sales for the first
quarter of fiscal 1999.
13
<PAGE>
Comparable store sales decreased in the first quarter of fiscal 1999
compared with the first quarter of fiscal 1998. The Company believes the
decrease in comparable store sales was impacted by declines in average
selling prices of certain of the Company's products, increased sales of
lower-end computer systems, and lower corporate sales as well as by a
reduction of sales in its Computer Superstores in September as a result of
the inventory liquidation sales conducted at the Computer City stores closed
by the Company. In addition, the Company believes the opening of additional
Computer Superstores in existing markets, as well as the acquisition of 29
Computer City stores in existing markets, has resulted in some reductions in
the rate of comparable store sales growth. CompUSA has historically opened
additional stores in existing markets largely to increase market penetration
and to provide customers with more convenience and better service. The
Company plans to continue its strategy of opening additional Computer
Superstores in existing markets. Management believes the resulting diversion
of sales from existing stores has adversely affected the Company's comparable
store sales. However, the Company believes that this strategy should increase
its awareness with local consumers, enhance its competitive position in such
markets, and create efficiencies in advertising and management, and therefore
is in the Company's long-term best interest.
RESULTS OF OPERATIONS
As a result of the expansion of the Company's store base,
period-to-period comparisons of financial results may not be meaningful and
the results of operations for historical periods may not be indicative of the
results to be expected in future periods. In addition, the Company expects
that its quarterly results of operations will fluctuate depending on the
timing of the opening of, and the amount of net sales contributed by, new
stores and the timing of costs associated with the selection, leasing,
construction, and opening of new stores, as well as seasonal factors, product
introductions, and changes in product mix. See "--Quarterly Data and
Seasonality."
The results of operations of the Company for the first quarter of
fiscal 1999 include the results of operations of the 37 acquired Computer
City stores that the Company intends to continue to operate and convert to
CompUSA Computer Superstores. The results of operations for the first quarter
of fiscal 1999 exclude the operating results of the 55 Computer City stores
in the United States closed by the Company and the seven Canadian Computer
City supercenters sold by the Company.
The following table sets forth certain items expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------------ -------------------
<S> <C> <C>
Net sales..................................... 100.0% 100.0%
Cost of sales and occupancy costs............. 85.9 85.3
------------------ -------------------
Gross profit.................................. 14.1 14.7
Operating expenses............................ 10.5 9.2
Pre-opening expenses.......................... 0.1 0.1
General and administrative expenses........... 2.3 2.1
------------------ -------------------
Operating income.............................. 1.2 3.3
Interest expense and other income, net........ 0.3 0.1
------------------ -------------------
Income before income taxes.................... 0.9 3.2
Income tax expense............................ 0.3 1.2
------------------ -------------------
Net income.................................... 0.6% 2.0%
------------------ -------------------
------------------ -------------------
</TABLE>
14
<PAGE>
FIRST QUARTER ENDED SEPTEMBER 26, 1998, COMPARED WITH THE FIRST QUARTER ENDED
SEPTEMBER 27, 1997
Net sales for the first quarter of fiscal 1999 increased 16.8% to
$1.39 billion from $1.19 billion for the first quarter of fiscal 1998. The
increase in net sales was primarily due to the additional sales volume
attributable to the new stores opened subsequent to the first quarter of
fiscal 1998 and the sales generated by the former Computer City stores
subsequent to their acquisition. However, comparable store sales by the
CompUSA Computer Superstores decreased 1.7% from the first quarter of fiscal
1998. Despite an increase in overall sales and the number of personal
computer systems sold in the first quarter of fiscal 1999, sales were
negatively impacted by, among other things, declines in average selling
prices for certain of the Company's products, including desktop and notebook
computers and monitors, increased sales of lower-end computer systems, and
lower corporate sales. The Company also believes the change in comparable
store sales was negatively impacted by a reduction of sales in the CompUSA
Computer Superstores in September as a result of (i) inventory liquidation
sales conducted at the Computer City stores closed by the Company and (ii)
the sales of the 29 former Computer City stores located in metropolitan areas
in which there are existing CompUSA Computer Superstores. Additionally, in
the first quarter of fiscal 1999, average net sales per CompUSA Computer
Superstore, including the 37 acquired Computer City stores, decreased
approximately 12% from the first quarter of fiscal 1998. The Company believes
average net sales per Computer Superstore were negatively impacted by
decreases in average selling prices, an increase in sales of lower-end
computer systems and lower sales per store by the 37 acquired Computer City
stores.
Gross profit was $196 million, or 14.1% of net sales, in the first
quarter of fiscal 1999, compared with $176 million, or 14.7% of net sales, in
the first quarter of fiscal 1998. The decline in gross profit as a percentage
of net sales in the first quarter of fiscal 1999 compared with the first
quarter of fiscal 1998 was due, in part, to an increase in occupancy costs as
a percentage of net sales. Occupancy costs, which are generally fixed in
nature, deleveraged in the first quarter of fiscal 1999 as a result of lower
average net sales per Computer Superstore compared to the first quarter of
fiscal 1998 in general, as well as average net sales per store at the former
Computer City stores that were lower than those of the CompUSA Computer
Superstores. These declines were partially offset by an increase in the ratio
of service revenues to total revenues. Service revenues were lower at the
former Computer City stores than at the Company's other stores. Service
revenues typically have higher gross margins than merchandise sales.
Operating expenses were $146.3 million, or 10.5% of net sales, in
the first quarter of fiscal 1999, compared with $109.2 million, or 9.2% of
net sales, in the first quarter of fiscal 1998. The increase in operating
expenses as a percentage of net sales for the first quarter of fiscal 1999
compared with the first quarter of fiscal 1998 was due to a $2.4 million
charge for the anticipated closure of three CompUSA Computer Superstores and
increased personnel and facility expenses. In the first quarter of fiscal
1999, the Company recorded a $2.4 million charge related to the costs to
close three CompUSA Computer Superstores. The stores to be closed are located
in markets in which there is both a former Computer City store and a CompUSA
Computer Superstore and the former Computer City store will continue to be
operated as a CompUSA Computer Superstore. Personnel expenses in the first
quarter of fiscal 1999 increased as a percentage of net sales primarily due
to increases in service revenues as percentages of net sales. Personnel
expenses generally constitute a higher percentage of net sales for service
revenues than for merchandise sales. In addition, personnel expenses
constituted a higher percentage of net sales at the former Computer City
stores than at the Company's other stores. Facilities expenses increased as a
percentage of net sales in the first quarter of fiscal 1999 compared with the
first quarter of fiscal 1998. Facilities expenses are generally fixed in
nature and deleveraged in the first quarter of fiscal 1999 as a result of
lower net sales per store. These increases were partially offset by lower net
advertising expense as a percentage of net sales due to increased vendor
participation.
Pre-opening expenses consist primarily of personnel expenses
incurred prior to a store's opening and promotional costs associated with the
opening. The Company's policy is to expense all pre-opening expenses as
incurred. In the first quarter of fiscal 1999, the Company incurred $1.4
million in pre-opening expenses, compared with $1.5 million in pre-opening
expenses incurred in the first quarter of fiscal 1998.
15
<PAGE>
General and administrative expenses were $32.6 million, or 2.3% of
net sales, in the first quarter of fiscal 1999, compared with $25.6 million,
or 2.1% of net sales, in the first quarter of fiscal 1998. The increase in
general and administrative expenses as a percentage of net sales was
primarily due to costs related to the expansion of the Company's corporate
facilities and personnel to support the Company's growth as well as
deleveraging of corporate facilities expenses, which are generally fixed in
nature. In addition, general and administrative expenses increased as a
result of costs incurred to support the operations of the acquired Computer
City stores. These increases were partially offset by lower incentive
compensation expense.
Interest expense and other income, net, was $2.8 million, or 0.3% of
net sales, in the first quarter of fiscal 1999 compared with $1.1 million, or
0.1% of net sales, in the first quarter of fiscal 1998. The increase in
interest expense and other income was due to the first month of interest
expense on the $136 million note payable to Tandy Corporation related to the
acquisition of Computer City. See "--Liquidity and Capital Resources."
The Company's effective tax rate was 38.5% for both the first
quarter of fiscal 1999 and the first quarter of fiscal 1998.
As a result of the above, net income for the first quarter of fiscal
1999 was $8.1 million, or $.09 per diluted share, compared with net income of
$23.5 million, or $.25 per diluted share, for the first quarter of fiscal
1998.
QUARTERLY DATA AND SEASONALITY
The Company expects that its quarterly results of operations will
fluctuate depending on the timing of the opening of, and the amount of net
sales contributed by, new stores and the timing of costs associated with the
selection, leasing, construction, and opening of new stores, as well as
seasonal factors, product introductions, and changes in product mix.
Based upon its past operating history, the Company believes that its
business is seasonal. Excluding the effects of new store openings, net sales
and earnings are generally lower during the first and fourth fiscal quarters
than in the second and third fiscal quarters.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, total assets were $1.60 billion, $1.26
billion of which were current assets, including $151 million of cash and cash
equivalents. Net cash provided by operating activities for the first quarter
of fiscal 1999 was $84.6 million, which was primarily attributable to the net
income for the quarter and an increase in accounts payable.
Approximately three-fourths of the Company's net sales during the
first quarter of both fiscal 1999 and fiscal 1998 were sales for which the
Company received payment at the time of sale either in cash, by check, or by
third-party credit card. The remaining net sales were primarily sales for
which the Company provided credit terms to corporate, government, and
education customers.
Merchandise inventories increased to $777 million at September 26,
1998, from $521 million at June 27, 1998. The increase in merchandise
inventories is primarily attributable to inventories at the four Computer
Superstores opened in the first quarter of fiscal 1999 and the 37 acquired
Computer City stores, higher inventories held at the Company's configuration
center, as well as inventories received in anticipation of seasonal promotional
sales to be held in the second quarter of fiscal 1999. At September 26, 1998,
inventory per store was $3.7 million, compared with $4.4 million at September
27, 1997.
16
<PAGE>
Capital expenditures during the first quarter of fiscal 1999 were
$12.7 million, of which $2.2 million were for fiscal 1999 new stores, $1.4
million were for the conversion of the acquired Computer City stores to the
CompUSA format, and $5.7 million were for existing stores, compared with
$21.2 million of capital expenditures during the first quarter of fiscal
1998, of which $3.4 million were for fiscal 1998 new stores and $3.0 million
were for existing stores. The Company plans to open 15 to 20 Computer
Superstores in fiscal 1999. In addition to the capital expenditures incurred
in connection with new stores, the Company also incurred capital expenditures
in the first quarter of fiscal 1999 and the first quarter of fiscal 1998
related to improvements in information systems and existing stores, and
additions to property and equipment at the Company's corporate facilities.
Excluding the effects of new store openings, the Company's greatest
short-term capital requirements occur during the second fiscal quarter to
support a higher level of sales in that quarter. Short-term capital
requirements are satisfied primarily by available cash and cash equivalents
and vendor and bank financing.
The Company has an unsecured $300 million credit agreement (the
"Credit Agreement") with a consortium of banks that expires in March 2001.
The Credit Agreement requires that the Company maintain certain financial
ratios and a minimum net worth and restricts, among other things, the
Company's ability to incur additional indebtedness. The Credit Agreement
allows the Company to securitize up to $200 million of certain assets. The
Company's ability to incur borrowings under the Credit Agreement is reduced
by outstanding letters of credit and, in certain circumstances, further
reduced based upon the financial covenants contained in the Credit Agreement.
The Company's ability to incur borrowings under the Credit Agreement could be
further limited in certain circumstances pursuant to the terms of the
indenture related to the Senior Subordinated Notes. At September 26, 1998, no
borrowings were outstanding under the Company's Credit Agreement and the
Company had $242 million available for future borrowings under the Credit
Agreement, after taking into account the limitations in the Senior
Subordinated Notes indenture.
The Company also finances certain fixture and equipment acquisitions
through equipment lessors. Lease financing is available from numerous sources
and the Company evaluates equipment leasing as a supplemental source of
financing on a continuing basis.
In connection with the acquisition of Computer City, the Company
issued a $136 million subordinated promissory note payable to Tandy (the
"Seller Note"). The Seller Note bears interest at a rate of 9.48% per annum
and provides for its repayment in semi-annual installments over a period of
ten years. The first three years of payments are interest only, with the
first principal payment due in December 2001. The Seller Note ranks pari
passu with the Senior Subordinated Notes. The unpaid principal amount of the
Seller Note may be prepaid, in whole or in part, at any time at the option of
the Company, without premium or penalty.
The Company believes that its available cash and cash equivalents,
funds generated by operations, currently available vendor and floor plan
financing, lease financing, and funds available under the Credit Agreement
should be sufficient to finance its continuing operations and expansion plans
through the end of fiscal 1999 and to make all required payments of interest
on the Senior Subordinated Notes and the Seller Note. The level of future
expansion will be contingent upon the availability of additional capital.
INFLATION
While inflation has not had, and the Company does not expect it to
have, a material impact upon operating results, there can be no assurances
that the Company's business will not be affected by inflation in the future.
17
<PAGE>
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which are effective for
fiscal years beginning after December 15, 1997. The adoption of the
disclosure requirements of SFAS No. 130 in the preparation of this Quarterly
Report on Form 10-Q for the thirteen weeks ended September 26, 1998 had no
impact on the Company's financial statements. The Company will adopt the
annual disclosure requirements of SFAS No. 131 in the preparation of its
Annual Report on Form 10-K for the fiscal year ending June 26, 1999, while the
quarterly disclosure requirements will be adopted in fiscal year 2000. The
American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for
fiscal years beginning after December 15, 1998. The Company's current policy
falls within the guidelines of SOP 98-1. Also, the AICPA issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities," which is effective for
fiscal years beginning after December 15, 1998. The Company adopted the
provisions of SOP 98-5 in the preparation of this Quarterly Report on Form
10-Q for the thirteen weeks ended September 26, 1998. The adoption of SOP
98-5 has had no material impact on the Company's financial statements.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The
Company's computer equipment and software and devices with embedded
technology that are time-sensitive may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has undertaken various initiatives intended to ensure
that its computer equipment and software will function properly with respect
to dates in the year 2000 and thereafter. For this purpose, the term
"computer equipment and software" includes systems that are commonly thought
of as information technology ("IT") systems, including accounting, data
processing, and telephone/PBX systems, cash registers, hand-held terminals,
scanning equipment, and other miscellaneous systems, as well as systems that
are not commonly thought of as IT systems, such as alarm systems, sprinkler
systems, fax machines, or other miscellaneous systems. Both IT and non-IT
systems may contain imbedded technology, which complicates the Company's Year
2000 identification, assessment, remediation, and testing efforts. Based upon
its identification and assessment efforts to date, the Company believes that
certain of the computer equipment and software it currently uses will require
replacement or modification. In addition, in the ordinary course of replacing
computer equipment and software, the Company attempts to obtain replacements
that it believes are Year 2000 compliant. Utilizing both internal and external
resources to identify and assess needed Year 2000 remediation, the Company
currently anticipates that its Year 2000 identification, assessment,
remediation, and testing efforts, which began in October 1996, will be
completed by June 30, 1999, and that such efforts will be completed prior to
any currently anticipated impact on its computer equipment and software. The
Company estimates that as of September 26, 1998, it had completed approximately
40% of the initiatives that it believes will be necessary to fully address
potential Year 2000 issues relating to its computer equipment and software.
The projects comprising the remaining 60% of the initiatives are in process
and expected to be completed on or about June 30, 1999.
18
<PAGE>
<TABLE>
<CAPTION>
PERCENT
YEAR 2000 INITIATIVE TIME FRAME COMPLETE
------------------ ---------------
<S> <C> <C>
Initial IT systems identification and assessment............................ 10/96-3/97 100%
Remediation and testing regarding central system issues..................... 5/97-4/98 100%
Remediation and testing regarding departmental system issues................ 3/98-6/99 75%
Remediation and testing regarding store and distribution system issues...... 8/98-6/99 5%
Upgrades to telephone/PBX and other systems................................. 3/98-11/98 80%
Electronic data interchange trading partner conversions..................... 3/98-3/99 20%
Identification, assessment, remediation, and testing regarding desktop and
individual system issues................................................. 2/98-6/99 65%
Identification and assessment regarding non-IT system issues................ 4/98-12/98 30%
Remediation and testing regarding non-IT system issues...................... 9/98-6/99 0%
</TABLE>
The Company has also mailed letters to its significant vendors and
service providers and has verbally communicated with many strategic customers
to determine the extent to which interfaces with such entities are vulnerable
to Year 2000 issues and whether the products and services purchased from or
by such entities are Year 2000 compliant. As of October 23, 1998, the Company
had received responses from approximately 51% of such third parties, and 76%
of the companies that have responded have provided written assurances that
they expect to address all their significant Year 2000 issues on a timely
basis.
The Company believes that the cost of its Year 2000 identification,
assessment, remediation, and testing efforts, as well as currently
anticipated costs to be incurred by the Company with respect to Year 2000
issues of third parties, will not exceed $5 million, which expenditures will
be funded from operating cash flows. Such amount represents approximately 3%
of the Company's total actual and anticipated IT expenditures for fiscal 1997
through fiscal 1999. As of September 26, 1998, the Company had incurred costs
of approximately $2.0 million related to its Year 2000 identification,
assessment, remediation, and testing efforts. All of the $2.0 million relates
to analysis, repair, or replacement of existing software, upgrades to
existing software, or evaluation of information received from significant
vendors, service providers, or customers. Other non-Year 2000 IT efforts have
not been materially delayed or impacted by Year 2000 initiatives. The Company
presently believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, if all Year 2000 issues are
not properly identified, or assessment, remediation, and testing are not
effected timely with respect to Year 2000 problems that are identified, there
can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be
no assurance that the Year 2000 issues of other entities will not have a
material adverse impact on the Company's systems or results of operations.
The Company has begun, but not yet completed, a comprehensive
analysis of the operational problems and costs (including loss of revenues)
that would be reasonably likely to result from the failure by the Company and
certain third parties to complete efforts to achieve Year 2000 compliance on
a timely basis. A contingency plan has not been developed for dealing with
the most reasonably likely worst case scenario, and such scenario has not yet
been clearly identified. The Company currently plans to complete such
analysis and contingency planning by December 31, 1999.
The Company has engaged an independent expert to evaluate its Year
2000 identification, assessment, remediation, and testing efforts.
19
<PAGE>
The costs of the Company's Year 2000 identification, assessment,
remediation, and testing efforts and the dates on which the Company believes
it will complete such efforts are based upon management's best estimates,
which were derived using numerous assumptions regarding future events,
including the continued availability of certain resources, third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ
materially from those currently anticipated. Specific factors that could
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues, the ability
to identify, assess, remediate, and test all relevant computer codes and
imbedded technology, and similar uncertainties. In addition, variability of
definitions of "compliance with Year 2000" and the myriad of different
products and services, and combinations thereof, sold by the Company may lead
to claims whose impact on the Company is not currently estimable. No
assurance can be given that the aggregate cost of defending and resolving
such claims, if any, will not materially adversely affect the Company's
results of operations. Although some of the Company's agreements with
manufacturers and others from whom it purchases products for resale contain
provisions requiring such parties to indemnify the Company under some
circumstances, there can be no assurance that such indemnification
arrangements will cover all of the Company's liabilities and costs related to
claims by third parties related to the Year 2000 issue.
20
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Note 4 of the Notes to Consolidated Financial Statements in Part I,
Item 1 is incorporated herein by reference as if fully restated herein. Note
4 contains forward-looking statements that are subject to the risks and
uncertainties discussed in Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cautionary Statement
Regarding Risks and Uncertainties That May Affect Future Results."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated and Amended Certificate of Incorporation. (1)
3.2 Restated and Amended Bylaws. (2)
10 Second Amendment to the Credit Agreement, dated August 31, 1998,
among the Company, certain lenders and NationsBank, N.A., as
administrative lender. (3)
11 Computation of Income per Common and Common Equivalent Share. (4)
27.1 Financial Data Schedule. (5)
27.2 Restated Financial Data Schedule. (5)
(b) Reports on Form 8-K.
Current Report on Form 8-K dated August 31, 1998, as filed with the
Securities and Exchange Commission regarding the Company's acquisition
of Computer City, Inc.
- --------------
(1) Previously filed as an exhibit to the Company's Registration
Statement No. 1-11566 on Form 8-A/A filed December 6, 1996,
as amended and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 26,
1994, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1998, and
incorporated herein by reference.
(4) Filed herewith.
(5) Included with EDGAR version only.
21
<PAGE>
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.
CompUSA Inc.
Date: November 10, 1998 By: /s/ JAMES E. SKINNER
-------------------------
James E. Skinner
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
22
<PAGE>
EXHIBIT 11
COMPUSA INC.
COMPUTATIONS OF
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
<S> <C> <C>
Common shares issued at beginning of period.......................... 93,373 91,763
Weighted average number of common shares issued during the period.... 377 213
Weighted treasury shares during the period........................... (2,507) (317)
----------- -----------
Weighted average common shares....................................... 91,243 91,659
Incremental shares related to assumed exercise of stock options...... 1,798 3,855
----------- -----------
Weighted average common shares assuming dilution..................... 93,041 95,514
----------- -----------
----------- -----------
Net income........................................................... $ 8,140 $ 23,459
Basic earnings per share............................................. $ 0.09 $ 0.26
Diluted earnings per share........................................... $ 0.09 $ 0.25
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE THIRTEEN WEEKS ENDED
SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 151,129
<SECURITIES> 0
<RECEIVABLES> 265,032
<ALLOWANCES> (5,492)
<INVENTORY> 776,992
<CURRENT-ASSETS> 1,259,698
<PP&E> 442,651
<DEPRECIATION> (213,372)
<TOTAL-ASSETS> 1,600,540
<CURRENT-LIABILITIES> 929,649
<BONDS> 110,000
0
0
<COMMON> 939
<OTHER-SE> 422,223
<TOTAL-LIABILITY-AND-EQUITY> 1,600,540
<SALES> 1,392,140
<TOTAL-REVENUES> 1,392,140
<CGS> 1,195,786
<TOTAL-COSTS> 1,195,786
<OTHER-EXPENSES> 180,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,383
<INCOME-PRETAX> 13,208
<INCOME-TAX> 5,068
<INCOME-CONTINUING> 8,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,140
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE 13 WEEKS ENDED
SEPT.28, 1996 AND SEPT.27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. CERTAIN INFORMATION HAS BEEN RESTATED IN ACCORDANCE
WITH ITEM 601(c)(2)(iii) OF REGULATION S-K, AS DESCRIBED IN FOOTNOTE 1 BELOW.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-27-1998 JUN-28-1997
<PERIOD-START> JUN-29-1997 JUN-30-1996
<PERIOD-END> SEP-27-1997 SEP-28-1996
<CASH> 294,894 266,126
<SECURITIES> 0 0
<RECEIVABLES> 221,541 155,277
<ALLOWANCES> (2,919) (1,591)
<INVENTORY> 631,279 564,289
<CURRENT-ASSETS> 1,164,274 1,003,066
<PP&E> 293,133 216,103
<DEPRECIATION> (111,551) (74,833)
<TOTAL-ASSETS> 1,355,610 1,152,665
<CURRENT-LIABILITIES> 788,509 692,363
<BONDS> 110,000 110,000
0 0
0 0
<COMMON> 922 908
<OTHER-SE> 451,759 341,088
<TOTAL-LIABILITY-AND-EQUITY> 1,355,610 1,152,665
<SALES> 1,191,812 990,530
<TOTAL-REVENUES> 1,191,812 990,530
<CGS> 1,016,213 853,610
<TOTAL-COSTS> 1,016,213 853,610
<OTHER-EXPENSES> 136,316 112,476
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,055 3,045
<INCOME-PRETAX> 38,146 23,652
<INCOME-TAX> 14,687 9,106
<INCOME-CONTINUING> 23,459 14,546
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,459 14,546
<EPS-PRIMARY> 0.26<F1> 0.16<F1>
<EPS-DILUTED> 0.25<F1> 0.15<F1>
<FN>
<F1>THE COMPANY ADOPTED THE PROVISIONS OF SFAS NO. 128 IN THE PREPARATION OF THE
FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE
THIRTEEN WEEKS ENDED DECEMBER 27, 1997. IN ACCORDANCE WITH THE PROVISIONS OF
SFAS NO. 128, THE COMPANY HAS RESTATED PREVIOUSLY REPORTED EARNINGS PER SHARE
AMOUNTS TO CONFORM TO THE PROVISIONS OF SFAS NO. 128.
</FN>
</TABLE>
