<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
AUGUST 31, 1998
COMPUSA INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
1-11566 75-2261497
(Commission File Number) (I.R.S. Employer
Identification No.)
14951 NORTH DALLAS PARKWAY
DALLAS, TEXAS 75240
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING
AREA CODE: (972) 982-4000
NOT APPLICABLE
(Former name or former address, if changed since last report.)
- -------------------------------------------------------------------------------
<PAGE>
The undersigned registrant hereby amends the following item of its Form 8-K
dated September 15, 1998 as set forth below and in the pages attached hereto:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses being acquired:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Computer City, Inc.
Report of Independent Accountants 4
Combined Balance Sheets as of December 31, 1997 and 1996 5
Combined Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 6
Combined Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 7
Combined Statements of Changes in Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 8
Notes to Combined Financial Statements 9
Unaudited Consolidated Balance Sheet as of June 30, 1998 24
Unaudited Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997 25
Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 26
Notes to Unaudited Consolidated Financial Statements 27
(b) Uuaudited pro forma consolidated financial information:
CompUSA Inc.
Unaudited Pro Forma Consolidated Statement of Operations for the
fiscal year ended June 27, 1998 30
Unaudited Pro Forma Consolidated Statement of Operations for the
thirteen weeks ended September 26, 1998 31
Notes to Unaudited Pro Forma Statements of Operations 32
</TABLE>
(c) Exhibits:
23 Consent of Independent Accountants
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
CompUSA Inc.
Dated: November 16, 1998 By: /s/ James E. Skinner
------------------------------
James E. Skinner
Executive Vice President and
Chief Financial Officer
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF COMPUTER CITY, INC.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of
Computer City, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 4 to the financial statements, the Company has suffered
recurring losses from operations and is dependent on Tandy Corporation to
provide financial support and liquidity to fund its operations. Additionally,
as discussed in Note 15, Tandy Corporation has entered an agreement in principle
whereby all of the outstanding common stock of Computer City, Inc. will be sold
to an unrelated party.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Fort Worth, Texas
February 19, 1998, except as to Note 15 and
the second paragraph of Note 2 which are as of
August 31, 1998
4
<PAGE>
COMPUTER CITY, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,564 $ 11,952
Accounts receivable, net of allowance for doubtful
accounts of $2,360 and $2,341, respectively 79,790 78,436
Inventories 297,227 318,469
Prepaid expenses and other current assets 4,596 8,459
--------- ---------
Total current assets 390,177 417,316
Property, plant and equipment, net 101,933 102,263
Other assets 3,211 1,672
--------- ---------
$ 495,321 $ 521,251
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 30,000 $ -
Accounts payable 117,874 168,262
Accrued liabilities 59,314 44,394
Current portion of capital lease obligations 549 417
--------- ---------
Total current liabilities 207,737 213,073
Capital lease obligations 28,745 29,294
Subordinated debt to Tandy 125,000 -
Deferred service contract revenue 5,990 4,193
--------- ---------
Total liabilities 367,472 246,560
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding - -
Class A common stock, $.01 par value;
30,000,000 shares authorized and outstanding 300 -
Class B common stock, $.01 par value; 25,000,000
shares authorized and 20,000,000 shares outstanding 200 -
Contributed capital by Tandy 307,896 425,772
Accumulated deficit (180,161) (151,188)
Foreign currency translation effects (386) 107
--------- ---------
Total stockholders' equity 127,849 274,691
--------- ---------
$ 495,321 $ 521,251
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
5
<PAGE>
COMPUTER CITY, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales and operating revenue $1,853,894 $2,001,746 $1,710,913
Cost of sales 1,656,575 1,826,559 1,535,243
---------- ---------- ----------
Gross profit 197,319 175,187 175,670
---------- ---------- ----------
Selling, general and administrative expenses 193,799 217,124 180,218
Depreciation and amortization 20,194 19,542 13,705
Impairment of long-lived assets - 18,186 -
Restructuring charges - 12,806 -
---------- ---------- ----------
Operating expenses 213,993 267,658 193,923
---------- ---------- ----------
Operating loss (16,674) (92,471) (18,253)
Other income (expense):
Interest expense (12,347) (6,283) (4,534)
Interest income 48 59 130
---------- ---------- ----------
Loss before income taxes (28,973) (98,695) (22,657)
Income taxes - - -
---------- ---------- ----------
Net loss $ (28,973) $ (98,695) $ (22,657)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
6
<PAGE>
COMPUTER CITY, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (28,973) $ (98,695) $(22,657)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 20,194 19,542 13,705
Bad debt expense 648 1,030 773
Impairment of long-lived assets - 18,186 -
Restructuring charges - 33,547 -
Other adjustments (269) (177) 673
Changes in assets and liabilities:
Accounts receivable (2,002) 426 (28,359)
Inventories 21,242 (14,622) 49,561
Prepaid expenses and other current assets 3,863 (4,900) (2)
Other assets (1,694) (1,684) 2
Accounts payable and accrued liabilities (35,468) (24,076) (34,326)
Other liabilities 1,797 1,817 1,409
---------- ---------- ----------
Net cash used in operating activities (20,662) (69,606) (19,221)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (19,933) (27,325) (33,150)
Cash flows provided by (used in) financing activities:
Borrowings under line of credit agreement 30,000 - -
Contributed capital from Tandy, net 7,624 83,378 60,679
Payments under capital lease obligations (417) (819) (481)
---------- ---------- ----------
Net cash provided by financing activities 37,207 82,559 60,198
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (3,388) (14,372) 7,827
Cash and cash equivalents at beginning of year 11,952 26,324 18,497
---------- ---------- ----------
Cash and cash equivalents at end of year $ 8,564 $ 11,952 $ 26,324
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,808 $ 6,283 $ 4,534
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of non-cash transactions:
Additions to property under capital leases $ - $ 4,502 $ 6,004
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
7
<PAGE>
COMPUTER CITY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
-------------- -------------- CONTRIBUTED FOREIGN
PAR PAR CAPITAL ACCUMULATED CURRENCY
SHARES VALUE SHARES VALUE BY TANDY DEFICIT TRANSLATION TOTAL
------ ----- ------ ----- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - - $ - $ 281,715 $ (29,836) $(389) $ 251,490
Net loss - - - - - (22,657) - (22,657)
Contributed capital, net - - - - 60,679 - - 60,679
Foreign currency translation
adjustment, net of taxes - - - - - - 673 673
------ ---- ------ ---- --------- --------- ------ ---------
Balance at December 31, 1995 - - - - 342,394 (52,493) 284 290,185
Net loss - - - - - (98,695) - (98,695)
Contributed capital, net - - - - 83,378 - - 83,378
Foreign currency translation
adjustment, net of taxes - - - - - - (177) (177)
------ ---- ------ ---- --------- --------- ------ ---------
Balance at December 31, 1996 - - - - 425,772 (151,188) 107 274,691
Net loss - - - - - (28,973) - (28,973)
Contributed capital, net - - - - 7,624 - - 7,624
Recapitalization of Company
and issuance of common stock 30,000 300 20,000 200 (125,500) - - (125,000)
Foreign currency translation
adjustment, net of taxes - - - - - - (493) (493)
------ ---- ------ ---- --------- --------- ------ ---------
Balance at December 31, 1997 30,000 $300 20,000 $200 $ 307,896 $(180,161) $(386) $ 127,849
------ ---- ------ ---- --------- --------- ------ ---------
------ ---- ------ ---- --------- --------- ------ ---------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
8
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BUSINESS
Computer City Inc. ("CCI" or the "Company") is a retailer of personal
computer hardware, software, accessories, and related products and services
conducting its operations principally through its Computer City Stores in the
United States and Canada. In addition to the retail sales of its stores, the
Company's stores also fulfill the principal marketing, product, and service
functions of the Company's other businesses, including direct sales to
corporate, government, and education customers and training and technical
services.
2. BASIS OF PRESENTATION
The accompanying combined financial statements consist of the combined
financial position and operating results of certain former Computer City
divisions of Tandy Corporation ("Tandy"): Computer City USA, Computer City
Canada, certain service centers formerly included in a division of Tandy, and
a former wholly-owned subsidiary of Tandy, National Leasehold Interests, Inc.
(collectively referred to as the "Computer City Division"). On June 26,
1997, Tandy Corporation ("Tandy") organized a new subsidiary, CCI, and
thereafter conveyed to it certain related assets and liabilities of the
Computer City Division. On July 1, 1997, Tandy and Eureka Venture Partners
III LLP, a Texas limited liability partnership ("Eureka"), entered into a
Stock Purchase Agreement whereby Eureka would acquire 19.9% of the
outstanding common stock of Computer City, Inc. for a total purchase price of
$24.9 million, payable in cash (1% of the purchase price) and a note (99% of
the purchase price). The note is secured only by the common shares of
Computer City, Inc. held by Eureka. Eureka also acquired a warrant to
purchase an additional 20.1% of the outstanding common stock of Computer
City, Inc. for $31.4 million, of which at least 10% must be cash and not more
than 90% in the form of a note issued by Eureka. This warrant is exercisable
upon either the attainment of certain financial performance goals by or upon
the date CCI is established as an independent entity.
Prior to CCI's being established as an independent entity, Tandy has the
right to reacquire all of the shares of CCI owned by Eureka and the warrant
in the event that it is exercisable, but unexercised, upon payment of certain
amounts, as determined by defined formulas pursuant to the Stock Purchase
Agreement. Effective June 19, 1998, Tandy and Eureka entered into a
termination agreement whereby Tandy reacquired all of the shares and warrants
owned by Eureka.
All cash advances from Tandy were classified as contributed capital prior to
August 1, 1997. In connection with the organization of the Company, Tandy
and Eureka agreed to a Recapitalization of CCI as of August 1, 1997. The
Recapitalization included a $125 million subordinated note payable to Tandy
with the remaining historical advances from Tandy being reflected as
contributed capital. Interest expense subsequent to August 1, 1997 has been
computed based on the capital structure in place and the actual amounts owed
to Tandy and any other outside party (see Note 11). No interest income has
been allocated to the Company in the accompanying combined financial
statements. These transactions are hereinafter referred to as the
"Recapitalization."
9
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The accompanying combined financial statements are presented as if the
Company had existed as a corporation separate from Tandy during the periods
presented and include the historical assets, liabilities, revenues and
expenses that are directly related to the Company's operations. All material
intercompany transactions have been eliminated. For the periods presented,
certain expenses reflected in the combined financial statements included
allocations of corporate expenses from Tandy. These allocations include
expenses for general management, management information systems, treasury,
legal, benefits administration, insurance, tax compliance and other
miscellaneous services. The allocation of expenses was generally based on
actual costs incurred, and such costs were apportioned to the Company using
varying methods including volume of sales and number of employees.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be incurred by the Company on
a stand-alone basis. Also, the financial information included in the
financial statements may not necessarily reflect the financial position,
results of operations and cash flows of the Company in the future or what the
financial position, results of operations or cash flows would have been if
the Company had been a separate, stand-alone company during the periods
presented.
3. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Cash at stores, deposits in banks, and short-term
investments with original maturities of three months or less are considered
cash and cash equivalents. Cash and cash equivalents are carried at cost,
which approximates fair value.
REVENUES - Sales are recorded on the accrual basis.
ACCOUNTS RECEIVABLE - Accounts receivable primarily represent amounts due
from customers related to the sale of the Company's products and services.
Such receivables are generally unsecured and are generally due from a diverse
group of corporate, government, and education customers located throughout
the United States and Canada and, accordingly, do not include any specific
concentrations of credit risk.
INVENTORIES - Inventories are valued at the lower of cost (determined on a
weighted average basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided in amounts sufficient to charge the cost of the
respective assets to operations over their estimated service lives on a
straight-line basis. Estimated service lives are as follows:
Furniture and fixtures . . . . . . . . . . . . . . . . 5-10 years
Equipment. . . . . . . . . . . . . . . . . . . . . . . 3-5 years
Leasehold improvements . . . . . . . . . . . . . . . . Life of lease
Equipment under capital leases . . . . . . . . . . . . Life of lease
10
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF ("FAS 121"). FAS 121 requires that
losses on the impairment of long-lived assets used in operations be recorded
when indicators of impairment are present and the undiscounted cash flows to
be generated by those assets are less than the assets' carrying amounts. The
standard was adopted by the Company in the preparation of its financial
statements for the fiscal year ended December 31, 1996. See Notes 5 and 6
for further information.
ADVERTISING EXPENSES - Advertising expenses are expensed in the month
incurred, subject to reduction by certain reimbursement from vendors. Net
advertising expenses were not a significant component of store operating
expenses for the fiscal years ended December 31, 1997, 1996, and 1995.
INCOME TAXES - Income taxes are accounted for using the liability method
pursuant to SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("FAS 109"). Deferred
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement and carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes for a
change in tax rates is recognized in income in the period that includes the
enactment date. In addition, FAS 109 requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
EXTENDED SERVICE CONTRACTS - The Company offers extended service contracts on
products sold. These contracts generally provide extended service coverage
for periods of 12 to 48 months. During 1997, 1996 and 1995, the Company sold
extended service contracts on behalf of an unrelated third party and, to a
much lesser extent, sold its own extended service contracts. Contracts sold
prior to 1995 were offered directly by the Company. The Company accounts for
sales of its own contracts in accordance with FASB Technical Bulletin No.
90-1, ACCOUNTING FOR SEPARATELY PRICED EXTENDED WARRANTY AND PRODUCT
MAINTENANCE CONTRACTS, which requires that revenues from sales of extended
service contracts be recognized ratably over the lives of the contracts.
Costs directly related to sales of such contracts are deferred and charged to
expense proportionately as the revenues are recognized. A loss is recognized
on extended service contracts if the sum of the expected costs of providing
services pursuant to the contracts exceeds related unearned revenue.
Commission revenue for the unrelated third party extended service contracts
is recognized at the time of sale.
STOCK OPTIONS - The Company applies Accounting Principles Board Opinion
("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), in
accounting for stock options and presents in Note 13 pro forma net earnings
as if the accounting prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, had been applied.
FOREIGN CURRENCY TRANSLATION - In accordance with SFAS No. 52, FOREIGN
CURRENCY TRANSLATION, balance sheet accounts of the Company's foreign
operations are translated from foreign currencies into U.S. dollars at
year-end or historical rates while income and expenses are translated at the
weighted average sales exchange rates for the year. Translation gains or
losses related to net assets located outside the United States are shown as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions (transactions denominated in a currency other
than the entity's
11
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
functional currency) are included in net income. Such foreign currency
transaction gains and losses were not significant for each of the years ended
December 31, 1997, 1996 and 1995.
FINANCIAL INSTRUMENTS - The Company evaluates financial instruments in
accordance with SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The following methods and assumptions were used to estimate the
fair value of each class of financial instrument: cash and receivables - the
carrying amounts approximate fair value because of the short maturity of
those instruments; debt - the fair value of the Company's debt is estimated
based on the current borrowing rates available for loans with similar terms
and maturities. The carrying amounts approximate fair value because of the
short maturity of those instruments. Throughout 1997, the Company did not
have any financial derivative instruments outstanding.
CAPITALIZED SOFTWARE COSTS - The Company capitalizes qualifying costs
relating to developing or obtaining internal use software. Capitalization of
costs begins after the conceptual formulation stage has been completed.
Capitalized costs are amortized over the estimated useful life of the
software, which ranges between three and five years. Capitalized costs at
December 31, 1997, 1996 and 1995 aggregated $6.0 million, $0.8 million and
$0.6 million, net of accumulated amortization of $0.8 million, $0.5 million
and $0.3 million, respectively.
USE OF ESTIMATES - The preparation of 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 combined
financial statements. Actual results could differ from those estimates.
4. CAPITAL RESOURCES AND OPERATING LOSSES
Since inception through August 1997, the Company's operating losses and its
working capital and capital expenditure requirements have been funded by cash
advances by Tandy. Effective August 1, 1997, the Company was Recapitalized,
as more fully described in Note 2. Tandy has also fully guaranteed the
Company's current $150 million line of credit facility (see Note 11). The
Company is seeking other sources of funding, including private equity money.
Additionally, the Company will seek to extend or replace its line of credit
facility without Tandy's guarantee prior to its expiration date of December
18, 1998. However, there can be no assurance that the Company will be
successful in its efforts to obtain private equity money or in its efforts to
extend or replace its line of credit without Tandy's guarantee. There is
also no assurance that Tandy will extend its line of credit guaranty beyond
December 1998 should the Company be unsuccessful in its attempts to extend
its line of credit without Tandy's guarantee.
The Company has accumulated losses since its inception and for the years
ended December 31, 1997, 1996 and 1995 has incurred net losses of $29.0
million, $98.7 million and $22.7 million, respectively. As described in Note
5, during the fourth quarter of fiscal 1996, the Company closed 21
unprofitable stores. Additionally, the new management team at CCI has taken
and will continue to take certain actions to increase revenues and achieve
profitability. These actions include increasing service revenues, which
typically have a higher gross margin than merchandise sales, increasing
direct sales to corporations, government and education customers, creating a
build-to-order program which allows customers to order
12
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
custom-configured personal computers, and developing the ability to purchase
products on-line via the internet. Management of CCI believe that these
actions will result in improved operating performance; however, there can be
no assurance that increased sales and profitability will be achieved.
Should the Company's actions fail to increase sales and achieve
profitability, or should the Company fail in its efforts to raise private
equity money or extend or obtain a replacement line of credit, management may
be required to close additional stores, sell certain assets or take other
measures they deem necessary to achieve improved operating performance and to
meet its debt service and working capital requirements.
5. RESTRUCTURING CHARGES
The Company recorded a pre-tax restructuring charge of $12.8 million in the
fourth quarter of 1996 related to the closure of 21 unprofitable Computer
City stores. The 1996 fourth quarter charge primarily relates to lease
obligations, employee termination expenses and contract termination costs.
Tandy directed the actual store closings in conjunction with other closures
of retail facilities owned by Tandy and indemnified the Company against any
future costs associated therewith. As noted above, the Company recognized
the appropriate store closing charge as an expense in 1996. At December 31,
1996, Tandy assumed responsibility for the disposition of the remaining
assets as well as any further costs to dispose of them should such costs be
necessary. As a result, the Company recorded additional contributed capital
from Tandy in lieu of recognizing the related liability.
In association with the 1996 restructurings, the Company also recognized an
impairment charge of $11.4 million pursuant to FAS 121 (see Note 6) and lower
of cost or market impairments aggregating approximately $20.7 million
primarily related to inventory liquidated at the affected stores. Inventory
impairment charges have been recognized as an increase in cost of sales in
the accompanying combined statements of income.
Sales and operating revenues and operating losses of the stores closed
pursuant to the restructuring plans are shown below for each year ended
December 31 (unaudited):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales and operating revenue $ - $354,756 $372,418
Net operating loss - (21,577) (15,627)
</TABLE>
13
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The components of the restructuring charge are included in the accompanying
table below.
<TABLE>
<CAPTION>
1996 LIABILITY BALANCE AT
RESTRUCTURING ASSUMED DECEMBER 31,
CHARGE BY TANDY 1996
------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations $6,592 $(6,592) $ -
Termination benefits 1,195 (1,195) -
Other 5,019 (5,019) -
------------- --------- ------------
Total $12,806 $(12,806) $ -
------------- --------- ------------
------------- --------- ------------
</TABLE>
6. IMPAIRMENT OF LONG-LIVED ASSETS
Upon adoption of FAS 121 during the first quarter of fiscal 1996, the Company
recognized an initial non-cash impairment of approximately $6.8 million to
conform with this statement, primarily as a result of grouping long-lived
assets at their lowest level of cash flows to determine impairment as
required by this statement. Fair value was principally determined based upon
estimated future discounted cash flows (before interest) related to each
group of assets.
The Company recognized an additional non-cash impairment charge of $11.4
million in the fourth quarter of 1996 primarily related to the disposal of
certain long-lived assets pursuant to the restructuring plan (see Note 5).
These assets related to the 21 stores that were included in the store closure
plan.
7. RELATED PARTY TRANSACTIONS
The Company has received services provided by Tandy which include employee
benefits administration, treasury, risk management, tax compliance, financial
reporting and accounting services, management information services, and other
miscellaneous services. The costs associated with these services have been
allocated to the Company as described in Note 1. During fiscal 1997, 1996
and 1995, allocated expenses from Tandy to the Company approximated $19.0
million, $11.1 million and $10.4 million, respectively. Subsequent to August
1997, Tandy continues to provide certain of these services to the Company
pursuant to a Transitional Services Agreement until the Company establishes
its own internal capabilities or engages external services to provide such
services to the extent management deems advisable. The Company has agreed to
compensate Tandy for providing such services.
During 1997 and 1996, the Company utilized a Tandy-owned centralized
distribution center to receive a portion of its vendor merchandise and ship
it to the Company's various retail store locations. Additionally, during
1997 and 1996, the Company utilized a Tandy-owned centralized returned
merchandise warehouse facility. This facility processes the bulk of the
Company's merchandise that will be returned to vendors. Tandy charged the
Company $8.4 million in 1997 and $5.7 million in 1996 for the use of these
facilities. The Company will continue to utilize these facilities until it
establishes its own distribution and return capabilities.
14
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Tandy has agreed to indemnify the Company for certain insurance claims
including workers' compensation and health insurance claims reported or
incurred prior to the date CCI achieves independent company status. The
Company has recognized its appropriate expense relating to these claims.
For purposes of the Company's combined financial statements, all cash
advances from Tandy to August 1, 1997 (the Recapitalization date) are shown
as capital contributions in the accompanying combined financial statements.
The Company has a $125 million subordinated note due to Tandy as of December
31, 1997. In addition, Tandy has fully guaranteed the Company's $150 million
line of credit facility. Tandy has either guaranteed or is still the primary
obligor on substantially all Company store leases. Three stores are leased
from Tandy.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Buildings under capital lease $ 31,267 $ 31,247
Machinery and equipment 41,556 28,724
Furniture, fixtures and equipment 24,154 25,175
Leasehold improvements 59,018 53,698
-------- --------
155,995 138,844
Less accumulated depreciation and
amortization of capital leases (54,062) (36,581)
-------- --------
$101,933 $102,263
-------- --------
-------- --------
</TABLE>
Accumulated amortization on buildings under capital lease totaled $7.0
million and $4.8 million at December 31, 1997 and 1996, respectively.
Amortization expense on capital leases totaled $2.2 million, $2.3 million and
$1.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
15
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries and bonuses $ 6,362 $ 5,163
Taxes, other than income and payroll 16,174 8,307
Rent 3,477 3,853
Sales returns accrual 17,083 17,083
Other 16,218 9,988
------- -------
$59,314 $44,394
------- -------
------- -------
</TABLE>
10. INCOME TAXES
In conjunction with the Recapitalization of the Company, Tandy and CCI
entered into a Tax-Sharing and Indemnification Agreement (the "Tax
Agreement"). Pursuant to the Tax Agreement, Tandy will continue to include
the Company in its consolidated tax returns until such date that Tandy's
ownership interest in CCI falls below the statutorily required percentage
ownership allowing inclusion in its consolidated return. Tandy is not
required to compensate CCI for benefits received from the use of any
operating losses generated by CCI. CCI is responsible for, and must pay
Tandy for, any taxes due with respect to income attributable to CCI.
FAS 109 provides that the allocation of current and deferred tax expense to
each member of a consolidated group should be made on a systematic, rational
method. The tax provision and the deferred tax assets/liabilities presented
in the accompanying combined financial statements have been determined on a
stand-alone basis as allowed pursuant to FAS 109. Tandy has utilized CCI's
current operating losses to reduce its taxes payable without compensating CCI
for such tax benefits. As a result, the Company has not recognized a tax
benefit associated with its generation of current operating losses and has
provided a valuation allowance for its net deferred tax assets since it is
management's assessment that, on a stand-alone basis, it would be more likely
than not that the tax benefits would not be realized.
16
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The tax effects of temporary differences giving rise to the deferred tax
asset (liability) at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets
Bad debts $880 $879
Inventory valuation 3,252 4,076
Other 165 99
------- -------
Gross current deferred tax assets 4,297 5,054
------- -------
Noncurrent deferred tax assets
Average rent 1,240 2,069
Deferred service contract income 1,973 1,564
Capital lease 1,219 1,009
Other 21 46
------- -------
Gross noncurrent deferred tax assets 4,453 4,688
------- -------
Deferred tax assets 8,750 9,742
------- -------
Current deferred tax liabilities
Prepaid expenses (174) (321)
Other (12) (159)
------- -------
Gross current deferred tax liabilities (186) (480)
------- -------
Noncurrent deferred tax liabilities
Depreciation (4,415) (2,902)
Other (151) (177)
------- -------
Gross noncurrent deferred tax liabilities (4,566) (3,079)
------- -------
Deferred tax liabilities (4,752) (3,559)
------- -------
Net deferred tax asset 3,998 6,183
Valuation allowance (3,998) (6,183)
------- -------
$ - $ -
------- -------
------- -------
</TABLE>
11. DEBT
DEBT TO TANDY - The December 31, 1997 balance sheet reflects the July 1997
Recapitalization of the Company which includes a $125 million subordinated
note payable to Tandy with interest at 8% per annum. The note matures in
July 2002 and interest is paid quarterly. During 1997, CCI expensed and paid
$4.2 million in interest related to this debt.
17
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
LINE OF CREDIT - In addition, at the date of Recapitalization, Tandy provided
the Company with a $150 million line of credit which was scheduled to expire
on December 31, 1997. Amounts borrowed under this line were secured by the
Company's inventories and accounts receivable. On December 19, 1997, this
line was replaced by a $150 million revolving credit facility with a
syndicate of banks. The credit facility is an unsecured, revolving line of
credit which expires December 18, 1998 and is fully guaranteed by Tandy.
Accordingly, the amount outstanding at December 31, 1997 of $30 million has
been classified as current in the accompanying combined balance sheet.
Interest rates on these borrowings are based upon a range of federal funds
borrowings rate or prime rate.
Interest rates on borrowings at December 31, 1997 ranged from 6.27% to 8.5%.
The Company pays commitment fees ranging from .08% to .1875% on unused
borrowings. At December 31, 1997, there was $120 million in available
borrowings pursuant to this line of credit facility.
The loan agreement contains provisions specifying certain limitations on the
amount of future indebtedness, investments and distributions, and requires
the maintenance of certain financial ratios.
Management anticipates additional borrowings in 1998 under the line of credit
facility. The facility expires in December 1998 and the Company will be
required to extend or replace it with a similar borrowing facility. The
existing credit facility is fully guaranteed by Tandy. Tandy's intent is to
allow Computer City to pledge its assets to either extend or obtain a
subsequent replacement facility without its guarantee. There can be no
assurance that the Company will be able to extend or obtain a replacement
credit facility without Tandy's guarantee or, if such facility is available,
that the terms will not be significantly more restrictive to the Company than
those which currently exist.
12. COMMITMENTS AND CONTINGENCIES
LITIGATION - 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.
In connection with the Recapitalization transactions, Tandy has agreed to
indemnify the Company against certain claims and liabilities arising with
respect to events occurring prior to the date the Company achieves
independent status from Tandy. These claims and liabilities are covered
pursuant to Tandy's self-insurance program which primarily relates to health
and workers' compensation claims. Upon achieving independent company status,
the Company plans to maintain liability insurance at levels which it believes
will be adequate for its needs and comparable with levels maintained by other
companies in the specialty retail business.
18
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
LEASES - The Company operates in facilities leased under noncancelable
capital and operating leases that expire at various dates through 2022 and
the majority of which contain renewal options and require the Company to pay
a proportionate share of common area maintenance. Contingent rents are
primarily based upon a percentage of the store's sales in excess of a
stipulated base figure. Tandy has either guaranteed or is the primary
obligor on substantially all of the Company's leases.
At December 31, 1997, future minimum lease payments under all leases with
initial or remaining noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ---------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998 $ 6,685 $ 19,277
1999 6,817 19,298
2000 7,082 19,089
2001 7,144 18,761
2002 6,917 17,973
Thereafter 51,933 112,742
------- --------
Total minimum lease payments 86,578 $207,140
--------
--------
Less amount representing interest 57,284
-------
Present value of minimum lease payments 29,294
Less current portion 549
-------
Capital lease obligations due after one year $28,745
-------
-------
</TABLE>
Rental expense of the Company is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Minimum rents $24,634 $35,636 $27,014
Contingent rents 118 68 106
Sublease rent income (291) (19) (23)
------- ------- -------
$24,461 $35,685 $27,097
------- ------- -------
------- ------- -------
</TABLE>
CONTRACT TERMINATION - During 1996, the Company and Electronic Data Systems
Corporation (EDS) entered into a ten-year Master Services Agreement whereby
EDS would provide certain information technology services and products to the
Company's customers. During 1997, the parties agreed to terminate the
agreement and the Company paid a termination fee of approximately $4.0
million, which amount was classified as selling, general and administrative
expense in the accompanying combined results of operations.
19
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
EMPLOYMENT AGREEMENTS - The Company has entered into employment contracts
with three employees. All three contracts were entered into in the fourth
quarter of 1997. All of these contracts have an initial term of three years.
The aggregate annual cost of the employment contracts approximates $1.5
million. One of these agreements contains a clause regarding a noncompete
agreement. Upon termination of employment, the Company and the employee can
agree to a noncompete agreement which calls for the employee to receive an
aggregate amount of $500,000 to be paid over three years (the term of said
noncompete agreement).
13. STOCKHOLDERS' EQUITY
COMMON STOCK - In accordance with the articles of incorporation for CCI, 55
million shares of $.01 par common stock were authorized. These shares are
divided into the following two classes:
- Class A Common Stock has 30 million shares authorized, issued and
outstanding at December 31, 1997 with a par value of $.01 per share.
Each shareholder of Class A Common Stock is entitled to five votes for
each share of Class A Common that they own. At December 31, 1997, Tandy
owned all issued and outstanding Class A Common Stock.
- Class B Common Stock has 25 million shares authorized, of which 20
million are issued and outstanding at December 31, 1997 with a par value
of $.01 per share. Each shareholder of Class B Common Stock is entitled
to one vote for each share of Class B Common that they own. At December
31, 1997, Tandy and Eureka own 10.05 million and 9.95 million shares of
Class B Common Stock, respectively.
Class A and B Common Stock are treated the same for dividend and liquidation
purposes.
PREFERRED STOCK - The Company has 5.0 million shares of authorized preferred
stock with a par value of $.01 per share. No shares have been issued.
Preferred shares can be issued in one or more series with the number of
shares in each series and all other designations to be determined at issuance.
RESTRICTED STOCK - On February 1, 1997, Tandy granted an aggregate of
approximately 78,400 restricted Tandy common stock awards of 800 shares each
to 98 Computer City store managers. Vesting of the restricted stock occurs
at the earlier of the following: (1) if managers are employed as a store
manager or higher position after February 1, 1999 and Tandy's common stock
closes at 33 13/16 or more for 20 consecutive trading days, the stock will
vest at that time, and, otherwise, (2) the shares will vest on February 1,
2002 if the managers are employed as store managers or a higher position of
CCI, at that time. Compensation expense, equal to the fair market value of
the shares upon vesting, will be recognized and pushed down to CCI when it
becomes probable that the performance criteria will be met or upon actual
vesting. As of December 31, 1997, there were 51,200 stock awards outstanding
and eligible for ultimate vesting pursuant to this restricted stock award.
STOCK OPTIONS - On October 1, 1997, the Company established a long-term
incentive plan under which an aggregate of 5,000,000 options to purchase CCI
Class B Common Stock may be granted. These options expire ten years from the
date of grant. In the event of a change in control, the options become
20
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
immediately and fully exercisable. Options outstanding at December 31, 1997
to purchase CCI Class B Common Stock expire in 2007.
A summary of activity in the plan follows:
<TABLE>
<CAPTION>
1997
------------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 4,463,500 3.89
Canceled (70,000) 4.00
Exercised - -
--------- --------
Outstanding at end of year 4,393,500 $ 3.89
--------- --------
--------- --------
Exercisable at end of year - -
--------- --------
--------- --------
</TABLE>
The options outstanding at December 31, 1997 are exercisable at prices
ranging from $3 to $4 per share and are exercisable at the earlier of a
transaction or series of transactions resulting in the Company's being an
independent entity as defined pursuant to the Stock Purchase Agreement
between Eureka and Tandy or 12 months from the date of grant. The weighted
average remaining contractual life of all outstanding options was 9.8 years
at December 31, 1997.
Tandy, as of February 1, 1997, also granted an aggregate of approximately
24,000 stock options to purchase Tandy common stock of 2,000 shares each to
Computer City sales managers. The exercise price of the options is equal to
the fair market value at the date of the grant. No compensation expense was
recognized since the exercise price of the options was equal to the fair
market value price of the stock at the date of grant.
The Company applies APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation
plans. Had compensation cost for the CCI options, Tandy options and
restricted stock awards been determined based on the fair value at the grant
date for awards consistent with the method prescribed by Statement of
Financial Accounting Standards No, 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's pro forma net loss for would have been increased
by approximately $3.4 million, $340,000 and $349,000 in 1997, 1996 and 1995,
respectively. For purposes of pro forma disclosures, the estimated fair
value of the options and restricted stock awards is amortized to expense over
the vesting period. The effects of applying FAS No. 123 in this pro forma
disclosure are not indicative of future amounts as the pro forma amounts do
not include the impact of Tandy stock options granted to CCI employees prior
to 1995.
21
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The fair value of each option grant and restricted stock grant was estimated
on the date of the grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used for 1997:
<TABLE>
<CAPTION>
Restricted
Stock
CCI options Awards
----------- ----------
<S> <C> <C>
Dividend yield 0% 1.7%
Expected volatility 48.1% 25.9%
Risk-free interest rate 6.0% 6.3%
Expected life (years) 5 5
Weighted average grant-date fair value 1.94 22.59
</TABLE>
<TABLE>
<CAPTION>
Tandy options
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield 1.7% 2.0% 1.3%
Expected volatility 25.5% 27.9% 27.3%
Risk-free interest rate 6.1% 6.7% 6.1%
Expected life (years) 6 7 7
Weighted average grant-date fair value 8.11 9.10 10.25
</TABLE>
14. EMPLOYEE BENEFIT PLANS
The employees of the CCI participate in Tandy's employee benefit plans
subject to the same eligibility terms as all Tandy employees.
TANDY STOCK PLAN - Eligible employees may contribute 1% to 7% of annual
compensation to purchase Tandy common stock at fair market value. Tandy
matches 40%, 60% or 80% of the employee's contribution depending on the
length of the employee's participation in the Tandy Stock Plan. The Company
recognized employee benefit expense associated with Tandy's contributions to
the stock purchase plan on behalf of the employees of the Company which
approximated $903,000, $1.0 million and $931,000 in 1997, 1996 and 1995,
respectively.
TANDY EMPLOYEE'S STOCK OWNERSHIP PLAN ("TESOP") - Compensation expense
included in the accompanying combined financial statements of the Company
related to the TESOP approximated $1.3 million, $1.5 million and $415,000 in
1997, 1996 and 1995, respectively. No assets or liabilities with respect to
the TESOP have been included in the accompanying combined balance sheet.
22
<PAGE>
COMPUTER CITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS
On June 21, 1998, Tandy entered into an agreement (as amended on August 31,
1998) with CompUSA Inc. whereby all of the outstanding common stock of CCI
will be sold to CompUSA Inc. The sale price will be based upon net book value
of the Company as of the closing, less $48 million and certain other
adjustments. The Company's financial statements do not reflect any
adjustments as a result of this proposed transaction.
In connection with the transaction, Tandy entered into a termination
agreement with Eureka whereby Tandy reacquired all common shares owned by
Eureka and the related warrant.
23
<PAGE>
COMPUTER CITY, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARES)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,111
Accounts receivable, net of allowance for doubtful
accounts of $2,360 85,170
Inventories 304,515
Prepaid expenses and other current assets 3,200
-----------
Total current assets 394,996
Property, plant and equipment, net 69,866
Other assets 3,051
-----------
$ 467,913
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 109,950
Accounts payable 136,292
Accrued liabilities 64,075
Current portion of capital lease obligations 549
-----------
Total current liabilities 310,866
Capital lease obligations 28,481
Subordinated debt to Tandy 125,000
Deferred service contract revenue 5,334
-----------
Total liabilities 469,681
-----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding -
Class A common stock, $.01 par value; 30,000,000 shares
authorized and outstanding 300
Class B common stock, $.01 par value; 25,000,000 shares
authorized and 20,000,000 shares outstanding 200
Contributed capital by Tandy 285,716
Accumulated deficit (287,097)
Foreign currency translation effects (887)
-----------
Total stockholders' deficit (1,768)
-----------
$ 467,913
-----------
-----------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
24
<PAGE>
COMPUTER CITY, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales and operating revenue $ 909,933 $ 850,609
Cost of sales 791,638 734,185
----------- -----------
Gross profit 118,295 116,424
----------- -----------
Selling, general and administrative expenses 155,271 113,861
Depreciation and amortization 11,664 8,884
Impairment of long-lived assets 48,000 -
----------- -----------
Operating expenses 214,935 122,745
----------- -----------
Operating loss (96,640) (6,321)
Other income (expense):
Interest expense (10,386) (3,105)
Interest income 90 10
----------- -----------
Loss before income taxes (106,936) (9,416)
Income taxes - -
----------- -----------
Net loss $ (106,936) $ (9,416)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
25
<PAGE>
COMPUTER CITY, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (106,936) $ (9,416)
Adjustments to reconcile net loss to net cash
used by operating activities:
Impairment of long-lived assets 48,000 -
Depreciation and amortization 11,664 8,884
Bad debt expense 54 226
Other adjustments (501) (699)
Changes in assets and liabilities:
Accounts receivable (5,434) 9,864
Inventories (7,288) 41,861
Prepaid expenses and other current assets 1,396 6,245
Other assets 160 203
Accounts payable and accrued liabilities 23,179 (81,133)
Other liabilities (656) 1,097
----------- -----------
Net cash used in operating activities (36,362) (22,868)
----------- -----------
Cash flows from investing activities:
Capital expenditures (27,597) (3,794)
Cash flows provided by (used in) financing activities:
Borrowings under line of credit agreement 79,950 -
Advances from (payments to) Tandy (22,180) 27,040
Payments under capital lease obligations (264) (189)
----------- -----------
Net cash provided by financing activities 57,506 26,851
----------- -----------
Net increase (decrease) in cash and cash equivalents (6,453) 189
Cash and cash equivalents at beginning of year 8,564 11,952
----------- -----------
Cash and cash equivalents at end of period $ 2,111 $ 12,141
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral
part of these combined financial statements.
26
<PAGE>
COMPUTER CITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Rules 3-01 and 3-02 of Regulation S-X and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation have been included. Operating
results for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
For further information, refer to the Computer City, Inc. (the "Company")
Combined Financial Statements for the year ended December 31, 1997.
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. SALE OF COMPUTER CITY, INC.
On June 21, 1998, Tandy Corporation ("Tandy") announced that it had signed a
definitive agreement with CompUSA Inc. ("CompUSA") for the sale of 100% of
the outstanding common stock of the Computer City, Inc. The ultimate
purchase price is dependent upon the Company's net assets, as defined in the
agreement, at the date of closing. As a result of the sale, the Company
recorded an impairment loss of $48 million on property, plant and equipment
("PP&E") and has reflected such loss in the accompanying unaudited statement
of operations for the six months ended June 30, 1998. The impairment loss
represents the difference between the book value of PP&E and the fair value.
The fair value was determined based on the purchase price which is defined in
the sale agreement as the net book value of the Company at closing less $48
million (and other adjustments).
In connection with the sale, Tandy reacquired the 19.9% interest of the Company
from Eureka Venture Partners III LLP ("EVP"), which was acquired by EVP from
Tandy in July 1997. Related to the reacquisition of EVP's ownership in the
Company, the management agreement with the three principles of EVP has been
terminated. In addition, the warrant that EVP purchased for an additional 20.1%
interest in the Company was cancelled.
3. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). Comprehensive
income is defined as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Comprehensive loss for the six months ended June 30, 1998 and 1997 was
($107,437,000) and ($10,115,000), respectively.
27
<PAGE>
COMPUTER CITY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES
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 the financial position 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. DEBT
In August 1998, Computer City Inc. paid off their Line of Credit and the
subordinated debt due to Tandy in accordance with the Stock Purchase Agreement
between Tandy and CompUSA.
28
<PAGE>
COMPUSA INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
On August 31, 1998, CompUSA Inc. (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
"Acquisition"). 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.
As a result of the Acquisition, the Company acquired 92 Computer City
stores in the United States and seven stores in Canada. The Company has
identified 37 Computer City stores in the United States that the Company
intends to continue to operate and convert to CompUSA Computer Superstores.
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 identified the remaining 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-SM-, 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.
The purchase of Computer City has been accounted for under the purchase
method of accounting. Accordingly, the purchase price paid was preliminary
allocated to the acquired assets and liabilities based on estimated fair
values as of the acquisition date in the preparation of the Company's
Consolidated Balance Sheet as of September 26, 1998, previously filed with the
Securities and Exchange Commission in the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 26, 1998.
The following unaudited pro forma consolidated statements of operations
for the fiscal year ended June 27, 1998 and the thirteen weeks ended September
26, 1998 have been prepared as if the Acquisition had occurred as of the
beginning of fiscal 1998. The unaudited pro forma consolidated statements of
operations for the respective periods presented herein should be read in
conjunction with the historical financial information of the Company included
in its Annual Report on Form 10-K for the year ended June 27, 1998 and its
Quarterly Report on Form 10-Q for the quarterly period ended September 26,
1998.
The unaudited pro forma consolidated results of operations for the year
ended June 27, 1998 and the thirteen weeks ended September 26, 1998 are not
necessarily indicative of the results of operations which actually would have
been attained if the Acquisition had been consummated as of the beginning of
fiscal 1998 and are not necessarily indicative of the results of operations
to be expected for the Company's entire fiscal year ending June 26, 1999.
29
<PAGE>
COMPUSA INC.
Unaudited Pro Forma Consolidated Statement of Operations
For the Fiscal Year Ended June 27, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------- Adjusted
Computer Closed Computer
CompUSA City Stores Other City Total
---------- ---------- ------------ ----- --------- ----------
(Note 1) (Note 2)
<S> <C> <C> <C> <C> <C> <C>
Net sales $5,286,041 $1,932,250 ($1,144,215) $ -- $ 788,035 $6,074,076
Cost of sales and occupancy costs 4,540,717 1,742,275 (1,025,616) -- 716,659 5,257,376
---------- -------- ---------- -------- -------- --------
Gross profit 745,324 189,975 (118,599) -- 71,376 816,700
Operating expenses 507,180 211,237 (123,078) -- 88,159 595,339
Pre-opening expenses 8,704 577 -- -- 577 9,281
General and administrative expenses 116,399 41,891 (985) 4,500 Note 3 45,406 161,805
Non-recurring amortization charge 55,885 -- -- -- 0 55,885
Impairment of long-lived assets -- 48,000 -- (48,000) Note 4 -- --
---------- -------- ---------- -------- -------- --------
Operating income (loss) 57,156 (111,730) 5,464 43,500 (62,766) (5,610)
Other expense (income):
Interest expense 12,331 19,629 (3,067) 12,893 Note 5 29,455 41,786
Other income, net (6,463) (4,866) (137) -- (5,003) (11,466)
---------- -------- ---------- -------- -------- --------
5,868 14,763 (3,204) 12,893 24,452 30,320
---------- -------- ---------- -------- -------- --------
Income (loss) before income tax expense (benefit) 51,288 (126,493) 8,668 30,607 (87,218) (35,930)
Income tax expense (benefit) 19,745 -- -- (33,579) Note 6 (33,579) (13,834)
---------- -------- ---------- -------- -------- --------
Net income (loss) $ 31,543 $(126,493) $ 8,668 $ 64,186 ($53,639) ($22,096)
---------- -------- ---------- -------- -------- --------
---------- -------- ---------- -------- -------- --------
Basic earnings (loss) per share $ 0.35 ($0.24)
---------- --------
---------- --------
Diluted earnings (loss) per share $ 0.33 ($0.24)
---------- --------
---------- --------
Weighted average common shares 91,369 91,369
Weighted average common shares assuming dilution 94,616 91,369
</TABLE>
See accompanying notes.
30
<PAGE>
COMPUSA INC.
Unaudited Pro Forma Consolidated Statement of Operations
For the Thirteen Weeks Ended September 26, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------- Adjusted
Computer Closed Computer
CompUSA City Stores Other City Total
---------- ---------- ------------ ----- --------- ----------
(Note 1) (Note 2)
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,392,140 $355,834 ($232,567) $ -- $ 123,267 $1,515,407
Cost of sales and occupancy costs 1,195,786 354,162 (231,199) -- 122,963 1,318,749
---------- -------- -------- -------- --------- ----------
Gross profit 196,354 1,672 (1,368) -- 304 196,658
Operating expenses 146,300 47,599 (29,530) -- 18,069 164,369
Pre-opening expenses 1,366 6 -- -- 6 1,372
General and administrative expenses 32,637 8,233 (387) 750 Note 3 8,596 41,233
---------- -------- -------- -------- --------- ----------
Operating income (loss) 16,051 (54,166) 28,549 (750) (26,367) (10,316)
Other expense (income):
Interest expense 4,383 4,646 (507) 2,149 Note 5 6,288 10,671
Other income, net (1,540) 1,267 (18) -- 1,249 (291)
---------- -------- -------- -------- --------- ----------
2,843 5,913 (525) 2,149 7,537 10,380
---------- -------- -------- -------- --------- ----------
Income (loss) before income tax expense (benefit) 13,208 (60,079) 29,074 (2,899) (33,904) (20,696)
Income tax expense (benefit) 5,068 -- -- (13,053) Note 6 (13,053) (7,985)
---------- -------- -------- -------- --------- ----------
Net income (loss) $ 8,140 ($60,079) $ 29,074 $ 10,154 ($20,851) ($12,711)
---------- -------- -------- -------- --------- ----------
---------- -------- -------- -------- --------- ----------
Basic earnings (loss) per share $ 0.09 ($0.14)
---------- ----------
---------- ----------
Diluted earnings (loss) per share $ 0.09 ($0.14)
---------- ----------
---------- ----------
Weighted average common shares 91,243 91,243
Weighted average common shares assuming dilution 93,041 91,243
</TABLE>
See accompanying notes.
31
<PAGE>
COMPUSA INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
1. BASIS OF PRESENTATION
The results of operations of Computer City for the year ended June 30, 1998
and the quarter ended September 30, 1998 are derived from the unaudited
financial data of Computer City. In the preparation of such data, the Company
has made adjustments to conform (i) the December 31 year-end of Computer City
prior to the Acquisition to the fiscal periods of the Company and (ii) the
financial statements classifications used by Computer City prior to the
Acquisition to those of the Company.
2. CLOSED STORES
The revenues and related direct operating, selling, general and
administrative, and interest expenses of the 55 Computer City stores in the
United States that were closed by the Company and the seven Canadian Computer
City supercenters sold by the Company have been eliminated in the preparation
of the unaudited pro forma consolidated statements of operations.
3. AMORTIZATION OF COSTS IN EXCESS OF NET ASSETS ACQUIRED
The excess of the purchase price paid over the estimated fair value 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.
4. IMPAIRMENT OF LONG-LIVED ASSETS
As a result of the Acquisition, Computer City recorded an impairment loss
of $48 million in its unaudited statement of operations for the six months
ended June 30, 1998. Management of Computer City attributed the impairment
loss to the difference between the book value and fair value of Computer
City's property, plant and equipment, with the fair value of such assets
having been determined based on the purchase price paid by the Company to
Tandy in connection with the Acquisition. In the preparation of the unaudited
pro forma consolidated statement of operations of the Company for the fiscal
year ended June 27, 1998, the Company has eliminated the impairment loss. In
connection with the preparation of the Company's unaudited balance sheet as
of September 26, 1998, the Company gave recognition to the difference between
the book value and fair value of the acquired net assets of Computer City in
preliminarily allocating the purchase price to the acquired net assets in
accordance with the provisions of Accounting Principles Board Opinion No. 16,
"Business Combinations".
5. INTEREST ON SELLER NOTE
In connection with the Acquisition, the Company issued a $136 million
subordinated promissory note payable to Tandy (the "Seller Note"). The Seller
Note bears interest at the 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 payment are interest only, with the first principal payment
due in December 2001. The Seller Note ranks pari passu with the Company's
$110 million, 9 1/2% Senior Subordinated Notes due June 15, 2000. 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.
6. INCOME TAX
The tax effect of the unaudited pro forma results of operations for the
fiscal year ended June 27, 1998 and the thirteen weeks ended September 26, 1998
has been recorded at the Company's effective tax rate of 38.5% for such periods
as the Company would have been able to realize the tax benefits of the losses
generated by Computer City in each of the periods presented.
32
<PAGE>
EXHIBIT INDEX
Exhibit 2.1 - Stock Purchase Agreement dated as of June 21, 1998 between
the Registrant, as buyer, and Tandy Corporation, as seller
(the "Stock Purchase Agreement"). (1)
Exhibit 2.2 - Amendment dated August 31, 1998 to the Stock Purchase
Agreement. (1)
Exhibit 2.3 - Subordinated Promissory Note dated August 31, 1998 of the
Registrant in the principal amount of $136,000,000 payable
to Tandy Corporation. (1)
Exhibit 23 - Consent of PricewaterhouseCoopers LLP. (2)
- ------------
(1) - Previously filed as an exhibit to the Company's Form 8-K filed with the
Securities and Exchange Commission on September 15, 1998.
(2) - Filed herewith.
33
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-86314, 33-99280, 33-45339, 33-72718, 33-99282,
333-18033 and 333-06235) of CompUSA Inc. of our report dated February 19, 1998,
except as to Note 15 and the second paragraph of Note 2 which are as of
August 31, 1998, relating to the combined financial statements of Computer
City, Inc. which appears in this Current Report on Form 8-K/A of CompUSA Inc.
dated November 13, 1998.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Ft. Worth, Texas
November 12, 1998
