<PAGE>
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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 DECEMBER 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 91,475,786 shares of common stock, $.01 per share par
value, outstanding as of February 5, 1999.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets at December 26, 1998 (unaudited)
and June 27, 1998...............................................................................3
Consolidated Income Statements for the thirteen weeks and twenty-six weeks
ended December 26, 1998 and December 27, 1997 (unaudited).......................................4
Consolidated Statements of Cash Flows for the twenty-six weeks
ended December 26, 1998 and December 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.......................................................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................25
SIGNATURES.......................................................................................................26
EXHIBITS.........................................................................................................27
</TABLE>
2
<PAGE>
COMPUSA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27,
1998 1998
------------------ -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 402,899 $ 151,779
Accounts receivable, net of allowance for doubtful accounts of $5,259
and $3,524 at December 26, 1998 and June 27, 1998, respectively........ 254,988 214,084
Merchandise inventories.................................................. 815,825 520,762
Deferred income taxes - current.......................................... 8,721 9,762
Prepaid expenses and other............................................... 22,225 26,480
------------------ -------------------
Total current assets................................................... 1,504,658 922,867
Property and equipment, net................................................. 232,860 210,528
Deferred income taxes....................................................... 14,229 18,076
Costs in excess of net assets of acquired businesses........................ 91,390 3,069
Other assets................................................................ 5,990 5,970
------------------- -------------------
$ 1,849,127 $ 1,160,510
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 966,809 $ 534,620
Accrued liabilities...................................................... 195,536 98,714
Current portion of capital lease obligations............................. 1,166 666
------------------ -------------------
Total current liabilities.............................................. 1,163,511 634,000
Capital lease obligations................................................... 633 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 93,943,299 and 93,372,545 shares issued at December 26, 1998 and
June 27, 1998, respectively............................................ 939 934
Paid-in capital.......................................................... 278,629 278,000
Retained earnings........................................................ 221,756 198,045
------------------ -------------------
501,324 476,979
Less: Treasury stock, at cost, 2,507,227 shares at December 26, 1998 and
June 27, 1998.......................................................... (62,341) (62,341)
------------------ -------------------
Total stockholders' equity............................................. 438,983 414,638
------------------ -------------------
$ 1,849,127 $ 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 TWENTY-SIX WEEKS ENDED
-------------------------------------- --------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
----------------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 1,776,374 $ 1,456,725 $ 3,168,514 $ 2,648,537
Cost of sales and occupancy costs.... 1,536,611 1,241,979 2,732,397 2,258,192
----------------- -------------------- ------------------ -------------------
Gross profit...................... 239,763 214,746 436,117 390,345
Operating expenses................... 170,461 125,658 316,761 234,907
Pre-opening expenses................. 2,095 4,028 3,461 5,480
General and administrative expenses.. 38,358 28,793 70,995 54,408
----------------- -------------------- ------------------ -------------------
Operating income.................. 28,849 56,267 44,900 95,550
Other expense (income):
Interest expense.................. 6,989 3,041 11,372 6,096
Other income, net................. (3,504) (2,166) (5,044) (4,084)
----------------- -------------------- ------------------ -------------------
3,485 875 6,328 2,012
----------------- -------------------- ------------------ -------------------
Income before income taxes........... 25,364 55,392 38,572 93,538
Income tax expense................... 9,793 21,325 14,861 36,012
----------------- -------------------- ------------------ -------------------
Net income........................... $ 15,571 $ 34,067 $ 23,711 $ 57,526
================= ==================== ================== ===================
Basic earnings per share............. $ 0.17 $ 0.37 $ 0.26 $ 0.63
Diluted earnings per share........... $ 0.17 $ 0.36 $ 0.26 $ 0.60
Weighted average common shares....... 91,408 91,405 91,325 91,532
Weighted average common shares
assuming dilution................. 92,834 95,508 92,938 95,511
</TABLE>
See accompanying notes.
4
<PAGE>
COMPUSA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
--------------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
----------------- -------------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income............................................................... $ 23,711 $ 57,526
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 33,002 22,212
Deferred income taxes................................................ 4,888 (1,027)
Other non-cash charges............................................... 2,410 --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................................................ 4,125 (8,861)
Merchandise inventories............................................ (133,537) (178,896)
Prepaid expenses and other assets.................................. 8,214 (5,834)
Increase in accounts payable and accrued liabilities................. 371,006 275,526
------------------ -------------------
Total adjustments................................................ 290,108 103,120
------------------ -------------------
Net cash provided by operating activities........................ 313,819 160,646
Cash (used in) provided by investing activities:
Capital expenditures..................................................... (36,391) (49,748)
Payment for purchase of Computer City, net of cash acquired.............. (34,841) --
Proceeds from sale of Canadian stores.................................... 8,980 --
Other.................................................................... 385 697
------------------ -------------------
Net cash used in investing activities............................ (61,867) (49,051)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock................................... 378 2,576
Purchase of treasury stock............................................... -- (30,902)
Payments under capital lease obligations................................. (1,210) (1,463)
------------------ -------------------
Net cash used in financing activities............................ (832) (29,789)
Net increase in cash and cash equivalents................................... 251,120 81,806
Cash and cash equivalents at beginning of period............................ 151,779 209,929
------------------ -------------------
Cash and cash equivalents at end of period.................................. $ 402,899 $ 291,735
================== ===================
</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 a purchase
price of approximately $172 million, subject to certain post-closing
adjustments, payable in a note and cash.
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 $9.0 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 statements for the thirteen and twenty-six weeks
ended December 26, 1998 include the results of operations from the
acquisition date for the 37 Computer City stores in the United States that
the Company is operating as CompUSA Computer Superstores(SM) and two former
Computer City "small market" stores. 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 pro forma combined net sales, net income, and diluted
earnings per share data summarize the results of operations for the second
quarter of fiscal 1998 and first six months of fiscal 1999 and 1998 as if
Computer City had been acquired as of the beginning of fiscal 1998. The pro
forma 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 TWENTY-SIX WEEKS ENDED
-------------------- --------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 27,
1997 1998 1997
-------------------- ------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................ $ 1,680,358 $ 3,291,781 $ 3,053,456
Net income........................... 23,163 2,860 36,980
Diluted earnings per share........... 0.24 0.03 0.39
</TABLE>
7
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. EQUITY
The calculation of basic and diluted earnings per share is summarized as
follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------- --------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
----------------- ------------------- ------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income........................... $ 15,571 $ 34,067 $ 23,711 $ 57,526
Weighted average common shares
outstanding....................... 91,408 91,405 91,325 91,532
----------------- ------------------- ------------------ -------------------
Basic earnings per share............. $ 0.17 $ 0.37 $ 0.26 $ 0.63
================= =================== ================== ===================
DILUTED EARNINGS PER SHARE:
Net income........................... $ 15,571 $ 34,067 $ 23,711 $ 57,526
Weighted average common shares
outstanding....................... 91,408 91,405 91,325 91,532
Incremental shares assuming dilution. 1,426 4,103 1,613 3,979
----------------- ------------------- ------------------ -------------------
Weighted average common shares
assuming dilution................. 92,834 95,508 92,938 95,511
----------------- ------------------- ------------------ -------------------
Diluted earnings per share........... $ 0.17 $ 0.36 $ 0.26 $ 0.60
================= =================== ================== ===================
</TABLE>
In September 1997, the Company's Board of Directors authorized the
purchase of up to $60 million of common stock of the Company ("Common Stock").
As of December 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 April 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
TWENTY-SIX WEEKS ENDED
--------------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Intercompany receivables.................................................... $ 85,233 $ 69,537
Other current assets........................................................ 679,146 516,176
Noncurrent assets........................................................... 96,204 169,028
Intercompany payables....................................................... 123,593 12,930
Other current liabilities................................................... 272,228 239,552
Long-term debt and liabilities.............................................. 1,178 2,065
Net sales................................................................... 2,184,705 1,810,000
Intercompany revenues....................................................... 127,190 102,919
Costs and expenses.......................................................... 2,163,319 1,746,952
Intercompany expenses....................................................... 84,156 68,059
Net income.................................................................. 39,619 60,213
</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>
TWENTY-SIX WEEKS ENDED
--------------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Cash paid (received) during the periods for:
Interest................................................................. $ 5,536 $ 5,510
Income taxes............................................................. (7,983) 28,130
Investing activities not affecting cash are as follows:
Additions to property and equipment under capital leases................. $ 471 $ 95
Financing activities not affecting cash are as follows:
Note payable to Tandy Corporation........................................ $ 136,000 $ --
</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 the 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 the 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. Subject to the financial
covenants contained in the Credit Agreement, as of December 26, 1998, the
Company had $190 million available for future borrowings under the Credit
Agreement.
Borrowings under the Credit Agreement bear interest, at the Company's
option, at either a prime rate (7.8% per annum as of December 26, 1998) or a
rate based on the London Interbank Offering Rate (LIBOR) ranging from 5.2% to
5.3% as of December 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 December 26, 1998, the Company had
approximately $71.5 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 with its CompUSA PC(TM) brand
personal computers in the first quarter of fiscal 1998 and the opening of its
own build-to-order manufacturing facility in the second quarter of fiscal
1999 involve significant additional risks, including without limitation
failure to achieve customer acceptance of the new products, substantial
dependence on third parties for quality and reliability of component parts,
and the Company's ability to fulfill customer orders timely. Additionally,
the Company's acquisition of Computer City in the first quarter of fiscal
1999 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, subject to certain
post-closing adjustments. See "--Liquidity and Capital Resources." The
acquisition was accounted for under the purchase accounting method.
The Company is operating 37 Computer City stores in the United States as
CompUSA Computer Superstores(SM) and two former Computer City "small market"
stores. Such stores were converted to the CompUSA information systems in
September and October 1998. The Company has initiated certain activities to
reconfigure these stores to the CompUSA format and expects such activities to
be completed over a period of time in fiscal 1999 and fiscal 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
$9.0 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 "second
quarter of fiscal 1999" and "first six months of fiscal 1999" relate to the
thirteen weeks and twenty-six weeks, respectively, ended December 26, 1998,
and all references to "second quarter of fiscal 1998" and "first six months
of fiscal 1998" relate to the thirteen weeks and twenty-six weeks,
respectively, ended December 27, 1997.
The following table sets forth certain items expressed as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------- --------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy costs.... 86.5 85.3 86.2 85.3
------------------ ------------------ ------------------ -------------------
Gross profit......................... 13.5 14.7 13.8 14.7
Operating expenses................... 9.6 8.6 10.0 8.9
Pre-opening expenses................. 0.1 0.2 0.2 0.1
General and administrative expenses.. 2.2 2.0 2.2 2.1
------------------ ------------------ ------------------ -------------------
Operating income..................... 1.6 3.9 1.4 3.6
Interest expense and other income,
net............................... 0.2 0.1 0.2 0.1
------------------ ------------------ ------------------ -------------------
Income before income taxes........... 1.4 3.8 1.2 3.5
Income tax expense................... 0.5 1.5 0.5 1.3
------------------ ------------------ ------------------ -------------------
Net income........................... 0.9% 2.3% 0.7% 2.2%
================== ================== ================== ===================
</TABLE>
13
<PAGE>
The following table sets forth certain operating data for the Company:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------- --------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
----------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Stores open at end of period......... 210 148 210 148
Computer City stores acquired during
the period (1).................. -- -- 37 --
Stores opened during the period...... 7 14 11 19
Stores relocated during the period... 2 1 4 2
Average net sales per gross square
foot (2):
Excluding Computer City stores... $ 323 $ 363 $ 610 $ 680
Including Computer City stores... $ 309 $ 363 $ 590 $ 680
Average net sales per Computer
Superstore:
Excluding Computer City stores... $ 8,901 $ 9,916 $ 16,777 $ 18,518
Including Computer City stores... $ 8,123 $ 9,916 $ 15,700 $ 18,518
Comparable store sales (decrease)
increase (3)...................... (4.7%) 8.8% (3.3%) 7.6%
</TABLE>
- -------------------------
(1) As of August 31, 1998, the Company acquired 37 Computer City stores
that the Company is operating as CompUSA Computer Superstores.
(2) Calculated using net sales divided by gross square footage of Computer
Superstores open at the end of the period, 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 as well as the Company's national accounts
group, but exclude sales of CompUSA Direct, the Company's internet and mail
order sales division.
(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 sales of
CompUSA Direct, the Company's internet and mail order sales division. The
sales of the 37 acquired Computer City stores are not included in the
calculation of the change in comparable store sales for the thirteen and
twenty-six weeks ended December 26, 1998.
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."
14
<PAGE>
The results of operations of the Company for the second quarter and
first six months of fiscal 1999 include the results of operations of the 37
acquired Computer City stores that the Company is operating as CompUSA
Computer Superstores and two former Computer City "small market" stores. The
results of operations for the second quarter and first six months 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.
SECOND QUARTER ENDED DECEMBER 26, 1998, COMPARED WITH THE SECOND QUARTER
ENDED DECEMBER 27, 1997
Net sales for the second quarter of fiscal 1999 increased 21.9% to
$1.78 billion from $1.46 billion for the second 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 second quarter of
fiscal 1998 and the sales generated by the former Computer City stores. In
addition, sales at CompUSA Direct increased approximately 48% in the second
quarter of fiscal 1999 compared with the second quarter of fiscal 1998.
Despite an increase in overall sales and the number of personal computer
systems sold in the second quarter of fiscal 1999, average net sales per
store for the second quarter of fiscal 1999 decreased approximately 18% from
the second 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 as a percentage of
total computer systems sold, and lower sales per store by the 37 acquired
Computer City stores.
Comparable store sales by the CompUSA Computer Superstores decreased
4.7% from the second quarter of fiscal 1998. The sales of the 37 acquired
Computer City stores are not included in the calculation of the change in
comparable store sales for the second quarter of fiscal 1999. The Company
believes comparable store 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, and
increased sales of lower-end computer systems as a percentage of total
computer systems sold. The Company also believes the change in comparable
store sales was negatively impacted by a reduction of sales in the CompUSA
Computer Superstores during the second quarter of fiscal 1999 due to the
transfer of sales from existing CompUSA Computer Superstores to the former
Computer City stores. Of the 37 acquired Computer City stores that the
Company continues to operate as CompUSA Computer Superstores, 29 stores are
located in metropolitan areas in which there are existing CompUSA Computer
Superstores. The Company believes the increased number of CompUSA Computer
Superstores in the markets previously served by both CompUSA Computer
Superstores and Computer City stores, as well as promotional sales activities
conducted in the acquired Computer City stores in the second quarter of
fiscal 1999, resulted in reductions in the comparable store sales growth in
the Company's existing CompUSA Computer Superstores in those markets.
While 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, to increase its
awareness with local consumers, to enhance its competitive position in such
markets, and to create efficiencies in advertising and management. Management
plans to continue its strategy of opening additional Computer Superstores in
existing markets since it believes such strategy is in the Company's
long-term best interest.
Gross profit was $240 million, or 13.5% of net sales, in the second
quarter of fiscal 1999, compared with $215 million, or 14.7% of net sales, in
the second quarter of fiscal 1998. The decline in gross profit as a
percentage of net sales in the second quarter of fiscal 1999 compared with
the second quarter of fiscal 1998 was primarily due to increased product,
freight, and occupancy costs as percentages of net sales. The increase in
product costs as a percentage of net sales was due to lower average selling
prices in general as well as promotional sales activities conducted in the
acquired Computer City stores and seasonal promotional sales. Freight expense
increased as a percentage of net sales in the second quarter of fiscal 1999
compared with the second quarter of fiscal 1998. Freight
15
<PAGE>
expense, which is generally a fixed cost based on the number of units sold,
increased as a percentage of net sales due to the decline in average selling
prices. In addition, freight expense increased as a percentage of net sales
due to the increased use of expedited freight in order to ensure the timely
receipt of merchandise inventories in the Company's Computer Superstores. The
decrease in gross profit as a percentage of net sales was also due to an
increase in occupancy costs as a percentage of net sales. Occupancy costs,
which are generally fixed in nature, increased as a percentage of net sales
in the second quarter of fiscal 1999 as a result of lower average net sales
per store compared to the second quarter of fiscal 1998, as well as lower
average net sales per store at the former Computer City stores 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
typically have higher gross margins than merchandise sales.
Operating expenses were $170.5 million, or 9.6% of net sales, in the
second quarter of fiscal 1999, compared with $125.7 million, or 8.6% of net
sales, in the second quarter of fiscal 1998. The increase in operating
expenses as a percentage of net sales for the second quarter of fiscal 1999
compared with the second quarter of fiscal 1998 was due to increased
personnel and facilities expenses as percentages of net sales and costs
incurred to support the conversion of the former Computer City stores to
CompUSA Computer Superstores. Personnel expenses in the second quarter of
fiscal 1999 increased as a percentage of net sales due, in part, to an
increase in service revenues as a percentage of net sales. Personnel expenses
generally constitute a higher percentage of net sales for service revenues
than for merchandise sales. In addition, both personnel and facilities
expenses increased as percentages of net sales as a result of lower average
net sales per store. The Company also incurred costs in the second quarter of
fiscal 1999 related to the training of personnel at the former Computer City
stores and other costs necessary to convert the former Computer City stores
to CompUSA Computer Superstores. These increases were partially offset by
lower net advertising expense as a percentage of net sales. Net advertising
expense decreased as a percentage of net sales in the second quarter of
fiscal 1999 due to advertising economies-of-scale related to the addition of
stores in multi-store markets, primarily as a result of the acquisition of
the Computer City stores, and increased vendor participation. These decreases
were partially offset by advertising expenses related to promotional sales
activities conducted in the acquired Computer City stores in the second
quarter of fiscal 1999.
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 second quarter of fiscal 1999, the Company incurred $2.1
million in pre-opening expenses, compared with $4.0 million in pre-opening
expenses incurred in the second quarter of fiscal 1998.
General and administrative expenses were $38.4 million, or 2.2% of
net sales, in the second quarter of fiscal 1999, compared with $28.8 million,
or 2.0% of net sales, in the second quarter of fiscal 1998. General and
administrative expenses per store were $185,000 in the second quarter of
fiscal 1999, compared with $205,000 in the second quarter of fiscal 1998. The
increase in general and administrative expenses as a percentage of net sales
was primarily due to increased personnel and facility expenses as percentages
of net sales and costs incurred to support the conversion of the former
Computer City stores to CompUSA Computer Superstores. Personnel expenses in
the second quarter of fiscal 1999 increased as a percentage of net sales due,
in part, to costs incurred to support the operations of the acquired Computer
City stores and increased personnel to support the Company's growth. Facility
expenses increased in the second quarter of fiscal 1999 as a result of the
expansion of the Company's corporate facilities. In addition, facility
expenses, which are generally fixed in nature, increased as a percentage of
net sales in the second quarter of fiscal 1999 as a result of lower average
net sales per store. These increases were partially offset by lower incentive
compensation expense.
16
<PAGE>
Interest expense and other income, net, was $3.5 million, or 0.2% of
net sales, in the second quarter of fiscal 1999, compared with $1.0 million,
or 0.1% of net sales, in the second quarter of fiscal 1998. The increase in
interest expense and other income was primarily due to 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 second
quarter of fiscal 1999 and the second quarter of fiscal 1998.
As a result of the above, net income for the second quarter of
fiscal 1999 was $15.6 million, or $.17 per diluted share, compared with net
income of $34.1 million, or $.36 per diluted share, for the second quarter of
fiscal 1998.
SIX MONTHS ENDED DECEMBER 26, 1998, COMPARED WITH THE SIX MONTHS ENDED
DECEMBER 27, 1997
Net sales for the first six months of fiscal 1999 increased 19.6% to
$3.17 billion from $2.65 billion for the first six months 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 second quarter of
fiscal 1998 and the sales generated by the former Computer City stores
subsequent to their acquisition. In addition, sales at CompUSA Direct
increased approximately 30% during the first six months of fiscal 1999
compared with the first six months of fiscal 1998. Despite the increase in
overall sales and the number of personal computer systems sold in the first
six months of fiscal 1999, average net sales per store for the first six
months of fiscal 1999 decreased approximately 14%. 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 as a percentage of total computer systems sold, and lower
sales per store by the 37 acquired Computer City stores.
Comparable store sales by the CompUSA Computer Superstores decreased
3.3% from the first six months of fiscal 1998. 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 six months of fiscal 1999. The Company
believes comparable store 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, and
increased sales of lower-end computer systems as a percentage of total
computer systems sold. The Company also believes the change in comparable
store sales was negatively impacted by a reduction of sales in the CompUSA
Computer Superstores during the first six months of fiscal 1999 as a result
of (i) the transfer of sales from existing CompUSA Computer Superstores to
the 29 former Computer City stores located in metropolitan areas in which
there are existing CompUSA Computer Superstores, (ii) inventory liquidation
sales conducted at the Computer City stores closed by the Company in
September and October, and (iii) promotional sales activities conducted in
the aqcuired Computer City stores in the second quarter of fiscal 1999.
Gross profit was $436 million, or 13.8% of net sales, in the first
six months of fiscal 1999, compared with $390 million, or 14.7% of net sales,
in the first six months of fiscal 1998. The decline in gross profit as a
percentage of net sales in the first six months of fiscal 1999 compared with
the first six months of fiscal 1998 was partially due to increased product,
freight, and occupancy costs as percentages of net sales. The increase in
product costs as a percentage of net sales was due to lower average selling
prices in general as well as promotional sales activities conducted in the
acquired Computer City stores in the second quarter of fiscal 1999 and
seasonal promotional sales. Freight expense increased as a percentage of net
sales in the first six months of fiscal 1999 compared with the first six
months of fiscal 1998. Freight expense, which is generally a fixed cost based
on the number of units sold, increased as a percentage of net sales due to
the decline in average selling prices. In addition, freight expense increased
as a percentage of net sales due to the increased use of expedited freight in
order to ensure the timely receipt of merchandise inventories in the
Company's Computer Superstores. The decrease in gross profit as a percentage
of net sales was also due to an increase in occupancy costs as a percentage
of net sales. Occupancy costs, which are generally fixed in nature, increased
as a percentage of net sales in the first six months of fiscal 1999 as a
17
<PAGE>
result of lower average net sales per store compared to the first six months
of fiscal 1998, as well as lower average net sales per store at the former
Computer City stores 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 typically have higher gross
margins than merchandise sales.
Operating expenses were $316.8 million, or 10.0% of net sales, in
the first six months of fiscal 1999, compared with $234.9 million, or 8.9% of
net sales, in the first six months of fiscal 1998. The increase in operating
expenses as a percentage of net sales for the first six months of fiscal 1999
compared with the first six months of fiscal 1998 was due to increased
personnel and facilities expenses as percentages of net sales. In addition,
operating expenses increased as a percentage of net sales due to costs
incurred to support the conversion of the former Computer City stores to
CompUSA Computer Superstores as well as a $2.4 million charge recorded in the
first quarter of fiscal 1999 for the anticipated closure of 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 six months of fiscal
1999 increased as a percentage of net sales due, in part, to an increase in
service revenues as a percentage of net sales. Personnel expenses generally
constitute a higher percentage of net sales for service revenues than for
merchandise sales. In addition, both personnel and facilities expenses
increased as percentages of net sales in the first six months of fiscal 1999
compared with the first six months of fiscal 1998 as a result of lower
average net sales per store. The Company also incurred costs in the first six
months of fiscal 1999 related to the training of personnel at the former
Computer City stores and other costs necessary to convert the former Computer
City stores to CompUSA Computer Superstores. These increases were partially
offset by lower net advertising expense as a percentage of net sales. Net
advertising expense decreased as a percentage of net sales in the first six
months of fiscal 1999 due to advertising economies-of-scale related to the
addition of stores in multi-store markets, primarily as a result of the
acquisition of the Computer City stores, and increased vendor participation.
These decreases were partially offset by advertising expenses related to
promotional sales activities conducted in the acquired Computer City stores
in the second quarter of fiscal 1999.
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 six months of fiscal 1999, the Company incurred $3.5
million in pre-opening expenses, compared with $5.5 million in pre-opening
expenses incurred in the first six months of fiscal 1998.
General and administrative expenses were $71.0 million, or 2.2% of
net sales, in the first six months of fiscal 1999, compared with $54.4
million, or 2.1% of net sales, in the first six months of fiscal 1998.
General and administrative expenses per store were $372,000 in the first six
months of fiscal 1999, compared with $399,000 in the first six months of
fiscal 1998. The increase in general and administrative expenses as a
percentage of net sales was primarily due to increased personnel and facility
expenses as percentages of net sales and costs incurred to support the
conversion of the former Computer City stores to CompUSA Computer
Superstores. Personnel expenses in the first six months of fiscal 1999
increased as a percentage of net sales due, in part, to costs incurred to
support the operations of the acquired Computer City stores and increased
personnel to support the Company's growth. Facility expenses increased in the
first six months of fiscal 1999 related to the expansion of the Company's
corporate facilities. In addition, facility expenses, which are generally
fixed in nature, increased as a percentage of net sales in the first six
months of fiscal 1999 as a result of lower average net sales per store. These
increases were partially offset by lower incentive compensation expense.
18
<PAGE>
Interest expense and other income, net, was $6.3 million, or 0.2% of
net sales, in the first six months of fiscal 1999, compared with $2.0
million, or 0.1% of net sales, in the first six months of fiscal 1998. The
increase in interest expense and other income was primarily due to 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 six
months of fiscal 1999 and the first six months of fiscal 1998.
As a result of the above, net income for the first six months of
fiscal 1999 was $23.7 million, or $.26 per diluted share, compared with net
income of $57.5 million, or $.60 per diluted share, for the first six months
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 December 26, 1998, total assets were $1.85 billion, $1.50 billion
of which were current assets, including $403 million of cash and cash
equivalents. Net cash provided by operating activities for the first six
months of fiscal 1999 was $314 million, which was primarily attributable to
net income for the first six months of fiscal 1999 and an increase in
accounts payable.
Approximately three-fourths of the Company's net sales during the
first six months 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 $816 million at December 26,
1998, from $521 million at June 27, 1998. The increase in merchandise
inventories is primarily attributable to inventories at the 11 Computer
Superstores opened in the first six months of fiscal 1999 and the 37 acquired
Computer City stores and higher inventories held at the Company's
configuration center. At December 26, 1998, inventory per store was $3.6
million, compared with $4.4 million at December 27, 1997.
19
<PAGE>
Capital expenditures during the first six months of fiscal 1999 were
$36.4 million, of which $6.3 million were for fiscal 1999 new stores, $7.5
million were for the conversion of the acquired Computer City stores to the
CompUSA format, and $11.0 million were for existing stores, compared with
$49.7 million of capital expenditures during the first six months of fiscal
1998, of which $16.6 million were for fiscal 1998 new stores and $6.9 million
were for existing stores. The Company plans to open approximately 15 Computer
Superstores in fiscal 1999, of which 11 had opened as of December 26, 1998.
In addition to the capital expenditures incurred in connection with new
stores, the Company also incurred capital expenditures in the first six
months of fiscal 1999 and the first six months 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 December 26, 1998, no
borrowings were outstanding under the Credit Agreement and the Company had
$190 million available for future borrowings under the Credit Agreement.
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.
20
<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 the 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 the Quarterly Report on Form
10-Q for the thirteen weeks ended September 26, 1998. The adoption of SOP
98-5 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. 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 December 26, 1998, it had completed
approximately 50% 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 50% of the initiatives
are in process and expected to be completed by June 30, 1999.
21
<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 80%
Remediation and testing regarding store and distribution system issues...... 8/98-6/99 25%
Upgrades to telephone/PBX and other systems................................. 3/98-6/99 80%
Electronic data interchange trading partner conversions..................... 3/98-6/99 65%
Identification, assessment, remediation, and testing regarding desktop and
individual system issues................................................. 2/98-6/99 65%
Identification and assessment regarding non-IT system issues................ 4/98-3/99 30%
Remediation and testing regarding non-IT system issues...................... 2/99-6/99 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 December 26, 1998, the
Company had received responses from approximately 56% of such third parties,
and 81% 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 December 26, 1998, the Company had incurred costs
of approximately $2.3 million related to its Year 2000 identification,
assessment, remediation, and testing efforts. All of the $2.3 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.
22
<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.
23
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on November 4,
1998. The following are the results of certain matters voted upon at the
meeting:
(a) With respect to the election of directors whose terms expired in 1998,
shares were voted as follows:
<TABLE>
<CAPTION>
GILES H. LEONARD L. MORTON E.
BATEMAN BERRY, PH.D. HANDEL
------------------- ------------------ -------------------
<S> <C> <C> <C>
For..................................................... 79,621,152 79,618,793 79,614,440
Withheld................................................ 641,255 643,614 647,967
------------------- ------------------ -------------------
80,262,407 80,262,407 80,262,407
=================== ================== ===================
</TABLE>
Messrs. Bateman, Berry, and Handel were elected for terms expiring
on the date of the annual meeting of stockholders in 2001. The following
members of the Board of Directors have terms expiring on the date of the
annual meeting of stockholders in the years indicated: Warren D. Feldberg,
Kevin J. Roche, and Barry L. Williams - 1999, and James F. Halpin, Denise
Ilitch, and Lawrence Mittman - 2000.
(b) With respect to the ratification of the selection of Ernst & Young LLP as
the Company's independent auditors for its 1999 fiscal year, shares were
voted as follows:
<TABLE>
<S> <C>
For.......................................................................... 80,036,040
Against...................................................................... 134,546
Abstentions.................................................................. 91,821
----------
80,262,407
==========
</TABLE>
24
<PAGE>
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)
11 Computation of Income per Common and Common Equivalent Share. (3)
27.1 Financial Data Schedule. (4)
27.2 Restated Financial Data Schedule. (4)
(b) Reports on Form 8-K.
Report on Form 8-K/A filed with the Securities and Exchange Commission
on November 16, 1998, amending items previously included in the Current
Report on Form 8-K dated August 31, 1998, 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) Filed herewith.
(4) Included with EDGAR version only.
25
<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: February 9, 1999 By: /s/ JAMES E. SKINNER
-------------------------
James E. Skinner
Executive Vice President,
Chief Financial Officer
and Treasurer (Principal
Financial and Accounting
Officer)
26
<PAGE>
EXHIBIT 11
COMPUSA INC.
COMPUTATION OF
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------- --------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
----------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Common shares issued at beginning of
period............................ 93,898 91,853 93,373 91,447
Weighted average number of common
shares issued during the period... 17 180 459 399
Weighted treasury shares during the
period............................ (2,507) (628) (2,507) (314)
----------------- ------------------ ------------------ -------------------
Weighted average common shares....... 91,408 91,405 91,325 91,532
Incremental shares related to
assumed exercise of stock options. 1,426 4,103 1,613 3,979
----------------- ------------------ ------------------ -------------------
Weighted average common shares
assuming dilution................. 92,834 95,508 92,938 95,511
================= ================== ================== ===================
Net income........................... $ 15,571 $ 34,067 $ 23,711 $ 57,526
Basic earnings per share............. $ 0.17 $ 0.37 $ 0.26 $ 0.63
Diluted earnings per share........... $ 0.17 $ 0.36 $ 0.26 $ 0.60
</TABLE>
27
<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 AND
TWENTY-SIX WEEKS ENDED DECEMBER 26, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 402,899
<SECURITIES> 0
<RECEIVABLES> 260,247
<ALLOWANCES> (5,259)
<INVENTORY> 815,825
<CURRENT-ASSETS> 1,504,658
<PP&E> 443,018
<DEPRECIATION> (210,158)
<TOTAL-ASSETS> 1,849,127
<CURRENT-LIABILITIES> 1,163,511
<BONDS> 110,000
0
0
<COMMON> 939
<OTHER-SE> 438,044
<TOTAL-LIABILITY-AND-EQUITY> 1,849,127
<SALES> 3,168,514
<TOTAL-REVENUES> 3,168,514
<CGS> 2,732,397
<TOTAL-COSTS> 2,732,397
<OTHER-EXPENSES> 391,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,372
<INCOME-PRETAX> 38,572
<INCOME-TAX> 14,861
<INCOME-CONTINUING> 23,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,711
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</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 AND 26 WEEKS ENDED
12-28-96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATE-
MENTS. CERTAIN INFO HAS BEEN RESTATED IN ACCORDANCE WITH ITEM 601(c)(2)(iii)
OF REGULATION S-K, AS DESCRIBED IN FN1 BELOW
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> DEC-28-1996
<CASH> 281,469
<SECURITIES> 0
<RECEIVABLES> 159,563
<ALLOWANCES> (1,715)
<INVENTORY> 586,160
<CURRENT-ASSETS> 1,047,478
<PP&E> 239,671
<DEPRECIATION> (82,985)
<TOTAL-ASSETS> 1,213,499
<CURRENT-LIABILITIES> 729,152
<BONDS> 110,000
0
0
<COMMON> 914
<OTHER-SE> 366,161
<TOTAL-LIABILITY-AND-EQUITY> 1,213,499
<SALES> 2,189,133
<TOTAL-REVENUES> 2,189,133
<CGS> 1,885,486
<TOTAL-COSTS> 1,885,486
<OTHER-EXPENSES> 238,978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,034
<INCOME-PRETAX> 62,234
<INCOME-TAX> 23,960
<INCOME-CONTINUING> 38,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,274
<EPS-PRIMARY> 0.42<F1>
<EPS-DILUTED> 0.40<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>
