<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED DECEMBER 25, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-11566
------------------------
COMPUSA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2261497
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
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 92,693,889 shares of common stock, $.01 per share par
value, outstanding as of February 7, 2000.
- --------------------------------------------------------------------------------
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<PAGE>
PART I--FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 25, 1999 (unaudited)
and June 26, 1999......................................... 3
Consolidated Statements of Operations for the thirteen weeks
and twenty-six weeks ended December 25, 1999 and
December 26, 1998 (unaudited)............................. 4
Consolidated Statements of Cash Flows for the twenty-six
weeks ended December 25, 1999 and December 26, 1998
(unaudited)............................................... 5
Notes to Consolidated Financial Statements (unaudited)...... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 44
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 45
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 45
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 46
SIGNATURES............................................................ 47
</TABLE>
2
<PAGE>
COMPUSA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
DECEMBER 25, JUNE 26,
1999 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 204,914 $ 173,350
Accounts receivable, net of allowance for doubtful
accounts of $4,494 at December 25, 1999 and $4,317 at
June 26, 1999........................................... 143,036 214,960
Merchandise inventories................................... 736,181 667,514
Deferred income taxes..................................... 35,158 32,106
Prepaid expenses and other................................ 12,214 20,607
---------- ----------
Total current assets.................................... 1,131,503 1,108,537
Property and equipment, net................................. 286,607 227,113
Deferred income taxes....................................... 30,299 37,520
Costs in excess of net assets of acquired businesses, net... 100,801 103,515
Other assets................................................ 8,917 5,030
---------- ----------
$1,558,127 $1,481,715
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 741,954 $ 645,067
Accrued liabilities....................................... 194,906 188,936
Deferred revenue.......................................... 21,814 21,595
Senior Subordinated Notes................................. -- 110,000
Current portion of capital lease obligations.............. 584 828
---------- ----------
Total current liabilities............................... 959,258 966,426
Deferred revenue............................................ 27,333 28,644
Note payable to Tandy Corporation........................... 136,000 136,000
Borrowings under the Credit Agreement....................... 100,000 --
Capital lease obligations................................... -- 169
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 shares issued of 94,089,532 at
December 25, 1999 and 94,105,525 at June 26, 1999....... 941 941
Paid-in capital........................................... 257,589 281,056
Retained earnings......................................... 111,708 126,654
---------- ----------
370,238 408,651
Less: Treasury stock, at cost, 1,395,643 shares at
December 25, 1999 and 2,339,678 shares at June 26,
1999.................................................... (34,702) (58,175)
---------- ----------
Total stockholders' equity................................ 335,536 350,476
---------- ----------
$1,558,127 $1,481,715
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
COMPUSA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------- ---------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales................................... $1,383,738 $1,753,776 $2,730,984 $3,129,215
Cost of sales and occupancy costs........... 1,158,619 1,519,273 2,302,469 2,702,096
---------- ---------- ---------- ----------
Gross profit............................ 225,119 234,503 428,515 427,119
Operating expenses.......................... 169,165 169,595 341,023 315,259
Pre-opening expenses........................ 915 2,095 2,594 3,461
General and administrative expenses......... 52,385 38,358 99,134 70,995
Restructuring charge (credit)............... (397) -- (2,573) --
---------- ---------- ---------- ----------
Operating income (loss)................. 3,051 24,455 (11,663) 37,404
Other expense (income):
Interest expense........................ 6,442 6,989 13,194 11,372
Other income, net....................... (128) (3,504) (942) (5,044)
---------- ---------- ---------- ----------
6,314 3,485 12,252 6,328
---------- ---------- ---------- ----------
Income (loss) before income taxes........... (3,263) 20,970 (23,915) 31,076
Income tax expense (benefit)................ (1,225) 8,101 (8,969) 11,975
---------- ---------- ---------- ----------
Net income (loss)........................... $ (2,038) $ 12,869 $ (14,946) $ 19,101
========== ========== ========== ==========
Basic earnings (loss) per share............. $ (0.02) $ 0.14 $ (0.16) $ 0.21
Diluted earnings (loss) per share........... $ (0.02) $ 0.14 $ (0.16) $ 0.21
Weighted average common shares.............. 92,694 91,408 92,697 91,325
Weighted average common shares assuming
dilution.................................. 92,694 92,834 92,697 92,938
</TABLE>
See accompanying notes.
4
<PAGE>
COMPUSA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
---------------------------
DECEMBER 25, DECEMBER 26,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)......................................... $ (14,946) $ 19,101
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 38,950 33,002
Non-cash restructuring and other non-recurring
charges............................................. 12,004 --
Deferred revenue...................................... (1,092) 7,516
Deferred income taxes................................. 4,169 2,002
Other non-cash charges................................ -- 2,410
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................................. 64,215 4,125
Merchandise inventories............................. (72,037) (133,537)
Prepaid expenses and other assets................... 8,393 8,214
Other assets........................................ (315) --
Increase in accounts payable and accrued
liabilities......................................... 104,273 370,986
--------- ---------
Total adjustments................................. 158,560 294,718
--------- ---------
Net cash provided by operating activities......... 143,614 313,819
Cash flows provided by (used in) investing activities:
Capital expenditures...................................... (97,041) (36,391)
Payment for purchase of Computer City, net of cash
acquired................................................ -- (34,841)
Proceeds from sale of Canadian stores..................... -- 8,980
Other..................................................... 723 385
--------- ---------
Net cash used in investing activities............. (96,318) (61,867)
Cash flows provided by (used in) financing activities:
Payment of Senior Subordinated Notes...................... (110,000) --
Fees paid for Credit Agreement............................ (5,257) --
Borrowings under Credit Agreement......................... 110,000 --
Repayment of borrowings under Credit Agreement............ (10,000) --
Payments under capital lease obligations.................. (483) (1,210)
Proceeds from issuance of common stock.................... 8 378
--------- ---------
Net cash used in financing activities............. (15,732) (832)
Net increase in cash and cash equivalents................... 31,564 251,120
Cash and cash equivalents at beginning of period............ 173,350 151,779
--------- ---------
Cash and cash equivalents at end of period.................. $ 204,914 $ 402,899
========= =========
</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/A for the
fiscal year ended June 26, 1999.
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.
All references herein to "fiscal 2000" relate to the fifty-two weeks ending
June 24, 2000, and references to "fiscal 1999" relate to the fifty-two weeks
ended June 26, 1999. In addition, all references herein to "second quarter of
fiscal 2000" and "first six months of fiscal 2000" relate to the thirteen weeks
and twenty-six weeks, respectively, ended December 25, 1999, and all references
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.
2. SUBSEQUENT EVENT--OFFER TO PURCHASE
On January 23, 2000, the Company entered into a definitive merger agreement
with Grupo Sanborns, S.A. de C.V. ("Grupo Sanborns") and TPC Acquisition Corp.
("TPC"), a wholly-owned subsidiary of Grupo Sanborns, providing for the
acquisition by TPC of all of the outstanding shares of common stock of the
Company ("Common Stock") for $10.10 per share in cash (the "Merger Agreement").
Under the terms of the Merger Agreement, Grupo Sanborns commenced a tender offer
on February 1, 2000 to acquire all of the Common Stock that it and its
affiliates do not already own (the "Tender Offer"). Grupo Sanborns currently
indirectly owns approximately 14.8% of the Common Stock. The Merger Agreement
has been unanimously approved by the Board of Directors of the Company.
Upon completion of the Tender Offer and the satisfaction or waiver of
certain conditions, TPC will be merged with and into the Company and the Company
will be the surviving corporation, unless Grupo Sanborns elects, in its sole
discretion, to cause the Company to merge into TPC, with TPC continuing as the
surviving corporation (the "Merger").
The accompanying financial statements do not reflect adjustments, if any, to
the carrying values of assets and liabilities that may be required to be
recorded in the event the Merger is consummated, or the effects of transactions,
if any, consummated concurrently with or as a result of the Merger.
6
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SUBSEQUENT EVENT--OFFER TO PURCHASE (CONTINUED)
The Tender Offer is subject to certain terms and conditions, including,
among other things, that the number of shares of Common Stock validly tendered
and not properly withdrawn prior to the expiration of the Tender Offer, together
with the shares of Common Stock then owned by TPC, Grupo Sanborns, and their
respective affiliates, represents at least two-thirds of the total number of
outstanding shares of Common Stock on a fully diluted basis (the "Minimum Tender
Condition"). If after consummation of the Tender Offer TPC owns at least 90% of
the then-outstanding shares of Common Stock, TPC, at its sole discretion, will
be able to cause the Merger to occur without a vote of the Company's
stockholders. If, however, after consummation of the Tender Offer TPC owns less
than 90% of the then-outstanding shares of Common Stock, a vote of the Company's
stockholders will be required to approve the Merger, and a significantly longer
period of time will be required to effect the Merger.
In the event the Merger Agreement is terminated as a result of the
acceptance or intended acceptance by the Company of a competing acquisition
proposal, or in certain other circumstances set forth in the documents filed
with the Securities and Exchange Commission with regard to the Tender Offer, the
Company would be required to pay a termination fee in the amount of $20.0
million to Grupo Sanborns and TPC, which fee would be considered reimbursement
to Grupo Sanborns and TPC for all fees and expenses related to this Tender
Offer.
3. CHANGE IN ACCOUNTING POLICY--EXTENDED SERVICE PLANS
The Company sells extended service plans on behalf of unrelated third
parties ("Non-Obligor Contracts") and, to a lesser extent, sells its own
extended service plans ("Obligor Contracts") in those states in which
third-party service plan sales are not permitted. In either case, the extended
service plans are administered by a third party ("Administrator") and all
performance obligations and risk of loss with respect to such contracts are
economically transferred to the Administrator and other parties at the time the
contracts are sold by the Company.
Effective as of the beginning of fiscal 2000, the Company changed its
accounting policy with respect to the recognition of revenues from the sale of
Obligor Contracts. Pursuant to the Company's new policy, the Company recognizes
revenues, net of direct selling expenses (consisting primarily of a lump sum
payment due to the Administrator at the time of sale), ratably over the terms of
the Obligor Contracts sold, generally two to five years. Previously, the Company
recognized substantially all revenues, net of direct selling expenses, from the
sale of Obligor Contracts at the time of sale. Such previous policy was adopted
in fiscal 1996 concurrent with the consummation of an agreement with a new
Administrator. The Company has given retroactive effect to this new accounting
policy by restatement of the Company's previously published financial statements
beginning with fiscal 1996.
The Company has and will continue to recognize revenues from the sale of
Non-Obligor Contracts at the time of sale. However, the Company has also
reclassified its previously published financial statements to show the net
commission income from the sale of Non-Obligor Contracts (retail price less the
lump sum payment due to the Administrator at the time of sale) as a component of
net sales. Previously, the Company reflected the full retail price of the
Non-Obligor Contracts as a component of net sales and the amount paid to the
Administrator as a component of costs of sales and occupancy costs.
7
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. CHANGE IN ACCOUNTING POLICY--EXTENDED SERVICE PLANS (CONTINUED)
The impact of the restatement and reclassification on the consolidated
statements of operations for the thirteen weeks and twenty-six weeks ended
December 26, 1998 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
DECEMBER 26, 1998 DECEMBER 26, 1998
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $1,776,374 $1,753,776 $3,168,514 $3,129,215
Cost of sales and occupancy costs.... 1,536,611 1,519,273 2,732,397 2,702,096
Operating expenses................... 170,461 169,595 316,761 315,259
Income tax expense................... 9,793 8,101 14,861 11,975
Net income........................... 15,571 12,869 23,711 19,101
Basic earnings per share............. 0.17 0.14 0.26 0.21
Diluted earnings per share........... 0.17 0.14 0.26 0.21
</TABLE>
In addition, the restatement resulted in changes to the consolidated balance
sheet as of June 26, 1999, and the statement of cash flows for the twenty-six
weeks ended December 26, 1998.
4. FISCAL 1999 INITIATIVES
In fiscal 1999, the Company implemented various programs and initiatives
(collectively, the "Fiscal 1999 Initiatives") that included (1) initiatives
announced in the fourth quarter of fiscal 1999 as a result of the Company's
extensive evaluation of its core businesses (the "Fourth Quarter Initiatives"),
(2) the formation of an Internet retailing subsidiary (the "Internet Retailing
Initiative"), (3) information technology initiatives (the "IT Initiatives"), and
(4) the transition of the former Computer City stores to the CompUSA Computer
Superstore(SM) format (the "Computer City Transition"). Non-recurring and
restructuring charges incurred in connection with these initiatives aggregated
approximately $84.0 million in fiscal 1999. Additional costs incurred in
connection with these initiatives were approximately $16.7 million in the first
quarter of fiscal 2000 and $7.7 million in the second quarter of fiscal 2000.
8
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
The following table summarizes the financial statement classification of the
non-recurring and restructuring charges incurred in the second quarter of fiscal
2000:
<TABLE>
<CAPTION>
FOURTH
QUARTER
INITIATIVES IT INITIATIVES TOTAL
----------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses............................. $6,655 $ 357 $7,012
General and administrative expenses............ -- 1,120 1,120
Restructuring charge........................... (397) -- (397)
------ ------ ------
$6,258 $1,477 $7,735
====== ====== ======
</TABLE>
The following table summarizes the nature of the non-recurring and
restructuring charges incurred in the second quarter of fiscal 2000:
<TABLE>
<CAPTION>
FOURTH
QUARTER
INITIATIVES IT INITIATIVES TOTAL
----------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-cash charges for asset write-downs,
primarily estimated losses related to the
change in the extended service plan
provider..................................... $2,549 $ -- $2,549
Personnel costs and professional fees.......... 1,096 1,477 2,573
Transition expenses related to the
implementation of the Fourth Quarter
Initiatives.................................. 3,010 -- 3,010
------ ------ ------
6,655 1,477 8,132
Amounts included in restructuring charge:
Severance and other personnel costs.......... (517) -- (517)
Professional and consulting fees............. 120 -- 120
------ ------ ------
(397) -- (397)
------ ------ ------
$6,258 $1,477 $7,735
====== ====== ======
</TABLE>
The following table summarizes the financial statement classification of the
non-recurring and restructuring charges incurred in the first six months of
fiscal 2000:
<TABLE>
<CAPTION>
FOURTH INTERNET
QUARTER RETAILING
INITIATIVES INITIATIVE IT INITIATIVES TOTAL
----------- ---------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of sales and occupancy costs............ $ 1,853 $1,530 $ -- $ 3,383
Operating expenses........................... 19,837 -- 357 20,194
General and administrative expenses.......... -- -- 3,402 3,402
Restructuring charge......................... (2,573) -- -- (2,573)
------- ------ ------ -------
$19,117 $1,530 $3,759 $24,406
======= ====== ====== =======
</TABLE>
9
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
The following table summarizes the nature of the non-recurring and
restructuring charges incurred in the first six months of fiscal 2000:
<TABLE>
<CAPTION>
FOURTH INTERNET
QUARTER RETAILING
INITIATIVES INITIATIVE IT INITIATIVES TOTAL
----------- ---------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-cash charges for asset write-downs,
primarily inventory and estimated losses
related to the change in the extended
service plan provider...................... $ 9,549 $1,530 $ -- $11,079
Write-down of fixed assets with no future
utility.................................... 3,722 -- -- 3,722
Personnel costs and professional fees........ 1,096 -- 3,759 4,855
Transition expenses related to the
implementation of the Fourth Quarter
Initiatives................................ 7,323 -- -- 7,323
------- ------ ------ -------
21,690 1,530 3,759 26,979
Amounts included in restructuring charge:
Adjustments to previously recorded
restructuring charges:
Exit costs related to the write-down of
fixed assets and the accrual of future
rental obligations of the Company's
fulfillment and configuration
facility............................... (5,011) -- -- (5,011)
Reserve for future rental obligations for
closed stores and related lease
carrying costs and other closing
costs.................................. 183 -- -- 183
Severance and other personnel costs...... 2,135 -- -- 2,135
Professional and consulting fees......... 120 -- -- 120
------- ------ ------ -------
(2,573) -- -- (2,573)
------- ------ ------ -------
$19,117 $1,530 $3,759 $24,406
======= ====== ====== =======
</TABLE>
10
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
FOURTH QUARTER INITIATIVES--The Fourth Quarter Initiatives were announced by
the Company on June 24, 1999, as a result of the Company's extensive evaluation
of its core businesses. The Fourth Quarter Initiatives were designed to increase
gross margins, reduce operating costs, improve customer service, and position
the Company to take advantage of additional strategic opportunities. The Company
recorded charges related to the Fourth Quarter Initiatives of approximately
$67.5 million in the fourth quarter of fiscal 1999, $12.9 million in the first
quarter of fiscal 2000, and $6.3 million in the second quarter of fiscal 2000.
Charges recorded in connection with the Fourth Quarter Initiatives were
related to (1) the streamlining of the Company's training business, (2) the
reorganization of the Company's technical services business, (3) the redesign of
the Company's direct sales fulfillment and configuration activities for
corporate, government, and education customers, (4) the evaluation of the
profitability of the Company's stores, and (5) the change in the third-party
provider of the extended service plans sold by the Company after June 1999.
STREAMLINING OF TRAINING BUSINESS--In connection with the redesign of the
Company's training business, the Company implemented a vertical, market-based
organizational structure in the fourth quarter of fiscal 1999. Previously, each
store operated as an independent training organization with a local focus.
The Company incurred expenses of $62,000 in the second quarter of fiscal
2000 and $207,000 in the first quarter of fiscal 2000 in connection with the
streamlining of the training business. Costs incurred in both the first and
second quarters of fiscal 2000 related primarily to transition expenses,
primarily advertising and marketing expenses, incurred in connection with the
implementation of the new organizational structure.
REORGANIZATION OF TECHNICAL SERVICES BUSINESS--As a result of the evaluation
of its technical services business, the Company implemented a strategy to focus
on high-volume technical service opportunities, including "break-fix" and
on-site warranty and technical services. In addition, the Company outsourced
networking and systems configuration services to third-party providers.
The Company incurred expenses of $37,000 in the second quarter of fiscal
2000 and $29,000 in the first quarter of fiscal 2000 in connection with the
reorganization of the technical services business. Costs incurred in both the
first and second quarters of fiscal 2000 related primarily to advertising,
marketing, and consulting expenses, incurred in connection with the
implementation of the new organizational structure.
REDESIGN OF DIRECT SALES FULFILLMENT AND CONFIGURATION ACTIVITIES--As part
of the Fourth Quarter Initiatives, the Company also committed to a plan to
redesign its direct sales fulfillment and configuration activities for
corporate, government, and education customers by (1) outsourcing the direct
sales fulfillment and configuration operations and (2) consolidating the
Company's direct sales organization to a regional sales force and central sales
support function.
11
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
Costs incurred in connection with the redesign of direct sales fulfillment
and configuration activities are as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------------------
DECEMBER 25, SEPTEMBER 25, JUNE 26,
1999 1999 1999
------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Outsourcing of direct sales fulfillment and
configuration operations:
Non-cash charges for asset write-downs,
primarily commercial inventories....... $ -- $ 1,500 $37,000
Termination of approximately 225
employees and other personnel costs.... 6 52 385
Exit costs related to the write-down of
fixed assets and accrual of future
rental obligations of the Company's
fulfillment and configuration
facility............................... -- (5,011) 13,813
Write-down of fixed assets with no future
utility................................ -- 3,722 --
Other--transition expenses............... -- 64 --
Consolidation of the Company's direct sales
organization:
Non-cash charges for asset write-downs,
primarily accounts receivables and
fixed assets with no future utility.... 750 1,000 1,623
Termination of approximately 1,646
employees and other personnel costs.... (523) 2,363 --
Professional fees........................ 1,165 -- --
Transition expenses related to the
start-up of the Company's new
centralized sales and support facility,
primarily personnel and facility
costs.................................. 1,879 3,307 --
------ ------- -------
$3,277 $ 6,997 $52,821
====== ======= =======
</TABLE>
In connection with the outsourcing of the fulfillment of purchase orders
from corporate, government, and education customers, the Company has implemented
a plan to liquidate the related commercial inventories in its fulfillment and
configuration facility and its retail stores. As a result, the Company wrote
down the carrying values of such inventories by approximately $37.0 million in
the fourth quarter of fiscal 1999 to management's estimates of the net
realizable value of such inventories to be generated from vendor returns,
liquidation through third parties, and promotional activities in the Company's
stores. Based upon the costs of liquidating certain of such inventories in the
first quarter of fiscal 2000 and its estimates of the costs to liquidate the
remaining inventories, the Company increased its previous estimate of the
write-down of its commercial inventories by $1.5 million in the first quarter of
fiscal 2000. The Company liquidated a substantial portion of such inventories in
the first and second quarters of fiscal 2000 and anticipates the liquidation of
the remaining commercial inventories by the end of the third quarter of fiscal
2000.
12
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
In August 1999, the Company discontinued the fulfillment and configuration
activities previously conducted in its Dallas/Fort Worth-area fulfillment and
configuration facility. At that time, purchase orders from corporate,
government, and education customers began to be fulfilled by Ingram Micro Inc.
("Ingram Micro"). Based upon its outsourcing of its direct sales fulfillment and
configuration operations to Ingram Micro, the Company believed it would abandon
its centralized fulfillment and configuration facility. Accordingly, the Company
recorded a charge in the fourth quarter of fiscal 1999 of approximately $11.6
million to write down the carrying value of those fixed assets it believed would
be abandoned and had no future utility to the Company and a charge of
approximately $2.2 million for the estimated remaining lease rental obligations
and other carrying costs, net of subrental income, associated with that facility
prior to the expiration of the lease term in 2008. In the first quarter of
fiscal 2000, the Company determined that it would be able to redeploy certain
portions of the centralized fulfillment and configuration facility in its
ongoing operating activities, primarily the Company's call center operations. As
a result, in the first quarter of fiscal 2000 the Company reversed the
previously recorded charge of $2.2 million for estimated remaining net lease
rental obligations and reduced the previously recorded estimate of the exit
costs related to the fixed assets to be abandoned by $2.8 million. The Company
redeployed certain of the assets located in the former centralized fulfillment
and configuration facility in its ongoing operating activities. In the first
quarter of fiscal 2000, the Company recorded a $3.7 million write-down of the
assets in the facility that had no future utility for the Company's ongoing
activities.
In August 1999, the Company organized a regional sales force and central
sales support function and opened a new 80,000 square-foot call center in the
Dallas/Fort Worth area to accommodate this function. Previously, each store
maintained a separate direct sales force. As a result of the consolidation of
the direct sales organization and the outsourcing of its direct sales
fulfillment and configuration operations, the Company terminated approximately
1,871 employees in August 1999 who were previously responsible for the direct
sales activities conducted through the Company's stores and the Company's
centralized fulfillment and configuration facility. Costs incurred in connection
with these termination actions and other personnel costs related to the redesign
of the Company's direct sales fulfillment and configuration activities to its
corporate, government, and education customers aggregated approximately $385,000
in the fourth quarter of fiscal 1999 and approximately $2.4 million in the first
quarter of fiscal 2000. In the second quarter of fiscal 2000, the Company
reversed approximately $517,000 of the previously recorded severance expenses
based upon actual severance payments made.
In connection with the implementation of its plan to redesign its direct
sales fulfillment and configuration activities to corporate, government, and
education customers, the Company incurred costs of approximately $3.4 million in
the first quarter of fiscal 2000 and $3.0 million in the second quarter of
fiscal 2000, primarily for start-up personnel, training, and facilities costs
related to the Company's new centralized direct sales and support facility
located in the Dallas/Fort Worth area as well as professional fees.
EVALUATION OF THE COMPANY'S STORES--In connection with the Fourth Quarter
Initiatives, the Company analyzed each of its retail stores in terms of
profitability and growth potential and closed four stores in July 1999. The
Company incurred costs of $718,000 in the first quarter of fiscal 2000 related
to the closing of these stores. Such costs related primarily to the write-down
of inventories, employee terminations, and other closing costs.
CHANGE IN EXTENDED SERVICE PLAN PROVIDER--In June 1999, in response to a
proposed premium rate increase related to the then-current extended service plan
program (the "Prior ESP Program"), the Company terminated the Prior ESP Program.
In July 1999, the Company implemented a new extended service plan program
utilizing new administration and insurance companies. As a result of the
foregoing,
13
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
the Company established reserves for estimated costs of $2.0 million in the
fourth quarter of fiscal 1999, $4.2 million in the first quarter of fiscal 2000,
and $1.8 million in the second quarter of fiscal 2000 associated with certain
unresolved issues with the administrator of the Prior ESP Program, primarily
related to repair services provided by the Company to the administrator of the
Prior ESP Program, as well as repair services provided by the Company subsequent
to the termination of the Prior ESP Program.
The administration of the extended service plans sold pursuant to the Prior
ESP Program is the responsibility of the administrator of the Prior ESP Program
and/or the insurance companies that insured the administration obligations of
the Prior ESP Program. In July 1999, the Company elected, for business and
customer relations reasons, to provide supplemental administrative services to
purchasers of extended service plans sold pursuant to the Prior ESP Program who
experienced difficulty in obtaining services from the administrator of the Prior
ESP Program. The Company incurred and expensed costs of approximately $748,000
in the first quarter of fiscal 2000 and $1.1 million in the second quarter of
fiscal 2000 in connection with providing these supplemental administrative
services. However, the Company is currently seeking reimbursement from the
insurance companies of the costs incurred by the Company in fiscal 2000 in
providing these supplemental services. The Company believes it is entitled to
full reimbursement of such costs and, during the third quarter of fiscal 2000,
the Company expects to consummate an arrangement with the insurance companies
for the reimbursement of such costs. In addition, the Company expects, during
the third quarter of fiscal 2000, to reach an agreement with the insurance
companies regarding the future administration of the Prior ESP Program.
Depending upon the outcome of these negotiations, the Company may (1) record a
charge for the estimated additional costs related to the supplemental and future
administration of the Prior ESP Program, to the extent such costs are not
reimbursed by the insurance companies, or (2) reverse previously recorded
expenses related to supplemental administrative services in the event such
expenses are subsequently reimbursed.
INTERNET RETAILING INITIATIVE--In March 1999, the Company completed the
formation of CompUSA Net.com Inc. ("CompUSA Net.com") by contributing to it the
net assets of the Company's CompUSA Direct division. Prior to the formation of
CompUSA Net.com, the Company conducted its mail order, fulfillment, and retail
Internet sales operations through CompUSA Direct. Concurrent with the formation
of CompUSA Net.com, the Company announced plans to change the operations of
CompUSA Net.com to an Internet-only business. Beginning in the fourth quarter of
fiscal 1999, the mail order and other non-Internet sales operations previously
conducted by CompUSA Direct were phased out or transferred to the Company. In
October 1999, the Company transferred CompUSA Net.com's Internet business to
cozone.com l.l.c., an indirect subsidiary of the Company. Another indirect
subsidiary, cozone.com inc., is the sole manager of cozone.com l.l.c. These two
subsidiaries are collectively referred to in these consolidated financial
statements as "cozone.com."
The Company incurred costs of approximately $1.5 million in the first
quarter of fiscal 2000 related to the implementation of its Internet retailing
strategy, primarily the write-down of inventories not consistent with this
strategy to their estimated net realizable value upon liquidation with a third
party.
Due to lower-than-expected net sales at cozone.com in the second quarter of
fiscal 2000, the Company is currently reevaluating the role of cozone.com in the
Company's overall Internet retailing strategy. Depending on the outcome of this
evaluation, the Company may incur additional charges or require additional
capital related to a change in the Company's Internet retailing strategy.
14
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FISCAL 1999 INITIATIVES (CONTINUED)
IT INITIATIVES--In the fourth quarter of fiscal 1998, the Company committed
to a new information technology ("IT") strategy. Pursuant to this strategy, the
Company outsourced substantially all of its IT processes to a third-party
service provider. In addition, the Company selected an Enterprise Resource
Management ("ERM") system in fiscal 1999 to replace a substantial portion of the
Company's existing IT systems. The Company implemented the first phases of the
ERM system in July and August 1999 and expects to complete the final
implementation of the ERM system in the first half of fiscal 2001. The Company
incurred non-recurring charges of approximately $2.3 million in the first
quarter of fiscal 2000 and $1.5 million in the second quarter of fiscal 2000
related primarily to the outsourcing of its IT operations and training and other
non-capitalizable costs incurred in connection with the implementation of the
ERM system.
COMPUTER CITY TRANSITION--The Company incurred costs of approximately $2.6
million in the first quarter of fiscal 1999 and $4.6 million 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 costs included a $2.4 million
charge taken in the first quarter of fiscal 1999 for the closure of CompUSA
Computer Superstores in markets where a former Computer City store remained open
in close proximity to the closed CompUSA Computer Superstore.
FISCAL 1999 INITIATIVES RESERVES--In connection with the Fourth Quarter
Initiatives, the Company recorded charges in the fourth quarter of fiscal 1999
and the first quarter of fiscal 2000 related to (1) the future rental
obligations and other lease carrying costs for the four stores closed in July
1999 and (2) future severance payments to be made to employees terminated in
connection with these initiatives.
A rollforward of the reserve for future rental obligations and other lease
carrying costs is as follows (in thousands):
<TABLE>
<S> <C>
Balance at September 25, 1999............................... $1,103
Payments.................................................... (489)
------
Balance at December 25, 1999................................ $ 614
======
</TABLE>
A rollforward of the reserve for future severance payments is as follows (in
thousands):
<TABLE>
<S> <C>
Balance at September 25, 1999............................... $ 240
Payments.................................................... (138)
------
Balance at December 25, 1999................................ $ 102
======
</TABLE>
15
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. PURCHASE OF COMPUTER CITY
On August 31, 1998, the Company completed the acquisition of Computer City,
Inc. ("Computer City") from Tandy Corporation ("Tandy"). The purchase of
Computer City was accounted for under the purchase method of accounting. The
accompanying statement of operations for the first six months of fiscal 1999
includes the results of operations from the date of acquisition for the former
Computer City stores in the United States that the Company operates as CompUSA
Computer Superstores. 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
statements of operations for the first six months of fiscal 1999, but rather
represent adjustments to the value of the related assets acquired and
liabilities assumed. The following pro forma net sales, net loss, and diluted
loss per share data summarize the results of operations of the Company for the
first six months of fiscal 1999 as if Computer City had been acquired as of the
beginning of fiscal 1999. The pro forma results below for the first six months
of fiscal 1999 are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect during the period presented, and
are not intended to be a projection of future results or trends (in thousands,
except per share data).
<TABLE>
<S> <C>
Net sales....................................... $3,252,482
Net loss........................................ (1,750)
Diluted loss per share.......................... (0.02)
</TABLE>
6. EQUITY
Basic earnings (loss) per share has been computed using the weighted average
number of shares of Common Stock outstanding for each period presented. The
dilutive effect of stock options and other common stock equivalents is included
in the calculation of diluted earnings per share using the treasury stock
method.
The calculation of basic and diluted earnings (loss) per share is summarized
as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------------- -----------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss)......................... $(2,038) $12,869 $ (14,946) $19,101
Weighted average common shares
outstanding............................. 92,694 91,408 92,697 91,325
------- ------- --------- -------
Basic earnings (loss) per share........... $ (0.02) $ 0.14 $ (0.16) $ 0.21
======= ======= ========= =======
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss)......................... $(2,038) $12,869 $ (14,946) $19,101
Weighted average common shares
outstanding............................. 92,694 91,408 92,697 91,325
Incremental shares assuming dilution...... -- 1,426 -- 1,613
------- ------- --------- -------
Weighted average common shares assuming
dilution................................ 92,694 92,834 92,697 92,938
------- ------- --------- -------
Diluted earnings (loss) per share......... $ (0.02) $ 0.14 $ (0.16) $ 0.21
======= ======= ========= =======
</TABLE>
For the second quarter of fiscal 2000, approximately 292,000 incremental
shares of Common Stock assuming dilution related to the Company's outstanding
stock options were excluded from the calculation of the diluted loss per share
because the impact was anti-dilutive.
16
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
On March 22, 1993, a lawsuit, THE LAITRAM CORPORATION V. OKI ELECTRIC
INDUSTRY COMPANY, LTD., OKI AMERICA, INC., OKIDATA AND COMPUSA INC., Civil
Action No. 93-0908, was filed in the United States District Court for the
Eastern District of Louisiana by the Laitram Corporation ("Laitram"). Laitram
has alleged various causes of action including patent infringement and is
seeking unspecified actual damages, costs, attorneys' fees, and treble damages.
Oki America, Inc. ("Oki") has agreed to defend the Company in this case and
pursuant to such agreement, Oki's counsel filed an answer on the Company's
behalf. In its answer, the Company denied liability in this matter and intends
to vigorously pursue all available defenses. The matter has been stayed pending
appeal of an unrelated case involving the same patent.
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 Common Stock and related publicly
traded options during the class period. 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. Among other things, the plaintiffs
allege that in order to halt a decline in the market price of Common Stock and
to artificially inflate the stock price, Company insiders falsely reported to
the market in early January 1998 that the Company was achieving strong sales of
certain types of products. The plaintiffs also allege that misstatements and
omissions by Company personnel related to projected and historical operating
results, sales, and other matters involving corporate operations resulted in an
inflation of the stock price. The plaintiffs seek unspecified compensatory
damages, recissory damages, interest, and attorneys' fees and costs, as well as
certain equitable relief. On September 25, 1998, the Company filed a Motion to
Dismiss together with a brief in support of the motion. On August 30, 1999, the
Court granted the Company's motion and dismissed the complaint, but granted
leave to the plaintiffs to replead. The plaintiffs filed a second amended
complaint on September 20, 1999. The Company filed a Motion to Dismiss the
second amended complaint and supporting brief on October 14, 1999. Based on
currently available information, it is not possible to give an estimate of the
possible loss or range of loss that might be incurred by the Company if the
plaintiffs in these lawsuits were to prevail in the litigation. The Company
believes the plaintiffs' claims are without merit and intends to vigorously
defend against such charges.
On January 14, 1999, Tom Johnson, on behalf of himself and the California
general public, filed a lawsuit in the Superior Court of California for the
County of Contra Costa commencing the action entitled JOHNSON V. CIRCUIT CITY
STORES, INC., Contra Costa Superior Court Case No. C99-00054 (the "Action"). By
the Action, the plaintiff alleges that the Company and six other retailers of
computer hardware and software products violated California Business and
Professions Code Sections 17200 and 17500 by, among other things, (1)
misrepresenting the Year 2000 ("Y2K") compliance of products sold by them, (2)
selling unnecessary Y2K fixes, and/or (3) failing to disclose the need for Y2K
fixes or upgrades. Johnson's complaint requests (1) freezing the retailers'
assets, (2) restitution of all funds acquired by the retailers since
January 15, 1995, by means of the alleged conduct, (3) an injunction requiring
the retailers to disclose, among other things, the nature of the Y2K problem, a
means to determine Y2K compliance, and what fixes are available to all of their
customers who have bought products since January 15, 1995, and (4) attorneys'
fees. The Company is currently engaged in settlement discussions and believes
that the Action will be settled for a nominal amount.
17
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On or about January 3, 2000, the Company was sued by COC Services, Ltd.
("CSL") in Cause No. 00-00023-B in the County Court at Law No. 2 of Dallas
County, Texas (the "Lawsuit"). In the Lawsuit, CSL originally asserted claims
against the Company for breach of an alleged contract, anticipatory breach of an
alleged contract, breach of an alleged duty of good faith and fair dealing,
tortious interference, fraud, and declaratory relief, arising out of a January
8, 1999 letter agreement concerning franchise retail stores in Mexico. On
February 1, 2000, CSL filed its First Amended Original Petition (the "Amended
Petition") and added as additional defendants Grupo Carso, S.A. de C.V. ("Grupo
Carso"), Grupo Sanborns, TPC, Carlos Slim Helu ("Slim"), and James F. Halpin
("Halpin"). In the Amended Petition, CSL continues to sue the Company for all of
the above-referenced claims and has added additional claims against Grupo Carso,
Grupo Sanborns, Slim, TPC, and Halpin for tortious interference with CSL's
alleged business and contractual relationships with the Company and with CSL's
expectation to conduct business in Mexico on behalf of the Company. CSL has also
added a claim of misappropriation against Grupo Carso, Grupo Sanborns, Slim, and
TPC (the "Slim Defendants") arising out of these defendants' alleged misuse of
confidential information regarding the Company in connection with their proposed
acquisition of the Company and/or an interest in OfficeMax, Inc. CSL also has
added claims for breach of contract against Grupo Carso arising out of an
alleged contract with Grupo Carso contemplating franchise retail stores in
Mexico. CSL also has added a claim for tortious interference against Halpin for
allegedly interfering with CSL's alleged contractual and business relationships
with the Company, Grupo Carso, and "others" regarding business matters to be
conducted in Mexico. CSL also has added a claim for unjust enrichment and/or
QUANTUM MERUIT against Halpin for the alleged benefits enjoyed or to be enjoyed
by Halpin in connection with the proposed acquisition of the Company. CSL also
has alleged that all of the defendants have conspired to deprive CSL of its
rights with respect to business in Mexico. CSL seeks at least $150,000,000 on
each of four breach of contract claims against the Company, at least
$150,000,000 for alleged breach of duty of good faith and fair dealing against
the Company, at least $150,000,000 for alleged tortious interference and an
additional claim for at least $300,000,000 in punitive damages for tortious
interference against the Company, at least $2,000,000 in damages for alleged
fraud against the Company, at least $150,000,000 against the Slim Defendants for
tortious interference and at least an additional $300,000,000 for punitive
damages for tortious interference against the Slim Defendants, at least
$150,000,000 for each of two breach of contract claims against Grupo Carso, at
least $150,000,000 against Halpin for alleged tortious interference and at least
an additional $300,000,000 in punitive damages for alleged tortious interference
against Halpin, at least $50,000,000 against the Slim Defendants for alleged
misappropriation and at least an additional $100,000,000 in exemplary damages
against the Slim Defendants for alleged misappropriation, at least $150,000,000
against all defendants for alleged civil conspiracy together with exemplary
damages of at least $300,000,000 against all defendants, and an unspecified
amount of damages against Halpin for alleged unjust enrichment and/or QUANTUM
MERUIT. CSL also seeks to recover interest, attorneys' fees, and costs of Court.
On January 28, 2000, the Company filed an answer to the original petition in the
Lawsuit asserting various affirmative defenses. The Company has not yet filed an
answer to the Amended Petition and discovery has not yet commenced. Based on
currently available information, it is not possible to give an estimate of the
possible loss or range of loss that might be incurred by the Company if the
plaintiff in the Lawsuit was to prevail in the litigation. The Company believes
the plaintiff's claims are without merit and intends to vigorously defend
against such charges.
18
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 24, 2000, a complaint seeking class action status, entitled
DANIEL EXNER V. COMPUSA INC. et al., Cause No. CC-00-00921-C, was filed in the
County Court at Law of Dallas County, Texas by Daniel Exner, a shareholder of
the Company, in connection with the proposed Merger discussed in Note 2, against
the Company and all of the members of the Board of Directors of the Company.
Plaintiff alleges that the individual defendants breached their fiduciary duties
of loyalty and care to the Company and its stockholders by, among other things,
entering into the Merger Agreement at an unfair price, failing to maximize
stockholder value, and benefiting themselves at the expense of the stockholders.
The complaint seeks a declaration that the individual defendants breached their
duties of loyalty and care, an injunction against the Merger, unspecified
monetary damages, costs and fees, and other relief. Based on currently available
information, it is not possible to give an estimate of the possible loss or
range of loss that might be incurred by the Company if the plaintiff in this
lawsuit were to prevail in the litigation. The Company believes the plaintiff's
claims are without merit and intends to vigorously defend against such charges.
In addition to the matters described above, 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, including the matters described above, 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 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.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
---------------------------
DECEMBER 25, DECEMBER 26,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash paid (received) during the periods for:
Interest.................................................. $ 8,144 $ 5,536
Income taxes.............................................. (1,155) (7,983)
Investing activities not affecting cash are as follows:
Additions to property and equipment under capital
leases.................................................. $ 70 $ 471
Financing activities not affecting cash are as follows:
Note payable to Tandy issued in connection with the
Computer City acquisition............................... $ -- $136,000
</TABLE>
19
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. CREDIT AGREEMENT
Effective June 30, 1999, the Company entered into a three-year secured
revolving credit agreement (the "Credit Agreement") with a consortium of banks
and financial institutions that provides for borrowings and letters of credit up
to a maximum of $500 million, with letters of credit not to exceed $100 million.
Borrowings under the Credit Agreement are subject to a borrowing base (the
"Borrowing Base") that is equal to the sum of (a) 85% of eligible accounts
receivable, as defined, and (b) an amount equal to the lowest of (i) 65% of the
lower of cost or market value of eligible inventory, as defined, (ii) 85% of
appraised liquidation value, as defined, of eligible inventory, or (iii) $400
million, less (c) outstanding letters of credit. The Borrowing Base may also be
reduced by certain reserves provided for in the Credit Agreement in the event
borrowings and letters of credit under the Credit Agreement exceed 50% of the
Borrowing Base without reduction for letters of credit or such reserves.
Borrowings under the Credit Agreement are secured by substantially all of the
Company's assets, excluding those of cozone.com and CompUSA Net.com. The funds
available under the Credit Agreement may be used for any corporate purpose. As
of December 25, 1999, the Company had approximately $446.5 million of
availability under the Credit Agreement, against which the Company had $100.0
million of outstanding borrowings and $28.1 million of outstanding letters of
credit.
Borrowings under the Credit Agreement bear interest, at the Company's
option, at either a prime rate of 8.5% per annum as of December 25, 1999, or a
rate based on the London Interbank Offering Rate (LIBOR) of 6.2% as of
December 25, 1999 plus a specified margin. At December 25, 1999, the rate of
interest applicable to the Company's outstanding borrowings under the Credit
Agreement was the prime rate of 8.5% per annum. 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 lenders' approval.
The Credit Agreement requires the Company to maintain a minimum fixed charge
coverage ratio in the event the amount available for future borrowings under the
Credit Agreement is less than $75 million. The Credit Agreement imposes certain
limitations on indebtedness, investments, purchases of Common Stock, prepayment
of subordinate debt, mergers and consolidations, acquisitions, liens and capital
expenditures, and prohibits the payment of dividends (other than stock
dividends). The indebtedness under the Credit Agreement is guaranteed on a full,
unconditional, and joint and several basis by all the subsidiaries of the
Company, except cozone.com and CompUSA Net.com.
The Credit Agreement contains a provision applicable in the event of a
change in control of the Company. As described in Note 2, the Company, Grupo
Sanborns, and TPC have entered into a definitive Merger Agreement. Consummation
of the transaction contemplated by the Merger Agreement would violate the change
in control provision in the Credit Agreement. If the Company were to violate
this provision, the lenders under the Credit Agreement would have the right to
demand immediate payment of all outstanding amounts of principal and interest
under the Credit Agreement, of which the Company had $100.0 million outstanding
as of December 25, 1999. In addition, if the lenders accelerated the payment of
more than $35 million of indebtedness under the Credit Agreement, the Company
would be in default on the $136 million note payable to Tandy related to the
purchase of Computer City and certain other financing agreements.
20
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. SEGMENT REPORTING
The Company's operations are conducted through four segments: Retail,
Direct, CompUSA PC, and Internet and mail order. These segments were determined
based on criteria consistent with those used by management of the Company in
evaluating its various businesses and allocating resources between businesses. A
summary description of the operations conducted by each segment is as follows:
RETAIL--The Retail segment is comprised of the sales of products and
services to retail customers, primarily through the Company's Computer
Superstores.
DIRECT--The Direct segment is comprised of sales of products and services to
corporate, government, and education customers. Beginning in fiscal 2000, the
Company outsourced its direct sales fulfillment. Prior to fiscal 2000, such
sales were fulfilled from either the Company's distribution and configuration
facility in the Dallas/Fort Worth area or from the Company's Computer
Superstores.
COMPUSA PC--The CompUSA PC segment is comprised of the Company's assembly
operations related to its CompUSA PC brand of desktop and notebook personal
computers and servers. The CompUSA PC segment sells build-to-order products
directly to consumers and assembles pre-configured products for sale in the
Company's Computer Superstores.
INTERNET AND MAIL ORDER--The Internet and mail order segment consists of the
Internet sales operations conducted by cozone.com, the Company's Internet-only
subsidiary, since its formation in October 1999. Prior to the formation of
cozone.com, the Company conducted its Internet sales operations from March 1999
to October 1999 through CompUSA Net.com Inc., a wholly-owned subsidiary of the
Company, and prior to March 1999 through CompUSA Direct, a division of the
Company. In addition to Internet sales operations, CompUSA Net.com and CompUSA
Direct also conducted mail order and other non-Internet sales operations. All
non-Internet sales operations were phased out or transferred to the Company
beginning in the fourth quarter of fiscal 1999 in connection with the Internet
Retailing Initiative.
The accounting policies for each of the Company's segments are the same as
those used by the Company in the preparation of its consolidated financial
statements. Intersegment sales and profits are eliminated in the preparation of
the Company's consolidated financial statements.
21
<PAGE>
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. SEGMENT REPORTING (CONTINUED)
Net sales for training and technical services aggregated $47.1 million in
the second quarter of fiscal 2000, compared with $66.2 million in the second
quarter of fiscal 1999. Such sales are included in the sales of the Company's
segments shown below.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED
-------------------------------------------------------
DECEMBER 25, 1999 DECEMBER 26, 1998
-------------------------- --------------------------
OPERATING OPERATING
NET SALES INCOME (LOSS) NET SALES INCOME (LOSS)
---------- ------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Retail...................................... $1,156,998 $ 91,492 $1,199,764 $ 62,839
Direct...................................... 224,013 (16,969) 475,645 2,183
CompUSA PC.................................. 24,755 (2,823) 22,627 (1,318)
Internet and mail order..................... 7,517 (11,656) 82,182 1,680
---------- -------- ---------- --------
1,413,283 60,044 1,780,218 65,384
Elimination of:
Intersegment sales........................ (29,545) -- (26,442) --
Intersegment operating loss............... -- 2,007 -- --
Unallocated:
General and administrative expenses,
excluding non-recurring and restructuring
charges................................... -- (51,265) -- (36,342)
Non-recurring and restructuring charges... -- (7,735) -- (4,587)
---------- -------- ---------- --------
$1,383,738 $ 3,051 $1,753,776 $ 24,455
========== ======== ========== ========
</TABLE>
Net sales for training and technical services aggregated $104.9 million in
the first six months of fiscal 2000, compared with $127.9 million in the first
six months of fiscal 1999. Such sales are included in the sales of the Company's
segments shown below.
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX WEEKS ENDED
-------------------------------------------------------
DECEMBER 25, 1999 DECEMBER 26, 1998
-------------------------- --------------------------
OPERATING OPERATING
NET SALES INCOME (LOSS) NET SALES INCOME (LOSS)
---------- ------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Retail...................................... $2,088,709 $149,878 $2,058,123 $105,547
Direct...................................... 635,713 (23,416) 933,120 7,619
CompUSA PC.................................. 59,072 (2,504) 51,655 (2,863)
Internet and mail order..................... 15,449 (16,844) 143,497 3,261
---------- -------- ---------- --------
2,798,943 107,114 3,186,395 113,564
Elimination of:
Intersegment sales........................ (67,959) -- (57,180) --
Intersegment operating loss............... -- 1,361 -- --
Unallocated:
General and administrative expenses,
excluding non-recurring and restructuring
charges................................... -- (95,732) -- (68,933)
Non-recurring and restructuring charges... -- (24,406) -- (7,227)
---------- -------- ---------- --------
$2,730,984 $(11,663) $3,129,215 $ 37,404
========== ======== ========== ========
</TABLE>
22
<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 in the Company's other
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, the opening of its own build-to-order assembly
facility in the second quarter of fiscal 1999, and the addition of notebook
computers and servers to the build-to-order product line in the third and fourth
quarters of fiscal 1999, respectively, 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 mitigate the financial impact of future lease commitments related to Computer
City stores closed, and to retain Computer City's retail and direct customers.
The Company's focus on its Internet retailing business through cozone.com
involves significant additional risks, including without limitation failure to
achieve customer acceptance and potential significant operating and/or capital
investments that may be required to be made by the Company. The Fiscal 1999
Initiatives, as defined and discussed below, involve certain risks and
uncertainties, including without limitation failure to achieve customer
acceptance, substantial dependence on a third party for timely fulfillment of
orders received from the Company's direct sales customers, failure to retain
established direct sales customers, as well as costs to be incurred in
connection with the store closures and the exiting of direct sales fulfillment
and configuration activities. The Company's information technology initiatives
involve additional risks, including deviations in scheduled installation dates,
implementation costs, projected savings, and functionality.
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,"
"intends," "anticipates," and similar expressions as they relate to the Company
or its management are intended to identify forward-looking statements.
OFFER TO PURCHASE
On January 23, 2000, the Company entered into a definitive merger agreement
(the "Merger Agreement") providing for the acquisition of all of the outstanding
shares of common stock of the Company and the merger of an affiliate of the
purchaser with the Company (the "Merger"). The financial statements discussed
below do not reflect adjustments, if any, to the carrying values of assets and
liabilities that may be required to be recorded in the event the Merger is
consummated, or the effects of transactions, if any, consummated concurrently
with or as a result of the Merger. See Note 2 of Notes to Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.
23
<PAGE>
CHANGE IN ACCOUNTING POLICY--EXTENDED SERVICE PLANS
The Company sells extended service plans on behalf of unrelated third
parties ("Non-Obligor Contracts") and, to a lesser extent, sells its own
extended service plans ("Obligor Contracts") in those states in which
third-party service plan sales are not permitted. In either case, the extended
service plans are administered by a third party ("Administrator") and all
performance obligations and risk of loss with respect to such contracts are
economically transferred to the Administrator and other parties at the time the
contracts are sold by the Company.
Effective as of the beginning of fiscal 2000, the Company changed its
accounting policy with respect to the recognition of revenues from the sale of
Obligor Contracts. Pursuant to the Company's new policy, the Company recognizes
revenues, net of direct selling expenses (consisting primarily of a lump sum
payment due to the Administrator at the time of sale), ratably over the terms of
the Obligor Contracts sold, generally two to five years. Previously, the Company
recognized substantially all revenues, net of direct selling expenses, from the
sale of Obligor Contracts at the time of sale. Such previous policy was adopted
in fiscal 1996 concurrent with the consummation of an agreement with a new
Administrator. The Company has given retroactive effect to this new accounting
policy by restatement of the Company's previously published financial statements
beginning with fiscal 1996. As a result of the change in accounting policy with
respect to Obligor Contracts, net income for the second quarter of fiscal 1999
was reduced by $2.7 million, or $0.03 per share, and net income for the first
six months of fiscal 1999 was reduced by $4.6 million, or $0.05 per share, from
the previously published amounts.
The Company has and will continue to recognize revenues from the sale of
Non-Obligor Contracts at the time of sale. However, the Company has also
reclassified its previously published financial statements to show the net
commission income from the sale of Non-Obligor Contracts (retail price less the
lump sum payment due to the Administrator at the time of sale) as a component of
net sales. Previously, the Company reflected the full retail price of the
Non-Obligor Contracts as a component of net sales and the amount paid to the
Administrator as a component of costs of sales and occupancy costs.
COZONE.COM
In March 1999, the Company completed the formation of its wholly-owned
subsidiary, CompUSA Net.com Inc. ("CompUSA Net.com"), by contributing to it the
net assets of CompUSA Direct, the Company's former mail order, fulfillment, and
Internet sales division. In the fourth quarter of fiscal 1999, CompUSA Net.com
began phasing out or transferring to the Company its previous mail order,
fulfillment, and other non-Internet operations.
In October 1999, the Company transferred CompUSA Net.com's Internet business
to cozone.com l.l.c., an indirect subsidiary of the Company. Another indirect
subsidiary, cozone.com inc., is the sole manager of cozone.com l.l.c. The two
subsidiaries are collectively referred to in this report as "cozone.com."
cozone.com currently offers a wide range of products for use in the home, home
office, and small office, and on the road, and specializes in customer service
and industry-leading Internet technology.
GENERAL
All references herein to "fiscal 2000" relate to the fifty-two weeks ending
June 24, 2000, and references to "fiscal 1999" relate to the fifty-two weeks
ended June 26, 1999. In addition, all references herein to "second quarter of
fiscal 2000" and "first six months of fiscal 2000" relate to the thirteen weeks
and twenty-six weeks, respectively, ended December 25, 1999, and all references
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.
24
<PAGE>
The following table sets forth certain operating data for the Company:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------- ---------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Stores open at end of period........ 217 210 217 210
Acquired Computer City stores(1).... -- -- -- 37
Stores opened during the period..... 4 7 10 11
Stores closed during the
period(1)......................... -- -- 4 --
Stores relocated during the
period............................ -- 2 1 4
Average net sales per gross square
foot(2)(3)........................ $ 219 $ 305 $ 454 $ 583
Average net sales per Computer
Superstore (in thousands)(2)...... $6,374 $8,017 $12,742 $15,501
Comparable store sales
decrease(4)....................... (1.8%) (4.4%) (1.0%) (3.6%)
</TABLE>
- ------------------------
(1) As of August 31, 1998, the Company acquired 37 Computer City stores that the
Company operated as CompUSA Computer Superstores through the end of fiscal
1999. Of the 37 former Computer City stores that the Company operated as
CompUSA Computer Superstores in fiscal 1999, the Company closed four such
former Computer City stores in the first quarter of fiscal 2000 in
connection with the Company's Fourth Quarter Initiatives, as defined and
discussed below.
(2) Net sales are comprised of retail sales generated from the Company's
Computer Superstores, direct sales to corporate, government, and education
customers, and sales of CompUSA PC Inc., but exclude sales of cozone.com and
its predecessors.
(3) 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.
(4) Comparable store sales are net retail sales for the Computer Superstores
open the same number of months in both the indicated and previous periods,
including stores that were relocated or expanded during either period.
Beginning with the first quarter of fiscal 2000, the calculation of the
change in comparable store sales has been changed to include only the net
retail sales of products and services through the Company's Computer
Superstores. As a result of the centralization of the Company's direct sales
organization and the outsourcing of its direct sales fulfillment and
configuration operations, direct sales to corporate, government, and
education customers are no longer included in the comparable store sales
calculation. The changes in comparable store sales for the second quarter
and first six months of fiscal 1999 have been restated because they are now
calculated by including only the net retail sales of products and services
generated from the Company's Computer Superstores. In addition, the
calculations of the change in comparable store sales for the second quarter
and first six months of fiscal 2000 include the retail sales beginning in
September 1999 of the 33 former Computer City stores acquired by the Company
as of August 31, 1998 that the Company is continuing to operate. The sales
of the former Computer City stores that the Company is continuing to operate
are not included in the calculation of the change in comparable store sales
for the second quarter and first six months of fiscal 1999.
25
<PAGE>
RESULTS OF OPERATIONS
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, store closings, and changes in product mix.
Therefore, 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. See "--Quarterly
Data and Seasonality."
SECOND QUARTER ENDED DECEMBER 25, 1999, COMPARED WITH THE SECOND QUARTER ENDED
DECEMBER 26, 1998
The following table sets forth certain financial data for the thirteen weeks
ended December 25, 1999 for (1) the Company's "core" business operations which
includes Retail, Direct, Training, Technical Services, Call Center, and CompUSA
PC build-to-order businesses ("CompUSA Core Operations"), (2) cozone.com's
Internet operations, and (3) non-recurring and restructuring charges related to
the Fiscal 1999 Initiatives. See "--Non-Recurring and Restructuring Charges.":
<TABLE>
<CAPTION>
COMPUSA CORE FISCAL 1999
OPERATIONS COZONE.COM INITIATIVES CONSOLIDATED
------------ ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................................. $1,376,221 $ 7,517 $ -- $1,383,738
Cost of sales and occupancy costs.......... 1,151,746 6,873 -- 1,158,619
---------- -------- ------- ----------
Gross profit........................... 224,475 644 -- 225,119
Operating expenses......................... 148,411 13,742 7,012 169,165
Pre-opening expenses....................... 915 -- -- 915
General and administrative expenses........ 47,681 3,584 1,120 52,385
Restructuring charge (credit).............. -- -- (397) (397)
---------- -------- ------- ----------
Operating income (loss)................ 27,468 (16,682) (7,735) 3,051
Other expense (income):
Interest expense....................... 6,431 11 -- 6,442
Other income, net...................... (223) 95 -- (128)
---------- -------- ------- ----------
6,208 106 -- 6,314
---------- -------- ------- ----------
Income (loss) before income taxes.......... 21,260 (16,788) (7,735) (3,263)
Income tax expense (benefit)............... 7,980 (6,304) (2,901) (1,225)
---------- -------- ------- ----------
Net income (loss).......................... $ 13,280 $(10,484) $(4,834) $ (2,038)
========== ======== ======= ==========
</TABLE>
26
<PAGE>
The following table sets forth certain financial data for the thirteen weeks
ended December 26, 1998 for (1) the CompUSA Core Operations, (2) CompUSA
Direct's mail order, fulfillment, and Internet operations, and
(3) non-recurring and restructuring charges related to the Fiscal 1999
Initiatives:
<TABLE>
<CAPTION>
COMPUSA CORE COMPUSA FISCAL 1999
OPERATIONS DIRECT INITIATIVES CONSOLIDATED
------------ -------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.............................. $1,671,594 $82,182 $ -- $1,753,776
Cost of sales and occupancy costs...... 1,444,090 75,183 -- 1,519,273
---------- ------- ------- ----------
Gross profit......................... 227,504 6,999 -- 234,503
Operating expenses..................... 161,705 5,319 2,571 169,595
Pre-opening expenses................... 2,095 -- -- 2,095
General and administrative expenses.... 35,107 1,235 2,016 38,358
---------- ------- ------- ----------
Operating income (loss).............. 28,597 445 (4,587) 24,455
Other expense (income):
Interest expense..................... 6,972 17 -- 6,989
Other income, net.................... (3,504) -- -- (3,504)
---------- ------- ------- ----------
3,468 17 -- 3,485
---------- ------- ------- ----------
Income (loss) before income taxes...... 25,129 428 (4,587) 20,970
Income tax expense (benefit)........... 9,726 142 (1,767) 8,101
---------- ------- ------- ----------
Net income (loss)...................... $ 15,403 $ 286 $(2,820) $ 12,869
========== ======= ======= ==========
</TABLE>
COMPUSA CORE OPERATIONS
The following table sets forth certain items expressed as a percentage of
net sales for the periods indicated for the CompUSA Core Operations only:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
DECEMBER 25, DECEMBER 26,
1999 1998
------------- -------------
<S> <C> <C>
Net sales........................................... 100.0% 100.0%
Cost of sales and occupancy costs................... 83.7 86.4
----- -----
Gross profit........................................ 16.3 13.6
Operating expenses.................................. 10.8 9.7
Pre-opening expenses................................ 0.0 0.1
General and administrative expenses................. 3.5 2.1
----- -----
Operating income.................................... 2.0 1.7
Interest expense and other income, net.............. 0.5 0.2
----- -----
Income before income taxes.......................... 1.5 1.5
Income tax expense.................................. 0.5 0.6
----- -----
Net income.......................................... 1.0% 0.9%
===== =====
</TABLE>
27
<PAGE>
NET SALES--Net sales for the second quarter of fiscal 2000 decreased
approximately 17.7% to $1.38 billion from $1.67 billion for the second quarter
of fiscal 1999. The decrease in net sales was primarily due to a decline in
direct sales to corporate, government, and education customers of approximately
58.8% to $218.1 million in the second quarter of fiscal 2000 from $529.5 million
in the second quarter of fiscal 1999. The decline in direct sales was primarily
attributable to actions taken by the Company in connection with the Fourth
Quarter Initiatives to reduce or eliminate sales to certain of the Company's
commercial customers that did not meet certain profitability objectives and to
consolidate the direct sales organization to a regional sales force and central
sales support function located in the Dallas/Fort Worth area. The decline in
direct sales to corporate, government, and education customers was partially
offset by an increase in sales at the Company's retail stores of approximately
1.2% to $1.16 billion in the second quarter of fiscal 2000 from $1.14 billion in
the second quarter of fiscal 1999.
The increase in the Company's retail sales was primarily due to sales at the
Computer Superstores opened since the second quarter of fiscal 1999, partially
offset by, among other things, a decrease in the number of personal computer
systems sold in the second quarter of fiscal 2000 compared with the second
quarter of fiscal 1999, declines in average selling prices for certain of the
Company's products, including desktop systems (computer and monitor) and
notebook computers, and increased sales of lower-end computer systems as a
percentage of total computer systems sold.
Average net sales per square foot decreased approximately 28.2% and average
net sales per store decreased approximately 20.5% from the second quarter of
fiscal 1999 to the second quarter of fiscal 2000. The Company believes the
declines in average net sales per square foot and average net sales per store
were primarily due to the decline in direct sales, a decrease in the number of
personal computer systems sold in the second quarter of fiscal 2000 compared
with the second quarter of fiscal 1999, and declines in average selling prices
for certain of the Company's products, including desktop systems and notebook
computers. The decline in direct sales was primarily attributable to actions
taken by the Company in connection with the Fourth Quarter Initiatives to reduce
or eliminate sales to certain of the Company's commercial customers that did not
meet certain profitability objectives and to consolidate the direct sales
organization to a regional sales force and central sales support function
located in the Dallas/Fort Worth area. The number of personal computer systems
sold in the second quarter of fiscal 2000 decreased approximately 19.4% from the
second quarter of fiscal 1999. Average selling prices for desktop systems
declined approximately 8.4% and for notebook computers declined approximately
4.8% from the second quarter of fiscal 1999 to the second quarter of fiscal
2000.
Comparable store sales for the Company's Computer Superstores decreased
approximately 1.8% from the second quarter of fiscal 1999. The Company believes
its comparable store sales were negatively impacted by, among other things, a
decrease in the number of personal computer systems sold in the second quarter
of fiscal 2000 compared with the second quarter of fiscal 1999, declines in
average selling prices for certain of the Company's products, including desktop
systems and notebook computers, and increased sales of lower-end computer
systems as a percentage of total computer systems sold.
GROSS PROFIT--Gross profit was $224.5 million, or 16.3% of net sales, in the
second quarter of fiscal 2000 compared with $227.5 million, or 13.6% of net
sales, in the second quarter of fiscal 1999. The increase in gross profit as a
percentage of net sales was primarily due to a decrease in product costs as a
percentage of net sales, partially offset by an increase in occupancy costs as a
percentage of net sales.
The increase in gross profit of approximately 3.3% as a percentage of net
sales in the second quarter of fiscal 1999 compared with the second quarter of
fiscal 2000 was primarily due to an increase in gross profit from the sale of
retail products. The Company believes gross profit from the sale of retail
products increased as a result of the adjustment of its merchandising focus
toward higher-margin product categories in coordination with a change in
promotional strategies implemented in connection with the Fourth Quarter
Initiatives as well as an increase in the average number of sales associates
employed by the Company's Computer Superstores. The increase in the gross profit
percentage was also due to actions
28
<PAGE>
taken by the Company in connection with the Fourth Quarter Initiatives to reduce
or eliminate sales to certain of the Company's commercial customers that did not
meet certain profitability objectives. Due to the decrease in direct sales,
retail sales represented a larger percentage of total sales. Retail margins
generally are higher than direct sales margins.
Occupancy costs increased by approximately 0.65% as a percentage of net
sales in the second quarter of fiscal 2000 compared with the second quarter of
fiscal 1999. Occupancy costs, which are generally fixed in nature, increased as
a percentage of net sales in the second quarter of fiscal 2000, primarily as a
result of lower average net sales per store compared with the second quarter of
fiscal 1999.
OPERATING EXPENSES--Operating expenses were $148.4 million, or 10.8% of net
sales, in the second quarter of fiscal 2000 compared with $161.7 million, or
9.7% of net sales, in the second quarter of fiscal 1999. The increase in
operating expenses as a percentage of net sales was primarily due to increases
in personnel and facility expenses as percentages of net sales, partially offset
by a decrease in advertising expense as a percentage of net sales.
Personnel expenses in the second quarter of fiscal 2000 increased 1.58% as a
percentage of net sales. Personnel expenses increased as a percentage of net
sales primarily as a result of lower average net sales per store. In addition,
personnel expenses increased due to an increase in the average number of sales
associates employed by the Company's Computer Superstores.
Facility expenses increased by approximately 0.29% as a percentage of net
sales compared with the second quarter of fiscal 1999. Facility expenses, which
are generally fixed in nature, increased as a percentage of net sales in the
second quarter of fiscal 2000, primarily as a result of lower average net sales
per store.
The above increases were partially offset by lower advertising expenses as a
percentage of net sales. Net advertising expense decreased by approximately
0.74% as a percentage of net sales in the second quarter of fiscal 2000,
primarily due to changes in the Company's advertising and marketing strategies
in connection with the Fiscal 1999 Initiatives.
PRE-OPENING EXPENSES--Pre-opening expenses consist primarily of personnel
expenses incurred prior to a store's opening and promotional costs associated
with the opening. In the second quarter of fiscal 2000, the Company incurred
$915,000 in pre-opening expenses in connection with the opening of four Computer
Superstores, compared with $2.1 million in pre-opening expenses in the second
quarter of fiscal 1999 incurred in connection with the opening of seven Computer
Superstores and the relocation of two Computer Superstores.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
were $47.7 million, or 3.5% of net sales, in the second quarter of fiscal 2000
compared with $35.1 million, or 2.1% of net sales, in the second quarter of
fiscal 1999. The increase in general and administrative expenses as a percentage
of net sales was primarily due to increased personnel, facility, and
depreciation and amortization expenses as percentages of net sales.
Personnel expenses increased as a percentage of net sales in the second
quarter of fiscal 2000 by approximately 0.60%. This increase in personnel
expenses as a percentage of net sales is primarily attributable to lower average
net sales per store in the second quarter of fiscal 2000 compared with the
second quarter of fiscal 1999. In addition, personnel expenses increased as a
percentage of net sales due to increased incentive compensation expense.
Facility expenses increased by approximately 0.22% as a percentage of net
sales in the second quarter of fiscal 2000 compared with the second quarter of
fiscal 1999. Facility expenses, which are generally fixed in nature, increased
as a percentage of net sales in the second quarter of fiscal 2000 compared with
the second quarter of fiscal 1999, primarily as a result of lower average net
sales per store.
29
<PAGE>
The Company recorded approximately $1.3 million, or 0.10% of net sales, of
amortization expense related to the goodwill associated with the acquisition of
Computer City in the second quarter of fiscal 2000 compared with approximately
$900,000, or 0.06% of net sales, recorded in the second quarter of fiscal 1999.
In addition, depreciation expense increased approximately 0.18% as a percentage
of net sales in the second quarter of fiscal 2000 primarily due to the initial
implementation and installation of the Company's ERM system and other corporate
fixed asset additions.
INTEREST EXPENSE AND OTHER INCOME, NET--Interest expense and other income,
net, was $6.2 million, or 0.5% of net sales, in the second quarter of fiscal
2000 compared with $3.5 million, or 0.2% of net sales, in the second quarter of
fiscal 1999. The Company incurred interest expense in the second quarter of
fiscal 2000 in connection with the borrowings under the Credit Agreement, which
were $100.0 million as of December 25, 1999. In addition, investment income
decreased in the second quarter of fiscal 2000 due to lower average cash
balances. These increases were partially offset by the decrease in interest
expense related to the Senior Subordinated Notes due to the payment of the
Senior Subordinated Notes on August 3, 1999. See "--Liquidity and Capital
Resources."
INCOME TAXES--The Company's consolidated effective tax rate was 37.5% for
the second quarter of fiscal 2000 and 38.5% for the second quarter of fiscal
1999.
COZONE.COM
Retail Internet net sales for the second quarter of fiscal 2000 increased
approximately 21.5% to $7.5 million from $6.2 million for the second quarter of
fiscal 1999. Net sales for the second quarter of fiscal 1999 included $76.0
million of mail order, fulfillment, and other non-Internet sales that were
phased out or transferred to the Company beginning in the fourth quarter of
fiscal 1999 in connection with the transition to cozone.com's Internet-only
operation in the second quarter of fiscal 2000.
Gross profit related to Internet sales of $644,000, or 8.6% of net sales, in
the second quarter of fiscal 2000 remained relatively constant as a percentage
of net sales compared with gross profit related to mail order, fulfillment, and
Internet sales of $7.0 million, or 8.5% of net sales, in the second quarter of
fiscal 1999.
The operating loss for the second quarter of fiscal 2000 was $16.7 million
compared with operating income of $445,000 in the second quarter of fiscal 1999.
The decline in results of operations was primarily due to lower sales volumes in
the second quarter of fiscal 2000 and advertising and marketing expenses related
to the launch of the cozone.com Internet web site in October 1999.
Due to lower-than-expected net sales at cozone.com in the second quarter of
fiscal 2000, the Company is currently reevaluating the role of cozone.com in the
Company's overall Internet retailing strategy.
30
<PAGE>
SIX MONTHS ENDED DECEMBER 25, 1999, COMPARED WITH THE SIX MONTHS ENDED DECEMBER
26, 1998
The following table sets forth certain financial data for the six months
ended December 25, 1999 for (1) the CompUSA Core Operations, (2) cozone.com's
Internet operations, and (3) non-recurring and restructuring charges related to
the Fiscal 1999 Initiatives:
<TABLE>
<CAPTION>
COMPUSA CORE FISCAL 1999
OPERATIONS COZONE.COM INITIATIVES CONSOLIDATED
------------ ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................ $2,715,535 $ 15,449 $ -- $2,730,984
Cost of sales and occupancy costs........ 2,284,893 14,193 3,383 2,302,469
---------- -------- -------- ----------
Gross profit........................... 430,642 1,256 (3,383) 428,515
Operating expenses....................... 301,287 19,542 20,194 341,023
Pre-opening expenses..................... 2,594 -- -- 2,594
General and administrative expenses...... 87,786 7,946 3,402 99,134
Restructuring charge (credit)............ -- -- (2,573) (2,573)
---------- -------- -------- ----------
Operating income (loss)................ 38,975 (26,232) (24,406) (11,663)
Other expense (income):
Interest expense....................... 13,172 22 -- 13,194
Other income, net...................... (1,017) 75 -- (942)
---------- -------- -------- ----------
12,155 97 -- 12,252
---------- -------- -------- ----------
Income (loss) before income taxes........ 26,820 (26,329) (24,406) (23,915)
Income tax expense (benefit)............. 10,057 (9,873) (9,153) (8,969)
---------- -------- -------- ----------
Net income (loss)........................ $ 16,763 $(16,456) $(15,253) $ (14,946)
========== ======== ======== ==========
</TABLE>
31
<PAGE>
The following table sets forth certain financial data for the six months
ended December 26, 1998 for (1) the CompUSA Core Operations, (2) CompUSA
Direct's mail order, fulfillment, and Internet operations, and
(3) non-recurring and restructuring charges related to the Fiscal 1999
Initiatives:
<TABLE>
<CAPTION>
COMPUSA CORE COMPUSA FISCAL 1999
OPERATIONS DIRECT INITIATIVES CONSOLIDATED
------------ -------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales..................................... $2,985,718 $143,497 $ -- $3,129,215
Cost of sales and occupancy costs............. 2,571,579 130,517 -- 2,702,096
---------- -------- ------- ----------
Gross profit................................ 414,139 12,980 -- 427,119
Operating expenses............................ 300,375 9,719 5,165 315,259
Pre-opening expenses.......................... 3,461 -- -- 3,461
General and administrative expenses........... 66,660 2,273 2,062 70,995
---------- -------- ------- ----------
Operating income (loss)..................... 43,643 988 (7,227) 37,404
Other expense (income):
Interest expense............................ 11,337 35 -- 11,372
Other income, net........................... (5,044) -- -- (5,044)
---------- -------- ------- ----------
6,293 35 -- 6,328
---------- -------- ------- ----------
Income (loss) before income taxes............. 37,350 953 (7,227) 31,076
Income tax expense (benefit).................. 14,433 327 (2,785) 11,975
---------- -------- ------- ----------
Net income (loss)............................. $ 22,917 $ 626 $(4,442) $ 19,101
========== ======== ======= ==========
</TABLE>
COMPUSA CORE OPERATIONS
The following table sets forth certain items expressed as a percentage of
net sales for the periods indicated for the CompUSA Core Operations only:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------------
DECEMBER 25, DECEMBER 26,
1999 1998
------------- -------------
<S> <C> <C>
Net sales................................................... 100.0% 100.0%
Cost of sales and occupancy costs........................... 84.1 86.1
------ ------
Gross profit................................................ 15.9 13.9
Operating expenses.......................................... 11.1 10.1
Pre-opening expenses........................................ 0.1 0.1
General and administrative expenses......................... 3.3 2.2
------ ------
Operating income............................................ 1.4 1.5
Interest expense and other income, net...................... 0.4 0.2
------ ------
Income before income taxes.................................. 1.0 1.3
Income tax expense.......................................... 0.4 0.5
------ ------
Net income.................................................. 0.6% 0.8%
====== ======
</TABLE>
32
<PAGE>
NET SALES--Net sales for the first six months of fiscal 2000 decreased
approximately 9.0% to $2.72 billion from $2.99 billion for the first six months
of fiscal 1999. The decrease in net sales was primarily due to a decline in
direct sales to corporate, government, and education customers of approximately
39.9% to $623.9 million in the first six months of fiscal 2000 from $1.04
billion in the first six months of fiscal 1999. The decline in direct sales was
primarily attributable to actions taken by the Company in connection with the
Fourth Quarter Initiatives to reduce or eliminate sales to certain of the
Company's commercial customers that did not meet certain profitability
objectives and to consolidate the direct sales organization to a regional sales
force and central sales support function located in the Dallas/Fort Worth area.
The decline in direct sales to corporate, government, and education customers
was partially offset by an increase in sales at the Company's retail stores of
approximately 6.3% to $2.09 billion in the first six months of fiscal 2000 from
$1.96 billion in the first six months of fiscal 1999.
The increase in the Company's retail sales was primarily due to sales at the
Computer Superstores opened since the second quarter of fiscal 1999, partially
offset by, among other things, a decrease in the number of personal computer
systems sold in the first six months of fiscal 2000 compared with the first six
months of fiscal 1999, declines in average selling prices for certain of the
Company's products, including desktop systems, and increased sales of lower-end
computer systems as a percentage of total computer systems sold.
Average net sales per square foot decreased approximately 22.1% and average
net sales per store decreased approximately 17.8% from the first six months of
fiscal 1999 to the first six months of fiscal 2000. The Company believes the
declines in average net sales per square foot and average net sales per store
were primarily due to the decline in direct sales, a decrease in the number of
personal computer systems sold in the first six months of fiscal 2000 compared
with the first six months of fiscal 1999, and declines in average selling prices
for certain of the Company's products, including desktop systems. The decline in
direct sales was primarily attributable to actions taken by the Company in
connection with the Fourth Quarter Initiatives to reduce or eliminate sales to
certain of the Company's commercial customers that did not meet certain
profitability objectives and to consolidate the direct sales organization to a
regional sales force and central sales support function located in the
Dallas/Fort Worth area. The number of personal computer systems sold in the
first six months of fiscal 2000 decreased approximately 3.9% from the first six
months of fiscal 1999. Average selling prices for desktop systems declined
approximately 13.4% from the first six months of fiscal 1999 to the first six
months of fiscal 2000.
Comparable store sales for the Company's Computer Superstores decreased
approximately 1.0% from the first six months of fiscal 1999. The Company
believes its comparable store sales were negatively impacted by, among other
things, a decrease in the number of personal computer systems sold in the first
six months of fiscal 2000 compared with the first six months of fiscal 1999,
declines in average selling prices for certain of the Company's products,
including desktop systems, and increased sales of lower-end computer systems as
a percentage of total computer systems sold.
GROSS PROFIT--Gross profit was $430.6 million, or 15.9% of net sales, in the
first six months of fiscal 2000 compared with $414.1 million, or 13.9% of net
sales, in the first six months of fiscal 1999. The increase in gross profit as a
percentage of net sales was primarily due to a decrease in product costs as a
percentage of net sales, partially offset by an increase in occupancy costs as a
percentage of net sales.
The increase in gross profit of approximately 2.6% as a percentage of net
sales in the first six months of fiscal 1999 compared with the first six months
of fiscal 2000 was primarily due to an increase in gross profit from the sale of
retail products. The Company believes gross profit from the sale of retail
products increased as a result of the adjustment of its merchandising focus
toward higher-margin product categories in coordination with a change in
promotional strategies implemented in connection with the Fourth Quarter
Initiative as well as an increase in the average number of sales associates
employed by the Company's Computer Superstores. The increase in gross profit was
also due to actions taken by the Company in connection with the Fourth Quarter
Initiatives to reduce or eliminate sales to certain of the
33
<PAGE>
Company's commercial customers that did not meet certain profitability
objectives. Due to the decrease in direct sales, retail sales represented a
larger percentage of total sales. Retail margins generally are higher than
direct sales margins.
Occupancy costs increased by approximately 0.57% as a percentage of net
sales in the first six months of fiscal 2000 compared with the first six months
of fiscal 1999. Occupancy costs, which are generally fixed in nature, increased
as a percentage of net sales in the first six months of fiscal 2000, primarily
as a result of lower average net sales per store compared with the first six
months of fiscal 1999.
OPERATING EXPENSES--Operating expenses were $301.3 million, or 11.1% of net
sales, in the first six months of fiscal 2000 compared with $300.4 million, or
10.1% of net sales, in the first six months of fiscal 1999. The increase in
operating expenses as a percentage of net sales was primarily due to increases
in personnel and facility expenses as percentages of net sales, partially offset
by a decrease in advertising expense as a percentage of net sales.
Personnel expenses in the first six months of fiscal 2000 increased 1.43% as
a percentage of net sales. Personnel expenses increased as a percentage of net
sales primarily as a result of lower average net sales per store. In addition,
personnel expenses increased due to an increase in the average number of sales
associates employed by the Company's Computer Superstores.
Facility expenses increased by approximately 0.27% as a percentage of net
sales compared with the first six months of fiscal 1999. Facility expenses,
which are generally fixed in nature, increased as a percentage of net sales in
the first six months of fiscal 2000, primarily as a result of lower average net
sales per store.
The above increases were partially offset by lower advertising expenses as a
percentage of net sales. Net advertising expense decreased by approximately
0.66% as a percentage of net sales in the first six months of fiscal 2000,
primarily due to changes in the Company's advertising and marketing strategies
in connection with the Fiscal 1999 Initiatives.
PRE-OPENING EXPENSES--Pre-opening expenses consist primarily of personnel
expenses incurred prior to a store's opening and promotional costs associated
with the opening. In the first six months of fiscal 2000, the Company incurred
$2.6 million in pre-opening expenses in connection with the opening of ten
Computer Superstores and the relocation of one Computer Superstore, compared
with $3.5 million in pre-opening expenses in the first six months of fiscal 1999
incurred in connection with the opening of 11 Computer Superstores and the
relocation of four Computer Superstores.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
were $87.8 million, or 3.3% of net sales, in the first six months of fiscal 2000
compared with $66.7 million, or 2.2% of net sales, in the first six months of
fiscal 1999. The increase in general and administrative expenses as a percentage
of net sales was primarily due to increased personnel, facility, and
depreciation and amortization expenses as percentages of net sales.
Personnel expenses increased as a percentage of net sales in the first six
months of fiscal 2000 by approximately 0.40%. This increase in personnel
expenses as a percentage of net sales is primarily attributable to lower average
net sales per store in the first six months of fiscal 2000 compared with the
first six months of fiscal 1999. In addition, personnel expenses increased as a
percentage of net sales due to increased incentive compensation expense.
Facility expenses increased by approximately 0.13% as a percentage of net
sales in the first six months of fiscal 2000 compared with the first six months
of fiscal 1999. Facility expenses, which are generally fixed in nature,
increased as a percentage of net sales in the first six months of fiscal 2000
compared with the first six months of fiscal 1999, primarily as a result of
lower average net sales per store.
The Company recorded approximately $2.6 million, or 0.10% of net sales, of
amortization expense related to the goodwill associated with the acquisition of
Computer City in the first six months of fiscal
34
<PAGE>
2000 compared with approximately $1.3 million, or 0.04% of net sales, recorded
in the first six months of fiscal 1999. In addition, depreciation expense
increased approximately 0.13% as a percentage of net sales in the first six
months of fiscal 2000, primarily due to the initial implementation and
installation of the Company's ERM system and other corporate fixed asset
additions.
INTEREST EXPENSE AND OTHER INCOME, NET--Interest expense and other income,
net, was $12.2 million, or 0.4% of net sales, in the first six months of fiscal
2000 compared with $6.3 million, or 0.2% of net sales, in the first six months
of fiscal 1999. The increase in interest expense and other income was due in
part to interest expense on the $136 million subordinated promissory note
payable to Tandy Corporation related to the acquisition of Computer City. The
Company also incurred interest expense in the first six months of fiscal 2000 in
connection with the borrowings under the Credit Agreement, which were $100.0
million as of December 25, 1999. In addition, investment income decreased in the
first six months of fiscal 2000 due to lower average cash balances. These
increases were partially offset by the decrease in interest expense related to
the Senior Subordinated Notes due to the payment of the Senior Subordinated
Notes on August 3, 1999. See "--Liquidity and Capital Resources."
INCOME TAXES--The Company's consolidated effective tax rate was 37.5% for
the first six months of fiscal 2000 and 38.5% for the first six months of fiscal
1999.
COZONE.COM
Retail Internet net sales for the first six months of fiscal 2000 decreased
approximately 2.0% to $13.5 million from $13.8 million for the first six months
of fiscal 1999. Net sales also included mail order, fulfillment, and other
non-Internet sales totaling $1.9 million for the first six months of fiscal 2000
and $129.7 million for the first six months of fiscal 1999. The mail order,
fulfillment, and other non-Internet operations were phased out or transferred to
the Company beginning in the fourth quarter of fiscal 1999 in connection with
the transition to cozone.com's Internet-only operation in the second quarter of
fiscal 2000.
Gross profit was $1.3 million, or 8.1% of net sales, in the first six months
of fiscal 2000, compared with $13.0 million, or 9.0% of net sales, in the first
six months of fiscal 1999. The decrease in gross profit was primarily due to the
elimination of mail order and fulfillment operations. Sales of these operations
generally had higher margins than Internet sales. In addition, gross profit
decreased as a percentage of net sales due to an increase in occupancy costs as
a percentage of net sales from the first six months of fiscal 1999 to the first
six months of fiscal 2000 primarily due to lower net sales.
The operating loss for the first six months of fiscal 2000 was $26.2
million, compared with operating income of $988,000 in the first six months of
fiscal 1999. The decline in results of operations was primarily due to lower
sales volumes in the first six months of fiscal 2000 and advertising and
marketing expenses related to the launch of the cozone.com Internet web site in
October 1999.
Due to lower-than-expected net sales at cozone.com in the first six months
of fiscal 2000, the Company is currently reevaluating the role of cozone.com in
the Company's overall Internet retailing strategy.
35
<PAGE>
NON-RECURRING AND RESTRUCTURING CHARGES
In fiscal 1999, the Company implemented various programs and initiatives
(collectively, the "Fiscal 1999 Initiatives") that included (1) initiatives
announced in the fourth quarter of fiscal 1999 as a result of the Company's
extensive evaluation of its core businesses (the "Fourth Quarter Initiatives"),
(2) the formation of an Internet retailing subsidiary (the "Internet Retailing
Initiative"), (3) information technology initiatives (the "IT Initiatives"), and
(4) the transition of the former Computer City stores to the CompUSA Computer
Superstore format (the "Computer City Transition"). Non-recurring and
restructuring charges incurred in connection with these initiatives aggregated
approximately $84.0 million in fiscal 1999. Additional costs incurred in
connection with these initiatives were approximately $16.7 million in the first
quarter of fiscal 2000 and $7.7 million in the second quarter of fiscal 2000.
The following table summarizes the financial statement classification of the
non-recurring and restructuring charges incurred in the second quarter of fiscal
2000:
<TABLE>
<CAPTION>
FOURTH
QUARTER
INITIATIVES IT INITIATIVES TOTAL
----------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses............................. $6,655 $ 357 $7,012
General and administrative expenses............ -- 1,120 1,120
Restructuring charge........................... (397) -- (397)
------ ------ ------
$6,258 $1,477 $7,735
====== ====== ======
</TABLE>
The following table summarizes the nature of the non-recurring and
restructuring charges incurred in the second quarter of fiscal 2000:
<TABLE>
<CAPTION>
FOURTH
QUARTER
INITIATIVES IT INITIATIVES TOTAL
----------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-cash charges for asset write-downs,
primarily estimated losses related to the
change in the extended service plan
provider..................................... $2,549 $ -- $2,549
Personnel costs and professional fees.......... 1,096 1,477 2,573
Transition expenses related to the
implementation of the Fourth Quarter
Initiatives.................................. 3,010 -- 3,010
------ ------ ------
6,655 1,477 8,132
Amounts included in restructuring charge:
Severance and other personnel costs.......... (517) -- (517)
Professional and consulting fees............. 120 -- 120
------ ------ ------
(397) -- (397)
------ ------ ------
$6,258 $1,477 $7,735
====== ====== ======
</TABLE>
36
<PAGE>
The following table summarizes the financial statement classification of the
non-recurring and restructuring charges incurred in the first six months of
fiscal 2000:
<TABLE>
<CAPTION>
FOURTH INTERNET
QUARTER RETAILING
INITIATIVES INITIATIVE IT INITIATIVES TOTAL
----------- ---------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of sales and occupancy costs............ $ 1,853 $1,530 $ -- $ 3,383
Operating expenses........................... 19,837 -- 357 20,194
General and administrative expenses.......... -- -- 3,402 3,402
Restructuring charge......................... (2,573) -- -- (2,573)
------- ------ ------ -------
$19,117 $1,530 $3,759 $24,406
======= ====== ====== =======
</TABLE>
The following table summarizes the nature of the non-recurring and
restructuring charges incurred in the first six months of fiscal 2000:
<TABLE>
<CAPTION>
FOURTH INTERNET
QUARTER RETAILING
INITIATIVES INITIATIVE IT INITIATIVES TOTAL
----------- ---------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-cash charges for asset write-downs,
primarily inventory and estimated losses
related to the change in the extended
service plan provider...................... $ 9,549 $1,530 $ -- $11,079
Write-down of fixed assets with no future
utility.................................... 3,722 -- -- 3,722
Personnel costs and professional fees........ 1,096 -- 3,759 4,855
Transition expenses related to the
implementation of the Fourth Quarter
Initiatives................................ 7,323 -- -- 7,323
------- ------ ------ -------
21,690 1,530 3,759 26,979
Amounts included in restructuring charge:
Adjustments to previously recorded
restructuring charges:
Exit costs related to the write-down of
fixed assets and the accrual of future
rental obligations of the Company's
fulfillment and configuration
facility............................... (5,011) -- -- (5,011)
Reserve for future rental obligations for
closed stores and related lease
carrying costs and other closing
costs.................................. 183 -- -- 183
Severance and other personnel costs........ 2,135 -- -- 2,135
Professional and consulting fees........... 120 -- -- 120
------- ------ ------ -------
(2,573) -- -- (2,573)
------- ------ ------ -------
$19,117 $1,530 $3,759 $24,406
======= ====== ====== =======
</TABLE>
37
<PAGE>
FOURTH QUARTER INITIATIVES--The Fourth Quarter Initiatives were announced by
the Company on June 24, 1999, as a result of the Company's extensive evaluation
of its core businesses. The Fourth Quarter Initiatives were designed to increase
gross margins, reduce operating costs, improve customer service, and position
the Company to take advantage of additional strategic opportunities. The Company
recorded charges related to the Fourth Quarter Initiatives of approximately
$67.5 million in the fourth quarter of fiscal 1999, $12.9 million in the first
quarter of fiscal 2000, and $6.3 million in the second quarter of fiscal 2000.
When fully implemented, the Company believes the Fourth Quarter Initiatives will
result in increased productivity and operating efficiencies that should result
in annualized cost savings of up to $100 million.
Charges recorded in connection with the Fourth Quarter Initiatives were
related to (1) the streamlining of the Company's training business, (2) the
reorganization of the Company's technical services business, (3) the redesign of
the Company's direct sales fulfillment and configuration activities for
corporate, government, and education customers, (4) the evaluation of the
profitability of the Company's stores, and (5) the change in the third-party
provider of the extended service plans sold by the Company after June 1999.
STREAMLINING OF TRAINING BUSINESS--In connection with the redesign of the
Company's training business, the Company implemented a vertical, market-based
organizational structure in the fourth quarter of fiscal 1999. Previously, each
store operated as an independent training organization with a local focus.
The Company incurred expenses of $62,000 in the second quarter of fiscal
2000 and $207,000 in the first quarter of fiscal 2000 in connection with the
streamlining of the training business. Costs incurred in both the first and
second quarters of fiscal 2000 related primarily to transition expenses,
primarily advertising and marketing expenses, incurred in connection with the
implementation of the new organizational structure.
REORGANIZATION OF TECHNICAL SERVICES BUSINESS--As a result of the evaluation
of its technical services business, the Company implemented a strategy to focus
on high-volume technical service opportunities, including "break-fix" and
on-site warranty and technical services. In addition, the Company outsourced
networking and systems configuration services to third-party providers.
The Company incurred expenses of $37,000 in the second quarter of fiscal
2000 and $29,000 in the first quarter of fiscal 2000 in connection with the
reorganization of the technical services business. Costs incurred in both the
first and second quarters of fiscal 2000 related primarily to advertising,
marketing, and consulting expenses, incurred in connection with the
implementation of the new organizational structure.
REDESIGN OF DIRECT SALES FULFILLMENT AND CONFIGURATION ACTIVITIES--As part
of the Fourth Quarter Initiatives, the Company also committed to a plan to
redesign its direct sales fulfillment and configuration activities for
corporate, government, and education customers by (1) outsourcing the direct
sales fulfillment and configuration operations and (2) consolidating the
Company's direct sales organization to a regional sales force and central sales
support function.
38
<PAGE>
Costs incurred in connection with the redesign of direct sales fulfillment
and configuration activities are as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------------------
DECEMBER 25, SEPTEMBER 25, JUNE 26,
1999 1999 1999
------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Outsourcing of direct sales fulfillment and configuration
operations:
Non-cash charges for asset write-downs, primarily
commercial inventories................................. $ -- $ 1,500 $37,000
Termination of approximately 225 employees and other
personnel costs........................................ 6 52 385
Exit costs related to the write-down of fixed assets and
accrual of future rental obligations of the Company's
fulfillment and configuration facility................. -- (5,011) 13,813
Write-down of fixed assets with no future utility........ -- 3,722 --
Other--transition expenses............................... -- 64 --
Consolidation of the Company's direct sales organization:
Non-cash charges for asset write-downs, primarily
accounts receivables and fixed assets with no future
utility................................................ 750 1,000 1,623
Termination of approximately 1,646 employees and other
personnel costs........................................ (523) 2,363 --
Professional fees........................................ 1,165 -- --
Transition expenses related to the start-up of the
Company's new centralized sales and support facility,
primarily personnel and facility costs................. 1,879 3,307 --
------ ------- -------
$3,277 $ 6,997 $52,821
====== ======= =======
</TABLE>
In connection with the outsourcing of the fulfillment of purchase orders
from corporate, government, and education customers, the Company has implemented
a plan to liquidate the related commercial inventories in its fulfillment and
configuration facility and its retail stores. As a result, the Company wrote
down the carrying values of such inventories by approximately $37.0 million in
the fourth quarter of fiscal 1999 to management's estimates of the net
realizable value of such inventories to be generated from vendor returns,
liquidation through third parties, and promotional activities in the Company's
stores. Based upon the costs of liquidating certain of such inventories in the
first quarter of fiscal 2000 and its estimates of the costs to liquidate the
remaining inventories, the Company increased its previous estimate of the
write-down of its commercial inventories by $1.5 million in the first quarter of
fiscal 2000. The Company liquidated a substantial portion of such inventories in
the first and second quarters of fiscal 2000 and anticipates the liquidation of
the remaining commercial inventories by the end of the third quarter of fiscal
2000.
In August 1999, the Company discontinued the fulfillment and configuration
activities previously conducted in its Dallas/Fort Worth-area fulfillment and
configuration facility. At that time, purchase orders from corporate,
government, and education customers began to be fulfilled by Ingram Micro Inc.
("Ingram Micro"). Based upon its outsourcing of its direct sales fulfillment and
configuration operations to Ingram Micro, the Company believed it would abandon
its centralized fulfillment and configuration facility. Accordingly, the Company
recorded a charge in the fourth quarter of fiscal 1999 of approximately $11.6
million to write down the carrying value of those fixed assets it believed would
be abandoned and had no future utility to the Company and a charge of
approximately $2.2 million for the estimated remaining lease rental obligations
and other carrying costs, net of subrental income, associated with that facility
prior to the expiration of the lease term in 2008. In the first quarter of
fiscal 2000, the Company determined that it would be able to redeploy certain
portions of the centralized fulfillment and configuration facility in its
39
<PAGE>
ongoing operating activities, primarily the Company's call center operations. As
a result, in the first quarter of fiscal 2000 the Company reversed the
previously recorded charge of $2.2 million for estimated remaining net lease
rental obligations and reduced the previously recorded estimate of the exit
costs related to the fixed assets to be abandoned by $2.8 million. The Company
redeployed certain of the assets located in the former centralized fulfillment
and configuration facility in its ongoing operating activities. In the first
quarter of fiscal 2000, the Company recorded a $3.7 million write-down of the
assets in the facility that had no future utility for the Company's ongoing
activities.
In August 1999, the Company organized a regional sales force and central
sales support function and opened a new 80,000 square-foot call center in the
Dallas/Fort Worth area to accommodate this function. Previously, each store
maintained a separate direct sales force. As a result of the consolidation of
the direct sales organization and the outsourcing of its direct sales
fulfillment and configuration operations, the Company terminated approximately
1,871 employees in August 1999 who were previously responsible for the direct
sales activities conducted through the Company's stores and the Company's
centralized fulfillment and configuration facility. Costs incurred in connection
with these termination actions and other personnel costs related to the redesign
of the Company's direct sales fulfillment and configuration activities to its
corporate, government, and education customers aggregated approximately $385,000
in the fourth quarter of fiscal 1999 and approximately $2.4 million in the first
quarter of fiscal 2000. In the second quarter of fiscal 2000, the Company
reversed approximately $517,000 of the previously recorded severance expenses
based upon actual severance payments made.
In connection with the implementation of its plan to redesign its direct
sales fulfillment and configuration activities to corporate, government, and
education customers, the Company incurred costs of approximately $3.4 million in
the first quarter of fiscal 2000 and $3.0 million in the second quarter of
fiscal 2000, primarily for start-up personnel, training, and facilities costs
related to the Company's new centralized direct sales and support facility
located in the Dallas/Fort Worth area as well as professional fees.
EVALUATION OF THE COMPANY'S STORES--In connection with the Fourth Quarter
Initiatives, the Company analyzed each of its retail stores in terms of
profitability and growth potential and closed four stores in July 1999. The
Company incurred costs of $718,000 in the first quarter of fiscal 2000 related
to the closing of these stores. Such costs related primarily to the write-down
of inventories, employee terminations, and other closing costs. The Company will
continue to analyze its retail stores in terms of profitability and growth
potential and anticipates the possible closure of an additional five to ten
underperforming stores.
CHANGE IN EXTENDED SERVICE PLAN PROVIDER--In June 1999, in response to a
proposed premium rate increase related to the then-current extended service plan
program (the "Prior ESP Program"), the Company terminated the Prior ESP Program.
In July 1999, the Company implemented a new extended service plan program
utilizing new administration and insurance companies. As a result of the
foregoing, the Company established reserves for estimated costs of $2.0 million
in the fourth quarter of fiscal 1999, $4.2 million in the first quarter of
fiscal 2000, and $1.8 million in the second quarter of fiscal 2000 associated
with certain unresolved issues with the administrator of the Prior ESP Program,
primarily related to repair services provided by the Company to the
administrator of the Prior ESP Program, as well as repair services provided by
the Company subsequent to the termination of the Prior ESP Program.
The administration of the extended service plans sold pursuant to the Prior
ESP Program is the responsibility of the administrator of the Prior ESP Program
and/or the insurance companies that insured the administration obligations of
the Prior ESP Program. In July 1999, the Company elected, for business and
customer relations reasons, to provide supplemental administrative services to
purchasers of extended service plans sold pursuant to the Prior ESP Program who
experienced difficulty in obtaining services from the administrator of the Prior
ESP Program. The Company incurred and expensed costs of approximately $748,000
in the first quarter of fiscal 2000 and $1.1 million in the second quarter of
fiscal 2000 in connection with providing these supplemental administrative
services. However, the Company is currently seeking reimbursement from the
insurance companies of the costs incurred by the Company in fiscal 2000
40
<PAGE>
in providing these supplemental services. The Company believes it is entitled to
full reimbursement of such costs and, during the third quarter of fiscal 2000,
the Company expects to consummate an arrangement with the insurance companies
for the reimbursement of such costs. In addition, the Company expects, during
the third quarter of fiscal 2000, to reach an agreement with the insurance
companies regarding the future administration of the Prior ESP Program.
Depending upon the outcome of these negotiations, the Company may (1) record a
charge for the estimated additional costs related to the supplemental and future
administration of the Prior ESP Program, to the extent such costs are not
reimbursed by the insurance companies, or (2) reverse previously recorded
expenses related to supplemental administrative services in the event such
expenses are subsequently reimbursed.
INTERNET RETAILING INITIATIVE--In March 1999, the Company completed the
formation of CompUSA Net.com by contributing to it the net assets of the
Company's CompUSA Direct division. Prior to the formation of CompUSA Net.com,
the Company conducted its mail order, fulfillment, and retail Internet sales
operations through CompUSA Direct. Concurrent with the formation of CompUSA
Net.com, the Company announced plans to change the operations of CompUSA Net.com
to an Internet-only business. Beginning in the fourth quarter of fiscal 1999,
the mail order and other non-Internet sales operations previously conducted by
CompUSA Direct were phased out or transferred to the Company. In October 1999,
the Company transferred CompUSA Net.com's Internet business to cozone.com
l.l.c., an indirect subsidiary of the Company. Another indirect subsidiary,
cozone.com inc., is the sole manager of cozone.com l.l.c. These two subsidiaries
are collectively referred to in these consolidated financial statements as
"cozone.com."
The Company incurred costs of approximately $1.5 million in the first
quarter of fiscal 2000 related to the implementation of its Internet retailing
strategy, primarily the write-down of inventories not consistent with this
strategy to their estimated net realizable value upon liquidation with a third
party.
Due to lower-than-expected net sales at cozone.com in the second quarter of
fiscal 2000, the Company is currently reevaluating the role of cozone.com in the
Company's overall Internet retailing strategy. Depending on the outcome of this
evaluation, the Company may incur additional charges or require additional
capital related to a change in the Company's Internet retailing strategy.
IT INITIATIVES--In the fourth quarter of fiscal 1998, the Company committed
to a new information technology ("IT") strategy. Pursuant to this strategy, the
Company outsourced substantially all of its IT processes to a third-party
service provider. In addition, the Company selected an Enterprise Resource
Management ("ERM") system in fiscal 1999 to replace a substantial portion of the
Company's existing IT systems. The Company implemented the first phases of the
ERM system in July and August 1999 and expects to complete the final
implementation of the ERM system in the first half of fiscal 2001. The Company
incurred non-recurring charges of approximately $2.3 million in the first
quarter of fiscal 2000 and $1.5 million in the second quarter of fiscal 2000
related primarily to the outsourcing of its IT operations and training and other
non-capitalizable costs incurred in connection with the implementation of the
ERM system.
In connection with its IT Initiatives, the Company expects to incur
additional costs of approximately $2 to $3 million in each remaining quarter of
fiscal 2000. The Company anticipates the completion of its IT Initiatives in the
first half of fiscal 2001.
COMPUTER CITY TRANSITION--The Company incurred costs of approximately $2.6
million in the first quarter of fiscal 1999 and $4.6 million 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 costs included a $2.4 million
charge taken in the first quarter of fiscal 1999 for the closure of CompUSA
Computer Superstores in markets where a former Computer City store remained open
in close proximity to the closed CompUSA Computer Superstore.
41
<PAGE>
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, store closings, 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 and store
closings, 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 25, 1999, total assets were $1.56 billion, $1.13 billion of
which were current assets, including $204.9 million of cash and cash
equivalents. Net cash provided by operating activities for the first six months
of fiscal 2000 was $143.6 million, compared with $313.8 million for the first
six months of fiscal 1999.
In excess of three-fourths of the Company's net sales during the first six
months of both fiscal 2000 and fiscal 1999 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 $736.2 million at December 25, 1999,
from $667.5 million at June 26, 1999. The increase in merchandise inventories is
primarily attributable to inventories at the ten Computer Superstores opened in
the first six months of fiscal 2000, partially offset by the closure of four
stores in the first quarter of fiscal 2000. At December 25, 1999, inventory per
store was $3.3 million compared with $3.7 million at December 26, 1998. This
decrease in inventory per store was primarily due the liquidation of commercial
inventories in the first and second quarters of fiscal 2000 in connection with
the Company's outsourcing of the fulfillment of purchase orders from corporate,
government, and education customers and the related reduction of commercial
inventories held by the Company's fulfillment and configuration facility.
Capital expenditures during the first six months of fiscal 2000 were $97.0
million, compared with capital expenditures of $36.4 million during the first
six months of fiscal 1999. The following table sets forth the capital
expenditures for the first six months of fiscal 2000 and the first six months of
fiscal 1999:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------------
DECEMBER 25, DECEMBER 26,
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
New stores.......................................... $ 5,129 $ 6,312
Existing stores..................................... 11,696 10,973
Computer City store conversions..................... -- 7,476
Direct sales call center............................ 6,545 --
Information technology initiatives.................. 56,045 3,392
Corporate and other................................. 17,626 8,238
------- -------
$97,041 $36,391
======= =======
</TABLE>
The Company opened ten Computer Superstores during the first six months of
fiscal 2000 and plans to open no additional new stores during the remainder of
fiscal 2000. The Company currently anticipates capital expenditures of
approximately $150 million in fiscal 2000, including capital expenditures of
approximately $100 million related to the IT Initiatives. Excluding the effects
of new store openings, the Company's greatest short-term capital requirements
occur during the second fiscal quarter to support a
42
<PAGE>
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.
Effective June 30, 1999, the Company entered into a three-year secured
revolving credit agreement (the "Credit Agreement") with a consortium of banks
and financial institutions that provides for borrowings and letters of credit up
to a maximum of $500 million, with letters of credit not to exceed $100 million.
Borrowings under the Credit Agreement are subject to a borrowing base (the
"Borrowing Base") that is equal to the sum of (a) 85% of eligible accounts
receivable, as defined, and (b) an amount equal to the lowest of (i) 65% of the
lower of cost or market value of eligible inventory, as defined, (ii) 85% of
appraised liquidation value, as defined, of eligible inventory or (iii) $400
million, less (c) outstanding letters of credit. The Borrowing Base may also be
reduced by certain reserves provided for in the Credit Agreement in the event
borrowings and letters of credit under the Credit Agreement exceed 50% of the
Borrowing Base without reduction for letters of credit or such reserves.
Borrowings under the Credit Agreement are secured by substantially all of the
Company's assets, excluding those of cozone.com and CompUSA Net.com. The Credit
Agreement requires the Company to maintain a minimum fixed charge coverage ratio
in the event the amount available for future borrowings under the Credit
Agreement is less than $75 million. As of December 25, 1999, the Company had
approximately $446.5 million of availability under the Credit Agreement, against
which the Company had $100.0 million of outstanding borrowings and $28.1 million
of outstanding letters of credit.
In July 1999, the Company announced the redemption of its 9 1/2% Senior
Subordinated Notes due 2000 (the "Senior Subordinated Notes"). The Senior
Subordinated Notes were paid in full on August 3, 1999 utilizing available cash
balances and proceeds from 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 Corporation (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 may be prepaid, in whole
or in part, at any time at the option of the Company, without premium or
penalty.
The Credit Agreement contains a provision applicable in the event of a
change in control of the Company. Consummation of the transaction contemplated
by the Merger Agreement would violate the change in control provision in the
Credit Agreement. If the Company were to violate this provision, the lenders
under the Credit Agreement would have the right to demand immediate payment of
all outstanding amounts of principal and interest under the Credit Agreement. In
addition, if the lenders accelerated the payment of more than $35 million of
indebtedness under the Credit Agreement, the Company would be in default on the
Seller Note and certain other financing agreements. The Company expects to
commence discussions with the lenders in the near future regarding these matters
and believes that a satisfactory resolution will be reached. The Company
therefore 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 2000 and to make all required payments of interest on the Seller Note and
outstanding borrowings under the Credit Agreement. The level of future expansion
will be contingent upon the availability of additional capital.
43
<PAGE>
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.
YEAR 2000 ISSUE
The Company undertook various initiatives to ensure that its computer
equipment and software would 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 IT systems, including
accounting, data processing, 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. Utilizing both
internal and external resources to identify and assess needed Year 2000
remediation, the Company completed its Year 2000 identification, assessment,
remediation, and testing efforts related to its IT systems, which began in
October 1996, in December 1999.
The Company incurred costs of approximately $4.8 million for its Year 2000
identification, assessment, remediation, and testing efforts, which expenditures
were funded from operating cash flows. Such amount represents approximately 3%
of the Company's total IT expenditures for fiscal 1997 through fiscal 1999. All
of the $4.8 million related 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 were not materially delayed or impacted by Year 2000 initiatives.
Some government and large corporate customers required the Company to
represent and warrant to them that all of the products the Company sold to them
were Year 2000 compliant. The Company is a defendant in one lawsuit involving
Year 2000 issues, and these factors may lead to additional 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 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.
The Company has not experienced any material Year 2000 compliance problems
and, to the Company's knowledge, none of its significant vendors, service
providers, or customers have suffered material problems related to Year 2000
compliance that the Company believes are likely to materially adversely affect
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. The Credit
Agreement provides for borrowings that bear interest at variable rates based on
either a prime rate or the London Interbank Offering Rate. At December 25, 1999,
the Company had approximately $446.5 million of availability under the Credit
Agreement, against which the Company had $100.0 million of outstanding
borrowings and $28.1 million of outstanding letters of credit. The Senior
Subordinated Notes, which required the Company to make semi-annual interest
payments at a fixed interest rate of 9 1/2% per annum, were paid in full on
August 3, 1999. In addition, the Seller Note requires the Company to make
semi-annual installment payments with a fixed interest rate of 9.48% per annum.
The Company believes, because of the retirement of the Senior Subordinated
Notes, the fixed nature of the interest charges of the Seller Note, and current
variable-rate indebtedness of $100.0 million, that the effect, if any, of
reasonably possible near-term changes in interest rates on the Company's
financial position, results of operations, and cash flows should not be
material.
44
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Note 7 of the Notes to Consolidated Financial Statements in Part I, Item 1
is incorporated herein by reference as if fully restated herein. Note 7 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 3, 1999. 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 1999,
shares were voted as follows:
<TABLE>
<CAPTION>
WARREN D. KEVIN J. BARRY L.
FELDBERG ROCHE WILLIAMS
---------- ---------- ----------
<S> <C> <C> <C>
For...................................... 86,011,225 86,012,135 86,010,732
Withheld................................. 3,303,461 3,302,551 3,303,954
---------- ---------- ----------
Total.................................... 89,314,686 89,314,686 89,314,686
========== ========== ==========
</TABLE>
Messrs. Feldberg, Roche, and Williams were elected for terms expiring on the
date of the annual meeting of stockholders in 2002. The following members of the
Board of Directors have terms expiring on the date of the annual meeting of
stockholders in the years indicated: James F. Halpin and Lawrence Mittman--2000,
and Giles H. Bateman, Leonard L. Berry, Ph.D., and Morton E. Handel--2001.
(b) With respect to the amendments to the Company's Long-Term Incentive Plan
to, among other things (i) increase by 7,500,000 the number of shares of Common
Stock authorized for issuance thereunder and (ii) extend the term thereof
through August 31, 2009, shares were voted as follows:
<TABLE>
<S> <C>
For......................................................... 23,272,191
Against..................................................... 15,808,552
Abstentions................................................. 455,049
----------
Total....................................................... 39,535,792
==========
</TABLE>
(c) With respect to the ratification of the selection of Ernst & Young LLP
as the Company's independent auditors for its 2000 fiscal year, shares were
voted as follows:
<TABLE>
<S> <C>
For......................................................... 88,201,242
Against..................................................... 826,393
Abstentions................................................. 287,051
----------
Total....................................................... 89,314,686
==========
</TABLE>
45
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C> <C>
2.1 Merger Agreement among Grupo Sanborns, S.A. de C.V., TPC
Acquisition Corp. and the Company, dated as of January 23,
2000. (1)
3.1 Restated and Amended Certificate of Incorporation. (2)
3.2 Restated and Amended Bylaws. (3)
4.1 Amendment No. 1 to Rights Agreement between the Company and
American Stock Transfer & Trust Company, dated as of
January 23, 2000. (1)
10.1 CompUSA Inc. Amended and Restated Supplemental Bonus and
Retention Plan. (4)
10.2 Amendment No. 3 to the CompSavings Plan for Employees of
CompUSA Inc. and Trust dated December 22, 1999. (4)
21 Subsidiaries. (5)
27.1 Financial Data Schedule. (6)
27.2 Restated Financial Data Schedule for the six months ended
December 26, 1998. (6)
27.3 Restated Financial Data Schedule for the six months ended
December 27, 1997. (6)
Exhibits 10.1 and 10.2 constitute management compensation
plans or contracts.
</TABLE>
(b) Reports on Form 8-K.
1. Report on Form 8-K filed with the Securities and Exchange Commission on
January 7, 2000, containing certain unaudited supplemental quarterly
financial and operating data with respect to the Company's results of
operations for the fiscal year ended June 26, 1999.
2. Report on Form 8-K filed with the Securities and Exchange Commission on
January 26, 2000, in connection with the execution of a definitive merger
agreement among Grupo Sanborns, S.A. de C.V., TPC Acquisition Corp. and
the Company.
- ------------------------
(1) Previously filed as an exhibit to the Company's Report on Form 8-K filed on
January 26, 2000, 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 December 27, 1997, and incorporated herein
by reference.
(3) 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.
(4) Filed herewith.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 25, 1999, and incorporated
herein by reference.
(6) Included with EDGAR version only.
46
<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.
<TABLE>
<S> <C> <C>
Date: February 8, 2000 By: /s/ JAMES E. SKINNER
------------------------------------------
James E. Skinner
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
</TABLE>
47
<PAGE>
COMPUSA INC.
AMENDED AND RESTATED
SUPPLEMENTAL BONUS AND RETENTION PLAN
1. PURPOSE. The purpose of this CompUSA Inc. Supplemental Bonus and
Retention Plan (the "Plan") is to provide additional incentive compensation
opportunities for certain officers of CompUSA Inc. (the "Company") and its
affiliates. The Plan is designed to assist in the attraction, motivation and
retention of superior talent at the officer level and to align the officers'
interests with those of the stockholders by giving the officers the opportunity
to earn cash bonuses based upon appreciation in the market price of the
Company's common stock, par value $.01 per share (the "Stock").
2. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"). Subject
to the provisions of the Plan, the Committee shall have the right and authority,
in its sole and absolute discretion, to: (i) adopt, amend or rescind
administrative and interpretive rules and regulations relating to the Plan,
(ii) construe the Plan, (iii) make all other determinations necessary or
advisable for administering the Plan and (iv) exercise the powers conferred on
the Committee under the Plan. The Committee may correct any defect or supply
any omission or reconcile any inconsistency in the Plan in the manner and to the
extent it shall deem expedient to carry it into effect, and it shall be the sole
and final judge of such expediency. The determinations of the Committee on the
matters referred to in this Section 2 shall be final and binding.
3. PARTICIPANTS. Participants in the Plan shall consist of such
officers of the Company as the Committee in its sole discretion may designate
from time to time to receive Bonuses (as hereinafter defined) hereunder.
Nothing in the Plan, including an officer's eligibility for participation in the
Plan, shall confer upon such officer any right with respect to the continuation
of such officer's employment by the Company or an affiliate or interfere in any
way with the right of the Company or an affiliate at any time to terminate such
employment or to increase or decrease the compensation of the officer.
4. BONUSES.
(a) AWARDS. Each participant in the Plan shall be entitled to receive, at
the times and under the circumstances provided in this Section 4, a bonus (a
"Bonus") in a maximum amount determined by the Committee, in its discretion.
Such determination shall be made by the Committee on the date the Bonus is
awarded to the participant (the "Award Date"). All Bonuses shall be payable in
cash and shall be subject to the normal rules and regulations regarding
withholding for taxes and other deductions, if any, as may be in effect from
time to time.
(b) VESTING AND ELECTIONS. Each Bonus shall vest with respect to one-half
of the total amount of the Bonus (each such half is referred to herein as a
"Bonus Amount") on each of the first two anniversaries of the Award Date. A
participant shall have the right to make a written election (an "Election") at
any time during a Window Period, but not after the last day of the Bonus Period
<PAGE>
(as hereinafter defined), to receive a vested Bonus Amount or Bonus Amounts. A
single Election may relate to one or more of the vested Bonus Amounts, but may
not relate to less than all of a vested Bonus Amount. The phrase "Window
Period" shall have the same meaning as described under the heading "Trading
Windows" in Addendum I (containing limitations applicable to "Designated
Insiders") to the Company's Statement of Company Policy: Securities Trades By
Company Personnel, as the same may be revised from time to time. For purposes
of the Plan, a Window Period is any such period all or part of which is during a
Bonus Period. If on any date during a Bonus Period a vested Bonus Amount would
be payable in full (that is, without reduction pursuant to Section 4(c)) based
on the closing sale price of the Stock on the preceding trading day and the
participant has the right under this Section 4(b) to make an Election on that
date to receive such Bonus Amount, then the participant shall automatically be
deemed to have made such an Election on that date and the Bonus Amount shall
thereafter be paid to him or her pursuant to Section 4(d).
(c) AMOUNTS PAYABLE. Each Bonus Amount shall be subject to reduction in
accordance with a schedule (a "Calculation Schedule") established by the
Committee on the Award Date. The Calculation Schedule shall be based on the
closing sale price of the Stock on the New York Stock Exchange (or such other
principal stock exchange or stock market on which the Stock may be traded from
time to time) on the last trading day preceding the date on which the
participant makes the Election to receive the Bonus Amount. The maximum Bonus
Amount shall be payable only if such closing sale price equals or exceeds a
target price (the "Target Price") specified by the Committee, in its discretion,
and a reduced Bonus Amount shall be payable if such closing sale price falls
within lower price ranges specified by the Committee, in its discretion, in the
Calculation Schedule. Upon payment of a reduced Bonus Amount in accordance
herewith, the amount by which the maximum Bonus Amount exceeds the reduced
amount paid as a result of an Election shall be forfeited by the participant.
(d) BONUS PERIODS. The term of each Bonus (a "Bonus Period") shall be a
period of five years ending at 5:00 p.m., Dallas, Texas time on the day
immediately preceding the fifth anniversary of the Award Date, and the
participant who has been awarded the Bonus may make an Election with respect to
any vested Bonus Amount at any time during such Bonus Period, provided that the
Election is made in a Window Period and otherwise in accordance with the Plan.
Each vested Bonus Amount with respect to which a participant has made a proper
Election, subject to reduction in accordance with Section 4(c), shall be paid to
the participant within 75 days after the date of the Election (whether or not
the date of payment is within a Bonus Period). If a participant (or his or her
beneficiary, as contemplated in Section 4(e)(i), if applicable) fails to make an
Election with respect to any Bonus Amount prior to the expiration of the Bonus
Period, then an Election with respect to such Bonus Amount shall be deemed to
have been made on the last day of the final Window Period during the Bonus
Period (or on the last day of such Bonus Period, if such day is within a Window
Period).
-2-
<PAGE>
(e) TERMINATION OF EMPLOYMENT.
(i) If during a Bonus Period a participant's employment with the
Company and its affiliates terminates due to death, Disability or
Retirement or is terminated by the Company or an affiliate for any reason
other than Cause, then the participant (or his or her beneficiary) shall
have the right to make an Election in the next succeeding Window Period
(but not after the last day of the Bonus Period) with respect to any Bonus
Amounts vested on the date of such termination of employment. An Election
shall be deemed to have been made on the last day of such Window Period (or
on the last day of the Bonus Period, if such day is within a Window Period)
with respect to any such vested Bonus Amounts with respect to which the
participant (or his or her beneficiary) fails to make such an Election. If
there is no Window Period between the date of termination of a
participant's employment and the end of the Bonus Period, the last sentence
of Section 4(d) shall apply with respect to such vested Bonus Amounts. The
vested Bonus Amounts, subject to reduction in accordance with Section 4(c),
shall be paid to the participant (or his or her beneficiary) within 75 days
after such Election is made or deemed to have been made. The "Disability"
of a participant shall be deemed to have occurred whenever a participant is
rendered unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected to last
for a continuing period of not less than 12 months. In the case of any
dispute, the determination of Disability shall be made by a licensed
physician selected by the Committee, which physician's decision shall be
final and binding. "Retirement" means resignation by the participant on or
after the date on which the participant has served the Company or one or
more of its affiliates for at least five years in the aggregate. In the
event of a participant's death, the beneficiary of the participant under
the Plan shall be the same as the participant's designated beneficiary
under the CompSavings Plan for Employees of CompUSA Inc., or in the absence
of such designation, the persons or entities entitled to receive the assets
of the participant's estate by will, if applicable, or if not, by the laws
of descent and distribution. With respect to the termination of a
participant's employment, "Cause" shall have the meaning given to that term
in any employment agreement between the Company and such participant.
(ii) If a participant's employment terminates for any reason after an
Election has been properly made but before payment of the Bonus Amount or
Bonus Amounts to which such Election relates, the participant shall be
entitled to receive such Bonus Amount or Bonus Amounts, subject to
reduction in accordance with Section 4(c), notwithstanding such termination
of employment.
(iii) If a participant's employment is terminated by the Company or an
affiliate for Cause or is terminated by the participant for any reason
other those specified in Section 4(e)(i), then the participant's right to
receive any Bonus Amounts under the Plan shall be forfeited immediately
upon such termination.
-3-
<PAGE>
(f) NO LIMITATION ON AMOUNTS. There is no limit on the amount of Bonuses
that may be awarded or paid under the Plan.
(g) CHANGE-IN-CONTROL TERMINATION OF PARTICIPANT. Upon the occurrence of
a "Triggering Termination" with respect to a participant (as defined in such
participant's employment agreement with the Company), (i) all Bonuses for such
participant shall be immediately vested in full and (ii) such participant shall
automatically be deemed to have made an Election, notwithstanding the Election
and Window Period requirements set forth in this Section 4, as to all Bonuses as
of the date of such Triggering Termination. Such participant shall be entitled
to payment of the Bonuses at the time and in the manner specified for payment of
"Termination Payments" (as defined in such participant's employment agreement
with the Company); provided that (i) Bonuses hereunder shall not be included in
the participant's "Target Bonus" for purposes of the participant's employment
agreement with the Company and (ii) nothing herein shall cause Bonuses hereunder
to be excluded from the "Payments" (as defined in such employment agreement) for
purposes of calculating the participant's "Gross Up Payment" (as defined in such
employment agreement). In the event of a Triggering Termination related to a
Change In Control (as defined in a participant's employment agreement) in which
the purchase price paid or proposed to be paid by the acquiring person for each
outstanding share of Stock is less than the Target Price specified in a
participant's Calculation Schedule, the amount payable under the Plan to such
participant as contemplated by this Section 4(g) shall be the amount determined
by reference to the participant's Calculation Schedule but using the per share
amount paid or proposed to be paid by such acquiring person (and not the closing
sale price contemplated by Section 4(c)) as the reference price for such
determination.
5. ADJUSTMENTS. In the event of any change in the outstanding shares of
Stock by reason of any stock dividend or stock split, reverse stock split or
other similar change in the Stock, the target prices and price ranges for the
Stock set forth in the Calculation Schedules contemplated by Section 4(c)
relating to outstanding Bonus awards shall be proportionately adjusted, and the
adjusted prices shall be used for purposes of determining the amount of the
reductions, if any, in the Bonus Amounts that shall be payable to participants.
In the event of any reclassification or change of outstanding shares of the
Stock, or any consolidation or merger of the Company with or into another
company or any sale or conveyance to another company of the property of the
Company as a whole or substantially as a whole, or upon dissolution or
liquidation of the Company, in each case in circumstances in which the
participants' rights to receive Bonuses hereunder are not accelerated as
contemplated by Section 4(g), the Committee shall establish new target prices
and price ranges for the Stock for purposes of the Calculation Schedules
contemplated by Section 4(c) and make such other adjustments with respect to
outstanding Bonus awards as it shall deem appropriate under the circumstances.
6. AMENDMENT AND TERMINATION OF THE PLAN. Subject to the provisions of
the Plan, the Board of Directors shall have the exclusive authority to amend,
modify, suspend or terminate the Plan at any time with or without notice;
provided that no amendment, modification, suspension or termination of the Plan
shall, without the consent of the participant, in any manner adversely affect
-4-
<PAGE>
the rights of any participant with respect to any Bonus that has been awarded
prior to such amendment, modification, suspension or termination.
7. EFFECTIVE DATE AND TERM OF THE PLAN. The Plan shall be effective on
the date of its adoption by the Board of Directors of the Company and shall
remain in effect until terminated by the Board of Directors.
8. MISCELLANEOUS.
(a) A participant shall not have the right to anticipate, alienate, sell,
transfer, assign, pledge or encumber his or her right to receive Bonuses
hereunder.
(b) The Plan is intended to constitute an unfunded plan of incentive
compensation. No participant shall have any lien on or rights with respect to
any assets of the Company or its affiliates that are greater than those of a
general creditor by reason of any rights to receive Bonuses hereunder.
(c) The adoption of the Plan or any modification or amendment hereof does
not imply any commitment to continue or adopt the same plan, or any modification
hereof, or any other plan for incentive compensation for any succeeding year.
(d) The internal laws of the State of Texas (and not the principles
relating to conflicts of laws) shall govern the Plan.
(e) The Plan shall be binding upon and inure to the benefit of the
successors and assigns of the Company and its affiliates.
(f) Headings and captions are used in the Plan for convenience only and
shall not affect the meaning or interpretation of the Plan or any of its
provisions.
-5-
<PAGE>
Amendment Three to the
CompSavings Plan for Employees of CompUSA Inc. and Trust
WHEREAS, CompUSA Inc. (the "Company") approved and adopted the CompSavings Plan
for Employees of CompUSA Inc. (the "Plan") and Trust Agreement (the "Trust")
which were originally effective January 1, 1995 and most recently restated
January 1, 1998;
WHEREAS, Section 19.1 of the Plan and Trust provides that the Company reserves
the right to amend the Plan and Trust; and
WHEREAS, the Company now desires to amend the Plan as set forth below;
NOW, THEREFORE, the Plan is amended as follows:
EFFECTIVE JANUARY 1, 1997:
1. Section 12 is amended to restate Subsection 12.1, item (i) as follows:
12.1 Contribution Limitation Definitions
(i) "HCE" or "Highly Compensated Employee". With respect to all Related
Companies, an Employee who (in accordance with Code section 414(q)):
(1) was a more than 5% Owner (within the meaning of Code section
414(q)(2)) at any time during the Plan Year or the preceding Plan
Year; or
(2) received Compensation during the preceding Plan Year in excess of
$80,000 (as adjusted for such Year pursuant to Code sections
414(q)(1) and 415(d)).
A former Employee shall be treated as an HCE if (1) such former
Employee was an HCE when he or she separated from service, or (2) such
former Employee was an HCE in service at any time after attaining age
55.
For purposes of the above, the reference to preceding Plan Year shall
mean the 12 months preceding January 1, 1997 with regard to the Plan
Year commencing January 1, 1997.
EFFECTIVE JANUARY 1, 1998:
1. Section 11 is amended to restate Subsection 11.4 in its entirety as
follows:
11.4 Distribution of Small Amounts
If after a Participant's employment with all Related Companies ends,
the Participant's vested Account balance is $5,000 or less, the
Participant's benefit shall be paid as a single lump sum as soon as
administratively feasible in accordance with procedures prescribed by
the Administrator.
Amendment Three to the
CompSavings Plan for Employees of CompUSA Inc. Page 1
- ---------------------------------------------- ------
<PAGE>
2. Section 13 is amended to change the reference in subsection 13.2 from
"Taxable Income" to "Compensation".
3. Section 14 is amended to change the reference in subsection 14.2 from
"Taxable Income" to "Compensation".
EFFECTIVE JANUARY 1, 1999:
1. Section 1 is amended to restate subsection 1.21 in its entirety as follows:
1.21 "Eligible Rollover Distribution". A distribution of all or any
portion of the balance to the credit of a Distributee, excluding (i) a
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or
life expectancy) of the Distributee or the joint lives (or joint life
expectancies) of the Distributee and the Distributee's designated
Beneficiary, or for a specified period of ten years or more; (ii) a
distribution to the extent such distribution is required under Code
section 401(a)(9); (iii) the portion of a distribution that is not
includible in gross income (determined without regard to the exclusion
for net unrealized appreciation with respect to Employer securities);
and (iv) Hardship Withdrawal amounts from a Participant's Pre-Tax
Account. Notwithstanding the foregoing, the Distributee may determine
a Hardship Withdrawal amount to be an Eligible Rollover Distribution
using the definition in effect prior to January 1, 1999.
EFFECTIVE APRIL 1, 1999:
1. Section 3 is amended to restate subsection 3.2 by deleting from the first
sentence the reference to frequency of changes in the contribution
election:
3.2 Changing a Contribution Election
A Participant who is an Eligible Employee may change his or her
Pre-Tax Contribution election at any time, in such manner and with
such advance notice as prescribed by the Administrator, and such
election change shall be effective with the first payroll paid after
such date. A Participant's Contribution election made as a percentage
of Pay shall automatically apply to Pay increases or decreases.
2. Section 5 is amended to restate subsection 5.1 by deleting item (a)(2) as
follows:
5.1 Company Matching Contributions
"was credited with at least 1,000 Hours of Service for the Plan Year."
3. Section 8 is amended to restate Section 8.4 in its entirety as follows:
8.4 Forfeitures of Non-Vested Account Balances
A Terminated Participant shall forfeit his or her non-vested Account
balance as soon as administratively feasible after the earliest of the
date he or she:
Amendment Three to the
CompSavings Plan for Employees of CompUSA Inc. Page 2
- ---------------------------------------------- ------
<PAGE>
(a) is determined to be a Terminated Participant if his or her
vested Account balance is zero;
(b) receives a complete distribution of his or her vested
Account balance; or
(c) incurs a Break in Service.
4. Appendix B is amended to restate item III, to delete item IV and to
re-designate item V as item IV and to restate item V as follows:
Appendix B - Payment of Plan Fees and Expenses
III. Loan Fees: For loans set-up prior to April 1, 1999, a $3.50 per month
fee shall be assessed and collected quarterly from the Account of each
Participant who has an existing loan balance. For loans set-up on or
after April 1, 1999, a one-time fee of $40 shall be assessed and
collected from the Account of a Participant at loan inception.
IV. Additional Fees Paid by Employer. All other Plan related fees and
expenses shall be paid by the Employer. To the extent that the
Administrator later elects that any such fees shall be borne by
Participants, estimates of the fees shall be determined and
reconciled, at least annually, and the fees shall be assessed monthly
and collected from Accounts quarterly. In addition, administrative
fees attributable to former Participants shall be charged to accounts
of former Participants.
EFFECTIVE JANUARY 1, 2000:
1. Section 13 is amended to delete Subsections 13.6, 13.7 and 13.8.
2. Section 14 is amended to delete Subsection 14.3.
SIGNED on this 22 day of DECEMBER, 1999
CompUSA Inc.
s/ Mel McCall
---------------------------------------
Mel McCall
Senior Vice President - Human Resources
Amendment Three to the
CompSavings Plan for Employees of CompUSA Inc. Page 3
- ---------------------------------------------- ------
<PAGE>
The provisions of the above amendment that relate to the Trustee are hereby
approved and executed.
Date: _____________, 1999 Merrill Lynch Trust Company, FSB
By:
-----------------------------------
Its:
----------------------------------
Amendment Three to the
CompSavings Plan for Employees of CompUSA Inc. Page 4
- ---------------------------------------------- ------
<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 25, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-24-2000
<PERIOD-START> JUN-27-1999
<PERIOD-END> DEC-25-1999
<CASH> 204,914
<SECURITIES> 0
<RECEIVABLES> 147,530
<ALLOWANCES> (4,494)
<INVENTORY> 736,181
<CURRENT-ASSETS> 1,131,503
<PP&E> 517,520
<DEPRECIATION> (230,913)
<TOTAL-ASSETS> 1,558,127
<CURRENT-LIABILITIES> 959,258
<BONDS> 0
0
0
<COMMON> 941
<OTHER-SE> 334,595
<TOTAL-LIABILITY-AND-EQUITY> 1,558,127
<SALES> 2,730,984
<TOTAL-REVENUES> 2,730,984
<CGS> 2,302,469
<TOTAL-COSTS> 2,302,469
<OTHER-EXPENSES> 440,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,194
<INCOME-PRETAX> (23,915)
<INCOME-TAX> (8,969)
<INCOME-CONTINUING> (14,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,946)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</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 THIRTEEN AND
TWENTY-SIX WEEKS ENDED DECEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<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<F1>
<CASH> 402,899
<SECURITIES> 0
<RECEIVABLES> 260,247
<ALLOWANCES> (5,259)
<INVENTORY> 815,825
<CURRENT-ASSETS> 1,509,657
<PP&E> 443,018
<DEPRECIATION> (210,158)
<TOTAL-ASSETS> 1,863,519
<CURRENT-LIABILITIES> 1,176,495
<BONDS> 110,000
0
0
<COMMON> 939
<OTHER-SE> 415,057
<TOTAL-LIABILITY-AND-EQUITY> 1,863,519
<SALES> 3,129,215
<TOTAL-REVENUES> 3,129,215
<CGS> 2,702,096
<TOTAL-COSTS> 2,702,096
<OTHER-EXPENSES> 389,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,372
<INCOME-PRETAX> 31,076
<INCOME-TAX> 11,975
<INCOME-CONTINUING> 19,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,101
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
<FN>
<F1>Restated financial data schedule. Effective as of the beginning of fiscal 2000,
the Company adopted a new accounting policy for the recognition of revenues
related to sales of certain extended service plans by the Company, as
described in Note 3 of Notes to Consolidated Financial Statements in the
Company's Report on Form 10-Q for the thirteen and twenty-six weeks ended
December 25, 1999. The Company has given retroactive effect to this new
accounting policy and is accordingly restating its financial statements for the
twenty-six weeks ended December 26, 1998.
</FN>
</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 THIRTEEN AND
TWENTY-SIX WEEKS ENDED DECEMBER 27,1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> DEC-27-1997<F1>
<CASH> 291,735
<SECURITIES> 0
<RECEIVABLES> 226,396
<ALLOWANCES> (2,967)
<INVENTORY> 680,322
<CURRENT-ASSETS> 1,221,876
<PP&E> 319,487
<DEPRECIATION> (121,248)
<TOTAL-ASSETS> 1,435,907
<CURRENT-LIABILITIES> 862,087
<BONDS> 110,000
0
0
<COMMON> 925
<OTHER-SE> 442,116
<TOTAL-LIABILITY-AND-EQUITY> 1,435,907
<SALES> 2,613,771
<TOTAL-REVENUES> 2,613,771
<CGS> 2,232,820
<TOTAL-COSTS> 2,232,820
<OTHER-EXPENSES> 293,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,096
<INCOME-PRETAX> 85,684
<INCOME-TAX> 32,988
<INCOME-CONTINUING> 52,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,696
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.55
<FN>
<F1>Restated financial data schedule. Effective as of the beginning of fiscal
2000, the Company adopted a new accounting policy for the recognition of
revenues related to sales of certain extended service plans by the Company, as
described in Note 3 of Notes to Consolidated Financial Statements in the
Company's Report on Form 10-Q for the thirteen and twenty-six weeks ended
December 25, 1999. The Company has given retroactive effect to this new
accounting policy and is accordingly restating its financial statements for
the twenty-six weeks ended December 27, 1997.
</FN>
</TABLE>
