ITEM 1. BUSINESS
CompUSA Inc. ("CompUSA" or the "Company") is one of the leading retailers and resellers of personal computers and related products and services, principally through its Computer Superstores-SM- located throughout the United States. Although retail sales through its Computer Superstores are the largest component of the Company's business, its stores also fulfill the principal marketing, product, and service functions of the Company's other businesses, including direct sales to corporate, government, and education customers and training and technical services.
The Company opened its first retail store in April 1985 and its first Computer Superstore in April 1988. As of June 27, 1998, the Company operated 162 Computer Superstores averaging approximately 27,000 square feet in 73 metropolitan areas in 40 states. In fiscal 1998, the Company's stores achieved average sales per square foot of $1,290. The Company plans to open approximately 15 to 20 Computer Superstores in fiscal 1999. In fiscal 1998, the Company tested a "small market" store concept by opening five stores ranging from 6,000 to 15,000 square feet in markets with populations of approximately 40,000 to 150,000 people.
In May 1996, the Company acquired PCs Compleat, Inc. ("PCs Compleat"), a leading direct reseller of brand-name personal computers and peripherals, located in Marlborough, Massachusetts, the operations of which were fully integrated into the Company's direct mail operations and became a part of the Company's "CompUSA Direct" division in August 1997. CompUSA Direct operates a distribution and configuration facility with integrated telephone, computer, and distribution systems.
On August 31, 1998, the Company completed its acquisition of Computer City, Inc. ("Computer City") from Tandy Corporation for approximately $211 million, payable in a note and cash. The purchase price is subject to certain post-closing adjustments based on the completion of an audit of Computer City's balance sheet as of the closing date. The sale will be accounted for under the purchase accounting method. The acquired operations include 96 retail stores located in the United States, including two locations that had not opened, 58 of which the Company currently intends to close upon completion of the liquidation of the inventories in those stores. The acquired operations also include seven retail stores in Canada, none of which the Company currently intends to close, and six corporate sales and/or training offices, five of which the Company currently intends to close. The Company also acquired a call center and a technical configuration center located in the Dallas/Ft. Worth area, both of which the Company currently intends to operate. The acquired stores in the United States will be operated under the "CompUSA" name, while those in Canada will continue to be operated under the "Computer City" name. All of the acquired stores that will be operated by the Company will continue to offer personal computers and related products and services and will be converted to the Company's format and merchandise mix.
As of September 15, 1998, the Company operated 200 CompUSA Computer Superstores in 79 metropolitan areas in 40 states (excluding the 58 Computer City stores that the Company intends to close) and seven Computer City stores in Canada. In addition, the Company operates seven "small market" concept stores.
The Company was incorporated in Delaware in 1988 to effect the acquisition of a company formed in 1984 called Soft Warehouse, Inc. Until March 1991, the Company operated under the name "Soft Warehouse, Inc." Except where the context indicates otherwise, all references in this Annual Report to "CompUSA" or "the Company" include all subsidiaries of CompUSA. The Company's principal executive offices are located at 14951 North Dallas Parkway, Dallas, Texas 75240, and its telephone number is (972) 982-4000.
MERCHANDISE
The Company offers thousands of personal computer hardware and software and related products and accessories as an essential component of its merchandising strategy. In addition to its in-store selection, which the Company believes is sufficiently broad to satisfy the needs of most of its customers, CompUSA offers customers the ability to special order approximately 30,000 additional products. Although prices for products and services are typically determined centrally, local personnel regularly compare these centrally determined prices with publicly available information regarding prices of competitors, and managers have the authority to adjust prices in response to local competitive conditions within guidelines established and controlled centrally. Additionally, prices for special order items are established at each store. Major types of products offered are as follows:
HARDWARE. Hardware products include desktop and laptop model personal computers; peripherals, such as printers, modems, monitors, data storage devices, add-on circuit boards, and connectivity products; certain business machines, such as facsimile machines, video conferencing equipment, and other related equipment and supplies; and certain electronics products such as digital cameras, hand-held personal computers, pagers, cellular phones, calculators, and virtual reality accessories. Major vendors include 3-Com, Apple, Canon, Compaq, Epson, Hewlett-Packard, IBM, Maxtor, NEC, Packard Bell, Sony, Texas Instruments, and Toshiba.
In the first quarter of fiscal 1998, the Company introduced the "CompUSA PC-TM-" brand of desktop personal computers. The CompUSA PC products are manufactured exclusively for the Company by third-party manufacturers and built to customers' specifications. Customers are able to place their orders through the Company's Computer Superstores as well as through CompUSA Direct, using the Company's toll-free telephone number, 1-800-COMPUSA, or its web site, www.compusa.com. Upon manufacture, the personal computers are shipped directly to the customers from the manufacturer.
SOFTWARE. The Company sells over 2,000 different software packages in the business and personal productivity, entertainment, education, utility, language, and reference categories. Major vendors include Broderbund, Claris, Disney, IBM, Intuit, Lotus, Microsoft, Netscape, Novell, Soft Key, and Symantec.
ACCESSORIES. Accessories sold by the Company include a broad range of personal computer-related items and supplies such as peripherals, CD-ROM drives, sound cards, media storage, and other computer-related supplies. Major vendors include 3M, Avery, Curtis, Daisytek, Fellowes, Gemini, Globe, Hewlett-Packard, Iomega, Kensington, Microsoft, Sony, and Western Digital.
DIRECT SALES
The Company believes that its presence in 79 metropolitan areas, broad product assortment, competitive pricing, customer service, and training and technical services position it to serve the diverse needs of corporate, government, education, and mail order customers by offering a "total solution" to their personal computing needs. CompUSA targets these customers primarily through direct solicitations, telemarketing sales, and catalogs. Direct sales are fulfilled by the Company from the on-hand inventories in its Computer Superstores, from its distribution and configuration facility located in the Dallas/Fort Worth area, consisting of approximately 143,500 square feet of distribution space and 32,500 square feet of configuration space, or from CompUSA Direct's distribution and configuration facility in Marlborough, Massachusetts, and with respect to its CompUSA PC brand, from the third-party manufacturers' facilities.
CORPORATE. All of the Company's stores have corporate sales groups that solicit potential corporate customers and offer phone ordering, delivery, business credit, leasing, and other services, including a corporate assistance window for merchandise pickup and technical assistance. The Company offers volume purchase and national account agreements to qualified major customers. The Company's corporate sales group markets on the basis of overall merchandise selection, pricing, and service along with classroom
training and technical services. Larger customers are assigned specific account executives who manage the Company's relationships with these customers. Account managers process the orders from each location.
GOVERNMENT AND EDUCATION. The government and education sales group markets to federal, state, and local governments, government related entities, and the education market, both directly and as a supplier to systems integrators and other contractors.
Over 10,000 products sold by the Company, from over 75 vendors, have been approved by the Federal General Services Administration ("GSA") on the fiscal 1996-1999 GSA schedule, making such products eligible for purchase by federal agencies and certain state and local governments. In addition to products listed on the GSA schedule, the Company also sells to government customers via the federal procurement card, electronic order placement via the Internet, and state, county, and city contracts. The Company is also an approved training and service vendor on the GSA schedule.
To address the needs of its education customers, CompUSA assigns an account manager to each of its education accounts. In addition to product purchases, schools can contract with CompUSA for technical services including upgrades, network design, maintenance, and telephone help desk support, as well as computer training courses for students, faculty, and administration.
MAIL ORDER. CompUSA Direct is a direct marketer of brand-name personal computers and peripherals, primarily to small to medium-size businesses, individuals, and corporate customers pursuant to employee purchase programs and other major fulfillment programs. The mission of CompUSA Direct is to provide its customers with the broad product selection of the Company's Computer Superstores, the value and convenience of a direct marketer, and superior service. CompUSA Direct's mail order fulfillment and call center is located in CompUSA Direct's 55,000 square foot distribution and configuration facility in Marlborough, Massachusetts, while advertising and merchandising functions are centralized at CompUSA's corporate headquarters.
CompUSA Direct maintains a central call center for telephone orders. By dialing 1-800-COMPUSA toll-free, customers nationwide can order from a selection of more than 50,000 personal computers and related products. CompUSA Direct customers can pick up orders, return and exchange purchases, or receive technical service at any CompUSA Computer Superstore nationwide. CompUSA Direct also provides convenient and affordable delivery and installation, as well as custom configuration. In addition, customers who purchase complete personal computer systems receive toll-free technical support.
CompUSA mail order customers can also place orders via the Internet by visiting the CompUSA web site, located at www.compusa.com. Featuring a "virtual Computer Superstore," the CompUSA web site offers an extensive product catalog, information about CompUSA, and links to vendor web sites.
Substantially all of CompUSA's advertisements, including its color circulars, feature the Company's toll-free 1-800-COMPUSA telephone number. The Company advertises major brands of personal computer hardware, software, accessories, and supplies, as well as its full service offerings of training and technical services in computer journals, magazines, catalogs, and many other publications.
SERVICES
TRAINING. The Company offers training for customers in classroom facilities located in all of the Company's Computer Superstores. Classes are offered for a variety of application and advanced technology software. A Computer Superstore typically has from one to three classrooms, each equipped with a personal computer for each participant. In total, the Company has over 500 classrooms in or adjacent to its stores. Most classrooms accommodate 12 to 14 students and each store offers approximately five to six full-day classes in each classroom per week. The Company's instructors receive periodic training both from software vendors and from the Company on new technology as well as instructional skills development. In addition, the Company provides training at customers' facilities or at other off-site locations.
The Company offers classroom training for all popular software applications, including networking and the Internet. In addition, the Company offers computer-based training and computerized skills assessment as well as training delivered via satellite and the Internet. The Company also offers project management services to facilitate the registration of students and reporting of training classes taken.
TECHNICAL SERVICES. The Company provides its customers with numerous technical services. Services provided at each location include computer upgrades, custom configurations, networking, diagnostic testing, maintenance, repair, and delivery and installation. The Company also performs repairs for third-party service centers and extended service plan providers under national service agreements. The Company is a vendor-authorized service provider for Apple, Compaq, Epson, Hewlett-Packard, IBM, Microsoft, NEC, Novell, Packard Bell, Toshiba, and other leading manufacturers.
In July 1998, the Company opened a new 1,000-plus seat call center facility in Plano, Texas offering a wide range of inbound and outbound services. The facility is divided into the sales and customer service department and the technical support department to offer high-volume call capacity and fully customizable sales, technical support, and customer support services for businesses of all sizes. The call center's sales and customer service group offers custom-designed inbound/outbound services for third-party, personal computer-related manufacturers and software publishers. In addition, this group provides customer service telephone support for CompUSA's retail and business customers. CompUSA's technical support group offers a full menu of technical support outsourcing and help desk services for third parties, while also functioning as the support center for CompUSA's "tech-service-by-phone" offerings. The Technical Support group gives personal computer users three flexible tech-service-by-phone options. The "Dial-A-Tech" option is a technical service card which offers the customer unlimited technical service calls within a specified time period (90, 180, 365 days). Customers that select CompUSA's "per incident" tech service option (1-888-NOW-TECH) are charged a flat rate of $24.95 per call. Customers that prefer to be charged by-the-minute can call 1-900-CALL-COMP for technical support at a rate of $2.49 per minute (first minute is free). Each of these services is provided 24 hours a day, seven days a week.
In addition to the store technical services departments in its Computer Superstores, the Company has outbound technical support and CompUSA Integrated Services ("CIS") teams supporting 20 major markets. These CIS teams are designed to provide on-site services for corporate, government, and education customers. Services include product consultation, evaluation, design, system configuration, installation, testing, upgrades, maintenance, and repairs. Other CIS team support functions include telephone help-desk services, on-site technicians, inventory control, asset management, customized training, and 24-hour emergency response. The Company also sells various extended service contracts that are administered and insured by an independent third party. Hardware customers whose purchases are still under manufacturers' warranties may call the Company for technical support at no charge for the first 30 days after purchase.
PURCHASING, VENDOR SELECTION, AND PRODUCT OBSOLESCENCE
The Company manages the purchase and replenishment of all store merchandise centrally. The inventory management department makes all purchases and directs merchandise transportation and transfers between the Company's facilities. The Company purchases a majority of its merchandise inventory directly from manufacturers, supplemented with purchases from distributors. Manufacturers and distributors ship merchandise inventories directly to the Company's stores, the Company's Dallas/Fort Worth area central distribution and configuration facility, CompUSA Direct's centralized distribution facility in Marlborough, Massachusetts, and the five regional cross-dock facilities utilized by the Company that consolidate vendor shipments and transfer merchandise to the stores. Substantially all inventory is held at the Company's stores.
The Company considers numerous factors in vendor selection, including customer demand, product availability, product performance, price, and credit terms. The Company believes that its significant
purchase volumes generally allow it to acquire products at or near the lowest prices available. The Company has maintained long-term relationships with vendors but does not have material long-term contracts or commitments with any of them. Brand names and individual products are important to the Company's business. In fiscal 1998, purchases of products manufactured by each of Hewlett-Packard Company and Compaq Computer Corporation constituted in excess of 10% of the Company's aggregate purchases.
Components used in CompUSA PC personal computers are purchased by third-party manufacturers engaged by the Company from vendors approved by CompUSA. Component and spare parts inventories are maintained at the third-party manufacturers' facilities. Because these personal computers are built to customers' specifications, no significant inventory of finished products is maintained.
As a retailer of personal computer products, the Company's exposure to product obsolescence and technological advances is less than that faced by manufacturers of such products. Substantially all of the Company's major vendors, either contractually or as a result of the vendor following industry practices, have reduced the Company's exposure to inventory obsolescence by providing favorable provisions, including price protection, stock balancing privileges, and other return privileges, subject to restrictions and limitations in certain circumstances, and promotional allowances for most products purchased. The Company has also entered into agreements with certain vendors that limit the Company's return privileges in exchange for additional purchase rebates. The Company further reduces technology and obsolescence risk through inventory management policies designed to maximize rapid inventory turnover. In fiscal 1998, the Company turned its inventory 7.2 times. A reduction in, or the discontinuation of, current vendor practices related to price protection, stock balancing privileges, and other return privileges or a significant decline in the Company's inventory turnover rate could expose the Company to product obsolescence risks which could have a material adverse effect on the Company. There can be no assurance that vendors will not change these provisions and privileges to the Company's detriment in the future.
CREDIT
CompUSA extends credit to qualified corporate, government, education, and mail order customers, generally pursuant to 30-day payment terms. CompUSA makes available revolving credit payment terms to corporations and individual consumers through private label credit card programs, which are provided by independent financial services companies. In addition, the Company accepts most major credit cards, including Visa, Mastercard, American Express, Diners Club, and Discover Card.
The Company has third-party leasing programs pursuant to which the Company refers corporations and individual consumers desiring financing to independent leasing companies that purchase the specified equipment and lease it directly to these customers.
SEASONALITY
Based upon its past operating history, the Company believes that its business is seasonal. Excluding the effects of new store openings, net sales and earnings are generally lower during the first and fourth fiscal quarters than in the second and third fiscal quarters. See Note 15 of Notes to Consolidated Financial Statements.
PERSONNEL
The Company considers its relationship with its employees to be excellent. None of the Company's employees are covered by collective bargaining agreements. At September 15, 1998, the Company employed approximately 13,700 full-time and 4,900 part-time employees (excluding approximately 2,300 employees at the Computer City stores that the Company currently intends to close).
INDUSTRY AND COMPETITION
The Company believes that unit sales of personal computers and related products and services have increased as a result of the following factors: (i) growth of the service/information-based sector of the economy; (ii) improvements in personal computer hardware performance and new software applications; (iii) the emergence of industry standards and component compatibility; (iv) reductions in prices of hardware and software; (v) increased user familiarity with personal computers; (vi) the replacement of obsolete hardware, software and peripherals; (vii) increased consumer awareness created, in part, by the "information superhighway" and Internet capabilities; (viii) office automation and the reengineering of the workplace; and (ix) the integration of personal computers into the educational curricula for students at all grade levels. The Company also believes that as higher performance personal computers continue to become available at even more attractive prices, the market for personal computers and related products and services should continue to grow.
The personal computer industry is undergoing significant change. Rapid technological advances, in combination with an increasingly computer literate population, have increased the use and popularity of personal computers, resulting in the emergence and growth of a variety of distribution channels. The Company believes that individuals, businesses, schools, and governments, having gained familiarity with personal computers, require less assistance in making their purchasing decisions and have become increasingly price sensitive. At the same time, intense competition for market share has forced hardware and accessory manufacturers, along with software vendors, to reduce prices and seek new channels through which to sell their products. These factors have resulted in widespread and intense competition among personal computer product resellers. CompUSA believes that its business strategy positions it well to compete successfully in this industry.
The Company competes with a large number and variety of resellers of personal computers and related products and services in various businesses. In the retail business, the Company primarily competes with other large format computer retailers, large format consumer electronics and office supply retailers, mail order houses, mass merchants, discounters, specialty electronics retailers, software specialty retailers, manufacturers and distributors that sell directly to the public, and other personal computer retailers. In the corporate, government, and education businesses, the Company primarily competes with outbound dealers, manufacturers, value-added resellers, other large format computer retailers, large format office supply retailers, and general office equipment retailers. In the mail order business, the Company competes with mail order houses, manufacturers and distributors that sell directly to the public through the use of mail order catalogs, general trade publications or the Internet, and other large format computer retailers. In the training business, the Company primarily competes with various local, regional, and national chains of training centers and other large format computer retailers. In the technical services business, the Company primarily competes with other large format computer retailers, manufacturers, various other computer retailers, specialty electronics retailers, and large format consumer electronics and office supply retailers.
The Company believes that the major competitive factors in its businesses include customer service, breadth and depth of selection, price, technical support, and marketing and sales capabilities. The Company's utilization of trained personnel and the ability to use national and local advertising media are important to the Company's ability to compete in its businesses. The Company believes it is a strong competitor with respect to each of the factors referenced above. Given the highly competitive nature of the personal computer industry, no assurances can be given that the Company will continue to compete successfully with respect to the factors referenced above. Also, the Company would be adversely affected if its competitors were to offer their products at significantly lower prices or if the Company were unable to obtain products in a timely manner for an extended period of time. Some of the Company's competitors are larger and/or have substantially greater resources than the Company.
TRADEMARKS AND SERVICE MARKS
The Company conducts its business in the United States under the trade names "CompUSA," "CompUSA The Computer Superstore," "CompUSA Direct," and "CompUSA PC." In Canada, the Company conducts business under the trade names "Computer City" and "Computer City Direct." The Company holds United States federal registrations for "CompUSA," "CompUSA The Computer Superstore," "CompUSA Direct," and other marks, and has applied for United States federal registrations for several other trademarks and service marks, including "CompUSA PC." The Company has also registered trademarks and service marks in numerous foreign countries. The Company pursues a program of registering and enforcing its trademarks and service marks in the United States and throughout the world.
The Company sells products under various trademarks and service marks and uses various trade names to which reference is made in this Annual Report that are the property of others.
ITEM 2.
ITEM 2. PROPERTIES
At September 15, 1998, the Company operated 200 CompUSA Computer Superstores in 79 metropolitan areas in the 40 states listed below (excluding the 58 Computer City stores that the Company currently intends to close) and seven Computer City stores in Canada.
All but four of the Company's stores are leased or subleased by the Company with lease terms expiring between 1998 and 2019. In most instances, the Company has renewal options at increased rents. Four stores are owned by the Company. The Company's stores range in size from 11,300 to 58,800 square feet and average approximately 26,000 square feet. The Company's headquarters, located in Dallas, Texas, occupies approximately 196,000 square feet of leased space. The initial lease term for the Company's headquarters has approximately five years remaining and the Company has renewal options at increased rents. In addition, the Company leases call center, distribution, warehouse, and office space that aggregates approximately 1,085,000 square feet and is subject to leases expiring at various dates through 2013. See Note 7 of Notes to Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On April 23, 1998, a lawsuit, Hoeck v. CompUSA Inc. et al., was filed by a stockholder of the Company in the United States District Court for the Northern District of Texas against the Company and certain of its officers, seeking class action status on behalf of the purchasers of the Company's Common Stock and related publicly traded options during the class period. The action alleges various violations of federal securities laws. Damages have not been specified. On June 24, 1998, a second stockholder suit was filed against the Company making virtually the same allegations. On August 24, 1998, a consolidated amended complaint was filed in the Hoeck case effectively consolidating the two cases. The Company believes the claims are without merit and intends to vigorously defend against such charges. In addition, the Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies would not have a material adverse impact on the Company's financial statements. However, there can be no assurances that future costs would not be material to the 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during the fourth quarter of fiscal 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the symbol "CPU." The following table sets forth the high and low sales prices per share for the Common Stock as reported to the Company by the NYSE for the periods indicated:
At September 7, 1998 there were 1,585 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid and has no current plans to pay cash dividends on the Common Stock. The Company currently intends to retain earnings for use in the operation and expansion of its business and therefore does not anticipate paying cash dividends in the foreseeable future. The terms of the Company's 9 1/2% Senior Subordinated Notes due 2000 (the "Senior Subordinated Notes") limit the Company's ability to pay dividends generally to 50% of cumulative net income since June 17, 1993, plus 100% of the consideration received from the issuance of capital stock since such date, less the amount of other restricted payments, as defined. See Note 9 of Notes to Consolidated Financial Statements. In addition, the terms of the Company's bank credit agreement limit the Company's ability to pay dividends on the Common Stock. See Note 8 of Notes to Consolidated Financial Statements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and operating data as of and for the years ended June 25, 1994 through June 27, 1998. This information should be read in conjunction with the Consolidated Financial Statements and related Notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this Annual Report on Form 10-K.
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NOTES ON FOLLOWING PAGE
(1) The Company's fiscal year is a 52/53 week year ending on the last Saturday of each June. The Company's fiscal years ended June 27, 1998 and June 28, 1997 each contained fifty-two weeks. The Company's fiscal year ended June 29, 1996 contained fifty-three weeks. The fiscal years ended June 24, 1995 and June 25, 1994 each contained fifty-two weeks.
(2) None of the above financial data include the financial data of Computer City, which was acquired by the Company on August 31, 1998. The acquisition of Computer City will be accounted for under the purchase accounting method.
(3) For a discussion of the Company's non-recurring amortization charge, see Note 2 of Notes to Consolidated Financial Statements.
(4) For a discussion of the Company's acquisition of PCs Compleat, see Note 3 of Notes to Consolidated Financial Statements.
(5) All references in this table to the number of shares, basic earnings per share, and diluted earnings per share have been adjusted on a retroactive basis to reflect the two-for-one stock splits declared by the Company's Board of Directors effective April 8, 1996 and November 18, 1996, and the issuance of shares in connection with the Company's acquisition of PCs Compleat.
(6) Calculated using net sales divided by gross square footage of the Company's Computer Superstores open at the end of the period, weighted by the number of months open during the period. Average net sales per gross square foot for the fiscal year ended June 29, 1996 has been calculated on the basis of a fifty-two week fiscal year.
(7) Net sales for purposes of the calculations in footnotes (6) and (8) are comprised of net sales generated from Computer Superstores, as well as sales of the Company's national accounts group, but exclude mail order sales.
(8) Comparable store sales are net sales for Computer Superstores open the same months in both the indicated and previous period, including stores that were relocated or expanded during either period. The comparable store sales increase for fiscal 1997 has been calculated by comparing net sales for the fifty-two weeks ended June 28, 1997 with net sales for the fifty-two weeks ended June 29, 1996. The comparable store sales increase for fiscal 1996 has been calculated by comparing net sales for the fifty-three weeks ended June 29, 1996 with net sales for the fifty-three weeks ended July 1, 1995.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements about the business, financial condition, 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 filings with the Securities and Exchange Commission. The Company's entry into the build-to-order market in the first quarter of fiscal 1998 with its CompUSA PC brand personal computers involves significant additional risks, including without limitation failure to achieve customer acceptance of the new products and substantial dependence on third parties for product quality and reliability and timely fulfillment of customer orders. Additionally, the Company's recent acquisition of Computer City involves certain risks and uncertainties, including without limitation the ability of the Company to operate the acquired stores profitably; to dispose of inventories and other assets, as well as future lease commitments,
related to Computer City stores anticipated to be closed following completion of inventory liquidation; to retain Computer City's retail and corporate customers; and other uncertainties.
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 Annual Report on Form 10-K, the words "believes," "estimates," "plans," "expects," and "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.
GENERAL
All references herein to "fiscal 1998" relate to the fifty-two weeks ended June 27, 1998. References to "fiscal 1999" relate to the fifty-two weeks ending June 26, 1999, references to "fiscal 1997" relate to the fifty-two weeks ended June 28, 1997, and references to "fiscal 1996" relate to the fifty-three weeks ended June 29, 1996.
The following table sets forth certain operating data for the Company:
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(1) Calculated using net sales divided by gross square footage of the Company's Computer Superstores open at the end of the period, weighted by the number of months open during the period. Average net sales per gross square foot for fiscal 1996 has been calculated on the basis of a fifty-two week fiscal year.
(2) Net sales for purposes of the above calculations are comprised of net sales generated from Computer Superstores, as well as the Company's national accounts group, but exclude mail order sales.
(3) Comparable store sales are net sales for Computer Superstores open the same number of months in both the indicated and previous period, including stores that were relocated or expanded during either period. The comparable store sales increase for fiscal 1997 has been calculated by comparing net sales for the fifty-two weeks ended June 28, 1997 with net sales for the fifty-two weeks ended June 29, 1996. The comparable store sales increase for fiscal 1996 has been calculated by comparing net sales for the fifty-three weeks ended June 29, 1996 with net sales for the fifty-three weeks ended July 1, 1995.
Average net sales per gross square foot declined during fiscal 1998 compared with fiscal 1997 primarily due to reductions in average net sales per Computer Superstore. In fiscal 1998, average net sales per Computer Superstore decreased approximately 6% from fiscal 1997. Average net sales per Computer Superstore were negatively impacted by declines in average selling prices of certain of the Company's products and increased sales of lower-end computer systems. Additionally, in fiscal 1998, net sales of stores open less than two years comprised a higher proportion of the Company's total net sales than in fiscal 1997. Less mature stores typically have lower net sales per gross square foot than more mature stores. In addition, management believes net sales have decreased at certain stores when the Company has opened additional stores in the same market.
The comparable store sales increase declined in fiscal 1998 compared with fiscal 1997 due to the reasons noted above. In addition, the Company believes the opening of additional Computer Superstores
in existing markets has resulted in some reductions in the rate of comparable store sales growth. CompUSA has opened additional stores in existing markets largely to increase market penetration and to provide customers with more convenience and better service. The Company plans to continue its strategy of opening additional Computer Superstores in existing markets. Management believes the resulting diversion of sales from existing stores has adversely affected the Company's comparable store sales. However, the Company believes that this strategy should increase its awareness with local consumers, enhance its competitive position in such markets, and create efficiencies in advertising and management, and therefore is in the Company's long-term best interest.
ACQUISITION OF COMPUTER CITY
On August 31, 1998, the Company completed its acquisition of Computer City from Tandy Corporation for $211 million, payable in a note and cash. See "--Liquidity and Capital Resources." The purchase price is subject to certain post-closing adjustments based on the completion of an audit of Computer City's balance sheet as of the closing date. The acquisition will be accounted for under the purchase accounting method.
The 58 Computer City stores that the Company currently intends to close are generally in closer proximity to, and therefore the Company believes would have been more directly competitive with, existing CompUSA Computer Superstores than the 36 Computer City stores in the United States that will remain open as CompUSA Computer Superstores. Of the 36 stores that will remain open, 29 are located in metropolitan areas in which there are existing CompUSA Computer Superstores. The Company believes its decision to continue to operate these 29 stores is consistent with its strategy of opening additional Computer Superstores in existing markets to increase market penetration and to provide customers with more convenience and better service. However, the continued operation of these 29 stores may cause the rate of comparable store sales growth in the CompUSA Computer Superstores already in operation in such metropolitan areas to be lower than it would have been if these 29 stores had been closed.
RESULTS OF OPERATIONS
As a result of the expansion of the Company's store base, period-to-period comparisons of financial results may not be meaningful and the results of operations for historical periods may not be indicative of the results to be expected in future periods. In addition, the Company expects that its quarterly results of operations will fluctuate depending on the timing of the opening of, and the amount of net sales contributed by, new stores and the timing of costs associated with the selection, leasing, construction, and opening of new stores, as well as seasonal factors, product introductions, and changes in product mix. See
"--Quarterly Data and Seasonality." The following table sets forth certain items expressed as a percentage of net sales for the periods indicated:
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(1) For a discussion of the Company's non-recurring amortization charge, see Note 2 of Notes to Consolidated Financial Statements.
(2) For a discussion of the Company's acquisition of PCs Compleat, see Note 3 of Notes to Consolidated Financial Statements.
FISCAL 1998 COMPARED WITH FISCAL 1997
Net sales for fiscal 1998 increased 14.7% to $5.29 billion from $4.61 billion for fiscal 1997. The increase in net sales was primarily due to the additional sales volume attributable to the new stores opened subsequent to fiscal 1997 and an increase in comparable store sales of 1.7%. Despite an increase in overall sales and the number of personal computer systems sold in fiscal 1998, sales were negatively impacted by, among other things, declines in average selling prices for certain of the Company's products, including desktop and notebook computers and monitors, as well as increased sales of lower-end computer systems. Additionally, in fiscal 1998, average net sales per Computer Superstore decreased approximately 6% from fiscal 1997. The Company believes average net sales per Computer Superstore were negatively impacted by decreases in average selling prices, an increase in sales of lower-end computer systems, and an increase in the number of the Company's stores open less than two years. In general, less mature stores generate lower sales than more mature stores.
Gross profit was $745 million, or 14.1% of net sales, in fiscal 1998, compared with $657 million, or 14.3% of net sales, in fiscal 1997. The decline in gross profit as a percentage of net sales in fiscal 1998 compared with fiscal 1997 is due, in part, to costs associated with the CompUSA PC line of build-to-order personal computers, increases in inventory shrinkage and freight expense, and the deleveraging of occupancy costs, which are generally fixed in nature. These declines were partially offset by an increase in the ratio of service revenues to total revenues. Service revenues typically have higher gross margins than merchandise sales.
Operating expenses were $507 million, or 9.6% of net sales, in fiscal 1998, compared with $402 million, or 8.7% of net sales, in fiscal 1997. The increase in operating expenses as a percentage of net sales is due primarily to the deleveraging of facilities expenses, an increase in the ratio of service revenues to total revenues, and the Company's efforts to expand certain of its businesses, offset by lower incentive
compensation. Facilities expenses are generally fixed in nature and deleveraged in fiscal 1998 as a result of lower average net sales per store. The increase in the ratio of service revenues to total revenues had the effect of increasing operating expenses as a percentage of net sales because operating expenses are generally higher for service revenues than for merchandise sales.
Pre-opening expenses consist primarily of personnel expenses incurred prior to a store's opening and promotional costs associated with the opening. The Company's policy is to expense all pre-opening expenses in the month of the store's grand opening. In fiscal 1998, the Company incurred $8.7 million in pre-opening expenses in connection with the opening of 33 Computer Superstores and the relocation of two Computer Superstores, compared with $6.2 million in pre-opening expenses incurred in fiscal 1997 in connection with the opening of 24 Computer Superstores.
General and administrative expenses were $116 million, or 2.2% of net sales, in fiscal 1998, compared with $92.2 million, or 2.0% of net sales, in fiscal 1997. The increase in general and administrative expenses as a percentage of net sales was primarily due to costs related to the expansion of the Company's corporate facilities to support the Company's growth as well as the deleveraging of corporate facilities expenses, which are generally fixed in nature. In addition, general and administrative expenses increased as a result of costs associated with the Company's efforts to expand certain of its businesses as well as to develop new business opportunities. These increases were partially offset by lower incentive compensation. General and administrative expenses per store were approximately $812,000 in fiscal 1998, compared with $785,000 in fiscal 1997.
During the fourth quarter of fiscal 1998, the Company committed to a plan to implement a new information technology ("IT") strategy. Pursuant to the strategy, the Company plans to outsource substantially all of its IT processes and implement an Enterprise Resource Management ("ERM") program. Implementation of the ERM program will result in the replacement of a substantial portion of the Company's existing IT systems, as well as certain systems in the development stage. The Company is in negotiations with software and IT service companies and currently plans to announce definitive agreements in the second quarter of fiscal 1999. Implementation of the ERM program is expected to take approximately 18 to 24 months after execution of such agreements. As a result of the adoption of this new strategy, the Company incurred a non-recurring, pre-tax amortization charge of $55.9 million ($34.4 million after tax) related to the impairment of existing IT systems and the abandonment of certain systems under development. See Note 2 of Notes to Consolidated Financial Statements.
Interest expense and other income, net, of $5.9 million, or 0.1% of net sales, in fiscal 1998, remained relatively constant as a percentage of net sales compared with $4.3 million, or 0.1% of net sales, in fiscal 1997. See "--Liquidity and Capital Resources."
The Company's effective tax rate was 38.5% for both fiscal 1998 and fiscal 1997. The effective tax rate for both fiscal 1998 and fiscal 1997 differed from the federal statutory rate primarily due to state income taxes, offset, in part, by the benefits of tax exempt interest earned by the Company.
As a result of the above, net income for fiscal 1998 was $31.5 million, or $0.33 per diluted share, compared with net income of $93.9 million, or $0.99 per diluted share for fiscal 1997.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales for fiscal 1997 increased 20.4% to $4.61 billion from $3.83 billion for fiscal 1996. Fiscal 1997 was a fifty-two week period while fiscal 1996 was a fifty-three week period. Net sales for fiscal 1997 increased 22% from the comparable fifty-two week period ended June 29, 1996. The increase in net sales was due to the additional sales volume attributable to the new stores opened during and subsequent to fiscal 1996 and an increase in comparable store sales of 5.9%. The Company believes the increase in comparable store sales was primarily due to the maturation of the Company's store base, increased customer demand, and increased growth in the Company's direct sales and service businesses. While
comparable store sales increased 5.9% in fiscal 1997, the Company believes the opening of Computer Superstores in existing markets resulted in the diversion of sales from existing stores.
Gross profit was $657 million, or 14.3% of net sales, in fiscal 1997, compared with $518 million, or 13.5% of net sales, in fiscal 1996. The increase in gross profit as a percentage of net sales was primarily due to higher product margin, an improvement in controllable costs such as inventory shrinkage and freight, and an increase in the ratio of service revenues to total revenues. Service revenues typically have higher gross margins than merchandise sales.
Operating expenses were $402 million, or 8.7% of net sales, in fiscal 1997, compared with $328 million, or 8.6% of net sales, in fiscal 1996. During fiscal 1997, net advertising expense decreased as a percentage of net sales and other operating expenses increased as a percentage of net sales. The decrease in net advertising expense as a percentage of net sales resulted primarily from increased vendor participation. Other operating expenses increased as a percentage of net sales primarily due to the increases in both new store net sales and service revenues as percentages of net sales. The increases in new store net sales and service revenues as percentages of net sales had the effect of increasing other operating expenses as percentages of net sales because of the following factors: (1) other operating expenses in general, and store personnel expenses in particular, generally constitute a higher percentage of net sales for less mature stores because of the lower sales volumes generated by less mature stores and (2) other operating expenses are generally higher for service revenues than for merchandise sales.
In fiscal 1997, the Company incurred $6.2 million in pre-opening expenses in connection with the opening of 24 new stores, compared with $5.5 million in pre-opening expenses incurred in fiscal 1996 in connection with the opening of 20 new stores, two Training Supercenter Plus locations, and the relocation of one store.
General and administrative expenses were $92.2 million, or 2.0% of net sales, for fiscal 1997, compared with $75.5 million, or 2.0% of net sales, for fiscal 1996. Increases in general and administrative expenses in fiscal 1997 were offset by the leveraging of such expenses over higher sales. General and administrative expenses per store were approximately $785,000 in fiscal 1997, compared with $814,000 in fiscal 1996.
Interest expense and other income, net, was $4.3 million in fiscal 1997, compared with $5.5 million in fiscal 1996. The decrease in net expense is attributable to increased other income related to higher average investment levels during fiscal 1997. See "--Liquidity and Capital Resources."
The Company's effective tax rate for fiscal 1997 was 38.5%, compared with an effective tax rate of 40% for fiscal 1996. The fiscal 1997 effective tax rate differed from the federal statutory rate primarily due to state income taxes offset, in part, by the benefits of tax exempt interest income earned by the Company. The effective tax rate differed in fiscal 1996 from the federal statutory rate primarily due to state income taxes and nondeductible transaction costs related to the Company's acquisition of PCs Compleat, offset in part by the benefits from tax exempt interest income earned by the Company.
As a result of the above, net income for fiscal 1997 was $93.9 million, or $0.99 per diluted share, compared with net income of $59.7 million, or $0.65 per diluted share, for fiscal 1996.
QUARTERLY DATA AND SEASONALITY
The Company expects that its quarterly results of operations will fluctuate depending on the timing of the opening of, and the amount of net sales contributed by, new stores and the timing of costs associated with the selection, leasing, construction, and opening of new stores, as well as seasonal factors, product introductions, and changes in product mix.
Based upon its past operating history, the Company believes that its business is seasonal. Excluding the effects of new store openings, net sales and earnings are generally lower during the first and fourth
fiscal quarters than in the second and third fiscal quarters. See Note 15 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1998, total assets were $1.16 billion, $923 million of which were current assets, including $152 million of cash and cash equivalents. Net cash provided by operating activities for fiscal 1998 was $128 million, compared with net cash provided by operating activities of $72.3 million for fiscal 1997.
Approximately three-fourths of the Company's net sales during both fiscal 1998 and fiscal 1997 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.
Capital expenditures during fiscal 1998 were $138 million, $42.7 million of which were for new stores, compared with $74.2 million of capital expenditures during fiscal 1997, $18.1 million of which were for new stores. The Company opened 33 new Computer Superstores during fiscal 1998 and 24 new Computer Superstores during fiscal 1997. The Company plans to open approximately 15 to 20 Computer Superstores in fiscal 1999. In addition to the capital expenditures made in connection with new stores, the Company also incurred capital expenditures in fiscal 1998 and fiscal 1997 related to improvements in information systems and existing stores, and additions to property and equipment at the Company's corporate facilities. In fiscal 1998, the Company incurred additional capital expenditures related to the Company's new call center and distribution center. Excluding the effects of new store openings, the Company's greatest short-term capital requirements occur during the second fiscal quarter to support a higher level of sales in that quarter. Short-term capital requirements are satisfied primarily by available cash and cash equivalents and vendor and bank financing.
The Company has an unsecured $300 million credit agreement (the "Credit Agreement") with a consortium of banks that expires in March 2001. The Credit Agreement requires that the Company maintain certain financial ratios and a minimum net worth and restricts, among other things, the Company's ability to incur additional indebtedness. The Credit Agreement allows the Company to securitize up to $200 million of certain assets. The Company's ability to incur borrowings under the Credit Agreement is reduced by outstanding letters of credit and, in certain circumstances, further reduced based upon the financial covenants contained in the Credit Agreement. The Company's ability to incur borrowings under the Credit Agreement could be further limited in certain circumstances pursuant to the terms of the indenture related to the Senior Subordinated Notes. At June 27, 1998, no borrowings were outstanding under the Company's Credit Agreement. See Note 8 of Notes to Consolidated Financial Statements.
Concurrent with the acquisition of Computer City, the Credit Agreement was amended with respect to certain of the financial ratios required to be maintained by the Company and the calculation of amounts available for future borrowings. As of August 31, 1998, after giving effect to the issuance of the Seller Note (as defined below) and the revisions to the Credit Agreement, the Company had $194 million available for future borrowings under the Credit Agreement.
The Company also finances certain fixture and equipment acquisitions through equipment lessors. Lease financing is available from numerous sources and the Company evaluates equipment leasing as a supplemental source of financing on a continuing basis.
In connection with the acquisition of Computer City, the Company issued a $136 million subordinated promissory note payable to Tandy Corporation (the "Seller Note"). The Seller Note provides for its repayment in semi-annual installments over a period of ten years at 9.48% interest per annum. The first three years of payments are interest only, with the first principal payment due in December 2001. The Seller Note ranks pari passu with the Senior Subordinated Notes. The unpaid principal amount of the
Seller Note may be prepaid, in whole or in part, at any time at the option of the Company, without premium or penalty.
In September 1997, the Company's Board of Directors authorized the purchase of up to $60 million of Common Stock. As of June 27, 1998, the Company had purchased 2.2 million shares of Common Stock, to be held as treasury stock, for $60 million ($27.34 per share), pursuant to the September 1997 authorization. No additional purchases of Common Stock can currently be made by the Company pursuant to such authorization.
The Company believes that its available cash and cash equivalents, funds generated by operations, currently available vendor and floor plan financing, lease financing, and funds available under the Credit Agreement should be sufficient to finance its continuing operations and expansion plans through the end of fiscal 1999 and to make all required payments of interest on the Senior Subordinated Notes and the Seller Note. The level of future expansion will be contingent upon market conditions and the availability of additional capital.
INFLATION
While inflation has not had, and the Company does not expect it to have, a material impact upon operating results, there can be no assurances that the Company's business will not be affected by inflation in the future.
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information, which are effective for fiscal years beginning after December 15, 1997. The Company will adopt the provisions of SFAS No. 130 and SFAS No. 131 in fiscal 1999. The American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. The Company's current policy falls within the guidelines of SOP 98-1. Also, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. Beginning in the first quarter of fiscal year 1999, the Company will elect to adopt the provisions of SOP 98-5. Management believes that the adoption of SOP 98-5 will have no material impact on the Company's financial statements.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment and software and devices with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the Year 2000 and thereafter. For this purpose, the term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, and telephone/PBX systems, cash registers, hand-held terminals, scanning equipment, and other miscellaneous systems, as well as systems that are not commonly thought of as IT systems, such as alarm systems, fax machines, or other miscellaneous systems. Both IT and non-IT systems may contain imbedded technology, which complicates the Company's Year 2000 identification, assessment, remediation, and testing efforts. Based upon its identification and assessment efforts to date,
the Company believes that certain of the computer equipment and software it currently uses will require replacement or modification. In addition, in the ordinary course of replacing computer equipment and software, the Company attempts to obtain replacements that are Year 2000 compliant. Utilizing both internal and external resources to identify and assess needed Year 2000 remediation, the Company currently anticipates that its Year 2000 identification, assessment, remediation and testing efforts, which began in October 1996, will be completed by June 30, 1999, and that such efforts will be completed prior to any currently anticipated impact on its computer equipment and software. The Company estimates that as of September 15, 1998, it had completed approximately 40% of the initiatives that it believes will be necessary to fully address potential Year 2000 issues relating to its computer equipment and software. The projects comprising the remaining 60% of the initiatives are in process and expected to be completed on or about June 30, 1999.
The Company has also mailed letters to its significant vendors and service providers and has verbally communicated with many strategic customers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues and whether the products and services purchased from or by such entities are Year 2000 compliant. As of September 15, 1998, the Company had received responses from approximately 42% of such third parties, and 76% of the companies that have responded have provided written assurances that they expect to address all their significant Year 2000 issues on a timely basis. A follow-up mailing to significant vendors and service providers that did not initially respond, or whose responses were deemed unsatisfactory by the Company, has been completed, with responses due by October 1, 1998.
The Company believes that the cost of its Year 2000 identification, assessment, remediation and testing efforts, as well as currently anticipated costs to be incurred by the Company with respect to Year 2000 issues of third parties, will not exceed $5 million, which expenditures will be funded from operating cash flows. Such amount represents approximately 3% of the Company's total actual and anticipated IT expenditures for fiscal 1997 through fiscal 1999. As of June 27, 1998, the Company had incurred costs of approximately $1.6 million related to its Year 2000 identification, assessment, remediation and testing efforts. All of the $1.6 million relates to analysis, repair or replacement of existing software, upgrades of existing software, or evaluation of information received from significant vendors, service providers, or customers. Other non-Year 2000 IT efforts have not been materially delayed or impacted by Year 2000 initiatives. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or assessment, remediation and testing are not effected timely with respect to Year 2000 problems that are identified, there can be no assurance that the Year 2000 issue will not materially adversely impact the Company's results of operations or adversely affect the Company's relationships with customers, vendors, or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations.
The Company has begun, but not yet completed, a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, and such scenario has not yet been clearly identified. The Company currently plans to complete such analysis and contingency planning by December 31, 1999.
The Company has engaged an independent expert to evaluate its Year 2000 identification, assessment, remediation and testing efforts.
The costs of the Company's Year 2000 identification, assessment, remediation and testing efforts and the dates on which the Company believes it will complete such efforts are based upon management's best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate and test all relevant computer codes and embedded technology, and similar uncertainties. In addition, variability of definitions of "compliance with Year 2000" and the myriad of different products and services, and combinations thereof, sold by the Company may lead to claims whose impact on the Company is not currently estimable. No assurance can be given that the aggregate cost of defending and resolving such claims, if any, will not materially adversely affect the Company's results of operations. Although some of the Company's agreements with manufacturers and others from whom it purchases products for resale contain provisions requiring such parties to indemnify the Company under some circumstances, there can be no assurance that such indemnification arrangements will cover all of the Company's liabilities and costs related to claims by third parties related to the Year 2000 issue.
ITEM 7A.
ITEM 7A. 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. In addition, the Company's Credit Agreement provides for borrowings which bear interest at variable rates based on either a prime rate or the London Interbank Offering Rate. The Company had no borrowings outstanding pursuant to the Credit Agreement in fiscal 1998. The Company believes 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page. Supplementary quarterly financial information for the Company is included in Note 15 of Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the directors of the Company is set forth in the Proxy Statement (the "Proxy Statement") to be sent to stockholders in connection with the Company's Annual Meeting of Stockholders to be held November 4, 1998 under the heading "Proposal No. 1--Election of Directors," which information is incorporated herein by reference. Information concerning each executive officer of the Company is set forth in the Proxy Statement under the heading "MANAGEMENT--Executive Officers," which information is incorporated herein by reference. Information concerning compliance by directors, officers, and 10% stockholders of the Company with the filing requirements of Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy Statement under the heading "EXECUTIVE COMPENSATION," which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP," which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "CERTAIN TRANSACTIONS," which information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page.
2. Exhibits:
(b) Reports on Form 8-K
1. Report on Form 8-K filed with the Securities and Exchange Commission on June 26, 1998, in connection with the execution by the Company of a definitive agreement relating to its acquisition of Computer City, as announced on June 22, 1998.
(c) Exhibits.
See Exhibit Index following page.
- ------------------------
(1) Previously filed as an exhibit to Registration Statement No. 33-62884 on Form S-3 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 27, 1992, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1993, and incorporated herein by reference.
(4) 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.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 23, 1995, and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 23, 1996, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Report on Form 8-K filed on June 14, 1996, as amended by Form 8-K/A filed on August 2, 1996.
(8) Previously filed as an exhibit to Registration Statement No. 33-86314 on Form S-8 and incorporated herein by reference.
(9) Previously filed as an exhibit to Registration Statement No. 333-06235 on Form S-8 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1996, and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement No. 1-11566 on Form 8-A/A filed December 6, 1996, as amended.
(12) Previously filed as an exhibit to Registration Statement No. 333-18033 on Form S-8 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 28, 1996, and incorporated herein by reference.
(14) 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.
(15) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 1998, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Report on Form 8-K filed on September 15, 1998, and incorporated herein by reference.
(17) Filed herewith.
(18) Included with EDGAR version only.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
COMPUSA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of CompUSA Inc. are included in response to Item 8:
Separate financial statements relating to the Company's subsidiaries are omitted since all of them are wholly owned and have each guaranteed the Company's 9 1/2% Senior Subordinated Notes due 2000 on a full, unconditional and joint and several basis and the Company does not consider such separate financial statements to be material to investors.
All financial statement schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors CompUSA Inc.
We have audited the accompanying consolidated balance sheets of CompUSA Inc. (the "Company") as of June 27, 1998 and June 28, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 27, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CompUSA Inc. at June 27, 1998 and June 28, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 27, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas August 12, 1998, except for Note 14, as to which the date is August 31, 1998
COMPUSA INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES)
See accompanying notes.
COMPUSA INC.
CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
COMPUSA INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES)
See accompanying notes.
COMPUSA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--CompUSA Inc. (the "Company") is a retailer and reseller of personal computer hardware, software, accessories, and related products and services conducting its operations principally through its Computer Superstores in the United States. The Company operated 162 Computer Superstores at June 27, 1998, 129 Computer Superstores at June 28, 1997, and 105 Computer Superstores at June 29, 1996. In addition to the retail sales of its stores, the Company's stores also fulfill the principal marketing, product, and service functions of the Company's other businesses, including direct sales to corporate, government, and education customers and training and technical services. In addition, the Company conducts mail order operations through CompUSA Direct and sells build-to-order CompUSA PCs.
FISCAL YEAR--The Company's fiscal year is a 52/53-week year ending on the last Saturday of each June. All references to the fiscal year ended June 27, 1998 relate to the fifty-two weeks then ended. All references to the fiscal year ended June 28, 1997 relate to the fifty-two weeks then ended. All references to the fiscal year ended June 29, 1996 relate to the fifty-three weeks then ended.
CONSOLIDATION--The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
USE OF ESTIMATES--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.
CASH AND CASH EQUIVALENTS--Cash on hand in stores, deposits in banks, and short-term investments with original maturities of three months or less are considered cash and cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
ACCOUNTS RECEIVABLE--Accounts receivable represent amounts due from customers related to the sale of the Company's products and services. Such receivables are generally unsecured and are generally due from a diverse group of corporate, government, and education customers located throughout the United States and, accordingly, do not include any specific concentrations of credit risk. The Company believes it has provided adequate reserves for potentially uncollectible accounts. For the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996, the Company's bad debt expense was $1.6 million, $959,000, and $878,000, respectively.
MERCHANDISE INVENTORIES--Merchandise inventories are valued at the lower of cost, determined on a weighted average basis, or market.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation is provided in amounts sufficient to charge the cost of the respective assets to operations over their estimated service lives on a straight-line basis. Estimated service lives are as follows:
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING EXPENSES--Advertising expenses are expensed in the month incurred, subject to reduction by reimbursement from vendors. Net advertising expenses were not a significant component of store operating expenses for the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996.
PRE-OPENING COSTS--Pre-opening costs are deferred prior to the date of the store's grand opening and are expensed in the month of the store's grand opening. Pre-opening costs consist primarily of personnel and advertising expenses incurred prior to a store's opening and promotional costs associated with the opening.
The American Institute of Certified Public Accountant's (the "AICPA") Accounting Standards Executive Committee has issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP requires that entities expense start-up costs and organization costs as they are incurred. Beginning in the first quarter of fiscal year 1999, the Company will adopt the provisions of SOP 98-5 and begin expensing all pre-opening costs as they are incurred. Management believes that the adoption of SOP 98-5 will have no material impact on the Company's financial statements.
INCOME TAXES--Income taxes are maintained in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," whereby deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years.
INCOME PER SHARE--The Company adopted the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" in the preparation of the financial statements included in the Quarterly Report on Form 10-Q for the thirteen weeks ended December 27, 1997. In accordance with the provisions of SFAS No. 128, the Company is required to report both "basic" and "diluted" earnings per share and to restate previously reported earnings per share amounts to conform to the provisions of SFAS No. 128. Basic earnings per share has been computed using the weighted average number of shares of common stock of the Company ("Common Stock") outstanding for each period presented. The dilutive effect of stock options and other common stock equivalents is included in the calculation of diluted earnings per share using the treasury stock method. Earnings per share data for all periods prior to December 27, 1998 presented herein have been restated to conform with the provisions of SFAS No. 128.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The calculation of basic and diluted earnings per share is summarized as follows:
On March 27, 1996, the Company's Board of Directors declared a two-for-one stock split effected in the form of a stock dividend to stockholders of record on April 8, 1996, payable on April 22, 1996. On November 6, 1996, the Company's Board of Directors declared a two-for-one stock split effected in the form of a stock dividend to stockholders of record on November 18, 1996, payable on December 2, 1996. Stock options and all other agreements payable in Common Stock were amended to reflect the splits. Amounts equal to the par value of shares issued in connection with the stock splits were transferred from additional paid-in capital to the common stock account.
All references to the number of shares of Common Stock (except for shares authorized) and basic and diluted earnings per share amounts in the consolidated financial statements and the accompanying notes have been adjusted on a retroactive basis to reflect the stock splits and the issuance of shares in connection with the Company's acquisition of PCs Compleat, Inc. ("PCs Compleat").
LONG-LIVED ASSETS--In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that losses on the impairment of long-lived assets used in operations be recorded when indicators of impairment are present and the undiscounted cash flows to be generated by those assets are less than the assets' carrying amounts. The standard was adopted by the Company in the preparation of its financial statements for the fiscal year ended June 28, 1997. Adoption of the standard had no impact on the Company's financial statements.
COMPREHENSIVE INCOME--In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 requires enterprises to report comprehensive income to measure more effectively all changes in equity of an enterprise that result from certain recognized transactions and other economic events other than income earned from the ordinary course of business. SFAS No. 130 is effective for financial statements for fiscal years beginning after
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) December 15, 1997, and therefore the Company will adopt the annual and quarterly disclosure requirements of SFAS No. 130 in the fiscal year ending June 26, 1999. Management believes the adoption of SFAS No. 130 will have no impact on the Company's financial statements.
SEGMENT REPORTING--In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards requiring public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the annual disclosure requirements in the preparation of its Annual Report on Form 10-K for the fiscal year ending June 26, 1999, while the quarterly disclosure requirements will be adopted in fiscal year 2000. Management has not determined the impact of SFAS No. 131 on the Company's financial statement disclosures.
2. NON-RECURRING AMORTIZATION CHARGE
During the fourth quarter of fiscal 1998, the Company committed to a plan to implement a new information technology ("IT") strategy. Pursuant to the strategy, the Company plans to outsource substantially all of its IT processes and implement an Enterprise Resource Management ("ERM") program. Implementation of the ERM program will result in the replacement of a substantial portion of the Company's existing IT systems, as well as certain systems in the development stage. The Company is in negotiations with software and IT service companies and currently plans to announce definitive agreements in the second quarter of fiscal 1999. Implementation of the ERM program is expected to take approximately 18 to 24 months after execution of such agreements. As a result of the adoption of this new strategy, the Company incurred a non-recurring, pre-tax amortization charge of $55.9 million ($34.4 million after tax) related to the impairment of existing IT systems and the abandonment of certain systems under development.
3. ACQUISITION OF PCS COMPLEAT, INC.
On May 30, 1996, pursuant to an Agreement and Plan of Merger dated as of May 15, 1996 (the "Merger Agreement") between the Company and PCs Compleat, PCs Compleat, a leading direct reseller of brand name personal computers and peripherals, located in Marlborough, Massachusetts, became a wholly-owned subsidiary of the Company (the "Merger"). The operations of PCs Compleat were fully integrated into the Company's direct mail order operations and became a part of the Company's "CompUSA Direct" division in August 1997.
The Company's consolidated financial statements reflect the Merger under the application of the pooling of interests method of accounting. Under the pooling of interests method of accounting, the historical book values of the assets, liabilities, and stockholders' equity of PCs Compleat, as reported on its balance sheet, have been carried over onto the consolidated balance sheet of the Company and no goodwill or other intangible assets were created. In addition, the Company has restated its consolidated financial statements for all periods prior to the Merger to include the results of operations of PCs Compleat.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
5. ACCRUED LIABILITIES
Accrued liabilities consist of:
6. INCOME TAXES
The provision for income taxes is summarized as follows:
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED) The reconciliation of the income tax provision to the amount calculated based on the federal statutory rate is as follows:
The tax effects of temporary differences giving rise to the deferred tax asset (liability) at June 27, 1998 and June 28, 1997 are as follows:
7. LEASES
The Company leases equipment under capital and operating leases that expire at various dates through 2000. The Company operates in facilities leased under noncancelable operating leases that expire at various dates through 2016 and the majority of which contain renewal options and require the Company to pay a proportionate share of common area maintenance.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED) At June 27, 1998, future minimum lease payments under all leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
Rental expense of the Company amounted to $79.0 million in fiscal 1998, $56.3 million in fiscal 1997 and $37.7 million in fiscal 1996.
8. CREDIT AGREEMENT
The Company has an unsecured $300 million credit agreement (the "Credit Agreement") with a consortium of banks that expires in March 2001. The Credit Agreement replaces a previous $150 million unsecured credit agreement. The funds available under the Credit Agreement may be used for any corporate purpose, including purchasing or redeeming the Senior Subordinated Notes in part or in full. The Credit Agreement requires that the Company maintain certain financial ratios and a minimum net worth. The Credit Agreement imposes certain limitations on indebtedness, liens, and mergers and consolidations.
The Company's ability to incur borrowings under the Credit Agreement is reduced by outstanding letters of credit and, in certain circumstances, further reduced based upon the financial covenants contained in the Credit Agreement (Note 14). The Company's ability to incur borrowings under the Credit Agreement could be further limited in certain circumstances pursuant to the terms of the indenture related to the Senior Subordinated Notes (Note 9). At June 27, 1998, no borrowings were outstanding under the Credit Agreement.
Borrowings under the Credit Agreement bear interest, at the Company's option, at either a prime rate (8.5% per annum as of June 27, 1998) or a rate based on the London Interbank Offering Rate (LIBOR) ranging from 5.7% to 5.8% per annum as of June 27, 1998, plus a specified margin, currently 0.875%. The Company also pays certain commitment and agent fees. The Company has the annual option to extend the Credit Agreement for an additional year with the banks' approval.
The Credit Agreement also limits the Company's ability to pay dividends and purchase shares of Common Stock. As of June 27, 1998, the Company had approximately $54.0 million available to pay
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT AGREEMENT (CONTINUED) dividends and purchase Common Stock pursuant to the provisions of the Credit Agreement. The Credit Agreement allows the Company to securitize up to $200 million of certain assets. The indebtedness under the Credit Agreement is guaranteed on a full, unconditional, and joint and several basis by all subsidiaries of the Company. However, the Credit Agreement allows the Company to designate one or more of its subsidiaries to be free from most of the restrictions under the Credit Agreement so long as no default will exist and such subsidiaries do not contribute more than 10% of the Company's consolidated cash flow or hold more than 10% of the Company's consolidated assets.
9. SENIOR SUBORDINATED NOTES
In June 1993, the Company issued $110,000,000 in principal amount of 9 1/2% Senior Subordinated Notes due June 15, 2000 (the "Senior Subordinated Notes"). Interest on the Senior Subordinated Notes is payable semi-annually on each June 15 and December 15. The Senior Subordinated Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company, as defined. Senior indebtedness, which totaled approximately $537 million and $489 million at June 27, 1998 and June 28, 1997, respectively, consists primarily of capital lease obligations, indebtedness incurred under the Credit Agreement, and trade payables.
The Senior Subordinated Notes are redeemable on or after June 15, 1998, at the option of the Company, in whole or in part, at 102.714% of the principal amount, declining to 100% of the principal amount on June 15, 1999 and thereafter. The Senior Subordinated Notes grant the holders the right to require the Company to repurchase all or any portion of their notes at 101% of the principal amount thereof, together with accrued interest, following the occurrence of a change in control of the Company, as defined.
The indenture related to the Senior Subordinated Notes restricts, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness or issue preferred stock, pay dividends and make other distributions, sell or issue stock of a subsidiary, create encumbrances on the ability of any subsidiary that is a guarantor to pay dividends or make other restricted payments, engage in certain transactions with affiliates, dispose of certain assets, merge or consolidate with or into, or sell or otherwise transfer their properties and assets as an entirety to, another entity, incur indebtedness that would rank senior in right of payment to the Senior Subordinated Notes and be subordinated to any other indebtedness of the Company, or create additional liens.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SENIOR SUBORDINATED NOTES (CONTINUED) The Senior Subordinated Notes are guaranteed on a full, unconditional and joint and several basis by all of the Company's direct and indirect subsidiaries, each of which is wholly owned. The combined summarized information of these subsidiaries is as follows:
In preparation of the Company's consolidated financial statements, all intercompany accounts were eliminated.
The fair value of the Senior Subordinated Notes, based on quoted market prices, was approximately $111.7 million at June 27, 1998 and $113.9 million at June 28, 1997.
10. COMMITMENTS AND CONTINGENCIES
On April 23, 1998, a lawsuit, Hoeck v. CompUSA Inc. et al., was filed by a stockholder of the Company in the United States District Court for the Northern District of Texas against the Company and certain of its officers, seeking class action status on behalf of the purchasers of the Company's Common Stock and related publicly traded options during the class period. The action alleges various violations of the federal securities laws. Damages have not been specified. On June 24, 1998, a second stockholder suit was filed against the Company making virtually the same allegations. The Company believes the claims are without merit and intends to vigorously defend against such charges. In addition, the Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies would not have a material adverse impact on the Company's financial statements. However, there can be no assurances that future costs would not be material to the 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.
11. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution profit-sharing plan (the "401(k) Plan") covering employees of the Company and its subsidiaries who are at least 21 years of age. Effective April 1, 1998,
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED) eligible employees may become participants as of the first day of the next calendar quarter after their hire date. The 401(k) Plan is intended to constitute a qualified profit sharing plan within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), which includes a qualified cash or deferred arrangement within the meaning of Code section 401(k). In addition, the Company sponsors a deferred compensation plan that permits eligible officers and employees to defer a portion of their compensation. Contributions to both the 401(k) Plan and the deferred compensation plan consist of employee pre-tax contributions determined as a percentage of each participating employee's compensation and the Company's matching contributions up to a specified limit. The Company may make additional contributions to either or both plans at the discretion of the Company's Board of Directors. The Company's expense for contributions to the 401(k) Plan and the deferred compensation plan aggregated $2.3 million for the fiscal year ended June 27, 1998, $1.4 million for the fiscal year ended June 28, 1997, and $1.7 million for the fiscal year ended June 29, 1996.
Effective February 26, 1998, a defined contribution plan sponsored by PCs Compleat was consolidated with the Company's 401(k) Plan and all plan assets were transferred to the Company's 401(k) Plan on that date. Prior to the consolidation of the plans, PCs Compleat sponsored a defined contribution profit sharing plan that was intended to be qualified within the meaning of Code section 401(a) and that included a qualified cash or deferred arrangement within the meaning of Code section 401(k). The plan covered substantially all employees of PCs Compleat who met minimum age and service requirements and allowed participants to defer a portion of their annual compensation on a pre-tax basis. No contributions were made to the plan by PCs Compleat for the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996.
12. STOCKHOLDERS' EQUITY
COMMON STOCK--In September 1995, the Company completed a public offering, selling 8,050,000 newly-issued shares of Common Stock and receiving net proceeds of approximately $76,800,000 (net of offering costs of approximately $3,500,000).
TREASURY STOCK--In September 1997, the Company's Board of Directors authorized the purchase of up to $60 million of Common Stock. As of June 27, 1998, the Company had purchased 2.2 million shares of Common Stock, to be held as treasury stock, for $60.0 million ($27.34 per share), pursuant to the September 1997 authorization. No additional purchases of Common Stock can currently be made by the Company pursuant to such authorization.
In February 1996, the Company made a cash contribution to the 401(k) Plan to effect the Company's required contribution to the plan for 1995, which the plan used to purchase 92,940 shares of treasury stock from the Company. In March 1997, the Company made a cash contribution to the 401(k) Plan to effect the Company's required contribution to the plan for 1996, which the plan used to purchase 62,833 shares of treasury stock from the Company.
STOCK-BASED INCENTIVE COMPENSATION PLANS--The CompUSA Inc. Long-Term Incentive Plan (the "Long-Term Incentive Plan") provides for the granting of stock-based incentive compensation in the form of stock options, restricted stock grants, stock appreciation rights, performance share awards, and stock unit awards, or a combination thereof. The Long-Term Incentive Plan, as restated and amended, authorizes the issuance of up to 16,788,736 shares of Common Stock upon the exercise of such incentive awards to employees, nonemployee directors, and advisors of the Company.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED) Under the Long-Term Incentive Plan, stock option awards may be granted in the form of incentive stock options or nonstatutory stock options and generally become exercisable in cumulative installments over periods of three to four years and expire after ten years. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the Common Stock on the grant date.
Prior to the Merger, PCs Compleat maintained a stock option plan (the "PCs Compleat Plan") for the benefit of its employees. In connection with the Merger, the Company assumed all outstanding options granted under the PCs Compleat Plan and converted such options into options to purchase an aggregate of 650,826 shares of Common Stock of the Company.
Stock option transactions related to both the Long-Term Incentive Plan and the PCs Compleat Plan are summarized in the following table:
The following table summarizes information about stock options outstanding at June 27, 1998:
For the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996, the Company granted restricted stock awards for 88,150, 80,002, and 163,572 shares of Common Stock, respectively, to the Company's officers. The restricted stock awards vest to the employees on the fifth anniversary of the grant date. The vesting period may be accelerated to a minimum of three years if specified performance goals are met. As of June 27, 1998, the restricted stock awards granted in the fiscal year ended June 29, 1996 were vested to the employees due to the attainment of the specified performance goals. A provision for restricted shares is made ratably over the vesting period. Expense recognized under the plan for restricted shares was $1.3 million for fiscal 1998 and $729,500 for fiscal 1997.
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED) The Company has adopted the pro forma disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As required by SFAS 123, pro forma information regarding net income and net income per share has been determined as if the Company had accounted for employee stock options and stock-based awards granted subsequent to June 24, 1995 under the fair value method provided for under SFAS 123. The fair value for those options was estimated at the date of grant using a Black-Sholes option pricing model with the following weighted-average assumptions: risk-free interest rates ranging from 5.04% to 6.75% for the fiscal year ended June 29, 1996, ranging from 5.67% to 6.60% for the fiscal year ended June 28, 1997, and ranging from 5.38% to 6.15% for the fiscal year ended June 27, 1998; a dividend yield of 0%; expected volatility of 52.6% for both the fiscal year ended June 29, 1996 and June 28, 1997, and 51.9% for the fiscal year ended June 27, 1998; and a weighted-average expected life of each option ranging from 1.66 years to 3.75 years for both the fiscal year ended June 29, 1996 and June 28, 1997, and 2.52 years to 3.61 years for the fiscal year ended June 27, 1998. The weighted average exercise prices and the weighted average fair values of employee stock options and restricted stock awards granted is as follows:
For purposes of pro forma disclosures, the estimated fair value of the options and stock-based awards is amortized to expense over the vesting period. Because SFAS 123 is applicable only to options and stock-based awards granted subsequent to June 24, 1995, its pro forma effect will not be fully reflected until the completion of one full vesting cycle. The Company's pro forma information is as follows:
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED) PREFERRED STOCK--The Company has authorized 10,000 shares of preferred stock, $.01 per share par value, none of which was issued and outstanding as of June 27, 1998. However, the Board of Directors has the authority, without further stockholder approval, to issue shares of preferred stock in one or more series and to determine the dividend rights, any conversion rights or rights of exchange, voting rights, rights and terms of redemption (including sinking fund provisions), liquidation preferences, and any other rights, preferences, privileges, and restrictions of any series of preferred stock, and the number of shares constituting such series and the designation thereof. The Company has no present plans to issue any shares of preferred stock. The terms of the Company's Senior Subordinated Notes limit the Company's ability to issue preferred stock (see Note 10).
RIGHTS AGREEMENT--On April 29, 1994, the Board of Directors of the Company declared a dividend of one right to purchase preferred stock (a "Right") for each outstanding share of Common Stock. As a result of the two-for-one stock split declared by the Board of Directors effective April 8, 1996 and November 18, 1996, the number of Rights associated with each outstanding share of Common Stock has been decreased to one-fourth of a Right in accordance with the provision of the Rights Agreement. The Rights will expire on April 28, 2004. Each Right will entitle its holder, in certain circumstances, to buy one ten-thousandth of a newly issued share of Series A Junior Participating Preferred Stock (the "Junior Preferred Stock") of the Company at the purchase price of $120.
The Rights will be exercisable and transferable apart from the Common Stock only if a person or group acquires beneficial ownership of 20% or more of the outstanding Common Stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 20% or more of the outstanding Common Stock.
The Company will generally be entitled to redeem the Rights at $.001 per Right at any time until a person or group has become the beneficial owner of 20% or more of the outstanding Common Stock. Under the Rights' "flip-in" feature, if any person or group becomes the beneficial owner of 20% or more of the outstanding Common Stock, then each Right not owned by such person or group of certain related parties will entitle its holder to purchase, at the Right's then current purchase price, shares of Common Stock (or in certain circumstances as determined by the Board of Directors, cash, other property, or other securities) having a value of twice the Right's purchase price.
Under the Rights' "flip-over" provision, if, after any person or group becomes the beneficial owner of 20% or more of the outstanding Common Stock, the Company is involved in a merger or other business combination transaction with another person, or sells 50% or more of its assets or earning power to another person in one or more transactions, each Right will entitle its holder to purchase, at the Right's then current purchase price, shares of common stock of such other person having a value of twice the Right's purchase price.
The Junior Preferred Stock will not be redeemable and, unless otherwise provided in connection with the creation of a subsequent series of preferred stock, will be subordinate to all other series of the Company's preferred stock. Each share of Junior Preferred Stock will represent the right to receive, when and if declared, a quarterly dividend at an annual rate equal to the greater of $1.00 per share or 10,000 times the quarterly per share cash dividends declared on the Common Stock during the immediately preceding fiscal year. In addition, each share of Junior Preferred Stock will represent the right to receive 10,000 times any noncash dividends (other than dividends payable in Common Stock) declared on the Common Stock, in like kind. In the event of the liquidation, dissolution or winding up of the Company,
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED) each share of Junior Preferred Stock will represent the right to receive a liquidation payment in an amount equal to the greater of $1.00 per share or 10,000 times the liquidation payment made per share of Common Stock. Each share of Junior Preferred Stock will have 10,000 votes, voting together with the Common Stock. In the event of any merger, consolidation, or other transaction in which common shares are exchanged, each share of Junior Preferred Stock will represent the right to receive 10,000 times the amount received per share of Common Stock. The rights of the Junior Preferred Stock as to dividends, liquidation, voting rights, and merger participation are protected by anti-dilution provisions.
EXECUTIVE SEVERANCE ARRANGEMENTS--The Company has severance arrangements for all officers that provide severance pay benefits in the event of a change in control of the Company, as defined in the severance agreements. The Company's officers (32 persons) have employment agreements containing provisions pursuant to which those persons will receive lump sum severance payments in an amount up to 2.99 times the sum of (i) their current base salary at the time of termination, (ii) two times their target bonus for the bonus period in which the change in control occurs, and (iii) their annualized automobile allowance, together with payments in lieu of continued group insurance benefits.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes are as follows:
Financing and investing activities not affecting cash are as follows:
14. ACQUISITION OF COMPUTER CITY
On August 31, 1998, the Company completed its acquisition of Computer City, Inc. ("Computer City") from Tandy Corporation, for $211 million, payable in a note and cash. The purchase price is subject to certain post-closing adjustments based on the completion of an audit of Computer City's balance sheet as of the closing date. The sale will be accounted for under the purchase accounting method.
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 provides for its repayment in semi-annual installments over a period of ten years at 9.48% interest per annum. The first three years of payments are interest only, with the first principal payment due in December 2001. The
COMPUSA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ACQUISITION OF COMPUTER CITY (CONTINUED) Seller Note ranks pari passu with the Senior Subordinated Notes. The unpaid principal amount of the Seller Note may be prepaid, in whole or in part, at any time at the option of the Company, without premium or penalty.
Concurrent with the acquisition, the Credit Agreement was amended with respect to certain of the financial ratios required to be maintained by the Company and the calculation of amounts available for future borrowings. As of August 31, 1998, after giving effect to the issuance of the Seller Note and the revisions to the Credit Agreement, the Company had approximately $194 million available for future borrowings under the Credit Agreement.
15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
INDEX TO EXHIBITS
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(1) Previously filed as an exhibit to Registration Statement No. 33-62884 on Form S-3 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 27, 1992, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1993, and incorporated herein by reference.
(4) 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.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 23, 1995, and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 23, 1996, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Report on Form 8-K filed on June 14, 1996, as amended by Form 8-K/A filed on August 2, 1996.
(8) Previously filed as an exhibit to Registration Statement No. 33-86314 on Form S-8 and incorporated herein by reference.
(9) Previously filed as an exhibit to Registration Statement No. 333-06235 on Form S-8 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1996, and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement No. 1-11566 on Form 8-A/A filed December 6, 1996, as amended.
(12) Previously filed as an exhibit to Registration Statement No. 333-18033 on Form S-8 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 28, 1996, and incorporated herein by reference.
(14) 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.
(15) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 1998, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Report on Form 8-K filed on September 15, 1998, and incorporated herein by reference.
(17) Filed herewith.
(18) Included with EDGAR version only.