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tion costs. In February 1996, the Company made a cash contribution to its 401(k) plan to
effect the Company™s required contribution to the plan for 1995, which the plan used to
purchase 46,470 shares of treasury stock from the Company.
At June 29, 1996, total assets were $909 million, $770 million of which were current
assets, including $208 million of cash and cash equivalents. Net cash provided by oper-
ating activities for ¬scal 1996 was $87.7 million, compared with net cash provided by
operating activities of $135.6 million for ¬scal 1995. Net cash provided by operating
activities for ¬scal 1995 was positively affected by the accounts payable to inventory ratio
rising to 91% at June 24, 1995, compared with 57% at June 25, 1994. This improvement
was due, in part, to the Company™s inventory turnover rate improving to 8.1 inventory
turns for ¬scal 1995, compared with an inventory turnover rate of 6.7 inventory turns for
¬scal 1994.
Approximately three-fourths of the Company™s net sales during both ¬scal 1996 and
¬scal 1995 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 edu-
cation customers.
Capital expenditures during ¬scal 1996 were $47.4 million, $15.5 million of which
were for ¬scal 1996 new stores, compared with $30.1 million of capital expenditures dur-
ing ¬scal 1995, $8.8 million of which were for ¬scal 1995 new stores. During ¬scal
1996, the Company opened 20 new Computer Superstores. Excluding the effects of new
store openings, the Company™s greatest short-term capital requirements occur during the
second ¬scal quarter to support a higher level of sales in that quarter. Short-term capital
requirements are satis¬ed primarily by available cash and cash equivalents and vendor
and bank ¬nancing.
885
Case: CompUSA




155
Part 4 Additional Cases




The Company has an unsecured $75 million credit agreement (the "Credit Agreement")
with a consortium of banks that expires in June 1999. At June 29, 1996, no amounts
were outstanding under the Credit Agreement and the Company had approximately
$74.4 million available for future borrowings after reduction for outstanding letters of
credit. The Company also ¬nances certain ¬xture and equipment acquisitions through
equipment lessors. Lease ¬nancing is available from numerous sources and the Com-
pany evaluates equipment leasing as a supplemental source of ¬nancing on a continuing
basis.
The Company believes that its available cash and cash equivalents, funds generated by
operations, currently available vendor and ¬‚oor plan ¬nancing, lease ¬nancing, and
funds available under the Credit Agreement should be suf¬cient to ¬nance its continuing
operations and expansion plans through the end of ¬scal 1997 and to make all required
payments of interest on the Senior Subordinated Notes. The level of future expansion will
be contingent upon the availability of additional capital.




CompUSA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business”CompUSA Inc. (the "Company") is a retailer of personal computer hardware,
software, accessories, and related products and services conducting its operations princi-
pally through its Computer Superstores in the United States. At June 29, 1996, June 24,
1995, and June 25, 1994, the Company operated 105, 85, and 76 Computer Super-
stores, respectively. In addition to the retail sales of its stores, the Company™s stores also
ful¬ll the principal marketing, product, and service functions of the Company™s other
businesses, including direct sales to corporate, government, education, and mail order
customers and training and technical services. In addition, the Company conducts mail
order operations both through its stores and through PCs Compleat, Inc. ("PCs Com-
pleat"), a wholly owned subsidiary of the Company.
Fiscal Year”The Company™s ¬scal year is a 52/53-week year ending on the last Satur-
day of each June. All references to the ¬scal year ended June 29, 1996 relate to the 53
weeks then ended. All references to the ¬scal years ended June 24, 1995 and June 25,
1994, respectively, relate to the 52 weeks then ended.
Consolidation”The ¬nancial statements include the accounts of the Company and its
wholly owned subsidiaries. All signi¬cant intercompany transactions have been elimi-
nated.
Use of Estimates”The preparation of consolidated ¬nancial statements in conformity
with generally accepted accounting principles requires management to make certain esti-
mates and assumptions. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues, and expenses and the disclosure of gain and loss contingen-
cies at the date of the consolidated ¬nancial statements. Actual results could differ from
those estimates.
Cash and Cash Equivalents”Cash on hand in stores, in banks, and short-term invest-
ments 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.
886 Case: CompUSA




156 Part 4 Additional Cases




Accounts Receivable”Accounts receivable represent amounts due from customers
related to the sale of the Company™s products and services. Such receivables are gener-
ally 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 speci¬c concentrations of credit risk. The Company believes it has provided
adequate reserves for potentially uncollectible accounts. For the ¬scal years ended June
29, 1996, June 24, 1995, and June 25, 1994, the Company™s bad debt expense was
$878,000, $766,000, and $762,000, 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 pro-
vided in amounts suf¬cient to charge the cost of the respective assets to operations over
their estimated service lives on a straight-line basis. Estimated service lives are as follows:
Furniture and ¬xtures 5“10 years
Equipment 3“5 years
Leasehold improvements Life of lease
CompUSA




Equipment under capital leases Life of lease
Advertising Expenses”Advertising expenses are expensed in the month incurred, sub-
ject to reduction by reimbursement from vendors. Net advertising expenses were not a
signi¬cant component of store operating expense for ¬scal years ended June 29, 1996,
June 24, 1995, and June 25, 1994.
Pre-opening Costs”Pre-opening costs are deferred 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 open-
ing and promotional costs associated with the opening.
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 ¬nancial statements that will result in taxable or deductible amounts in
future years.
Income (Loss) per Share”Income (loss) per common and common equivalent share is
computed using the weighted average number of shares of common stock and common
stock equivalents outstanding during each period. If dilutive, the effects of stock options
are calculated using the treasury stock method.
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. Stock options and all other agreements payable in the Com-
pany™s common stock (the "Common Stock") were amended to re¬‚ect the split. An
amount equal to the par value of shares issued has been transferred from additional
paid-in capital to the common stock account.
All references to the number of shares, except for shares authorized, and income per
common and common equivalent share amounts in the consolidated ¬nancial statements
and the accompanying notes have been adjusted on a retroactive basis to re¬‚ect the stock
split and the Company™s acquisition of PCs Compleat (Note 2).
Reclassi¬cations”Certain prior year balances have been reclassi¬ed to conform to the
current year basis of presentation.
887
Case: CompUSA




157
Part 4 Additional Cases




6. Leases

The Company leases equipment under capital and operating leases that expire at vari-
ous 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 com-
mon area maintenance. At June 29, 1996, future minimum lease payments under all
leases with initial or remaining noncancelable lease terms in excess of one year are as
follows:
Fiscal Year (in thousands) Capital Leases Operating Leases

1997 $4,991 $45,480
1998 3,194 47,148
1999 1,488 47,540
2000 657 46,331
2001 146 43,355
Thereafter ” 314,985




CompUSA
Total minimum lease payments 10,476 $544,839
Less amount representing interest 1,028
Present value of minimum lease payments 9,448
Less current portion 4,382
Capital lease obligations due after one year $ 5,066



7. Credit Agreement

At June 29, 1996, the Company has an unsecured credit agreement (the "Credit
Agreement") with a consortium of banks that provides for borrowings and letters of credit
up to a maximum of $75,000,000. The Credit Agreement replaced a previous
$50,000,000 secured credit facility that was terminated in June 1995. Borrowings under
the Credit Agreement are subject to a borrowing base limitation (the "Borrowing Base")
that is equal to the sum of (a) 80% of eligible accounts, as de¬ned, and (b) an amount
equal to 40% of eligible inventory, which is de¬ned as inventory minus outstanding trade
accounts payable incurred with respect to the purchase of production of eligible inventory
(provided that the amount computed in (b) above cannot comprise more than
$20,000,000 of the Borrowing Base), less (c) outstanding letters of credit (which may not
exceed $35,000,000 in the aggregate). At June 29, 1996, and June 24, 1995, no
amounts were outstanding under the Credit Agreement and the Company had
$74,400,000 and $60,000,000, respectively, available for future borrowings (after
reduction for outstanding letters of credit).
Borrowings under the Credit Agreement bear interest, at the Company™s option, at
either a prime rate (8.25% per annum as of June 29, 1996) or a rate based on the Lon-
don Interbank Offering Rate ranging from 5.5% to 6.125% per annum as of June 29,
1996, plus a speci¬ed margin. The Company also pays certain commitment and agent
fees. Although the Credit Agreement expires in June 1999, the Company has the annual
option to extend the Credit Agreement for an additional year with the banks™ approval.
Borrowings under the credit facility have to be in place before the Credit Agreement bore
interest at the bank™s prime rate.
888 Case: CompUSA




158 Part 4 Additional Cases




The Credit Agreement requires the maintenance of certain ¬nancial ratios. If the Com-
pany is unable to maintain certain minimum ¬nancial ratios, the banks may require out-
standing borrowings under the Credit Agreement to be secured by the Company™s
accounts receivable and certain approved inventories. The Credit Agreement also
imposes credit limitations on mergers and consolidations and prohibits the payment of
dividends. The indebtedness under the Credit Agreement is guaranteed on a full, uncon-
ditional, and joint and several basis by all the current subsidiaries of the Company.

8. 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 de¬ned. Senior indebtedness,
which totaled approximately $387,000,000 and $293,000,000 at June 29, 1996 and
CompUSA




June 24, 1995, 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, declin-
ing to 100% of the principal amount on June 15, 1999 and thereafter. The Senior Subor-
dinated 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 de¬ned.
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 sub-
sidiary, 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 af¬li-
ates, 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 subordi-
nated to any other indebtedness of the Company, or create additional liens.
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:
As of and for the Fiscal Year Ended

(in thousands) June 29, 1996 June 24, 1995

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