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Intercompany receivables $ ” $ 92,293
Other current assets 39,442 40,001
Noncurrent assets 3,955 1,880
Intercompany payables 362 6,123
Other current liabilities 22,775 15,009
Long-term debt and liabilities 704 61
Intercompany revenues 60,933 28,434
Other revenues 221,536 123,304
Costs and expenses 218,742 122,004
Net income 42,302 15,611
889
Case: CompUSA




159
Part 4 Additional Cases




In preparation of the Company™s consolidated ¬nancial statements, all intercompany
accounts were eliminated.
The fair value of the Senior Subordinated Notes, based on quoted market prices, was
approximately $111,650,000 and $105,875,000 at June 29, 1996 and June 24, 1995,
respectively.

13. Supplemental Cash Flow Information

Cash payments for interest and income taxes are as follows:
Fiscal Year Ended

(In thousands) June 29, 1996 June 24, 1995 June 25, 1994

Interest $11,611 $12,274 $11,768
Income taxes $35,253 $11,065 $ 1,156




CompUSA
Financing and investing activities not affecting cash are as follows:
Fiscal Year Ended

June 29, 1996 June 24, 1995 June 25, 1994

Additions to property and equipment under capital leases $ 4,491 $ 2,257 $11,185




14. Supplemental Quarterly Financial Data (unaudited)

(In thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter

Fiscal Year Ended June 29, 1996:
Net sales $781,978 $983,228 $1,065,731 $998,849
Cost of sales and occupancy costs 684,090 852,177 916,837 858,578
Operating income 12,951 31,865 38,603 21,934
Net income 6,207 18,748 22,933 11,777
Income per common and common
equivalent share $0.15 $0.40 $0.50 $0.25
Weighted average common and
common equivalent shares 42,535 46,509 46,287 47,109

Fiscal Year Ended June 24, 1995:
Net sales $614,097 $791,863 $805,580 $724,361
Cost of sales and occupancy costs 540,498 696,616 702,865 633,966
Operating income (loss) (1,204) 14,755 19,177 8,180
Net income (loss) (2,943) 9,945 12,642 4,695
Income (loss) per common and common
equivalent share $(0.07) $0.24 $0.31 $0.11
Weighted average common and
common equivalent shares 39,679 40,757 41,270 41,762
890 Case: CompUSA




160 Part 4 Additional Cases




REPORT OF INDEPENDENT AUDITORS

The Board of Directors
CompUSA
We have audited the accompanying consolidated balance sheets of CompUSA Inc. (the
"Company") as of June 29, 1996 and June 24, 1995, and the related consolidated state-
ments of operations, stockholders™ equity, and cash ¬‚ows for each of the three years in
the period ended June 29, 1996. These ¬nancial statements are the responsibility of the
Company™s management. Our responsibility is to express an opinion on these ¬nancial
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 assur-
ance about whether the ¬nancial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the ¬nancial statements. An audit also includes assessing the accounting principles used
CompUSA




and signi¬cant estimates made by management, as well as evaluating the overall ¬nan-
cial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the ¬nancial statements referred to above present fairly, in all material
respects, the consolidated ¬nancial position of CompUSA Inc. at June 29, 1996 and June
24, 1995, and the consolidated results of its operations and its cash ¬‚ows for each of the
three years in the period ended June 29, 1996, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP
Dallas Texas
August 14, 1996
The Computer Industry in 1992




I
t is mid-1992. The collection of industries under the heading “computer
systems” (SIC 3571) grew dramatically during the 1970s and 1980s, but it is now in a
state of turmoil. Most ¬rms have suffered declines in earnings, and several”including
industry giants IBM and Digital Equipment Corporation”have experienced large losses.
Overall, pro¬tability (as measured by return on equity) in the industry has fallen steadily
from 23 percent in 1988 to 11 percent in 1991, and sales have been ¬‚at for the last two
years. In the face of this turmoil, however, some ¬rms with well-positioned product lines
have managed to grow at a quick pace. For example, Sun Microsystems, a major player
in the expanding market for workstations, experienced a 30 percent compounded annual
growth rate from 1986 through 1991.
Standard and Poor™s Corporation describes the situation as follows:
Computer manufacturers have become used to citing the reasons for the present
malaise in the information technology business. These include the following:
1. The spread of open system computer networks based on standard industry
components that cannot command the gross profit margins inherent in propri-
etary designs. The gross margin associated with a mainframe computer sale
can be as high as 70 percent; for personal computers (PCs) and workstations,
it can be less than 30 percent.
2. A seemingly never-ending decline in the cost, and growth in the power of data
processing equipment, which has further squeezed manufacturers™ margins. A
high performance workstation can cost less than $1000 for every million in-
structions per second (mips) of computer power. Mainframes typically cost
more than $100,000 per mip. For many tasks, but not all, it is possible to sub-
stitute low-cost workstation power for mainframe power.
3. A slackening of demand for computer systems . . . [due to] saturation in some
areas of the market, dissatisfaction with the results of continued computeriza-
tion, and (in some countries) high interest rates.1
To deal with the changes in the industry, some ¬rms have abandoned product differ-
entiation, cut prices, and focused on cost reduction. Some have undergone major restruc-
turings. Several ¬rms, including Apple and IBM, have formed new alliances.

.........................................................................................................................
This case was prepared by Professor Victor L. Bernard, and is based upon publicly available information. It was
prepared as a basis for class discussion and is not intended to illustrate either an effective or ineffective
management of a business situation.

1. Standard and Poor™s Industry Report Service (July 3, 1992), Vol. 3., No. 2, Sec. 2.




891
892 Case: The Computer Industry in 1992




162 Part 4 Additional Cases




The following brief sketches of four computing systems manufacturers help describe
the variety of experience within the industry.


ATARI CORPORATION
The Computer Industry in 1992




Atari manufactures personal computers and video game systems. The ¬rm™s principle
products are its Atari ST series of PCs, based on Motorola 68000 and 68030 series
microprocessors and employing Atari™s own TOS operating system with state-of-the-art
graphical interface; its PC-compatible, MS-DOS based personal computers, including the
one-pound Atari Portfolio and full-scale PCs driven by an 80386 microprocessor; Atari
8-bit microcomputers, which retail for less than $100; and video game systems. There
are over 8000 software titles available for the ST computers, as well as a variety of pe-
ripherals. The fractions of net sales accounted for by the various product lines have been
as follows:
1991 1990 1989
.........................................................................................................................

Atari ST personal computers .53 .59 .59
Atari PC compatible palm-top & personal computers .10 .18 .17
Atari microcomputers .03 .02 .06
Atari video game systems .34 .21 .18
.........................................................................................................................


More than 80 percent of Atari™s sales are in Europe, where it holds about 5 percent of
the PC market, ranking behind IBM, Commodore, Olivetti, and Amstrad, and barely
ahead of Apple Macintosh and Compaq. Until the second quarter of 1991, the com-
pany™s principle products were manufactured in Taiwan, but that facility was sold. Since
that time, various independent subcontractors have assembled the products, and some
start-up problems were encountered. Atari intends to acquire another location for its
manufacturing operations and resume in-house production.
Net sales declined 37 percent for Atari in 1991. In his letter to shareholders, Atari
CEO Sam Tramiel (son of 46-percent owner Jack Tramiel) was straightforward: “I am
quite displeased with the company™s 1991 results, and hope that this message accurately
conveys my dissatisfaction.” Net income in 1991 reached its highest level since 1987,
but only after inclusion of a $40.9 million pretax gain on the sale of its Taiwan manufac-
turing facility. Atari™s ST sales continued the slide that began in 1990, as software pro-
ducers”miffed by Atari™s giveaway of prepackaged programs with ST computers”
shifted their efforts to Apple and DOS systems.
Tramiel points to several corrections in Atari™s strategy, all of which were in place or
being put into place by the end of ¬scal 1991. The changes include (1) cost reductions
and careful monitoring of inventory levels, (2) refocusing of advertising to target spe-
ci¬c audiences and reduce costs, and (3) rede¬ning R&D, with a shift in emphasis to
high volume production. Looking forward to late 1992, Atari is also ready to bring two
893
Case: The Computer Industry in 1992




163
Part 4 Additional Cases




new products to market. One is the Falcon 030, a more powerful version of the ST com-
puter; the other is Jaguar, the next-generation video game console.
A summary of Atari™s recent ¬nancial performance appears in Exhibit 1. The com-
pany experienced a loss in the ¬rst quarter of 1992 equal to 11 percent of beginning eq-
uity. Analysts™ forecasts for future performance are not available.




The Computer Industry in 1992
CRAY RESEARCH
Cray is the leading manufacturer of supercomputers, used in weather forecasting, air-
craft and automotive design, scienti¬c research, and seismic analysis. At the end of
1991, 324 Cray supercomputer systems were in use, including 68 installed in 1991. Ap-
proximately half of Cray sales for 1991 were in the U.S.; remaining sales were primarily
in Western Europe and Paci¬c Asia. Cray is clearly the world leader in supercomputers,
holding a market share in excess of 50 percent. However, it faces competition not only
from other supercomputer manufacturers but also from the increasing power of “mini-
supercomputers.”
Cray supercomputers have generally relied on a single microprocessor. However,
there has been a shift in high-speed computing toward massively parallel processing
(MPP), which allows the simultaneous employment of many microprocessors. Cray has
recently developed a partnership with Digital Equipment Corporation (DEC), to produce
MPP implementations for sale by 1993. Cray also announced that, beginning in 1992,
their EL systems will be sold not only through existing channels, but also through DEC™s
distribution network. The EL systems are “low-end” supercomputers, selling for approx-
imately $350,000; some of its purchasers may ultimately upgrade to larger systems.
Cray™s high-end C90 systems sell for $30 million.
Cray also formed an alliance with Sun Microsystems that would facilitate seamless
linkage of Cray computers and Sun workstations, as well as allow the use of Sun™s
SPARC chip in new Cray hardware. In the meantime, Cray introduced ¬ve new super-
computer systems in 1991. In their letter to shareholders, the CEO and COO labeled the
market™s response as “enthusiastic,” and reported 58 new customers in 1991, more than
in any previous year.

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