-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LecNlQ6P8FkOMsliM1I9D+atu5a2bHkQvHM8oCN+6rjgIS6/vfXrKBMsdOetEzAq 0hoFKzA6lk7tjO2tpAMsDw== 0000912057-99-006117.txt : 19991117 0000912057-99-006117.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUSA INC CENTRAL INDEX KEY: 0000880323 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-COMPUTER & COMPUTER SOFTWARE STORES [5734] IRS NUMBER: 752261497 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-43450 FILM NUMBER: 99755456 BUSINESS ADDRESS: STREET 1: 14951 N DALLAS PKWY CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9729824000 MAIL ADDRESS: STREET 1: 14951 NORTH DALLAS PKWY CITY: DALLAS STATE: TX ZIP: 75240 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-11566 ------------------------ COMPUSA INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2261497 (State or other jurisdiction (I.R.S. Employer of Identification No.) incorporation or organization)
14951 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75240 (Address of principal executive offices) Registrant's telephone number, including area code: (972) 982-4000 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The registrant had 92,712,054 shares of common stock, $.01 per share par value, outstanding as of November 9, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at September 25, 1999 (unaudited) and June 26, 1999............................... 3 Consolidated Statements of Operations for the thirteen weeks ended September 25, 1999 and September 26, 1998 (unaudited)................................................. 4 Consolidated Statements of Cash Flows for the thirteen weeks ended September 25, 1999 and September 26, 1998 (unaudited)................................................. 5 Notes to Consolidated Financial Statements (unaudited)...... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 36 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS........................................... 37 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 37 SIGNATURES........................................................... 38
2 COMPUSA INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES)
SEPTEMBER 25, JUNE 26, 1999 1999 -------------- ---------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 128,322 $ 173,350 Accounts receivable, net of allowance for doubtful accounts of $4,697 at September 25, 1999 and $4,317 at June 26, 1999........................................... 145,682 214,960 Merchandise inventories................................... 675,508 667,514 Deferred income taxes..................................... 33,301 32,106 Prepaid expenses and other................................ 13,637 20,607 ---------- ---------- Total current assets.................................... 996,450 1,108,537 Property and equipment, net................................. 253,367 227,113 Deferred income taxes....................................... 38,059 37,520 Costs in excess of net assets of acquired businesses, net... 102,158 103,515 Other assets................................................ 9,513 5,030 ---------- ---------- $1,399,547 $1,481,715 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 647,666 $ 645,067 Accrued liabilities....................................... 177,381 188,936 Deferred revenue.......................................... 20,854 21,595 Senior Subordinated Notes................................. -- 110,000 Current portion of capital lease obligations.............. 741 828 ---------- ---------- Total current liabilities............................... 846,642 966,426 Deferred revenue............................................ 29,268 28,644 Note payable to Tandy Corporation........................... 136,000 136,000 Borrowings under the Credit Agreement....................... 50,000 -- Capital lease obligations................................... 66 169 Commitments and contingencies............................... -- -- Stockholders' equity: Preferred stock, $.01 per share par value, 10,000 shares authorized, none issued................................. -- -- Common stock, $.01 per share par value; 325,000,000 shares authorized with shares issued of 94,107,509 at September 25, 1999 and 94,105,525 at June 26, 1999...... 941 941 Paid-in capital........................................... 257,586 281,056 Retained earnings......................................... 113,746 126,654 ---------- ---------- 372,273 408,651 Less: Treasury stock, at cost, 1,395,643 shares at September 25, 1999 and 2,339,678 shares at June 26, 1999...................................................... (34,702) (58,175) ---------- ---------- Total stockholders' equity.............................. 337,571 350,476 ---------- ---------- $1,399,547 $1,481,715 ========== ==========
See accompanying notes. 3 COMPUSA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THIRTEEN WEEKS ENDED ------------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 -------------- -------------- Net sales................................................... $1,347,246 $1,375,439 Cost of sales and occupancy costs........................... 1,143,850 1,182,823 ---------- ---------- Gross profit.............................................. 203,396 192,616 Operating expenses.......................................... 171,858 145,664 Pre-opening expenses........................................ 1,679 1,366 General and administrative expenses......................... 46,749 32,637 Restructuring charges....................................... (2,176) -- ---------- ---------- Operating income (loss)................................... (14,714) 12,949 Other expense (income): Interest expense.......................................... 6,752 4,383 Other expense (income), net............................... (814) (1,540) ---------- ---------- 5,938 2,843 ---------- ---------- Income (loss) before income taxes........................... (20,652) 10,106 Income tax expense (benefit)................................ (7,744) 3,874 ---------- ---------- Net income (loss)........................................... $ (12,908) $ 6,232 ========== ========== Basic earnings (loss) per share............................. $ (0.14) $ 0.07 Diluted earnings (loss) per share........................... $ (0.14) $ 0.07 Weighted average common shares.............................. 92,700 91,243 Weighted average common shares assuming dilution............ 92,700 93,041
See accompanying notes. 4 COMPUSA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THIRTEEN WEEKS ENDED ----------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 ------------- ------------- Cash flows provided by (used in) operating activities: Net income (loss)......................................... $ (12,908) $ 6,232 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......................... 19,138 15,435 Non-cash restructuring and non-recurring charges...... 9,455 -- Deferred revenue...................................... (117) 3,181 Deferred income taxes................................. (1,734) 5,013 Other non-cash charges................................ -- 2,410 Changes in assets and liabilities: Decrease (increase) in: Accounts receivable................................. 64,118 2,859 Merchandise inventories............................. (11,364) (81,407) Prepaid expenses and other assets................... 6,970 6,498 Other assets........................................ 93 -- Increase (decrease) in accounts payable and accrued liabilities......................................... (8,956) 124,380 --------- -------- Total adjustments................................. 77,603 78,369 --------- -------- Net cash provided by operating activities......... 64,695 84,601 Cash flows provided by (used in) investing activities: Capital expenditures...................................... (44,051) (12,713) Payment for purchase of Computer City, net of cash acquired................................................ -- (73,341) Other..................................................... (172) 1,152 --------- -------- Net cash used in investing activities............. (44,223) (84,902) Cash flows provided by (used in) financing activities: Payment of Senior Subordinated Notes...................... (110,000) -- Fees paid for Credit Agreement............................ (5,257) -- Borrowings under Credit Agreement......................... 50,000 -- Payments under capital lease obligations.................. (246) (733) Proceeds from issuance of common stock.................... 3 384 --------- -------- Net cash used in financing activities............. (65,500) (349) Net decrease in cash and cash equivalents................... (45,028) (650) Cash and cash equivalents at beginning of period............ 173,350 151,779 --------- -------- Cash and cash equivalents at end of period.................. $ 128,322 $151,129 ========= ========
See accompanying notes. 5 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of CompUSA Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows of the Company for the applicable interim periods. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete interim financial statements. Therefore, these financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1999. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of gain and loss contingencies at the date of the consolidated financial statements. Actual results could differ from those estimates. 2. CHANGE IN ACCOUNTING POLICY--EXTENDED SERVICE PLANS The Company sells extended service plans on behalf of unrelated third parties ("Non-Obligor Contracts") and, to a lesser extent, sells its own extended service plans ("Obligor Contracts") in those states in which third-party service plan sales are not permitted. In either case, the extended service plans are administered by a third party ("Administrator") and all performance obligations and risk of loss with respect to such contracts are economically transferred to the Administrator and other parties at the time the contracts are sold by the Company. Effective as of the beginning of fiscal 2000, the Company has changed its accounting policy with respect to the recognition of revenues from the sale of Obligor Contracts. Pursuant to the Company's new policy, the Company recognizes revenues, net of direct selling expenses (consisting primarily of a lump sum payment due to the Administrator at the time of sale), ratably over the terms of the Obligor Contracts sold, generally two to five years. Previously, the Company recognized substantially all revenues, net of direct selling expenses, for the sale of Obligor Contracts at the time of sale. Such policy was adopted in fiscal 1996 concurrent with the consummation of an agreement with a new Administrator. The Company has given retroactive effect to this new accounting policy by restatement of the Company's previously published financial statements beginning with fiscal 1996. The impact of the restatement on the consolidated 6 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. CHANGE IN ACCOUNTING POLICY--EXTENDED SERVICE PLANS (CONTINUED) statement of operations for the three months ended September 26, 1998, is as follows (in thousands, except per share amounts):
AS PREVIOUSLY AS REPORTED RESTATED ------------- ---------- Net sales................................................... $1,392,140 $1,375,439 Cost of sales and occupancy costs........................... 1,195,786 1,182,823 Operating expenses.......................................... 146,300 145,664 Income tax expense.......................................... 5,068 3,874 Net income.................................................. 8,140 6,232 Basic earnings per share.................................... 0.09 0.07 Diluted earnings per share.................................. 0.09 0.07
In addition, the impact of the restatement also resulted in changes to the consolidated balance sheet as of June 26, 1999, and the statement of cash flows for the three months ended September 26, 1998. The Company has and will continue to recognize revenues from the sale of Non-Obligor Contracts at the time of sale. However, the Company has also reclassified its previously published financial statements to show the net commission income from the sale of Non-Obligor Contracts (retail price less the lump sum payment due to the Administrator at the time of sale) as a component of net sales. Previously, the Company reflected the full retail price of the Non-Obligor Contracts as a component of net sales and the amount paid to the Administrator as a component of cost of sales and occupancy costs. 3. FISCAL 1999 INITIATIVES In fiscal 1999, the Company implemented various programs and initiatives (collectively, the "Fiscal 1999 Initiatives") that included (1) initiatives announced in the fourth quarter of fiscal 1999 as a result of the Company's extensive evaluation of its core businesses (the "Fourth Quarter Initiatives"), (2) the formation of CompUSA Net.com Inc. ("CompUSA Net.com") and its transition to an Internet-only business (the "CompUSA Net.com Realignment"), which business was transferred to cozone.com in October 1999, and (3) information technology initiatives (the "IT Initiatives"). Non-recurring and restructuring charges incurred in connection with these initiatives aggregated approximately $84.0 million in fiscal 1999 and approximately $16.7 million in the first quarter of fiscal 2000. 7 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) The following table summarizes the financial statement classification of the non-recurring and restructuring charges incurred:
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 ------------------------------------------------------ FOURTH COMPUSA QUARTER NET.COM INITIATIVES REALIGNMENT IT INITIATIVES TOTAL ----------- ----------- -------------- --------- (IN THOUSANDS) Cost of sales and occupancy costs............................ $ 1,853 $1,530 $ -- $ 3,383 Operating expenses................. 13,182 -- -- 13,182 General and administrative expenses......................... -- -- 2,282 2,282 Restructuring charges.............. (2,176) -- -- (2,176) ------- ------ ------ ------- $12,859 $1,530 $2,282 $16,671 ======= ====== ====== =======
The following table summarizes the nature of the non-recurring and restructuring charges incurred:
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 ------------------------------------------------------ FOURTH COMPUSA QUARTER NET.COM INITIATIVES REALIGNMENT IT INITIATIVES TOTAL ----------- ----------- -------------- --------- (IN THOUSANDS) Non-cash charges for asset write-downs, primarily inventory and estimated losses related to the change in the extended service plan provider..... $ 6,000 $1,530 $ -- $ 7,530 Write-down of fixed assets with no future utility.......................................... 3,722 -- -- 3,722 Personnel costs and professional fees.............. -- -- 2,282 2,282 Transition expenses related to the implementation of the Fourth Quarter Initiatives................ 5,313 -- -- 5,313 ------- ------ ------ ------- 15,035 1,530 2,282 18,847 Amounts included in restructuring charges: Adjustments to previously recorded restructuring charges: Exit costs related to the write-down of fixed assets and the accrual of future rental obligations of the Company's fulfillment and configuration facility....................... (5,011) -- -- (5,011) Reserves for future rental obligations for closed stores and related lease carrying costs and other closing costs................ 183 -- -- 183 Severance and other personnel costs.............. 2,652 -- -- 2,652 ------- ------ ------ ------- (2,176) -- -- (2,176) ------- ------ ------ ------- $12,859 $1,530 $2,282 $16,671 ======= ====== ====== =======
8 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) FOURTH QUARTER INITIATIVES--The Fourth Quarter Initiatives were announced by the Company on June 24, 1999, as a result of the Company's extensive evaluation of its core businesses. The Fourth Quarter Initiatives were designed to increase gross margins, reduce operating costs, improve customer service, and position the Company to take advantage of additional strategic opportunities. The Company recorded charges related to the Fourth Quarter Initiatives of approximately $67.5 million in the fourth quarter of fiscal 1999 and $12.9 million in the first quarter of fiscal 2000. Charges recorded in connection with the Fourth Quarter Initiatives were related to (1) the streamlining of the Company's training business, (2) the reorganization of the Company's technical services business, (3) the redesign of the Company's direct sales fulfillment and configuration activities for corporate, government, and education customers, (4) the evaluation of the profitability of the Company's stores, and (5) the change in the third-party provider of the extended service plans sold by the Company after June 1999. STREAMLINING OF TRAINING BUSINESS--In connection with the redesign of the Company's training business, the Company implemented a vertical, market-based organizational structure in the fourth quarter of fiscal 1999. Previously, each store operated as an independent training organization with a local focus. Costs incurred in connection with the streamlining of the training business are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Termination of approximately 160 employees and other personnel costs...................................... $ 33 $640 Transition expenses related to the implementation of a new structure, primarily advertising and marketing... 174 -- ---- ---- $207 $640 ==== ====
REORGANIZATION OF TECHNICAL SERVICES BUSINESS--As a result of the evaluation of its technical services business, the Company implemented a strategy to focus on high-volume technical service opportunities, including "break-fix" and on-site warranty and technical services. In addition, the Company outsourced networking and systems configuration services to third-party providers. 9 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) Costs incurred in connection with the reorganization of the technical services business are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Termination of approximately 150 employees and other personnel costs...................................... $ 9 $643 Transition expenses related to the implementation of a new structure, primarily advertising and marketing... 20 -- --- ---- $29 $643 === ====
REDESIGN OF DIRECT SALES FULFILLMENT AND CONFIGURATION ACTIVITIES--As part of the Fourth Quarter Initiatives, the Company also committed to a plan to redesign its direct sales fulfillment and configuration activities for corporate, government, and education customers by (1) outsourcing the direct sales fulfillment and configuration operations and (2) consolidating the Company's direct sales organization to a regional sales force and central sales support. Costs incurred in connection with the redesign of direct sales fulfillment and configuration activities are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Outsourcing of direct sales fulfillment and configuration operations: Costs of liquidating commercial inventories......... $1,500 $37,000 Termination of approximately 225 employees and other personnel costs................................... 52 385 Exit costs related to the write-down of fixed assets and accrual of future rental obligations of the Company's fulfillment and configuration facility.......................................... (5,011) 13,813 Write-down of fixed assets with no future utility... 3,722 -- Other............................................... 64 -- Consolidation of the Company's direct sales organization: Write-down of fixed assets.......................... -- 1,623 Termination of approximately 1,370 employees and other personnel costs............................. 2,363 -- Transition expenses related to the start-up of the Company's new centralized sales and support facility, primarily personnel and facility costs............................................. 4,307 -- ------ ------- $6,997 $52,821 ====== =======
10 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) In connection with the outsourcing of the fulfillment of purchase orders from corporate, government, and education customers, the Company has implemented a plan to liquidate the related commercial inventories in its fulfillment and configuration facility and its retail stores. As a result, the Company wrote down the carrying values of such inventories by approximately $37.0 million in the fourth quarter of fiscal 1999 to management's estimates of the net realizable value of such inventories to be generated from vendor returns, liquidation through third parties, and promotional activities in the Company's stores. Based upon the costs of liquidating certain of such inventories in the first quarter of fiscal 2000 and its estimates of the costs to liquidate the remaining inventories, the Company increased its previous estimate of the write-down of its commercial inventories by $1.5 million in the first quarter of fiscal 2000. In August 1999, the Company discontinued the fulfillment and configuration activities previously conducted in its Dallas/Fort Worth-area fulfillment and configuration facility. At that time, purchase orders from corporate, government, and education customers began to be fulfilled by Ingram Micro Inc. ("Ingram Micro"). Based upon its outsourcing of its direct sales fulfillment and configuration operations to Ingram Micro, the Company believed it would abandon its centralized fulfillment and configuration facility. Accordingly, the Company recorded a charge in the fourth quarter of fiscal 1999 of approximately $11.6 million to write down the carrying value of those fixed assets it believed would be abandoned and had no future utility to the Company and a charge of approximately $2.2 million for the estimated remaining lease rental obligations and other carrying costs, net of subrental income, associated with that facility prior to the expiration of the lease term in 2008. In the first quarter of fiscal 2000, the Company determined that it would be able to redeploy certain portions of the centralized fulfillment and configuration facility in its ongoing operating activities, primarily the Company's call center operations. As a result, the Company reversed the previously recorded charge of $2.2 million for estimated remaining net lease rental obligations and reduced the previously recorded estimate of the exit costs related to the fixed assets to be abandoned by $2.8 million. The Company plans to redeploy certain of the assets located in the former centralized fulfillment and configuration facility for its ongoing operating activities. The Company recorded a $3.7 million write-down of the assets in the facility that had no future utility for the Company's ongoing activities. In August 1999, the Company organized a regional sales force and central sales support function and opened a new 80,000 square-foot call center in the Dallas/Fort Worth area to accommodate this function. Previously, each store maintained a separate direct sales force. As a result of the consolidation of the direct sales organization and the outsourcing of its direct sales fulfillment and configuration operations, the Company terminated approximately 1,595 employees in August 1999 who were previously responsible for the direct sales activities conducted through the Company's stores and the Company's centralized fulfillment and configuration facility. Costs incurred in connection with these termination actions and other personnel costs related to the redesign of the Company's direct sales fulfillment and configuration activities to its corporate, government, and education customers aggregated approximately $385,000 in the fourth quarter of fiscal 1999 and approximately $2.4 million in the first quarter of fiscal 2000. In connection with the implementation of its plan to redesign its direct sales fulfillment and configuration activities to corporate, government, and education customers, the Company incurred costs of approximately $4.3 million in the first quarter of fiscal 2000, primarily related to start-up personnel, training, and facilities costs related to the Company's new centralized direct sales and support facility located in the Dallas/Fort Worth area. 11 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) EVALUATION OF THE COMPANY'S STORES--In connection with the Fourth Quarter Initiatives, the Company analyzed each of its retail stores in terms of profitability and growth potential and closed four stores in July 1999. Costs incurred in connection with the evaluation of the Company's stores are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Costs related to store closings: Write-down of fixed assets and inventories and other closing costs...................................... $523 $2,615 Termination of approximately 145 employees........... 195 -- Impairment charge for on-going stores.................. -- 6,512 ---- ------ $718 $9,127 ==== ======
CHANGE IN EXTENDED SERVICE PLAN PROVIDER--In June 1999, in response to a proposed premium rate increase related to the then-current extended service plan program (the "Prior ESP Program"), the Company terminated the Prior ESP Program. In July 1999, the Company implemented a new extended service plan program utilizing new administration and insurance companies. As a result of the foregoing, the Company provided for estimated losses of $2.0 million in the fourth quarter of fiscal 1999 and $4.2 million in the first quarter of fiscal 2000 associated with certain unresolved issues with the administrator of the Prior ESP Program, primarily related to repair services provided by the Company to the administrator of the Prior ESP Program. The administration of the extended service plans sold pursuant to the Prior ESP Program is the responsibility of the administrator of the Prior ESP Program and/or the insurance companies that insured the administration obligations of the Prior ESP Program. In July 1999, the Company elected, for business and customer relations reasons, to provide supplemental administrative services to purchasers of extended service plans sold pursuant to the Prior ESP Program who experienced difficulty in obtaining services from the administrator of the Prior ESP Program. In the first quarter of fiscal 2000, the Company incurred and expensed costs of approximately $748,000 in connection with providing these supplemental administrative services. However, the Company is currently seeking reimbursement from the insurance companies of the costs incurred by the Company in fiscal 2000 in providing these supplemental services. The Company believes it is entitled to full reimbursement of such costs and, during the second quarter of fiscal 2000, the Company expects to consummate an arrangement with the insurance companies for the reimbursement of such costs. In addition, the Company expects, during the second quarter of fiscal 2000, to reach an agreement with the insurance companies regarding the future administration of the Prior ESP Program. Depending upon the outcome of these negotiations, the Company may (1) record a charge for the estimated additional costs related to the supplemental and future administration of the Prior ESP Program, to the extent such costs are not reimbursed by the insurance companies or (2) reverse previously recorded expenses related to supplemental administrative services in the event such expenses are subsequently reimbursed. 12 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) COMPUSA NET.COM REALIGNMENT--In March 1999, the Company completed the formation of CompUSA Net.com by contributing to it the net assets of the Company's CompUSA Direct division. Prior to the formation of CompUSA Net.com, the Company conducted its mail order, fulfillment, and retail Internet sales operations through CompUSA Direct. Concurrent with the formation of CompUSA Net.com, the Company announced plans to change the operations of CompUSA Net.com to an Internet-only business. Beginning in the fourth quarter of fiscal 1999, the mail order and other non-Internet sales operations previously conducted by CompUSA Direct were phased out or transferred to the Company. In October 1999, the Company transferred CompUSA Net.com's Internet business to cozone.com l.l.c., an indirect subsidiary of the Company. Another indirect subsidiary, cozone.com inc., is the sole manager of cozone.com l.l.c. These two subsidiaries are collectively referred to in this report as "cozone.com." The Company incurred costs of approximately $1.5 million in the first quarter of fiscal 2000 related to the implementation of its Internet-only strategy, primarily the write-down of inventories not consistent with the Internet-only strategy to their estimated net realizable value upon liquidation with a third party. IT INITIATIVES--In the fourth quarter of fiscal 1998, the Company committed to a new IT strategy. Pursuant to this strategy, the Company outsourced substantially all of its IT processes to a third-party service provider. In addition, the Company selected an Enterprise Resource Management ("ERM") system in fiscal 1999 to replace a substantial portion of the Company's existing IT systems. The Company implemented the first phases of the ERM system in July and August 1999 and expects to complete the final implementation of the ERM system in fiscal 2000. In the first quarter of fiscal 2000, the Company incurred non-recurring charges of approximately $2.3 million related to the outsourcing of its IT operations and training and other non-capitalizable costs incurred in connection with the implementation of the ERM system. FISCAL 1999 INITIATIVES RESERVES--In connection with the Fiscal 1999 Initiatives, the Company recorded charges in the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000 to create reserves related to (1) the future rental obligations and other lease carrying costs for (i) the discontinued fulfillment and configuration activities previously conducted in the Company's Dallas/Fort Worth-area fulfillment and configuration center and (ii) the four stores closed in July 1999 and (2) future severance payments to be made to employees terminated in connection with these initiatives. A rollforward of the reserve for future rental obligations and other lease carrying costs is as follows (in thousands): Balance at June 26, 1999.................................... $ 3,479 Payments.................................................... (345) Reversals and other adjustments............................. (2,031) ------- Balance at September 25, 1999............................... $ 1,103 =======
13 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. FISCAL 1999 INITIATIVES (CONTINUED) A rollforward of the reserve for future severance payments is as follows (in thousands): Balance at June 26, 1999.................................... $ 647 Payments.................................................... (3,059) Severance charges related to first quarter terminations..... 2,652 ------- Balance at September 25, 1999............................... $ 240 =======
4. PURCHASE OF COMPUTER CITY On August 31, 1998, the Company completed the acquisition of Computer City, Inc. ("Computer City") from Tandy Corporation ("Tandy"). The purchase of Computer City was accounted for under the purchase method of accounting. The accompanying statement of operations for the first quarter of fiscal 1999 includes the results of operations from the date of acquisition for the former Computer City stores in the United States that the Company operates as CompUSA Computer Superstores. The results of liquidating the 55 Computer City stores in the United States closed by the Company, and the seven Computer City supercenters in Canada sold by the Company, are not included in the accompanying statements of operations for the first quarter of fiscal 1999, but rather represent adjustments to the value of the related assets acquired and liabilities assumed. The following pro forma net sales, net loss, and diluted loss per share data summarize the results of operations of the Company for the first quarter of fiscal 1999 as if Computer City had been acquired as of the beginning of fiscal 1999. The pro forma results given below are not necessarily indicative of what actually would have occurred if the acquisition had been in effect during the periods presented, and are not intended to be a projection of future results or trends.
THIRTEEN WEEKS ENDED --------------------- SEPTEMBER 26, 1998 --------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................................ $1,498,706 Net loss................................................. (14,619) Diluted loss per share................................... (0.16)
5. EQUITY Basic earnings (loss) 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. 14 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. EQUITY (CONTINUED) The calculation of basic and diluted earnings (loss) per share is summarized as follows:
THIRTEEN WEEKS ENDED ----------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS (LOSS) PER SHARE: Net income (loss).................................. $(12,908) $ 6,232 Weighted average common shares outstanding......... 92,700 91,243 -------- ------- Basic earnings (loss) per share.................... $ (0.14) $ 0.07 ======== ======= DILUTED EARNINGS (LOSS) PER SHARE: Net income (loss).................................. $(12,908) $ 6,232 Weighted average common shares outstanding......... 92,700 91,243 Incremental shares assuming dilution............... -- 1,798 -------- ------- Weighted average common shares assuming dilution... 92,700 93,041 -------- ------- Diluted earnings (loss) per share.................. $ (0.14) $ 0.07 ======== =======
For the first quarter of fiscal 2000, approximately 444,000 incremental shares of Common Stock assuming dilution related to the Company's outstanding stock options were excluded from the calculation of the diluted loss per share because the impact was anti-dilutive. 15 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. 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 Common Stock and related publicly traded options during the class period. On June 24, 1998, a second stockholder suit was filed against the Company making virtually the same allegations. On August 24, 1998, a consolidated amended complaint was filed in the Hoeck case, effectively consolidating the two cases. Among other things, the plaintiffs allege that in order to halt a decline in the market price of Common Stock and to artificially inflate the stock price, CompUSA insiders falsely reported to the market in early January 1998 that the Company was achieving strong sales of certain types of products. The plaintiffs also allege that misstatements and omissions by Company personnel related to projected and historical operating results, sales, and other matters involving corporate operations resulted in an inflation of the stock price. The plaintiffs seek unspecified compensatory damages, recissory damages, interest, and attorneys' fees and costs, as well as certain equitable relief. On September 25, 1998, the Company filed a Motion to Dismiss together with a brief in support of the motion. On August 30, 1999, the Court granted the Company's motion and dismissed the complaint, but granted leave to the plaintiffs to replead. The plaintiffs filed a second amended complaint on September 20, 1999, in which they attempted to address the deficiencies noted in the Court's order of dismissal and reasserted substantially the same allegations and sought the same relief. On October 14, 1999, the Company filed a Motion to Dismiss the second amended complaint and supporting brief, and final briefing will be completed in November 1999. Based on currently available information, it is not possible to give an estimate of the possible loss or range of loss that might be incurred by the Company if the plaintiffs in these lawsuits were to prevail in the litigation. The Company believes the plaintiffs' claims are without merit and intends to vigorously defend against such charges. On January 14, 1999, Tom Johnson, on behalf of himself and the California public, filed a lawsuit in the Superior Court of California for the County of Contra Costa commencing the action entitled JOHNSON V. CIRCUIT CITY STORES, INC., Contra Costa Superior Court case No. c99-00054 (the "Action"). By the Action, the plaintiff alleges that the Company and six other retailers of computer hardware and software products violated California Business and Professions Code Sections 17200 and 17500 by, among other things, (1) misrepresenting the Year 2000 ("Y2K") compliance of products sold by them, (2) selling unnecessary Y2K fixes, and/or (3) failing to disclose the need for Y2K fixes or upgrades. Johnson's complaint requests (1) freezing of the retailers' assets, (2) restitution of all funds acquired by the retailers since January 15, 1995, by means of the alleged conduct, (3) an injunction requiring the retailers to disclose among other things the nature of the Y2K problem, a means to determine Y2K compliance, and what fixes are available to all of their customers who have bought products since January 15, 1995, and (4) attorneys' fees. Based on currently available information, it is not possible to give an estimate of the possible loss or range of loss that might be incurred by the Company if the plaintiff in this lawsuit were to prevail in the litigation. The Company believes the claims are without merit and intends to vigorously defend against such charges. In addition to the matters described above, the Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the matters described above, would not have a material adverse impact on the Company's financial statements. However, there can be no assurances that future costs would not be material to the results of operations of the Company for a particular future period. In addition, the Company's estimates of future costs are subject to change as circumstances change and additional information becomes available during the course of litigation. 16 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
THIRTEEN WEEKS ENDED ----------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 ------------- ------------- (IN THOUSANDS) Cash paid (received) during the periods for: Interest.................................................. $ 8,036 $ 253 Income taxes.............................................. (1,433) (7,662) Investing activities not affecting cash are as follows: Additions to property and equipment under capital leases.................................................. $ 56 $ 471 Financing activities not affecting cash are as follows: Subordinated promissory note payable to Tandy issued in connection with the Computer City acquisition........... $ -- $136,000
8. CREDIT AGREEMENT Effective June 30, 1999, the Company entered into a three-year secured revolving credit agreement (the "Credit Agreement") with a consortium of banks and financial institutions that provides for borrowings and letters of credit up to a maximum of $500 million, with letters of credit not to exceed $100 million. Borrowings under the Credit Agreement are subject to a borrowing base (the "Borrowing Base") that is equal to the sum of (a) 85% of eligible accounts receivable, as defined, and (b) an amount equal to the lowest of (i) 65% of the lower of cost or market value of eligible inventory, as defined, (ii) 85% of appraised liquidation value, as defined, of eligible inventory, or (iii) $400 million, less (c) outstanding letters of credit. The Borrowing Base may also be reduced by certain reserves provided for in the Credit Agreement in the event borrowings and letters of credit under the Credit Agreement exceed 50% of the Borrowing Base without reduction for letters of credit or such reserves. Borrowings under the Credit Agreement are secured by substantially all of the Company's assets, excluding those of CompUSA Net.com and cozone.com. The funds available under the Credit Agreement may be used for any corporate purpose. As of September 25, 1999, the Company had approximately $456.6 million of total availability under the Credit Agreement, against which the Company had $50.0 million of outstanding borrowings and $13.5 million of outstanding letters of credit. Borrowings under the Credit Agreement bear interest, at the Company's option, at either a prime rate of 8.25% per annum as of September 25, 1999, or a rate based on the London Interbank Offering Rate (LIBOR) of 5.4% as of September 25, 1999 plus a specified margin, which interest rate was 7.4% as of September 25, 1999. The Company also pays certain commitment and agent fees. The Company has the annual option to extend the Credit Agreement for an additional year with the lenders' approval. The Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio in the event the amount available for future borrowings under the Credit Agreement is less than $75 million. The Credit Agreement imposes certain limitations on indebtedness, investments, purchases of Common Stock, prepayment of subordinate debt, mergers and consolidations, acquisitions, liens and capital expenditures, and prohibits the payment of dividends (other than stock dividends). The indebtedness under the Credit Agreement is guaranteed on a full, unconditional, and joint and several basis by all the subsidiaries of the Company except CompUSA Net.com and cozone.com. 17 COMPUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. SEGMENT REPORTING The Company's operations are conducted through four segments: Retail, Direct, CompUSA PC-TM-, and CompUSA Net.com. These segments were determined based on criteria consistent with those used by management of the Company in evaluating its various businesses and allocating resources between businesses. A summary description of the operations conducted by each segment is as follows: RETAIL--The Retail segment is comprised of the sales of products and services to retail customers, primarily through the Company's Computer Superstores. DIRECT--The Direct segment is comprised of the sales of products and services to corporate, government, and education customers. Beginning in fiscal 2000, the Company began the operation of its direct sales fulfillment and configuration activities pursuant to the plans announced in connection with the Fourth Quarter Initiatives. Prior to fiscal 2000, such sales were fulfilled from either the Company's distribution and configuration facility in the Dallas/Fort Worth area or from the Company's Computer Superstores. COMPUSA PC--The CompUSA PC segment is comprised of the Company's assembly operations related to its CompUSA PC brand of desktop and notebook personal computers and servers. The CompUSA PC segment sells build-to-order products directly to consumers and assembles pre-configured products for sale in the Company's Computer Superstores. COMPUSA NET.COM--The CompUSA Net.com segment consists of the Internet sales operations conducted by CompUSA Net.com, the Company's Internet-only subsidiary. As a result of the Company's initiatives to make CompUSA Net.com an Internet-only business, the mail order and other non-Internet sales operations previously conducted by CompUSA Net.com were phased out or transferred to the Company beginning in the fourth quarter of fiscal 1999. Effective as of October 1999, the Internet business previously conducted by CompUSA Net.com is being conducted by cozone.com, an indirect subsidiary of the Company. The accounting policies for each of the Company's segments are the same as those used by the Company in the preparation of its consolidated financial statements. Intersegment sales and profits are eliminated in the preparation of the Company's consolidated financial statements. Net sales for training and technical services aggregated $57.8 million in the first quarter of fiscal 2000, compared with $61.7 million in the first quarter of fiscal 1999. Such sales are included in the sales of the Company's segments shown below.
FOR THE THIRTEEN WEEKS ENDED ------------------------------------------------------- SEPTEMBER 25, 1999 SEPTEMBER 26, 1998 -------------------------- -------------------------- OPERATING OPERATING NET SALES INCOME (LOSS) NET SALES INCOME (LOSS) ---------- ------------- ---------- ------------- (IN THOUSANDS) Retail................................. $ 931,711 $ 58,386 $ 858,359 $ 42,708 Direct................................. 411,700 (6,447) 457,475 5,436 CompUSA PC............................. 34,317 319 29,028 (1,545) CompUSA Net.com........................ 7,932 (5,188) 61,315 1,581 ---------- -------- ---------- -------- 1,385,660 47,070 1,406,177 48,180 Intersegment sales..................... (38,414) -- (30,738) -- Intersegment operating income.......... -- (646) -- -- Unallocated: General and administrative expenses excluding IT Initiatives........... -- (44,467) -- (32,591) Non-recurring and restructuring charges............................ -- (16,671) -- (2,640) ---------- -------- ---------- -------- $1,347,246 $(14,714) $1,375,439 $ 12,949 ========== ======== ========== ========
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS This Quarterly Report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of the Company, and Year 2000 issues. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including without limitation changes in product demand, the availability of products, changes in competition, the ability of the Company to open new stores in accordance with its plans, economic conditions, real estate market fluctuations, interest rate fluctuations, dependence on manufacturers' product development, various inventory risks due to changes in market conditions, changes in tax and other governmental rules and regulations applicable to the Company, and other risks indicated in the Company's other filings with the Securities and Exchange Commission. The Company's entry into the build-to-order market with its CompUSA PC-TM- brand personal computers in the first quarter of fiscal 1998, the opening of its own build-to-order assembly facility in the second quarter of fiscal 1999, and the addition of notebook computers and servers to the build-to-order product line in the third and fourth quarters of fiscal 1999, respectively, involve significant additional risks, including without limitation failure to achieve customer acceptance of the new products, substantial dependence on third parties for quality and reliability of component parts, and the Company's ability to fulfill customer orders timely. Additionally, the Company's acquisition of Computer City in the first quarter of fiscal 1999 involves certain risks and uncertainties, including without limitation the ability of the Company to operate the acquired stores profitably, to mitigate the financial impact of future lease commitments related to Computer City stores closed, and to retain Computer City's retail and direct customers. The Company's focus on its Internet retailing business through cozone.com involves significant additional risks, including without limitation failure to achieve customer acceptance and potential significant operating and/or capital investments that may be required to be made by the Company. The Fiscal 1999 Initiatives, as defined and discussed below, involve certain risks and uncertainties, including without limitation failure to achieve customer acceptance, substantial dependence on a third party for timely fulfillment of orders received from the Company's direct sales customers, failure to retain established direct sales customers, as well as costs to be incurred in connection with the store closures and the exiting of direct sales, fulfillment, and configuration activities. The Company's information technology initiatives involve additional risks, including deviations in scheduled installation dates, implementation costs, projected savings, and functionality. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words "believes," "estimates," "plans," "expects," "intends," "anticipates," and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. CHANGE IN ACCOUNTING POLICY--EXTENDED SERVICE PLANS The Company sells extended service plans on behalf of unrelated third parties ("Non-Obligor Contracts") and, to a lesser extent, sells its own extended service plans ("Obligor Contracts") in those states in which third-party service plan sales are not permitted. In either case, the extended service plans are administered by a third party ("Administrator") and all performance obligations and risk of loss with respect to such contracts are economically transferred to the Administrator and other parties at the time the contracts are sold by the Company. Effective as of the beginning of the fiscal 2000, the Company has changed its accounting policy with respect to the recognition of revenues from the sale of Obligor Contracts. Pursuant to the Company's new policy, the Company recognizes revenues, net of direct selling expenses (consisting primarily of a lump sum payment due to the Administrator at the time of sale), ratably over the terms of the Obligor Contracts sold, 19 generally two to five years. Previously, the Company recognized substantially all revenues, net of direct selling expenses for the sale of Obligor Contracts at the time of sale. Such policy was adopted in fiscal 1996 concurrent with the consummation of an agreement with a new Administrator. The Company has given retroactive effect to this new accounting policy by restatement of the Company's previously published financial statements beginning with fiscal 1996. As a result of the change in accounting policy with respect to Obligor Contracts, net income for the first quarter of fiscal 1999 was reduced by $1.9 million, or $0.02 per share, from the previously published amounts. The Company has and will continue to recognize revenues from the sale of Non-Obligor Contracts at the time of sale. However, the Company has also reclassified its previously published financial statements to show the net commission income from the sale of Non-Obligor Contracts (retail price less the lump sum payment due to the Administrator at the time of sale) as a component of net sales. Previously, the Company reflected the full retail price of the Non-Obligor Contracts as a component of net sales and the amount paid to the Administrator as a component of cost of sales and occupancy costs. COMPUSA NET.COM In March 1999, the Company completed the formation of its wholly-owned subsidiary, CompUSA Net.com Inc. ("CompUSA Net.com") by contributing to it the net assets of CompUSA Direct, the Company's former mail order, fulfillment, and Internet sales division. In the fourth quarter of fiscal 1999, CompUSA Net.com began phasing out or transferring to the Company its previous mail order, fulfillment, and other non-Internet operations. In October 1999, the Company transferred CompUSA Net.com's Internet business to cozone.com l.l.c., an indirect subsidiary of the Company. Another indirect subsidiary, cozone.com inc., is the sole manager of cozone.com l.l.c. These two subsidiaries are collectively referred to in this report as "cozone.com." cozone.com offers a wide range of products for use in the home, home office, and small office, and on the road, and specializes in customer service and industry-leading Internet technology. 20 GENERAL All references herein to "fiscal 2000" relate to the fifty-two weeks ending June 24, 2000, and references to "fiscal 1999" relate to the fifty-two weeks ended June 26, 1999. In addition, all references herein to "first quarter of fiscal 2000" relate to the thirteen weeks ended September 25, 1999, and all references to "first quarter of fiscal 1999" relate to the thirteen weeks ended September 26, 1998. The following table sets forth certain items expressed as a percentage of net sales for the periods indicated:
THIRTEEN WEEKS ENDED ----------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999(1) 1998 ------------- ------------- Net sales.......................................... 100.0% 100.0% Cost of sales and occupancy costs.................. 84.9 86.0 ----- ----- Gross profit....................................... 15.1 14.0 Operating expenses................................. 12.8 10.6 Pre-opening expenses............................... 0.1 0.1 General and administrative expenses................ 3.5 2.4 Restructuring charges.............................. (0.2) -- ----- ----- Operating income (loss)............................ (1.1) 0.9 Interest expense and other income, net............. 0.4 0.2 ----- ----- Income (loss) before income taxes.................. (1.5) 0.7 Income tax expense (benefit)....................... (0.5) 0.2 ----- ----- Net income (loss).................................. (1.0)% 0.5% ===== =====
- ------------------------ (1) For a discussion of the Company's non-recurring and restructuring charges, see Note 3 of Notes to Consolidated Financial Statements. 21 The following table sets forth certain operating data for the Company:
THIRTEEN WEEKS ENDED ----------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 ------------- ------------- Stores open at end of period....................... 213 203 Acquired Computer City stores(1)................... -- 37 Stores opened during the period.................... 6 4 Stores closed during the period(1)................. 4 -- Stores relocated during the period................. 1 2 Average net sales per gross square foot(2), (3).... $ 235 $ 278 Average net sales per Computer Superstore (in thousands)(2).................................... $6,368 $7,484 Comparable store sales decrease(4)................. (0.03)% (1.62)%
- ------------------------ (1) As of August 31, 1998, the Company acquired 37 Computer City stores that the Company operated as CompUSA Computer Superstores through the end of fiscal 1999. Of the 37 former Computer City stores that the Company operated as CompUSA Computer Superstores in fiscal 1999, the Company closed four such former Computer City stores in the first quarter of fiscal 2000 in connection with the Company's Fourth Quarter Initiatives. (2) Net sales are comprised of retail sales generated from the Company's Computer Superstores, direct sales to corporate, government, and education customers, and sales of CompUSA PC Inc., but exclude sales of CompUSA Net.com (now cozone.com). (3) Calculated using net sales divided by gross square footage of Computer Superstores open at the end of the period, weighted by the number of months open during the period. (4) Comparable store sales are net retail sales for the Computer Superstores open the same number of months in both the indicated and previous periods, including stores that were relocated or expanded during either period. Beginning with the first quarter of fiscal 2000, the calculation of the change in comparable store sales has been changed to include only the net retail sales of products and services through the Company's Computer Superstores. As a result of the centralization of the Company's direct sales organization and the outsourcing of its direct sales fulfillment and configuration operations, direct sales to corporate, government, and education customers are no longer included in the comparable store sales calculation. The calculation of the change in comparable store sales for the first quarter of fiscal 1999 has been restated to include only the net retail sales of products and services generated from the Company's Computer Superstores. In addition, the calculation of the change in comparable store sales for the first quarter of fiscal 2000 includes the September 1999 retail sales of the 33 former Computer City stores acquired by the Company as of August 31, 1998, that the Company is continuing to operate. The sales of the former Computer City stores that the Company is continuing to operate are not included in the calculation of the change in comparable store sales for the first quarter of fiscal 1999. 22 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, store closings, and changes in product mix. See "--Quarterly Data and Seasonality." FIRST QUARTER ENDED SEPTEMBER 25, 1999, COMPARED WITH THE FIRST QUARTER ENDED SEPTEMBER 26, 1998 In fiscal 1999, the Company implemented various programs and initiatives (collectively, the "Fiscal 1999 Initiatives") that included (1) initiatives announced in the fourth quarter of fiscal 1999 as a result of the Company's extensive evaluation of its core businesses (the "Fourth Quarter Initiatives"), (2) the formation of CompUSA Net.com and its transition to an Internet-only business (the "CompUSA Net.com Realignment"), which business was transferred to cozone.com in October 1999, and (3) information technology initiatives (the "IT Initiatives"). Non-recurring and restructuring charges incurred in connection with these initiatives aggregated approximately $84.0 million in fiscal 1999 and approximately $16.7 million in the first quarter of fiscal 2000. The following table summarizes the financial statement classification of the non-recurring and restructuring charges incurred:
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 ------------------------------------------------------ FOURTH COMPUSA QUARTER NET.COM INITIATIVES REALIGNMENT IT INITIATIVES TOTAL ----------- ----------- -------------- --------- (IN THOUSANDS) Cost of sales and occupancy costs.................. $ 1,853 $1,530 $ -- $ 3,383 Operating expenses................................. 13,182 -- -- 13,182 General and administrative expenses................ -- -- 2,282 2,282 Restructuring charges.............................. (2,176) -- -- (2,176) ------- ------ ------ ------- $12,859 $1,530 $2,282 $16,671 ======= ====== ====== =======
23 The following table summarizes the nature of the non-recurring and restructuring charges incurred:
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 ------------------------------------------------------ FOURTH COMPUSA QUARTER NET.COM INITIATIVES REALIGNMENT IT INITIATIVES TOTAL ----------- ----------- -------------- --------- (IN THOUSANDS) Non-cash charges for asset write-downs, primarily inventory and estimated losses related to the change in the extended service plan provider..... $ 6,000 $1,530 $ -- $ 7,530 Write-down of fixed assets with no future utility.......................................... 3,722 -- -- 3,722 Personnel costs and professional fees.............. -- -- 2,282 2,282 Transition expenses related to the implementation of the Fourth Quarter Initiatives................ 5,313 -- -- 5,313 ------- ------ ------ ------- 15,035 1,530 2,282 18,847 Amounts included in restructuring charges: Adjustments to previously recorded restructuring charges: Exit costs related to the write-down of fixed assets and the accrual of future rental obligations of the Company's fulfillment and configuration facility....................... (5,011) -- -- (5,011) Reserves for future rental obligations for closed stores and related lease carrying costs and other closing costs................ 183 -- -- 183 Severance and other personnel costs.............. 2,652 -- -- 2,652 ------- ------ ------ ------- (2,176) -- -- (2,176) ------- ------ ------ ------- $12,859 $1,530 $2,282 $16,671 ======= ====== ====== =======
FOURTH QUARTER INITIATIVES--The Fourth Quarter Initiatives were announced by the Company on June 24, 1999, as a result of the Company's extensive evaluation of its core businesses. The Fourth Quarter Initiatives were designed to increase gross margins, reduce operating costs, improve customer service, and position the Company to take advantage of additional strategic opportunities. The Company recorded charges related to the Fourth Quarter Initiatives of approximately $67.5 million in the fourth quarter of fiscal 1999 and $12.9 million in the first quarter of fiscal 2000. The Company anticipates incurring approximately $3 to $6 million of transition costs in the second quarter of fiscal 2000 related to the implementation of the Fourth Quarter Initiatives, primarily severance and hiring and training of personnel. When fully implemented, the Company believes the Fourth Quarter Initiatives will result in increased productivity and operating efficiencies that should result in annualized cost savings of up to $100 million. Charges recorded in connection with the Fourth Quarter Initiatives were related to (1) the streamlining of the Company's training business, (2) the reorganization of the Company's technical services business, (3) the redesign of the Company's direct sales fulfillment and configuration activities for corporate, government, and education customers, (4) the evaluation of the profitability of the Company's stores, and (5) the change in the third-party provider of the extended service plans sold by the Company after June 1999. STREAMLINING OF TRAINING BUSINESS--In connection with the redesign of the Company's training business, the Company implemented a vertical, market-based organizational structure in the fourth quarter of fiscal 1999. Previously, each store operated as an independent training organization with a local focus. 24 Costs incurred in connection with the streamlining of the training business are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Termination of approximately 160 employees and other personnel costs...................................... $ 33 $640 Transition expenses related to the implementation of a new structure, primarily advertising and marketing... 174 -- ---- ---- $207 $640 ==== ====
REORGANIZATION OF TECHNICAL SERVICES BUSINESS--As a result of the evaluation of its technical services business, the Company implemented a strategy to focus on high-volume technical service opportunities, including "break-fix" and on-site warranty and technical services. In addition, the Company outsourced networking and systems configuration services to third-party providers. Costs incurred in connection with the reorganization of the technical services business are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Termination of approximately 150 employees and other personnel costs...................................... $ 9 $643 Transition expenses related to the implementation of a new structure, primarily advertising and marketing... 20 -- --- ---- $29 $643 === ====
REDESIGN OF DIRECT SALES FULFILLMENT AND CONFIGURATION ACTIVITIES--As part of the Fourth Quarter Initiatives, the Company also committed to a plan to redesign its direct sales fulfillment and configuration activities for corporate, government, and education customers by (1) outsourcing the direct sales fulfillment and configuration operations and (2) consolidating the Company's direct sales organization to a regional sales force and central sales support. 25 Costs incurred in connection with the redesign of direct sales fulfillment and configuration activities are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Outsourcing of direct sales fulfillment and configuration operations: Costs of liquidating commercial inventories......... $1,500 $37,000 Termination of approximately 225 employees and other personnel costs................................... 52 385 Exit costs related to the write-down of fixed assets and accrual of future rental obligations of the Company's fulfillment and configuration facility.......................................... (5,011) 13,813 Write-down of fixed assets with no future utility... 3,722 -- Other............................................... 64 -- Consolidation of the Company's direct sales organization: Write-down of fixed assets.......................... -- 1,623 Termination of approximately 1,370 employees and other personnel costs............................. 2,363 -- Transition expenses related to the start-up of the Company's new centralized sales and support facility, primarily personnel and facility costs............................................. 4,307 -- ------ ------- $6,997 $52,821 ====== =======
In connection with the outsourcing of the fulfillment of purchase orders from corporate, government, and education customers, the Company has implemented a plan to liquidate the related commercial inventories in its fulfillment and configuration facility and its retail stores. As a result, the Company wrote down the carrying values of such inventories by approximately $37.0 million in the fourth quarter of fiscal 1999 to management's estimates of the net realizable value of such inventories to be generated from vendor returns, liquidation through third parties, and promotional activities in the Company's stores. Based upon the costs of liquidating certain of such inventories in the first quarter of fiscal 2000 and its estimates of the costs to liquidate the remaining inventories, the Company increased its previous estimate of the write-down of its commercial inventories by $1.5 million in the first quarter of fiscal 2000. In August 1999, the Company discontinued the fulfillment and configuration activities previously conducted in its Dallas/Fort Worth-area fulfillment and configuration facility. At that time, purchase orders from corporate, government, and education customers began to be fulfilled by Ingram Micro Inc. ("Ingram Micro"). Based upon its outsourcing of its direct sales fulfillment and configuration operations to Ingram Micro, the Company believed it would abandon its centralized fulfillment and configuration facility. Accordingly, the Company recorded a charge in the fourth quarter of fiscal 1999 of approximately $11.6 million to write down the carrying value of those fixed assets it believed would be abandoned and had no future utility to the Company and a charge of approximately $2.2 million for the estimated remaining lease rental obligations and other carrying costs, net of subrental income, associated with that facility prior to the expiration of the lease term in 2008. In the first quarter of fiscal 2000, the Company determined that it would be able to redeploy certain portions of the centralized fulfillment and configuration facility in its ongoing operating activities, primarily the Company's call center operations. As a result, the Company reversed the previously recorded charge of $2.2 million for estimated remaining net lease rental obligations and reduced the previously recorded estimate of the exit costs related to the fixed assets to be abandoned by $2.8 million. The Company plans to redeploy certain of the assets located in the former centralized 26 fulfillment and configuration facility for its ongoing operating activities. The Company recorded a $3.7 million write-down of the assets in the facility that had no future utility for the Company's ongoing activities. In August 1999, the Company organized a regional sales force and central sales support function and opened a new 80,000 square-foot call center in the Dallas/Forth Worth area to accommodate this function. Previously, each store maintained a separate direct sales force. As a result of the consolidation of the direct sales organization and the outsourcing of its direct sales fulfillment and configuration operations, the Company terminated approximately 1,595 employees in August 1999 who were previously responsible for the direct sales activities conducted through the Company's stores and the Company's centralized fulfillment and configuration facility. Costs incurred in connection with these termination actions and other personnel costs related to the redesign of the Company's direct sales fulfillment and configuration activities to its corporate, government, and education customers aggregated approximately $385,000 in the fourth quarter of fiscal 1999 and approximately $2.4 million in the first quarter of fiscal 2000. The Company anticipates incurring an additional $3 to $6 million in costs in the second quarter of fiscal 2000 related to such initiatives. In connection with the implementation of its plan to redesign its direct sales fulfillment and configuration activities to corporate, government, and education customers, the Company incurred costs of approximately $4.3 million in the first quarter of fiscal 2000, primarily related to start-up personnel, training, and facilities costs related to the Company's new centralized direct sales and support facility located in the Dallas/Fort Worth area. EVALUATION OF THE COMPANY'S STORES--In connection with the Fourth Quarter Initiatives, the Company analyzed each of its retail stores in terms of profitability and growth potential and closed four stores in July 1999. Costs incurred in connection with the evaluation of the Company's stores are as follows:
THIRTEEN WEEKS ENDED ------------------------ SEPTEMBER 25, JUNE 26, 1999 1999 ------------- -------- (IN THOUSANDS) Costs related to store closings: Write-down of fixed assets and inventories and other closing costs...................................... $523 $2,615 Termination of approximately 145 employees........... 195 -- Impairment charge for on-going stores.................. -- 6,512 ---- ------ $718 $9,127 ==== ======
The Company will continue to analyze its retail stores in terms of profitability and growth potential and anticipates the possible closure of an additional five to ten underperforming stores. CHANGE IN EXTENDED SERVICE PLAN PROVIDER--In June 1999, in response to a proposed premium rate increase related to the then-current extended service plan program (the "Prior ESP Program"), the Company terminated the Prior ESP Program. In July 1999, the Company implemented a new extended service plan program utilizing new administration and insurance companies. As a result of the foregoing, the Company provided for estimated losses of $2.0 million in the fourth quarter of fiscal 1999 and $4.2 million in the first quarter of fiscal 2000 associated with certain unresolved issues with the administrator of the Prior ESP Program, primarily related to repair services provided by the Company to the administrator of the Prior ESP Program. The administration of the extended service plans sold pursuant to the Prior ESP Program is the responsibility of the administrator of the Prior ESP Program and/or the insurance companies that insured 27 the administration obligations of the Prior ESP Program. In July 1999, the Company elected, for business and customer relations reasons, to provide supplemental administrative services to purchasers of extended service plans sold pursuant to the Prior ESP Program who experienced difficulty in obtaining services from the administrator of the Prior ESP Program. In the first quarter of fiscal 2000, the Company incurred and expensed costs of approximately $748,000 in connection with providing these supplemental administrative services. However, the Company is currently seeking reimbursement from the insurance companies of the costs incurred by the Company in fiscal 2000 in providing these supplemental services. The Company believes it is entitled to full reimbursement of such costs and, during the second quarter of fiscal 2000, the Company expects to consummate an arrangement with the insurance companies for the reimbursement of such costs. In addition, the Company expects, during the second quarter of fiscal 2000, to reach an agreement with the insurance companies regarding the future administration of the Prior ESP Program. Depending upon the outcome of these negotiations, the Company may (1) record a charge for the estimated additional costs related to the supplemental and future administration of the Prior ESP Program, to the extent such costs are not reimbursed by the insurance companies or (2) reverse previously recorded expenses related to supplemental administrative services in the event such expenses are subsequently reimbursed. COMPUSA NET.COM REALIGNMENT--In March 1999, the Company completed the formation of CompUSA Net.com by contributing to it the net assets of the Company's CompUSA Direct division. Prior to the formation of CompUSA Net.com, the Company conducted its mail order, fulfillment, and retail Internet sales operations through CompUSA Direct. Concurrent with the formation of CompUSA Net.com, the Company announced plans to change the operations of CompUSA Net.com to an Internet-only business. Beginning in the fourth quarter of fiscal 1999, the mail order and other non-Internet sales operations previously conducted by CompUSA Direct were phased out or transferred to the Company. In October 1999, the Company transferred CompUSA Net.com's Internet business to cozone.com. The Company incurred costs of approximately $1.5 million in the first quarter of fiscal 2000 related to the implementation of its Internet-only strategy, primarily the write-down of inventories not consistent with the Internet-only strategy to their estimated net realizable value upon liquidation with a third party. The Company anticipates pre-tax operating losses at cozone.com in the second quarter of fiscal 2000 of approximately $19 to $23 million. The Company plans to explore strategic partnerships and/or access the capital markets in the second half of fiscal 2000 to fund the growth of cozone.com. IT INITIATIVES--In the fourth quarter of fiscal 1998, the Company committed to a new IT strategy. Pursuant to this strategy, the Company outsourced substantially all of its IT processes to a third-party service provider. In addition, the Company selected an Enterprise Resource Management ("ERM") system in fiscal 1999 to replace a substantial portion of the Company's existing IT systems. The Company implemented the first phases of the ERM system in July and August 1999 and expects to complete the final implementation of the ERM system in fiscal 2000. In the first quarter of fiscal 2000, the Company incurred non-recurring charges of approximately $2.3 million related to the outsourcing of its IT operations and training and other non-capitalizable costs incurred in connection with the implementation of the ERM system. In connection with its IT Initiatives, the Company expects to incur additional costs of approximately $3 to $4 million in each fiscal quarter for the remainder of fiscal 2000. The Company anticipates the completion of the IT Initiatives in the fourth quarter of fiscal 2000. 28 NET SALES--Net sales for the first quarter of fiscal 2000 decreased approximately 2.0% to $1.35 billion from $1.38 billion for the first quarter of fiscal 1999. The decrease in net sales was primarily due to a decline in direct sales to corporate, government, and education customers to $410 million in the first quarter of fiscal 2000 from $509 million in the first quarter of fiscal 1999. The decline in direct sales was primarily attributable to actions taken by the Company in connection with the Fourth Quarter Initiatives to reduce or eliminate sales to certain of the Company's corporate, government, and education customers that did not meet certain profitability objectives and to consolidate the direct sales organization to a central sales and support force located in the Dallas/Fort Worth area. The Company anticipates that direct sales in the second quarter of fiscal 2000 will decline approximately $300 million from the second quarter of fiscal 1999. The decrease in direct sales was partially offset by the sales of the former Computer City stores that were included in the three months ended September 25, 1999, compared with operations from September 1, 1998 through September 26, 1998 included in the first quarter of fiscal 1999. Despite an increase in the number of personal computer systems sold in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999, sales were negatively impacted by, among other things, declines in average selling prices for certain of the Company's products, including desktop computers and monitors, and increased sales of lower-end computer systems as a percentage of total computer systems sold. Average net sales per square foot decreased approximately 15% and average net sales per store decreased approximately 15% from the first quarter of fiscal 1999 to the first quarter of fiscal 2000. The Company believes the declines in average net sales per square foot and average net sales per store were primarily due to (1) the decline in direct sales, (2) lower average net sales of the former Computer City stores, and (3) declines in average selling prices for certain of the Company's products, including desktop computers and monitors. The decline in direct sales is primarily attributable to actions taken by the Company in connection with the Fourth Quarter Initiatives to reduce or eliminate sales to certain of the Company's corporate, government, and education customers that did not meet certain profitability objectives and to consolidate the direct sales organization. The former Computer City stores generally have lower average net sales compared with other CompUSA Computer Superstores. In addition, the decline in average net sales per square foot and average net sales per store were impacted by the lower average net sales of the former Computer City stores, which are included in operations for three months in the first quarter of fiscal 2000 compared with one month in the first quarter of fiscal 1999. Average selling prices for desktop computers and monitors declined approximately 18% from $1,588 in the first quarter of fiscal 1999 to $1,305 in the first quarter of fiscal 2000. This decrease was partially offset by an increase in the average selling prices for notebook computers of approximately 4% from $1,854 in the first quarter of fiscal 1999 to $1,922 in the first quarter of fiscal 2000. Comparable store sales for the Company's stores decreased approximately 0.03% from the first quarter of fiscal 1999. The Company believes the change in comparable store sales was negatively impacted by, among other things, declines in average selling prices for certain of the Company's products, including desktop computers and monitors, and increased sales of lower-end computer systems as a percentage of total computer systems sold. GROSS PROFIT--Gross profit was $203.4 million, or 15.1% of net sales, in the first quarter of fiscal 2000 compared with $192.6 million, or 14.0% of net sales, in the first quarter of fiscal 1999. Excluding costs associated with the Fiscal 1999 Initiatives aggregating approximately $3.4 million, gross profit was $206.8 million, or 15.3% of net sales, in the first quarter of fiscal 2000. The increase in gross profit as a percentage of net sales to 15.3% in the first quarter of fiscal 2000 from 14.0% in the first quarter of fiscal 1999 was primarily due to a decrease in product costs as a percentage of net sales, partially offset by an increase in occupancy costs as a percentage of net sales. The increase in gross profit from the first quarter of fiscal 1999 to the first quarter of fiscal 2000 was primarily due to an increase in the gross profit of retail products as well as an increase in the percentage of retail sales as a percentage of total sales. Retail margins generally are higher than direct sales margins. In addition, the Company believes gross profit increased due to improved pricing strategies in coordination 29 with a change in promotional strategies implemented in connection with the Fourth Quarter Initiatives, as well as an increase in the average number of sales associates employed by the Company's Computer Superstores. Occupancy costs increased by approximately 0.55% as a percentage of net sales in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. Occupancy costs, which are generally fixed in nature, increased as a percentage of net sales in the first quarter of fiscal 2000 primarily as a result of lower average net sales per store compared with the first quarter of fiscal 1999. In connection with the Fourth Quarter Initiatives, the Company incurred costs in the first quarter of fiscal 2000 of approximately $1.9 million, or 0.14% of net sales, related to the liquidation of commercial inventories held by the Company's centralized fulfillment and configuration facility and the Company's stores as well as the liquidation of inventories held by the four Computer Superstores closed in July 1999. In addition, the Company incurred costs of approximately $1.5 million, or 0.11% of net sales, in the first quarter of fiscal 2000 in connection with the CompUSA Net.com Realignment, primarily related to the liquidation of inventories not consistent with the Internet-only operations to be conducted by cozone.com as successor to CompUSA Net.com. OPERATING EXPENSES--Operating expenses were $171.9 million, or 12.8% of net sales, in the first quarter of fiscal 2000 compared with $145.7 million, or 10.6% of net sales, in the first quarter of fiscal 1999. Excluding costs associated with the Fiscal 1999 Initiatives aggregating approximately $13.2 million, operating expenses were $158.7 million, or 11.8% of net sales, in the first quarter of fiscal 2000. The increase in operating expenses as a percentage of net sales to 11.8% in the first quarter of fiscal 2000 from 10.6% in the first quarter of fiscal 1999 was due to increases in personnel and facility expenses as percentages of net sales, partially offset by a decrease in advertising expense as a percentage of net sales. In addition, the Company recorded a charge of approximately $2.4 million, or 0.18% of net sales, in the first quarter of fiscal 1999 for the anticipated closure of certain CompUSA Computer Superstores in markets where a former Computer City store remained open in close proximity to a CompUSA Computer Superstore. Excluding personnel costs of approximately $2.3 million incurred in the first quarter of fiscal 2000 in connection with the Fourth Quarter Initiatives, personnel expenses in the first quarter of fiscal 2000 increased 1.44% as a percentage of net sales. Personnel costs increased as a percentage of net sales primarily as a result of lower average net sales per store. In addition, personnel expenses increased due to the Company's increase in the average number of sales associates employed by the Company's Computer Superstores. Facility expenses increased by approximately 0.25% as a percentage of net sales compared with the first quarter of fiscal 1999. Facility expenses, which are generally fixed in nature, increased as a percentage of net sales in the first quarter of fiscal 2000 primarily as a result of lower average net sales per store. The above increases were partially offset by lower advertising expenses as a percentage of net sales. Excluding expenses in the first quarter of fiscal 2000 of approximately $135,000 related to the Fourth Quarter Initiatives, net advertising expense decreased by approximately 0.38% as a percentage of net sales in the first quarter of fiscal 2000 due to advertising economies-of-scale related to the addition of stores in multi-store markets, primarily as a result of the acquisition of the Computer City stores. This decrease in net advertising expense as a percentage of net sales was partially offset by an increase in advertising expenses of approximately $2.3 million related to cozone.com advertising and marketing strategies. In connection with the Fourth Quarter Initiatives, the Company incurred non-recurring charges of approximately $13.2 million, or 0.98% of net sales, in the first quarter of fiscal 2000. The primary components of such charges were (1) the $3.7 million impairment charge related to the write-down of fixed assets in the Company's former centralized fulfillment and configuration facility, (2) personnel, training, and facilities costs of approximately $4.3 million related to the consolidation of the Company's direct sales 30 organization, and (3) costs aggregating approximately $5.0 million related to the change in the provider of the Company's extended service plans. PRE-OPENING EXPENSES--Pre-opening expenses consist primarily of personnel expenses incurred prior to a store's opening and promotional costs associated with the opening. In the first quarter of fiscal 2000, the Company incurred $1.7 million in pre-opening expenses in connection with the opening of six Computer Superstores and the relocation of one Computer Superstore, compared with $1.4 million in pre-opening expenses in the first quarter of fiscal 1999 incurred in connection with the opening of four Computer Superstores and the relocation of two Computer Superstores. GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses were $46.7 million, or 3.5% of net sales, in the first quarter of fiscal 2000 compared with $32.6 million, or 2.4% of net sales, in the first quarter of fiscal 1999. Excluding costs associated with the Fiscal 1999 Initiatives aggregating approximately $2.3 million, general and administrative expenses were $44.5 million, or 3.3% of net sales, in the first quarter of fiscal 2000. The increase in general and administrative expenses as a percentage of net sales to 3.3% in the first quarter of fiscal 2000 from 2.4% in the first quarter of fiscal 1999 was primarily due to increased personnel, facility, and depreciation and amortization expenses as percentages of net sales. Excluding personnel costs of approximately $382,000 incurred in the first quarter of fiscal 2000 in connection with the IT Initiatives, personnel expenses increased as a percentage of net sales in the first quarter of fiscal 2000 by approximately 0.26%. This increase in personnel expenses as a percentage of net sales is primarily attributable to lower average net sales per store in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. In addition, personnel expenses increased due to increased incentive compensation expense. Facility expenses increased by approximately 0.07% of net sales in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. Facility expenses, which are generally fixed in nature, increased as a percentage of net sales in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999 primarily as a result of lower average net sales per store. Excluding professional fees of approximately $1.9 million incurred in the first quarter of fiscal 2000 in connection with the IT initiatives, professional fees increased by approximately 0.31% of net sales in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. The increase in professional fees was primarily related to the cozone.com web site and consulting fees of approximately $2.6 million for the cozone.com marketing campaign. The Company recorded approximately $1.3 million, or 0.10% of net sales, of amortization expense related to the goodwill associated with the acquisition of Computer City in the first quarter of fiscal 2000 compared with approximately $300,000, or 0.02% of net sales, recorded in the first quarter of fiscal 1999. In addition, depreciation expense increased approximately 0.08% as a percentage of net sales in the first quarter of fiscal 2000 due to the expansion of the Company's corporate facilities and the initial implementation and installation of the Company's ERM system. In the first quarter of fiscal 2000, the Company incurred expenses of approximately $2.3 million, or 0.17% of net sales, related to the IT Initiatives. Such costs were primarily due to the outsourcing of the Company's IT development and training and other non-capitalizable costs incurred in connection with the initial implementation and installation of its ERM System. INTEREST EXPENSE AND OTHER INCOME, NET--Interest expense and other income, net, was $5.9 million, or 0.4% of net sales, in the first quarter of fiscal 2000 compared with $2.8 million, or 0.2% of net sales, in the first quarter of fiscal 1999. The increase in interest expense and other income was primarily due to interest expense on the $136 million subordinated promissory note payable to Tandy Corporation related to the acquisition of Computer City. In addition, the Company incurred interest expense in the first quarter of fiscal 2000 in connection with the $50.0 million of borrowings outstanding under the Credit Agreement as of September 25, 1999. These increases were partially offset by the decrease in interest expense related to 31 the Senior Subordinated Notes due to the payment of the Senior Subordinated Notes on August 3, 1999. See "--Liquidity and Capital Resources." INCOME TAXES--The Company's effective tax rate was 37.5% for the first quarter of fiscal 2000 and 38.3% for the first quarter of fiscal 1999. NET LOSS--As a result of the above, the net loss for the first quarter of fiscal 2000 was $12.9 million, or $.14 per diluted share, compared with net income of $6.2 million, or $.07 per diluted share, for the first quarter of fiscal 1999. QUARTERLY DATA AND SEASONALITY The Company expects that its quarterly results of operations will fluctuate depending on the timing of the opening of, and the amount of net sales contributed by, new stores and the timing of costs associated with the selection, leasing, construction, and opening of new stores, as well as seasonal factors, store closings, product introductions, and changes in product mix. Based upon its past operating history, the Company believes that its business is seasonal. Excluding the effects of new store openings and store closings, net sales and earnings are generally lower during the first and fourth fiscal quarters than in the second and third fiscal quarters. LIQUIDITY AND CAPITAL RESOURCES At September 25, 1999, total assets were $1.40 billion, $996.5 million of which were current assets, including $128.3 million of cash and cash equivalents. Net cash provided by operating activities for the first quarter of fiscal 2000 was $64.7 million, compared with $84.6 million for the first quarter of fiscal 1999. Approximately three-fourths of the Company's net sales during the first quarter of both fiscal 2000 and fiscal 1999 were sales for which the Company received payment at the time of sale either in cash, by check, or by third-party credit card. The remaining net sales were primarily sales for which the Company provided credit terms to corporate, government, and education customers. Merchandise inventories increased to $675.5 million at September 25, 1999, from $667.5 million at June 26, 1999. The increase in merchandise inventories is primarily attributable to inventories at the six Computer Superstores opened in the first quarter of fiscal 2000 as well as inventories received in anticipation of seasonal promotional sales to be held in the second quarter of fiscal 2000. At September 25, 1999, inventory per store was $3.1 million compared with $3.7 million at September 26, 1998. The decrease in inventory per store from the first quarter of fiscal 1999 to the first quarter of fiscal 2000 was primarily due to the liquidation of commercial inventories in the first quarter of fiscal 2000 in connection with the Company's outsourcing of the fulfillment of purchase orders from corporate, government, and education customers and the related reduction of commercial inventories held by the Company's fulfillment and configuration facility. 32 Capital expenditures during the first quarter of fiscal 2000 were $44.1 million, compared with $12.7 million of capital expenditures during the first quarter of fiscal 1999. The following table sets forth the capital expenditures for the first quarter of fiscal 2000 and the first quarter of fiscal 1999.
THIRTEEN WEEKS ENDED ------------------------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 -------------- -------------- New stores......................................... $ 3,200 $ 2,159 Existing stores.................................... 4,911 5,688 Computer City store conversions.................... -- 1,414 Direct sales call center........................... 4,055 -- Information technology............................. 25,700 -- Corporate and other................................ 6,185 3,452 ------- ------- $44,051 $12,713 ======= =======
The Company plans to open approximately 10 Computer Superstores in fiscal 2000, of which six were opened in the first quarter of fiscal 2000. The Company currently anticipates capital expenditures of approximately $125 million in fiscal 2000, including capital expenditures of approximately $76 million related to the Company's IT Initiatives. Excluding the effects of new store openings, the Company's greatest short-term capital requirements occur during the second fiscal quarter to support a higher level of sales in that quarter. Short-term capital requirements are satisfied primarily by available cash and cash equivalents and vendor and bank financing. Effective June 30, 1999, the Company entered into a three-year secured revolving credit agreement (the "Credit Agreement") with a consortium of banks and financial institutions that provides for borrowings and letters of credit up to a maximum of $500 million, with letters of credit not to exceed $100 million. Borrowings under the Credit Agreement are subject to a borrowing base (the "Borrowing Base") that is equal to the sum of (a) 85% of eligible accounts receivable, as defined, and (b) an amount equal to the lowest of (i) 65% of the lower of cost or market value of eligible inventory, as defined, (ii) 85% of appraised liquidation value, as defined, of eligible inventory, or (iii) $400 million, less (c) outstanding letters of credit. The Borrowing Base may also be reduced by certain reserves provided for in the Credit Agreement in the event borrowings and letters of credit under the Credit Agreement exceed 50% of the Borrowing Base without reduction for letters of credit or such reserves. Borrowings under the Credit Agreement are secured by substantially all of the Company's assets, excluding those of CompUSA Net.com and cozone.com. The Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio in the event the amount available for future borrowings under the Credit Agreement is less than $75 million. As of September 25, 1999, the Company had approximately $456.6 million of total availability under the Credit Agreement, against which the Company had $50.0 million of outstanding borrowings and $13.5 million of outstanding letters of credit. In July 1999, the Company announced the redemption of its 9 1/2% Senior Subordinated Notes due 2000 (the "Senior Subordinated Notes"). The Senior Subordinated Notes were paid in full on August 3, 1999 utilizing available cash balances and proceeds from borrowings under the Credit Agreement. The Company also finances certain fixture and equipment acquisitions through equipment lessors. Lease financing is available from numerous sources and the Company evaluates equipment leasing as a supplemental source of financing on a continuing basis. In connection with the acquisition of Computer City, the Company issued a $136 million subordinated promissory note payable to Tandy Corporation (the "Seller Note"). The Seller Note bears interest at a rate of 9.48% per annum and provides for its repayment in semi-annual installments over a period of ten years. The first three years of payments are interest only, with the first principal payment due in December 2001. 33 The Seller Note may be prepaid, in whole or in part, at any time at the option of the Company, without premium or penalty. The Company currently plans to explore strategic partnerships and/or access the capital markets in the second half of fiscal 2000 to fund the growth of cozone.com. There can be no assurance that such strategic partnerships can be effected and/or such funding can be accomplished through the capital markets on terms acceptable to the Company. 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 2000 and to make all required payments of interest on the Seller Note and outstanding borrowings under the Credit Agreement. The level of future expansion will be contingent upon the availability of additional capital. INFLATION While inflation has not had, and the Company does not expect it to have, a material impact upon operating results, there can be no assurances that the Company's business will not be affected by inflation in the future. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer equipment and software and devices with embedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. For this purpose, the term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, telephone/PBX systems, cash registers, hand-held terminals, scanning equipment, and other miscellaneous systems, as well as systems that are not commonly thought of as IT systems, such as alarm systems, sprinkler systems, fax machines, or other miscellaneous systems. Both IT and non-IT systems may contain imbedded technology, which complicates the Company's Year 2000 identification, assessment, remediation, and testing efforts. Based upon its identification and assessment efforts to date, the Company believes that certain of the computer equipment and software it currently uses will require replacement or modification. In addition, in the ordinary course of replacing computer equipment and software, the Company attempts to obtain replacements that it believes are Year 2000 compliant. Utilizing both internal and external resources to identify and assess needed Year 2000 remediation, the Company currently anticipates that its Year 2000 identification, assessment, remediation, and testing efforts related to its IT systems, which began in October 1996, will be completed by November 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 November 3, 1999, it had completed approximately 98% 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 2% of the initiatives are in process and expected to be completed by November 30, 1999. As non-IT system issues are 34 identified and assessed, remediation and testing of the non-IT system issues will be ongoing through December 31, 1999.
PERCENT YEAR 2000 INITIATIVE TIME FRAME COMPLETE - -------------------- ----------- -------- Initial IT systems identification and assessment............ 10/96-3/97 100% Remediation and testing regarding central system issues..... 5/97-4/98 100% Remediation and testing regarding departmental system issues.................................................... 3/98-11/99 95% Remediation and testing regarding store and distribution system issues............................................. 8/98-10/99 100% Upgrades to telephone/PBX and other systems................. 3/98-3/99 100% Electronic data interchange trading partner conversions..... 3/98-11/99 98% Identification, assessment, remediation, and testing regarding desktop and individual system issues............ 2/98-10/99 100% Identification and assessment regarding non-IT system issues.................................................... 4/98-12/99 99% Remediation and testing regarding non-IT system issues...... 2/99-12/99 98% Integrated company-wide testing............................. 9/99-12/99 90%
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 25, 1999, the Company had received responses from approximately 81% of such third parties, and 56% of the companies that have responded have provided written assurances that they expect to address all their significant Year 2000 issues on a timely basis. The Company believes that the cost of its Year 2000 identification, assessment, remediation, and testing efforts, as well as currently anticipated costs to be incurred by the Company with respect to Year 2000 issues of third parties, will not exceed $5.0 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 November 3, 1999, the Company had incurred costs of approximately $4.5 million related to its Year 2000 identification, assessment, remediation, and testing efforts. All of the $4.5 million relates to analysis, repair, or replacement of existing software, upgrades to existing software, or evaluation of information received from significant vendors, service providers, or customers. Other non-Year 2000 IT efforts have not been materially delayed or impacted by Year 2000 initiatives. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or assessment, remediation, and testing are not effected timely with respect to Year 2000 problems that are identified, there can be no assurance that the Year 2000 issue will not materially adversely impact the Company's results of operations or adversely affect the Company's relationships with customers, vendors, or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. The Company has begun, but not yet completed, a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by the Company and certain third parties to complete efforts to achieve Year 2000 compliance on a timely basis. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, and such scenario has not yet been clearly identified. The Company currently plans to complete such analysis and contingency planning by December 31, 1999. 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 35 those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate, and test all relevant computer codes and imbedded technology, and similar uncertainties including the variability of definitions of "compliance with Year 2000" and the myriad of different products and services, and combinations thereof, sold by the Company. In addition, some government and large corporate customers have required the Company to represent and warrant to them that all of the products the Company sells to them are Year 2000 compliant. The Company is a defendant in one lawsuit involving Year 2000 issues, and these factors may lead to additional claims whose impact on the Company is not currently estimable. No assurance can be given that the aggregate cost of defending and resolving such claims will not materially adversely affect the Company's results of operations. Although some of the Company's agreements with manufacturers and others from whom it purchases products for resale contain provisions requiring such parties to indemnify the Company under some circumstances, there can be no assurance that such indemnification arrangements will cover all of the Company's liabilities and costs related to claims by third parties related to the Year 2000 issue. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. The Company's Credit Agreement provides for borrowings that bear interest at variable rates based on either a prime rate or the London Interbank Offering Rate. At September 25, 1999, the Company had approximately $456.6 million of total availability under the Credit Agreement, against which the Company had $50.0 million of outstanding borrowings and $13.5 million of outstanding letters of credit. The Senior Subordinated Notes, which required the Company to make semi-annual interest payments at a fixed interest rate of 9 1/2% per annum, were paid in full on August 3, 1999. In addition, the Seller Note requires the Company to make semi-annual installment payments with a fixed interest rate of 9.48% per annum. The Company believes, because of the retirement of the Senior Subordinated Notes, the fixed nature of the interest charges of the Seller Note, and current variable-rate indebtedness of $50.0 million, that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations, and cash flows should not be material. 36 PART II ITEM 1. LEGAL PROCEEDINGS Note 6 of the Notes to Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference as if fully restated herein. Note 6 contains forward-looking statements that are subject to the risks and uncertainties discussed in Item 2--"Management's Discussion and Analysis of Financial Condition and Results of Operations--Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Restated and Amended Certificate of Incorporation.(1) 3.2 Restated and Amended Bylaws.(2) 10.1 CompUSA Inc. 1999 Change in Control Termination Plan.(3) 10.2 Amended and Restated CompUSA Inc. Long-Term Incentive Plan.(3) 10.3 CompUSA Inc. cozone.com Stock Option Plan.(3) 10.4 cozone.com inc. Long-Term Incentive Plan and related form of cozone.com inc. Nonstatutory Stock Option Agreement.(3) 10.5 Secured Wholesale Finance Agreement dated as of November 3, 1999 between CompUSA Stores L.P. and FINOVA Capital Corporation and related Corporate Guaranty of CompUSA Inc.(3) 21 Subsidiaries. (3) 27 Financial Data Schedule.(4) Exhibits 10.1 through 10.4 constitute management compensatory plans or contracts.
(b) Reports on Form 8-K. None. - ------------------------ (1) Previously filed as an exhibit to the Company's Registration Statement No. 1-11566 on Form 8-A/A filed December 6, 1996, as amended and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 1994, and incorporated herein by reference. (3) Filed herewith. (4) Included with EDGAR version only. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPUSA INC. Date: November 15, 1999 By: /s/ JAMES E. SKINNER ----------------------------------------- James E. Skinner EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
38 EX-10.1 2 EXHIBIT 10.1 COMPUSA INC. 1999 CHANGE IN CONTROL TERMINATION PLAN R E C I T A L S: A. Employer considers the maintenance of a sound management team essential to protecting and enhancing its best interests and those of its stockholders. B. Employer recognizes that the possibility of a change in control of Employer may result in the departure or distraction of management to the detriment of Employer and its stockholders. C. Employer has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of selected members of Employer's management team to their assigned duties without the distraction arising from the possibility of a change in control of Employer. D. Employer has determined that the benefits of the Plan should only be made available to those members of management who have demonstrated a commitment to Employer by entering into a limited agreement not to compete with Employer. E. Employer desires to implement the CompUSA Inc. 1999 Change In Control Termination Plan effective October 1, 1999. NOW, THEREFORE, Employer hereby adopts the Plan upon the following terms and conditions: ARTICLE I PARTICIPATION 1.1 COMMENCEMENT OF PARTICIPATION. Each employee employed by Employer in an Eligible Category who enters into a Participation Agreement shall become a Participant on the date of his or her execution and delivery to Employer of the Participation Agreement. 1.2 DURATION OF PARTICIPATION. (a) GENERAL PROVISIONS. Each Participant shall continue to participate in the Plan until the earliest to occur of the following: (i) termination of the Participant's employment with all Employers other than in a Triggering Termination; (ii) transfer, other than during an Applicable Period, of the Participant's employment so that Participant ceases to be employed in an Eligible Category; (iii) the last Employer (other than the Company) by which the Participant is employed ceases to be a subsidiary or other affiliate of the Company other than during an Applicable Period; (iv) a Triggering Termination of the Participant's employment with all Employers, but only after payment of the entire amount of the Termination Payment to the Participant and all other payments that the Participant is, or may become, entitled to receive under the Plan; (v) expiration of the term of the Plan as provided in Section 6.1; (vi) expiration of the Applicable Period with respect to a Change In Control; (vii) death of the Participant; or (viii) any breach or threatened breach by the Participant of the Participant's Participation Agreement. 1.3 ELIGIBLE CATEGORY. The term "Eligible Category" refers to employees employed by Employer in the capacity of Regional Manager, Senior Director or Director, as those terms are defined in accordance with Employer's personnel policies. ARTICLE II CHANGE IN CONTROL 2.1 CHANGE IN CONTROL DEFINED. A Change In Control shall be deemed to have occurred for purposes hereof when any Person meets the requirements for becoming an Acquiring Person, whether or not a Distribution Date occurs or the Rights are redeemed by the Company, as those terms are defined in the Rights Agreement dated as of April 29, 1994 (the "Rights Agreement") between the Company and Bank One, Texas, N.A., as Rights Agent (American Stock Transfer & Trust Company became successor Rights Agent as of April 19, 1996); provided that a Change In Control shall not be deemed to have occurred for purposes hereof with respect to any Person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended. ARTICLE III CHANGE IN CONTROL TERMINATION PAYMENT 3.1 TERMINATION PAYMENT. (a) AMOUNT. -2- (i) In the event a Participant's employment with Employer terminates in a Triggering Termination, Employer shall pay the Participant a lump sum payment in cash (the "Termination Payment") equal to 50% of the sum of the following items: (1) Participant's annual base compensation determined by reference to his highest annual base compensation in effect at any time during the Participant's employment with Employer; (2) the Target Bonus that would be payable to the Participant by Employer for the bonus period in which the Change In Control occurred; and (3) the Participant's annualized car allowance determined by reference to his highest car allowance rate in effect at any time during the Participant's employment with Employer. (ii) The Termination Payment shall include the amounts described in Section 3.1(a)(i) plus the following amounts described in this Section 3.1(a)(ii): (1) the amount of the Participant's compensation accrued but unpaid as of the date of the Triggering Termination; (2) reimbursements due to the Participant for unpaid expenses incurred in the performance of his duties for Employer prior to the Triggering Termination; (3) any other benefit accrued but unpaid as of the date of the Triggering Termination; and (4) the estimated cost of obtaining accident, health, dental, disability and life insurance coverage for the six-month period following the expiration of the Participant's continuation (COBRA) rights; provided that such coverage is substantially similar to the most comprehensive coverage provided to the Participant by Employer at any time during the Applicable Period; and provided further that this Section 3.1(a)(ii)(4) shall be applied without regard to, and the amount payable under this Section 3.1(a)(ii)(4) is in addition to, any continuation (COBRA) rights or conversion rights under any plan provided by Employer, which rights are not affected by any provision of the Plan. (c) APPLICABLE PERIOD DEFINED. "Applicable Period" means the 15-month period that begins three months before the Change In Control and ends 12 months after the Change In Control. (d) TRIGGERING TERMINATION DEFINED. Each of the following events constitutes a "Triggering Termination" when a Participant's employment with all Employers is: -3- (i) actually terminated by an Employer during an Applicable Period other than for Good Reason; (ii) Constructively Terminated by an Employer during an Applicable Period other than for Good Reason; or (iii) the last Employer (other than the Company) by which the Participant is employed ceases to be a subsidiary or other affiliate of the Company during an Applicable Period. (e) GOOD REASON DEFINED. "Good Reason" means the termination of a Participant's employment with Employer as a result of the Participant's commission of a felony or failure to obey written directions delivered to the Participant by the Company's Chairman of the Board, President, Chief Executive Officer or its Board of Directors or by any of the Company's Executive Vice Presidents, Senior Vice Presidents or Vice Presidents. (f) CONSTRUCTIVELY TERMINATED DEFINED. "Constructively Terminated" with respect to a Participant's employment with Employer will be deemed to have occurred if Employer: (i) demotes the Participant to a lesser position, either in title or responsibility, than the highest position held by the Participant with Employer at any time during the Participant's employment with Employer; (ii) decreases the Participant's compensation below the highest level in effect at any time during the Participant's employment with Employer or reduces the Participant's benefits and perquisites below the highest levels in effect at any time during the Participant's employment with Employer (other than as a result of any amendment or termination of any employee or group or other executive benefit plan, which amendment or termination is applicable to all executives of Employer); or (iii) requires the Participant to relocate to a principal place of business more than 25 miles from the principal place of business occupied by Employer on the first day of an Applicable Period. 3.2 OUTPLACEMENT CONSULTING SERVICES. In addition to the Termination Payment, Employer shall pay each Participant who incurs a Triggering Termination a cash payment in the amount of $5,000 as an allowance for the cost of outplacement consulting services. Such amount shall be paid at such time and in accordance with Section 3.3 as if the payment under this Section 3.2 constituted part of the Termination Payment. The Participant shall not be obligated to apply the amount of the payment under this Section 3.2 to outplacement consulting services and shall not be obligated to account to Employer for the expenditure of such amounts. 3.3 TIME FOR PAYMENT; INTEREST. Employer shall pay the Termination Payment to the Participant concurrent with the Triggering Termination or concurrent with the Change In Control -4- if the Participant's employment terminated in a Triggering Termination during the portion of the Applicable Period prior to the Change In Control. Employer's obligation to pay any amounts under the Plan to a Participant, including without limitation the Termination Payment and any Gross Up Payment due under Article IV, shall bear interest at the maximum rate allowed by law until paid by Employer, and all accrued and unpaid interest shall bear interest at the same rate, all of which interest shall be compounded daily. All Employers shall be and remain jointly and severally liable for all payments due under the Plan until such payments are made in full. ARTICLE IV GROSS UP PAYMENT 4.1 EXCESS PARACHUTE PAYMENT. If a Participant incurs the tax (the "Excise Tax") imposed by Section 4999 of the Code on "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code as the result of any payments or distributions by Employer to or for the benefit of Participant (whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise) or as a result of the acceleration of vesting of Options, Restricted Stock or other rights (collectively, the "Payments"), or if Participant would incur the Excise Tax if the Change In Control satisfied the requirements of Section 280G(b)(2)(A)(i) of the Code, then without regard to whether the Change In Control in fact satisfies the requirements of Section 280G(b)(2)(A)(i) of the Code, Employer shall pay to the Participant an amount (the "Gross Up Payment") such that the net amount retained by the Participant, after deduction of (i) any Excise Tax owed, or that would be owed if the Change In Control satisfied the requirements of Section 280G(b)(2)(A)(i) of the Code, upon any Payments (other than payments provided by this Section 4.1) and (ii) any federal, state and local income and employment taxes (together with penalties and interest) and Excise Tax owed, or that would be owed if the Change In Control satisfied the requirements of Section 280G(b)(2)(A)(i) of the Code, upon the payments provided by this Section 4.1, shall be equal to the amount of the Payments (other than payments provided by this Section 4.1). 4.2 APPLICABLE RATES. For purposes of determining the Gross Up Payment amount, the Participant shall be deemed: (a) to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individual taxpayers in the calendar year in which the Gross Up Payment is made (which rate shall be adjusted as necessary to take into account the effect of any reduction in deductions, exemptions or credits otherwise available to the Participant had the Gross Up Payment not been received); (b) to pay additional employment taxes as a result of the receipt of the Gross Up Payment in an amount equal to the highest marginal rate of employment taxes applicable to wages; provided that if any employment tax is applied only up to a specified maximum amount of wages, such limit shall be taken into account for purposes of such calculation; and -5- (c) to pay state and local income taxes at the highest marginal rates of taxation in the state and locality of the Participant's residence on the date of the Triggering Termination, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes. 4.3 DETERMINATION OF GROSS UP PAYMENT AMOUNT. The determination of the Gross Up Payment amount shall be made, at Employer's expense, by Ernst & Young LLP or another nationally recognized public accounting firm reasonably acceptable to the Participant (in either case, the "Accountants"). If the Excise Tax amount payable by the Participant, based upon a "Determination," is different from the Excise Tax amount computed by the Accountants for purposes of determining the Gross Up Payment amount, then appropriate adjustments to the Gross Up Payment amount shall be made in the manner provided in Section 4.4. For purposes of determining the Gross Up Payment amount prior to a Determination of the Excise Tax amount, the following assumptions shall be utilized: (a) that portion of the Termination Payment that is attributable to the items described in Sections 3.1(a)(i)(1), (2) and (3), Section 3.1(a)(ii)(4), the payment made pursuant to Section 3.2, and the Gross Up Payment amount shall be treated as a Parachute Payment; (b) no portion of any payment made pursuant to Sections 3.1(a)(ii)(1), (2) or (3) or Section 8.3 shall be treated as a Parachute Payment; (c) the "ascertainable fair market value" (as set forth in Prop. Treas. Reg. Section 1.280G-1, Q&A 13) of the Options, the vesting of which was accelerated by the Change In Control as provided in the Incentive Plan and as further provided in Section 5.1, shall be equal to the product of (i) and (ii) as set forth below: (i) the number of shares covered by such Options; and (ii) the difference between: (1) the fair market value per share as of the date of the Change In Control; and (2) the exercise price per share of stock subject to such Options; and (d) for purposes of applying the rules set forth in Prop. Treas. Reg. Section 1.280G-1, Q&A 24(c), the amount reflecting the lapse of the obligation to continue performing services shall be equal to the minimum amount allowed for such payment as set forth in Prop. Treas. Reg. Section 1.280G-1, Q&A 24(c)(2) (or if Prop. Treas. Reg. Section 1.280G-1 has been superseded by temporary or final regulations, the minimum amount provided for in any temporary or final regulations that supersede Prop. Treas. Reg. Section 1.280G-1 and that are applicable to the Termination Payment, Gross Up Payment or both). -6- 4.4 TIME FOR PAYMENT. Employer shall pay the estimated Gross Up Payment amount in cash to the Participant concurrent with the payment of the Termination Payment. The Participant and Employer agree to reasonably cooperate in the determination of the actual Gross Up Payment amount. Further, the Participant and Employer agree to make such adjustments to the estimated Gross Up Payment amount as may be necessary to equal the actual Gross Up Payment amount based upon a Determination, which in the case of the Participant refers to refunds of prior overpayments and in the case of Employer refers to makeup of prior underpayments. ARTICLE V STOCK OPTIONS AND RESTRICTED STOCK 5.1 TREATMENT OF OPTIONS AND RESTRICTED STOCK. A Participant may hold options ("Options") issued under the Incentive Plan that become immediately exercisable upon a Change In Control. In addition, a Participant may hold restricted stock ("Restricted Stock") issued under the Incentive Plan pursuant to which applicable restrictions will lapse upon a Change In Control. Employer shall take no action to facilitate a transaction involving a Change In Control, including without limitation redemption of the Rights issued pursuant to the Rights Agreement, unless it has taken such action as may be necessary to ensure that each Participant has the opportunity to exercise all Options he may then hold, and obtain certificates containing no restrictive legends in respect of any Restricted Stock he may then hold, at a time and in a manner that shall give each Participant the opportunity to sell or exchange the securities of Employer acquired upon exercise of his Options and upon receipt of unrestricted certificates for shares of common stock of the Company in respect of his Restricted Stock, if any (collectively, the "Acquired Securities"), at the earliest time and in the most advantageous manner any holder of the same class of securities as the Acquired Securities is able to sell or exchange such securities in connection with such Change In Control. Employer acknowledges that its covenants in the preceding sentence (the "Covenants") are reasonable and necessary in order to protect the legitimate interests of Employer in maintaining the Participants as employees and that any violation of the Covenants by Employer would result in irreparable injuries to the Participants, and Employer therefore acknowledges that in the event of any violation of the Covenants by Employer or its directors, officers or employees, or any of their respective agents, each Participant shall be entitled to obtain from any court of competent jurisdiction temporary, preliminary and permanent injunctive relief in order to (i) obtain specific performance of the Covenants, (ii) obtain specific performance of the exercise of his Options, delivery of certificates containing no restrictive legends in respect of his Restricted Stock and the sale or exchange of the Acquired Securities in the advantageous manner contemplated above or (iii) prevent violation of the Covenants; provided that in the event a Participant fails to obtain such injunctive relief, nothing in this Plan shall be deemed to prejudice the Participant's rights to damages for violation of the Covenants. -7- ARTICLE VI AMENDMENT AND TERMINATION 6.1 TERM. The Plan shall commence on the Effective Date and shall terminate on September 30, 2003, if a Change In Control has not occurred before such date. If, however, a Change In Control occurs before September 30, 2003, the Plan shall continue in effect with respect to each Participant throughout the Applicable Period with respect to such Change In Control. 6.2 AMENDMENT PROCEDURES. The Plan may be modified, amended or terminated at any time by a written instrument executed by an officer of the Company; provided that execution of such instrument must be authorized by a written resolution of the Board of Directors of the Company or a written resolution of the Committee. 6.3 NO AMENDMENTS DURING APPLICABLE PERIOD. Notwithstanding any provision of the Plan to the contrary, the Plan shall not be modified, amended or terminated in any respect during an Applicable Period if the effect of any such amendment would be to reduce any benefit payable to a Participant or that may become payable in the future to a Participant. 6.4 ADOPTION BY OTHER EMPLOYERS. Any subsidiary or other affiliate of the Company may adopt the Plan for the benefit of its employees by appropriate action of its Board of Directors. No subsidiary or other affiliate that is an adopting employer of the Plan pursuant to this Section 6.4 shall have any power at any time to modify or amend the Plan in any respect. ARTICLE VII ADMINISTRATION 7.1 AUTHORITY AND RESPONSIBILITY OF THE COMMITTEE. The Committee has the authority to control and manage the operation and administration of the Plan; provided that if the Committee for any reason fails or refuses to take any action required or permitted under the terms of the Plan, the Board of Directors of the Company may take such action in lieu of the Committee. The Committee shall be the "named fiduciary" of the Plan for purposes of ERISA. 7.2 COMMITTEE ACTIONS. Each decision of a majority of the members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act (a) at meetings called or held in person or by conference telephone call and (b) by unanimous written consent, and shall keep minutes of all meetings held and a record of all actions taken by unanimous written consent. 7.3 COMMITTEE POWERS AND DUTIES. The Committee shall enforce the Plan in accordance with its terms and, except as provided in Section 7.7, shall have all powers and discretion necessary or appropriate to supervise the administration of the Plan and to control its operation in accordance with its terms, including without limitation the following powers: -8- (a) to issue rules and regulations necessary for the conduct and administration of the Plan and to change, alter or amend such rules and regulations; (b) to interpret and determine the meaning of the Plan and to determine and resolve any questions arising under, or in connection with, the administration of the Plan; (c) to determine and resolve all questions relating to the eligibility of employees to become Participants and the rights of Participants to any payments under the Plan; (d) to compute the amount of Termination Payments, Gross Up Payments and other payments under the Plan to Participants; (e) to keep records relating to Participants and other matters applicable to the Plan; (f) to appoint an agent for service of legal process with respect to the Plan; (g) to prescribe procedures to be followed and forms to be used in the administration of the Plan, including adoption of a claims and appeal procedure in compliance with ERISA; (h) to make available for inspection and to provide upon request at such charge as may be permitted and determined by the Committee, documents and instruments required by ERISA to be disclosed to Participants; and (i) to file, or cause to be filed, all reports required by law to be filed with governmental agencies. 7.4 COMMITTEE DELEGATIONS AND ALLOCATIONS OF RESPONSIBILITY. (a) DELEGATION. The Committee shall have the authority to delegate, by instrument in writing filed in the Committee's minute book, all or any part of its responsibilities under the Plan to such person as it may deem advisable (and may authorize such person to delegate such responsibilities to such other person as the Committee shall authorize); and in the same manner, the Committee shall have the authority to revoke any such delegation of its responsibilities. Any action of the Committee delegate in the exercise of such delegated responsibilities shall have the same force and effect for all purposes under the Plan as if such action had been taken by the Committee. The Committee shall not be liable for any acts or omissions of any such delegate. The delegate shall report periodically to the Committee concerning the discharge of the delegated responsibilities. (b) ALLOCATION. The Committee shall have the authority to allocate from time to time, by instrument in writing filed in the Committee's minute book, all or any part of its responsibilities under the Plan to one or more of its members as it may deem advisable and in the same manner to revoke such allocation of responsibilities. Any action of the member to whom responsibilities are allocated in the exercise of such allocated responsibilities shall have the same force and effect for all purposes under the Plan as if such action had been taken by the Committee. The Committee shall -9- not be liable for any acts or omissions of any such member. The member to whom responsibilities have been allocated shall report periodically to the Committee concerning the discharge of the allocated responsibilities. (c) LIMITATION ON LIABILITY. Fiduciary duties and responsibilities that have been delegated or allocated pursuant to the terms of the Plan are intended to limit the liability of the Committee, the Boards of Directors of all Employers, and all Employers in accordance with the provisions of ERISA. 7.5 RECORDS. The regularly kept records of the Committee and Employer shall be conclusive evidence in the determination of any amounts to be paid to any Participant in accordance with the Plan. 7.6 FIDUCIARY CAPACITY. Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan. 7.7 REVIEW OF COMMITTEE DETERMINATIONS. Prior to a Change In Control, the Committee shall exercise unlimited discretion in making and resolving all determinations required or permitted under the Plan, and it is the intention of the Company that all such determinations actually made and resolved by the Committee shall be reviewed, if reviewed at all, in accordance with the arbitrary and capricious standard of review, with maximum deference given to the determination of the Committee. Following a Change In Control, the Committee shall have no discretion in making or resolving any determinations required under the Plan, and it is the intention of the Company that any such determinations made and resolved by the Committee shall be given no deference in any legal or equitable action. It is the further intention of the Company that no Participant shall be required to exhaust any administrative remedies, whether under the Plan or otherwise, as a condition to any legal or equitable action to obtain benefits under the Plan following a Change In Control. 7.8 CLAIMS; ARBITRATION. Any controversy or claim arising out of or relating to the Plan shall be settled exclusively by arbitration in Dallas, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrators may be entered in, and enforced by, any court having jurisdiction of such claim or controversy. ARTICLE VIII MISCELLANEOUS 8.1 NOTICES. All notices and other communications hereunder shall be in writing or by written telecommunication, and shall be deemed to have been duly given if delivered personally or if sent by nationally recognized overnight courier service, prepaid, or if mailed by certified mail, return receipt requested, or by written telecommunication, to the relevant address set forth below, -10- or to such other address as the recipient of such notice or communication shall have specified to the other party in accordance with this Section 8.1: If to Employer, to: with a copy to: CompUSA Inc. Thompson & Knight L.L.P. 14951 North Dallas Parkway 1700 Pacific Avenue, Suite 3300 Dallas, Texas 75240 Dallas, Texas 75201 Attention: General Counsel Attention: Fred W. Fulton Facsimile Number: (972) 982-4183 Facsimile Number: (214) 969-1751 If to a Participant, to his last known address as reflected in Employer's personnel records or such other address as shall be furnished in writing in accordance with this Section 8.1. Any such notice shall be deemed to have been given as of the date so mailed or sent. 8.2 WITHHOLDING; NO OFFSET. All payments required to be made by Employer under the Plan to a Participant shall be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. No payment under the Plan shall be subject to offset or reduction attributable to any amount a Participant may owe Employer or any other person. 8.3 LEGAL AND ACCOUNTING COSTS. Employer shall pay all attorneys' and accountants' fees and costs incurred by a Participant as a result of any breach by Employer of its obligations under the Plan, including without limitation all such costs incurred in contesting or disputing any determination made by Employer under the Plan or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment under the Plan. Reimbursements of such costs shall be made by Employer within 15 days after a Participant's presentation to Employer of any statements of such costs and thereafter shall bear interest at the maximum rate allowed by law until paid by Employer, and all accrued and unpaid interest shall bear interest at the same rate, all of which interest shall be compounded daily. 8.4 SEVERABILITY. If any provision of the Plan is held to be illegal, invalid or unenforceable, such provision shall be fully severable, and the Plan shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof, and the remaining provisions of the Plan shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of the Plan a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 8.5 WAIVERS. No delay or omission by either party in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. -11- 8.6 CAPTIONS. The captions in the Plan are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. 8.7 REFERENCE TO PLAN. Use of the words "hereof," "hereunder" and the like in the Plan refer to the Plan only as a whole and not to any particular section or subsection of the Plan, unless otherwise noted. 8.8 BINDING EFFECT. The Plan shall be binding upon and inure to the benefit of Employer and the Participants and shall be enforceable by the personal representatives and heirs of each Participant and the successors and assigns of Employer. The obligations of Employer under the Plan may be assigned by the Company or any Employer to any Employer; provided that in the event of any such assignment, the Company shall remain liable for all of its obligations hereunder and shall be liable for all obligations of all such assignees hereunder. If a Participant dies while any amounts are payable to him hereunder, such amounts shall be paid to the Participant's estate. The amounts payable under the Plan are not otherwise assignable by Participants. 8.9 GOVERNING LAW. Except to the extent provided by ERISA, the Plan and its performance shall be construed and governed in accordance with the laws of the State of Texas, without regard to its choice of law principles. 8.10 GENDER AND NUMBER. The masculine gender shall be deemed to denote the feminine or neuter genders, the singular to denote the plural, and the plural to denote the singular, where the context so permits. ARTICLE IX DEFINITIONS 9.1 DEFINITIONS. As used in the Plan, the following terms have the meanings set forth below: (a) ACCOUNTANTS has the meaning ascribed to it in Section 4.3. (b) ACQUIRED SECURITIES has the meaning ascribed to it in Section 5.1. (c) APPLICABLE PERIOD has the meaning ascribed to it in Section 3.1(c). (d) CHANGE IN CONTROL has the meaning ascribed to it in Section 2.1. (e) CODE means the Internal Revenue Code of 1986, as amended. (f) COMMITTEE means the Compensation Committee of the Board of Directors of the Company. -12- (g) COMPANY means CompUSA Inc., a Delaware corporation. (h) CONSTRUCTIVELY TERMINATED has the meaning ascribed to it in Section 3.1(f). (i) COVENANTS has the meaning ascribed to it in Section 5.1. (j) DETERMINATION has the meaning ascribed to it in Section 1313(a) of the Code. (k) EFFECTIVE DATE means October 1, 1999. (l) ELIGIBLE CATEGORY has the meaning ascribed to it in Section 1.3. (m) EMPLOYER refers collectively to the Company and any of its subsidiaries and other affiliates that adopt the Plan in accordance with Section 6.4. Each Participant shall be deemed to be employed by the Company and all compensation and benefits paid or provided to a Participant by any Employer at any time shall be deemed to have been paid or provided to the Participant by the Company regardless of whether a Participant's actual Employer is the Company or is a subsidiary or other affiliate of the Company. (n) ERISA means the Employee Retirement Income Security Act of 1974, as amended. (o) EXCISE TAX has the meaning ascribed to it in Section 4.1. (p) GOOD REASON has the meaning ascribed to it in Section 3.1(e). (q) GROSS UP PAYMENT has the meaning ascribed to it in Section 4.1. (r) INCENTIVE PLAN means, collectively, the CompUSA Inc. Long-Term Incentive Plan and the CompUSA Inc. Nonstatutory Option Plan, in each case as amended from time to time. (s) OPTIONS has the meaning ascribed to it in Section 5.1. (t) PARTICIPANT means an individual who satisfies the requirements of Article I to participate in the Plan. (u) PARTICIPATION AGREEMENT means a CompUSA Inc. Change In Control Termination Plan Participation and Noncompetition Agreement in such form as may be approved by the Committee from time to time. (v) PARACHUTE PAYMENTS has the meaning ascribed to it in Section 280G(b)(2) of the Code. (w) PLAN means the CompUSA Inc. 1999 Change In Control Termination Plan. -13- (x) RESTRICTED STOCK has the meaning ascribed to it in Section 5.1. (y) RIGHTS AGREEMENT has the meaning ascribed to it in Section 2.1. (z) TARGET BONUS means, with respect to each Participant, the dollar amount that is equal to the established percentage of such Participant's base salary that would be paid to the Participant under the management incentive bonus plan of Employer assuming the measurement criteria contained in such plan with respect to the Participant were achieved for the bonus period in which the Change In Control occurred. (aa) TERMINATION PAYMENT has the meaning ascribed to it in Section 3.1(a)(i). (bb) TRIGGERING TERMINATION has the meaning ascribed to it in Section 3.1(d). -14- EX-10.2 3 EXHIBIT 10.2 AS AMENDED AND RESTATED SEPTEMBER 1, 1999 COMPUSA INC. LONG-TERM INCENTIVE PLAN ARTICLE I DEFINITIONS As used in this Plan, the following terms will have the following meanings: 1.1. ANNUAL STOCKHOLDERS MEETING has the meaning ascribed to it in Section 4.2. 1.2. AUTOMATIC GRANT DATE has the meanings ascribed to it in Sections 4.2(a) and 4.2(b), as applicable. 1.3. AWARD means a grant of Options under Article IV of the Plan, a Restricted Stock Award under Article V of the Plan, a Stock Appreciation Rights Award under Article VI of the Plan, a Performance Share Award under Article VII of the Plan or a Stock Unit Award under Article VIII of the Plan. 1.4. AWARD AGREEMENT means an Option Agreement, Restricted Stock Agreement, Stock Appreciation Rights Agreement, Performance Share Agreement or Stock Unit Agreement. 1.5. BOARD means the Company's Board of Directors. 1.6. CAUSE means an act or acts engaged in by a Participant involving (i) a felony, (ii) fraud, (iii) embezzlement, (iv) gross or willful neglect of duty or misconduct, (v) the commission of any act that causes or reasonably may be expected to cause substantial injury to the Company. 1.7. CODE means the federal Internal Revenue Code of 1986, as amended. 1.8. COMMITTEE means a committee comprised of two or more Directors of the Company, appointed by the Board, the members of which satisfy the requirements for eligibility set forth in Section 3.1 and which is responsible for the administration of the Plan; provided that the full Board may at any time, in its sole discretion, exercise any or all functions and authority of the Committee. 1.9. COMMISSION means the United States Securities and Exchange Commission. 1.10. COMPANY means CompUSA Inc., a Delaware corporation. 1.11. DIRECTOR means a member of the Board of Directors of the Company or of a subsidiary thereof. 1.12. DISABILITY of a Participant will be deemed to occur whenever a Participant is rendered unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuing period of not less than 12 months. In the case of any dispute as to whether or not a Participant is disabled within the meaning of this Section, the determination of disability will be made by a licensed physician selected by the Board and acceptable to the Participant, which physician's decision will be final and binding. 1.13. EMPLOYEE means any employee of the Company or of any of its subsidiaries, as defined under Section 3401(c) of the Code and the regulations promulgated thereunder. 1.14. EMPLOYMENT AGREEMENT means an agreement, if any, between the Company or any subsidiary thereof and a Participant, setting forth the terms and conditions of the Participant's employment by the Company or such subsidiary. 1.15. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 1.16. GRANT DATE means, with respect to an Option, the date on which an Option is granted, as specified in Section 4.2 or, as applicable, in Section 4.3. 1.17. INCENTIVE OPTION means an Option that by its terms is intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Code. 1.18. MARKET VALUE means, on any date, the closing price per share of the Stock on the New York Stock Exchange on such date. 1.19. MINIMUM PERFORMANCE GOAL means the minimum objective(s) established by the Committee that must be satisfied before any portion of a Performance Share Award is earned. The Minimum Performance Goal may, in the sole discretion of the Committee, be the same as or less than the Performance Goal. 1.20. NONEMPLOYEE DIRECTOR means a member of the Board who is not an Employee. 1.21. NONSTATUTORY OPTION means any Option that is not an Incentive Option. 1.22. OPTION means an option to purchase Stock granted under the Plan. 1.23. OPTION AGREEMENT means a written agreement between the Company and a Participant setting forth the terms and conditions of an Option. 1.24. OPTION PRICE means the price to be paid by a Participant for a share of Stock upon exercise of an Option. -2- 1.25. PARTICIPANT means a person to whom an Award has been granted. 1.26. PERFORMANCE CYCLE OR CYCLE means a period of years selected by the Committee during which the performance of the Company and/or the Participant is measured for the purpose of determining the extent to which Performance Shares that have been contingently awarded with respect to such Cycle are earned. 1.27. PERFORMANCE GOAL means the objective(s) established by the Committee at the time each Performance Share Award is granted with respect to the related Performance Cycle for the purpose of determining the extent to which Performance Shares that have been contingently awarded for such Cycle are earned. 1.28. PERFORMANCE SHARE OR PERFORMANCE SHARE AWARD means an Award granted pursuant to Article VII expressed as a share of Stock. 1.29. PERFORMANCE SHARE AGREEMENT means a written agreement between the Company and a Participant setting forth the terms and conditions of a Performance Share Award. 1.30. PLAN means this Long-Term Incentive Plan of the Company, as amended from time to time. 1.31. RESTRICTED STOCK OR RESTRICTED STOCK AWARD means an award of Stock granted under Article V. 1.32. RESTRICTED STOCK AGREEMENT means a written agreement between the Company and a Participant with respect to a Restricted Stock Award. 1.33. RETIREMENT means resignation by the Participant on or after the date on which the Participant has served the Company or one or more subsidiaries thereof for at least five years in the aggregate. 1.34. RULE 16b-3 means Rule 16b-3 or its successors promulgated under the Exchange Act. 1.35. SECURITIES ACT means the Securities Act of 1933, as amended. 1.36. SECTION 162(m) means Section 162(m) of the Code and the regulations promulgated thereunder. 1.37. STOCK means Common Stock, par value $.01 per share, of the Company or, in the event the outstanding shares of such stock are hereafter changed into or exchanged for shares of a different security of the Company or some other corporation, such other security. -3- 1.38. STOCK APPRECIATION RIGHT OR STOCK APPRECIATION RIGHTS AWARD means an Award granted under Article VI. 1.39. STOCK APPRECIATION RIGHTS AGREEMENT means an agreement between the Company and a Participant setting forth the terms and conditions of a Stock Appreciation Rights Award. 1.40. STOCK UNIT OR STOCK UNIT AWARD means an award of Stock or units granted under Article VIII. 1.41. STOCK UNIT AGREEMENT means a written agreement between the Company and a Participant setting forth the terms and conditions of a Stock Unit Award. 1.42. TEN PERCENT OWNER means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or its parent or subsidiary corporations, within the meaning of Sections 424(e) and 424(f) of the Code). Whether a person is a Ten Percent Owner will be determined with respect to each Option based on the facts existing immediately prior to the Grant Date of such Option. 1.43. VESTING YEAR for any portion of any Incentive Option means the calendar year in which that portion of the Option first becomes exercisable. ARTICLE II GENERAL 2.1. PURPOSE. This Plan is intended to encourage ownership of Stock by Participants and to provide additional incentives for them to promote the success of the Company's business. The Company intends that Incentive Options granted under Article IV will qualify as "incentive stock options" within the meaning of Section 422 of the Code. 2.2. TERM OF THE PLAN. Awards may be granted not later than August 31, 2009. 2.3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 9.2 and subject to any additional restrictions elsewhere in the Plan, the maximum aggregate number of shares of Stock that may be issued from time to time on or after September 1, 1999 pursuant to the Plan may not exceed the total of (a) 16,416,699 shares plus (b) a number of shares equal to the number of shares of Restricted Stock outstanding under the Plan as of September 1, 1999 that are forfeited and returned to the Company at any time on or after September 1, 1999. The maximum aggregate number of shares of Stock with respect to which Awards may be granted to any Participant during the term of the Plan may not exceed 50% of the total number of shares of Stock that may be issued from time to time under the Plan. Shares to be issued pursuant to Awards may be either authorized but unissued shares or shares held by the Company in its treasury. If shares of Stock are reacquired by the Company pursuant to the provisions of the Plan or if Options expire or terminate for any -4- reason without having been exercised in full, the reacquired shares and/or the shares not purchased will again be available for issuance under the Plan to the extent permitted by law. 2.4. ELIGIBILITY. Any full-time or part-time Employee, Director, consultant or advisor of one or more of the Company or any subsidiary thereof will be eligible to be a Participant; provided that Incentive Options may be granted only to Employees. 2.5. ACCELERATION IN CERTAIN EVENTS. The Committee may accelerate the exercisability of any Option or Stock Appreciation Right or waive any restrictions and/or Performance Goals with respect to shares of Restricted Stock, Performance Shares or Stock Units in whole or in part at any time. In addition, notwithstanding the provisions of any Award Agreement, the following provisions will apply: (a) MERGERS AND REORGANIZATIONS. In the event the Company or its stockholders enter into an agreement to dispose of all or substantially all of the assets of the Company by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which the Company is not the surviving corporation, any Option or Stock Appreciation Right will become immediately exercisable with respect to the full number of shares subject to that Option or Stock Appreciation Right and all restrictions and/or Performance Goals will be deemed lapsed, waived and/or satisfied (as applicable) with respect to any Restricted Stock Award, Performance Share Award or Stock Unit Award; provided that no Option or Stock Appreciation Right will be immediately exercisable and no restrictions or Performance Goals will be deemed lapsed, waived and/or satisfied with respect to a Restricted Stock Award, Performance Share Award or Stock Unit Award under this Section 2.5 on account of any agreement of merger or other reorganization when the stockholders of the Company immediately before the consummation of the transaction will own at least 50% of the total combined voting power of all classes of stock entitled to vote of the surviving entity immediately after the consummation of the transaction. (b) CHANGE IN CONTROL. All Options and Stock Appreciation Rights will become immediately exercisable and all restrictions and/or Performance Goals related to any Restricted Stock Award, Performance Share Award or Stock Unit Award will be deemed lapsed, waived and/or satisfied (as applicable) in the event any Person (other than a Person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) or its successors promulgated under the Exchange Act) meets the requirements for becoming an Acquiring Person, whether or not a Distribution Date occurs or the Rights are redeemed by the Company, as those terms are defined in the Rights Agreement dated as of April 29, 1994 between the Company and Bank One, Texas, N.A., as Rights Agent (American Stock Transfer & Trust Company became successor Rights Agent August 19, 1996). 2.6. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan, if at any time in the reasonable opinion of the Company the issuance of shares of Stock pursuant to an Award may constitute a violation of law, then the Company may delay such issuance -5- and the delivery of a certificate for such shares of Stock until (i) approval has been obtained from such governmental agencies, other than the Commission, as may be required under any applicable law, rule or regulation and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the Commission, one of the following conditions has been satisfied: (a) the issuance of shares of Stock is effectively registered under the Securities Act; or (b) a no-action letter in form and substance reasonably satisfactory to the Company with respect to the issuance of such shares has been obtained by the Company from the staff of the Commission. The Company will make all reasonable efforts to bring about the occurrence of such events. 2.7. PURCHASE FOR INVESTMENT; SUBSEQUENT REGISTRATION. (a) Unless the issuance of shares of Stock to be issued pursuant to an Award has been effectively registered under the Securities Act, the Company will be under no obligation to issue any shares of Stock pursuant to an Award unless the Participant gives a written representation to the Company that is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he is acquiring the shares of Stock issued pursuant to such Award as an investment and not with a view to, or for sale in connection with, the distribution of any such shares of Stock. (b) If required in the opinion of counsel, each certificate representing shares of Stock issued pursuant to an Award will bear a reference to the investment representation made in accordance with this Section 2.7 and to the fact that no registration statement has been filed with the Commission in respect of the issuance of such shares of Stock. (c) If the Company deems it necessary or desirable to register under the Securities Act or other applicable statutes the issuance of any shares of Stock with respect to which an Award has been granted, or to qualify the issuance of any such shares for exemption from the Securities Act or other applicable statutes, then the Company will take such action at its own expense. The Company may require from each Participant such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Company and its Directors and officers from such holder against all losses, claims, damages and liabilities arising from such use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. -6- 2.8. WITHHOLDING; NOTICE OF DISPOSITION OF STOCK PRIOR TO EXPIRATION OF SPECIFIED HOLDING PERIOD. (a) Whenever shares of Stock are to be issued pursuant to an Award, the Company will have the right to require the Participant to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements (whether so required to secure for the Company an otherwise available tax deduction or otherwise) prior to the delivery of any certificate or certificates for such shares of Stock. (b) When a Participant is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with an Award, such payment may be made, in whole or in part, (i) in cash, (ii) by check, (iii) if permitted by the Committee, by delivery to the Company of shares of Stock already owned by the Participant having a Market Value on the date on which the amount of tax to be withheld is determined (the "Tax Date") equal to the amount required to be withheld, (iv) with respect to Options, through the withholding by the Company ("Company Withholding") of a portion of the shares of Stock acquired upon the exercise of the Options, or (v) in any other form of valid consideration, as permitted by the Committee in its sole discretion. (c) The Company may require as a condition to the issuance of shares of Stock upon exercise of an Incentive Option that the party exercising such Option give a written representation to the Company, which is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he will report to the Company any disposition of such shares prior to the expiration of the holding periods specified by Section 422(a)(1) of the Code. If and to the extent that the realization of income in such a disposition imposes upon the Company federal, state, local or other withholding tax requirements, or any such withholding is required to secure for the Company an otherwise available tax deduction, the Company will have the right to require that the recipient remit to the Company an amount sufficient to satisfy those requirements; and the Company may require as a condition to the issuance of shares of Stock upon exercise of an Incentive Option that the party exercising such option agree, in writing in a form satisfactory to the Company, to make such a remittance. 2.9. RESERVATION OF STOCK. The Company must at all times during the term of the Plan reserve or otherwise keep available such number of shares of Stock as will be sufficient to satisfy the requirements of the Plan and will pay all fees and expenses necessarily incurred by the Company in connection therewith. 2.10. NO SPECIAL EMPLOYMENT OR OTHER RIGHTS. Nothing contained in the Plan or in any Award will confer upon any Participant any right with respect to the continuation of his employment or service with the Company (or any subsidiary), or interfere in any way with the right of the Company (or any subsidiary), subject to the terms of any separate employment or consulting agreement or provision of law or certificate of incorporation or bylaws to the contrary, at any time -7- to terminate such employment or consulting agreement or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award. ARTICLE III ADMINISTRATION 3.1. ADMINISTRATION. Subject to the provisions of the Plan, the Plan will be administered by the Committee. Each member of the Committee must qualify as a "Non-Employee Director" within the meaning of Rule 16b-3. In addition, with respect to any Award that the Company intends to qualify for the exception for qualified performance-based compensation set forth in Section 162(m), such Award must be granted solely by "outside directors" within the meaning of such section. The Committee will have sole discretion and authority to determine from time to time the Participants to whom Awards will be granted and the number of shares of Stock subject to each Award, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine and interpret the terms and provisions of each Award Agreement or waive any conditions, restrictions and/ or Performance Goals applicable to any Option or Stock Appreciation Right (or the exercise thereof) or to any shares of Restricted Stock, Performance Shares or Stock Units, and to make all other determinations necessary or advisable for the administration of the Plan. In making such determinations, the Committee may take into account the nature of the services rendered by the respective Participants, their present and potential contributions to the success of the Company and its subsidiaries, and such other factors as the Committee in its sole discretion deems relevant. The Committee's determinations on the matters referred to in this Section 3.1 will be conclusive. ARTICLE IV OPTIONS 4.1 GRANT OF OPTIONS. The Committee may, in its sole discretion, grant Options in accordance with the terms and conditions set forth in the Plan. Each Option Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 4.2. AUTOMATIC GRANTS OF OPTIONS TO NONEMPLOYEE DIRECTORS. (a) DIRECTORS ELECTED OR RE-ELECTED AT ANNUAL STOCKHOLDERS MEETING. Each Nonemployee Director who is elected or re-elected to the Board at an annual stockholders meeting or special meeting in lieu of an annual meeting (an "Annual Stockholders Meeting"), or continues to serve as a Nonemployee Director after such Annual Stockholders Meeting, is hereby granted, on the date of such meeting (as used in or with reference to this Section 4.2(a), an "Automatic Grant Date"), a Nonstatutory Option to purchase that whole number of shares (without any fraction) of Stock calculated by dividing $50,000 by the Market Value on the Automatic Grant Date. Each Option granted to a Participant under this Section 4.2(a) will (i) have an Option Price equal to 100% of the Market Value of the Stock on the Automatic Grant Date, (ii) terminate on the tenth anniversary of the Automatic Grant -8- Date and (iii) become exercisable in three equal installments as follows: 33 1/3% on the first anniversary of the Automatic Grant Date, an additional 33 1/3% on the second anniversary of the Automatic Grant Date, and an additional 33 1/3% on the third anniversary of the Automatic Grant Date. (b) DIRECTORS ELECTED AT OTHER TIMES. Each Nonemployee Director who is elected to the Board on a date other than the day of an Annual Stockholders Meeting (as used in or with reference to this Section 4.2(b), an "Automatic Grant Date") is hereby granted, on the Automatic Grant Date, an Option to purchase the number of shares of Stock set forth below, which Option will become exercisable if the Participant remains a Nonemployee Director as set forth below: (1) If such individual is elected after the day of an Annual Stockholders Meeting but on or before December 31, he is hereby granted an Option to purchase that whole number of shares (without any fraction) of Stock calculated by dividing $37,500 by the Market Value on the Automatic Grant Date, which Option will become exercisable in three equal installments as follows: 33 1/3% on the first anniversary of the Automatic Grant Date, an additional 33 1/3% on the second anniversary of the Automatic Grant Date, and an additional 33 1/3% on the third anniversary of the Automatic Grant Date. (2) If such individual is elected on or after January 1 but on or before March 31, he is hereby granted an Option to purchase that whole number of shares (without any fraction) of Stock calculated by dividing $25,000 by the Market Value on the Automatic Grant Date, which Option will become exercisable in three equal installments as follows: 33 1/3% on the first anniversary of the Automatic Grant Date, an additional 33 1/3% on the second anniversary of the Automatic Grant Date, and an additional 33 1/3% on the third anniversary of the Automatic Grant Date. (3) If such individual is elected on or after April 1 but on or before June 30, he is hereby granted an Option to purchase that whole number of shares (without any fraction) of Stock calculated by dividing $12,500 by the Market Value on the Automatic Grant Date, which Option will become exercisable in three equal installments as follows: 33 1/3% on the first anniversary of the Automatic Grant Date, an additional 33 1/3% on the second anniversary of the Automatic Grant Date, and an additional 33 1/3% on the third anniversary of the Automatic Grant Date. Each Option granted to a Nonemployee Director under Section 4.2(b) will have an Option Price equal to 100% of the Market Value on the Automatic Grant Date and will terminate on the tenth anniversary of the Automatic Grant Date. 4.3. TIME OF GRANTING OPTIONS. Except as provided in Sections 4.2(a) and 4.2(b), the granting of an Option will take place at the time specified in the Option Agreement. -9- 4.4. OPTION PRICE. The Option Price under each Incentive Option may not be less than 100% of the Market Value on the Grant Date, or less than 110% of the Market Value on the Grant Date if the Participant is a Ten Percent Owner. The Option Price under each Nonstatutory Option will not be so limited solely by reason of this Section 4.4. 4.5. OPTION PERIOD. No Incentive Option may be exercised later than the tenth anniversary of the Grant Date, or, if the Participant is a Ten Percent Owner, not later than the fifth anniversary of the Grant Date. The option period under each Nonstatutory Option will not be so limited solely by reason of this Section 4.5. Options may become exercisable in such installments, cumulative or noncumulative, as the Committee may determine. 4.6. LIMIT ON INCENTIVE OPTION CHARACTERIZATION. To the extent any Option fails to qualify as an Incentive Option, such Option will be considered a Nonstatutory Option. 4.7. EXERCISE OF OPTIONS. (a) METHOD OF EXERCISE. Each Option will be exercisable in accordance with the terms of the Option Agreement pursuant to which the Option was granted. No Option may be exercised for a fraction of a share of Stock. (b) PAYMENT OF PURCHASE PRICE. The purchase price of any shares of Stock purchased must be paid at the time of exercise of the Option either (i) in cash, (ii) by certified or cashier's check, (iii) by shares of Stock, if permitted by the Committee, (iv) if then permitted under the laws of the State of Delaware and approved by the Committee, by a promissory note for the total purchase price of the shares of Stock being purchased, which note will contain such terms and provisions as the Committee may approve, including without limitation the right to repay the note partially or wholly with Stock, (v) by delivery of a copy of irrevocable instructions from the Participant to a broker or dealer, reasonably acceptable to the Company, to sell certain of the shares of Stock purchased upon exercise of the Option or to pledge them as collateral for a loan and promptly deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price or (vi) in any other form of valid consideration, as permitted by the Committee in its sole discretion. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Stock, those shares will be valued at the then Market Value. 4.8. TERMINATION OF EMPLOYMENT OR ASSOCIATION WITH THE COMPANY. (a) TERMINATION OF EMPLOYMENT WITH THE COMPANY. If a Participant ceases to be employed by the Company or any subsidiary thereof because the Participant is terminated for Cause, any Options held by that Participant will automatically expire. If a Participant's employment is terminated for any reason other than for Cause or due to death, such Participant's Option will be exercisable (to the extent exercisable on the date of termination of the Participant's employment or, if the Committee, in its sole discretion, has accelerated -10- the vesting of such Option, to the extent exercisable following such acceleration) at any time within 30 days after he ceases to be an Employee (or within (i) three months after termination if on account of Retirement or (ii) 12 months after termination if on account of Disability), unless by its terms it expires earlier or unless, with respect to any Nonstatutory Option, the Committee agrees, in its sole discretion, to extend the term of such Option; provided that the term of any such Option will not be extended beyond its original term. If a Participant dies while employed by the Company or any subsidiary thereof, or within three months after ceasing to be an Employee, such Participant's Option will be exercisable (to the extent exercisable on the date of death, or, if the Committee, in its sole discretion, has accelerated the vesting of such Option, to the extent exercisable following such acceleration) at any time within 12 months after the date of death, unless by its terms it expires earlier or unless, with respect to any Nonstatutory Option, the Committee agrees, in its sole discretion, to extend the term of such Option; provided that the term of any such Option will not be extended beyond its original term. Military or sick leave will not be deemed a termination of employment, provided that it does not exceed the longer of three months or the period during which the absent Participant's reemployment rights, if any, are guaranteed by statute or by contract. The foregoing is qualified by the following: (i) if any facts that would constitute Cause for termination of employment of a Participant are brought to the attention of the Committee after the Participant's employment with the Company or any subsidiary thereof has ended, any Options then held by the Participant may be immediately terminated by the Committee and (ii) if a Participant is an Employee employed pursuant to a written Employment Agreement, the Participant's employment with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's employment is considered under the circumstances to have been terminated for cause for purposes of such agreement. (b) TERMINATION OF ASSOCIATION WITH THE COMPANY. If (i) a Nonemployee Director is removed for Cause or (ii) a consultant or advisor or other Participant who is not an Employee has his relationship with the Company terminated for Cause, any Options held by any such Participant will automatically expire. In all other cases, any Options held by such a Participant, to the extent exercisable on the date of termination of the Participant's association with the Company, will remain exercisable and will expire in accordance with the terms of the applicable Option Agreement; provided that (i) if any facts that would constitute cause for removal or termination of a Participant who is a Nonemployee Director, consultant or advisor or other person who is not an Employee are brought to the attention of the Committee after such Participant's association with the Company has ended, any Options held by such Participant may be immediately terminated by the Committee, and (ii) if such Participant has been retained pursuant to a written agreement, the Participant's relationship with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's association with the Company is considered under the circumstances to have been terminated for cause for purposes of such written agreement. -11- 4.9. TRANSFERABILITY OF OPTIONS. (a) INCENTIVE OPTIONS. Incentive Options may not be transferred or assigned other than by will or the laws of descent and distribution and may be exercised during the lifetime of the Participant only by the Participant or by the Participant's legally authorized representative, and each Option Agreement in respect of an Incentive Option will so provide. The designation by a Participant of a beneficiary will not constitute a transfer of the Option. (b) NONSTATUTORY OPTIONS. With respect to Nonstatutory Options, the Committee may, in its sole discretion, provide in any Option Agreement (or in an amendment to any existing Option Agreement) such provisions regarding transferability of the Nonstatutory Options as the Committee, in its sole discretion, deems appropriate. 4.10. LIMITATION OF RIGHTS IN STOCK. A Participant will not be deemed for any purpose to be a stockholder of the Company with respect to any of the shares of Stock covered by an Option, except to the extent the Option has been exercised with respect thereto and, in addition, a certificate has been issued therefor and delivered to the Participant or his agent. Any Stock issued pursuant to the Option will be subject to all restrictions upon the transfer thereof that may be now or hereafter imposed by the Certificate of Incorporation of the Company (as amended or restated from time to time), the Bylaws of the Company (as amended or restated from time to time) and any applicable Employment Agreement. 4.11. OPTION REPRICINGS PROHIBITED. Notwithstanding any other provision of the Plan, neither the Board nor the Committee shall, except as provided under Section 9.2, (a) amend or modify any Options previously granted under the Plan to reduce the Option Price of such Options or (b) cancel any Options previously granted under the Plan in connection with the grant to the holders of such Options of new Options under the Plan at a lower Option Price. ARTICLE V RESTRICTED STOCK 5.1 GRANT OF RESTRICTED STOCK AWARDS. The Committee may, in its sole discretion, grant Restricted Stock Awards in accordance with the terms and conditions set forth in the Plan. Each Restricted Stock Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 5.2. TERMS AND CONDITIONS. Each Restricted Stock Award confers upon the recipient thereof the right to receive a specified number of shares of Stock in accordance with the terms and conditions of each Participant's Restricted Stock Agreement. The general terms and conditions of a Restricted Stock Award will be as follows: (a) Any shares of Stock awarded hereunder to a Participant will be restricted for a period of time to be determined by the Committee for each Participant at the time of the -12- Award, which period shall be not more than ten years. The restrictions will prohibit the sale, assignment, transfer, pledge or other encumbrance of such shares, and will provide for possible reversion thereof to the Company in accordance with subparagraph (b) during the period of restriction. (b) All Restricted Stock awarded under this Plan to a Participant will be forfeited and returned to the Company in the event the Participant's employment or service with the Company or a subsidiary thereof is terminated prior to the expiration of the period of restriction, unless the Participant's termination of employment or service is due to his death, Disability or Retirement or unless the Committee, in its sole discretion, waives the restrictions established in accordance with subparagraph (a) with respect to any or all of the shares of Restricted Stock. (c) In the event of a Participant's death or Disability, the restrictions established in accordance with subparagraph (a) will lapse with respect to all Restricted Stock awarded to the Participant prior to any such event, and the shares of Stock involved will cease to be Restricted Stock and will no longer be subject to forfeiture to the Company pursuant to subparagraph (b). (d) In the event of a Participant's Retirement, the restrictions established in accordance with subparagraph (a) will continue to apply unless the Committee in its sole discretion shortens the restriction period. (e) Stock certificates issued with respect to Restricted Stock Awards will be registered in the name of the Participant, but will be delivered by him to the Company together with a stock power endorsed in blank. Each such certificate will bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE, RESTRICTIONS ON TRANSFER AND CERTAIN OTHER TERMS AND CONDITIONS SET FORTH IN THE COMPUSA INC. LONG-TERM INCENTIVE PLAN AND THE AGREEMENT BETWEEN THE REGISTERED OWNER OF THE SHARES REPRESENTED BY THIS CERTIFICATE AND COMPUSA INC. ENTERED INTO PURSUANT TO SUCH PLAN." From the time of grant of the Restricted Stock Award, the Participant will be entitled to exercise all rights (including dividend and voting rights) with respect to the shares represented by such certificate, subject to forfeiture of such voting rights and the Stock as provided in subparagraph (b). (f) Upon the lapse of a restriction period as determined pursuant to subparagraph (a), the Company will return the stock certificates representing the shares with respect to -13- which the restriction has lapsed to the Participant or his legal representative, and pursuant to the instruction of the Participant or his legal representative will issue a certificate for such shares that does not bear the legend set forth in subparagraph (e). (g) Any other securities or assets (other than ordinary cash dividends) that are received by a Participant with respect to Restricted Stock awarded to him, which is still subject to restrictions established in accordance with subparagraph (a), will be subject to the same restrictions and will be delivered by the Participant to the Company as provided in subparagraph (e). 5.3. NOTICE TO COMPANY OF SECTION 83(b) ELECTION. Any Participant who exercises an election under Section 83(b) of the Code to have his receipt of Shares of Restricted Stock taxed currently, without regard to restrictions, must give notice to the Company of such election immediately upon making such election. Such an election must be made within 30 days after the effective date of issuance and cannot be revoked except with the consent of the Internal Revenue Service. ARTICLE VI STOCK APPRECIATION RIGHTS 6.1. GRANT OF STOCK APPRECIATION RIGHTS. The Committee may, in its sole discretion, grant Stock Appreciation Rights in accordance with the terms and conditions set forth in the Plan. Each Stock Appreciation Rights Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 6.2. TERMS AND CONDITIONS. A Stock Appreciation Right will entitle a Participant to receive an amount equal to (or if the Committee shall so determine at the time of grant, less than) the excess of the Market Value on the date of exercise over the Market Value on the date of grant of such right (or such other price as is set by the Committee), multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised. 6.3. FORM OF GRANT. A Stock Appreciation Right may be granted in combination with, in addition to, or completely independent of, an Option or any other Award. 6.4. FORM OF PAYMENT. Settlement of a Stock Appreciation Right may be made (i) in cash, (ii) by certified or cashier's check, (iii) if permitted by the Committee, in shares of Stock or (iv) in any other form of valid consideration, as determined by the Committee in its sole discretion. However, any Stock Appreciation Right exercised upon or subsequent to the occurrence of an event described in Sections 2.5(a) or 2.5(b) must be paid in cash. 6.5. EXERCISE OF STOCK APPRECIATION RIGHTS; EFFECTS ON OPTIONS AND VICE-VERSA. Each Stock Appreciation Right will be exercisable in accordance with the terms of the Stock Appreciation Rights Agreement pursuant to which the Stock Appreciation Right is granted. Whenever a Stock -14- Appreciation Right is granted in relation to an Option and the exercise of one affects the right to exercise the other, the number of shares of Stock available under the Option to which the Stock Appreciation Right relates will decrease by a number equal to the number of shares of Stock for which the Stock Appreciation Right is exercised. Upon the exercise of an Option, any related Stock Appreciation Right will terminate as to any number of shares of Stock subject to such Stock Appreciation Right that exceeds the total number of shares of Stock for which the Option remains unexercised. 6.6. TRANSFERABILITY OF STOCK APPRECIATION RIGHTS. Subject to Section 6.8, the Committee may, in its sole discretion, provide in any Stock Appreciation Rights Agreement (or in an amendment to any existing Stock Appreciation Rights Agreement) such provisions regarding transferability of the Stock Appreciation Rights as the Committee, in its sole discretion, deems appropriate. 6.7. TERMINATION OF EMPLOYMENT OR SERVICE. Whenever a Stock Appreciation Right is granted in relation to an Option and the exercise of one affects the right to exercise the other, in the event of the termination of the Participant's employment or service with the Company, the Stock Appreciation Right may be exercised only during the period, if any, within which the Option to which it relates may be exercised. If a Stock Appreciation Right is granted independently of an Option under the Plan, the following provisions will apply: (a) TERMINATION OF EMPLOYMENT WITH THE COMPANY. If a Participant ceases to be employed by the Company or any subsidiary thereof because the Participant is terminated for Cause, any Stock Appreciation Rights held by that Participant will automatically expire. If a Participant's employment is terminated for any reason other than Cause or due to death, such Participant's Stock Appreciation Right will be exercisable (to the extent exercisable on the date of termination of the Participant's employment or, if the Committee, in its sole discretion, has accelerated the vesting of such Stock Appreciation Right, to the extent exercisable following such acceleration) at any time within 30 days after he ceases to be an Employee (or within (i) three months after termination if on account of Retirement or (ii) 12 months after termination if on account of Disability), unless by its terms it expires earlier or unless the Committee agrees, in its sole discretion, to extend the term of such Stock Appreciation Right; provided that the term of any such Stock Appreciation Right will not be extended beyond its original term. If a Participant dies while employed by the Company or any subsidiary thereof, or within three months after ceasing to be an Employee, such Participant's Stock Appreciation Right will be exercisable (to the extent exercisable on the date of death, or, if the Committee, in its sole discretion, has accelerated the vesting of such Stock Appreciation Right, to the extent exercisable following such acceleration) at any time within 12 months after the date of death, unless by its terms it expires earlier or unless the Committee agrees, in its sole discretion, to extend the term of such Stock Appreciation Right; provided that the term of any such Stock Appreciation Right will not be extended beyond its original term. Military or sick leave will not be deemed a termination of employment, provided that it does not exceed the longer of three months or the period during -15- which the absent Participant's reemployment rights, if any, are guaranteed by statute or by contract. The foregoing is qualified by the following: (i) if any facts that would constitute Cause for termination of employment of a Participant are brought to the attention of the Committee after the Participant's employment with the Company or any subsidiary thereof has ended, any Stock Appreciation Rights then held by the Participant may be immediately terminated by the Committee and (ii) if a Participant is an Employee employed pursuant to a written Employment Agreement, the Participant's employment with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's employment is considered under the circumstances to have been terminated for cause for purposes of such agreement. (b) TERMINATION OF ASSOCIATION WITH THE COMPANY. If a consultant or advisor or other Participant who is not an Employee has his relationship with the Company terminated for Cause, any Stock Appreciation Rights held by any such Participant will automatically expire. In all other cases, any Stock Appreciation Rights held by such a Participant, to the extent exercisable on the date of termination of the Participant's association with the Company, will remain exercisable and will expire in accordance with the terms of the applicable Stock Appreciation Rights Agreement; provided that (i) if any facts that would constitute cause for removal or termination of a Participant who is a consultant or advisor or other person who is not an Employee are brought to the attention of the Committee after such Participant's association with the Company has ended, any Stock Appreciation Rights held by such Participant may be immediately terminated by the Committee and (ii) if such Participant has been retained pursuant to a written agreement, the Participant's relationship with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's association with the Company is considered under the circumstances to have been terminated for cause for purposes of such written agreement. 6.8. TANDEM INCENTIVE OPTION - STOCK APPRECIATION RIGHT. Whenever an Incentive Option and a Stock Appreciation Right are granted together and the exercise of one affects the right to exercise the other, the following requirements shall apply: (a) The Stock Appreciation Right will expire no later than the expiration of the underlying Incentive Option. (b) The Stock Appreciation Right may be for no more than the difference between the Option Price of the underlying Incentive Option and the Market Value of the Stock subject to the underlying Incentive Option at the time the Stock Appreciation Right is exercised. (c) The Stock Appreciation Right is transferable only when the underlying Incentive Option is transferable, and under the same conditions. -16- (d) The Stock Appreciation Right may be exercised only when the underlying Incentive Option is eligible to be exercised. (e) The Stock Appreciation Right may be exercised only when the Market Value of the Stock subject to the underlying Incentive Option exceeds the Option Price of the underlying Incentive Option. 6.9. WRITTEN NOTICE REQUIRED. Any Stock Appreciation Right will be deemed to be exercised when written notice of exercise has been received by the Company at its principal office from the person entitled to exercise the Stock Appreciation Right. ARTICLE VII PERFORMANCE SHARES 7.1. GRANT OF PERFORMANCE SHARES. The Committee may, in its sole discretion, grant Performance Shares in accordance with the terms and conditions set forth in the Plan. Each Performance Share Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 7.2. TERMS AND CONDITIONS. Performance Shares may be earned based on the attainment of Performance Goals established by the Committee for a particular Performance Cycle. The Committee may establish Performance Goals on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. 7.3. AMOUNT OF PAYMENT. After the end of each Performance Cycle, the Committee will determine the number of Performance Shares earned by each Participant with respect to the Performance Cycle in accordance with the following: (a) If the Performance Goal is attained or exceeded, a Participant will be deemed to have earned the full number of Performance Shares granted to the Participant. (b) If the Minimum Performance Goal is not attained, a Participant will be deemed to have earned no Performance Shares. (c) If the Performance Goal is not attained, but the Minimum Performance Goal is attained or exceeded, the number of Performance Shares deemed to have been earned by a Participant will be a portion of the Performance Shares, as determined based on a formula established by the Committee at the time of grant. (d) If a Participant's employment or service with the Company or any subsidiary thereof has terminated because of death, Disability or Retirement prior to the end of a Performance Cycle, the number of Performance Shares such Participant will be deemed to have earned shall be the number of Performance Shares determined as though such -17- Participant's employment or service had not terminated, multiplied by a fraction, the numerator of which is the number of months such Participant was employed or served the Company or a subsidiary thereof during the Performance Cycle (including the month during which employment or service terminated) and the denominator of which is the total number of months in the Performance Cycle. (e) If the Participant's employment or service has terminated for any reason other than death, Disability or Retirement, such Participant will be deemed to have earned no Performance Shares except as and to the extent the Committee may determine; provided that the number of Performance Shares that may be so determined by the Committee to have been earned may not exceed the number that would have been earned had the provisions of Section 7.3(a) been applicable. (f) At any time prior to the end of a Performance Cycle, the Committee may adjust downward (but not upward) the Performance Goal and/or the Minimum Performance Goal as a result of major events unforeseen at the time the Performance Shares were awarded, such as changes in the economy, the industry, laws affecting the operation of the Company or any subsidiary thereof, changes in applicable tax laws or accounting principles or any other event the Committee determines would have a significant impact upon the probability of attaining the previously established Performance Goal and/or Minimum Performance Goal. 7.4. FORM OF PAYMENT. Payment in respect of earned Performance Shares will be made to the Participant or, if the Participant has died, to the Participant's designated beneficiary, as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under Section 7.3. Payment in respect of earned Performance Shares may be made in cash, in shares of Stock or a combination thereof, as determined by the Committee in its sole discretion at the time of payment. 7.5. ADDITIONAL AWARDS. In the sole discretion of the Committee, a Performance Share Award may provide the Participant with (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to such Award. ARTICLE VIII STOCK UNIT AWARDS 8.1. GRANT OF STOCK UNIT AWARDS. The Committee may, in its sole discretion, grant Stock Unit Awards in accordance with the terms and conditions set forth in the Plan. Each Stock Unit Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 8.2 TERMS AND CONDITIONS. Stock Unit Awards may be in the form of Stock or units, the value of which is based, in whole or in part, on the Market Value of Stock. Stock Unit Awards will be subject to such terms, restrictions, conditions, vesting requirements and payment -18- requirements as the Committee may determine in its sole discretion at the time of grant, including without limitation the following: (a) Any shares of Stock that are part of a Stock Unit Award may be subject to restrictions on sale, assignment, transfer, pledge or other encumbrance. (b) Stock Unit Awards may provide for the payment of cash consideration by the Participant or provide that the Award, and any Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration. (c) Stock Unit Awards may relate in whole or in part to certain performance criteria established by the Committee. (d) Stock Unit Awards may provide for deferred payment schedules and/or vesting over a specified period of employment or service with the Company or any subsidiary thereof. 8.3. ADDITIONAL AWARDS. In the sole discretion of the Committee, a Stock Unit Award may provide the Participant with (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to such Award. ARTICLE IX TERMINATION, AMENDMENT AND ADJUSTMENT 9.1. TERMINATION AND AMENDMENT OF THE PLAN. The Board (or, if the Board has specifically delegated this authority to the Committee, the Committee) may at any time terminate the Plan or make such modifications of the Plan as it deems advisable; provided that no amendment may be made without approval of the stockholders of the Company if such approval is required under applicable law. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award has theretofore been granted, adversely affect the rights of such Participant under such Award. 9.2. ADJUSTMENT. In the event of any stock dividend payable in Stock or any split-up or contraction of the number of shares of Stock after the date an Award is granted and prior to the exercise in full of an Option or Stock Appreciation Right or the lapse, waiver and/or satisfaction of any restrictions or Performance Goals related to a Restricted Stock Award, Performance Share Award or Stock Unit Award, the number of shares subject to such Award and, if applicable, the Option Price, will be proportionately adjusted. In the event of any reclassification or change of outstanding shares of Stock or in case of any consolidation or merger of the Company with or into another company or in case of any sale or conveyance to another company or entity of the property of the Company as a whole or substantially as a whole, shares of stock or other securities equivalent in kind and value to those shares a Participant would have received if he had held the full number of shares of Stock subject to the Award immediately prior to such reclassification, change, -19- consolidation, merger, sale or conveyance (together with all other shares, stock and securities thereafter issued in respect thereof) will thereupon be subject to the Award. Upon dissolution or liquidation of the Company, all Awards will terminate, but the Participant will have the right, immediately prior to such dissolution or liquidation, to exercise any Option or Stock Appreciation Right to the extent exercisable on the date of such dissolution or liquidation. No fraction of a share of Stock will be purchasable or deliverable upon exercise, but in the event any adjustment hereunder of the number of shares covered by the Award will cause such number to include a fraction of a share, such number of shares will be adjusted to the nearest smaller whole number of shares. In the event of changes in the outstanding Stock by reason of any stock dividend, split-up, contraction, reclassification, or change of outstanding shares of Stock of the nature contemplated by this Section 9.2, the maximum number of shares of Stock that may be issued from time to time pursuant to the Plan and the maximum number of shares of Stock with respect to which Awards may be granted to any Participant during the term of the Plan, as stated in Section 2.3, will be correspondingly adjusted. ARTICLE X MISCELLANEOUS 10.1. NOTICES AND OTHER COMMUNICATIONS. All notices and other communications required or permitted under the Plan will be effective if in writing and if delivered or sent by certified or registered mail, return receipt requested (a) if to the Participant, at his residence address last filed with the Company and (b) if to the Company, at 14951 North Dallas Parkway, Dallas, Texas 75240 Attention: President, with a copy to the Chairman of the Board of Directors of the Company, presently at 14951 North Dallas Parkway, Dallas, Texas 75240, or to such other persons or addresses as the Participant or the Company may specify by a written notice to the other from time to time. 10.2. PLAN BINDING ON SUCCESSORS. The Plan will be binding upon the successors and assigns of the Company. 10.3. NUMBER AND GENDER. Whenever used herein, nouns in the singular will include the plural where appropriate, and the masculine pronoun will include the female gender. -20- EX-10.3 4 EXHIBIT 10.3 COMPUSA INC. COZONE.COM STOCK OPTION PLAN ARTICLE I DEFINITIONS As used in this Plan, the following terms will have the following meanings: 1.1. BOARD means the Company's Board of Directors. 1.2. BUSINESS shall mean the business involving the sale of computer hardware, software and peripherals as well as certain other consumer electronics and technology products via the Internet, as conducted by Cozone L.L.C. or its successor. 1.3. CAUSE means an act or acts engaged in by an Optionee involving (i) a felony, (ii) fraud, (iii) embezzlement, (iv) gross or willful neglect of duty or misconduct, or (v) the commission of any act that causes or reasonably may be expected to cause substantial injury to the Company. 1.4. CODE means the federal Internal Revenue Code of 1986, as amended. 1.5. COMMISSION means the United States Securities and Exchange Commission. 1.6. COMMITTEE means a committee comprised of two or more Directors of the Company, appointed by the Board; provided that the full Board may at any time, in its sole discretion, exercise any or all functions and authority of the Committee. 1.7. COMPANY means CompUSA Inc., a Delaware corporation. 1.8. COZONE INC. means cozone.com inc., a Delaware corporation. 1.9. COZONE INC. PLAN means the cozone.com inc. Long-Term Incentive Plan. 1.10. COZONE L.L.C. means cozone.com l.l.c., a Delaware limited liability company. 1.11. DIRECTOR means a member of the Board of Directors of the Company or of a subsidiary thereof. 1.12. DISABILITY of an Optionee will be deemed to occur whenever an Optionee is rendered unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuing period of not less than 12 months. In the case of any dispute as to whether or not an Optionee is disabled within the meaning of this Section, the determination of disability will be made by a licensed physician selected by the Board and acceptable to the Optionee, which physician's decision will be final and binding. 1.13. EMPLOYEE means any employee of the Company or of any of its subsidiaries, as defined under Section 3401(c) of the Code and the regulations promulgated thereunder. 1.14. EMPLOYMENT AGREEMENT means an agreement, if any, between the Company or any subsidiary thereof and an Optionee, setting forth the terms and conditions of the Optionee's employment by the Company or such subsidiary. 1.15. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 1.16. EXERCISE PRICE means the price to be paid by an Optionee for a share of Stock upon exercise of an Option. 1.17. NONEMPLOYEE DIRECTOR means a member of the Board who is not an Employee. 1.18. OPTION means an option to purchase Stock granted under the Plan. 1.19. OPTION AGREEMENT means a written agreement between the Company and an Optionee setting forth the terms and conditions of an Option. 1.20. OPTION VALUE with respect to any date shall be equal to (i) the Stock Value calculated as of such date minus the Exercise Price, multiplied by (ii) the number of shares of Stock that would be purchasable pursuant to the Option as of such date if it was exercisable in full. 1.21. OPTIONEE means a person to whom an Option has been granted. 1.22. PLAN means this cozone.com Stock Option Plan of the Company, as amended from time to time. 1.23. PUBLICLY TRADED means either (i) listed on the New York Stock Exchange or (ii) quoted on the National Association of Securities Dealers Automated Quotation National Market System. 1.24. RETIREMENT means resignation by the Optionee on or after the date on which the Optionee has served the Company or one or more subsidiaries thereof for at least five years in the aggregate. 1.25. SECURITIES ACT means the Securities Act of 1933, as amended. -2- 1.26. STOCK means Class A Common Stock, par value $.01 per share, of Cozone Inc., or, in the event the outstanding shares of such stock are hereafter changed into or exchanged for shares of a different security of Cozone Inc. or some other company, such other security. 1.27. "STOCK VALUE" with respect to any date shall be equal to the average of the valuations of a share of Stock as of such date determined by two independent, nationally-recognized investment banking firms, which valuations shall equal the fair market value of one share of Stock without taking into account any discount for illiquidity or lack of control. ARTICLE II GENERAL 2.1. PURPOSE. This Plan is intended to encourage ownership of Stock by Optionees and to provide additional incentives for them to promote the success of the Company's business and its investment in Cozone Inc. 2.2. TERM OF THE PLAN. Options may not be granted after November 2, 2009. 2.3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 5.2 and subject to any additional restrictions elsewhere in the Plan, the maximum aggregate number of shares of Stock that may be available from time to time pursuant to the Plan may not exceed 600,000. Shares available pursuant to Options will be shares of Stock held by the Company. If Options expire or terminate for any reason without having been exercised in full, the shares not purchased will again be available for purchase pursuant to the Plan. 2.4. ELIGIBILITY. Any full-time or part-time Employee, Director, consultant or advisor of one or more of the Company or any subsidiary thereof will be eligible to be an Optionee. 2.5. ACCELERATION AND TREATMENT OF OPTION IN CERTAIN EVENTS. The Committee may accelerate the exercisability of any Option in whole or in part at any time. In addition, notwithstanding the provisions of any Option Agreement, the following provisions will apply: (a) SALE, MERGER OR REORGANIZATION. If before the Stock has become Publicly Traded, the Company enters into an agreement to dispose of all or substantially all the assets of the Company, by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which the Company is not the surviving corporation, the Company shall purchase, if Optionee so elects, the entire Option for a price equal to the Option Value (as defined below) calculated as of the date the transaction requiring such determination is consummated, payable in cash as soon as practicable and in any event within 60 days after consummation of the transaction causing such purchase obligation; provided that no purchase obligation shall exist under this Section 2.5(a) on account of any agreement of merger or other reorganization when the stockholders of the Company immediately before consummation of the transaction will own at least 50% of the -3- total combined voting power of all classes of stock entitled to vote of the surviving entity immediately after consummation of the transaction. (b) COMPANY CHANGE IN CONTROL. If a Company Change In Control (as defined below) occurs before the Stock has become Publicly Traded, the Company shall purchase, if Optionee so elects, the entire Option for a price equal to the Option Value calculated as of the date the transaction requiring such determination is consummated, payable in cash as soon as practicable and in any event within 60 days after the occurrence of the event constituting the Company Change In Control. (c) COZONE CHANGE IN CONTROL. If a Cozone Change In Control (as defined below) occurs before the Stock has become Publicly Traded, the Company shall purchase, if Optionee so elects, the entire Option for a price equal to the Option Value calculated as of the date the transaction requiring such determination is consummated. Any payment due pursuant to the preceding sentence shall be made, at the Company's sole option, by tendering such payment in the form of (i) cash, (ii) shares of the common stock of the Company, with each of such shares valued at the closing sale price of a share of Company common stock on the last trading day immediately preceding the date of payment, or (iii) any combination of the foregoing. The resale of any shares of Company common stock tendered to Optionee pursuant to the preceding sentence must at the time of such tender be registered pursuant to an effective registration statement filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended. (d) POST-IPO COZONE CHANGE IN CONTROL. If a Cozone Change In Control occurs after the Stock has become Publicly Traded, the Option will become immediately exercisable in full. (e) Certain defined terms: (i) At any time BEFORE the Stock has become Publicly Traded, a "Cozone Change In Control" shall be deemed to have occurred if either (a) the Company and its majority-owned direct or indirect subsidiaries shall at any time cease to be the beneficial owners, collectively, of securities representing at least 15% of the equity interest in Cozone Inc., or (b) any of Cozone Inc. or its stockholders or Cozone L.L.C. or its members enter into an agreement to dispose of all or substantially all the assets of the Business by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which the Company or Cozone L.L.C., as applicable, is not the surviving entity; provided that entering into such an agreement shall not constitute a Company Change In Control if (1) the stockholders of the Company and members of Cozone L.L.C., as applicable, immediately before the consummation of the transaction will collectively own or control, directly or indirectly, at least 15% of the equity interest of the surviving entity or successor in ownership to the Business, as applicable, immediately after the consummation of the transaction, or (2) the surviving entity or successor in ownership to the Business is the Company or an entity controlled directly or indirectly by the Company. -4- At any time AFTER the Stock has become Publicly Traded, a "Cozone Change In Control" shall be deemed to have occurred if Cozone Inc. has adopted a stockholder rights plan (the "Cozone Rights Plan") and either (a) a Person has met the requirements for becoming an Acquiring Person of Cozone Inc., whether or not a Distribution Date occurs or the Rights are redeemed by Cozone Inc.; provided that a Cozone Change In Control shall not be deemed to have occurred for purposes hereof with respect to any Person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the Exchange Act, or any successor provision (for purposes of this Section 2.5(e)(i), "Person," "Acquiring Person," "Distribution Date" and "Rights" shall have the meanings ascribed to such terms or any analogous terms in the Cozone Rights Plan on the date the Cozone Rights Plan is adopted, whether or not the Cozone Rights Plan is subsequently amended to change the meaning of any such terms or analogous terms), or (b) any of Cozone Inc. or its stockholders or Cozone L.L.C. or its members enter into an agreement to dispose of all or substantially all of the assets of the Business by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which Cozone Inc. or Cozone L.L.C., as applicable, is not the surviving entity; provided that entering into such an agreement shall not constitute a Cozone Change In Control if (1) the stockholders of Cozone Inc. and members of Cozone L.L.C., as applicable, immediately before the consummation of the transaction will collectively own or control, directly or indirectly, at least 15% of the equity interest of the surviving entity or successor in ownership to the Business, as applicable, immediately after the consummation of the transaction, or (2) the surviving entity or successor in ownership to the Business is the Company or an entity controlled directly or indirectly by the Company. (ii) A "Company Change In Control" shall be deemed to have occurred when any Person meets the requirements for becoming an Acquiring Person of the Company, whether or not a Distribution Date occurs or the Rights are redeemed by the Company; provided that a Company Change In Control shall not be deemed to have occurred for purposes hereof with respect to any Person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the Exchange Act, or any successor provision. For purposes of this Section 2.5(e)(ii), "Person," "Acquiring Person," "Distribution Date" and "Rights" shall have the meanings ascribed to such terms in the Rights Agreement between the Company and Bank One, Texas, N.A. as Rights Agent (American Stock Transfer & Trust Company became successor Rights Agent as of August 19, 1996), dated as of April 29, 1994. Notwithstanding the foregoing, a Company Change In Control shall not be deemed to have occurred in the event a Cozone Change In Control shall have occurred at any time prior to the occurrence of the event otherwise constituting a Company Change In Control. 2.6. RESTRICTIONS ON TRANSFER OF SHARES. Notwithstanding any other provision of the Plan, if at any time in the reasonable opinion of the Company the transfer of shares of Stock pursuant to an Option may constitute a violation of law, then the Company may delay such transfer and the delivery of a certificate for such shares of Stock until (i) approval has been obtained from such governmental agencies, other than the Commission, as may be required under any applicable law, -5- rule or regulation and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the Commission, one of the following conditions has been satisfied: (a) the transfer of the Stock has been effectively registered under the Securities Act; or (b) a no-action letter in form and substance reasonably satisfactory to the Company with respect to the transfer of such shares has been obtained by the Company from the staff of the Commission. The Company will make all reasonable efforts to bring about the occurrence of such events. 2.7. PURCHASE FOR INVESTMENT; SUBSEQUENT REGISTRATION. (a) Unless the transfer of the shares of Stock from the Company to an Optionee pursuant to exercise of an Option has been effectively registered under the Securities Act, the Company will be under no obligation to transfer any shares of Stock pursuant to exercise of an Option unless the Optionee gives a written representation to the Company that is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he is acquiring the shares of Stock transferred pursuant to such Option as an investment and not with a view to, or for sale in connection with, the distribution of any such shares of Stock. (b) If required in the opinion of counsel, each certificate representing shares of Stock transferred by the Company to an Optionee pursuant to exercise of an Option will bear a reference to the investment representation made in accordance with this Section 2.7 and to the fact that no registration statement has been filed with the Commission in respect of the transfer of such shares of Stock. 2.8. WITHHOLDING. (a) Whenever shares of Stock are to be transferred pursuant to exercise of an Option, the Company will have the right to require the Optionee to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements (whether so required to secure for the Company an otherwise available tax deduction or otherwise) prior to the delivery of any certificate or certificates for such shares of Stock. (b) When an Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with exercise of an Option, such payment may be made either in cash or by certified or cashier's check. -6- 2.9. RESERVATION OF STOCK. The Company must at all times during the term of the Plan reserve or otherwise keep available such number of shares of Stock as will be sufficient to satisfy the requirements of the Plan and will pay all fees and expenses necessarily incurred by the Company in connection therewith. 2.10. NO SPECIAL EMPLOYMENT OR OTHER RIGHTS. Nothing contained in the Plan or in any Option will confer upon any Optionee any right with respect to the continuation of his employment or service with the Company (or any subsidiary), or interfere in any way with the right of the Company (or any subsidiary), subject to the terms of any separate employment or consulting agreement or provision of law or certificate of incorporation or bylaws to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease the compensation of the Optionee from the rate in existence at the time of the grant of an Option. ARTICLE III ADMINISTRATION 3.1. ADMINISTRATION. Subject to the provisions of the Plan, the Plan will be administered by the Committee. The Committee will have sole discretion and authority to determine from time to time the Optionees to whom Options will be granted and the number of shares of Stock subject to each Option, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine and interpret the terms and provisions of each Option Agreement and to make all other determinations necessary or advisable for the administration of the Plan. In making such determinations, the Committee may take into account the nature of the services heretofore rendered by the respective Optionees, their present and potential contributions to the success of the Company and its subsidiaries, and such other factors as the Committee in its sole discretion deems relevant. The Committee's determinations on the matters referred to in this Section 3.1 will be conclusive. ARTICLE IV OPTIONS 4.1 GRANT OF OPTIONS. The Committee may, in its sole discretion, grant Options in accordance with the terms and conditions set forth in the Plan. Each Option Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 4.2. TIME OF GRANTING OPTIONS. The granting of an Option will take place at the time specified in the Option Agreement. 4.3. EXERCISE PRICE. The Exercise Price under each Option will be as specified in the Option Agreement. -7- 4.4. OPTION PERIOD. The option period under each Option will be as specified in the Option Agreement. Options may become exercisable in such installments, cumulative or noncumulative, as the Committee may determine. 4.5. EXERCISE OF OPTIONS. (a) METHOD OF EXERCISE. Each Option will be exercisable in accordance with the terms of the Option Agreement pursuant to which the Option was granted. No Option may be exercised for a fraction of a share of Stock. (b) PAYMENT OF EXERCISE PRICE. The Exercise Price of any shares of Stock purchased must be paid at the time of exercise of the Option either in cash or by certified or cashier's check. 4.6. TERMINATION OF EMPLOYMENT OR ASSOCIATION WITH THE COMPANY. (a) TERMINATION OF EMPLOYMENT WITH THE COMPANY. If an Optionee ceases to be employed by the Company or any subsidiary thereof because the Optionee is terminated for Cause, any Options held by that Optionee will automatically expire. If an Optionee's employment is terminated for any reason other than for Cause or due to death, such Optionee's Option will be exercisable (to the extent exercisable on the date of termination of the Optionee's employment or, if the Committee, in its sole discretion, has accelerated the vesting of such Option, to the extent exercisable following such acceleration) at any time within 30 days after he ceases to be an employee of the Company or any subsidiary thereof (or within (i) three months after termination if on account of Retirement or (ii) 12 months after termination if on account of Disability), unless by its terms it expires earlier or unless the Committee agrees, in its sole discretion, to extend the term of such Option; provided that the term of any such Option will not be extended beyond its original term. If an Optionee dies while employed by the Company or any subsidiary thereof, or within three months after ceasing to be an employee of the Company or any subsidiary thereof, such Optionee's Option will be exercisable (to the extent exercisable on the date of death, or, if the Committee, in its sole discretion, has accelerated the vesting of such Option, to the extent exercisable following such acceleration) at any time within 12 months after the date of death, unless by its terms it expires earlier or unless the Committee agrees, in its sole discretion, to extend the term of such Option; provided that the term of any such Option will not be extended beyond its original term. Military or sick leave will not be deemed a termination of employment, provided that it does not exceed the longer of three months or the period during which the absent Optionee's reemployment rights, if any, are guaranteed by statute or by contract. The foregoing is qualified by the following: (i) if any facts that would constitute Cause for termination of employment of an Optionee are brought to the attention of the Committee after the Optionee's employment with the Company or any subsidiary thereof has ended, any Options then held by the Optionee may be immediately terminated by the Committee and (ii) if an Optionee is employed pursuant to a written Employment Agreement, the Optionee's -8- employment with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Optionee's employment is considered under the circumstances to have been terminated for cause for purposes of such agreement. (b) TERMINATION OF ASSOCIATION WITH THE COMPANY. If (i) a Nonemployee Director is removed for Cause or (ii) a consultant or advisor or other Optionee who is not an Employee has his relationship with the Company terminated for Cause, any Options held by any such Optionee will automatically expire. In all other cases, any Options held by such a Optionee, to the extent exercisable on the date of termination of the Optionee's association with the Company, will remain exercisable and will expire in accordance with the terms of the applicable Option Agreement; provided that (i) if any facts that would constitute cause for removal or termination of a Optionee who is a Nonemployee Director, consultant or advisor or other person who is not an employee of the Company are brought to the attention of the Committee after such Optionee's association with the Company has ended, any Options held by such Optionee may be immediately terminated by the Committee, and (ii) if such Optionee has been retained pursuant to a written agreement, the Optionee's relationship with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Optionee's association with the Company is considered under the circumstances to have been terminated for cause for purposes of such written agreement. 4.7. TRANSFERABILITY OF OPTIONS. The Committee may, in its sole discretion, provide in any Option Agreement (or in an amendment to any existing Option Agreement) such provisions regarding transferability of the Options as the Committee, in its sole discretion, deems appropriate. 4.8. LIMITATION OF RIGHTS IN STOCK. An Optionee will not be deemed for any purpose to be a stockholder of Cozone Inc. with respect to any of the shares of Stock covered by an Option, except to the extent the Option has been exercised with respect thereto and, in addition, a certificate has been issued therefor and delivered to the Optionee or his agent. Any Stock acquired pursuant to exercise of the Option will be subject to all restrictions upon the transfer thereof that may be now or hereafter imposed by the Certificate of Incorporation of Cozone Inc. (as amended or restated from time to time), the Bylaws of Cozone Inc. (as amended or restated from time to time) and any applicable Employment Agreement. ARTICLE V TERMINATION, AMENDMENT AND ADJUSTMENT 5.1. TERMINATION AND AMENDMENT OF THE PLAN. The Board (or, if the Board has specifically delegated this authority to the Committee, the Committee) may at any time terminate the Plan or make such modifications of the Plan as it deems advisable. No termination or amendment of the Plan may, without the consent of the Optionee to whom any Option has theretofore been granted, adversely affect the rights of such Optionee under such Option. -9- 5.2. ADJUSTMENT. In the event of any stock dividend payable in Stock or any split or contraction of the number of shares of Stock after the date an Option is granted and prior to the exercise in full of an Option, the number of shares subject to such Option and, if applicable, the Exercise Price, will be proportionately adjusted. In the event of any reclassification or change of outstanding shares of Stock or in case of any consolidation or merger of Cozone Inc. with or into another company or in case of any sale or conveyance to another company or entity of the property of Cozone Inc. as a whole or substantially as a whole, shares of stock or other securities equivalent in kind and value to those shares an Optionee would have received if he had held the full number of shares of Stock subject to the Option immediately prior to such reclassification, change, consolidation, merger, sale or conveyance (together with all other shares, stock and securities thereafter issued in respect thereof) will thereupon be subject to the Option. Upon dissolution or liquidation of Cozone Inc., all Options will terminate, but the Optionee will have the right, immediately prior to such dissolution or liquidation, to exercise any Option to the extent exercisable on the date of such dissolution or liquidation. No fraction of a share of Stock will be purchasable or deliverable upon exercise, but in the event any adjustment hereunder of the number of shares covered by the Option will cause such number to include a fraction of a share, such number of shares will be adjusted to the nearest smaller whole number of shares. In the event of changes in the outstanding Stock by reason of any stock dividend, split-up, contraction, reclassification, or change of outstanding shares of Stock of the nature contemplated by this Section 5.2, the number of shares of Stock available for the purpose of the Plan as stated in Section 2.3 will be correspondingly adjusted. ARTICLE VI MISCELLANEOUS 6.1. NOTICES AND OTHER COMMUNICATIONS. All notices and other communications required or permitted under the Plan will be effective if in writing and if delivered or sent by certified or registered mail, return receipt requested (a) if to the Optionee, at his residence address last filed with the Company and (b) if to the Company, at 14951 North Dallas Parkway, Dallas, Texas 75240 Attention: President, or to such other persons or addresses as the Optionee or the Company may specify by a written notice to the other from time to time. 6.2. PLAN BINDING ON SUCCESSORS. The Plan will be binding upon the successors and assigns of the Company. 6.3. NUMBER AND GENDER. Whenever used herein, nouns in the singular will include the plural where appropriate, and the masculine pronoun will include the female gender. -10- EX-10.4 5 EXHIBIT 10.4 COZONE.COM INC. LONG-TERM INCENTIVE PLAN ARTICLE I DEFINITIONS As used in this Plan, the following terms will have the following meanings: 1.1. AWARD means a grant of Options under Article IV of the Plan, a Restricted Stock Award under Article V of the Plan, a Stock Appreciation Rights Award under Article VI of the Plan, a Performance Share Award under Article VII of the Plan or a Stock Unit Award under Article VIII of the Plan. 1.2. AWARD AGREEMENT means an Option Agreement, Restricted Stock Agreement, Stock Appreciation Rights Agreement, Performance Share Agreement or Stock Unit Agreement. 1.3. BOARD means the Company's Board of Directors. 1.4. CAUSE means an act or acts engaged in by a Participant involving (i) a felony, (ii) fraud, (iii) embezzlement, (iv) gross or willful neglect of duty or misconduct, or (v) the commission of any act that causes or reasonably may be expected to cause substantial injury to the Company. 1.5. CODE means the federal Internal Revenue Code of 1986, as amended. 1.6. COMMISSION means the United States Securities and Exchange Commission. 1.7. COMMITTEE means a committee comprised of two or more persons, appointed by the Board, the members of which satisfy the requirements for eligibility set forth in Section 3.1 and which is responsible for the administration of the Plan; provided that the full Board may at any time, in its sole discretion, exercise any or all functions and authority of the Committee. 1.8. COMPANY means cozone.com inc., a Delaware corporation. 1.9. DIRECTOR means a member of the Board of Directors of the Company or of a subsidiary thereof. 1.10. DISABILITY of a Participant will be deemed to occur whenever a Participant is rendered unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuing period of not less than 12 months. In the case of any dispute as to whether or not a Participant is disabled within the meaning of this Section, the determination of disability will be made by a licensed physician selected by the Board and acceptable to the Participant, which physician's decision will be final and binding. 1.11. EMPLOYEE means any employee of the Company or of any of its subsidiaries, as defined under Section 3401(c) of the Code and the regulations promulgated thereunder. 1.12. EMPLOYMENT AGREEMENT means an agreement, if any, between the Company or any subsidiary thereof and a Participant, setting forth the terms and conditions of the Participant's employment by the Company or such subsidiary. 1.13. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 1.14. GRANT DATE means, with respect to an Option, the date determined pursuant to Section 4.2. 1.15. INCENTIVE OPTION means an Option that by its terms is intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Code. 1.16. IPO has the meaning ascribed to it in Section 4.1. 1.17. MARKET VALUE means, as of any date, the value of a share of Stock determined as follows: (a) if such Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination; (b) if such Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Stock is listed or admitted to trading; (c) if such Stock is publicly traded but is not quoted on Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination; or (d) if none of the foregoing is applicable, by the Committee in good faith. 1.18. MINIMUM PERFORMANCE GOAL means the minimum objective(s) established by the Committee that must be satisfied before any portion of a Performance Share Award is earned. The Minimum Performance Goal may, in the sole discretion of the Committee, be the same as or less than the Performance Goal. 1.19. NASDAQ NATIONAL MARKET means the Nasdaq Stock Market's National Market System. 1.20. NONEMPLOYEE DIRECTOR means a member of the Board who is not an Employee. 1.21. NONSTATUTORY OPTION means any Option that is not an Incentive Option. 1.22. OPTION means an option to purchase Stock granted under the Plan. 1.23. OPTION AGREEMENT means a written agreement between the Company and a Participant setting forth the terms and conditions of an Option. 1.24. EXERCISE PRICE means the price to be paid by a Participant for a share of Stock upon exercise of an Option. -2- 1.25. PARENT means CompUSA Inc., a Delaware corporation. 1.26. PARTICIPANT means a person to whom an Award has been granted. 1.27. PERFORMANCE CYCLE or CYCLE means a period of years selected by the Committee during which the performance of the Company and/or the Participant is measured for the purpose of determining the extent to which Performance Shares that have been contingently awarded with respect to such Cycle are earned. 1.28. PERFORMANCE GOAL means the objective(s) established by the Committee at the time each Performance Share Award is granted with respect to the related Performance Cycle for the purpose of determining the extent to which Performance Shares that have been contingently awarded for such Cycle are earned. 1.29. PERFORMANCE SHARE or PERFORMANCE SHARE AWARD means an Award granted pursuant to Article VII expressed as a share of Stock. 1.30. PERFORMANCE SHARE AGREEMENT means a written agreement between the Company and a Participant setting forth the terms and conditions of a Performance Share Award. 1.31. PLAN means this Long-Term Incentive Plan of the Company, as amended from time to time. 1.32. RESTRICTED STOCK or RESTRICTED STOCK AWARD means an award of Stock granted under Article V. 1.33. RESTRICTED STOCK AGREEMENT means a written agreement between the Company and a Participant with respect to a Restricted Stock Award. 1.34. RETIREMENT means resignation by the Participant on or after the date on which the Participant has served the Company or one or more subsidiaries thereof for at least five years in the aggregate. 1.35. RULE 16b-3 means Rule 16b-3 or its successors promulgated under the Exchange Act. 1.36. SECURITIES ACT means the Securities Act of 1933, as amended. 1.37. SECTION 162(m) means Section 162(m) of the Code and the regulations promulgated thereunder. 1.38. STOCK means Class A Common Stock, par value $.01 per share, of the Company or, in the event the outstanding shares of such stock are hereafter changed into or exchanged for shares of a different security of the Company or some other corporation, such other security. -3- 1.39. STOCK APPRECIATION RIGHT or STOCK APPRECIATION RIGHTS AWARD means an Award granted under Article VI. 1.40. STOCK APPRECIATION RIGHTS AGREEMENT means an agreement between the Company and a Participant setting forth the terms and conditions of a Stock Appreciation Rights Award. 1.41. STOCK UNIT or STOCK UNIT AWARD means an award of Stock or units granted under Article VIII. 1.42. STOCK UNIT AGREEMENT means a written agreement between the Company and a Participant setting forth the terms and conditions of a Stock Unit Award. 1.43. TEN PERCENT OWNER means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or its parent or subsidiary corporations, within the meaning of Sections 424(e) and 424(f) of the Code). Whether a person is a Ten Percent Owner will be determined with respect to each Option based on the facts existing immediately prior to the grant of such Option. 1.44. VESTING YEAR for any portion of any Incentive Option means the calendar year in which that portion of the Option first becomes exercisable. ARTICLE II GENERAL 2.1. PURPOSE. This Plan is intended to encourage ownership of Stock by Participants and to provide additional incentives for them to promote the success of the Company's business. The Company intends that Incentive Options granted under Article IV will qualify as "incentive stock options" within the meaning of Section 422 of the Code. 2.2. TERM OF THE PLAN. No Awards may be granted after November 2, 2009. 2.3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 9.2 and subject to any additional restrictions elsewhere in the Plan, the maximum aggregate number of shares of Stock that may be issued from time to time pursuant to the Plan may not exceed 2,200,000. The maximum aggregate number of shares of Stock with respect to which Awards may be granted to any Participant during the term of the Plan may not exceed 50% of the total number of shares of Stock that may be issued from time to time under the Plan. Shares to be issued pursuant to Awards may be either authorized but unissued shares or shares held by the Company in its treasury. If shares of Stock are reacquired by the Company pursuant to the provisions of the Plan or if Options expire or terminate for any reason without having been exercised in full, the reacquired shares and/or the shares not purchased will again be available for issuance under the Plan to the extent permitted by law. -4- 2.4. ELIGIBILITY. Any full-time or part-time Employee, Director, consultant or advisor of one or more of the Company or any subsidiary thereof will be eligible to be a Participant; provided that Incentive Options may be granted only to Employees. 2.5. TREATMENT OF AWARDS IN CERTAIN EVENTS. The Committee may accelerate the exercisability of any Option or Stock Appreciation Right or waive any restrictions and/or Performance Goals with respect to shares of Restricted Stock, Performance Shares or Stock Units in whole or in part at any time. In addition, the provisions of any Award Agreement may provide for the automatic acceleration of exercisability of any Option or Stock Appreciation Right or automatic waiver of any restrictions and/or Performance Goals with respect to shares of Restricted Stock, Performance Shares or Stock Units or provide for the triggering of certain other rights and obligations applicable to the Company, Parent and Participant upon the occurrence of certain specified events such as a change in control of the Company or Parent. 2.6. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan, if at any time in the reasonable opinion of the Company the issuance of shares of Stock pursuant to an Award may constitute a violation of law, then the Company may delay such issuance and the delivery of a certificate for such shares of Stock until (i) approval has been obtained from such governmental agencies, other than the Commission, as may be required under any applicable law, rule or regulation and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the Commission, one of the following conditions has been satisfied: (a) the issuance of shares of Stock is effectively registered under the Securities Act; or (b) a no-action letter in form and substance reasonably satisfactory to the Company with respect to the issuance of such shares has been obtained by the Company from the staff of the Commission. The Company will make all reasonable efforts to bring about the occurrence of such events. 2.7. PURCHASE FOR INVESTMENT; SUBSEQUENT REGISTRATION. (a) Unless the issuance of shares of Stock to be issued pursuant to an Award has been effectively registered under the Securities Act, the Company will be under no obligation to issue any shares of Stock pursuant to an Award unless the Participant gives a written representation to the Company that is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he is acquiring the shares of Stock issued pursuant to such Award as an investment and not with a view to, or for sale in connection with, the distribution of any such shares of Stock. (b) If required in the opinion of counsel, each certificate representing shares of Stock issued pursuant to an Award will bear a reference to the investment representation -5- made in accordance with this Section 2.7 and to the fact that no registration statement has been filed with the Commission in respect of the issuance of such shares of Stock. (c) If the Company deems it necessary or desirable to register under the Securities Act or other applicable statutes the issuance of any shares of Stock with respect to which an Award has been granted, or to qualify the issuance of any such shares for exemption from the Securities Act or other applicable statutes, then the Company will take such action at its own expense. The Company may require from each Participant such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Company and its Directors and officers from such holder against all losses, claims, damages and liabilities arising from such use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. 2.8. WITHHOLDING; NOTICE OF DISPOSITION OF STOCK PRIOR TO EXPIRATION OF SPECIFIED HOLDING PERIOD. (a) Whenever shares of Stock are to be issued pursuant to an Award, the Company will have the right to require the Participant to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements (whether required to secure for the Company an otherwise available tax deduction or otherwise) prior to the delivery of any certificate or certificates for such shares of Stock. (b) When a Participant is required to pay to the Company an amount required to be withheld under applicable tax laws in connection with an Award, such payment may be made, in whole or in part, (i) in cash, (ii) by check, (iii) if permitted by the Committee, by delivery to the Company of shares of Stock already owned by the Participant having a Market Value on the date as of which the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld, (iv) with respect to Options, through the withholding by the Company ("Company Withholding") of a portion of the shares of Stock acquired upon the exercise of the Options, or (v) in any other form of valid consideration, as permitted by the Committee in its sole discretion. (c) The Company may require as a condition to the issuance of shares of Stock upon exercise of an Incentive Option that the party exercising such Option give a written representation to the Company, which is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he will report to the Company any disposition of such shares prior to the expiration of the holding periods specified by Section 422(a)(1) of the Code. If and to the extent that the realization of income in such a disposition imposes upon the Company federal, state, local or other withholding tax requirements, or any such withholding is required to secure for the Company an otherwise available tax deduction, the Company will have the right to require that the recipient remit to the Company an -6- amount sufficient to satisfy those requirements; and the Company may require as a condition to the issuance of shares of Stock upon exercise of an Incentive Option that the party exercising such option agree, in writing in a form satisfactory to the Company, to make such a remittance. 2.9. RESERVATION OF STOCK. The Company must at all times during the term of the Plan reserve or otherwise keep available such number of shares of Stock as will be sufficient to satisfy the requirements of the Plan and will pay all fees and expenses necessarily incurred by the Company in connection therewith. 2.10. NO SPECIAL EMPLOYMENT OR OTHER RIGHTS. Nothing contained in the Plan or in any Award will confer upon any Participant any right with respect to the continuation of his employment or service with the Company (or any subsidiary), or interfere in any way with the right of the Company (or any subsidiary), subject to the terms of any separate employment or consulting agreement or provision of law or certificate of incorporation or bylaws to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award. ARTICLE III ADMINISTRATION 3.1. ADMINISTRATION. Subject to the provisions of the Plan, the Plan will be administered by the Committee. With respect to any Award that the Company intends to qualify for the exception for qualified performance-based compensation set forth in Section 162(m), such Award must be granted solely by "outside directors" within the meaning of such section. The Committee will have sole discretion and authority to determine from time to time the Participants to whom Awards will be granted and the number of shares of Stock subject to each Award, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine and interpret the terms and provisions of each Award Agreement or waive any conditions, restrictions and/ or Performance Goals applicable to any Option or Stock Appreciation Right (or the exercise thereof) or to any shares of Restricted Stock, Performance Shares or Stock Units, and to make all other determinations necessary or advisable for the administration of the Plan. In making such determinations, the Committee may take into account the nature of the services rendered by the respective Participants, their present and potential contributions to the success of the Company and its subsidiaries, and such other factors as the Committee in its sole discretion deems relevant. The Committee's determinations on the matters referred to in this Section 3.1 will be conclusive. ARTICLE IV OPTIONS 4.1 GRANT OF OPTIONS. The Committee may, in its sole discretion, grant Options in accordance with the terms and conditions set forth in the Plan; provided, however, that before the Company shall have consummated an initial public offering (the "IPO") of its Stock pursuant to an effective registration statement under the Securities Act, all grants of Options must also be approved -7- by the Board. Each Option Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 4.2. TIME OF GRANTING OPTIONS. The granting of an Option will take place at the time specified in the Option Agreement. 4.3. EXERCISE PRICE. The Exercise Price under each Incentive Option may not be less than 100% of the Market Value on the Grant Date, or less than 110% of the Market Value on the Grant Date if the Participant is a Ten Percent Owner. The Exercise Price under each Nonstatutory Option will not be so limited solely by reason of this Section 4.3. 4.4. OPTION PERIOD. No Incentive Option may be exercised more than 10 years after the Grant Date, or, if the Participant is a Ten Percent Owner, more than five years after the Grant Date. The option period under each Nonstatutory Option will not be so limited solely by reason of this Section 4.4. Options may become exercisable in such installments, cumulative or noncumulative, as the Committee may determine. 4.5. LIMIT ON INCENTIVE OPTION CHARACTERIZATION. To the extent any Option fails to qualify as an Incentive Option, such Option will be considered a Nonstatutory Option. 4.6. EXERCISE OF OPTIONS. (a) METHOD OF EXERCISE. Each Option will be exercisable in accordance with the terms of the Option Agreement pursuant to which the Option was granted. No Option may be exercised for a fraction of a share of Stock. (b) PAYMENT OF PURCHASE PRICE. The purchase price of any shares of Stock purchased must be paid at the time of exercise of the Option either (i) in cash, (ii) by certified or cashier's check, (iii) by shares of Stock, if permitted by the Committee, (iv) if then permitted under the laws of the State of Delaware and approved by the Committee, by a promissory note for the total purchase price of the shares of Stock being purchased, which note will contain such terms and provisions as the Committee may approve, including without limitation the right to repay the note partially or wholly with Stock, (v) by delivery of a copy of irrevocable instructions from the Participant to a broker or dealer, reasonably acceptable to the Company, to sell certain of the shares of Stock purchased upon exercise of the Option or to pledge them as collateral for a loan and promptly deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price or (vi) in any other form of valid consideration, as permitted by the Committee in its sole discretion. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Stock, those shares will be valued at the then Market Value. -8- 4.7. TERMINATION OF EMPLOYMENT OR ASSOCIATION WITH THE COMPANY. (a) TERMINATION OF EMPLOYMENT WITH THE COMPANY. If a Participant ceases to be employed by the Company or any subsidiary thereof because the Participant is terminated for Cause, any Options held by that Participant will automatically expire. If a Participant's employment is terminated for any reason other than for Cause or due to death, such Participant's Option will be exercisable (to the extent exercisable on the date of termination of the Participant's employment or, if the Committee, in its sole discretion, has accelerated the vesting of such Option, to the extent exercisable following such acceleration) at any time within 30 days after he ceases to be an Employee (or within (i) three months after termination if on account of Retirement or (ii) 12 months after termination if on account of Disability), unless by its terms it expires earlier or unless, with respect to any Nonstatutory Option, the Committee agrees, in its sole discretion, to extend the term of such Option; provided that the term of any such Option will not be extended beyond its original term. If a Participant dies while employed by the Company or any subsidiary thereof, or within three months after ceasing to be an Employee, such Participant's Option will be exercisable (to the extent exercisable on the date of death, or, if the Committee, in its sole discretion, has accelerated the vesting of such Option, to the extent exercisable following such acceleration) at any time within 12 months after the date of death, unless by its terms it expires earlier or unless, with respect to any Nonstatutory Option, the Committee agrees, in its sole discretion, to extend the term of such Option; provided that the term of any such Option will not be extended beyond its original term. Military or sick leave will not be deemed a termination of employment, provided that it does not exceed the longer of three months or the period during which the absent Participant's reemployment rights, if any, are guaranteed by statute or by contract. The foregoing is qualified by the following: (i) if any facts that would constitute Cause for termination of employment of a Participant are brought to the attention of the Committee after the Participant's employment with the Company or any subsidiary thereof has ended, any Options then held by the Participant may be immediately terminated by the Committee and (ii) if a Participant is an Employee employed pursuant to a written Employment Agreement, the Participant's employment with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's employment is considered under the circumstances to have been terminated for cause for purposes of such agreement. (b) TERMINATION OF ASSOCIATION WITH THE COMPANY. If (i) a Nonemployee Director is removed for Cause or (ii) a consultant or advisor or other Participant who is not an Employee has his relationship with the Company terminated for Cause, any Options held by any such Participant will automatically expire. In all other cases, any Options held by such a Participant, to the extent exercisable on the date of termination of the Participant's association with the Company, will remain exercisable and will expire in accordance with the terms of the applicable Option Agreement; provided that (i) if any facts that would constitute cause for removal or termination of a Participant who is a Nonemployee Director, consultant or advisor or other person who is not an Employee are brought to the attention of the Committee after such Participant's association with the Company has ended, any Options -9- held by such Participant may be immediately terminated by the Committee, and (ii) if such Participant has been retained pursuant to a written agreement, the Participant's relationship with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's association with the Company is considered under the circumstances to have been terminated for cause for purposes of such written agreement. 4.8. TRANSFERABILITY OF OPTIONS. (a) INCENTIVE OPTIONS. Incentive Options may not be transferred or assigned other than by will or the laws of descent and distribution and may be exercised during the lifetime of the Participant only by the Participant or by the Participant's legally authorized representative, and each Option Agreement in respect of an Incentive Option will so provide. The designation by a Participant of a beneficiary will not constitute a transfer of the Option. (b) NONSTATUTORY OPTIONS. With respect to Nonstatutory Options, the Committee may, in its sole discretion, provide in any Option Agreement (or in an amendment to any existing Option Agreement) such provisions regarding transferability of the Nonstatutory Options as the Committee, in its sole discretion, deems appropriate. 4.9. LIMITATION OF RIGHTS IN STOCK. A Participant will not be deemed for any purpose to be a stockholder of the Company with respect to any of the shares of Stock covered by an Option, except to the extent the Option has been exercised with respect thereto and, in addition, a certificate has been issued therefor and delivered to the Participant or his agent. Any Stock issued pursuant to the Option will be subject to all restrictions upon the transfer thereof that may be now or hereafter imposed by the Certificate of Incorporation of the Company (as amended or restated from time to time), the Bylaws of the Company (as amended or restated from time to time) and any applicable Employment Agreement. ARTICLE V RESTRICTED STOCK 5.1 GRANT OF RESTRICTED STOCK AWARDS. The Committee may, in its sole discretion, grant Restricted Stock Awards in accordance with the terms and conditions set forth in the Plan; provided, however, that before the IPO, all grants of Restricted Stock Awards must also be approved by the Board. Each Restricted Stock Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 5.2. TERMS AND CONDITIONS. Each Restricted Stock Award confers upon the recipient thereof the right to receive a specified number of shares of Stock in accordance with the terms and conditions of each Participant's Restricted Stock Agreement. The general terms and conditions of a Restricted Stock Award will be as follows: (a) Any shares of Stock awarded hereunder to a Participant will be restricted for a period of time to be determined by the Committee for each Participant -10- at the time of the Award, which period shall be not more than ten years. The restrictions will prohibit the sale, assignment, transfer, pledge or other encumbrance of such shares, and will provide for possible reversion thereof to the Company in accordance with subparagraph (b) during the period of restriction. (b) All Restricted Stock awarded under this Plan to a Participant will be forfeited and returned to the Company in the event the Participant's employment or service with the Company or a subsidiary thereof is terminated prior to the expiration of the period of restriction, unless the Participant's termination of employment or service is due to his death, Disability or Retirement or unless the Committee, in its sole discretion, waives the restrictions established in accordance with subparagraph (a) with respect to any or all of the shares of Restricted Stock. (c) In the event of a Participant's death or Disability, the restrictions established in accordance with subparagraph (a) will lapse with respect to all Restricted Stock awarded to the Participant prior to any such event, and the shares of Stock involved will cease to be Restricted Stock and will no longer be subject to forfeiture to the Company pursuant to subparagraph (b). (d) In the event of a Participant's Retirement, the restrictions established in accordance with subparagraph (a) will continue to apply unless the Committee in its sole discretion shortens the restriction period. (e) Stock certificates issued with respect to Restricted Stock Awards will be registered in the name of the Participant, but will be delivered by him to the Company together with a stock power endorsed in blank. Each such certificate will bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE, RESTRICTIONS ON TRANSFER AND CERTAIN OTHER TERMS AND CONDITIONS SET FORTH IN THE COZONE.COM INC. LONG-TERM INCENTIVE PLAN AND THE AGREEMENT BETWEEN THE REGISTERED OWNER OF THE SHARES REPRESENTED BY THIS CERTIFICATE AND COZONE.COM INC. ENTERED INTO PURSUANT TO SUCH PLAN." From the time of grant of the Restricted Stock Award, the Participant will be entitled to exercise all rights (including dividend and voting rights) with respect to the shares represented by such certificate, subject to forfeiture of such voting rights and the Stock as provided in subparagraph (b). (f) Upon the lapse of a restriction period as determined pursuant to subparagraph (a), the Company will return the stock certificates representing the -11- shares with respect to which the restriction has lapsed to the Participant or his legal representative, and pursuant to the instruction of the Participant or his legal representative will issue a certificate for such shares that does not bear the legend set forth in subparagraph (e). (g) Any other securities or assets (other than ordinary cash dividends) that are received by a Participant with respect to Restricted Stock awarded to him, which is still subject to restrictions established in accordance with subparagraph (a), will be subject to the same restrictions and will be delivered by the Participant to the Company as provided in subparagraph (e). 5.3. NOTICE TO COMPANY OF SECTION 83(b) ELECTION. Any Participant who makes an election under Section 83(b) of the Code to have his receipt of Shares of Restricted Stock taxed currently, without regard to restrictions, must give notice to the Company of such election immediately upon making such election. Such an election must be made within 30 days after the effective date of issuance and cannot be revoked except with the consent of the Internal Revenue Service. ARTICLE VI STOCK APPRECIATION RIGHTS 6.1. GRANT OF STOCK APPRECIATION RIGHTS. The Committee may, in its sole discretion, grant Stock Appreciation Rights in accordance with the terms and conditions set forth in the Plan; provided, however, that before the IPO, all grants of Stock Appreciation Rights must also be approved by the Board. Each Stock Appreciation Rights Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 6.2. TERMS AND CONDITIONS. A Stock Appreciation Right will entitle a Participant to receive an amount equal to (or if the Committee shall so determine at the time of grant, less than) the excess of the Market Value on the date of exercise over the Market Value on the date of grant of such right (or such other price as is set by the Committee), multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised. 6.3. FORM OF GRANT. A Stock Appreciation Right may be granted in combination with, in addition to, or completely independent of, an Option or any other Award. 6.4. FORM OF PAYMENT. Settlement of a Stock Appreciation Right may be made (i) in cash, (ii) by certified or cashier's check, (iii) if permitted by the Committee, in shares of Stock or (iv) in any other form of valid consideration, as determined by the Committee in its sole discretion. However, any Stock Appreciation Right exercised upon or subsequent to the occurrence of an event described in Sections 2.5(a) or 2.5(b) must be paid in cash. -12- 6.5. EXERCISE OF STOCK APPRECIATION RIGHTS; EFFECTS ON OPTIONS AND VICE-VERSA. Each Stock Appreciation Right will be exercisable in accordance with the terms of the Stock Appreciation Rights Agreement pursuant to which the Stock Appreciation Right is granted. Whenever a Stock Appreciation Right is granted in relation to an Option and the exercise of one affects the right to exercise the other, the number of shares of Stock available under the Option to which the Stock Appreciation Right relates will decrease by a number equal to the number of shares of Stock for which the Stock Appreciation Right is exercised. Upon the exercise of an Option, any related Stock Appreciation Right will terminate as to any number of shares of Stock subject to such Stock Appreciation Right that exceeds the total number of shares of Stock for which the Option remains unexercised. 6.6. TRANSFERABILITY OF STOCK APPRECIATION RIGHTS. Subject to Section 6.8, the Committee may, in its sole discretion, provide in any Stock Appreciation Rights Agreement (or in an amendment to any existing Stock Appreciation Rights Agreement) such provisions regarding transferability of the Stock Appreciation Rights as the Committee, in its sole discretion, deems appropriate. 6.7. TERMINATION OF EMPLOYMENT OR SERVICE. Whenever a Stock Appreciation Right is granted in relation to an Option and the exercise of one affects the right to exercise the other, in the event of the termination of the Participant's employment or service with the Company, the Stock Appreciation Right may be exercised only during the period, if any, within which the Option to which it relates may be exercised. If a Stock Appreciation Right is granted independently of an Option under the Plan, the following provisions will apply: (a) TERMINATION OF EMPLOYMENT WITH THE COMPANY. If a Participant ceases to be employed by the Company or any subsidiary thereof because the Participant is terminated for Cause, any Stock Appreciation Rights held by that Participant will automatically expire. If a Participant's employment is terminated for any reason other than Cause or due to death, such Participant's Stock Appreciation Right will be exercisable (to the extent exercisable on the date of termination of the Participant's employment or, if the Committee, in its sole discretion, has accelerated the vesting of such Stock Appreciation Right, to the extent exercisable following such acceleration) at any time within 30 days after he ceases to be an Employee (or within (i) three months after termination if on account of Retirement or (ii) 12 months after termination if on account of Disability), unless by its terms it expires earlier or unless the Committee agrees, in its sole discretion, to extend the term of such Stock Appreciation Right; provided that the term of any such Stock Appreciation Right will not be extended beyond its original term. If a Participant dies while employed by the Company or any subsidiary thereof, or within three months after ceasing to be an Employee, such Participant's Stock Appreciation Right will be exercisable (to the extent exercisable on the date of death, or, if the Committee, in its sole discretion, has accelerated the vesting of such Stock Appreciation Right, to the extent exercisable following such acceleration) at any time within 12 months after the date of death, unless by its terms it expires earlier or unless the Committee agrees, in its sole discretion, to extend the term of such Stock Appreciation Right; provided that the term of any such Stock Appreciation Right will not be extended -13- beyond its original term. Military or sick leave will not be deemed a termination of employment, provided that it does not exceed the longer of three months or the period during which the absent Participant's reemployment rights, if any, are guaranteed by statute or by contract. The foregoing is qualified by the following: (i) if any facts that would constitute Cause for termination of employment of a Participant are brought to the attention of the Committee after the Participant's employment with the Company or any subsidiary thereof has ended, any Stock Appreciation Rights then held by the Participant may be immediately terminated by the Committee and (ii) if a Participant is an Employee employed pursuant to a written Employment Agreement, the Participant's employment with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's employment is considered under the circumstances to have been terminated for cause for purposes of such agreement. (b) TERMINATION OF ASSOCIATION WITH THE COMPANY. If a consultant or advisor or other Participant who is not an Employee has his relationship with the Company terminated for Cause, any Stock Appreciation Rights held by any such Participant will automatically expire. In all other cases, any Stock Appreciation Rights held by such a Participant, to the extent exercisable on the date of termination of the Participant's association with the Company, will remain exercisable and will expire in accordance with the terms of the applicable Stock Appreciation Rights Agreement; provided that (i) if any facts that would constitute cause for removal or termination of a Participant who is a consultant or advisor or other person who is not an Employee are brought to the attention of the Committee after such Participant's association with the Company has ended, any Stock Appreciation Rights held by such Participant may be immediately terminated by the Committee and (ii) if such Participant has been retained pursuant to a written agreement, the Participant's relationship with the Company will be deemed terminated for "cause" for purposes of the Plan only if the Participant's association with the Company is considered under the circumstances to have been terminated for cause for purposes of such written agreement. 6.8. TANDEM INCENTIVE OPTION - STOCK APPRECIATION RIGHT. Whenever an Incentive Option and a Stock Appreciation Right are granted together and the exercise of one affects the right to exercise the other, the following requirements shall apply: (a) The Stock Appreciation Right will expire no later than the expiration of the underlying Incentive Option. (b) The Stock Appreciation Right may be for no more than the difference between the Exercise Price of the underlying Incentive Option and the Market Value of the Stock subject to the underlying Incentive Option at the time the Stock Appreciation Right is exercised. (c) The Stock Appreciation Right is transferable only when the underlying Incentive Option is transferable, and under the same conditions. -14- (d) The Stock Appreciation Right may be exercised only when the underlying Incentive Option is eligible to be exercised. (e) The Stock Appreciation Right may be exercised only when the Market Value of the Stock subject to the underlying Incentive Option exceeds the Exercise Price of the underlying Incentive Option. (f) If Awards are to be purchased pursuant to Section 2.5, the Company shall purchase either the Incentive Option or the Stock Appreciation Right, at the election of the Participant holding such Awards, but shall not purchase both. 6.9. WRITTEN NOTICE REQUIRED. Any Stock Appreciation Right will be deemed to be exercised when written notice of exercise has been received by the Company at its principal office from the person entitled to exercise the Stock Appreciation Right. ARTICLE VII PERFORMANCE SHARES 7.1. GRANT OF PERFORMANCE SHARES. The Committee may, in its sole discretion, grant Performance Shares in accordance with the terms and conditions set forth in the Plan; provided, however, that before the IPO, all grants of Performance Shares must also be approved by the Board. Each Performance Share Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 7.2. TERMS AND CONDITIONS. Performance Shares may be earned based on the attainment of Performance Goals established by the Committee for a particular Performance Cycle. The Committee may establish Performance Goals on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. 7.3. AMOUNT OF PAYMENT. After the end of each Performance Cycle, the Committee will determine the number of Performance Shares earned by each Participant with respect to the Performance Cycle in accordance with the following: (a) If the Performance Goal is attained or exceeded, a Participant will be deemed to have earned the full number of Performance Shares granted to the Participant. (b) If the Minimum Performance Goal is not attained, a Participant will be deemed to have earned no Performance Shares. (c) If the Performance Goal is not attained, but the Minimum Performance Goal is attained or exceeded, the number of Performance Shares deemed to have been earned by a Participant will be a portion of the Performance Shares, as determined based on a formula established by the Committee at the time of grant. -15- (d) If a Participant's employment or service with the Company or any subsidiary thereof has terminated because of death, Disability or Retirement prior to the end of a Performance Cycle, the number of Performance Shares such Participant will be deemed to have earned shall be the number of Performance Shares determined as though such Participant's employment or service had not terminated, multiplied by a fraction, the numerator of which is the number of months such Participant was employed or served the Company or a subsidiary thereof during the Performance Cycle (including the month during which employment or service terminated) and the denominator of which is the total number of months in the Performance Cycle. (e) If the Participant's employment or service has terminated for any reason other than death, Disability or Retirement, such Participant will be deemed to have earned no Performance Shares except as and to the extent the Committee may determine; provided that the number of Performance Shares that may be so determined by the Committee to have been earned may not exceed the number that would have been earned had the provisions of Section 7.3(a) been applicable. (f) At any time prior to the end of a Performance Cycle, the Committee may adjust downward (but not upward) the Performance Goal and/or the Minimum Performance Goal as a result of major events unforeseen at the time the Performance Shares were awarded, such as changes in the economy, the industry, laws affecting the operation of the Company or any subsidiary thereof, changes in applicable tax laws or accounting principles or any other event the Committee determines would have a significant impact upon the probability of attaining the previously established Performance Goal and/or Minimum Performance Goal. 7.4. FORM OF PAYMENT. Payment in respect of earned Performance Shares will be made to the Participant or, if the Participant has died, to the Participant's designated beneficiary, as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under Section 7.3. Payment in respect of earned Performance Shares may be made in cash, in shares of Stock or a combination thereof, as determined by the Committee in its sole discretion at the time of payment. 7.5. ADDITIONAL AWARDS. In the sole discretion of the Committee, a Performance Share Award may provide the Participant with (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to such Award. ARTICLE VIII STOCK UNIT AWARDS 8.1. GRANT OF STOCK UNIT AWARDS. The Committee may, in its sole discretion, grant Stock Unit Awards in accordance with the terms and conditions set forth in the Plan; provided, however, that before the IPO, all grants of Stock Unit Awards must also be approved by the Board. -16- Each Stock Unit Agreement may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as are determined by the Committee in its sole discretion. 8.2 TERMS AND CONDITIONS. Stock Unit Awards may be in the form of Stock or units, the value of which is based, in whole or in part, on the Market Value of Stock. Stock Unit Awards will be subject to such terms, restrictions, conditions, vesting requirements and payment requirements as the Committee may determine in its sole discretion at the time of grant, including without limitation the following: (a) Any shares of Stock that are part of a Stock Unit Award may be subject to restrictions on sale, assignment, transfer, pledge or other encumbrance. (b) Stock Unit Awards may provide for the payment of cash consideration by the Participant or provide that the Award, and any Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration. (c) Stock Unit Awards may relate in whole or in part to certain performance criteria established by the Committee. (d) Stock Unit Awards may provide for deferred payment schedules and/or vesting over a specified period of employment or service with the Company or any subsidiary thereof. 8.3. ADDITIONAL AWARDS. In the sole discretion of the Committee, a Stock Unit Award may provide the Participant with (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to such Award. ARTICLE IX TERMINATION, AMENDMENT AND ADJUSTMENT 9.1. TERMINATION AND AMENDMENT OF THE PLAN. The Board (or, if the Board has specifically delegated this authority to the Committee, the Committee) may at any time terminate the Plan or make such modifications of the Plan as it deems advisable; provided that no amendment may be made without approval of the stockholders of the Company if such approval is required under the Code or any requirement under applicable state law. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award has theretofore been granted, adversely affect the rights of such Participant under such Award. 9.2. ADJUSTMENT. In the event of any stock dividend payable in Stock or any split-up or contraction of the number of shares of Stock after the date an Award is granted and prior to the exercise in full of an Option or Stock Appreciation Right or the lapse, waiver and/or satisfaction of any restrictions or Performance Goals related to a Restricted Stock Award, Performance Share Award or Stock Unit Award, the number of shares of Stock subject to such Award and, if applicable, the Exercise Price, will be proportionately adjusted. In the event of any reclassification or change -17- of outstanding shares of Stock or in case of any consolidation or merger of the Company with or into another company or in case of any sale or conveyance to another company or entity of the property of the Company as a whole or substantially as a whole, shares of stock or other securities equivalent in kind and value to the Stock subject to the Award immediately prior to such reclassification, change, consolidation, merger, sale or conveyance (together with all other shares, stock and securities thereafter issued in respect thereof) will thereupon be subject to the Award. Upon dissolution or liquidation of the Company, all Awards will terminate, but the Participant will have the right, immediately prior to such dissolution or liquidation, to exercise any Option or Stock Appreciation Right to the extent exercisable on the date of such dissolution or liquidation. No fraction of a share of Stock will be purchasable or deliverable upon exercise, but in the event any adjustment hereunder of the number of shares covered by the Award will cause such number to include a fraction of a share, such number of shares will be adjusted to the nearest smaller whole number of shares. In the event of changes in the outstanding Stock by reason of any stock dividend, split-up, contraction, reclassification, or change of outstanding shares of Stock of the nature contemplated by this Section 9.2, the maximum number of shares of Stock that may be issued from time to time pursuant to the Plan and the maximum number of shares of Stock with respect to which Awards may be granted to any Participant during the term of the Plan, as stated in Section 2.3, will be correspondingly adjusted. ARTICLE X MISCELLANEOUS 10.1. NOTICES AND OTHER COMMUNICATIONS. All notices and other communications required or permitted under the Plan will be effective if in writing and if delivered or sent by certified or registered mail, return receipt requested (a) if to the Participant, at his residence address last filed with the Company and (b) if to the Company, at 34 St. Martin Drive, Marlborough, Massachusetts 01752, Attention: President, with a copy to the General Counsel of Parent, presently at 14951 North Dallas Parkway, Dallas, Texas 75240, or to such other persons or addresses as the Participant or the Company may specify by a written notice to the other from time to time. 10.2. PLAN BINDING ON SUCCESSORS. The Plan will be binding upon the successors and assigns of the Company. 10.3. NUMBER AND GENDER. Whenever used herein, nouns in the singular will include the plural where appropriate, and the masculine pronoun will include the female gender. -18- Form of Nonstatutory Stock Option Agreement COZONE.COM INC. NONSTATUTORY STOCK OPTION AGREEMENT AGREEMENT dated as of _______________________ between cozone.com inc., a Delaware corporation (the "Company") that is an indirect subsidiary of CompUSA Inc., a Delaware corporation ("Parent"), and the individual identified below, residing at the address there set out ("Optionee"). 1. GRANT OF OPTION. Pursuant to the Company's Long-Term Incentive Plan, a copy of which is attached hereto as Exhibit A (as amended or restated to date, the "Plan"), the Company grants to Optionee an option (the "Option") to purchase from the Company a total of _______________ shares of the Company's Class A Common Stock, par value $.01 per share ("Common Stock"), at a price of $________ per share (the "Exercise Price"). This Option is granted as of the date first above written (the "Grant Date"). 2. CHARACTER OF OPTION. This Option will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986. 3. DURATION OF OPTION. This Option may not be exercised after the expiration of 10 years from the Grant Date, or, in the event of Optionee's termination of employment with the Company, after such earlier date as may be provided in Section 4.7 of the Plan. 4. EXERCISE OF OPTION. This Option may be exercised in full or in part, in the manner specified in Section 4.6 of the Plan, to the extent vested, from the date of vesting for each installment of the Option until the last date of exercisability determined in accordance with Section 3 hereof. This Option will become fully vested on the fifth anniversary of the Vesting Start Date (as defined below), provided that if the Common Stock becomes Publicly Traded (as defined below) prior to such date this Option will become vested in the installments identified in the table below. Notwithstanding any of the foregoing, after termination of Optionee's employment with the Company, this Option will, until its expiration, be exercisable only to the extent exercisable immediately prior to such termination.
PERCENTAGE DATE THE OPTION OF SHARES VESTING BECOMES VESTED IN EACH INSTALLMENT FOR SUCH SHARES 33.33 First Anniversary of Vesting Start Date 33.33 Second Anniversary of Vesting Start Date 33.34 Third Anniversary of Vesting Start Date
5. TRANSFER OF OPTION. This Option may not be transferred except by will or the laws of descent and distribution and, during the lifetime of Optionee, may be exercised only by Optionee or by Optionee's legally authorized representative. 6. INCORPORATION OF PLAN TERMS. This Option is granted subject to all of the applicable terms and provisions of the Plan, and such terms and provisions are incorporated by reference herein. Capitalized terms used in this Agreement and not otherwise defined herein have the meanings ascribed to such terms in the Plan. 7. SALE OF PARENT. (a) If before the Common Stock has become Publicly Traded, Parent enters into an agreement to dispose of all or substantially all the assets of Parent, by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which Parent is not the surviving corporation, the Company shall purchase, if Optionee so elects, the entire Option for a price equal to the Option Value (as defined below) calculated as of the date the transaction requiring such determination is consummated, payable in cash as soon as practicable and in any event within 60 days after consummation of the transaction causing such purchase obligation; provided that no purchase obligation shall exist under this Section 7(a) on account of any agreement of merger or other reorganization when the stockholders of Parent immediately before consummation of the transaction will own at least 50% of the total combined voting power of all classes of stock entitled to vote of the surviving entity immediately after consummation of the transaction. (b) The Common Stock shall be deemed to be "Publicly Traded" if it is either (i) listed on the New York Stock Exchange or (ii) quoted on the National Association of Securities Dealers Automated Quotation National Market System. (c) The "Option Value" with respect to any date shall be equal to (i) the Stock Value (as defined below) calculated as of such date minus the Exercise Price, multiplied by (ii) the number of shares of Common Stock that would be purchasable pursuant to the Option as of such date if it was vested and exercisable in full. (d) The "Stock Value" with respect to any date shall be equal to the average of the valuations of a share of Common Stock as of such date determined by two independent, nationally-recognized investment banking firms, which valuations shall equal the fair market value of one share of Common Stock without taking into account any discount for illiquidity or lack of control. 8. CHANGE IN CONTROL. (a) If a Parent Change In Control (as defined below) occurs before the Common Stock has become Publicly Traded, the Company shall purchase, if Optionee so elects, the entire Option for a price equal to the Option Value calculated as of the date the transaction requiring such determination is consummated, payable in cash as soon as practicable and in any event within 60 days after the occurrence of the event constituting the Parent Change In Control. -2- (b) If a Company Change In Control (as defined below) occurs before the Common Stock has become Publicly Traded, the Company shall purchase, if Optionee so elects, for a price equal to the Pro Rata Option Value (as defined below), up to the full amount of either (i) 50% of the Option if the Company Change In Control occurs before the first anniversary of the Vesting Start Date, (ii) 67% of the Option if the Company Change In Control occurs on or after the first anniversary of the Vesting Start Date but before the second anniversary of the Vesting Start Date, (iii) 83% of the Option if the Company Change In Control occurs on or after the second anniversary of the Vesting Start Date but before the third anniversary of the Vesting Start Date, or (iv) 100% of the Option if the Company Change In Control occurs on or after the third anniversary of the Vesting Start Date. The remaining portion of the Option not purchased by the Company pursuant to the preceding sentence will remain outstanding and subject to the vesting schedule set forth in Section 4 hereof (allocated on a pro rata basis over any remaining installments of vesting of the Option). For purposes of the foregoing, the Pro Rata Option Value shall be calculated as of the date the transaction requiring such determination is consummated, and shall be paid as soon as practicable and in any event within 60 days after the event constituting the Company Change In Control. Any payment due pursuant to the preceding sentence shall be made, at the Company's sole option, by tendering such payment in the form of (i) cash, (ii) shares of the common stock of Parent, with each of such shares valued at the closing sale price of a share of Parent common stock on the last trading day immediately preceding the date of payment, or (iii) any combination of the foregoing. The resale of any shares of Parent common stock tendered to Optionee pursuant to the preceding sentence must at the time of such tender be registered pursuant to an effective Registration Statement filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended. (c) If a Company Change In Control occurs after the Common Stock has become Publicly Traded, the Option will become immediately vested and exercisable in full. (d) Certain defined terms: (i) The "Business" shall mean the business involving the sale of computer hardware, software and peripherals as well as certain other consumer electronics and technology products via the Internet, as conducted by cozone.com l.l.c., a Delaware limited liability company ("Cozone L.L.C."), or its successor. (ii) At any time BEFORE the Common Stock has become Publicly Traded, a "Company Change In Control" shall be deemed to have occurred if either (a) Parent and its majority-owned direct or indirect subsidiaries shall at any time cease to be the beneficial owners, collectively, of securities representing at least 15% of the equity interest in the Company, or (b) any of the Company or its stockholders or Cozone L.L.C. or its members enter into an agreement to dispose of all or substantially all the assets of the Business by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which the Company or Cozone L.L.C., as applicable, is not the surviving entity; provided that entering into such an agreement shall not constitute a Company Change In Control if (1) the stockholders of the Company and members of Cozone L.L.C., as applicable, immediately -3- before the consummation of the transaction will collectively own or control, directly or indirectly, at least 15% of the equity interest of the surviving entity or successor in ownership to the Business, as applicable, immediately after the consummation of the transaction, or (2) the surviving entity or successor in ownership to the Business is Parent or an entity controlled directly or indirectly by Parent. At any time AFTER the Common Stock has become Publicly Traded, a "Company Change In Control" shall be deemed to have occurred if the Company has adopted a stockholder rights plan (the "Company Rights Plan") and either (a) a Person has met the requirements for becoming an Acquiring Person of the Company, whether or not a Distribution Date occurs or the Rights are redeemed by the Company; provided that a Company Change In Control shall not be deemed to have occurred for purposes hereof with respect to any Person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended, or any successor provision (for purposes of this Section 8(d)(ii), "Person," "Acquiring Person," "Distribution Date" and "Rights" shall have the meanings ascribed to such terms or any analogous terms in the Company Rights Plan on the date the Company Rights Plan is adopted, whether or not the Company Rights Plan is subsequently amended to change the meaning of any such terms or analogous terms), or (b) any of the Company or its stockholders or Cozone L.L.C. or its members enter into an agreement to dispose of all or substantially all of the assets of the Business by means of a sale, merger or other reorganization, liquidation or otherwise in a transaction in which the Company or Cozone L.L.C., as applicable, is not the surviving entity; provided that entering into such an agreement shall not constitute a Company Change In Control if (1) the stockholders of the Company and members of Cozone L.L.C., as applicable, immediately before the consummation of the transaction will collectively own or control, directly or indirectly, at least 15% of the equity interest of the surviving entity or successor in ownership to the Business, as applicable, immediately after the consummation of the transaction, or (2) the surviving entity or successor in ownership to the Business is Parent or an entity controlled directly or indirectly by Parent. (iii) "Vesting Start Date" shall mean _________-_________. (iv) "Pro Rata Option Value" with respect to any date shall be equal to the Option Value calculated as of such date multiplied by a fraction, the numerator of which shall be equal to the number of shares of Common Stock attributable to the portion of the Option being purchased by the Company and the denominator of which shall be equal to the total number of shares of Common Stock subject to the Option. (v) A "Parent Change In Control" shall be deemed to have occurred when any Person meets the requirements for becoming an Acquiring Person of Parent, whether or not a Distribution Date occurs or the Rights are redeemed by Parent; provided that a Parent Change In Control shall not be deemed to have occurred for purposes hereof with respect to any Person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended, or any successor provision. For -4- purposes of this Section 8(d)(iii), "Person," "Acquiring Person," "Distribution Date" and "Rights" shall have the meanings ascribed to such terms in the Rights Agreement between Parent and Bank One, Texas, N.A. as Rights Agent (American Stock Transfer & Trust Company became successor Rights Agent as of August 19, 1996), dated as of April 29, 1994. Notwithstanding the foregoing, a Parent Change In Control shall not be deemed to have occurred in the event a Company Change In Control shall have occurred at any time prior to the occurrence of the event otherwise constituting a Parent Change In Control. 9. REGISTRATION OF SALE OF SHARES. As soon as practicable after the Common Stock has become Publicly Traded, the Company shall cause the issuance of Common Stock under the Plan to be registered under the Securities Act of 1933, as amended. 10. MISCELLANEOUS. This Agreement will be construed and enforced in accordance with the laws of the State of Texas (other than the rules governing conflicts of laws) and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of Optionee. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. cozone.com inc. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- Optionee ----------------------------------------- Name: ------------------------------------ Address: --------------------------------- Social Security Number: ------------------ -5- EX-10.5 6 EXHIBIT 10.5 [GRAPHICD] SECURED WHOLESALE FINANCE AGREEMENT THIS SECURED WHOLESALE FINANCE AGREEMENT (collectively with any Schedule (the "SCHEDULE") attached hereto, the "AGREEMENT") dated the date set forth below, is entered into between COMPUSA STORES LP, a Texas limited partnership (the "DEALER"), with its chief executive office and principal place of business located at 14951 North Dallas Parkway, Dallas, Texas 75240 and FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), whose address is 12647 Alcosta Boulevard, San Ramon, CA 94583. 1. DEFINITIONS. In addition to terms defined elsewhere in this Agreement, the following terms have the definitions set forth below: "ACCOMMODATION PARTY" means Compaq Computer Corporation, a Delaware corporation. "ALLOWED CREDITS" means those adjustments to Vendor invoices requested by Dealer, as more particularly set forth, processed and determined in accordance with the procedures set forth in the Tri-Party Agreement. "BASE RATE" means the rate of interest announced publicly by Citibank, N.A. (or any successor thereto) as its "Prime Rate" which may not be such institution's lowest rate. "CODE" means the Uniform Commercial Code as adopted and in effect in the State of Arizona from time-to-time. "COLLATERAL" means all of Dealer's present and future right, title and interest in and to the Financed Inventory, all identifiable cash proceeds (including proceeds of any insurance payable due to loss or damage to any of the Financed Inventory) and products thereof, rights, claims and choses-in-action of Dealer against Vendor in respect of the Financed Inventory, and books, records and computer data relating thereto; provided, that notwithstanding the forgoing, the term "Collateral" expressly excludes any proceeds constituting accounts, instruments or general intangibles (as such terms are defined by the Code). "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "ERISA AFFILIATE" means each trade or business (whether or not incorporated and whether or not foreign) which is or may hereafter become a member of a group of which Dealer is a member and which is treated as a single employer under ERISA Section 4001(b)(1), or IRC Section 414. "FINANCED INVENTORY" means all inventory (as such term is defined by the Code) acquired or to be acquired by Dealer at any time or from time-to-time from Vendor in the ordinary course of Dealer's business with proceeds of Loans made by FINOVA to, or for the benefit of, Dealer, including, but not limited to Financed Inventory bearing Vendor's trademark, and all additions to and accession of such inventory, including software integrated or installed thereon by Vendor, Dealer or any third party and any of such Financed Inventory returned to or repossessed by Dealer, and all documents of title or other documents representing Financed Inventory. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Boards which are applicable to the circumstances as of the date of determination consistently applied. "GUARANTOR" means CompUSA, Inc., a Delaware corporation. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "LOAN DOCUMENTS" means, collectively, this Agreement, any note executed by Dealer and payable to FINOVA, and any other agreement entered into, or instrument or document executed, delivered or recorded in connection with the Advances, including, without limitation, Vendor invoices and purchase orders, and all alterations, amendments, extensions, modifications, refinancings, renewals, replacements, restatements or supplements of or to any of the foregoing. "LOAN PARTY" means Dealer and Guarantor. "OBLIGATIONS" means all present and future Advances and all interest, and reasonable charges, expenses, fees, attorney's fees, and other sums chargeable to Dealer hereunder. "PBGC" means the Pension Benefit Guarantee Corporation. "PERMITTED DISCRETION" means FINOVA's reasonable discretion in the exercise of reasonable credit judgment which FINOVA believes: (i) will or could adversely affect the value of any Collateral, the enforceability or priority of FINOVA's liens thereon or the amount which FINOVA would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral; (ii) suggests that any collateral report or financial information delivered to FINOVA by any person on behalf of Dealer is incomplete, inaccurate or misleading in any material respect; (iii) materially increases the likelihood of a bankruptcy, reorganization or other insolvency proceeding involving Dealer or any of the Collateral, or (iv) creates or reasonably could be expected to create an Event of Default. The phrase "FINOVA's reasonable discretion in the exercise of reasonable credit judgment" shall be measured according to that discretion which would be exercised by a reasonably prudent Person that is a commercial lender in the inventory/distribution finance industry and acting in such capacity under the same or substantially similar circumstances. "PERSON" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, government, or any agency or political division thereof, or any other entity. "PRIMARY LENDER" means Bank of America, N.A. (formerly NationsBank, N.A.), and those certain other lenders identified as such in the Primary Loan Agreement. "PRIMARY LOAN AGREEMENT" means that certain Loan and Security Agreement dated as of June 30, 1999, by and among Dealer and those certain other lenders which are parties thereto, as the same may from time-to-time be amended, increased, supplemented, extended, modified, renewed, refunded, replaced or refinanced. "SCHEDULE" has the meaning set forth in the Preamble. "TRI-PARTY AGREEMENT" means that certain agreement of even date herewith by and among Dealer, Vendor and FINOVA, as the same may from time-to-time be amended in accordance with the provisions thereof, pursuant to which the parties thereto have established procedures for the purchase, sale, delivery, pricing and funding of the Financed Inventory to be purchased by the Dealer from the Vendor. "VENDOR" means COMPAQ COMPUTER CORPORATION. 2. CREDIT FACILITY. 2.1 TOTAL FACILITY. Upon the terms and conditions set forth herein and provided that no Event of Default or event, which with the giving of notice or the passage of time, or both, would constitute an Event of Default, may have occurred and be continuing, FINOVA shall, at Dealer's request and in FINOVA's Permitted Discretion, make advances from time to time (each, an "ADVANCE" and collectively, "ADVANCES") to or for Dealer's account in an aggregate principal amount not to exceed the Total Facility amount set forth in the Schedule ("TOTAL FACILITY") for the purpose of financing Dealer's acquisition of Financed Inventory from the Vendor. The Total Facility shall at no time exceed Eighty-Five Million ($85,000,000) Dollars 2.2 PROCEDURE FOR ADVANCES., Advances shall be made in accordance with the following general procedures: (i) Dealer shall deliver to Vendor Dealer's purchase order for Financed Inventory; (ii) upon receipt of such purchase order, Vendor will promptly deliver to FINOVA a copy thereof requesting FINOVA's approval thereof; (iii) if in the exercise of FINOVA's Permitted Discretion, FINOVA grants its approval of such purchase order, FINOVA will promptly deliver to Vendor FINOVA's approval -2- number with respect thereto; (iv) upon receipt of such approval number from FINOVA, Vendor shall promptly ship the Financed Inventory and deliver Vendor's invoice therefor to FINOVA, with a copy thereof to Dealer; and (v) subject to the terms, conditions and procedures set forth in the Tri-Party Agreement, FINOVA shall pay such invoice, and the full amount of such invoice (notwithstanding any discount or other financial accommodation which may be provided to FINOVA by the Vendor or others with respect thereto) shall be deemed an Advance under the Loan made at the ultimate request of the Dealer for the benefit of Dealer. In the event that FINOVA fails to issue its approval to Vendor, as provided in clause (iii) above, upon no less than fifteen (15) days prior written notice to FINOVA, Dealer may terminate this Agreement and avoid the payment of an Early Termination Fee as set forth in the Schedule; provided, however, that FINOVA shall continue to honor all invoices previously approved by FINOVA under clause (iii) above, and Dealer shall pay all Obligations hereunder as and when otherwise due hereunder. This Agreement may be terminated by FINOVA and Dealer as more specifically set forth in the Schedule. 2.3 EVIDENCE OF ADVANCES. Each Advance or the Total Facility may, in FINOVA's Permitted Discretion, be evidenced by notes or other instruments issued or made by Dealer to FINOVA. If not so evidenced, such Advance shall be evidenced solely by entries upon FINOVA's books and records. 2.4 PAYMENTS; PAYMENTS WITHOUT DEDUCTION. Advances shall be due within the period specified on the Schedule. Any invoice not paid within such period shall bear interest at the Default Rate provided in Section 3.1 of the Schedule. FINOVA will provide Dealer with monthly statements and weekly confirmations of transactions. Payments are due at the notice address set forth on the signature page hereto on the 5th, 15th and 25th day of each month. With the exception of Allowed Credits, Dealer shall pay all principal, interest, and other charges payable hereunder when due, without any deduction whatsoever, including, without limitation, any deduction for setoff, counterclaim, or recoupment, or for any credit or other sum due Dealer from Vendor. Dealer's obligations under this Agreement shall not be affected or impaired in any way by reason of any present or future claim of Dealer against Vendor or its agents, including, without limitation, any claim for breach of express or implied warranty of title, or otherwise related to the condition of the Financed Inventory or Dealer's relationship with Vendor. 2.5 APPLICATION OF PAYMENTS. All payments shall be applied first to the Advance, the proceeds of which enabled Dealer to acquire rights in or use of specific Financed Inventory, and then to other Advances outstanding in order of the payment due dates thereunder. 2.6 APPROVED VENDOR. Dealer shall not request, and FINOVA shall have no obligation to make, any Advance to finance Dealer's acquisition of Financed Inventory unless such Financed Inventory are sold to Dealer by Vendor. 2.7 TRI-PARTY AGREEMENT. The provisions of the Tri-Party Agreement are expressly incorporated herein and made a part hereof. 2.8 POWER OF ATTORNEY. Dealer hereby appoints any attorney, employee, officer, agent or representative of FINOVA as Dealer's true and lawful attorney-in-fact, and upon the occurrence of an Event of Default such Person or Persons shall have the power to execute and deliver as attorney-in-fact for Dealer: (i) any and all UCC-1 Financing Statements in favor of FINOVA, together with any and all UCC-3 Continuation Statements in favor of FINOVA; (ii) any and all instruments arising out of the sale or other disposition of any Collateral, including releases and satisfactions; (iii) any check which may be payable to Dealer for returned or unearned premiums or the proceeds of insurance with respect to the Collateral; and (iv) with respect to the Collateral, to sign and endorse the name of Dealer upon drafts drawn on persons liable, directly or indirectly, on any account, and on assignments, verifications, notices, invoices, freight or express bills, bills of lading, storage or warehouse receipts and similar items. Dealer hereby grants to said attorney full power to do any and all things necessary to be done with respect to the above as fully and effectively as Dealer might or could do, with full power of substitution, and hereby ratifying and confirming all its said attorney or its substitutes shall lawfully do or cause to be done by virtue hereof. This power of attorney, being coupled with an interest, shall be irrevocable until all amounts or the Obligations hereunder are paid and performed in full, and shall survive any dissolution, termination or liquidation of Dealer. -3- 3. INTEREST 3.1 RATE. With respect to the Advances, Dealer shall pay FINOVA interest as set forth in the Schedule. 3.2 FLOATING RATE; COMPUTATION. The interest rate chargeable on any Advance shall be increased or decreased as the case may be, without notice or demand of any kind, upon the announcement of any change in the Base Rate. Each change in the Base Rate shall be effective immediately. Interest and all other fees and charges shall be computed on the basis of a year of 360 days and actual days elapsed and shall be payable to FINOVA in arrears on the first business day of each month. 3.3 [INTENTIONALLY DELETED] 3.4 EXCESS INTEREST. The contracted for rate of interest contemplated hereby, without limitation, shall consist of the following: (i) the interest rate set forth in the Schedule, calculated and applied to the principal balance of the Obligations in accordance with the provisions of this Agreement; (ii) interest after an Event of Default, calculated and applied to the amount of the Obligations in accordance with the provisions hereof; (iii) any discount afforded FINOVA with respect Vendor invoices for Financed Inventory; and (iv) all Additional Sums (as herein defined), if any. Dealer agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. The Facility Fee, attorneys fees, the Early Termination Fee, other charges or any other sums or things of value paid or payable by Dealer hereunder (collectively, the "ADDITIONAL SUMS"), whether pursuant to this Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Dealer as, and shall be deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. It is the intent of the parties to comply with the usury laws of the State of Arizona (the "APPLICABLE USURY LAW"). Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Agreement, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Agreement or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law (the "MAXIMUM INTEREST RATE"). In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Dealer or otherwise in connection with the loan evidenced hereby, (b) the maturity of the Obligations is accelerated in whole or in part, or (c) all or part of the Obligations shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the Maximum Interest Rate, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Dealer nor any other person or entity now or hereafter liable for the payment of the Obligations shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Interest Rate, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount of the Obligations or refunded to Dealer, at FINOVA's option, and (4) the effective rate of interest shall be automatically reduced to the Maximum Interest Rate. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the Maximum Interest Rate shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Dealer or otherwise in connection with such Advance; and (y) in the event that the effective rate of interest on the loan should at any time exceed the Maximum Interest Rate, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to time, if and when the effective interest rate on the loan otherwise falls below the Maximum Interest Rate, to the extent that interest paid to the date of calculation does not exceed the Maximum Interest Rate, until the entire amount of interest which would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Dealer further -4- agrees that should the Maximum Interest Rate be increased at any time hereafter because of a change in the Applicable Usury Law, then to the extent not prohibited by the Applicable Usury Law, such increases, if applicable, shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the Maximum Interest Rate be decreased because of a change in the Applicable Usury Law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 4. COLLATERAL 4.1 SECURITY FOR ADVANCES. To secure the prompt and complete payment and performance of the Advances, Dealer hereby grants to FINOVA a purchase-money lien on, and security interest in, the Collateral. 4.2 [INTELLIONALLY DELETED] 4.3 COLLATERAL IN POSSESSION OF OTHERS. If any Collateral is at any time in the possession or control of any warehouseman, bailee or any of Dealer's agents or processors, Dealer shall notify such Person of FINOVA's security interest in such Collateral and, upon FINOVA's request, instruct them to hold all such Collateral for FINOVA's account subject to FINOVA's instructions. From time to time, Dealer shall, upon FINOVA's request, execute and deliver confirmatory written instructions pledging the Collateral to FINOVA, but Dealer's failure to do so shall not affect or limit FINOVA's security interest or other rights in and to the Collateral. Until the obligations have been fully satisfied and FINOVA's obligation to make further Advances hereunder has terminated, FINOVA's security interest in the Collateral shall continue in full force and in effect. 5. REPRESENTATIONS. Dealer represents and warrants that: 5.1 DUE AUTHORIZATION. Dealer is a limited partnership duly organized and existing under the laws of the State set forth in the Schedule, is qualified and authorized to do business and is in good standing in all states in which such qualifications and good standings are necessary in order for it to conduct its business and own its property, except where the failure to be so qualified or authorized would not have a material adverse effect on its business, assets, operation or condition, financial or otherwise. Further Dealer has all requisite power and authority to conduct its business as presently conducted to own its property and except where the failure to be so qualified or authorized would not have a material adverse effect on its business assets, operation or condition, financial or otherwise, and to execute and deliver each of the Loan Documents to which it is a party and perform all of its obligations thereunder, has not taken any steps to wind up, dissolve or otherwise liquidate its assets and the execution, delivery and performance of this Agreement have been duly authorized and are not in contravention of any law, organizational documents of Dealer, or any arrangements of Dealer with any Vendor. 5.2 OTHER NAMES. Dealer has not, during the preceding five (5) years, been known by or used any other corporate or fictitious name except as set forth in the Schedule, nor has Dealer been the surviving entity of a merger or consolidation or acquired all or substantially all of the assets of any person during such time, except as set forth in the Schedule; 5.3 BINDING OBLIGATION. Each of the Loan Documents to which Dealer is a party is the legal, valid and binding obligation of Dealer enforceable against Dealer in accordance with its terms, except as may be limited by bankruptcy, insolvency and other similar laws effecting creditors rights generally; 5.4 INTANGIBLE PROPERTY. Dealer possesses adequate Trademarks, Copyrights, Licenses and Patents for the present and planned future conduct of its business without any known conflict with the rights of others, and each is valid and has been duly registered or filed with the appropriate governmental or regulatory authorities, except matters that would not have a material adverse effect upon its business, assets, operation or condition, financial or otherwise.; 5.5 CAPITAL. Dealer has capital sufficient to conduct its business, is able to pay its debts as they mature and owns property having a fair salable value greater than the amount required to pay all of its debts (including contingent debts); 5.6 MATERIAL LITIGATION. Except as disclosed on the Schedule, Dealer has no pending, or to its knowledge threatened, litigation, actions or proceedings which would materially and adversely -5- affect its business, assets, operations, condition, financial or otherwise, or the Collateral or any of FINOVA's interests therein; 5.7 TITLE; SECURITY INTERESTS OF FINOVA. Upon purchase and taking possession thereof, Dealer will have good, indefeasible and merchantable title to the Collateral and, upon the execution and delivery of the Loan Documents, the timely filing of UCC-1 Financing Statements in the appropriate offices and the timely delivery of written notification to the Primary Lender, this Agreement and such documents shall create valid and perfected first priority liens in and to the Collateral. Except as disclosed on the Schedule, there are no liens or encumbrances with respect to any portion of the Collateral; 5.8 RESTRICTIVE AGREEMENTS; LABOR CONTRACTS. Dealer is not a party or subject to any contract or subject to any charge, corporate restriction, judgment, decree or order materially and adversely affecting its business, assets, operations, condition, financial or otherwise, or which restricts its right or ability to incur the Obligations, and it is not party to any labor dispute. In addition, no labor contract is scheduled to expire during the Term of this Agreement, except as disclosed to FINOVA in writing prior to the date hereof; 5.9 LAWS. Dealer is not in violation of any applicable statute, regulation, ordinance or any order of any court, tribunal or governmental agency, in any respect materially and adversely affecting the Collateral; 5.10 CONSENTS. Dealer has obtained or caused to be obtained or issued any required consent of a governmental agency or other Person in connection with the financing contemplated hereby; 5.11 DEFAULTS. Dealer is not in default with respect to any note, indenture, loan agreement, mortgage, lease, deed or other agreement to which it is a party or by which it or its assets are bound, nor has any event occurred which, with the giving of notice or the lapse of time, or both, would cause such a default, if the existence of such defaults, singly or in the aggregate, would during a period of twelve (12) months, result in losses which would exceed an amount equal to or in excess of fifteen (15%) percent of the consolidated net worth of Guarantor (exclusive of CompUSANet.com) as reflected upon the most recent financial statements delivered to FINOVA hereunder; 5.12 FINANCIAL CONDITION. The financial statements of the Dealer heretofore delivered to FINOVA fairly present Dealer's financial condition and results of operations and those of such other Persons described therein as of the date thereof in accordance with GAAP; there are no material omissions from such financial Statements or other facts or circumstances not reflected in such Financial Statements; and there has been no material and adverse change in such financial condition or operations since the dates of such financial statements, except with respect to restructuring charges relating to "Management's Restructuring Plan" (as such term is defined in the Primary Loan Agreement), or as disclosed in the Primary Loan Agreement; 5.13 ERISA. None of Dealer, any ERISA Affiliate, or any Plan is or has been in violation of any of the provisions of ERISA, any of the qualification requirements of IRC Section 401(a) or any of the published interpretations thereunder, nor has Dealer or any ERISA Affiliate received any notice to such effect. No notice of intent to terminate a Plan has been filed under Section 4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not instituted proceedings to terminate, or appointed a trustee to administer, a Plan. No lien upon the assets of Dealer has arisen with respect to a Plan. No prohibited transaction or Reportable Event has occurred with respect to a Plan. Neither Dealer nor any ERISA Affiliate has incurred any withdrawal liability with respect to any Multiemployer Plan. Dealer and each ERISA Affiliate have made all contributions required to be made by them to any Plan or Multiemployer Plan when due. There is no accumulated funding deficiency in any Plan, whether or not waived; 5.14 TAXES. Dealer has filed all tax returns and such other reports as it is required by law to file and has paid or made adequate provision for the payment on or prior to the date when due of all taxes, assessments and similar charges that are due and payable; 5.15 LOCATIONS; FEDERAL TAX ID NO. Dealer's chief executive office and the offices and locations where it keeps the Collateral (except for Inventory in transit) are at the locations set forth in the Schedule, except to the extent that such locations may have been changed after notice to FINOVA in -6- accordance with Section 6.10 hereof; Dealer's federal tax identification number is as shown in the Schedule; 5.16 BUSINESS RELATIONSHIPS. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Dealer and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Dealer, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially and adversely affect Dealer or prevent Dealer from conducting such business after the consummation of the transactions contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted; 5.17 INDEPENDENT OBLIGATIONS. This Agreement and all Advances, extensions of credit, and other financial accommodations of FINOVA to Dealer, are completely independent of Dealer's or FINOVA's arrangements with the Vendor, or any other Vendor, and neither FINOVA nor any Vendor is an agent for or acting on behalf of the other. FINOVA makes no representation with respect to any of the Financed Inventory or any materials provided by the Vendor with respect to the Financed Inventory; 5.18 RELIANCE ON VENDOR. Dealer has relied exclusively upon the Vendor with respect to the quality, merchantability, and fitness for any particular purpose of the Financed Inventory purchased from the Vendor. Dealer has determined with the Vendor the price, quantity and other terms with respect to the sale of Financed Inventory to Dealer. Dealer has not relied, and will not rely, on any statements, promises, or representations, oral or written, made by Vendor (whether or not purported to be on FINOVA's behalf) relating to any of the Advances; 5.19 [Intentionally omitted] 5.20 REAFFIRMATIONS. Each request for a loan made by Dealer pursuant to this Agreement shall constitute (i) an automatic representation and warranty by Dealer to FINOVA that there does not then exist any Event of Default and (ii) a reaffirmation as of the date of said request of all of the representations and warranties of Dealer contained in this Agreement and the other Loan Documents. 6. COVENANTS. Dealer covenants, acknowledges, warrants and agrees that: 6.1 OWNERSHIP, CONDITION AND USE OF COLLATERAL. Except for sales in the ordinary course of Dealer's business, and the junior liens of (i) the lenders under the Primary Loan Agreement, and (ii) Vendor, Dealer is and shall continue to be the owner of all of the Collateral, free and clear of all liens and encumbrances. 6.2 ACCURATE INFORMATION. All information provided by Dealer to FINOVA in connection with each Advance is, and will be, complete and accurate in every material respect; provided, however that absent manifest error or fraud, nothing herein shall be deemed to relieve FINOVA or Dealer from their respective obligations under the Tri-Party Agreement. 6.3 VENDOR AUTHORIZATIONS. Vendor is authorized to issue directly to FINOVA, and/or FINOVA's agents, credit memos, invoices, purchase orders, certificates of origin and other documents and information relating to Dealer's acquisition of Financed Inventory from Dealer. 6.4 INSURANCE. Dealer shall procure and maintain theft, burglary and fire and other casualty insurance containing so-called extended coverage insurance, insuring the Collateral, all of which insurance shall be in such reasonable amounts and written by insurers and with lender's loss payee, additional insured, and other endorsements satisfactory to FINOVA, and shall be, if adjustable, adjustable by FINOVA, and payable to and for the benefit of Dealer, the Primary Lender, and FINOVA as their interests may appear. Dealer shall pay all premiums as and when due, and upon FINOVA's request, shall furnish FINOVA with evidence satisfactory to FINOVA of its payment of premiums for such policies or certificates evidencing its -7- compliance with such insurance requirements. If Dealer fails to comply with this section, FINOVA may (but shall not be required to) procure such insurance and endorsements at Dealer's expense and charge the cost thereof to Dealer's Advance account as an Obligation. 6.5 CONSENTS. Dealer has obtained or caused to be obtained or issued any required consent of a governmental agency, the Primary Lender and any other lender, or other person in connection with the financing contemplated by this Agreement. If requested by FINOVA, Dealer shall exercise commercially reasonable efforts to furnish to FINOVA waivers from the lessors, bailors and/or mortgagees of all locations where any Collateral is located. 6.6 [INTENTIONALLY DELETED] 6.7 LIENS. Other than the purchase money security interest in favor of FINOVA created hereby and the junior liens of (i) the lenders under the Primary Loan Agreement, and (ii) Vendor, Dealer shall not create, incur, assume or permit to exist any lien or encumbrance upon any of the Collateral, whether now owned or hereafter acquired. 6.8 FURTHER ASSURANCES. Dealer shall do all acts and execute and deliver all writings FINOVA may at any time require to protect or enforce FINOVA's interests, rights and remedies created by, provided in or emanating from, this Agreement. 6.9 NOTICES. Within five days of acquiring knowledge thereof, Dealer shall notify FINOVA in writing of (i) any change in any information provided by Dealer to FINOVA in connection with any of the Advances or the Loan Documents, OTHER than as outlined in the Tri-Party Agreement, (ii) any change in the location of any of the Collateral or other matter materially affecting any of the Collateral, (iii) any matter which has or may have a material adverse effect on Dealer's business, assets, operations or financial condition, (iv) any substantial loss, theft, damage, or destruction of any of the Collateral, or (v) any matter which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. 6.10 REPORTING REQUIREMENTS. Dealer shall furnish FINOVA, upon request, such information and statements as FINOVA shall request from time to time regarding Dealer's business affairs, financial condition and the results of its operations. Without limiting the generality of the foregoing, Dealer shall provide FINOVA with those reports identified in the Schedule as set forth in the Schedule. 6.11 PRIMARY LOAN AGREEMENT. Dealer shall timely perform each and every term, condition and covenant as and when the same are to be performed under the Primary Loan Agreement. In the event that the Primary Loan Agreement shall be amended, modified or terminated, Dealer shall give FINOVA prompt, detailed written information concerning the same together with true, correct and complete copies of all written documentation evidencing the same, and within thirty (30) days of receipt of all such information, FINOVA may elect, to terminate this Agreement by providing Dealer with no less than thirty (30) days prior written notice of its intention to so terminate. If FINOVA elects to terminate this Agreement pursuant to the provisions of the preceding sentence and provided no Event of Default has occurred, FINOVA shall waive the Early Termination Fee as described in the Schedule, and other than the repayment of Advances which shall be due and payable in the ordinary course as set forth in the Schedule, all other Obligations shall become immediately due and payable in full in immediately available funds upon the effective date of such termination. 6.12 TRI-PARTY AGREEMENT. Dealer shall timely perform each and every term, condition and covenant as and when the same are to be performed under the Tri-Party Agreement. 6.13 FINANCIAL COVENANTS. Dealer shall comply with each and all of the financial covenants as set forth in the Primary Loan Agreement. 6.14 COLLATERAL MAINTENANCE REQUIREMENT. Dealer shall comply with the Collateral Maintenance requirement as set forth in the Schedule. 6.15 Y2K COMPLIANCE. Dealer shall take all action necessary to assure that there will be no material adverse change to Dealer's business by reason of the advent of the year 2000, including without limitation that all computer-based systems, embedded microchips and other processing -8- capabilities effectively recognize and process dates after December 31, 1999. At FINOVA's request, Dealer shall provide to FINOVA assurance reasonably acceptable to FINOVA that Dealer's computer-based systems, embedded microchips and other processing capabilities are year 2000 compatible. 6.16 REVOCATION OF ACCOMMODATION PARTY GUARANTY. In the event that the Accommoda-tion Party revokes, or reduces the amount of, its guaranty of the Obligations, FINOVA may, at its election, reduce the Total Facility to Fifty Million ($50,000,000) Dollars within thirty (30) days of receipt of the Accommodation party's notice to FINOVA of such termination or reduction. FINOVA will use its best efforts to obtain another guarantor or accommodation party, or participant or participants for indebtedness in excess of Fifty Million ($50,000,000) Dollars. Should FINOVA be unable to find another guarantor, accommodation party, participant or participants and should FINOVA reduce the Total Facility in the event the Accommodation party reduces its guaranty and provided no Event of Default has occurred, Dealer has the right to terminate the Total Facility within thirty (30) days of notice of reduction in the Total facility by FINOVA. FINOVA shall waive the Early Termination Fee as provided in the Schedule pursuant to the provisions of the preceding sentence, and other than the repayment of the Advances which shall be due and payable in the ordinary course as set forth in the Schedule, all other Obligations shall become immediately due and payable in full in immediately available funds upon the effective date of such termination. 7. DEFAULTS AND REMEDIES. 7.1 EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default under this Agreement: (a) Dealer fails to pay all or any part of the Obligations within three (3) business days of written notice by FINOVA when due and payable at stated maturity, upon acceleration or otherwise; (b) Dealer or any other Loan Party fails or neglects to perform, keep, or observe in any material respect any term, provision, condition, covenant or agreement contained in any Loan Document to which Dealer or such other Loan Party is a party, and such default continues for a period of thirty (30) days after written notice thereof has been given to Dealer by FINOVA ; (c) An Event of Default shall have occurred under the Primary Loan Agreement, and the payment of the indebtedness thereunder shall have been accelerated; (d) [Intentionally omitted] (e) The value or priority of FINOVA's purchase money security interest in the Collateral is materially impaired; (f) Any portion of Dealer's assets is seized, attached, subjected to a writ or distress warrant, is levied upon or comes into the possession of any judicial officer, the value of which assets would exceed an amount equal to or in excess of fifteen (15%) percent of the consolidated net worth of Guarantor (exclusive of CompUSANet.com) as reflected upon the most recent financial statements delivered to FINOVA hereunder, unless such action is stayed and such attachment is dismissed within thirty (30) days; (g) Dealer shall generally not pay its debts as they become due or shall enter into any agreement (whether written or oral), or offer to enter into any agreement, with all or a significant number of its creditors regarding any moratorium or other indulgence with respect to its debts or the participation of such creditors or their representatives in the supervision, management or control of the business of Dealer; (h) Any bankruptcy or other insolvency proceeding is commenced by Dealer, or any such proceeding is commenced against Dealer and remains undischarged or unstayed for sixty (60) days; (i) Other than those with respect to the Collateral and then only to the extent permitted hereunder, any notice or notices of lien, levy or assessment, the value of which assets which would be adversely affected by such lien, levy or assessment would exceed an amount equal to or in excess of fifteen (15%) percent of the consolidated net worth of Guarantor (exclusive of CompUSANet.com) as reflected upon the most recent financial statements delivered to FINOVA hereunder; (j) Any judgments are entered against Dealer, the value of which would exceed an amount equal to or in excess of fifteen (15%) percent of the consolidated net worth of Guarantor (exclusive of CompUSANet.com) as reflected upon the most recent financial statements -9- delivered to FINOVA hereunder, unless each such judgment or judgments are stayed and each such judgment is dismissed within thirty (30) days of the entry thereof; (k) Any default shall occur under any material agreement between Dealer and any third party, which results in the acceleration by such third party of any indebtedness of Dealer to such third party. For the purposes of this provision, the term "material agreement" shall mean any agreement which gives any Person the right to accelerate the indebtedness of the Dealer thereunder in an amount equal to or in excess of fifteen (15%) percent of the consolidated net worth of Guarantor (exclusive of CompUSANet.com) as reflected upon the most recent financial statements delivered to FINOVA hereunder; (l) Any representation or warranty made or deemed to be made by Dealer or any other Loan Party in any Loan Document, or any other statement, document or report made or delivered to FINOVA in connection with the transactions contemplated thereby (including, without limitation, any representation or warranty made by a Vendor on Dealer's behalf) shall prove to have been misleading in any material respect; or (m) The Guarantor revokes, terminates or attempts to revoke or terminate its guaranty or any security therefor, or becomes subject to any bankruptcy or other insolvency proceeding, is dissolved, liquidated, merged or reorganized (except where the Guarantor is the surviving entity), or terminated. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE RIGHT TO CEASE MAKING ANY ADVANCES OR ADVANCES IF AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING. 7.2 REMEDIES. Upon the occurrence of an Event of Default, FINOVA may, at its option and in its Permitted Discretion and in addition to all of its other rights under the Loan Documents, terminate this Agreement and declare all of the Advances to be immediately payable in full. FINOVA shall also have all of its rights and remedies under applicable law, including, without limitation, the default rights and remedies of a secured party under the Code and upon the occurrence of an Event of Default, Dealer hereby consents to the appointment of a receiver by FINOVA in any action initiated by FINOVA pursuant to this Agreement and to the jurisdiction and venue set forth in SECTION 9.15, and Dealer waives notice and posting of a bond in connection therewith. Further, FINOVA may, at any time, take possession of the Collateral and keep it on Dealer's premises, at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA may desire, or Dealer shall, upon FINOVA's demand, at Dealer's sole cost, assemble the Collateral and make it available to FINOVA at a place reasonably convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or private sales, for cash, upon credit or otherwise, at such prices and upon such terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA deems it reasonable, postpone or adjourn any sale of the Collateral by an announcement at the time and place of sale or of such postponed or adjourned sale without giving a new notice of sale. Dealer agrees that FINOVA has no obligation to preserve rights to the Collateral or marshall any Collateral for the benefit of any Person. FINOVA is hereby granted a license or other right to use, without charge, Dealer's trademarks, copyrights, licenses and patents or any similar property, in completing production, advertising or selling any Collateral and Dealer's rights under all licenses and all franchise agreements shall inure to FINOVA's benefit. Any requirement of reasonable notice shall be met if such notice is mailed postage prepaid to Dealer at its address set forth in the heading to this Agreement at least ten (10) days before sale or other disposition. The proceeds of sale shall be applied, first, to all reasonable attorneys fees and other expenses of sale, and second, to the Obligations in such order as FINOVA shall elect, in its sole discretion. FINOVA shall return any excess to Dealer and Dealer shall remain liable for any deficiency to the fullest extent permitted by law. FINOVA shall also have the right to reduce the Total Facility amount, or to modify the terms and conditions upon which FINOVA is willing to consider making advances under the Total Facility. 8. EXPENSES. So long as any Advance remains outstanding and this Agreement remains in effect, Dealer shall promptly reimburse FINOVA for all reasonable costs, fees and expenses incurred by FINOVA in connection with the negotiation, preparation, execution, delivery, administration, amendment, and enforcement of each of the Loan Documents, including, but not limited to, the attorneys' and paralegals' fees. Notwithstanding the foregoing, FINOVA acknowledges and agrees -10- that the amount of all such costs, fees and expenses as of the date of execution hereof shall not exceed the amount of the Facility Fee as defined in the Schedule. 9. MISCELLANEOUS. 9.1 EXAMINATION OF RECORDS; FINANCIAL REPORTING. FINOVA shall at all reasonable times have full access to and the right to examine, audit, make abstracts and copies from and inspect Dealer's records, files, books of account and all other documents, instruments and agreements relating to the Collateral and the right to check, test and appraise the Collateral. Dealer shall furnish FINOVA, upon request and at the times specified by FINOVA in FINOVA's Permitted Discretion, such information and statements as FINOVA shall request from time to time regarding Dealer's business affairs, financial condition and the results of its operations. Failure to provide any of the requested information and statements to FINOVA at the time specified by FINOVA shall be an Event of Default. If any of the Advances are guaranteed, Dealer shall cause the Guarantor to deliver to FINOVA such information and statements as FINOVA shall request from time to time regarding Guarantor's financial condition. 9.2 TERM; TERMINATION. The term of this Agreement and the termination rights, duties and obligations of the parties are as set forth in the Schedule. Subject to the obligation of the Dealer to pay the Early Termination Fee as set forth in the Schedule (except as otherwise expressly provided herein), either FINOVA or Dealer may terminate the Total Facility at any time and for any reason upon no less than thirty (30) days prior written notice to the of other their intention to so terminate the Total Facility. Upon the effective date of termination, other than the repayment of Advances which shall be due and payable in the ordinary course as set forth in the Schedule, all other Obligations shall become immediately due and payable in full in immediately available funds 9.3 RECOURSE TO SECURITY; CERTAIN WAIVERS. All Advances shall be payable by Dealer as provided for herein and, in full, at the termination of this Agreement; recourse to security shall not be required at any time. Dealer waives presentment and protest of any instrument and notice thereof, notice of default and, to the extent permitted by applicable law, all other notices to which Dealer might otherwise be entitled. 9.4 NO WAIVER BY FINOVA. Neither FINOVA's failure to exercise any right, remedy or option under this Agreement, any supplement, the Loan Documents or other agreement between FINOVA and Dealer nor any delay by FINOVA in exercising the same shall operate as a waiver. An Event of Default shall exist or continue or be continuing until such Event of Default is waived in writing by FINOVA as herein provided. No waiver by FINOVA shall be effective unless in writing and then only to the extent stated. No waiver by FINOVA shall affect its right to require strict performance of this Agreement. FINOVA's rights and remedies shall be cumulative and not exclusive. 9.5 BINDING ON SUCCESSOR AND ASSIGNS. All terms, conditions, promises, covenants, provisions and warranties shall inure to the benefit of and bind FINOVA's and Dealer's respective representatives, successors and assigns. 9.6 SEVERABILITY. If any provision of this Agreement shall be prohibited or invalid under applicable law, it shall be ineffective only to such extent, without invalidating the remainder of this Agreement. 9.7 AMENDMENTS; ASSIGNMENTS. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Dealer and FINOVA. Dealer may not sell, assign or transfer any interest in this Agreement or any other Loan Document, or any portion thereof, including, without limitation, any of Dealer's rights, title, interests, remedies, powers and duties hereunder or thereunder. Dealer hereby consents to FINOVA's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, FINOVA's rights, title, interests, remedies, powers and duties hereunder or thereunder. In connection therewith, FINOVA may disclose all documents and information which FINOVA now or hereafter may have relating to Dealer or Dealer's business. To the extent that FINOVA assigns its rights and obligations hereunder to a third party, FINOVA shall thereafter be released from such assigned obligations to Dealer and such assignment shall effect a novation between Dealer and such third party. -11- 9.8 INTEGRATION. This Agreement, together with the Schedule (which is a part hereof) and the other Loan Documents, reflect the entire understanding of the parties with respect to the transactions contemplated hereby. 9.9 SURVIVAL. All of the representations and warranties of Dealer contained in this Agreement shall survive the execution, delivery and acceptance of this Agreement by the parties. No termination of this Agreement or of any guaranty of the Obligations shall affect or impair the powers, obligations, duties, rights, representations, warranties or liabilities of the parties hereto and all shall survive any such termination. 9.10 NOTICES. Any written notice, consent or other communication provided for in this Agreement shall be delivered personally (effective upon delivery), via facsimile (effective upon confirmation of transmission), via overnight courier (effective the next business day after dispatch if instructed to deliver on next business day) or via U.S. Mail (effective 3 days after mailing, postage prepaid, first class) to each party at its address(es) and/or facsimile number(s) set forth below its signature, or to such other address as either party shall specify to the other in writing from time to time. 9.11 DISBURSEMENT. All Advances shall be made directly to the Vendor in accordance with the terms of the invoices, all as more particularly provided in the Schedule. 9.12 CAPTIONS. The Section titles contained in this Agreement are without substantive meaning and are not part of this Agreement. 9.13 COUNTERPARTS; FACSIMILE EXECUTION. This Agreement may be executed in one or more counterparts, each of which taken together shall constitute one and the same instrument, admissible into evidence. Delivery of an executed counterpart of this Agreement by facsimile shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by facsimile shall also deliver a manually executed counterpart of this Agreement, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 9.14 TIME OF ESSENCE. Time is of the essence for the performance by Dealer under this Agreement. 9.15 GOVERNING LAW; JURISDICTION; VENUE. THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. DEALER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF MARICOPA, THE STATE OF ARIZONA OR, AT THE SOLE OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. DEALER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE. 9.16 SERVICE OF PROCESS; WAIVERS. DEALER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO DEALER AT THE ADDRESS SET FORTH BELOW ITS SIGNATURE HERETO AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED TO DEALER'S ADDRESS. DEALER FURTHER WAIVES ANY RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT. 9.17 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND DEALER EACH HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND DEALER; OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA -12- OR DEALER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH FINOVA OR DEALER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have caused this Agreement to be executed as of the date first written above. COMPUSA STORES LP By: CompUSA GP Holdings Company, its sole general partner By: /s/ J. Robert Gary ------------------------------------------- J. Robert Gary, Senior Vice President Notice address: Attn: Mark R. Walker, General Counsel 14951 North Dallas Parkway Dallas, TX 75240 Facsimile No.: (972) 982-4183 FINOVA CAPITAL CORPORATION By: /s/ Patrick Smith ------------------------------------------- Patrick Smith, Vice President, Credit Manager Notice Address: FINOVA Capital Corporation Attn: Portfolio Manager 12647 Alcosta Boulevard San Ramon, CA 94583 Facsimile No.: 925-543-1818 -13- [GRAPHIC OMITTED] SCHEDULE TO SECURED WHOLESALE FINANCE AGREEMENT DEALER: COMPUSA STORES LP EIN: 75-2652809 ADDRESS: 14951 NORTH DALLAS PARKWAY DALLAS, TX 75240 DATE: NOVEMBER 3, 1999 This Schedule forms an integral part of the Secured Wholesale Finance Agreement between the above Dealer and FINOVA Capital Corporation ("FINOVA") dated the above date, and all references herein and therein to this "AGREEMENT" shall be deemed to refer to said Agreement and to this Schedule. ================================================================================ DEFINITIONS (SECTION 1): "ACCOMMODATION PARTY" means Compaq Computer Corporation, a Delaware corporation. "GUARANTOR" means CompUSA Inc., a Delaware corporation. ================================================================================ TOTAL FACILITY (SECTION 2.1): An amount not in excess of $85,000,000. ================================================================================ TERM (SECTION 9.2): The initial term shall commence as of the date of the Agreement and shall expire on the day immediately preceding the second annual anniversary thereof (the "Maturity Date"), unless extended or renewed by FINOVA in its Permitted Discretion prior to such Maturity Date for an additional term of one (1) year(s). FINOVA agrees to provide Dealer with its notice of its intent to renew or extend the Loan no less 1 than ninety (90) days prior to the applicable Maturity Date. Unless the Maturity Date is extended or renewed, other than the repayment of Advances which shall be due and payable in the ordinary course as set forth in the Tri-Party Agreement, all other Obligations are immediately due and payable to FINOVA in immediately available funds on the Maturity Date. ================================================================================ CONDITIONS PRECEDENT (SECTION 2.3): As conditions precedent to the initial Loan, each of the following conditions shall have been fulfilled or waived to the satisfaction of FINOVA in its Permitted Discretion: a. (a) Execution and delivery of the Loan Documents, including without limitation: - Secured Wholesale Finance Agreement - Schedule - Guaranty of CompUSA, Inc. - Guaranty of Accommodation Party - Tri-Party Agreement - Notices by FINOVA to Senior Lender(s) - InterCreditor Agreement - Subordination Agreement - Y2k Undertaking - UCC-1 Financing Statements - Such other documents, instruments and agreements as FINOVA shall require b. (b) For Dealer and each guarantor not a natural person, copies of all organizational documents (Articles of Incorporation, By-Laws, Certificate of Limited Partnership, Certificate of Formation, Partnership Agreement, Operating Agreement, etc.) together with all amendments thereto to the date hereof, and copies of authorizing resolutions, certified by the secretary of Dealer and such guarantor that the same are true, correct and complete copies of the originals thereof and have not been amended or rescinded to the date hereof. c. Good standing and foreign qualification certificates for Dealer, Guarantor, and the Accommodation Party. c. (d) Evidence of casualty insurance in amounts at least equal to the Loan Facility with loss payable endorsement to FINOVA and not less than 30 days prior notice to FINOVA of cancellation or modification.. d. (e) [Intentionally omitted] e. f. (f) With respect to the Dealer, FINOVA shall have conduced such searches of the public record as it shall deem necessary or appropriate in its permitted Discretion. g. (g) Opinion of Dealer's counsel as to such matters as FINOVA shall determine in its Permitted Discretion. 2 ================================================================================ PAYMENT TERMS (SECTION 2.7) All Advances shall be repaid in immediately available funds in accordance with the following (each a "Payment Date"): (i) Advances be made within forty (40) days of the date of the invoice therefor. Notwithstanding the foregoing, at such time as the aggregate amount of the Obligations is (i) Seven Million Five Hundred Thousand ($7,500,000) Dollars or greater in excess of (ii) the aggregate value of the Financed Inventory (determined at the lower of cost or market as determined by the accounting methods utilized by Dealer in accordance with GAAP) in the possession of Dealer (the "COLLATERAL DEFICIT"), Dealer shall within five (5) days of FINOVA's receipt of a monthly collateral report reflecting such excess, repay in immediately available funds such portion of the Obligations as is necessary to reduce the Obligations so that upon receipt of such payment, the Collateral Deficit shall not exceed Seven Million Five Hundred Thousand ($7,500,000) Dollars (a "PAYDOWN"). To the extent that a Paydown occurs in respect of unpaid invoices which are at the time of the Paydown less than thirty (30) days from their respective dates of issue, Dealer shall be entitled to a discount of fifteen (15) basis points of the aggregate amount of such invoices. ================================================================================ INTEREST RATE AND FEES (SECTION 3.1): INTEREST RATE: Provided that each Advance is paid on or before the respective Payment Date, such Advances shall not bear interest as long as the Vendor shall continue to support the transaction via Vendor subsidy on the non-interest bearing period. In the event that the subsidy provided by the Vendor to support the transaction is reduced or increased, FINOVA shall have the right to fully and completely pass through to Dealer any and all such additional costs or savings. Any decrease in terms or increase in costs to the Dealer as a result of Vendor support changes shall enable the dealer to terminate the Agreement. Dealer will be responsible for the lesser of: (i) the pro-rata share of the Early Termination Fee (as hereinafter defined) for such year (i.e. the product of the Early Termination Fee for such year times a fraction, the numerator of which is the total number of days remaining in such year and the denominator of which is 360; or (ii) Fifty (50%) Percent of the Early Termination Fee for such year. Any payment received after the respective Payment Date shall bear interest at a rate equal to three (3) percent per annum in excess of the Base Rate from the date such Advance was made. AMOUNT OF FEES: FACILITY FEE. As a condition precedent to Closing, Dealer shall pay to FINOVA in immediately available funds a Facility Fee in an amount equal to One Hundred Seventy Thousand ($170,000) Dollars ("FACILITY FEE"). The Facility Fee shall be deemed fully earned and non-refundable at the time when due; provided, however that this fee shall be credited by FINOVA against any of FINOVA's documented reasonable legal fees and other reasonable out-of-pocket expenses. EARLY TERMINATION FEE. Either FINOVA or Dealer may terminate the Total Facility at any time and for any reason upon no less than thirty (30) days prior written notice to the of other their intention to so terminate the Total Facility; provided, however that if the Total Facility is so terminated, Dealer agrees to compensate FINOVA for FINOVA's expenses and loss of anticipated profits in accordance with the following: (i) an amount equal to One-Half of One (0.005%) Percent of the Total Facility amount if terminated prior to the first anniversary of the Closing Date; or (ii) an amount equal to One Tenth of One (0.001%) Percent, if terminated after the first anniversary of 3 the Closing Date, but prior to the end of the eighteenth month following the Closing Date (each an "EARLY TERMINATION FEE"). ================================================================================ REPRESENTATIONS (SECTION 5): STATE OF ORGANIZATION (Section 5.1): Texas STATES QUALIFIED TO DO BUSINESS (Section 5.1): See, Exhibit 5.1. DEALER'S NAMES (Sections 5.2): Prior Corporate Names: Fictitious Names: LITIGATION (Section 5.6): See Exhibit 5.6 attached LIENS (Section 5.7): See Exhibit 5.7 attached LOCATIONS OF COLLATERAL (Section 5.15): See Exhibit 5.15 attached CHIEF EXECUTIVE OFFICE (Section 5.15): 14951 North Dallas Parkway, Dallas, TX 75240 AFFIRMATIVE COVENANTS (SECTION 6): ================================================================================ REPORTING REQUIREMENTS (Section 6.11) Dealer shall furnish FINOVA, upon request, such information and statements as FINOVA shall request from time to time regarding Dealer's business affairs, financial condition and the results of its operations. Without limiting the generality of the foregoing, Dealer shall provide FINOVA with: (i) within twenty (20) days after the end of each fiscal period perpetual inventory reports for all inventory (separately identifying the Financed Inventory, and the location of all inventory and the Financed Inventory individually) determined at the lower of cost or market as determined by the accounting methods utilized by Dealer in accordance with GAAP; 4 (ii) within twenty (20) days after the end of each fiscal period of each fiscal year (except for any fiscal period that is the last fiscal period of a fiscal quarter), internally prepared consolidated balance sheet of Parent and its consolidated subsidiaries as of the end of such fiscal period and the related consolidated statements of operations for such fiscal period and for the elapsed portion of the year ended with the last day of such fiscal period and a consolidated statement of cash flows for the elapsed portion of the year ended. With the last day of such fiscal period all prepared in accordance with GAAP. (iii) within forty-five (45) days of the end of each of the first three fiscal quarters of Dealer, Form 10Q of CompUSA Inc., as filed with the Securities and Exchange Commission; (iv) within ninety (90) days of the end of fiscal year, Form 10K of CompUSA Inc., as filed with the Securities and Exchange Commission; (v) no later than the end of the first quarter of each fiscal quarter of each fiscal year, submit Annual Projections by fiscal quarter with respect to such fiscal year; and (vi) as and when required to be submitted to the Primary Lender under the Primary Loan Agreement, true, correct, complete and originally executed copies of any borrowing base certificate, compliance certificates, and other similar certifications as required thereunder, showing Dealer's compliance with each of the financial covenants set forth in the Primary Loan Agreement, and stating whether any Event of Default has occurred or event which, with giving of notice or the passage of time, or both, would constitute an Event of Default thereunder. FINANCIAL COVENANT (Section 6.13): Dealer shall comply with all financial covenants required under the Primary Loan Agreement. COLLATERAL MAINTENANCE REQUIREMENT. The Collateral Deficit shall at no time exceed Seven Million Five Hundred Thousand ($7,500,000) Dollars; provided, however that if Dealer's borrowing availability from Dealer's Primary Lender under the Primary Loan Agreement is less than One Hundred Seventy-Five Million ($175,000,000) Dollars, no Collateral Deficit shall be permitted to exist. In the event that the Dealer's Primary Loan Agreement is replaced, amended or modified, FINOVA and the Dealer agree to enter into negotiations with the desired objective that such provisions be adjusted or otherwise modified to fairly take into account any such change. If no agreement can be reached either party reserves their right to terminate the Agreement. 5 ================================================================================ DISBURSEMENT (SECTION 9.11): All Advances to be made hereunder shall be made for the account of Dealer directly to Compaq Computer Corporation in accordance with the payment terms of the invoices submitted to FINOVA to Dealer. EXECUTED UNDER SEAL BY: DEALER: FINOVA: COMPUSA STORES LP FINOVA CAPITAL BY: COMPUSA GP HOLDINGS COMPANY, CORPORATION ITS SOLE GENERAL PARTNER BY: /s/ PATRICK SMITH BY: /s/ J. ROBERT GARY ---------------------------------- ------------------------------------- (SEAL) J. ROBERT GARY, SENIOR VICE PRESIDENT TITLE: PATRICK SMITH, VICE PRESIDENT, CREDIT MANAGER
6 STATE OF TEXAS COUNTY OF DALLAS THE FOREGOING SCHEDULE TO SECURED WHOLESALE FINANCE AGREEMENT WAS ACKNOWLEDGED BEFORE ME THIS 3RD DAY OF NOVEMBER, 1999, BY COMPUSA GP HOLDINGS COMPANY, A DELAWARE BUSINESS TRUST, THE SOLE GENERAL PARTNER OF COMPUSA STORES LP, A TEXAS LIMITED PARTNERSHIP, ON BEHALF OF SUCH PARTNERSHIP. MELISSA VANCE TITLE OR RANK: --------------- SERIAL NUMBER, IF ANY: ------- 7 CORPORATE GUARANTY TO: FINOVA Capital Corporation Attn: Portfolio Manager 12647 Alcosta Boulevard San Ramon, CA 94583 1. IDENTIFICATION. This Guaranty is made by each of the undersigned, jointly and severally if more than one, in your favor, in order to induce you to enter into one or more notes, loan agreements and/or security agreements (herein, the "Agreements"), with COMPUSA STORES L.P. (herein, the "Debtor"), or to otherwise extend or continue financial accommodations in favor of the Debtor or to acquire obligations or indebtedness owing by the Debtor. 2. GUARANTY OBLIGATION. (a) We unconditionally guarantee to you and undertake the obligations of a surety with respect to the following described obligations and liabilities of the Debtor (herein, the "Debtor's Liabilities"): (i) The prompt payment in full of any and all now existing or hereafter arising indebtedness or obligations of the Debtor to you of every kind or nature, whether acquired by you by negotiation, assignment or otherwise, and whether direct or indirect, absolute on contingent, matured or unmatured, or otherwise, and including without limitation all advances and other loans now or at any time hereafter made by you to the Debtor under or secured by the Agreements, or otherwise. WITHOUT LIMITATION, THE FOREGOING GUARANTY SHALL EXTEND TO ANY OBLIGATIONS WHICH THE DEBTOR MAY INCUR TO YOU UNDER ANY AGREEMENT OR BY REASON OF ANY OTHER FINANCIAL ACCOMMODATION BETWEEN YOU AND THE DEBTOR MADE AFTER THE DATE HEREOF WHETHER OR NOT PRESENTLY CONTEMPLATED. WE ACKNOWLEDGE THAT IT IS OUR RESPONSIBILITY TO OBTAIN FROM TIME-TO-TIME DIRECTLY FROM THE DEBTOR SUCH INFORMATION AS WE MAY REQUIRE CONCERNING THE OBLIGATIONS AND INDEBTEDNESS GUARANTEED HEREBY, WHICH RESPONSIBILITY IS REASONABLE IN LIGHT OF OUR RELATIONSHIP WITH THE DEBTOR; and (ii) The prompt, full and faithful performance and discharge by the Debtor of each and every term, condition, agreement, representation, warranty and provision on the part of the Debtor contained in any of the Agreements or in any modification, amendment or substitution thereof or in any other document or instrument evidencing or securing any obligation or indebtedness of the Debtor to you. (b) We shall, on your demand, reimburse you for all expenses, collection charges, court costs and attorneys' fees incurred by you in endeavoring to collect Debtor's Liabilities, and to enforce, protect or defend any of your rights and remedies against us and/or the Debtor or against any other person or entity primarily or secondarily liable for the obligations and indebtedness guaranteed hereby (herein, an "Obligor"), or against or with respect to any property, real or personal, now or hereafter granted to or obtained by you as security for Debtor's Liabilities or for our liabilities and obligations to you hereunder or for those of any Obligor (herein, "Secured Property"), together with interest thereon until reimbursed at a rate equal to three (3) percent above the rate of interest payable on the Debtor's Liabilities guaranteed hereby (or the highest rate permitted by law) of the amount due by us to you. 3. LIABILITY ABSOLUTE; WAIVERS. (a) We shall pay all of the foregoing amounts and perform all of the foregoing terms, covenants and conditions notwithstanding that any part or all of the Agreements or other documents or instruments evidencing the Debtor's Liabilities, or any financial accommodation for or transaction with the Debtor, shall be invalid, void, voidable or otherwise unenforceable, in whole or in part, as against the Debtor, any property of the Debtor, or any of Debtor's creditors, including a trustee in bankruptcy of Debtor or Debtor as a debtor-in-possession, including without limitation by reason of any theory or provision of law or equity, statutory or otherwise, relating to consideration, or the lack thereof, or to any alleged fraudulent, preferential or other improper transfer or conveyance, and including further, without limitation, by reason of failure by any person, including yourself, to file any document or take any other action to make any of your rights against the Debtor, any other Obligor or any property, pursuant to the Agreements or otherwise, enforceable in accordance with their respective terms. (b) You shall have the right from time to time, and at any time, without notice to or consent from us, and without affecting, impairing or discharging, in whole or in part, our obligations to you hereunder, to enter into agreements with the Debtor or any other Obligor to modify, change or supplement, in any respect whatsoever, any evidence of indebtedness, or any agreement or transaction between you and the Debtor or between you and any other Obligor, or any portion or provision of any thereof; to grant extensions of time and other indulgences of any kind to the Debtor or other Obligor; to compromise, release, substitute, exercise, enforce, or fail or refuse to exercise or enforce any claims, rights or remedies of any kind which you may have, at any time, against the Debtor or any other Obligor, or any portion thereof, or with respect to any Secured Property; and to release, substitute or surrender and to enforce, collect or liquidate any security of any kind held by you at any time, and all of the foregoing whether done negligently, willfully or otherwise. (c) Our obligations to you shall not be affected, impaired or discharged, in whole or in part, by reason of your failure to obtain, in the first instance, rights against any person or entity, including without limitation, the Debtor, or in or with respect to any property, or to protect, perfect, continue or maintain any such rights. (d) We waive notice of acceptance hereof and all notices and demands of any kind to which we may otherwise be entitled including, without limitation, all demands of payment and notice of nonpayment, protest and dishonor, to us or to the Debtor, or to the makers or endorsers of any notes or other instruments for which we are or may be liable hereunder, and further waive notice of any adverse change in the Debtor's financial condition, the value of any Secured Property, or any other fact which might materially increase our risk to you hereunder. (e) We waive any right to require you to, prior to proceeding against us hereunder: (i) proceed against Debtor and/or any other Obligor; (ii) proceed against or exhaust any Secured Property; or (iii) pursue any other remedy which you may have. 4. PRIMARY NATURE OF OBLIGATIONS; NO SET-OFF. Our liability to you hereunder is primary, absolute, unconditional, continuing, direct and independent of the obligations of the Debtor. Nothing shall discharge or satisfy our liability hereunder except the full performance and payment of all of the Debtor's Liabilities. In the event that all of Debtor's Liabilities shall have at any time been paid and performed in full, this Guaranty and our obligations hereunder shall nevertheless remain in full force and effect and be operative with respect to Debtor's Liabilities incurred or arising at any time to times thereafter. We shall have no right of subrogation, reimbursement or indemnity whatsoever and no right of recourse to or with respect to the Debtor and/or any property of the Debtor, unless and until all of Debtor's Liabilities have been paid and performed in full. Our liability to you hereunder shall not be subject to set-off, counterclaim, crossclaim or defense arising out of or by virtue of any claim or right which we may at any time have against the Debtor or other Obligor, or which we may at any time have against you in connection with this or any other transaction with or acquired by you. 5. CONTINUING NATURE OF GUARANTY. (2) Our obligations under the Guaranty shall be continuing. This instrument shall continue in full force and effect until our obligations to you are terminated by the actual receipt by you of written notice from us of such termination. Such termination shall be applicable only to such of Debtor's Liabilities as have their inception thereafter. Specifically, without limitation, we shall, after and notwithstanding such termination, remain obligated to you under the term hereof for: (i) all of Debtor's Liabilities incurred prior to your actual receipt of such notice of termination, including interest or other finance charges at any time theretofore accrued or thereafter accruing or payable thereon; (ii) all of your costs and expenses, including attorneys' fees, at any time incurred in connection with your enforcement and collection of Debtor's Liabilities incurred prior to your actual receipt of such notice of termination; (iii) Debtor's Liabilities incurred subsequent to your actual receipt of such notice of termination pursuant to any perceived or actual commitment made on your part prior to such notice of termination, arising out of any course of dealing or other perceived or actual legal or other requirement obligating or committing you to make advances, loans or other financial accommodations giving rise to such Debtor's Liabilities; and (iv) advances at any time made by you to protect your interests under or in connection with Debtor's Liabilities incurred prior to you actual receipt of such notice of termination. We acknowledge that, upon such termination, you will have absolutely no further obligation to consider any further requests for loans or other extensions of credit or financial accommodations for the Debtor. 6. SECURITY FOR GUARANTY. All sums at any time to our credit and any of our present and future property at any time in your possession shall be deemed held by you as security for any and all of our obligations to you hereunder. 7. SUBORDINATION. Any and all present and future indebtedness and obligations of the Debtor to us are hereby agreed to be postponed in your favor. Upon written notice given by you to us, which you may give at any time whether or not the Debtor is in default to you, we will refrain from accepting any payments on account of such indebtedness tendered by the Debtor or any other Obligor thereon, or realized from any security therefor, and any amounts received by us in violation of the foregoing shall be held by us upon an express trust for your benefit and turned over to you upon demand. Until such notice, we will accept only such payments which are in the nature of regularly scheduled payments made pursuant to periodic reductions required by the terms of the documents evidencing such indebtedness, and shall not accept any prepayment thereof, whether on default, on demand under any demand instrument, or otherwise. We represent to you that all such indebtedness owing to us is, and agree that it shall remain, and any future indebtedness shall be unsecured. 8. NO WAIVER. No failure, omission or delay on your part in exercising any rights hereunder or under the Agreements or with respect to Debtor's Liabilities, either against the Debtor or any other Obligor, or any Secured Property, shall operate as a waiver of such rights or shall, in any manner, prejudice your rights against us hereunder or otherwise. 9. CUMULATIVE REMEDIES. All of your rights and remedies under the Agreements, this Guaranty and under any other document or instrument evidencing or securing Debtor's Liabilities are separate and cumulative and may be pursued separately, successively or concurrently, are non-exclusive and the exercise of any one or more of them shall in no way limit or prejudice any other legal or equitable right, remedy or recourse to which you may be entitled. This Guaranty shall be deemed to be in addition to, and not in lieu of, any prior suretyship or guaranty delivered by us to you, and any suretyship or guaranty at any time hereafter delivered by us to you shall be deemed to be in addition to, and not in lieu of, this Guaranty. 10. APPLICATION OF FUNDS. (3) Any payment made by us hereunder, or by the Debtor or any other Obligor, and any proceeds realized by you from any Secured Property, may be applied by you to any of Debtor's Liabilities in any order which you may determine, notwithstanding any designation by us, the Debtor or other Obligor to the contrary. To the extent that the Debtor has at any time any liabilities or obligations to you for which we are not obligated to you under the terms of this Guaranty, any payments received by you from Debtor or any other Obligor, or proceeds realized by you from any security, and regardless of any designation by any person or entity to the contrary, may be applied by you to such other liabilities and obligations prior to your applying any amounts to Debtor's Liabilities for which we are obligated to you hereunder. 11. MODIFICATIONS. No provision thereof shall be modified or limited, except by a written agreement expressly referring hereto and to the provision so modified or limited, and signed by us and you. 12. MERGER. This writing is intended as a final, complete and exclusive expression of our agreement with you relative to the subject matter hereof. No course of prior dealing between you and us, no usage of the trade, and no parole or extrinsic evidence of any nature, shall be used or be relevant to supplement or explain or modify and term used in this Guaranty. 13. SEVERABILITY. In case any one or more of the provisions contained in this Guaranty shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and this Guaranty shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 14. NOTICES. We agree that any notice or demand upon us shall be deemed to be sufficiently given or served if it is in writing and is personally served, or in lieu of personal service is mailed by first class certified mail, postage prepaid, addressed to us at the address set forth below. Any notice or demand so mailed shall be deemed received on the date of actual receipt or the first business day following mailing, whichever first occurs. 15. JUDGMENT INTEREST. Any judgment entered against us hereunder shall, to the extent permitted by applicable law, bear interest at the highest rate applicable to the Debtor's Liabilities guaranteed hereby. 16. GOVERNING LAW. THIS INSTRUMENT SHALL FOR ALL PURPOSES BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAW RULES) OF THE STATE OF ARIZONA. WE HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF MARICOPA, THE STATE OF ARIZONA OR, AT YOUR SOLE OPTION, IN ANY OTHER COURT IN WHICH YOU SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. WE HEREBY IRREVOCABLY WAIVE ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE. 17. WAIVER OF JURY TRIAL. (4) AS AN INDEPENDENT COVENANT, WE IRREVOCABLY WAIVE JURY TRIAL AND THE RIGHT THERETO IN ANY AND ALL ACTIONS BETWEEN US, WHETHER UNDER THIS AGREEMENT OR OTHERWISE. 18. SUCCESSORS AND ASSIGNS. This Guaranty shall inure to the benefit of your successors and assigns and shall be binding on our successors and assigns. 19. GENDER; JOINT AND SEVERAL LIABILITY. If there be more than one person or entity signing this Guaranty, each of us will be jointly and severally obligated to you hereunder, and the terms "we", "us" or "our" as used herein shall refer to each of us jointly and severally. If less than all persons or entities who were intended to sign this Guaranty do so, the same shall nevertheless be binding upon those who do sign. IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned has duly executed this Guaranty as of this 3rd day of November, 1999. CompUSA Inc., a Delaware Corporation By: /s/ J. Robert Gary ---------------------------------------- J. Robert Gary, Senior Vice President Attest: [Blank in original] [Corporate Seal] Address: Attn: Mark R. Walker, General Counsel 14951 North Dallas Parkway Dallas, TX 75240 (5) EX-21 7 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF COMPUSA INC. 1. CompUSA Stores L.P., a Texas limited partnership. 2. CompUSA GP Holdings Company, a Delaware business trust. 3. CompUSA Holdings Company, a Delaware business trust. 4. CompUSA PC Inc., a Delaware corporation. 5. CompUSA PC Operating Company, a Delaware business trust. 6. CompUSA Net.com Inc., a Delaware corporation. 7. cozone.com inc., a Delaware corporation 8. cozone.com l.l.c., a Delaware limited liability company 9. CompTeam Inc., a Delaware corporation. 10. CompUSA Management Company, a Delaware business trust. 11. CompUSA Holdings I Inc., a Delaware corporation. 12. CompUSA Holdings II Inc., a Delaware corporation. EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 AND THE THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS JUN-24-2000 JUN-26-1999 JUN-27-1999 JUN-28-1998 SEP-25-1999 SEP-26-1998 128,322 151,129 0 0 150,379 265,032 (4,697) (5,492) 675,508 776,992 996,450 1,264,293 467,952 442,651 (214,585) (213,372) 1,399,547 1,613,240 846,642 941,584 0 110,000 0 0 0 0 941 939 336,630 401,938 1,399,547 1,613,240 1,347,246 1,375,439 1,347,246 1,375,439 1,143,850 1,182,823 1,143,850 1,182,823 218,110 179,667 0 0 6,752 4,383 (20,652) 10,106 (7,744) 3,874 (12,908) 6,232 0 0 0 0 0 0 (12,908) 6,232 (0.14) 0.07 (0.14) 0.07 RESTATED FINANCIAL DATA SCHEDULE. EFFECTIVE AS OF THE BEGINNING OF FISCAL 2000, THE COMPANY ADOPTED A NEW ACCOUNTING POLICY FOR THE RECOGNITION OF REVENUES RELATED TO SALES OF CERTAIN EXTENDED SERVICE PLANS BY THE COMPANY, AS DESCRIBED IN NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THE COMPANY'S REPORT ON FORM 10-Q FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999. THE COMPANY HAS GIVEN RETROACTIVE EFFECT TO THIS NEW ACCOUNTING POLICY AND IS ACCORDINGLY RESTATING ITS FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998.
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