-----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, E6JQvThtSlOuYHBgZNOBCcyG4jNQLFwAFgFZcxJzR6xav4jm8a1PqfPxw0zWVTm8 nc/u7hNjOJcGGQbD4IJ/2w== 0001017062-00-001220.txt : 20000516 0001017062-00-001220.hdr.sgml : 20000516 ACCESSION NUMBER: 0001017062-00-001220 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE COMPUTERS INC CENTRAL INDEX KEY: 0000937941 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 954518700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25790 FILM NUMBER: 634403 BUSINESS ADDRESS: STREET 1: 2555 WEST 190TH STREET CITY: TORRENCE STATE: CA ZIP: 90504 BUSINESS PHONE: 3103545600 MAIL ADDRESS: STREET 1: 2555 WEST 190TH STREET CITY: TORRENCE STATE: CA ZIP: 90504 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 3/31/2000 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2000 [ ] 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 0-25790 CREATIVE COMPUTERS, INC. (Exact name of registrant as specified in its charter) Delaware 95-4518700 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2555 West 190th Street Torrance, California 90504 (address of principal executive offices) (310) 354-5600 (Registrant's telephone number, including area code) Indicated 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 [ ] There were 10,409,726 outstanding shares of Common Stock at May 10, 2000. 1 Creative Computers, Inc. Index to Form 10-Q
PART I-FINANCIAL INFORMATION Page Item 1 - Financial Statements Consolidated Balance Sheet............................................................................ 3 Consolidated Statement of Operations.................................................................. 4 Consolidated Statement of Cash Flows.................................................................. 5 Condensed Notes to Consolidated Financial Statements.................................................. 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7 Item 3 - Quantitative and Qualitative Disclosures about Market Risk................................... 9 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K............................................................. 10 SIGNATURE............................................................................................. 10
2 ITEM 1 FINANCIAL STATEMENTS CREATIVE COMPUTERS, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data)
March 31, 2000 (unaudited) December 31, 1999 --------------- ------------------ Assets Current assets: Cash and cash equivalents $ 10,944 $ 24,326 Accounts receivable, net of allowance for doubtful accounts 47,544 47,618 Inventories 33,722 39,359 Prepaid expenses and other current assets 3,075 2,962 Income tax refund receivable 177 177 Notes receivable 3,331 3,331 Deferred income taxes 2,047 2,047 -------- -------- Total current assets 100,840 119,820 Property, plant and equipment, net 15,333 14,569 Goodwill, net 11,706 11,836 Deferred income taxes 3,738 3,738 Other assets 44 42 -------- -------- $131,661 $150,005 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 75,254 $ 86,609 Accrued expenses and other current liabilities 14,255 14,366 Capital leases - current portion 136 142 Notes payable - current portion 6 6 -------- -------- Total current liabilities 89,651 101,123 Capital leases 102 136 Notes payable 146 148 -------- -------- Total liabilities 89,899 101,407 -------- -------- Stockholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value; 15,000,000 shares authorized; 10,409,726 and 10,404,069 shares issued 11 11 Additional paid-in capital 74,348 74,337 Treasury stock, at cost: 15,000 shares (91) (91) Retained earnings (accumulated deficit) (32,506) (25,659) -------- -------- Total stockholders' equity 41,762 48,598 -------- -------- $131,661 $150,005 ======== ========
See condensed notes to consolidated financial statements. 3 Creative Computers, Inc. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited, in thousands except per share data)
For the three months ended March 31, -------------------------- 2000 1999 ---------- --------- Net sales $238,457 $176,289 Cost of goods sold 215,453 156,251 -------- -------- Gross profit 23,004 20,038 Selling, general and administrative expenses 29,886 19,361 -------- -------- Income (loss) from operations (6,882) 677 Interest income (expense), net 35 (51) -------- -------- Income (loss) before income taxes (6,847) 626 Income tax provision - 238 -------- -------- Income (loss) from continuing operations (6,847) 388 Loss from discontinued operations - (2,685) -------- -------- Net income (loss) $ (6,847) $ (2,297) ======== ======== Earnings (loss) per share Continuing operations $ (0.66) $ 0.04 Discontinued operations - (0.26) -------- -------- $ (0.66) $ (0.22) ======== ======== Diluted earnings (loss) per share Continuing operations $ (0.66) $ 0.04 Discontinued operations - (0.26) -------- -------- $ (0.66) $ (0.22) ======== ======== Basic weighted average number of shares outstanding 10,407 10,340 ======== ======== Diluted weighted average number of shares outstanding 10,407 10,340 ======== ========
See condensed notes to consolidated financial statements. 4 Creative Computers, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited, in thousands)
For the three months ended March 31, -------------------------- 2000 1999 -------- -------- Cash flows from operating activities: Net income (loss) $ (6,847) $ (2,297) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,465 1,128 Provision for deferred income taxes - 238 Discontinued operations - 2,685 Changes in assets and liabilities, net of divestiture: Accounts receivable 74 (604) Inventories 4,346 3,451 Prepaid expenses and other current assets 2,681 2,319 Other assets (2) 34 Accounts payable (11,355) (12,911) Accrued expenses and other current liabilities (1,639) (2,980) Income tax refund receivable - 3 -------- -------- Total adjustments (4,430) (6,637) -------- -------- Net cash used in operating activities (11,277) (8,934) -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (2,074) (646) -------- -------- Net cash used in investing activities (2,074) (646) -------- -------- Cash flows from financing activities: Net payments under notes payable (2) - Net borrowings under line of credit - 4,500 Principal payments of obligations under capital leases (40) (64) Proceeds from stock issued under stock option plans 11 699 -------- -------- Net cash provided by (used in) financing activities (31) 5,135 -------- -------- Net decrease in cash and cash equivalents (13,382) (4,445) Cash and cash equivalents: Beginning of the period 24,326 6,442 -------- -------- End of the period $ 10,944 $ 1,997 ======== ========
See condensed notes to consolidated financial statements. 5 Creative Computers, Inc. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated interim financial statements include the accounts of Creative Computers, Inc. (a Delaware corporation) and its wholly owned subsidiaries (the Company) and have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2000 and 1999 and the results of operations and cash flows for the three months ended March 31, 2000 and 1999. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation. 2. Discontinued Operations On December 9, 1998, uBid, Inc., a subsidiary of the Company at that time, completed an initial public offering (the Offering) of 1,817,000 shares of common stock. The shares sold to the public in the offering represented approximately 19.9% of uBid's outstanding common stock. On June 7, 1999, the Company divested its ownership in uBid by means of a tax-free distribution of all of its remaining 7.3 million shares of uBid common stock to the Company's shareholders of record as of May 24, 1999. In accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations," uBid's revenues and expenses have been excluded from the Company's consolidated revenues and expenses from continuing operations. uBid's operating results, net of taxes, have been reported as a separate line item on the Company's consolidated statement of operations under the caption "Loss from discontinued operations". The Company's consolidated statement of cash flows has been restated to reflect the divestiture of uBid. Net sales for the discontinued segment were $34.3 million for the three months ended March 31, 1999. 3. Net Income (Loss) Per Share Basic Earnings Per Share (EPS) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock options and other commitments to issue common stock were exercised. The computation of Basic and Diluted EPS is as follows: 6
Three Months Ended March 31, ------------------- 2000 1999 ------- ------- (in thousands except per share data) Net income (loss) $(6,847) $(2,297) ======= ======= Weighted average shares - Basic 10,407 10,340 Effect of dilutive stock options and warrants - - ------- ------- Weighted average shares-Diluted 10,407 10,340 ======= ======= Net earnings/(loss) per share-Basic $ (0.66) $ (0.22) ======= ======= Net earnings/(loss) per share-Diluted $ (0.66) $ (0.22) ======= =======
4. Segment Information The Company operates in three reportable segments: 1) a direct marketer of personal computers, hardware, software, peripheral products and consumer electronics under the PCMall, MacMall, ComputAbility and CCIT brands; 2) a multi-category Internet retailer under the eCOST.com brand, and 3) a portal for Linux-based products and services provided under the eLinux.com brand. Summarized segment information from continuing operations for the three months ended March 31, 2000 and 1999 is as follows:
March 31, 2000 (in thousands) --------------------------------------------------------- Gross Operating Total Sales Profit Profit (Loss) Assets --------------------------------------------------------- Direct Marketer $195,699 $22,278 $ 344 $129,526 Multi-category Internet 42,268 682 (6,380) 2,016 Linux Portal 490 44 (846) 119 -------- ------- ------- -------- Consolidated $238,457 $23,004 $(6,882) $131,661
March 31, 1999 December 31, 1999 (in thousands) (in thousands) --------------------------------------- ----------------- Gross Operating Total Sales Profit Profit (Loss) Assets --------------------------------------- ----------------- Direct Marketer $176,289 $20,038 $ 780 $144,657 Multi-category Internet - - (103) 5,348 -------- ------- ----- -------- Consolidated $176,289 $20,038 677 $150,005
Segment information for eLinux.com is not provided for the quarter ended March 31, 1999 as the Company did not operate in the Linux portal segment until the launch of eLinux.com in February 2000. The Company no longer operates in the Internet Auction segment as a result of the spin-off of uBid, Inc. in June 1999. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview and Recent Developments Net sales of the Company are primarily derived from the sale of personal computer hardware, software, peripherals, accessories and consumer electronics to large corporations, small businesses, home offices and individual consumers through the Internet, dedicated inbound and outbound telemarketing sales executives, a direct sales force, retail showrooms and direct response catalogs. 7 During 1999, the Company successfully completed a spin-off of its former subsidiary, uBid, Inc., (uBid) to the Company's stockholders. Consistent with its strategic focus on the Internet and business-to-business markets, the Company formed a new subsidiary, eCOST.com, a multi-category Internet retail web site, in February 1999. In December 1999, the Company formed a new subsidiary, eLinux.com, to provide products, news, discussion groups, services and support to the Linux community. eLinux.com commenced operations in February 2000. Results of Operations Unless otherwise stated, all comparisons are results which exclude uBid. Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31, 1999 Net sales for the quarter ended March 31, 2000 were $238.5 million, a 35.3% increase over last year's first quarter. eCOST.com accounted for $42.3 million of sales in the first quarter of 2000, and eLinux.com accounted for $0.5 million in the same period. For the core business, excluding eCOST.com and eLinux.com, PC/WINTEL sales increased to $105.3 million for the three months ended March 31, 2000, an 18.5% increase from $88.8 in the comparable period last year. Apple/Macintosh-related sales increased to $90.4 million for the three months ended March 31, 2000, a 3.4% increase from $87.4 million in the same period last year. PC/WINTEL sales represented 53.8% of the core business sales for the quarter ended March 31, 2000, compared to 50.4% for the same quarter last year. The increase in net sales for the quarter is primarily attributable to a 251.3% increase in Internet revenues and a 90.9% increase in outbound business-to- business revenues. The Company intends to significantly reduce advertising and other expenditures for its eCOST.com subsidiary, which could have a short-term negative impact on sales in the future. Gross profit from continuing operations was $23.0 million for the three months ended March 31, 2000, an increase of $3.0 million over the prior year comparable quarter. For the core business, excluding eCOST.com and eLinux.com, gross profit as a percentage of net sales was 11.4%, flat versus the first quarter of the prior year. Including the impact of eCOST.com and eLinux.com, gross profit as a percentage of net sales was 9.7%. The Company's gross profit percentage may vary from quarter to quarter, depending on the continuation of key vendor support programs, including price protections, rebates and return policies and based on product mix, pricing strategies and other factors. Selling, general and administrative expenses for continuing operations during the first quarter of 2000 increased by $10.5 million from the first quarter of 1999 constituting 12.5% as a percentage of net sales, due primarily to advertising and brand development expenses associated with eCOST.com and eLinux.com, and additional investments in the outbound business-to-business sales force. Total selling, general and administrative expenses for the start-up subsidiaries in the first quarter of 2000 was $8.0 million. For the core business, selling, general and administrative expenses as a percent of net sales increased from 10.9% in last year's first quarter to 11.2% in the first quarter of this year. Selling, general and administrative expenses for the core business in the first quarter of 2000 increased $2.7 million from the prior year, due in part to the ramp-up in the outbound business-to-business sales force and increased Internet marketing expenditures. Net interest income for the three months ended March 31, 2000 was $35,000 compared to net interest expense of $51,000 for the comparable quarter in 1999. Net interest income for 2000 resulted from the note receivable from uBid and the investment of excess cash, partially offset by expenses of borrowings under the Company's floorplan line of credit. The net interest expense for 1999 resulted from the expense of borrowing under the Company's floor plan line of credit. The Company did not record an income tax provision for the three months ended March 31, 2000, as the Company considers that it is more likely than not that all or some portion of the additional deferred tax asset will not be realized. The tax provision in the prior year's comparable quarter was $238,000. Net loss was $6.8 million for the three months ended March 31, 2000 compared to a net loss of $2.3 million for the same period last year inclusive of discontinued operations. Excluding the $6.3 million net loss of eCOST.com and the $0.8 million net loss of eLinux.com, net income would have been $0.3 million, or $0.03 per share, in the first quarter of 2000. Liquidity and Capital Resources The Company's primary capital need has been the funding of the working capital requirements created by its rapid growth in sales. Historically, the Company's primary sources of financing have been from public offerings and borrowings from its stockholders, private investors and financial institutions. As of March 31, 2000, the Company had cash and cash equivalents of $10.9 million and working capital of $11.2 million, compared to $24.3 million of cash and cash equivalents and $18.7 million in working capital at December 31, 1999. Inventories decreased to $33.7 million at March 31, 2000 from $39.4 million at December 31, 1999 due to increased sales drop-shipped from vendors and increased order frequency. Accounts receivable decreased slightly to $47.5 million at March 31, 2000 from $47.6 million at December 31, 1999 due to a decrease in days sales outstanding, partially offset by increased business-to-business sales. During the three months ended March 31, 2000, the Company's capital expenditures were $2.1 million, versus $0.7 million for the comparable period last year. 8 As of March 31, 2000, the Company had an existing credit facility consisting of separate credit lines totaling $60.0 million. Part of the credit facility functions in lieu of a vendor trade payable for inventory purchases, is included in accounts payable, and does not bear interest if paid within terms specific to each vendor. Part of the credit facility functions as a working capital line of credit secured by, and is limited to, a percentage of eligible inventory and accounts receivable, and bears interest at the prime rate. The line of credit allows working capital advances up to $27.5 million and floorplan inventory financing up to $45 million, however, aggregate advances and floorplan financing cannot exceed $60 million. As of March 31, 2000, the Company had $10.2 million in total borrowings under the credit facility included in accounts payable. There was no working capital advance outstanding at March 31, 2000. The overall credit facility is secured by substantially all of the Company's assets and contains certain covenants that require the Company to maintain a minimum level of tangible net worth and income and a maximum leverage ratio. At March 31, 2000, the Company is in compliance with all such covenants. At March 31, 2000, the Company had $46.2 million available for working capital advances and floorplan inventory financing. The Company believes that current working capital, together with cash flows from operations and available lines of credit, will be adequate to support the Company's current operating plans through 2000. However, if the Company requires additional funds, such as for acquisitions or expansion or to fund a significant downturn in sales that causes losses, there are no assurances that adequate financing will be available at acceptable terms, if at all. In July 1996, the Company announced its plan to repurchase up to 1,000,000 shares of its Common Stock. The shares will be repurchased from time to time at prevailing market prices, through open market or negotiated transactions, depending upon market conditions. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that the Company will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as the Company's management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. The Company will finance the repurchase plan with existing working capital. As of March 31, 2000, the Company has repurchased 15,000 shares under the program. As part of its growth strategy, the Company may, in the future, acquire other companies in the same or complementary lines of business. Any such acquisition and the ensuing integration of the operations of the acquired company would place additional demands on the Company's management and operating and financial resources. The Company currently has no definitive agreements with respect to any acquisitions. Inflation Inflation has not had a material impact upon operating results, and the Company does not expect it to have such an impact in the near future. There can be no assurances, however, that the Company's business will not be so affected by inflation. Business Factors Except for historical information, all of the statements, expectations and assumptions contained in the foregoing are forward-looking statements. The realization of any or all of these expectations is subject to a number of risks and uncertainties and it is possible that the assumptions made by management may not materialize. There can be no assurances that the first quarter trends for Apple, Macintosh and PC/Wintel sales will be sustained, that outbound sales trends will continue in future periods, or that the Company's Internet sales will continue to grow. There can be no assurance that the Internal Revenue Service will treat the distribution of uBid shares as a tax-free distribution for federal tax purposes. In addition, there can be no assurance that the Company's eCOST.com and eLinux.com subsidiaries will be developed successfully, achieve market acceptance or be profitable. There can also be no assurance that the Company will be successful in its efforts to reduce expenditures for its eCOST.com subsidiary, or that the impact of any such reductions on sales will be limited to short-term. There can also be no assurance that the Company will not require additional funding, such as for acquisitions or expansion or to fund significant downturn in sales that causes losses, or that adequate financing will be available at acceptable terms, if at all. In addition to the factors set forth above, other important factors that could cause actual results to differ materially from the Company's expectations include competition from companies either currently in the market or entering the market, competition from other catalog and retail store resellers and price pressures related thereto, uncertainties surrounding the supply of and demand for products manufactured by and compatible with Apple Computer, the Company's reliance on Apple Computer, IBM, Hewlett Packard, Compaq and other vendors, and risks due to shifts in market demand and/or price erosion of owned inventory. This list of risk factors is not intended to be exhaustive. Reference should also be made to the risk factors set forth from time to time in the Company's SEC reports, including but not limited to those set forth in the section entitled "Certain Factors Affecting Future Results" in its Annual Report on Form 10-K for the year ended December 31, 1999. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and long-term debt. At May 15, 2000, the carrying values of the Company's financial instruments approximated their fair values based on current market prices and rates. It is the Company's policy not to enter into derivative financial instruments. The Company does not have any significant foreign currency exposure since it does not transact business in foreign currencies. Therefore, the Company does not have significant overall currency exposure at May 15, 2000. 9 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits. The exhibit index attached hereto is incorporated herein by reference. b. Reports on Form 8-K None. SIGNATURE 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. CREATIVE COMPUTERS, INC. Date: May 15, 2000 By /s/ Ted Sanders -------------------------------- Ted Sanders Chief Financial Officer (Duly Authorized Officer of the Registrant and Principal Financial Officer) 10 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10.37(b) Amendment No. 1 to the Tax Indemnification and Allocation Agreement by and among uBid, Creative Computers and CMGI Inc., dated as of February 9, 2000 (incorporated by reference to the Annual Report on Form 10-K of uBid, Inc. (Commission File No. 000-25719) for the year ended December 31, 1999). 27 Financial Data Schedule 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 10,944 0 47,544 0 33,722 100,840 15,333 0 131,661 89,651 0 0 0 11 41,751 131,661 238,457 238,457 215,453 215,453 29,886 0 (35) (6,847) 0 (6,847) 0 0 0 (6,847) (0.66) (0.66)
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