<PAGE>
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 September 30, 1996
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 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.)
2645 Maricopa Street
Torrance, California 90503
(address of principal executive offices)
(310) 787-4500
(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 9,774,076 outstanding shares of COMMON STOCK at November 12, 1996.
<PAGE>
CREATIVE COMPUTERS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheet.................................................. 2
Consolidated Statement of Operations........................................ 3
Consolidated Statement of Cash Flows........................................ 4
Condensed Notes to the Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 6
PART II - OTHER INFORMATION................................................. 10
SIGNATURE................................................................... 11
</TABLE>
1
<PAGE>
CREATIVE COMPUTERS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,626 $ 13,082
Securities available for sale 4,097 12,575
Accounts receivable, net of allowance for
doubtful accounts 16,574 18,305
Inventories 46,547 52,026
Prepaid expenses and other current assets 4,058 4,231
Deferred income taxes 4,421 1,109
-------- --------
Total current assets 95,323 101,328
Property, plant and equipment, net 11,012 10,814
Deferred income taxes 2,119 ----
Other assets 190 427
-------- --------
$108,644 $112,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,180 $ 46,098
Accrued expenses and other current liabilities 12,336 8,642
Capital leases - current portion 245 250
Notes payable - current portion 37 31
-------- --------
Total current liabilities 56,798 55,021
Capital leases 354 535
Notes payable 45 54
Deferred income taxes ---- 399
-------- --------
Total liabilities 57,197 56,009
-------- --------
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares
authorized; 9,774,945 and 9,750,000 shares issued 10 10
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding
Additional paid in capital 53,845 51,547
Treasury stock, at cost; 15,000 shares (91) ----
Retained earnings (deficit) (2,317) 5,003
-------- --------
Total stockholders' equity 51,447 56,560
-------- --------
$108,644 $112,569
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
2
<PAGE>
CREATIVE COMPUTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $111,291 $119,546 $314,989 $290,354
Cost of goods sold 97,321 103,562 281,355 250,186
-------- -------- -------- --------
Gross profit 13,970 15,984 33,634 40,168
Selling, general and administrative expenses 13,201 13,119 46,217 31,806
Cost associated with the relocation of
the Company's distribution center --- 150 --- 150
-------- -------- -------- --------
Income (loss) from operations before
interest and income taxes 769 2,715 (12,583) 8,212
Interest income 215 224 450 303
-------- -------- -------- --------
Income (loss) before income taxes 984 2,939 (12,133) 8,515
Provision (benefit) for income taxes 427 1,155 (4,813) 3,318
-------- -------- -------- --------
Net income (loss) $ 557 $ 1,784 $ (7,320) $ 5,197
======== ======== ======== ========
Earnings (loss) per share $ 0.06 $ 0.19 $ (0.75) $ 0.60
======== ======== ======== ========
Weighted average shares outstanding 9,882 9,633 9,764 8,639
-------- -------- -------- --------
</TABLE>
See condensed notes to consolidated financial statements.
3
<PAGE>
CREATIVE COMPUTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,320) $ 5,197
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities:
Depreciation and amortization 1,439 819
Loss on disposal of asset ---- 19
Increase in allowance for doubtful accounts 2,089 536
Increase in inventory reserves 5,579 615
Deferred income taxes (5,830) 607
Changes in operating assets and liabilities:
Accounts receivable (358) (11,729)
Inventories (100) (25,921)
Prepaid expenses and other current assets 173 (3,269)
Other assets 237 (353)
Accounts payable (1,918) 11,752
Accrued expenses and other current liabilities 3,694 5,798
Income taxes payable ---- (1,082)
-------- --------
Total adjustments 5,005 (22,208)
-------- --------
Net cash used in operating activities (2,315) (17,011)
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale (19,223) (15,649)
Redemptions of securities available for sale 27,701 ----
Acquisition of property, plant and equipment (1,637) (6,382)
Increase in related party notes receivable ---- (265)
-------- --------
Net cash provided by (used in) investing activities 6,841 (22,296)
-------- --------
Cash flows from financing activities:
Payments on line of credit, net ---- (3,279)
Payments under notes payable, net (3) (1,037)
Payments under notes payable - related parties ---- (415)
Proceeds from profits realized by Director in sale of stock 2,160 ----
Principal payments of obligations under capital leases (186) (874)
Borrowings through subordinated debt ---- 2,000
Net proceeds from sale of common stock ---- 46,550
Purchase of treasury stock (91) ----
Proceeds from stock issued under stock option plans 138 ----
-------- --------
Net cash provided by financing activities 2,018 42,945
-------- --------
Net increase in cash and cash equivalents 6,544 3,638
Cash and cash equivalents:
Beginning of the period 13,082 3,348
-------- --------
End of the period $ 19,626 $ 6,986
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
4
<PAGE>
CREATIVE COMPUTERS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
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. Although the Company believes that the disclosures herein are
adequate to make the information not misleading, 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 at
December 31, 1995.
In the opinion of management, the accompanying financial statements contain
all adjustments necessary to present fairly the financial position of the
Company at September 30, 1996 and 1995 and the results of operations and
cash flows for the nine months ended September 30, 1996 and 1995.
2. HOLDING COMPANY TRANSACTION
On February 22, 1995, the Company (a California corporation) became a
wholly-owned subsidiary of Creative Computers, Inc., a newly formed
Delaware corporation, by merger of a wholly-owned subsidiary of the newly
formed Delaware corporation into the Company. In the merger, 10,000 shares
of Common Stock of the Company outstanding prior to the merger were
converted into 4,900,000 shares of Common Stock in the newly formed
Delaware corporation. The accompanying financial statements have been
retroactively adjusted to give effect to this transaction.
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of
common shares and common share equivalents outstanding during each period,
after retroactive adjustment for the Holding Company Transaction (Note 2).
Common share equivalents include dilutive stock options and warrants, if
any, using the treasury stock method.
4. CONVERSION OF STOCK WARRANT
On April 1, 1995, the holder of the Company's subordinated debt exercised
its warrant to purchase up to 30% of the equity of the Company for $5
million. The debt holder exercised the warrant by canceling the
subordinated debt and reducing by $50,000 the amount of cash the Company
was required to pay for interest accrued through the date of conversion.
5. PUBLIC STOCK OFFERINGS
On April 3, 1995, the Company completed an initial public offering (the
Offering) of 2,250,000 shares of common stock at an offering price of
$17.00 per share. Net proceeds to the Company were $34,401,000, after
deducting the underwriting discount and other costs associated with the
Offering.
In connection with the Offering, the Company purchased a retail store
location previously owned by the Company's majority stockholders by
repaying the indebtedness on the property of approximately $1,297,000,
canceling related party notes receivable in the amount of $1,771,000,
5
<PAGE>
making a payment of approximately $181,000 to the stockholders, and
recording a payable to a related company for $251,000 which was paid in May
1995. The aggregate purchase price for the property was $3.5 million, an
amount determined by the Board of Directors to be the current fair value of
the property based on a recent appraisal. However, the property has been
included in the Company's financial statements at the stockholders'
historical cost of $1,823,000 which resulted in a reduction in the
Company's retained earnings of $1,677,000.
On August 23, 1995, the Company completed a follow-on offering for
2,300,000 shares of common stock, of which 500,000 shares were sold by the
Company, at an offering price of $26.25 per share. Net proceeds to the
Company were $12,149,000, after deducting the underwriting discount and
other costs associated with this follow-on offering.
6. PROCEEDS FROM PROFITS REALIZED BY DIRECTOR IN THE SALE OF STOCK
In June 1996, the Company recorded additional paid in capital in the amount
of $2,160,000 which represents cash contributed to the Company associated
with profits realized in the sale of stock by a Director due to Section
16(b) of the Securities Exchange Act of 1934.
7. UNUSUAL PERIOD END CHARGES
During the quarter ended June 30, 1996, the Company analyzed inventory by
category and age in conjunction with an analysis of market conditions
including the uncertainties surrounding Apple in the first half of the
year. As a result, the Company recorded write-downs of $3,700,000 of
inventory including adjustments for slow-moving and excessive inventory,
$1,600,000 for accounts receivable, and $1,700,000 for products returned to
vendors for which the Company does not anticipate payment.
During the quarter ended March 31, 1996, the Company experienced
approximately $1,900,000 in losses due to theft and inventory shrinkage.
A small portion of this total has been recovered from insurance. Customer
fraudulent credit card charges and chargebacks also increased resulting in
a charge of $1,300,000 during the quarter ended March 31, 1996. In
addition , the Company was victimized by external credit card fraud,
including two schemes investigated by the Secret Service and others
investigated by law enforcement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company began operations in 1987 with a single retail store and mail order
operations conducted through advertisements in national magazines. The Company
added an additional retail store in 1988, became an authorized Apple dealer in
1991, opened two additional retail stores in the second quarter of 1993 and
relocated its original store in the fourth quarter of 1993.
In May of 1993, the Company relocated its mail order/catalog operations to a
central location in Torrance, CA. The Company shifted its principal distribution
and marketing focus from retail stores to direct mail distribution and
marketing. In March 1994, the Company received authorization from Apple to offer
the full retail line of Apple products via direct mail. The Company distributed
the first edition of its MacMall catalog in April 1994, the first edition of its
PC Mall catalog in May 1995, and the first edition of its DataCom Mall catalog
in January 1996. During the fourth quarter of 1995, the Company moved its
distribution center from Torrance, CA to a new facility in Memphis, TN. This
distribution center consists of 220,000 square feet, with an additional 105,000
square feet to be added on May 1, 1997.
6
<PAGE>
Net sales of the Company are primarily derived from the sale of personal
computer hardware, software, peripherals and accessories to individuals, home
offices, small businesses and large corporations. The Company is dependent on
sales of Apple computers and software and peripheral products used with Apple
computers. Products manufactured by Apple represented approximately 27% of the
Company's net sales for the quarter ended September 30, 1996 as compared to 44%
for the comparable period of 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Net sales for the quarter ended September 30, 1996 were $111.3 million, a 6.9%
decrease over net sales of $119.5 million for the comparable quarter in 1995.
Net sales for the quarter ended September 30, 1996 were up 17.7% over the second
quarter of 1996. PC/Wintel sales increased 50% from $19.0 million last year to
$28.4 million this year for the three months ended September 30, 1996. Apple and
related sales decreased 17.6% to $82.9 million for the three months ended
September 30, 1996 as compared with $100.5 million for the comparable period in
the prior year primarily as a result of planned decrease in catalog circulation
and shortages on certain CPU products. Mail order/catalog net sales reflected a
decrease of 4.5%, from $102.3 million in the third quarter last year to $97.8
million for the quarter ended September 30, 1996. On a comparable basis
(excluding DataCom) the Company's catalog circulation that impacted the quarter
was approximately 10.5 million catalogs during the three months ended September
30, 1996. During the same period ended September 30, 1995, the number of
catalogs was 11.7 million.
Gross profit decreased by $2 million to $14.0 million for the quarter ended
September 30, 1996 from $16.0 million in the third quarter of 1995. Gross
profit as a percentage of net sales decreased to 12.6% for the third quarter of
1996 from 13.4% for the like period in 1995 primarily due to PC sales comprising
a larger percentage of the business and stronger sales promotions. The Company
shipped approximately 240,000 mail order/catalog orders during the three months
ended September 30, 1996 as compared to 224,000 for the same period last year.
The Company's average order size was $407 for the three months ended September
30, 1996 as compared to $457 for the same period in 1995.
Selling, general and administrative (SG&A) expenses amounted to $13.2 million
for the three months ended September 30, 1996 as compared to $13.1 million for
the comparable period in the prior year. As a percentage of net sales, SG&A
expenses increased to 11.9% for the quarter from 11.0% for the same quarter in
1995. Net advertising costs declined as a result of implementing a new marketing
strategy while personnel costs increased as the Company continues to lay the
foundation for future growth.
Interest income for the three months ended September 30, 1996 decreased by
$9,000 or 4.0%, to $215,000 compared to $224,000 for the comparable quarter in
1995. The decrease was due to a reduction in cash invested in securities
available for sale.
Net income decreased by $1.2 million to $0.6 million for the three months ended
September 30, 1996 from $1.8 million for the same period last year. In
comparison to the second quarter of 1996, net income improved from a loss of
$(5.4) million in the second quarter to a profit of $0.6 million.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales increased by $24.6 million or 8.5% to $315.0 million in the nine
months ended September 30, 1996 from $290.4 million in the nine months ended
September 30, 1995. Net sales for the period increased primarily due to growth
in PC sales, which generated sales of $65.9 million for the nine months ended
September 30, 1996, compared with $22.9 million during the same period last
year. Apple and related sales were $249.1 million for the nine months ended
September 30, 1996 as compared with $267.5 million for the comparable period in
the prior year. Mail order/catalog net sales reflected an increase of
7
<PAGE>
13.1%, from $241.9 million for the nine months ended September 30, 1995 to
$273.5 million for the nine months ended September 30, 1996. For comparative
purposes (excluding DataCom) approximately 31.4 million catalogs were in
circulation during the nine months ended September 30, 1996. During the same
period ended September 30, 1995, the Company had approximately 22.8 million
catalogs in circulation.
Gross profit decreased by $6.5 million to $33.6 million for the nine months
ended September 30, 1996 from $40.2 million in the same period of 1995. Gross
profit as a percentage of net sales decreased to 10.7% for the nine months of
1996 compared to 13.8% for the nine months of 1995. The decrease in gross profit
margin was primarily the result of write-downs during the second quarter of 1996
of $3.7 million for slow-moving and excessive inventory and $1.7 million for
products returned to vendors for which the Company does not anticipate payment
plus $1.9 million for theft and shrinkage of inventory in the first quarter of
1996.
Selling, general and administrative (SG&A) expense increased by $14.4 million to
$46.2 million for the nine months ended September 30, 1996 from $31.8 million
for the comparable period in the prior year. The increase in SG&A was primarily
the result of an increase in personnel costs which included strengthening of the
Company's management team, an increase in advertising costs resulting from
increased catalog circulation, operational inefficiencies in the first six
months associated with the relocation of the Company's distribution center to
Memphis, Tennessee from Torrance, California, along with a $2.0 million increase
in the allowance for doubtful accounts. As a percent to net sales, SG&A
expenses increased to 14.7% for the period as compared to 11.0% for the nine
months of 1995.
Interest income for the nine months ended September 30, 1996 increased by
$147,000 or 48.5%, to $450,000 compared to $303,000 for the comparable quarter
in 1995. The increase in interest income is a result of the investment of cash
proceeds from the Company's stock offerings in April and August of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been funding the working capital
requirements created by its rapid growth in sales. Prior to April 1995, the
Company's primary sources of financing have been borrowings from its
stockholders, private investors and financial institutions. In April and August
of 1995, the Company completed an initial public offering and a follow-on
offering of its common stock which resulted in net proceeds to the Company of
approximately $46.6 million. As of September 30, 1996, the Company had cash
and short term investments of $23.7 million.
Inventories decreased to $46.5 million at September 30, 1996 from $52.0 million
at December 31, 1995. Accounts receivable decreased $1.7 million at September
30, 1996 to $16.6 million compared to $18.3 million at December 31, 1995,
partially as a result of increasing the allowance for doubtful accounts by $2.0
million.
During the nine months ended September 30, 1996, the Company's capital
expenditures were $1.6 million primarily for distribution equipment and
leasehold improvements for the Company's new Memphis distribution center.
Capital expenditures for the comparable period of last year were $6.4 million.
The Company's primary capital needs will continue to be the funding of its
working capital requirements for anticipated sales growth.
The Company has an existing credit facility of $50.0 million with a financial
institution. At September 30, 1996, the Company had $12.3 million outstanding
under this credit facility. The credit facility functions in lieu of a vendor
trade payable for inventory purchases and is included in accounts payable. The
revolving credit line is cancelable upon 30 days advance notice and does not
bear interest if paid within 60 days of the date inventory is purchased. The
credit facility is secured by substantially all of the Company's assets and
contains certain covenants which require the Company to maintain a minimum level
of tangible net worth.
8
<PAGE>
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 September 30, 1996, the Company has
repurchased 15,000 shares.
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 from time to time engages in evaluation of and
discussions with third parties regarding potential acquisitions and from time to
time has submitted, and may in the future submit, proposals with respect to such
potential acquisitions. The Company currently has no definitive agreements with
respect to any such 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 this report are forward looking statements. The
realization of any or all of these expectations and assumptions is subject to a
number of risks and uncertainties, and it is possible that the assumptions made
by management may not materialize. In addition to the factors set forth above,
other important factors that could cause actual results to differ materially
from our expectations include 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 and clones thereof; and the Company's reliance on major 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 its Annual Report on Form 10-K for
1995.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
10
<PAGE>
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: November 12, 1996 By /s/ Richard Finkbeiner
------------------------
RICHARD FINKBEINER
Chief Financial Officer
(Duly Authorized Officer of the Registrant
and Principal Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 19,626
<SECURITIES> 4,097
<RECEIVABLES> 16,574
<ALLOWANCES> 0
<INVENTORY> 46,547
<CURRENT-ASSETS> 95,323
<PP&E> 11,012
<DEPRECIATION> 0
<TOTAL-ASSETS> 108,644
<CURRENT-LIABILITIES> 56,798
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 51,437
<TOTAL-LIABILITY-AND-EQUITY> 108,644
<SALES> 111,291
<TOTAL-REVENUES> 111,291
<CGS> 97,321
<TOTAL-COSTS> 97,321
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 984
<INCOME-TAX> 427
<INCOME-CONTINUING> 557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 557
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
