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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, 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
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
There were 9,763,740 outstanding shares of COMMON STOCK at May 10, 1996.
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Creative Computers, Inc.
Index to Form 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets................................................2
Consolidated Statements of Operations......................................3
Consolidated Statements 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................................................8
SIGNATURE..................................................................9
1
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Creative Computers, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $10,364 $ 13,082
Securities available for sale 1,616 12,575
Accounts receivable, net of allowance for
doubtful accounts 18,414 18,305
Inventories 43,217 52,026
Prepaid expenses and other current assets 5,783 4,231
Deferred income taxes 1,109 1,109
------- --------
Total current assets 80,503 101,328
Property, plant and equipment, net 11,198 10,814
Other assets 378 427
------- --------
$92,079 $112,569
====== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $28,885 $ 46,098
Accrued expenses and other current liabilities 7,885 8,642
Capital leases - current portion 248 250
Notes payable - current portion 39 31
------- --------
Total current liabilities 37,057 55,021
Capital leases 475 535
Notes payable 61 54
Deferred income taxes 399 399
------- --------
Total liabilities 37,992 56,009
------- --------
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares
authorized; 9,763,740 and 9,750,000 shares issued
and outstanding 10 10
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding
Additional paid in capital 51,574 51,547
Retained earnings 2,503 5,003
------- --------
Total stockholders' equity 54,087 56,560
------- --------
$92,079 $112,569
====== =======
</TABLE>
See condensed notes to consolidated financial statements
2
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Creative Computers, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1996 1995
<S> <C> <C>
Net sales $109,171 $88,065
Cost of goods sold 95,949 75,758
-------- -------
Gross profit 13,222 12,307
Selling, general and administrative expenses 17,460 9,610
-------- -------
Income (loss) from operations (4,238) 2,697
Interest income (expense), net 98 (126)
-------- -------
Income (loss) before income taxes (4,140) 2,571
Provision (benefit) for income taxes (1,640) 1,035
-------- -------
Net income (loss) $ (2,500) $ 1,536
-------- -------
Earnings (loss) per share $(0.25) $0.22
======== =======
Weighted average number of
shares outstanding 9,787 6,983
-------- -------
</TABLE>
See condensed notes to consolidated financial statements.
3
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Creative Computers, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
For the three months ended
March 31, 1996 March 31, 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,500) $ 1,536
Adjustments to reconcile net income (loss) to
net cash (used in)provided by operating activities:
Depreciation and amortization 465 190
Increase in allowance for doubtful accounts 394 17
Increase in inventory reserves 1,866 95
Deferred income taxes ---- (2)
Changes in operating assets and liabilities:
Accounts receivable (503) (2,488)
Inventories 6,943 (3,059)
Prepaid expenses and other current assets (1,552) (1,314)
Other assets 49 (37)
Accounts payable (17,213) 1,679
Accrued expenses and other current liabilities (757) 4,852
Income taxes payable ---- (57)
-------- -------
Total adjustments (10,308) (124)
-------- -------
Net cash (used in) provided by operating activities (12,808) 1,412
-------- -------
Cash flows from investing activities:
Purchases of securities available for sale (5,895) ----
Redemptions of securities available for sale 16,854 ----
Acquisition of property, plant and equipment (849) (1,013)
Increase in related party notes receivable ---- (125)
-------- -------
Net cash provided by (used in) investing activities 10,110 (1,138)
-------- -------
Cash flows from financing activities:
Net line of credit payments ---- (3,180)
(Payments)borrowings under notes payable, net 15 (125)
Payments under notes payable -related parties ---- (164)
Principal payments of obligations under capital leases (62) (102)
Subordinated debt borrowings ---- 2,000
Proceeds from stock issued under stock option plans 27 ----
-------- -------
Net cash used by financing activities (20) (1,571)
-------- -------
Net decrease in cash and cash equivalents (2,718) (1,297)
Cash and cash equivalents:
Beginning of the period 13,082 3,348
-------- -------
End of the period $ 10,364 $ 2,051
======= ======
</TABLE>
See condensed notes to consolidated financial statements.
4
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Creative Computers, Inc.
CONDENSED NOTES TO THE 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 March 31, 1996 and the results of operations and cash flows for
the three months ended March 31, 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. Initial Public Offering
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,
making a payment of
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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.
6. Follow-on Offering
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.
7. Stock Options
On February 12, 1996, the Compensation Committee of the Board of Directors
repriced all stock options previously granted to the closing price for the
day of $9.50 per share. Additionally, the Compensation Committee also
granted 130,000 options to certain officers of the Company at $9.50 per
share.
8. Unusual Period End Charges
During the quarter ended March 31, 1996, the Company experienced
approximately $1.9 million in losses due to theft and inventory shrinkage.
Some portion of this total may be recovered from insurance. Customer
fraudulent credit card charges and chargebacks also increased resulting in
a charge of $1.3 million 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 local 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. 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.
The Company operates a full-service distribution center in Memphis, Tennessee.
The distribution center consists of over 220,000 square feet, and was opened
during the fourth quarter of 1995. On May 1, 1997, the Company is obligated to
lease an additional 105,000 square feet of the existing distribution center
building.
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
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manufactured by Apple represented approximately 32.4% of the Company's net sales
for the quarter ended March 31, 1996 as compared to 56.3% for the comparable
quarter of the prior year.
The Company experiences variability in its net sales and net income on a
quarterly basis as a result of many factors. These factors include, among
others, the following: business conditions and amount of growth in the personal
computer industry and general economy; competitive factors, including increasing
competition from other catalog and retail store resellers and price pressures
related hereto; uncertainties surrounding the supply of and demand for products
manufactured by and compatible with Apple Computer and clones thereof; reliance
on Apple Computer and other vendors; inventory risks due to shifts in market
demand and/or price erosion of owned inventory; continued success in sales
growth; ability to attract and retain customers; management growth; ability to
attract and retain personnel, including key management personnel; costs of
paper, printing, and postage; technological change and inventory obsolescence;
dependence on management information systems, including the telephone system and
related fraud review system; and other items described in 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.
Results of Operations
Three Months Ended March 31, 1996 Compared to the Three Months Ended March 31,
1995
Net sales for the quarter ended March 31, 1996 were $109.2 million, a 24.0%
increase over net sales of $88.1 million for the comparable quarter in 1995.
Mail order/catalog net sales reflected an increase of 36%, from $71.4 million in
the first quarter of last year to $97.1 million for the quarter ended March 31,
1996. The increase in net sales was primarily attributable to an increase in
sales of Wintel products which resulted from the distribution of the Company's
new PC Mall catalog. Sales of PC Mall products accounted for 19% of net sales
during the quarter ended March 31, 1996. The increase on the PC side was
partially offset by slower growth in Apple related catalog sales and decreased
retail store sales as a result of recent media attention relating to
difficulties being faced by Apple Computer. Net sales at the Company's retail
stores were down 11% from the comparable quarter of 1995.
Gross profit increased by $0.9 million, or 7.4%, to $13.2 million for the
quarter ended March 31, 1996 from $12.3 million in the first quarter of 1995.
Gross profit as a percentage of net sales decreased to 12.2% for the first
quarter of 1996 from 14.0% during the quarter ended March 31, 1995. The
decrease in gross profit margin was primarily the result of unusually high theft
and shrinkage of inventory which approximated $1.9 million during the quarter,
before insurance recoveries, if any. The Company's average order size was $425
for the three months ended March 31, 1996 as compared to $495 for the same
period in 1995. The Company shipped approximately 267,000 orders during the
three months ended March 31, 1996 as compared to 151,000 for the same period
last year. The Company distributed approximately 10.2 million catalogs (4
million of PC Mall and DataCom Mall) during the three months ended March 31,
1996.
Selling, general and administrative (SG&A) expenses increased by $7.9 million,
or 81.7%, to $17.5 million for the three months ended March 31, 1996 from $9.6
million for the comparable period in the prior year. As a percentage of net
sales, SG&A expenses increased to 16.0% for the quarter from 10.9% for the
corresponding quarter in 1995. The increase in SG&A costs as a percentage of
sales was primarily attributable to an increase in personnel costs associated
with the strengthening of the Company's management team, an increase in
advertising costs resulting from the increased catalog circulation, and
operational inefficiencies associated with the relocation of the Company's
distribution center to Memphis, Tennessee from Torrance, California. In
addition, the increase as a percentage of net sales was the result
of unusually high fraudulent credit card charges and chargebacks which was
primarily due to an error generated by a minor software update installed in the
quarter, which allowed orders to bypass the Company's fraud review system. This
situation was corrected as soon as practical and the Company has seen a decrease
in the amount of loss to date.
Net interest income/(expense) for the three months ended March 31, 1996
increased by $224,000 or 178%, to $98,000 compared to $(126,000) for the
comparable quarter in 1995.
7
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Liquidity and Capital Resources
The Company's primary capital need has been funding the working capital
requirements created by its rapid growth in sales. Historically, the Company's
primary sources of financing have been borrowings from its stockholders, private
investors and financial institutions. In April and August 1995, the Company
completed an initial 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
March 31, 1996, the Company had cash, cash equivalents and short term
investments of $12.0 million.
Inventories decreased to $43.2 million at March 31, 1996 from $52 million at
December 31, 1995 as a result of increased efforts to improve inventory turns.
Accounts receivable increased $0.1 million at March 31, 1996 from $18.3 million
to $18.4 million at December 31, 1995. Open account sales grew to approximately
17.1% of net sales for the three months ended March 31, 1996 as compared to
12.7% for the comparable period in 1995.
During the three months ended March 31, 1996, the Company's capital expenditures
were $0.8 million primarily for distribution equipment and leasehold
improvements for the Company's Memphis distribution center. Capital
expenditures for the comparable quarter of last year were $1.0 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 March 31, 1996, the Company had $10.5 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 (as defined).
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 is engaged in ongoing 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 future. There can be no
assurances, however, that the Company's business will not be so affected by
inflation.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.1 Letter Agreement between David Burcham and the Company
(b) Reports on Form 8-K
None.
8
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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 14, 1996 By /s/ David Burcham
David Burcham
Acting Chief Financial Officer
(Duly Authorized Officer of the Registrant
and Principal Financial Officer)
9
<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> MAR-31-1996
<CASH> 10,364
<SECURITIES> 1,616
<RECEIVABLES> 18,414
<ALLOWANCES> 0
<INVENTORY> 43,217
<CURRENT-ASSETS> 80,503
<PP&E> 11,198
<DEPRECIATION> 0
<TOTAL-ASSETS> 92,079
<CURRENT-LIABILITIES> 37,057
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 54,077
<TOTAL-LIABILITY-AND-EQUITY> 92,079
<SALES> 109,171
<TOTAL-REVENUES> 109,171
<CGS> 95,949
<TOTAL-COSTS> 95,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,140)
<INCOME-TAX> (1,640)
<INCOME-CONTINUING> (2,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,500)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
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EXHIBIT 10.1
February 21, 1996
Mr. David Burcham
16104 NE 99th
Redmond, Washington 98052
Dear David:
On behalf of Creative Computers, Inc. it is my pleasure to confirm our
offer to you of the position of Senior Vice President, Operations. As we
discussed, if you accept this offer you will be reporting directly to me. I
have enjoyed speaking with you and very much hope that you will accept our
offer.
Your duties generally will be in the areas of overseeing and managing
the Company's distribution center, store distribution, facilities, security,
service and configuration, customer service administration, and dual
responsibility for many other areas, and you may be assigned other duties as
needed and your duties may change from time to time on reasonable notice.
You will earn a monthly base salary of $16,666.66 (payable semi-
monthly). Your potential bonus will be $10,000 per quarter, based on meeting
various goals to be set by the Company. You will receive a signing bonus of
$50,000 upon the commencement of your employment. If you decide to leave
Creative during the first 90 days, you will pay back $25,000 of this signing
bonus.
You will be granted options to purchase 60,000 shares of Creative
Computers, Inc. stock at the price on the date you accept this offer. These
options will vest quarterly over three years at a rate of 8.33% (5,000 shares)
per quarter, provided you are still employed by the Company. The first 5,000
shares will vest when your employment begins.
We hope that our association will continue for a substantial period of
time, but we recognize that the future is inherently uncertain and that
assurances of permanent or continuing employment are not feasible. Therefore,
in accordance
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Mr. David Burcham
February 21, 1996
Page 2
with our standard policy, your employment will be "at-will." In other words,
either you or the Company can end your employment at any time for any reason,
with or without cause. This term of employment can only be changed in writing
over my signature. This letter constitutes an exception to that policy as
follows: as we discussed, if Creative elects to terminate your employment during
the first 24 months, Creative will pay you $50,000. If Creative elects to
terminate your employment after 24 months, you will not be eligible to receive
any severance pay.
The first 90 days of your employment is a time for you and Creative to
get acquainted. Normally, employees are not eligible for benefits during this
period. However, we are making an exception for you, and you will be eligible
for all benefits sponsored by the Company subject to the terms and conditions of
the various benefit programs, including medical, dental and life insurance and
our 401(k) plan.
We would like you to begin work as soon as possible, but not later
than February 26, 1996.
We very much look forward to your joining our organization. In order
to confirm your acceptance of our offer as set forth here, please sign a copy of
this letter and return it to me. If there is anything that you want to discuss
further, please do not hesitate to contact me.
Sincerely,
Frank Khulusi
President and Chief
Executive Officer
AGREED AND ACCEPTED THIS ______ DAY OF FEBRUARY, 1996.
_______________________________
David Burcham
