<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 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
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Creative Computers, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION Page
Item 1 - Financial Statements
<S> <C>
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
</TABLE>
2
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ITEM 1 FINANCIAL STATEMENTS
CREATIVE COMPUTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, 2000
(unaudited) December 31, 1999
--------------- ------------------
<S> <C> <C>
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
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
3
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Creative Computers, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
2000 1999
---------- ---------
<S> <C> <C>
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
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
4
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Creative Computers, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
5
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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
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
<S> <C> <C>
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)
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
March 31, 2000
(in thousands)
---------------------------------------------------------
Gross Operating Total
Sales Profit Profit (Loss) Assets
---------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1999
(in thousands) (in thousands)
--------------------------------------- -----------------
Gross Operating Total
Sales Profit Profit (Loss) Assets
--------------------------------------- -----------------
<S> <C> <C> <C> <C>
Direct Marketer $176,289 $20,038 $ 780 $144,657
Multi-category Internet - - (103) 5,348
-------- ------- ----- --------
Consolidated $176,289 $20,038 677 $150,005
</TABLE>
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
<PAGE>
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
<PAGE>
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
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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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,944
<SECURITIES> 0
<RECEIVABLES> 47,544
<ALLOWANCES> 0
<INVENTORY> 33,722
<CURRENT-ASSETS> 100,840
<PP&E> 15,333
<DEPRECIATION> 0
<TOTAL-ASSETS> 131,661
<CURRENT-LIABILITIES> 89,651
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 41,751
<TOTAL-LIABILITY-AND-EQUITY> 131,661
<SALES> 238,457
<TOTAL-REVENUES> 238,457
<CGS> 215,453
<TOTAL-COSTS> 215,453
<OTHER-EXPENSES> 29,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35)
<INCOME-PRETAX> (6,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,847)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
