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, 2001
[_] 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
IDEAMALL, 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 10,433,866 outstanding shares of Common Stock at May 14, 2001.
1
IDEAMALL, INC.
INDEX TO FORM 10-Q
Page
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PART I-FINANCIAL INFORMATION
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......... 10
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................... 11
SIGNATURE................................................................... 12
2
ITEM 1 FINANCIAL STATEMENTS
IDEAMALL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
March 31, 2001
(unaudited) December 31, 2000
-------------- ------------------
Assets
------
Current Assets:
Cash and cash equivalents $ 10,405 $ 12,195
Accounts receivable, net of allowance for
doubtful accounts 47,583 54,970
Inventories 34,611 35,838
Prepaid expenses and other current assets 2,454 2,489
Deferred income taxes 1,324 2,047
-------- --------
Total current assets 96,377 107,539
Property and equipment, net 13,623 14,928
Goodwill, net 11,186 11,316
Deferred income taxes 3,738 3,738
Other assets 45 45
-------- --------
$124,969 $137,566
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 62,469 $ 59,294
Accrued expenses and other current liabilities 12,275 12,963
Deferred revenue 6,493 7,204
Line of credit - 17,315
Capital leases - current portion 539 573
Notes payable - current portion 1,000 6
-------- --------
Total current liabilities 82,776 97,355
Capital leases - long term 453 562
Notes payable - long term 1,000 141
-------- --------
Total liabilities 84,229 98,058
-------- --------
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; 10,433,866 shares issued 11 11
Additional paid-in capital 74,403 74,403
Treasury stock, at cost: 15,000 shares (91) (91)
Retained earnings (accumulated deficit) (33,583) (34,815)
-------- --------
Total stockholders' equity 40,740 39,508
-------- --------
$124,969 $137,566
======== ========
See condensed notes to consolidated financial statements.
3
IDEAMALL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands except per share data)
For the three months ended
March 31,
--------------------------
2001 2000
----------- -----------
Net sales $198,351 $237,137
Cost of goods sold 176,428 214,240
-------- --------
Gross profit 21,923 22,897
Selling, general and administrative expenses 19,763 29,867
-------- --------
Income (loss) from operations 2,160 (6,970)
Interest income (expense), net (204) 35
-------- --------
Income (loss) before income taxes 1,956 (6,935)
Income tax provision 724 -
-------- --------
Income (loss) before effect of cumulative change in
accounting principle 1,232 (6,935)
Effect of cumulative change in accounting principle - (536)
-------- --------
Net income (loss) $ 1,232 $ (7,471)
======== ========
Earnings (loss) per share
Income (loss) before effect of cumulative change in
accounting principle $ 0.12 $ (0.67)
Cumulative change in accounting principle - (0.05)
-------- --------
$ 0.12 $ (0.72)
======== ========
Diluted earnings (loss) per share
Income (loss) before effect of cumulative change in
accounting principle $ 0.12 $ (0.67)
Cumulative change in accounting principle - (0.05)
-------- --------
$ 0.12 $ (0.72)
======== ========
Basic weighted average number of
shares outstanding 10,434 10,407
======== ========
Diluted weighted average number of
shares outstanding 10,436 10,407
======== ========
See condensed notes to consolidated financial statements.
4
IDEAMALL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
For the three months ended
March 31,
--------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 1,232 $ (7,471)
Adjustments to reconcile net income (loss) to
net cash provided by/(used in) operating
activities:
Depreciation and amortization 1,456 1,465
Provision for deferred income taxes 724 -
Loss on disposal of fixed assets 41 -
Changes in assets and liabilities:
Accounts receivable 7,387 74
Inventories 1,227 (544)
Prepaid expenses and other current assets 28 (138)
Other assets - (2)
Accounts payable 3,175 (11,485)
Accrued expenses and other current liabilities (1,399) 6,824
-------- --------
Total adjustments 12,639 (3,806)
-------- --------
Net cash provided by/(used in) operating
activities 13,871 (11,277)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (285) (2,074)
Proceeds from sale of property and equipment 229 -
-------- --------
Net cash used in investing activities (56) (2,074)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable 2,000 -
Payments under notes payable (147) (2)
Net payments under line of credit (17,315) -
Principal payments of obligations under
capital leases (143) (40)
Proceeds from stock issued under stock option plans - 11
-------- --------
Net cash used in financing activities (15,605) (31)
-------- --------
Net (decrease)/increase in cash and cash
equivalents (1,790) (13,382)
Cash and cash equivalents:
Beginning of the period 12,195 24,326
-------- --------
End of the period $ 10,405 $ 10,944
======== ========
See condensed notes to consolidated financial statements.
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IDEAMALL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated interim financial statements include the accounts of
IdeaMall, Inc., a Delaware corporation, (formerly Creative Computers, Inc.)
and its wholly owned subsidiaries (collectively, 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, 2000.
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, 2001 and December 31, 2000 and the results of
operations and cash flows for the three months ended March 31, 2001 and
2000. 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 2000 financial statements
to conform to the 2001 presentation.
2. Recent Accounting Pronouncements
In the fourth quarter of 2000, the Company adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 requires the Company to defer,
in certain situations, sales revenue until goods have been received by the
customer and risk of loss has been passed. The adjustment resulted from the
change in timing of revenue recognition from the point of shipment to the
point of delivery of product to the customer. The adoption of SAB 101
resulted in a cumulative effect of a change in accounting principle in 2000
of $536,000 retroactively applied to January 1, 2000. The financial effect
of adoption on revenue for the quarters ended March 31, 2001 and 2000 was
not material.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
will be recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company
adopted FAS No. 133 on January 1, 2001. There was no effect on
financial results from adopting this new standard for the quarter ended
March 31, 2001, as the company holds no derivatives.
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:
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Three Months Ended March 31,
-----------------------------
2001 2000
------- --------
(in thousands except per share data)
Income (loss) before cumulative effect of change
in accounting principle $ 1,232 $(6,936)
Cumulative effect of change in accounting principle
for revenue recognition - (536)
------- -------
Net income (loss) $ 1,232 $(7,472)
======= =======
Weighted average shares - Basic 10,434 10,407
Effect of dilutive stock options
and warrants (a) 2 -
------- -------
Weighted average shares-Diluted 10,436 10,407
======= =======
Net earnings (loss) per share-Basic $ 0.12 $ (0.72)
======= =======
Net earnings (loss) per share-Diluted $ 0.12 $ (0.72)
======= =======
(a) Potential common shares of 294,450 for the quarter ended March 31,
2000 have been excluded from the earnings (loss) per share
computations because of the effect of their inclusion would be anti-
dilutive.
4. Segment Information
The Company operates in three reportable segments: 1) a rapid response
supplier of technology solutions for business, government and educational
institutions as well as consumers, collectively referred to as the "Core
Business"; 2) a multi-category Internet retailer under the eCOST.com brand,
and 3) a rapid response supplier of Linux-based products and services
provided under the eLinux brand, which commenced operations in February
2000.
Summarized segment information for the three months ended March 31, 2001 and
2000 is as follows (in thousands):
Core
Three months ended March 31, 2001 Business eCOST.com eLinux Consolidated
- --------------------------------- -----------------------------------------------
Net sales $173,772 $22,715 $1,864 $198,351
Gross profit 19,795 1,941 187 21,923
Income (loss) from operations 2,379 (4) (215) 2,160
Core
Three months ended March 31, 2000 Business eCOST.com eLinux Consolidated
- --------------------------------- -----------------------------------------------
Net sales $194,379 $42,268 $ 490 $237,137
Gross profit 22,172 681 44 22,897
Income (loss) from operations 255 (6,380) (846) (6,971)
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Recent Developments
IdeaMall, Inc. (the "Company"), formerly Creative Computers, Inc., founded in
1987, is a rapid response direct marketer of computer hardware, software,
peripheral and electronics products. The Company offers products to business,
government and educational institutions as well as individual consumers through
relationship-based telemarketing techniques, direct response catalogs, dedicated
inbound telemarketing sales executives, the Internet, a direct sales force, and
a retail showroom. The Company offers a broad selection of products through its
distinctive full-
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color catalogs under the PC Mall, MacMall, eLinux and eCOST.com brands and its
five worldwide web sites on the Internet: pcmall.com, macmall.com, ccit-inc.com,
ecost.com, and elinux.com, and other promotional materials. The Company's staff
of knowledgeable telemarketing sales executives, customer service and technical
support personnel work together to serve customers by assisting in product
selection and offering technical assistance. The Company believes that its high
level of customer service results in customer loyalty and repeat customer
orders.
In December 1999, the Company formed a new subsidiary, eLinux, to perform as a
rapid response supplier of Linux-based products and services. eLinux commenced
operations in February 2000.
Results of Operations
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000
Net sales for the quarter ended March 31, 2001 were $198.4 million, a 16.4%
decrease over last year's first quarter. eCOST.com accounted for $22.7 million
of sales in the first quarter of 2001, and eLinux accounted for $1.9 million in
the same period. The decrease in net sales for the quarter is primarily
attributable to a 46.3% decline in eCOST.com sales and an 18% decrease in
consumer sales due to the Company's shift in focus to Outbound business sales
and profitability. PC/WINTEL sales represented 57.5% of net sales for the
quarter ended March 31, 2001, compared to 60.5% for the same quarter last year.
Apple/Macintosh-related sales increased to 42.5% for the three months ended
March 31, 2001, compared to 39.5% for the same quarter last year.
Gross profit was $21.9 million for the three months ended March 31, 2001, a
decrease of $1.0 million, or 4.3%, over the prior year's comparable quarter. For
the Core business, gross profit decreased $2.4 million, or 10.7%, to $19.8
million. For eCOST.com, gross profit for the first quarter of 2001 was $1.9
million, an increase of $1.3 million, or 185.0%, over the prior year's first
quarter. For eLinux, gross profit for the quarter ended March 31, 2001 was $0.2
million, an increase of $0.1 million or 100% from the prior year's first
quarter. As a percentage of net sales, gross profit for the three months ended
March 31, 2001 increased to 11.1% compared with 9.7% in the prior year,
reflecting the Company's emphasis on the profitability of its start-up
subsidiaries eCOST.com and eLinux. For the Core business, gross profit as a
percentage of net sales remained unchanged at 11.4% compared to the prior year's
first quarter. Gross profit as a percentage of net sales for eCOST.com increased
to 8.5% from 1.6% in the prior year's first quarter, reflecting increased focus
on improvements in profitability for that segment. For eLinux, gross profit as a
percentage of net sales increased to 10.0% from 9.0% compared to the prior
year's first quarter. 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 were $19.8 million for the three
months ended March 31, 2001, a decrease of $10.1 million, or 33.8%, from the
prior year. As a percent of sales, selling, general and administrative expenses
decreased to 10.0% from 12.6% in the prior year, primarily due to reductions in
advertising expenses associated with eCOST.com and company-wide cost containment
efforts. For the Core business, selling, general and administrative expenses in
the first quarter of 2001 decreased by $4.5 million or 20.5% compared to the
first quarter of the prior year primarily due to cost containment efforts. As a
percent of net sales, selling, general and administrative expenses for the Core
business decreased to 10.0% compared with 11.3% in the first quarter last year.
For eCOST.com, selling, general and administrative expenses in the first quarter
of 2001 were $1.9 million, a decrease of $5.1 million, or 72.5% compared with
the first quarter of the prior year, reflecting the Company's focus on cost
containment and increased emphasis on profitability of its start-up
subsidiaries. As a percent of net sales, selling, general and administrative
expenses for eCOST.com decreased to 8.6% in the first quarter of 2001 compared
with 16.7% in the first quarter last year. For eLinux, selling, general and
administrative expenses in the first quarter of 2001 were $0.4 million, a
decrease of $0.5 million, or 54.8% compared with the first quarter of the prior
year. As a percent of net sales, selling, general and administrative expenses
for eLinux decreased to 21.6% compared with 181.6% in the first quarter last
year, reflecting the maturity of this business after its first full year of
operations.
Net interest expense for the three months ended March 31, 2001 was $0.2 million
compared to net interest income of $35,000 for the comparable quarter in 2000.
The net interest expense for 2001 resulted primarily from the expense of
borrowing under the Company's line of credit. 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 Company recorded an income tax provision for the quarter ended March 31,
2001 of $0.7 million, utilizing an
8
effective tax rate of 37%. The Company did not record an income tax provision in
the prior year. The change in effective tax rate is primarily due to the non-
recognition of tax benefits from losses recorded in the prior year's first
quarter.
Net income was $1.2 million, or $0.12 per share, for the three months ended
March 31, 2001 compared to a net loss of $7.5 million, or $0.72 per share, for
the same period last year. Excluding the operating losses from the Company's
start-ups, eCOST.com and eLinux, net income would have been $1.7 million, or
$0.16 per share, in the first quarter of 2001 compared to a net income of $0.2
million, or $0.02 per share for the three months ended March 31, 2000. Net loss
for the three months ended March 31, 2000 included a charge of $0.5 million, or
$0.05 per share, for the cumulative effect of a change in accounting principle
for revenue recognition.
Liquidity and Capital Resources
The Company's primary capital need has been the funding of the working capital
requirements created by its growth in sales and the development of the Outbound
business. 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 $10.4 million
and working capital of $13.6 million. Inventory decreased $1.2 million from
December 31, 2000. Accounts receivable decreased $7.4 million from December 31,
2000 primarily due to improved days sales outstanding at March 31, 2001. For
the three months ended March 31, 2001, capital expenditures were $0.3 million
versus $2.1 million for the comparable quarter last year. 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 2001. However, if the Company needs extra 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.
During the first quarter of 2001, the Company's existing $40 million credit
facility with a commercial finance company was replaced with a new $75 million,
three-year asset-based revolving credit facility from a lending unit of a large
commercial bank (the "New Line of Credit"). The New Line of Credit functions as
a working capital line of credit with a borrowing base of inventory and accounts
receivable, and bears interest at prime with a LIBOR option. The New Line of
Credit is secured by substantially all of the Company's assets. The New Line of
Credit has as its single financial covenant a minimum tangible net worth
requirement and also includes a commitment fee of 0.25% annually on the unused
portion of the line up to $60 million. In addition, in March 2001, the Company
entered into a new $40 million flooring credit facility, which functions in lieu
of a vendor trade payable for inventory purchases and does not bear interest if
paid within terms specific to each vendor (the "New Flooring Facility"). The
New Flooring Facility is secured by substantially all of the Company's assets
and is also supported by a letter of credit issued under the New Line of Credit
in the amount outstanding under the New Flooring Facility from time to time.
The amount of the Letter of Credit is applied against the credit limit under the
New Line of Credit. The Company had $8.8 million of borrowings under the credit
facility included in accounts payable and no working capital advances
outstanding at March 31, 2001. The Company had $66.2 million available for
working capital advances and floorplan inventory financing, and was in
compliance with all credit facility covenants as of March 31, 2001.
In July 1996, the Company announced its plan to repurchase up to 1,000,000
shares of its Common Stock. The shares may 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, 2001, 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
9
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 trends for Apple,
Macintosh and PC/Wintel sales will be sustained, that Outbound business 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 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
start-up subsidiaries, or that the impact of any such reductions on sales will
be limited to the 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 or vendor credit will be available at acceptable terms, if at all.
There can also be no assurance that the Company will continue to be in
compliance with its bank credit facility covenants in future periods. 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, 2000.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and long-term debt. As of
March 31 2001, 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 as of March 31, 2001.
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Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits.
10.43 Loan and Security Agreement, dated March 7, 2001, between
Congress Financial Corporation and IdeaMall, Inc. and
Subsidiaries (incorporated by reference to the Company's
report on Form 10-K for the fiscal year ended December 31,
2000).
10.44 Agreement for Wholesale Financing, dated March 15, 2001,
between Deutsche Financial Services Corporation and
IdeaMall, Inc. and Subsidiaries (incorporated by reference
to the Company's report on form 10-K for the fiscal year
ended December 31, 2000).
b. Reports on Form 8-K
None.
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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.
IDEAMALL, INC.
Date: May 15, 2001 By /s/ TED SANDERS
---------------
Ted Sanders
Chief Financial Officer
(Duly Authorized Officer of
the Registrant and Principal
Financial Officer)
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