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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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
IDEAMALL, INC.
Delaware 95-4518700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2555 West 190th Street, Torrance, California 90504
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (310) 354-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.001 par value
Indicate 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 30, 2001, the aggregate market value of the Common Stock held
by non-affiliates of the Registrant was $8,461,589. The number of shares
outstanding of the Registrant's Common Stock as of March 30, 2001 was
10,433,866.
Documents incorporated by reference into Part III: Portions of the
definitive Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
1
IDEAMALL, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 20
Item 3. Legal Proceedings................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters.................................. 21
Item 6. Selected Financial Data.......................................... 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 28
Item 8. Financial Statements and Supplementary Data...................... 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant............... 29
Item 11. Executive Compensation........................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management... 29
Item 13. Certain Relationships and Related Transactions................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 30
SIGNATURES..................................................................... 32
2
PART I
ITEM 1. BUSINESS
General
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-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 September 1997, the Company formed a wholly-owned subsidiary, uBid, to
sell computer-related products and consumer electronics through an auction
format on the Internet. On December 9, 1998, uBid completed an initial public
offering of 1,817,000 shares of its Common Stock. Upon completion of this
offering, the Company owned 80.1% of the outstanding Common Stock of uBid. 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 stockholders of record as of May 24, 1999. In April 2000, uBid
was acquired by CMGI.
In February 1999, the Company formed eCOST.com as a wholly-owned subsidiary.
eCOST.com is a multi-category Internet retailer of computer products and
electronics, and offers a broad selection of name-brand products, most of which
are sold at competitive prices plus itemized fees for processing and shipping
the order. In December 1999, the Company formed eLinux.com as a wholly-owned
subsidiary to focus on products and services directed to the Linux community.
In 2000, the Company operated in three reportable business segments: 1) a
direct marketer of personal computers, hardware, software, peripheral products
and consumer electronics under the PCMall, MacMall, and CCIT brands,
collectively referred to as the "Core Business"; 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 brand. For segment information relating to
net sales, gross profit and operating income, see Note 10 to the Company's
financial statements included herein.
Strategy
The Company's strategy is to be a leading high-volume, cost-effective rapid
response direct marketer of a broad range of computers, software and related
products, focusing on supplying technology solutions to businesses, governmental
and educational institutions, and individual customers. Specific elements of
the Company's operating strategy include:
Continued Expansion into Outbound Telemarketing. During 2000, the Company
continued to intensify its outbound telemarketing efforts to focus on the under-
served small and medium-size business market. The Company believes this market
represents a high potential growth opportunity. Outbound business-to-business
sales can also be more profitable than inbound sales due to reduced advertising
and higher average order size. The Company's strategy is to expand its outbound
sales executive workforce and mine its catalog customer database and purchased
name lists for prospects. During 2000, the Company continued to hire
experienced outbound telemarketing executives to manage this initiative, and
hire experienced outbound telemarketing recruiters to expand the outbound sales
executive workforce. The Company also focuses on the development of its
telemarketing executives with its comprehensive training program. The Company
expects to continue to invest in outbound telemarketing and prospect its
3
catalog database for sales leads.
Focus on the Windows/Intel (WINTEL) Market. The Company launched its first
PC catalog, PC Mall, primarily for WINTEL customers, in May 1995. The Company
published seven editions of PC Mall with a total circulation of 11.1 million
copies in 1995. During 2000, there were 14 editions of PC Mall.com, 6 editions
of PC Mall Business Solutions, and 6 editions of ComputAbility's catalog
published. Total circulation for these three catalogs combined was 19.7 million
in 2000. By the end of 2000, the Company consolidated the three WINTEL catalogs
into one catalog under the PC Mall name to maximize brand promotion. Total
WINTEL revenues were $498 million, a 21% or $88 million increase over 1999
WINTEL revenue of $410 million.
The Company is authorized or otherwise has the ability to sell IBM, Compaq,
Hewlett-Packard, Sony, Toshiba and other name brand computers. The Company
became one of the leading catalog resellers of WINTEL products since the start
of its WINTEL initiative in 1995.
Continued Macintosh Marketshare Expansion. Throughout 2000, the Company
continued to be a leading direct marketer of Macintosh products, offering the
full line of Apple and related products. The Company's sales of Mac-related
products in 2000 was $320 million, flat compared to $322 million in 1999.
During 2000, the Company published 14 editions of its MacMall catalog with a
circulation of 29.5 million copies, a 6% decrease from the prior year's 31.5
million circulation and an l1% decrease from the 33.0 million copies circulated
in 1998. Although total catalog circulation has decreased, revenues per catalog
have increased.
Penetration of the Linux Market. In February 2000, the Company launched its
newest venture, eLinux, focusing on providing technology solutions to Linux
users. Linux is an open source operating software gaining rapid acceptance
within the IT community and is used extensively to run network servers. eLinux
offers complete multi-vendor Linux solutions, including Linux compatible
products, consulting and support services, and community. eLinux.com serves the
rapidly growing Linux community by providing multi-vendor Linux solutions and
custom configurations of Linux-based systems and compatible products through its
secure web site.
Marketing Database Growth. The Company has compiled a proprietary mailing
list of over six million names of previous and potential customers. The
database is continually analyzed to target customer types and increase response
and purchase rates. The Company's response rate (calculated by dividing the
number of orders generated by the number of catalogs distributed) for its
proprietary mailing list during 2000 was higher than its response rate for third
party mailing lists.
Increased Relationship-Based Selling. The Company's sales executives are
highly trained in relationship building with their customers and are
continuously coached to offer higher levels of service. The Company is
committed to relationship-based selling. Each sales executive is trained and
empowered to handle all customer needs including on-going customer service and
returns-related issues. Additionally, sales executives bring other expertise to
bear as needed from within the Company including Novell-trained Certified
Network Engineers (CNE), Microsoft Windows NT specialists (MCSE) and Apple-
certified technicians.
Leverage of Internet Leadership Position. The Company considers itself a
leader in Internet e-commerce innovation and intends to continue enhancing its
leadership position on the Internet. The Company was among the first to enter
the Internet auction space with its ubid.com web site. uBid completed a
successful initial public offering ("IPO") in December 1998, and the Company
subsequently distributed to its stockholders all of its remaining shares of uBid
in June 1999.
In March 1999, the Company launched the eCOST.com web site, which offers a
broad selection of name-brand products, most of which are sold at discount
prices. Customers are provided an itemized description of the fees associated
with processing their orders, including a handling fee to cover warehousing,
order processing, systems and overhead costs, and a shipping fee. With the
introduction of eCOST.com, the Company believes that it was among the first
full-spectrum Internet resellers in the
4
personal computing marketplace, offering customers many different ways to
purchase computer hardware, software, peripherals and consumer electronics.
Marketing and Sales
The Company designs its various marketing programs to attract new customers
and to stimulate additional purchases by previous customers. The Company
continuously attracts new customers by producing leads from existing and
purchased databases, employing outbound telemarketing sales techniques to
establish relationships with businesses, selectively mailing catalogs to
prospective customers and through advertising on the Internet and in major
computer user magazines, such as PC World, PC Computing, Computer Shopper,
MacWorld and others. In addition, the Company obtains the names of prospective
customers through selected mailing lists acquired from various sources,
including manufacturers, suppliers and computer magazine publishers. The
Company sells its products to business, government and educational institutions
as well as individual consumers.
Outbound and Inbound Telemarketing. The Company believes that much of its
success has come from the quality and training of its telemarketing sales
executives. These sales executives are responsible for assisting customers in
purchasing decisions, answering product pricing and availability questions and
processing product orders. Telemarketing sales executives have the authority to
vary prices within specified parameters in order to meet prices of competitors.
In addition to product training, the sales executives are trained in systems and
networking solutions, sales techniques, phone etiquette and customer service.
Telemarketing sales executives attend frequent training sessions to stay up-to-
date on new products. Sales executives staff the Company's toll-free order
lines 24 hours a day, seven days a week. Customer service and technical support
personnel assist inbound and outbound telemarketing sales executives.
The Company's phone and computer systems are used for order entry, customer
tracking and inventory management. The computer system maintains a database
listing previous customer purchases, which allows telemarketing sales executives
to make product suggestions that fit each customer's specific buying preferences
and to offer the latest upgrades for products previously purchased from the
Company. During 2000, the Company shipped approximately 687,000 telemarketing
orders with an average order size of $837.
Catalogs. The Company published 26 editions of its PC Mall Business
Solutions, PC Mall.com, and ComputAbility catalogs during 2000 and distributed
approximately 19.7 million catalogs. PC Mall customers receive a catalog
several times a year depending on purchasing history. In addition, the Company
includes a catalog with every order shipped, as well as special promotional
flyers and manufacturers' product brochures.
The Company published 14 editions of MacMall in 2000 and distributed
approximately 29.5 million catalogs. Active MacMall customers receive a catalog
several times a year depending upon purchasing history, and the Company includes
a catalog with every order shipped, as well as special promotional flyers and
manufacturers' product brochures.
The Company creates all of its catalogs in-house with its own design team and
production artists using a computer-based desktop publishing system. The in-
house preparation of the catalogs streamlines the production process, provides
greater flexibility and creativity in catalog production, and results in
significant cost savings over outside production.
The Internet. The Company maintains five worldwide web sites on the Internet,
including pcmall.com, macmall.com, ccit-inc.com, eCOST.com and eLinux.com. The
Company offers many advanced Internet features such as on-line ordering, access
to inventory availability and a large product selection with detailed product
information. Sales generated through the Internet have grown rapidly for the
Company as it offers its customers a convenient means of shopping and ordering
its products. In addition, the Company's web sites also serve as another source
of new customers. In 2000, the Company shipped approximately 390,000 Internet
orders, with an average order size of $533.
5
Vendor Supported Marketing. The Company currently has a marketing team that
sells advertising space in the Company's catalogs, advertising on the Company's
Internet sites and vendor supported outbound marketing campaigns. These
advertising sales generate revenues which offset a substantial portion of the
expense of publishing and distributing the catalogs. The same marketing team
develops marketing campaigns to maximize product sales.
National Off-Page Advertising. The Company continuously attracts new catalog
customers and generates orders through large multi-page color advertisements in
major publications such as PC World, PC Magazine, Computer Shopper and MacWorld.
During 2000, the Company purchased 271 pages of magazine advertising.
Corporate Sales. The specific needs of corporate buyers are fulfilled through
a combination of inbound and outbound full-time sales personnel as well as a
direct sales force through its CCIT subsidiary. The Company's sales staff
builds long-term relationships with corporate customers through regular phone
contact and personalized service. Corporate customers may choose from several
purchase or lease options for financing product purchases, and the Company
extends credit terms to certain corporate customers.
Customer Return Policy. The Company offers a 30-day return policy on a
number of its products subject to vendor terms and conditions. Returns are
monitored to identify trends in product acceptance and defects, to enhance
customer satisfaction and to reduce overall returns.
Products and Merchandising
The Company offers hardware, software, peripherals, components and accessories
for users of computer products, as well as electronics equipment. The Company
screens new products and selects products for inclusion in its catalogs and web
sites based on features, quality, sales trends, price, margins,
cooperative/market development funds and warranties. The Company offers its
customers other value-added services, such as the ability to purchase systems
that have been specifically configured to meet the customer's requirements.
Through frequent mailings of its catalogs and e-mails to its customers, the
Company is able to quickly introduce new products and replace slower selling
products with new products.
The following table sets forth the Company's net sales by major product
category as a percentage of total net sales for the periods presented.
Year Ended December 31
--------------------------------------------------
1998 1999 2000
---- ---- ----
Computer systems....................... 42.2% 43.9% 44.3%
Peripherals, components 45.4 44.0 42.0
and accessories.....................
Software............................... 10.7 9.8 9.0
Other (1).............................. 1.7 2.3 4.7
Total............................. 100.0% 100.0% 100.0%
(1) Other consists primarily of other electronic products, income from labor
charges and sales of extended warranties.
Computer Systems. In connection with the Company's expansion into the WINTEL
market, the Company has obtained catalog sales authorizations or otherwise has
the ability to sell WINTEL products from the major WINTEL-platform hardware
manufacturers, including IBM, Compaq, Hewlett-Packard, Sony, Toshiba and others.
The Company is also authorized to sell the full line of Apple hardware.
6
Peripherals, Components and Accessories. The Company offers a large selection
of peripheral and component products from manufacturers such as Apple, Hewlett-
Packard, Sony, Epson, 3Com, US Robotics, IBM, Iomega and Compaq. Peripherals
and components include printers, modems, monitors, data storage devices, add-on
circuit boards, connectivity products and communications products. The
accessories offered by the Company include a broad range of computer-related
items and supplies such as diskettes, cables and connectors.
Software. The Company sells a wide variety of software packages in the
business and personal productivity, utility, language, educational and
entertainment categories, including word processing, spreadsheet and database
software. The Company offers a large number of software programs and licenses
from established vendors, such as Microsoft, Corel, Adobe, Symantec, Quark,
Lotus, Macromedia and Intuit as well as numerous specialty products from new and
emerging vendors. The Company also markets upgrades from certain vendors, such
as Symantec, Corel, Lotus and Microsoft, which the Company believes offer
incremental revenue opportunities.
Purchasing and Inventory
The Company believes that effective purchasing is a key element of its
business strategy to provide name brand computer products and related software
and peripherals at competitive prices. The Company believes that its high
volume of sales results in increased purchasing power with its primary
suppliers, resulting in volume discounts, favorable product return policies and
vendor promotional allowances. During 2000, the Company purchased products from
over 579 vendors. During 1998, 1999 and 2000, products manufactured by Apple
represented approximately 20.0%, 25.4% and 24.9% of net sales, respectively.
The Company is also linked electronically with eleven distributors, which allows
account executives to view distributor product availability on line and drop-
ship product directly to their customers. The benefits of this program, known
as virtual warehouse, include reduced inventory carrying costs and improved
inventory turns. The Company intends to expand its use of virtual warehouse in
the future.
Most key vendors have agreements to provide market development funds to the
Company, whereby such vendors fund portions of the cost of catalog publication
and distribution based upon the amount of coverage given in the catalogs for
their products. Termination or interruption of the Company's relationships with
its vendors, or modification of the terms of or discontinuance of the Company's
agreements with its vendors, could adversely affect the Company's operating
results. The Company's success is dependent in part upon the ability of its
vendors to develop and market products that meet the changing requirements of
the marketplace. As is customary in the industry, the Company has no long-term
supply contracts with any of its vendors. Substantially all of the Company's
contracts with its vendors are terminable upon 30 days' notice or less.
The Company attempts to manage its inventory position to generate the highest
levels of customer satisfaction possible while limiting inventory risk. The
Company believes that it has increased its ability to provide constrained
products, which it believes is an important competitive advantage; and the
Company invested in this strategy heavily during 2000. The Company's average
annual inventory turns were 13.5 times in 1998, 16.4 times in 1999 and 19.8
times in 2000. Inventory levels may vary from period to period, due in part to
increases or decreases in sales levels, the Company's practice of making large-
volume purchases when it deems the terms of such purchases to be attractive and
the addition of new manufacturers and products. The Company has negotiated
agreements with many of its vendors that contain price protection provisions
intended to reduce the Company's risk of loss due to manufacturer price
reductions. The Company currently has such rights with respect to products
which it purchases from Apple, IBM, Compaq, Hewlett Packard and certain other
vendors; however, such rights vary by product line, have other conditions and
limitations and can be terminated or changed at any time.
The market for computers, computer products, peripherals, software and
electronics is characterized by rapid technological change and a growing
diversity of products. The Company's success depends in large part on its
ability to identify and obtain the right to market products that will meet the
changing requirements of the marketplace and to obtain sufficient quantities of
product to meet changing demands.
7
There can be no assurance that the Company will be able to identify and offer
products necessary to remain competitive or avoid losses related to excess or
obsolete inventory.
Distribution
The Company operates a full-service 325,000 square foot distribution center in
Memphis, Tennessee. The centralized distribution operations, strategically
located near the Federal Express hub in Memphis, allow most orders of in-stock
products accepted by 10:00 p.m. Eastern Standard Time to be shipped for delivery
by 10:30 a.m. the following day via Federal Express. Upon request, orders may
also be shipped at a lower cost by United Parcel Ground Service. As of December
31, 2000, the Company subleases 175,600 square feet of the Company's 325,000
square foot facility to uBid, Inc. under two sublease agreements. The first
sublease agreement covers 105,600 square feet, and is co-terminus with the
building lease. The remaining 70,000 square feet is covered in a sublease
agreement expiring in 2001.
When an order is entered into the system, an automated credit check or credit
card verification is performed and, if approved, the order is electronically
transmitted to the warehouse area, and a packing slip is printed for order
fulfillment. Orders fulfilled by certain distributors linked electronically
with the Company are transmitted directly to their warehouses. All inventory
items are bar coded and located in computer-designated areas which are easily
identified on the packing slip. All orders are checked with bar code scanners
prior to final packing to ensure that each order is packed correctly.
The Company believes that its existing distribution facilities are currently
adequate for its needs.
Management Information Systems
The Company has committed significant resources to the development of a
sophisticated computer system which is used to manage all aspects of its
business. The Company's computer system supports telemarketing, marketing,
purchasing, accounting, customer service, warehousing and distribution, and
facilitates the preparation of daily operating control reports which provide
concise and timely information regarding key aspects of its business. The
system allows the Company to, among other things, monitor sales trends, make
informed purchasing decisions and provide product availability and order status
information. In addition to the main computer system, the Company has a system
of networked personal computers, which facilitates data sharing. The Company
also applies its management information systems to the task of managing its
inventory. The Company currently operates its management information system
using a Hewlett Packard HP3000 Enterprise System and has a back-up system
available in the event of a system failure. The Company believes that in order
to remain competitive it will be necessary to upgrade its management information
systems on a continuing basis.
The Company's success is in part dependent on the accuracy and proper
utilization of its management information systems and its telephone system. In
addition to the costs associated with system upgrades, the transition to and
implementation of new or upgraded hardware or software systems can result in
system delays or failures. Any interruption, corruption, degradation or failure
of the Company's management information systems or telephone system could impact
its ability to receive and process customer orders on a timely basis.
Retail Computer Showrooms
During the first quarter of 1998, the Company closed seven retail showrooms to
focus its efforts on its business-to-business and Internet channels of
distribution. The Company recorded a one-time pretax restructuring charge of
$10.5 million relating to exit costs associated with the closing of retail
operations. Recorded in selling, general and administrative costs were $3.1
million of goodwill write-offs, $1.9 million of fixed asset write-offs, $1.5
million of reserves for lease exit costs, and $0.3 million of employee-related
severance costs. Recorded as cost of sales were $3.7 million of reserves for
store inventory. The Company currently operates one retail computer showroom,
located in Santa Monica, California.
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Competition
The retail business for personal computers and related products is highly
competitive. The Company competes with other direct marketers, including
MicroWarehouse, CDW, Multiple Zones, Insight Direct, PC Connection and Global
Direct. The Company also competes with Internet retailers such as buy.com,
egghead.com and beyond.com. In addition, the Company competes with computer
retail stores and resellers including superstores such as CompUSA and Best Buy,
corporate resellers such as Compucom, Entex and Inacom, certain hardware and
software vendors such as Gateway and Dell Computer which sell directly to end
users, and other direct marketers of hardware, software and computer-related
products. Barriers to entry are relatively low in the direct marketing industry
and the risk of new competitors entering the market is high. The market in
which the Company's retail showroom operates is also highly competitive.
The manner in which personal computers, software and related products are
distributed and sold is changing, and new methods of sales and distribution have
emerged, such as the Internet. Technology now allows software vendors the
ability to sell and download programs directly to consumers, if so desired. In
addition, in recent years the industry has generated a number of new, cost-
effective channels of distribution such as computer superstores, consumer
electronic and office supply superstores, national direct marketers and mass
merchants. Computer resellers are consolidating operations and acquiring or
merging with other resellers to achieve economies of scale and increased
efficiency. In addition, traditional retailers have entered and may increase
their penetration into the direct mail channel. The current industry
reconfiguration and the trend toward consolidation could cause the industry to
become even more competitive, further increase pricing pressures and make it
more difficult for the Company to maintain its operating margins or to increase
or maintain the same level of net sales or gross profit.
Although many of the Company's competitors have greater financial resources
than the Company, the Company believes that its ability to offer the consumer a
wide selection of products, at competitive prices, with prompt delivery and a
high level of customer service, and its good relationships with its vendors and
suppliers, allow it to compete effectively. There can be no assurance that the
Company can continue to compete effectively against existing or new competitors
that may enter the market. The Company believes that competition may increase
in the future, which could require the Company to reduce prices, increase
advertising expenditures or take other actions which may have an adverse effect
on the Company's operating results.
Employees
As of December 31, 2000, the Company had 897 full-time employees, including
112 people at the Company's distribution center. The Company emphasizes the
recruiting and training of high quality personnel and, to the extent practical,
promotes people to positions of increased responsibility from within the
Company. Each employee initially receives training appropriate for his or her
position, followed by varying levels of training in computer technology,
communication and leadership. New account executives participate in an
intensive six-week training program, during which time they are introduced to
the Company's philosophy, available resources, products and services, as well as
basic and advanced sales skills. Training for specific product lines and
continuing education programs for all employees are conducted on an ongoing
basis, supplemented by vendor-sponsored training programs for all sales
executives and technical support personnel.
The Company's employees are generally compensated on a basis that rewards
performance and the achievement of identified goals. For example, sales
executives receive compensation pursuant to a commission schedule which is based
primarily upon aggregate sales, gross profit dollars and gross profit percentage
generated from their sales efforts. The Company believes that these incentives
positively impact its performance and operating results.
The Company considers its employee relations to be good. None of the
Company's employees is represented by a labor union, and the Company has
experienced no work stoppages.
9
Since its formation, the Company has experienced rapid growth. As a result of
this growth, the Company has added a significant number of employees and has
been required to expend considerable effort in training these new employees.
Properties
The Company's facilities at December 31, 2000 were as follows:
Description Sq. Ft. Location
- ----------- ----------- -----------------------
IdeaMall Corporate Headquarters...................... 143,532 Torrance, CA
Distribution Center.................................. 325,000 Memphis, TN
CCIT Corporate Headquarters.......................... 25,840 Elk Grove Village, IL
Wisconsin Sales Office............................... 35,503 Milwaukee, WI
Kansas Property...................................... 32,800 Lenexa, KS
Wisconsin Administration............................. 15,000 Milwaukee, WI
Wisconsin Sales Office............................... 12,500 Milwaukee, WI
Retail Showroom...................................... 9,750 Santa Monica, CA
CCIT Colorado Corporate Sales........................ 2,315 Englewood, CO
The Company leases all of its facilities, except for the following: the Santa
Monica retail showroom and the Lenexa property, each of which is owned by the
Company, and the Wisconsin Administration Office, which was sold in March 2001.
The Company's distribution center serves the Company's core business, eCOST.com
and eLinux operations, as well as its retail showroom, and includes shipping,
receiving, warehousing and administrative space. The Company subleases 175,600
square feet of its distribution center to uBid Inc. The following leases have
remaining terms greater than two years: CCIT corporate headquarters, and CCIT
Colorado Corporate Sales Office. All of the other leases have remaining terms
less than two years.
During the first quarter of 1998, the Company closed all of its retail
showrooms except for its Santa Monica showroom. The Company recorded a one-time
$1.5 million reserve for lease exit costs during the first quarter of 1998. The
Company intends to sell its Lenexa, Kansas building.
In February 2000, the Company signed an agreement to lease 35,503 square feet
in Milwaukee, Wisconsin to support the expansion of the Wisconsin sales force.
This lease will replace the existing Wisconsin Sales Office lease and the
Wisconsin Administration Office, which was sold in March 2001.
Regulatory and Legal Matters
The direct response business as conducted by the Company is subject to the
Merchandise Mail Order Rule and related regulations promulgated by the Federal
Trade Commission and laws or regulations directly applicable to access to or
commerce on the Internet. While the Company believes it is currently in
compliance with such laws and regulations and has implemented programs and
systems to address its ongoing compliance with such regulations, no assurances
can be given that new laws or regulations will not be enacted or adopted which
might adversely affect the Company's operations. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet. The growth and
development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any additional
laws or regulations may decrease the growth of the Internet, which, in turn,
could decrease the demand for and growth of the Company's Internet-based sales.
10
Based upon current law, the Company, or various subsidiaries, currently
collects and remits sales tax only on sales of its products to residents of the
states in which the Company or its respective subsidiaries has a physical
presence. Various state taxing authorities have sought to impose on direct
marketers with no physical presence in the taxing state the burden of collecting
state sales and use taxes on the sale of products shipped to those states'
residents, and it is possible that such a requirement could be imposed in the
future. In addition, a number of bills are pending before federal and state
legislatures that would potentially expand the tax collection responsibility of
internet-related companies. Until these legislative efforts have run their
course and the courts have considered and resolved some cases involving these
tax collection issues, there can be no assurance that future laws imposing taxes
or other regulations on commerce over the Internet would not substantially
impair the growth of e-commerce and as a result have a material adverse effect
on the Company's business, results of operations and financial condition.
11
Executive Officers
The executive officers of the Company as of March 30, 2001 and their
respective ages and positions are as follows:
Name Age Position
---- --- --------
Frank F. Khulusi........... 34 Chairman of the Board, President and Chief Executive Officer
Theodore R. Sanders........ 46 Chief Financial Officer
Daniel J. DeVries.......... 39 Executive Vice President - Marketing and Sales
The following is a biographical summary of the experience of the executive
officers:
Frank F. Khulusi is a co-founder of the Company and has served as Chairman of
the Board and Chief Executive Officer of the Company since the Company's
inception in 1987, served as President until July 1999 and resumed the office of
President in March 2001. Mr. Khulusi attended attended the University of
Southern California.
Theodore R. Sanders has served as Chief Financial Officer since September
1998 and was Vice President - Controller of the Company from May 1997 to
September 1998. Prior to joining the Company, Mr. Sanders spent ten years with
the Pittston Company in various senior finance roles including Controller of its
Burlington Air Express Global division and Director of Internal Audit. Mr.
Sanders started his career with Deloitte & Touche and rose to the position of
Manager. Mr. Sanders is a C.P.A. and received a B.S.B.A. degree from Nichols
College.
Daniel J. DeVries has served as Executive Vice President since February 1996
and was Senior Vice President from October 1994 to that time. Mr. DeVries is
responsible for all marketing, sales, purchasing and the retail showroom. Mr.
DeVries' marketing responsibilities include vendor co-op marketing,
merchandising, database marketing and Internet marketing. From April 1993 to
October 1994, he held various sales and marketing positions with the Company.
From July 1988 to April 1993, Mr. DeVries was a Regional Manager for Sun
Computers, a computer retailer.
CERTAIN FACTORS AFFECTING FUTURE RESULTS
This Annual Report on Form 10-K, including the sections entitled "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other sections of this Report, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. Words such as "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "may," "will," "should,"
"seeks" and variations of such words and similar expressions are intended to
identify such forward-looking statements. The Company intends such forward-
looking statements to be covered by the safe harbor provisions for forward-
looking statements contained in the Private Securities Litigation Reform Act of
1995, and the Company is including this statement for purposes of complying with
these safe harbor provisions. The Company has based these forward-looking
statements on its current expectations and projections about future events.
These
12
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions, and actual results could differ
materially as a result of several factors, including those set forth under this
section entitled "Certain Factors Affecting Future Results" and elsewhere
herein. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
(1) The loss of a key vendor or decline in demand for products of a key
vendor, such as Apple, may reduce sales and adversely affect operating
results.
(2) Intense competition may lead to reduced prices and lower gross
margins.
(3) The Company's narrow margins magnify the impact on operating results
of variations in operating performance. A number of factors may reduce
the Company's margins even further.
(4) Seasonal variations in the demand for products and services, as well
as the introduction of new products, may cause variations in the
Company's quarterly results.
(5) The availability (or lack thereof) of capital on acceptable terms may
hamper the Company in its efforts to fund its increasing working
capital needs.
(6) The failure of the Company to adequately manage its growth, including
the integration of acquired companies, may adversely impact the
Company's results of operations.
(7) A failure of the Company's information systems may adversely impact
the Company's results of operations.
(8) The loss of a key executive officer or other key employee may
adversely impact the Company's operations.
(9) The inability of the Company to obtain products on favorable terms may
adversely impact the Company's results of operations.
(10) The Company's operations may be adversely impacted by an acquisition
that is either (i) not suited for the Company or (ii) improperly
executed.
(11) The Company's financial condition may be adversely impacted by a
decline in value of a portion of the Company's inventory.
(12) The failure of certain shipping companies to deliver product to the
Company, or from the Company to its customers, may adversely impact
the Company's results of operations.
(13) The failure of the Company to respond adequately to changes in
consumer preferences, such as the use of the Internet for purchasing,
may adversely affect the Company's business and results of operations.
(14) Rapid technological change may alter the market for the Company's
products and services, requiring the Company to anticipate such
technological changes, to the extent possible.
(15) The failure of the Company to attract and retain skilled personnel may
adversely affect the Company's business and results of operations.
It is not reasonably possible to itemize all of the many factors and specific
events that could affect the Company and/or the computer products and
electronics industry as a whole. However, the discussion below discusses in
more detail some of the foregoing factors, as well as additional factors which
may affect the Company's actual results and cause such results to differ
materially from those projected, forecasted, estimated, budgeted or otherwise
expressed in any "forward-looking statements."
13
The addition of a new business focus could subject the Company to risks commonly
associated with a new company.
The Company has historically operated as a direct marketer of computer
products, and has only recently expanded its business model to include a focus
on the business-to-business and Internet markets by developing its portfolio of
web site properties. The Company has only been active in this new line of
business since 1995 when the pcmall.com web site was launched. The Company
established uBid.com, an online auction web site in 1997, the ecost.com web site
in March 1999 and the eLinux.com web site in February 2000, and plans to
continue its focus on the business-to-business and Internet market in the
future. The Company does not have a significant operating history to evaluate
the new business focus, and past performance should not relied upon to predict
future performance. In adding a new business focus, the Company expects that it
will have to make changes to its business operations, sales and implementation
practices, customer service and support operations and management focus. The
Company also faces new risks and challenges, including a lack of meaningful
historical financial data upon which to plan future budgets, reliance on the
growth and use of the Internet to generate commercial opportunities, competition
from a wider range of sources, the need to develop strategic relationships and
other risks. The Company cannot guarantee that it will be able to successfully
transition to this new business focus.
Dependence on Apple
The Company is dependent on sales of Apple computers and software and
peripheral products used with Apple computers. Products manufactured by Apple
represented 20.0%, 25.4% and 24.9% of the Company's net sales in 1998, 1999 and
2000, respectively. A decline in sales of Apple computers or a decrease in
supply of or demand for software and peripheral products for such computers
could have a material adverse impact on the Company's business. During parts of
1999 and 2000, certain Apple computers were in short supply. A continuation of
such shortages or future shortages could adversely affect the Company's
operating results. The Company is an authorized dealer for the full retail line
of Apple products; however, the Company's dealer agreement with Apple is
terminable upon 30 days' notice. The Company's business would be adversely
affected if all or a portion of the line of Apple products was no longer
available to the Company. The Company's success is, in part, dependent upon the
ability of Apple to develop and market products that meet the changing
requirements of the marketplace. To the extent that these products are not
available to the Company, the Company could encounter increased price and other
competition, which would adversely affect the Company's business, financial
condition and results of operations.
Rapid Growth
Since its formation, the Company has experienced rapid growth. Net sales
have grown from $8.7 million in 1990 to $818.6 million in 2000. The Company's
catalog sales grew from $117.9 million in 1994 to $575.0 million in 2000.
Internet sales on its pcmall.com, macmall.com, computability.com, ecost.com and
ccit-inc.com web sites grew from $15.6 million in 1997 to $207.8 million in
2000. As a result of the Company's shift from the retail showroom to the
Internet sales and catalog distribution channels, retail showroom sales have
decreased from 28.0% of net sales in 1994 to 4.4% in 2000. During the first
quarter of 1998, the Company closed seven retail showrooms to focus its efforts
on its catalog, corporate and Internet channels of distribution. The Company
recorded a one-time pretax restructuring charge of $10.5 million in the first
quarter of 1998 relating to exit costs, asset write-offs, other charges and
related goodwill. In response to the growth in catalog sales, the Company has
rapidly added a significant number of employees and has been required to expend
considerable efforts in training these new employees. This growth has placed
strains on the Company's management, resources and facilities. As part of its
growth strategy, the Company acquired Elek-Tek and ComputAbility in 1997 and
may, in the future, acquire other companies in the same or complementary lines
of business. These acquisitions and any such acquisition and the ensuing
integration of the operations of the acquired company with those of the Company
place additional demands on the Company's management, operating and financial
resources. The Company's success will, in part, be dependent upon the ability
of the Company to manage growth effectively. In addition, the Company's
business and growth could be affected by the spending patterns of existing or
prospective customers, the cyclical nature of capital expenditures of
businesses, continued
14
competition and pricing pressures, changes in the rate of development of new
technologies and new products by manufacturers, acceptance by end-users and
other trends in the general economy. There can be no assurance that the
Company's historical growth rates will continue in the future.
In connection with the Company's expansion into the WINTEL market, the
Company has obtained catalog sales authorizations or otherwise has the ability
to sell WINTEL products from certain major hardware manufacturers, including
IBM, Compaq, Hewlett-Packard, Sony, Toshiba, and others. Many of its current
vendors of peripherals, components, accessories and software also offer WINTEL
products. While the Company has been successful to date in becoming a major
catalog reseller of WINTEL products, no assurances can be given that the Company
will be able to maintain that position.
Competition
The retail business for personal computers, electronics and related products
is highly competitive, based primarily on price, product availability, speed and
accuracy of delivery, effectiveness of sales and marketing programs, credit
availability, ability to tailor specific solutions to customer needs, quality
and breadth of product lines and services, and availability of technical or
product information. The Company competes with other direct marketers,
including MicroWarehouse, CDW, Multiple Zones, Insight Direct, PC Connection and
Global Direct. The Company also competes with Internet retailers such as
buy.com, egghead.com and beyond.com. In addition, the Company competes with
computer retail stores and resellers, including superstores, such as CompUSA,
Best Buy, corporate resellers such as Compucom, Entex and Inacom, certain
hardware and software vendors, such as Gateway and Dell Computer, which sell
directly to end users, and other direct marketers of hardware, software and
computer-related products. In the direct marketing and Internet retail
industries, barriers to entry are relatively low and the risk of new competitors
entering the market is high. Certain existing competitors of the Company have
substantially greater financial resources than the Company. There can be no
assurance that the Company can continue to compete effectively against existing
competitors, consolidations of competitors or new competitors that may enter the
market. In addition, price is an important competitive factor in the personal
computer hardware, software and peripherals market and the market for
electronics products, and there can be no assurance that the Company will not be
subject to increased price competition, which may have an adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not lose market share or that it will not be
forced in the future to reduce its prices in response to the actions of its
competitors and thereby experience a further reduction in its gross margins.
Narrow Operating Margins
As a result of intense price competition in the computer products and
electronics industry, the Company's margins have historically been narrow and
are expected to continue to be narrow. These narrow margins magnify the impact
on operating results of variations in operating costs and of adverse or
unforeseen events.
Potential Quarterly Fluctuations
The Company experiences variability in its net sales and net income on a
quarterly basis as a result of many factors. These factors include the
frequency of catalog mailings, introduction or discontinuation of new catalogs,
the introduction of new products or services by the Company and its competitors,
changes in prices from suppliers, the loss or consolidation of a significant
supplier or customer, general competitive conditions including pricing, the
Company's ability to control costs, the timing of capital expenditures, the
condition of the personal computer industry and electronics in general, seasonal
shifts in demand for computer and electronics products, industry announcements
and market acceptance of new products or upgrades, deferral of customer orders
in anticipation of new product applications, product enhancements or operating
systems, the relative mix of products sold during the period, inability of the
Company to obtain adequate quantities of products carried in its catalogs,
delays in the release by suppliers of new products and inventory adjustments and
expenditures by the Company on new business ventures. The Company's planned
operating expenditures each quarter are based on sales forecasts for the
quarter. If sales do not meet expectations in any given quarter, operating
results for the quarter may be materially
15
adversely affected. The Company's narrow margins may magnify the impact of these
factors on the Company's operating results. The Company believes that period-to-
period comparisons of its operating results should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not necessarily indicative of results to be expected for a full
fiscal year. In certain future quarters, the Company's operating results may be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's Common Stock could be materially adversely
affected.
Dependence on Vendors
The Company purchases all of its products from vendors. Certain key vendors,
including IBM, Hewlett Packard, Compaq and Apple, provide the Company with trade
credit as well as substantial incentives in the form of discounts, credits and
cooperative advertising. Most key vendors have agreements to provide, or
otherwise have consistently provided, market development funds to the Company,
whereby such vendors finance portions of the cost of catalog publication and
distribution based upon the amount of coverage given in the catalogs to their
respective products. Termination or interruption of the Company's relationships
with one or more of these vendors, including Apple, or modification of the terms
or discontinuance of the agreements with these vendors, could adversely affect
the Company's operating income and cash flow. The Company's success is
dependent in part upon the ability of its vendors to develop and market products
that meet the changing requirements of the marketplace. Substantially all of
the Company's contracts with its vendors are terminable upon 30 days' notice or
less. In most cases, the Company has no guaranteed price or delivery
arrangements with its suppliers. As a result, the Company has experienced and
may in the future experience short-term inventory shortages on certain products.
In addition, manufacturers who currently sell their products through the Company
may decide to sell their products directly or through resellers or channels
other than the Company. Further, the personal computer industry experiences
significant product supply shortages and customer order backlogs from time to
time due to the inability of certain manufacturers to supply certain products as
needed. There can be no assurance that suppliers will be able to maintain an
adequate supply of products to fulfill the Company's customers' orders on a
timely basis or that the Company will be able to obtain particular products or
that a product line currently offered by suppliers will continue to be
available. Similarly, there can be no assurance that the Company will be able
to obtain authorizations from new vendors which may introduce new products that
create market demand.
Business Interruption; Facilities
The Company believes that its success to date has been, and future results of
operations will be, dependent in large part upon its ability to provide prompt
and efficient service to its customers. The Company has taken several
precautionary steps to help minimize the impact of disasters that might cause
business interruptions. There can be no assurance that a disruption will not
occur; however, any disruption of the Company's day-to-day operations including
those caused by natural disasters could have a material adverse effect upon the
Company and any interruption, corruption, degradation or failure of the
Company's management information systems, distribution center, web site or
telephone system could impair its ability to receive and process customer orders
and ship products on a timely basis. The Company does not have a redundant
telephone system and does not have a backup or redundant call center.
Changing Methods of Distribution
The manner in which computer and electronics products are distributed and
sold is changing, and new methods of sale and distribution, such as the
Internet, have emerged. Computer hardware and software vendors have sold, and
may intensify their efforts to sell, their products directly to end users. From
time to time, certain vendors have instituted programs for the direct sale of
large quantities of hardware and software to certain major corporate accounts.
These types of programs may continue to be developed and used by various
vendors. Vendors also may attempt to increase the volume of software products
distributed electronically to end users' personal computers. Any of these
competitive programs, if successful, could have a material adverse effect on the
Company's business, financial condition and results of operations.
16
Dependence on Independent Shipping Companies
The Company relies almost entirely on arrangements with independent shipping
companies, especially Federal Express and UPS, for the delivery of its products.
The disruption or termination of the Company's arrangements with Federal
Express, UPS or other shipping companies, or the failure or inability of one or
more shipping companies to deliver products from the Company to its customers,
or from suppliers to the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Postage, Shipping and Paper Costs
Postage and shipping are significant expenses in the operation of the
Company's business. The Company ships its products to customers by overnight
delivery and ground delivery services and generally mails its catalogs through
the U.S. Postal Service. Any increases in postal or shipping rates in the
future could have a material adverse effect on the business, financial condition
and results of operations. The cost of paper is also a significant expense of
the Company in printing its catalogs. The cost of paper has fluctuated
significantly over the last several years. While the Company believes that it
may be able to recoup a portion of any increased postage and paper costs through
increases in vendor advertising rates, no assurance can be given that such
advertising rate increases can be sustained or that they will offset all of the
increased costs.
Risk of Technological Changes and Inventory Obsolescence
The market for personal computers, peripherals, software and electronics
products is characterized by rapid technological change and a growing diversity
of products. The Company's success depends in large part on its ability to
identify and obtain the right to market products that will meet the changing
requirements of the marketplace. There can be no assurance that the Company
will be able to identify and offer products necessary to remain competitive or
avoid losses related to excess and obsolete inventory. The Company currently
has limited return rights with respect to products which it purchases from
Apple, IBM, Compaq, Hewlett Packard and certain other vendors; however, such
rights vary by product line, have other conditions and limitations and can be
terminated or changed at any time.
State Sales Tax Collection
Based upon current law, the Company, or various subsidiaries, currently
collects and remits sales tax only on sales of its products to residents of the
states in which the Company or its respective subsidiaries has a physical
presence. The U.S. Supreme Court has ruled that the various states, absent
Congressional legislation, may not impose tax collection obligations on an out-
of-state mail order company whose only contacts with the taxing state are
distribution of catalogs and other advertisement materials through the mail, and
whose subsequent delivery of purchased goods is by mail or interstate common
carriers. Certain court cases have upheld tax collection obligations on
companies, including mail order companies, whose contacts with the taxing state
was quite limited (e.g., visiting the state several times a year to aid
customers or to inspect showrooms stocking their goods). The Company believes
its operations are different from the operations of the companies in these cases
and thus do not give rise to tax collection obligations.
However, the Company cannot predict the level of contact with any state
which would give rise to future or past tax collection obligations. The tax
treatment of the Internet and e-commerce is currently in a state of flux.
Various state taxing authorities have sought to impose on direct marketers with
no physical presence in the taxing state the burden of collecting state sales
and use taxes on the sale of products shipped to those states' residents, and it
is possible that such a
17
requirement could be imposed in the future. In addition, a number of bills are
pending before federal and state legislatures that would potentially expand the
tax collection responsibility of internet-related companies. It is possible that
federal legislation could be enacted that would permit states to impose sales
tax collection obligations on out-of-state mail order companies and if enacted,
the imposition of a tax collection obligation on the Company may result in
additional administrative expenses to the Company and price increases to its
customers that could adversely affect the Company's business, financial
condition and results of operations. States also potentially may expand tax
collection responsibilities of out-of-state companies through legislation. Until
these legislative efforts have run their course and the courts have considered
and resolved some cases involving tax collection issues, there can be no
assurance that future laws imposing taxes or other regulations on commerce over
the Internet would not substantially impair the growth of e-commerce and as a
result have a material adverse effect on the Company's business, results of
operations and financial condition.
Industry Evolution and Price Reductions
The personal computer industry is undergoing significant change. In
addition, in recent years a number of new, cost-effective channels of
distribution have developed in the industry, such as the Internet, computer
superstores, consumer electronic and office supply superstores, national direct
marketers and mass merchants. Computer resellers are consolidating operations
and acquiring or merging with other resellers and/or direct marketers to achieve
economies of scale and increased efficiency. The current industry
reconfiguration and the trend towards consolidation could cause the industry to
become even more competitive, further increase pricing pressures and make it
more difficult for the Company to maintain its operating margins or to increase
or maintain the same level of net sales or gross profit. Declining prices,
resulting in part from technological changes, may require the Company to sell a
greater number of products to achieve the same level of net sales and gross
profit. Such a trend could make it more difficult for the Company to continue
to increase its net sales and earnings growth. In addition, the personal
computer market has experienced rapid growth. If the growth rate of the
personal computer market were to decrease, the Company's business, financial
condition and operating results could be adversely affected.
Management Information Systems
The Company's success is in part dependent on the accuracy and proper
utilization of its management information systems, including its telephone
system. The Company's ability to analyze data derived from its management
information systems to increase product promotions, manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis and to maintain cost-efficient operations, are each
dependent upon the quality and utilization of the information generated by its
management information systems. During 1995, the Company significantly upgraded
its management information system hardware and software. The Company believes
that to remain competitive it will be necessary to upgrade its management
information systems on a continuing basis. In addition to the costs associated
with such upgrades, the transition to and implementation of new or upgraded
hardware or software systems can result in system delays or failures which could
impair the Company's ability to receive and process orders and ship products in
a timely manner. The Company does not currently have a redundant or back-up
telephone system, and any interruption in telephone service including those
caused by natural disasters could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Senior Management
The Company's future performance will depend to a significant extent upon the
efforts and abilities of certain key management personnel, including Frank
Khulusi, Chairman of the Board and Chief Executive Officer. The Company has a
$3 million key man life insurance policy on Mr. Khulusi. The loss of service of
one or more of the Company's key management personnel could have an adverse
effect on the Company's business. The Company's success and plans for future
growth will also depend in part on management's continuing ability to hire,
train and retain skilled personnel in all areas of its business.
Management of Growth
The rapid growth of the Company's business has required the Company to make
significant recent additions in personnel and has significantly increased the
Company's working capital requirements. Although the Company has experienced
significant sales growth in recent years, such growth should not be considered
indicative of future sales growth. Such growth has resulted in new and increased
responsibilities for management personnel and has placed and continues to place
significant strain upon the Company's management, operating and financial
systems, and other resources. There can be no assurance that this strain will
not have a material adverse effect on the Company's business, financial
condition, and results of operations, nor can there be any assurance that the
Company will be able to attract or retain sufficient personnel to continue the
expansion of its operations. Also crucial to the Company's success in managing
its growth will be its ability to achieve additional economies of scale. There
can be no assurance that the Company will be able to achieve such economies of
scale, and the failure to do so could have a material adverse effect upon the
Company's business, financial condition and results of operations.
18
Acquisitions
As part of its growth strategy, the Company acquired two marketers of
computers and computer-related products in 1997 and may continue to pursue
acquisitions of companies that would either complement or expand its existing
business. No assurance can be given that the benefits expected from the
integration of acquired companies will be realized. In addition, acquisitions
involve a number of risks and difficulties, including expansion into new
geographic markets and business areas, the diversion of management's attention
to the assimilation of the operations and personnel of the acquired company, the
integration of the acquired company's management information systems with those
of the Company, potential short-term adverse effects on the Company's operating
results and the amortization of acquired intangible assets. Any delays or
unexpected costs incurred in connection with the integration of acquired
operations could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to implement or sustain its acquisition strategy or
that its strategy will ultimately prove profitable for the Company.
Possible Volatility of Stock Price
The Company believes certain factors, such as sales of Common Stock into the
market by existing stockholders, fluctuations in quarterly operating results and
market conditions generally, including market conditions affecting stocks of
computer hardware and software manufacturers and resellers and companies in the
Internet and electronic commerce industries in particular, and other technology
or related stocks, could cause the market price of the Common Stock to fluctuate
substantially. The stock market in general, and the stocks of computer and
software resellers, and companies in the Internet and electronic commerce
industries in particular, and other technology or related stocks, have in the
past experienced extreme price and volume fluctuations which have been unrelated
to corporate operating performance. Such market volatility may adversely affect
the market price of the Common Stock.
The Company's common stock is presently authorized for quotation on the
Nasdaq National Market. Accordingly, the Company is subject to all requirements
of its listing agreement with Nasdaq. Among the events that could cause the
Company's common stock to have its status as a National Market security
terminated include the failure to maintain a minimum closing bid price for the
common stock of $1.00 per share, failure to timely hold annual meetings of
stockholders and failure to comply with other corporate governance requirements.
The Company's common stock has traded below the $1.00 minimum bid. If the
closing bid price of the Company's common were to remain below that level for 30
consecutive trading days, it could result in delisting or the need to complete a
reverse stock split. If the Company's common stock loses its Nasdaq National
Market status, it would trade either on the over-the-counter bulletin board or
in the "pink sheets," both of which are viewed by most investors as less
desirable, and less liquid, marketplaces. Moreover, the Company's common stock
may become subject to SEC "penny stock" regulations that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors. Consequently,
delisting from Nasdaq, if it were to occur, could materially and adversely
affect the ability of broker-dealers to sell the Company's common stock, which
would impair the liquidity of such securities and could adversely affect the
trading price for the Company's common stock. Loss of Nasdaq National Market
status would also adversely affect the Company's ability to raise funds through
the sale of equity securities and would complicate compliance with state blue-
sky laws.
Privacy Concerns
The Company mails catalogs and sends electronic messages to names in its
proprietary customer database and to potential customers whose names the Company
obtains from rented or exchanged mailing lists. Worldwide public concern
regarding personal privacy has subjected the rental and use of customer mailing
lists and other customer information to increased scrutiny. Any domestic or
foreign legislation enacted limiting or prohibiting these practices could
negatively affect the Company's business, financial condition and results of
operations.
19
Dependence on Continued Use of Internet
The Company's level of sales generated from its worldwide web sites has
increased in part because of the growing use and acceptance of the Internet by
end-users. The growth in Internet usage is a relatively recent development, and
no assurance can be made that the Internet will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the Internet
and other online services as a medium of commerce. Sales of computer products
over the Internet have increased as a percentage of the Company's net sales in
recent years. Continued growth of the Company's Internet sales is dependent on
potential customers using the Internet in addition to traditional means of
commerce to purchase products. The Company cannot accurately predict the rate at
which they will do so. If the use by consumers of the Internet to purchase
products does not continue, the Company's business, financial condition and
results of operations could be adversely affected.
The Company's success in maintaining and growing its Internet business will
depend in large part upon the development of an infrastructure for providing
Internet access and services. If the number of Internet users or their use of
Internet resources continues to grow rapidly, such growth may overwhelm the
existing Internet infrastructure. The Company's ability to increase the speed
with which it provides services to customers and to increase the scope of such
services ultimately is limited by and reliant upon the speed and reliability of
the networks operated by third parties. The Company cannot assure that networks
and infrastructure providing sufficient capacity and reliability will continue
to be developed.
ITEM 2. PROPERTIES
See "Properties" in Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings or claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to those actions will not materially affect the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2000.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National Market
since the Company's initial public offering on April 4, 1995 (the "IPO"). Prior
to the IPO, there was no public market for the Company's Common Stock. The
following table sets forth the range of high and low closing sales prices for
the Common Stock for the periods indicated, as reported by the Nasdaq National
Market.
Price Range of
Common Stock
------------------
High Low
--------- -------
Year Ended December 31, 1998
----------------------------
First Quarter.............. $ 12 7/8 7 5/16
Second Quarter............. 10 5 1/4
Third Quarter.............. 12 1/2 6
Fourth Quarter............. 59 11/16 5 1/4
Year Ended December 31, 1999
----------------------------
First Quarter.............. 43 1/4 25 1/8
Second Quarter............. 39 1/8 6 1/16
Third Quarter.............. 7 7/8 5 1/4
Fourth Quarter............. 11 5 3/4
Year Ended December 31, 2000
----------------------------
First Quarter.............. 14 1/16 7 1/8
Second Quarter............. 10 1/16 3 21/32
Third Quarter.............. 4 9/16 2 19/32
Fourth Quarter............. 3 1/8 17/32
On March 30, 2001, the closing price of the Company's Common Stock as
reported on the Nasdaq National Market was $1.25 per share. As of March 30,
2001, there were approximately 48 holders of record of the Common Stock.
On June 7, 1999, the Company distributed to its stockholders all of the 7.3
million shares of common stock of uBid, Inc. owned by the Company, representing
approximately 80.1% of the outstanding stock of uBid. Each of the holders of the
Company's common stock entitled to the distribution received approximately
.70488 shares of uBid common stock for each share of the Company's common stock
held by such stockholders on May 24, 1999. On June 8, 1999, the Company's Common
Stock traded ex-dividend to reflect the spin-off of uBid, and its closing price
on the Nasdaq National Market on that date was $8.6875.
The Company has never paid and has no present plans to pay any cash dividends
on its capital stock. The Company intends to retain its earnings to finance the
growth and development of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are qualified by reference
to, and should be read in conjunction with, the Company's Consolidated Financial
Statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein. The
selected income statement data for the years ended December 31, 1998, 1999 and
2000 and the selected balance sheet data as of December 31, 1999 and 2000 are
derived from the Company's audited consolidated financial statements, which are
included elsewhere herein. The selected income statement data for the years
ended December 31, 1996 and 1997 along with the balance sheet data
21
as of December 31, 1996, 1997 and 1998 are derived from the audited consolidated
financial statements of the Company which are not included herein. The selected
operating data are derived from the operating records of the Company and have
not been audited.
Year Ended December 31,
(in thousands, except per share data)
--------------------------------------------------------------------------
1996 1997(1) 1998(1) 1999(1) 2000(1)(3)
-------- -------- -------- -------- ----------
Net sales.................................... $444,971 $546,122 $642,006 $730,181 $818,627
Cost of goods sold........................... 395,000 476,053 568,309 650,630 730,794
Retail store closure inventory reserve....... - - 3,679 - -
-------- -------- -------- -------- ---------
Gross profit................................. 49,971 70,069 70,018 79,551 87,833
Selling, general and administrative expenses. 60,585 63,252 76,812 83,687 95,536
Expenses related to retail store closure..... - - 6,773 - -
-------- -------- -------- -------- ---------
Income (loss) from operations................ (10,614) 6,817 (13,567) (4,136) (7,703)
Interest income (expense).................... 593 144 (291) 245 (917)
-------- -------- -------- -------- ---------
Income (loss) before income taxes............ (10,021) 6,961 (13,858) (3,891) (8,620)
Income tax provision (benefit)............... (3,972) 2,642 (5,034) 812 -
-------- -------- -------- -------- ---------
Income (loss) from continuing operations..... (6,049) 4,319 (8,824) (4,703) (8,620)
Discontinued operations...................... - (194) (8,971) (6,240) -
Cumulative change in accounting principle.... - - - - (536)
-------- -------- -------- -------- ---------
Net income (loss)............................ $ (6,049) $ 4,125 $(17,795) $(10,943) $ (9,156)
======== ======== ======== ======== =========
Basic earnings (loss) per share (2)
Continuing operations...................... $ (0.62) $ 0.44 $ (0.87) $ (0.45) $ (0.83)
Discontinued operations.................... - (0.02) (0.88) (0.60) -
Cumulative effect of change in accounting
principle............................... - - - - (0.05)
-------- -------- -------- -------- ---------
$ (0.62) $ 0.42 $ (1.75) $ (1.05) $ (0.88)
======== ======== ======== ======== =========
Diluted earnings (loss) per share (2)
Continuing operations...................... $ (0.62) $ 0.43 $ (0.87) $ (0.45) $ (0.83)
Discontinued operations.................... - (0.02) (0.88) (0.60) -
Cumulative effect of change in accounting
principle............................... - - - - (0.05)
-------- -------- -------- -------- ---------
$ (0.62) $ 0.41 $ (1.75) $ (1.05) $ (0.88)
======== ======== ======== ======== =========
Pro Forma amounts assuming the accounting change
required by SAB 101 is applied retroactively (See
Note 1 of Notes to Consolidated Financial
Statements)
Income (loss) from continuing operations..... $ (6,018) $ 4,222 $ (8,928) $ (4,842) $ (8,620)
Net income (loss)............................ $ (6,018) $ 4,028 $(17,898) $(11,082) $ (8,620)
======== ======== ======== ======== =========
Basic earnings (loss) per share
Continuing operations.................. $ (0.62) $ 0.43 $ (0.88) $ (0.47) $ (0.83)
Net income (loss)...................... $ (0.62) $ 0.41 $ (1.76) $ (1.07) $ (0.83)
======== ======== ======== ======== =========
Diluted earnings (loss) per share
Continuing operations.................. $ (0.62) $ 0.42 $ (0.88) $ (0.47) $ (0.83)
Net income (loss)...................... $ (0.62) $ 0.40 $ (1.76) $ (1.07) $ (0.83)
======== ======== ======== ======== =========
Basic weighted average number of shares
outstanding (2)............................... 9,767 9,895 10,176 10,383 10,419
======== ======== ======== ======== =========
Diluted weighted average number of shares
outstanding (2)................................ 9,767 10,030 10,176 10,383 10,419
======== ======== ======== ======== =========
(1) Operating results in 1997, 1998 and 1999 reflect the effects of
acquisitions of ComputAbility, Ltd., and Elek-Tek, Inc. in August 1997 and
October 1997, respectively. Further, these results also reflect uBid's
results as discontinued operations. See Note 6 and Note 10 of Notes to
Consolidated Financial Statements.
(2) Earnings (loss) per share and weighted average shares outstanding have been
restated for all periods prior to 1998 to reflect the adoption of SFAS 128,
"Earnings per Share."
(3) Operating results in 2000 reflect the implementation of SAB 101. See Note 1
of Notes to Consolidated Financial Statements.
22
Year Ended December 31,
--------------------------------------------------------------------------
(in thousands, except average order size)
Selected Operating Data 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Telemarketing/catalog net sales............... $383,864 $462,705 $562,284 $556,461 $574,956
Internet sales................................ $ 3,239 $ 15,586 $ 36,143 $138,986 $207,826
Retail net sales.............................. $ 57,868 $ 67,831 $ 43,579 $ 34,734 $ 35,845
Number of catalogs distributed................ 48,753 62,220 69,427 58,955 49,263
Orders filled (telemarketing/catalog)......... 921 982 1,075 874 687
Orders filled (Internet)...................... 10 44 121 336 390
Average order size (telemarketing/catalog).... $ 417 $ 471 $ 523 $ 637 $ 837
Average order size (Internet)................. $ 324 $ 354 $ 299 $ 414 $ 533
Mailing list size............................. 2,518 4,177 4,792 5,459 6,022
December 31,
--------------------------------------------------------------------------
(in thousands)
Balance Sheet Data 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Working capital............................... $ 42,600 $ 30,183 $ 36,285 $ 18,697 $ 10,184
Total assets.................................. $113,431 $131,466 $143,174 $150,005 $137,566
Short-term debt............................... $ 283 $ 10,186 $ 122 $ 148 $ 579
Long-term debt, excluding current portion..... $ 325 $ 496 $ 161 $ 284 $ 703
Stockholders' equity.......................... $ 52,805 $ 60,082 $ 67,564 $ 48,598 $ 39,508
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
Overview
The Company began operations in May 1987 as a mail-order company and opened
its first retail computer showroom in August 1987. After opening its first
retail showroom, the Company conducted mail order operations from one of its
retail showroom locations. The Company became an authorized Apple dealer in
1991. During 1997, the Company operated four retail showrooms in Southern
California under the name Creative Computers and three retail showrooms in
Illinois and one retail showroom in Indiana under the name of Elek-Tek. During
the first quarter of 1998, the Company closed all but one of its retail
showrooms.
In 1993, the Company shifted its principal distribution and marketing focus
from retail showrooms to direct mail marketing distribution and relocated its
mail order/catalog operations to a central location. In 1994, the Company
received authorization from Apple to offer the full retail line of Apple
products via direct mail and the Company distributed the first edition of its
MacMall catalog in April 1994.
In 1998, the Company modified its strategic focus to acquiring small-to-
medium size business customers and established an outbound relationship-based
telemarketing model. The outbound telemarketing model involves hiring and
training technical sales executive, developing qualified business leads and
establishing business relationships with IT professionals.
During 1999, the Company successfully completed a spin-off of its former
subsidiary, uBid, Inc., to the Company's stockholders. Consistent with its
strategic focus on the business-to-business and Internet 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 its eLinux subsidiary to
provide products, news, discussion groups, services and support to the Linux
community.
23
Net sales from telemarketing/catalog operations, as a percentage of net
sales, were 87.6%, 76.2% and 70.2% in 1998, 1999 and 2000, respectively, with
average order size of $523, $637 and $837 for those respective years. Net sales
from the Internet, as a percentage of net sales, were 5.6%, 19.0% and 25.4% in
1998, 1999 and 2000, respectively, with average order size of $299, $414 and
$533 for those respective years.
Net sales of the Company are derived primarily from the sale of computer
hardware, software, peripherals, and electronic 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. Gross profit consists of net sales less product and shipping
costs. The Company receives marketing development funds ("MDF") from
manufacturers of products included in the Company's catalogs and web sites, as
well as co-operative advertising funds ("Co-Op") on products purchased from
manufacturers and vendors.
A substantial portion of the Company's business is dependent on sales of
Apple computers and software and peripheral products used with Apple computers.
Products manufactured by Apple represented approximately 20.0%, 25.4% and 24.9%
of the Company's net sales in 1998, 1999 and 2000, respectively.
Results of Operations
The following table sets forth for the years indicated information derived
from the Company's consolidated statement of operations expressed as a
percentage of net sales. Results for the years ended 1999 and 1998 have been
restated to reflect the results of uBid as discontinued operations. There can be
no assurance that trends in sales growth or operating results will continue in
the future.
Percentage of Net Sales
---------------------------
Year Ended December 31,
---------------------------
1998 1999 2000
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 89.1 89.1 89.3
----- ----- -----
Gross profit 10.9 10.9 10.7
Selling, general and administrative expenses 12.0 11.5 11.7
Expenses related to retail store closure 1.0 --- ---
----- ----- -----
Income (loss) from operations (2.1) (0.6) (1.0)
Interest (income) expense, net 0.1 0.1 ---
----- ----- -----
Income (loss) before income taxes (2.2) (0.5) (1.0)
Income tax provision (benefit) (0.8) 0.1 ---
----- ----- -----
Income (loss) from continuing operations (1.4) (0.6) (1.0)
Loss from discontinued operations (1.4) (0.9) ---
Cumulative change in accounting principle --- --- (0.1)
----- ----- -----
Net income (loss) (2.8)% (1.5)% (1.1)%
===== ===== =====
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net sales for the year ended December 31, 2000 were $818.6 million, an
increase of $88.4 million or 12.1% over net sales for the year ended December
31, 1999 of $730.2 million. Telemarketing/catalog sales for 2000 were $575.0
million, an increase of $18.5 million or 3.3% compared to 1999
telemarketing/catalog sales of $556.5 million. The increase in
telemarketing/catalog sales is primarily due to higher revenue per book and
average order value. Net catalog circulation in 2000 decreased 16.4%, or 9.7
million catalogs to 49.3 million, of which MacMall comprised 29.5 million, PC
Mall 18.0 million and ComputAbility 1.8 million. The ComputAbility catalog was
merged with PC Mall during 2000. Internet sales in 2000 were $207.8 million, an
increase of 49.5%, or $68.8 million over 1999. Retail net sales in 2000 were
$35.8 million, an increase of 3.2%, or $1.1 million from 1999. WINTEL net sales
increased
24
21.5% to $498.4 million in 2000, versus $410.2 million in 1999. Sales for
eCOST.com were $110.0 million, an increase of $73.2 million, or 199% over 1999
sales of $36.8 million. Sales for eLinux were $6.2 million in its first year of
operations.
Gross profit for the year ended December 31, 2000 was $87.8 million, an
increase of $8.3 million or 10.4% from gross profit of $79.6 million for the
year ended December 31, 1999. The increase in gross profit was primarily due to
the sales increase in 2000 over 1999, partially offset by a slight decrease in
overall margin as a percentage of sales. Gross profit as a percentage of sales
was 10.7% in 2000, versus 10.9% in 1999. The gross profit percentage was
negatively affected by lower margins experienced by eCOST.com, primarily in the
first half of the year, and other factors, including outbound sales initiatives
and fluctuations in key vendor support programs, offset by an improvement in the
core business margin to 11.7% from 11.4% of sales in 1999. Completing its second
year of operations, gross profit for eCost.com was $5.2 million for the year
ended December 31, 2000, an increase of 1,877% or $4.9 million over 1999 gross
profit of $0.3 million. Gross profit for eLinux was $0.7 million for the year
ended December 31, 2000, its first year of operations.
Selling, general and administrative expenses (SG&A) were $95.5 million for
the year ended December 31, 2000, an increase of $11.8 million or 14.2% over
SG&A expenses of $83.7 million for the year ended December 31, 1999. As a
percentage of net sales, SG&A expenses were 11.7% in 2000, versus 11.5% in 1999,
the increase due to higher advertising expenditures in the first half of the
year. For its second year of operations, SG&A expenses for eCost.com were $14.6
million for the year ended December 31, 2000, versus $6.4 million in the prior
year, primarily due to advertising increases. For its first year of operations
SG&A expenses for eLinux were $3.5 million for the year ended December 31, 2000.
Net interest expense was $0.9 million for the year ended December 31, 2000
compared to $0.2 million net interest income for the year ended December 31,
1999. The increase was due to increased debt outstanding in 2000 versus 1999.
No income tax provision was recorded for the year ended December 31, 2000
versus a provision of $0.8 million for the year ended December 31, 1999. As
such, the effective tax rate for 2000 was 0%, compared with 20.8% in 1999. The
change in effective tax rate is primarily due to the provision of valuation
allowance against deferred tax assets.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net sales for the year ended December 31, 1999 were $730.2 million, an
increase of $88.2 million or 13.7% over net sales for the year ended December
31, 1998 of $642.0 million. Telemarketing/catalog sales for 1999 were $556.5
million, a decrease of $5.8 million or 1.0% compared to 1998
telemarketing/catalog sales of $562.3 million. The decrease in
telemarketing/catalog sales is primarily due to a decline in circulation
resulting from a shift in marketing expenditures toward the Internet, offset by
an increase in average order value. Net catalog circulation in 1999 decreased
15.1%, or 10.5 million catalogs to 59.0 million, of which MacMall comprised 31.5
million, PC Mall 21.2 million and ComputAbility 6.3 million. The DataCom Mall
catalog was discontinued at the end of 1998. Internet sales in 1999 were $139.0
million, an increase of 284.5%, or $102.9 million over 1998. Retail net sales
in 1999 were $34.7 million, a decrease of 20.3%, or $8.9 million from 1998.
WINTEL net sales increased 16.2% to $410.2 million in 1999, versus $352.9
million in 1998.
Gross profit for the year ended December 31, 1999 was $79.6 million, an
increase of $9.6 million or 13.6% from gross profit of $70.0 million for the
year ended December 31, 1998. The increase in gross profit was primarily due to
the increase in sales in 1999 over 1998. Gross profit as a percentage of sales
was 10.9% in 1999, flat versus 1998. The gross profit percentage was negatively
affected by lower margins experienced by eCOST.com and other factors, including
outbound sales initiatives and fluctuations in key vendor support programs,
offset by the impact of the 1998 write-offs.
Selling, general and administrative expenses (SG&A) were $83.7 million for
the year ended December 31, 1999, an increase of $6.9 million or 9.0% over SG&A
expenses of $76.8 million for the year ended December 31, 1998. As a percentage
of net sales, SG&A expenses were 11.5% in 1999, versus 12.0% in 1998. The
decrease is primarily the result of first quarter write-offs included in the
prior year related to a more rapid decline in Mac sales and the effect of rapid
price erosion at that time.
Net interest income was $0.2 million for the year ended December 31, 1999
compared to $0.3 million net interest expense for the year ended December 31,
1998. The change primarily resulted from the elimination of interest expense
related to the 1997 borrowings to finance the acquisition of Elek-Tek.
25
Income tax provision for the year ended December 31, 1999 was $0.8 million
versus a benefit of $5.0 million for the year ended December 31, 1998. The
effective tax rate for 1999 increased to 20.8% from (36.3%) in 1998. The change
in effective tax rate is primarily due to the provision of additional valuation
allowance against deferred tax assets in 1999.
During 1997, the Company operated four retail showrooms in Southern
California under the name Creative Computers and three retail showrooms in
Illinois and one retail showroom in Indiana under the name of Elek-Tek. During
February 1998, the Company closed its Indiana showroom. On March 20, 1998, the
Company closed six of its other retail showrooms to focus its efforts on its
catalog, corporate and Internet channels. Net sales from the Company's retail
showroom operations were $67.8 million and $43.6 million for the years ended
December 31, 1997 and 1998, representing 12.4% and 6.8% of net sales,
respectively. In the first quarter of 1998, the Company recorded a one-time
pretax restructuring charge of $10.5 million relating to exit costs associated
with the closing of retail operations. Recorded in selling, general and
administrative costs were a $3.1 million write-off of goodwill, a $1.9 million
write-off for fixed assets, a $1.5 million reserve for lease exit cost, and $0.3
million employee-related severance costs. Recorded as cost of sales were $3.7
million of reserves for store inventory. The reserves have been fully utilized
as of December 31, 1998. In addition, during the first quarter of 1998, $7.0
million of pretax write-offs were taken primarily relating to a more rapid
decline in Mac sales during the quarter and the effects of rapid price erosion
and other changes in the industry on inventory and receivables during the
quarter.
As a result of the spin-off of uBid in June 1999, the Company recorded uBid's
results of operations in discontinued operations for 1999 and 1998.
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 come from public offerings and borrowings from
its stockholders, private investors and financial institutions. In April and
August 1995, the Company completed an initial public offering and a follow-on
offering of its Common Stock which resulted in aggregate net proceeds to the
Company of approximately $46.6 million. Cash flows from operations were $13.7
million, $21.5 million and $(28.0) million for 1998, 1999 and 2000,
respectively.
Inventory decreased $3.5 million in 2000 and inventory turns continued to
improve from 16.4 in 1999 to 19.8 in 2000. Accounts receivable increased $7.4
million during 2000, primarily due to higher open account business-to-business
sales.
During the year ended December 31, 2000, the Company's capital expenditures
were $4.4 million as compared to $4.2 million in 1999 and $3.2 million in 1998.
The Company's primary capital needs will continue to be funding its working
capital requirements for anticipated sales growth, possible acquisitions and new
business ventures.
During 2000 and the first quarter of 2001, the Company had a $40 million credit
facility with a commercial finance company. Part of the credit facility
functioned in lieu of a vendor trade payable for inventory purchases, was
included in accounts payable, and did not bear interest if paid within terms
specific to each vendor. Part of the credit facility functioned as a working
capital line of credit secured by inventory and accounts receivable, and bore
interest at prime (9.5% and 8.5% per annum at December 31, 2000 and 1999,
respectively). As of December 31, 2000, the Company had $6.7 million in
borrowings under the credit facility included in accounts payable and $17.3
million of working capital advances outstanding, which was used to finance
inventory purchases, receivable, and its start-up subsidiaries. At December 31,
2000, the Company had a $16.0 million available for working capital advances and
floorplan inventory financing. The overall credit facility was secured by
substantially all of the Company's assets. The credit facility had certain
covenants requiring a minimum tangible net worth and limitations on future
losses and leverage. As of December 31, 2000, the Company was in compliance
with all credit facility covenants.
26
In March 2001, the Company replaced its existing $40 million credit facility
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.
At December 31, 2000 and 1999, the Company had cash and short-term
investments of $12.2 million and $24.3 million, respectively, and working
capital of $10.2 million and $18.7 million, respectively. 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.
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. As of December 31, 2000, 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, and pursue other
business ventures. Any launch of a new business venture or any acquisition and
the ensuing integration of the operations of the acquired company with those of
the Company would place additional demands on the Company's management,
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.
Impact of Recently Issued Accounting Standards
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 new rules will be effective the first
quarter of 2001. The Company does not believe that the new standard will have
any impact on the Company's consolidated financial statements, as the Company
currently holds no derivatives.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and long-term debt. At
March 30, 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 at March 30,
2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements listed in Item 14(a) under the caption "Consolidated Financial
Statements" and commencing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth under the caption
"Election of Directors," in the Company's definitive Proxy Statement to be filed
in connection with its 2001 Annual Meeting of Stockholders and such information
is incorporated herein by reference. A list of executive officers of Registrant
is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation and Other Information" and "Election of Directors -
Compensation of Directors" in the Company's definitive Proxy Statement to be
filed in connection with its 2001 Annual Meeting of Stockholders and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement to be filed in connection with its 2001
Annual Meeting of Stockholders and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Certain Relationships and Related Transactions" and "Compensation Committee
Interlocks and Insider Participation" in the Company's definitive Proxy
Statement to be filed in connection with its 2001 Annual Meeting of Stockholders
and such information is incorporated herein by reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following consolidated financial statements of Registrant are filed as part
of this report:
(a) (1) Consolidated Financial Statements. See Index to Consolidated
Financial Statements.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements.
(3) Exhibits.
The following exhibits are filed or incorporated by reference as
part of this report:
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of the Company (1)
3.1(A) Certificate of Amendment of Certificate of Incorporation
3.2 Amended and Restated Bylaws of the Company
10.1* Amended and Restated 1994 Stock Incentive Plan (11)
10.2* Employment Agreement dated January 1, 1995, between Creative
Computers, Inc. and Frank F. Khulusi (1)
10.4* Employment Agreement dated January 1, 1994, between Creative
Computers, Inc. and Dan DeVries (1)
10.6 ITT Commercial Financial Corporation ("ITT") financing
arrangements:
a. Agreement for Wholesale Financing (Security Agreement-
Arbitration) dated April 4, 1991, as amended, between ITT
and Creative Computers, Inc. (1)
10.18* Directors' Non-Qualified Stock Option Plan, amended and
restated as of May 18, 1999 (7)
10.22 Agreement dated August 1, 1995 between Creative Computers, Inc.
and Deutsche Financial Services (formerly known as ITT
Commercial Finance Corp.) (2)
10.25 Industrial Lease Agreement between Corporate Estates, Inc. and
Creative Computers, Inc. dated September 15, 1995 for the
premises located at 4515 E. Shelby Drive, Memphis, Tennessee,
filed in connection with the Company's 10-Q for the quarter
ended September 30, 1995 (4)
10.28 Authorized Apple Dealer U.S. Sales Agreement dated August 29,
1996; Authorized Apple Catalog Reseller Sales Agreement dated
August 29, 1996; Dealer Apple Authorized Service Provider
Agreement dated August 29, 1996; Apple Corporate Alliance
Program Addendum to the Authorized Apple Dealer Sales Agreement
dated August 29, 1996 (4)
10.29 Amendment to Agreement for Wholesale Financing dated February
25, 1997 (4)
10.31 Business Credit and Security Agreement dated October 14, 1997
between Deutsche Financial Services Corporation and Elek-Tek
Acquisition Corp. (3)
10.32 Business Credit and Security Agreement dated October 14, 1997
between Deutsche Financial Services Corporation and Creative
Computers, Inc. (3)
10.32(A) Amendment No. 3 to Business Credit and Security Agreement,
dated as of June 30, 2000, between Deutsche Financial Services
Corporation and IdeaMall, Inc. (12)
10.35 Separation and Distribution Agreement by and between Creative
Computers, Inc. and uBid, Inc., dated as of December 7, 1998,
as amended (7)
30
10.37 (A) Tax Indemnification and Allocation Agreement by and between
Creative Computers, Inc. and uBid, Inc., dated as of December
7, 1998, as amended (8)
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 (10)
10.38 Sublease Agreement between Creative Computers, Inc. and uBid,
Inc., dated as of July 1, 1998 (6)
10.39 Agreement Restricting Transfer of Assets and Letter Agreement
dated as of September 23, 1998 by and between Deutsche
Financial Services Corporation and Creative Computers, Inc. and
uBid, Inc. (6)
10.40 Assignment and License Agreement by and between Creative
Computers, Inc. and uBid, Inc., dated as of November 30, 1998
(6)
10.41 Sublease Agreement between Creative Computers, Inc. and uBid,
Inc., dated as of December 1, 1999 (13)
10.42* Employment Agreement dated July 22, 1999, between Creative
Computers, Inc. and Scott Klein (9)
10.43 Loan and Security Agreement, dated March 7, 2001, between
Congress Financial Corporation and IdeaMall, Inc. and
Subsidiaries
10.44 Agreement for Wholesale Financing dated March 15, 2001 between
Deutsche Financial Services Corporation and IdeaMall, Inc. and
Subsidiaries
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (33-89572) declared effective on April 4,
1995.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-1 (33-95416) declared effective on August
23, 1995.
(3) Incorporated by reference to the Company's Form 8-K dated
October 11, 1997, filed with the Commission on October 30, 1997
(4) Incorporated by reference to the Company's 1996 Form 10-K,
filed with the Commission on March 31, 1997.
(5) Intentionally omitted.
(6) Incorporated by reference to the Registration Statement on Form
S-1 of uBid, Inc. (File No. 333-58477), on file with the
Commission.
(7) Incorporated by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 1999, filed with the Commission
on August 16, 1999.
(8) Incorporated by reference to the Company's Report on Form 10-Q
for the quarter ended March 31, 1999, filed with the Commission
on May 17, 1999.
(9) Incorporated by reference to the Company's Report on Form 10-Q
for the quarter ended September 30, 1999, filed with the
Commission on November 15, 1999.
(10) Incorporated by reference to the Annual Report on 10-K of uBid,
Inc. (Commission File No. 000-25119) for the year ended
December 31, 1999.
(11) Incorporated by reference to Annex A of the registrant's
Definitive Proxy Statement filed with the Commission on April
24, 2000.
(12) Incorporated by reference to the Company's Report on Form 10-Q
for the quarter ended June 30, 2000, filed with the Commission
on August 14, 2000.
(13) Incorporated by reference to the Company's Annual Report on
Form 10-K, File Number 0-25790, for the year ended December 31,
1999, filed with the Commission on March 30, 2000.
* The referenced exhibit is a compensatory contract, plan or
arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the
period covered by this Report.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Torrance,
State of California, on March 30, 2001.
IDEAMALL, INC.
By: /s/ FRANK F. KHULUSI
----------------------------------
Frank F. Khulusi
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Frank F. Khulusi and Theodore R. Sanders,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ FRANK F. KHULUSI Chairman of the Board of March 30, 2001
- ------------------------------
Frank F. Khulusi Directors, Chief Executive
Officer and President
(Principal Executive Officer)
/s/ THEODORE R. SANDERS Chief Financial Officer March 30, 2001
- ------------------------------
Theodore R. Sanders (Principal Financial and
Accounting Officer)
/s/ SAM U. KHULUSI Director March 30, 2001
- -----------------------------
Sam U. Khulusi
/s/ THOMAS MALOOF Director March 30, 2001
- -----------------------------
Thomas Maloof
/s/ RONALD B. RECK Director March 30, 2001
- -----------------------------
Ronald B. Reck
32
IDEAMALL, INC.
Exhibit Index
Exhibit
Number Description
------- -----------
3.1(A) Certificate of Amendment of Certificate of Incorporation
3.2 Amended and Restated Bylaws of the Company
10.43 Loan and Security Agreement, dated March 7, 2001, between
Congress Financial Corporation and IdeaMall, Inc. and
Subsidiaries
10.44 Agreement for Wholesale Financing dated March 15, 2001 between
Deutsche Financial Services Corporation and IdeaMall, Inc. and
Subsidiaries
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
IDEAMALL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements and Supplementary Data
- -------------------------------------------
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 2000 and 1999 F-3
Consolidated Statement of Operations for the Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2000, 1999
and 1998 F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (unaudited) F-18
Financial Statement Schedule
- ----------------------------
Schedule II - Valuation and Qualifying Accounts F-19
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements and notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of IdeaMall, Inc.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of IdeaMall, Inc. and
its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We did not
audit the financial statements of uBid, Inc., a former majority-owned
subsidiary, for the year ended December 31, 1998, which statements reflect total
revenues of $48,232,000 and net loss of $10,169,000 for the year then ended.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for uBid, Inc. for the year ended December 31, 1998, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of revenue recognition in 2000.
/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
January 19, 2001, except as to the second paragraph
of Note 3, which is as of March 7, 2001
F-2
IDEAMALL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
December 31,
----------------------------------
2000 1999
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 12,195 $ 24,326
Accounts receivable, net of allowance for doubtful accounts of
$1,162 and $1,483, respectively 54,970 47,618
Inventories 35,838 39,359
Prepaid expenses and other current assets 2,489 2,962
Income tax refund receivable - 177
Notes receivable - 3,331
Deferred income taxes 2,047 2,047
-------- --------
Total current assets 107,539 119,820
Property and equipment, net 14,928 14,569
Goodwill, net 11,316 11,836
Deferred income taxes 3,738 3,738
Other assets 45 42
-------- --------
$137,566 $150,005
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 59,294 $ 86,609
Accrued expenses and other current liabilities 12,963 14,366
Deferred revenue 7,204 -
Line of credit 17,315 -
Capital leases - current portion 573 142
Notes payable - current portion 6 6
-------- --------
Total current liabilities 97,355 101,123
Capital leases 562 136
Notes payable 141 148
-------- --------
Total liabilities 98,058 101,407
-------- --------
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; 10,433,866 and 10,404,069 shares issued 11 11
Additional paid-in capital 74,403 74,337
Treasury stock, at cost: 15,000 shares (91) (91)
Retained earnings (accumulated deficit) (34,815) (25,659)
-------- --------
Total stockholders' equity 39,508 48,598
-------- --------
$137,566 $150,005
======== ========
See accompanying notes to consolidated financial statements.
F-3
IDEAMALL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Net sales $818,627 $730,181 $642,006
Cost of goods sold 730,794 650,630 568,309
Retail store closure inventory reserve - - 3,679
-------- -------- --------
Gross profit 87,833 79,551 70,018
Selling, general and administrative expenses 95,536 83,687 76,812
Expenses related to retail store closures - - 6,773
-------- -------- --------
Income (loss) from operations (7,703) (4,136) (13,567)
Interest income (expense), net (917) 245 (291)
-------- -------- --------
Income (loss) before income taxes (8,620) (3,891) (13,858)
Income tax provision (benefit) - 812 (5,034)
-------- -------- --------
Income (loss) from continuing operations (8,620) (4,703) (8,824)
Loss from discontinued operations,
net of minority interest of $1,500
and $1,198 in 1999 and 1998 - (6,240) (8,971)
-------- -------- --------
Income (loss) before cumulative
effect of change in accounting principle (8,620) (10,943) (17,795)
Cumulative effect of change in accounting
principle for revenue recognition (536) - -
-------- -------- --------
Net income (loss) $ (9,156) $(10,943) $(17,795)
======== ======== ========
Basic and diluted earnings (loss) per share
Continuing operations $ (0.83) $ (0.45) $ (0.87)
Discontinued operations - (0.60) (0.88)
Cumulative effect of change
in accounting principle (0.05) - -
-------- -------- --------
$ (0.88) $ (1.05) $ (1.75)
======== ======== ========
Pro Forma amounts assuming the accounting
change is applied retroactively (See Note 1)
Income (loss) from continuing operations $ (8,620) $ (4,842) $ (8,928)
======== ======== ========
Net income (loss) $ (8,620) $(11,082) $(17,898)
======== ======== ========
Basic and diluted earnings (loss) per share
Income (loss) from continuing operations $ (0.83) $ (0.47) $ (0.88)
======== ======== ========
Net income (loss) $ (0.83) $ (1.07) $ (1.76)
======== ======== ========
Basic and diluted weighted average number of
shares outstanding 10,419 10,383 10,176
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
IDEAMALL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Additional Retained
-------------- Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------ ------ -------- --------- --------- ------
Balance at December 31, 1997 10,105 $10 $56,772 $ 3,079 $(91) $ 59,770
Capital contributed by minority
stockholders of subsidiary 18,943 18,943
uBid stock-based compensation 5,267 5,267
Stock option exercises, including
related income tax benefit 160 1,379 1,379
Net loss (17,795) (17,795)
------- ----- ------- -------- ---- --------
Balance at December 31, 1998 10,265 10 82,361 (14,716) (91) 67,564
Spin-off of uBid subsidiary (8,877) (8,877)
Stock option exercises 139 1 853 854
Net loss (10,943) (10,943)
------- ----- ------- -------- ---- --------
Balance at December 31, 1999 10,404 11 74,337 (25,659) (91) 48,598
Stock option exercises 30 66 66
Net loss (9,156) (9,156)
------- ----- ------- -------- ---- --------
Balance at December 31, 2000 10,434 $11 $74,403 $(34,815) $(91) $ 39,508
======= ===== ======= ======== ==== ========
See accompanying notes to consolidated financial statements.
F-5
IDEAMALL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating
activities:
Net income (loss) $ (9,156) $(10,943) $(17,795)
-------- -------- --------
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities:
Provision (benefit) for
deferred income taxes - 693 (5,017)
Depreciation and amortization 6,001 4,961 3,882
Loss on disposal of property,
plant and equipment - - 1,950
Loss on impairment of goodwill - - 3,095
Loss from discontinued
operations - 6,240 8,971
Changes in assets and
liabilities, net of
acquisitions
and spin-off:
Accounts receivable (7,352) (7,189) 2,017
Inventories 3,521 1,090 3,483
Prepaid expenses and other
current assets 370 (471) (2,561)
Other assets (3) 96 (742)
Accounts payable (27,315) 24,480 16,171
Accrued expenses and other
current liabilities 5,801 2,504 (75)
Income tax refund
receivable 177 13 279
-------- -------- --------
Total adjustments (18,800) 32,417 31,453
-------- -------- --------
Net cash (used in) provided by
operating activities (27,956) 21,474 13,658
-------- -------- --------
Cash flows from investing
activities:
Collection of notes receivable 3,331 - -
Acquisition of property,
plant and equipment (4,425) (4,185) (3,209)
Advances to uBid - - (2,661)
-------- -------- --------
Net cash used in investing
activities (1,094) (4,185) (5,870)
-------- -------- --------
Cash flows from financing
activities:
Net borrowings (payments)
under line of credit 17,315 - (9,956)
Payments under notes payable (7) (7) (210)
Principal payments of
obligations under capital
leases (455) (252) (233)
Proceeds from stock issued
under stock option plans 66 854 1,035
-------- -------- --------
Net cash provided by (used in)
financing activities 16,919 595 (9,364)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (12,131) 17,884 (1,576)
Cash and cash equivalents:
Beginning of year 24,326 6,442 8,018
-------- -------- --------
End of year $ 12,195 $ 24,326 $ 6,442
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. Summary of Significant Accounting Policies
Description of Company
IdeaMall, Inc., formerly Creative Computers, Inc., (the "Company"), founded
in 1987, is a direct marketer of personal computer hardware, software and
peripheral products, as well as consumer electronics. The Company offers
products to individual consumers, home offices, small businesses and large
corporations through direct response catalogs, dedicated inbound and outbound
telemarketing sales executives, a direct sales force, a retail showroom and
multiple Internet web sites. The Company offers a broad selection of products
through its distinctive, full-color catalogs, MacMall, PC Mall, MacMall Software
Buyers Guide and eCOST.com, the Company's worldwide web sites on the Internet,
and other promotional materials.
In September 1997, the Company formed a wholly owned subsidiary, uBid, Inc.
("uBid") to sell computer-related products and consumer electronics through an
auction format on the Internet. In December 1998, uBid completed an initial
public offering of 1,817,000 shares of its 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. The Company's share of uBid's
operating results, net of taxes, for the periods presented 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
balance sheet and consolidated statement of cash flows have also been restated
for all periods presented to reflect the divestiture of uBid. uBid's revenues
were $48,232 for the year ended December 31, 1998, and $64,784 for the period
ended June 7, 1999.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the respective reporting
periods. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Revenue Recognition
Net sales include product sales, net of returns and allowances, and gross
outbound shipping and handling charges. The Company recognizes revenue from
product sales, net of discounts, coupon redemption and estimated sales returns,
when title to products sold has transferred to the customer. The Company
considers this to occur upon receipt of products by the customer. The Company
provides an allowance for sales returns, which is based on historical
experience. For all product sales shipped directly from suppliers to customers,
the Company takes title to the products sold upon shipment, bears credit risk,
and bears inventory risk for returned products that are not successfully
returned to suppliers, although some of these risks are mitigated through
arrangements with the Company's shippers and suppliers.
F-7
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
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 of $536, retroactively
applied to January 1, 2000. The financial effect of adoption on revenue for the
year ended December 31, 2000 is immaterial. The pro forma amounts shown in the
consolidated statement of operations present the effect of retroactive
application of SAB 101.
Outbound Shipping Costs
Outbound shipping costs incurred to deliver products to customers are
included in cost of goods sold.
Cash Equivalents
All highly liquid investments with initial maturities of three months or less
are considered cash equivalents.
Concentration of Credit Risk
Accounts receivable potentially subject the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of each
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. At
December 31, 1999, receivables from one large customer were $6.0 million. No
customer accounted for more than 10% of trade accounts receivable at December
31, 2000.
Inventories
Inventories consist primarily of finished goods, and are stated at cost
(determined under the first-in, first-out cost method) or market, whichever is
lower. At December 31, 2000 and 1999, the Company had reserves of $1,107 and
$2,331, respectively, for demonstration inventory, lower of cost or market
pricing and potential excess and obsolete inventory.
Deferred Advertising Revenue and Costs
The Company produces and circulates catalogs at various dates throughout the
year. The Company receives market development funds and cooperative (co-op)
advertising funds from vendors included in each catalog. These funds are
recognized based on sales generated over the life of the catalog, which
approximates eight weeks. The costs of developing and circulating each catalog
are deferred and charged to advertising expense in the same time period as the
co-op funds based on sales over the life of the catalog. Deferred advertising
revenue is included in accrued expenses and other current liabilities.
Advertising expense, net of advertising revenue earned, included in selling,
general and administrative expenses, was $13,355, $7,325 and $4,157 in 2000,
1999, and 1998, respectively. Deferred advertising costs were $1,784 and $2,051
at December 31, 2000 and 1999, respectively, and are included in prepaid
expenses and other current assets in the consolidated balance sheet.
F-8
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Property and Equipment
Property and equipment (including equipment acquired under capital leases)
are stated at cost and are depreciated using straight-line methods over the
estimated useful lives of the assets, as follows:
Furniture and fixtures 5 - 7 years
Leasehold improvements Life of lease--not to exceed 15 years
Computers, machinery and equipment 3 - 7 years
Building 31.5 years
Disclosures About Fair Value of Financial Instruments
The carrying amount of cash, cash equivalents, accounts receivable, accounts
payable and accrued expenses and other current liabilities approximates fair
value because of the short-term maturity of these instruments. The carrying
amount of the Company's notes payable approximates fair value based upon the
current rates offered to the Company for obligations of similar terms and
remaining maturities.
Goodwill
Goodwill, resulting from acquisitions, is amortized using the straight-line
method over periods not exceeding twenty-five years and is subject to periodic
review for impairment. Accumulated amortization at December 31, 2000 and 1999
was $1,606 and $1,086, respectively. Amortization expense totaled $520, $482 and
$514 in 2000, 1999 and 1998, respectively. During 1998, in conjunction with the
store closures, the Company determined that goodwill related to acquired retail
stores was impaired and, accordingly, the Company recorded a write-off of
$3,095.
Accounting for the Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded.
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, deferred income taxes are recognized by applying enacted statutory tax
rates applicable to future years to differences between the tax bases and
financial reporting amounts of existing assets and liabilities. A valuation
allowance is provided when it is more likely than not that all or some portion
of deferred tax assets will not be realized.
Earnings (Loss) per Share
Basic 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 if stock
options and other commitments to issue common stock were exercised using the
treasury stock method.
F-9
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
The composition of Basic and Diluted EPS is as follows:
2000 1999 1998
----------- ----------- -----------
Income (loss) from continuing operations $ (8,620) $ (4,703) $ (8,824)
Loss from discontinued operations - (6,240) (8,971)
Cumulative effect of change in
accounting principle for revenue recognition (536) - -
----------- ----------- -----------
Net income (loss) $ (9,156) $ (10,943) $ (17,795)
=========== =========== ===========
Weighted average shares - Basic 10,418,558 10,383,052 10,175,864
Effect of dilutive stock options
and warrants (a) - - -
----------- ----------- -----------
Weighted average shares - Diluted 10,418,558 10,383,052 110,175,864
=========== =========== ===========
Basic and diluted earnings (loss) per share
Continuing operations $ (0.83) $ (0.45) $ (0.87)
Discontinued operations - (0.60) (0.88)
Cumulative effect of change in
accounting principle (0.05) - -
----------- ----------- -----------
Net income (loss) $ (0.88) $ (1.05) $ (1.75)
=========== =========== ===========
(a) Potential common shares of 168,133, 339,609 and 232,700 for 2000, 1999 and
1998, respectively, have been excluded from the earnings (loss) of per share
computations because the effect of their inclusion would be anti-dilutive.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 and related interpretations. The
disclosures required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), have been included in Note
7.
Reclassifications
Certain reclassifications have been made to the 1998 and 1999 financial
statement amounts to conform to the 2000 presentation.
Recent Accounting Pronouncements
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 new rules will be effective the first
quarter of 2001. The Company does not believe that the new standard will have
any impact on the Company's consolidated financial statements, as the Company
holds no derivatives.
F-10
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
2. Property and Equipment
Property and equipment consist of the following as of December 31:
2000 1999
-------- --------
Furniture and fixtures $ 2,819 $ 2,216
Leasehold improvements 3,071 3,181
Computers, machinery and equipment 23,066 18,507
Building 3,512 2,827
Land 1,446 1,446
-------- --------
33,914 28,177
Less: Accumulated depreciation and amortization (18,986) (13,608)
-------- --------
$ 14,928 $ 14,569
======== ========
Depreciation expense in 2000, 1999 and 1998 totaled $5,378, $4,415 and $3,307,
respectively.
3. Line of Credit
During 2000 and the first quarter of 2001, the Company had a $40 million
credit facility with a commercial finance companyFinancial Printing
GroupFinancial Printing GroupDuring 2000 and the first quarter of 2001, the
Company had a $40 million credit facility with a commercial finance company.
Part of the credit facility functioned in lieu of a vendor trade payable for
inventory purchases, was included in accounts payable, and did not bear interest
if paid within terms specific to each vendor. Part of the credit facility
functioned as a working capital line of credit secured by inventory and accounts
receivable, and bore interest at prime (9.5% and 8.5% per annum at December 31,
2000 and 1999, respectively). As of December 31, 2000, the Company had $6.7
million in borrowings under the credit facility included in accounts payable and
$17.3 million of working capital advances outstanding, which was used to finance
inventory purchases, receivables, and its start-up subsidiaries. At December 31,
2000, the Company had $16.0 million available for working capital advances and
floorplan inventory financing. The overall credit facility was secured by
substantially all of the Company's assets. The credit facility had certain
covenants requiring a minimum tangible net worth and limitations on future
losses and leverage. As of December 31, 2000, the Company was in compliance with
all credit facility covenants.
In March 2001, the Company replaced its existing $40 million credit facility
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.
At December 31, 2000 and 1999, the Company had cash and short-term
investments of $12.2 million and $24.3 million, respectively, and working
capital of $10.2 million and $18.7 million, respectively. 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.
4. Income Taxes
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
2000 1999 1998
-------- -------- --------
Current
Federal $ - $ 106 $ (100)
State - 13 83
-------- -------- --------
- 119 (17)
-------- -------- --------
Deferred
Federal - 620 (4,584)
State 73 (433)
-------- -------- --------
- 693 (5,017)
-------- -------- --------
$ - $ 812 $(5,034)
======== ======== ========
F-11
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
The provision (benefit) for income taxes differed from the amount computed
by applying the U.S. federal statutory rate to income (loss) before income taxes
due to the effects of the following:
2000 1999 1998
------ ------ ------
Expected taxes at federal
statutory tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal
income tax benefit - (2.9)% (1.5)%
Change in valuation allowance 34.0 53.7% --
Other - 4.0% (0.8)%
------ ------ ------
- 20.8% (36.3)%
====== ====== ======
The significant components of deferred tax assets and liabilities are as
follows at December 31:
2000 1999
------- -------
Accounts receivable $ 465 $ 638
Inventories 219 356
Property, plant and equipment 379 (162)
Amortization (539) (462)
Accrued expenses and reserves 755 621
Tax credits and loss carryforwards 11,016 8,171
Other - 3
Less: Valuation allowance (6,510) (3,380)
------- -------
Net deferred tax assets $ 5,785 $ 5,785
======= =======
At December 31, 2000, the Company had federal net operating loss
carryforwards of $29,896, which expire at the end of 2018. At December 31, 2000,
the Company had various state net operating loss carryforwards ranging in
amounts from $150 to $6,766, which begin to expire at the end of 2003.
5. Commitments and Contingencies
Leases
The Company leases office and warehouse space and equipment under various
operating and capital leases which provide for minimum annual rentals and
escalations based on increases in real estate taxes and other operating
expenses.
F-12
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Minimum annual rentals under non-cancelable leases at December 31, 2000 were
as follows:
Capitalized Operating
Leases Leases
----------- ---------
2001 $ 661 $2,542
2002 507 1,924
2003 149 283
2004 - 207
2005 - 13
Thereafter - -
------ ------
Total minimum lease payments $1,317 $4,969
======
Less amount representing interest 182
------ ------
Present value of minimum lease payments,
including current maturity of $573 $1,135
======
In 2000, 1999 and 1998 rent expense included in selling, general and
administrative costs was $3,969, $3,206 and $2,486, respectively. Some of the
leases contain renewal options and escalation clauses and require the Company to
pay taxes, insurance and maintenance costs.
Legal Proceedings
Various claims and actions, considered normal to the Company's business, have
been asserted and are pending against the Company. The Company believes that
such claims and actions will not have any material adverse effect upon the
Company's consolidated financial position or results of operations.
6. Stockholders' Equity
Initial Public Offering and Spin-off of uBid, Inc.
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 at an offering price of $15.00 per share. Net proceeds to uBid
were $23,847. The shares sold to the public in the offering represented
approximately 19.9% of uBid's outstanding common stock. As a result of the
Offering, the Company's share of the amount of the Offering Proceeds in excess
of the corresponding carrying value of uBid equity in the amount of $18,943 was
credited to additional paid-in capital. As discussed in Note 1, the Company's
remaining interest in uBid was subsequently spun off to the Company's
shareholders in June 1999, resulting in a charge of $8,877 to additional paid-in
capital in 1999.
Treasury Stock
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. As of December 31, 2000, the Company
has repurchased 15,000 shares.
F-13
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
7. Employee Benefits
401(k) Savings Plan
Effective January 1, 1994, the Company adopted a 401(k) Savings Plan which
covers substantially all full-time employees who meet the plan's eligibility
requirements. Participants may make tax-deferred contributions of up to 15% of
annual compensation (subject to other limitations specified by the Internal
Revenue Code). In December 1995, the Company amended the Plan to make a 25%
matching contribution for amounts that do not exceed 4% of the participants'
annual compensation. During 2000, 1999 and 1998, the Company incurred $154,
$142 and $87, respectively, of expenses related to the 401(k) matching component
of this plan.
1994 Employee Stock Option Plan
In November 1994, the Board of Directors and stockholders of the Company
approved the 1994 Stock Option Plan (the "1994 Plan"), which provides for the
grant of stock options to employees and consultants of the Company. Under the
1994 Plan, the Company may grant options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, or options not intended to
qualify as Incentive Stock Options ("Nonstatutory Stock Options").
In May 2000, the Board of Directors and stockholders of the Company approved
amendments to the 1994 Plan which (i) increased the number of shares authorized
to be issued under the Plan from 1,950,000 shares to 2,950,000 shares, (ii)
added an "evergreen provision" the effect of which automatically increases the
number of shares of the Company's Common Stock available for issuance under the
Plan as of January 1 of each year by three percent (3%) of the Company's
outstanding Common Stock as of December 31 of the immediately preceding fiscal
year, (iii) added non-employee directors as persons eligible to receive options
and other stock-based awards under the Plan, and (iv) added certain provisions
to the Plan to ensure that options may qualify as performance-based compensation
under Section 162(m) of the Code.
As of December 31, 2000, a total of 995,779 shares of authorized but unissued
shares are available for future grants as of December 31, 2000. All options
granted through December 31, 2000 have been Nonstatutory Stock Options.
The 1994 Plan is administered by the Compensation and Stock Option Committee
of the Board of Directors. Subject to the provisions of the 1994 Plan, the
Committee has the authority to select the employees and consultants to whom
options are granted and determine the terms of each option, including (i) the
number of shares of common stock covered by the option, (ii) when the option
becomes exercisable, (iii) the option exercise price, which must be at least
100%, with respect to Incentive Stock Options, and at least 85%, with respect to
Nonstatutory Stock Options, of the fair market value of the common stock as of
the date of grant, and (iv) the duration of the option (which may not exceed ten
years). All options generally vest annually over four to five years, and are
nontransferable other than by will or by the laws of descent and distribution.
F-14
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1995 Director Stock Option Plan
The Company adopted the Directors' Non-Qualified Stock Option Plan (the
"Director Plan") in 1995 under which each non-employee director of the Company
("Non-Employee Director") receives a non-qualified option to purchase 5,000
shares of Common Stock upon his or her first election or appointment to the
Board of Directors, as well as subsequent grants each year after the annual
meeting of the Company's stockholders. In 1999, the Company increased the total
number of shares reserved for issuance under the Director Plan to 100,000 from
50,000. However, in May 2000, the Company's Board of Directors and shareholders
voted to terminate the Director Plan such that no further grants would be made
thereunder, and further provided that Non-Employee Directors are persons
eligible to receive future options and other stock-based awards under the 1994
Employee Stock Option Plan.
The following table summarizes stock option activity:
Weighted
Average
Number Exercise Price
---------- ----------------
Outstanding at December 31, 1997 854,177 $6.80
Granted 500,100 8.43
Canceled (290,893) 8.04
Exercised (159,031) 6.26
----------
Outstanding at December 31, 1998 904,353 7.34
Granted 1,758,048 5.04
Canceled (1,014,907) 7.72
Exercised (139,029) 6.15
----------
Outstanding at December 31, 1999 1,508,465 4.54
Granted 511,150 5.52
Canceled (369,223) 5.58
Exercised (29,797) 2.22
----------
Outstanding at December 31, 2000 1,620,595 4.67
==========
Of the options outstanding at December 31, 2000, 1999 and 1998, options to
purchase 599,000, 361,632 and 306,483 shares were exercisable at weighted
average prices of $3.24, $1.88 and $6.41 per share, respectively. The following
table summarizes information concerning currently outstanding and exercisable
stock options:
Options exercisable at
Options Outstanding at December 31, 2000 December 31, 2000
--------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------- -------------- ------------------ ------------ -------------- --------------
$0.59-$2.82 560,207 6.45 $1.79 418,660 $1.79
$2.83-$6.88 722,400 8.97 $5.53 111,400 $6.12
$7.00-$12.31 337,988 8.64 $7.59 68,940 $7.41
------------ ----------
1,620,595 599,000
============ ==========
F-15
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
FAS 123 Pro Forma Information
The Company accounts for its stock option plans under APB Opinion No. 25. Had
compensation expense for these plans been determined consistent with SFAS 123,
the Company's net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts in the following table.
2000 1999 1998
--------- --------- ---------
Net income (loss) As Reported $ (9,156) $(10,943) $(17,795)
Pro Forma $(10,818) $(12,943) $(18,097)
Basic and diluted net
income (loss) per share As Reported $ (0.88) $ (1.05) $ (1.75)
Pro Forma $ (1.04) $ (1.25) $ (1.78)
The fair value of each stock option grant has been estimated pursuant to SFAS
123 on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
2000 1999 1998
---------- ---------- ----------
Risk free interest rates 6.22% 6.10% 4.89%
Expected dividend yield none none none
Expected lives 7 yrs. 7 yrs. 7 yrs.
Expected volatility 112.0% 124.0% 100.0%
The weighted average grant date fair values of options granted under the
Plans during 2000, 1999 and 1998 were $4.91, $7.41 and $7.11, respectively.
1999 eCOST.com Employee Stock Option Plan
The Company adopted the eCOST.com Employee Stock Option Plan in 1999. During
1999 and 2000, options to purchase 537,000 and 598,000 shares, respectively, of
eCOST.com common stock were granted at a weighted average exercise price of
$0.20 and $2.59. Options generally vest annually over four to five years, and
are nontransferable other than by will or by the laws of descent and
distribution. As of December 31, 2000, options to purchase 1,023,000 eCOST.com
shares were outstanding at a weighted average exercise price of $1.60.
8. Supplemental Disclosures of Cash Flow Information
2000 1999 1998
------ ----- -----
Cash paid during the year ending December 31:
Interest $1,035 $ 407 $ 851
Income taxes $ 0 $ 12 $ 281
Non-cash investing and financing activities:
Equipment acquired under capital lease
obligations $1,311 $ 409 --
F-16
IDEAMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
9. Retail Store Closures
During February 1998, the Company closed its Indiana retail showroom. On
March 20, 1998, the Company closed six retail showrooms to focus its efforts on
its catalog, corporate and Internet channels of distribution. The Company
recorded a one-time pretax restructuring charge of $10.5 million in 1998
relating to exit costs associated with the closing of retail operations.
Recorded in selling, general and administrative costs were $3.1 million in
write-offs of goodwill, $1.9 million in write-offs of fixed assets, a $1.5
million reserve for lease exit costs, and $0.3 million in employee-related
severance costs. Recorded in cost of sales were $3.7 million of reserves for
store inventory. All reserves were utilized by December 31, 1998.
10. Segment Information
The Company operates in three reportable business segments: 1) a direct
marketer of personal computers, hardware, software, peripheral products and
consumer electronics under the PCMall, MacMall, and CCIT brands, collectively
referred to as the "Core Business"; 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 brand.
Summarized segment information for continuing operations for the years ended
December 31, 2000 and 1999 is as follows:
Year Ended December 31, 2000 Core Business eCOST.com eLinux Consolidated
- ---------------------------- ------------- ---------- ------- ------------
Net sales $702,448 $109,965 $ 6,214 $818,627
Gross profit 82,006 5,161 666 87,833
Operating income (loss) 4,529 (9,441) (2,791) (7,703)
Year Ended December 31, 1999 Core Business eCOST.com eLinux Consolidated
- --------------------------- ------------- --------- ------- ------------
Net sales $693,391 $ 36,790 $ - $730,181
Gross profit 79,290 261 - 79,551
Operating income (loss) 2,047 (6,183) - (4,136)
Segment information is not provided for eCOST.com for the year ended December
31, 1998, as the Company did not operate in the Multi-Category Internet segment
until the formation of eCOST.com in April 1999.
Segment information for eLinux is not presented for the year ended December
31, 1999 and December 31, 1998, as the Company did not operate that segment
until its formation in January 2000.
The Company no longer operates in the Internet Auction segment as a result of
the spin-off of uBid, Inc. in 1999.
F-17
IDEAMALL, INC.
QUARTERLY FINANCIAL INFORMATION
(unaudited)
(in thousands, except per share data)
2000
-------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
As previously As As previously As As previously As As
reported restated(2) reported restated(2) reported restated(2) reported
Net Sales $238,457 $237,137 $194,725 $195,892 $188,306 $187,187 $198,411
Gross Profit 23,004 22,897 21,003 21,197 21,343 21,330 22,409
Income (loss) from (6,847) (6,935) (3,530) (3,370) (704) (714) 2,399
continuing operations
Cumulative effect of change
in accounting principle - (536) - - - - -
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (6,847) $ (7,471) $ (3,530) $ (3,370) $ (704) $ (714) $ 2,399
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings
(loss) per share $ (0.66) $ (0.67) $ (0.34) $ (0.32) $ (0.07) $ (0.07) $ 0.23
======== ======== ======== ======== ======== ======== ========
1999
----------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (3)
------------ ------------- ------------- ---------------
Net Sales $ 176,289 $161,535 $172,377 $221,754
Gross Profit 20,037 18,982 18,215 22,317
Income (loss) from
continuing operations 388 (277) (2,533) (2,281)
Loss from discontinued
Operations (1) (2,685) (3,555) - -
--------- -------- --------- ---------
Net income (loss) (2,297) (3,832) (2,533) (2,281)
========= ======== ========= =========
Basic and diluted earnings
(loss) per share $ (0.22) $ (0.37) $ (0.24) $ (0.22)
========= ======== ========= =========
(1) See Note 1 to the consolidated financial statements for a discussion of the
uBid spin-off.
(2) During the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements.
Effective January 1, 2000, the Company recorded the cumulative effect of
the accounting change and, accordingly, the quarterly information for the
first three quarters of 2000, which had been previously reported, has been
restated.
(3) Had the new method of revenue recognition under SAB 101 been used in prior
years, the change in net loss for the fourth quarter of 1999 would have
been immaterial.
F-18
SCHEDULE II
IDEAMALL, INC.
Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1999 and 2000
(in thousands)
Balance at Additions Deduction Balance
Beginning Charged to from at End
of Year Operations Reserves of Year
------------ ------------ ------------ ------------
Allowance for doubtful accounts for the year
ended:
December 31, 1998 $2,859 $ 3,927 $ (3,110) $3,676
December 31, 1999 3,676 3,206 (5,399) 1,483
December 31, 2000 1,483 2,341 (2,662) 1,162
Reserve for inventory for the year ended:
December 31, 1998 5,364 6,172 (6,796) 4,740
December 31, 1999 4,740 2,019 (4,428) 2,331
December 31, 2000 2,331 2,478 (3,702) 1,107
Restructuring reserve for the year ended:
December 31, 1998 - 10,452 (10,452) -
Deferred tax asset valuation allowance for the
year ended:
December 31, 1999 - 3,380 - 3,380
December 31, 2000 3,380 3,130 - 6,510
F-19