PartII>see the link in part I for full report>>>Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Unless otherwise stated, all sales increase comparisons are results which
exclude the closed retail stores.
Net sales for the quarter ended September 30, 1998 were $185.7 million, a 51%
increase over last year's third quarter. Including net sales from the closed
retail stores, net sales from all operations grew 40% from $132.2 million for
the third quarter last year. Net sales for the quarter from Elek-Tek,
ComputAbility and uBid accounted for $53.2 million. PC/WINTEL sales increased
92% (22% excluding acquisitions) from $49.7 million in last year's comparable
quarter to $95.5 million for the three months ended September 30, 1998.
Increased PC/WINTEL sales from acquisitions of Elek-Tek and ComputAbility
accounted for $32.5 million or 71% of the increase. Apple/Macintosh- related
product sales increased 2% to $75.0 million for the three months ended September
30, 1998 as compared with $73.4 million for the comparable period in the prior
year. PC/WINTEL sales comprised over 56% of total net sales for the third
quarter in 1998 versus 39% for the same quarter last year.
Gross profit from all operations increased $4.4 million primarily due to
increased sales. Gross profit as a percent of net sales was 11.5% and 11.8%,
excluding uBid. This represents a decrease from the Company's second quarter
gross profit of 12.3% and 12.5%, respectively, and a decrease from last year's
third quarter gross profit of 12.8%. The sequential change in gross profit
percentage resulted from a shift in mix favoring CPUs and the effect of the
Company's aggressive iMac promotion. The Company's gross profit percentage may
vary from quarter to quarter, depending on the continuation of key vendor
support programs, including price protections, rebates and return policies and
based on product mix, pricing strategies and other factors.
Selling, general and administrative expenses for the third quarter of 1998
increased $6.0 million compared with the same period last year, inclusive of
closed retail stores. Excluding uBid, the increase was $3.8 million due to
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volume-related support costs. Selling, general and administrative expenses as a
percent of net sales declined from 10.9% in last year's third quarter to 10.7%
this year without the investment in uBid.
Net interest expense for the three months ended September 30, 1998 was $100,000
compared to net interest income of $152,000 for the comparable quarter in 1997.
The net interest expense for 1998 resulted from debt incurred and cash invested
to acquire Elek-Tek, Inc. and ComputAbility, Inc. Net interest income for 1997
resulted from the investment of excess cash.
Net income decreased by $1,159,000 to $435,000 for the three months ended
September 30, 1998 from $1,594,000 for the same period last year. Excluding the
Company's investment in uBid, net income would have been $1,113,000, or $0.11
per diluted share, in the third quarter of 1998.
If the Company completes the pending IPO, a measurement date would occur as of
the effective date of the IPO based on the current terms of outstanding options
to purchase "u"Bid Common Stock, and the Company would be required to compute
compensation expense based upon the difference between the exercise price of the
"u"Bid options and the IPO price. Based upon the difference between the assumed
IPO price of $13 per share contained in the prospectus for the pending IPO, and
the exercise prices of the 858,568 options outstanding at September 30, 1998,
the total compensation charge would be approximately $10.7 million, which would
be recognized over the vesting period.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997
Net sales from all operations (including the closed retail stores) increased by
$131.4 million or 36% to $499.8 million in the nine months ended September 30,
1998 from $368.4 million in the nine months ended September 30, 1997. Net sales
for the nine-month period from Elek-Tek, ComputAbility and uBid account for
$134.4 million. Net sales for the period increased primarily due to growth in
PC/WINTEL sales, which increased 117% and generated sales of $280.0 million for
the nine months ended September 30, 1998 compared with $129.3 million for the
nine months ended September 30, 1997. Increased PC/WINTEL sales from
acquisitions of Elek-Tek and ComputAbility accounted for $103.6 million or 69%
of the increase. Apple/Macintosh and related sales were $197.7 million for the
nine months ended September 30, 1998 as compared with $239.1 million for the
comparable period in the prior year. Approximately 53.0 million catalogs were
mailed during the nine months ended September 30, 1998, as compared with 46.7
million catalogs for the comparable period in the prior year.
Gross profit from all operations increased by $5,183,000 to $52.4 million for
the nine months ended September 30, 1998 from $47.2 million in the same period
of 1997. Gross profit as a percentage of net sales decreased to 12.1% for the
nine months of 1998, excluding the write-offs in the first quarter and uBid,
compared to 12.8% for the nine months of 1997.
Selling, general and administrative expenses, excluding the one-time
restructuring charge related to the retail store closures, increased by $22.3
million to $64.9 million for the nine months ended September 30, 1998 from $42.6
million for the comparable period in the prior year. Approximately $6.8 million
of the increase was associated with the write-offs mentioned in Note 4, $15.2
million was the result of increased sales, and the remainder was due to support
costs for higher levels of expected Mac sales that were not realized during the
first quarter and support costs for uBid.
Net interest expense for the nine months ended September 30, 1998 was $319,000
compared to interest income of $473,000 for the comparable period in 1997. The
net interest expense for 1998 resulted from debt incurred and cash invested to
acquire Elek-Tek, Inc. and ComputAbility, Inc. Net interest income for 1997
resulted from the investment of excess cash.
As a result of the foregoing, the Company incurred a net loss of $12.2 million
or $1.20 per share, for the nine months ended September 30, 1998 compared to net
income of $3.1 million, or $0.31 per diluted share, for the same period last
year.
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Liquidity and Capital Resources
The Company's primary capital need has been the funding of the working capital
requirements created by its rapid growth in sales. Historically, the Company's
primary sources of financing have been from public offerings and borrowings from
its stockholders, private investors and financial institutions.
The Company has funded the startup and working capital requirements of uBid with
a net investment of $3.7 million through September 30, 1998. As discussed in
Note 2, on July 2, 1998, uBid filed a registration statement for an IPO. The
net proceeds after IPO expenses would be used to repay the advances made by the
Company to uBid as well as future uBid working capital needs. It is anticipated
that the Company will not be advancing additional funds to uBid after the IPO.
There can be no assurance, however, as to when or if the proposed IPO will take
place.
As of September 30, 1998, the Company had cash, cash equivalents and short-term
investments of $15.5 million and working capital of $20.8 million. Inventories
increased to $45.0 million at September 30, 1998 from $42.6 million at December
31, 1997. Accounts receivable decreased to $40.6 million at September 30, 1998
from $42.5 million at December 31, 1997 due in part to the collection of
receivables purchased from the Elek-Tek acquisition. During the nine months
ended September 30, 1998, the Company's capital expenditures were $2.7 million,
versus $1.6 million for the comparable period last year.
As of September 30, 1998, the Company had an existing credit facility consisting
of separate credit lines totaling $60 million. Part of the credit facility
functions in lieu of a vendor trade payable for inventory purchases, is included
in accounts payable, and does not bear interest if paid within terms specific to
each vendor. Part of the credit facility functions as a working capital line of
credit secured by, and is limited to, a percentage of eligible inventory and
accounts receivable, and bears interest at the prime rate. For 1998, the
Company repaid $7.4 million borrowed under this facility. As of September 30,
1998, the Company had $2.8 million in borrowings under the credit facility. The
overall credit facility is secured by substantially all of the Company's assets
and contains certain covenants that require the Company to maintain a minimum
level of tangible net worth and income and a maximum leverage ratio. The
Company believes it is currently in compliance with all such covenants.
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 1999. However, if the Company
requires additional funds, such as for acquisitions or expansion or to fund a
significant downturn in sales that causes continued losses, there are no
assurances that adequate financing will be available at acceptable terms.
In July 1996, the Company announced its plan to repurchase up to 1,000,000
shares of its Common Stock. The shares will be repurchased from time to time at
prevailing market prices, through open market or negotiated transactions,
depending upon market conditions. No limit was placed on the duration of the
repurchase program. There is no guarantee as to the exact number of shares that
the Company will repurchase. Subject to applicable securities laws, repurchases
may be made at such times and in such amounts as the Company's management deems
appropriate. The program can also be discontinued at any time management feels
additional purchases are not warranted. The Company will finance the repurchase
plan with existing working capital. As of September 30, 1998, the Company has
repurchased 15,000 shares under the program.
As part of its growth strategy, the Company may, in the future, acquire other
companies in the same or complementary lines of business. Any such acquisition
and the ensuing integration of the operations of the acquired company would
place additional demands on the Company's management and operating and financial
resources.
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.
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