<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
------ ------
Commission file number 0-25790
CREATIVE COMPUTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4518700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2645 Maricopa Street
Torrance, California 90503
(address of principal executive offices)
(310) 787-4500
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- --------
There were 9,773,912 outstanding shares of COMMON STOCK at August 7, 1996.
<PAGE>
CREATIVE COMPUTERS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Consolidated Balance Sheets.................................... 2
Consolidated Statements of Operations.......................... 3
Consolidated Statements of Cash Flows.......................... 4
Condensed Notes to the Consolidated Financial Statements....... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 6
Item 4 - Submission of Matters to a Vote of Security-Holders... 10
PART II - OTHER INFORMATION.................................... 11
SIGNATURE...................................................... 12
</TABLE>
1
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CREATIVE COMPUTERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,093 $ 13,082
Securities available for sale 4,140 12,575
Accounts receivable, net of allowance for
doubtful accounts 14,566 18,305
Inventories 35,764 52,026
Prepaid expenses and other current assets 3,426 4,231
Deferred income taxes 4,625 1,109
------- --------
Total current assets 75,614 101,328
Property, plant and equipment, net 10,933 10,814
Deferred income taxes 2,119 -
Other assets 323 427
------- --------
$88,989 $112,569
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $28,803 $ 46,098
Accrued expenses and other current liabilities 8,460 8,642
Capital leases - current portion 246 250
Notes payable - current portion 38 31
------- --------
Total current liabilities 37,547 55,021
Capital leases 414 535
Notes payable 53 54
Deferred income taxes - 399
------- --------
Total liabilities 38,014 56,009
------- --------
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares
authorized; 9,773,912 and 9,750,000 shares issued
and outstanding 10 10
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding
Additional paid in capital 53,839 51,547
Retained earnings (deficit) (2,874) 5,003
------- --------
Total stockholders' equity 50,975 56,560
------- --------
$88,989 $112,569
======= ========
</TABLE>
See condensed notes to consolidated financial statements.
2
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CREATIVE COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $94,527 $82,743 $203,698 $170,808
Cost of goods sold 88,085 70,866 184,034 146,624
------- ------- -------- --------
Gross profit 6,442 11,877 19,664 24,184
Selling, general and administrative expenses 15,556 9,077 33,016 18,687
------- ------- -------- --------
Income (loss) from operations before
interest and income taxes (9,114) 2,800 (13,352) 5,497
Interest income 137 205 235 79
------- ------- -------- --------
Income (loss) before income taxes (8,977) 3,005 (13,117) 5,576
Provision (benefit) for income taxes (3,600) 1,128 (5,240) 2,163
------- ------- -------- --------
Net income (loss) $(5,377) $ 1,877 $ (7,877) $ 3,413
======= ======= ======== ========
Earnings (loss) per share $ (0.55) $ 0.20 $ (0.81) $ 0.42
======= ======= ======== ========
Weighted average shares outstanding 9,771 9,304 9,763 8,142
------- ------- -------- --------
</TABLE>
See condensed notes to consolidated financial statements.
3
<PAGE>
CREATIVE COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,877) $ 3,413
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Depreciation and amortization 946 445
Increase in allowance for doubtful accounts 1,994 268
Increase in inventory reserves 5,544 375
Deferred income taxes (6,034) 136
Changes in operating assets and liabilities:
Accounts receivable 1,745 (3,747)
Inventories 10,718 (14,612)
Prepaid expenses and other current assets 805 (2,445)
Other assets 104 (174)
Accounts payable (17,295) 1,241
Accrued expenses and other current liabilities (182) 5,336
Income taxes payable - (715)
-------- --------
Total adjustments (1,655) (13,892)
-------- --------
Net cash used in operating activities (9,532) (10,479)
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale (14,043) (14,671)
Redemptions of securities available for sale 22,478 -
Acquisition of property, plant and equipment (1,065) (4,520)
Increase in related party notes receivable - (370)
-------- --------
Net cash provided by (used in) investing activities 7,370 (19,561)
-------- --------
Cash flows from financing activities:
Net line of credit payments - (3,279)
Borrowing (payments) under notes payable, net 6 (1,031)
Payments under notes payable - related parties - (415)
Proceeds from profits realized by Director in sale of stock 2,160 -
Principal payments of obligations under capital leases (125) (364)
Subordinated debt borrowings - 2,000
Net proceeds from initial public offering - 34,401
Proceeds from stock issued under stock option plans 132 -
-------- --------
Net cash provided by financing activities 2,173 31,312
-------- --------
Net increase in cash and cash equivalents 11 1,272
Cash and cash equivalents:
Beginning of the period 13,082 3,348
-------- --------
End of the period $ 13,093 $ 4,620
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
4
<PAGE>
CREATIVE COMPUTERS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The consolidated interim financial statements include the accounts of
Creative Computers, Inc. (a Delaware corporation) and its wholly owned
subsidiaries (the Company) and have been prepared, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
regulations. Although the Company believes that the disclosures herein are
adequate to make the information not misleading, these financial statements
should be read in conjunction with the audited financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K at
December 31, 1995.
In the opinion of management, the accompanying financial statements contain
all adjustments necessary to present fairly the financial position of the
Company at June 30, 1996 and 1995 and the results of operations and cash
flows for the six months ended June 30, 1996 and 1995.
2. HOLDING COMPANY TRANSACTION
On February 22, 1995, the Company (a California corporation) became a
wholly-owned subsidiary of Creative Computers, Inc., a newly formed
Delaware corporation, by merger of a wholly-owned subsidiary of the newly
formed Delaware corporation into the Company. In the merger, 10,000 shares
of Common Stock of the Company outstanding prior to the merger were
converted into 4,900,000 shares of Common Stock in the newly formed
Delaware corporation. The accompanying financial statements have been
retroactively adjusted to give effect to this transaction.
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of
common shares and common share equivalents outstanding during each period,
after retroactive adjustment for the Holding Company Transaction (Note 2).
Common share equivalents include dilutive stock options and warrants, if
any, using the treasury stock method.
4. CONVERSION OF STOCK WARRANT
On April 1, 1995, the holder of the Company's subordinated debt exercised
its warrant to purchase up to 30% of the equity of the Company for $5
million. The debt holder exercised the warrant by canceling the
subordinated debt and reducing by $50,000 the amount of cash the Company
was required to pay for interest accrued through the date of conversion.
5. PUBLIC STOCK OFFERINGS
On April 3, 1995, the Company completed an initial public offering (the
Offering) of 2,250,000 shares of common stock at an offering price of
$17.00 per share. Net proceeds to the Company were $34,401,000, after
deducting the underwriting discount and other costs associated with the
Offering.
In connection with the Offering, the Company purchased a retail store
location previously owned by the Company's majority stockholders by
repaying the indebtedness on the property of approximately $1,297,000,
canceling related party notes receivable in the amount of $1,771,000,
making a payment of approximately $181,000 to the stockholders, and
recording a payable to a related company for $251,000 which was paid in May
1995. The aggregate purchase price for the property was $3.5 million, an
amount determined by the Board of Directors to be the current fair
5
<PAGE>
value of the property based on a recent appraisal. However, the property
has been included in the Company's financial statements at the
stockholders' historical cost of $1,823,000 which resulted in a reduction
in the Company's retained earnings of $1,677,000.
On August 23, 1995, the Company completed a follow-on offering for
2,300,000 shares of common stock, of which 500,000 shares were sold by the
Company, at an offering price of $26.25 per share. Net proceeds to the
Company were $12,149,000, after deducting the underwriting discount and
other costs associated with this follow-on offering.
6. PROCEEDS FROM PROFITS REALIZED BY DIRECTOR IN THE SALE OF STOCK
In June 1996, the Company recorded additional paid in capital in the amount
of $2,160,000 which represents cash contributed to the Company associated
with profits realized in the sale of stock by a Director due to Section
16(b) of the Securities Exchange Act of 1934.
7. UNUSUAL PERIOD END CHARGES
During the quarter ended June 30, 1996, the Company analyzed inventory by
category and age in conjunction with an analysis of market conditions
including the uncertainties surrounding Apple in the first half of the
year. As a result, the Company recorded write-downs of $3,700,000 of
inventory including adjustments for slow-moving and excessive inventory,
$1,600,000 for accounts receivable, and $1,700,000 for products returned to
vendors for which the Company does not anticipate payment.
During the quarter ended March 31, 1996, the Company experienced
approximately $1,900,000 in losses due to theft and inventory shrinkage.
Some portion of this total may be recovered from insurance. Customer
fraudulent credit card charges and chargebacks also increased resulting in
a charge of $1,300,000 during the quarter ended March 31, 1996. In
addition, the Company was victimized by external credit card fraud,
including two schemes investigated by the Secret Service and others
investigated by law enforcement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company began operations in 1987 with a single retail store and mail order
operations conducted through advertisements in national magazines. The Company
added an additional retail store in 1988, became an authorized Apple dealer in
1991, opened two additional retail stores in the second quarter of 1993 and
relocated its original store in the fourth quarter of 1993.
In May of 1993, the Company relocated its mail order/catalog operations to a
central location. The Company shifted its principal distribution and marketing
focus from retail stores to direct mail distribution and marketing. In March
1994, the Company received authorization from Apple to offer the full retail
line of Apple products via direct mail. The Company distributed the first
edition of its MacMall catalog in April 1994, the first edition of its PC Mall
catalog in May 1995, and the first edition of its DataCom Mall catalog in
January 1996.
The Company operates a full-service distribution center in Memphis, Tennessee.
The distribution center consists of over 220,000 square feet, and was opened
during the fourth quarter of 1995. On May 1, 1997, the Company is obligated to
lease an additional 105,000 square feet of the existing distribution center
building. Net sales of the Company are primarily derived from the sale of
personal computer hardware, software, peripherals and accessories to
individuals, home offices, small businesses and large corporations. The Company
is dependent on sales of Apple computers and software and peripheral products
used with
6
<PAGE>
Apple computers. Products manufactured by Apple represented approximately 34.8%
of the Company's net sales for the quarter ended June 30, 1996 as compared to
52.6% for the comparable period of 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30,1995
Net sales for the quarter ended June 30, 1996 were $94.5 million, a 14% increase
over net sales of $82.7 million for the comparable quarter in 1995. Net sales
for the period increased primarily due to growth in PC sales, which generated
sales of $17 million for the three months ended June 30, 1996, compared with
$3.9 million for only two months during the same period last year. Apple and
related sales were $77.5 million for the three months ended June 30, 1996 as
compared with $78.8 million for the comparable period in the prior year. Mail
order/catalog net sales reflected an increase of 23.6%, from $68.2 million in
the second quarter last year to $84.3 million for the quarter ended June 30,
1996. The Company distributed approximately 10 million catalogs (4 million of
PC Mall and DataCom Mall) during the three months ended June 30, 1996. During
the same period ended June 30, 1995, the Company distributed approximately 8.1
million catalogs.
Gross profit decreased by $5.4 million to $6.4 million for the quarter ended
June 30, 1996 from $11.9 million in the second quarter of 1995. Gross profit as
a percentage of net sales decreased to 6.8% for the second quarter of 1996 from
14.3% at June 30, 1995. The decrease in gross profit margin was primarily the
result of inventory write-downs of $3.7 million which includes adjustments for
slow-moving and excessive inventory and $1.7 million for products returned to
vendors for which the Company does not anticipate payment. The Company shipped
approximately 189,000 mail order/catalog orders during the three months ended
June 30, 1996 as compared to 148,000 for the same period last year. The
Company's average order size was $447 for the three months ended June 30, 1996
as compared to $460 for the same period in 1995.
Selling, general and administrative (SG&A) expenses increased by $6.5 million to
$15.6 million for the three months ended June 30, 1996 from $9.1 million for the
comparable period in the prior year. The increase in SG&A costs was primarily
attributable to an increase in personnel costs which included the strengthening
of the Company's management team, an increase in advertising costs resulting
from the increased catalog circulation, and a $1.6 million increase in allowance
for doubtful accounts. As a percentage of net sales, SG&A expenses increased to
16.4% for the quarter from 11.0% for the same quarter in 1995.
Interest income for the three months ended June 30, 1996 decreased by $68,000 or
33%, to $137,000 compared to $205,000 for the comparable quarter in 1995. The
decrease was due to a reduction in cash invested in securities available for
sale.
7
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SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Net sales increased by $32.9 million or 19%, to $203.7 million in the six months
ended June 30, 1996 from $170.8 million in the six months ended June 30, 1995.
Net sales for the period increased primarily due to growth in PC sales, which
generated sales of $38 million for the six months ended June 30, 1996, compared
with $3.9 million for only two months during the same period last year. Apple
and related sales were $165.7 million for the six months ended June 30, 1996 as
compared with $166.9 million for the comparable period in the prior year. Mail
order/catalog net sales reflected an increase of 30%, from $139.6 million for
the six months ended June 30, 1995 to $181.4 million for the six months ended
June 30, 1996. Approximately 20.2 million catalogs were mailed during the six
months ended June 30, 1996, including 1.4 million just prior to the end of the
second quarter. During the same period ended June 30, 1995, the Company
distributed approximately 12.9 million catalogs.
Gross profit decreased by $4.5 million to $19.7 million for the six months ended
June 30, 1996 from $24.2 million in the same period of 1995. Gross profit as a
percentage of net sales decreased to 9.6% for the six months of 1996 compared to
14.2% for the six months of 1995. The decrease in gross profit margin was
primarily the result of write-downs of $3.7 million for slow-moving and
excessive inventory, $1.7 million for products returned to vendors for which
the Company does not anticipate payment, and $1.9 million for theft and
shrinkage of inventory in the first quarter of 1996.
Selling, general and administrative (SG&A) expense increased by $14.3 million to
$33 million for the six months ended June 30, 1996 from $18.7 million for the
comparable period in the prior year. The increase in SG&A was primarily the
result of an increase in personnel costs which included strengthening of the
Company's management team, an increase in advertising costs resulting from
increased catalog circulation, operational inefficiencies associated with the
relocation of the Company's distribution center to Memphis, Tennessee from
Torrance, California, along with a $2.0 million increase in the allowance for
doubtful accounts. As a percent to net sales, SG&A expenses increased to 16.2%
for the period as compared to 10.9% for the six months of 1995.
Interest income for the six months ended June 30, 1996 increased by $156,000 or
197%, to $235,000 compared to $79,000 for the comparable quarter in 1995. The
increase in interest income is a result of the investment of cash proceeds from
the Company's stock offerings in April and August of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been funding the working capital
requirements created by its rapid growth in sales. Prior to April 1995, the
Company's primary sources of financing have been borrowings from its
stockholders, private investors and financial institutions. In April and August
of 1995, the Company completed an initial public offering and a follow-on
offering of its common stock which resulted in net proceeds to the Company of
approximately $46.6 million. As of June 30, 1996, the Company had cash and
short term investments of $17.2 million.
Inventories decreased to $35.8 million at June 30, 1996 from $52 million at
December 31, 1995 as a result of continued efforts to improve inventory turns
and inventory write-downs described above of $5.6 million. Accounts receivable
decreased $3.7 million at June 30, 1996 to $14.6 million compared to $18.3
million at December 31, 1995, partially as a result of increasing the allowance
for doubtful accounts by $2.0 million.
During the six months ended June 30, 1996, the Company's capital expenditures
were $1.1 million primarily for distribution equipment and leasehold
improvements for the Company's new Memphis distribution center. Capital
expenditures for the comparable period of last year were $4.5 million. The
Company's primary capital needs will continue to be the funding of its working
capital requirements for anticipated sales growth.
8
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The Company has an existing credit facility of $50.0 million with a financial
institution. At June 30, 1996, the Company had $7.4 million outstanding under
this credit facility. The credit facility functions in lieu of a vendor trade
payable for inventory purchases and is included in accounts payable. The
revolving credit line is cancelable upon 30 days advance notice and does not
bear interest if paid within 60 days of the date inventory is purchased. The
credit facility is secured by substantially all of the Company's assets and
contains certain covenants which require the Company to maintain a minimum level
of tangible net worth.
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.
In June 1996, a Director contributed additional paid in capital of $2.2 million
associated with profits realized in the sale of stock due to Section 16(b) of
the Securities Exchange Act of 1934.
As part of its growth strategy, the Company may, in the future, acquire other
companies in the same or complementary lines of business. Any such acquisition
and the ensuing integration of the operations of the acquired company would
place additional demands on the Company's management and operating and financial
resources. The Company is engaged in ongoing evaluation of and discussions with
third parties regarding potential acquisitions and from time to time has
submitted, and may in the future submit, proposals with respect to such
potential acquisitions. The Company currently has no definitive agreements with
respect to any such acquisitions.
INFLATION
Inflation has not had a material impact upon operating results, and the Company
does not expect it to have such an impact in the future. There can be no
assurances, however, that the Company's business will not be so affected by
inflation.
OUTLOOK
- -------
The Company expects sales for the third quarter of 1996 to exceed its second
quarter 1996 results, but to fall below the same quarter last year. The
anticipated decline is a result of a number of factors, including reduced
circulation of MacMall catalogs for most of the quarter compared to the same
quarter last year in light of Apple's past difficulties, including product
shortages on Apple CPUs such as their newly introduced Mac lines and high-end
and mid-range Powerbook models. Fourth quarter 1996 sales currently are
expected to surpass significantly the third quarter of 1996 as a result of
expected increased availability of Apple CPUs and planned increased circulation
of the MacMall catalog during the fourth quarter. The Company also anticipates
an increase in sales of its Wintel-platform product lines during the third and
fourth quarters. Wintel-platform sales significantly increased during the third
quarter to date as a result of the Company's increased efforts to grow this
part of the business. The Company recently received authorization from Hewlett
Packard to carry additional CPU products which is expected to contribute to
further increases in Wintel-platform sales.
BUSINESS FACTORS
- ----------------
Except for historical information, all of the statements, expectations and
assumptions contained in this report are forward looking statements. The
realization of any or all of these expectations and assumptions is subject to a
number of risks and uncertainties, and it is possible that the assumptions made
by management may not materialize. In addition to the factors set forth above,
other important factors that could cause actual results to differ materially
from our expectations include competition from other catalog and retail store
resellers and price pressures related thereto; uncertainties surrounding the
supply of and demand for products manufactured by and compatible with Apple
Computer and clones thereof; and our reliance on Apple Computer and other
vendors. This list of risk factors is not intended to be exhaustive. Reference
should also be made to the risk factors set forth from time to time in the
Company's SEC reports, including but not limited to its Annual Report on Form
10-K for 1995.
9
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held its 1996 Annual Meeting of Stockholders on May 30, 1996.
At the Annual Meeting the stockholders voted on the following matters:
1. The reelection as directors of Frank F. Khulusi, Sam U. Khulusi,
Ahmed O. Alfi and Al S. Joseph, all whom were reelected at the Annual Meeting.
2. The ratification of the appointment of Price Waterhouse LLP as
independent auditors for the Company for the year ended December 31, 1996 (the
"Accountant's Proposal").
3. The approval of an amendment to the Company's 1994 Stock Incentive Plan
to increase the number of shares authorized to be issued under the plan (the
"Stock Plan Proposal").
The results of voting for the Accountant's Proposal and the Stock Plan
Proposal were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--------- ------- -----------
<S> <C> <C> <C>
Accountant's Proposal 8,650,310 25,200 7,100
Stock Plan Proposal 5,654,652 839,711 9,250
</TABLE>
10
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PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<C> <S>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
10.1 Letter Agreement between Richard Finkbeiner and the Company
(b) Reports on Form 8-K
None.
</TABLE>
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE COMPUTERS, INC.
Date: August 7, 1996 By /s/ RICHARD FINKBEINER
-----------------------
Richard Finkbeiner
Chief Financial Officer
(Duly Authorized Officer of the
Registrant and Principal Financial
Officer)
12
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EXHIBIT 10.1
May 21, 1996
Mr. Richard Finkbeiner
Dear Rick:
On behalf of Creative Computers, Inc. it is my pleasure to confirm our
offer to you of the position of Chief Financial Officer. As we discussed, if
you accept this offer you will be reporting directly to me. I have enjoyed
speaking with you and very much hope that you will accept our offer.
Your duties generally will be in the areas of overseeing and managing the
Company's finance, planning, accounting and administrative functions, as well as
possibly human resources, and you will have dual responsibility for many other
areas, and you may be assigned other duties as needed and your duties may change
from time to time on reasonable notice.
You will earn a monthly base salary of $19,583.33 (payable semi-monthly).
Your bonus potential will be a maximum of $117,500 annually. Twenty-five percent
of the total bonus potential is attainable based on quarterly goals based on
company performance. The remaining 75% of the bonus potential will be based
upon company performance for each fiscal year. For 1996, your bonus, if any,
will be prorated based on the amount of time you are employed here. For the
first twelve months of your employment with the Company, you are guaranteed a
minimum $25,000 bonus, payable at the end of the first twelve months if you have
not already achieved $25,000 in bonus by meeting your quarterly or annual bonus
goals.
You will receive a signing bonus of $25,000 upon the commencement of your
employment. If you decide to leave Creative during the first 90 days, you will
pay back all of this signing bonus.
You will be granted options to purchase 75,000 shares of Creative
Computers, Inc. stock at the price on the date you accept this offer. The first
<PAGE>
Mr. Richard Finkbeiner
May 21, 1996
Page 2
5,000 shares will vest when your employment begins. Options on the remaining
70,000 shares will vest as follows, all provided you are still employed by the
Company: options to purchase 35,000 shares will vest quarterly over three years
at a rate of 8.33% per quarter; and options to purchase an additional 35,000
shares will vest annually over five years at a rate of 20% per year.
We will also reimburse you for (or advance as necessary) your moving and
relocation expenses as follows: packing and moving; broker fees and closing
costs for the sale of your current residence in Minnesota; closing costs for
buying a home in Southern California (not including any borrowing costs on the
purchase money); and reasonable living expenses (limited to apartment, rental
car and food) for you while you are living here for up to six months or until
your house in Minnesota sells, whichever is sooner. We will also pay for coach
airfare for you to visit Minnesota once every two weeks during this period. As
to all of the expenses associated with your relocation, we understand that you
will use your best efforts to minimize the expenses as much as reasonably
possible.
You will be eligible for all benefits sponsored by the Company subject to
the terms and conditions of the various benefit programs, including medical,
dental and life insurance. Our 401(k) plan requires that you be employed for at
least 6 months to be eligible, and allows enrollment only twice a year. We
cannot waive those conditions. As we discussed, the Company will reimburse you
for the cost of a $500,000 term life insurance policy, with a carrier and at a
rate subject to approval in the Company's discretion. You will receive a $600
per month auto allowance. You will be eligible for three weeks vacation per
year during your first two years of employment and four weeks per year after the
first three years, provided you are still employed by the Company.
We hope that our association will continue for a substantial period of
time, but we recognize that the future is inherently uncertain and that
assurances of permanent or continuing employment are not feasible. Therefore,
in accordance with our standard policy, your employment will be "at-will." In
other words, either you or the Company can end your employment at any time for
any reason, with or without cause. This term of employment is not subject to
change or modification of any kind except in a writing signed by you and me.
Please note that this agreement supersedes any prior agreements, arrangements or
understandings concerning your employment, and that it constitutes the full,
complete and exclusive agreement between you and the Company as to all matters
covered herein.
In addition, you agree not to in any way jeopardize or expose Creative to
liability by using for Creative's benefit trade secrets of any former employer
or
<PAGE>
Mr. Richard Finkbeiner
May 21, 1996
Page 3
client. You further agree and represent that you have not entered into any
agreements with any former employer or client that would affect your ability to
give your full efforts to Creative, would expose Creative to any liability, or
would negatively impact Creative's ability to run its business and compete
effectively for personnel or for business on a go-forward basis. You agree to
sign an agreement to this effect (as well as a confidentiality agreement) prior
to or upon commencement of your employment here.
We would like you to begin work as soon as possible, but not later than
June 10, 1996.
As you know, we plan to announce your joining the Company prior to your
actual start date. Therefore, it is important for you to carefully consider
this offer and be willing to make a definite commitment to joining us before you
sign and send back this letter.
We very much look forward to your joining our organization. In order to
confirm your acceptance of our offer as set forth here, please sign a copy of
this letter and return it to me. If there is anything that you want to discuss
further, please do not hesitate to contact me.
Sincerely,
Frank Khulusi
President and Chief
Executive Officer
AGREED AND ACCEPTED THIS DAY OF MAY, 1996.
-----
- -----------------------------
Richard Finkbeiner
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