<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CREATIVE COMPUTERS, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
CREATIVE COMPUTERS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 30, 1996
The Annual Meeting of Stockholders (the "Annual Meeting") of Creative
Computers, Inc., a Delaware corporation (the "Company"), will be held at the
Marriot Hotel, 3635 Fashion Way, Torrance, California 90503, on Thursday, May
30, 1996, at 10:00 a.m. local time for the following purposes:
1. To elect four directors of the Company to serve until the 1997 Annual
Meeting of Stockholders or until their successors are duly elected and
qualified;
2. To ratify the appointment of Price Waterhouse LLP as the independent
auditors for the Company for the fiscal year ending December 31, 1996;
3. To approve an amendment to the 1994 Stock Incentive Plan; and
4. To transact such other business as may properly come before the Annual
Meeting and any adjournment or postponement thereof.
The foregoing items of business, including the nominees for directors, are
more fully described in the Proxy Statement which is attached and made a part
of this notice.
The Board of Directors has fixed the close of business on April 12, 1996 as
the record date for determining the stockholders entitled to notice of and to
vote at the Annual Meeting and any adjournment or postponement thereof.
All stockholders are cordially invited to attend the Annual Meeting in
person. However, whether or not you expect to attend the Annual Meeting in
person, you are urged to mark, sign, date and return the enclosed proxy card
as promptly as possible in the postage-prepaid envelope provided to ensure
your representation and the presence of a quorum at the Annual Meeting. If you
send in your proxy card and then decide to attend the Annual Meeting to vote
your shares in person, you may still do so. Your proxy is revocable in
accordance with the procedures set forth in the Proxy Statement.
By Order of the Board of Directors,
[SIGNATURE]
FRANK F. KHULUSI
Chairman of the Board
and Chief Executive Officer
Torrance, California
May 3, 1996
<PAGE>
CREATIVE COMPUTERS, INC.
2645 MARICOPA STREET
TORRANCE, CALIFORNIA 90503
PROXY STATEMENT
GENERAL
This Proxy Statement is furnished to stockholders of Creative Computers,
Inc., a Delaware corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company (the "Board") of proxies
in the enclosed form for use in voting at the Annual Meeting of Stockholders
(the "Annual Meeting") of the Company to be held on Thursday, May 30, 1996, at
10:00 a.m., local time, at the Marriott Hotel, 3635 Fashion Way, Torrance,
California 90503 and any adjournment or postponement thereof. The shares
represented by the proxies received, properly marked, dated, executed and not
revoked will be voted at the Annual Meeting.
These proxy solicitation materials are being mailed to stockholders on or
about May 6, 1996.
VOTING AND SOLICITATION
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections. The Inspector of Elections will also determine
whether or not a quorum is present. The presence, in person or by proxy, of
the holders of a majority of the shares of Common Stock issued and outstanding
is necessary to constitute a quorum at the meeting. Shares represented at the
meeting in person or by proxy but not voted will nevertheless be counted for
purposes of determining the presence of a quorum. Accordingly, abstentions and
broker non-votes (shares as to which a broker or nominee has indicated that it
does not have discretionary authority to vote) on a particular matter,
including the election of directors, will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum but will be treated as not voted for purposes of determining the
decision of stockholders with respect to such matter. In the election of
directors, the four nominees for directors who receive the greatest number of
affirmative votes will be elected to the Board of Directors, without giving
effect to abstentions and broker non-votes. Ratification of the appointment of
Price Waterhouse LLP as the Company's independent auditors for the fiscal year
ending December 31, 1996 and the approval of an amendment to the 1994
Incentive Plan require the affirmative vote of a majority of the shares
present or represented at the meeting, assuming that a quorum is present or
represented at the meeting. An abstention or broker non-vote will have the
same effect as a vote cast against this matter.
Proxies in the accompanying form which are properly executed, duly returned
to the Company and not revoked will be voted in accordance with the
instructions therein. IF NO INSTRUCTION IS GIVEN WITH RESPECT TO ANY PROPOSAL
TO BE ACTED UPON, THE PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES
NAMED IN THIS PROXY STATEMENT AND IN FAVOR OF PROPOSAL 2 AND PROPOSAL 3. No
matter currently is expected to be considered at the Annual Meeting other than
the proposals set forth in the accompanying Notice of Annual Meeting, but if
any other matters are properly brought before the Annual Meeting for action,
it is intended that the persons named in the proxy and acting thereunder will
vote in accordance with their discretion on such matters.
The presence at the meeting of a stockholder will not revoke his or her
proxy. However, a proxy may be revoked at any time before it is voted by
delivering to the Company (Attention: Linda G. Louie, at the principal offices
of the Company) a written notice of revocation or a duly executed proxy
bearing a later date.
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing
and mailing proxy solicitation materials for the Annual Meeting and
reimbursements paid to brokerage firms and others for their expenses incurred
in forwarding such materials to beneficial owners of the Company's Common
Stock. The Company may conduct further solicitation personally, telephonically
or by facsimile through its officers, directors and employees, none of whom
will receive additional compensation for assisting with the solicitation.
<PAGE>
RECORD DATE AND SHARES OUTSTANDING
The close of business on April 12, 1996 has been fixed as the record date
(the "Record Date") for determining the holders of shares of Common Stock of
the Company entitled to notice of and to vote at the Annual Meeting. As of the
close of business on the Record Date, the Company had 9,763,740 shares of
Common Stock outstanding. At the meeting each stockholder entitled to vote at
the meeting will be entitled to cast one vote in person or by proxy for each
share of Common Stock held by such stockholder.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the Record Date, (i) by each person who is
known by the Company to beneficially own more than 5% of the Company's Common
Stock, (ii) by each director and nominee, (iii) by each executive officer of
the Company named in the Summary Compensation Table contained herein and (iv)
by all directors and executive officers of the Company as a group. Except as
indicated, each person listed below has sole voting and investment power with
respect to the shares set forth opposite such person's name.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF
NAME AND ADDRESS(1) OWNED CLASS
------------------- ------------ ----------
<S> <C> <C>
Frank F. Khulusi(2).................................... 2,090,000 21.4%
Sam U. Khulusi(3)...................................... 2,251,425 23.0%
Ahmed O. Alfi(4)....................................... 157,884 1.6%
Al S. Joseph........................................... -- --
Amre A. Youness(5) .................................... 777,752 8.0%
West Highland Capital, Inc.(6)......................... 665,000 6.8%
Daniel J. DeVries(7)................................... 16,110 *
Grant L. Trexler(8).................................... 6,366 *
All directors and executive officers as a group
(6 persons)(9)........................................ 4,521,785 46.2%
</TABLE>
- - --------
* Less than 1%.
(1) Unless otherwise indicated, the address for each person is 2645 Maricopa
Street, Torrance, California 90503.
(2) Includes 326,340 shares and 8,575 shares held in trust for the benefit of
the children of Sam Khulusi and Basimah Khulusi, respectively.
(3) Includes 326,340 shares held in trust for the benefit of the children of
Frank Khulusi; this total does not include 170,000 shares that Mr. Khulusi
has indicated are held for the benefit of his mother.
(4) Includes 2,000 shares subject to outstanding options which are exercisable
within 60 days after the record date.
(5) The address for Mr. Youness is 3 Civic Plaza, Suite 170, Newport Beach,
California 92660.
(6) Based on information contained in a Schedule 13G filed with the Securities
and Exchange Commission. The address for West Highland Capital, Inc. is 30
Drake's Landing Road, Greenbrae, California 94904.
(7) Includes 15,510 shares subject to outstanding options which are
exercisable within 60 days after the record date.
(8) Includes 6,366 shares subject to outstanding options which are exercisable
within 60 days after the record date.
(9) Includes 23,876 shares subject to outstanding options which are
exercisable within 60 days after the record date.
2
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
In accordance with the Company's Certificate of Incorporation, the Company's
Board of Directors are elected at each Annual Meeting of stockholders.
Vacancies on the Board of Directors and newly created directorships will
generally be filled by vote of a majority of the directors then in office, and
any directors so chosen will hold office until the next election of directors.
The Board of Directors has no reason to believe that any of its nominees will
be unable or unwilling to serve if elected to office and, to the knowledge of
the Board of Directors, each of its nominees intends to serve the entire term
for which election is sought. However, should any nominee of the Board of
Directors become unable or unwilling to accept nomination or election as a
director of the Company, the proxies solicited by management will be voted for
such other person as the Board may determine.
In voting for directors, each stockholder is entitled to cast one vote for
each candidate. Stockholders are not entitled to cumulate their votes for
members of the Board of Directors. The four nominees for election as directors
who receive the greatest number of affirmative votes will be elected to the
Board of Directors.
The nominees for election are:
Frank F. Khulusi
Sam U. Khulusi
Ahmed O. Alfi
Al S. Joseph
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF
THE NOMINEES NAMED ABOVE
NOMINEES
The names of the nominees, their ages as of the Record Date, and certain
other information about them are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCE
---- --- --------------------- --------
<S> <C> <C> <C>
Frank F. Khulusi............ 29 Chairman of the Board of Directors and 1987
Chief Executive Officer
Sam U. Khulusi.............. 40 Director 1987
Ahmed O. Alfi............... 39 Director 1994
Al S. Joseph................ 63 Director 1995
</TABLE>
Frank F. Khulusi is a co-founder of the Company (and its predecessor) and
has served as Chairman of the Board, President and Chief Executive Officer of
the Company since the Company's inception in 1987.
Sam U. Khulusi is a co-founder of the Company and served as Executive Vice
President and Chief Operating Officer of the Company from October 1994 until
February 1996. From 1987 until October 1994,Mr. Khulusi served as Chief
Financial Officer of the Company.
Ahmed O. Alfi has served as a director of the Company since September 1994.
Mr. Alfi has served as the Chairman of the Board and Chief Executive Officer
of Alfigen, a prenatal diagnostic company, since January 1992. In 1987, Mr.
Alfi founded and continues to co-manage Delphi Investments, Ltd., an
investment management company. From 1991 until May 1993, he was also a
Managing Director of Mitchum, Jones &
3
<PAGE>
Templeton, Inc., an institutional brokerage firm. From March 1980 until
October 1990, Mr. Alfi was a registered representative at Jeffries & Company.
From January 1994 until December 1994, he was a branch manager of Brookstreet
Securities Corporation, a securities firm.
Dr. Al S. Joseph has served as a director of the Company since July 1995.
Dr. Joseph, a former senior engineering executive at Rockwell International,
is the founder of Vitesse Semiconductor, Inc. serving as CEO and Chairman from
1984 through 1988. Dr. Joseph is also a co-founder of Quad Design (now View
Logic). From 1988 to the present Dr. Joseph has been a consultant to the
electronics industry serving such clients as Cray Research, E-Systems
Raytheon, Flextronics International, Booz, Allen & Hamilton, and the Dow
Chemical Company. Dr. Joseph is the father of Ray Joseph, currently employed
as the Director of Business Development for the Company.
COMPENSATION OF DIRECTORS
Under the Company's Directors' Non-Qualified Stock Option Plan each director
who is not an employee of the Company is entitled to receive an option to
purchase 2,000 shares of the Company's Common Stock upon joining the Board.
After the initial grant described above, each director receives an additional
option to purchase 1,000 shares of the Company's Common Stock on the date of
each succeeding annual meeting of stockholders so long as the director has
served on the Board for the entire preceding year. Options are granted at fair
market value on the date of grant and vest on the first anniversary of the
date of grant.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee.
The Board of Directors does not have a nominating committee or a committee
performing the functions of a nominating committee. Although there are no
formal procedures for stockholders to recommend nominations, the Board of
Directors will consider recommendations from stockholders, which should be
addressed to Linda G. Louie, at the principal offices of the Company.
The members of the Audit Committee are Ahmed Alfi and Al Joseph. The Audit
Committee held one meeting during the year ended December 31, 1995. The
functions of the Audit Committee include reviewing and supervising the
financial controls of the Company, making recommendations to the Board of
Directors regarding the Company's auditors, reviewing the books and accounts
of the Company, meeting with the officers of the Company regarding the
Company's financial controls, acting upon recommendations of the auditors and
taking such further actions as the Audit Committee deems necessary to complete
an audit of the books and accounts of the Company.
The members of the Compensation Committee are Frank Khulusi and Ahmed Alfi.
The Compensation Committee held two meetings during the year ended December
31, 1995 and met a number of times on an informal basis. The Compensation
Committee's functions include reviewing with management cash and other
compensation policies for employees, making recommendations to the Board of
Directors regarding compensation matters and determining compensation for the
Chief Executive Officer. In addition, the Compensation Committee administers
the Company's stock plans and, within the terms of the respective stock plan,
determines the terms and conditions of issuances thereunder.
The Board of Directors held a total of eight meetings during the year ended
December 31, 1995. During such year, each director attended over 75% of the
meetings of the Board and the committees of the Board on which he served that
were held during the period he served.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between April 1995 and July 1995, the Company made loans to Frank Khulusi
and Sam Khulusi, each a director and principal stockholder of the Company. The
loans bore interest at 10.0% per annum and the largest amounts owing to the
Company by Frank Khulusi and Sam Khulusi thereunder were $84,435 and $208,435
respectively. These loans were repaid in full during 1995.
4
<PAGE>
Prior to December 31, 1992, Sam Khulusi, a director and principal
stockholder of the Company, and his relatives, made loans to the Company in an
aggregate principal amount of $896,000. The loans had interest rates of
between 0% and 18% depending upon the year in which they were made. The
Company made payments, net of proceeds, of approximately $732,000 on these
loans through December 30, 1994. On December 30, 1994, certain outstanding
obligations owed by the Company to Sam Khulusi and his relatives and owed by
such persons to the Company were consolidated and the remaining balance was
assumed by Frank Khulusi (with the exception of $164,000 owed to a relative
which was repaid in January 1995). The consolidation resulted in a net
obligation to the Company by Frank Khulusi of approximately $297,000, which
was canceled upon consummation of the Company's initial public offering in
connection with the transfer of the property to the Company from a related
party as described below.
From time to time prior to December 31, 1994, the Company loaned an
aggregate of $1,349,000 to Centaur Software, Inc. ("Centaur"), a company
wholly owned by Messrs. Frank Khulusi and Sam Khulusi, which loan bore
interest at a rate of 10% per annum, was guaranteed by Frank Khulusi and Sam
Khulusi, and was secured by certain real property owned by them. The loan was
canceled upon consummation of the Company's initial public offering as
described below. The Company also has an agreement to provide certain office
and warehouse space and support services to Centaur for which Centaur pays a
monthly fee plus a daily rate for certain services. During 1993, 1994 and
1995, Centaur paid the Company approximately $10,000 each year under this
agreement.
Until April 1995, the Company leased 9,620 square feet of retail space in
Santa Monica, California from Messrs. Frank Khulusi and Sam Khulusi. The total
amounts paid by the Company to Messrs. Khulusi for rent, including taxes and
insurance, were approximately $166,400, $189,300 and $110,000 for 1993, 1994
and 1995, respectively. The lease was terminated upon transfer of the property
to the Company as described in the next paragraph.
The Company entered into an agreement with Messrs. Frank Khulusi, Sam
Khulusi and Centaur which provided that concurrently with the consummation of
the Company's initial public offering the Company would purchase the property
on which the Santa Monica retail store is located for $3.5 million. In
consideration of that transfer, the Company assumed indebtedness on the
property of $1.297 million, which bore interest at 9.75% per annum
(subsequently paid with proceeds from the Company's initial public offering),
canceled the note of Centaur described above, the $297,000 obligation owed by
Frank Khulusi, and additional borrowings during April 1995 in the amount of
$125,000 and paid approximately $432,000 to them. The Company believes that
the aggregate purchase price for the property was the current fair market
value based on an independent appraisal.
On September 29,1994, the Company borrowed $2.95 million from Creative
Partners, L.P., of which Mr. Alfi was a limited partner. The loan was
subordinate to the Company's line of credit and was secured by all of the
assets of the Company, and bore interest at a rate of 10% per annum. In
connection with the loan, Creative Partners purchased a warrant (the
"Warrant") for $50,000 entitling it to purchase up to 30% of the equity of the
Company on or prior to an initial public offering by the Company at an
aggregate exercise price of $5.0 million. On February 17, 1995, Creative
Partners loaned an additional $1.25 million to the Company on the same terms
and conditions and with the same security as the $2.95 million loan. In
addition, on March 2, 1995 Creative Partners loaned an additional $750,000 to
the Company on the same terms and conditions. Creative Partners exercised the
Warrant prior to the closing of the Company's initial public offering by
canceling the notes outstanding with respect to the above described loans and
paying the remaining exercise price in cash.
The Company purchased approximately $765,000, $859,000 and $646,704 of
products during 1993, 1994 and 1995, respectively, from RasterOps Corporation,
one of the Company's vendors. The wife of Richard Rodriguez, a former
executive officer of the Company, was the western regional sales director for
RasterOps and received commission from her employer relating to sales
originated in her geographic region (which included sales to the Company). The
Company believes that the terms of the transactions between the Company and
RasterOps were no less favorable to the Company than the terms available to
third parties.
5
<PAGE>
In November 1993, Centaur sold office furniture to a third-party leasing
company, which then leased the furniture to the Company. Total payments under
the lease will be approximately $107,000 during the five-year term of the
lease. Centaur has no continuing interest in the lease transaction.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the cash compensation earned for services
performed for the Company during the two years in the period ended December
31, 1995 by the Company's Chief Executive Officer and each of its other four
most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND POSITION YEAR SALARY($) ($)(1) ($)(2) (#) ($)(3)
----------------- ---- --------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Frank F. Khulusi........ 1995 300,000 -- -- -- 4,396
Chairman and Chief 1994 279,500 -- -- -- 17,922
Executive Officer
Sam U. Khulusi.......... 1995 300,000 -- -- -- 4,483
Executive Vice 1994 300,200 -- -- -- 13,507
President and
Chief Operating Officer
Richard Rodriguez....... 1995 154,212 61,666 -- 10,000 2,790
Senior Vice President 1994 153,900 56,370 -- 39,200 6,729
Daniel J. DeVries....... 1995 122,418 118,189 -- 15,000 3,284
Senior Vice President 1994 122,418 90,698 -- 58,800 --
Grant L. Trexler........ 1995 137,038 24,500 -- 9,000 6,690
Chief Financial Officer 1994(4) 34,327 -- -- 20,580 1,308
</TABLE>
- - --------
(1) Bonus includes, in the case of Messrs. DeVries and Rodriguez, commissions.
(2) Except as set forth in the Summary Compensation Table, the incremental
cost to the Company of providing perquisites and other personal benefits
during the last two fiscal years did not exceed, as to any named executive
officer, the lesser of $50,000 or 10% of the total salary and bonus paid
to such executive officer for any such year and, accordingly, is omitted
from the table.
(3) Represents benefits paid by the Company relating to health insurance
premiums and/or automobile allowances.
(4) Mr. Trexler joined the Company in August 1994.
6
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information with respect to stock
options granted to the named executive officers in 1995. In addition, as
required by Securities and Exchange Commission rules, the table sets forth the
hypothetical gains that would exist for the options based on assumed rates of
annual compound stock price appreciation during the option term.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(4)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE(3) 5%($) 10%($)
---- ------------- ------------ ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frank F. Khulusi........ -- -- -- -- -- --
Sam U. Khulusi.......... -- -- -- -- -- --
Richard Rodriguez....... 10,000 2.9% 26.25 (5) (5) (5)
Daniel J. DeVries....... 15,000 4.4% 9.50 8/4/05 56,675 142,072
Grant L. Trexler........ 9,000 2.6% 9.50 8/4/05 53,692 134,594
</TABLE>
- - --------
(1) These nonstatutory stock options vest and become exercisable 8.25% per
quarter from the date of grant.
(2) The exercise price on the date of grant was equal to the closing stock
price on the date of grant. All options granted in 1995 were repriced by
the Compensation Committee of the Board of Directors to $9.50 per share on
February 12, 1996, except options granted to employees who resigned prior
to the end of February 1996.
(3) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(4) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their terms, assuming the specified compounded
rates of appreciation on the Company's Common Stock over the term of the
options. Actual gains, if any, on stock option exercise are dependent upon
a number of factors, including the future performance of the Common Stock
and the timing of option exercises, as well as the optionee's continued
employment through the term of the options. There can be no assurance that
the amounts reflected in this table will be achieved.
(5) Mr. Rodriguez resigned from the Company in February 1996 and therefore
this information is not relevant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995
ACQUIRED ON ------------------------- -------------------------
NAME EXERCISE(#) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Frank F. Khulusi.... -- -- -- -- --
Sam U. Khulusi...... -- -- -- -- --
Richard Rodriguez... -- 8,673 40,527 99,960 399,840
Daniel J. DeVries... -- 13,010 60,790 149,940 599,760
Grant L. Trexler.... -- 4,866 24,714 52,479 209,916
</TABLE>
7
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange
Act of 1934 that might incorporate future filings, including this Proxy
Statement, in whole or in part, the following report and the Stock Performance
Graph which follows shall not be deemed to be incorporated by reference into
any such filings.
In February 1995, the Board of Directors established the Compensation
Committee. The Compensation Committee reviews with management cash and other
compensation policies for employees, makes recommendations to the Board of
Directors regarding compensation matters and determines (acting through a sub-
committee) the compensation for the Chief Executive Officer. In addition, the
Compensation Committee administers the Company's stock plans and, within the
terms of the respective stock plan, determines the terms and conditions of
issuances thereunder. The compensation of the executive officers of the
Company, except for the compensation of the Chief Executive Officer, is set
and approved by the Compensation Committee of the Board of Directors based on
the recommendation of the Chief Executive Officer.
Compensation Policies
The Compensation Committee's executive compensation policies are designed to
provide levels of compensation that integrate pay with the Company's
objectives and goals, reward above-average corporate performance, recognize
individual initiative and achievements and assist the Company in attracting
and retaining qualified executives. Executive compensation is set at levels
that the Compensation Committee believes to be adequate to recruit, retain and
motivate key employees.
There are three primary elements in the Company's executive compensation
program:
. Base salary
. Bonus
. Stock options
Individual base salaries are established based on an executive officer's
experience, historical contribution and future importance to the Company and
other subjective factors, without assigning a specific weight to individual
factors.
Bonuses are paid pursuant to executive bonus plans. Bonus awards are set
based on various goals dependent upon the person's function in the
organization. Certain individuals' bonus plans are set as a percentage of base
salary, with the specific percentage determined by the person's position
within the Company. The award of bonuses is dependent on the achievement of
specified goals. The achievement of quantitative goals at the department and
corporate levels is the primary factor in determining bonuses and such goals
are tied to the achievement of specified performance targets.
8
<PAGE>
The Chief Executive Officer's bonus, if any, is determined as set forth in
his employment contract, as described below.
The Company believes that a component of the compensation paid to the
Company's executives over the long term should be derived from stock options.
The Company believes that stock ownership in the Company is a valuable
incentive to executives and that the grant of stock options to them serves to
align their interests with the interests of the stockholders as a whole and
encourages them to manage the Company in its best interests. The Compensation
Committee determines whether to grant stock options, as well as the amount of
the grants, based on a person's position within the Company.
Compensation of Chief Executive Officer
In establishing the Chief Executive Officer's overall compensation, a sub-
committee of the Compensation Committee (the "Sub-Committee"), considered a
number of factors, including the record of leadership and service provided by
the Chief Executive Officer since co-founding the Company. The Sub-Committee
has not found it practicable to, and has not attempted to, assign relative
weights to the specific factors considered in determining the Chief Executive
Officer's compensation. Consistent with the Company's overall executive
compensation program, the Chief Executive Officer's compensation is composed
of base salary and bonus. The Chief Executive Officer's base salary was set at
$400,00 in his employment agreement with the Company. During 1995, the Chief
Executive Officer elected to reduce his salary, in consultation with the
Compensation Committee, to $300,000. In 1995, the Chief Executive Officer did
not receive a bonus and was not granted any stock options.
Policy Regarding Deductibility of Compensation for Tax Purposes--
Compliance With Internal Revenue Code Section 162 (m)
Section 162(m) of the Code, generally disallows a tax deduction to public
companies for annual compensation over $1 million paid to the chief executive
officer or any of the four other most highly compensated executive officers.
However, certain compensation meeting a tax law definition of "performance-
based" is generally exempt from this deduction limit. The Company does not
currently have a policy regarding qualification of cash compensation, such as
salary and bonuses, for deductibility under Section 162(m). However, none of
the Company's executives receive such compensation at levels that approach the
Section 162(m)$1 million limit. As discussed under "Approval of An Amendment
to the Creative Computers, Inc. 1994 Stock Incentive Plan," the Company has
included provisions in the 1994 Stock Incentive Plan designed to enable grants
of options and SARs to executive officers affected by Section 162(m) to
qualify as "performance-based" compensation. However, such grants cannot
qualify until such grants are made by a "disinterested committee" under
Section 162(m), which the Company currently does not have.
COMPENSATION COMMITTEE
Ahmed O. Alfi
Frank F. Khulusi
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frank F. Khulusi, a member of the Compensation Committee, is an executive
officer of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file an initial report of
ownership on Form 3 and changes in ownership on Form 4 or 5 with the
Securities and Exchange Commission
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(the "Commission"). Such officers, directors and 10% stockholders are also
required by the Commission rules to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for such persons, the Company believes that during 1995, all Section
16(a) filing requirements applicable to its officers, directors and ten
percent stockholders were complied with, except that a Form 4 regarding the
purchase of 600 shares by Daniel J. DeVries in the Company's initial public
offering and a Form 4 relating to an option to purchase 2,000 shares of Common
Stock granted to Al S. Joseph were filed late.
STOCK PERFORMANCE GRAPH
The performance graph below compares the cumulative total stockholder return
of the Company with the cumulative total return of the Standard & Poor's High
Tech Composite Index ("High Tech Index") and the cumulative total return of
the Standard & Poor's 500 Stock Index ("S&P 500"). The performance graph
assumes that $100 was invested in the Company's initial public offering, on
April 4, 1995, in common stock of the High Tech Index and in the S&P 500. The
stock price performance shown in this graph is neither necessarily indicative
of nor intended to suggest future stock price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CREATIVE COMPUTERS, INC., A PEER GROUP AND THE S&P 500
<TABLE>
<CAPTION>
CREATIVE S&P HIGH
Measurement Period COMPUTERS, S&P TECH
(Fiscal Year Covered) INC. 500 COMPOSITE
- - ------------------- ---------- --------- ----------
<S> <C> <C> <C>
FYE 04/04/1995 $100 $100 $100
FYE 12/31/1995 $107 $125 $128
</TABLE>
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PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Price Waterhouse LLP has served as the independent auditors of the Company
and its predecessor, since 1994 and has been appointed by the Board of
Directors to continue as the independent auditors of the Company for the year
ending December 31, 1996. In the event that ratification of this selection of
auditors is not approved by a majority of the shares of Common Stock voting at
the Annual Meeting in person or by proxy, the Board of Directors will review
its future selection of auditors. A representative of Price Waterhouse LLP is
expected to be present at the Annual Meeting, will have an opportunity to make
a statement and will be able to respond to appropriate questions.
THE BOARD RECOMMENDS A VOTE FOR RATIFICATION
OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 1996
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PROPOSAL NO. 3
APPROVAL OF AN AMENDMENT TO THE
CREATIVE COMPUTERS, INC.
1994 STOCK INCENTIVE PLAN
At the Annual Meeting, stockholders will be requested to approve an
amendment to the Company's 1994 Stock Incentive Plan (the "1994 Plan"). The
Company adopted and the stockholders approved the 1994 Plan in November 1994.
The 1994 Plan provides a means to attract and retain officers and key
employees and promote the success of the Company. Subject to approval by a
majority of stockholders, the Board of Directors has approved an amendment to
the 1994 Plan to increase the number of shares authorized to be issued under
the 1994 Plan by 1,250,000 shares, from the current 700,000 shares to
1,950,000 shares. Approval of the amendment to the 1994 Plan will also
constitute approval for federal securities law and income tax law purposes,
including approval for purposes of Section 162(m) of the Internal Revenue Code
(the "Code"). The proposed amendment and the material features of the 1994
Plan are described below.
PROPOSED AMENDMENT TO THE 1994 PLAN
At April 15, 1996, options to purchase 620,950 shares of Common Stock were
outstanding under the 1994 Plan and 79,050 shares remained available for
issuance under the 1994 Plan.
In April 1996, the Board of Directors adopted, subject to stockholder
approval, a proposed increase in the number of shares authorized to be issued
under the 1994 Plan from 700,000 shares to 1,950,000 shares. The proposed
increase will provide the Company with additional flexibility in the number of
shares subject to options that can be granted to individuals under the 1994
Plan. The Board of Directors believes that it is desirable and in the best
interests of the Company to increase by 1,250,000 shares the number of shares
authorized and available to be issued under the 1994 Plan.
An affirmative vote by the holders of a majority of the outstanding shares
of the Company's Common Stock is required for the approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE
AMENDMENT TO THE 1994 PLAN.
PURPOSES OF THE 1994 STOCK INCENTIVE PLAN
The purposes of the 1994 Plan are to (i) provide a means by which selected
employees of and consultants to the Company and any parent corporation or
subsidiary corporation of the Company (an "affiliate"), as those terms are
defined in the Code, may be given an opportunity to benefit from increases in
the value of the stock of the Company through the granting of stock options
and other stock-based awards ("Stock Awards"), (ii) assist the Company in
retaining the services of such individuals, (iii) secure and retain the
services of persons capable of performing services for the Company and its
Affiliates, and (iv) provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
ADMINISTRATION
The 1994 Plan is administered by the Board of Directors of the Company,
unless the Board delegates administration of the 1994 Plan to a committee of
the Board of Directors composed of two or more members of the Board (the
"Committee") or such lesser number as permitted by Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and satisfying the other requirements of the 1994 Plan, namely that such
Committee members be "disinterested" for purposes of Rule 16b-3. The 1994 Plan
provides that the Committee may delegate to a subcommittee or separate
committee (the "Subcommittee") the responsibility to make grants of options or
SARs or sales or bonus grants of Common Stock to any "Covered Employee" as
such term is defined by Section 162(m) of the Code, and, if applicable, to
establish, administer
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and certify the attainment of performance goals, with respect to such grants.
Any such Subcommittee shall, in addition to meeting other applicable
requirements, be composed solely of two or more outside directors within the
meaning of Section 162(m) of the Code to the extent necessary to qualify such
grants as "performance-based compensation" under Section 162(m) of the Code
and the regulations thereunder. The Company does not currently have a
Subcommittee. As used herein with respect to the 1994 Plan, the "Board" refers
to the Compensation Committee (or subcommittee thereof) as well as the Board
itself.
The Board has the final power to construe and interpret the 1994 Plan and
the Stock Awards granted under it, and, subject to the provisions of the 1994
Plan, to determine the persons to whom Stock Awards will be granted pursuant
to the 1994 Plan; when and how Stock Awards shall be granted; whether a Stock
Award will be an incentive stock option, a nonstatutory stock option, a stock
grant, a restricted stock grant, a right to purchase restricted stock, a stock
appreciation right or a combination of the foregoing; the provisions of each
Stock Award granted (which need not be identical), including the time or times
when a person shall be permitted to purchase or receive stock pursuant to a
Stock Award; and the number of shares with respect to which Stock Awards shall
be granted to each such person.
DURATION, AMENDMENT AND TERMINATION
The Board may at any time amend or terminate the 1994 Plan, provided,
however, that no amendment or termination shall impair or alter any rights
granted under the 1994 Plan prior to such amendment or termination without the
written consent of the grantee of such rights. Any amendment of the 1994 Plan
must be approved by the stockholders of the Company if the amendment would (i)
materially increase the benefits accruing to participants under the 1994 Plan,
(ii) increase the maximum number of shares of Common Stock that may be
acquired in any single calendar year by any individual under the 1994 Plan,
(iii) materially increase the number of shares of Common Stock available for
grant of incentive stock options under the 1994 Plan, or (iv) materially
modify the eligibility requirements for participation in the 1994 Plan or the
class of employees eligible to receive options under the 1994 Plan or to
change the designation or class of persons eligible to receive incentive stock
options under the 1994 Plan. Unless sooner terminated, the 1994 Plan will
terminate on October 7, 2004.
ELIGIBILITY
Incentive stock options may be granted only to employees (including
executive officers) of the Company or any Affiliate. Stock Awards other than
incentive stock options may be granted only to employees (including executive
officers), independent contractors or consultants of the Company or any
Affiliate.
STOCK SUBJECT TO THE 1994 PLAN
Subject to certain adjustments, the stock that may be issued pursuant to
Stock Awards granted under the 1994 Plan currently shall not exceed in the
aggregate 700,000 shares of the Company's Common Stock. If Stock Awards
granted under the 1994 Plan expire or otherwise terminate without being
exercised, the Common Stock not issued under such Stock Awards shall again
become available for issuance under the 1994 Plan.
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TERMS OF STOCK AWARDS UNDER THE 1994 PLAN
TERMS OF STOCK OPTIONS
The following is a description of the terms and conditions of stock options
permitted by the 1994 Plan. Such terms and conditions may change from time to
time, and the terms and conditions of separate options need not be identical.
EXERCISE PRICE. The exercise price for any incentive stock option granted
under the 1994 Plan may not be less than the fair market value of the stock
subject to the option on the date of grant. However, no incentive stock option
may be granted to a person who, at the time of the grant, owns stock
constituting more than 10% of the total combined voting power of all classes
of stock entitled to vote of the Company or of an Affiliate ("10%
Stockholder"), unless the exercise price is at least 110% of the fair market
value of such stock on the date the option is granted and the term of the
option does not exceed five years from the grant date. The exercise price for
any nonstatutory stock option granted under the 1994 Plan may be determined by
the Committee. If a Subcommittee of qualifying outside directors is appointed
for purposes of making grants to Covered Employee that will qualify as
"performance-based compensation" under Section 162(m) of the Code, then the
exercise price of stock options granted to a Covered Employee would be not
less than 100% of the fair market value of the Common Stock subject to the
option on the date the option is granted.
In the event of a decline in the value of a Company's Common Stock, the
Board has the authority to offer optionees the opportunity to replace
outstanding higher-priced options with new lower-priced options, provided,
however, that any replaced options still count against the per employee limit
described below on the number of shares of Common Stock that may be granted to
an individual in the form of options in a given calendar year.
CONSIDERATION. The exercise price of options granted under the 1994 Plan
must be paid either (i) in cash or by check, bank draft or money order at the
time of the option is exercised, (ii) by delivery of shares of Common Stock
valued at fair market value owned by optionee or with shares of Common Stock
(valued at fair market value) withheld from the shares otherwise delivered to
optionee upon exercising the option, (iii) by delivery of an irrevocable
direction to a securities broker to sell shares of Common Stock and deliver
the proceeds to the Company, (iv) by delivery of a promissory note with such
terms as the Committee requires, or (v) in any combination of the foregoing.
OPTION EXERCISE. Options granted under the 1994 Plan may be immediately
exercisable or allotted in periodic installments as determined by the Board.
If the total number of shares subject to an option is allotted in periodic
installments, then during each installment period, the option may become
exercisable with respect to some or all of the shares allotted to that period
and may be exercised with respect to some or all of the shares allotted to
that period and any prior period for which the option was not fully exercised.
TERM. The term of an incentive stock option granted under the 1994 Plan will
not exceed ten years; provided that the term of any incentive stock option
granted to a 10% Stockholder will not exceed five years.
TERMINATION OF OPTION. Although subject to the Board's discretion, optionees
generally earn the right to exercise their options by remaining as employees,
independent contractors or consultants of the Company or an Affiliate. In
addition, generally an option will terminate three months after the optionee
ceases to be employed by the Company or an Affiliate or ceases to act as an
independent contractor or consultant unless (i) the termination is due to such
person's permanent and total disability (as defined in the Code), in which
case the option may, but need not, provide that it may be exercised at any
time within one year of such termination; or (ii) the optionee dies while
employed by or while serving as a consultant to the Company or an Affiliate,
in which case the option may, but need not, provide that it may be exercised
by the person or persons to whom the rights of such option pass by will or the
laws of descent or distribution within one year of the optionee's death; or
(iii) the option by its terms specifically provides either (A) that it will
terminate sooner than three months
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after termination of the optionee's employment or relationship as a consultant
or director or (B) that it may be exercised more than three months after
termination of the optionee's relationship with the Company or an Affiliate.
NONTRANSFERABILITY. To the extent required by Rule 16b-3, an option or SAR
may not be transferred by the holder other than by will or by the laws of
descent and distribution. If Rule 16b-3 is amended to permit broader
transferability of options or SARs, the Board may authorize such broader
transferability.
TERMS OF STOCK PURCHASES AND BONUSES AND STOCK APPRECIATION RIGHTS
GENERAL. The Board shall have the authority to grant Stock Awards under the
1994 Plan in the form of stock grants, restricted stock grants, through the
sale of restricted stock or through the issuance of SARs. The terms of the
stock grant, restricted stock grant, restricted stock purchase agreement or
SAR may change from time to time and may vary between participants; however,
each shall include the substance of the following provisions:
CONSIDERATION. The purchase price under each restricted stock purchase
agreement shall be such amount as the Board shall determine and designate in
such agreement. Stock grants, restricted stock grants and SARs will be awarded
pursuant to a stock grant, restricted stock grant or SAR agreement. The
purchase price for stock acquired pursuant to a stock purchase agreement shall
be paid either in cash at the time of purchase or, at the discretion of the
Board, according to a deferred or other arrangement, or in any other form of
legal consideration that may be acceptable to the Board.
REPURCHASE OPTION BY COMPANY. Stock sold or awarded under the 1994 Plan may,
but need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board. Should a
participant cease to be an employee, independent contractor or consultant of
the Company or an Affiliate, then the Company may, in its discretion, decide
to repurchase or otherwise acquire any stock which has not vested as of the
date of termination.
SECTION 162(M) OF THE CODE. Under Section 162(m) of the Code, compensation
paid in any year to any of the Company's Covered Employee's (the Chief
Executive Officer and four other most highly compensated executive officers)
is potentially nondeductible by the Company to the extent that it exceeds
$1,000,000. However, certain "performance-based compensation" is exempt from
the $1,000,000 cap on deductibility.
The 1994 Plan contains provisions designed to enable grants of options or
SARs to Covered Employees to qualify as "performance-based compensation"
provided that the grants of options or SARs: (i) are made by a Subcommittee
(as described above under "Administration") of the Board consisting solely of
two or more outside directors (as that term is specially defined for purposes
of section 162(m) of the Code), and (ii) (A) in the case of options, have a
per share option exercise price at least equal to the per share fair market
value (on the grant date) of the stock subject to the option and, (B) in case
of SARs, the amount received pursuant to the SAR is based solely on an
increase in the price of the Company's Stock after the grant date.
However, at the present time, the Compensation Committee of the Board does
not have two or more members that satisfy the definition of an outside
director for purposes of Section 162(m) of the Code, nor can the Company
predict when it will establish a Subcommittee meeting these requirements of
Section 162(m). Until a qualifying Subcommittee is established, it will not be
possible to make grants of options or SARs qualifying as "performance-based
compensation" for purposes of section 162(m). Thus, some portion of
compensation paid to Covered Employees, for example, income realized on the
exercise of a stock option, could be non-deductible by the Company. At such
time that the Company has a qualifying Subcommittee, it anticipates that
grants of options and SARs to Covered Employees will be made in a manner
intended to qualify such grants as "performance-based compensation" for
purposes of Section 162(m) of the Code.
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ADJUSTMENT PROVISIONS
If any change is made in the stock subject to the 1994 Plan or subject to
any Stock Award granted under the 1994 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend (in excess of 2%), dividend
in property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Board shall make appropriate adjustments in the classes and maximum number of
shares subject to the 1994 Plan and the classes, number of shares and price
per share of stock subject to outstanding Stock Awards in order to preserve
but not to increase the benefits of such outstanding Stock Awards.
In the sole discretion of the Board and to the extent permitted by
applicable law, any stock option, SAR, stock bonus or any stock purchase
agreement evidencing any of the above may provide that, in the event of a
change in control of the Company (i) any outstanding options or SARs covered
by such an agreement shall be fully vested, nonforfeitable and exercisable,
and (ii) any restricted stock covered by such an agreement shall be released
from restrictions on transfer and repurchase or forfeiture rights. A change in
control is defined in the 1994 Plan to include (i) the acquisition of
beneficial ownership (as defined in the Securities Exchange Act of 1934) of
50% or more of the combined voting power of the Company's then outstanding
voting securities; (ii) a change in the composition of the Board of Directors
over a period of 36 months or less such that the majority of the members
cease, by reason of one or more contested elections for Board membership or by
one or more actions by written consent of stockholders, to be comprised of
individuals who have been (A) Board members continuously since the beginning
of such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time such election or
nomination was approved by the Board; (iii) approval by the Company's
stockholders of a merger or consolidation in which the Company is not the
surviving company, except for a transaction the principal purpose of which is
to change the state in which the Company is incorporated; (iv) approval by the
Company's stockholders of the sale, transfer or other disposition of the
assets of the Company or the complete liquidation or dissolution thereof; or
(v) approval by the Company's stockholders of any reverse merger in which the
Company survives as an entity but in which securities possessing more than 50%
of the total combined voting power of the Company's then outstanding
securities are transferred to a person or persons different from those who
held such securities immediately prior to such merger.
If the Board incorporates a change of control provision in any option or SAR
agreement, such agreement shall provide that, in the event of a change in
control as described in clauses (i), (ii) and (v) above, the option or SAR
shall remain exercisable for the remaining term of the option. Further, in the
event of a change in control as described in clauses (iii) or (iv) above, the
option or SAR shall terminate as of the effective date of such change in
control. In no event shall any option or SAR be exercised after the expiration
of the term provided for in the related stock option or SAR agreement. In its
discretion, the Board may provide that in the event of change of control, any
outstanding option or SAR will be fully vested, nontransferable and become
exercisable, and that any restricted stock shall be released from restrictions
on transfer and repurchase and forfeiture rights.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO STOCK AWARDS GRANTED UNDER THE
1994 PLAN
INCENTIVE STOCK OPTIONS
Incentive stock options under the 1994 Plan are intended to be eligible for
the favorable federal income tax treatment accorded "incentive stock options"
under Section 422 of the Code. Incentive stock options generally have the
following tax consequences:
There are generally no federal income tax consequences to the optionee or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
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If an optionee holds stock for more than two years from the date on which
the option is granted and more than one year from the date on which the shares
are transferred to the optionee upon exercise of the option, any gain or loss
on a disposition of such stock will be long-term capital gain or loss. In this
event, the Company will not be allowed a business expense deduction with
respect to the disposition of shares. However, if the optionee disposes of the
stock before the expiration of either of the above-stated holding periods (a
"disqualifying disposition"), at the time of disposition the optionee will
realize taxable ordinary income equal to the lesser of (i) the excess of the
fair market value on the date of exercise over the exercise price, or (ii) the
optionee's actual gain, if any, on the purchase and sale. The optionee's
additional gain or any loss upon the disqualifying disposition will be a
capital gain or loss which will be long-term or short-term depending on
whether the stock was held for more than one year. Slightly different rules
may apply to optionees who acquire stock subject to certain repurchase options
or who are subject to Section 16(b) of the Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will be entitled (subject to the
requirement of reasonableness and perhaps, in the future, the satisfaction of
a withholding obligation) to a corresponding business expense deduction in the
tax year in which the disposition occurs.
NONSTATUTORY STOCK OPTIONS
Nonstatutory Stock Options under the 1994 Plan generally have the following
federal income tax consequences:
There generally are not tax consequences to the optionee or the Company by
reason of the grant of a nonstatutory stock option. Upon exercise of a
nonstatutory stock option, the optionee will recognize taxable ordinary income
equal to the excess of the stock's fair market value on the date of exercise
over the exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an
amount based on the ordinary income recognized. Subject to the requirement of
reasonableness and the satisfaction of any withholding obligation, the Company
will be entitled to a business expense deduction equal to the taxable ordinary
income realized by the optionee. Upon disposition of stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any amount recognized
as ordinary income upon exercise of the option. Such gain or loss will be long
or short term depending on whether the stock was held for more than one year.
Slightly different rules may apply to optionees who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
STOCK PURCHASES AND BONUSES AND STOCK APPRECIATION RIGHTS
Stock grants, restricted stock grants, restricted stock purchases and SARs
granted under the 1994 Plan have the following federal income tax
consequences:
Generally, a recipient of stock under the 1994 Plan would recognize ordinary
income equal to the difference between the market value of the stock on the
grant or purchase date and any amount paid or required to be paid for the
stock. If the stock is restricted and subjected to vesting, then the recipient
of the stock would recognize ordinary income as the restrictions are removed
and the stock vests. On each vesting date, the recipient would recognize
ordinary income equal to the difference between the fair market value of the
shares of stock that have vested on such date and any amount paid or required
to paid for the shares of stock. The recipient of the stock would not
recognize any income to the extent the rights to the stock have not vested. A
recipient of stock under the 1994 Plan, however, may make a Section 83(b)
election whereby the recipient elects to be taxed at the grant date at
ordinary income rates on the difference between the fair market value of the
stock on the grant or purchase date (such valuation taking into account the
restrictions, if any, on the stock and the risk of forfeiture thereof) and any
amount paid by the recipient for the stock.
With respect to employees, the Company is required to withhold from regular
wages or supplemental wage payments an amount based on the ordinary income
recognized. Subject to the requirement of reasonableness and the satisfaction
of any withholding obligation, the Company will be entitled to a business
expense deduction equal to the taxable ordinary income realized by the
recipient.
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Upon disposition of stock, the recipient will recognize a capital gain or
loss equal to the difference between the selling price and the sum of the
amount paid for such stock plus any amount recognized as ordinary income. Such
gain or loss will be long or short term depending on whether the stock was
held for more than one year.
STOCK APPRECIATION RIGHTS
Recipients of stock appreciation rights generally should not recognize
income until such rights are exercised (assuming there is no ceiling on the
value of the right). Upon exercise, the participating individual will normally
recognize ordinary compensation income for federal income tax purposes equal
to the amount of cash and the fair market value of stock, if any, received
upon such exercise. Participating individuals who are employees will be
subject to withholding with respect to income recognized upon exercise of a
stock appreciation right.
The Company will be entitled to a tax deduction to the extent and in the
year that ordinary income is recognized by the participating individual, so
long as the Company withholds the appropriate taxes with respect to such
income and the individual's total compensation is deemed reasonable in amount.
Participating individuals will recognize gain upon the disposition of any
stock received on exercise of a stock appreciation right equal to the excess
of (a) the amount realized on such disposition over (b) the ordinary income
recognized with respect to such stock under the principles set forth above.
That gain will be taxable as long or short term capital gain depending on
whether the stock was held for at least one year. See the discussion of the
taxation of capital gains and losses under "Incentive Stock Options" above.
OTHER TAX CONSEQUENCES
The foregoing discussion is not a complete description of the federal income
tax aspects of Stock Awards granted under the 1994 Plan. In addition,
administrative and judicial interpretations of the application of the federal
income tax laws are subject to change. Furthermore, no information is given
with respect to state or local taxes that may be applicable.
Participants in the 1994 Plan who are residents of or are employed in a
country other than the United States may be subject to taxation in accordance
with the tax laws of that particular country in addition to or in lieu of
United States federal income taxes.
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THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL 3.
STOCKHOLDER PROPOSALS
Stockholders may submit proposals on matters appropriate for stockholder
action at subsequent annual meetings of the Company consistent with Rule 14a-8
promulgated under the Exchange Act. Proposals of stockholders intended to be
presented at the Company's 1997 Annual Meeting of Stockholders must be
received by the Company (Attention: Linda G. Louie, at the principal offices
of the Company), no later than January 2, 1997, for inclusion in the Board's
proxy statement and form of proxy for that meeting.
OTHER MATTERS
The Board of Directors currently knows of no other business which will be
presented to the Annual Meeting. If any other business is properly brought
before the Annual Meeting, it is intended that proxies in the enclosed form
will be voted in respect thereof as the proxy holders deem advisable.
A FORM OF PROXY IS ENCLOSED FOR YOUR USE. PLEASE MARK, DATE, SIGN AND
PROMPTLY RETURN THE PROXY CARD IN THE ENCLOSED ENVELOPE. IT IS IMPORTANT THAT
THE PROXIES BE RETURNED PROMPTLY AND THAT YOUR SHARES BE REPRESENTED.
By Order of the Board of Directors,
[SIGNATURE]
FRANK F. KHULUSI
Chairman of the Board
and Chief Executive Officer
May 3, 1996
Torrance, California
19
<PAGE>
PROXY CREATIVE COMPUTERS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 30, 1996
The undersigned hereby appoints Frank F. Khulusi and Sam U. Khulusi
(collectively, the "Proxies"), or either of them, each with the power of
substitution, to represent and vote the shares of the undersigned, with all the
powers which the undersigned would possess if personally present, at the Annual
Meeting of Stockholders (the "Annual Meeting") of Creative Computers, Inc., a
Delaware corporation (the "Company"), to be held on Thursday, May 30, 1996, at
10:00 a.m. local time, at the Marriott Hotel, 3635 Fashion Way, Torrance,
California 90503 and at any adjournments or postponements thereof. SHARES
REPRESENTED BY THIS PROXY CARD WILL BE VOTED AS DIRECTED BY THE STOCKHOLDER. IF
NO SUCH DIRECTIONS ARE INDICATED, THE PROXIES WILL HAVE AUTHORITY TO VOTE FOR
THE ELECTION OF THE NOMINEES LISTED BELOW, FOR PROPOSAL 2 AND FOR PROPOSAL 3.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
The Board of Directors recommends a vote FOR the election of Directors, FOR
proposal 2 and FOR proposal 3.
1. Election of Directors:
[_] FOR the nominees listed below [_] WITHHOLD AUTHORITY
(except as marked to the (to vote for nominees
contrary below) listed below)
Nominees: Frank F. Khulusi, Sam U. Khulusi, Ahmed O. Alfi and Al S. Joseph
(Instructions: To withhold authority to vote for any nominee, print that
nominees's name in the space provided below.)
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SEE REVERSE SIDE: IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS, JUST SIGN AND DATE ON THE REVERSE SIDE. YOU NEED
NOT MARK ANY BOXES.
2. To ratify the appointment of Price Waterhouse LLP as the
independent auditors for the Company for the year ending
December 31, 1996.
[_] FOR [_] AGAINST [_] ABSTAIN
3. To approve an amendment to the 1994 Stock Incentive Plan
to increase the number of shares available thereunder to
a total of 1,950,000 shares.
[_] FOR [_] AGAINST [_] ABSTAIN
Please sign exactly as your name
appears herein. Joint owners should
each sign. When signing as
attorney, executor, administrator,
trustee or guardian, pleases give
full title as such. If a
corporation, please sign in full
corporate name by President or
other authorized person. If a
partnership, please sign in full
partnership name by authorized
person.
____________________________________
(Signature)
____________________________________
(Signature, if jointly held)
DATE:_________________________, 19
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
REPLY ENVELOPE
