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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 September 30, 1999
[_] 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.)
2555 West 190th Street
Torrance, California 90504
(address of principal executive offices)
(310) 354-5600
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
There were 10,403,269 outstanding shares of Common Stock at November 11, 1999.
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Creative Computers, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheet............................................ 3
Consolidated Statement of Operations.................................. 4
Consolidated Statement of Cash Flows.................................. 5
Condensed Notes to Consolidated Financial Statements.................. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 8
PART II - OTHER INFORMATION........................................... 13
Item 6 - Exhibits and Reports on Form 8-K............................. 13
SIGNATURE............................................................. 13
</TABLE>
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ITEM 1 FINANCIAL STATEMENTS
Creative Computers, Inc.
CONSOLIDATED BALANCE SHEET
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, 1999
(unaudited) December 31, 1998
------------------ -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,984 $ 6,442
Accounts receivable, net of allowance for
doubtful accounts 46,991 39,152
Due from uBid 721 1,277
Inventories 16,818 40,736
Prepaid expenses and other current assets 3,788 3,796
Net assets of uBid discontinued segment - 18,633
Income tax refund receivable 190 190
Notes receivable from uBid 3,331 -
Deferred income taxes 5,280 5,216
-------- --------
Total current assets 94,103 115,442
Notes receivable from uBid - 3,331
Property, plant and equipment, net 14,763 14,391
Goodwill, net 11,957 12,318
Deferred income taxes 1,262 1,262
Other assets 39 138
-------- --------
$122,124 $146,882
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 58,909 $ 62,129
Accrued expenses and other current liabilities 11,843 13,198
Capital leases - current portion 172 116
Notes payable - current portion 6 6
-------- --------
Total current liabilities 70,930 75,449
Capital leases 170 6
Notes payable 150 155
-------- --------
Total liabilities 71,250 75,610
-------- --------
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares
authorized; 10,401,936 and 10,264,539 shares issued 11 10
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding - -
Additional paid-in capital 74,332 86,069
Treasury stock, at cost: 15,000 shares (91) (91)
Retained earnings (accumulated deficit) (23,378) (14,716)
-------- --------
Total stockholders' equity 50,874 71,272
-------- --------
$122,124 $146,882
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
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Creative Computers, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 172,377 $ 170,442 $ 510,201 $ 475,684
Cost of goods sold 154,162 150,401 452,966 421,569
Retail store closure inventory reserves - - - 3,679
---------- ------------ ------------ -----------
Gross profit 18,215 20,041 57,235 50,436
Selling, general and administrative expenses 21,319 18,220 59,713 60,128
Expenses related to retail store closures - - - 6,773
---------- ------------ ------------ -----------
Income (loss) from operations (3,104) 1,821 (2,478) (16,465)
Interest income (expense), net 147 (28) 109 (160)
---------- ------------ ------------ -----------
Income (loss) before income taxes (2,957) 1,793 (2,369) (16,625)
Income tax provision (benefit) (424) 681 53 (6,311)
---------- ------------ ------------ -----------
Income (loss) from continuing operations (2,533) 1,112 (2,422) (10,314)
Loss from discontinued operations - (677) (6,240) (1,848)
---------- ------------ ------------ -----------
Net income (loss) $ (2,533) $ 435 $ (8,662) $ (12,162)
========== ============ ============ ===========
Basic earnings (loss) per share
Continuing operations $ (0.24) $ 0.11 $ (0.23) $ (1.02)
Discontinued operations - (0.07) (0.60) (.18)
---------- ------------ ------------ -----------
$ (0.24) $ 0.04 $ (0.83) $ (1.20)
========== ============ ============ ===========
Diluted earnings (loss) per share
Continuing operations $ (0.24) $ 0.11 $ (0.23) $ (1.02)
Discontinued operations - (0.07) (0.60) (.18)
---------- ------------ ------------ -----------
$ (0.24) $ 0.04 $ (0.83) $ (1.20)
========== ============ ============ ===========
Basic weighted average number of
shares outstanding 10,400 10,194 10,376 10,150
========== ============ ============ ===========
Diluted weighted average number of
shares outstanding 10,400 10,353 10,376 10,150
========== ============ ============ ===========
</TABLE>
See condensed notes to consolidated financial statements.
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Creative Computers, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(8,662) $(12,162)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,603 2,856
Provision (benefit) for deferred income taxes 53 (6,311)
Loss on write-off of property, plant and equipment - 2,052
Loss on impairment of goodwill - 3,095
Cash flows from discontinued operations 6,240 1,848
Changes in assets and liabilities, net of divestiture:
Accounts receivable (7,283) (657)
Inventories 23,918 2,181
Prepaid expenses and other current assets (40) (1,260)
Other assets 99 502
Accounts payable (3,220) 25,159
Accrued expenses and other current liabilities (1,664) (305)
Income taxes refund receivable - (144)
------- --------
Total adjustments 21,706 29,016
------- --------
Net cash provided by operating activities 13,044 16,854
------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,566) (2,667)
------- --------
Net cash used in investing activities (3,566) (2,667)
------- --------
Cash flows from financing activities:
Payments under notes payable (5) (7,352)
Principal borrowings (payments) of obligations under capital leases 220 (183)
Proceeds from stock issued under stock option plans 849 858
------- --------
Net cash provided by (used in) financing activities 1,064 (6,677)
------- --------
Net increase in cash and cash equivalents 10,542 7,510
Cash and cash equivalents:
Beginning of the period 6,442 8,018
------- --------
End of the period $16,984 $ 15,528
======= ========
</TABLE>
See condensed notes to consolidated financial statements.
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Creative Computers, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
In the opinion of management, the accompanying financial statements contain
all adjustments necessary to present fairly the financial position of the
Company at September 30, 1999 and the results of operations and cash flows
for the three and nine months ended September 30, 1999 and 1998. The
results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
2. uBid, Inc.
On December 9, 1998, uBid, Inc., a subsidiary of the Company at that time,
completed an initial public offering (the Offering) of 1,817,000 shares of
common stock at an offering price of $15.00 per share. Net proceeds to uBid
were $23.8 million, and were used for advertising, brand development,
uBid's infrastructure, and general corporate purposes. The shares sold to
the public in the offering represented approximately 19.9% of uBid's
outstanding common stock. On June 7, 1999, the Company divested its
ownership in uBid by means of a tax-free distribution of all of its
remaining 7.3 million shares of uBid common stock to the Company's
shareholders of record as of May 24, 1999. In accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations,"
uBid's revenues and expenses have been excluded from the Company's
consolidated revenues and expenses from continuing operations. uBid's
operating results, net of taxes, for the periods presented have been
reported as a separate line item on the Company's consolidated statement of
operations under the caption "Loss from discontinued operations." The
Company's consolidated balance sheet and consolidated statement of cash
flows have been restated for the periods presented to reflect the
divestiture of uBid. This transaction is a non-cash investing activity for
purposes of the consolidated statement of cash flows. Net revenues for the
discontinued segment were $30.5 million for the period beginning January 1,
1999 and ending June 7, 1999, and were $24.1 million for the nine months
ended September 30, 1998.
3. Net Income (Loss) Per Share
Basic Earnings Per Share (EPS) excludes dilution and is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the reported periods. Diluted EPS reflects the
potential dilution that could occur under the treasury stock method if
stock options and other commitments to issue common stock were exercised.
The computation of Basic and Diluted EPS is as follows:
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1999 1998 1999 1998
-------- -------- ------- ---------
(in thousands except per share data)
<S> <C> <C> <C>
Net income (loss) $(2,533) $ 435 $(8,662) $(12,162)
======= ======= ======= ========
Weighted average shares - Basic 10,400 10,194 10,376 10,150
Effect of dilutive stock options
and warrants - 159 - -
------- ------- ------- --------
Weighted average shares-Diluted 10,400 10,353 10,376 10,150
======= ======= ======= ========
Net earnings (loss) per share-Basic $ (0.24) $ 0.04 $ (0.83) $ (1.20)
======= ======= ======= ========
Net earnings (loss) per share-Diluted $ (0.24) $ 0.04 $ (0.83) $ (1.20)
======= ======= ======= ========
</TABLE>
4. Retail Store Closures
In February 1998, the Company closed one retail store acquired from Elek-
Tek and on March 20, 1998, the Company announced the closure of six retail
stores to focus its efforts on its catalog, corporate and Internet channels
of distribution. The closed retail stores generated 9% of the Company's
first-quarter 1998 sales, but had operating losses approaching $2.0 million
for that quarter. The Company recorded a one-time pretax restructuring
charge of $10.5 million relating to exit costs associated with the closing
of retail operations. Recorded in selling, general and administrative
costs were $3.1 million in write-offs of goodwill, $1.9 million in write-
offs of fixed assets, $1.5 million reserve for lease exit costs, and $0.3
million in employee-related severance costs. Recorded as cost of sales
were $3.7 million of reserves for store inventory. No reserves remain at
September 30, 1999 related to the retail showroom closures. In addition,
during the first quarter of 1998, $7.0 million of pretax write-offs were
taken primarily relating to a more rapid decline in Mac sales during the
quarter and the effects on inventory and receivables of rapid price erosion
and other changes in the industry during the quarter.
5. Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related
Information" (SFAS No. 131). This statement requires companies to report
financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and
expense items, and segment assets, as well as information about the
revenues derived from the Company's products or services, the countries in
which the Company earns revenues and holds assets, and major customers.
SFAS No. 131 requires the use of the management approach to determine the
information to be reported. The management approach is based on the way
management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. It is
management's opinion that the Company has two reportable segments: 1) a
direct marketer of personal computers, hardware, software, peripheral
products and consumer electronics under the PCMall, MacMall, ComputAbility
and CCIT brands; and 2) a fee-based Internet retailer of multiple product
categories under the eCOST.com brand.
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Summarized segment information from continuing operations for the three
months ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
September 30, 1999
(in thousands)
----------------------------------------------
Gross Operating Total
Sales Profit Profit (Loss) Assets
----------------------------------------------
<S> <C> <C> <C> <C>
Direct marketer $164,393 $18,183 $(1,264) $121,395
Fee-based Internet 7,984 32 (1,840) 729
-------- ------- ------------ --------
Consolidated $172,377 $18,215 $(3,104) $122,124
======== ======= ============ ========
</TABLE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Recent Developments
Net sales of the Company are primarily derived from the sale of personal
computer hardware, software, peripherals and accessories to large corporations,
small businesses, home offices and individual consumers through the Internet,
dedicated inbound and outbound telemarketing sales executives, a direct sales
force, retail showrooms and direct response catalogs.
During the first quarter of 1998, the Company closed seven out of eight retail
stores to focus its efforts on its corporate, Internet sales channels and
catalogs. In December 1998, uBid completed an initial public offering of
1,817,000 shares of its common stock. In June 1999, the Company completed a
spin-off of its remaining 80.1% ownership in uBid by means of a stock dividend,
which was structured as a tax-free spin-off under Section 355 of the Internal
Revenue Code. Section 355 generally provides that a company that distributes
shares of a subsidiary in a spin-off that is otherwise tax-free will incur U.S.
federal income tax liability if 50% or more, by vote or by value, of the capital
stock of either the company making the distribution or the subsidiary is
acquired by one or more persons acting pursuant to a plan or series of related
transactions that include the spin-off. In order to preserve the tax-free
treatment of the spin-off, the Company has entered into agreements with uBid
which restrict uBid's ability to issue or repurchase its equity securities. In
addition, uBid has agreed to indemnify the Company for any tax liability
suffered by the Company arising out of uBid's actions that would cause the
distribution to lose its tax-free treatment.
In March 1999, the Company launched eCOST.com as a wholly-owned subsidiary.
eCOST.com offers a broad selection of name-brand products, most of which are
sold at discount prices plus itemized fees for processing and shipping the
order.
Results of Operations
Unless otherwise stated, all comparisons are results which exclude uBid and the
closed retail stores.
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Net sales for the quarter ended September 30, 1999 were $172.4 million, a 1.1%
increase over last year's third quarter. Net sales for the quarter from
eCOST.com accounted for $8.0 million. PC/WINTEL sales increased 3.3% from $95.5
million in last year's comparable quarter to $98.6 million for the three months
ended September 30, 1999. Apple/Macintosh- related product sales decreased
12.3% to $65.8 million for the three months ended September 30, 1999 as compared
with $75.0 million for the comparable period in the prior year. PC/WINTEL sales
comprised 60.0% of total net sales for the third quarter in 1999 versus 56.0%
for the same quarter last year. The increase in net sales for the quarter is
primarily attributable to higher Internet and Outbound business-to-business
revenues, offset by a decline in Apple sales resulting from constrained product
availability.
Gross profit from all operations decreased $1.8 million to $18.2 million,
resulting from a shift in sales mix from higher margin Apple sales to PC/WINTEL
sales due to Apple product availability difficulties, as well as a general
decline in gross profit margin related to Internet promotions and eCOST.com.
Excluding eCOST.com, gross profit as a
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percentage of net sales was 11.1%, a decrease from last year's third quarter
gross profit of 11.8%. Including the impact of eCOST.com, gross profit as a
percentage of net sales was 10.6%. The Company's gross profit percentage may
vary from quarter to quarter, depending on the continuation of key vendor
support programs, including price protections, rebates and return policies and
based on product mix, pricing strategies and other factors.
Selling, general and administrative expense for all operations during the third
quarter of 1999 increased by $3.1 million from a year ago due to expenses
associated with eCOST.com and Outbound business-to-business sales. Selling,
general and administrative expenses as a percent of net sales, excluding
eCOST.com, increased from 10.7% in last year's third quarter to 11.8% in the
third quarter of this year. Selling, general and administrative expenses for the
third quarter of 1999 increased $1.2 million from the prior year, excluding
eCOST.com, due in part to the ramp-up in the Outbound business-to-business sales
force, increased Internet marketing expenditures, as well as a one-time charge
of $0.3 million related to severance costs resulting from an 18% reduction in
non-sales headcount.
Net interest income for the three months ended September 30, 1999 was $147,000
compared to net interest expense of $28,000 for the comparable quarter in 1998.
Net interest income for 1999 resulted from the note receivable from uBid and the
investment of excess cash, partially offset by expenses of borrowings under the
Company's floorplan line of credit. The net interest expense for 1998 resulted
from debt incurred and cash invested to acquire Elek-Tek, Inc. and
ComputAbility, Inc.
The Company recorded a $0.4 million income tax benefit for the three months
ended September 30, 1999, compared to a provision of $0.7 million for the three
months ended September 30, 1998, primarily due to changes in profitability.
Net loss was $2.5 million for the three months ended September 30, 1999 compared
to net income of $0.4 million for the same period last year inclusive of uBid
and the closed stores. Excluding the Company's $1.8 million investment in
eCOST.com, net loss would have been $0.7 million, or $0.07 per share, in the
third quarter of 1999.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Net sales for the nine months ended September 30, 1999 increased $49.3 million,
or 10.7%, to $510.2 million. Including the closed retail stores, net sales
increased by $34.5 million or 6.9% in the nine months ended September 30, 1999
from $475.7 million in the nine months ended September 30, 1998. Net sales for
the nine-month period from eCOST.com accounted for $9.9 million.
Gross profit increased from the prior year by $2.4 million to $57.2 million for
the nine months ended September 30, 1999, primarily resulting from increased
sales, partially offset by a decline in gross profit margin related to Internet
promotions and eCOST.com. Gross profit as a percentage of net sales declined to
11.2% for the first nine months of 1999, compared to 11.9% for the first nine
months of 1998. Excluding eCOST.com, gross profit as a percentage of net sales
was 11.4%.
Selling, general and administrative expenses from all operations excluding uBid
decreased from the prior year by $0.4 million to $59.7 million for the nine
months ended September 30, 1999. As a percentage of net sales, selling, general
and administrative expenses were 11.7%, a 0.9% improvement over the prior year.
Excluding the impact of eCOST.com, selling, general and administrative costs as
a percentage of sales was 11.4% for the nine months ended September 30, 1999.
Net interest income for the nine months ended September 30, 1999 was $109,000
compared to interest expense of $160,000 for the comparable period in 1998. The
net interest income for 1999 resulted from the notes receivable from uBid and
the investment of excess cash, partially offset by borrowings under the
Company's floorplan line of credit. Net interest expense for 1998 resulted from
debt incurred and cash invested to acquire Elek-Tek, Inc. and ComputAbility,
Inc.
The Company recorded a $53,000 income tax provision for the nine months ended
September 30, 1999, compared to a benefit of $6.3 million in the prior year.
The benefit in 1998 resulted primarily from the non-recurring restructuring
charge in the first quarter of 1998 related to the closure of retail stores.
The Company incurred a net loss of $8.7 million or $(0.83) per share, for the
nine months ended September 30, 1999 compared to net loss of $12.2 million, or
$1.20 per share, for the same period last year, inclusive of closed stores and
the discontinued operations of uBid. Excluding the Company's investment in
eCOST.com and uBid discontinued
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operations, net income would have been $0.2 million, or $0.02 per diluted share,
for the nine months ended September 30, 1999.
Liquidity and Capital Resources
The Company's primary capital need has been the funding of the working capital
requirements created by its rapid growth in sales. Historically, the Company's
primary sources of financing have been from public offerings and borrowings from
its stockholders, private investors and financial institutions.
As of September 30, 1999, the Company had cash and cash equivalents of $17.0
million and working capital of $23.2 million. Inventories decreased to $16.8
million at September 30, 1999 from $40.7 million at December 31, 1998 due to
increased sales drop-shipped from vendors and increased order frequency.
Accounts receivable increased to $47.0 million at September 30, 1999 from $39.2
million at December 31, 1998 due to an increase in business customer purchases.
During the nine months ended September 30, 1999, the Company's capital
expenditures were $3.6 million, versus $2.7 million for the comparable period
last year.
As of September 30, 1999, the Company had an existing credit facility consisting
of separate credit lines totaling $60.0 million. Part of the credit facility
functions in lieu of a vendor trade payable for inventory purchases, is included
in accounts payable, and does not bear interest if paid within terms specific to
each vendor. Part of the credit facility functions as a working capital line of
credit secured by, and is limited to, a percentage of eligible inventory and
accounts receivable, and bears interest at the prime rate. As of September 30,
1999, the Company had $4.6 million in total borrowings under the credit facility
included in accounts payable. The overall credit facility is secured by
substantially all of the Company's assets and contains certain covenants that
require the Company to maintain a minimum level of tangible net worth and income
and a maximum leverage ratio. At September 30, 1999, the Company is in
compliance with all such covenants.
The Company believes that current working capital, together with cash flows from
operations and available lines of credit, will be adequate to support the
Company's current operating plans through 1999. However, if the Company
requires additional funds, such as for acquisitions or expansion or to fund a
significant downturn in sales that causes losses, there are no assurances that
adequate financing will be available at acceptable terms, if at all.
In July 1996, the Company announced its plan to repurchase up to 1,000,000
shares of its Common Stock. The shares will be repurchased from time to time at
prevailing market prices, through open market or negotiated transactions,
depending upon market conditions. No limit was placed on the duration of the
repurchase program. There is no guarantee as to the exact number of shares that
the Company will repurchase. Subject to applicable securities laws, repurchases
may be made at such times and in such amounts as the Company's management deems
appropriate. The program can also be discontinued at any time management feels
additional purchases are not warranted. The Company will finance the repurchase
plan with existing working capital. As of September 30, 1999, the Company has
repurchased 15,000 shares under the program.
As part of its growth strategy, the Company may, in the future, acquire other
companies in the same or complementary lines of business. Any such acquisition
and the ensuing integration of the operations of the acquired company would
place additional demands on the Company's management and operating and financial
resources. The Company currently has no definitive agreements with respect to
any acquisitions.
Inflation
Inflation has not had a material impact upon operating results, and the Company
does not expect it to have such an impact in the near future. There can be no
assurances, however, that the Company's business will not be so affected by
inflation.
Year 2000
Computer systems, software packages, and microprocessor dependent equipment may
cease to function or may generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are
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programmed to accept a two-digit code in date code fields. To correctly identify
the year 2000, a four-digit date code field will be required to be what is
commonly termed "year 2000 compliant."
The Company may realize exposure and risk if the systems for which it is
dependent upon to conduct day-to-day operations are not year 2000 compliant. The
potential areas of exposure include electronic data exchange systems operated by
third parties with whom the Company transacts business, certain products
purchased from third parties for resale, and computers, software, telephone
systems, and other equipment used internally. To minimize the potential adverse
affects of the year 2000 problem, the Company has established an internal
project team comprised of all functional disciplines. This project team has been
engaged in a three-phase process of identifying internal systems (both
information technology and non-information technology systems) not year 2000
compliant, determining their significance in the effective operation of the
Company, and developing plans to resolve the issues where necessary. The Company
has been communicating with its suppliers and others to coordinate year 2000
readiness. The responses received by the Company to date have indicated that
steps are currently being undertaken to address this concern. However, if such
third parties are not able to make all systems and products year 2000 compliant,
there could be a material adverse impact on the Company. Also, should products
previously sold by the Company as well as products currently marketed by the
Company fail to meet Y2K readiness there could be a material adverse impact on
the Company to the extent not indemnified by its vendors.
Review of the Company's principal application software through which nearly all
of the Company's business is transacted, has determined it to be year 2000
compliant and, as such, the Company does not anticipate any material adverse
operational issues to arise. The Company has completed its year 2000 compliance
assessment and implemented corrective solutions for its critical systems. To
date, the costs incurred by the Company with respect to this project are $0.5
million. Currently, management expects total costs in connection with the
Company's year 2000 compliance project not to exceed $0.6 million; a $0.2
million decrease from second quarter 1999 estimates; however, future anticipated
costs are difficult to estimate with any certainty and may differ materially
from those currently projected. All costs incurred in connection with the year
2000 compliance project will be financed from general corporate funds. The
anticipated costs associated with the Company's year 2000 compliance program do
not include time and costs that may be incurred as a result of any potential
failure of third parties to become year 2000 compliant or costs to implement the
Company's future contingency plans. Management estimates that approximately one
half of the expected costs will be attributed to the redeployment of internal
resources and the other half will be comprised principally of external
consulting fees and software upgrades. No hardware expenditures for year 2000
are contemplated. The redeployment of internal data processing resources has
not, nor is expected to materially delay any significant projects. Year 2000
spending is expected to be 10% of total budgeted data processing expenditures.
Contingency plans were finalized during the third quarter of 1999. Upon
completion of this project, if systems material to the Company's operations have
not been made year 2000 compliant, or if third parties fail to make their
systems year 2000 compliant in a timely manner, the year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Business Factors
Except for historical information, all of the statements, expectations and
assumptions contained in the foregoing are forward-looking statements. The
realization of any or all of these expectations is subject to a number of risks
and uncertainties and it is possible that the assumptions made by management may
not materialize. There can be no assurances that the momentum in PC/Wintel
sales will be sustained, that the third quarter supply shortages for Apple
products will not continue, that Mac and out-bound sales trends will continue in
future periods, or that the Company's Internet sales will continue to grow.
There can be no assurance that the Internal Revenue Service will treat the
distribution of uBid shares as a tax-free distribution for federal tax purposes.
In addition, there can be no assurance that the Company's new eCOST.com
subsidiary will be developed successfully, achieve market acceptance or be
profitable. In addition to the factors set forth above, other important factors
that could cause actual results to differ materially from the Company's
expectations include competition from companies either currently in the market
or entering the market, competition from other catalog and retail store
resellers and price pressures related thereto, uncertainties surrounding the
supply of and demand for products manufactured by and compatible with Apple
Computer, the Company's reliance on Apple Computer, IBM, Hewlett Packard, Compaq
and other vendors, and risks due to shifts in market demand and/or price erosion
of owned inventory. This list of risk factors is not intended to be
11
<PAGE>
exhaustive. Reference should also be made to the risk factors set forth from
time to time in the Company's SEC reports, including but not limited to those
set forth in the section entitled "Certain Factors Affecting Future Results" in
its Annual Report on Form 10-K for 1998.
12
<PAGE>
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits. The exhibit index attached hereto is incorporated herein
by reference.
b. Reports on Form 8-K
None.
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: November 15, 1999 By /s/ Ted Sanders
--------------------------------
Ted Sanders
Chief Financial Officer
(Duly Authorized Officer of
the Registrant and Principal
Financial Officer)
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
99.1 Employment Agreement dated July 22, 1999 between the
Company and Scott Klein.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,984
<SECURITIES> 0
<RECEIVABLES> 47,712
<ALLOWANCES> 0
<INVENTORY> 16,818
<CURRENT-ASSETS> 88,030
<PP&E> 14,763
<DEPRECIATION> 0
<TOTAL-ASSETS> 122,124
<CURRENT-LIABILITIES> 70,930
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 50,863
<TOTAL-LIABILITY-AND-EQUITY> 122,124
<SALES> 172,377
<TOTAL-REVENUES> 172,377
<CGS> 154,162
<TOTAL-COSTS> 154,162
<OTHER-EXPENSES> 21,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (147)
<INCOME-PRETAX> (2,957)
<INCOME-TAX> (424)
<INCOME-CONTINUING> (2,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,533)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
<PAGE>
EXHIBIT 99.1
July 22, 1999
Mr. Scott W. Klein
3604 Shantara Lane
Plano, Texas 75093
Dear Scott:
On behalf of Creative Computers, Inc. ("Creative," or the "Company"), it is
my pleasure to confirm our offer to you of the position of President of Creative
Computers under the terms and conditions outlined below. Your responsibilities
generally will be to act as the President of the Company, reporting to the
Chairman and Chief Executive Officer. Your duties may change from time to time
as necessary. As we discussed, your position will involve and require travel
and time away from your current residence.
You will start your new position on July 26, 1999 ("Commencement Date").
Upon assuming your position, you will contemporaneously resign from your
director and officer positions with Creative's subsidiary, eCOST.com, Inc.
("ecost"). However, you agree that you will provide transition management
services to ecost until such time as a new chief executive officer is hired. If
the Company terminates your employment (other than for "cause" as defined below)
you will be entitled during the "Severance Period" (as defined below) to
severance in an amount equal to up to six months salary (as specified below) and
continuation, at the Company's expense, of health insurance benefits for you and
your family, subject to your execution of a separation agreement, satisfactory
to the Company's Board of Directors, containing customary mutual releases.
Severance payments will be made in equal bi-monthly installments over a six-
month period; provided that, if you obtain other employment during the six month
period, the Company's obligation to pay the severance payments otherwise due
during the remainder of the six-month period shall cease as of the date you
obtain such other employment. Your employment will cease for all purposes as of
the date of your termination by the Company notwithstanding the post-termination
severance payments provided for in the two preceding sentences. The shorter of
(i) six months after the Company terminates your employment (other than for
"cause") or (ii) the period from the date of such termination until you obtain
other employment is referred to in this paragraph as the "Severance Period."
Notwithstanding the foregoing, in the event of termination of your employment
with Creative (other than for cause), Creative may, in its sole discretion,
offer to you the opportunity to return to ecost as its President and Chief
Executive Officer on terms identical to those set forth in your April 15, 1999
employment letter, including the granting to you of options to purchase ecost
common stock (with an exercise price equal to the then per share fair market
value of ecost common stock) that will restore your current 500,000 share option
position. In the event
<PAGE>
Mr. Scott W. Klein
July 22, 1999
Page Two
Creative so offers to you the opportunity to return to ecost, Creative shall
have no severance payment obligation to you under this paragraph as a result of
the termination of your Creative employment.
For the purpose of the preceding paragraph, "cause" shall mean: (i) a
material breach by you of your employment obligations with the Company,
including your obligations hereunder, which breach is not cured within fifteen
(15) days after written notice thereof from the Company; (ii) your commission of
an act of personal dishonesty or breach of fiduciary duty involving personal
profit in connection with your employment by the Company; (iii) your commission
of an act involving willful misconduct or gross negligence on your part in the
conduct of your duties as an officer of the Company; (iv) a material and willful
violation of a federal or state law or regulation by you applicable to the
business of the Company; (v) your conviction of, or pleading of nolo contendere
to, a felony or a crime involving moral turpitude; or (vi) a diagnosis of your
addiction to illegal drugs. No act, or failure to act, by you shall be
considered willful unless committed without good faith and without a reasonable
belief that the act or omission was in the Company's best interest. You agree
that any dispute between you and the Company arising out of your employment will
be resolved by binding arbitration in Los Angeles County pursuant to the
American Arbitration Association's employment dispute resolution rules then in
effect.
You are going to be employed in the Company's Torrance, California facility
and accordingly need to commute to that facility to work on a weekly basis
(Monday through Friday). The Company will pay your coach airfare to commute
from your Texas residence to the Company's Torrance, California headquarters.
The Company will also arrange and pay for temporary lodging (hotel room or
apartment) when you are working at the Company's Torrance office. At the
Company's request, you agree to relocate your permanent residence to Southern
California, and the Company will pay up to an aggregate of $150,000 of your
documented out-of-pocket relocation expenses described.
As compensation for your services and in consideration for your agreement
to enter into the Employee Proprietary Information Agreement described below,
you will earn a base salary of $309,150 per annum ($5,745.19 per week) payable
in accordance with Creative's standard payroll practices. You will also be
eligible to receive performance bonuses of up to $50,000 each year, in the sole
discretion of the Company's Compensation Committee; provided that, for the first
twelve months of your employment, your performance bonus will not be less than
$12,500. Your yearly salary may be increased or decreased, by mutual agreement.
You will also receive a car allowance of up to $1,450 per month plus a monthly
amount to cover insurance on the
<PAGE>
Mr. Scott W. Klein
July 22, 1999
Page Three
automobile (to be determined at the time of employment) which amounts will be
added to your salary and which amounts will be grossed up for taxes, to the
extent necessary. The Company will also pay for vehicle registration fees and
maintenance expenses associated with the automobile. During the term of your
employment, you will also receive (i) health insurance coverage for you and the
members of your family and (ii) three weeks of paid vacation during your first
year of employment and four weeks per year thereafter. In addition, except for
the salary, bonus, car allowance and other benefits specifically provided for in
this letter, you shall be eligible to receive other benefits during the course
of your employment comparable to those generally made available to other senior
executives of Creative.
In addition to the compensation set forth above, you will be granted on the
Commencement Date an option to purchase 250,000 shares of the common stock of
Creative with an exercise price equal to the closing price of the Company's
common stock on such date. Vesting of your option will be at a rate of 20% per
year on each anniversary date of the option. Vesting of your option will be
subject to the condition that you are still employed by the Company. Generally,
the option shall expire 90 days after you are no longer with the Company.
Effective as of the Commencement Date, you agree that, in consideration of the
Creative stock option described above, the number of shares covered by your
current stock option to purchase shares of ecost Common Stock shall be reduced
from 500,000 shares to 150,000 shares. Finally, upon approval by stockholders
of Creative of an increase in the number of shares issuable under Creative's
Stock Incentive Plan (or, if earlier, the approval by stockholders of a new
stock option plan), you will be granted an option to purchase an additional
75,000 shares of Creative common stock vesting at a rate of 20% per year from
the Commencement Date, with an exercise price equal to the closing price of
Creative common stock on the date of such shareholder approval.
In addition, you agree not to in any way jeopardize or expose the Company
to liability by using for the Company's benefit trade secrets of any former
employer or client. You agree that upon the Commencement Date, your April 15,
1999 employment offer letter with ecost shall be terminated and that neither
ecost nor Creative will have any further obligations thereunder, other than
payment thereunder of unpaid salary accruing through, and reimbursement of
expenses incurred prior to, the Commencement Date. 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 the
Company, would expose the Company to any liability, or would negatively impact
the Company's ability to run its business and compete effectively for personnel
or for business on a go-forward basis. You further agree to sign an Employee
Proprietary
<PAGE>
Mr. Scott W. Klein
July 22, 1999
Page Four
Information Agreement. A copy of that agreement is attached for your review and
signature.
We look forward to your starting your new position. If there is any matter
in this letter that you want to discuss further, please do not hesitate to
contact me.
Sincerely,
/s/ FRANK F. KHULUSI
- --------------------
Frank F. Khulusi
Chairman and CEO
Encl: Proprietary Information Agreement
Accepted and Agreed:
/s/SCOTT W. KLEIN
- -----------------
Scott W. Klein July 22, 1999
