<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
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
[X] Definitive Proxy Statement Rule 14a-6(e)(2))
[_] 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)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] 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:
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(2) Aggregate number of securities to which transaction applies:
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(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:
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(5) Total fee paid:
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[_] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
CREATIVE COMPUTERS, INC.
2555 W. 190th Street
Torrance, California 90504
----------------
Notice of Annual Meeting of Shareholders
May 18, 1999
----------------
To the Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of Creative
Computers, Inc., a Delaware corporation (the "Company"), will be held at the
Marriott Hotel, 3635 Fashion Way, Torrance, California 90503 on Tuesday, May
18, 1999 at 10:00 a.m. local time for the following purposes as more fully
described in the Proxy Statement accompanying this Notice:
1. To elect four directors of the Company to serve until the 2000 Annual
Meeting of Shareholders or until their successors are duly elected and
qualified;
2. To approve an amendment to the Directors' Non-Qualified Stock Option
Plan to increase the number of shares subject to the Plan from 50,000 to
100,000;
3. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December 31, 1999; and
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only shareholders of record at the close of business on April 16, 1999, are
entitled to notice of and to vote at the meeting of or any adjournment
thereof. A list of such shareholders will be available for examination by any
shareholder at the Annual Meeting, or at the office of the Secretary of the
Company, 2555 W. 190th Street, Torrance, California 90504, for a period of ten
days prior to the Annual Meeting.
A copy of the Company's Annual Report for the fiscal year ended December
31, 1998, containing consolidated financial statements, is included with this
mailing. Your attention is directed to the accompanying Proxy Statement for
the text of the matters to be proposed at the meeting and further information
regarding each proposal to be made.
SHAREHOLDERS UNABLE TO ATTEND THE MEETING IN PERSON ARE ASKED TO COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN
PERSON IF YOU WISH.
By Order of the Board of Directors,
/s/ Frank F. Khulusi
Frank F. Khulusi
Chairman of the Board, President
and Chief Executive Officer
Torrance, California
May 3, 1999
<PAGE>
CREATIVE COMPUTERS, INC.
2555 W. 190th Street
Torrance, California 90504
----------------
PROXY STATEMENT
----------------
Annual Meeting of Shareholders--May 18, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is furnished by the Board of Directors of Creative
Computers, Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of Proxies to be used at the Annual Meeting of Shareholders
(the "Meeting") of the Company to be held on Tuesday, May 18, 1999, at 10:00
a.m. local time, at the Marriott Hotel, 3635 Fashion Way, Torrance, California
90503, and at all adjournments thereof for the purposes set forth herein and
in the accompanying Notice of Annual Meeting of Shareholders. ANY PROXY IN
WHICH NO DIRECTION IS SPECIFIED WILL BE VOTED IN FAVOR OF EACH OF THE MATTERS
FOR WHICH NO DIRECTION IS SPECIFIED. This Proxy Statement and the Notice of
Meeting and Proxy are being mailed to shareholders on or about May 3, 1999.
The close of business on April 16, 1999 has been fixed as the record date
for the determination of shareholders entitled to receive notice of and to
vote at the Meeting. At that date, the Company's outstanding voting securities
consisted of 10,375,893 shares of common stock, par value $.001 per share (the
"Common Stock"). On all matters which will come before the Meeting, each
shareholder or his Proxy will be entitled to one vote for each share of Common
Stock of which such shareholder was the holder of record on the record date.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time prior to its use by (i) delivering to the principal
office of the Company a written notice of revocation, (ii) filing with the
Company a duly executed Proxy bearing a later date or (iii) attending the
Meeting and voting in person.
The costs of this solicitation will be borne by the Company. The Company
will request brokerage houses and other nominees, custodians and fiduciaries
to forward soliciting material to beneficial owners of the Company's Common
Stock. The Company will reimburse brokerage firms and other persons
representing beneficial owners for their expenses in forwarding solicitation
materials to beneficial owners.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock and the Common Stock of uBid, Inc., a
majority owned subsidiary of the Company ("uBid"), as of April 16, 1999: (i)
by each of the Company's executive officers included in the Summary
Compensation Table set forth under the caption "Executive Compensation"; (ii)
by each director; (iii) by all current directors and executive officers of the
Company as a group; and (iv) by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of the Company's
Common Stock.
<TABLE>
<CAPTION>
Company Common Stock uBid Common Stock
------------------------------------- -------------------------------------
Number of Shares Percent of Shares Number of Shares Percent of Shares
Name and Address(1) Beneficially Owned Beneficially Owned Beneficially Owned Beneficially Owned
------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Frank F. Khulusi........ 1,827,993(2) 17.5% 0 *
Sam U. Khulusi.......... 1,916,585(3) 18.5% 0 *
Daniel J. DeVries....... 97,390(4) * 0 *
Theodore R. Sanders..... 9,466(5) * 0 *
Thomas A. Maloof........ 5,000(6) * 5,450 *
Ronald B. Reck.......... 3,750 * 1,000 *
Richard M. Finkbeiner... 93,581 * 0 *
David R. Burcham........ 0 * 200 *
All directors and
executive officers as a
group (7 persons)...... 3,860,184 36.6% 6,650 *
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise indicated, the address for each person is 2555 W. 190th
Street, Torrance, California 90504.
(2) Includes (i) 8,575 shares held in trust for the benefit of the children
of Basimah Khulusi, and (ii) 58,333 shares underlying options which are
presently vested or will vest within 60 days of April 16, 1999.
(3) Includes 13,000 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 16, 1999.
(4) Includes 96,790 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 16, 1999.
(5) Includes 9,466 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 16, 1999.
(6) Includes 5,000 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 16, 1999.
(7) This figure includes an aggregate of 182,589 shares issuable upon
exercise of stock options which are presently vested or will vest within
60 days of April 16, 1999.
2
<PAGE>
PROPOSAL ONE
ELECTION OF DIRECTORS
General
Four directors are to be elected at the meeting, each director to hold
office until the next Annual Meeting of Shareholders, or until his successor
is elected and qualified. All of the persons listed below are now serving as
directors of the Company. All of the persons listed below have consented to
serve as a director, if elected. The Board of Directors proposes for election
the nominees listed below.
Effective December 1998, Ahmed O. Alfi resigned as a director of the
Company, reducing the number of directors to three and creating a vacancy on
the Board of Directors. Effective April 12, 1999, Ronald B. Reck was appointed
to fill the vacancy and has agreed to seek election with the other nominees.
The table below gives certain information concerning the nominees and other
directors:
<TABLE>
<CAPTION>
Director
Name Age Nominee Since
---- --- ------- --------
<S> <C> <C> <C>
Frank F. Khulusi.......... 32 Chairman of the Board, President and 1987
Chief Executive Officer
Sam U. Khulusi(1)(2)...... 43 Director 1987
Thomas A. Maloof(1)(2).... 47 Director 1998
Ronald B. Reck............ 50 Director 1999
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
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. Mr. Khulusi also serves as
a director of uBid. He is the brother of Sam U. Khulusi.
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. Mr. Khulusi currently is the Chairman and
Chief Executive Officer of Kabang, LLC, an Internet company. He is the brother
of Frank F. Khulusi.
Thomas A. Maloof has served as a director of the Company since May 1998.
Mr. Maloof is the President of Perinatal Practice Management, Inc. From
September 1997 until February 1998, Mr. Maloof served as Chief Financial
Officer of Prospect Medical Holdings. From January 1995 until September 1997,
Mr. Maloof was the Chief Executive Officer of Prime Health of Southern
California. From October 1992 until December 1994, Mr. Maloof was President of
Foundation Health, a California health plan provider.
Ronald B. Reck has served as a director of the Company since April 1999.
Mr. Reck is Executive Vice President of Applebees International and has worked
for Applebees International since 1987.
Voting Information
Proxies solicited by the Board of Directors will, unless otherwise
directed, be voted to elect all four of the nominees. A shareholder submitting
a Proxy may vote for all or any of the nominees for election to the Board of
Directors or may withhold his or her vote from all or any of such nominees.
Directors are elected by a plurality of votes. An abstention from voting on
this matter by a shareholder, while included for purposes of calculating a
quorum for the Meeting, has no effect. In addition, although broker "non-
votes" will be counted for purposes of attaining a quorum, they will have no
effect on the vote. PROXIES RETURNED TO THE COMPANY WILL BE VOTED "FOR" EACH
NOMINEE UNLESS OTHERWISE INSTRUCTED ON SUCH PROXY.
3
<PAGE>
All of the nominees have agreed to serve the Company as a director if
elected. However, should any nominee become unwilling or unable to serve if
elected, the Proxy Agents named in the Proxy will exercise their voting power
in favor of such other person as the Board of Directors of the Company may
recommend. The Company's Certificate of Incorporation does not provide for
cumulative voting in the election of directors.
Meetings and Committees of the Board of Directors
During the fiscal year ended December 31, 1998, the Board of Directors held
six meetings. Each director attended at least 75% of the aggregate total
number of meetings of the Board of Directors plus the total number of meetings
of all committees of the Board on which he served.
During 1998, the members of the Audit Committee were Ahmed Alfi and Thomas
Maloof. In March 1999, Ahmed Alfi was succeeded on the Audit Committee by Sam
Khulusi. The Audit Committee held one meeting during the year ended December
31, 1998. 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 independent accountants,
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 independent accountants and taking such further actions
as the Audit Committee deems necessary to complete an audit of the books and
accounts of the Company.
During 1998, the members of the Compensation Committee were Frank Khulusi
and Thomas Maloof. In March 1999, Frank Khulusi was succeeded on the
Compensation Committee by Sam Khulusi. The Compensation Committee held one
formal meeting during the year ended December 31, 1998 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 Company has no nominating committee or any committee performing those
functions. The Board as a whole performs the functions which would otherwise
be delegated to a nominating committee.
Compensation of Directors
The Company compensates directors who are not employed by the Company or
its affiliates $5,000 per meeting, up to a maximum of four meetings per year,
plus expenses for services as a director. During 1998, the Company paid Sam
Khulusi $10,000 in consulting fees in connection with his work on real estate
transactions. Under the Directors' Non-Qualified Stock Option Plan, as
amended, each director who is not an employee of the Company is entitled to
receive an option to purchase 5,000 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 5,000 shares of the Company's Common
Stock on the date of each succeeding annual meeting of stockholders so long as
the director had served on the Board for at least one year. Options are
granted at fair market value on the date of grant and vest on the first
anniversary of the date of grant.
4
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company and the other four executive officers whose
compensation exceeded $100,000 during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------------- ------------
Awards
Other Annual ------------ All Other
Name and Principal Fiscal Salary Bonus Compensation Options Compensation
Position Year ($) ($)(1) ($)(2) (#) ($)(3)
------------------ ------ ------- ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Frank F. Khulusi........ 1998 400,000 -- -- -- 2,438
Chairman and Chief 1997 395,266 25,000 -- 100,000 2,719
Executive Officer 1996 303,900 -- -- -- 1,352
Theodore R. Sanders(4).. 1998 147,692 36,225 -- 50,000 --
Chief Financial Officer
Richard M.
Finkbeiner(5).......... 1998 239,668 -- 1,871
Chief Financial Officer 1997 233,063 94,653 -- 20,000 17,621(7)
1996 128,195 25,000 -- 150,000(6) 18,504(10)
Daniel J. DeVries....... 1998 207,221 30,000 1,972
Executive Vice 1997 198,486 25,000 -- 15,000 2,280
President, Sales and 1996 198,702 36,937 23,720(8) 130,000(6) 1,342
Marketing
David R. Burcham(9)..... 1998 102,968 -- -- -- 1,089
Executive Vice 1997 197,851 22,500 -- 20,000 1,861
President, Operations 1996 166,667 23,333 -- 120,000(6) 50,000(10)
</TABLE>
- --------
(1) Reflects bonus paid during the fiscal year.
(2) "Other Annual Compensation" includes the following, to the extent that
the aggregate amount thereof exceeds the lesser of $50,000 or 10% of the
total annual salary and bonus reported for the individual: personal
benefits received by the named individuals and amounts reimbursed the
individuals during the year.
(3) Unless otherwise specified, the number constitutes Company matching
contributions under its 401(k) plan.
(4) Mr. Sanders joined the Company in May 1997 and was promoted to Chief
Financial Officer in September 1998.
(5) Mr. Finkbeiner joined the Company in June 1996 and resigned in October
1998.
(6) In the case of Messrs. Finkbeiner, DeVries and Burcham, includes options
to purchase 75,000, 65,000 and 60,000 shares, respectively, that were
repriced in 1996.
(7) Includes $2,375 in Company 401(k) matching contributions and $15,246 for
relocation.
(8) Represents automobile allowance of $18,182 and health insurance premiums
of $5,538.
(9) Mr. Burcham joined the Company in February 1996 and resigned in May 1998.
(10) Represents relocation expenses and allowances paid by the Company.
5
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants in fiscal 1998 to
the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
% of Total
Number of Options/SARs Grant
Securities Granted to Exercise Date
Underlying Employees in or Base Present
Options/SARs Fiscal Price Expiration Value
Name Granted (#)(1) Year(2) ($/sh) Date ($)(3)
---- -------------- ------------ -------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Frank F. Khulusi........ 0 0% $ N/A N/A $ N/A
Theodore R. Sanders..... 10,000 2.1 7.00 August 31, 2008 58,877
40,000 8.6 7.1875 September 21, 2008 241,920
Richard M. Finkbeiner... 0 0 N/A N/A N/A
Daniel J. DeVries....... 30,000 6.4 6.125 June 15, 2008 155,538
David R. Burcham........ 0 0 N/A N/A N/A
</TABLE>
- --------
(1) The options vest at a rate of 20% per year beginning on the first
anniversary of the date of grant. Upon the occurrence of certain events
resulting in a change of control of the Company or certain major corporate
transactions, the options become fully vested and exercisable, subject to
certain exceptions and limitations.
(2) The Company granted 467,425 options during fiscal 1998.
(3) As suggested by the Commission's rules on executive compensation
disclosure, the Company used the Black-Scholes model of options valuation
to determine grant date present value. The Company does not advocate or
necessarily agree that the Black-Scholes model can properly determine the
value of an option. The present value calculations are based on a ten-year
option term with an expected life of seven years. Assumptions include an
interest rate of 4.89%, an annual dividend yield of 0% and volatility of
100%.
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table above, the year-end value of unexercised
options.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Value Options at End of In-the-Money Options at
Exercise Realized Fiscal 1998 (#) End of Fiscal 1998($)(2)
-------- -------- ------------------------- -------------------------
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank F. Khulusi........ -- $ -- 41,666 58,334 $1,026,025 $1,436,475
Theodore R. Sanders..... 1,200 7,500 5,799 63,001 153,674 1,574,547
Richard M. Finkbeiner... -- -- 53,581 0 1,370,338 0
Daniel J. DeVries....... -- -- 88,290 80,510 2,289,956 2,065,419
David R. Burcham........ 51,248 277,868 0 0 0 0
</TABLE>
- --------
(1) The value realized equals the aggregate amount of the excess of the closing
price of the Company's Common Stock reported on the Nasdaq National Market
for the exercise date, over the relevant exercise price(s).
(2) Value based on market value of the Company's Common Stock on December 31,
1998, which was $31.75, less the exercise price, times the number of shares
issuable pursuant to such options.
Compensation Committee Interlocks and Insider Participation
Frank F. Khulusi, who served as a member of the Compensation Committee
during 1998, is an executive officer of the Company. Mr. Khulusi also serves as
a director and was formerly an executive officer of uBid, Inc., a majority-
owned subsidiary of the Company, with which the Company has engaged in several
transactions which are described under the caption "Certain Relationships and
Related Transactions" below. Prior to the formation of uBid's compensation
committee, the board of directors of uBid set the compensation of uBid's
officers. Daniel J. DeVries, one of the Company's executive officers, and
Richard M. Finkbeiner, a former executive officer of the Company, each served
on the board of directors of uBid until July 1998.
6
<PAGE>
Employment Agreements
In January 1995, the Company entered into a three-year employment agreement
with Frank F. Khulusi (the "Employment Agreement"). Although the original term
of the Employment Agreement expired January 1, 1998, the Employment Agreement
further provides for one-year automatic extensions if the Employment Agreement
is not terminated by the Company or Mr. Khulusi. In 1997, the Employment
Agreement provided for an annual base salary to Mr. Khulusi of $400,000. The
Employment Agreement also provides that Mr. Khulusi is entitled to certain
severance benefits in the event that his employment is terminated by the
Company "without cause" or by Mr. Khulusi for "good reason" or following a
"change of control" (all as defined in the Employment Agreement). In such
cases, Mr. Khulusi would receive two times his salary and bonus for the
preceding twelve months in a lump sum distribution following notice of
termination.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Securities Act") requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership on Form 3 and changes in ownership on
Forms 4 or 5 with the Securities and Exchange Commission (the "Commission").
Such officers, directors and ten percent shareholders are also required by the
Commission's 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
representations from certain reporting persons that no Forms 5 were required
for such persons, the Company believes that during the fiscal year ended
December 31, 1998, all Section 16(a) filing requirements applicable to its
officers, directors and ten percent stockholders were complied with, except
that Sam Khulusi inadvertently failed to file a Form 4 with respect to eight
separate dispositions of the Company's Common Stock occurring in February
1998. Mr. Khulusi subsequently reported such transactions on Form 5 in
February 1999.
Compensation Committee Report 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.
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
7
<PAGE>
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.
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
$400,000 in his employment agreement with the Company and is currently his
base salary for 1999. During 1995, the Chief Executive Officer elected to
reduce his salary, in consultation with the Compensation Committee, to
$300,000. The Chief Executive Officer's salary remained at $300,000 throughout
1996. In 1997, the Chief Executive Officer's base salary was restored to
$400,000. In 1997, the Chief Executive Officer received a bonus of $25,000 and
a stock option to purchase 100,000 shares of Common Stock. No bonus was paid
and no stock options were granted to the Chief Executive Officer in 1998.
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. 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 committee consisting of "outside directors" under Section 162(m).
Prior to March 1999, the Compensation Committee did not meet this requirement.
Compensation Committee
Frank F. Khulusi
8
<PAGE>
Stock Performance Graph
The performance graph below compares the cumulative total stockholder
return of the Company with the cumulative total return of the Nasdaq Stock
Market-US Companies Index ("Nasdaq-US") and the Nasdaq Retail Trade Index
("Nasdaq-Retail"). The performance graph assumes that $100 was invested in the
Company's initial public offering, on April 4, 1995, in common stock of the
Nasdaq-US and Nasdaq-Retail. 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., Nasdaq-US, Nasdaq-Retail
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Creative Computers, NASDAQ STOCK MARKET
Covered) Inc. (U.S.) NASDAQ RETAIL TRADE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Measurement Date $100 $100 $100
04/04/95
- -------------------------------------------------------------------------------
FYE 12/95 $107 $130 $111
- -------------------------------------------------------------------------------
FYE 12/96 $ 43 $160 $133
- -------------------------------------------------------------------------------
FYE 12/97 $ 58 $195 $156
- -------------------------------------------------------------------------------
FYE 12/98 $187 $275 $190
</TABLE>
9
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Historical Intercompany Relationships
uBid was a wholly-owned subsidiary of the Company until its December 1998
initial public offering (the "Offering"). The Company currently owns
approximately 80.1% of the outstanding capital stock of uBid. Mr. Frank
Khulusi is a director of uBid and serves as its Secretary. As a wholly-owned
subsidiary, uBid received various services provided by the Company, including
administration (accounting, human resources, legal), warehousing and
distribution (through June 1998), Internet/telecom and joint marketing. The
Company has also provided uBid with the services of a number of its executives
and employees. In consideration for these services, the Company historically
allocated a portion of its overhead costs related to such services to uBid.
None of these services were provided to uBid pursuant to any written agreement
between uBid and the Company.
Separation of uBid from the Company
The Company has announced that, subject to certain conditions, the Company
intends to separate uBid from the Company's other operations and businesses
(the "Separation") and to distribute to its stockholders all of the uBid
Common Stock owned by the Company (the "Distribution") in no event prior to
June 7, 1999. The Separation will establish uBid as a stand-alone entity with
objectives separate from those of the Company. In December 1998, uBid and the
Company entered into a Separation and Distribution Agreement (the "Separation
and Distribution Agreement") and certain other agreements providing for the
Separation and the Distribution, the provision by the Company of certain
interim services to uBid, and addressing employee benefit arrangements, and
tax and other matters. These agreements (the "Ancillary Agreements") are
discussed below.
Separation and Distribution Agreement
The Separation and Distribution Agreement entered into between uBid and the
Company sets forth certain agreements among uBid and the Company, with respect
to the principal corporate transactions required to effect the Separation, the
Offering and the Distribution, and certain other agreements governing the
relationship among the parties thereafter.
The Distribution. The Separation and Distribution Agreement provides that,
subject to the terms and conditions thereof, the Company and uBid will take
all reasonable steps necessary and appropriate to cause all conditions to the
Distribution to be satisfied and to effect the Distribution. The Board of
Directors of the Company will have the sole discretion to set the date of the
distribution (the "Distribution Date") for any date after June 7, 1999 and
ending on or prior to December 31, 1999. In accordance with the Separation and
Distribution Agreement, completion of the Distribution will be subject to the
satisfaction, or waiver by the Board, of the following conditions: (i) the
opinion of PricewaterhouseCoopers LLP as to the tax-free nature of the
Distribution (the "PwC Opinion") shall have been obtained, in form and
substance satisfactory to the Company, and be confirmed at the time of
Distribution; (ii) if the Company decides to seek a private letter ruling from
the Internal Revenue Service (a "Letter Ruling"), the Letter Ruling shall have
been obtained and remain effective consistent with the conclusions reached in
the PwC Opinion, and such ruling shall be in form and substance satisfactory
to the Company, in its sole discretion; (iii) any material Governmental
Approvals and Consents (as such terms are defined in the Separation and
Distribution Agreement) necessary to consummate the Distribution shall have
been obtained and shall be in full force and effect; (iv) no order, injunction
or decree issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Distribution
shall be in effect, and no other event outside the control of the Company
shall have occurred or failed to occur that prevents the consummation of the
Distribution; and (v) no other events or developments shall have occurred
subsequent to the closing of the Offering that, in the judgment of the Board,
would result in the Distribution having a material adverse effect on the
Company or its stockholders. The Company has agreed to consummate the
Distribution, subject to the satisfaction of the conditions set forth above.
The Company may terminate the obligation to consummate the Distribution if the
Distribution has not occurred by December 31, 1999, unless extended by the
Company and uBid. In addition, the Separation and Distribution
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Agreement may be amended or terminated at any time prior to the Distribution
Date by the mutual consent of uBid and the Company.
The Company and uBid have agreed that none of the parties will take, or
permit any of its affiliates to take, any action which reasonably could be
expected to prevent the Distribution from qualifying as a tax-free
distribution to the Company and its stockholders pursuant to Section 355 of
the Internal Revenue Code of 1986, as amended (the "Code"). The parties have
also agreed to take any reasonable actions necessary in order for the
Distribution to qualify as a tax-free distribution to the Company and its
stockholders pursuant to Section 355 of the Code. Without limiting the
foregoing, prior to the Distribution Date, uBid agreed not to issue or grant,
directly or indirectly, any shares of its capital stock or any rights,
warrants, options or other securities to purchase or acquire (whether upon
conversion, exchange or otherwise) any shares of its capital stock (whether or
not then exercisable, convertible or exchangeable) that would affect the tax-
free nature of the Distribution.
Registration Rights. The Separation and Distribution Agreement provides
that the Company, and Messrs. Frank and Sam Khulusi, holders of approximately
18% and 19%, respectively of Company Common Stock, will have the right in
certain circumstances, but in no event prior to June 7, 1999 (in the case of
the Company) and 180 days after the Distribution (in the case of Messrs. Frank
and Sam Khulusi), to require uBid to use its best efforts to register for
resale shares of uBid Common Stock held by them under the Securities Act of
1933, as amended ("1933 Act"), subject to certain conditions, limitations and
exceptions ("Demand Registration"). uBid also has agreed with the Company and
Messrs. Frank and Sam Khulusi that if uBid files a registration statement for
the sale of securities under the 1933 Act, then such persons may, subject to
certain conditions, limitations and exceptions, include in such registration
statement shares of uBid Common Stock held by them ("Piggyback Registration").
In addition, for an additional 90 days after the applicable 180-day period,
uBid will be entitled to include its shares in any requested Demand
Registration and to reduce the number of shares to be sold by the Company or
Messrs. Frank and Sam Khulusi thereunder to a minimum of 20%, collectively, of
the total offering plus the amount of any underwriters' over-allotment option.
In the case of Messrs. Frank and Sam Khulusi, uBid will bear up to $100,000 of
the cost of the first, and up to $50,000 of the second, requested
registrations and will bear the cost of all piggyback registrations. In
addition, the Company's registration rights will terminate upon consummation
of the Distribution.
Releases and Indemnification. The Separation and Distribution Agreement
provides for a full and complete release and discharge as of the closing date
of the Offering of all liabilities, known or unknown, existing or arising from
all acts and events occurring or failing to occur or alleged to have occurred
or to have failed to occur and all conditions existing or alleged to have
existed on or before the closing date of the Offering, between uBid and the
Company (including any contractual agreements or arrangements existing or
alleged to exist between them on or before the closing date of the Offering),
except as expressly set forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, uBid has
agreed to indemnify, defend and hold harmless the Company and each of the
Company's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of uBid or any
other person to pay, perform or otherwise promptly discharge any liabilities
of uBid in accordance with their respective terms; (ii) any breach by uBid of
the Separation and Distribution Agreement or any of the Ancillary Agreements;
and (iii) any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with
respect to all information contained in the Prospectus or the Registration
Statement used in connection with the Offering.
Except as provided in the Separation and Distribution Agreement, the
Company has agreed to indemnify, defend and hold harmless uBid and each of
uBid's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of the Company
or any other person to pay, perform or otherwise promptly discharge any
liabilities of the Company other than the liabilities of uBid; and (ii) any
breach by the Company of the Separation and Distribution Agreement or any of
the Ancillary Agreements. Neither uBid nor the Company is obligated under the
Separation and Distribution Agreement to
11
<PAGE>
indemnify the other for: (i) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the other under the Separation and
Distribution Agreement or any Ancillary Agreement; (ii) any liability for the
sale, lease, construction or receipt of goods, property or services purchased,
obtained or used in the ordinary course of business between the parties prior
to December 9, 1998; (iii) any liability for unpaid amounts for products or
services or refunds owing on products or services due on a value-received
basis for work done by one party at the request or on behalf of the other;
(iv) any liability that uBid or the Company may have with respect to
indemnification or contribution pursuant to the Separation and Distribution
Agreement for claims brought against other party by third persons; or (v)
generally, any liability the release of which would result in the release of
any person other than a person released pursuant to the Separation and
Distribution Agreement.
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to
mandatory, binding arbitration, subject to the provisions of the Separation
and Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy
or claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended
to produce an expeditious resolution of any such dispute, controversy or
claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration
award in excess of $5 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $5
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
Noncompetition; Certain Business Transactions. The Separation and
Distribution Agreement provides that, for a period of nine months after the
Distribution Date, the Company will not directly or indirectly, including by
way of acquisition of other companies, engage in the Internet online auction
business in substantially the same manner and format as conducted by uBid on
the date of the Separation and Distribution Agreement. The Separation and
Distribution Agreement also provides for the allocation of certain corporate
opportunities during the period prior to the Distribution Date. During this
period, neither uBid nor the Company will have any duty to communicate or
offer such opportunities to the other and may pursue or acquire any such
opportunity for itself or direct such opportunity to any other person. Except
as otherwise contemplated under the intercompany agreements, it is anticipated
that all contracts between uBid and the Company after consummation of the
Offering will be at arms length.
Expenses. Except as expressly set forth in the Separation and Distribution
Agreement or in any Ancillary Agreement, whether or not the Distribution is
consummated, each party will bear its own respective third-party fees, costs
and expenses paid or incurred in connection with the Distribution.
Company Stock Options. Options to purchase Common Stock of the Company that
were granted on or prior to December 9, 1998 and that are outstanding as of
the Distribution Date will, as of the Distribution Date, become options to
purchase shares of both uBid common stock and Company Common Stock ("Adjusted
Options"). The number of shares of uBid common stock that will be subject to
such Adjusted Options will be based upon the ratio of the number of shares of
uBid common stock distributed to the Company's stockholders in the
Distribution divided by the total number of shares of Company Common Stock
outstanding on the record date for the Distribution. In addition, the exercise
price for each Adjusted Option will be allocated between the option to
purchase Company Common Stock and the option to purchase uBid common stock
based on the respective pre- and post-Distribution prices of Company Common
Stock and uBid common stock on the Nasdaq
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<PAGE>
National Market. The options to purchase uBid common stock covered by the
Adjusted Options will be issued under uBid's 1998 Stock Incentive Plan. As of
March 26, 1999, there were outstanding options to purchase 777,051 shares of
Company Common Stock. Based on the number of shares of Company Common Stock
and options to purchase Company Common Stock outstanding on March 26, 1999 and
the number of shares of uBid Common Stock outstanding on such date, options to
purchase approximately 548,935 shares of uBid Common Stock would be granted in
connection with Adjusted Options.
As a result of the Distribution, any options to purchase the Company's
Common Stock issued after the closing date of the Offering will not be
convertible into options to purchase uBid common stock. Therefore, options to
purchase Company Common Stock granted between the closing date of the Offering
and the Distribution Date, including the options granted to Mr. Reck upon his
appointment to the Company's Board of Directors and options to be granted to
Sam Khulusi and Thomas Maloof on the date of the Company's 1999 Annual Meeting
of Shareholders, will be adjusted (without creating an option for uBid common
stock as described in the preceding paragraph) to preserve the intrinsic value
of such options in accordance with the terms of the Directors' Non-Qualified
Stock Option Plan and consistent with applicable accounting rules.
Termination. The Separation and Distribution Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of the Company
and uBid. In the event of any termination of the Separation and Distribution
Agreement, only the provisions of the Separation and Distribution Agreement
that obligate the parties to pursue the Distribution, or take, or refrain from
taking, actions which would or might prevent the Distribution from qualifying
for tax-free treatment under Section 355 of the Code, will terminate, and the
other provisions of the Separation and Distribution Agreement and each
Ancillary Agreement will remain in full force and effect.
Services Agreement
In December 1998, uBid and the Company entered into a services agreement
(the "Services Agreement") pursuant to which the Company provides to uBid
various administrative services, including general accounting services, credit
services and payroll and benefits administration. Except as noted below, the
following services will be provided by the Company until the Distribution is
consummated.
General Accounting Services. Pursuant to the Services Agreement, the
Company provides uBid with accounts payable services and general ledger
services. The services are provided on a cost-plus 10% basis.
Credit Services. The Services Agreement also provides for the provision by
the Company to uBid of credit services, including full credit checking and
analysis at a cost to uBid of $1.50 per transaction. The Company will
undertake to use its best efforts to process each credit check within 24 hours
of receipt of uBid's request.
Payroll and Benefits Administration. Under the Services Agreement, the
Company administers uBid's payroll and uBid's employees are covered under the
Company's health insurance plan and participate in the Company's 401(k) plan.
uBid reimburses the Company for all payroll and benefits costs, and the
Company receives a monthly servicing fee on a cost-plus 10% basis per covered
or participating employee.
Payments pursuant to the Service Agreement are made monthly in arrears
within 30 days after uBid's receipt of an invoice detailing the services
rendered. uBid believes that the fees for services to be provided under the
Services Agreement are no less favorable to uBid than could have been obtained
by uBid from unaffiliated third parties.
Any services rendered to uBid by the Company beyond the services to be
provided under the terms of the Services Agreement that the Company determines
are not covered by the fees provided for under the terms of the Services
Agreement will be billed to uBid as described in the Services Agreement, or on
such other basis as uBid and the Company may agree, provided that the price
payable by uBid for non-covered services will be established on a negotiated
basis which is no less favorable to uBid than the charges for comparable
services from unaffiliated third parties.
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<PAGE>
Termination of the Services Agreement at Distribution. uBid and the Company
expect that, as of the Distribution Date, the Services Agreement will be
terminated and the Company will no longer perform the transactional and
administrative services described above and certain other services
historically performed by the Company.
Tax Indemnification and Allocation Agreement
uBid and the Company have entered into a Tax Indemnification and Allocation
Agreement, which provides that if any one of certain events occurs, and such
event causes the Distribution not to be a tax-free transaction to the Company
under Section 355 of the Code, then uBid will indemnify the Company for income
taxes the Company may incur by reason of the Distribution not so qualifying
under the Code (the "Distribution Taxes"). Such events include any breach of
representations relating to uBid's activities and ownership of its capital
stock made to the Company or in connection with the PwC Opinion or any
solicitation of a Letter Ruling. In connection with the Distribution,
confirmation of the PwC Opinion at the time of the Distribution and any Letter
Ruling, uBid will likely make certain representations regarding its intentions
at the time of the Distribution with respect to its business.
The Tax Indemnification and Allocation Agreement also provides that the
Company will indemnify uBid for Distribution Taxes for which uBid has no
liability to the Company under the circumstances described above.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement provides for: (i) the allocation and payment of taxes for
periods during which uBid and the Company are included in the same
consolidated group for federal income tax purposes or the same consolidated,
combined or unitary returns for state tax purposes; (ii) the allocation of
responsibility for the filing of tax returns; (iii) the conduct of tax audits
and the handling of tax controversies; and (iv) various related matters.
For periods during which uBid is included in the Company's consolidated
federal income tax returns or state consolidated, combined, or unitary tax
returns (which will include the periods on or before the Distribution Date),
uBid will be required to pay an amount of income tax equal to the amount it
would have paid had it filed its tax return as a separate entity, except in
cases where the consolidated or combined group as a whole realizes a detriment
from consolidation or combination. uBid will be responsible for its own
separate tax liabilities that are not determined on a consolidated or combined
basis. uBid will also be responsible in the future for any increases to the
consolidated tax liability of uBid and the Company that is attributable to
uBid, and will be entitled to refunds for reductions of tax liabilities
attributable to uBid for prior periods.
uBid will be included in the Company's consolidated group for federal
income tax purposes so long as the Company beneficially owns at least 80% of
the total voting power and value of the outstanding common stock of uBid. Each
corporation that is a member of a consolidated group during any portion of the
group's tax year is jointly and severally liable for the federal income tax
liability of the group for that year. While the Tax Indemnification and
Allocation Agreement allocates tax liabilities between uBid and the Company
during the period on or prior to the Distribution Date in which uBid is
included in the Company's consolidated group, uBid could be liable in the
event federal tax liability allocated to the Company is incurred, but not
paid, by the Company or any other member of the Company's consolidated group
for the Company's tax years that include such periods. In such event, uBid
would be entitled to seek indemnification from the Company pursuant to the Tax
Indemnification and Allocation Agreement.
As a condition to the Company effecting the Distribution, uBid will be
required to indemnify the Company for any tax liability suffered by the
Company arising out of actions by uBid after the Distribution that would cause
the Distribution to lose its qualification as a tax-free distribution or to be
taxable to the Company for federal income tax purposes under Section 355 of
the Code. For example, 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 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
14
<PAGE>
transactions that include the spin-off. To ensure that issuances of equity
securities by uBid will not cause the Distribution to be taxable to the
Company, the Tax Indemnification and Allocation Agreement contains certain
restrictions on issuances of equity securities of uBid and its repurchase of
equity securities until three years following the Distribution Date (the
"Restriction Period"). Until the second anniversary of the Distribution Date,
uBid cannot issue its common stock and other equity securities (including the
shares sold in the Offering) that would cause the number of shares of Common
Stock distributed by the Company in the Distribution to constitute less than
60% of the outstanding shares of Common Stock unless uBid first obtains either
the consent of the Company or a favorable IRS letter ruling that the issuance
will not affect the tax-free status of the Distribution. After this period
until the end of the third year from the Distribution Date, uBid cannot issue
its common stock and other equity securities that, when combined with equity
securities sold in and after the Offering would cause the number of shares of
uBid common stock distributed by the Company in the Distribution to constitute
less than 55% of the outstanding shares of uBid common stock unless uBid first
obtains the consent of the Company or a favorable IRS letter or opinion of tax
counsel that the issuance would not affect the tax-free status of the
Distribution. These restrictions on the issuance of equity securities may
impede the ability of uBid to raise necessary capital or to complete
acquisitions, if any, using equity securities. The foregoing prohibitions do
not apply to issuances of debt securities of uBid that are not convertible
into Common Stock or other equity securities. The same requirements for an IRS
ruling, consent of the Company or an opinion of counsel are applicable to any
proposed repurchases of uBid common stock during the Restriction Period.
Joint Marketing Agreement
uBid and the Company have entered into a joint marketing agreement (the
"Marketing Agreement"), pursuant to which the Company and uBid agreed to
continue certain joint marketing efforts presently in place. The Marketing
Agreement provides that uBid will continue to be presented on the home page of
the Company's "PC Mall" Website on at least one quarter of the page as well as
receive a banner advertisement on the home page of the Company's "PC Mall"
Website. The Marketing Agreement provides that uBid will provide to the
Company a button that "clicks through" from the home page of uBid's Website to
the Company's "PC Mall" Website. As consideration for these marketing
services, uBid will either make a payment of $10,000 per month to the Company
or the Company, in its sole discretion, may elect to receive a banner
advertisement on each page of uBid's Website in lieu of the monthly payment.
The Marketing Agreement has a term of one year and is terminable by either
party upon 60 days prior written notice.
Internet/Telecommunications Agreement
uBid and the Company have also entered into an Internet/telecommunications
agreement (the "Internet/Telecommunications Agreement") pursuant to which the
Company will continue to provide uBid with certain Internet and
telecommunications services, including hosting uBid's Website. uBid agreed to
reimburse the Company for all telecommunications charges (other than personnel
charges), as well as pay additional monthly personnel charges on a cost-plus
10% basis and capital equipment charges based on standard lease rates. The
Internet/Telecommunications Agreement has an initial term of one year and is
cancelable, at the option of either party, upon 90 days prior written notice,
provided that, upon such cancellation, uBid will be required to purchase all
capital equipment from the Company at its depreciated book value.
Sublease Agreement
In July 1998, uBid and the Company entered into a sublease currently
covering 100,000 square feet of the Company's 325,000 square foot distribution
center in Memphis, Tennessee. The sublease provides for uBid's continued use
of the Company's sophisticated inventory control and shipping systems during
the term of the sublease. The sublease is at a monthly rate equal to the
Company's obligations to the landlord, plus taxes and utilities, and will
expire in 2002.
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<PAGE>
Other Relationships with the Company
Company Credit Agreement. The Company is party to a credit agreement
pursuant to which it has a credit facility of up to $60 million. Under the
credit agreement, each of the Company's subsidiaries, including uBid, is
required to guarantee the Company's obligations and to grant the lender a
security interest in its assets to secure the obligations under the guaranty.
The lender has signed a letter consenting to the Distribution and releasing
uBid's guaranty obligations and the lender's security interest in uBid's
assets. In connection with obtaining the lender's consent thereto, uBid and
the Company have entered into an agreement with the lender that provides that,
through the Distribution Date, neither uBid nor the Company will make certain
transfers to each other of their respective assets which might impair the
effectiveness or enforceability of the lender's security interest in assets of
the Company.
Payable to the Company. Since uBid's inception in 1997, the Company has
provided the funds to finance uBid's operations in the form of advances that
bear interest at the prime rate. uBid had amounts due to the Company for
working capital and fixed asset purchases (the "Payable") totaling
approximately $4.6 million as of December 31, 1998, of which $3.3 million is
represented by a note due in June 2000 with interest payable monthly, and the
remaining $1.3 million of which was repaid during the first quarter of 1999.
Advances made by the Company after the first quarter of 1999, if any, will be
repaid within the respective quarter.
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PROPOSAL TWO
AMENDMENT OF DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
At the Annual Meeting, the Company's stockholders will be asked to vote on
a proposal to approve an amendment to the Directors' Non-Qualified Stock
Option Plan (the "Directors' Plan") to increase the number of shares subject
to the Directors' Plan from 50,000 to 100,000. The essential features of the
Directors' Plan are discussed below.
The Directors' Plan was originally adopted by the Company's Board of
Directors and Shareholders in April 1995. A total of 50,000 shares of Common
Stock are currently reserved for issuance under the Directors' Plan, of which
14,000 remain available for grant. As of April 16, 1999, options to purchase
an aggregate of 36,000 shares of Common Stock were outstanding under the
Directors' Plan at exercise prices between $6.00 and $10.625 per share, and no
options had been exercised under the plan. In order to have sufficient shares
available for future grants, the number of shares of Common Stock that can be
issued under the Directors' Plan is proposed to be increased to 100,000.
The Directors' Plan provides that each non-employee director of the Company
(a "Non-Employee Director") (currently consisting of Messrs. Maloof, Reck and
Sam Khulusi) receives an automatic grant of a non-qualified option to purchase
5,000 shares of Common Stock upon his or her first election or appointment to
the Board (an "Initial Grant"). Thereafter, on the date of each annual meeting
of the Company's stockholders, each Non-Employee Director who continues to be
a director after such meeting will be granted an option to purchase 5,000
shares of Common Stock (a "Subsequent Grant"); provided that no Subsequent
Grant will be made to any Non-Employee Director who has not served as a
director of the Company, as of the time of such annual meeting, for at least
one year.
The exercise price per share of each option granted under the Directors'
Plan is the fair market value of the Common Stock on the date the option is
granted. Payment of the exercise price of any option granted under the
Directors' Plan may be made in whole or in part in (i) cash or (ii) Common
Stock held by the Non-Employee Director. The closing price of the Company's
Common Stock as reported on the Nasdaq National Market on April 22, 1999 was
$27.75.
Options granted under the Directors' Plan vest on the first anniversary of
the date of grant, subject to earlier vesting upon a change of control or
corporate transaction. Under the Directors' Plan, a "change of control" occurs
upon (i) the acquisition of more than 50% of the voting power of the Company
by a person or (ii) a change in the composition of the members of the Board
over a three year period to include a majority of persons not serving on the
Board at the beginning of the period or nominated by such persons. Under the
Directors' Plan, a "corporate transaction" consists of (i) a merger or
consolidation in which the Company is not the surviving entity, (ii) the sale
of all or substantially all of the assets of the Company, or (iii) any reverse
merger in which the Company is the surviving entity in which holders of the
Company's voting securities prior to the merger do not own at least 50% of the
voting power in the Company after the merger.
The Board of Directors, without further approval of the stockholders, may
amend the Directors' Plan at any time in such respects as the Board of
Directors may deem advisable, subject to any shareholder or regulatory
approval required by law, and to any conditions established by the terms of
such amendment; provided that in no event may the Directors' Plan be amended
more than once every six months other than to correspond with changes in
certain laws.
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Federal Income Tax Consequences Relating to the Directors' Plan
The following is a brief summary of the current United States federal
income tax rules generally applicable to the awards under the Directors' Plan.
Non-Qualified Stock Options. The grant of a non-qualified stock option
under the Plan will not result in any federal income tax consequences to the
optionee or to the Company. Upon exercise of a non-qualified stock option, the
optionee is subject to income taxes at the rate applicable to ordinary
compensation income on the difference between the option exercise price and
the fair market value of the shares on the date of exercise. The Company is
entitled to an income tax deduction in the amount of the income recognized by
the optionee. Any gain or loss on the optionee's subsequent disposition of the
shares of Common Stock will receive long or short-term capital gain or loss
treatment, depending on whether the shares are held for more than one year
following exercise. The Company does not receive a tax deduction for any such
gain. The maximum marginal federal tax rate at which ordinary income is taxed
to individuals is currently 39.6%. The maximum marginal federal tax rate at
which long-term capital gains are taxed is 20% for most types of property held
for more than one year.
Other Tax Consequences. The foregoing discussion is not a complete
description of the federal income tax aspects of stock options under the
Directors' 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 or any stock awards other than options. Participants in the
Directors' Plan who are residents 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.
New Plan Benefits
Because awards are based on annual service on the Board of Directors and
directors are subject to election by the stockholders, future benefits to be
received under the Directors' Plan by any specific director cannot be
presently determined. No officer or employee of the Company is eligible to
receive benefits under the Directors' Plan. Ronald B. Reck received a grant of
options to purchase 5,000 shares of Common Stock upon joining the Company's
Board of Directors in April 1999. On the date of the Annual Meeting, Thomas A.
Maloof and Sam U. Khulusi will each receive an automatic grant of an option to
purchase 5,000 shares of Common Stock.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT OF THE
DIRECTORS' PLAN AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF COMMON
STOCK VOTE "FOR" APPROVAL OF THE FOLLOWING RESOLUTION WHICH WILL BE PRESENTED
TO THE MEETING:
RESOLVED, that the stockholders of Creative Computers, Inc. hereby amend
the first sentence of Section 3 of the Directors' Non-Qualified Stock
Option Plan to read in its entirety as follows: "Subject to Section 12 of
the Plan, the maximum number of shares of Stock which may be subject to
Options and sold under the Plan is 100,000 shares of Stock."
Board Recommendation and Shareholder Vote Required
The Board of Directors recommends a vote FOR approval of the amendment to
the Directors' Plan as described above. Approval of the proposal requires the
affirmative vote by a majority of the shares of Common Stock present or
represented at the Meeting. Shares held by persons who abstain from voting on
the proposal and broker "non-votes" will not be voted for or against the
proposal. Shares held by persons abstaining will be counted in determining
whether a quorum is present for purposes of voting on the proposal and will
have the same effect as a vote against the matter but broker non-votes will
not be counted for this purpose. The persons designated in the enclosed proxy
will vote your shares FOR approval of the resolution unless instructions to
the contrary are indicated in the enclosed proxy.
18
<PAGE>
PROPOSAL THREE
RATIFICATION AND APPROVAL OF THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors selected the accounting firm of
PricewaterhouseCoopers LLP to serve as its independent accountants for the
fiscal year ending December 31, 1999. PricewaterhouseCoopers LLP has audited
the Company's financial statements since 1994. A proposal to ratify the
appointment for the current year will be presented at the Meeting.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Meeting. They will have an opportunity to make a statement if they desire
to do so and will be available to respond to appropriate questions from
shareholders.
Board Recommendation and Shareholder Vote Required
The Board of Directors recommends a vote FOR ratification of the
appointment of the independent accountant. Ratification of the selection
requires the affirmative vote by a majority of the shares of Common Stock
present or represented at the Meeting. Shares held by persons who abstain from
voting on the proposal and broker "non-votes" will not be voted for or against
the proposal. Shares held by persons abstaining will be counted in determining
whether a quorum is present for purposes of voting on the proposal and will
have the same effect as a vote against the matter but broker non-votes will
not be counted for this purpose. If the appointment is not ratified by the
shareholders, the Board of Directors is not obligated to appoint other
independent accountants, but the Board of Directors will give consideration to
such unfavorable vote.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
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 next annual meeting of stockholders must be
received by the Company (Attention: Chief Financial Officer, at the principal
offices of the Company), no later than January 2, 2000, for inclusion in the
Company's proxy statement and form of proxy for that meeting. In order for a
stockholder proposal not intended to be subject to Rule 14a-8 (and thus not
subject to inclusion in the Company's Proxy Statement) to be considered
"timely" within the meaning of Rule 14a-4 under the Exchange Act and pursuant
to the Company's Bylaws, notice of any such stockholder proposals must be
given to the Company in writing not less than 45 days nor more than 75 days
prior to the date on which the Company first mailed its proxy materials for
the 1999 meeting, which is set forth on page 1 of this Proxy Statement (or the
date on which the Company mails its proxy materials for the 2000 Annual
Meeting if the date of that meeting is changed more than 30 days from the
prior year). A stockholder's notice to the Company must set forth for each
matter proposed to be brought before the annual meeting (a) a brief
description of the matter the stockholder proposes to bring before the meeting
and the reasons for conducting such business at the meeting, (b) the name and
recent address of the stockholder proposing such business, (c) the class and
number of shares of the Company which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such
business. With respect to proposals by stockholders for director nominations,
the Company's Bylaws require written notice to be received by the Company not
less than 30 days nor more than 60 days before the meeting, unless less than
40 days' notice or public disclosure of the meeting is given, in which case
the stockholder's notice must be received within 10 days after such notice or
disclosure is given. The notice must contain specified information about the
proposals nominee and the stockholder making the nomination.
19
<PAGE>
OTHER MATTERS
All properly executed proxies delivered pursuant to this solicitation and
not revoked will be voted at the Meeting in accordance with the directions
given. Any Proxy in which no direction is specified will be voted in favor of
each of the nominees and the matters to be considered.
The Board of Directors does not intend to bring any matters before the
Meeting other than as stated in this Proxy Statement and is not aware that any
other matters will be presented for action at the Meeting. Should any other
matters be properly presented, the person named in the enclosed form of Proxy
will vote the Proxy with respect thereto in accordance with their best
judgment, pursuant to the discretionary authority granted by the Proxy.
Copies of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 as filed with the Securities and Exchange Commission will be
provided to stockholders without charge upon written request to Theodore R.
Sanders, Chief Financial Officer, Creative Computers, Inc., 2555 W. 190th
Street, Torrance, California 90504.
By Order of the Board of Directors,
/s/ FRANK F. KHULUSI
Frank F. Khulusi
Chairman of the Board, President
and Chief Executive Officer
May 3, 1999
Torrance, California
20
<PAGE>
APPENDIX A
CREATIVE COMPUTERS, INC.
DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
------------------------------------------
(amended and restated as of May 18, 1999)
1. Establishment and Purpose.
-------------------------
(a) Creative Computers, Inc., a Delaware corporation (the "Company"),
hereby adopts its Directors' Non-Qualified Stock Option Plan. The Plan is
intended to provide a means whereby eligible members of the Board may be given
an opportunity to purchase shares of Stock pursuant to options which are not
intended to qualify as incentive stock options under Section 422 of the Code.
(b) The purpose of the Plan is to enable the Company to attract
qualified individuals to serve as members of the Board, to provide additional
performance incentives to such individuals while serving as directors, and to
encourage their continued service on the Board.
2. Definitions.
-----------
As used herein, the following definitions shall apply:
(a) "Affiliate" shall mean any parent or subsidiary corporations of
the Company, as defined in Sections 424(e) and (f) of the Code (but substituting
"the Company" for "employer corporation"), including parents or subsidiaries of
the Company that become such after adoption of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Change in Control" shall mean a change in ownership or control of
the Company effected through either of the following transactions:
. the direct or indirect acquisition by any Person or related
group of Persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a Person or related group of
Persons that directly or indirectly controls, is controlled by, or is under
common control with, the Company) of beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities, or
<PAGE>
. a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who either (a)
have been 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.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Company" shall mean Creative Computers, Inc., a Delaware
corporation.
(f) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(g) "Corporate Transaction" shall means any of the following
stockholder-approved transactions to which the Company is a party:
. a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated,
. the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in complete liquidation or dissolution of the Company,
or
. any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are transferred to
a Person or Persons different from those who held such securities immediately
prior to such merger.
(h) "Director" shall mean a member of the Board.
(i) "Effective Date" shall mean the date this Plan is adopted by the
Board.
(j) "Employee" shall mean any person who is an employee of the
Company, or any Affiliate of the Company, for purposes of tax withholding under
the Code. The payment of a director's fee by the Company shall not be sufficient
to render the recipient of such fee an Employee.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
(l) "Fair Market Value" shall mean the price which the Board acting in
good faith determines through any reasonable valuation method that a share of
Stock might change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell and both having reasonable
knowledge of the relevant facts; provided, however, that where there exists a
public market for the Stock at the time of such determination, the Fair Market
Value shall be the average of the closing bid and asked prices of a share of
Stock quoted in the Over-The-Counter Market Summary or the last reported sale
price of a share of Stock or the closing price of a share of Stock quoted on The
Nasdaq National Market or on any exchange on which the Stock is then listed,
whichever is applicable, as published in the Western Edition of The Wall Street
---------------
Journal on the trading day prior to the date of determination of Fair Market
- -------
Value.
(m) "Initial Public Offering" shall mean the closing of the Company's
first underwritten offering of Common Stock to the public generally.
(n) "Option" shall mean an option to purchase shares of Stock granted
pursuant to the Plan.
(o) "Option Certificate" shall mean the written certificate setting
forth the terms of an Option in the form attached as Exhibit A hereto.
(p) "Optionee" shall mean an Outside Director who receives an Option.
(q) "Outside Director" shall mean a Director who is not an Employee.
(r) "Person" shall mean a natural person, corporation, partnership,
limited liability company, joint venture, trust, or any other entity and any
government or instrumentality of a government.
(s) "Plan" shall mean this Creative Computers, Inc. Directors' Non-
Qualified Stock Option Plan.
(t) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(u) "Stock" shall mean the Common Stock, $.001 par value per share, of
the Company.
3. Stock Subject to the Plan.
-------------------------
Subject to Section 12 of the Plan, the maximum number of shares of
Stock which may be subject to Options and sold under the Plan is 100,000 shares
of Stock. If an Option expires or becomes unexercisable for any reason and has
not been exercised in full, the Stock subject to such Option shall be available
for future grant under the Plan. If Stock which was acquired upon exercise of an
Option is subsequently repurchased by the Company, such Stock shall not be
available for future grants under the Plan.
3
<PAGE>
4. Interpretation and Administration of the Plan.
---------------------------------------------
(a) The Plan is intended to be self-executing pursuant to the terms
hereof. However, any questions concerning interpretation or execution of the
Plan or grants hereunder shall be decided by the Board. All decisions,
determinations and interpretations of the Board shall be final and binding on
all holders of any Options granted under the Plan.
(b) Subject to the provisions and restrictions of the Plan, the Board
shall have the authority to: (i) authorize any person to execute on behalf of
the Company any agreements or other documents in connection with the grant of an
Option under the Plan; (ii) approve forms of agreement for use under the Plan
consistent with the terms of the Plan; and (iii) make all other determinations
deemed necessary or advisable for the implementation of the Plan.
5. Option Grants.
-------------
(a) All grants of Options hereunder shall be automatic and
nondiscretionary and shall be made strictly in accordance with the provisions of
this Section 5. Neither the Board nor any person shall have any discretion to
select which Outside Directors shall be granted Options, or to determine the
number of shares of Stock to be covered by Options granted to Outside Directors,
the timing of such Option grants or the exercise price thereof.
(b) An option to purchase 5,000 shares of Stock shall be granted
("Initial Grant") to each Outside Director, such Initial Grant to be made (i) to
the then existing Outside Directors upon the closing of the Company's Initial
Public Offering and (ii) to other Outside Directors elected or appointed to the
Board after the Company's Initial Public Offering upon the date each such
Outside Director first becomes an Outside Director of the Company. Beginning
with the first annual meeting of the Company's stockholders following the
Initial Public Offering and thereafter at each subsequent annual meeting of the
Company's stockholders, each Outside Director who continues as an Outside
Director immediately following each such annual meeting shall be granted an
option to purchase 5,000 shares of Stock ("Subsequent Grant"); provided that no
Subsequent Grant shall be made to any Outside Director who has not served as an
Outside Director of the Company, as of the time of such annual meeting, for at
least one year. Each Subsequent Grant shall be made on the date of the annual
stockholders' meeting in question. If any Option ceases to be exercisable in
whole or in part, the shares which were subject to such Option but as to which
the Option had not been exercised shall continue to be available under the Plan.
6. Terms and Conditions of Options.
-------------------------------
(a) Each Option granted pursuant to the Plan shall be evidenced by an
Option Certificate executed by the Company and the Optionee.
(b) The exercise price per share of Options granted under the Plan
shall be 100% of the Fair Market Value per share of Stock on the date of grant
of the Option, subject to
4
<PAGE>
adjustment to the extent provided in Section 12 hereof; provided, that with
respect to Options granted concurrently with the closing of the Company's
Initial Public Offering, the exercise price shall be the initial offering price
of the Common Stock of the Company to the public, subject to adjustment to the
extent provided in Section 12 hereof.
(c) Subject to the provisions in the Option Certificate and Sections
10(e) and 10(f) hereof, each Option shall vest and become exercisable twelve
(12) months after the date of grant.
(d) The term of each Option shall be ten (10) years from the date of
grant, unless a shorter period is required to comply with any applicable law, in
which case such shorter period shall apply.
7. Eligibility.
-----------
Options may be granted only to Outside Directors. No Optionee shall
have any rights as a stockholder of the Company as a result of the grant of an
Option under the Plan or his or her exercise of such Option pending the actual
issuance by the Company of the Stock subject to such Option. The Plan shall not
confer upon any Outside Director any right with respect to continuation of
service as a Director or nomination to serve as a Director, nor shall it
interfere in any way with any rights that the Director or the Company may have
to terminate his or her directorship at any time.
8. Term of Plan; Effective Date.
----------------------------
The Plan shall become effective on the Effective Date, subject to
approval of the Plan by the stockholders of the Company. If the Effective Date
precedes such stockholder approval any Option granted under the Plan prior to
such approval shall be conditioned upon approval by stockholders of the Plan.
Options may be granted under the Plan at any time on or before the tenth
anniversary of the date of adoption of the Plan.
9. Payment Upon Exercise.
---------------------
Payment of the exercise price upon exercise of any Option may be made
(i) in cash, (ii) by delivery on a form prescribed by the Board of an
irrevocable direction to a securities broker approved by the Board to sell
shares and deliver all or a portion of the proceeds to the Company in payment
for the Stock; (iii) with shares of Stock owned by the Optionee or withholding
of shares otherwise deliverable to the Optionee upon exercise of the Option; or
(v) any combination of the foregoing. Any stock used to exercise an Option shall
be valued at its Fair Market Value on the date of the exercise of the Option.
10. Exercise of Option.
------------------
(a) An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option Certificate
5
<PAGE>
by the person entitled to exercise the Option and full payment for the Stock has
been received by the Company in accordance with Section 9 hereof. An Option may
not be exercised for a fraction of a share of Stock.
(b) If an Optionee ceases to serve as Director (other than as a result
of disability, death or following a Change in Control), he or she may, but only
within three (3) months after the date he or she ceases to be a Director,
exercise his or her then outstanding Options to the extent that he or she was
entitled to exercise them at the date of such termination. Notwithstanding the
foregoing, in no event may any Option be exercised after the expiration of its
term set forth in Section 6. To the extent that the Optionee was not entitled to
exercise an Option at the date of such termination, or does not exercise such
Option (that he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) Notwithstanding the provisions of Section 9(b) above, in the event
an Optionee is unable to continue his or her service as a Director as a result
of his or her total and permanent disability (as defined in Section 22(e)(3) of
the Code), he or she may, within twelve (12) months from the date of such
termination, exercise his or her then outstanding Options to the extent he or
she was entitled to exercise them at the date of such termination.
Notwithstanding the foregoing, in no event may any Option be exercised after the
expiration of its term set forth in Section 6. To the extent that the Optionee
was not entitled to exercise the Option at the date of termination, or if
Optionee does not exercise such Option (that he or she was entitled to exercise)
within the time specified herein, the Option shall terminate.
(d) If during the term of his or her Option, an Optionee (A) dies and
had been in Continuous Status as a Director at the time of his or her death, or
(B) dies within three (3) months after termination of Continuous Status as a
Director, the Option may be exercised at any time within twelve (12) months
following the date of the Optionee's death by the Optionee's personal
representative or by a person who acquired the right to exercise the Option by
bequest or intestate succession, but only to the extent the Optionee was
entitled to exercise the Option at the time of his or her termination of
Continuous Status as a Director. Notwithstanding the foregoing, in no event may
the Option be exercised after the expiration of the term set forth in Section 6.
(e) Should any Corporate Transaction occur while an Optionee remains
in Continuous Status as a Director, then each outstanding Option held by such
Optionee shall become fully exercisable, immediately prior to the specified
effective date of such Corporate Transaction, for all or any portion of the
shares at the time represented by such Option and may be exercised with respect
to any or all of such shares represented by the Option prior to the specified
effective date of such Corporate Transaction. Immediately following the
consummation of the Corporate Transaction, each such option shall terminate
unless assumed by the successor company or its parent.
(f) Should a Change in Control occur while an Optionee remains in
Continuous Status as a Director, then each outstanding Option held by such
Optionee shall become fully exercisable, immediately prior to the effective date
of such Change in Control, for
6
<PAGE>
all of the shares at the time subject to such Option and may be exercised with
respect to any or all of such shares represented by the Option. The Option shall
remain so exercisable until the expiration or sooner termination of the Option
term.
11. Nontransferability of Options.
-----------------------------
To the extent required by Rule 16b-3 of the Exchange Act, no Option
shall be transferable by an Optionee other than by operation of law or by will
or by the laws of descent or distribution; provided that, if Rule 16b-3 is
amended after the Board's adoption of the Plan to permit greater transferability
of an Option hereunder, all Options hereunder shall be transferable after the
Initial Public Offering to the fullest extent provided by Rule 16b-3 as so
amended. In the event of any Rule 16b-3 permitted transfer of an Option, the
transferee shall be entitled to exercise the Option in the same manner and only
to the same extent as the Optionee (or his personal representative or the person
who would have acquired the right to exercise the Option by bequest or intestate
succession) would have been entitled to exercise the Option under Sections 9 and
10 had the Option not been transferred.
12. Adjustment Upon Changes in Capitalization.
-----------------------------------------
In the event that the number of outstanding shares of Stock of the
Company is changed through merger, consolidation, reorganization,
recapitalization, reincorporation, stock split, stock dividend (in excess of two
percent) or other change in the capital structure of the Company without
consideration, the number of shares of Stock available under the Plan, the
number of shares of Stock deliverable in connection with any Option and the
exercise price per share of such Option shall be proportionately adjusted;
provided however, that no certificate or scrip representing fractional shares
shall be issued and any resulting fractions of a share shall be ignored.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) The Board may amend the Plan from time to time in such respects as
the Board may deem advisable; provided, however, that to the extent necessary to
comply with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain approval by the Company's stockholders to
amend the Plan to the extent and in the manner required by such law or
regulation. Notwithstanding the foregoing, the provisions set forth in Sections
5 and 6 of the Plan (and any other Sections of the Plan that affect the formula
award terms required to be specified in the Plan by Rule 16b-3 of the Exchange
Act and any successor to such Rule) shall not be amended periodically and in no
event more than once every six (6) months, other than to comport with changes in
the Code, the Employee Retirement Income Security Act of 1974, as amended, or
any applicable rules and regulations thereunder.
(b) The Board, without further approval of the stockholders, may at
any time terminate or suspend the Plan. Except as otherwise provided herein, any
such termination or suspension of the Plan shall not affect Options already
granted hereunder, and such Options shall remain in full force and effect as if
the Plan had not been terminated or suspended.
7
<PAGE>
(c) Except as otherwise provided herein, rights and obligations under
any outstanding Option shall not be altered or impaired by amendment, suspension
or termination of the Plan, except with the consent of the person to whom the
Option was granted or transferred.
14. Conditions Upon Issuance of Stock.
---------------------------------
(a) Stock shall not be issued pursuant to the exercise of an Option
unless the exercise of such Option and the issuance and delivery of such Stock
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, state securities laws, and the requirements
of any stock exchange or national market system upon which the Stock may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
(b) Inability of the Company to obtain authority from any regulatory
body having jurisdictional authority deemed by the Company's counsel to be
necessary for the lawful issuance and sale of any Stock hereunder shall relieve
the Company of any liability for failure to issue or sell such Stock.
15. Reservation of Stock.
--------------------
The Company, during the term of the Plan, will at all times reserve
and keep available such number of shares of Stock as shall be sufficient to
satisfy the requirements of the Plan.
16. Additional Restrictions of Rule 16b-3.
-------------------------------------
Transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Board fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Board. Moreover, in the event the Plan does not include a
provision required by Rule 16b-3 to be stated therein in order to qualify the
Plan as a formula plan, such provision (other than one relating to eligibility
requirements, or the price and amount of awards) shall be deemed automatically
to be incorporated by reference into the Plan.
8
<PAGE>
PROXY
CREATIVE COMPUTERS, INC.
ANNUAL MEETING OF SHAREHOLDERS--MAY 18, 1999
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Frank F. Khulusi and Sam U. Khulusi, and each
of them, with full power of substitution as proxies and agents (the "Proxy
Agents") in the name of the undersigned, to attend the Annual Meeting of
Shareholders of Creative Computers, Inc., a Delaware corporation to be held at
the Marriott Hotel, 3635 Fashion Way, Torrance, California 90503 on Tuesday,
May 18, 1999 at 10:00 a.m. local time, or any adjournment thereof, and to vote
the number of shares of Common Stock of the Company that the undersigned would
be entitled to vote, and with all the power the undersigned would possess, if
personally present, as follows.
1. ELECTION OF DIRECTORS
[_] FOR all nominees [_] WITHHOLD AUTHORITY to
listed below (except as vote for all nominees
marked to the contrary). listed below.
(To withhold authority to vote for any individual nominee, strike a line
through the nominee's name in the list below.)
Frank F. Khulusi Sam U. Khulusi
Ronald B. Reck Thomas A. Maloof
2. PROPOSAL TO APPROVE THE AMENDMENT OF THE DIRECTORS' NON-QUALIFIED STOCK
OPTION PLAN to increase the number of shares subject to the Plan from
50,000 to 100,000.
[_] FOR [_] AGAINST [_] ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICE WATERHOUSECOOPERS LLP as the
Company's independent auditor for the Company's current fiscal year.
[_] FOR [_] AGAINST [_] ABSTAIN
4. In their discretion, the Proxy Agents are authorized to vote on such
other business as may properly come before the meeting or any adjournment
thereof.
THIS PROXY WHEN PROPERLY EXECUTED AND RETURNED TO THE COMPANY WILL BE VOTED IN
THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
- --------------------------------------------------------------------------------
PLEASE DATE AND SIGN the enclosed proxy
exactly as the name(s) appears herein and
return promptly in the accompanying
envelope. If the shares are held by joint
tenants or as community property, both
shareholders should sign. Receipt of Notice
of Annual Meeting of Shareholders, Annual
Report for the year ended December 31, 1998
and Proxy Statement dated May 3, 1999, is
hereby acknowledged by the undersigned.
Dated: _________________, 1999
------------------------------------------
Signature
------------------------------------------
Name, typed or printed
------------------------------------------
Tax identification or social security
number
------------------------------------------
Signature
------------------------------------------
Name, typed or printed
------------------------------------------
Tax identification or social security
number
