<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______ to ______
Commission file number 0-25790
CREATIVE COMPUTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4518700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2555 West 190th Street
Torrance, California 90504
(address of principal executive offices)
(310) 354-5600
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ----------
There were 10,399,586 outstanding shares of Common Stock at August 11, 1999.
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Creative Computers, Inc.
Index to Form 10-Q
PART I - FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
Consolidated Balance Sheet............................................... 3
Consolidated Statement of Operations..................................... 4
Consolidated Statement of Cash Flows..................................... 5
Condensed Notes to Consolidated Financial Statements..................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 8
PART II - OTHER INFORMATION.............................................. 12
Item 4 - Submission of Matters to a Vote of Security Holders............. 12
Item 6 - Exhibit and Reports on Form 8-K................................. 12
SIGNATURE................................................................ 12
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ITEM 1 FINANCIAL STATEMENTS
Creative Computers, Inc.
CONSOLIDATED BALANCE SHEET
(in thousands except share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(unaudited)
-------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,061 $ 6,442
Accounts receivable, net of allowance for
doubtful accounts 41,940 39,152
Due from uBid 477 1,277
Inventories 20,638 40,736
Prepaid expenses and other current assets 3,868 3,796
Net assets of uBid discontinued segment - 18,633
Income tax refund receivable 190 190
Deferred income taxes 4,856 5,216
-------- --------
Total current assets 88,030 115,442
-------- --------
Notes receivable from uBid 3,331 3,331
Property, plant and equipment, net 14,924 14,391
Goodwill, net 12,077 12,318
Deferred income taxes 1,262 1,262
Other assets 52 138
-------- --------
$119,676 $146,882
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 53,933 $ 62,129
Accrued expenses and other current liabilities 11,782 13,198
Capital leases - current portion 199 116
Notes payable - current portion - 6
-------- --------
Total current liabilities 65,914 75,449
-------- --------
Capital leases 204 6
Notes payable 157 155
-------- --------
Total liabilities 66,275 75,610
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares
authorized; 10,398,736 and 10,375,893 shares issued 11 10
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding - -
Additional paid-in capital 57,796 75,587
Treasury stock, at cost: 15,000 shares (91) (91)
Retained earnings (accumulated deficit) (4,315) (4,234)
-------- --------
Total stockholders' equity 53,401 71,272
-------- --------
$119,676 $146,882
======== ========
</TABLE>
See condensed notes to consolidated financial statements.
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Creative Computers, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $161,535 $143,183 $337,824 $305,242
Cost of goods sold 142,553 125,181 298,804 271,168
Retail store closure inventory reserves - - - 3,679
-------- -------- -------- --------
Gross profit 18,982 18,002 39,020 30,395
Selling, general and administrative expenses 19,033 16,579 38,394 41,907
Expenses related to retail store closures - - - 6,773
-------- -------- -------- --------
Income (loss) from operations (51) 1,423 626 (18,285)
Interest income (expense), net 13 (76) (38) (132)
-------- -------- -------- --------
Income (loss) before income taxes (38) 1,347 588 (18,417)
Income tax provision (benefit) 239 539 477 (6,991)
-------- -------- -------- --------
Income (loss) before discontinued operations (277) 808 111 (11,426)
Net loss from discontinued operations (3,555) (596) (6,240) (1,171)
-------- -------- -------- --------
Net income (loss) $ (3,832) $ 212 $ (6,129) $(12,597)
======== ======== ======== ========
Earnings (loss) per share
Continuing operations $ (0.03) $ 0.08 $ 0.01 $ (1.13)
Discontinued operations (0.34) (0.06) (0.60) (0.11)
-------- -------- -------- --------
$ (0.37) $ 0.02 $ (0.59) $ (1.24)
======== ======== ======== ========
Diluted earnings (loss) per share
Continuing operations $ (0.03) $ 0.08 $ 0.01 $ (1.13)
Discontinued operations (0.34) (0.06) (0.60) (0.11)
-------- -------- -------- --------
$ (0.37) $ 0.02 $ (0.59) $ (1.24)
======== ======== ======== ========
Basic weighted average number of
shares outstanding 10,391 10,152 10,365 10,133
======== ======== ======== ========
Diluted weighted average number of
shares outstanding 10,391 10,244 10,365 10,133
======== ======== ======== ========
</TABLE>
See condensed notes to consolidated financial statements.
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Creative Computers, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,129) $(12,597)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 2,328 4,580
Provision (benefit) for deferred income taxes 360 (7,709)
Loss on write-off of property, plant and equipment - 2,052
Discontinued operations 6,240 1,888
Changes in assets and liabilities, net of acquisition:
Accounts receivable (1,988) 5,140
Inventories 20,098 12,986
Prepaid expenses and other current assets (104) (3,005)
Other assets 86 173
Accounts payable (8,196) 11,300
Accrued expenses and other current liabilities (1,608) (2,689)
Income taxes refund receivable - (144)
------- --------
Total adjustments 17,216 24,572
------- --------
Net cash provided by operating activities 11,087 11,975
------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,588) (1,742)
------- --------
Net cash used in investing activities (2,588) (1,742)
------- --------
Cash flows from financing activities:
Net payments under notes payable (4) (4,932)
Principal borrowings (payments) of obligations under capital leases 281 (118)
Proceeds from stock issued under stock option plans 843 291
------- --------
Net cash provided by (used in) financing activities 1,120 (4,759)
------- --------
Net increase in cash and cash equivalents 9,619 5,474
Cash and cash equivalents:
Beginning of the period 6,442 8,018
------- --------
End of the period $16,061 $ 13,492
======= ========
</TABLE>
See condensed notes to consolidated financial statements.
5
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Creative Computers, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated interim financial statements include the accounts of
Creative Computers, Inc. (a Delaware corporation) and its wholly and
majority owned subsidiaries (the "Company") and have been prepared,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations. These financial
statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial
position of the Company at June 30, 1999 and the results of operations
and cash flows for the three and six months ended June 30, 1999 and 1998.
The results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
2. uBid, Inc.
On December 9, 1998, uBid, Inc., a subsidiary of the Company, completed
an initial public offering (the Offering) of 1,817,000 shares of common
stock at an offering price of $15.00 per share. Net proceeds to uBid were
$23.8 million, and are being used for advertising and brand development
of uBid's infrastructure to support growth, and for uBid's general
corporate purposes. The shares sold to the public in the offering
represent approximately 19.9% of uBid's outstanding common stock. On June
7, 1999, the Company divested its ownership in uBid by means of a tax-
free distribution of all of its 7.3 million shares of uBid common stock
to the Company's shareholders of record as of May 24, 1999. In accordance
with Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations," uBid's revenues and expenses have been excluded from the
Company's consolidated revenues and expenses. uBid's operating results,
net of taxes, for the periods presented have been reported as a separate
line item on the Company's income statement under the caption "Net loss
from discontinued operations." The Company's consolidated balance sheet
and consolidated statement of cash flows have been restated for the
periods presented to reflect the divestiture of uBid.
3. Net Income (Loss) Per Share
Basic Earnings Per Share (EPS) excludes dilution and is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding during the reported periods. Diluted EPS reflects the
potential dilution that could occur under the treasury stock method if
stock options and other commitments to issue common stock were exercised.
The computation of Basic and Diluted EPS is as follows:
6
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net income (loss) $(3,832) $ 212 $(6,129) $(12,597)
======= ======= ======= ========
Weighted average shares - Basic 10,391 10,152 10,365 10,133
Effect of dilutive stock options
and warrants - 92 - -
------- ------- ------- --------
Weighted average shares-Diluted 10,391 10,244 10,365 10,133
======= ======= ======= ========
Net earnings/(loss) per share-Basic $ (0.37) $ 0.02 $ (0.59) $ (1.24)
======= ======= ======= ========
Net earnings/(loss) per share-Diluted $ (0.37) $ 0.02 $ (0.59) $ (1.24)
======= ======= ======= ========
</TABLE>
4. Retail Store Closures
In February 1998, the Company closed one retail store acquired from Elek-
Tek and on March 20, 1998, the Company announced the closure of six
retail stores to focus its efforts on its catalog, corporate and Internet
channels of distribution. The closed retail stores generated 9% of the
Company's first-quarter 1998 sales, but had operating losses approaching
$2.0 million for that quarter. The Company recorded a one-time pretax
restructuring charge of $10.5 million relating to exit costs associated
with the closing of retail operations. Recorded in selling, general and
administrative costs were $3.1 million in write-offs of goodwill, $1.9
million in write-offs of fixed assets, $1.5 million reserve for lease
exit costs, and $0.3 million in employee-related severance costs.
Recorded as cost of sales were $3.7 million of reserves for store
inventory. No reserves remain at March 31, 1999 related to the retail
showroom closures. In addition, during the first quarter of 1998, $7.0
million of pretax write-offs were taken primarily relating to a more
rapid decline in Mac sales during the quarter and the effects on
inventory and receivables of rapid price erosion and other changes in the
industry during the quarter.
5. Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related
Information" (SFAS No. 131). This statement requires companies to report
financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and
expense items, and segment assets, as well as information about the
revenues derived from the Company's products or services, the countries
in which the company earns revenues and holds assets, and major
customers. SFAS No. 131 requires the use of the management approach to
determine the information to be reported. The management approach is
based on the way management organizes the enterprise to assess
performance and make operating decisions regarding the allocation of
resources. It is management's opinion that the Company has two reportable
segments: 1) a direct marketer of personal computers, hardware, software,
peripheral products and consumer electronics under the PCMall, MacMall,
ComputAbility and CCIT brands; and 2) a fee-based internet retailer of
multiple product categories under the eCOST.com brand.
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Summarized segment information for the three months ended June 30, 1999
is as follows:
<TABLE>
<CAPTION>
June 30, 1999
(in thousands)
----------------------------------------------
Gross Operating Total
Sales Profit Profit (Loss) Assets
----------------------------------------------
<S> <C> <C> <C> <C>
Direct marketer $159,582 $18,988 $ 618 $119,426
Fee-based internet 1,953 (6) (669) 250
Consolidated 161,535 18,982 (51) 119,676
</TABLE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Recent Developments
Net sales of the Company are primarily derived from the sale of personal
computer hardware, software, peripherals and accessories to large corporations,
small businesses, home offices and individual consumers through the Internet,
dedicated inbound and outbound telemarketing sales executives, a direct sales
force, retail showrooms and direct response catalogs.
During the first quarter of 1998, the Company closed seven out of eight retail
stores to focus its efforts on its corporate, Internet sales channels and
catalog. In December 1998, uBid completed an initial public offering of
1,817,000 shares of its common stock. In June 1999, the Company distributed its
remaining 80.1% ownership in uBid by means of a tax-free stock dividend.
In June 1999, the Company completed a spin-off of its remaining 80.1% ownership
in uBid by means of a stock dividend, which was structured as a tax-free
spin-off under Section 355 of the Internal Revenue Code. Section 355 generally
provides that a company that distributes shares of a subsidiary in a spin-off
that is otherwise tax-free will incur U.S. federal income tax liability if 50%
or more, by vote or by value, of the capital stock of either the company making
the distribution or the subsidiary is acquired by one or more persons acting
pursuant to a plan or series of related transactions that include the spin-off.
In order to preserve the tax-free treatment of the spin-off, the Company has
entered into agreements with uBid which restrict uBid's ability to issue or
repurchase its equity securities. In addition, uBid has agreed to indemnify the
Company for any tax liability suffered by the Company arising out of uBid's
actions that would cause the distribution to lose its tax-free treatment.
In March 1999, the Company launched eCOST.com as a wholly-owned subsidiary.
eCOST.com offers a broad selection of name-brand products, most of which are
sold at wholesale cost plus itemized fees for processing and shipping the order.
Results of Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Unless otherwise stated, all comparisons are results which exclude uBid and the
closed retail stores.
Net sales for the quarter ended June 30, 1999 were $161.5 million, a 13%
increase over last year's second quarter. Net sales for the quarter from
eCOST.com accounted for $2.0 million. PC/WINTEL sales increased 5% from $85.9
million in last year's comparable quarter to $90.6 million for the three months
ended June 30, 1999. Apple/Macintosh-related product sales increased 21% to
$68.9 million for the three months ended June 30, 1999 as compared with $57.1
million for the comparable period in the prior year. PC/WINTEL sales comprised
over 57% of total net sales for the second quarter in 1999 versus 60% for the
same quarter last year.
Gross profit from all operations increased $1.0 million due to increased sales,
partially offset by a decline in profit margin. Excluding eCOST.com, gross
profit as a percentage of net sales was 11.9%. This represents a decrease from
last year's second quarter gross profit of 12.6%. Including the impact of
eCOST.com, gross profit as a percentage of net sales was 11.8%. The Company's
gross profit percentage may vary from quarter to quarter, depending on the
continuation of key vendor support programs, including price protections,
rebates and return policies and based on product mix, pricing strategies and
other factors.
Selling, general and administrative expenses as a percent of net sales,
excluding eCOST.com, declined from 11.6% in last year's second quarter to 11.5%
in the second quarter of this year. Selling, general and administrative
expenses for the second quarter of 1999 increased $1.8 million from the prior
year, excluding eCOST.com, due in part to increased spending on outbound sales.
8
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Net interest income for the three months ended June 30, 1999 was $13,000
compared to net interest expense of $(76,000) for the comparable quarter in
1998. Net interest income for 1999 resulted from the note receivable from uBid
and the investment of excess cash, partially offset by expenses of borrowings
under the Company's floorplan line of credit. The net interest expense for 1998
resulted from debt incurred and cash invested to acquire Elek-Tek, Inc. and
ComputAbility, Inc.
The Company recorded a $239,000 income tax provision for the three months ended
June 30, 1999, compared to a provision of $539,000 in the prior year primarily
due to changes in profitability.
Net loss was $3.8 million for the three months ended June 30, 1999 compared to a
net income of $212,000 for the same period last year inclusive of uBid and the
closed stores. Excluding the Company's investment in eCOST.com and discontinued
operations of uBid, net income would have been $392,000, or $0.04 per diluted
share, in the second quarter of 1999.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Net sales for the six months ended June 30, 1999 increased 16% to $337.8
million. Net sales from all operations (including the closed retail stores)
increased by $32.6 million or 11% in the six months ended June 30, 1999 from
$305.2 million in the six months ended June 30, 1998. Net sales for the six-
month period from eCOST.com accounted for $2.0 million.
Gross profit from all operations increased by $4.9 million to $39.0 million for
the six months ended June 30, 1999 from $34.1 million in the same period of
1998. Gross profit from all operations as a percentage of net sales increased
to 11.6% for the first six months of 1999, compared to 11.2% for the first six
months of 1998.
Selling, general and administrative expenses decreased by $3.5 million to $38.4
million for the six months ended June 30, 1999 from $41.9 million for the
comparable period in the prior year. The reduction in selling, general and
administrative expense is due to the closure of the retail stores in 1998.
Net interest expense for the six months ended June 30, 1999 was $38,000 compared
to interest expense of $132,000 for the comparable period in 1998. The net
interest expense for 1999 resulted from borrowings under the Company's
floorplan line of credit, partially offset by interest income from the notes
receivable from uBid. Net interest expense for 1998 resulted from debt incurred
and cash invested to acquire Elek-Tek, Inc. and ComputAbility, Inc.
The Company recorded at $477,000 tax provision for the six months ended June 30,
1999, compared to a benefit of $7.0 million in the prior year. The benefit in
1998 resulted primarily from the non-recurring restructuring charge in the first
quarter of 1998 related to the closure of retail stores.
The Company incurred a net loss of $6.1 million or $0.59 per share, for the six
months ended June 30, 1999 compared to net loss of $12.6 million, or $1.24 per
share, for the same period last year, inclusive of closed stores and the
discontinued operations of uBid. Excluding the Company's investment in
eCOST.com and uBid discontinued operations, net income would have been $882,000,
or $0.08 per diluted share, for the six months ended June 30, 1999.
Liquidity and Capital Resources
The Company's primary capital need has been the funding of the working capital
requirements created by its rapid growth in sales. Historically, the Company's
primary sources of financing have been from public offerings and borrowings from
its stockholders, private investors and financial institutions.
As of June 30, 1999, the Company had cash, cash equivalents and short-term
investments of $16.0 million and working capital of $22.1 million. Inventories
decreased to $20.6 million at June 30, 1999 from $40.7 million at December 31,
1998 due to increased sales drop-shipped from vendors and increased order
frequency. Accounts receivable increased to $41.9 million at June 30, 1999 from
$39.2 million at December 31, 1998 due to an increase in business customer
purchases. During the six months ended June 30, 1999, the Company's capital
expenditures were $2.6 million, versus $1.7 million for the comparable period
last year.
9
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As of June 30, 1999, the Company had an existing credit facility consisting of
separate credit lines totaling $60.0 million. Part of the credit facility
functions in lieu of a vendor trade payable for inventory purchases, is included
in accounts payable, and does not bear interest if paid within terms specific to
each vendor. Part of the credit facility functions as a working capital line of
credit secured by, and is limited to, a percentage of eligible inventory and
accounts receivable, and bears interest at the prime rate. As of June 30, 1999,
the Company had $5.6 million in total borrowings under the credit facility. The
overall credit facility is secured by substantially all of the Company's assets
and contains certain covenants that require the Company to maintain a minimum
level of tangible net worth and income and a maximum leverage ratio. At June
30, 1999, the Company is in compliance with all such covenants.
The Company believes that current working capital, together with cash flows from
operations and available lines of credit, will be adequate to support the
Company's current operating plans through 1999. However, if the Company
requires additional funds, such as for acquisitions or expansion or to fund a
significant downturn in sales that causes losses, there are no assurances that
adequate financing will be available at acceptable terms, if at all.
In July 1996, the Company announced its plan to repurchase up to 1,000,000
shares of its Common Stock. The shares will be repurchased from time to time at
prevailing market prices, through open market or negotiated transactions,
depending upon market conditions. No limit was placed on the duration of the
repurchase program. There is no guarantee as to the exact number of shares that
the Company will repurchase. Subject to applicable securities laws, repurchases
may be made at such times and in such amounts as the Company's management deems
appropriate. The program can also be discontinued at any time management feels
additional purchases are not warranted. The Company will finance the repurchase
plan with existing working capital. As of June 30, 1999, the Company has
repurchased 15,000 shares under the program.
As part of its growth strategy, the Company may, in the future, acquire other
companies in the same or complementary lines of business. Any such acquisition
and the ensuing integration of the operations of the acquired company would
place additional demands on the Company's management and operating and financial
resources. The Company currently has no definitive agreements with respect to
any acquisitions.
Inflation
Inflation has not had a material impact upon operating results, and the Company
does not expect it to have such an impact in the near future. There can be no
assurances, however, that the Company's business will not be so affected by
inflation.
Year 2000
Computer systems, software packages, and microprocessor dependent equipment may
cease to function or generate erroneous data when the year 2000 arrives. The
problem affects those systems or products that are programmed to accept a two-
digit code in date code fields. To correctly identify the year 2000, a four-
digit date code field will be required to be what is commonly termed "year 2000
compliant."
The Company may realize exposure and risk if the systems for which it is
dependent upon to conduct day-to-day operations are not year 2000 compliant.
The potential areas of exposure include electronic data exchange systems
operated by third parties with whom the Company transacts business, certain
products purchased from third parties for resale, and computers, software,
telephone systems, and other equipment used internally. To minimize the
potential adverse affects of the year 2000 problem, the Company has established
an internal project team comprised of all functional disciplines. This project
team has begun a three-phase process of identifying internal systems (both
information technology and non-information technology systems) not year 2000
compliant, determining their significance in the effective operation of the
Company, and developing plans to resolve the issues where necessary. The
Company has been communicating with the suppliers and others to coordinate year
2000 readiness. The responses received by the Company to date have indicated
that steps are currently being undertaken to address this concern. However, if
such third parties are not able to make all systems and products year 2000
compliant, there could be a material adverse impact on the Company. Also,
should products previously sold by the Company as well as products currently
marketed by the Company fail to meet Y2K readiness there could be a material
adverse impact on the Company to the extent not indemnified by its vendors.
10
<PAGE>
Initial review of the Company's principal application software through which
nearly all of the Company's business is transacted, has determined it to be year
2000 compliant and, as such, the Company does not anticipate any material
adverse operational issues to arise. The Company has completed its year 2000
compliance assessment for critical systems and plans to implement corrective
solutions before the end of the third quarter of 1999. To date, the costs
incurred by the Company with respect to this project are $0.3 million. Based on
current estimates, management expects that the Company's total costs in
connection with its year 2000 compliance project will be approximately $0.8
million and will be financed from general corporate funds; however, future
anticipated costs are difficult to estimate with any certainty and may differ
materially from those currently projected based on the results of the assessment
phase of the Company's year 2000 project. The anticipated costs associated with
the Company's year 2000 compliance program do not include time and costs that
may be incurred as a result of any potential failure of third parties to become
year 2000 compliant or costs to implement the Company's future contingency
plans. Management estimates that approximately one half of the expected costs
will be attributed to the redeployment of internal resources and the other half
will be comprised principally of external consulting fees and software upgrades.
No hardware expenditures for year 2000 are contemplated. The redeployment of
internal data processing resources is not expected to materially delay any
significant projects. Year 2000 spending is expected to be 10% of total
budgeted data processing expenditures. Contingency plans are being developed
and are expected to be completed by the end of the third quarter of 1999. Upon
completion of this project, if systems material to the Company's operations have
not been made year 2000 compliant, or if third parties fail to make their
systems year 2000 compliant in a timely manner, the year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Business Factors
Except for historical information, all of the statements, expectations and
assumptions contained in the foregoing are forward-looking statements. The
realization of any or all of these expectations is subject to a number of risks
and uncertainties and it is possible that the assumptions made by management may
not materialize. There can be no assurances that the momentum in PC/Wintel sales
will be sustained, that the second quarter trends for Apple, Mac and out-bound
sales will continue in future periods, or that the Company's Internet sales will
continue to grow. There can be no assurance that the distribution of uBid shares
will be treated as a tax-free distribution for federal tax purposes by the
Internal Revenue Service. In addition, there can be no assurance that the
Company's new eCOST.com subsidiary will be developed successfully, achieve
market acceptance or be profitable. In addition to the factors set forth above,
other important factors that could cause actual results to differ materially
from our expectations include competition from companies either currently in the
market or entering the market, competition from other catalog and retail store
resellers and price pressures related thereto, uncertainties surrounding the
supply of and demand for products manufactured by and compatible with Apple
Computer, our reliance on Apple Computer, IBM, Hewlett Packard, Compaq and other
vendors, and risks due to shifts in market demand and/or price erosion of owned
inventory. This list of risk factors is not intended to be exhaustive. Reference
should also be made to the risk factors set forth from time to time in the
Company's SEC reports, including but not limited to those set forth in the
section entitled "Certain Factors Affecting Future Results" in its Annual Report
on Form 10-K for 1998.
11
<PAGE>
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its 1999 Annual Meeting of Stockholders on May 18,
1999. At the Annual Meeting, the stockholders voted on the following
matters:
1. The reelection as directors of Frank F. Khulusi, Sam U. Khulusi,
Thomas A. Maloof, and Ronald B. Reck, all of whom were reelected
at the Annual Meeting. Each of the directors received the
following votes: FOR 8,679,669, WITHHELD 17,360.
2. The approval of 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 (the Directors' Stock Option Plan
Proposal).
FOR AGAINST ABSTENTIONS
--- ------- -----------
Directors' Stock Option Plan
Proposal 7,576,896 1,118,563 1,570
3. The ratification of the appointment of PricewaterhouseCoopers LLP
as independent auditors for the Company for the year ended
December 31, 1999 (the Accountant's Proposal).
FOR AGAINST ABSTENTIONS
--- ------- -----------
Accountant's Proposal 8,862,555 12,804 1,670
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits. The exhibit index attached hereto is incorporated
herein by reference.
b. Reports on Form 8-K
1b. The Company filed a Form 8-K dated May 19, 1999 with respect
to the Company's announcement of the date of record and the
date of distribution for the distribution to its
stockholders of all of the remaining shares of uBid, Inc.
owned by the Company.
2b. The Company filed a Form 8-K dated May 28, 1999 with respect
to the number of shares of uBid, Inc. to be distributed to
the Company's stockholders of record on the Distribution
Date.
3b. The Company filed a Form 8-K dated June 22, 1999 with
respect to the consummation of the Company's distribution of
its approximately 80.1% of the outstanding stock of uBid,
Inc. to the Company's stockholders.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE COMPUTERS, INC.
Date: August 16, 1999 By /s/ Ted Sanders
Ted Sanders
Chief Financial Officer
(Duly Authorized Officer of the Registrant
and Principal Financial Officer)
12
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.1 Separation and Distribution Agreement, dated as of December
7, 1998, by and between the Company and uBid, Inc., as
amended.(1)
10.2 Directors' Non-Qualified Stock Option Plan, amended and
restated as of May 18, 1999.
27 Financial Data Schedule
_____________
(1) Incorporated by reference to the Company's 8-K filed on May 28, 1999.
13
<PAGE>
EXHIBIT 10.2
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 a 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
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<PAGE>
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