<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________ to _________.
Commission file number: 0-25790
CREATIVE COMPUTERS, INC.
Delaware 95-4518700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2555 West 190th Street, Torrance, California 90504
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (310) 354-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.001 par value
Indicate 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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment this
Form 10-K. [_]
As of March 26, 1999, the aggregate market value of the Common Stock held
by non-affiliates of the Registrant was approximately $226 million. The number
of shares outstanding of the Registrant's Common Stock as of March 26, 1999 was
10,375,893.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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>
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(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, Inc., a majority-owned subsidiary of the Company ("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.
A list of executive officers of Registrant is included in Part I of this
report. Effective March 1, 1998, the Company accepted Al S. Joseph's resignation
as a director of the Company. Effective December 8, 1998, the Company accepted
Ahmed Alfi's resignation as a director of the Company.
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.
2
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ITEM 11. 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>
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(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 $5,538.
(9) Mr. Burcham joined the Company in February 1996 and resigned in May 1998.
(10) Represents relocation expenses and allowances paid by the Company.
3
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Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants in fiscal 1998 to
the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
% of Total
Number of Options/SARs Grant
Securities Granted to Exercise Date
Underlying Employees in or Base Present
Options/SARs Fiscal Price Expiration Value
Name Granted (#)(1) Year(2) ($/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>
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(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>
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(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.
4
<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.
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.
5
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock and the Common Stock of uBid, Inc. 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.
6
<PAGE>
ITEM 13. 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.
7
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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 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.
8
<PAGE>
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 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.
9
<PAGE>
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 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.
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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.
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.
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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 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.
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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.
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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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Torrance,
State of California, on April 30, 1999.
CREATIVE COMPUTERS, INC.
By: /s/ THEODORE R. SANDERS
-------------------------------------
Theodore R. Sanders
Chief Financial Officer
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