-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cf4w1RE9vQFoKLIIwn0hvQjMKLcWIFL1E8QD6UgVPA7Lq1pBphm5SwzwGYpXgQzf FI5DExJiLcfYjtwSBDuWRQ== 0001017062-97-000589.txt : 19970401 0001017062-97-000589.hdr.sgml : 19970401 ACCESSION NUMBER: 0001017062-97-000589 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE COMPUTERS INC CENTRAL INDEX KEY: 0000937941 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 954518700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25790 FILM NUMBER: 97570261 BUSINESS ADDRESS: STREET 1: 2645 MARICOPA ST CITY: TORRENCE STATE: CA ZIP: 90503 BUSINESS PHONE: 3107874500 MAIL ADDRESS: STREET 1: 2645 MARICOPA ST CITY: TORRENCE STATE: CA ZIP: 90503 10-K 1 ANNUAL REPORT, YEAR ENDED 12/31/96 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K 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, 1996 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. (Exact name of Registrant as specified in its charter) Delaware 95-4518700 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2645 MARICOPA STREET, TORRANCE, CALIFORNIA 90503 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (310) 787-4500 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 [X] No [_] 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 to this Form 10-K. [_] As of March 14, 1997, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $22 million. The number of shares outstanding of the Registrant's Common Stock as of March 14, 1997 was 9,776,950. Documents incorporated by reference into Part III: Portions of the definitive Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 1 CREATIVE COMPUTERS, INC. TABLE OF CONTENTS
Page ---- PART I Item 1. Business.............................................................. 3 Item 2. Properties............................................................ 19 Item 3. Legal Proceedings..................................................... 20 Item 4. Submission of Matters to a Vote of Security Holders................... 20 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................................... 20 Item 6. Selected Financial Data............................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 22 Item 8. Financial Statements and Supplementary Data........................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 26 PART III Item 10. Directors and Executive Officers of the Registrant.................... 26 Item 11. Executive Compensation................................................ 27 Item 12. Security Ownership of Certain Beneficial Owners and Management........ 27 Item 13. Certain Relationships and Related Transactions........................ 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 28 SIGNATURES.......................................................................... 29
i PART I ITEM 1. BUSINESS GENERAL Creative Computers, Inc. (the "Company") is a direct marketer of personal computer hardware, software and peripheral products. The Company offers products to individual consumers, home offices, small businesses and large corporations through direct response catalogs, dedicated inbound and outbound telemarketing sales executives, retail showrooms and advertising on the Internet. The Company offers a broad selection of products through its distinctive, full-color catalogs, MacMall, PC Mall and DataCom Mall, and other promotional materials. The Company's staff of knowledgeable telemarketing sales executives, customer service and technical support personnel work together to serve customers by assisting in product selection and offering technical assistance. The Company believes that its high level of customer service results in customer loyalty and repeat customer orders. The Company also operates four retail showrooms in Southern California under the name Creative Computers. STRATEGY The Company's strategy is to be a leading high-volume, cost-effective direct marketer of a broad range of personal computers, software and related products. Specific elements of the Company's operating strategy include: Focus on the Windows/Intel (WINTEL) Market. The Company launched its first PC catalog, PC Mall, primarily for WINTEL customers, in May 1995. During 1995, the Company published seven editions of PC Mall with a total circulation of 11.1 million copies. During 1996, the Company published thirteen editions of PC Mall and increased its circulation to 15.3 million copies and more than doubled its WINTEL-based revenue. In January 1996, the Company also mailed a new catalog, DataCom Mall, featuring networking and data communications related hardware and software products. During 1996, the Company received additional authorizations to resell major brand name products and is currently authorized to sell IBM, Compaq, Hewlett-Packard, NEC, Sony, Digital Equipment, AST, Hitachi, Toshiba, Texas Instruments, Fujitsu and other name brand computers. Through these additional authorizations and increased sales during 1996, the Company became one of the leading catalog resellers of WINTEL products. In 1997, the Company currently plans to increase PC Mall catalog circulation by approximately 50% over 1996. Expansion into the Data Communications Market. In January 1996, the Company introduced a new catalog, DataCom Mall, featuring networking and data communications related hardware and software products. The catalog is targeted at LAN, MIS and Database managers located at small to medium sized businesses. DataCom Mall currently is supported by major networking vendors such as 3COM, Allied Telesyn, Ascend Communications and Bay Networks. During 1996 the Company published 6 editions of its DataCom Mall catalog with a total circulation of 3.2 million copies. The Company's strategy for 1997 includes increasing circulation of its catalog, increasing its dedicated and focused DataCom sales specialist group and increasing brand awareness through advertising in trade magazines such as LAN Times, Network Computing and Network Magazine. Continued Expansion in the Macintosh Market. During 1996, the Company was a leading direct marketer of Macintosh products offering the full line of Apple and Apple-clone computers as well as related products. The Company currently plans to continue its efforts in expanding its Macintosh marketshare through an increased number of editions and circulation of its MacMall catalog. During 1996 and 1995, the Company published thirteen and ten editions annually of its MacMall catalog, with a total circulation of 30.3 and 27.3 million copies, respectively. The Company published five editions of MacMall in 1994 and distributed approximately 7.7 million catalogs. 3 Database Marketing. The Company has compiled a proprietary mailing list of previous and potential customers, and continually analyzes the database to target customer types and increase response and purchase rates. The Company's response rate (calculated by dividing the number of orders generated by the number of catalogs distributed) for its proprietary mailing list during 1996 was higher than its response rate with respect to the use of third party mailing lists. Expansion into Outbound Telemarketing. In the fourth quarter of 1996, the Company established a dedicated outbound telemarketing group. By year end, this department consisted of 27 highly trained people and represented one of the Company's fastest growing segments. The focus of this team is on the relatively under-serviced small and mid-sized business market. The Company believes that these markets represent the highest growth potential and that, in this market, the competition is less fierce from aggregators, value-added resellers (VAR's), and corporate outside sales teams than in the highly targeted Fortune 500 types of accounts. In 1997, the Company plans to significantly expand its outbound telemarketing. Relationship-Based Selling. The Company's sales executives are highly trained in relationship building with their customers and are continuously coached to offer higher levels of service. The sales executive is trained and empowered to handle all the customers' needs including customer service or returns related issues. Additionally, sales executives bring other expertise to bear as needed from within the Company including Novell trained Certified Network Engineers (CNE), Microsoft Windows NT specialists and Apple certified technicians. Focus on the Internet Market. In 1995, the Company launched its world-wide website located at www.pcmall.com, www.datacommall.com and www.macmall.com in order to capitalize on the growing interest and opportunity created by electronic commerce. During 1996, the Company continued to enhance its site by implementing on-line ordering, giving customers access to inventory availability and greatly expanding the product selection, content and information available on-line. In 1997 the Company plans to start advertising on other commercial sites on the Internet, and is currently incorporating ESD (Electronic Software Distribution) into its website to further expand its efforts on the Internet. Broad Product Selection and Competitive Pricing. The Company seeks to offer its customers one-stop shopping for their hardware, software, peripheral and accessories requirements. The Company offers a large number of products to its customers and is continually reviewing and updating the products offered. The Company's catalogs include detailed descriptions and specifications of popular brand name products, as well as recently introduced and difficult-to-find products. The catalogs are designed to serve as a comprehensive reference source that introduces new products, enhances awareness of existing products and stimulates purchasing decisions. The Company is able to offer its customers competitive pricing in an increasingly price sensitive market, primarily as a result of relatively low overhead associated with its direct marketing operations as compared to other forms of distribution. High Quality Customer Service. The Company believes that a key element of its success has been the high quality of its customer service. The Company makes a substantial investment in initial and continuing education of its personnel to enable them to provide professional service to customers. The Company is able to offer its customers overnight delivery services by 10:30 a.m. on a cost effective basis. The Company offers its customers other value-added services, such as the ability to purchase systems that have been specifically configured to meet the customer's requirements. The Company also offers its customers a 30- day return policy on some of its products. The Company believes that its high level of customer service results in customer loyalty and repeat customer orders. High-Level Technical Support. The Company offers its customers specially trained technical support personnel to assist them in solving hardware and software problems. The technical support line is toll free and service charge free and is available nine hours per day, Monday through Friday. 4 MARKETING The Company's various marketing programs are designed to attract new customers and to stimulate additional purchases by previous customers. The Company continuously attracts new customers by selectively mailing catalogs to prospective customers as well as through advertising on the Internet and in major user magazines, such as Computer Shopper, MacWorld, and MacUser. In addition, the Company obtains the names of prospective customers through the use of selected mailing lists acquired from various sources, including manufacturers, suppliers and computer magazine publishers. The Company sells its products to individual consumers, home offices, small businesses and large corporations. During 1996, the Company shipped approximately 931,000 mail order/catalog orders with an average order size of $416. The Company distributes its catalogs throughout the United States. Catalogs. The Company published thirteen editions of its PC Mall catalog during 1996 and distributed approximately 15.3 million catalogs. The PC Mall catalog reached 132 pages by the end of 1996. PC Mall customers receive a catalog several times a year depending on purchasing history. In addition, the Company includes a catalog with every order shipped, as well as special promotional flyers and manufacturers' product brochures. The most recent edition of PC Mall featured over 1,900 products. In January 1996, the Company introduced a new catalog, DataCom Mall, featuring networking and data communications related hardware and software products. The catalog is targeted at LAN, MIS and Database managers located at small to medium sized businesses. During 1996, the Company published 6 editions of its DataCom Mall catalog with a total circulation of 3.2 million copies. The Company published thirteen editions of MacMall in 1996 and distributed approximately 30.3 million catalogs. The Company plans to increase the number of editions to 14, and to increase the circulation of MacMall, in 1997. Active MacMall customers receive a catalog several times a year depending upon purchasing history and the Company includes a catalog with every order shipped, as well as special promotional flyers and manufacturers' product brochures. The Company creates its MacMall, PC Mall and DataCom Mall catalogs in-house with its own design team and production artists using a computer-based desktop publishing system. The in-house preparation of the catalogs streamlines the production process, provides greater flexibility and creativity in catalog production, and results in significant cost savings over outside production. The Internet. The Company offers a world-wide website on the Internet that can be accessed via its three catalog names, www.pcmall.com, www.datacommall.com and www.macmall.com. The Company offers many advanced features such as on-line ordering, access to inventory availability, a large product selection with detailed product information and in the near future, Electronic Software Distribution (ESD). Sales generated through the Internet are growing very rapidly for the Company as it offers its customers a convenient means of shopping and ordering its products. In addition, the Company's website also serves as another source for new customers. Inbound and Outbound Telemarketing. The Company believes that much of its success has come from the quality and training of its telemarketing sales executives. These sales executives are responsible for assisting customers in purchasing decisions, answering product pricing and availability questions and processing product orders. Telemarketing sales executives have the authority to vary prices within specified parameters in order to meet prices of competitors. In addition to product training, the sales executives are trained in systems and networking solutions, sales techniques, phone etiquette and customer service. Telemarketing sales executives attend frequent training sessions to stay up-to- date on new products. The Company's toll-free order numbers are staffed by sales 5 executives 24 hours a day, seven days a week. Inbound and outbound telemarketing sales executives are assisted by customer service and technical support personnel. The Company's phone and computer systems are used for order entry, customer tracking and inventory management. The computer system maintains a database listing previous customer purchases, which allows telemarketing sales executives to make product suggestions that fit each customer's specific buying preferences and to offer the latest upgrades for products previously purchased from the Company. Vendor Supported Marketing. The Company currently has a marketing team which sells advertising space in the Company's catalogs to vendors according to a published rate schedule. These ad sales generate revenues which offset a substantial portion of the expense of publishing and distributing the catalogs. The same marketing team develops marketing campaigns to maximize product sales. National Off-Page Advertising. The Company continuously attracts new catalog customers and generates orders through large multi-page color advertisements in major publications such as Computer Shopper, MacWorld and MacUser. During 1996, the Company purchased 274 pages of magazine advertising. Corporate Sales. The specific needs of corporate buyers are fulfilled through a combination of inbound and outbound full-time sales personnel. The Company's sales staff builds long-term relationships with corporate customers through regular phone contact and personalized service. Corporate customers may choose from several purchase or lease options for financing product purchases, and the Company extends credit terms to certain corporate customers. Customer Return Policy. The Company offers a 30-day return policy on a number of its products. Returns are monitored to identify trends in product acceptance and defects, to enhance customer satisfaction and to reduce overall returns. PRODUCTS AND MERCHANDISING The Company offers hardware, software, peripherals, components and accessories for users of computer products. The Company screens new products and selects products for inclusion in its catalogs based on features, quality, sales trends, price, margins, cooperative/market development funds and warranties. The Company offers its customers other value added services, such as the ability to purchase systems that have been specifically configured to meet the customer's requirements. Through frequent mailings of its catalogs, the Company is able to quickly introduce new products and replace slower selling products with new products. 6 The following table sets forth the Company's net sales and percentage of net sales by major product category for the periods presented.
YEAR ENDED DECEMBER 31, (IN MILLIONS OF DOLLARS) 1994 % 1995 % 1996 % ------ ----- ------ ----- ------ ----- Computer systems.......... $ 74.9 45.8% $173.0 41.1% $166.9 37.5% Peripherals, components and accessories.......... 73.2 44.7 193.2 45.9 227.8 51.2 Software.................. 12.3 7.5 46.7 11.1 45.4 10.2 Other(1).................. 3.3 2.0 8.0 1.9 4.9 1.1 ------ ----- ------ ----- ------ ----- Total................. $163.7 100.0% $420.9 100.0% $445.0 100.0% ====== ===== ====== ===== ====== =====
(1) Other consists primarily of other electronic products, income from labor charges and sales of extended warranties. Computer Systems. In connection with the Company's expansion into the WINTEL market, the Company has obtained catalog sales authorizations or otherwise has the ability to sell WINTEL products from the major WINTEL-platform hardware manufacturers, including IBM, Compaq, Hewlett-Packard, NEC, Sony, Digital Equipment, AST, Hitachi, Toshiba, Texas Instruments, Fujitsu and others. The Company also is authorized or otherwise has the ability to sell the full line of Apple hardware as well as Apple-clone products from Motorola, Umax and Power Computing. Peripherals, Components and Accessories. The Company offers a large selection of peripheral and component products from manufacturers such as Apple, Hewlett-Packard, Sony, Epson, 3Com, US Robotics, IBM, Iomega and Compaq. Peripherals and components include printers, modems, monitors, data storage devices, add-on circuit boards, connectivity products and communications products. The accessories offered by the Company include a broad range of computer-related items and supplies such as diskettes, cables and connectors. Software. The Company sells a wide variety of software packages in the business and personal productivity, utility, language, educational and entertainment categories, including word processing, spreadsheet and database software. The Company offers a large number of software programs from established vendors, such as Microsoft, Corel, Adobe, Symantec, Quark, Lotus, Macromedia and Intuit as well as numerous specialty products from new and emerging vendors. The Company also markets upgrades from certain vendors, such as Symantec, Corel, Lotus and Microsoft, which the Company believes offer incremental revenue opportunities. PURCHASING AND INVENTORY The Company believes that effective purchasing is a key element of its business strategy to provide name brand computer products and related software and peripherals at competitive prices. The Company believes that its high volume of sales results in increased purchasing power with its primary suppliers, resulting in volume discounts, favorable product return policies and vendor promotional allowances. The Company purchases products from over 900 vendors. During 1994, 1995 and 1996, products manufactured by Apple represented approximately 58.7%, 45.9% and 30.1% of net sales, respectively. 7 Most key vendors have agreements to provide market development funds to the Company, whereby such vendors finance portions of the cost of catalog publication and distribution based upon the amount of coverage given in the catalogs for their products. Termination or interruption of the Company's relationships with its vendors, or modification of the terms of or discontinuance of the Company's agreements with its vendors, could adversely affect the Company's operating results. The Company's success is, in part, dependent upon the ability of its vendors to develop and market products that meet the changing requirements of the marketplace. As is customary in the industry, the Company has no long-term supply contracts with any of its vendors. Substantially all of the Company's contracts with its vendors are terminable upon 30 days' notice or less. The Company attempts to manage its inventory position to generate the highest levels of customer satisfaction possible while limiting inventory risk. The Company believes that it has increased its ability to provide constrained products, an important competitive advantage, and the Company invested in this strategy heavily during 1996. The Company's average annual inventory turns were 10.5 times during 1994 and 1995, and 7.7 times in 1996. Inventory turns were higher in 1994 and 1995 primarily due to rapid growth in sales which lowered the average inventory levels for those years. Inventory levels may vary from period to period, due in part to increases or decreases in sales levels, the Company's practice of making large-volume purchases when it deems the terms of such purchases to be attractive and the addition of new manufacturers and products. The Company has negotiated agreements with many of its vendors which contain price protection provisions intended to reduce, in part, the Company's risk of loss due to manufacturer price reductions. In addition, with many of its vendors, the Company has the right to return a certain percentage of purchases, subject to certain limitations. The market for personal computers, peripherals and software is characterized by rapid technological change and a growing diversity of products. The Company's success depends in large part on its ability to identify and obtain the right to market products that will meet the changing requirements of the marketplace and to obtain sufficient quantities of product to meet changing demands. There can be no assurance that the Company will be able to identify and offer products necessary to remain competitive or avoid losses related to excess or obsolete inventory. DISTRIBUTION The Company operates a full-service distribution center in Memphis, Tennessee. The distribution center consists of over 220,000 square feet, and was opened during the fourth quarter of 1995. On May 1, 1997, the Company is obligated to lease an additional 105,000 square feet of the existing distribution center building, which the Company plans to sublease. The centralized distribution operations, strategically located near the Federal Express hub in Memphis, allow most orders of in-stock product accepted by 11:00 p.m. eastern standard time to be shipped for delivery by 10:30 a.m. the following day via Federal Express and other overnight delivery services. Upon request, orders may also be shipped at a lower cost by United Parcel Ground Service and are shipped on the same day if orders are accepted by 5:00 p.m. When an order is entered into the system, a computer credit check or credit card verification is performed and, if approved, the order is electronically transmitted to the warehouse area and a packing slip is printed for order fulfillment. All inventory items are bar coded and located in computer- designated areas which are easily identified on the packing slip. All orders are checked with bar code scanners prior to final packing to ensure that each order is packed correctly. The Company believes that its existing distribution facility is currently adequate for its needs. 8 MANAGEMENT INFORMATION SYSTEMS The Company has committed significant resources to the development of a sophisticated computer system which is used to manage all aspects of its business. The Company's computer system supports telemarketing, marketing, purchasing, accounting, customer service, warehousing and distribution, and allows the preparation of daily operating control reports which provide concise and timely information regarding key aspects of its business. The system allows the Company to, among other things, monitor sales trends, make informed purchasing decisions and provide product availability and order status information. The Company's retail showrooms utilize point of sale computer terminals which are connected to the Company's main computer via dedicated lines. In addition to the main computer system, the Company has a system of networked personal computers, which facilitates data sharing. The Company also applies its management information systems to the task of managing its inventory. The Company currently operates its management information system using a Hewlett Packard HP995 and has a back-up system available in the event of a system failure. The Company believes that in order to remain competitive it will be necessary to upgrade its management information systems on a continuing basis. The Company's success is in part dependent on the accuracy and proper utilization of its management information systems, including its telephone system. In addition to the costs associated with system upgrades, the transition to and implementation of new or upgraded hardware or software systems can result in system delays or failures. Any interruption, corruption, degradation or failure of the Company's management information systems could impact its ability to receive and process customer orders on a timely basis. RETAIL COMPUTER SHOWROOMS The Company operates four retail computer showrooms in Southern California, ranging in size from approximately 3,400 to 20,000 square feet of retail sales space. These showrooms offer customers over 2,500 in-stock products, consisting of computer hardware, software, peripherals and accessories. The Company opened its first retail computer showroom in 1987. Sales in the Company's retail computer showrooms have been built through the use of newspaper and catalog advertising, as well as periodic clearance sales and promotions. The Company's showrooms offer customers broad product selection, competitive prices and knowledgeable sales personnel. The Company believes that its showrooms provide it with several competitive advantages in addition to the increased economies of scale gained by their additional sales volume. For example, the showrooms provide the Company's marketing staff with valuable insights into computer sales trends and consumer attitudes regarding computers through face-to-face experience with consumers. The Company's ability to move excess product through the showrooms also improves operating results. In addition, the Company has a direct sales force located in two showrooms that sell to local corporate customers. While the showrooms are an important part of the Company's overall marketing strategy, the Company has no plans to expand their operations and may relocate certain showrooms in the future based on considerations such as lease expirations, economic conditions and the performance of individual showrooms. The Company has decided to focus its expansion efforts and resources on the direct mail channel of distribution. COMPETITION The retail business for personal computers and related products is highly competitive. The Company competes with other direct marketers, including MicroWarehouse, CDW Computer Centers, Multiple Zones, Insight Direct, PCs Compleat, PC Connection and Global Direct. In addition, the 9 Company competes with computer retail stores and resellers including superstores such as CompUSA and Micro Center, corporate resellers such as Compucom, Entex, Vanstar and Ameridata, certain hardware and software vendors such as Gateway 2000 and Dell Computer which sell directly to end users, and other direct marketers of hardware, software and computer-related products. Barriers to entry are relatively low in the direct marketing industry and the risk of new competitors entering the market is high. The markets in which the Company's retail showrooms operate are also highly competitive. The Company's retail showrooms compete with national chains of computer and consumer electronics retailers, such as CompUSA, Computer City, Micro Center, Circuit City and Best Buy, as well as with smaller retail operations and direct marketers of computers and computer products. Certain national computer resellers also have established or acquired their own direct marketing operations. The manner in which personal computers, software and related products are distributed and sold is changing, and new methods of sales and distribution have emerged, such as the Internet. Technology now allows software vendors the ability to sell and download programs directly to consumers, if so desired. In addition, in recent years the industry has generated a number of new, cost- effective channels of distribution such as computer superstores, consumer electronic and office supply superstores, national direct marketers and mass merchants. Computer resellers are consolidating operations and acquiring or merging with other resellers to achieve economies of scale and increased efficiency. In addition, traditional retailers have entered and may increase their penetration into the direct mail channel. The current industry reconfiguration and the trend toward consolidation could cause the industry to become even more competitive, further increase pricing pressures and make it more difficult for the Company to maintain its operating margins or to increase or maintain the same level of net sales or gross profit. Although many of the Company's competitors have greater financial resources than the Company, the Company believes that its ability to offer the consumer a wide selection of products, at low prices, with prompt delivery and a high level of customer service, and its good relationships with its vendors and suppliers, allow it to compete effectively. There can be no assurance that the Company can continue to compete effectively against existing or new competitors that may enter the market. The Company believes that competition may increase in the future, which could require the Company to reduce prices, increase advertising expenditures or take other actions which may have an adverse effect on the Company's operating results. EMPLOYEES As of December 31, 1996, the Company employed 847 full-time people, including 116 people at the Company's retail computer showrooms and 164 at its distribution center. The Company emphasizes the recruiting and training of high quality personnel and, to the extent possible, promotes people to positions of increased responsibility from within the Company. Each employee initially receives training appropriate for his or her position, followed by varying levels of training in computer technology. New account executives participate in an intensive three week training program, during which time they are introduced to the Company's philosophy, available resources, products and services. Training for specific product lines and continuing education programs for all employees are conducted on an ongoing basis, supplemented by vendor-sponsored training programs for all sales executives and technical support personnel. The Company's employees are generally compensated on a basis that rewards performance and the achievement of identified goals. For example, sales executives receive compensation pursuant to a commission schedule which is based primarily upon aggregate gross profit dollars generated from their sales efforts. Accounts receivable personnel are eligible for monthly bonuses based upon certain collection criteria and late balances being held below targeted levels, and inventory control personnel are eligible for monthly bonuses based upon such factors as prompt vendor returns and order 10 fulfillment rates. The Company believes that these incentives positively impact its performance and operating results. The Company considers its employee relations to be good. None of the Company's employees is represented by a labor union, and the Company has experienced no work stoppages. Since its formation, the Company has experienced rapid growth. As a result of this growth, the Company has added a significant number of employees and has been required to expend considerable effort in training these new employees. PROPERTIES The Company's facilities are as follows:
Description Sq.Ft. Location - ----------- -------- ------------- Corporate headquarters............. 83,700 Torrance, CA Telemarketing...................... 34,000 Los Angeles,CA Distribution Center................ 220,000* Memphis, TN Retail showroom #1................. 9,620 Santa Monica, CA Retail showroom #2................. 20,000 San Diego, CA Retail showroom #3................. 6,751 Lawndale, CA Retail showroom #4................. 3,400 Lake Forest, CA
*On May 1, 1997 the Company's lease provides that it will take an additional 105,000 square feet at the existing distribution center. The Company is currently seeking to sublease that space. The Company leases all of its facilities, except for its Santa Monica retail showroom. In addition, the Company leases an additional 3,300 square feet adjacent to its Santa Monica retail showroom. Except for the lease relating to the Company's retail computer showroom in Lake Forest, all of the leases have remaining terms in excess of two years. The Company's distribution center serves both the Company's catalog operations and the Company's retail showrooms. The Memphis facility includes shipping, receiving, warehousing, and administrative space. The Company's corporate headquarters consists of approximately 24,000 square feet of office space and 60,000 square feet of warehouse space. The warehouse space has been used to stage inventory prior to shipment to the Company's retail showrooms. The Company also leases 34,000 square feet of space near its headquarters for its telemarketing operations. The Company believes that its existing Memphis facility is adequate for its current needs; however, due to planned growth, its headquarters and telemarketing facilities are not adequate. The Company has the ability to terminate its existing headquarters and telemarketing leases with minimal expense, and is presently looking for a larger facility to lease in the same general area that will allow it to house all of its headquarters and telemarketing operations under one roof if it so chooses. 11 REGULATORY AND LEGAL MATTERS The direct response business as conducted by the Company is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission and laws or regulations directly applicable to access to or commerce on the Internet. While the Company believes it currently is in compliance with such laws and regulations and has implemented programs and systems to address its ongoing compliance with such regulations, no assurances can be given that new laws or regulations will not be enacted or adopted which might adversely affect the Company's operations. Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet. The growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business over the Internet. The adoption of any additional laws or regulations may decrease the growth of the Internet, which, in turn, could decrease the demand for and growth of the Company's Internet-based sales. The Company currently collects and remits sales tax only on sales of products to residents of the states of California and Tennessee. Various states have sought to impose on direct marketers the burden of collecting state sales taxes on the sale of products shipped to those states' residents and it is possible that such a requirement could be imposed in the future. There are no material legal proceedings pending against the Company. EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions are as follows as of March 25, 1997:
Name Age Position ---- --- -------- Frank F. Khulusi............ 30 Chairman of the Board, President and Chief Executive Officer Richard M. Finkbeiner....... 50 Chief Financial Officer Daniel J. DeVries........... 35 Executive Vice President - Marketing David R. Burcham............ 32 Executive Vice President-Operations and Sales
The following is a biographical summary of the experience of the executive officers: Frank F. Khulusi is a co-founder of the Company and has served as Chairman of the Board, President and Chief Executive Officer of the Company since the Company's inception. Richard M. Finkbeiner joined the Company in June 1996 as Chief Financial Officer. From January 1996 to June 1996 he was Chief Financial Officer for Petro Stopping Centers, a national travel plaza retailer. Prior to that he was Chief Financial Officer for NordicTrack, a direct marketer and retailer of fitness equipment, from 1993 to 1996. From 1989 to 1993 he was Chief Financial Officer for Current, Inc., a direct marketer of greeting cards, and from 1984 to 1989 he was Controller and then Chief Financial Officer for Fox Photo, a photofinisher. Mr. Finkbeiner spent the first 12 years of his career with Hallmark Cards, a manufacturer and retailer of social expression products. 12 Daniel J. DeVries has served as Executive Vice President since February 1996 and was Senior Vice President from October 1994 to that time. Mr. DeVries is responsible for all marketing, including vendor co-op marketing, merchandising, database marketing and Internet marketing. From April 1993 to October 1994, he held various sales and marketing positions with the Company. From July 1988 to April 1993, Mr. DeVries was a regional manager for Sun Computers, a computer retailer. David R. Burcham has served as Executive Vice President of Operations and Sales since March 1997 and was Senior Vice President from February 1996 to that time. Mr. Burcham is responsible for all sales, purchasing, distribution, MIS, and retail showrooms. From June of 1990 to February of 1996, he held various sales and operational positions for Multiple Zones International, Inc. including Vice President of Sales and Vice President of Operations. Prior to that, he was Vice President of Sales and Marketing for BID International, Inc., a publishing and information services company. CERTAIN FACTORS AFFECTING FUTURE RESULTS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for "forward-looking statements" to encourage companies to provide prospective information, so long as such information is identified as forward looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Except for historical information, certain statements contained in this Annual Report on Form 10-K may be "forward-looking statements" within the meaning of the Act. In order to take advantage of the "safe harbor" provisions of the Act, the Company identifies the following important factors which could affect the Company's actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed by the Company in "forward-looking statements" made by or on behalf of the Company: (1) The loss of a key vendor or decline in demand for products of a key vendor, such as Apple, may reduce sales and adversely affect operating results. (2) Intense competition may lead to reduced prices and lower gross margins. (3) The Company's narrow margins magnify the impact on operating results of variations in operating performance. A number of factors may reduce the Company's margins even further. (4) Seasonal variations in the demand for products and services, as well as the introduction of new products, may cause variations in the Company's quarterly results. (5) The availability (or lack thereof) of capital on acceptable terms may hamper the Company in its efforts to fund its increasing working capital needs . (6) The failure of the Company to adequately manage its growth may adversely impact the Company's results of operations. (7) A failure of the Company's information systems may adversely impact the Company's results of operations. (8) The loss of a key executive officer or other key employee may adversely impact the Company's operations. (9) The inability of the Company to obtain products on favorable terms may adversely impact the Company's results of operations. (10) The Company's operations may be adversely impacted by an acquisition that is either (i) not suited for the Company or (ii) improperly executed. 13 (11) The Company's financial condition may be adversely impacted by a decline in value of a portion of the Company's inventory. (12) The failure of certain shipping companies to deliver product to the Company, or from the Company to its customers, may adversely impact the Company's results of operations. (13) Rapid technological change may alter the market for the Company's products and services, requiring the Company to anticipate such technological changes, to the extent possible. It is not reasonably possible to itemize all of the many factors and specific events that could affect the Company and/or the microcomputer industry as a whole. However, the discussion below discusses in more detail some of the foregoing factors, as well as additional factors which may affect the Company's actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in "forward-looking statements." Dependence on Apple The Company is dependent on sales of Apple computers and software and peripheral products used with Apple computers. Products manufactured by Apple represented approximately 58.7%, 45.9% and 30.1% of the Company's net sales in 1994, 1995 and 1996, respectively. A decline in sales of Apple computers or a decrease in supply of or demand for software and peripheral products for such computers could have a material adverse impact on the Company's business. During 1996, certain Apple computers were in short supply. A continuation of such shortages or future shortages could adversely affect the Company's operating results. The Company is an authorized dealer for the full retail line of Apple products; however, the Company's dealer agreement with Apple is terminable upon 30 days' notice. The Company's business would be adversely affected if all or a portion of the line of Apple products were no longer available to the Company. The Company's success is, in part, dependent upon the ability of Apple to develop and market products that meet the changing requirements of the marketplace. During 1995 and 1996, several companies began manufacturing, under a license from Apple, computer hardware using the Macintosh operating system. The Company anticipates that additional manufacturers will be licensed by Apple. To the extent that these products are not available to the Company, the Company could encounter increased price and other competition, which would adversely affect operating results. The Company has had discussions with several licensees of the Macintosh operating system, and has agreements with three such licensees giving it the right to distribute certain products of such licensees. There can be no assurance that the Company will be able to enter into distribution agreements with other licensees or with respect to future products or that any such agreements would be on terms favorable to the Company. Rapid Growth Since its formation, the Company has experienced rapid growth. Net sales have grown from $8.7 million in 1990 to $445.0 million in 1996. The Company's catalog sales grew from $37.8 million in 1993 to $ 387.1 million in 1996. As a result of the Company's shift from the retail showroom to the catalog distribution channel, retail showroom sales have decreased from 46.3% of net sales in 1993 to 13.0% in 1996. In response to the growth in catalog sales, the Company has rapidly added a significant number of employees and has been required to expend considerable efforts in training these new employees. This growth has placed strains on the Company's management, resources and facilities. 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 with those of the Company would place additional demands on the Company's management, operating and financial resources. The Company's success will, in part, be dependent upon the ability of the Company to manage growth effectively. In addition, the Company's business and growth could be affected by the spending patterns of existing or prospective customers, the cyclical nature of capital expenditures of businesses, 14 continued competition and pricing pressures, changes in the rate of development of new technologies and new products by manufacturers, acceptance by end-users and other trends in the general economy. There can be no assurance that the Company's historical growth rates will continue in the future. In connection with the Company's recent expansion into the WINTEL market, the Company has obtained catalog sales authorizations or otherwise has the ability to sell WINTEL products from certain major hardware manufacturers, including IBM, Compaq, Hewlett-Packard, NEC, Sony, Digital Equipment, AST, Hitachi, Toshiba, Texas Instruments, Fujitsu and others. Many of its current vendors of peripherals, components, accessories and software also offer WINTEL products. While the Company has been successful to date in becoming a major catalog reseller of WINTEL products, no assurances can be given that the Company will continue with its rapid growth. Competition The retail business for personal computers and related products is highly competitive, based primarily on price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical or product information. The Company competes with other direct marketers, including MicroWarehouse, CDW Computer Centers, Multiple Zones, Insight Direct, PCs Compleat, PC Connection and Global Direct. In addition, the Company competes with computer retail stores and resellers, including superstores, such as CompUSA and Micro Center, corporate resellers such as Compucom, Entex, Vanstar and Ameridata, certain hardware and software vendors, such as Gateway 2000 and Dell Computer, which sell directly to end users, and other direct marketers of hardware, software and computer-related products. In the direct marketing industry, barriers to entry are relatively low and the risk of new competitors entering the market is high. The markets in which the Company's retail showrooms operate are also highly competitive. The Company's retail showrooms compete with national chains of computer and consumer electronics retailers, such as CompUSA, Computer City, Micro Center, Circuit City and Best Buy, as well as with smaller retail operations and direct marketers of computers and computer products. Certain existing competitors of the Company have substantially greater financial resources than the Company. There can be no assurance that the Company can continue to compete effectively against existing competitors or new competitors that may enter the market. In addition, price is an important competitive factor in the personal computer hardware, software and peripherals market and there can be no assurance that the Company will not be subject to increased price competition, which may have an adverse effect on the Company's operating results. There can be no assurance that the Company will not lose market share or that it will not be forced in the future to reduce its prices in response to the actions of its competitors and thereby experience a further reduction in its gross margins. Narrow Operating Margins As a result of intense price competition in the microcomputer products industry, the Company's margins have historically been narrow and are expected to continue to be narrow. These narrow margins magnify the impact on operating results of variations in operating costs and of adverse or unforeseen events. 15 Potential Quarterly Fluctuations The Company experiences variability in its net sales and net income on a quarterly basis as a result of many factors. These factors include the frequency of catalog mailings, introduction of new catalogs such as DataCom Mall, the introduction of new products or services by the Company and its competitors, changes in prices from suppliers, the loss or consolidation of a significant supplier or customer, general competitive conditions including pricing, the Company's ability to control costs, the timing of capital expenditures, the condition of the personal computer industry in general, seasonal shifts in demand for hardware and software products, industry announcements and market acceptance of new products or upgrades, including deferral of customer orders in anticipation of new product applications, product enhancements or operating systems, the relative mix of products sold during the period, inability of the Company to obtain adequate quantities of products carried in its catalogs or delays in the release by suppliers of new products and inventory adjustments. The Company's planned operating expenditures each quarter are based on sales forecasts for the quarter. If sales do not meet expectations in any given quarter, operating results for the quarter may be materially adversely affected. The Company's narrow margins may magnify the impact of these factors on the Company's operating results. The Company believes that period-to-period comparisons of its operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not necessarily indicative of results to be expected for a full fiscal year. In certain future quarters, the Company's operating results may be below the expectations of public market analysts or investors. In such event, the market price of the common stock would be materially adversely affected. Dependence on Vendors The Company purchases all of its products from vendors. Certain key vendors, including IBM, Hewlett Packard and Apple, provide the Company with trade credit as well as substantial incentives in the form of discounts, credits and cooperative advertising. Most key vendors have agreements to provide or otherwise have consistently provided market development funds to the Company, whereby such vendors finance portions of the cost of catalog publication and distribution based upon the amount of coverage given in the catalogs to their respective products. Termination or interruption of the Company's relationships with these vendors, including Apple, or modification of the terms or discontinuance of the agreements with the Company, could adversely affect the Company's operating income and cash flow. The Company's success is, in part, dependent upon the ability of its vendors to develop and market products that meet the changing requirements of the marketplace. Substantially all of the Company's contracts with its vendors are terminable upon 30 days' notice or less. In most cases, the Company has no guaranteed price or delivery arrangements with its suppliers. As a result, the Company has experienced and may in the future experience short-term inventory shortages on certain products. In addition, manufacturers who currently sell their products through the Company may decide to sell their products directly or through resellers or channels other than the Company. Further, the personal computer industry experiences significant product supply shortages and customer order backlogs from time to time due to the inability of certain manufacturers to supply certain products as needed. There can be no assurance that suppliers will be able to maintain an adequate supply of products to fulfill the Company's customers' orders on a timely basis or that the Company will be able to obtain particular products or that a product line currently offered by suppliers will continue to be available. Similarly, there can be no assurance that the Company will be able to obtain authorizations from new vendors which may introduce new products that create market demand. Business Interruption; Facilities The Company believes that its success to date has been, and future results of operations will be, dependent in large part upon its ability to provide prompt and efficient service to its customers. The Company has taken several precautionary steps to help minimize the impact of disasters that might cause business interruptions. However, any disruption of the Company's day-to-day operations including those caused by natural disasters could have a material adverse effect upon the Company 16 and any interruption, corruption, degradation or failure of the Company's management information systems, distribution center or telephone system could impair its ability to receive and process customer orders and ship products on a timely basis. The Company does not have a redundant telephone system and does not have a backup or redundant call center. Changing Methods of Distribution The manner in which personal computers and related software and products are distributed and sold is changing, and new methods of sale and distribution, such as the Internet, have emerged. Hardware and software vendors have sold, and may intensify their efforts to sell, their products directly to end users. From time to time, certain vendors have instituted programs for the direct sale of large quantities of hardware and software to certain major corporate accounts. These types of programs may continue to be developed and used by various vendors. Vendors also may attempt to increase the volume of software products distributed electronically to end users' personal computers. Any of these competitive programs, if successful, could have a material adverse effect on the Company's business and financial results. Dependence on Independent Shipping Companies The Company relies almost entirely on arrangements with independent shipping companies, especially Federal Express, for the delivery of its products. The disruption or termination of the Company's arrangements with Federal Express or other shipping companies, or the failure or inability of one or more shipping companies to deliver products from the Company to its customers, or from suppliers to the Company, could have a material adverse effect on the Company's business, financial condition or results of operations. Postage, Shipping and Paper Costs Postage and shipping are significant expenses in the operation of the Company's business. The Company ships its products to customers by overnight delivery and ground delivery services and generally mails its catalogs through the U.S. Postal Service. As is customary in the direct response marketing industry, the Company generally passes on only a portion of the costs of overnight delivery and parcel shipments directly to customers as separate shipping and handling charges. Any increases in postal or shipping rates in the future could have an adverse effect on the Company's operating results. The cost of paper is also a significant expense of the Company in printing its catalogs. The cost of paper has fluctuated significantly over the last several years. While the Company believes that it will be able to recoup a significant portion of any increased postage and paper costs through increases in vendor advertising rates, no assurance can be given that such advertising rate increases can be sustained or that they will offset all of the increased costs. Risk of Technological Changes and Inventory Obsolescence The market for personal computers, peripherals and software is characterized by rapid technological change and a growing diversity of products. The recent growth in sales of personal computers and related software and peripherals has been, in part, due to the introduction of new hardware and software, including multimedia personal computer systems and upgraded Apple computers. The Company's success depends in large part on its ability to identify and obtain the right to market products that will meet the changing requirements of the marketplace. In connection with the Company's recent entry into the WINTEL, networking and data communications market, it will need to continue to identify and purchase products from existing and new vendors for which the Company does not have a purchasing history. There can be no assurance that the Company will be able to identify and offer products necessary to remain competitive or avoid losses related to excess and obsolete inventory. In 1994, 1995 and 1996, the Company recorded increases in its reserve for excess and obsolete inventory of $234,000, $650,000 and $4,885,000, respectively. The Company currently has return rights with respect to products which it purchases from Apple, IBM, Compaq, 17 Hewlett Packard and certain other vendors; however, such rights vary by product line, have other conditions and limitations and can be terminated or changed at any time. State Sales Tax Collection The Company currently collects and remits sales tax only on sales of products to residents of the states of California and Tennessee. Various states have sought to impose on direct marketers the burden of collecting state sales taxes on the sale of products shipped to those states' residents. The U.S. Supreme Court has ruled that the various states, absent Congressional legislation, may not impose tax collection obligations on an out-of-state mail order company whose only contacts with the taxing state are distribution of catalogs and other advertisement materials through the mail, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. A New York Court of Appeals case imposed tax collection obligations on two Vermont companies, one of which was a mail order company, whose contacts with New York consisted of visiting the state several times a year to aid customers or visiting showrooms stocking their goods. The Company believes its operations are different from the operations of the companies in the New York case and thus do not give rise to tax collection obligations. However, the Company cannot predict the level of contact with any state which would give rise to future or past tax collection obligations within the parameters of the Supreme Court case. It is possible that federal legislation could be enacted that would permit states to impose sales tax collection obligations on out-of-state mail order companies and if enacted, the imposition of a tax collection obligation on the Company may result in additional administrative expenses to the Company and price increases to its customers that could adversely affect the Company. Industry Evolution and Price Reductions The personal computer industry is undergoing significant change. In addition, in recent years a number of new, cost-effective channels of distribution have developed in the industry, such as computer superstores, consumer electronic and office supply superstores, national direct marketers and mass merchants. Computer resellers are consolidating operations and acquiring or merging with other resellers and/or direct marketers to achieve economies of scale and increased efficiency. The current industry reconfiguration and the trend towards consolidation could cause the industry to become even more competitive, further increase pricing pressures and make it more difficult for the Company to maintain its operating margins or to increase or maintain the same level of net sales or gross profit. Declining prices, resulting in part from technological changes, may require the Company to sell a greater number of products to achieve the same level of net sales and gross profit. Such a trend could make it more difficult for the Company to continue to increase its net sales and earnings growth. In addition, the personal computer market has experienced rapid growth. If the growth rate of the personal computer market were to decrease, the Company's operating results could be adversely affected. Management Information Systems The Company's success is in part dependent on the accuracy and proper utilization of its management information systems, including its telephone system. The Company's ability to analyze data derived from its management information systems to increase product promotions, manage inventory and accounts receivable collections, to purchase, sell and ship products efficiently and on a timely basis, and to maintain cost-efficient operations are each dependent upon the quality and utilization of the information generated by its management information systems. During 1995, the Company significantly upgraded its management information system hardware and software. The Company believes that to remain competitive it will be necessary to upgrade its management information systems on a continuing basis. In addition to the costs associated with such upgrades, the transition to and implementation of new or upgraded hardware or software systems can result in system delays or failures which could impair the Company's ability to receive and process orders and ship products in a timely manner. The Company does not currently have a redundant or back-up 18 telephone system, and any interruption in telephone service including those caused by natural disasters could have a material adverse effect on the Company's results of operations. Dependence on Senior Management The Company's future performance will depend to a significant extent upon the efforts and abilities of certain key management personnel, including Frank Khulusi, Chairman of the Board, President and Chief Executive Officer. The Company has a $3 million key man life insurance policy on Mr. Khulusi. The loss of service of one or more of the Company's key management personnel could have an adverse effect on the Company's business. The Company's success and plans for future growth will also depend in part on management's continuing ability to hire, train and retain skilled personnel in all areas of its business. Management of Growth The rapid growth of the Company's business has required the Company to make significant recent additions in personnel and has significantly increased the Company's working capital requirements. Although the Company has experienced significant sales growth in recent years, such growth should not be considered indicative of future sales growth. Such growth has resulted in new and increased responsibilities for management personnel and has placed and continues to place significant strain upon the Company's management, operating and financial systems, and other resources. There can be no assurance that this strain will not have a material adverse effect on the Company's business, financial condition, and results of operations, nor can there be any assurance that the Company will be able to attract or retain sufficient personnel to continue the expansion of its operations. Also crucial to the Company's success in managing its growth will be its ability to achieve additional economies of scale. There can be no assurance that the Company will be able to achieve such economies of scale, and the failure to do so could have a material adverse effect upon the Company's business, financial condition and results of operations. Potential Acquisitions As part of its growth strategy, the Company may pursue the acquisition of companies that would either complement or expand its existing business. Acquisitions involve a number of risks and difficulties, including expansion into new geographic markets and business areas, the diversion of management's attention to the assimilation of the operations and personnel of the acquired company, the integration of the acquired company's management information systems with those of the Company, potential short-term adverse effects on the Company's operating results and the amortization of acquired intangible assets. Possible Volatility of Stock Price The Company believes certain factors, such as sales of Common Stock into the market by existing stockholders, fluctuations in quarterly operating results and market conditions generally, including market conditions affecting stocks of computer hardware and software manufacturers and resellers in particular, and other technology or related stocks, could cause the market price of the Common Stock to fluctuate substantially. The stock market in general, and the stocks of computer and software resellers in particular, and other technology or related stocks, has in the past experienced extreme price and volume fluctuations which have been unrelated to corporate operating performance. Such market volatility may adversely affect the market price of the Common Stock. ITEM 2. PROPERTIES See "Properties" in Item 1 above. 19 ITEM 3. LEGAL PROCEEDINGS Various claims and actions, considered normal to the Company's business, have been asserted and are pending against the Company. The Company believes that such claims and actions should not have any material adverse effect upon the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company has been traded on the Nasdaq National Market since the Company's initial public offering on April 4, 1995 (the "IPO"). Prior to the IPO, there was no public market for the Company's Common Stock. The following table sets forth the range of high and low closing sales prices for the Common Stock for the periods indicated, as reported by the Nasdaq National Market.
Price Range of Common Stock ----------------- High Low ------- ------- Year Ended December 31, 1995 - ---------------------------- Second Quarter (from April 4, 1995)............. $29 1/2 $22 1/4 Third Quarter................................... 33 24 1/2 Fourth Quarter.................................. 29 3/4 16 Year Ended December 31, 1996 - ---------------------------- First Quarter................................... 18 3/4 6 3/4 Second Quarter.................................. 10 5/8 6 Third Quarter................................... 9 7/8 4 1/2 Fourth Quarter.................................. 11 3/4 7 5/16
On March 14, 1997, the closing price of the Company's Common Stock as reported on the Nasdaq National Market was $5 per share. As of March 14, 1997, there were approximately 50 holders of record of the Common Stock. The Company has never paid and has no present plans to pay any cash dividends on its capital stock. The Company intends to retain its earnings to finance the growth and development of its business. The Company announced in July 1996 that, depending on various factors including market price, it would repurchase up to 1,000,000 shares of its stock. The Company has repurchased 15,000 shares to date under this program. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein. The selected income statement data for the years ended December 31, 1994, 1995 20 and 1996 and the selected balance sheet data as of December 31, 1995 and 1996 are derived from the Company's audited consolidated financial statements which are included elsewhere herein. The selected income statement data for the years ended December 31, 1992 and 1993 along with the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from the audited consolidated financial statements of the Company which are not included herein. The selected operating data are derived from the accounting records of the Company and have not been audited.
Year Ended December 31, ------------------------------------------------------- (in thousands, except per share data) ----------------------------------- 1992 1993 1994 1995 1996 ------- ------- -------- -------- -------- Income Statement Data: Net sales................................................ $37,695 $70,406 $163,706 $420,877 $444,971 Cost of goods sold....................................... 31,911 59,235 140,229 361,803 395,000 ------- ------- -------- -------- -------- Gross profit............................................. 5,784 11,171 23,477 59,074 49,971 Selling, general and administrative expenses............. 5,600 11,389 19,384 48,455 60,585 Expenses associated with the relocation of the Company's distribution center........................... -- -- -- 1,389 -- ------- ------- -------- -------- -------- Income (loss) from operations before interest, income taxes and cumulative effect of change in accounting principle.................................... 184 (218) 4,093 9,230 (10,614) Interest income (expense)................................ (77) (501) (759) 371 593 ------- ------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle................ 107 (719) 3,334 9,601 (10,021) Income taxes (benefit)................................... 43 (294) 1,328 3,754 (3,972) ------- ------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle................................. 64 (425) 2,006 5,847 (6,049) Cumulative effect of change in accounting for income taxes........................................... 526 -- -- -- -- ------- ------- -------- -------- -------- Net income (loss)........................................ $590 $(425) $2,006 $5,847 $(6,049) ======= ======= ======== ======== ========= Net income (loss) per share.............................. $0.08 $(0.06) $0.29 $0.65 $(0.62) ======= ======= ======== ======== ========= Weighted average number of shares outstanding............ 6,983 6,983 6,983 9,021 9,767 ======= ======= ======== ======== ========= SELECTED OPERATING DATA (IN THOUSANDS, EXCEPT AVERAGE ORDER SIZE): Mail order/catalog net sales............................. $17,196 $37,837 $117,863 $353,324 $387,103 Retail net sales......................................... $20,499 $32,569 $45,843 $67,553 $57,868 Number of catalogs distributed........................... -- 190 7,700 38,398 48,800 Orders filled (mail order/catalog)....................... 39 50 194 784 931 Average order size (mail order/catalog).................. $441 $757 $608 $451 $416 Mailing list size........................................ 107 151 397 1,300 2,518 BALANCE SHEET DATA (AT PERIOD END)(IN THOUSANDS): Working capital (deficit)................................ $ (360) $(4,122) $161 $46,307 $42,600 Total assets............................................. 9,865 20,907 42,942 112,569 113,431 Short-term debt.......................................... 956 3,285 4,190 281 283 Long-term debt, excluding current portion................ 540 1,342 1,878 589 325 Subordinated debt........................................ -- -- 2,950 -- -- Stockholders' equity (deficit)........................... (741) (1,166) 890 56,560 52,805
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein. OVERVIEW The Company began operations in May 1987 as a mail-order company and then opened its first retail computer showroom in August 1987 and a second showroom in 1988. These showrooms and mail-order operations primarily offered Commodore Amiga personal computers and related products. After opening its first retail store, the Company conducted mail order operations from one of its retail showroom locations. The Company became an authorized Apple dealer in 1991, opened two additional retail computer showrooms in the second quarter of 1993 and relocated and expanded an existing showroom in the fourth quarter of 1993. Net sales from the Company's retail computer showrooms as a percentage of net sales were 28.0%, 16.0% and 13.0% in 1994, 1995 and 1996, respectively. In the fourth quarter of 1993, the Company shifted its principal distribution and marketing focus from retail showrooms to direct mail marketing distribution and relocated its mail order/catalog operations to a central location. In March 1994, the Company received authorization from Apple to offer the full retail line of Apple products via direct mail and the Company distributed the first edition of its MacMall catalog in April 1994. During 1994, the Company mailed five editions of its MacMall catalog with a total circulation of approximately 7.7 million to previous and potential customers. During 1995, the Company distributed ten editions of its MacMall catalog with a total MacMall circulation of approximately 27.3 million. In 1996, total MacMall circulation increased to 30.3 million with thirteen editions. In May 1995, the Company distributed its first PC Mall catalog focusing on the WINTEL personal computer market. During 1995, the Company distributed seven PC Mall catalogs to approximately 11.1 million previous and prospective customers. In 1996, the Company distributed thirteen PC Mall catalogs with a total circulation of 15.3 million. In January 1996, the Company mailed its first DataCom Mall catalog and distributed 3.2 million DataCom Mall catalogs in 1996. All catalogs feature new products and contain detailed information about product capabilities, specifications, key features and system requirements. Net sales from mail order/catalog operations, as a percentage of net sales, were 72.0%, 84.0% and 87.0% in 1994, 1995 and 1996, respectively, with average order size being $608, $451 and $416 for those same respective years. The decrease in average order size is primarily the result of the Company's implementation of its strategy to increase, on a percentage of sales basis, its sales of software and peripheral products which on average sell at lower prices than computer systems but carry higher margins. Net sales of the Company are derived primarily from the sale of personal computer hardware, software, peripherals and accessories to individual consumers, home offices, small businesses and large corporations through direct response catalogs, dedicated inbound and outbound telemarketing sales executives, retail showrooms and advertising on the Internet. Gross profit consists of net sales less product and shipping costs. The Company receives marketing development funds ("MDF") from manufacturers of products included in the Company's catalogs, as well as co-operative advertising funds ("Co-Op") on products purchased from manufacturers and vendors. 22 The Company is dependent on sales of Apple computers and software and peripheral products used with Apple computers. Products manufactured by Apple represented approximately 58.7%, 45.9% and 30.1% of the Company's net sales in 1994, 1995 and 1996, respectively. RESULTS OF OPERATIONS The following table sets forth for the years indicated information derived from the Company's consolidated statement of operations expressed as a percentage of net sales. There can be no assurance that trends in sales growth or operating results will continue in the future.
Percentage of Net Sales ----------------------- Year Ended December 31, 1994 1995 1996 ----- ----- ----- Net sales........................................ 100.0% 100.0% 100.0% Cost of goods sold............................... 85.7 86.0 88.8 ----- ----- ----- Gross profit..................................... 14.3 14.0 11.2 Selling, general and administrative expenses..... 11.8 11.5 13.6 Expenses associated with the relocation of the Company's distribution center................... --- 0.3 --- ----- ----- ----- Income (loss) from operations.................... 2.5 2.2 (2.4) Interest income (expense)........................ (0.5) 0.1 0.1 ----- ----- ----- Income (loss) before income taxes................ 2.0 2.3 (2.3) Income taxes (benefit)........................... 0.8 0.9 (0.9) ----- ----- ----- Net income (loss)................................ 1.2% 1.4% (1.4)% ===== ===== =====
The Company markets its products through the distribution of catalogs, outbound telemarketing, retail showrooms and the Internet . Net sales from the Company's mail order/catalog operations were $117.9 million, $353.3 million and $387.1 million for the years ended December 31, 1994, 1995 and 1996, representing 72.0%, 84.0% and 87.0% of net sales, respectively. Net sales from the Company's retail showroom operations were $45.8 million, $67.6 million and $57.9 million for the years ended December 31, 1994, 1995 and 1996, representing 28.0%, 16.0% and 13.0% of net sales, respectively. Merchandise sold through both channels of distribution is similarly priced and many retail customers also purchase items through catalogs. Gross profit as a percentage of net sales for the Company's mail order/catalog operations was 14.0%, 14.1% and 11.7% for the years ended December 31, 1994 , 1995 and 1996, respectively. Gross profit as a percentage of net sales for the Company's retail showroom operations was 15.2%, 13.6% and 8.1% for the years ended December 31, 1994, 1995 and 1996, respectively. Income (loss) from operations for mail order/catalog operations for the years ended December 31, 1994, 1995 and 1996 was $3.8 million, $8.6 million and $(7.4) million, or 3.2%, 2.4% and (1.9)% of net mail order/catalog sales, respectively, after deducting the direct costs of mail order/catalog operations and allocating indirect and corporate costs based on relative sales. Income (loss) from operations for retail showroom operations for the years ended December 31, 1994, 1995 and 1996 was $0.3 million, $0.6 million and $(3.2) million, or 0.7%, 0.9% and (5.5)% of net retail sales, respectively, after deducting the direct costs of retail showroom operations and allocating indirect and corporate costs based on relative sales. The computation of income from operations excludes non-operating income and expenses and income taxes. YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Net sales for the year ended December 31, 1996 were $445.0 million, an increase of $24.1 million or 5.7% over net sales for the year ended December 31, 1995 of $420.9 million. Mail order/catalog sales for 1996 were $387.1 million, an increase of $33.8 million or 9.6% over 1995 mail order/catalog 23 sales of $353.3 million. The increase in net sales was primarily due to an increase in the number of catalogs distributed during the year, the growth from the PC Mall catalog and the introduction of the DataCom Mall Catalog. The Company distributed approximately 48.8 million catalogs during 1996, of which MacMall comprised 30.3 million, PC Mall 15.3 million and DataCom Mall 3.2 million. This compared to 38.4 million catalogs distributed in 1995. Retail net sales in 1996 were $57.9 million, a decline of $9.7 million or 14.3% from retail net sales of $67.6 million in 1995. WINTEL net sales increased 136% to $102.4 million in 1996 versus $43.3 million in 1995. WINTEL net sales for 1996 comprised 23.0% of total net sales as compared to 10.3% in 1995. By December 1996, WINTEL net sales comprised almost 30% of total Company net sales. Gross profit for the year ended December 31, 1996 was $50.0 million, a decrease of $9.1 million or 15.4% from gross profit of $59.1 million for the year ended December 31, 1995. Gross profit as a percentage of net sales was 11.2% in 1996 versus 14.0% in 1995. The decrease in gross profit dollars was primarily due to $7.5 million in write-offs in the first and second quarters due to unusually high theft and inventory shrinkage associated with the Company's warehouse move in late 1995, an increase in inventory reserves for slow moving and excessive inventory, and reserves established for products returned to vendors for which the Company did not get paid. Excluding these write-offs, gross profit margin for 1996 would have been 12.9% versus 14.0% in 1995. The remaining decline in gross profit margin was primarily the result of WINTEL products comprising a larger percentage of the Company's total net sales. Typically, WINTEL products carry a lower profit margin than Apple and Macintosh compatible products. Selling, general and administrative (SG&A) expenses were $60.6 million for the year ended December 31, 1996, an increase of $12.1 million or 25.0% over SG&A expenses of $48.5 million for the year ended December 31, 1995 that excluded a one time charge associated with the relocation of the Company's distribution center. As a percentage of net sales, SG&A expenses were 13.6% in 1996 versus 11.5% in 1995. Approximately $4.0 million of the $12.1 million increase was due to one time charges in the first and second quarters of 1996 relating to unusually high credit card losses including external fraud and those caused by an error generated by a minor software update installed in the first quarter, which allowed some customer orders to bypass the Company's fraud review system, and an increase in reserves for past due accounts. Excluding these charges, SG&A for 1996 would have been 12.7% versus 11.5% in 1995. The remaining increase in SG&A as a percentage of net sales was primarily due to an increase in personnel costs associated with the strengthening of the Company's management team and laying the foundation for future growth. Net advertising expense as a percentage of net sales declined in 1996 versus 1995. During 1995, the Company incurred approximately $1.4 million in expenses, or 0.3% of net sales, associated with the relocation of its distribution center to Memphis, Tennessee from its headquarters in Torrance, California. These charges primarily related to duplicative labor, freight and certain other costs associated with operating dual warehouse facilities while starting operations in Memphis. Interest income (net of interest expense) was $0.6 million in 1996 compared to $0.4 million in 1995. The increase was due to higher average cash balances invested in securities in 1996. During 1995, the Company received a total of $46.6 million in net proceeds from an initial public offering in April 1995 and its follow-on offering in August 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 Net sales increased by $257.2 million, or 157.1%, to $420.9 million for the year ended December 31, 1995 from $163.7 million for the year ended December 31, 1994. Mail order/catalog sales increased by $235.4 million, or 199.7%, to $353.3 million from $117.9 million in 1994. The increase in net sales was primarily attributable to an increase in the number of catalogs distributed during the year, an increase in the average number of pages in each catalog, and the introduction of the Company's PC Mall catalog. The Company distributed approximately 38.4 million catalogs during the year ended December 31, 1995, including approximately 27.3 million MacMall catalogs as 24 compared to approximately 7.7 million MacMall catalogs 1994. The Company also experienced growth in net sales at its retail showrooms of $21.8 million, or 47.4%, to $67.6 million in 1995 from $45.8 million in 1994. Gross profit increased by $35.6 million, or 151.6%, to $59.1 million for the year ended December 31, 1995 from $23.5 million in 1994 as a result of the increase in net sales. Gross profit as a percentage of net sales decreased to 14.0% for 1995 from 14.3% for 1994. The decrease in gross profit margin was the result of a shift in the Company's product mix to a higher proportion of WINTEL products which typically have a lower gross profit as a percentage of sales as compared to Apple products, and sales associated with the introduction of Microsoft Windows 95 and companion software products in the third quarter of 1995 which were at lower margins than historical levels. The Company shipped approximately 33,000 Windows 95 and Microsoft brand Windows 95 products during the third quarter of 1995. Corporate sales, which typically have a lower gross margin, also continued to increase in 1995, representing over 15% of the Company's net sales in 1995. Selling general and administrative (SG&A) expenses increased by $29.1 million, or 150.0% to $48.5 million for the year ended December 31, 1995 from $19.4 million in the prior year. As a percentage of net sales, SG&A expenses, excluding one time charges associated with the relocation of the Company's distribution center, decreased to 11.5% from 11.8% for 1994. The decrease as a percentage of net sales was the result of the Company's increased net sales. The increase in SG&A expenses was primarily attributable to an increase in personnel costs associated with the increased sales volume and an increase in advertising costs resulting from increased catalog circulation. During 1995, the Company also incurred approximately $1.4 million in expenses, or 0.3% of net sales, associated with the relocation of its distribution center to Memphis, Tennessee from its headquarters in Torrance, California. These one time charges primarily related to duplicative labor, freight and rent costs associated with operating dual warehouse facilities while starting operations in Memphis. Interest income (net of interest expense) increased by $1.1 million or 148.9%, to $371,000 from ($759,000) in 1994. The increase in interest income was primarily due to interest received on funds from the Company's initial public offering in April 1995 and its follow-on offering in August 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital need has been funding the working capital requirements created by its rapid growth in sales. Historically, the Company's primary sources of financing have been borrowings from its stockholders, private investors and financial institutions. In April and August 1995, the Company completed an initial public offering and a follow-on offering of its common stock which resulted in net proceeds to the Company of approximately $46.6 million. Cash flows from operations were $(767,000), $(12,790,000) and $(7,789,000) for 1994, 1995 and 1996, respectively. Cash flows from operations were negative primarily due to investments in inventory and accounts receivable necessitated by the rapid sales growth of the Company, including those associated with the introduction of the Company's MacMall, PC Mall and DataCom Mall catalogs. Inventories increased $3.1 million to $55.1 million at December 31, 1996 from $52.0 million at December 31, 1995 as a result of increased sales, the purchase of inventory for PC Mall and DataCom Mall and opportunistic buys. Accounts receivable increased $1.6 million during the year ended December 31, 1996 to $19.9 million primarily due to the Company's effort to target open account sales to corporate customers and expand the sale of advertising space in its catalogs. During the year ended December 31, 1996, the Company's capital expenditures were $2.1 million as compared to $7.9 million in 1995, primarily for distribution and computer equipment. The Company's primary capital needs will continue to be funding its working capital requirements for anticipated sales growth. 25 The Company has an existing credit facility of up to $50.0 million with a financial institution. As of December 31, 1996, the Company had $23.0 million outstanding under this credit facility. The credit facility functions like a trade payable for financing inventory purchases and is included in accounts payable. The revolving credit line is cancelable upon 30 days' or less advance notice and does not bear interest if paid within 60 days of the date inventory is purchased. The credit facility is secured by substantially all of the Company's assets and contains certain covenants which require the Company to maintain a minimum level of subordinated debt plus tangible net worth of $25 million. At December 31, 1996, the Company had approximately $50 million of subordinated debt plus tangible net worth. At December 31, 1996, the Company had cash and short term investments of over $17.8 million and working capital of $42.6 million. 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 1997. However, if the Company needs extra funds, such as for acquisitions or expansion, there are no assurances that adequate financing will be available at acceptable terms. 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 with those of the Company would place additional demands on the Company's management, operating and financial resources. The Company is engaged in ongoing evaluation of and discussions with third parties regarding potential acquisitions and from time to time has submitted, and may in the future submit, proposals with respect to such potential acquisitions. The Company currently has no definitive agreements with respect to any such 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, notes to consolidated financial statements and report of independent accountants required hereunder are indexed on page F-1 of this report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company is set forth under the caption "Election of Directors," in the Company's definitive Proxy Statement to be filed in connection with its 1997 Annual Meeting of Stockholders and such information is incorporated herein by reference. A list of executive officers of Registrant is included in Part I of this report. 26 COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file an initial report of ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange Commission (the "Commission"). Such officers, directors and 10% stockholders are also required by the Commission rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that during 1996 all Section 16(a) filing requirements applicable to its officers, directors and 10% stockholders were complied with, except that one of the Company's directors, Sam Khulusi, filed a late Form 3 regarding the purchase of 150,000 shares. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Executive Compensation and Other Information" in the Company's definitive Proxy Statement to be filed in connection with its 1997 Annual Meeting of Stockholders and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be filed in connection with its 1997 Annual Meeting of Stockholders and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the captions "Executive Compensation and Other Information -- Certain Relationship and Related Transactions and Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement to be filed in connection with its 1997 Annual Meeting of Stockholders and such information is incorporated herein by reference. 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following consolidated financial statements of Registrant are filed as part of this report:
Page ---- (a)(1) Consolidated Financial Statements --------------------------------- (1) Report of Independent Accountants - Price Waterhouse LLP F-2 (2) Consolidated Balance Sheet at December 31, 1996 and 1995 F-3 (3) Consolidated Statement of Operations for the Years Ended F-4 December 31, 1996, 1995 and 1994 (4) Consolidated Statement of Stockholders' Equity F-5 for the Years Ended December 31, 1996, 1995 and 1994 (5) Consolidated Statement of Cash Flows for the Years F-6 Ended December 31, 1996, 1995 and 1994 (6) Notes to the Consolidated Financial Statements F-7 (2) Financial Statement Schedules ----------------------------- SCHEDULE II - Valuation and Qualifying Accounts F-17
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (3) Exhibits -------- Reference is made to the Exhibit Index immediately preceding the exhibits hereto for the exhibits included herein. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1996. 28 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 March 27, 1997. CREATIVE COMPUTERS, INC. By: FRANK F. KHULUSI ------------------------- Frank F. Khulusi President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----- FRANK F. KHULUSI Chairman of the Board of March 27, 1997 - -------------------------------- Directors, President and Frank F. Khulusi Chief Executive Officer (Principal Executive Officer) RICHARD M. FINKBEINER Chief Financial Officer March 27, 1997 - -------------------------------- (Principal Financial and Richard M. Finkbeiner Accounting Officer) SAM U. KHULUSI* Director March 27, 1997 - -------------------------------- Sam U. Khulusi AHMED O. ALFI* Director March 27, 1997 - -------------------------------- Ahmed O. Alfi AL S. JOSEPH* Director March 27, 1997 - -------------------------------- Al S. Joseph
*By Richard M. Finkbeiner Attorney-in-Fact 29 CREATIVE COMPUTERS, INC. Exhibit Index
Exhibit Number Description - -------------- ----------- 3.1 Certificate of Incorporation of the Company* 3.2 Bylaws of the Company* 10.1 1994 Stock Incentive Plan and form of stock option agreement* 10.2 Employment Agreement dated January 1, 1995, between Creative Computers, Inc. and Frank F. Khulusi* 10.4 Employment Agreement dated January 1, 1994, between Creative Computers, Inc. and Dan DeVries* 10.5 Standard Industrial/Commercial Single-Tenant Lease-Net dated February 10, 1993 between Herman Platt and Marjorie Platt, as Co-Trustees of the Herman Platt and Marjorie Platt Trust dated October 11, 1985 and Creative Computers, Inc. for the premises located at 2645 Maricopa Street, Torrance, California** 10.6 ITT Commercial Financial Corporation ("ITT") financing arrangements: a. Agreement for Wholesale Financing (Security Agreement-Arbitration) dated April 4, 1991, as amended, between ITT and Creative Computers, Inc.* 10.13 Warrant to Purchase Common Stock of Creative Computers, Inc. dated September 29, 1994 in favor of Creative Partners, L.P.* 10.14 Security Agreement dated as of September 26, 1994 by Creative computers, Inc. in favor of Creative Partners, L.P.* 10.18 Form of Directors' Non-Qualified Stock Option Plan* 10.22 Agreement dated August 1, 1995 between Creative Computers, Inc. and Deutsche Financial Services (formerly known as ITT Commercial Finance Corp.)** 10.25 Industrial Lease Agreement between Corporate Estates, Inc. and Creative Computers, Inc. dated September 15, 1995 for the premises located at 4515 E. Shelby Drive, Memphis, Tennessee, filed in connection with the Company's 10-Q for the quarter ended September 30, 1995 10.26 Employment Agreement dated February 21, 1996, between Creative Computers, Inc. and David R. Burcham, filed in connection with the Company's 10-Q for the quarter ended March 31, 1996 as Exhibit 10.1 thereto 10.27 Employment Agreement dated May 21, 1996, between Creative Computers, Inc. and Richard M. Finkbeiner, filed in connection with the Company's 10-Q for the quarter ended June 30, 1996 as Exhibit 10.1 thereto 10.28 Authorized Apple Dealer U.S. Sales Agreement dated August 29, 1996; Authorized Apple Catalog Reseller Sales Agreement dated August 29, 1996; Dealer Apple Authorized Service Provider Agreement dated August 29, 1996; Apple Corporate Alliance Program Addendum to the Authorized Apple Dealer Sales Agreement dated August 29, 1996 10.29 Amendment to Agreement for Wholesale Financing dated February 25, 1997 13.1 Consolidated Financial Statements and Report of Independent Accountants 21.1 Subsidiaries** 23.1 Consent of Price Waterhouse LLP 24.1 Power of Attorney 27.1 Financial Data Schedule (filed with EDGAR version only) * Incorporated by reference from the Company's Registration Statement on Form S-1 (33-89572) declared effective on April 4, 1995. ** Incorporated by reference from the Company's Registration Statement on Form S-1 (33-95416) declared effective on August 23, 1995.
30 EX-10.28 2 AUTHORIZED APPLE AGREEMENTS - 8/29/96 EXHIBIT 10.28 Apple Computer, Inc. Apple Corporate Alliance Program Addendum to the Authorized Apple Dealer Sales Agreement This Addendum to the Authorized Apple Dealer Sales Agreement ("Agreement") made between Apple Computer, Inc. ("Apple") and Creative Computers, Inc. with its principal place of business located at 2645 Maricopa Street, Torrance, CA 90503 ("Dealer"), executed by Apple on August 29, 1996 sets forth the terms and conditions for Dealer's participation in the Apple Corporate Alliance Program. In consideration for selection to participate in the Apple Corporate Alliance Program ("ACAP"), Dealer agrees at all times to meet the following requirements: (1) Dealer must be designated by an Apple Corporate Alliance Program customer ("Customer") to participate in the ACAP. (2) Dealer must ship allocated Apple Product(s) to the ACAP Customer. (3) Dealer must provide monthly end customer reporting to Apple via Electronic Data Interchange ("EDI"). (4) Dealer must maintain, at each Authorized Location selected to participate in the ACAP, a named account team for each ACAP Customer. (5) Dealer agrees to keep confidential all information and data developed with Apple with regard to ACAP Customer account strategy and planning and to use such information and data solely for the promotion and sale of Apple Product(s). (6) Dealer agrees to attend semiannual ACAP training sessions provided by Apple. Dealer understands that Apple will provide adequate advance notice of the date and location. All incidental costs associated with such training shall be paid by Dealer. (7) Upon request by Apple, Dealer will attend regular account planning and progress tracking session with Apple and will generally work with Apple in developing and supporting the ACAP Customer. (8) Dealer agrees to work with Apple in designing a proper seed unit strategy for the ACAP Customer. (9) Failure to comply with the terms and conditions of this Addendum or the Agreement may result, at the option of Apple, in either termination of the Agreement or termination of the right to participate in the ACAP, or both. (10) The terms and conditions of the Agreement shall remain in full force and effect. The duly authorized representatives of the parties execute this Addendum as of the dates set forth below. Dealer SIGNATURE: /s/ PRINT NAME: Dan DeVries TITLE: Executive Vice President DATE: 7-1-96 Apple 1 SIGNATURE: /s/ PRINT NAME: Catherine P Lyons TITLE: Sr. Contracts Specialist DEPT: Bids & Contracts Management EFFECTIVE DATE: 8-29-96 part #P00133 Please return to: Apple Computer, Inc., 900 E. Hamilton Avenue M/S 73-CM, Campbell, CA 95008 2/95 2 Apple Computer, Inc. Authorized Apple Catalog Reseller Sales Agreement This Agreement is made between Apple Computer, Inc., a California corporation with its principal place of business located at 1 Infinite Loop, Cupertino, California 95014, "Apple," and Creative Computers, Inc., a corporation organized under the laws of California with its principal place of business located at 2645 Maricopa Street, Torrance, CA 90503, "Catalog Reseller." Definitions As used in this Agreement, the following terms and conditions have the meanings specified below: A. "Agreement" - this Authorized Apple(R) Catalog Reseller Sales Agreement and any documents incorporated herein by reference. B. "Authorized Product(s)," "Apple Products," and/or "Product(s)" -hardware, software, support, and/or training products, including items manufactured, distributed or licensed ("sold") exclusively by Apple and items manufactured or distributed by others, that Catalog Reseller is authorized by this Agreement to purchase from Apple and resell to customers. C. " Apple Service Programs Manual" - the then current so titled document which describes Apple's policies and procedures for providing customer service and support. D. "Catalog" - a magazine style booklet of high quality containing color photographs of Apple Products and information about purchase and use of Authorized Products, typically provided to customers via the mail. Information includes possible configurations, specifications, and other related information necessary for an end-user to make an informed decision on the purchase of an Authorized Product equivalent to the decision the customer could make by visiting a store location. E. "Catalog Sales" - the promotion of Authorized Products via Catalogs the taking of orders for such Authorized Products via the telephone or other non-in person means, and fulfilling such orders via mail. F. "Policies and Business Practices Manual" - Apple's then current policies relating to doing business in Apple Products and Apple administrative programs and procedures which a Catalog Reseller must follow. G. "Price List" - the Apple Computer, Inc. Authorized Apple Dealer Confidential Price List. 1. Appointment A. Apple appoints Catalog Reseller as an Authorized Apple Catalog Reseller and Catalog Reseller accepts such appointment. This non-exclusive appointment is valid only so long as Catalog Reseller complies with the terms and conditions of this Agreement and the Apple Catalog Program Guidelines. Appointment allows Catalog Reseller to perform the functions described herein and represent to the public that Catalog Reseller has been authorized by Apple to do so. B. Catalog Reseller is an independent contractor, has no power or authority to bind Apple and is contracting for certain goods and services. Nothing in this Agreement shall be construed as creating any relationship such as employer- employee, principal-agent or franchisor-franchisee . C. The appointment is based upon the existing ownership of Catalog Reseller and is, therefore, personal in nature. Consequently Catalog Reseller may not assign or transfer any or all of its rights and obligations under this Agreement without express written approval from Apple. 3 2. Scope of Authorization A. Catalog Reseller shall only sell Products for which it has been specifically authorized by Apple. As of the date of this Agreement those Products include all Products on the Price List, unless specifically excepted. Apple reserves the right to remove Products from the Price List, to limit those Products available to Catalog Reseller and to require Product specific authorizations in the future. B. Catalog Reseller shall only sell Authorized Products for use within the United States of America (50 states and the District of Columbia). C. Catalog Reseller must conduct its sales of Authorized Products in the United States of America (50 states and the District of Columbia). D. Catalog Reseller shall only resell to end-users. E. Catalog Reseller shall not sell Authorized Products as follows unless specifically authorized to do so by an amendment to this Agreement: (1) for resale. If Apple authorizes Catalog Reseller to resell Products to other Apple resellers, Catalog Reseller shall pass on to the reseller all promotional allowances received from Apple for the Products sold; (2) for export, either directly or indirectly; (3) to public and private non-profit educational institutions, including, without limitation, those portions of state contracts concerning purchases for educational institutions (4) in response to a Federal Government Contracting Officer's Notice of Intent to place a delivery order against a General Services Administration (GSA) Automatic Data Processing (ADP) Schedule as published in the Commerce Business Daily; and (5) to Premium/Incentive customers defined by Apple for programs that will compete with existing Apple Premium/Incentive programs. F. Catalog Reseller shall determine its own resale prices unilaterally. Although Apple price lists may show suggested retail prices those are suggestions only and Catalog Reseller may freely choose to charge different prices. 3. Catalog Reseller's Obligations A. Promotion and Sales Catalog Reseller shall vigorously promote and sell Products to end-users via Catalogs which comply with all policies contained in the Apple Catalog Program Guidelines; and, shall achieve and maintain a level of customer satisfaction acceptable to Apple. Catalog Reseller agrees and represents that it shall accomplish at least the following: (1) comply with Apple's programs and policies contained in the Policies and Business Practices Manual and the Apple Catalog Program Guidelines or other documentation available to Catalog Reseller (2) provide all customers with the benefit of skilled, pre-sale and post-sale education, orientation and support; (3) promote Apple Products and do so in a manner that reflects favorably on the products and the good name, goodwill and reputation of Apple; (4) utilize the promotional programs and funds Apple makes available from time to time; and (5) not engage in any illegal, false or misleading activities with respect to any Apple Product or service and support activity described herein. B. Service Catalog Reseller shall provide for the service of all Apple Product in a manner which ensures customer satisfaction and conforms to Apple's requirements. Catalog Reseller shall meet its service obligation by utilizing one or more of the following options: 1) if qualified, execute an Apple Authorized Service Provider Agreement and perform service and repair itself; 2) use a third party Apple authorized service 4 provider to perform the service; and/or 3) use Apple to perform the service. These service options and their respective requirements are more fully described in the Apple Service Programs Manual. (1) Catalog Reseller shall provide for the service of all Apple Product even if such Product was not purchased from Catalog Reseller, was not purchased in the United States of America, or is not currently manufactured by Apple. (2) Catalog Reseller shall complete and return to Apple the Apple Service Selection Plan designating how Catalog Reseller will fulfill its service obligations. (3) In the event Catalog Reseller elects to use a third party Apple authorized service provider to perform its service obligations on its behalf, Catalog Reseller acknowledges that it shall remain responsible for ensuring service and repairs are performed in accordance with the Agreement. (4) In the event Catalog Reseller elects to perform service itself, Catalog Reseller shall execute the Apple Authorized Service Provider Agreement and return it to Apple with the Apple Service Selection Plan. C. Support Catalog Reseller shall support all Apple Products it offers for sale. Adequate minimum support of Apple Products includes: (1) helping customers determine appropriate system configurations for their specific requirements; (2) providing appropriate information, assistance, and advice to assist customers in applying and using Apple Products; (3) explaining to the customers the various Apple service and support program options available for Apple Products; and (4) furnishing each customer with a bill of sale or other receipt that states the Customer's name and address, date of sale, and the serial numbers of the Apple Products sold. 4. Limited Warranty to Catalog Reseller A. Apple warrants to Catalog Reseller that any Authorized Products shipped by Apple shall conform to the general description of that Product on Price List. This warranty is non-transferable. Catalog Reseller's sole and exclusive remedy for any breach by Apple of the foregoing warranty shall be replacement of the item upon return to Apple of the non-conforming unit. Catalog Reseller shall have SIX (6) MONTHS from the original invoice date to Catalog Reseller to notify Apple of a suspected warranty breach and receive a return authorization or the above warranty shall expire. B. Catalog Reseller-owned Apple Products used for demonstration, display, seeding, or training purposes are covered by Apple's standard Limited Warranty; coverage shall commence on the date Catalog Reseller first uses the Product. If Catalog Reseller does not maintain records indicating the date of first use, the coverage period will start from Catalog Reseller's date of purchase. C. APPLE MAKE NO OTHER WARRANTY TO CATALOG RESELLER, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO ANY APPLE PRODUCTS PURCHASED BY CATALOG RESELLER HEREUNDER. APPLE SPECIFACALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. D. For Authorized Products sold by Catalog Reseller to end-users, Apple's standard Limited Warranty shall flow to the end-user. Catalog Reseller shall make available Apple's standard Limited Warranty to all purchasers prior to purchase. 5. Inspections, Records, and Reporting A. Catalog Reseller shall maintain information which Apple may reasonably request. B. Apple shall have the right to inspect Catalog Reseller and its operation at any time during regular business hours to verify Catalog Reseller's compliance with the terms and conditions of this Agreement 5 and Apple programs. Upon Apple's request, Catalog Reseller shall promptly make and provide copies of any and all records and documents. C. Catalog Reseller shall maintain for at least FIVE (5) YEARS its records, contracts, and accounts relating to the sale of Apple Products. D. Catalog Reseller will provide to Apple a monthly report listing inventory and sell-through information for the previous month for all serialized Apple Products. This report shall be in a form and format prescribed by Apple. Failure to submit the reports will result in Catalog Reseller being ineligible for certain Apple programs. E. Catalog Reseller will promptly notify Apple in writing of any suspected Product defect or safety problem. F. Catalog Reseller shall notify Apple in writing no less than TEN (10) DAYS prior to any material change in the management or control of Catalog Reseller, any new affiliation or association, or transfer of any substantial part of Catalog Reseller's business. Catalog Reseller shall also notify Apple in writing no less than TEN (10) DAYS prior to any acquisition by Catalog Reseller in whole or in part of a third party engaged in the sale of Apple Products. 6. Ordering; Shipping; Payment A. Catalog Reseller may submit orders for Authorized Products. Orders shall be subject to acceptance by Apple. The price shall be Apple's price on the then- current Price List on the date of Apple's acceptance. The prices set forth in Apple's then-current Price List include freight (using an Apple-selected carrier), insurance and routing to Catalog Reseller. B. Apple shall use reasonable efforts to ship according to Catalog Reseller's request, but shall not be liable for any failure to do so or for any failure to meet a proposed delivery date. Unless Catalog Reseller clearly advises Apple to the contrary in writing, Apple may make partial shipments on account of Catalog Reseller's orders, to be separately in-voiced and paid for when due. Title to all shipped Product shall pass to Catalog Reseller at Apple's shipping location. When shipping pursuant to Apple's standard practices, Apple will place tracers, file claims and replace product lost or damaged in transit. C. Should orders for Product exceed Apple's available inventory, Apple will allocate its available inventory and make deliveries (including partial shipments) on a basis Apple deems equitable, in its sole discretion and without liability to Catalog Reseller. D. Catalog Reseller shall be invoiced upon shipment of Product and, provided Catalog Reseller is eligible for credit from Apple, shall pay each invoice no later than THIRTY (30) DAYS from the date of invoice. Upon Apple's request, Catalog Reseller shall provide financial statements to Apple. Apple reserves the right to change credit terms should Catalog Reseller's financial status or payment record so warrant. 7. Apple Proprietary Rights A. Trademarks, Service Marks and Tradenames (1) During the term of this Agreement, Catalog Reseller is authorized and permitted by Apple to display the registered trademarks "Apple" and the Apple logo, the service mark "AppleCare(R)," the other trademarks, service marks and names belonging or licensed to Apple ("Apple Marks"), and the designation "Authorized Apple Catalog Reseller" solely in connection with Catalog Reseller's promotion of, or Catalog Reseller's support and service capabilities for, Authorized Products. Catalog Reseller's display of such Apple Marks shall be in accordance with Apple's written policies in effect from time to time. Catalog Reseller will not remove any Apple Marks from any Authorized Products nor shall Catalog Reseller add any marks to such products. (2) Apple retains all rights not expressly conveyed to Catalog Reseller by this Agreement. Catalog Reseller recognizes the great value of the publicity and goodwill associated with the Apple Marks and 6 acknowledges that such goodwill exclusively accrues to the benefit of and belongs to Apple. Catalog Reseller has no rights of any kind whatsoever with respect to the Apple Marks. Catalog Reseller shall not use or license others to use the Apple Marks on or in connection with any goods or services (including but not limited to promotional and merchandising Items such as key chains, mugs, and T-shirts) other than the Apple Products, except in accordance with Apple's written merchandising programs and policies. B. Software Rights (1) Catalog Reseller acknowledges that Authorized Products often contain not only hardware but also software. Software may be provided on separate media, such as floppy diskettes or CD-ROM or may be included within the hardware. Such software is proprietary, is copyrighted, and may also contain valuable trade secrets and be protected by patents. Catalog Reseller shall not separate the software from the associated Apple Product as shipped by Apple, nor may Catalog Reseller disassemble, decompile, reverse engineer, copy, modify, prepare derivative works thereof, or otherwise change any of the software or its form. (2) Catalog Reseller understands that Apple does not sell software. Rather, Catalog Reseller is licensed to distribute software that is incorporated in or packaged with Authorized Products only as part of its authorized distribution, sale, or resale of the associated Authorized Products. The end user of an Apple Product is licensed directly to use any software contained in such Product, subject to the terms of the license accompanying the Apple Product, if any, and the applicable patent, trademark, copyright, and other federal and state intellectual property laws. (3) Prior to selling an Apple Product, Catalog Reseller will make available to end user the applicable end user Software License Agreement. Apple will provide copies of the applicable Software License Agreements with the Product or upon request. 8. Insurance and Indemnities A. While this Agreement is in effect, Catalog Reseller shall keep in force and effect a sufficient general liability insurance policy, including premises liability, products, and completed operations, with limits of coverage not less than $1,000,000 bodily or personal injury and $1,000,000 property damage, or $1,000,000 combined single limit. B. Apple agrees to defend any proceeding or action brought by a third party against Catalog Reseller to the extent based on a claim that: (1) the marketing or use of any product sold by Apple to Catalog Reseller infringes any U.S. patent, copyright, trademark, trade secret or other proprietary right of a third party; or (2) a defective Apple product directly caused death or personal injury (provided the product at issue has not been altered, modified or otherwise changed by Catalog Reseller). Apple agrees to indemnify Catalog Reseller for damages awarded to third parties solely as a result of such claims. Apple's obligation to so defend and indemnify Catalog Reseller is contingent on Catalog Reseller's compliance with Section D below. C. Catalog Reseller agrees to defend any proceeding or action brought by a third party against Apple to the extent based on a claim arising from the acts or omissions of Catalog Reseller, its employees or agents in conduct associated with the offering for sale or marketing of Apple products, except acts or omissions expressly required by Apple's written programs and policies. Catalog Reseller agrees to indemnify Apple for any losses, damages, liabilities, costs and reasonable expenses arising from such acts or omissions. Catalog Reseller's obligation to so defend and indemnify Apple is contingent on Apple's compliance with Section D below. D. Each party shall promptly notify the other party of any claim, demand, proceeding or suit of which the other party becomes aware which may give rise to a right of defense or indemnification pursuant to this section ("Claim"). Notice of any Claim which is a legal proceeding, by suit or otherwise, must be provided to the indemnifying party within THIRTY (30) days of first learning of such proceeding. Notice shall include an offer to tender the defense of the Claim to the indemnifying party. The indemnifying party, if it accepts such tender, shall be entitled to take over sole control of the defense of the Claim. That control shall include the right to take any and all actions necessary to completely and finally resolve the Claim by settlement or compromise (in which case the indemnifying party shall be responsible for the cost of 7 settlement/compromise related to the Claim). Upon acceptance of tender, the indemnified party shall cooperate with the indemnifying party we respect to such defense and settlement. In the event a Claim is settled, both parties agree not to publicize the settlement and will make every effort to ensure the settlement agreement contains a non-disclosure provision. 9. Confidentiality Any information disclosed to Catalog Reseller by Apple relating to Apple's present or future developments, including but not limited to future product information, business activities, terms and conditions of this Agreement (including any documents incorporated by reference), pricing, and all other amendments and addenda between Catalog Reseller and Apple (except such information as is previously known to Catalog Reseller without an obligation of confidentiality or is publicly disclosed by Apple either prior or subsequent to Catalog Reseller's receipt of such information from Apple), shall be characterized as confidential information. Catalog Reseller shall hold such confidential information in trust and confidence for Apple and shall not use it except in furtherance of the relationship set forth in this Agreement, nor publish, disclose, or disseminate it for a period of FIVE (5) YEARS after receipt thereof by Catalog Reseller, except as may be authorized by Apple in writing. Catalog Reseller shall have no right to prepare any derivative works of such confidential information. 10. Limitation of Liability IN NO EVENT SHALL APPLE BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECLAL DAMAGES OF ANY NATURE, INCLUDING, WITHOUT LIMITATION, LOST BUSINESS PROFITS. DIRECT DAMAGES SHALL BE LIMITED TO AN AMOUNT NOT TO EXCEED $100,000 PER INCIDENT. 11. Limitation of Remedies THE REMEDIES SET FORTH IN THIS AGREEMENT SHALL BE CATALOG RESELLER'S SOLE AND EXCLUSIVE REMEDIES FOR ANY BREACH OF THIS AGREEMENT BY APPLE. 12. Term and Termination A. Term Unless terminated as provided herein, this Agreement shall be effective from its effective date until its expiration on March 31, 1997. Catalog Reseller and Apple agree that in no event shall either party be obligated to renew or extend this Agreement. B. Termination with Thirty (30) Days Notice Either party may terminate this Agreement at will, at any time, with or without cause, by written notice to the other party not less than THIRTY (30) DAYS before the effective date of such notice. C. Immediate Termination To the extent permitted by applicable law, Apple may terminate this Agreement effective immediately and without notice in the event that: (1) Catalog Reseller fails to perform any obligation, duty, or responsibility imposed under this Agreement and such failure or default remains unremedied FIFTEEN (I5) DAYS after written notice thereof; (2) Catalog Reseller commits a felony, engages in an unlawful business practice, or conducts business in any manner prohibited by Sections 2 or 3; (3) there should be any material change or transfer in the management or control of Catalog Reseller, Catalog Reseller's business operations, or any new affiliation or transfer of any substantial part of its business; (4) any conduct or proposed conduct of Catalog Reseller exposes or threatens to expose Apple to any liability or obligation, including any federal, state, or local law; or 8 (5) Catalog Reseller fails to maintain sufficient net worth and working capital to perform its obligations; has a receiver or similar party appointed for its property; becomes insolvent or makes an assignment for the benefit of creditors; or ceases to do business in Authorized Products. D. Effect of Notice of Termination In the event that notice of termination of this Agreement is given for any reason, the due date of all Apple invoices shall be accelerated so that they become due and payable as of the date of notice of termination, even if longer terms had been provided previously. Apple shall be entitled, in its sole discretion, to reject all or part of any orders received from Catalog Reseller after the date of such notice or to cancel any orders previously accepted. Apple may restrict Catalog Reseller's use of any available promotional allowances. Catalog Reseller may continue to represent publicly that it is an authorized Apple Catalog Reseller but shall not enter into any commitments requiring Authorized Products after the termination date. E. Effect of Termination Upon expiration or termination of this Agreement: (1) Catalog Reseller shall submit to Apple within TEN (10) DAYS after such expiration or termination a list of all Authorized Products owned by Catalog Reseller as of such termination. Apple, at its option, may purchase from Catalog Reseller any or all Authorized Products that are still in their original, unopened containers, in good condition, at the respective prices paid by Catalog Reseller for such items. These prices shall be determined by assuming that the Products are from Catalog Reseller's most recent purchase of such items from Apple . Apple, at its option, may purchase any or all Authorized Products in opened containers at prices determined by Apple. If the prices offered by Apple are unacceptable to Catalog Reseller, Catalog Reseller may refuse Apple's offer and thereafter resell such Authorized Product to an authorized Apple reseller. After receipt of any such Authorized Product from Catalog Reseller, Apple will issue an appropriate credit to Catalog Reseller's account, subject to offset for any amounts due Apple. (2) Catalog Reseller shall immediately cease use of the Apple Marks provided by Section 7 herein, and otherwise discontinue representing to the public and trade that it is an authorized Apple Catalog Reseller. (3) All unshipped Product orders shall be automatically canceled. (4) All promotional allowance or other fund accruals shall cease. Catalog Reseller may claim against any available balances for any activities approved by Apple and conducted prior to the date of termination. (5) Catalog Reseller shall promptly return to Apple all property of Apple in its possession, including but not limited to loaned equipment and any documents of any kind containing Apple confidential information. F. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND, INCLUDING INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, ON ACCOUNT OF EXPIRATION OR TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS. G. To the extent permitted by applicable law, and in consideration of its entering into this Agreement, Catalog Reseller hereby waives and relinquishes any rights or claims under franchise, dealership, or other statutes, or at common law, that would or might arise out of a termination of this Agreement by Apple or refusal by Apple to renew or extend the term of this Agreement. H. Catalog Reseller's obligations under Sections 5, 7, 8, 9, 10, 11, 12 and 13 and their subsections shall survive expiration or termination of this Agreement. 13. General Terms A. Governing Law This Agreement and the corresponding relationships of the parties shall be governed by and construed in accordance with the laws of the State of California without giving effect to its conflict of law provisions. 9 B. Disputes (1) Any dispute, resolution, or proceeding with respect to this Agreement shall take place solely in the County of Santa Clara, State of California. Catalog Reseller expressly agrees that venue within this district is proper and voluntarily submits to the jurisdiction of the courts within same. (2) Any action arising from or related to this Agreement must be brought within ONE (1) YEAR from the date such action could have first been brought. The parties expressly agree to this provision notwithstanding any longer period which may be provided by statute and any such period is expressly waived. C. Notice Notices and demands of any kind that Catalog Reseller may be required or desire to serve upon Apple pursuant to this Agreement shall be served by United States mail, postage prepaid, or overnight courier, to Apple, at Apple Computer, Inc. Bids & Contracts Management 900 E. Hamilton Avenue, M/S 72-CM Campbell, CA 95008 Notices and demands of any kind that Apple may be required or desire to serve upon Catalog Reseller pursuant this Agreement shall be served by personal service, United States mail, postage prepaid, overnight courier, or electronic mail to Catalog Reseller at Catalog Reseller's address set forth in this Agreement or Catalog Reseller's AppleLink(R) electronic mail address. With written notice to the other, Apple and Catalog Reseller may designate in writing different addresses. All notices or demands by United States mail shall be deemed given and complete upon mailing. D. Severability (1) In the event that any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining portions of this Agreement shall remain in full force and effect and be construed so as to best effectuate the intention of the parties upon execution. (2) The paragraph headings contained herein are for reference only and shall not be considered as substantive parts of this Agreement. Use of the singular or plural form shall include the other. E. Waiver The waiver of any one default shall not waive subsequent defaults of the same or different kind. F. Successors in Interest The provisions of this Agreement shall be binding upon and inure to the benefit of the parties, their successors, and permitted assigns. 14. Entire Agreement This document and all documents referred to or incorporated herein by reference contain all the agreements, warranties, understandings, conditions, covenants, and representations made between Catalog Reseller and Apple. Neither Apple nor Catalog Reseller shall be liable for any agreements, warranties, understandings, conditions, covenants, or representations that are not expressly set forth in this Agreement. Any different or additional terms and conditions in any purchase order invoice or other such document are hereby expressly rejected by Apple and shall have no force or effect. This Agreement may only be modified in writing by an instrument signed by an authorized representative of each party. Apple may unilaterally modify the Price List, the Policies and Business Practices Manual, the Apple Service Programs Manual and the AppleFund(TM) Guidelines effective on the date designated by Apple. Catalog Reseller shall have a reasonable period of time to implement changes requiring Catalog 10 Reseller to materially alter its activities provided such period does not exceed THIRTY (30) DAYS from the stated effective date. The duly authorized representatives of the parties execute this Agreement as of the dates set forth below. Catalog Reseller SIGNATURE: /s/ PRINT NAME: Dan DeVries TITLE: Executive Vice President DATE: 7-1-96 Apple Computer, Inc. SIGNATURE: /s/ PRINTNAME: Catherine P. Lyons; TITLE: Sr. Contracts Specialist DEPT: Bids & Contract Management EFFECTIVE DATE: 8-29-96 (C) 1996 Apple Computer, Inc. All rights reserved. Apple, the Apple logo, and AppleLink are registered trademarks of Apple Computer, Inc. AppleFund is a trademark of Apple Computer, Inc. AppleCare is a registered service mark of Apple Computer, Inc. 11 APPLE COMPUTER, INC. AUTHORIZED APPLE DEALER U.S. SALES AGREEMENT This Agreement is made between Apple Computer, Inc., a California corporation with its principal place of business located at 1 Infinite Loop, Cupertino, California 95014,"Apple," and Creative Computers, Inc. a corporation organized under the laws of California with its principal place of business located at 2645 Maricopa Street, Torrance, CA 90503, "Dealer." Definitions As used in this Agreement, the following terms and conditions have the meanings specified below: A. "Agreement" - this Authorized Apple(R) Dealer U.S. Sales Agreement and any documents incorporated herein by reference. B. "Apple Product(s)" and/or "Product(s)" - hardware, software support, and training products, including items manufactured, distributed or licensed ("sold") exclusively by Apple and items manufactured or distributed by others, that may be sold by Apple to Dealer for resale to customers. C. "Apple Service Programs Manual" - the then-current so titled document which describes Apple's policies and procedures for providing customer service and support. D. "Authorized Location(s)" - the location(s) at which Dealer is authorized by Apple to resell Products to customers. E. "Authorized Product(s)" - those Products that Dealer is authorized by this Agreement to resell to customers. F. "Consumables" - those items, such as paper, toner cartridges, printer ribbons, floppy disks, and labels, as specified by Apple in the appropriate price list. G. "Policies and Practices Manual" - Apple's then-current policies relating to doing business in Apple Products and Apple administrative programs and procedures which a Dealer must follow. H. "Price List" - the Apple Computer, Inc. Authorized Apple Dealer Confidential Price List. 1. Appointment A. Apple appoints Dealer as an Authorized Apple Dealer and Dealer accepts such appointment. The appointment is limited, non-exclusive and effective only so long as Dealer complies with the terms and conditions of this Agreement. Appointment allows Dealer to perform the functions described herein and represent to the public that Dealer has been authorized by Apple to do so. B. Dealer is an independent contractor, has no power or authority to bind Apple and is contracting for certain goods and services. Nothing in this Agreement shall be construed as creating any relationship such as employer-employee, principal-agent or franchisor-franchisee. C. The appointment is based upon the existing ownership of Dealer and is, therefore, personal in nature. Consequently, Dealer may not assign or transfer any or all of its rights and obligations under this Agreement without express written approval from Apple. 2. Scope of Authorization 12 A. Dealer shall only sell Products for which it has been specifically authorized by Apple. As of the date of this Agreement those Products include all Products on the Price List. Apple reserves the right to remove Products from the Price List, to limit those Products available to Dealer and to require Product specific authorizations in the future. B. Dealer shall only sell Authorized Products for use within the United States of America (50 states and the District of Columbia). C. Dealer shall only sell Authorized Products from Authorized Locations. Each Authorized Location shall comply with the terms of this Agreement. D. Dealer may only promote the sale of Authorized Products to potential purchasers within a reasonable geographic proximity of Dealer's Authorized Location. E. Dealer shall only sell Authorized Products to end-users within a reasonable geographic proximity of Dealer's Authorized Location. F. Dealer shall only resell to end-users. G. Dealer shall not sell Authorized Products as follows unless specifically authorized to do so by an amendment to this Agreement: (1) by mail-order or any similar means; (2) for resale. If Apple authorizes Dealer to resell Products to other Apple resellers, Dealer shall pass on to the reseller all promotional allowances received from Apple for the Products sold; (3) for export, either directly or indirectly; (4) to public and private non-profit educational institutions including, without limitation, those portions of state contracts concerning purchases for educational institutions; and (5) to Premium/Incentive customers defined by Apple for programs that will compete with existing Apple Premium/Incentive programs. H. Dealer shall determine its own resale prices unilaterally. Although Apple price lists may show suggested retail prices, those are suggestions only and Dealer may freely choose to charge different prices. 3. Dealer's Obligations A. Promotion and Sales Dealer shall vigorously promote and sell Products and Consumables to end-users within Dealer's geographic area and achieve and maintain a level of customer satisfaction acceptable to Apple. Dealer agrees and represents that it shall accomplish at least the following: (1) comply with Apple's programs and policies either contained in the Policies and Practices Manual or other documentation available to Dealer; (2) provide all customers with the benefit of skilled, face-to-face, pre-sale and post-sale education, orientation and support; (3) maintain adequate facilities to display and promote Apple Products and do so in a manner that reflects favorably on the products and the good name, goodwill and reputation of Apple; (4) intend to purchase from Apple during the term of this Agreement no less than three hundred and fifty thousand dollars ($350,000) worth of Apple Products; (5) utilize the promotional programs and funds Apple makes available from time to time; and (6) not engage in any illegal, false or misleading activities with respect to any Apple Product or service and support activity described herein. B. Service Dealer shall provide for the service of all Apple Product in a manner which ensures customer satisfaction and conforms to Apple's requirements. Dealer shall meet its service obligation at each Authorized Location by utilizing one of the following options for each product category identified in the 13 Product/Service Matrix located in the Apple Service Programs Manual: 1) if qualified, execute an Apple Authorized Service Provider Agreement and perform service and repair itself; 2) use a third party Apple authorized service provider to perform the service; or 3) use Apple to perform the service. The product categories, service options and their respective requirements are more fully described in the Apple Service Programs Manual. (1) Dealer shall provide for the service of all Apple Product even if such Product was not purchased from Dealer, was not purchased in the United States of America, or is not currently manufactured by Apple. (2) Dealer shall report to Apple which service option(s) it will utilize to fulfill its service obligations. (3) In the event Dealer elects to use a third party Apple authorized service provider to perform its service obligations on its behalf, Dealer acknowledges that it shall remain responsible for ensuring service and repairs are performed in accordance with the Agreement. (4) In the event Dealer elects to perform service itself, Dealer shall execute the Apple Authorized Service Provider Agreement and return it to Apple with the Apple Service Selection Plan. C. Support Dealer shall support all Apple Products it offers for sale. Adequate minimum support of Apple Products includes: (1) helping customers determine appropriate system configurations for their specific requirements; (2) providing appropriate information, assistance, and advice to assist customers in applying and using Apple Products; (3) explaining to the customers the various Apple service and support program options available for Apple Products; and (4) furnishing each customer with a bill of sale or other receipt that states the customer's name and address, date of sale, and the serial numbers of the Apple Products sold. 4. Limited Warranty to Dealer A. Apple warrants to Dealer that any Authorized Products shipped by Apple shall conform to the general description of that Product on the Price List. This warranty is non-transferable. Dealer's sole and exclusive remedy for any breach by Apple of the foregoing warranty shall be replacement of the item upon return to Apple of the non- conforming unit. Dealer shall have SIX (6) MONTHS from the original invoice date to Dealer to notify Apple of a suspected warranty breach and receive a return authorization or the above warranty shall expire. B. Dealer-owned Apple Products used for demonstration, display, seeding, or training purposes are covered by Apple's standard Limited Warranty; coverage shall commence on the date Dealer first uses the Product. If Dealer does not maintain records indicating the date of first use, the coverage period will start from Dealer's date of purchase. C. APPLE MAKES NO OTHER WARRANTY TO DEALER, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO ANY APPLE PRODUCTS OR CONSUMABLES PURCHASED BY DEALER HEREUNDER. APPLE SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. D. For Apple Products sold by Dealer to end-users, Apple's standard Limited Warranty shall flow to the end-user. Dealer shall make available Apple's standard Limited Warranty to all purchasers prior to purchase. 5. Inspections, Records, and Reporting A. Dealer shall maintain with Apple a list of all Authorized Locations and such other Dealer information Apple may reasonably request. B. Apple shall have the right to inspect any Authorized Location(s) and its operation at any time during regular business hours to verify Dealer's compliance with the terms and conditions of this Agreement and 14 Apple programs. Upon Apple's request, Dealer shall promptly make and provide copies of any and all requested records and documents. C. Dealer shall maintain at the Authorized Location for at least FIVE (5) YEARS its records, contracts, and accounts relating to the sale of Apple Products. D. Dealer will provide to Apple a monthly report listing inventory and sell- through information for the previous month for all serialized Apple Products. This report shall be in a form and format prescribed by Apple. Failure to submit the reports will result in Dealer being ineligible for certain Apple programs such as price protection. E. Dealer will promptly notify Apple in writing of any suspected Product defect or safety problem. F. Dealer shall notify Apple in writing no less than TEN (10) DAYS prior to any material change in the management or control of Dealer, any new affiliation or association, or transfer of any substantial part of Dealer's business, whether as a whole or respecting an Authorized Location. Dealer shall also notify Apple in writing no less than TEN (10) DAYS prior to any acquisition by Dealer in whole or in part of a third party engaged in the sale of Apple Products. 6. Ordering; Shipping; Payment A. Dealer may submit orders for Products and Consumables. Orders shall be subject to acceptance by Apple. The price shall be Apple's price on the then- current Price List on the date of Apple's acceptance. The prices set forth in Apple's then-current Price List include freight (using an Apple-selected carrier), insurance and routing to Dealer. B. Apple shall use reasonable efforts to ship according to Dealer's request, but shall not be liable for any failure to do so or for any failure to meet a proposed delivery date. Unless Dealer clearly advises Apple to the contrary in writing, Apple may make partial shipments on account of Dealer's orders, to be separately invoiced and paid for when due. Title to all shipped Product shall pass to Dealer at Apple's shipping location. When shipping pursuant to Apple's standard practices, Apple will place tracers, file claims and replace product lost or damaged in transit. C. Should orders for Product exceed Apple's available inventory, Apple will allocate its available inventory and make deliveries (including partial shipments) on a basis Apple deems equitable, in its sole discretion and without liability to Dealer. D. Dealer shall be invoiced upon shipment of Product and, provided Dealer is eligible for credit from Apple, shall pay each invoice no later than THIRTY (30) DAYS from the date of invoice. Upon Apple's request, Dealer shall provide financial statements to Apple. Apple reserves the right to change credit terms should Dealer's financial status or payment record so warrant. 7. Apple Proprietary Rights A. Trademarks, Service Marks and Tradenames (1) During the term of this Agreement, Dealer is authorized and permitted by Apple to display the registered trademarks "Apple" and the Apple logo, the service mark "AppleCare(R)," the other trademarks, service marks and names belonging or licensed to Apple ("Apple Marks"), and the designation "Authorized Apple Dealer" solely in connection with Dealer's promotion of, or Dealer's support and service capabilities for, Authorized Products and/or Consumables. Dealer's display of such Apple Marks shall be in accordance with Apple's written policies in effect from time to time. Dealer will not remove any Apple Marks from any Authorized Products or Consumables nor shall Dealer add any marks to such products. (2) Apple retains all rights not expressly conveyed to Dealer by this Agreement. Dealer recognizes the great value of the publicity and goodwill associated with the Apple Marks and acknowledges that such goodwill exclusively accrues to the benefit of and belongs to Apple. Dealer has no rights of any kind 15 whatsoever with respect to the Apple Marks. Dealer shall not use or license others to use the Apple Marks on or in connection with any goods or services (including but not limited to promotional and merchandising items such as key chains, mugs, and T-shirts) other than the Apple Products, except in accordance with Apple's written merchandising programs and policies. B. Software Rights (1) Dealer acknowledges that Authorized Products often contain not only hardware but also software. Software may be provided on separate media, such as floppy diskettes or CD-ROM or may be included within the hardware. Such software is proprietary, is copyrighted, and may also contain valuable trade secrets and be protected by patents. Dealer shall not separate the software from the associated Authorized Product as shipped by Apple, nor may Dealer disassemble, decompile, reverse engineer, copy, modify, prepare derivative works thereof, or otherwise change any of the software or its form. (2) Dealer understands that Apple does not sell software. Rather, Dealer is licensed to distribute software that is incorporated in or packaged with Authorized Products only as part of its authorized distribution, sale, or resale of the associated Authorized Products. The end user of an Apple Product is licensed directly to use any software contained in such Product, subject to the terms of the license accompanying the Apple Product, if any, and the applicable patent, trademark, copyright, and other federal and state intellectual property laws. (3) Prior to selling an Apple Product, Dealer will make available to end user the applicable end user Software License Agreement. Apple will provide copies of the applicable Software License Agreements with the Product or upon request. 8. Insurance and Indemnities A. While this Agreement is in effect, Dealer shall keep in force and effect for each Authorized Location a sufficient general liability insurance policy, including premises liability, products, and completed operations with limits of coverage not less than $1,000,000 bodily or personal injury and $1,000,000 property damage, or $1,000,000 combined single limit. B. Apple agrees to defend any proceeding or action brought by a third party against Dealer to the extent based on a claim that: (1) the marketing or use of any product sold by Apple to Dealer infringes any U.S. patent, copyright, trademark, trade secret or other proprietary right of a third party; or (2) a defective Apple product directly caused death or personal injury (provided the product at issue has not been altered, modified or otherwise changed by Dealer). Apple agrees to indemnify Dealer for damages awarded to third parties solely as a result of such claims. Apple's obligation to so defend and indemnify Dealer is contingent on Dealer's compliance with Section D below. C. Dealer agrees to defend any proceeding or action brought by a third party against Apple to the extent based on a claim arising from the acts or omissions of Dealer, its employees or agents in conduct associated with the offering for sale or marketing of Apple products, except acts or omissions expressly required by Apple's written programs and policies. Dealer agrees to indemnify Apple for any losses, damages, liabilities, costs and reasonable expenses arising from such acts or omissions. Dealer's obligation to so defend and indemnify Apple is contingent on Apple's compliance with Section D below. D. Each party shall promptly notify the other party of any claim, demand, proceeding or suit of which the other party becomes aware which may give rise to a right of defense or indemnification pursuant to this section ("Claim"). Notice of any Claim which is a legal proceeding, by suit or otherwise, must be provided to the indemnifying party within THIRTY (30) days of first learning of such proceeding. Notice shall include an offer to tender the defense of the Claim to the indemnifying party. The indemnifying party, if it accepts such tender, shall be entitled to take over sole control of the defense of the Claim. That control shall include the right to take any and all actions necessary to completely and finally resolve the Claim by settlement compromise (in which case the indemnifying party shall be responsible for the cost of settlement/compromise related to the Claim). Upon acceptance of tender, the indemnified party shall cooperate with the indemnifying party with respect to such defense and settlement. In the event a Claim is settled, both parties agree not to publicize the settlement and will make every effort to ensure the settlement agreement contains a non-disclosure provision. 16 9. Confidentiality Any information disclosed to Dealer by Apple relating to Apple's present or future developments, including but not limited to future product information, business activities, terms and conditions of this Agreement (including any documents incorporated by reference), pricing, and all other amendments and addenda between Dealer and Apple (except such information as is previously known to Dealer without an obligation of confidentiality or is publicly disclosed by Apple either prior or subsequent to Dealer's receipt of such information from Apple), shall be characterized as confidential information. Dealer shall hold such confidential information in trust and confidence for Apple and shall not use it except in furtherance of the relationship set forth in this Agreement, nor publish, disclose, or disseminate it for a period of FIVE (5) YEARS after receipt thereof by Dealer, except as may be authorized by Apple in writing. Dealer shall have no right to prepare any derivative works of such confidential information. 10. Limitation of Liability IN NO EVENT SHALL APPLE BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES OF ANY NATURE, INCLUDING, WITHOUT LIMITATION, LOST BUSINESS PROFITS. DIRECT DAMAGES SHALL BE LIMITED TO AN AMOUNT NOT TO EXCEED $100,000 PER INCIDENT. 11. Limitation of Remedies THE REMEDIES SET FORTH IN THIS AGREEMENT SHALL BE DEALER'S SOLE AND EXCLUSIVE REMEDIES FOR ANY BREACH OF THIS AGREEMENT BY APPLE. 12. Term and Termination A. Term Unless terminated as provided herein: (1) the initial term of this Agreement shall be from its effective date until March 31 1997; and, (2) unless either party provides written notice thirty (30) days prior to the expiration date, the term of this Agreement shall be extended for one additional twelve (12) month period. Dealer and Apple agree that in no event shall either party be obligated to renew or extend this Agreement. B. Termination with Thirty (30) Days Notice Either party may terminate this Agreement at will, at any time, with or without cause, by written notice to the other party not less than THIRTY (30) DAYS before the effective date of such notice. C. Immediate Termination To the extent permitted by applicable law, Apple may terminate this Agreement effective immediately and without notice in the event that: (1) Dealer fails to perform any obligation, duty, or responsibility imposed under this Agreement and such failure or default remains unremedied FIFTEEN (15) DAYS after written notice thereof; (2) Dealer commits a felony, engages in an unlawful business practice, or conducts business in any manner prohibited by Sections 2 or 3; (3) there should be any material change or transfer in the management or control of Dealer, Dealer's business operations, or any new affiliation or transfer of any substantial part of its business; (4) any conduct or proposed conduct of Dealer exposes or threatens to expose Apple to any liability or obligation, including any federal, state, or local law; or (5) Dealer fails to maintain sufficient net worth and working capital to perform its obligations; has a receiver or similar party appointed for its property; becomes insolvent or makes an assignment for the benefit of creditors; closes its Authorized Location or ceases to do business in Apple Products. D. Effect of Notice of Termination In the event that notice of termination of this Agreement is given for any reason, the due date of all Apple invoices shall be accelerated so that they become due and payable as of the date of notice of termination, 17 even if longer terms had been provided previously. Apple shall be entitled, in its sole discretion, to reject all or part of any orders received from Dealer after the date of such notice or to cancel any orders previously accepted. Apple may restrict Dealer's use of any available promotional allowances. Dealer may continue to represent publicly that it is an authorized Apple Dealer but shall not enter into any commitments requiring Apple Authorized Products or Consumables after the termination date. E. Effect of Termination Upon expiration or termination of this Agreement: (1) Dealer shall submit to Apple within TEN (10) DAYS after such expiration or termination a list of all Authorized Products owned by Dealer as of such termination. Apple, at its option, may purchase from Dealer any or all Authorized Products that are still in their original, unopened containers, in good condition, at the respective prices paid by Dealer for such items. These prices shall be determined by assuming that the Products are from Dealer's most recent purchase of such items from Apple. Apple, at its option, may purchase any or all Authorized Products in opened containers at prices determined by Apple. If the prices offered by Apple are unacceptable to Dealer, Dealer may refuse Apple's offer and thereafter resell such Authorized Product to an authorized Apple Dealer. After receipt of any such Authorized Product from Dealer, Apple will issue an appropriate credit to Dealer's account, subject to offset for any amounts due Apple. (2) Dealer shall immediately cease use of the Apple Marks provided by Section 7 herein, and otherwise discontinue representing to the public and trade that it is an authorized Apple Dealer . (3) All unshipped Product orders shall be automatically canceled. (4) All promotional allowance or other fund accruals shall cease. Dealer may claim against any available balances for any activities approved by Apple and conducted prior to the date of termination. (5) Dealer shall promptly return to Apple all property of Apple in its possession, including but not limited to loaned equipment and any documents of any kind containing Apple confidential information. F. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND, INCLUDING INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, ON ACCOUNT OF EXPIRATION OR TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS. G. To the extent permitted by applicable law, and in consideration of its entering into this Agreement, Dealer hereby waives and relinquishes any rights or claims under franchise, dealership, or other statutes, or at common law, that would or might arise out of a termination of this Agreement by Apple or refusal by Apple to renew or extend the term of this Agreement. H. Dealer's obligations under Sections 5, 7, 8, 9, 10, 11, 12 and 13 and their subsections shall survive expiration or termination of this Agreement. 13. General Terms A. Governing Law This Agreement and the corresponding relationships of the parties shall be governed by and construed in accordance with the laws of the State of California without giving effect to its conflict of law provisions. B. Disputes (1) Any dispute, resolution, or proceeding with respect to this Agreement shall take place solely in the County of Santa Clara, State of California. Dealer expressly agrees that venue within this district is proper and voluntarily submits to the jurisdiction of the courts within same. (2) Any action arising from or related to this Agreement must be brought within ONE (1) YEAR from the date such action could have first been brought. The parties expressly agree to this provision notwithstanding any longer period which may be provided by statute and any such period is expressly waived. 18 C. Notice Notices and demands of any kind that Dealer may be required or desire to serve upon Apple pursuant to this Agreement shall be served by United States mail, postage prepaid, or overnight courier, to Apple, at Apple Computer, Inc. Contracts Management 900 E. Hamilton Avenue, M/S 72-CM Campbell, CA 95008 Notices and demands of any kind that Apple may be required or desire to serve upon Dealer pursuant this Agreement shall be served by personal service, United States mail, postage prepaid, or overnight courier to Dealer, at Dealer's address set forth in this Agreement . With written notice to the other, Apple and Dealer may designate in writing different addresses. All notices or demands by United States mail shall be deemed given and complete upon mailing. D. Severability (1) In the event that any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining portions of this Agreement shall remain in full force and effect and be construed so as to best effectuate the intention of the parties upon execution. (2) The paragraph headings contained herein are for reference only and shall not be considered as substantive parts of this Agreement. Use of the singular or plural form shall include the other. E. Waiver The waiver of any one default shall not waive subsequent defaults of the same or different kind. F. Successors in Interest The provisions of this Agreement shall be binding upon and inure to the benefit of the parties, their successors, and permitted assigns. 14. Entire Agreement This document and all documents referred to or incorporated herein by reference contain all the agreements, warranties, understandings, conditions, covenants, and representations made between Dealer and Apple. Neither Apple nor Dealer shall be liable for any agreements, warranties, understandings, conditions, covenants, or representations that are not expressly set forth in this Agreement. Any different or additional terms and conditions in any purchase order, invoice or other such document are hereby expressly rejected by Apple and shall have no force or effect. This Agreement may only be modified in writing by an instrument signed by an authorized representative of each party. Apple may unilaterally modify the Price List, the Policies and Practices Manual, the Apple Service Programs Manual and the AppleFund(TM) Guidelines effective on the date designated by Apple. Dealer shall have a reasonable period of time to implement changes requiring Dealer to materially alter its activities provided such period does not exceed THIRTY (30) DAYS from the stated effective date. The duly authorized representatives of the parties execute this Agreement as of the dates set forth below. Dealer SIGNATURE: /s/ PRINT NAME: Dan DeVries TITLE: Executive Vice President DATE: 7-1-96 19 Apple Computer, Inc. SIGNATURE: /s/ PRINT NAME: TITLE: Catherine P. Lyons TITLE: Sr. Contracts Specialist DEPT: Contracts Management EFFECTIVE DATE: 8-29-96 (C)1996 Apple Computer, Inc. All rights reserved. Apple and the Apple logo are registered trademarks of Apple Computer, Inc. AppleFund is a trademark of Apple Computer, Inc. AppleCare is a registered service mark of Apple Computer, Inc. 20 Apple Computer, Inc. Dealer Apple Authorized Service Provider Agreement This Dealer Apple Authorized Service Provider Agreement is made between Apple Computer, Inc., a California corporation with its principal place of business located at 1 Infinite Loop, Cupertino, California 95014, "Apple," and Creative Computers, Inc., a corporation organized under the laws of California with its principal place of business located at 2645 Maricopa Street, Torrance, CA 90503, "Service Provider." Definitions As used in this Agreement, the following terms and conditions have the meanings specified below: A. "AASP Agreements" - this Dealer Apple(R) Authorized Service Provider Agreement and any documents incorporated herein by reference. B. "Apple Service Programs Manual" - the then current so titled information, made available to Service Provider, which describes Apple's policies and procedures for providing customer service and support. C. "Authorized Location(s)" - the location(s) at which Dealer is authorized by Apple to resell Apple product to customers. D. "Authorized Service Location" - the location(s) at which Service Provider is authorized by Apple to service Apple product. E. "Dealer Agreement" - the Authorized Apple Dealer U.S. Sales Agreement F. "Inoperable Upon First Use," or "IUFU" - any Apple product that does not function upon first use and, as determined by Apple, requires replacement of existing parts in order to be repaired. G. "Service Price List" - the Apple price list for Service Stock and Service Tools made available via AppleLink(R), AppleOrder(TM), and the Service Price Pages. H. "Service Selection Plan" - the document which defines the three reseller service options and product repair requirements. 1. "Service Stock" - service inventory of new or refurbished modules and/or new piece parts that are sold by Apple to Service Provider for the sole purpose of repairing Apple products. J. "Service Training & Tools" - Apple product service documentation, tools, diagnostics and training materials. 1. Appointment A. Service Provider elects to perform service as required under its Dealer Agreement by becoming either an Apple Authorized Service Provider Plus ("AASP Plus") or Apple Authorized Service Provider ("AASP"). Such status as either an AASP Plus or AASP is designated by Service Provider and reported to Apple with this AASP Agreement. On the basis of Service Provider's representations that it has the capabilities to perform the applicable services required, Apple hereby appoints Service Provider as an AASP Plus or AASP. Such nonexclusive appointment authorizes Service Provider to perform service on certain Apple products in the manner set forth in the Apple Service Programs Manual. Service Provider accepts such appointment and, in consideration therefore, represents that it will meet the specific service requirements as set forth in the Apple Service Programs Manual and in this AASP Agreement as outlined below. B. Service Provider is an independent contractor, has no power or authority to bind Apple and is contracting for certain goods and services. Nothing in this AASP Agreement shall be construed as creating any relationship such as employer- employee, principal-agent or franchisor-franchisee. 21 C. The appointment is based upon the existing ownership of Service Provider and is, therefore, personal in nature. Consequently, Service Provider may not assign or transfer any or all of its rights or obligations under this AASP Agreement without express written approval from Apple. 2. Scope of Authorization A. After order of required Service Training & Tools is complete as designated in the Service Programs Manual, Service Provider is authorized to purchase Service Stock for the sole purpose of performing its obligations hereunder. B. Service Provider shall not resell or otherwise transfer such Service Stock to third parties, except in the course of its: a) actually rendering the repair services contemplated hereunder on Apple products; b) with the prior written permission of Apple; or c) pursuant to a pre-established Apple program and in compliance with the terms of that program. C. Except for repairs made under Apple's Limited Warranty or AppleCare(R) service contract, Service Provider shall unilaterally determine its own prices for the service and repair of Apple products. 3. Service Provider's Obligations A. Service Provider shall ensure its technicians have all required certification(s) prior to performing service on Apple products. Only certified technicians may perform repairs on Apple products. The service training options and certification requirements are specified in the Apple Service Programs Manual. B. Service Provider shall service and repair Apple products in accordance with all terms and conditions applicable to its status as an AASP Plus or AASP as set forth in the Apple Service Programs Manual. As required by the Apple Service Programs Manual, Service Provider shall at a minimum meet the requirements below. (1) Perform service and repair on certain products identified in the Apple Service Programs Manual, even if they were not purchased from Service Provider, were not purchased in the united States of America, or are not currently manufactured by Apple. Service Provider shall adhere to the service requirements for each product or product category as set forth in the Apple Service Programs Manual. (2) Sell and use Service Stock only for providing service on Apple products under this Agreement. (3) Maintain a sufficient number of technicians with required certification(s) to effectively perform timely maintenance and warranty service, including on- site warranty service where required. (4) Purchase and keep current all Apple Service Training & Tools designated as required by Apple in the Apple Service Programs Manual. Service Provider shall keep its service personnel apprised of all such revisions and updates to the Service Training & Tools. Such information and materials shall be deemed confidential and treated in accordance with the confidentiality provisions set forth in Section 9 of this AASP Agreement. (5) Purchase and keep current at all times an inventory of Service Stock for Apple products that is reasonably necessary to meet the Service Provider's obligations. (6) Comply with all required service administrative and reporting procedures. (7) Honor Apple's standard Limited Warranty, perform or provide for all work required thereunder on Apple's behalf, accept reimbursement from Apple for such work performed according to Apple's then-current rates, and make no other charge for such service. (8) Obtain all necessary certifications, registrations and licenses and comply with all existing and future federal, state and local laws and regulations in performing the services and repairs authorized under this AASP Agreement. (9) Provide service to certain Apple products within response times published by Apple in the Apple Service Programs Manual, but in no event longer than the maximum time provided by applicable federal, state, and local laws and regulations. C. Apple reserves the right, in its sole discretion and without liability to Service Provider, to modify the service requirements set forth in the Apple Service Programs Manual as required for all similar entities authorized by Apple to perform service. Apple shall communicate any such change in the service requirements prior to its effect. Service Provider shall have a reasonable period of time to implement changes requiring Service Provider to materially alter its activities provided such period does not exceed THIRTY (30) DAYS from the stated effective date. 4. Limited Warranty to Service Provider A. Apple warrants to Service Provider that any Service Stock and Service Tool shipped by Apple shall: (1) conform to the general description of that Service Stock or Service Tool on the Service Price List and (2) shall not be Inoperable Upon First Use. These 22 warranties are non-transferable and void if the product has been modified, abused or subjected to unusual physical or electrical stress. Service Providers sole and exclusive remedy for any breach by Apple of the foregoing warranties shall be replacement of the item upon return to Apple of the non-conforming unit. Service Provider shall have SIX (6) MONTHS from the original invoice date to Service Provider to notify Apple of a suspected warranty breach and receive a return authorization or the above warranties shall expire. B. APPLE MAKES NO OTHER WARRANTY TO SERVICE PROVIDER, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO ANY APPLE PRODUCTS OR SERVICE STOCK PURCHASED BY SERVICE PROVIDER HEREUNDER. APPLE SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5. Inspections, Records, and Reporting A. Service Provider shall report to Apple the service option selected for each Authorized Location. B. Apple shall have the right to inspect any Authorized Service Location(s) and its operation at any time during regular business hours to verify Service Provider's compliance with the terms and conditions of this AASP Agreement and Apple programs. Upon Apple's request. Service Provider shall promptly make and provide copies of any and all requested records and documents. C. Service Provider shall maintain at the Authorized Location for at least FIVE (5) YEARS its records, contracts, and accounts relating to the service of Apple products. D. Service Provider shall notify Apple immediately upon discovering that any Service Stock or Service Tool fails to comply with any applicable consumer product or electrical safety rule or contains a defect that could create a substantial product or electrical hazard, and supply Apple with information concerning the nature and extent of the detect involved and the nature and severity of injuries or potential injuries caused by the particular Service Stock or Service Tool. 6. Ordering; Shipping; Payment A. Service Provider may submit orders for Service Stock and Service Tools. Orders shall be subject to acceptance by Apple. The price shall be Apple's price on the then-current Service Price List on the date of Apple's acceptance. The prices set forth in Apple's then-current Service Price List include freight (using an Apple-selected carrier), insurance and routing to Service Provider. B. Apple shall use reasonable efforts to ship according to Service Provider's request, but shall not be liable for any failure to do so or for any failure to meet a proposed delivery date. Unless Service Provider clearly advises Apple to the contrary in writing, Apple may make partial shipments on account of Service Provider's orders, to be separately invoiced and paid for when due. Title to all shipped service product shall pass to Service Provider at Apple's shipping location. When shipping pursuant to Apple's standard practices, Apple will place tracers, file claims and replace product lost or damaged in transit. C. Should orders for service product exceed Apple's available inventory, Apple will allocate its available inventory and make deliveries (including partial shipments) on a basis Apple deems equitable, in its sole discretion and without liability to Service Provider. D. Service Provider shall be invoiced upon shipment of product and, provided Service Provider is eligible for credit from Apple, shall pay each invoice no later than THIRTY (30) DAYS from the date of invoice. Upon Apple's request, Service Provider shall provide financial statements to Apple. Apple reserves the right to change credit terms should Service Provider s financial status or payment record so warrant. 7. Apple Proprietary Rights A. Trademarks, Service Marks and Tradenames (1) During the term of this AASP Agreement, Service Provider is authorized and permitted by Apple to display the registered trademarks "Apple" and the Apple logo the service mark "AppleCare," the other trademarks, service marks and names belonging or licensed to Apple ("Apple Marks"), and the designation "Authorized Apple Service Provider" or if applicable "Authorized Apple Service Provider Plus" solely in connection with Service Provider's support and service activities for Apple products. Service Provider's display of such Apple Marks shall be in accordance with Apple's written policies in effect from time to time. Service 23 Provider will not remove any Apple Marks from any Apple products, Service Stock or Service Tools nor shall Service Provider add any marks to such products. (2) Apple retains all rights not expressly conveyed to Service Provider by this AASP Agreement. Service Provider recognizes the great value of the publicity and goodwill associated with the Apple Marks and acknowledges that such goodwill exclusively accrues to the benefit of and belongs to Apple. Service Provider has no rights of any kind whatsoever with respect to the Apple Marks. Service Provider shall not use or license others to use the Apple Marks on or in connection with any goods or services (including but not limited to promotional and merchandising items such as key chains. mugs, and T-shirts) other than the Apple products. B. Software Rights (1) Service Provider acknowledges that Service Stock or Service Tools may contain not only hardware but also software. Software may be provided on separate media, such as floppy diskettes or CD-ROM or may be included within the hardware. Such software is proprietary, is copy righted, and may also contain valuable trade secrets and be protected patents. Service Provider shall not separate the software from the associated service product as shipped by Apple, nor may Service Provider disassemble, decompile, reverse engineer, copy, modify, prepare derivative works thereof, or otherwise change any of the software or its form. (2) Service Provider understands that Apple does not sell software. Rather, Service Provider is licensed to distribute software that is incorporated in or packaged with Service Stock or Service Tool only as part of its authorized service and repair of the associated Apple products. The end user of an Apple product is licensed directly to use any software contained in such Service Stock or Service Tool subject to the terms of the license accompanying the Apple product, if any, and the applicable patent, trademark, copyright, and other federal and state intellectual property laws. 8. Insurance and Indemnities A. While this AASP Agreement is in effect, Service Provider shall keep in force and effect for each Authorized Service Location a sufficient general liability insurance policy, including premises liability, products, ant completed operations, with limits of coverage not less than $1,000,00 bodily or personal injury and $1,000,000 property damage, or $1,000,00 combined single limit. B. Apple agrees to defend any proceeding or action brought by a third party against Service Provider to the extent based on a claim that: (1) the marketing or use of any service product sold by Apple to Service Provider infringes any U.S. patent, copyright, trademark, trade secret or other proprietary right of a third party; or (2) a defective Apple service product directly caused death or personal injury (provided the product at issue has not been altered, modified or otherwise changed by Service Provider). Apple agrees to indemnify Service Provider for damages awarded to third parties solely as a result of such claims. Apple's obligation to so defend and indemnify Service Provider is contingent on Service Providers compliance with Section 8D below. C. Service Provider agrees to defend any proceeding or action brought by a third party against Apple to the extent based on a claim arising from the acts or omissions of Service Provider, its employees or agents in conduct associated with this AASP Agreement, except acts or omissions expressly required by Apple's written programs and policies. Service Provider agrees to indemnify Apple for any losses, damages, liabilities, costs and reasonable expenses arising from such acts or omissions. Service Provider's obligation to so defend and indemnify Apple is contingent on Apple's compliance with Section 8D below. D. Each party shall promptly notify the other party of any claim, demand, proceeding or suit of which the other party becomes aware which may give rise to a right of defense or indemnification pursuant to this section ("Claim"). Notice of any Claim which is a legal proceeding, by suit or otherwise, must be provided to the indemnifying party within THIRTY (30) days of first learning of such proceeding. Notice shall include an offer to tender the defense of the Claim to the indemnifying party. The indemnifying party, if it accepts such tender, shall be entitled to take over sole control of the defense of the Claim. That control shall include the right to take any and all actions necessary to completely and finally resolve the Claim by settlement or compromise (in which case the indemnifying party shall be responsible for the cost of settlement/compromise related to the Claim). Upon acceptance of tender, the indemnified party shall cooperate with the indemnifying party with respect to such defense and settlement. In the event a Claim is settled, both parties agree not to publicize the settlement and will make every effort to ensure the settlement agreement contains a non-disclosure provision. 9. Confidentially Any information disclosed to Service Provider by Apple relating to Apple's present or future developments, including but not limited to product design and repair, future product information, service activities, terms and conditions of this AASP Agreement (including any documents incorporated by reference), pricing, and all other amendments and addenda between Service Provider and Apple (except such information as is previously known to Service Provider without an obligation of confidentiality or is publicly disclosed by Apple either prior or subsequent to Service Provider's receipt of such information from Apple), shall be characterized as confidential information. Service Provider shall hold such confidential information in trust and confidence for Apple and shall not use it except in furtherance of the relationship set forth in this AASP Agreement, nor publish, disclose, or disseminate it for a period 24 of FIVE (5) YEARS after receipt thereof by Service Provider, except as may be authorized by Apple in writing. Service Provider shall have no right to prepare any derivative works of such confidential information. 10. Limitation of Liability IN NO EVENT SHALL APPLE BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES OF ANY NATURE, INCLUDING, WITHOUT LIMITATION, LOST BUSINESS PROFITS. DIRECT DAMAGES SHALL BE LIMITED TO AN AMOUNT NOT TO EXCEED $100,000 PER INCIDENT. 11. Limitation of Remedies THE REMEDIES SET FORTH IN THIS AASP AGREEMENT SHALL BE SERVICE PROVIDER'S SOLE AND EXCLUSIVE REMEDIES FOR ANY BREACH OF THIS AASP AGREEMENT BY APPLE. 12. Term and Termination A. Term Unless terminated as provided herein, this AASP Agreement shall be effective from its effective date and shall continue in full force and effect throughout the term of Service Provider's Dealer Agreement. Service Provider and Apple agree that in no event shall either party be obligated to renew or extend this AASP Agreement. B. Termination with Thirty (30) Days Notice Either party may terminate this AASP Agreement at will, at any time, with or without cause, by written notice to the other party not less than THIRTY (30) DAYS before the effective date of such notice. C. Immediate Termination To the extent permitted by applicable law, Apple may terminate this AASP Agreement effective immediately and without notice in the event that: (1) Service Provider fails to perform any obligation, duty, or responsibility imposed under this AASP Agreement and such failure or default remains unremedied THIRTY (30) DAYS after written notice thereof; (2) Service Provider commits a felony, engages in an unlawful business practice, or conducts business in any manner prohibited by Sections 2 or 3; (3) any conduct or proposed conduct of Service Provider exposes or threatens to expose Apple to any liability or obligation, including any federal, state, or local law; (4) Service Provider fails to maintain sufficient net worth and working capital to perform its obligations, has a receiver or similar party appointed for its property; becomes insolvent or makes an assignment for the benefit of creditors; closes its Authorized Service Location; or (5) Service Provider's Dealer Agreement expires or terminates for any cause, with or without notice. D. Effect of Notice of Termination In the event that notice of termination of this AASP Agreement is given for any reason, the due date of all Apple invoices shall be accelerated so that they become due and payable as of the date of notice of termination, even if longer terms had been provided previously. Apple shall be entitled, in its sole discretion, to reject all or part of any orders received from Service Provider after the date of such notice or to cancel any orders previously accepted. Service Provider may continue to represent publicly that it is an Authorized Apple Service Provider but shall not enter into any service commitments requiring Apple products after the termination date. E. Effect of Termination Upon expiration or termination of this AASP Agreement: (1) Service Provider shall report to Apple the service option selected for each Authorized Location, if applicable. Termination of this AASP Agreement shall not relieve Service Provider of its obligations to provide for service on all Apple products as required under the Dealer Agreement; and (2) Service Provider shall submit to Apple within TEN (10) DAYS after such expiration or termination a list of all Service Stock owned by Service Provider as of such termination. Service Provider shall also submit a list of all service repairs in progress on Apple products. Apple, at its option, may purchase from Service Provider any or all Service Stock or Service Tools that are still in original, unopened containers, in good condition, at the respective prices paid by Service Provider for such items. These prices shall be determined by 25 assuming that such service product is from Service Provider s most recent purchase of such items from Apple. Apple, at its option, may purchase any or all Service Stock or Service Tools in opened containers at prices determined by Apple. If the prices offered by Apple are unacceptable to Service Provider, Service Provider may refuse Apple's offer and thereafter resell such service product to an AASP or AASP Plus. After receipt of any such Service Stock from Service Provider, Apple will issue an appropriate credit to Service Provider s account, subject to offset for any amounts due Apple. (3) Except to the extent authorized otherwise by Apple, Service Provider shall immediately cease use of the Apple Marks provided by Section 7 herein, and otherwise discontinue representing to the public and trade that it is an authorized AASP or AASP Plus. (4) All unshipped Service Stock and Service Tools orders shall be automatically canceled. (5) Service Provider shall promptly complete all maintenance and service work in progress on Apple products, and shall make final claim upon Apple for all warranty and Apple service program (such as AppleCare) reimbursement that may be due Service Provider within THIRTY (30) DAYS of the date of such expiration or termination. (6) Service Provider shall promptly return to Apple all property of Apple in its possession, including but not limited to loaned equipment and any documents of any kind containing Apple confidential information. F. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND, INCLUDING INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, ON ACCOUNT OF EXPIRATION OR TERMINATION OF THIS AASP AGREEMENT IN ACCORDANCE WITH ITS TERMS. G. To the extent permitted by applicable law, and in consideration of its entering into this AASP Agreement, Service Provider hereby waives and relinquishes any rights or claims under franchise, or other statutes, or at common law, that would or might arise out of a termination of this AASP Agreement by Apple or refusal by Apple to renew or extend the term of this AASP Agreement. H. Service Provider's obligations under Sections 5, 7, 8, 9, 10, 11, 12 and 13 and their subsections shall survive expiration or termination of this AASP Agreement. 13. General Terms A. Governing Law This AASP Agreement and the corresponding relationships of the parties shall be governed by and construed in accordance with the laws of the State of California without giving effect to its conflict of law provisions. B. Disputes (1) Any dispute, resolution. or proceeding with respect to this AASP Agreement shall take place solely in the County of Santa Clara, State of California. Service Provider expressly agrees that venue within this district is proper and voluntarily submits to the jurisdiction of the courts within same. (2) Any action arising from or related to this AASP Agreement must be brought within ONE (1) YEAR from the date such action could have first been brought. The parties expressly agree to this provision notwithstanding any longer period which may be provided by statute and any such period is expressly waived. C. Notice Notices and demands of any kind that Service Provider may be required or desire to serve upon Apple pursuant to this AASP Agreement shall be served by United States mail, postage prepaid, or overnight courier, to Apple, at Apple Computer, Inc. Contracts Management 900 E. Hamilton Avenue, M S 72CM Campbell, CA 95008 Notices and demands of any kind that Apple may be required or desire to serve upon Service Provider pursuant this AASP Agreement shall be served by personal service, United States mail, postage prepaid, or overnight courier to Service Provider, at Service Provider's address set forth in this AASP Agreement. With written notice to the other, Apple and Service Provider may designate in writing different addresses. All notices or demands by United States mail shall be deemed given and complete upon mailing. D. Severability 26 (1) In the event that any provision of this AASP Agreement shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining portions of this AASP Agreement shall remain in full force and effect and be construed so as to best effectuate the intention of the parties upon execution. (2) The paragraph headings contained herein are for reference only and shall not be considered as substantive parts of this AASP Agreement. Use of the singular or plural form shall include the other. E. Waiver The waiver of any one default shall not waive subsequent defaults of the same or different kind. F. Successors in Interest The provisions of this AASP Agreement shall be binding upon and inure to the benefit of the parties, their successors, and permitted assigns. 14. Entire Agreement This document and all documents referred to or incorporated herein by reference contain all the agreements, warranties, understandings, conditions, covenants, and representations made between Service Provider and Apple regarding the provision of service for Apple products. Neither Apple nor Service Provider shall be liable for any agreements, warranties, understandings, conditions, covenants, or representations that are not expressly set forth in this AASP Agreement. Any different or additional terms and conditions in any purchase order, invoice or other such document are hereby expressly rejected by Apple and shall have no force or effect. In the event of a conflict between the terms or conditions of this AASP Agreement, the Service Selection Plan or the Apple Service Programs Manual, the terms and conditions of this AASP Agreement shall prevail. This AASP Agreement may only be modified in writing by an instrument signed by an authorized representative of each party. Apple may unilaterally modify the Service Price List and the Apple Service Programs Manual effective on the date designated by Apple. Service Provider shall have a reasonable period of time to implement changes requiring Service Provider to materially alter its activities provided such period does not exceed THIRTY (30) DAYS from the stated effective date. The duly authorized representatives of the parties execute this AASP Agreement as of the dates set forth below. Service Provider SIGNATURE: /s/ PRINT NAME: Dan DeVries TITLE: Executive Vice President DATE: 7-1-96 Apple Computer, Inc. SIGNATURE: /s/ PRINT NAME: Catherine P. Lyons TITLE: Sr. Contracts Specialist DEPT: Contracts Management EFFECTIVE DATE: 8-29-96 (C) 1996 Apple Computer. Inc. All rights reserved. Apple, the Apple logo, and AppleLink are registered trademarks of Apple Computer. Inc. AppleOrder is a trademark of Apple Computer, Inc. AppleCare is a registered service mark of Apple Computer, Inc. 27 EX-10.29 3 AMEND. TO AGREE. FOR WHOLESALE FINANCING EXHIBIT 10.29 PAYDOWN AMENDMENT TO AGREEMENT FOR WHOLESALE FINANCING This Amendment is made to that certain Agreement for Wholesale Financing entered into by and between CREATIVE COMPUTERS, INC. ("Dealer") and Deutsche Financial ------------------------- Services Corporation ("DFS") on April 4th 1991, as amended ("Agreement"). FOR VALUE RECEIVED, Dealer and DFS agree to amend the Agreement to provide as follows (capitalized terms shall have the same meaning as defined in the Agreement unless otherwise indicated): Dealer will forward to DFS by the FIRST AND THIRD TUESDAY OF EACH ------------------------------- CALENDAR MONTH A Collateral Report (as defined below) dated as of the ---------------- Monday immediately preceding each such Tuesday. Regardless of the SPP terms pertaining to any Collateral financed by DFS, and notwithstanding any scheduled payments made by Dealer after the Determination Date (as defined below) or anything contained in the Agreement to the contrary, if DFS determines, after reviewing the Collateral Report, after conducting an inspection of the Collateral or otherwise, that (i) the total current outstanding indebtedness owed by Dealer to DFS as of the date of the Collateral Report, inspection or any other data on which a paydown is otherwise required hereunder, as applicable (the "Determination Date"), exceeds (ii) the Collateral Liquidation Value (as defined below) as of the Determination Date, Dealer will immediately upon demand pay DFS the difference between (i) Dealer's total current outstanding indebtedness owed to DFS as of the Determination Date, and (ii) the Collateral Liquidation Value as of the Determination Date. The term "Collateral Report" is defined herein to mean a report complied by Dealer specifying the following information: (a) the total aggregate wholesale invoice price of all of Dealer's inventory financed by DFS that is unsold and in Dealer's inventory financed by DFS that is unsold and in Dealer's possession and control as of the date of such Report; and (b) the total outstanding balance owed to Dealer on Dealer's Eligible Accounts (as defined below) as of the date of such Report; in each case to the extent DFS has a first priority, fully perfected security interest therein. The term "Eligible Accounts" is defined herein to include all of Dealer's accounts receivable except for: (a) accounts credited from the sale of goods and services on non-standard terms and/or that allow for payment to be made more than thirty (30) days from the date of sale; (b) accounts unpaid more than ninety (90) days from the date of invoice; (c) all accounts of any obligor with fifty percent (50%) or more of the outstanding balance unpaid for more than ninety (90) days from the date of invoice; (d) accounts which the obligor is an officer, director, shareholder, partner, member, owner, employee, agent, parent, subsidiary, affiliate of, or is related or has common shareholders, officers, directors, owners, partners or members; (e) consignment sales; (f) accounts for which the payment is or may be conditional; (g) accounts for which the obligor is not a commercial or institutional entity or is not a resident of the United States or Canada; (h) accounts with respect to which any warranty or representation provided herein is not true and correct; (i) accounts which represent goods or services purchased for a personal, family or household purpose; (j) accounts which represent goods used for demonstration purposes or loaned by Dealer to another party; (k) accounts which are progress payment, barter or contra accounts; (l) accounts which are discounts, rebates, bonuses or credits for returned goods owed to Dealer by any third party; (m) accounts which are being financed by DFS pursuant to a Business Financing Agreement or other comparable document between Dealer and DFS; and (n) any and all other accounts which DFS deems to be ineligible. The term "Collateral Liquidation Value" is defined herein to mean: (i) ONE HUNDRED percent (100%) of the total aggregate wholesale invoice ----------- price of all of Dealer's inventory financed by DFS that is unsold and in Dealer's possession and control; and (ii) FIFTY percent (50%) of ----- the total outstanding balance of Dealer's Eligible Accounts: in each case as of the date of the Collateral Report and to the extent DFS has a first priority, fully perfected security interest therein. If Dealer from time to time is required to make immediate payment to DFS of any past due obligation discovered during any Collateral review, upon review of a Collateral Report or at any other time, Dealer agrees that acceptance of such payment by DFS shall not be construed to have waived or amended the terms of its financing program. All other terms as they appear in the Agreement, to the extent consistent with the foregoing, are ratified and remain unchanged and in full force and effect. IN WITNESS WHEREOF, Dealer and DFS have executed this Paydown Amendment to Agreement for Wholesale Financing the 25 day of February , 1997. ------- ------------ Creative Computers, Inc. ------------------------- (Dealer) ATTEST By: Rick Finkbeiner ----------------- Title: Chief Financial Officer ------------------------------- Linda Louie - ----------- General Counsel DEUTSCHE FINANCIAL SERVICES CORPORATION By: /s/ Title: Credit Manager -------------- EX-13.1 4 CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 13 CREATIVE COMPUTERS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2 Consolidated Balance Sheet at December 31, 1996 and 1995 F-3 Consolidated Statement of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of Creative Computers, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a) (1) and (2) present fairly, in all material respects, the financial position of Creative Computers, Inc. and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Costa Mesa, California January 21, 1997 F-2 CREATIVE COMPUTERS, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data)
December 31, --------------------- 1996 1995 --------- -------- ASSETS Current assets: Cash and cash equivalents $ 17,329 $ 13,082 Securities available for sale (Note 1) 521 12,575 Accounts receivable, net of allowance for doubtful accounts of $2,134 and $1,365, respectively 19,948 18,305 Inventories (Note 1) 55,092 52,026 Prepaid expenses and other current assets 3,410 3,437 Income tax refund receivable (Notes 1 and 5) 1,753 794 Deferred income taxes (Notes 1 and 5) 4,284 1,109 --------- -------- Total current assets 102,337 101,328 Property, plant and equipment, net (Notes 1 and 2) 10,909 10,814 Other assets 185 427 --------- -------- $ 113,431 $112,569 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable (Note 3) $ 50,770 $ 46,606 Accrued expenses and other current liabilities 8,684 8,134 Capital leases--current portion (Note 2) 243 250 Notes payable--current portion (Note 4) 40 31 --------- -------- Total current liabilities 59,737 55,021 Capital leases (Note 2) 293 535 Notes payable (Note 4) 32 54 Deferred income taxes (Notes 1 and 5) 564 399 --------- -------- Total liabilities 60,626 56,009 Stockholders' equity: Common stock, $.001 par value; authorized 15,000,000 shares; 9,791,825 and 9,750,000 shares issued 10 10 Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued and outstanding Additional paid in capital 53,932 51,547 Treasury stock, at cost: 15,000 shares (91) -- Retained earnings (accumulated deficit) (1,046) 5,003 --------- -------- Total stockholders' equity 52,805 56,560 --------- -------- $ 113,431 $112,569 ========= ========
See notes to the consolidated financial statements F-3 CREATIVE COMPUTERS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data)
Year ended December 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- Net sales $444,971 $420,877 $163,706 Cost of goods sold 395,000 361,803 140,229 -------- -------- -------- Gross profit 49,971 59,074 23,477 Selling, general and administrative expenses 60,585 48,455 19,384 Expenses associated with the relocation of the Company's distribution center -- 1,389 -- -------- -------- -------- Income (loss) from operations (10,614) 9,230 4,093 Interest income (expense), net 593 371 (759) -------- -------- -------- Income (loss) before income taxes (10,021) 9,601 3,334 Income tax provision (benefit) (Notes 1 and 5) (3,972) 3,754 1,328 -------- -------- -------- Net income (loss) $ (6,049) $ 5,847 $ 2,006 ======== ======== ======== Earnings (loss) per share $ (0.62) $ 0.65 $ 0.29 ======== ======== ======== Weighted average number of shares outstanding 9,767 9,021 6,983 ======== ======== ========
See notes to the consolidated financial statements F-4 CREATIVE COMPUTERS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
COMMON STOCK ADDITIONAL RETAINED -------------- PAID IN EARNINGS TREASURY SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL ------ ------ ---------- --------- -------- ------- Balance at December 31, 1993 4,900 $5 $ 2 $(1,173) $ $(1,166) Sale of warrant 50 50 Net income 2,006 2,006 ------ --- ------- ------- ------ ------- Balance at December 31, 1994 4,900 5 52 833 890 Initial public offering, net 2,250 2 34,399 34,401 Exercise of warrant 2,100 2 4,948 4,950 Purchase of building from related parties (1,677) (1,677) Follow-on offering, net 500 1 12,148 12,149 Net income 5,847 5,847 ------ --- ------- ------- ------ ------- Balance at December 31, 1995 9,750 10 51,547 5,003 56,560 Purchase of treasury stock (91) (91) Stock option exercises 42 239 239 Proceeds from director, net (Note 7) 2,146 2,146 Net loss (6,049) (6,049) ------ --- ------- ------- ------ ------- Balance at December 31, 1996 9,792 $10 $53,932 $(1,046) $ (91) $52,805 ====== === ======= ======= ====== =======
See notes to the consolidated financial statements F-5 CREATIVE COMPUTERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year ended December 31, -------------------------------- 1996 1995 1994 -------- --------- -------- Cash flows from operating activities: Net income (loss) $ (6,049) $ 5,847 $ 2,006 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation 1,955 1,254 543 Loss on disposal of asset -- 19 -- Increase in allowance for doubtful accounts 769 842 329 Increase in inventory reserves 4,885 650 234 Deferred income taxes (3,010) 651 (73) Changes in operating assets and liabilities: Accounts receivable (2,412) (13,420) (3,158) Inventories (7,951) (27,037) (15,043) Prepaid expenses and other current assets 27 (2,201) (1,225) Income tax refund receivable (959) (794) -- Other assets 242 (344) 2 Accounts payable 4,164 17,160 13,648 Accrued expenses and other current liabilities 550 5,677 1,057 Income taxes payable -- (1,094) 913 -------- --------- -------- Total adjustments (1,740) (18,637) (2,773) -------- --------- -------- Net cash used by operating activities (7,789) (12,790) (767) Cash flows from investing activities: Purchase of securities available for sale (19,751) (148,172) -- Redemptions of securities available for sale 31,805 135,597 -- Acquisition of property, plant and equipment (2,050) (7,900) (355) Increase in related party notes receivable -- (125) (687) -------- --------- -------- Net cash provided by (used in) investing activities 10,004 (20,600) (1,042) Cash flows from financing activities: Net line of credit (payments) borrowings -- (3,279) 985 (Payments) borrowings under notes payable, net (13) (1,044) 328 Payments on notes payable--related parties -- (164) (362) Subordinated debt borrowings -- 2,000 2,950 Sale of warrant -- -- 50 Principal payments of obligations under capital leases (249) (939) (242) Purchase of treasury stock (91) -- -- Proceeds from stock issued under stock option plans 239 -- -- Proceeds from profits realized by Director in sale of stock 2,146 -- -- Net proceeds from initial and follow-on public offerings -- 46,550 -- -------- --------- -------- Net cash provided by financing activities 2,032 43,124 3,709 -------- --------- -------- Net increase in cash and cash equivalents 4,247 9,734 1,900 Cash and cash equivalents: Beginning of period 13,082 3,348 1,448 -------- --------- -------- End of period $ 17,329 $ 13,082 $ 3,348 ======== ========= ========
See notes to consolidated financial statements F-6 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES Description of Company Creative Computers, Inc. (the "Company"), a California corporation which began operations in 1987, is a direct marketer of personal computer hardware, software and peripheral products. The Company offers a broad selection of products through its full-color catalogs, MacMall, PC Mall, and DataCom Mall, a World-Wide Website on the Internet and other promotional materials. The Company also operates four retail computer showrooms under the name Creative Computers which are located in Southern California. Holding Company Transaction On February 22, 1995, the Company (a California corporation) became a wholly-owned subsidiary of Creative Computers, Inc., a newly formed Delaware corporation, by merger of a wholly-owned subsidiary of the newly formed Delaware corporation into the Company. In the merger, the 10,000 shares of Common Stock of the Company outstanding prior to the merger were converted into 4,900,000 shares of Common Stock in the newly formed Delaware corporation. The accompanying financial statements have been retroactively adjusted to give effect to this transaction. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. Cash Equivalents All highly liquid investments with initial maturities of three months or less are considered cash equivalents. Securities Available for Sale The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1995. In accordance with the principles thereunder, the Company has classified its investments as securities available for sale and has reported them at fair value, with unrealized gains and losses included in equity. Unrealized gains or losses were not material at December 31, 1996 or 1995. Realized gains or losses are determined on the specific identification method and are reported in income. At December 31, 1996, the Company's investment portfolio consisted primarily of U.S. government obligations of less than one year. At December 31, 1996 and 1995, the fair market value approximates the amortized cost of these securities. Inventories Inventories consist of computer hardware, software and peripheral products, and are stated at cost (determined under the first-in, first-out cost method) or market, whichever is lower. The Company had reserves of approximately $6,304 and $1,419 for demonstration inventory, lower of cost or market pricing and potential excess and obsolete inventory at December 31, 1996 and 1995, respectively. F-7 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Deferred Advertising Costs and Revenue The Company produces and circulates catalogs at various dates throughout the year. The Company receives market development funds and cooperative (co-op) advertising funds from vendors included in each catalog. These funds are recognized based on sales taken over the life of the catalog, which approximates eight weeks. The costs of developing and circulating each catalog are deferred and charged to advertising expense in the same time period as the co-op funds based on sales over the life of the catalog. Advertising expense, net of advertising revenue earned, included in selling, general and administrative expenses, was approximately $8,155, $11,500 and $1,900 for the years ended December 31, 1996, 1995, and 1994, respectively. Deferred advertising costs were approximately $2,800 and $3,000 at December 31, 1996 and 1995, respectively. The Company adopted Statement of Position 93-7, "Reporting on Advertising Costs" (SOP 93-7) effective January 1, 1995. This adoption did not have a material impact on the Company's financial condition and results of operations. Management believes that if SOP 93-7 had been adopted in prior years, it would not have had a material impact on the Company's financial position and results of operations. Revenue Recognition Revenue on product sales is recognized at the time of shipment. The Company's return policy provides for a 30-day money back guarantee on certain items. An allowance for product returns is established based upon historical trends. Property, Plant and Equipment Property, plant and equipment (including equipment acquired under capital leases) are stated at cost and are depreciated using straight-line methods over the estimated useful lives of the assets, as follows:
Furniture and fixtures 5 - 7 years Leasehold improvements Life of lease--not to exceed 15 years Computer, machinery and equipment 5 - 7 years Building 31.5 years
Disclosures About Fair Value of Financial Instruments The carrying amount of cash, cash equivalents and accounts receivable approximate fair value because of the short maturity of these instruments. The carrying amount of the Company's long-term obligations approximate fair value based upon the current rates offered to the Company for obligations of the same remaining maturities. Income Taxes (Benefit) The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision (benefit) for income taxes represents the income tax payable for the period and the change during the period in deferred income tax assets and liabilities. F-8 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Income (Loss) per Share Income (loss) per share is based on the weighted average number of common shares and common stock equivalents outstanding during each period, after retroactive adjustment for the Holding Company Transaction (see Note 1). Common stock equivalents include dilutive stock options and warrants, if any, using the treasury stock method. Accounting for Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. The disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), have been included in Note 8. Long-Lived Assets In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996, the Company adopted this statement and the effect of adoption in 1996 was not material. Reclassifications Certain reclassifications have been made to the 1994 and 1995 financial statement balances to conform with the 1996 presentation. 2. Property, Plant and Equipment Property, plant and equipment consist of the following as of December 31:
1996 1995 ------- ------- Furniture and fixtures $ 1,943 $ 1,809 Leasehold improvements 2,739 2,334 Computer, machinery and equipment 8,685 7,174 Building 912 912 Land 911 911 ------- ------- 15,190 13,140 Less accumulated depreciation (4,281) (2,326) ------- ------- $10,909 $10,814 ======= =======
The Company leases certain equipment under capital leases. The following is a summary of this equipment as of December 31:
1996 1995 ------- ------- Computer, machinery and equipment $ 1,724 $ 1,732 Furniture and fixtures 372 372 ------- ------- 2,096 2,104 Less accumulated depreciation (1,327) (891) ------- ------- $ 769 $ 1,213 ======= =======
F-9 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) The following is a schedule of future minimum payments required under capital leases, together with their estimated present value as of December 31, 1996:
1997 $ 281 1998 216 1999 91 2000 6 2001 and thereafter -- ----- Total minimum lease payments 594 Less amount representing interest (58) ----- Present value of minimum lease payments 536 Current portion (243) ----- $293 =====
3. LINE OF CREDIT At December 31, 1996, the Company had advances of approximately $23,005 pursuant to a $50,000 line of credit with a finance company. The line of credit provides for borrowings secured by substantially all of the Company's assets and is cancelable upon 30 days or less advance notice. Amounts owed under this line are included in accounts payable and do not bear interest if paid within 60 days of the inventory purchase date. Interest on the advances not paid within 60 days is charged at the finance company's prime rate plus 2% (10.25% at December 31, 1996 and 10.5% at December 31, 1995). The line of credit contains certain covenants which require the Company to maintain a minimum level of tangible worth (as defined). At December 31, 1996, the Company was in compliance with these covenants. 4. NOTES PAYABLE The Company is obligated under the following notes at December 31:
1996 1995 ----- ------ Various notes dated November 1992 to March 1996. Interest payable at 9% to 15% per annum. Certain notes require monthly payments of $2; others are payable within two weeks of demand. Certain notes are guaranteed by the Company's founding stockholders. $ 72 $ 85 Less current portion (40) (31) ----- ----- $ 32 $ 54 ===== =====
Maturites of notes payable, subsequent to December 31, 1996 are as follows: $40 in 1997, $26 in 1998, $6 in 1999, and $0 thereafter. Subordinated Note Payable On September 29, 1994, the Company borrowed $2,950 from Creative Partners, L.P., an unrelated entity. The loan was subordinate to the Company's line of credit and secured by all the assets of the Company. This subordinated note payable bore interest at a rate of 10% per annum. In connection with obtaining the loan, Creative Partners, L.P. purchased a warrant for $50 entitling it to purchase up to 30% of the equity of the Company for $5,000. On February 17,1995 and March 2, 1995, Creative Partners, L.P. loaned additional amounts of $1,250 and $750, respectively, to the Company under the same terms and conditions. On April 1, 1995, Creative Partners, L.P. exercised the warrant by canceling the $4,950 in F-10 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) subordinated debt and reducing by $50 the amount of cash the Company was required to pay for interest accrued through the date of conversion. 5. INCOME TAXES The provision (benefit) for income taxes consists of the following for the years ended December 31:
1996 1995 1994 ------- ------ ------ Current Federal $(1,011) $2,459 $1,088 State 49 644 313 ------- ------ ------ (962) 3,103 1,401 Deferred Federal (2,514) 598 (64) State (496) 53 (9) ------- ------ ------ (3,010) 651 (73) ------- ------ ------ $(3,972) $3,754 $1,328 ======= ====== ======
The provision (benefit) for income taxes differed from the amount computed by applying the U.S. federal statutory rate to income (loss) before income taxes due to the effects of the following:
1996 1995 1994 ---- ---- ---- Expected taxes at federal statutory tax rate (34.0)% 34.0% 34.0% State income taxes, net of federal income tax benefit (4.6) 5.0 6.1 Other (1.0) 0.1 (0.3) ----- ---- ---- (39.6)% 39.1% 39.8% ===== ==== ====
The significant components of deferred tax assets (liabilities) are as follows at December 31:
1996 1995 ------ ------ Accounts receivable $ 776 $ 514 Inventory 2,347 619 Prepaid expenses (10) (504) Accrued expenses and reserves 830 338 Allowance for sales returns 166 123 Section 481 adjustments (43) (42) Tax credits and operating loss carryforwards 226 -- Property, plant and equipment (798) (377) Other 226 39 ------ ------ Net deferred tax asset $3,720 $ 710 ====== ======
F-11 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) At December 31, 1996, the Company had federal net operating losses of $3,084. The entire amount of the loss for the year ended December 31, 1996 will be carried back to previous tax years to obtain a refund of taxes paid. At December 31, 1996, the Company had state net operating loss carryforwards of $300. These losses begin to expire in 2002. At December 31, 1996, the Company had state tax credit carryforwards of $199, which begin to expire in 2011. 6. COMMITMENTS AND CONTINGENCIES Leases The Company occupies office and warehouse space under various operating leases with independent parties which provide for minimum annual rentals and escalations based on increases in real estate taxes and other operating expenses. Minimum annual rentals at December 31, 1996 were as follows:
1997 $1,564 1998 1,457 1999 1,160 2000 951 2001 827 Thereafter 276 ------ Total $6,235 ======
In 1996, 1995 and 1994, rent expense was $1,408, $863 and $748, respectively, including $0, $101 and $189, respectively, paid to related parties (Note 7). Some of the leases contain renewal options, escalation clauses and require the Company to pay taxes, insurance and maintenance costs. Legal Proceedings Various claims and actions, considered normal to the Company's business, have been asserted and are pending against the Company. The Company believes that such claims and actions will not have any material adverse effect upon the Company's financial position or results of operations. 7. STOCKHOLDERS' EQUITY Initial Public Offering On April 4, 1995, the Company completed an initial public offering (the Offering) of 2,250,000 shares of Common Stock at an offering price of $17.00 per share. Net proceeds to the Company were $34,401, after deducting the underwriting discount and other costs associated with the Offering. In connection with the Offering, the Company purchased a retail showroom location previously owned by the Company's majority stockholders by repaying the indebtedness on the property of approximately $1,297, canceling related party notes receivable in the principal amounts of $1,646 and $125 (additional borrowings in April 1995) making a payment of approximately $181 to the stockholders, and recording a payable to a related company for $251 (which was paid in May 1995). The aggregate purchase price for the property was $3,500, an amount determined by the Board of Directors to be the current fair value of the property based on an appraisal. However, the property has been recorded in the Company's financial statements at the majority stockholders' historical cost of $1,823 which resulted in a reduction in the Company's retained earnings of $1,677. F-12 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Follow-on Offering On August 23, 1995, the Company completed a follow-on offering for 2,300,000 shares of common stock, of which 500,000 shares were sold by the Company, at an offering price of $26.25 per share. Net proceeds to the Company were $12,149 after deducting the underwriting discount and other costs associated with this offering. Proceeds from Profits Realized by Director in the Sale of Stock In June 1996, the Company recorded additional paid in capital in the amount of $2,146 net of expenses, which represents cash contributed to the Company associated with profits realized in the sale of stock by a Director pursuant to Section 16(b) of the Securities Exchange Act of 1934. 8. EMPLOYEE BENEFITS 401(K) Savings Plan Effective January 1, 1994, the Company adopted a 401(k) Savings Plan which covers substantially all full-time employees who meet the plan's eligibility requirements. Participants may take tax-deferred contributions of up to 15% of annual compensation (subject to other limitations specified by the Internal Revenue Code). In December 1995, the Company amended the 401(k) Savings Plan to make a 25% matching contribution for amounts which do not exceed 4% of the participants annual compensation. During 1996, the Company incurred approximately $66 of expense related to the 401(k) matching component of this plan. 1994 Employee Stock Option Plan In November 1994, the Board of Directors and stockholders of the Company approved the 1994 Stock Option Plan (the 1994 Plan), which provides for the grant of stock options to employees and consultants of the Company. Under the 1994 Plan, the Company may grant options ("Incentive Stock Options") within the meaning of Section 422A of the Internal Revenue Code of 1986, or options not intended to qualify as Incentive Stock Options ("Nonstatutory Stock Options"). A total of 1,950,000 shares of common stock have been reserved for issuance upon the exercise of options granted under the 1994 Plan. As of December 31, 1996, 1,187,461 shares of authorized but unissued common stock are available for future grants under the 1994 Plan. All options granted through December 31, 1996 have been Nonstatutory Stock Options. The 1994 Plan is administered by the Compensation and Stock Option Committee of the Board of Directors. Subject to the provisions of the 1994 Plan, the Committee has the authority to select the employees and consultants to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock covered by the option, (ii) when the option becomes exercisable, (iii) the option exercise price, which must be at least 100%, with respect to Incentive Stock Options, and at least 85%, with respect to Nonstatutory Stock Options, of the fair market value of the common stock as of the date of grant, and (iv) the duration of the option (which may not exceed ten years). All options are nontransferable other than by will or by the laws of descent and distribution. F-13 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 1995 Director Stock Option Plan The Company adopted the Directors' Non-Qualified Stock Option Plan (the "Director Plan") in 1995. A total of 50,000 shares of Common Stock are reserved for issuance under the Director Plan of which options to purchase 8,000 shares have been granted as of December 31, 1996. Under the Director Plan each non-employee director of the Company ("Non-Employee Director") receives a non-qualified option to purchase 2,000 shares of Common Stock (an "Initial Grant") upon his or her first election or appointment to the Board of Directors. In addition, the Director Plan provides that each Non- Employee Director who is a director immediately prior to an annual meeting of the Company's stockholders and who continues to be a director after such meeting will be granted an option to purchase 1,000 shares of Common Stock (a "Subsequent Grant"); provided that no Subsequent Grant will be made to any Non- Employee Director who has not served as a director of the Company, as of the time of such annual meeting, for at least one year. The exercise price per share of each option granted under the Director Plan will be the fair market value of the Company's Common Stock on the date the option is granted. Options granted under the Director Plan vest on the first anniversary of the date of grant, subject to earlier vesting upon a change of control or corporate transaction. The following table summarizes stock option activity:
WEIGHTED AVERAGE NUMBER EXERCISE PRICE ----------- --------------- Outstanding at December 31, 1993 - - Granted 178,360 $5.50 Canceled - - Exercised - - ---------- ------------- Outstanding at December 31, 1994 178,360 5.50 Granted 347,400 24.59 Canceled (45,200) 23.64 Exercised - - ---------- -------------- Outstanding at December 31, 1995 480,560 17.60 Granted 576,200 8.51 Canceled (294,221) 9.00 Exercised (41,825) 5.66 ---------- ------------- Outstanding at December 31, 1996 720,714 $6.36 ========== =============
On February 12, 1996, the Compensation Committee of the Board of Directors repriced all stock options granted from April 15, 1995 through February 12, 1996 to the closing price for the day of $9.50. On Saturday July 27, 1996, the Compensation Committee of the Board of Directors repriced all stock options (with exercise prices in excess of $6.00 per share) to $6.00 per share. The closing price per share on July 26, 1996 was $5.25. Of the options outstanding at December 31, 1996 under the Plans, options to purchase 144,531 shares were exercisable at weighted average prices of $5.85 per share. There were no exercisable options at December 31, 1995 or 1994. The following table summarizes information concerning currently outstanding and exercisable stock options: F-14 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data)
OPTIONS EXERCISABLE AT OPTIONS OUTSTANDING AT DECEMBER 31, 1996 DECEMBER 31, 1996 ------------------------------------------ --------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - ------------------ ---------------------------------------------- --------------------------- $4.62 to $6.75 636,214 8.9 $5.83 144,531 $5.85 $9.06 to $11.50 84,500 9.8 10.31 - - ------------- ------------- 720,714 144,531 ============= =============
The Company accounts for these Plans under APB Opinion No. 25. Had compensation expense for these Plans been determined consistent with SFAS 123, the Company's net income (loss) per share would have been reduced (increased) to the pro forma amounts in the following table. The SFAS 123 method of accounting has not been applied to options prior to December 31, 1994.
Years ended December 31, 1996 1995 ---- ---- Net income (loss) As Reported $(6,049) $5,847 Pro Forma $(7,478) $5,491 Net income (loss) per share As Reported $(0.62) $0.65 Pro Forma $(0.77) $0.61
The fair value of each stock option grant has been estimated pursuant to SFAS 123 on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1996 1995 ------ ------ Risk free interest rates 6.23% 6.47% Expected dividend yield none none Expected lives 5 yrs. 5 yrs. Expected volatility 60.0% 60.0%
The weighted average grant date fair values of options granted under the Plans during 1996 and 1995 were $2.75 and $14.14, respectively. F-15 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1996 1995 1994 ---- ------ ----- Cash paid during the year ending December 31: Interest $ 119 $ 485 $ 753 Income taxes 74 5,260 492 Non-cash investing and financing activities: Equipment acquired under capital lease obligations -- 228 732 Conversion of subordinated debt to equity -- 4,950 -- Cancellation of related party notes receivable in connection with acquisition of retail showroom -- 1,771 -- Acquisition of retail showroom purchased from a related party - noncash portion -- 94 --
F-16 SCHEDULE II CREATIVE COMPUTERS, INC. Valuation and Qualifying Accounts For the years ended December 31, 1994, 1995 and 1996 (in thousands)
BALANCE AT ADDITIONS DEDUCTION BALANCE BEGINNING CHARGED TO FROM AT END OF YEAR OPERATIONS RESERVES OF YEAR ---------- ---------- --------- ------- Allowance for doubtful accounts for the year ended: December 31, 1994 $ 194 $ 329 $ --- $ 523 December 31, 1995 523 996 154 1,365 December 31, 1996 1,365 2,041 1,272 2,134 Reserve for inventory for the year ended: December 31, 1994 $ 535 $ 234 $ --- $ 769 December 31, 1995 769 1,088 438 1,419 December 31, 1996 1,419 6,432 1,547 6,304
F-17 EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-848) of Creative Computers, Inc. of our report dated January 21, 1997 appearing on page F-2 of this Form 10-K. PRICE WATERHOUSE LLP Costa Mesa, California March 28, 1997 EX-24.1 6 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Frank F. Khulusi and Richard M. Finkbeiner and each of them, as attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign the Annual Report on Form 10-K of Creative Computers, Inc., a Delaware corporation, and any amendment to such Form 10-K Annual Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date --------- ----- ----- FRANK F. KHULUSI Chairman of the Board of March 27, 1997 - -------------------------------- Directors, President and Frank F. Khulusi Chief Executive Officer (Principal Executive Officer) RICHARD M. FINKBEINER Chief Financial Officer March 27, 1997 - -------------------------------- (Principal Financial and Richard M. Finkbeiner Accounting Officer) SAM U. KHULUSI Director March 27, 1997 - -------------------------------- Sam U. Khulusi AHMED O. ALFI Director March 27, 1997 - -------------------------------- Ahmed O. Alfi AL S. JOSEPH Director March 27, 1997 - -------------------------------- Al S. Joseph
EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 17,329 521 19,948 0 55,092 102,337 10,909 0 113,431 59,737 0 0 0 10 52,795 113,431 444,971 444,971 395,000 395,000 60,585 0 (593) (10,021) (3,972) (6,049) 0 0 0 (6,049) (.62) 0
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