-----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, CeeDIUjoWN3TTAna/3/ghtZFV7/ifAtgDw7yMr+dex9M0dfsYmrPJ/uB79asaPCr 1Tg1kgLfh8LeoUS10QHviQ== 0001017062-00-000840.txt : 20000331 0001017062-00-000840.hdr.sgml : 20000331 ACCESSION NUMBER: 0001017062-00-000840 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: SEC FILE NUMBER: 000-25790 FILM NUMBER: 587322 BUSINESS ADDRESS: STREET 1: 2555 WEST 190TH STREET CITY: TORRENCE STATE: CA ZIP: 90504 BUSINESS PHONE: 3103545600 MAIL ADDRESS: STREET 1: 2555 WEST 190TH STREET CITY: TORRENCE STATE: CA ZIP: 90504 10-K 1 FORM 10-K FOR PERIOD ENDING 12/31/1999 ================================================================================ 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _________ to _________. Commission file number: 0-25790 CREATIVE COMPUTERS, INC. Delaware 95-4518700 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2555 West 190th Street, Torrance, California 90504 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (310) 354-5600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Common Stock, $.001 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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 this Form 10-K. [ ] As of March 28, 2000, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $77 million. The number of shares outstanding of the Registrant's Common Stock as of March 28, 2000 was 10,409,726. Documents incorporated by reference into Part III: Portions of the definitive Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. ================================================================================ CREATIVE COMPUTERS, INC. TABLE OF CONTENTS Page ---- PART I Item 1. Business........................................................ 3 Item 2. Properties...................................................... 19 Item 3. Legal Proceedings............................................... 19 Item 4. Submission of Matters to a Vote of Security Holders............. 19 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 7A. Quantitative and Qualitative Disclosures about Market Risk...... 27 Item 8. Financial Statements and Supplementary Data..................... 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 27 PART III Item 10. Directors and Executive Officers of the Registrant.............. 28 Item 11. Executive Compensation.......................................... 28 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 28 Item 13. Certain Relationships and Related Transactions.................. 28 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 29 SIGNATURES.................................................................. 31 2 PART I ITEM 1. BUSINESS General Creative Computers, Inc. (the "Company"), founded in 1987, is a direct marketer of personal computer hardware, software, peripheral products and consumer electronics. 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, the Internet, a direct sales force, and a retail showroom. The Company offers a broad selection of products through its six worldwide web sites on the Internet, ecost.com, pcmall.com, macmall.com, computability.com, ccit-inc.com and elinux.com, and its distinctive full-color catalogs, including MacMall, PC Mall Business Solutions, PC Mall.com, and ComputAbility 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 recently announced its plans to intensify its focus on the Internet and business-to-business markets by developing its growing portfolio of web site properties. In 1997, the Company acquired and assimilated two marketers of personal computer hardware and software products, Elek-Tek, Inc. (currently operating as CCIT) and ComputAbility, Ltd. During 1997, the Company operated four retail showrooms in Southern California under the name Creative Computers and three retail showrooms in Illinois and one retail showroom in Indiana under the name of Elek-Tek. In the first quarter of 1998, the Company closed all but one of its showrooms to focus its efforts on its catalog, corporate and Internet channels. Net sales from the Company's retail showroom operations were $67.8 million, $43.6 million and $34.7 million for the years ended December 31, 1997, 1998 and 1999, representing 12.4%, 6.8% and 4.7% of net sales, respectively. In September 1997, the Company formed a wholly-owned subsidiary, uBid, to sell computer-related products and consumer electronics through an auction format on the Internet. On December 9, 1998, uBid completed an initial public offering of 1,817,000 shares of its Common Stock. Upon completion of this offering, the Company owned 80.1% of the outstanding Common Stock of uBid. On June 7, 1999, the Company divested its ownership in uBid by means of a tax-free distribution of all of its remaining 7.3 million shares of uBid Common Stock to the Company's stockholders of record as of May 24, 1999. In February 1999, the Company formed eCOST.com as a wholly-owned subsidiary. eCOST.com is a multi-category Internet retailer of computer products and electronics, and offers a broad selection of name-brand products, most of which are sold at competitive prices plus itemized fees for processing and shipping the order. In December 1999, the Company formed eLinux.com as a wholly- owned subsidiary to focus on products and services directed to the Linux community. In 1999, the Company operated in two reportable business segments: Direct marketing and multi-category Internet retailing. The direct marketing segment consists of retail sales of personal computers, hardware, software, peripheral products and consumer electronics under the PCMall, MacMall, ComputAbility and CCIT brands, and the multi-category Internet segment consists of retail sales of computer products and electronics under the eCOST.com brand. The Company no longer operates in the Internet Auction segment as a result of the spin-off of uBid in 1999. For segment information relating to net sales, operating income and assets, see Note 12 to the Company's financial statements included herein. 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, focusing on the Internet and business-to-business markets. Specific elements of the Company's operating strategy include: 3 Leverage of Internet Leadership Position. The Company considers itself a leader in Internet e-commerce innovation and intends to continue enhancing its leadership position on the Internet. The Company was among the first to enter the Internet auction space with its ubid.com web site. uBid completed a successful initial public offering ("IPO") in December 1998, and the Company subsequently distributed to its stockholders all of its remaining shares of uBid in June 1999. In March 1999, the Company launched the eCOST.com web site, which offers a broad selection of name-brand products, most of which are sold at discount prices. Customers are provided an itemized description of the fees associated with processing their orders, including a handling fee to cover warehousing, order processing, systems and overhead costs, and a shipping fee. With the introduction of eCOST.com, the Company believes that it is among the first full- spectrum Internet resellers in the personal computing marketplace, offering customers many different ways to purchase computer hardware, software, peripherals and consumer electronics. In February 2000, the Company launched its newest Internet venture, eLinux.com, to offer complete multi-vendor Linux solutions, including Linux compatible products, consulting and support services, and community. eLinux.com serves the rapidly growing Linux community by providing multi-vendor Linux solutions and custom configurations of Linux-based systems and compatible products through its secure web site. Core Business Focus. The Company's core business is built around its catalog, Internet and business-to-business sales to various customer bases. PC Mall.com focuses on marketing computers and related products to small businesses with fewer than 100 employees, as well as high-end consumers. PCM.com Business Solutions focuses on marketing servers, desktops and network equipment to businesses with 100 or more employees. CCIT is a field service organization focusing on Fortune 1000 companies. Continued Expansion into Outbound Telemarketing. During 1999, the Company continued to intensify its outbound telemarketing efforts to focus on the under- served small and medium-size business market. The Company believes this market represents a high potential growth opportunity. Outbound business-to-business sales can also be more profitable than inbound sales due to reduced advertising and higher average order size. The Company's strategy is to rapidly expand its outbound sales executive workforce and mine its catalog customer database as well as purchased name lists for prospects. During 1999, the Company continued to hire experienced outbound telemarketing executives to manage this initiative and experienced outbound telemarketing recruiters to expand the outbound sales executive workforce. The Company also commissioned the development of a new comprehensive training program for outbound sales executives. The Company expects to continue to invest in outbound telemarketing and prospect its catalog database for sales leads. The Company expects that its outbound telemarketing initiative will transform the Company's customer sales mix to an even higher percentage of business customer sales. Focus on the Windows/Intel (WINTEL) Market. The Company launched its first PC catalog, PC Mall, primarily for WINTEL customers, in May 1995. The Company published seven editions of PC Mall with a total circulation of 11.1 million copies in 1995. Since then, the PC Mall catalog has expanded into two catalogs, PC Mall.com and PC Mall Business Solutions, with fourteen editions each in 1999, and total combined circulation of 21.2 million. Combining ComputAbility's 1999 catalog circulation of 6.3 million, total WINTEL revenues were $410 million, a 13% or $47 million increase over 1998 WINTEL revenue of $363 million. 4 The Company is authorized or otherwise has the ability to sell IBM, Compaq, Hewlett-Packard, Sony, Toshiba and other name brand computers. The Company has rapidly become one of the leading catalog resellers of WINTEL products since the start of its WINTEL initiative in 1995. Continued Macintosh Marketshare Expansion. Throughout 1999, the Company continued to be a leading direct marketer of Macintosh products, offering the full line of Apple as well as related products. The Company's sales of Mac- related products in 1999 increased 15% to $322 million from $279 million in 1998. During 1999, the Company published fourteen editions of its MacMall catalog with a circulation of 31.5 million copies, a 5% decrease from the prior year's 33.0 million circulation and a 13% decrease from the 36.0 million copies circulated in 1997. Although total catalog circulation has decreased, the Company has focused on expanding its presence by marketing through its MacMall.com web site. Marketing Database Growth. The Company has compiled a proprietary mailing list of over five million names of previous and potential customers. The database is continually analyzed 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 1999 was higher than its response rate for third party mailing lists. Increased 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 Company is committed to relationship-based selling. Each sales executive is trained and empowered to handle all customer needs including on-going customer service and 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 (MCSE) and Apple-certified technicians. Marketing and Sales The Company designed its various marketing programs 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 computer user magazines, such as PC World, PC Magazine, Computer Shopper and MacWorld. In addition, the Company obtains the names of prospective customers through 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 1999, the Company shipped approximately 874,000 mail order/catalog orders with an average order size of $639. The Company distributes its catalogs throughout the United States. Catalogs. The Company published twenty-eight editions of its PC Mall Business Solutions and PC Mall.com catalogs during 1999 and distributed approximately 21.2 million catalogs. 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 Company published fourteen editions of MacMall in 1999 and distributed approximately 31.5 million catalogs. 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 all of its 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. 5 The Internet. The Company maintains worldwide web sites on the Internet that can be accessed via its four catalog names, pcmall.com, macmall.com, computability.com and ccit-inc.com, as well as eCOST.com and eLinux.com. The Company also maintains direct links to its PC Mall and eCOST.com web sites on AOL (through the AOL Shopping Channel), and direct links to its eCOST.com site on MSN. The Company offers many advanced Internet features such as on-line ordering, access to inventory availability and a large product selection with detailed product information. Sales generated through the Internet have grown rapidly for the Company as it offers its customers a convenient means of shopping and ordering its products. In addition, the Company's web sites also serve as another source of new customers. In 1999, the Company shipped approximately 336,000 Internet orders, with an average order size of $414. Outbound and Inbound 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. Sales executives staff the Company's toll-free order numbers 24 hours a day, seven days a week. Customer service and technical support personnel assist inbound and outbound telemarketing sales executives. 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 that sells advertising space in the Company's catalogs, advertising on the Company's Internet sites and vendor supported outbound marketing campaigns. These advertising 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 PC World, PC Magazine, Computer Shopper and MacWorld. During 1999, the Company purchased 404 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 as well as a direct sales force through its CCIT subsidiary. 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 subject to vendor terms and conditions. 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, as well as consumer electronics equipment. The Company screens new products and selects products for inclusion in its catalogs and web sites 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 and e-mails to its customers, 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) 1997 % 1998 % 1999 % ------ ----- ------ ----- ------ ----- Computer systems........ $231.1 42.3% $270.9 42.2% $321.2 43.9% Peripherals, components and accessories...... 247.9 45.4 291.7 45.4 322.0 44.0 Software................ 60.9 11.2 68.5 10.7 72.0 9.8 Other (1)............... 6.2 1.1 10.9 1.7 16.8 2.3 ------ ----- ------ ----- ------ ----- Total.............. $546.1 100.0% $642.0 100.0% $732.0 100.0% ====== ===== ====== ===== ====== =====
(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, Sony, Toshiba and others. The Company is also authorized to sell the full line of Apple hardware. 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 and licenses 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. During 1999, the Company purchased products from over 560 vendors. During 1997, 1998 and 1999, products manufactured by Apple represented approximately 21.4%, 20.0% and 25.4% of net sales, respectively. The Company is also linked electronically with four large distributors, which allows account executives to view distributor product availability on line and drop- ship product directly to their customers. The benefits of this program, known as virtual warehouse, include reduced inventory carrying costs and improved inventory turns. The Company intends to expand its use of virtual warehouse in the future. 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 dependent in part 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, which it believes is an important competitive advantage; and the Company invested in this strategy heavily during 1999. The Company's average annual inventory turns were 9.9 times in 1997, 13.5 times in 1998 and 16.4 times in 1999. 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 that contain price protection provisions intended to reduce the Company's risk of loss due to manufacturer price reductions. The Company currently has such rights with respect to products which it purchases from Apple, IBM, Compaq, 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. The market for computers, computer products, peripherals, software and electronics 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 325,000 square foot distribution center in Memphis, Tennessee. The centralized distribution operations, strategically located near the Federal Express hub in Memphis, allow most orders of in-stock products accepted by 10:00 p.m. Eastern Standard Time to be shipped for delivery by 10:30 a.m. the following day via Federal Express. Upon request, orders may also be shipped at a lower cost by United Parcel Ground Service. As of December 31, 1999, the Company subleases 175,600 square feet of the Company's 325,000 square foot facility to uBid, Inc. under two sublease agreements. The first sublease agreement covers 105,600 square feet, and is co-terminus with the building lease. The remaining 70,000 square feet is covered in a sublease agreement expiring in 2001. 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. Orders fulfilled by certain distributors linked electronically with the Company are transmitted directly to their warehouses. 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 facilities are currently adequate for its needs. 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 facilitates the preparation of daily operating control reports which provide concise and timely information 8 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. 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 HP3000 Enterprise System 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 and 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 or telephone system could impact its ability to receive and process customer orders on a timely basis. Retail Computer Showrooms During the first quarter of 1998, the Company closed seven retail showrooms to focus its efforts on its business-to-business and Internet channels of distribution. The Company recorded a one-time pretax restructuring charge of $10.5 million relating to exit costs associated with the closing of retail operations. Recorded in selling, general and administrative costs were $3.1 million of goodwill write-offs, $1.9 million of fixed asset write-offs, $1.5 million of reserves for lease exit costs, and $0.3 million of employee-related severance costs. Recorded as cost of sales were $3.7 million of reserves for store inventory. The Company currently operates one retail computer showroom, located in Santa Monica, California. Competition The retail business for personal computers and related products is highly competitive. The Company competes with other direct marketers, including MicroWarehouse, CDW, Multiple Zones, Insight Direct, PC Connection and Global Direct. The Company also competes with Internet retailers such as buy.com, onvia.com, egghead.com and beyond.com. In addition, the Company competes with computer retail stores and resellers including superstores such as CompUSA and Best Buy, corporate resellers such as Compucom, Entex and Inacom, certain hardware and software vendors such as Gateway 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 market in which the Company's retail showroom operates is also highly competitive. 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 competitive 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 9 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, 1999, the Company had 980 full-time employees, including 132 people at the Company's distribution center. The Company emphasizes the recruiting and training of high quality personnel and, to the extent practical, 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, communication and leadership. New account executives participate in an intensive six-week training program, during which time they are introduced to the Company's philosophy, available resources, products and services, as well as basic and advanced sales skills. 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 sales, gross profit dollars and gross profit percentage generated from their sales efforts. 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 at December 31, 1999 were as follows:
Description Sq. Ft. Location - --------------------------------------------- ---------- ------------------------- Creative Computers Corporate Headquarters.... 143,532 Torrance, CA Distribution Center.......................... 325,000 Memphis, TN Retail Showroom.............................. 13,050 Santa Monica, CA CCIT Corporate Headquarters.................. 25,840 Elk Grove Village, IL Kansas Property.............................. 32,800 Lenexa, KS CCIT Colorado Corporate Sales................ 2,315 Englewood, CO ComputAbility Corporate Headquarters......... 15,000 Milwaukee, WI ComputAbility Sales Office................... 15,000 Milwaukee, WI
The Company leases all of its facilities, except for the following: 9,750 square feet of the Santa Monica retail showroom, the Lenexa property, and the ComputAbility Corporate headquarters, each of which is owned by the Company. The Company's distribution center serves the Company's catalog, ComputAbility and eCOST.com operations, as well as its retail showrooms, and includes shipping, receiving, warehousing and administrative space. The Company subleases 175,600 square feet of its distribution center to uBid Inc. The following leases have remaining terms greater than two years: Creative Computers corporate headquarters, Memphis distribution center and CCIT corporate headquarters. All of the other leases have remaining terms less than two years. During the fourth quarter of 1997, the Company consolidated its 10 headquarters facility and its telemarketing operations into a 160,000 square foot building in Torrance, California. The one-time charge for the move was $0.8 million. During the first quarter of 1998, the Company closed all of its retail showrooms except for its Santa Monica showroom. The Company recorded a one-time $1.5 million reserve for lease exit costs during the first quarter of 1998. The Company intends to sell its Lenexa, Kansas building and its ComputAbility Corporate Headquarters. In February 2000, the Company signed an agreement to lease 35,503 square feet in Milwaukee, Wisconsin to support the expansion of the Wisconsin sales force. This lease will replace the existing ComputAbility Sales Office lease, which expired in January 2000, and the ComputAbility Corporate Headquarters. 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 is currently 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, or various subsidiaries, currently collects and remits sales tax only on sales of its products to residents of the states in which the Company or its respective subsidiaries has a physical presence. Various states have sought to impose on direct marketers with no physical presence in the taxing state the burden of collecting state sales and use 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. A number of proposals have been made at the federal, state and local level, and by certain foreign governments, that would impose additional taxes on the sale of goods and services over the Internet. In October 1998, Congress passed the Internet Tax Freedom Act (the "ITFA"). The stated purpose of the ITFA is neutral tax treatment of economic activity, electronic or otherwise. The ITFA prohibits state and local taxes that discriminate against or single out the Internet. As part of the ITFA, Congress created a committee to conduct an 18- month study of whether use of or sales on the Internet should be taxed and, if so, how taxes could be applied without subjecting the Internet and electronic commerce to special, discriminatory or multiple taxation. Although it is not an issue specific to the Internet, one of the agenda items for the committee set up as part of the ITFA is a review of the sales tax "nexus" issue as it relates to all direct marketers. There can be no assurance the committee's report to Congress will not ultimately result in a modification by legislation of the Supreme Court's favorable rulings regarding sales and use taxation on out of state marketers. 11 Executive Officers The executive officers of the Company as of March __, 2000 and their respective ages and positions are as follows: Name Age Position ---- --- -------- Frank F. Khulusi........... 33 Chairman of the Board and Chief Executive Officer Scott W. Klein............. 42 President Theodore R. Sanders........ 45 Chief Financial Officer Daniel J. DeVries.......... 38 Executive Vice President - Marketing 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 and Chief Executive Officer of the Company since the Company's inception in 1987, and served as President until July 1999. Mr. Khulusi attended the University of Southern California. Scott W. Klein has served as President of Creative Computers since July 1999. In May 1999, Mr. Klein joined the Creative Computers organization as the President and CEO of eCOST.com. Prior to joining the Company, Mr. Klein was Executive Vice President and COO of PrimeSource Building Products, Inc. from 1984 to May 1999, where he oversaw sales, marketing, distribution and MIS and held a position on the Board of Directors. From 1981 to 1984, Mr. Klein was a Director of Marketing for Pepsi Co. Mr. Klein also worked in Brand Management at Procter & Gamble. Mr. Klein received a B.S. degree in Accounting from Syracuse University. Theodore R. Sanders has served as Chief Financial Officer since September 1998 and was Vice President - Controller of the Company from May 1997 to September 1998. Prior to joining the Company, Mr. Sanders spent ten years with the Pittston Company in various senior finance roles including Controller of its Burlington Air Express Global division and Director of Internal Audit. Mr. Sanders started his career with Deloitte & Touche and rose to the position of Manager. Mr. Sanders is a C.P.A. and received a B.S.B.A. degree from Nichols College. 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, sales, purchasing and the retail showroom. Mr. DeVries' marketing responsibilities include 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. CERTAIN FACTORS AFFECTING FUTURE RESULTS This Annual Report on Form 10-K, including the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Report, contain forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Words such as "expect," "anticipate," "intend," "plan," "believe," "estimate," "may," "will," "should," "seeks" and variations of such words and similar expressions are intended to identify such forward-looking statements. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and the Company is including this statement for purposes of complying with these safe harbor provisions. The Company has based these 12 forward-looking statements on its current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, and actual results could differ materially as a result of several factors, including those set forth under this section entitled "Certain Factors Affecting Future Results" and elsewhere herein. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. (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, including the integration of acquired companies, 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. (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) The failure of the Company to respond adequately to changes in consumer preferences, such as the use of the Internet for purchasing, may adversely affect the Company's business and results of operations. (14) 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. (15) The failure of the Company to attract and retain skilled personnel may adversely affect the Company's business and results of operations. It is not reasonably possible to itemize all of the many factors and specific events that could affect the Company and/or the computer products and electronics 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 13 Company's actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in any "forward-looking statements." Our addition of a new business focus could subject us to risks commonly associated with a new company We have historically operated as a direct marketer of computer products, and have only recently expanded our business model to include a focus on the Internet and business-to-business markets by developing our portfolio of web site properties. We have only been active in this new line of business since 1995 when we launched the PCMall.com web site. We established uBid.com, an online auction web site, in 1997, our eCOST.com web site in March 1999 and our eLinux.com web site in February 2000, and plan to continue our focus on the Internet and business-to-business market in the future. We do not have a significant operating history upon which you can evaluate our new business focus, and you should not rely upon past performance to predict our future performance. In adding a new business focus, we expect that we will have to make changes to our business operations, sales and implementation practices, customer service and support operations and management focus. We are also facing new risks and challenges, including a lack of meaningful historical financial data upon which to plan future budgets, reliance on the growth and use of the Internet to generate commercial opportunities, competition from a wider range of sources, the need to develop strategic relationships and other risks. We cannot guarantee that we will be able to successfully transition to this new business focus. 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 21.4%, 20.0% and 25.4% of the Company's net sales in 1997, 1998 and 1999, 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 parts of 1997 and 1999, 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 was 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. 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 the Company's business, financial condition and results of operations. Rapid Growth Since its formation, the Company has experienced rapid growth. Net sales have grown from $8.7 million in 1990 to $732.0 million in 1999. The Company's catalog sales grew from $117.9 million in 1994 to $558.2 million in 1999. Internet sales on its pcmall.com, macmall.com, computability.com, ecost.com and ccit-inc.com web sites grew from $15.6 million in 1997 to $139.0 million in 1999. As a result of the Company's shift from the retail showroom to the Internet sales and catalog distribution channels, retail showroom sales have decreased from 28.0% of net sales in 1994 to 4.7% in 1999. During the first quarter of 1998, the Company closed seven retail showrooms to focus its efforts on its catalog, corporate and Internet channels of distribution. The Company recorded a one-time pretax restructuring charge of $10.5 million in the first quarter of 1998 relating to exit costs, asset write-offs, other charges and related goodwill. 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 acquired Elek-Tek and ComputAbility in 1997 and may, in the future, acquire other companies in the same or complementary lines of business. These acquisitions and any such acquisition and the ensuing integration of the operations of the acquired company with those of the Company 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, 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 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, Sony, Toshiba, 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 be able to maintain that position. Competition The retail business for personal computers, electronics and related products is highly competitive, based primarily on price, product availability, speed and accuracy of delivery, effectiveness of sales and 14 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, Multiple Zones, Insight Direct, PC Connection and Global Direct. The Company also competes with Internet retailers such as buy.com, egghead.com and beyond.com. In addition, the Company competes with computer retail stores and resellers, including superstores, such as CompUSA, Best Buy, corporate resellers such as Compucom, Entex and Inacom, certain hardware and software vendors, such as Gateway and Dell Computer, which sell directly to end users, and other direct marketers of hardware, software and computer-related products. In the direct marketing and Internet retail industries, barriers to entry are relatively low and the risk of new competitors entering the market is high. 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, consolidations of 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 the market for electronics products, 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 business, financial condition and results of operations. 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 computer products and electronics 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. 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 or discontinuation of new catalogs, 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 and electronics in general, seasonal shifts in demand for computer and electronics products, industry announcements and market acceptance of new products or upgrades, 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, delays in the release by suppliers of new products and inventory adjustments and expenditures by the Company on new business ventures. 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 Company's Common Stock could be materially adversely affected. Dependence on Vendors The Company purchases all of its products from vendors. Certain key vendors, including IBM, Hewlett Packard, Compaq 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 one or more of these vendors, including Apple, or modification of the terms or 15 discontinuance of the agreements with these vendors, could adversely affect the Company's operating income and cash flow. The Company's success is dependent in part 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. There can be no assurance that a disruption will not occur; 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 and any interruption, corruption, degradation or failure of the Company's management information systems, distribution center, web site 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 computer and electronics products are distributed and sold is changing, and new methods of sale and distribution, such as the Internet, have emerged. Computer 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, financial condition and results of operations. Dependence on Independent Shipping Companies The Company relies almost entirely on arrangements with independent shipping companies, especially Federal Express and UPS, for the delivery of its products. The disruption or termination of the Company's arrangements with Federal Express, UPS 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 and 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. Any increases in postal or shipping rates in the future could have a material adverse effect on the business, financial condition and results of operations. 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 may be able to 16 recoup a 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, software and electronics products 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. 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. The Company currently has limited return rights with respect to products which it purchases from Apple, IBM, Compaq, 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, or various subsidiaries, currently collects and remits sales tax on sales of products to residents of the states that it has legal presence in. 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's business, financial condition and results of operations. The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by certain foreign governments that could impose taxes on the sale of goods and services and certain other Internet activities. In 1998, the Internet Tax Freedom Act was signed into law, placing a three-year moratorium on new state and local taxes on Internet commerce. However, there can be no assurance that future laws imposing taxes or other regulations on commerce over the Internet would not substantially impair the growth of e-commerce and as a result have a material adverse effect on the Company's business, results of operations and financial condition. 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 the Internet, 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 17 market has experienced rapid growth. If the growth rate of the personal computer market were to decrease, the Company's business, financial condition and 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 telephone system, and any interruption in telephone service including those caused by natural disasters could have a material adverse effect on the Company's business, financial condition and 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 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. Acquisitions As part of its growth strategy, the Company acquired two marketers of computers and computer-related products in 1997 and may continue to pursue acquisitions of companies that would either complement or expand its existing business. No assurance can be given that the benefits expected from the integration of acquired companies will be realized. In addition, 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. Any delays or unexpected costs incurred in connection with the integration of acquired operations could have a material adverse effect on the Company's business, financial condition and results 18 of operations. There can be no assurance that the Company will be able to implement or sustain its acquisition strategy or that its strategy will ultimately prove profitable for the Company. 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 and companies in the Internet and electronic commerce industries 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, and companies in the Internet and electronic commerce industries in particular, and other technology or related stocks, have 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. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various legal proceedings or claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to those actions will not materially affect the Company's business, financial condition 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 1999. 19 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, 1997 ---------------------------- First Quarter............... $ 8 1/8 5 Second Quarter.............. 7 3/4 5 Third Quarter............... 13 11/16 7 1/8 Fourth Quarter.............. 16 5/16 8 1/2 Year Ended December 31, 1998 ---------------------------- First Quarter............... 12 7/8 7 5/16 Second Quarter.............. 10 5 1/4 Third Quarter............... 12 1/2 6 Fourth Quarter.............. 59 11/16 5 1/4 Year Ended December 31, 1999 ---------------------------- First Quarter............... 43 1/4 25 1/8 Second Quarter.............. 39 1/8 6 1/16 Third Quarter............... 7 7/8 5 1/4 Fourth Quarter.............. 11 5 3/4
On March 28, 2000, the closing price of the Company's Common Stock as reported on the Nasdaq National Market was $11.50 per share. As of March 29, 2000, there were approximately 52 holders of record of the Common Stock. On June 7, 1999, the Company distributed to its stockholders all of the 7.3 million shares of common stock of uBid, Inc. owned by the Company, representing approximately 80.1% of the outstanding stock of uBid. Each of the holders of the Company's common stock entitled to the distribution received approximately .70488 shares of uBid common stock for each share of the Company's common stock held by such stockholders on May 24, 1999. On June 8, 1999, the Company's Common Stock traded ex-dividend to reflect the spin-off of uBid, and its closing price on the Nasdaq National Market on that date was $8.6875. 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. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data are 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, 1997, 1998 and 1999 and the selected balance sheet data as of December 31, 1998 and 1999 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, 1995 and 1996 along with the balance sheet data as 20 of December 31, 1995, 1996 and 1997 are derived from the audited consolidated financial statements of the Company which are not included herein. The selected operating data are derived from the operating records of the Company and have not been audited.
Year Ended December 31, --------------------------------------------------------------------------- (in thousands, except per share data) 1995 1996 1997(1) 1998(1) 1999(1) -------- -------- -------- -------- -------- Net sales..................................... $420,877 $444,971 $546,122 $642,006 $731,955 Cost of goods sold............................ 361,803 395,000 476,053 568,309 652,404 Retail store closure inventory reserve........ - - - 3,679 - -------- -------- -------- -------- -------- Gross profit.................................. 59,074 49,971 70,069 70,018 79,551 Selling, general and administrative expenses.. 49,844 60,585 63,252 76,812 83,687 Expenses related to retail store closure...... - - - 6,773 - -------- -------- -------- -------- -------- Income (loss) from operations................. 9,230 (10,614) 6,817 (13,567) (4,136) Interest income (expense)..................... 371 593 144 (291) 245 -------- -------- -------- -------- -------- Income (loss) before income taxes............. 9,601 (10,021) 6,961 (13,858) (3,891) Income taxes (benefit)........................ 3,754 (3,972) 2,642 (5,034) 812 -------- -------- -------- -------- -------- Income (loss) from continuing operations...... 5,847 (6,049) 4,319 (8,824) (4,703) Discontinued operations....................... - - (194) (8,971) (6,240) -------- -------- -------- -------- -------- Net income (loss)............................. $ 5,847 $ (6,049) $ 4,125 $(17,795) $(10,943) ======== ======== ======== ======== ======== Basic earnings (loss) per share (2) Continuing operations....................... $ 0.71 $ (0.62) $ 0.44 $ (0.87) $ (0.45) Discontinued operations..................... - - (0.02) (0.88) (0.60) -------- -------- -------- -------- -------- $ 0.71 $ (0.62) $ 0.42 $ (1.75) $ (1.05) ======== ======== ======== ======== ======== Diluted earnings (loss) per share (2) Continuing operations....................... $ 0.66 $ (0.62) $ 0.43 $ (0.87) $ (0.45) Discontinued operations..................... - - (0.02) (0.88) (0.60) -------- -------- -------- -------- -------- $ 0.66 $ (0.62) $ 0.41 $ (1.75) $ (1.05) ======== ======== ======== ======== ======== Basic weighted average number of shares outstanding (2)............................. 8,291 9,767 9,895 10,176 10,383 ======== ======== ======== ======== ======== Diluted weighted average number of shares outstanding (2)............................. 8,890 9,767 10,030 10,176 10,383 ======== ======== ======== ======== ========
(1) Operating results in 1997, 1998 and 1999 reflect the effects of acquisitions of ComputAbility, Ltd., and Elek-Tek, Inc. in August 1997 and October 1997, respectively. Further, these results also reflect uBid's results as discontinued operations. See Note 6 and Note 9 of Notes to Consolidated Financial Statements. (2) Earnings (loss) per share and weighted average shares outstanding have been restated for all periods prior to 1998 to reflect the adoption of SFAS 128, "Earnings per Share." See Note 1 of Notes to Consolidated Financial Statements. 21
Year Ended December 31, --------------------------------------------------------- (in thousands, except average order size) Selected Operating Data 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- Mail order/catalog net sales............... $353,324 $383,864 $462,705 $562,284 $558,235 Internet sales............................. $ - $ 3,239 $ 15,586 $ 36,143 $138,986 Retail net sales........................... $ 67,553 $ 57,868 $ 67,831 $ 43,579 $ 34,734 Number of catalogs distributed............. 38,680 48,753 62,220 69,427 58,955 Orders filled (mail order/catalog)......... 784 921 982 1,075 874 Orders filled (Internet)................... - 10 44 121 336 Average order size (mail order/catalog).... $ 451 $ 417 $ 471 $ 523 $ 639 Average order size (Internet).............. $ - $ 324 $ 354 $ 299 $ 414 Mailing list size.......................... 1,300 2,518 4,177 4,792 5,459 December 31, -------------------------------------------------------- (in thousands) Balance Sheet Data 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- Working capital............................ $ 46,307 $ 42,600 $ 30,183 $ 36,285 $ 18,697 Total assets............................... $112,569 $113,431 $131,466 $143,174 $151,533 Short-term debt............................ $ 281 $ 283 $ 10,186 $ 122 $ 148 Long-term debt, excluding current portion.. $ 589 $ 325 $ 496 $ 161 $ 284 Stockholders' equity....................... $ 56,560 $ 52,805 $ 60,082 $ 67,564 $ 48,598
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 opened its first retail computer showroom in August 1987. After opening its first retail showroom, the Company conducted mail order operations from one of its retail showroom locations. The Company became an authorized Apple dealer in 1991. During 1997, the Company operated four retail showrooms in Southern California under the name Creative Computers and three retail showrooms in Illinois and one retail showroom in Indiana under the name of Elek-Tek. During the first quarter of 1998, the Company closed all but one of its retail showrooms. During 1999, the Company successfully completed a spin-off of its former subsidiary, uBid, Inc., to the Company's stockholders. Consistent with its strategic focus on the Internet and business-to-business markets, the Company formed a new subsidiary, eCOST.com, a multi-category Internet retail web site, in February 1999. In December 1999, the Company formed a new subsidiary, eLinux.com, to provide products, news, discussion groups, services and support to the Linux community. During 1997, the Company completed two acquisitions. On August 29, 1997, the Company acquired the assets and assumed the liabilities of Milwaukee-based ComputAbility Ltd., a privately owned direct reseller of PC/WINTEL hardware, peripheral and software products, for $8.0 million. On October 15, 1997, the Company acquired substantially all the assets of Elek-Tek, Inc., a marketer of PC/WINTEL hardware, peripheral and software products located in the Midwest for $29.4 million plus direct costs of the acquisition. 22 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 1997, 1998, and 1999, the Company distributed fourteen editions of its MacMall catalog per year with total MacMall circulation of approximately 36.0 million, 33.0 million, and 31.5 million, respectively. Total MacMall circulation decreased as the Company began to expand into the business-to-business and Internet channels. In May 1995, the Company distributed its first PC Mall catalog focusing on the WINTEL personal computer market. During 1997, 1998, and 1999, the Company distributed fourteen editions of its PC Mall catalogs per year with a total circulation of 21.9 million, 25.8 million and 21.2 million, respectively. In September 1997, the Company distributed its first ComputAbility catalog. During 1997, the Company distributed three ComputAbility catalogs to approximately 1.5 million previous and prospective customers. In 1998, total ComputAbility circulation was 9.1 million with thirteen editions. In 1999, the Company distributed thirteen Computability catalogs with a distribution of 6.3 million. 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 84.7%, 87.6% and 76.3% in 1997, 1998 and 1999, respectively, with average order size being $471, $523 and $639 for those respective years. Net sales from the Internet, as a percentage of net sales, were 2.9%, 5.6% and 19.0% in 1997, 1998 and 1999, respectively, with average order size of $354, $299 and $414 for those respective years. Net sales of the Company are derived primarily from the sale of personal computer hardware, software, peripherals, accessories and consumer electronics to individual consumers, home offices, small businesses and large corporations through direct response catalogs, dedicated inbound and outbound telemarketing sales executives, a direct sales force, retail showrooms and its Internet web sites. 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. A substantial portion of the Company's business is dependent on sales of Apple computers and software and peripheral products used with Apple computers. Products manufactured by Apple represented approximately 21.4%, 20.0% and 25.4% of the Company's net sales in 1997, 1998 and 1999, 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. Results for the years ended 1997 and 1998 have been restated to reflect the results of uBid as discontinued operations. There can be no assurance that trends in sales growth or operating results will continue in the future. 23
Percentage of Net Sales -------------------------- Year Ended December 31, -------------------------- 1997 1998 1999 ------- ------- ------ Net sales 100.0% 100.0% 100.0% Cost of goods sold 87.2 89.1 89.1 ----- ----- ----- Gross profit 12.8 10.9 10.9 Selling, general and administrative expenses 11.6 12.0 11.4 Expenses related to retail store closure --- 1.0 --- ----- ----- ----- Income (loss) from operations 1.2 (2.1) (0.5) Interest (income) expense, net --- 0.1 --- ----- ----- ----- Income (loss) before income taxes 1.2 (2.2) (0.5) Income taxes (benefit) 0.4 (0.8) 0.1 ----- ----- ----- Income (loss) from continuing operations 0.8 (1.4) (0.6) Loss from discontinued operations --- (1.4) (0.9) ----- ----- ----- Net income (loss) 0.8% (2.8)% (1.5)% ===== ===== =====
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 Net sales for the year ended December 31, 1999 were $732.0 million, an increase of $90.0 million or 14.0% over net sales for the year ended December 31, 1998 of $642.0 million. Mail order/catalog sales for 1999 were $558.2 million, a decrease of $4.1 million or 0.7% compared to 1998 mail order/catalog sales of $562.3 million. The decrease in mail order/catalog sales is primarily due to a decline in circulation resulting from a shift in marketing expenditures toward the Internet, offset by an increase in average order value. Net catalog circulation in 1999 decreased 15.1%, or 10.5 million catalogs to 59.0 million, of which MacMall comprised 31.5 million, PC Mall 21.2 million and ComputAbility 6.3 million. The DataCom Mall catalog was discontinued at the end of 1998. Internet sales in 1999 were $139.0 million, an increase of 284.5%, or $102.9 million over 1998. Retail net sales in 1999 were $34.7 million, a decrease of 20.3%, or $8.9 million from 1998. WINTEL net sales increased 8.1% to $381.4 million in 1999, versus $352.9 million in 1998. Gross profit for the year ended December 31, 1999 was $79.6 million, an increase of $9.6 million or 13.6% from gross profit of $70.0 million for the year ended December 31, 1998. The increase in gross profit was primarily due to the increase in sales in 1999 over 1998. Gross profit as a percentage of sales was 10.9% in 1999, flat versus 1998. The gross profit percentage was negatively affected by lower margins experienced by eCOST.com and other factors, including outbound sales initiatives and fluctuations in key vendor support programs, offset by the impact of the 1998 write-offs. Selling, general and administrative expenses (SG&A) were $83.7 million for the year ended December 31, 1999, an increase of $6.9 million or 9.0% over SG&A expenses of $76.8 million for the year ended December 31, 1998. As a percentage of net sales, SG&A expenses were 11.4% in 1999, versus 12.0% in 1998. The decrease is primarily the result of first quarter write-offs included in the prior year related to a more rapid decline in Mac sales and the effect of rapid price erosion at that time. Net interest income was $0.2 million for the year ended December 31, 1999 compared to $0.3 million net interest expense for the year ended December 31, 1998. The change primarily resulted from the elimination of interest expense related to the 1997 borrowings to finance the acquisition of Elek-Tek. Income tax provision for the year ended December 31, 1999 was $0.8 million versus a benefit of $5.0 million for the year ended December 31, 1998. The effective tax rate for 1999 increased to 20.8% from (36.3%) in 1998. The change in effective tax rate is primarily due to the provision of valuation allowance against deferred tax assets. During 1997, the Company operated four retail showrooms in Southern California under the name Creative Computers and three retail showrooms in Illinois and one retail showroom in Indiana under the name of Elek-Tek. During February 1998, the Company closed its Indiana showroom. On March 20, 1998, the Company closed six of its other retail showrooms to focus its efforts on its catalog, corporate and Internet channels. Net sales from the Company's retail showroom operations were $67.8 million and $43.6 24 million for the years ended December 31, 1997 and 1998, representing 12.4% and 6.8% of net sales, respectively. In the first quarter of 1998, the Company recorded a one-time pretax restructuring charge of $10.5 million relating to exit costs associated with the closing of retail operations. Recorded in selling, general and administrative costs were a $3.1 million write-off of goodwill, a $1.9 million write-off for fixed assets, a $1.5 million reserve for lease exit cost, and $0.3 million employee-related severance costs. Recorded as cost of sales were $3.7 million of reserves for store inventory. The reserves have been fully utilized as of December 31, 1998. In addition, during the first quarter of 1998, $7.0 million of pretax write-offs were taken primarily relating to a more rapid decline in Mac sales during the quarter and the effects of rapid price erosion and other changes in the industry on inventory and receivables during the quarter. As a result of the spin-off of uBid in June 1999, the Company recorded uBid's results of operations in discontinued operations for 1999, 1998 and 1997. Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997 Net sales for the year ended December 31, 1998 were $642.0 million, an increase of $95.9 million or 18% over net sales for the year ended December 31, 1997 of $546.1 million. Mail order/catalog sales for 1998 were $562.3 million, an increase of $99.6 million or 21.5% over 1997 mail order/catalog sales of $462.7 million. The increase in direct marketing sales was primarily due to an increase in WINTEL sales, partially offset by a decrease in Mac sales. Catalog circulation in 1998 increased 11.6% to 69.4 million catalogs, of which MacMall comprised 33.1 million, PC Mall 25.8 million, ComputAbility 9.1 million and DataCom Mall 1.4 million. Internet sales were $36.1 million in 1998, an increase of 131.9% or $20.6 million over 1997. Retail net sales in 1998 were $43.6 million, a decrease of $24.3 million or 35.8% due to the closure of seven of the Company's stores in the first quarter of 1998. WINTEL net sales increased 64.8% to $364.6 million in 1998, versus $221.3 million in 1997. Gross profit for the year ended December 31, 1998 was $70.0 million, a decrease of $0.1 million from gross profit of $70.1 million for the year ended December 31, 1997. The change in gross profit was primarily due to the increase in sales in 1998 over 1997, offset by the large first quarter write-off related to the retail store closures and slow-moving and excess inventory. Gross profit as a percentage of sales was 10.9% in 1998, versus 12.8% in 1997. The decrease in gross profit percentage was primarily due to the 1998 first quarter write- offs. Selling, general and administrative expenses (SG&A) were $76.8 million for the year ended December 31, 1998, an increase of $13.5 million or 21% over SG&A expenses of $63.3 million for the year ended December 31, 1997. As a percentage of net sales, SG&A expenses were 12.0% in 1998, versus 11.6% in 1997. The increase is primarily due to the first quarter write-offs related to a more rapid decline in Mac sales and the effect of rapid price erosion and other charges related to the store closures in the first quarter of 1998. Net interest expense was $0.3 million for the year ended December 31, 1998 compared with $0.1 million net interest income for the year ended December 31, 1997. The increase is primarily attributed to borrowings in conjunction with the acquisition of Elek-Tek. Income tax benefit for the year ended December 31, 1998 was $5.0 million versus a provision of $2.6 million for the year ended December 31, 1997. The effective tax rate for 1998 decreased to (36.3%) from 38.0% in 1997. The decrease in effective tax rate is primarily due to the loss recorded in 1998. 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 come from public offerings and 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 aggregate net proceeds to the Company of approximately $46.6 million. Cash flows from operations were $18.4 million, $13.7 million and $21.5 million for 1997, 1998 and 1999, respectively. 25 Cash flows from operations in 1999 were favorable due to continuing improvements of inventory and payables management. Inventory decreased $1.1 million in 1999 and inventory turns continued to improve from 13.5 in 1998 to 16.4 in 1999. Accounts receivable increased $7.2 million during 1999, primarily due to higher open account business-to-business sales. During the year ended December 31, 1999, the Company's capital expenditures were $4.2 million as compared to $3.2 million in 1998 and $2.9 million in 1997. The Company's primary capital needs will continue to be funding its working capital requirements for anticipated sales growth, possible acquisitions and new business ventures. As of December 31, 1999 and 1998, the Company had advances outstanding of $12.4 million and $38.0 million, respectively, under a $60.0 million line of credit with a finance company. The line of credit allows working capital advances up to $27.5 million and floorplan inventory financing up to $45.0 million; however, aggregate advances and floorplan financing cannot exceed $60.0 million. The advances outstanding at December 31, 1999 and 1998 relate to floorplan inventory financing to purchase inventory, which is included in accounts payable. There were no outstanding working capital advances at December 31, 1999 or 1998. Working capital advances are also limited to eligible accounts receivable and inventory collateral. The line of credit is secured by substantially all of the Company's assets and is cancelable upon 90 days' advance notice. Interest for amounts owed for working capital advances are calculated at the finance company's prime rate (8.50% and 7.75% per annum at December 31, 1999 and 1998, respectively). Floorplan financing does not bear interest if paid within an average of 30 days of the inventory purchase date. Interest on floorplan financing not paid within an average of 45 days is charged at the finance company's prime rate plus 2% (10.50% and 9.75% per annum at December 31, 1999 and 1998, respectively). The line of credit requires that the Company maintain a minimum tangible net worth, a minimum pretax earnings to interest expense ratio and limits debt as a ratio to tangible net worth. At December 31, 1999 and 1998, the Company was in compliance with these covenants. At December 31, 1999 and 1998, the Company had $47.6 million and $22.0 million available for working capital advances and floorplan inventory financing. At December 31, 1999 and 1998, the Company had cash and short-term investments of $24.3 million and $6.4 million, respectively, and working capital of $18.7 million and $36.3 million, respectively. 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 2000. However, if the Company needs extra funds, such as for acquisitions or expansion or to fund a significant downturn in sales that causes losses, there are no assurances that adequate financing will be available at acceptable terms, if at all. In July 1996, the Company announced its plan to repurchase up to 1,000,000 shares of its Common Stock. The shares will be repurchased from time to time at prevailing market prices, through open market or negotiated transactions, depending upon market conditions. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that the Company will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as the Company's management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. The Company will finance the repurchase plan with existing working capital. As of December 31, 1999, the Company has repurchased 15,000 shares. As part of its growth strategy, the Company may, in the future, acquire other companies in the same or complementary lines of business, and pursue other business ventures. Any launch of a new business venture or any 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 currently has no definitive agreements with respect to any acquisitions. 26 Year 2000 Computer systems, software packages, and microprocessor dependent equipment may cease to function or generate erroneous data during the year 2000 or thereafter. The problem affects those systems or products that are programmed to accept a two-digit code in date code fields. To correctly identify dates after December 31, 1999, a four-digit date code field must be created to be what is commonly termed "year 2000 compliant." In prior reports, the Company has discussed the nature and progress of its plans to become year 2000 ready. In late 1999, the Company completed its testing and remediation of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems, and the Company believes those systems successfully responded to the year 2000 date change. The Company expensed approximately $0.5 million during 1999 in connection with its testing and remediation efforts. The Company is not aware of any material problems resulting from year 2000 issues, either with its products, its internal systems, or the products and services of third parties. Although the Company has not experienced any material year 2000 problems or disruptions since January 1, 2000, there can be no assurance that such problems or disruptions will not occur in the future. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and long-term debt. At March 30, 2000, the carrying values of the Company's financial instruments approximated their fair values based on current market prices and rates. It is the Company's policy not to enter into derivative financial instruments. The Company does not have any significant foreign currency exposure since it does not transact business in foreign currencies. Therefore, the Company does not have significant overall currency exposure at March 30, 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained in the financial statements listed in Item 14(a) under the caption "Consolidated Financial Statements" and commencing on page F-1 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 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 2000 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. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Executive Compensation and Other Information" and "Election of Directors - Compensation of Directors" in the Company's definitive Proxy Statement to be filed in connection with its 2000 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 2000 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 Relationships and Related Transactions and Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement to be filed in connection with its 2000 Annual Meeting of Stockholders and such information is incorporated herein by reference. 28 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: (a) (1) Consolidated Financial Statements. See Index to Consolidated Financial Statements. (2) Financial Statement Schedules. See Index to Consolidated Financial Statements. (3) Exhibits. The following exhibits are filed or incorporated by reference as part of this report:
Exhibit Number Description -------------- ----------- 3.1 Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 10.1* 1994 Stock Incentive Plan and form of stock option agreement (1) 10.2* Employment Agreement dated January 1, 1995, between Creative Computers, Inc. and Frank F. Khulusi (1) 10.4* Employment Agreement dated January 1, 1994, between Creative Computers, Inc. and Dan DeVries (1) 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 (2) 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. (1) 10.18* Directors' Non-Qualified Stock Option Plan, amended and restated as of May 18, 1999 (7) 10.22 Agreement dated August 1, 1995 between Creative Computers, Inc. and Deutsche Financial Services (formerly known as ITT Commercial Finance Corp.) (2) 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 (4) 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 (4) 10.29 Amendment to Agreement for Wholesale Financing dated February 25, 1997 (4) 10.30 Asset Purchase Agreement dated September 27, 1997 between Creative Computers, Inc. and Elek-Tek (3) 10.31 Business Credit and Security Agreement dated October 14, 1997 between Deutsche Financial Service Corporation and Elek-Tek Acquisition Corp. (3) 10.32 Business Credit and Security Agreement dated October 14, 1997 between Deutsche Financial Service Corporation and Creative Computers, Inc. (3) 10.33 Asset Purchase Agreement dated August 29, 1997 between Creative Computers, Inc. and ComputAbility, Ltd. (5) 10.34 Registration Rights Agreement by and between Creative Computers, Inc. and uBid, Inc., dated as of December 7, 1998 (6) 29
10.35 Separation and Distribution Agreement by and between Creative Computers, Inc. and uBid, Inc., dated as of December 7, 1998, as amended (7) 10.36 Services Agreement by and between Creative Computers, Inc. and uBid, Inc., dated as of December 7, 1998 (6) 10.37(A) Tax Indemnification and Allocation Agreement by and between Creative Computers, Inc. and uBid, Inc., dated as of December 7, 1998, as amended (8) 10.37(B) Amendment No. 1 to the Tax Indemnification and Allocation Agreement by and among uBid, Creative Computers and CMGI, Inc., dated as of February 9, 2000 (10) 10.38 Sublease Agreement between Creative Computers, Inc. and uBid, Inc., dated as of July 1, 1998 (6) 10.39 Agreement Restricting Transfer of Assets and Letter Agreement dated as of September 23, 1998 by and between Deutsche Financial Services Corporation and Creative Computers, Inc. and uBid, Inc. (6) 10.40 Assignment and License Agreement by and between Creative Computers, Inc. and uBid, Inc., dated as of November 30, 1998 (6) 10.41 Sublease Agreement between Creative Computers, Inc. and uBid, Inc., dated as of December 1, 1999 10.42* Employment Agreement dated July 22, 1999, between Creative Computers, Inc. and Scott Klein (9) 21.1 Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Financial Data Schedule (filed with EDGAR version only) (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (33-89572) declared effective on April 4, 1995. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (33-95416) declared effective on August 23, 1995. (3) Incorporated by reference to the Company's Form 8-K dated October 11, 1997, filed with the Commission on October 30, 1997 (4) Incorporated by reference to the Company's 1996 Form 10-K, filed with the Commission on March 31, 1997. (5) Incorporated by reference to the Company's 1997 Form 10-K, filed with the Commission on March 31, 1998. (6) Incorporated by reference to the Registration Statement on Form S-1 of uBid, Inc. (File No. 333-58477), on file with the Commission. (7) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended June 30, 1999, filed with the Commission on August 16, 1999. (8) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1999, filed with the Commission on May 17, 1999. (9) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30, 1999, filed with the Commission on November 15, 1999. (10) Incorporated by reference to the Annual Report on 10-K of uBid, Inc. (Commission File No. 000-25119) for the year ended December 31, 1999.
* The referenced exhibit is a compensatory contract, plan or arrangement. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of the period covered by this Report. 30 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 30, 2000. CREATIVE COMPUTERS, INC. By: /s/ FRANK F. KHULUSI ------------------------------ Frank F. Khulusi Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Frank F. Khulusi and Theodore R. Sanders, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, 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 might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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 --------- ----- ---- /s/ FRANK F. KHULUSI Chairman of the Board of March 30, 2000 - --------------------------- Directors and Chief Frank F. Khulusi Executive Officer (Principal Executive Officer) /s/ THEODORE R. SANDERS Chief Financial Officer March 30, 2000 - --------------------------- (Principal Financial and Theodore R. Sanders Accounting Officer) /s/ SAM U. KHULUSI Director March 30, 2000 - --------------------------- Sam U. Khulusi /s/ THOMAS MALOOF Director March 30, 2000 - --------------------------- Thomas Maloof /s/ RONALD B. RECK Director March 30, 2000 - --------------------------- Ronald B. Reck
31 CREATIVE COMPUTERS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements and Supplementary Data - ------------------------------------------- Report of Independent Accountants...................................................................... F-2 Consolidated Balance Sheet at December 31, 1999 and 1998............................................... F-3 Consolidated Statement of Operations for the Years Ended December 31, 1999, 1998 and 1997.............. F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.... F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.............. F-6 Notes to Consolidated Financial Statements............................................................. F-7 Quarterly Financial Information (unaudited)............................................................ F-18 Financial Statement Schedule - ---------------------------- Schedule II - Valuation and Qualifying Accounts........................................................ F-19 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.
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Creative Computers, Inc. In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Creative Computers, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of uBid, Inc., a former majority-owned subsidiary, for the year ended December 31, 1998, which statements reflect total assets of $34,625,000 and total liabilities of $15,992,000 at December 31, 1998, and total revenues of $48,232,000 and net loss of $10,169,000 for the year then ended. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for uBid, Inc. at December 31, 1998 and for the year then ended, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, 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 and the report of other auditors provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California February 4, 2000 F-2 CREATIVE COMPUTERS, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data)
December 31, --------------------- ASSETS 1999 1998 --------- --------- Current assets: Cash and cash equivalents $ 24,326 $ 6,442 Accounts receivable, net of allowance for doubtful accounts of $1,483 and $3,676 47,618 40,429 Inventories 38,068 39,158 Prepaid expenses and other current assets 5,781 5,374 Net assets of uBid discontinued segment, net of minority interest of $3,708 in 1998 - 14,925 Income tax refund receivable 177 190 Notes receivable 3,331 - Deferred income taxes 2,047 5,216 -------- -------- Total current assets 121,348 111,734 Notes receivable - 3,331 Property, plant and equipment, net 14,569 14,391 Goodwill, net 11,836 12,318 Deferred income taxes 3,738 1,262 Other assets 42 138 -------- -------- $151,533 $143,174 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 86,609 $ 62,129 Accrued expenses and other current liabilities 15,894 13,198 Capital leases - current portion 142 116 Notes payable - current portion 6 6 -------- -------- Total current liabilities 102,651 75,449 Capital leases 136 6 Notes payable 148 155 -------- -------- Total liabilities 102,935 75,610 -------- -------- Commitments and contingencies (Note 5) Stockholders' equity: Common stock, $.001 par value; 15,000,000 shares authorized; 10,404,069 and 10,264,539 shares issued 11 10 Preferred stock, $.001 par value; 5,000,000 shares authorized; none issued and outstanding - - Additional paid-in capital 74,337 82,361 Treasury stock, at cost: 15,000 shares (91) (91) Retained earnings (accumulated deficit) (25,659) (14,716) -------- -------- Total stockholders' equity 48,598 67,564 -------- -------- $151,533 $143,174 ======== ========
See accompanying notes to consolidated financial statements. F-3 CREATIVE COMPUTERS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data)
Year ended December 31, --------------------------------- 1999 1998 1997 --------- --------- --------- Net sales $731,955 $642,006 $546,122 Cost of goods sold 652,404 568,309 476,053 Retail store closure inventory reserve - 3,679 - -------- -------- -------- Gross profit 79,551 70,018 70,069 Selling, general and administrative expenses 83,687 76,812 63,252 Expenses related to retail store closures - 6,773 - -------- -------- -------- Income (loss) from operations (4,136) (13,567) 6,817 Interest income (expense), net 245 (291) 144 -------- -------- -------- Income (loss) before income taxes (3,891) (13,858) 6,961 Income tax provision (benefit) 812 (5,034) 2,642 -------- -------- -------- Income (loss) from continuing operations (4,703) (8,824) 4,319 Loss from discontinued operations, net of minority interest of $1,500 and $1,198 in 1999 and 1998 (6,240) (8,971) (194) -------- -------- -------- Net income (loss) $(10,943) $(17,795) $ 4,125 ======== ======== ======== Basic earnings (loss) per share Continuing operations $ (0.45) $ (0.87) $ 0.44 Discontinued operations (0.60) (0.88) (0.02) -------- -------- -------- $ (1.05) $ (1.75) $ 0.42 ======== ======== ======== Diluted earnings (loss) per share Continuing operations $ (0.45) $ (0.87) $ 0.43 Discontinued operations (0.60) (0.88) (0.02) -------- -------- -------- $ (1.05) $ (1.75) $ 0.41 ======== ======== ======== Basic weighted average number of shares outstanding 10,383 10,176 9,895 ======== ======== ======== Diluted weighted average number of shares outstanding 10,383 10,176 10,030 ======== ======== ========
See accompanying notes to 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, 1996 9,792 $10 $53,932 $ (1,046) $(91) $ 52,805 Issuance of stock in connection with acquisition 272 2,500 2,500 Stock option exercises, including related income tax benefit 41 340 340 Net income 4,125 4,125 ------ --- ------- --------- ---- -------- Balance at December 31, 1997 10,105 10 56,772 3,079 (91) 59,770 Capital contributed by minority stockholders of subsidiary 18,943 18,943 uBid stock-based compensation 5,267 5,267 Stock option exercises, including related income tax benefit 160 1,379 1,379 Net loss (17,795) (17,795) ------ --- ------- --------- ---- -------- Balance at December 31, 1998 10,265 10 82,361 (14,716) (91) 67,564 Spin-off of uBid subsidiary (8,877) (8,877) Stock option exercises 139 1 853 854 Net loss (10,943) (10,943) ------ --- ------- --------- ---- -------- Balance at December 31, 1999 10,404 $11 $74,337 $(25,659) $(91) $ 48,598 ====== === ======= ======== ==== ========
See accompanying notes to consolidated financial statements. F-5 CREATIVE COMPUTERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year ended December 31, --------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net income (loss) $(10,943) $(17,795) $ 4,125 -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,961 3,882 2,333 Provision (benefit) for deferred income taxes 693 (5,017) 2,469 Loss on disposal of property, plant and equipment - 1,950 783 Loss on impairment of goodwill - 3,095 - Loss from discontinued operations 6,240 8,971 194 Changes in assets and liabilities, net of acquisitions and spin-off: Accounts receivable (7,189) 2,017 (5,773) Inventories 1,090 3,483 17,416 Prepaid expenses and other current assets (471) (2,561) 926 Other assets 96 (742) 3 Accounts payable 24,480 16,171 (6,827) Accrued expenses and other current liabilities 2,504 (75) 1,063 Income tax refund receivable 13 279 1,723 -------- -------- -------- Total adjustments 32,417 31,453 14,310 -------- -------- -------- Net cash provided by operating activities 21,474 13,658 18,435 -------- -------- -------- Cash flows from investing activities: Redemptions of securities available for sale - - 1,536 Purchase of securities available for sale - - (1,015) Acquisition of Elek-Tek - - (9,083) Acquisition of ComputAbility - - (5,482) Acquisition of property, plant and equipment (4,185) (3,209) (2,945) Advances to uBid - (2,661) - Proceeds from sale of equipment - - 13 -------- -------- -------- Net cash used in investing activities (4,185) (5,870) (16,976) -------- -------- -------- Cash flows from financing activities: Net line of credit payments - (9,956) (10,775) Payments under notes payable (7) (210) (81) Principal payments of obligations under capital leases (252) (233) (254) Proceeds from stock issued under stock option plans 854 1,035 340 -------- -------- -------- Net cash provided by (used in) financing activities 595 (9,364) (10,770) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 17,884 (1,576) (9,311) Cash and cash equivalents: Beginning of year 6,442 8,018 17,329 -------- -------- -------- End of year $ 24,326 $ 6,442 $ 8,018 ======== ======== ========
See accompanying 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 Policies Description of Company Creative Computers, Inc. (the "Company"), founded in 1987, is a direct marketer of personal computer hardware, software and peripheral products, as well as consumer electronics. 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, a direct sales force, a retail showroom and multiple Internet web sites. The Company offers a broad selection of products through its distinctive, full-color catalogs, MacMall, PC Mall, PC Mall.Com, MacMall Buyers Software Guide and ComputAbility, the Company's worldwide web sites on the Internet, and other promotional materials. During 1997, the Company acquired and assimilated two marketers of personal computer hardware and software products, Elek-Tek, Inc. and ComputAbility, Ltd. In September 1997, the Company formed a wholly owned subsidiary, uBid, Inc. ("uBid") to sell computer-related products and consumer electronics through an auction format on the Internet. In December 1998, uBid completed an initial public offering of 1,817,000 shares of its common stock. On June 7, 1999, the Company divested its ownership in uBid by means of a tax-free distribution of all of its remaining 7.3 million shares of uBid common stock to the Company's shareholders of record as of May 24, 1999. In accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations," uBid's revenues and expenses have been excluded from the Company's consolidated revenues and expenses from continuing operations. The Company's share of uBid's operating results, net of taxes, for the periods presented have been reported as a separate line item on the Company's consolidated statement of operations under the caption "Loss from discontinued operations." The Company's consolidated balance sheet and consolidated statement of cash flows have also been restated for all periods presented to reflect the divestiture of uBid. uBid's revenues were $9 and $48,232 for the years ended December 31, 1997 and 1998, respectively, and $64,784 for the period ended June 7, 1999. 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. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition Net sales include product sales net of returns and allowances, and gross outbound shipping and handling charges. The Company recognizes revenue from product sales, net of discounts, coupon redemption and estimated sales returns, when the products are shipped to customers. The Company provides an allowance for sales returns, which is based on historical experience. For all product sales shipped directly from suppliers to customers, the Company takes title to the products sold upon shipment, bears credit risk, and bears inventory risk for returned products that are not successfully returned to suppliers, although some of these risks are mitigated through arrangements with the Company's shippers and suppliers. F-7 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Cash Equivalents All highly liquid investments with initial maturities of three months or less are considered cash equivalents. Concentration of Credit Risk Accounts receivable potentially subject the Company to credit risk. The Company extends credit to its customers based upon an evaluation of each customer's financial condition and credit history and generally does not require collateral. The Company has historically incurred minimal credit losses. At December 31, 1999 and 1998, receivables from one large customer were $6.0 million and $8.8 million, respectively. Inventories Inventories consist primarily of finished goods, and are stated at cost (determined under the first-in, first-out cost method) or market, whichever is lower. At December 31, 1999 and 1998, the Company had reserves of $2,331 and $4,740, respectively, for demonstration inventory, lower of cost or market pricing and potential excess and obsolete inventory. 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 generated 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 $7,325, $4,157 and $1,387 in 1999, 1998, and 1997, respectively. Deferred advertising costs were $4,870 and $4,684 at December 31, 1999 and 1998, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheet. 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 Computers, machinery and equipment 3-7 years Building 31.5 years F-8 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Disclosures About Fair Value of Financial Instruments The carrying amount of cash, cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximates fair value because of the short-term maturity of these instruments. The carrying amount of the Company's notes payable approximate fair value based upon the current rates offered to the Company for obligations of similar terms and remaining maturities. Goodwill Goodwill, resulting from acquisitions, is amortized using the straight-line method over periods not exceeding twenty-five years and is subject to periodic review for impairment. Accumulated amortization at December 31, 1999 and 1998 was $1,086 and $604, respectively. Amortization expense totaled $482, $514 and $90 in 1999, 1998 and 1997, respectively. During 1998, in conjunction with the store closures, the Company determined that goodwill related to acquired retail stores was impaired and, accordingly, the Company recorded a write-off of $3,095. Accounting for the Impairment of Long-Lived Assets The Company reviews long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Income Taxes The Company accounts for income taxes under the liability method. 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. A valuation allowance is provided when it is more likely than not that all or some portion of deferred tax assets will not be realized. Earnings (Loss) per Share Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised using the treasury stock method. F-9 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) The composition of Basic and Diluted EPS is as follows:
1999 1998 1997 ------------ ------------ ------------ Income (loss) from continuing operations $ (4,703) $ (8,824) $ 4,319 Loss from discontinued operations (6,240) (8,971) (194) ----------- ----------- ----------- Net income (loss) $ (10,943) $ (17,795) $ 4,125 =========== =========== =========== Weighted average shares - Basic 10,383,052 10,175,864 9,895,179 Effect of dilutive stock options and warrants - - 135,238 Weighted average shares - Diluted 10,383,052 10,175,864 10,030,417 Basic earnings (loss) per share Continuing operations (0.45) (0.87) 0.44 Discontinued operations (0.60) (0.88) (.02) ----------- ----------- ----------- $ (1.05) $ (1.75) $ 0.42 =========== =========== =========== Diluted earnings (loss) per share Continuing operations (0.45) (0.87) 0.43 Discontinued operations (0.60) (0.88) (.02) ----------- ----------- ----------- $ (1.05) $ (1.75) $ 0.41 =========== =========== ===========
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 7. 1. Reclassifications Certain reclassifications have been made to the 1997 and 1998 financial statement amounts to conform to the 1999 presentation. 2. Property, Plant and Equipment Property, plant and equipment consist of the following as of December 31:
1999 1998 --------- -------- Furniture and fixtures $ 2,216 $ 2,370 Leasehold improvements 3,181 2,703 Computers, machinery and equipment 18,507 14,474 Building 2,827 2,827 Land 1,446 1,446 -------- ------- 28,177 23,820 Less: Accumulated depreciation and amortization (13,608) (9,429) -------- ------- $ 14,569 $14,391 ======== =======
Depreciation expense in 1999, 1998 and 1997 totaled $4,415, $3,307 and $2,247, respectively. F-10 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 3. Line of Credit As of December 31, 1999 and 1998, the Company had advances outstanding of $12,362 and $37,971, respectively, under a $60,000 line of credit with a finance company. The line of credit allows working capital advances up to $27,500 and floorplan inventory financing up to $45,000, however, total advances and floorplan financing cannot exceed $60,000. The advances outstanding at December 31, 1999 and 1998 relate to floorplan inventory financing to purchase inventory which is included in accounts payable. There were no outstanding working capital advances at December 31, 1999 or 1998. Working capital advances are also limited to eligible accounts receivable and inventory collateral. The line of credit is collateralized by substantially all of the Company's assets and is cancelable upon 90 days' advance notice. Interest for amounts owed for working capital advances are calculated at the finance company's prime rate (8.50% and 7.75% per annum at December 31, 1999 and 1998, respectively). Floorplan financing does not bear interest if paid within an average of 30 days of the inventory purchase date. Interest on floorplan financing not paid within an average of 45 days is charged at the finance company's prime rate plus 2% (10.50% and 9.75% per annum at December 31, 1999 and 1998, respectively). The line of credit requires that the Company maintain a minimum tangible net worth, a minimum pretax earnings to interest expense ratio and limits debt as a ratio to tangible net worth. At December 31, 1999 and 1998, the Company was in compliance with these covenants. At December 31, 1999 and 1998, the Company had $47,638 and $22,029 available for working capital advances and floorplan inventory financing. 4. Income Taxes The provision (benefit) for income taxes consists of the following for the years ended December 31:
1999 1998 1997 ------- -------- ------ Current Federal $ 106 $ (100) $ 103 State 13 83 70 ----- ------- ------ 119 (17) 173 ----- ------- ------ Deferred Federal 620 (4,584) 2,207 State 73 (433) 262 ----- ------- ------ 693 (5,017) 2,469 ----- ------- ------ $ 812 $(5,034) $2,642 ===== ======= ======
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:
1999 1998 1997 ------- ------- ------ Expected taxes at federal statutory tax rate (34.0)% (34.0)% 34.0% State income taxes, net of federal income tax benefit (2.9)% (1.5)% 5.0% Change in valuation allowance 53.7% -- -- Other 4.0% (0.8)% (1.0)% ------ ------ ----- 20.8% (36.3)% 38.0% ====== ====== =====
F-11 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) The significant components of deferred tax assets and liabilities are as follows at December 31:
1999 1998 -------- -------- Accounts receivable $ 638 $ 1,439 Inventories 356 786 Property, plant and equipment (162) (1,194) Amortization (462) (394) Accrued expenses and reserves 621 606 Tax credits and loss carryforwards 8,171 5,232 Other 3 3 Less: Valuation allowance (3,380) 0 ------- ------- Net deferred tax assets $ 5,785 $ 6,478 ======= =======
At December 31, 1999, the Company had federal net operating loss carryforwards of $22,046, which expire between 2018 and 2019. At December 31, 1999, the Company had various state net operating loss carryforwards ranging in amounts from $53 to $4,792, which expire between 2003 and 2004. At December 31, 1999, the Company also had federal and state capital loss carryforwards of $71, which expire between 2000 and 2001. 5. Commitments and Contingencies Leases The Company occupies office and warehouse space under various operating leases 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, 1999 were as follows:
2000 $2,530 2001 2,502 2002 1,882 2003 273 2004 207 Thereafter 13 ------ Total $7,407 ======
In 1999, 1998 and 1997 rent expense included in selling, general and administrative costs was $3,206, $2,486 and $1,978, respectively. Some of the leases contain renewal options and 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 consolidated financial position or results of operations. F-12 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 6. Stockholders' Equity Initial Public Offering and Spin-off of uBid, Inc. On December 9, 1998, uBid, Inc., a subsidiary of the Company at that time, completed an initial public offering (the "Offering") of 1,817,000 shares of common stock at an offering price of $15.00 per share. Net proceeds to uBid were $23,847. The shares sold to the public in the offering represented approximately 19.9% of uBid's outstanding common stock. As a result of the Offering, the Company's share of the amount of the Offering Proceeds in excess of the corresponding carrying value of uBid equity in the amount of $18,943 was credited to additional paid-in capital. As discussed in Note 1, the Company's remaining interest in uBid was subsequently spun off to the Company's shareholders in June 1999, resulting in a charge of $8,877 to additional paid-in capital in 1999. Treasury Stock In July 1996, the Company announced its plan to repurchase up to 1,000,000 shares of its Common Stock. The shares will be repurchased from time to time at prevailing market prices, through open market or negotiated transactions, depending upon market conditions. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that the Company will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as the Company's management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. The Company will finance the repurchase plan with existing working capital. As of December 31, 1999, the Company has repurchased 15,000 shares. 7. 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 make 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 Plan to make a 25% matching contribution for amounts which do not exceed 4% of the participants' annual compensation. During 1999, 1998 and 1997, the Company incurred $142, $87 and $84, respectively, of expenses 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, or options not intended to qualify as Incentive Stock Options ("Nonstatutory Stock Options"). A total of 1,950,000 shares are reserved for issuance upon the exercise of options granted under the 1994 Plan, and 150,706 shares of authorized but unissued shares are available for future grants as of December 31, 1999. All options granted through December 31, 1999 have been Nonstatutory Stock Options. F-13 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 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 generally vest annually over five years, and are nontransferable other than by will or by the laws of descent and distribution. 1995 Director Stock Option Plan The Company adopted the Directors' Non-Qualified Stock Option Plan (the "Director Plan") in 1995. In 1999, the Company increased the total number of shares reserved for issuance under the Director Plan to 100,000 from 50,000, of which options to purchase 33,000 shares are outstanding as of December 31, 1999. Under the Director Plan each non-employee director of the Company ("Non- Employee Director") receives a non-qualified option to purchase 5,000 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 5,000 shares of Common Stock (a "Subsequent Grant"); provided that no Subsequent Grant will be made to any Non- Employee Director who has not served as a director of the Company, as of the time of such annual meeting, for at least one year. The exercise price per share of each option granted under the 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, 1996 720,714 $6.36 Granted 351,750 7.61 Canceled (176,593) 7.00 Exercised (41,694) 5.42 ---------- Outstanding at December 31, 1997 854,177 6.80 Granted 500,100 8.43 Canceled (290,893) 8.04 Exercised (159,031) 6.26 ---------- Outstanding at December 31, 1998 904,353 7.34 Granted 1,758,048 5.04 Canceled (1,014,907) 7.72 Exercised (139,029) 6.15 ---------- Outstanding at December 31, 1999 1,508,465 4.54 ==========
F-14 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Of the options outstanding at December 31, 1999, 1998 and 1997, options to purchase 361,632, 306,483 and 274,914 shares were exercisable at weighted average prices of $1.88, $6.41 and $6.21 per share, respectively. The following table summarizes information concerning currently outstanding and exercisable stock options:
Options exercisable at Options Outstanding at December 31, 1999 December 31, 1999 -------------------------------------------------- ------------------------------ Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price - -------------------------- -------------------------------------------------- ------------------------------ $1.33-$ 1.96 536,090 7.35 $1.73 286,083 $1.70 $1.99-$ 6.88 661,400 9.33 $5.54 75,349 $2.55 $7.00-$10.63 310,975 9.45 $7.26 200 $8.50 --------------- --------------- 1,508,465 361,632 =============== ===============
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:
1999 1998 1997 --------- --------- --------- Risk free interest rates 6.10% 4.89% 6.34% Expected dividend yield none none none Expected lives 7 yrs. 7 yrs. 6 yrs. Expected volatility 124.0% 100.0% 80.0%
The weighted average grant date fair values of options granted under the Plans during 1999, 1998 and 1997 were $7.41, $7.11 and $5.55, respectively. 1999 eCOST.com Employee Stock Option Plan The Company adopted the eCOST.com Employee Stock Option Plan in 1999. During 1999, options to purchase 537,000 shares of eCOST.com common stock were granted at a weighted average exercise price of $0.20. Options generally vest annually over five years, and are nontransferable other than by will or by the laws of descent and distribution. FAS 123 Pro Forma Information The Company accounts for its stock option plans under APB Opinion No. 25. Had compensation expense for these plans been determined consistent with SFAS 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts in the following table.
1999 1998 1997 --------- ---------- ------- Net income (loss) As Reported $(10,943) $(17,795) $4,125 Pro Forma $(12,943) $(18,097) $3,549 Diluted net income (loss) per share As Reported $ (1.05) $ (1.75) $ 0.41 Pro Forma $ (1.25) $ (1.78) $ 0.37
F-15 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 8. Supplemental Disclosures of Cash Flow Information
1999 1998 1997 ------------ ------------ ------------ Cash paid during the year ending December 31: Interest $ 407 $ 851 $ 488 Income taxes $ 12 $ 281 $ 538 Non-cash investing and financing activities: Borrowing incurred in connection with the acquisition of Elek-Tek, Inc. -- -- $20,731 Equipment acquired under capital lease obligations $ 409 -- $ 73 Notes payable assumed in connection with acquisition of ComputAbility -- -- $ 380
9. Acquisitions On August 29, 1997, the Company acquired the assets and assumed the liabilities of Milwaukee-based ComputAbility, Ltd., ("ComputAbility") a privately held direct market reseller of PC/WINTEL hardware, peripheral and software products, for $8,000 consisting of $5,500 paid in cash and the remainder through the issuance of 271,739 shares of common stock valued at $2,500. The acquisition of ComputAbility has been accounted for using the purchase method and the operating results of ComputAbility have been combined with those of the Company since the date of acquisition. The total cost of the acquisition exceeded the fair value of the net assets acquired and liabilities assumed by $6,763 and, accordingly, the excess has been recorded as goodwill and is being amortized using the straight-line basis over 25 years. On October 15, 1997, the Company acquired substantially all of the assets of Elek-Tek, Inc. ("Elek-Tek"), a Delaware corporation, for a purchase price of $29,400 plus direct costs of the acquisition pursuant to an Asset Purchase Agreement dated September 17, 1997, as amended. Such assets consisted primarily of accounts receivable, inventory, property, plant and equipment, certain intangibles and customer lists and the businesses associated with mail order, direct sales and retail activities. The acquisition was completed as a result of bankruptcy court approval of the agreement signed by the Company and Elek-Tek in connection with the September 17, 1997 filing by Elek-Tek for protection under Chapter 11 of the U.S. Bankruptcy Code. Elek-Tek currently operates as a wholly owned subsidiary of the Company under the name CCIT. The Elek-Tek acquisition was accounted for as a purchase. Accordingly, the operating results of Elek-Tek have been combined with those of the Company since the date of acquisition. The Company borrowed $20.7 million of the purchase price from Deutsche Financial Services Corporation, and the remaining $8.7 million was paid in cash. The purchase price was allocated to the net assets acquired based upon their estimated fair values at the date of acquisition. The excess of the purchase price over the net assets acquired of $8,468 is being amortized using the straight line basis over 25 years. In connection with the acquisition of Elek-Tek, the Company incurred expenses of $1,470 in the fourth quarter of 1997. These expenses related primarily to integrating Elek-Tek's sales force and customer base into the Company. The following table reflects unaudited pro forma combined results of operations of the Company, ComputAbility and Elek-Tek as if these acquisitions had occurred at the beginning of the year presented. However, these pro forma results are not necessarily indicative of the actual results of operations that would have occurred. F-16 CREATIVE COMPUTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data)
1997 --------- Net sales $791,345 Net income $ 1,046 Diluted earnings per share $ 0.10
10. Headquarters Move In November 1997, the Company consolidated its headquarters and telemarketing facilities into a 160 thousand square foot building in Torrance, CA. The charge associated with the move was $815, and was expensed in the fourth quarter of 1997. 11. Retail Store Closures During February 1998, the Company closed its Indiana retail showroom. On March 20, 1998, the Company closed six retail showrooms to focus its efforts on its catalog, corporate and Internet channels of distribution. The Company recorded a one-time pretax restructuring charge of $10.5 million in 1998 relating to exit costs associated with the closing of retail operations. Recorded in selling, general and administrative costs were $3.1 million in write-offs of goodwill, $1.9 million in write-offs of fixed assets, a $1.5 million reserve for lease exit costs, and $0.3 million in employee-related severance costs. Recorded in cost of sales were $3.7 million of reserves for store inventory. All reserves were utilized by December 31, 1998. 12. Segment Information The Company operates in two reportable segments: 1) a direct marketer of personal computers, hardware, software, peripheral products and consumer electronics under the PCMall, MacMall, ComputAbility and CCIT brands; and 2) a Multi-Category Internet retailer under the eCOST.com brand. Summarized segment information for continuing operations for the year ended December 31, 1999 is as follows:
Direct Multi-Category Marketer Internet Consolidated ----------- -------------- ------------- Net sales $695,165 $36,790 $731,955 Gross profit 79,290 261 79,551 Operating income (loss) 2,047 (6,183) (4,136) Total assets 146,185 5,348 151,533
Segment information is not provided for the years ended December 31, 1998 and December 31, 1997, as the Company did not operate in the Multi-Category Internet segment until the formation of eCOST.com in April 1999. The Company no longer operates in the Internet Auction segment as a result of the spin-off of uBid, Inc. in 1999. F-17 CREATIVE COMPUTERS, INC. QUARTERLY FINANCIAL INFORMATION (unaudited) (in thousands, except per share data)
1999 ----------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- Net Sales $176,289 $161,535 $172,377 $221,754 Gross Profit 20,037 18,982 18,215 22,317 Income (loss) from continuing operations 388 (277) (2,533) (2,281) Loss from discontinued operations (2,685) (3,555) - - Net income (loss) (2,297) (3,832) (2,533) (2,281) Basic earnings (loss) per share Continuing operations $ 0.04 $ (0.03) $ (0.24) $ (0.22) Discontinued operations (0.26) (0.34) - - -------- -------- -------- -------- $ (0.22) $ (0.37) $ (0.24) $ (0.22) ======== ======== ======== ======== Diluted earnings (loss) per share Continuing operations $ 0.04 $ (0.03) $ (0.24) $ (0.22) Discontinued operations (0.26) (0.34) - - -------- -------- -------- -------- $ (0.22) $ (0.37) $ (0.24) $ (0.22) ======== ======== ======== ========
See Note 1 to the consolidated financial statements for a discussion of the uBid spin-off.
1998 ----------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- Net Sales $162,059 $143,183 $170,442 $166,322 Gross Profit 12,394 18,002 20,041 19,581 Income (loss) from continuing operations (12,234) 808 1,112 1,490 Loss from discontinued operations (575) (596) (677) (7,123) Net income (loss) (12,809) 212 435 (5,633) Basic earnings (loss) per share Continuing operations $ (1.21) $ 0.08 $ 0.11 $ 0.15 Discontinued operations (0.05) (0.06) (0.07) (0.70) -------- -------- -------- -------- $ (1.26) $ 0.02 $ 0.04 $ (0.55) ======== ======== ======== ======== Diluted earnings (loss) per share Continuing operations $ (1.21) $ 0.08 $ 0.11 $ 0.15 Discontinued operations (0.05) (0.06) (0.07) (0.70) -------- -------- -------- -------- $ (1.26) $ 0.02 $ 0.04 $ (0.55) ======== ======== ======== ========
See Note 11 to the consolidated financial statements for a discussion of special charges for the year ended December 31, 1998. F-18 SCHEDULE II CREATIVE COMPUTERS, INC. Valuation and Qualifying Accounts For the years ended December 31, 1997, 1998 and 1999 (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, 1997 $2,134 $ 5,680 $ (4,955) $2,859 December 31, 1998 2,859 3,927 (3,110) 3,676 December 31, 1999 3,676 3,206 (5,399) 1,483 Reserve for inventory for the year ended: December 31, 1997 6,304 6,548 (7,488) 5,364 December 31, 1998 5,364 6,172 (6,796) 4,740 December 31, 1999 4,740 2,019 (4,428) 2,331 Restructuring reserve for the year ended: December 31, 1998 - 10,452 (10,452) - Deferred tax asset valuation allowance for the year ended: December 31, 1999 - 3,380 - 3,380
F-19 EX-10.41 2 SUBLEASE AGREEMENT EXHIBIT 10.41 SUBLEASE AGREEMENT ------------------ THIS SUBLEASE AGREEMENT (this "Sublease"), dated as of December 1, 1999, is made by and between CREATIVE COMPUTERS, INC., a Delaware corporation ("Sublessor") and uBID, INC., a Delaware corporation ("Sublessee"). 1. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby -------- subleases from Sublessor for the term, at the rental, and upon all of the conditions set forth herein, that certain improved space (the "Subleased Premises") consisting of approximately seventy thousand (70,000) rentable square feet, situated in that certain industrial building (the "Building") located at 4715 East Shelby Drive, Memphis, Tennessee 38118. A depiction of the Subleased Premises is attached hereto as Exhibit "A." ---------- 2. Master Lease. Sublessor is the lessee of the Subleased Premises and other ------------ additional office space by virtue of that certain Industrial Lease Agreement dated September 15, 1995 (the "Master Lease"), between Mercy Capital Center Joint Venture, successor in interest to Corporate Estates, Inc., a California corporation ("Master Landlord") and Sublessor, as lessee, a copy of which is attached hereto as Exhibit "B." Additionally, the parties acknowledge and agree ---------- that the Master Lease is subject to that certain Payment in Lieu of Taxes Lease between the Industrial Development Board of the City of Memphis and the County of Shelby, Tennessee ("IDB"), as landlord, and Master Landlord, as tenant. Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Master Lease. Sublessor hereby represents and warrants to Sublessee that Sublessor is not in default under the Master Lease nor is Sublessor aware of any default of Master Landlord under the Master Lease. 3. Term. ---- 3.1 Term. The term (the "Term") of this Sublease shall commence on the ---- "Commencement Date" (as defined below) and expire on the date that the last business day of the calendar month twenty-two (22) months following the Commencement Date, unless sooner terminated pursuant to any provision hereof. The parties acknowledge and agree that the Commencement Date shall occur on the later of (i) the date that Sublessor delivers written notice to Sublessee that "Substantial Completion" of the Tenant Improvements (as defined and pursuant to Section 8, below) has occurred, or (ii) the date the parties obtain Master - --------- Landlord's consent pursuant to Section 6 below. --------- 3.2 Early Occupancy. In the event that Sublessee occupies the Subleased --------------- Premises for business purposes prior to the Commencement Date, such occupancy shall be subject to all provisions hereof, and such occupancy shall not advance the termination date. 4. Rent. ---- 4.1 Basic Rent. Sublessee shall pay to Sublessor monthly in advance, on ---------- the first (1st) day of each month during the Term, rent (the "Basic Rent") for the Subleased Premises in an amount equal to (a) Sixteen Thousand Six Hundred Twenty-Five and No/100 Dollars ($16,625.00), less (b) the Amortized Tenant Improvement Cost (as defined below). The Amortized Tenant Improvement Cost is equal to the quotient of (i) the actual incurred Tenant Improvement Costs (as defined in Section 8(a) below), divided by (ii) twenty-two (22). Rent for any ------------ period during the Term hereof which is for less than one (1) month shall be a prorata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 4.2 Additional Rent. --------------- (a) Sublessee shall pay to Sublessor as additional rent for the Subleased Premises Sublessee's proportionate share ("Sublessee's Proportionate Share") of Tenant's proportionate share of all Additional Rent and "operating expenses" (as defined and pursuant to Section 6 of the Master Lease) and real estate taxes and other impositions. Sublessee's Proportionate Share shall be equal to the fraction, the numerator consisting of the then existing rentable square feet of the Subleased Premises and the denominator consisting of 325,000. Sublessee shall pay Sublessor's Proportionate Share of Additional Rent to Sublessor within ten (10) days of invoice. (b) In addition, to the extent that during the term hereof, Sublessee requires extraordinary services or any resource in excess of that customarily supplied to Sublessor's other premises under the Master Lease, Sublessee shall contract, at Sublessee's sole costs and expense, with Master Landlord for such services. Sublessor and Sublessee acknowledge and agree that Sublessee shall not be required to pay any additional charge for basic services Master Landlord is required to so provide without additional charge to Sublessor pursuant to Section 6 of the Master Lease. 4.3 Payment of Rent and Consent to Sublease. Notwithstanding anything to --------------------------------------- the contrary contained herein, Basic Rent and Additional Rent shall be payable in the amounts and at the times set forth in this Section 4 regardless of the --------- date that the parties hereto receive Master Landlord's consent to this Sublease pursuant to Section 6 below. In the event, however, Master Landlord denies or --------- fails to consent to this Sublease prior to the expiration of the Approval Period (as defined in Section 6 below), Sublessee shall be entitled to the prompt --------- return of all rent paid applicable to the period following the date Master Landlord denied the approval of this Sublease and this Sublease shall be of no further force or effect and the parties hereto shall have no further obligation to each other. 5. Use. The Subleased Premises shall be used and occupied for office, --- warehouse and distribution of computers and related equipment and other uses related to Sublessee's business any other uses permitted under the Master Lease. Sublessee's business shall be conducted throughout the term hereof so as not to violate any term, provision or condition of the Master Lease. Sublessee shall comply with all applicable statutes, ordinances, rules, regulations, orders, restrictions of record and requirements in effect during the term hereof regulating the use by Sublessee of the Subleased Premises; provided however, Sublessee shall not be responsible for violations of applicable law relating to the Subleased Premises occurring prior to Sublessee's occupancy of the Subleased Premises. 6. Consent of Master Landlord. The parties hereto acknowledge that the Master -------------------------- Lease requires that Sublessor obtain the consent of Master Landlord to any subletting of the Subleased Premises. Therefore Sublessor and Sublessee agree that this Sublease shall be terminated pursuant to Section 31 below unless, ---------- within thirty (30) days of the date hereof (the "Approval Period"), Master Landlord grants its express consent to the terms and conditions of this Sublease. 7. Environmental Matters. --------------------- (a) For purposes of this Sublease: (i) "Contamination" as used herein means the uncontained or uncontrolled presence of or release of Hazardous Substances (as hereinafter defined) into any environmental media from, upon, within, below, into or on any portion of the Subleased Premises or the Building so as to require remediation, cleanup or investigation under any applicable Environmental Law (as hereinafter defined). (ii) "Environmental Laws" as used herein means all federal, state, and local laws, regulations, orders, permits, ordinances or other requirements, concerning Hazardous Substances, and the protection of human health, safety and the environment, all as may be amended from time to time. (iii) "Hazardous Substances" as used herein means any hazardous or toxic substance, material, chemical, pollutant, contaminant or waste as those terms are defined by any applicable Environmental Laws (including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA") and the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. ("RCRA") and any solid wastes, polychlorinated biphenyls, urea formaldehyde, asbestos, radioactive materials, radon, explosives, petroleum products and oil. 2 (b) Sublessee represents that all its activities on the Subleased Premises or the Building during the course of this Sublease will be conducted in compliance with Environmental Laws. Sublessee warrants that at its warehouse facilities (i) to Sublessee's actual knowledge, is currently in compliance with all applicable Environmental Laws and (ii) that there are no pending or threatened notices of deficiency, notices of violation, orders, or judicial or administrative actions involving alleged violations by Sublessee of any Environmental Laws. Sublessee, at Sublessee's sole cost and expense, shall be responsible for obtaining all permits or licenses or approvals under Environmental Laws for Sublessee's operation of its business on the Subleased Premises and shall make all notifications and registrations required by any applicable Environmental Laws. Sublessee, at Sublessee's sole cost and expense shall at all times comply with the terms and conditions of all such permits, licenses, approvals, notifications and registrations with any other applicable Environmental Laws. Sublessee warrants that it will apply for all such permits, licenses or approvals and made all such notifications and registrations required by any applicable Environmental Laws necessary for Sublessee's operation of its business on the Subleased Premises prior to the Commencement Date and will obtain prior to the Commencement Date or as soon thereafter as reasonably possible all such permits, licenses or approvals. (c) Sublessee shall not cause or permit any Hazardous Substances to be brought upon, kept or used in or about the Subleased Premises or the Building without the prior written consent of Sublessor, which consent shall not be unreasonably withheld; provided, however, that the consent of Sublessor shall -------- ------- not be required for the use at the Subleased Premises of cleaning supplies, toner for photocopying machines and other similar materials, in containers and quantities reasonably necessary for and consistent with normal and ordinary use by Sublessee, at the Subleased Premises, in the routine operation or maintenance of Sublessee's office equipment or in the routine janitorial service, cleaning and maintenance for the Subleased Premises. For purposes of this Section 7, --------- Sublessor shall be deemed to have reasonably withheld consent if Sublessor determines that the presence of such Hazardous Substance within the Subleased Premises could result in a risk of harm to person or property or otherwise negatively affect the value or marketability of the Building. (d) Sublessee shall not cause or permit the release of any Hazardous Substances by Sublessee or its agents, contractors, employees or invitees into any environmental media such as air, water or land, or into or on the Subleased Premises or the Building in any manner that violates any Environmental Laws. If such release shall occur, Sublessee shall (i) take all steps reasonably necessary to contain and control such release and any associated Contamination, (ii) clean up or otherwise remedy such release and any associated Contamination to the extent required by, and take any and all other actions required under, applicable Environmental Laws, and (iii) notify and keep Sublessor and Master Landlord reasonably informed of such release and response. (e) Sublessee shall under no circumstances whatsoever (i) cause or permit any activity on the Subleased Premises which would cause the Subleased Premises to become subject to regulation as a hazardous waste treatment, storage or under RCRA or the regulations promulgated thereunder; (ii) discharge Hazardous Substances into the storm sewer system serving the Building; or (iii) install any storage tank or underground piping on or under the Subleased Premises. (f) Sublessee shall and hereby does indemnify Sublessor and Master Landlord and hold Sublessor and Master Landlord harmless from and against any and all expense, loss, and liability suffered by Sublessor or Master Landlord (with the exception of those expenses, losses, and liabilities arising from Sublessor's or Master Landlord's own negligence or willful act), by reason of Sublessee's improper storage, generation, handling, treatment, transportation, disposal, or arrangement for transportation or disposal, of any Hazardous Substances (whether accidental, intentional, or negligent) or by reason of Sublessee's breach of any of the provisions of this Section 7. Such expenses, losses and liabilities --------- shall include, without limitation, (i) any and all expenses that Sublessor or Master Landlord may incur to comply with any Environmental Laws as a result of Sublessee's failure to comply therewith; (ii) any and all costs that Sublessor or Master Landlord may incur in studying or remedying any Contamination at or arising from the Subleased Premises or the Building; (iii) any and all costs that Sublessor or Master Landlord may incur in studying, removing, disposing or otherwise addressing any Hazardous Substances; (iv) any and all fines, 3 penalties or other sanctions assessed upon Sublessor or Master Landlord by reason of Sublessee's failure to comply with Environmental Laws; and (v) any and all legal and professional fees and costs incurred by Sublessor or Master Landlord in connection with the foregoing. The indemnity contained herein shall survive the termination or expiration of this Sublease. (g) Sublessor and Master Landlord shall have the right, but not the obligation, to enter the Subleased Premises at reasonable times throughout the Term upon two (2) business days prior notice, except in the event of any emergency, to audit and inspect the Subleased Premises for Sublessee's compliance with this Section 7. --------- 8. Tenant Improvements; Condition of Premises and Alterations. ---------------------------------------------------------- (a) Sublessor shall, at Sublessee's sole cost and expense, acquire, construct and install the tenant improvements (the "Tenant Improvements") as set forth on Exhibit "C" attached hereto. Upon the execution of this Sublease, Sublessee - ----------- shall deliver to Sublessor, in cash or immediately available funds, Three Hundred Ninety Thousand One Hundred Ninety-Five and No/100 Dollars ($390,195.00) (the "Tenant Improvement Allowance") to be used by Sublessor to pay for the Tenant Improvements. In the event that the cost for the acquisition, installation and construction of the Tenant Improvements (the "Tenant Improvement Costs") is less than the Tenant Improvement Allowance, Sublessor shall return the balance of the Tenant Improvement Allowance to Sublessee, and the parties hereto agree that Basic Rent shall be adjusted as set forth in Section 4.1. In the event that the Tenant Improvement Costs exceed the Tenant - ----------- Improvement Allowance, Sublessee shall pay the cost of such overage up to Twenty-Five Thousand and no/100 Dollars ($25,000.00) (the "Additional Allowance"). In the event that the Tenant Improvement Costs exceed the sum of Tenant Improvement Allowance and the Additional Allowance, Sublessor shall pay such overage. Sublessor shall deliver written notice to Sublessee upon the occurrence of and evidencing the substantial completion ("Substantial Completion") of the acquisition, construction and installation of the Tenant Improvements, subject to minor punch list items. (b) In the event that Sublessee requests in writing a revision in any plans approved by Sublessee relating to the Tenant Improvements or otherwise requests any change to the Tenant Improvements as contemplated in this Sublease, then provided such requested change is acceptable to Sublessor, in Sublessor's reasonable discretion, Sublessor shall advise Sublessee by written change order of any additional cost such change would cause. Sublessee shall approve or disapprove such change order in writing within five (5) days following its receipt. Sublessee's approval of a change order shall not be effective unless accompanied by payment in full of the additional cost, if any, of the tenant improvement work resulting from the change order. It is understood that Sublessor shall have no obligation to interrupt or modify the construction and installation of the Tenant Improvement work pending Sublessee's approval of a change order. (c) Except as otherwise set forth in Section 8(a) and Section 8(b) above, ------------ ------------ the Subleased Premises sublet hereunder shall be taken and leased by Sublessee in their "as is" condition existing as of the date hereof. Except for non- structural alterations costing less than Ten Thousand and No/100 Dollars ($10,000.00), Sublessee shall not make or suffer to be made any alterations, additions or improvements to or of the Subleased Premises or any part thereof without first obtaining the prior written consent of Master Landlord and Sublessor. Sublessor agrees that Sublessor's consent to such alterations, additions or improvements shall not be unreasonably withheld or delayed. In the event Sublessor consents to the making of any alterations, additions or improvements to the Subleased Premises by Sublessee the same shall be made by Sublessee at Sublessee's sole cost and expense. All alterations, additions and improvements made by Sublessee pursuant to this Sublease shall at the expiration of the Term hereof become the property of Sublessor without any additional consideration. Upon the expiration or sooner termination of the Term hereof, Sublessee shall, upon written demand by Sublessor given at least thirty (30) days prior to the end of the term, at Sublessee's sole cost and expense, forthwith and with all due diligence remove any alterations, additions, or improvements made by Sublessee, designated by Sublessor to be removed and further, Sublessee shall, forthwith and with all due diligence at its sole cost and expense, repair any damage to the Subleased Premises caused by such removal. In all events, Sublessee shall maintain the Subleased Premises in good condition and repair and shall surrender the Subleased Premises 4 to Sublessor upon expiration of this Sublease, or the sooner termination thereof, in good condition and repair, excluding ordinary wear and tear. 9. Liens. Sublessee shall keep the Subleased Premises and all alterations, ----- additions and improvements thereto, free from any liens arising out of any work performed or obligations incurred by or for Sublessee or materials furnished to Sublessee. Sublessor shall have the right to post notices of no responsibility with respect to any work performed or obligations incurred by or for Sublessee or materials furnished to Sublessee. If Sublessee fails to keep the Subleased Premises free from any such liens and does not, within ten (10) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Sublessor shall have, in addition to all other remedies provided herein and by law, the right but not the obligation, to cause the same to be released by such means as it shall deem proper, including payment of or defense against the claim giving rise to such lien. All sums paid by Sublessor and all expenses incurred by it in connection therewith (including, without limitation, reasonable attorneys, fees) shall create automatically an obligation of Sublessee to pay an equivalent amount as Additional Rent, which Additional Rent shall be payable by Sublessee on Sublessor's demand with interest at the maximum rate per annum permitted by law until paid. Such interest charged shall not constitute Sublessor's exclusive remedy nor compromise or limit any other rights granted Sublessor by this Sublease or by law or equity. Nothing herein shall imply any consent by Sublessor to subject Sublessor's estate to liability under any mechanic's lien law. Sublessee may contest the validity and/or amount of any lien imposed on the Subleased Premises, provided that Sublessee has caused such lien to be released of record by the payment or posting of the proper bond. 10. Repairs. Sublessee shall promptly make all repairs to the Subleased ------- Premises not required to be made by Master Landlord pursuant to the Master Lease, including, but not limited to special items and equipment installed by or on behalf of Sublessee. Sublessee shall pay for any repairs to the Subleased Premises or the Building made necessary by any act, neglect, misuse or omission of duty by Sublessee or its assignees, subtenants, employees, invitees or their respective agents or other persons permitted in the Subleased Premises or on any other portion of the Building by Sublessee, or any of them, and will maintain the Subleased Premises, and will leave the Subleased Premises upon termination of this Sublease, in a safe, clean, neat and sanitary condition. If Sublessee fails to maintain the Subleased Premises in good order, condition and repair, Sublessor shall give Sublessee notice to do such acts as are reasonably required to so maintain the Subleased Premises. If Sublessee fails to promptly commence such work and diligently prosecute it to completion, Sublessor shall have the right to do such acts and expend such funds at the expense of Sublessee as are reasonably required to perform such work. Prior to commencing any item of repair or maintenance work which is connected to the Building or may affect any structural portion of the Building or any of its basic systems (including, without limitation, air conditioning, heating, plumbing, electrical, and light fixtures), Sublessee shall notify Master Landlord and Sublessor and obtain Master Landlord's and Sublessor's prior written approval of the contractor who will perform such work. Master Landlord or Sublessor may elect to perform the required work at Sublessee's cost. All amounts payable by Sublessee to Sublessor pursuant to this Section 10 shall be paid as Additional Rent within ---------- ten (10) days after Sublessor delivers to Sublessee invoices or cancelled checks evidencing such payment obligations. Notwithstanding the foregoing, the parties hereto acknowledge and agree that Master Landlord shall remain responsible for the performance of all repairs expressly required to be performed by Master Landlord pursuant to the terms and conditions of the Master Lease ("Landlord's Repair Obligations"). Sublessee shall notify both Master Landlord and Sublessor in the event that Master Landlord shall fail to perform Landlord's Repair Obligations. Upon such notification and in addition to such other rights and remedies Sublessor shall have under the Master Lease, Sublessor shall either (i) take reasonable action under the Master Lease to require Master Landlord to perform its obligations thereunder, or (ii) permit Sublessee, with Sublessor's reasonable cooperation, to enforce Master Landlord's repair obligations under the Master Lease. 11. Damage or Destruction. In the event of damage or destruction to the --------------------- Building or any part thereof, the Master Lease shall either continue or terminate pursuant to Section 20 of the Master Lease. If the Master Lease ---------- terminates, the Sublease shall also terminate. If the Master Lease does not terminate, then Master Landlord shall commence the necessary repair or restoration of the Building, including that portion 5 of the Subleased Premises, if any, suffering damage or destruction, as required under the Master Lease. Sublessor shall have no responsibility whatsoever for the repair or restoration of the Subleased Premises, it being acknowledged by Sublessee that any repairs must be performed, if at all, by Master Landlord. There shall be no reduction or abatement of rent for any period during which Sublessee is unable to use the Subleased Premises, in whole or in part, due to the repairs or restoration required under this paragraph, unless Sublessor actually receives a reduction or abatement in rent under the terms of the Master Lease and then, only to the extent such reduction or abatement relates to the Subleased Premises. In any event Sublessee shall not be entitled to any insurance proceeds or other remuneration except for insurance proceeds from insurance policies it purchased for its own personal property. 12. Eminent Domain or Condemnation. In the event a proceeding in eminent ------------------------------ domain or condemnation is instituted against the Building, or any part thereof, the Master Lease shall either continue or terminate pursuant to Section 21 of ---------- the Master Lease. If the Master Lease terminates, this Sublease shall also terminate. If the Master Lease does not terminate and the Subleased Premises have not been materially affected, then the Sublease shall continue in full force and effect except that the rental payable hereunder shall be reduced to the extent that rent applicable to the Subleased Premises is equitably reduced under the Master Lease. If the Master Lease does not terminate and the Subleased Premises are materially and substantially affected by the proceeding in eminent domain or condemnation, then Sublessee shall have the right to terminate the Sublease. In any event, Sublessee shall not be entitled to any award of damages for Sublessee's interest in the Subleased Premises. Notwithstanding the foregoing, nothing contained herein shall prevent Sublessee from seeking an award against a taking authority for the taking of personal property and fixtures owned by Sublessee or for moving expenses as a result of such taking; provided however, the award sought and received by Sublessee shall not diminish or affect, in whole or in part the award sought by Master Landlord or Sublessor. 13. Waiver of Liability; Indemnification. Without limiting in any way the ------------------------------------ effect or generality of all indemnification and waiver provisions contained as part of the terms of the Master Lease, which are incorporated herein pursuant to Section 15 below, Sublessee hereby agrees that: - ---------- (a) Sublessor shall not be liable to Sublessee, and Sublessee hereby waives all claims against Sublessor, for any injury or damage to any person or property in or about the Subleased Premises by or from any cause whatsoever other than by reason of the negligent acts or willful misconduct of Sublessor. (b) Sublessee shall defend, indemnify and hold Sublessor and Master Landlord harmless against any and all claims or liability for any injury or damage to any person or property whatsoever when such injury or damage shall be caused in part or in whole by the act, neglect, fault of, or omission of any duty with respect to the same, by Sublessee, its agents, servants, employees, or invitees: (i) occurring in, on, or about the Subleased Premises or any part thereof, and (ii) occurring in, on, or about any facilities (including, without prejudice to the generality of the term "facilities," elevators, stairways, passageways or hallways) the use of which Sublessee may have in conjunction with other tenants of the Building. (c) Sublessee and Sublessor each hereby, on behalf of itself and all persons and parties claiming under or through it, including without limitation its insurance carrier(s), waives any right of recovery or claim against the other for any damage to or destruction of any property located in or about the Subleased Premises which results from or arises out of any casualty or event insured by any casualty and/or property insurance policy carried by such waiving party, regardless of the cause or origin of such casualty or event, including without limitation, the negligence of Sublessee or Sublessor. 14. Assignment and Subletting. ------------------------- (a) Sublessee shall not sell, assign, encumber or otherwise transfer by operation of law or otherwise this Sublease or any interest herein, sub-sublet the Subleased Premises, or suffer any other person to occupy or use the Subleased Premises or any portion thereof, without the prior written consent of Sublessor and Master Landlord as provided herein, nor shall Sublessee permit any lien to be placed on the Sublessee's interest by operation of law or otherwise. Sublessee shall, by written notice, advise Sublessor of its desire from and after a stated date (which shall not be less than ten (10) days nor more than ninety 6 (90) days after the date of Sublessee's notice), to subsublet the Subleased Premises or any portion thereof for any part of the term hereof. Said notice by Sublessee shall state the name and address of the proposed sub-subtenant, together with such proposed sub-subtenant's certified financial statements, and Sublessee shall deliver to Sublessor a true and complete copy of the proposed subsublease with said notice. Sublessor shall not unreasonably withhold its own consent to such sub-sublease, provided Master Landlord shall also give its consent. (b) Any sub-subletting hereunder by Sublessee shall not result in Sublessee being released or discharged from any liability under this Sublease. Any consent by Sublessor to any sub-subletting of the Subleased Premises or any part thereof by Sublessee shall not be deemed to be a consent to any other sub- subletting of the Subleased Premises and shall not constitute a waiver of the requirements of Sublessor's consent to any other subsubletting of the Subleased Premises as such requirement is stated herein. Any sale, assignment, encumbrance, subsubletting, occupation, lien or other transfer of this Sublease which does not comply with the provisions of this paragraph shall be voidable and at Sublessor's election shall constitute a default hereunder. (c) Sublessee shall pay to Sublessor of all rent received by Sublessee from any sub-subletting hereunder in excess of the rent payable by Sublessee to Sublessor under this Sublease, and any sums paid to Sublessee by any assignee hereunder in consideration of the assignment of this Sublease. Sublessee hereby irrevocably assigns to Sublessor, as security for Sublessee's obligations under this Sublease, all rent from any sub-subletting provided, however, that until the occurrence of an event of default by Sublessee hereunder, Sublessee shall have the right to collect such rent. 15. Incorporation of Terms of Master Lease. It is expressly understood, -------------------------------------- acknowledged and agreed by Sublessee that all of the other terms, conditions and covenants of this Sublease shall be those stated in the Master Lease but only to the extent that the terms of the Master Lease relate to the Subleased Premises, except for (i) the basic rent obligations set forth in Article 4 of the Master Lease, (ii) the Additional Rent obligations set forth in Article 6 of the Master Lease, subject however to Section 4 above and (iii) Articles 16 through 18, --------- inclusive, 35 through 37, inclusive, 39 and 40 of the Master Lease. Sublessee shall and hereby agrees to be subject to and bound by and to comply with the Master Lease with respect to the Subleased Premises and to satisfy all applicable terms and conditions of the Master Lease for the benefit of both Sublessor and Master Landlord, and that upon the breach of any of said terms, conditions or covenants of the Master Lease by Sublessee or upon the failure of the Sublessee to pay rent or comply with any of the provisions of this Sublease, Sublessor may exercise any and all rights and remedies granted to Master Landlord by the Master Lease, as well as any and all rights and remedies granted to Sublessor by this Sublease. It is further understood and agreed that the Sublessor has no duty or obligation to the Sublessee under the Master Lease other than to maintain the Master Lease in full force and effect during the term of this Sublease, provided, however, that Sublessor shall not be liable to Sublessee for any earlier termination of the Master Lease which is not due to the fault of Sublessor. Whenever the provisions of the Master Lease which have been incorporated as provisions of this Sublease require the written consent of the Master Landlord, said provisions shall be construed to require the written consent of both the Master Landlord and the Sublessor. Sublessor hereby covenants that its consent shall not be unreasonably withheld or delayed. Sublessee hereby acknowledges that it has read and is familiar with the terms of the Master Lease, and agrees that this Sublease is subordinate and subject to the Master Lease and that any termination thereof shall likewise terminate this Sublease. Sublessee further agrees that, in executing this Sublease and assuming the obligations of lessee under the Master Lease (to the extent applicable), it has not been granted any of the rights of Sublessor, as lessee under the Master Lease, such rights being specifically reserved by Sublessor, except to the extent granted to Sublessee hereunder. In the event of any inconsistencies between any of the provisions of this Sublease and the Master Lease, the terms of this Sublease shall govern. 16. Personal Property Taxes. Sublessee shall pay or cause to be paid, before ----------------------- delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon all Sublessee's leasehold improvements, equipment, furniture, fixtures and personal property located in the Subleased Premises. 7 17. Default and Remedies. -------------------- (a) The occurrence of any one or more of the following events shall constitute a material default and breach of this Sublease by Sublessee: (i) The failure by Sublessee to make any payment of rent or any other payment required to be made by Sublessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Sublessor to Sublessee; (ii) The abandonment (but not vacation of the Subleased Premises provided Sublessee continue to timely pay all rent due hereunder) of the Subleased Premises by Sublessee; (iii) The failure by Sublessee to observe or perform any of the covenants, conditions or provisions of this Sublease to be observed or performed by Sublessee, where such failure shall continue for a period of twenty (20) days after written notice thereof by Sublessor to Sublessee. If the nature of such default is such that the same cannot be reasonably cured within such twenty (20) day period, Sublessee shall not be deemed to be in default hereunder if Sublessee shall within such period commence such cure and thereafter diligently prosecute the same to completion, provided Master Landlord has not declared a material default and breach of the Master Lease as a result of Sublessee's failure to cure such default; (iv) The making by Sublessee of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Sublessee of a petition to have Sublessee adjudged a bankrupt, or a petition for reorganization or arrangement under any law, now existing or hereafter amended or enacted, relating to bankruptcy or insolvency (unless, in the case of a petition filed against Sublessee, Sublessee has not consented to, or admitted the material allegation of said petition is dismissed within thirty (30) days); or the appointment of a trustee or a receiver (other than in a bankruptcy or insolvency proceeding) to take possession of substantially all of Sublessee's assets located at the Subleased Premises or of Sublessee's interest in this Sublease, where possession is not restored to Sublessee within thirty (30) days; or (v) Sublessee causes a material default and breach under the Master Lease. (b) In the event of any such material default or breach by Sublessee, Sublessor may, at any time thereafter, with or without notice or demand, and without limiting Sublessor in the exercise of any right or remedy which Sublessor may have hereunder, under the Master Lease as incorporated herein or otherwise at law or in equity by reason of such default or breach, including, but not limited to: (i) Terminate this Sublease and Sublessee's right to possession of the Subleased Premises by notice to Sublessee or any other lawful means, in which case this Sublease shall terminate and Sublessee shall immediately surrender possession of the Subleased Premises to Sublessor. In such event Sublessor shall be entitled to recover from Sublessee all unpaid installments of rent and other sums due and owing under this Sublease as of the date of Sublessee's default and all damages incurred by Sublessor by reason of Sublessee's default, including, but not limited to : (A) The cost of recovering possession of the Subleased Premises; or (B) The worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Sublessee proves could be reasonably avoided. Unpaid installments of rent or other sums shall bear interest from the date due at the highest legal rate permissible in the State where the Subleased Premises are located. In the event Sublessee shall have abandoned the Subleased Premises, Sublessor shall have the option of (1) taking possession of the 8 Subleased Premises and recovering from Sublessee the amounts specified hereinabove, or (2) proceeding under the provisions of the following paragraphs (ii) and/or (iii). (ii) Maintain Sublessee's right to possession, in which case this Sublease shall continue in effect whether or not Sublessee shall have abandoned the Subleased Premises. In such event Sublessor shall be entitled to enforce all of Sublessor's rights and remedies under this Sublease, including, without limitation, the right to recover the rent as it becomes due hereunder. Notwithstanding any election by Sublessor not to terminate this Sublease or Sublessee's right to possession, and whether or not Sublessor has sublet the Subleased Premises or any part thereof as provided hereinabove, Sublessor shall retain the right to and may at any time thereafter elect to terminate this Sublease or Sublessee's right to possession for any default of Sublessee which remains uncured or for any subsequent default of Sublessee by giving Sublessee written notice thereof. (iii) Pursue any other remedy now or thereafter available to Sublessor under the laws or judicial decisions of the State in which the Subleased Premises are located. (c) No entry or taking of possession of the Subleased Premises or any part thereof by Sublessor, nor any subletting thereof by Sublessor for Sublessee, nor any appointment of a receiver, nor any other act of Sublessor, whether acceptance of keys to the Subleased Premises or otherwise, shall constitute or be construed as an election by Sublessor to terminate this Sublease or Sublessee's right to possession of the Subleased Premises unless a written notice of such election be given to Sublessee by Sublessor. (d) In the event Sublessor elects to terminate this Sublease or Sublessee's right to possession hereunder, Sublessee shall surrender and vacate the Subleased Premises in broom-clean condition, and Sublessor may re-enter and take possession of the Subleased Premises and may eject all parties in possession or eject some and not others or eject none. Any personal property of or under the control of Sublessee remaining on the Subleased Premises at the time of such re- entry may be considered and treated by Sublessor as abandoned. (e) Termination of this Sublease or Sublessee's right to possession by Sublessor shall not relieve Sublessee from any liability to Sublessor under any provision of this Sublease providing for any indemnification of Sublessor by Sublessee. 18. Brokers. Sublessee and Sublessor each represent and warrant to one another ------- that no brokers brought about or had any connection with the procuring, execution, or delivery of this Sublease, and each party hereto agrees to indemnify and hold the other harmless against any claims by any broker for services rendered to the indemnifying party in connection with this Sublease. 19. Insurance. Sublessee shall during the entire Term of this Sublease, --------- maintain all insurance policies required by Sublessor to be maintained under the Master Lease in accordance with the terms of the Master Lease to the extent applicable to the Subleased Premises. Sublessee shall name Sublessor as an additional insured on all such policies in which Master Landlord is also named as an additional insured. 20. ADA Compliance. Sublessee shall, at its sole cost and expense, cause the -------------- Subleased Premises to comply at all times with the requirements of the Americans With Disabilities Act (42 U.S.C. (S) 12181 et seq.), the regulations now or hereafter adopted pursuant thereto, and any and all applicable state or local laws, statutes, ordinances, rules and regulations concerning public accommodations for disabled persons now or hereafter in effect. Sublessee shall indemnify, defend (with counsel approved by Sublessor) and hold Sublessor harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities and losses (including, without limitation, reasonable attorneys' fees and disbursements) arising from Sublessee's failure to comply with this Article. 21. Systems. During the term of this Sublease, Sublessee shall have the right ------- to use Sublessor's current inventory control and shipping systems ("Systems") to the extent permitted under Sublessor's 9 license ("Sublessor's Licensing Agreement"). Sublessee acknowledges and agrees that its use of the Systems are on an "AS-IS" basis. Sublessee shall not be required to pay any additional amount to Sublessor for the use of Sublessor's License Agreement but may be required to make payment for such use to the licensor thereunder. Sublessee shall pay to Sublessor Sublessee's proportional share of all cost and expense ("Maintenance Costs") necessary for the maintenance and support of the Systems, including, but not limited to Sublessor's cost for personnel to maintain the Systems, in accordance with the schedule attached hereto as Exhibit "D." All Maintenance Costs shall be billed ---------- monthly with Basic Rent and shall be payable within five (5) days of demand. All other additional costs incurred by Sublessor as a result of Sublessee's use of the Systems, including but not limited to additional licensing fees and upgrades in software, shall be reimbursed by Sublessee, as additional rent, within five (5) days of demand by Sublessor. Notwithstanding the foregoing, Sublessor shall have no liability whatsoever to Sublessee for any error, act, omission, or failure associated with the Systems or the use by Sublessee thereof, unless such error, act, omission or failure is attributable to Sublessor's willful misconduct or gross negligence. In addition, in no event shall Sublessee be entitled to any reduction in or offset to Basic Rent or Additional Rent hereunder as a result of any such error, act, omission or failure or in the event Sublessee elects at any time to discontinue its use of the Systems. Notwithstanding anything to the contrary contained in that certain Sublease Agreement dated July 1, 1998 (the "Prior Sublease") between Sublessor and Sublessee, Sublessee acknowledges and agrees that following June 30, 2000, either Sublessee or Sublessor shall have the right upon thirty (30) days prior written notice to the other, to terminate Sublessor's Licensing Agreement and (i) Sublessor shall have no liability whatsoever to Sublessee as a result of the same under this Sublease or the Prior Sublease, (ii) this Sublease shall continue in full force and effect, and (iii) Sublessee shall not be entitled to any reduction in or offset to Basic Rent or Additional Rent due hereunder as a result of such termination. 22. Notices. All notices and demands which may or are required to be given by ------- either party to the other hereunder shall be in writing and shall be personally delivered or sent by United States certified or registered mail, postage prepaid, return receipt requested, or sent by reputable overnight courier (such as Federal Express, UPS or DHL with delivery confirmation) and addressed as follows: TO SUBLESSOR: CREATIVE COMPUTERS, INC. 2555 West 190th Street Torrance, California 90504 Attn: Chief Financial Officer With a copy to: MORRISON & FOERSTER LLP 19900 MacArthur Boulevard Suite 1200 Irvine, California 92612 Attention: William B. Tate II, Esq. TO SUBLESSEE: uBID, INC. 2525 Busse Highway Elk Grove Village, Illinois 60007 Attn: Chief Financial Officer With a copy to: WINSTON & STRAWN 35 West Wacker Drive Chicago, Illinois 60601-9703 Attention: Helen Shapiro, Esq. All notices shall be deemed to have been received at the time of delivery, if personally delivered, or three (3) business days after deposit in the United States mail as specified above, if mailed or one (1) business day if sent by overnight courier for next business day delivery. Either party may from time to time change the address for delivery of notices and demands by giving notice of such change as specified above. Sublessor shall promptly provide Sublessee with a copy of any notice of default under the Master Lease and any notice relating to the Subleased Premises received by Sublessor from Master Landlord. Sublessee 10 shall forward concurrently to Sublessor any notices sent or received from Master Landlord relating to the Subleased Premises. 23. Hold Over. In the event of any holding over without the consent of --------- Sublessor beyond the end of the term, this Sublease shall be deemed a tenant at sufferance upon the covenants and conditions herein contained and upon payment of (i) 150% the monthly rental last paid by Sublessee and (ii) prompt reimbursement to Sublessor of all loss, cost, expense and consequential damages incurred by Sublessor as a result of such continued tenancy. 24. Captions. The captions of sections of this Sublease are not a part of this -------- Sublease and shall have no effect upon the construction or interpretation of any part hereof. 25. Successors and Assigns. The covenants and conditions herein contained, ---------------------- subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators, legal representatives and assigns of the parties hereto. 26. Attorneys' Fees. In the event of any legal action or proceeding brought by --------------- either party against the other arising out of this Sublease (an "Action"), the prevailing party shall be entitled to the payment by the losing party of its reasonable attorneys' fees, court costs and litigation expenses, as determined by the court. 27. Post-Judgment Attorneys' Fees. The prevailing party in any Action shall be ----------------------------- entitled, in addition to and separately from the amounts receivable under Section 26 above, to the payment by the losing party of the prevailing party's - ---------- reasonable attorneys' fees, court costs and litigation expenses incurred in connection with (a) any appellate review of the judgment rendered in such Action or of any other ruling in such Action, and (b) any proceeding to enforce a judgment in such Action. It is the intent of the parties that the provisions of this Section 27 be distinct and severable from the other rights of the parties ---------- under this Lease, shall survive the entry of judgment in any Action and shall not be merged into such judgment. 28. Gender and Number. Wherever the context so requires, each gender shall ----------------- include any other gender, and the singular number shall include the plural and vice-versa. 29. Cumulative Remedies. No remedy or election hereunder shall be deemed ------------------- exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 30. Separability. Any provision of this Sublease which shall prove to be ------------ invalid, void or illegal shall. in no way affect, impair, or invalidate any other provision hereof and all such other provisions shall remain in full force and effect. 31. Effectiveness. This Sublease shall become effective when executed by all ------------- the parties hereto. In the event Master Landlord and IDB, however fail to expressly consent to the same within the Approval Period, this Sublease shall terminate. Sublessor shall return to Sublessee the initial payment of Basic Rent delivered to Sublessor concurrently with the execution hereof by Sublessee, and the parties hereto shall have no further obligation or liability to the other. This Sublease may be executed by telefacsimile. 32. Quiet Enjoyment. Upon Sublessee paying all Basic Rent, Additional Rent and ---------------- other charges due hereunder and observing and performing all of the covenants, conditions and provisions to be performed by Sublessee hereunder, Sublessee shall have quiet possession of the Subleased Premises for the entire term hereof, subject to all of the provisions of this Sublease and the Master Lease. 33. Time of the Essence. Time is of the essence of each provision of this ------------------- Sublease where time is an element. 11 34. Counterparts. This Sublease may be executed in counterparts, each is ------------ hereby declared to be an original; all, however constitute but one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Sublease on the date first above written. Executed at Torrance, CA CREATIVE COMPUTERS, INC., ------------------------ a California corporation on December 1, 1999 - By: /s/ Ted Sanders ------------------------------- Name: Ted Sanders -------------------------- Title: Chief Financial Officer ------------------------- By: /s/ Scott Klein ------------------------------- Name: Scott Klein -------------------------- Title: President -------------------------- "Sublessor" (Corporate Seal) Executed at Chicago, IL uBID, INC., a Delaware corporation ------------------------ on January 5, 2000 - By: /s/ Rhytas Kleiza ------------------------------- Name: Rhytas Kleiza -------------------------- Title: Director of Distribution ------------------------- By: /s/ Timothy Takesue ------------------------------- Name: Timothy Takesue -------------------------- Title: Vice President-Merchandising ---------------------------- "Sublessor" (Corporate Seal) 12 EX-21.1 3 LIST OF SUBSIDIARIES EXHIBIT 21.1 Elek-Tek, Inc (a Delaware corporation) Computability, Ltd. (a Delaware corporation) ecost.com, Inc. (a Delaware corporation) Creative Computers, Inc. (a California corporation) EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-848, No. 333-76851, No. 333-79337, and No. 333-82257) of Creative Computers, Inc. of our report dated February 4, 2000 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California March 30, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 24,326 0 47,618 1,483 38,068 121,348 14,569 0 151,533 102,651 0 0 0 11 48,587 151,533 731,955 731,955 652,404 652,404 83,687 0 (245) (3,891) 812 (4,703) (6,240) 0 0 (10,943) (1.05) (1.05)
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