-----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, VpHB25/xTp9Z6C+xAuqm4f9j02yxr+Hw0VPKLI8U3Mcvw85DNqPGnGwVL2WN4K4r w9UZ3oa+bPZxOmwPUwC05w== 0001017062-01-000738.txt : 20010409 0001017062-01-000738.hdr.sgml : 20010409 ACCESSION NUMBER: 0001017062-01-000738 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDEAMALL 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: 1591959 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 FORMER COMPANY: FORMER CONFORMED NAME: CREATIVE COMPUTERS INC DATE OF NAME CHANGE: 19950215 10-K 1 0001.txt ANNUAL REPORT ON FORM 10-K 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, 2000 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 IDEAMALL, 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 to this Form 10-K. [_] As of March 30, 2001, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was $8,461,589. The number of shares outstanding of the Registrant's Common Stock as of March 30, 2001 was 10,433,866. Documents incorporated by reference into Part III: Portions of the definitive Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 1 IDEAMALL, INC. TABLE OF CONTENTS
Page ---- PART I Item 1. Business......................................................... 3 Item 2. Properties....................................................... 20 Item 3. Legal Proceedings................................................ 20 Item 4. Submission of Matters to a Vote of Security Holders.............. 20 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................................. 21 Item 6. Selected Financial Data.......................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 23 Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 28 Item 8. Financial Statements and Supplementary Data...................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 28 PART III Item 10. Directors and Executive Officers of the Registrant............... 29 Item 11. Executive Compensation........................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management... 29 Item 13. Certain Relationships and Related Transactions................... 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 30 SIGNATURES..................................................................... 32
2 PART I ITEM 1. BUSINESS General IdeaMall, Inc. (the "Company"), formerly Creative Computers, Inc., founded in 1987, is a rapid response direct marketer of computer hardware, software, peripheral and electronics products. The Company offers products to business, government and educational institutions as well as individual consumers through relationship-based telemarketing techniques, direct response catalogs, dedicated inbound telemarketing sales executives, the Internet, a direct sales force, and a retail showroom. The Company offers a broad selection of products through its distinctive full-color catalogs under the PC Mall, MacMall, eLinux and eCOST.com brands and its five worldwide web sites on the Internet: pcmall.com, macmall.com, ccit-inc.com, ecost.com, and elinux.com, 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. 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 April 2000, uBid was acquired by CMGI. 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 2000, the Company operated in three reportable business segments: 1) a direct marketer of personal computers, hardware, software, peripheral products and consumer electronics under the PCMall, MacMall, and CCIT brands, collectively referred to as the "Core Business"; 2) a multi-category Internet retailer under the eCOST.com brand, and 3) a portal for Linux-based products and services provided under the eLinux brand. For segment information relating to net sales, gross profit and operating income, see Note 10 to the Company's financial statements included herein. Strategy The Company's strategy is to be a leading high-volume, cost-effective rapid response direct marketer of a broad range of computers, software and related products, focusing on supplying technology solutions to businesses, governmental and educational institutions, and individual customers. Specific elements of the Company's operating strategy include: Continued Expansion into Outbound Telemarketing. During 2000, 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 expand its outbound sales executive workforce and mine its catalog customer database and purchased name lists for prospects. During 2000, the Company continued to hire experienced outbound telemarketing executives to manage this initiative, and hire experienced outbound telemarketing recruiters to expand the outbound sales executive workforce. The Company also focuses on the development of its telemarketing executives with its comprehensive training program. The Company expects to continue to invest in outbound telemarketing and prospect its 3 catalog database for sales leads. 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. During 2000, there were 14 editions of PC Mall.com, 6 editions of PC Mall Business Solutions, and 6 editions of ComputAbility's catalog published. Total circulation for these three catalogs combined was 19.7 million in 2000. By the end of 2000, the Company consolidated the three WINTEL catalogs into one catalog under the PC Mall name to maximize brand promotion. Total WINTEL revenues were $498 million, a 21% or $88 million increase over 1999 WINTEL revenue of $410 million. The Company is authorized or otherwise has the ability to sell IBM, Compaq, Hewlett-Packard, Sony, Toshiba and other name brand computers. The Company became one of the leading catalog resellers of WINTEL products since the start of its WINTEL initiative in 1995. Continued Macintosh Marketshare Expansion. Throughout 2000, the Company continued to be a leading direct marketer of Macintosh products, offering the full line of Apple and related products. The Company's sales of Mac-related products in 2000 was $320 million, flat compared to $322 million in 1999. During 2000, the Company published 14 editions of its MacMall catalog with a circulation of 29.5 million copies, a 6% decrease from the prior year's 31.5 million circulation and an l1% decrease from the 33.0 million copies circulated in 1998. Although total catalog circulation has decreased, revenues per catalog have increased. Penetration of the Linux Market. In February 2000, the Company launched its newest venture, eLinux, focusing on providing technology solutions to Linux users. Linux is an open source operating software gaining rapid acceptance within the IT community and is used extensively to run network servers. eLinux offers 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. Marketing Database Growth. The Company has compiled a proprietary mailing list of over six 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 2000 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. 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 was among the first full-spectrum Internet resellers in the 4 personal computing marketplace, offering customers many different ways to purchase computer hardware, software, peripherals and consumer electronics. Marketing and Sales The Company designs its various marketing programs to attract new customers and to stimulate additional purchases by previous customers. The Company continuously attracts new customers by producing leads from existing and purchased databases, employing outbound telemarketing sales techniques to establish relationships with businesses, selectively mailing catalogs to prospective customers and through advertising on the Internet and in major computer user magazines, such as PC World, PC Computing, Computer Shopper, MacWorld and others. 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 business, government and educational institutions as well as individual consumers. 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 lines 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. During 2000, the Company shipped approximately 687,000 telemarketing orders with an average order size of $837. Catalogs. The Company published 26 editions of its PC Mall Business Solutions, PC Mall.com, and ComputAbility catalogs during 2000 and distributed approximately 19.7 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 14 editions of MacMall in 2000 and distributed approximately 29.5 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. The Internet. The Company maintains five worldwide web sites on the Internet, including pcmall.com, macmall.com, ccit-inc.com, eCOST.com and eLinux.com. 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 2000, the Company shipped approximately 390,000 Internet orders, with an average order size of $533. 5 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 2000, the Company purchased 271 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 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. The following table sets forth the Company's net sales by major product category as a percentage of total net sales for the periods presented.
Year Ended December 31 -------------------------------------------------- 1998 1999 2000 ---- ---- ---- Computer systems....................... 42.2% 43.9% 44.3% Peripherals, components 45.4 44.0 42.0 and accessories..................... Software............................... 10.7 9.8 9.0 Other (1).............................. 1.7 2.3 4.7 Total............................. 100.0% 100.0% 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. 6 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 2000, the Company purchased products from over 579 vendors. During 1998, 1999 and 2000, products manufactured by Apple represented approximately 20.0%, 25.4% and 24.9% of net sales, respectively. The Company is also linked electronically with eleven 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. Most key vendors have agreements to provide market development funds to the Company, whereby such vendors fund 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 2000. The Company's average annual inventory turns were 13.5 times in 1998, 16.4 times in 1999 and 19.8 times in 2000. 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. 7 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, 2000, 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, an automated 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 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. 8 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, 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 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, 2000, the Company had 897 full-time employees, including 112 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. 9 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, 2000 were as follows:
Description Sq. Ft. Location - ----------- ----------- ----------------------- IdeaMall Corporate Headquarters...................... 143,532 Torrance, CA Distribution Center.................................. 325,000 Memphis, TN CCIT Corporate Headquarters.......................... 25,840 Elk Grove Village, IL Wisconsin Sales Office............................... 35,503 Milwaukee, WI Kansas Property...................................... 32,800 Lenexa, KS Wisconsin Administration............................. 15,000 Milwaukee, WI Wisconsin Sales Office............................... 12,500 Milwaukee, WI Retail Showroom...................................... 9,750 Santa Monica, CA CCIT Colorado Corporate Sales........................ 2,315 Englewood, CO
The Company leases all of its facilities, except for the following: the Santa Monica retail showroom and the Lenexa property, each of which is owned by the Company, and the Wisconsin Administration Office, which was sold in March 2001. The Company's distribution center serves the Company's core business, eCOST.com and eLinux operations, as well as its retail showroom, 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: CCIT corporate headquarters, and CCIT Colorado Corporate Sales Office. All of the other leases have remaining terms less than two years. 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. 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 Wisconsin Sales Office lease and the Wisconsin Administration Office, which was sold in March 2001. 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. 10 Based upon current law, 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 state taxing authorities 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. In addition, a number of bills are pending before federal and state legislatures that would potentially expand the tax collection responsibility of internet-related companies. Until these legislative efforts have run their course and the courts have considered and resolved some cases involving these tax collection issues, 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. 11 Executive Officers The executive officers of the Company as of March 30, 2001 and their respective ages and positions are as follows:
Name Age Position ---- --- -------- Frank F. Khulusi........... 34 Chairman of the Board, President and Chief Executive Officer Theodore R. Sanders........ 46 Chief Financial Officer Daniel J. DeVries.......... 39 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, served as President until July 1999 and resumed the office of President in March 2001. Mr. Khulusi attended attended the University of Southern California. 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 forward-looking statements on its current expectations and projections about future events. These 12 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 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." 13 The addition of a new business focus could subject the Company to risks commonly associated with a new company. The Company has historically operated as a direct marketer of computer products, and has only recently expanded its business model to include a focus on the business-to-business and Internet markets by developing its portfolio of web site properties. The Company has only been active in this new line of business since 1995 when the pcmall.com web site was launched. The Company established uBid.com, an online auction web site in 1997, the ecost.com web site in March 1999 and the eLinux.com web site in February 2000, and plans to continue its focus on the business-to-business and Internet market in the future. The Company does not have a significant operating history to evaluate the new business focus, and past performance should not relied upon to predict future performance. In adding a new business focus, the Company expects that it will have to make changes to its business operations, sales and implementation practices, customer service and support operations and management focus. The Company also faces 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. The Company cannot guarantee that it 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 20.0%, 25.4% and 24.9% of the Company's net sales in 1998, 1999 and 2000, 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 1999 and 2000, 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 $818.6 million in 2000. The Company's catalog sales grew from $117.9 million in 1994 to $575.0 million in 2000. 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 $207.8 million in 2000. 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 4.4% in 2000. 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 14 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 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 15 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 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. 16 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 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 Based upon current law, 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. 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. Certain court cases have upheld tax collection obligations on companies, including mail order companies, whose contacts with the taxing state was quite limited (e.g., visiting the state several times a year to aid customers or to inspect showrooms stocking their goods). The Company believes its operations are different from the operations of the companies in these cases 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. The tax treatment of the Internet and e-commerce is currently in a state of flux. Various state taxing authorities 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 17 requirement could be imposed in the future. In addition, a number of bills are pending before federal and state legislatures that would potentially expand the tax collection responsibility of internet-related companies. 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. States also potentially may expand tax collection responsibilities of out-of-state companies through legislation. Until these legislative efforts have run their course and the courts have considered and resolved some cases involving tax collection issues, 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 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. 18 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 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. The Company's common stock is presently authorized for quotation on the Nasdaq National Market. Accordingly, the Company is subject to all requirements of its listing agreement with Nasdaq. Among the events that could cause the Company's common stock to have its status as a National Market security terminated include the failure to maintain a minimum closing bid price for the common stock of $1.00 per share, failure to timely hold annual meetings of stockholders and failure to comply with other corporate governance requirements. The Company's common stock has traded below the $1.00 minimum bid. If the closing bid price of the Company's common were to remain below that level for 30 consecutive trading days, it could result in delisting or the need to complete a reverse stock split. If the Company's common stock loses its Nasdaq National Market status, it would trade either on the over-the-counter bulletin board or in the "pink sheets," both of which are viewed by most investors as less desirable, and less liquid, marketplaces. Moreover, the Company's common stock may become subject to SEC "penny stock" regulations that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. Consequently, delisting from Nasdaq, if it were to occur, could materially and adversely affect the ability of broker-dealers to sell the Company's common stock, which would impair the liquidity of such securities and could adversely affect the trading price for the Company's common stock. Loss of Nasdaq National Market status would also adversely affect the Company's ability to raise funds through the sale of equity securities and would complicate compliance with state blue- sky laws. Privacy Concerns The Company mails catalogs and sends electronic messages to names in its proprietary customer database and to potential customers whose names the Company obtains from rented or exchanged mailing lists. Worldwide public concern regarding personal privacy has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny. Any domestic or foreign legislation enacted limiting or prohibiting these practices could negatively affect the Company's business, financial condition and results of operations. 19 Dependence on Continued Use of Internet The Company's level of sales generated from its worldwide web sites has increased in part because of the growing use and acceptance of the Internet by end-users. The growth in Internet usage is a relatively recent development, and no assurance can be made that the Internet will continue to develop or that a sufficiently broad base of consumers will adopt and continue to use the Internet and other online services as a medium of commerce. Sales of computer products over the Internet have increased as a percentage of the Company's net sales in recent years. Continued growth of the Company's Internet sales is dependent on potential customers using the Internet in addition to traditional means of commerce to purchase products. The Company cannot accurately predict the rate at which they will do so. If the use by consumers of the Internet to purchase products does not continue, the Company's business, financial condition and results of operations could be adversely affected. The Company's success in maintaining and growing its Internet business will depend in large part upon the development of an infrastructure for providing Internet access and services. If the number of Internet users or their use of Internet resources continues to grow rapidly, such growth may overwhelm the existing Internet infrastructure. The Company's ability to increase the speed with which it provides services to customers and to increase the scope of such services ultimately is limited by and reliant upon the speed and reliability of the networks operated by third parties. The Company cannot assure that networks and infrastructure providing sufficient capacity and reliability will continue to be developed. 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 2000. 20 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, 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 Year Ended December 31, 2000 ---------------------------- First Quarter.............. 14 1/16 7 1/8 Second Quarter............. 10 1/16 3 21/32 Third Quarter.............. 4 9/16 2 19/32 Fourth Quarter............. 3 1/8 17/32
On March 30, 2001, the closing price of the Company's Common Stock as reported on the Nasdaq National Market was $1.25 per share. As of March 30, 2001, there were approximately 48 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, 1998, 1999 and 2000 and the selected balance sheet data as of December 31, 1999 and 2000 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, 1996 and 1997 along with the balance sheet data 21 as of December 31, 1996, 1997 and 1998 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) -------------------------------------------------------------------------- 1996 1997(1) 1998(1) 1999(1) 2000(1)(3) -------- -------- -------- -------- ---------- Net sales.................................... $444,971 $546,122 $642,006 $730,181 $818,627 Cost of goods sold........................... 395,000 476,053 568,309 650,630 730,794 Retail store closure inventory reserve....... - - 3,679 - - -------- -------- -------- -------- --------- Gross profit................................. 49,971 70,069 70,018 79,551 87,833 Selling, general and administrative expenses. 60,585 63,252 76,812 83,687 95,536 Expenses related to retail store closure..... - - 6,773 - - -------- -------- -------- -------- --------- Income (loss) from operations................ (10,614) 6,817 (13,567) (4,136) (7,703) Interest income (expense).................... 593 144 (291) 245 (917) -------- -------- -------- -------- --------- Income (loss) before income taxes............ (10,021) 6,961 (13,858) (3,891) (8,620) Income tax provision (benefit)............... (3,972) 2,642 (5,034) 812 - -------- -------- -------- -------- --------- Income (loss) from continuing operations..... (6,049) 4,319 (8,824) (4,703) (8,620) Discontinued operations...................... - (194) (8,971) (6,240) - Cumulative change in accounting principle.... - - - - (536) -------- -------- -------- -------- --------- Net income (loss)............................ $ (6,049) $ 4,125 $(17,795) $(10,943) $ (9,156) ======== ======== ======== ======== ========= Basic earnings (loss) per share (2) Continuing operations...................... $ (0.62) $ 0.44 $ (0.87) $ (0.45) $ (0.83) Discontinued operations.................... - (0.02) (0.88) (0.60) - Cumulative effect of change in accounting principle............................... - - - - (0.05) -------- -------- -------- -------- --------- $ (0.62) $ 0.42 $ (1.75) $ (1.05) $ (0.88) ======== ======== ======== ======== ========= Diluted earnings (loss) per share (2) Continuing operations...................... $ (0.62) $ 0.43 $ (0.87) $ (0.45) $ (0.83) Discontinued operations.................... - (0.02) (0.88) (0.60) - Cumulative effect of change in accounting principle............................... - - - - (0.05) -------- -------- -------- -------- --------- $ (0.62) $ 0.41 $ (1.75) $ (1.05) $ (0.88) ======== ======== ======== ======== ========= Pro Forma amounts assuming the accounting change required by SAB 101 is applied retroactively (See Note 1 of Notes to Consolidated Financial Statements) Income (loss) from continuing operations..... $ (6,018) $ 4,222 $ (8,928) $ (4,842) $ (8,620) Net income (loss)............................ $ (6,018) $ 4,028 $(17,898) $(11,082) $ (8,620) ======== ======== ======== ======== ========= Basic earnings (loss) per share Continuing operations.................. $ (0.62) $ 0.43 $ (0.88) $ (0.47) $ (0.83) Net income (loss)...................... $ (0.62) $ 0.41 $ (1.76) $ (1.07) $ (0.83) ======== ======== ======== ======== ========= Diluted earnings (loss) per share Continuing operations.................. $ (0.62) $ 0.42 $ (0.88) $ (0.47) $ (0.83) Net income (loss)...................... $ (0.62) $ 0.40 $ (1.76) $ (1.07) $ (0.83) ======== ======== ======== ======== ========= Basic weighted average number of shares outstanding (2)............................... 9,767 9,895 10,176 10,383 10,419 ======== ======== ======== ======== ========= Diluted weighted average number of shares outstanding (2)................................ 9,767 10,030 10,176 10,383 10,419 ======== ======== ======== ======== =========
(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 10 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." (3) Operating results in 2000 reflect the implementation of SAB 101. See Note 1 of Notes to Consolidated Financial Statements. 22
Year Ended December 31, -------------------------------------------------------------------------- (in thousands, except average order size) Selected Operating Data 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Telemarketing/catalog net sales............... $383,864 $462,705 $562,284 $556,461 $574,956 Internet sales................................ $ 3,239 $ 15,586 $ 36,143 $138,986 $207,826 Retail net sales.............................. $ 57,868 $ 67,831 $ 43,579 $ 34,734 $ 35,845 Number of catalogs distributed................ 48,753 62,220 69,427 58,955 49,263 Orders filled (telemarketing/catalog)......... 921 982 1,075 874 687 Orders filled (Internet)...................... 10 44 121 336 390 Average order size (telemarketing/catalog).... $ 417 $ 471 $ 523 $ 637 $ 837 Average order size (Internet)................. $ 324 $ 354 $ 299 $ 414 $ 533 Mailing list size............................. 2,518 4,177 4,792 5,459 6,022
December 31, -------------------------------------------------------------------------- (in thousands) Balance Sheet Data 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Working capital............................... $ 42,600 $ 30,183 $ 36,285 $ 18,697 $ 10,184 Total assets.................................. $113,431 $131,466 $143,174 $150,005 $137,566 Short-term debt............................... $ 283 $ 10,186 $ 122 $ 148 $ 579 Long-term debt, excluding current portion..... $ 325 $ 496 $ 161 $ 284 $ 703 Stockholders' equity.......................... $ 52,805 $ 60,082 $ 67,564 $ 48,598 $ 39,508
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. In 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 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. In 1998, the Company modified its strategic focus to acquiring small-to- medium size business customers and established an outbound relationship-based telemarketing model. The outbound telemarketing model involves hiring and training technical sales executive, developing qualified business leads and establishing business relationships with IT professionals. 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 business-to-business and Internet 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 its eLinux subsidiary to provide products, news, discussion groups, services and support to the Linux community. 23 Net sales from telemarketing/catalog operations, as a percentage of net sales, were 87.6%, 76.2% and 70.2% in 1998, 1999 and 2000, respectively, with average order size of $523, $637 and $837 for those respective years. Net sales from the Internet, as a percentage of net sales, were 5.6%, 19.0% and 25.4% in 1998, 1999 and 2000, respectively, with average order size of $299, $414 and $533 for those respective years. Net sales of the Company are derived primarily from the sale of computer hardware, software, peripherals, and electronic products to business, government and educational institutions as well as individual consumers through relationship-based telemarketing techniques, direct response catalogs, dedicated inbound telemarketing sales executives, the Internet, a direct sales force, and a retail showroom. 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 and web sites, 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 20.0%, 25.4% and 24.9% of the Company's net sales in 1998, 1999 and 2000, 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 1999 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. Percentage of Net Sales --------------------------- Year Ended December 31, --------------------------- 1998 1999 2000 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of goods sold 89.1 89.1 89.3 ----- ----- ----- Gross profit 10.9 10.9 10.7 Selling, general and administrative expenses 12.0 11.5 11.7 Expenses related to retail store closure 1.0 --- --- ----- ----- ----- Income (loss) from operations (2.1) (0.6) (1.0) Interest (income) expense, net 0.1 0.1 --- ----- ----- ----- Income (loss) before income taxes (2.2) (0.5) (1.0) Income tax provision (benefit) (0.8) 0.1 --- ----- ----- ----- Income (loss) from continuing operations (1.4) (0.6) (1.0) Loss from discontinued operations (1.4) (0.9) --- Cumulative change in accounting principle --- --- (0.1) ----- ----- ----- Net income (loss) (2.8)% (1.5)% (1.1)% ===== ===== ===== Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 Net sales for the year ended December 31, 2000 were $818.6 million, an increase of $88.4 million or 12.1% over net sales for the year ended December 31, 1999 of $730.2 million. Telemarketing/catalog sales for 2000 were $575.0 million, an increase of $18.5 million or 3.3% compared to 1999 telemarketing/catalog sales of $556.5 million. The increase in telemarketing/catalog sales is primarily due to higher revenue per book and average order value. Net catalog circulation in 2000 decreased 16.4%, or 9.7 million catalogs to 49.3 million, of which MacMall comprised 29.5 million, PC Mall 18.0 million and ComputAbility 1.8 million. The ComputAbility catalog was merged with PC Mall during 2000. Internet sales in 2000 were $207.8 million, an increase of 49.5%, or $68.8 million over 1999. Retail net sales in 2000 were $35.8 million, an increase of 3.2%, or $1.1 million from 1999. WINTEL net sales increased 24 21.5% to $498.4 million in 2000, versus $410.2 million in 1999. Sales for eCOST.com were $110.0 million, an increase of $73.2 million, or 199% over 1999 sales of $36.8 million. Sales for eLinux were $6.2 million in its first year of operations. Gross profit for the year ended December 31, 2000 was $87.8 million, an increase of $8.3 million or 10.4% from gross profit of $79.6 million for the year ended December 31, 1999. The increase in gross profit was primarily due to the sales increase in 2000 over 1999, partially offset by a slight decrease in overall margin as a percentage of sales. Gross profit as a percentage of sales was 10.7% in 2000, versus 10.9% in 1999. The gross profit percentage was negatively affected by lower margins experienced by eCOST.com, primarily in the first half of the year, and other factors, including outbound sales initiatives and fluctuations in key vendor support programs, offset by an improvement in the core business margin to 11.7% from 11.4% of sales in 1999. Completing its second year of operations, gross profit for eCost.com was $5.2 million for the year ended December 31, 2000, an increase of 1,877% or $4.9 million over 1999 gross profit of $0.3 million. Gross profit for eLinux was $0.7 million for the year ended December 31, 2000, its first year of operations. Selling, general and administrative expenses (SG&A) were $95.5 million for the year ended December 31, 2000, an increase of $11.8 million or 14.2% over SG&A expenses of $83.7 million for the year ended December 31, 1999. As a percentage of net sales, SG&A expenses were 11.7% in 2000, versus 11.5% in 1999, the increase due to higher advertising expenditures in the first half of the year. For its second year of operations, SG&A expenses for eCost.com were $14.6 million for the year ended December 31, 2000, versus $6.4 million in the prior year, primarily due to advertising increases. For its first year of operations SG&A expenses for eLinux were $3.5 million for the year ended December 31, 2000. Net interest expense was $0.9 million for the year ended December 31, 2000 compared to $0.2 million net interest income for the year ended December 31, 1999. The increase was due to increased debt outstanding in 2000 versus 1999. No income tax provision was recorded for the year ended December 31, 2000 versus a provision of $0.8 million for the year ended December 31, 1999. As such, the effective tax rate for 2000 was 0%, compared with 20.8% in 1999. The change in effective tax rate is primarily due to the provision of valuation allowance against deferred tax assets. Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 Net sales for the year ended December 31, 1999 were $730.2 million, an increase of $88.2 million or 13.7% over net sales for the year ended December 31, 1998 of $642.0 million. Telemarketing/catalog sales for 1999 were $556.5 million, a decrease of $5.8 million or 1.0% compared to 1998 telemarketing/catalog sales of $562.3 million. The decrease in telemarketing/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 16.2% to $410.2 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 11.5% 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. 25 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 additional valuation allowance against deferred tax assets in 1999. 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 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 and 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 $13.7 million, $21.5 million and $(28.0) million for 1998, 1999 and 2000, respectively. Inventory decreased $3.5 million in 2000 and inventory turns continued to improve from 16.4 in 1999 to 19.8 in 2000. Accounts receivable increased $7.4 million during 2000, primarily due to higher open account business-to-business sales. During the year ended December 31, 2000, the Company's capital expenditures were $4.4 million as compared to $4.2 million in 1999 and $3.2 million in 1998. 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. During 2000 and the first quarter of 2001, the Company had a $40 million credit facility with a commercial finance company. Part of the credit facility functioned in lieu of a vendor trade payable for inventory purchases, was included in accounts payable, and did not bear interest if paid within terms specific to each vendor. Part of the credit facility functioned as a working capital line of credit secured by inventory and accounts receivable, and bore interest at prime (9.5% and 8.5% per annum at December 31, 2000 and 1999, respectively). As of December 31, 2000, the Company had $6.7 million in borrowings under the credit facility included in accounts payable and $17.3 million of working capital advances outstanding, which was used to finance inventory purchases, receivable, and its start-up subsidiaries. At December 31, 2000, the Company had a $16.0 million available for working capital advances and floorplan inventory financing. The overall credit facility was secured by substantially all of the Company's assets. The credit facility had certain covenants requiring a minimum tangible net worth and limitations on future losses and leverage. As of December 31, 2000, the Company was in compliance with all credit facility covenants. 26 In March 2001, the Company replaced its existing $40 million credit facility with a new $75 million, three-year asset-based revolving credit facility from a lending unit of a large commercial bank (the "New Line of Credit"). The New Line of Credit functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, and bears interest at prime with a LIBOR option. The New Line of Credit is secured by substantially all of the Company's assets. The New Line of Credit has as its single financial covenant a minimum tangible net worth requirement and also includes a commitment fee of 0.25% annually on the unused portion of the line up to $60 million. In addition, in March 2001, the Company entered into a new $40 million flooring credit facility, which functions in lieu of a vendor trade payable for inventory purchases and does not bear interest if paid within terms specific to each vendor (the "New Flooring Facility"). The New Flooring Facility is secured by substantially all of the Company's assets and is also supported by a letter of credit issued under the New Line of Credit in the amount outstanding under the New Flooring Facility from time to time. The amount of the Letter of Credit is applied against the credit limit under the New Line of Credit. At December 31, 2000 and 1999, the Company had cash and short-term investments of $12.2 million and $24.3 million, respectively, and working capital of $10.2 million and $18.7 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 2001. 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. As of December 31, 2000, 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. 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. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The new rules will be effective the first quarter of 2001. The Company does not believe that the new standard will have any impact on the Company's consolidated financial statements, as the Company currently holds no derivatives. 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and long-term debt. At March 30, 2001, 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, 2001. 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. 28 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 2001 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 2001 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 2001 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 "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 2001 Annual Meeting of Stockholders and such information is incorporated herein by reference. 29 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) 3.1(A) Certificate of Amendment of Certificate of Incorporation 3.2 Amended and Restated Bylaws of the Company 10.1* Amended and Restated 1994 Stock Incentive Plan (11) 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) 10.6 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) 10.31 Business Credit and Security Agreement dated October 14, 1997 between Deutsche Financial Services Corporation and Elek-Tek Acquisition Corp. (3) 10.32 Business Credit and Security Agreement dated October 14, 1997 between Deutsche Financial Services Corporation and Creative Computers, Inc. (3) 10.32(A) Amendment No. 3 to Business Credit and Security Agreement, dated as of June 30, 2000, between Deutsche Financial Services Corporation and IdeaMall, Inc. (12) 10.35 Separation and Distribution Agreement by and between Creative Computers, Inc. and uBid, Inc., dated as of December 7, 1998, as amended (7) 30 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 (13) 10.42* Employment Agreement dated July 22, 1999, between Creative Computers, Inc. and Scott Klein (9) 10.43 Loan and Security Agreement, dated March 7, 2001, between Congress Financial Corporation and IdeaMall, Inc. and Subsidiaries 10.44 Agreement for Wholesale Financing dated March 15, 2001 between Deutsche Financial Services Corporation and IdeaMall, Inc. and Subsidiaries 21.1 Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP (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) Intentionally omitted. (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. (11) Incorporated by reference to Annex A of the registrant's Definitive Proxy Statement filed with the Commission on April 24, 2000. (12) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended June 30, 2000, filed with the Commission on August 14, 2000. (13) Incorporated by reference to the Company's Annual Report on Form 10-K, File Number 0-25790, for the year ended December 31, 1999, filed with the Commission on March 30, 2000. * 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. 31 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, 2001. IDEAMALL, INC. By: /s/ FRANK F. KHULUSI ---------------------------------- Frank F. Khulusi President and 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, 2001 - ------------------------------ Frank F. Khulusi Directors, Chief Executive Officer and President (Principal Executive Officer) /s/ THEODORE R. SANDERS Chief Financial Officer March 30, 2001 - ------------------------------ Theodore R. Sanders (Principal Financial and Accounting Officer) /s/ SAM U. KHULUSI Director March 30, 2001 - ----------------------------- Sam U. Khulusi /s/ THOMAS MALOOF Director March 30, 2001 - ----------------------------- Thomas Maloof /s/ RONALD B. RECK Director March 30, 2001 - ----------------------------- Ronald B. Reck
32 IDEAMALL, INC. Exhibit Index Exhibit Number Description ------- ----------- 3.1(A) Certificate of Amendment of Certificate of Incorporation 3.2 Amended and Restated Bylaws of the Company 10.43 Loan and Security Agreement, dated March 7, 2001, between Congress Financial Corporation and IdeaMall, Inc. and Subsidiaries 10.44 Agreement for Wholesale Financing dated March 15, 2001 between Deutsche Financial Services Corporation and IdeaMall, Inc. and Subsidiaries 21.1 Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP IDEAMALL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements and Supplementary Data - ------------------------------------------- Report of Independent Accountants F-2 Consolidated Balance Sheet at December 31, 2000 and 1999 F-3 Consolidated Statement of Operations for the Years Ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 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 IdeaMall, 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 IdeaMall, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 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. for the year ended December 31, 1998, 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 of America, 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 our opinion. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of revenue recognition in 2000. /s/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California January 19, 2001, except as to the second paragraph of Note 3, which is as of March 7, 2001 F-2 IDEAMALL, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data)
December 31, ---------------------------------- 2000 1999 -------- -------- Assets Current assets: Cash and cash equivalents $ 12,195 $ 24,326 Accounts receivable, net of allowance for doubtful accounts of $1,162 and $1,483, respectively 54,970 47,618 Inventories 35,838 39,359 Prepaid expenses and other current assets 2,489 2,962 Income tax refund receivable - 177 Notes receivable - 3,331 Deferred income taxes 2,047 2,047 -------- -------- Total current assets 107,539 119,820 Property and equipment, net 14,928 14,569 Goodwill, net 11,316 11,836 Deferred income taxes 3,738 3,738 Other assets 45 42 -------- -------- $137,566 $150,005 ======== ======== Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Accounts payable $ 59,294 $ 86,609 Accrued expenses and other current liabilities 12,963 14,366 Deferred revenue 7,204 - Line of credit 17,315 - Capital leases - current portion 573 142 Notes payable - current portion 6 6 -------- -------- Total current liabilities 97,355 101,123 Capital leases 562 136 Notes payable 141 148 -------- -------- Total liabilities 98,058 101,407 -------- -------- Stockholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value; 15,000,000 shares authorized; 10,433,866 and 10,404,069 shares issued 11 11 Additional paid-in capital 74,403 74,337 Treasury stock, at cost: 15,000 shares (91) (91) Retained earnings (accumulated deficit) (34,815) (25,659) -------- -------- Total stockholders' equity 39,508 48,598 -------- -------- $137,566 $150,005 ======== ========
See accompanying notes to consolidated financial statements. F-3 IDEAMALL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data)
Year ended December 31, ------------------------------------------ 2000 1999 1998 -------- -------- -------- Net sales $818,627 $730,181 $642,006 Cost of goods sold 730,794 650,630 568,309 Retail store closure inventory reserve - - 3,679 -------- -------- -------- Gross profit 87,833 79,551 70,018 Selling, general and administrative expenses 95,536 83,687 76,812 Expenses related to retail store closures - - 6,773 -------- -------- -------- Income (loss) from operations (7,703) (4,136) (13,567) Interest income (expense), net (917) 245 (291) -------- -------- -------- Income (loss) before income taxes (8,620) (3,891) (13,858) Income tax provision (benefit) - 812 (5,034) -------- -------- -------- Income (loss) from continuing operations (8,620) (4,703) (8,824) Loss from discontinued operations, net of minority interest of $1,500 and $1,198 in 1999 and 1998 - (6,240) (8,971) -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle (8,620) (10,943) (17,795) Cumulative effect of change in accounting principle for revenue recognition (536) - - -------- -------- -------- Net income (loss) $ (9,156) $(10,943) $(17,795) ======== ======== ======== Basic and diluted earnings (loss) per share Continuing operations $ (0.83) $ (0.45) $ (0.87) Discontinued operations - (0.60) (0.88) Cumulative effect of change in accounting principle (0.05) - - -------- -------- -------- $ (0.88) $ (1.05) $ (1.75) ======== ======== ======== Pro Forma amounts assuming the accounting change is applied retroactively (See Note 1) Income (loss) from continuing operations $ (8,620) $ (4,842) $ (8,928) ======== ======== ======== Net income (loss) $ (8,620) $(11,082) $(17,898) ======== ======== ======== Basic and diluted earnings (loss) per share Income (loss) from continuing operations $ (0.83) $ (0.47) $ (0.88) ======== ======== ======== Net income (loss) $ (0.83) $ (1.07) $ (1.76) ======== ======== ======== Basic and diluted weighted average number of shares outstanding 10,419 10,383 10,176 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 IDEAMALL, 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, 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 Stock option exercises 30 66 66 Net loss (9,156) (9,156) ------- ----- ------- -------- ---- -------- Balance at December 31, 2000 10,434 $11 $74,403 $(34,815) $(91) $ 39,508 ======= ===== ======= ======== ==== ========
See accompanying notes to consolidated financial statements. F-5 IDEAMALL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year ended December 31, ------------------------------------- 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ (9,156) $(10,943) $(17,795) -------- -------- -------- Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Provision (benefit) for deferred income taxes - 693 (5,017) Depreciation and amortization 6,001 4,961 3,882 Loss on disposal of property, plant and equipment - - 1,950 Loss on impairment of goodwill - - 3,095 Loss from discontinued operations - 6,240 8,971 Changes in assets and liabilities, net of acquisitions and spin-off: Accounts receivable (7,352) (7,189) 2,017 Inventories 3,521 1,090 3,483 Prepaid expenses and other current assets 370 (471) (2,561) Other assets (3) 96 (742) Accounts payable (27,315) 24,480 16,171 Accrued expenses and other current liabilities 5,801 2,504 (75) Income tax refund receivable 177 13 279 -------- -------- -------- Total adjustments (18,800) 32,417 31,453 -------- -------- -------- Net cash (used in) provided by operating activities (27,956) 21,474 13,658 -------- -------- -------- Cash flows from investing activities: Collection of notes receivable 3,331 - - Acquisition of property, plant and equipment (4,425) (4,185) (3,209) Advances to uBid - - (2,661) -------- -------- -------- Net cash used in investing activities (1,094) (4,185) (5,870) -------- -------- -------- Cash flows from financing activities: Net borrowings (payments) under line of credit 17,315 - (9,956) Payments under notes payable (7) (7) (210) Principal payments of obligations under capital leases (455) (252) (233) Proceeds from stock issued under stock option plans 66 854 1,035 -------- -------- -------- Net cash provided by (used in) financing activities 16,919 595 (9,364) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (12,131) 17,884 (1,576) Cash and cash equivalents: Beginning of year 24,326 6,442 8,018 -------- -------- -------- End of year $ 12,195 $ 24,326 $ 6,442 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 1. Summary of Significant Accounting Policies Description of Company IdeaMall, Inc., formerly 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, MacMall Software Buyers Guide and eCOST.com, the Company's worldwide web sites on the Internet, and other promotional materials. 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 $48,232 for the year ended December 31, 1998, 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 title to products sold has transferred to the customer. The Company considers this to occur upon receipt of products by the customer. 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 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) In the fourth quarter of 2000, the Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 requires the Company to defer, in certain situations, sales revenue until goods have been received by the customer and risk of loss has been passed. The adjustment resulted from the change in timing of revenue recognition from the point of shipment to the point of delivery of product to the customer. The adoption of SAB 101 resulted in a cumulative effect of a change in accounting principle of $536, retroactively applied to January 1, 2000. The financial effect of adoption on revenue for the year ended December 31, 2000 is immaterial. The pro forma amounts shown in the consolidated statement of operations present the effect of retroactive application of SAB 101. Outbound Shipping Costs Outbound shipping costs incurred to deliver products to customers are included in cost of goods sold. 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, receivables from one large customer were $6.0 million. No customer accounted for more than 10% of trade accounts receivable at December 31, 2000. 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, 2000 and 1999, the Company had reserves of $1,107 and $2,331, respectively, for demonstration inventory, lower of cost or market pricing and potential excess and obsolete inventory. Deferred Advertising Revenue and Costs 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. Deferred advertising revenue is included in accrued expenses and other current liabilities. Advertising expense, net of advertising revenue earned, included in selling, general and administrative expenses, was $13,355, $7,325 and $4,157 in 2000, 1999, and 1998, respectively. Deferred advertising costs were $1,784 and $2,051 at December 31, 2000 and 1999, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheet. F-8 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Property and Equipment Property 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 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 approximates 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, 2000 and 1999 was $1,606 and $1,086, respectively. Amortization expense totaled $520, $482 and $514 in 2000, 1999 and 1998, 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 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) The composition of Basic and Diluted EPS is as follows:
2000 1999 1998 ----------- ----------- ----------- Income (loss) from continuing operations $ (8,620) $ (4,703) $ (8,824) Loss from discontinued operations - (6,240) (8,971) Cumulative effect of change in accounting principle for revenue recognition (536) - - ----------- ----------- ----------- Net income (loss) $ (9,156) $ (10,943) $ (17,795) =========== =========== =========== Weighted average shares - Basic 10,418,558 10,383,052 10,175,864 Effect of dilutive stock options and warrants (a) - - - ----------- ----------- ----------- Weighted average shares - Diluted 10,418,558 10,383,052 110,175,864 =========== =========== =========== Basic and diluted earnings (loss) per share Continuing operations $ (0.83) $ (0.45) $ (0.87) Discontinued operations - (0.60) (0.88) Cumulative effect of change in accounting principle (0.05) - - ----------- ----------- ----------- Net income (loss) $ (0.88) $ (1.05) $ (1.75) =========== =========== ===========
(a) Potential common shares of 168,133, 339,609 and 232,700 for 2000, 1999 and 1998, respectively, have been excluded from the earnings (loss) of per share computations because the effect of their inclusion would be anti-dilutive. 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. Reclassifications Certain reclassifications have been made to the 1998 and 1999 financial statement amounts to conform to the 2000 presentation. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The new rules will be effective the first quarter of 2001. The Company does not believe that the new standard will have any impact on the Company's consolidated financial statements, as the Company holds no derivatives. F-10 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 2. Property and Equipment Property and equipment consist of the following as of December 31: 2000 1999 -------- -------- Furniture and fixtures $ 2,819 $ 2,216 Leasehold improvements 3,071 3,181 Computers, machinery and equipment 23,066 18,507 Building 3,512 2,827 Land 1,446 1,446 -------- -------- 33,914 28,177 Less: Accumulated depreciation and amortization (18,986) (13,608) -------- -------- $ 14,928 $ 14,569 ======== ======== Depreciation expense in 2000, 1999 and 1998 totaled $5,378, $4,415 and $3,307, respectively. 3. Line of Credit During 2000 and the first quarter of 2001, the Company had a $40 million credit facility with a commercial finance companyFinancial Printing GroupFinancial Printing GroupDuring 2000 and the first quarter of 2001, the Company had a $40 million credit facility with a commercial finance company. Part of the credit facility functioned in lieu of a vendor trade payable for inventory purchases, was included in accounts payable, and did not bear interest if paid within terms specific to each vendor. Part of the credit facility functioned as a working capital line of credit secured by inventory and accounts receivable, and bore interest at prime (9.5% and 8.5% per annum at December 31, 2000 and 1999, respectively). As of December 31, 2000, the Company had $6.7 million in borrowings under the credit facility included in accounts payable and $17.3 million of working capital advances outstanding, which was used to finance inventory purchases, receivables, and its start-up subsidiaries. At December 31, 2000, the Company had $16.0 million available for working capital advances and floorplan inventory financing. The overall credit facility was secured by substantially all of the Company's assets. The credit facility had certain covenants requiring a minimum tangible net worth and limitations on future losses and leverage. As of December 31, 2000, the Company was in compliance with all credit facility covenants. In March 2001, the Company replaced its existing $40 million credit facility with a new $75 million, three-year asset-based revolving credit facility from a lending unit of a large commercial bank (the "New Line of Credit"). The New Line of Credit functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, and bears interest at prime with a LIBOR option. The New Line of Credit is secured by substantially all of the Company's assets. The New Line of Credit has as its single financial covenant a minimum tangible net worth requirement and also includes a commitment fee of 0.25% annually on the unused portion of the line up to $60 million. In addition, in March 2001, the Company entered into a new $40 million flooring credit facility, which functions in lieu of a vendor trade payable for inventory purchases and does not bear interest if paid within terms specific to each vendor (the "New Flooring Facility"). The New Flooring Facility is secured by substantially all of the Company's assets and is also supported by a letter of credit issued under the New Line of Credit in the amount outstanding under the New Flooring Facility from time to time. The amount of the Letter of Credit is applied against the credit limit under the New Line of Credit. At December 31, 2000 and 1999, the Company had cash and short-term investments of $12.2 million and $24.3 million, respectively, and working capital of $10.2 million and $18.7 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 2001. 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. 4. Income Taxes The provision (benefit) for income taxes consists of the following for the years ended December 31:
2000 1999 1998 -------- -------- -------- Current Federal $ - $ 106 $ (100) State - 13 83 -------- -------- -------- - 119 (17) -------- -------- -------- Deferred Federal - 620 (4,584) State 73 (433) -------- -------- -------- - 693 (5,017) -------- -------- -------- $ - $ 812 $(5,034) ======== ======== ========
F-11 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 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:
2000 1999 1998 ------ ------ ------ 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)% Change in valuation allowance 34.0 53.7% -- Other - 4.0% (0.8)% ------ ------ ------ - 20.8% (36.3)% ====== ====== ======
The significant components of deferred tax assets and liabilities are as follows at December 31:
2000 1999 ------- ------- Accounts receivable $ 465 $ 638 Inventories 219 356 Property, plant and equipment 379 (162) Amortization (539) (462) Accrued expenses and reserves 755 621 Tax credits and loss carryforwards 11,016 8,171 Other - 3 Less: Valuation allowance (6,510) (3,380) ------- ------- Net deferred tax assets $ 5,785 $ 5,785 ======= =======
At December 31, 2000, the Company had federal net operating loss carryforwards of $29,896, which expire at the end of 2018. At December 31, 2000, the Company had various state net operating loss carryforwards ranging in amounts from $150 to $6,766, which begin to expire at the end of 2003. 5. Commitments and Contingencies Leases The Company leases office and warehouse space and equipment under various operating and capital leases which provide for minimum annual rentals and escalations based on increases in real estate taxes and other operating expenses. F-12 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) Minimum annual rentals under non-cancelable leases at December 31, 2000 were as follows:
Capitalized Operating Leases Leases ----------- --------- 2001 $ 661 $2,542 2002 507 1,924 2003 149 283 2004 - 207 2005 - 13 Thereafter - - ------ ------ Total minimum lease payments $1,317 $4,969 ====== Less amount representing interest 182 ------ ------ Present value of minimum lease payments, including current maturity of $573 $1,135 ======
In 2000, 1999 and 1998 rent expense included in selling, general and administrative costs was $3,969, $3,206 and $2,486, 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. 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. As of December 31, 2000, the Company has repurchased 15,000 shares. F-13 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 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 that do not exceed 4% of the participants' annual compensation. During 2000, 1999 and 1998, the Company incurred $154, $142 and $87, 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"). In May 2000, the Board of Directors and stockholders of the Company approved amendments to the 1994 Plan which (i) increased the number of shares authorized to be issued under the Plan from 1,950,000 shares to 2,950,000 shares, (ii) added an "evergreen provision" the effect of which automatically increases the number of shares of the Company's Common Stock available for issuance under the Plan as of January 1 of each year by three percent (3%) of the Company's outstanding Common Stock as of December 31 of the immediately preceding fiscal year, (iii) added non-employee directors as persons eligible to receive options and other stock-based awards under the Plan, and (iv) added certain provisions to the Plan to ensure that options may qualify as performance-based compensation under Section 162(m) of the Code. As of December 31, 2000, a total of 995,779 shares of authorized but unissued shares are available for future grants as of December 31, 2000. All options granted through December 31, 2000 have been Nonstatutory Stock Options. The 1994 Plan is administered by the Compensation and Stock Option Committee of the Board of Directors. Subject to the provisions of the 1994 Plan, the Committee has the authority to select the employees and consultants to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock covered by the option, (ii) when the option becomes exercisable, (iii) the option exercise price, which must be at least 100%, with respect to Incentive Stock Options, and at least 85%, with respect to Nonstatutory Stock Options, of the fair market value of the common stock as of the date of grant, and (iv) the duration of the option (which may not exceed ten years). All options generally vest annually over four to five years, and are nontransferable other than by will or by the laws of descent and distribution. F-14 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 1995 Director Stock Option Plan The Company adopted the Directors' Non-Qualified Stock Option Plan (the "Director Plan") in 1995 under which each non-employee director of the Company ("Non-Employee Director") receives a non-qualified option to purchase 5,000 shares of Common Stock upon his or her first election or appointment to the Board of Directors, as well as subsequent grants each year after the annual meeting of the Company's stockholders. In 1999, the Company increased the total number of shares reserved for issuance under the Director Plan to 100,000 from 50,000. However, in May 2000, the Company's Board of Directors and shareholders voted to terminate the Director Plan such that no further grants would be made thereunder, and further provided that Non-Employee Directors are persons eligible to receive future options and other stock-based awards under the 1994 Employee Stock Option Plan. The following table summarizes stock option activity:
Weighted Average Number Exercise Price ---------- ---------------- 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 Granted 511,150 5.52 Canceled (369,223) 5.58 Exercised (29,797) 2.22 ---------- Outstanding at December 31, 2000 1,620,595 4.67 ==========
Of the options outstanding at December 31, 2000, 1999 and 1998, options to purchase 599,000, 361,632 and 306,483 shares were exercisable at weighted average prices of $3.24, $1.88 and $6.41 per share, respectively. The following table summarizes information concerning currently outstanding and exercisable stock options:
Options exercisable at Options Outstanding at December 31, 2000 December 31, 2000 --------------------------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price ------------------- -------------- ------------------ ------------ -------------- -------------- $0.59-$2.82 560,207 6.45 $1.79 418,660 $1.79 $2.83-$6.88 722,400 8.97 $5.53 111,400 $6.12 $7.00-$12.31 337,988 8.64 $7.59 68,940 $7.41 ------------ ---------- 1,620,595 599,000 ============ ==========
F-15 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 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.
2000 1999 1998 --------- --------- --------- Net income (loss) As Reported $ (9,156) $(10,943) $(17,795) Pro Forma $(10,818) $(12,943) $(18,097) Basic and diluted net income (loss) per share As Reported $ (0.88) $ (1.05) $ (1.75) Pro Forma $ (1.04) $ (1.25) $ (1.78)
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:
2000 1999 1998 ---------- ---------- ---------- Risk free interest rates 6.22% 6.10% 4.89% Expected dividend yield none none none Expected lives 7 yrs. 7 yrs. 7 yrs. Expected volatility 112.0% 124.0% 100.0%
The weighted average grant date fair values of options granted under the Plans during 2000, 1999 and 1998 were $4.91, $7.41 and $7.11, respectively. 1999 eCOST.com Employee Stock Option Plan The Company adopted the eCOST.com Employee Stock Option Plan in 1999. During 1999 and 2000, options to purchase 537,000 and 598,000 shares, respectively, of eCOST.com common stock were granted at a weighted average exercise price of $0.20 and $2.59. Options generally vest annually over four to five years, and are nontransferable other than by will or by the laws of descent and distribution. As of December 31, 2000, options to purchase 1,023,000 eCOST.com shares were outstanding at a weighted average exercise price of $1.60. 8. Supplemental Disclosures of Cash Flow Information
2000 1999 1998 ------ ----- ----- Cash paid during the year ending December 31: Interest $1,035 $ 407 $ 851 Income taxes $ 0 $ 12 $ 281 Non-cash investing and financing activities: Equipment acquired under capital lease obligations $1,311 $ 409 --
F-16 IDEAMALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) 9. 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. 10. Segment Information The Company operates in three reportable business segments: 1) a direct marketer of personal computers, hardware, software, peripheral products and consumer electronics under the PCMall, MacMall, and CCIT brands, collectively referred to as the "Core Business"; 2) a multi-category Internet retailer under the eCOST.com brand, and 3) a portal for Linux-based products and services provided under the eLinux brand. Summarized segment information for continuing operations for the years ended December 31, 2000 and 1999 is as follows:
Year Ended December 31, 2000 Core Business eCOST.com eLinux Consolidated - ---------------------------- ------------- ---------- ------- ------------ Net sales $702,448 $109,965 $ 6,214 $818,627 Gross profit 82,006 5,161 666 87,833 Operating income (loss) 4,529 (9,441) (2,791) (7,703) Year Ended December 31, 1999 Core Business eCOST.com eLinux Consolidated - --------------------------- ------------- --------- ------- ------------ Net sales $693,391 $ 36,790 $ - $730,181 Gross profit 79,290 261 - 79,551 Operating income (loss) 2,047 (6,183) - (4,136)
Segment information is not provided for eCOST.com for the year ended December 31, 1998, as the Company did not operate in the Multi-Category Internet segment until the formation of eCOST.com in April 1999. Segment information for eLinux is not presented for the year ended December 31, 1999 and December 31, 1998, as the Company did not operate that segment until its formation in January 2000. The Company no longer operates in the Internet Auction segment as a result of the spin-off of uBid, Inc. in 1999. F-17 IDEAMALL, INC. QUARTERLY FINANCIAL INFORMATION (unaudited) (in thousands, except per share data)
2000 ------------------------------------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- As previously As As previously As As previously As As reported restated(2) reported restated(2) reported restated(2) reported Net Sales $238,457 $237,137 $194,725 $195,892 $188,306 $187,187 $198,411 Gross Profit 23,004 22,897 21,003 21,197 21,343 21,330 22,409 Income (loss) from (6,847) (6,935) (3,530) (3,370) (704) (714) 2,399 continuing operations Cumulative effect of change in accounting principle - (536) - - - - - -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ (6,847) $ (7,471) $ (3,530) $ (3,370) $ (704) $ (714) $ 2,399 ======== ======== ======== ======== ======== ======== ======== Basic and diluted earnings (loss) per share $ (0.66) $ (0.67) $ (0.34) $ (0.32) $ (0.07) $ (0.07) $ 0.23 ======== ======== ======== ======== ======== ======== ========
1999 ---------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (3) ------------ ------------- ------------- --------------- 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 (1) (2,685) (3,555) - - --------- -------- --------- --------- Net income (loss) (2,297) (3,832) (2,533) (2,281) ========= ======== ========= ========= Basic and diluted earnings (loss) per share $ (0.22) $ (0.37) $ (0.24) $ (0.22) ========= ======== ========= =========
(1) See Note 1 to the consolidated financial statements for a discussion of the uBid spin-off. (2) During the fourth quarter of 2000, the Company implemented Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. Effective January 1, 2000, the Company recorded the cumulative effect of the accounting change and, accordingly, the quarterly information for the first three quarters of 2000, which had been previously reported, has been restated. (3) Had the new method of revenue recognition under SAB 101 been used in prior years, the change in net loss for the fourth quarter of 1999 would have been immaterial. F-18 SCHEDULE II IDEAMALL, INC. Valuation and Qualifying Accounts For the years ended December 31, 1998, 1999 and 2000 (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, 1998 $2,859 $ 3,927 $ (3,110) $3,676 December 31, 1999 3,676 3,206 (5,399) 1,483 December 31, 2000 1,483 2,341 (2,662) 1,162 Reserve for inventory for the year ended: December 31, 1998 5,364 6,172 (6,796) 4,740 December 31, 1999 4,740 2,019 (4,428) 2,331 December 31, 2000 2,331 2,478 (3,702) 1,107 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 December 31, 2000 3,380 3,130 - 6,510
F-19 EX-3.1(A) 2 0002.txt CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION EXHIBIT 3.1(a) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CREATIVE COMPUTERS, INC. Creative Computers, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Creative Computers, Inc. resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directed that the amendment proposed be considered at the next annual meeting of the stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be, and it hereby is, amended to restate Article 1 to read in full as follows: "Article 1. The name of the Corporation is IdeaMall, Inc." SECOND: That thereafter, pursuant to resolution of its Board of Directors, an annual meeting of the stockholders of said corporation was duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute was voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, Creative Computers, Inc. has caused this certificate to be signed by Frank F. Khulusi, its Chief Executive Officer, this 1st day of June, 2000. BY: /s/ Frank F. Khulusi ---------------------- Name: Frank F. Khulusi Title: Chief Executive Officer EX-3.2 3 0003.txt AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF CREATIVE COMPUTERS, INC. a Delaware corporation TABLE OF CONTENTS -----------------
Page - ------------------ ARTICLE I Offices......................................... 1 Section 1 Registered Office............................... 1 Section 2 Other Offices................................... 1 ARTICLE II Stockholders' Meetings.......................... 1 Section 1 Place of Meetings............................... 1 Section 2 Annual Meetings................................. 1 Section 3 Special Meetings................................ 1 Section 4 Notice of Meetings.............................. 2 Section 5 Quorum and Voting............................... 3 Section 6 Voting Rights................................... 4 Section 7 Voting Procedures and Inspectors of Elections... 5 Section 8 List of Stockholders............................ 6 Section 9 Stockholder Proposals at Annual Meetings........ 6 Section 10 Nominations of Persons for Election to the Board of Directors....................... 7 Section 11 Action Without Meeting.......................... 9 ARTICLE III Directors....................................... 9 Section 1 Number and Term of Office....................... 9 Section 2 Powers.......................................... 10 Section 3 Vacancies....................................... 10 Section 4 Resignations.................................... 10 Section 5 Meetings........................................ 10 Section 6 Quorum and Voting............................... 11 Section 7 Action Without Meeting.......................... 12 Section 8 Fees and Compensation........................... 12 Section 9 Committees...................................... 12 Section 10 Duties of the Chairman of the Board of Directors 14 ARTICLE IV Officers........................................ 14 Section 1 Officers Designated............................. 14 Section 2 Tenure and Duties of Officers................... 14
i ARTICLE V Execution of Corporate Instruments, and Voting of Securities Owned by the Corporation.... 16 Section 1 Execution of Corporate Instruments............... 16 Section 2 Voting of Securities Owned by Corporation........ 16 ARTICLE VI Shares of Stock.................................. 17 Section 1 Form and Execution of Certificates............... 17 Section 2 Lost Certificates................................ 17 Section 3 Transfers........................................ 18 Section 4 Fixing Record Dates.............................. 18 Section 5 Registered Stockholders.......................... 19 ARTICLE VII Other Securities of the Corporation.............. 20 ARTICLE VIII Corporate Seal................................... 20 ARTICLE IX Indemnification of Officers, Directors, Employees and Agents.................. 21 Section 1 Right to Indemnification......................... 21 Section 2 Authority to Advance Expenses.................... 21 Section 3 Right of Claimant to Bring Suit.................. 22 Section 4 Provisions Nonexclusive.......................... 22 Section 5 Authority to Insure.............................. 23 Section 6 Survival of Rights............................... 23 Section 7 Settlement of Claims............................. 23 Section 8 Effect of Amendment.............................. 23 Section 9 Subrogation...................................... 23 Section 10 No Duplication of Payments....................... 23 ARTICLE X Notices.......................................... 24 ARTICLE XI Amendments....................................... 25
ii AMENDED AND RESTATED BYLAWS --------------------------- OF -- CREATIVE COMPUTERS, INC. ------------------------ ARTICLE I --------- Offices ------- Section 1. Registered Office. The registered office of the corporation in --------- ----------------- the State of Delaware shall be in the City of Dover, County of Kent. Section 2. Other Offices. The corporation shall also have and maintain an --------- ------------- office or principal place of business at 2555 West 190th Street, Torrance, California 90504, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II ---------- Stockholders' Meetings ---------------------- Section 1. Place of Meetings. Meetings of the stockholders of the --------- ----------------- corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 of Article I hereof. Section 2. Annual Meetings. The annual meetings of the stockholders of --------- --------------- the corporation, commencing with the year 1995, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors, or, if not so designated, then at 10:00 a.m. on the second Wednesday in May in each year if not a legal holiday, and, if a legal holiday, at the same hour and place on the next succeeding day not a holiday. Section 3. Special Meetings. Special Meetings of the stockholders of the --------- ---------------- corporation may be called, for any purpose or purposes, by the Chairman of the Board or the President or the Board of Directors at any time. Upon written request of any stockholder or stockholders holding in the aggregate ten percent the voting power of all stockholders delivered in person or sent by registered mail to the Chairman of the Board, President or Secretary of the corporation, the Secretary shall call a special meeting of 1 stockholders to be held at the office of the corporation required to be maintained pursuant to Section 2 of Article I hereof at such time as the Secretary may fix, such meeting to be held not less than ten nor more than sixty days after the receipt of such request, and if the Secretary shall neglect or refuse to call such meeting, within seven days after the receipt of such request, the stockholder making such request may do so. Section 4. Notice of Meetings. --------- ------------------ (a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, date and hour and purpose or purposes of the meeting, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote thereat, directed to his or her address as it appears upon the books of the corporation. (b) If at any meeting action is proposed to be taken which, if taken, would entitle stockholders fulfilling the requirements of section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of that statutory section. (c) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken unless the adjournment is for more than 30 days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (d) Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and to the extent permitted by law will be waived by any stockholder by his or her attendance thereat, in person or by proxy. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (e) Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his or her legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. Section 5. Quorum and Voting. --------- ----------------- (a) At all meetings of stockholders, except where otherwise provided by law, the Certificate of Incorporation, or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting have been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, by vote of the 2 holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. (b) Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation. (c) Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Section 6. Voting Rights. --------- ------------- (a) Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum. (b) Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his or her duly authorized agent, which proxy shall be filed with the Secretary of the corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three years from its date unless the proxy provides for a longer period. (c) Without limiting the manner in which a stockholder may authorize another person or persons to act for him or her as proxy pursuant to subsection (b) of this section, the following shall constitute a valid means by which a stockholder may grant such authority: (1) A stockholder may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or his or her authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. 3 (2) A stockholder may authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Such authorization can be established by the signature of the stockholder on the proxy, either in writing or by a signature stamp or facsimile signature, or by a number or symbol from which the identity of the stockholder can be determined, or by any other procedure deemed appropriate by the inspectors or other persons making the determination as to due authorization. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. (d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 7. Voting Procedures and Inspectors of Elections. --------- --------------------------------------------- (a) The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. (b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. 4 (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. (d) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b)(v) of this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors, belief that such information is accurate and reliable. Section 8. List of Stockholders. The officer who has charge of the stock --------- -------------------- ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 9. Stockholder Proposals at Annual Meetings. At an annual meeting --------- ---------------------------------------- of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 45 days nor more than 75 prior to the date on which the corporation first mailed its proxy materials for the previous year's annual meeting of stockholders (or the date on which the corporation mails its proxy materials for 5 the current year if during the prior year the corporation did not hold an annual meeting or if the date of the annual meeting was changed more than thirty (30) days from the prior year). A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 9, provided, however, that nothing in this Section 9 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.9, and if he or she should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Nothing in this Section 2.9 shall affect the right of a stockholder to request inclusion of a proposal in the corporation's proxy statement to the extent that such right is provided by an applicable rule of the Securities and Exchange Commission. Section 10. Nominations of Persons for Election to the Board of Directors. ---------- ------------------------------------------------------------- In addition to any other applicable requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 30 days nor more than 60 days prior to the meeting; provided, however, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the corporation which are beneficially owned by the person, and (iv) any other information relating to the person that 6 is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of preferred stock. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he and she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 11. Action Without Meeting. Unless otherwise provided in the ---------- ---------------------- Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. To be effective, a written consent must be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the books in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this Section to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation in accordance with this Section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 7 ARTICLE III ----------- Directors --------- Section 1. Number and Term of Office. The number of directors --------- ------------------------- constituting the entire Board of Directors shall not be less than three nor more than five as fixed from time to time by vote of a majority of the entire Board of Directors, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the entire Board of Directors shall be three until otherwise fixed by a majority of the entire Board. Section 2. Powers. The powers of the corporation shall be exercised, its --------- ------ business conducted and its property controlled by or under the direction of the Board of Directors. Section 3. Vacancies. Vacancies and newly created directorships resulting --------- --------- from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next election of directors, and until his or her successor shall have been duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this section in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected (including any meeting referred to in Section 4 below) to elect the number of directors then constituting the whole Board. Section 4. Resignations and Removals. --------- -------------------------- (a) Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified. (b) At a special meeting of stockholders called for the purpose in the manner hereinabove provided, the Board of Directors, or any individual director, may be removed from office, with or without cause, and a new director or directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of directors. 8 Section 5. Meetings. --------- -------- (a) The annual meeting of the Board of Directors shall be held immediately after the annual stockholders, meeting and at the place where such meeting is held or at the place announced by the Chairman at such meeting. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 of Article I hereof. Regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolutions of the Board of Directors or the written consent of all directors. (c) Special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board or, if there is no Chairman of the Board, by the President, or by a majority of the directors then in office. (d) Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each director or sent by telegram or facsimile transmission at least 48 hours before the start of the meeting, or sent by first class mail at least 120 hours before the start of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat. Section 6. Quorum and Voting. --------- ----------------- (a) A quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 1 of Article III of these Bylaws, but not less than one; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board at which a quorum is present all questions and business shall be determined by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. (c) Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. 9 (d) The transactions of any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 7. Action Without Meeting. Unless otherwise restricted by the --------- ---------------------- Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board or committee. Section 8. Fees and Compensation. Directors and members of committees may --------- --------------------- receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. Section 9. Committees. --------- ---------- (a) Executive Committee: The Board of Directors may, by resolution passed ------------------- by a majority of the whole Board, appoint an Executive Committee of not less than one member, each of whom shall be a director. The Executive Committee, to the extent permitted by law, shall have and may exercise when the Board of Directors is not in session all powers of the Board in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement or merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the Corporation a dissolution of the Corporation or a revocation of a dissolution, or to amend these Bylaws. (b) Other Committees: The Board of Directors may, by resolution passed by ----------------- a majority of the whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committee, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (c) Term: The members of all committees of the Board of Directors shall ---- serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 9, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided, that no committee shall consist of less than one 10 member. The membership of a committee member shall terminate on the date of his death or voluntary resignation, but the Board may at any time for any reason remove any individual committee member and the Board may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings: Unless the Board of Directors shall otherwise provide, -------- regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 9 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter; special meetings of any such committee may be held at the principal office of the corporation required to be maintained pursuant to Section 2 of Article I hereof; or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 10. Duties of the Chairman of the Board of Directors. The ---------- ------------------------------------------------ Chairman of the Board of Directors shall, when present, preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. ARTICLE IV ---------- Officers -------- Section 1. Officers Designated. The officers of the corporation shall be --------- ------------------- a President, and one or more Vice-Presidents, a Secretary, and a Treasurer. The order of the seniority of the Vice Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. The Board of Directors or the President may also appoint one or more assistant secretaries, assistant treasurers, and such other officers and 11 agents with such powers and duties as it or he shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. Section 2. Tenure and Duties of Officers. --------- ----------------------------- (a) General: All officers shall hold office at the pleasure of the Board ------- of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the corporation. (b) Duties of President: The President shall be the chief executive ------------------- officer of the corporation in the absence of the Chairman of the Board and shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (c) Duties of Vice-Presidents: The Vice-Presidents, in the order of their ------------------------- seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of the President is vacant. The Vice-Presidents shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (d) Duties of Secretary: The Secretary shall attend all meetings of the ------------------- stockholders and of the Board of Directors and any committee thereof, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice, in conformity with these Bylaws, of all meetings of the stockholders, and of all meetings of the Board of Directors and any Committee thereof requiring notice. The Secretary shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) Duties of Treasurer: The Treasurer shall keep or cause to be kept the ------------------- books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The 12 Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. ARTICLE V --------- Execution of Corporate Instruments, and Voting of Securities Owned by the Corporation --------------------------------------------- Section 1. Execution of Corporate Instruments. --------- ---------------------------------- (a) The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. (b) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the corporation, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board (if there be such an officer appointed) or by the President; such documents may also be executed by any Vice-President and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (c) All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation, or in special accounts of the corporation, shall be signed by such person or persons as the Board of Directors shall authorize so to do. Section 2. Voting of Securities Owned by Corporation. All stock and other --------- ----------------------------------------- securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), or by the President, or by any Vice-President. 13 ARTICLE VI ---------- Shares of Stock --------------- Section 1. Form and Execution of Certificates. Certificates for the --------- ---------------------------------- shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman of the Board (if there be such an officer appointed), or by the President or any Vice-President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him or her in the corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Lost Certificates. The Board of Directors may direct a new --------- ----------------- certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to indemnify the corporation in such manner as it shall require and/or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. Section 3. Transfers. Transfers of record of shares of stock of the --------- --------- corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a certificate or certificates for a like number of shares, properly endorsed. 14 Section 4. Fixing Record Dates. --------- ------------------- (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record entitled notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the books in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5. Registered Stockholders. The corporation shall be entitled to --------- ----------------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive 15 dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII ----------- Other Securities of the Corporation ----------------------------------- All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President or any Vice-President or such other person as may be authorized by the Board of Directors and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE VIII ------------ Corporate Seal -------------- The corporate seal shall consist of a die bearing the name of the corporation and the state and date of its incorporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE IX ---------- Indemnification of Officers, Directors, Employees and Agents ----------------------------------------- Section 1. Right to Indemnification. Each person who was or is a party or --------- ------------------------ is threatened to be made a party to or is involved (as a party, witness, or otherwise), in any 16 threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "Proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, whether the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent (hereafter an "Agent"), shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended or interpreted (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the corporation to provide broader indemnification rights than were permitted prior thereto) against all expenses, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement, and any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed on any Agent as a result of the actual or deemed receipt of any payments under this Article) reasonably incurred or suffered by such person in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding (hereinafter "Expenses"); provided, however, that except as to actions to enforce indemnification rights - -------- ------- pursuant to Section 3 of this Article, the corporation shall indemnify any Agent seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if the Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Article shall be a contract right. Section 2. Authority to Advance Expenses. Expenses incurred by an officer --------- ----------------------------- or director (acting in his capacity as such) in defending a Proceeding shall be paid by the corporation in advance of the final disposition of such Proceeding, provided, however, that such Expenses shall be advanced only upon delivery to - -------- -------- the corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article or otherwise. Expenses incurred by other Agents of the corporation (or by the directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon such terms and conditions as the Board of Directors deems appropriate. Any obligation to reimburse the corporation for Expense advances shall be unsecured and no interest shall be charged thereon. Section 3. Right of Claimant to Bring Suit. If a claim under Section 1 or --------- ------------------------------- 2 of this Article is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys, fees) of prosecuting such claim. The burden of proof of such proceeding shall be on the claimant to establish that he is entitled to be indemnified under this Article. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in 17 defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 4. Provisions Nonexclusive. The rights conferred on any person by --------- ----------------------- this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Certificate of Incorporation, agreement, or vote of the stockholders or disinterested directors is inconsistent with these bylaws, the provision, agreement, or vote shall take precedence. Section 5. Authority to Insure. The corporation may purchase and maintain --------- ------------------- insurance to protect itself and any Agent against any Expense, whether or not the corporation would have the power to indemnify the Agent against such Expense under applicable law or the provisions of this Article. Section 6. Survival of Rights. The rights provided by this Article shall --------- ------------------ continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 7. Settlement of Claims. The corporation shall not be liable to --------- -------------------- indemnify any Agent under this Article (a) for any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. Section 8. Effect of Amendment. Any amendment, repeal, or modification of --------- ------------------- this Article shall not adversely affect any right or protection of any Agent existing at the time of such amendment, repeal, or modification. Section 9. Subrogation. In the event of payment under this Article, the --------- ----------- corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Agent, who shall execute all papers required and shall do everything that may be necessary 18 to secure such rights, including the execution of such documents necessary to enable the corporation effectively to bring suit to enforce such rights. Section 10. No Duplication of Payments. The corporation shall not be ---------- -------------------------- liable under this Article to make any payment in connection with any claim made against the Agent to the extent the Agent has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. ARTICLE X --------- Notices ------- Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, the same shall be given in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his or her last known post office address as shown by the stock record of the corporation or its transfer agent. Any notice required to be given to any director may be given by the method hereinabove stated, or by telegram or other means of electronic transmission, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of facsimile telecommunication) facsimile telephone number as such director shall have filed in writing with the Secretary of the corporation, or, in the absence of such filing, to the last known post office address of such director. If no address of a stockholder or director be known, such notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 of Article I hereof. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram or other means of electronic transmission shall be deemed to have been given as at the sending time recorded by the telegraph company or other electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him or her in the manner above provided, shall not be affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the 19 giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. ARTICLE XI ---------- Amendments ---------- These Bylaws may be repealed, altered or amended or new Bylaws adopted by written consent of stockholders in the manner authorized by Section 11 of Article II, or at any meeting of the stockholders, either annual or special, by the affirmative vote of a majority of the stock entitled to vote at such meeting. The Board of Directors shall also have the authority to repeal, alter or amend these Bylaws or adopt new Bylaws (including, without limitation, the amendment of any Bylaws setting forth the number of directors who shall constitute the whole Board of Directors) by unanimous written consent or at any annual, regular, or special meeting by the affirmative vote of a majority of the whole number of directors, subject to the power of the stockholders to change or repeal such Bylaws and provided that the Board of Directors shall not make or alter any Bylaws fixing the qualifications, classifications, or term of office of directors. 20 EX-10.43 4 0004.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10.43 LOAN AND SECURITY AGREEMENT by and among CONGRESS FINANCIAL CORPORATION (WESTERN) as Lender and IDEAMALL, INC. CREATIVE COMPUTERS, INC. ECOST.COM, INC. ELINUX.COM, INC. CREATIVE COMPUTERS INTEGRATED TECHNOLOGIES, INC. and COMPUTABILITY LIMITED as Borrowers Dated: March 7, 2001 LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated March 7, 2001 is entered into by and among CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender") and IDEAMALL, INC., a Delaware corporation ("IdeaMall"), CREATIVE ------ -------- COMPUTERS, INC., a California corporation ("Creative Computers"), ECOST.COM, ------------------ INC., a Delaware corporation ("ecost"), ELINUX.COM, INC., a Delaware corporation ----- ("eLinux"), CREATIVE COMPUTERS INTEGRATED TECHNOLOGIES, INC., a Delaware ------ corporation ("CCIT") and COMPUTABILITY LIMITED, a Delaware corporation ---- ("Computability"), jointly and severally as co-borrowers (each a "Borrower" and ------------- -------- collectively "Borrowers"). --------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, IdeaMall owns all of the issued and outstanding capital stock of the other Borrowers; and WHEREAS, Borrowers operate as an integrated business unit with common product lines and the financial success of each of them is dependent upon the financial success of each other; and WHEREAS, IdeaMall receives essentially all of the payments made on account of the income of all of the Borrowers, and pays all of the expenses of the Borrowers; and WHEREAS, Creative Computers acquires and holds all of the Inventory for all of the Borrowers; and WHEREAS, all of the administrative and accounting functions of all of the Borrowers are consolidated and performed at their chief executive office; and WHEREAS, it would be impractical and uneconomical for Borrowers to change their operations and their administrative and accounting functions so as to act as separate and distinct enterprises; and WHEREAS, Borrowers have requested that Lender enter into certain financing arrangements with Borrowers as an integrated business unit pursuant to which Lender may make loans and provide other financial accommodations to Borrowers as an integrated business unit; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. ------------ All terms used herein which are defined in Article 1 or Article 9 of the California Uniform Commercial Code shall have the respective meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural. All references to Borrowers and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3. Any accounting term used herein unless otherwise defined in this Agreement shall have the meaning customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean all present and future rights of Borrowers to -------- payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. 1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest ------------------------ Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a decimal, - ------------------- prescribed by any United States or foreign banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. 1.3 "Adjusted Tangible Net Worth" shall mean as to any Person, at any --------------------------- time, in accordance with GAAP (except as otherwise specifically set forth below), on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, excluding Intangible Assets, calculating the book value of inventory for this purpose on a first-in- first-out basis, after deducting from such book values all appropriate reserves in accordance with GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including tax and other proper accruals) plus (b) indebtedness of such Person ---- and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions acceptable to Lender. 1.4 "Apple Computer" shall mean Apple Computer, Inc., a California -------------- corporation. 1.5 "Apple Intercreditor Agreement" shall mean that certain Intercreditor ----------------------------- and Release Agreement of even date herewith between Apple Computer as Lender, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.6 "Appraised Liquidation Value" shall mean, with respect to Eligible --------------------------- Inventory, the appraised value of such Eligible Inventory, expressed as a percentage of the Value thereof, as 2 determined by Lender as of any date on an "orderly liquidation" basis, net of all estimated liquidation expenses, shrinkage and markdowns, pursuant to an appraisal conducted, at Borrowers' expense, by an independent appraisal firm acceptable to Lender or such value as otherwise determined by Lender in its sole discretion. 1.7 "Availability Reserves" shall mean, as of any date of determination, --------------------- such amounts as Lender may from time to time establish and revise in its commercially reasonable discretion reducing the amount of Revolving Loans and Letter of Credit Accommodations which would otherwise be available to Borrowers under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do affect either (i) the Collateral or any other property which is security for the Obligations or its value or (ii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of any Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect any state of facts which Lender determines in good faith constitutes an Event of Default. Without limiting the generality of the foregoing, Lender (i) shall establish on the date hereof and maintain throughout the term of this Agreement and throughout any renewal term an Availability Reserve for an amount equal to two (2) months (or one (1) month in the case of the warehouse in Tennessee) of Borrowers' gross rent and other obligations as lessee for each leased premises of Borrowers which is either a warehouse location or is located in a state where a landlord may be entitled to a priority lien on Collateral to secure unpaid rent and with respect to each such property the landlord has not executed a form of waiver and consent acceptable to Lender, (ii) shall establish on the date hereof and maintain throughout the term of this Agreement and throughout any renewal term an Availability Reserve for an amount equal to the greater of the Value of the Inventory subject to the security interest of Apple Computer (or any other Persons who hold a security interest prior to Lender in the sale proceeds of Inventory, including without limitation Matsushita Electric Corp. of America, Phillips Consumer Electronics Company and Cannon U.S.A., Inc. unless and until those Persons have released or subordinated their security interests against Borrowers in a manner satisfactory to Lender) or the sum of the Borrowers' payables and accrued payables to Apple Computer (or such other Persons), provided, that, the Availability Reserve for the sum of such payables to Apple - -------- ---- Computer shall be based upon the amounts reported from time to time by Apple Computer to Lender pursuant to the Apple Intercreditor Agreement, as such amounts may be reduced by wire transfers made by Lender to Apple Computer upon the written instructions of Borrowers, (iii) shall establish on the date hereof and maintain throughout the term of this Agreement and throughout any renewal term Availability Reserves for Letter of Credit Accommodations as provided in Section 2.2(c) hereof and without duplication of Section 2.2(c), and (iv) if the Real Estate is sold, shall then establish and maintain throughout the remaining term of this Agreement and throughout any subsequent renewal term, an Availability Reserve in the amount of One Million Dollars ($1,000,000). 1.8 "Blocked Account" shall have the meaning set forth in Section 6.3 --------------- hereof. 1.9 "Business Day" shall mean any day other than a Saturday, Sunday, or ------------ other day on which commercial banks are authorized or required to close under the laws of the State of New York or the State of North Carolina, and a day on which the Reference Bank and Lender are open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which 3 banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market. 1.10 "Code" shall mean the Internal Revenue Code of 1986, as the same now ---- exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.11 "Collateral" shall have the meaning set forth in 5 hereof. ---------- 1.12 "Credit Card/Check Processing Agreements" shall mean all agreements --------------------------------------- now or hereafter entered into by any Borrower with any Credit Card Issuer or Credit Card/Check Processor as the same may now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.13 "Credit Card Issuer" shall mean any person who issues or whose members ------------------ issue credit cards used by customers of any Borrower to purchase goods, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards, and American Express, Discover, Diners Club, Carte Blanche, and other non-bank credit or debit cards. 1.14 "Credit Card/Check Processor" shall mean any servicing or processing --------------------------- agent or any factor or financial intermediary who facilities, services, processes, collects, guarantees or manages the credit authorization, billing transfer and/or payment from a Credit Card Issuer or on a check and other procedures with respect to any sales transactions of any Borrower involving credit card, debit card or check purchases by customers. 1.15 "Credit Card/Check Processing Receivables" shall mean all Accounts ---------------------------------------- consisting of the present and future rights of any Borrower to payment by Credit Card Issuers or Credit Card/Check Processors for merchandise sold and delivered to customers of such Borrower who have purchased such goods using a credit card, debit card or check. 1.16 "DFS" shall mean Deutsche Financial Services Corporation, a Nevada --- corporation. 1.17 "DFS Flooring Line" shall mean the floor plan financing arrangement ----------------- between DFS and Borrowers pursuant to which DFS will from time to time extend certain financing to Borrowers for the acquisition of certain Inventory. 1.18 "DFS Intercreditor Agreement" shall mean that certain Intercreditor --------------------------- and Subordination Agreement of even date herewith between DFS and Lender, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.19 "Eligible Accounts" shall mean Accounts created by Borrowers which are ----------------- and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and bona fide sale and ---- ---- delivery of goods by Borrowers in the ordinary course of their business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; 4 (b) such Accounts are not unpaid more than one hundred twenty (120) days after the date of the original invoice for them and are not unpaid more than sixty (60) days after the original due date for them; (c) such Accounts comply with the terms and conditions contained in Section 7.2(d) of this Agreement, but any Credit Card/Check Processing Receivable complying with those terms and conditions shall not be Eligible Accounts; (d) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent (except for returns made in the ordinary course of business and in accordance with Borrowers' present practices); (e) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America or Canada, or, at Lender's option, if either: (i) the account debtor has delivered to Borrowers an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender and payable only in the United States of America and in U.S. dollars, sufficient to cover such Account, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determine); (f) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice; (g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by any Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts); (h) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts (other than the collectibility of such Accounts by Lender by virtue of the Federal Assignment of Claims Act of 1940, as amended or any similar state or local law, if applicable), or reduce the amount payable or delay payment thereunder; (i) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; (j) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or agent of or affiliated with any Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise; 5 (k) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (l) such Accounts of a single account debtor or its affiliates do not constitute more than fifteen percent (15%) of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts); (m) such Accounts are not owed by an account debtor who has Accounts unpaid more than one hundred twenty (120) days after the date of the original invoice for them or more than sixty (60) days after the original due date for them which constitute more than fifty percent (50%) of the total Accounts of such account debtor; (n) such Accounts are not Credit Card/Check Processing Receivables; (o) such Accounts are not owed by consumers; (p) such Accounts are not service Accounts (other than for a manufacturer or other third party warranty contract); (q) if a bankruptcy petition is filed by or against any Borrower, and without limiting Lender's rights and remedies upon such filing, such Accounts are not generated from the sale of Inventory subject to the security interest of IBM Credit Corporation; and (r) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender in its commercially reasonable discretion. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. 1.20 "Eligible Inventory" shall mean Inventory consisting of finished ------------------ goods held for resale in the ordinary course of the business of Borrowers which are located at Borrowers' warehouse location(s) or retail store(s) and which are acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) raw materials or work-in-process; (b) components which are not part of finished goods; (c) spare parts for equipment; (d) packaging and shipping materials; (e) supplies and fixed assets used or consumed in Borrowers' business; (f) Inventory at premises other than those owned or controlled by Borrowers, except if Lender shall have received an agreement in writing from the person in possession of such Inventory in form and substance satisfactory to Lender acknowledging Lender's priority security interest in the Inventory, waiving security interests and claims by such person against the Inventory and permitting Lender access to, and the right to remain on, the premises so as to exercise Lender's rights and remedies and otherwise deal with the Collateral; (g) Inventory in transit, unless such Inventory is in transit to one of Borrowers' retails stores or warehouse locations under a Letter of Credit Accommodation hereunder, and the bill of lading covering such Inventory names Lender as consignee and otherwise contains terms acceptable to Lender, and all originals of such bill of lading are in the possession of Lender, Reference Bank or another bailee acceptable to Lender; (h) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (i) bill and hold goods; (j) unserviceable or obsolete Inventory; (k) Inventory which is not subject to the valid and perfected security interest of Lender; (l) returned (except for closed box returns), damaged and/or defective Inventory; (m) Inventory purchased or sold on consignment; (n) Inventory located at service centers; (o) software, books, magazines, manuals, videos and similar Inventory; (p) 6 Inventory purchased under a Letter of Credit Accommodation that is outstanding as contemplated in Section 2.2(c)(i) hereof, and (q) Inventory subject to the security interest of IBM Credit Corporation or Hewlett-Packard Company. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.21 "Eligible Transferee" shall mean (a) any affiliate of Lender; (b) any ------------------- other commercial bank or other financial institution and (c) any "accredited investor" (as defined in Regulation D under the Securities Act of 1933) approved by Lender, and except as otherwise provided in Section 12.5 hereof, as to any such accredited investor, as approved by Borrowers, such approval of Borrowers not to be unreasonably withheld, conditioned or delayed and such approval to be deemed given by Borrowers if no objection from Borrowers is received within ten (10) Business Days after written notice of such proposed assignment has been provided by Lender; provided, that, neither any Borrower nor any affiliate of -------- ---- any Borrower shall qualify as an Eligible Transferee. 1.22 "Environmental Laws" shall mean all foreign, Federal, State and local ------------------ laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between any Borrower and any governmental authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term "Environmental Laws" includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials. 1.23 "Equipment" shall mean all of Borrowers' now owned and hereafter --------- acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.24 "ERISA" shall mean the United States Employee Retirement Income ----- Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.25 "ERISA Affiliate" shall mean any person required to be aggregated with --------------- any Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. 7 1.26 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on --------------------- which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof. 1.27 "Eurodollar Rate" shall mean with respect to the Interest Period for a --------------- Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic average of the rates of interest per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is offered deposits of United States dollars in the London interbank market (or other Eurodollar Rate market selected by Borrowers and approved by Lender) on or about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement of such Interest Period in amounts substantially equal to the principal amount of the Eurodollar Rate Loans requested by and available to Borrowers in accordance with this Agreement, with a maturity of comparable duration to the Interest Period selected by Borrowers. 1.28 "Eurodollar Rate Margin" based upon the audited net income of ---------------------- Borrowers on a consolidated basis during any twelve (12) month fiscal year shall mean (a) two and one-quarter percent (2.25%) per annum if such audited net income was greater than Two Million Five Hundred Thousand Dollars ($2,500,000), (b) two and one-half percent (2.50%) per annum if such audited net income was equal to or less than Two Million Five Hundred Thousand Dollars ($2,500,000) but not less than One Dollar ($1), and (c) two and three-quarters percent (2.75%) per annum if such audited net income was less than One Dollar ($1), as adjusted pursuant to Section 3.1(d) hereof, provided, that, the Eurodollar Rate Margin -------- ---- shall not be reduced if an Event of Default has occurred and is continuing as determined by Lender. 1.29 "Event of Default" shall mean the occurrence or existence of any event ---------------- or condition described in Section 10.1 hereof. 1.30 "Excess Availability" shall mean the amount, as determined by Lender, ------------------- calculated at any time, equal to: (a) the lesser of (i) the amount of the Revolving Loans available to Borrowers as of such time (based on the applicable advance rates set forth in Section 2.1(a) hereof), subject to the sublimits and Availability Reserves from time to time established by Lender hereunder and (ii) the Maximum Credit (less the then outstanding principal amount of the Term Loan), minus ----- (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations (but not including for this purpose the then outstanding principal amount of the Term Loan) (ii) the aggregate amount of all trade payables of Borrowers which are more than thirty (30) days past due as of such time, (iii) the aggregate amount of Borrowers' book overdrafts, and (iv) the aggregate amount of Borrowers' past due lease and notes payable. 1.31 "Financing Agreements" shall mean, collectively, this Agreement and -------------------- all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by any Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. [B 1.32 "GAAP" shall mean generally accepted accounting principles in the ---- United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Boards which are applicable to the circumstances as of the date of determination consistently applied, except that, 8 for purposes of Section 9.15 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. 1.33 "Hazardous Materials" shall mean any hazardous, toxic or dangerous ------------------- substances, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). 1.34 "Information Certificates" shall mean the Information Certificates of ------------------------ Borrowers constituting Exhibit A hereto containing material information with --------- respect to Borrowers, their business and assets provided by or on behalf of Borrowers to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.35 "Intangible Assets" shall mean as to any Person (a) all loans or ----------------- advances to, and other receivables owing from, any officers, employers, subsidiaries or other affiliates of such Person, (b) all investments of such Person, (c) all goodwill of such Person, and (d) all other assets of such Person deemed intangible under GAAP or determined to be intangible by Lender in good faith. 1.36 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of --------------- approximately one (1), two (2), or three (3) months duration as Borrowers may elect, the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided, that, Borrowers may -------- ---- not elect an Interest Period which will end after the last day of the then- current term of this Agreement. 1.37 "Inventory" shall mean all of Borrowers' now owned and hereafter --------- existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. 1.38 "Inventory Advance Rates" shall mean the advance rates applicable to ----------------------- Eligible Inventory as determined in accordance with Section 2.1(a)(ii)(A). 1.39 "Letter of Credit Accommodations" shall mean the letters of credit, ------------------------------- merchandise purchase or other guaranties which are from time to time either (a) issued, opened or provided by Lender for the account of any Borrower or any Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by any Borrower of its obligations to such issuer. 1.40 "Loans" shall mean the Revolving Loans and the Term Loan. ----- 1.41 "Maximum Credit" shall mean, with reference to the Revolving Loans, -------------- the Term Loan and the Letter of Credit Accommodations, the amount of Seventy- Five Million Dollars ($75,000,000). 9 1.42 "Net Amount of Eligible Accounts" shall mean the gross amount of ------------------------------- Eligible Accounts less returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto. 1.43 "Obligations" shall mean any and all Revolving Loans, the Term Loan, ----------- the Letter of Credit Accommodations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by any Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to any Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.44 "Obligor" shall mean any guarantor, endorser, acceptor, surety or ------- other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrowers. 1.45 "Participant" shall mean any person which at any time participates ----------- with Lender in respect of the Loans, the Letter of Credit Accommodations or other Obligations or any portion thereof. 1.46 "Payment Account" shall have the meaning set forth in Section 6.3 --------------- hereof. 1.47 "Person" or "person" shall mean any individual, sole proprietorship, ------ ------ partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.48 "Prime Rate" shall mean the rate from time to time publicly announced ---------- by Reference Bank, or its successors, from time to time as its prime rate, whether or not such announced rate is the best rate available at such bank. 1.49 "Prime Rate Loans" shall mean any Loans or portion thereof on which ---------------- interest is payable based upon the Prime Rate in accordance with the terms hereof. 1.50 "Real Estate" shall mean the real estate owned by Creative Computers ----------- and commonly known as 1505 Wilshire Boulevard, Santa Monica, California. 1.51 "Records" shall mean all of Borrowers' present and future books of ------- account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrowers with respect to the foregoing maintained with or by any other person). 10 1.52 "Reference Bank" shall mean First Union National Bank, or such ------------- other bank as Lender may from time to time designate. 1.53 "Renewal Date" shall have the meaning set forth in Section ------------ 12.1(a) hereof. 1.54 "Revolving Loans" shall mean the loans now or hereafter made by --------------- Lender to or for the benefit of Borrowers on a revolving basis (involving advances, repayments and readvances) as set forth in Section 2.1 hereof. 1.55 "Slow Moving Inventory" shall mean Inventory held by Borrowers --------------------- for more than one hundred twenty (120) days. 1.56 "Term Loan" shall mean the term loan made by Lender to Borrowers --------- as provided in Section 2.3 hereof. 1.57 "Value" shall mean, as determined by Lender in good faith, with ----- respect to Inventory, the lower of (a) cost under the first-in-first-out method, net of vendor discounts or (b) market value. SECTION 2. CREDIT FACILITIES. ------------------ 2.1 Revolving Loans. --------------- (a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrowers from time to time in amounts requested by Borrowers up to the amount equal to the sum of: (i) eighty-five percent (85%) of the Net Amount of Eligible Accounts, provided, that, such percentage advance rate shall be reduced by one -------- ---- percent (1%) for each percentage point by which the dilution rate on the Accounts, as determined by Lender in good faith based on the ratio of (A) the aggregate amount of reductions in Accounts other than as a result of payments in cash, to (B) the aggregate amount of total sales, exceeds five percent (5%), and provided, further, that the total sum available under this Section 2.1(a)(i) - -------- ------- based upon Eligible Accounts owed by the United States of America, any State, political subdivision, agency or instrumentality thereof, with respect to which Borrowers have not fully complied with the Federal Assignment of Claims Act of 1940, as amended or any similar state or local law, if applicable, shall not exceed One Million Dollars ($1,000,000) at any time, plus ---- (ii) the lesser of: (A) the sum of (1) sixty percent (60%) of the Value of Eligible Inventory not consisting of office supplies (held for sale by Borrowers), refurbished Inventory, Slow Moving Inventory, or the Inventory described in clause (3) immediately below, not to exceed eighty-five percent (85%) of the Appraised Liquidation Value of such Eligible Inventory, plus (2) ---- the lesser of Two Million Dollars ($2,000,000) or forty percent (40%) of the Value of Eligible Inventory consisting of office supplies (held for sale by Borrowers), refurbished Inventory or Slow Moving Inventory and not consisting of the Inventory described in clause (3) immediately below, not to exceed eighty- five percent (85%) of the Appraised Liquidation Value of such Eligible Inventory, plus (3) seventy-five percent (75%) of the Value of Eligible ---- Inventory (a) that is in the vendor's original unopened, individual and factory sealed packaging, 11 that has been held by Borrowers no more than ninety (90) days from date of purchase, and that DFS is committed to purchase for not less than ninety percent (90%) of the original invoice price therefor pursuant to the terms and provisions of the DFS Intercreditor Agreement, or (b) that is in its original closed box, that has been held by Borrowers no more than one hundred twenty (120) days, and for which Apple Computer, upon its repossession thereof, is committed to credit the sum of the purchase prices thereof, net of certain rebates and other allowances, pursuant to the terms and provisions of the Apple Intercreditor Agreement, provided, that, the total sum available under this -------- ---- Section 2.1(a)(ii)(A) based upon Eligible Inventory that is in transit to Borrowers shall not exceed Two Million Dollars ($2,000,000) at any time; or (B) Forty Million Dollars ($40,000,000), provided, that, such -------- ---- amount shall be reduced to Twenty Million Dollars ($20,000,000) if the turn of Borrowers' Inventory is slower than twenty (20) days, as determined by Lender on a rolling six (6) month basis in accordance with Exhibit B attached hereto as the product of three hundred sixty (360) times the quotient of the average total Value of Inventory, divided by the cost of all Inventory sold, minus ----- (iii) the then undrawn amounts of outstanding Letter of Credit Accommodations, multiplied by the applicable percentages as provided for in Section 2.2(c)(i) or Section 2.2(c)(ii) hereof; minus ----- (iv) any Availability Reserves. (Based upon the Appraised Liquidation Values of Eligible Inventory as of the date hereof, the effective advance rates under Section 2.1(a)(ii)(A) above will initially be forty-eight percent (48%) for Eligible Inventory not consisting of office supplies, refurbished Inventory and Slow Moving Inventory and forty percent (40%) for Eligible Inventory consisting of office supplies, refurbished Inventory and Slow Moving Inventory). (b) Lender may, in its commercially reasonable discretion, from time to time, upon not less than ten (10) days prior notice to Borrowers reduce the lending formula(s) with respect to Eligible Inventory to the extent that Lender determines that: (i) the number of days of the turnover, or the mix, of such Inventory for any period has changed in any materially adverse respect; or (ii) the nature and quality of the Inventory has deteriorated in any material respect. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Availability Reserves. (c) Except in Lender's discretion, the aggregate amount of the Loans, the Letter of Credit Accommodations and other Obligations outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Loans and Letter of Credit Accommodations, or the aggregate amount of the outstanding Loans and Letter of Credit Accommodations and other Obligations, exceeds the amounts available under the lending formulas set forth in Section 2.1(a) hereof, the sublimits for Letter of Credit Accommodations set forth in Section 2.2(d) or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrowers shall, upon demand by Lender, which may be made at any time 12 or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. (d) For purposes only of applying the sublimit on Revolving Loans based on Eligible Inventory pursuant to Section 2.1(a)(ii)(B) Lender may treat the then undrawn amounts of outstanding Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory as Revolving Loans to the extent Lender is in effect basing the issuance of the Letter of Credit Accommodations on the Value of the Eligible Inventory being purchased with such Letter of Credit Accommodations. In determining the actual amounts of such Letter of Credit Accommodations to be so treated for purposes of the sublimit, the outstanding Revolving Loans and Availability Reserves shall be attributed first to any components of the lending formulas in Section 2.1(a) that are not subject to such sublimit, before being attributed to the components of the lending formulas subject to such sublimit. 2.2 Letter of Credit Accommodations. ------------------------------- (a) Subject to, and upon the terms and conditions contained herein, at the request of Borrowers, Lender agrees to provide or arrange for Letter of Credit Accommodations for the account of Borrowers (including without limitation a Letter of Credit Accommodation in favor of DFS pursuant to the DFS Intercreditor Agreement) containing terms and conditions acceptable to Lender and the issuer thereof. Any payments made by Lender to any issuer thereof and/or related parties in connection with the Letter of Credit Accommodations shall constitute additional Revolving Loans to Borrowers pursuant to this Section 2. (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrowers shall pay to Lender a letter of credit fee at a rate equal to one and one-half percent (1.50%) per annum on the daily outstanding balance of the Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month; provided, -------- however, that so long as no Event of Default has occurred and is continuing, - ------- such letter of credit fee shall not be charged on any Letter of Credit Accommodations up to an aggregate outstanding sum of Twenty Million Dollars ($20,000,000) that are issued in favor of any financial institution providing floorplan financing to Borrowers, and provided, further, that so long as no -------- ------- Event of Default has occurred and is continuing, such letter of credit fee on any Letter of Credit Accommodations issued in favor of any such floorplanning financial institutions that exceed Twenty Million Dollars ($20,000,000) in the aggregate outstanding shall be at a rate equal to one percent (1.0%) per annum. Notwithstanding the foregoing, such letter of credit fee shall be increased, at Lender's option without notice, to three and one-half percent (3.50%) per annum upon the occurrence and during the continuation of an Event of Default, and for the period on or after the date of termination or non-renewal of this Agreement. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrowers to pay such fee shall survive the termination or non-renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available unless on the date of the proposed issuance of any Letter of Credit Accommodations, the Revolving Loans available to Borrowers (subject to the Maximum Credit and any Availability Reserves) are equal to or greater than: 13 (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the sum of: (A) the product of the Value or Appraised Liquidation Value of such Eligible Inventory multiplied by one minus the Inventory Advance Rate under Section 2.1(a)(ii)(A) as applicable, plus ---- (B) freight, taxes, duty and other amounts which Lender estimates must be paid in connection with such Inventory upon arrival and for delivery to one of Borrowers' locations for Eligible Inventory within the United States of America; (ii) if the proposed Letter of Credit Accommodation is for standby letters of credit guaranteeing the purchase of Eligible Inventory or for any other purpose, other than the Letter of Credit Accommodation in favor of DFS pursuant to the DFS Intercreditor Agreement, an amount equal to one hundred percent (100%) of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto; and (iii) with respect to the Letter of Credit Accommodation in favor of DFS pursuant to the DFS Intercreditor Agreement, an amount equal to the indebtedness owed by Borrowers to DFS as reported to Lender by DFS on a daily basis pursuant to the DFS Intercreditor Agreement and to which the draws under such Letter of Credit Accommodation are limited pursuant to the DFS Intercreditor Agreement. Effective on the issuance of each Letter of Credit Accommodation, the amount of Revolving Loans which might otherwise be available to Borrowers shall be reduced by the applicable amount set forth in this Section 2.2(c). (d) An Availability Reserve shall be established in the amount set forth in Section 2.2(c)(i) upon the placement of the order for the purchase of the subject Inventory. Effective upon the issuance of each Letter of Credit Accommodation for a purpose other than the purchase of Inventory, an Availability Reserve shall be established in the amount set forth in Sections 2.2(c)(ii) or (iii), as applicable. (e) Except in Lender's discretion, the amount of all outstanding Letter of Credit Accommodations and all other commitments and obligations made or incurred by Lender in connection therewith shall not at any time exceed Forty Million Dollars ($40,000,000); provided, that, if the sublimit on Revolving -------- ---- Loans based on Eligible Inventory pursuant to Section 2.1(a)(ii)(B) is reduced to Twenty Million Dollars ($20,000,000), the amount of all outstanding Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory and all other commitments and obligations made or incurred by Lender in connection therewith shall not exceed Twenty Million Dollars ($20,000,000). At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrowers will either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations, and in either case, the Revolving Loans otherwise available to Borrowers shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. (f) Borrowers shall indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto (excluding any of the foregoing to the extent arising from the gross 14 negligence or willful misconduct of Lender), including, but not limited to, any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit Accommodation. Borrowers assume all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed Borrowers' agent. Borrowers assume all risks for, and agree to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit Accommodations or any documents, drafts or acceptances thereunder. Borrowers hereby release and hold Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrowers, by any issuer or correspondent or otherwise, unless caused by the gross negligence or willful misconduct of Lender, with respect to or relating to any Letter of Credit Accommodation. The provisions of this Section 2.2(f) shall survive the payment of Obligations and the termination or non-renewal of this Agreement. (g) Nothing contained herein shall be deemed or construed to grant Borrowers any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Borrowers shall be bound by any interpretation made in good faith by Lender, or any other issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Borrowers. Lender shall have the sole and exclusive right and authority to, and Borrowers shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non-compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in any Borrower's name. (h) Any rights, remedies, duties or obligations granted or undertaken by Borrowers to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by Borrowers to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been undertaken by Borrowers to Lender and to apply in all respects to Borrowers. 2.3 Term Loan. Lender is making a Term Loan to Borrowers in the original --------- principal amount of Two Million Dollars ($2,000,000). The Term Loan is (a) evidenced by a Term Promissory Note in such original principal amount duly executed and delivered by Borrowers to Lender concurrently herewith; (b) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Term Promissory Note, and the other Financing Agreements and (c) secured by all of the Collateral. If the Real Estate is sold, the outstanding 15 principal amount of the Term Loan, together with all accrued but unpaid interest thereon, shall become immediately due and payable. SECTION 3. INTEREST AND FEES. ------------------ 3.1 Interest. -------- (a) Except as provided in Sections 3.1(b), (c), (d) and (e) below, Borrowers shall pay to Lender interest on the outstanding principal amount of the non-contingent Obligations at the Prime Rate. (b) Borrowers may from time to time request that Prime Rate Loans be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans continue for an additional Interest Period. Such request from Borrowers shall specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such Eurodollar Rate Loans. Subject to the terms and conditions contained herein, three (3) Business Days after receipt by Lender of such a request from Borrowers, such Prime Rate Loans shall be converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be, provided, that, (i) no Event of Default, or event which with notice or -------- ---- passage of time or both would constitute an Event of Default exists or has occurred and is continuing, (ii) no party hereto shall have sent any notice of termination or non-renewal of this Agreement, (iii) Borrowers shall have complied with such customary procedures as are established by Lender and specified by Lender to Borrowers from time to time for requests by Borrowers for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans must be in an amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of the Eurodollar Rate Loans at any time requested by Borrowers shall not exceed the amount equal to eighty percent (80%) of the lowest principal amount of the Loans which it is anticipated will be outstanding during the applicable Interest Period, in each case as determined by Lender (but with no obligation of Lender to make such Loans) and (vii) Lender shall have determined that the Interest Period or Adjusted Eurodollar Rate is available to Lender through the Reference Bank and can be readily determined as of the date of the request for such Eurodollar Rate Loan by Borrowers. Any request by Borrowers to convert Prime Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Lender and Reference Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Lender and Reference Bank had purchased such deposits to fund the Eurodollar Rate Loans. (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Lender has received and approved a request to continue such Eurodollar Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by Lender to Borrowers, convert to Prime Rate Loans in the event that (i) an Event of Default or event which, with the notice or passage of time, or both, would constitute an Event of Default, shall exist, (ii) this Agreement shall terminate or not be renewed, or (iii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to Eurodollar Rate Loans or existing Eurodollar Rate Loans continued, as the case 16 may be, at the beginning of an Interest Period shall at any time during such Interest Period exceed either (A) the aggregate principal amount of the Loans then outstanding, or (B) the sum of the Revolving Loans then available to Borrowers under Section 2 hereof. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing. (d) Except as provided in Section 3.1(e) below, Borrowers shall pay to Lender interest on the outstanding principal amount of the Eurodollar Rate Loans at the rate of two and three-quarters percent (2.75%) per annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period selected by Borrowers as in effect three (3) Business Days after the date of receipt by Lender of the request of Borrowers for such Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is higher or lower than any rate previously quoted to Borrowers), provided, that, -------- ---- effective on the first day of the calendar month immediately following Lender's receipt of the audited financial statements of Borrowers for any twelve (12) month fiscal year (commencing with the twelve (12) month fiscal year ending December 31, 2000), and Lender's determination that those audited financial statements comply with the requirements set forth in Section 9.6(a)(ii) hereof, such interest rate shall be adjusted to such Adjusted Eurodollar Rate plus the applicable Eurodollar Rate Margin based upon the consolidated net income of Borrowers during such fiscal year as reflected in those audited financial statements, and provided further, that, such interest rate shall not be reduced -------- ------- ---- if those audited financial statements are qualified under GAAP or if an Event of Default is continuing as determined by Lender, and provided further, that, if -------- ------- ---- the audited statements of Borrowers for any fiscal year are not furnished to Lender as and when required under Section 9.6(a)(ii) hereof, such interest rate shall be adjusted to such Adjusted Eurodollar Rate plus the highest Eurodollar Rate Margin until Lender receives and approves those audited financial statements. (e) Notwithstanding the foregoing, Borrowers shall pay to Lender interest, at Lender's option, without notice, at a rate two (2.0%) percent per annum greater than the applicable rate(s) chargeable above: (i) on the non-contingent Obligations for the period from and after the date of termination or non-renewal hereof, or the date of the occurrence of an Event of Default, and for so long as such Event of Default is continuing as determined by Lender and until such time as Lender has received full and final payment of all such Obligations (notwithstanding entry of any judgment against Borrowers); and (ii) on the Revolving Loans at any time outstanding in excess of the amounts available to Borrowers under Section 2 (whether or not such excess(es), arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default). All interest accruing hereunder on and after the occurrence of any of the events referred to in this Section 3.1(e) shall be payable on demand. (f) Interest shall be payable by Borrowers to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three 17 hundred sixty (360) day year and actual days elapsed. The interest rate on non- contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrowers to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. 3.2 Closing Fee. Borrowers shall pay to Lender as a closing fee ----------- (inclusive of any commitment fees paid to Lender by Borrowers) Two Hundred Eighty-One Thousand Two Hundred Fifty Dollars ($281,250), which fee shall be fully earned as of and payable on the date hereof. 3.3 Loan Servicing Fee. Borrowers shall pay to Lender a monthly loan ------------------ servicing fee in an amount equal to Three Thousand Dollars ($3,000), plus out- of-pocket costs and expenses, in respect of Lender's services while this Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on a monthly basis, in advance, on the date hereof and on the first day of each month hereafter. 3.4 Unused Line Fee. Borrowers shall pay to Lender monthly an unused line --------------- fee equal to a rate equal to one-quarter of one percent (0.25%) per annum calculated upon the amount, if any, by which the sum of Sixty Million Dollars ($60,000,000) exceeds the average daily principal balance of the outstanding Loans and Letter of Credit Accommodations during the immediately preceding month while this Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on the first day of each month in arrears. 3.5 Compensation Adjustment. ----------------------- (a) If after the date of this Agreement the introduction of, or any change in, any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) having general application to financial institutions of the same type as Lender or any Participant, or any interpretation thereof, or compliance by Lender or any Participant therewith: (i) subjects Lender to any tax, duty, charge or withholding on or from payments due from Borrowers (excluding franchise taxes imposed upon, and taxation of the overall net income of, Lender or any Participant), or changes the basis of taxation of payments, in either case in respect of amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve requirement or other reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Lender or any Participant, or (iii) imposes any other condition the result of which is to increase the cost to Lender or any Participant of making, funding or maintaining the Loans or Letter of Credit Accommodations or reduces any amount receivable by Lender or any Participant in connection with the Loans or Letter of Credit Accommodations, or requires Lender or any Participant to make payment calculated by references to the amount of loans held or interest received by it, by an amount deemed material by Lender or any Participant, or 18 (iv) imposes or increases any capital requirement or affects the amount of capital required or expected to be maintained by Lender or any Participant or any corporation controlling Lender or any Participant, and Lender or any Participant determines that such imposition or increase in capital requirements or increase in the amount of capital expected to be maintained is based upon the existence of this Agreement or the Loans or Letter of Credit Accommodations hereunder, all of which may be determined by Lender's reasonable allocation of the aggregate of its impositions or increases in capital required or expected to be maintained, and the result of any of the foregoing is to increase the cost to Lender or any Participant of making, renewing or maintaining the Loans or Letter of Credit Accommodations, or to reduce the rate of return to Lender or any Participant on the Loans or Letter of Credit Accommodations, then upon demand by Lender, Borrowers shall pay to Lender, and continue to make periodic payments to Lender or any Participant, such additional amounts as may be necessary to compensate Lender or any Participant for any such additional cost incurred or reduced rate of return realized. (b) A certificate of Lender claiming entitlement to compensation as set forth above will be conclusive in the absence of manifest error. Such certificate will set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid and the compensation and the method by which such amounts were determined. In determining any additional amounts due from Borrowers under this Section 3.5, Lender shall act reasonably and in good faith and will, to the extent that the increased costs, reductions, or amounts received or receivable relate to the Lender's or a Participant's loans or commitments generally and are not specifically attributable to the Loans and commitments hereunder, use averaging and attribution methods which are reasonable and equitable and which cover all such loans and commitments by the Lender or such Participant, as the case may be, whether or not the loan documentation for such other loans and commitments permits the Lender or such Participant to receive compensation costs of the type described in this Section 3.5. 3.6 Changes in Laws and Increased Costs of Loans. -------------------------------------------- (a) Notwithstanding anything to the contrary contained herein, all Eurodollar Rate Loans shall, upon notice by Lender to Borrowers, convert to Prime Rate Loans in the event that (i) any change in applicable law or regulation having general application to financial institutions of the same type as Lender, Reference Bank or any Participant, as applicable (or the interpretation or administration thereof) shall either (A) make it unlawful for Lender, Reference Bank or any Participant to make or maintain Eurodollar Rate Loans or to comply with the terms hereof in connection with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs to Lender, Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C) reduce the amounts received or receivable by Lender in respect thereof, by an amount deemed by Lender to be material or (ii) the cost to Lender, Reference Bank or any Participant of making or maintaining any Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to be material. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any Participant for any loss (including loss of anticipated profits), cost or expense incurred by such person as a result of the foregoing, including, without limitation, any such loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain the Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting forth the basis for the determination of such amount necessary to compensate Lender as aforesaid shall be delivered to Borrowers and shall be conclusive, absent manifest 19 error. In determining any additional amounts due from Borrowers under this Section 3.6, Lender shall act reasonably and in good faith and will, to the extent that the increased costs, reductions, or amounts received or receivable relate to the Lender's or a Participant's loans or commitments generally and are not specifically attributable to the Loans and commitments hereunder, use averaging and attribution methods which are reasonable and equitable and which cover all such loans and commitments by the Lender or such Participant, as the case may be, whether or not the loan documentation for such other loans and commitments permits the Lender or such Participant to receive compensation costs of the type described in this Section 3.6. (b) If any payments or prepayments in respect of the Eurodollar Rate Loans are received by Lender other than on the last day of the applicable Interest Period (whether pursuant to acceleration, upon maturity or otherwise), including any payments pursuant to the application of collections under Section 6.3 or any other payments made with the proceeds of Collateral, Borrowers shall pay to Lender upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any Participant for any additional loss (including loss of anticipated profits), cost or expense incurred by such person as a result of such prepayment or payment, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain such Eurodollar Rate Loans or any portion thereof. SECTION 4. CONDITIONS PRECEDENT. -------------------- 4.1 Conditions Precedent to Initial Loans and Letter of Credit ---------------------------------------------------------- Accommodations. Each of the following is a condition precedent to Lender making - -------------- the initial Loans and providing the initial Letter of Credit Accommodations hereunder: (a) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination of any interest in and to any assets and properties of Borrowers, duly authorized, executed and delivered by Epson America Inc., including, but not limited to, UCC termination statements for all UCC financing statements and Lender shall have satisfied itself that it has valid, perfected and first priority security interests in and liens upon the Collateral and any other property which is intended as security for the Obligations or the liability of any Obligor in respect thereto, subject only to the security interests and liens permitted herein or in the other Financing Agreements; (b) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including, without limitation, records of requisite corporate action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities; (c) no material adverse change shall have occurred in the assets, business or prospects of Borrowers since the date of Lender's latest field examination and no change or event shall have occurred which would impair the ability of any Borrower or any Obligor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; 20 (d) Lender shall have completed a field review of the Records and of such other financial information, projections, budgets, business plans, cash flows as Lender shall reasonably request from time to time, including, but not limited to, current agings of receivables, current perpetual inventory records and/or rollforwards of Accounts and Inventory through the date of closing (including an appraisal and a physical count of the Inventory by third parties acceptable to Lender), together with supporting documentation, including documentation with respect to Inventory in-transit, goods in bonded warehouses or at other third-party locations, that will enable Lender to accurately identify and verify the Eligible Inventory at or before the date hereof in a manner satisfactory to Lender, the results of which shall be satisfactory to Lender; (e) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, acknowledgments by lessors, mortgagees and warehousemen of Lender's security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and agreements permitting Lender access to, and the right to remain on, the premises to exercise its rights and remedies and otherwise deal with the Collateral; (f) Lender shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee; (g) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrowers and Obligors with respect to the Financing Agreements and such other matters as Lender may reasonably request; (h) the Excess Availability as determined by Lender as of the date hereof, shall be not less than Four Million Seven Hundred Thousand Dollars ($4,700,000) after giving effect to the initial Loans made or to be made hereunder and the payment of all fees and expenses payable upon the consummation of the initial transactions contemplated by this Agreement; (i) Lender shall have received, in form and substance satisfactory to Lender and its counsel, the assignment of all of Borrowers' rights in registered patents, trademarks, service marks and copyrights, as Collateral hereunder, on Lender's standard forms of Collateral Assignments; (j) Lender shall have received, in form and substance satisfactory to Lender, an executed copy of a Blocked Account agreement, pursuant to Section 6.3(a) hereof, among Lender, Borrowers and a bank acceptable to Lender; (k) the other Financing Agreements and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender; (l) Apple Computer, DFS, IBM Credit Corporation and Hewlett-Packard Company shall have executed such intercreditor/subordination/release agreements in form and substance satisfactory to Lender; 21 (m) all Credit Card Issuers and Credit Card/Check Processors shall have been irrevocably directed by the parties to Credit Card/Check Processing Agreements, and such Credit Card Issuers and Credit Card/Check Processors shall agree, that all proceeds of Credit Card/Check Processing Receivables shall be remitted to the Blocked Account; (n) each of the depository banks used for payment of Borrowers' expenses and by Borrowers' retail store locations(s) for the deposit of receipts from the sale of merchandise or for the deposit of other proceeds of Collateral and other property which are security for the Obligations shall have been notified of Lender's security interest therein and shall have been irrevocably authorized and directed to send all funds on deposit with such banks only to the Blocked Account or as Lender otherwise directs; (o) each of the institutions with which Borrowers maintain any investment property shall have executed a control agreement in form and substance satisfactorily to Lender; (p) Lender shall have received, in form and substance satisfactory to Lender, a deed of trust against the Real Estate, together with an irrevocable commitment to issue a valid and effective title insurance policy issued by a company acceptable to Lender insuring the priority, amount and sufficiency of such deed of trust, insuring against matters that would be disclosed by surveys and containing any legally available endorsements, assurances or affirmative coverage reasonably requested by Lender for protection of its interest; and as a condition precedent to the Term Loan only, Lender shall have received a written appraisal of the fair market value of the Real Estate, which appraisal shall be addressed to Lender and shall be in form and substance, and issued by an appraiser, satisfactory to Lender, together with a Phase I environmental assessment report on the Real Estate, which report shall be addressed to Lender and shall be in form and substance, and issued an environmental firm, satisfactory to Lender; and (q) Lender shall have reviewed and approved of any and all of Borrowers' agreements with its vendors, and shall have received consents of such vendors, if required, in form and substance satisfactory to Lender. 4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations. --------------------------------------------------------------------- Each of the following is an additional condition precedent to Lender making Loans and/or providing Letter of Credit Accommodations to Borrowers, including the initial Loans and Letter of Credit Accommodations and any future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto; and (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto. 22 SECTION 5. GRANT OF SECURITY INTEREST. --------------------------- To secure payment and performance of all Obligations, each Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of such Borrower, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): - ----------- 5.1 all Accounts and other indebtedness owed to the such Borrower; 5.2 all present and future contract rights, general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, mailing lists, licenses, whether as licensor or licensee, choses in action and other claims and existing and future leasehold interests in equipment, real estate and fixtures), chattel paper, documents, instruments, securities, investment property, letters of credit, proceeds of letters of credit, bankers' acceptances and guaranties; 5.3 all present and future monies, securities, credit balances, deposits, deposit accounts and other property of such Borrower now or hereafter held or received by or in transit to Lender or its affiliates or at any other depository or other institution from or for the account of such Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts and other Collateral, including, without limitation, (a) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (b) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (c) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts or other Collateral, including, without limitation, returned, repossessed and reclaimed goods, and (d) deposits by and property of account debtors or other persons securing the obligations of account debtors; 5.4 all Inventory; 5.5 all Equipment; 5.6 all Records; 5.7 as to Creative Computers, the Real Estate; and 5.8 all products and proceeds of the foregoing, in any form, including, without limitation, insurance proceeds and any claims against third parties for loss or damage to or destruction of any or all of the foregoing. SECTION 6. COLLECTION AND ADMINISTRATION. ------------------------------ 6.1 Borrowers' Loan Account. Lender shall maintain one or more loan ----------------------- account(s) on its books in which shall be recorded (a) all Loans, all Letter of Credit Accommodations and all other Obligations and the Collateral, (b) all payments made by or on behalf of Borrowers and (c) all other appropriate debits and credits as provided in this Agreement, including, without 23 limitation, fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2 Statements. Lender shall render to Borrowers each month a statement ---------- setting forth the balance in the Borrowers' loan account(s) maintained by Lender for Borrowers pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrowers and conclusively binding upon Borrowers as an account stated except to the extent that Lender receives a written notice from Borrowers of any specific exceptions of Borrowers thereto within sixty (60) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrowers a written statement as provided above, the balance in Borrowers' loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrowers. 6.3 Collection of Accounts. ---------------------- (a) Borrowers shall establish and maintain, at their expense, deposit account arrangements and merchant payment arrangements with the banks set forth on Schedule 8.8 and after prior written notice to Lender, such other banks as ------------ Borrowers may hereafter select as are acceptable to Lender. The banks set forth on Schedule 8.8 constitute all of the banks with whom any Borrower has deposit ------------ account arrangements and merchant payment arrangements as of the date hereof. (i) Borrowers shall deposit all proceeds from sales of Inventory in every form (including, without limitation, cash, checks, credit card sales drafts, credit card sales of charge slip or receipts and other forms of daily receipts) and all other proceeds of Collateral that are received at Borrowers' retail store location(s), on each Business Day into the deposit accounts of Borrowers used solely for such purpose as set forth on Schedule 8.8. Borrowers ------------ shall irrevocably authorize and direct in writing, in form and substance satisfactory to Lender, each of the banks into which proceeds from sales of Inventory and any and all other proceeds of Collateral are at any time deposited as provided above to send by wire transfer on a daily basis all funds deposited in such account, and shall irrevocably authorize and direct in writing their account debtors, Credit Card Issuers and Credit Card/Check Processors to directly remit payments on their Accounts, Credit Card Receivables and all other payments constituting process of Inventory to the Blocked Accounts described in Section 6.3(a)(ii) below. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing, those of such banks used by Borrowers' retail store location in Memphis, Tennessee shall remit the foregoing proceeds received by them to the Blocked Accounts on a weekly basis, instead of a daily basis, provided, that, the aggregate sum of such proceeds held by those banks -------- ---- shall not exceed Fifty Thousand Dollars ($50,000) at any time. Such authorizations and directions shall not be rescinded, revoked or modified without the prior written consent of Lender. (ii) Borrowers shall establish and maintain, at their expense, a blocked account or lockboxes and related blocked accounts (in either case, each a "Blocked Account" and collectively the "Blocked Accounts"), as Lender may --------------- ---------------- specify, with such bank or banks as are acceptable to Lender into which Borrowers shall promptly deposit and direct their account debtors to directly remit all payments on Accounts and all payments constituting proceeds of Inventory or other Collateral in the identical form in which such payments are made, whether by cash, check or other manner. Each bank at which a Blocked Account is established shall enter 24 into an agreement, in form and substance satisfactory to Lender, providing (unless otherwise agreed to by Lender) that all items received or deposited in such Blocked Account are the Collateral of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all funds received or deposited into such Blocked Account to such bank account of Lender as Lender may from time to time designate for such purpose (the "Payment Account"). Borrowers agree that all --------------- amounts deposited in the Blocked Accounts or other funds received and collected by Lender, whether as proceeds of Inventory, the collection of Accounts or other Collateral or otherwise shall be the Collateral of Lender. (b) For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations one (1) Business Day following the date of receipt of immediately available funds by Lender in the Payment Account. For purposes of calculating the amount of the Revolving Loans available to Borrowers such payments will be applied (conditional upon final collection) to the Obligations on the Business Day of receipt by Lender in the Payment Account, if such payments are received within sufficient time (in accordance with Lender's usual and customary practices as in effect from time to time) to credit Borrowers' loan account on such day, and if not, then on the next Business Day. If no monetary obligations by Borrowers are outstanding on any day, Borrowers shall pay interest at the applicable rate set forth in Section 3.1(a) on the amount of any payments or other funds that are received by Lender (irrespective of the characterization of whether receipts are owned by Lender or Borrowers) for such day. (c) Borrowers and all of their affiliates, subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, cash, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts or from sales of Inventory or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender. In no event shall any such monies, checks, notes, drafts or other payments be commingled with any Borrower's own funds. Borrowers agree to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person, unless such payment or indemnification obligation of Lender was a result of Lender's gross negligence or willful misconduct. The obligation of Borrowers to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non-renewal of this Agreement. 6.4 Payments. All Obligations shall be payable to the Payment Account as -------- provided in Section 6.3 or such other place as Lender may designate from time to time. Lender may apply payments received or collected from Borrowers or for the account of Borrowers (including, without limitation, the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines; provided, that, so long as no Event of Default has occurred and is continuing, - -------- ---- proceeds generated in the ordinary course of Borrowers' business on Accounts or Inventory will not be applied to any principal amount not yet due and payable on the Term Loan or to contingent Obligations. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrowers. Borrowers shall make all payments to Lender on 25 the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrowers shall be liable to pay to Lender, and do hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 6.5 Authorization to Make Loans. Lender is authorized to make the Loans --------------------------- and provide the Letter of Credit Accommodations based upon telephonic or other instructions received from anyone purporting to be an officer of Borrowers or other authorized person or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations; provided, that, proceeds of Loans shall be -------- ---- remitted by Lender to accounts designated by Borrowers in writing, which accounts shall be accounts of Borrowers unless otherwise agreed by Lender. All requests for Loans or Letter of Credit Accommodations hereunder shall specify the date on which the requested advance is to be made or Letter of Credit Accommodations established (which day shall be a Business Day) and the amount of the requested Loan. Requests received at or before 10:30 a.m. (Los Angeles time) on any Business Day shall be deemed to have been made as of such Business Day. Requests received on any day that is not a Business Day or received after 10:30 a.m. (Los Angeles time) on any Business Day shall be deemed to have been made as of the opening of business on the immediately following Business Day. Subject to the terms and conditions of this Agreement, Lender will make the Loans or commence arranging for the Letter of Credit Accommodations (as requested by Borrowers) on the Business Day the request is deemed to have been made or such later Business Day as may be specified by Borrowers. All Loans and Letter of Credit Accommodations under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrowers when deposited to the credit of Borrowers or otherwise disbursed or established in accordance with the instructions of Borrowers or in accordance with the terms and conditions of this Agreement. 6.6 Use of Proceeds. Borrowers shall use the initial proceeds of the --------------- Loans provided by Lender to Borrowers hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrowers to Lender on or about the date hereof and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made or Letter of Credit Accommodations provided by Lender to Borrowers pursuant to the provisions hereof shall be used by Borrowers only for general operating, working capital and other proper corporate purposes of Borrowers not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. 26 SECTION 7. COLLATERAL REPORTING AND COVENANTS. ----------------------------------- 7.1 Collateral Reporting. Borrowers shall provide Lender with the -------------------- following documents in a form satisfactory to Lender: (a) on a weekly basis, (i) schedules of sales made, credits issued and cash received, which, after the occurrence of an Event of Default or the filing of a bankruptcy petition by or against any Borrower, and for so long as such Event of Default is continuing or such bankruptcy petition has not been dismissed, shall separately account for sales of Inventory subject to the security interest of IBM Credit Corporation, (ii) schedules of Inventory (net of fixed assets) separately identifying Inventory by vendor, type, location and age, with perpetual inventory reports identifying "Qualified Merchandise" (as defined in the DFS Intercreditor Agreement), (iii) schedules of accounts payable and accrued accounts payable to any vendor holding a security interest in any property of the Borrowers, and (iv) borrowing base certificates; (c) on a monthly basis, on or before the tenth (10th) Business Day of such month for the immediately preceding month or more frequently as Lender may request, (i) agings of accounts receivable, (ii) detailed perpetual inventory reports, (iii) inventory reports (net of fixed assets) by vendor, type, location and age, (iv) agings of accounts payable, accrued accounts payable, lease payables and other payables, (v) reports of sales for each category of Inventory, (vi) summary reports on sales and use tax collections, deposits and payments, including monthly sales and use tax accruals, (vii) reports on Credit Card/Check Processing Receivables, and other indebtedness owed to Borrowers, including aggregate outstanding amounts by category, payments, accruals and returns and other credits, and (viii) a certificate from an authorized officer of Borrowers representing that each Borrower has made payment of sales and use taxes during such month or, at Lender's request, other evidence of such payment; (d) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrowers; and (e) such other reports as to the Collateral or other property which is security for the Obligations as Lender shall request from time to time. Borrowers shall provide Lender, as soon as available, but in any event not later than five (5) days after receipt by Borrowers, with all statements received from Apple Computer and any other vendor who may hold a security interest in any Borrower's assets, together with such additional information as shall be sufficient to enable Lender to monitor the accounts payable and accrued accounts payable to them. If any of Borrowers' records or reports of the Collateral or other property which is security for the Obligations are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrowers hereby irrevocably authorize such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 Accounts Covenants. ------------------ (a) Borrowers shall notify Lender promptly of the assertion of any claims, offsets, defenses of counterclaims by any account debtor, or any disputes with any of such persons or any settlement, adjustment or compromise thereof, in the schedules, certificates and reports provided pursuant to Section 7.1 hereof. (b) Borrowers shall notify Lender promptly of: (i) any material delay in any Borrower's performance of any of its obligations to any account debtor or the assertion of any claims, offsets, defenses or counterclaims by any account debtor, or any disputes with account debtors, or any settlement, adjustment or compromise thereof, (ii) all material adverse 27 information relating to the financial condition of any account debtor and (iii) any event or circumstance which, to Borrowers' knowledge would cause Lender to consider any then existing Accounts as no longer constituting Eligible Accounts. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor, Credit Card Issuer or Credit Card/Check Processor except in the ordinary course of Borrowers' business in accordance with its most recent past practices and policies. So long as no Event of Default exists or has occurred and is continuing, Borrowers may settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor, Credit Card Issuer or Credit Card/Check Processor in the ordinary course of Borrowers' business in accordance with their most recent past practices and policies. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor, Credit Card Issuer or Credit Card/Check Processor or grant any credits, discounts or allowances. Borrowers shall notify Lender promptly of (i) any notice of a material default by any Borrower under any of the Credit Card/Check Processing Agreements or of any default which might result in the Credit Card Issuer or Credit Card/Check Processor ceasing to make payments or suspending payments to Borrowers, (ii) any notice from any Credit Card Issuer or Credit Card/Check Processor that such person is ceasing or suspending, or will cease or suspend, any present or future payments due or to become due to Borrowers from such person, or that such person is terminating or will terminate any of the Credit Card/Check Processing Agreements, and (iii) the failure of any Borrower to comply with any material terms of the Credit Card/Check Processing Agreements or any terms thereof which might result in the Credit Card Issuer or Credit Card/Check Processor ceasing or suspending payments to Borrowers. (c) Without limiting the obligation of Borrowers to deliver any other information to Lender, Borrowers shall promptly report to Lender any return of Inventory by any account debtor. At any time that Inventory is returned, reclaimed or repossessed, the Account (or portion thereof) which arose from the sale of such returned, reclaimed or repossessed Inventory shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrowers shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (d) With respect to each Account and Credit Card/Check Processing Receivable: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments delivered to Lender pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor, Credit Card Issuer or Credit Card/Check Processor except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of Borrowers' business in accordance with practices and policies previously disclosed to Lender, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement, (v) none of the transactions giving rise thereto will violate any applicable State or Federal Laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms. 28 (e) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account, Credit Card/Check Processing Receivable or other Collateral, by mail, telephone, facsimile transmission or otherwise. (f) Borrowers shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrowers, all chattel paper and instruments which Borrowers now own or may at any time acquire immediately upon Borrowers' receipt thereof, except as Lender may otherwise agree. (g) Lender may, at any time or times that an Event of Default exists or has occurred, (i) notify any or all account debtors, Credit Card Issuers or Credit Card/Check Processors that the Accounts and Credit Card/Check Processing Receivables have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all account debtors, Credit Card Issuers or Credit Card/Check Processors to make payments of Accounts and Credit Card/Check Processing Receivables directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts and Credit Card/Check Processing Receivables or other obligations included in the Collateral and thereby discharge or release the account debtor, Credit Card Issuer, Credit Card/Check Processor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts and Credit Card/Check Processing Receivables or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof or for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts due from such account debtor and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrowers shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. 7.3 Inventory Covenants. With respect to the Inventory: ------------------- (a) Borrowers shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Borrowers' cost therefor and daily withdrawals therefrom and additions thereto; (b) Borrowers shall cause a third party firm acceptable to Lender to conduct a complete physical count of the Inventory at a minimum of once every twelve (12) months but at any time as Lender may reasonably request upon the occurrence and during the continuance of an Event of Default, and promptly following such physical count such firm shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count; (c) Borrowers shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Borrowers' business and except to move Inventory directly from one location set forth or permitted herein to another such location; 29 (d) upon Lender's request, Borrowers shall, at their expense, no more than four (4) times in any twelve (12) month period as to desktop appraisals, and no more than one (1) time in any twelve (12) month period as to full appraisals, but at any time or times as Lender may request upon the occurrence and during the continuance of an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and addressing such issues as Lender may require in its commercially reasonable judgment, issued by an appraiser acceptable to Lender, and addressed to Lender or upon which Lender is expressly permitted to rely (with the understanding that Lender may revise the definition of "Eligible Inventory" hereunder or establish Availability Reserves as Lender ------------------ may deem advisable in its sole discretion based upon the results of such updated appraisals); (e) Borrowers shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Borrowers assume all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) Borrowers shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate Borrowers to repurchase such Inventory (except for returns made in the ordinary course of Borrowers' business pursuant to their existing policies and in accordance with their industry standards); (h) Borrowers shall keep the Inventory in good and marketable condition; (i) Borrowers shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval; and (j) upon the occurrence and during the continuance of an Event of Default, Borrowers shall not return any Inventory to its vendors without the prior consent of Lender. 7.4 Equipment Covenants. With respect to the Equipment: ------------------- (a) upon Lender's request, Borrowers shall, at their expense, at any time or times as Lender may request upon the occurrence and during the continuation of an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology reasonably acceptable to Lender and by an appraiser acceptable to Lender; (b) Borrowers shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrowers shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Borrowers' business and not for personal, family, household or farming use; 30 (e) Borrowers shall not remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Borrowers or to move Equipment directly from one such location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Borrowers in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrowers shall not permit any of the Equipment to be or become a part of or affixed to real property; and (g) Borrowers assume all responsibility and liability arising from the use of the Equipment. 7.5 Power of Attorney. Borrowers hereby irrevocably designate and appoint ----------------- Lender (and all persons designated by Lender) as Borrowers' true and lawful attorney-in-fact, and authorizes Lender, in any Borrower's or Lender's name, to: (a) at any time an Event of Default has occurred and is continuing: (i) demand payment on Accounts, Credit Card/Check Processing Receivables or other proceeds of Inventory or other Collateral; (ii) enforce payment of Accounts, Credit Card/Check Processing Receivables or other Obligations included in the Collateral by legal proceedings or otherwise; (iii) exercise all of Borrowers' rights and remedies to collect any Account, Credit Card/Check Processing Receivables or other proceeds of Inventory or other Collateral; (iv) sell or assign any Account and Credit Card/Check Processing Receivables upon such terms, for such amount and at such time or times as the Lender deems advisable; (v) settle, adjust, compromise, extend or renew any Accounts and Credit Card/Check Processing Receivables; (vi) discharge and release any Accounts and Credit Card/Check Processing Receivables or other Obligations included in the Collateral; (vii) prepare, file and sign Borrowers' name on any proof of claim in bankruptcy or other similar document against an account debtor; (viii) notify the post office authorities to change the address for delivery of Borrowers' mail to an address designated by Lender, and open and dispose of all mail addressed to Borrowers, provided, that, any such -------- ---- mail received by Lender that does not constitute checks or other items of payment shall be forwarded by Lender to Borrowers promptly after receipt by Lender; and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrowers' obligations under this Agreement and the other Financing Agreements; and 31 (b) at any time, subject to the terms of the agreement(s) relating to the Blocked Account(s) to: (i) take control in any manner of any item of payment or proceeds thereof; (ii) have access to any lockbox or postal box into which Borrowers' mail is deposited; (iii) endorse Borrowers' name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations; (iv) endorse Borrowers' name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Accounts or Credit Card/Check Processing Receivables or any goods pertaining thereto or any other Collateral; (v) sign Borrowers' name on any verification of Accounts or Credit Card/Check Processing Receivables and notices thereof to account debtors, Credit Card Issuers or Credit Card/Check Processors; and (vi) execute in Borrowers' name and file any UCC financing statements or amendments thereto as deemed appropriate by Lender to perfect its security interests in the Collateral. Borrowers hereby release Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of the gross negligence or willful misconduct of Lender or its officers, employees or designees as determined pursuant to a final non-appealable order of a court of competent jurisdiction. 7.6 Right to Cure. After the occurrence and during the continuance of an ------------- Event of Default, Lender may, at its option, (a) cure any default by Borrowers under any agreement with a third party or pay or bond on appeal any judgment entered against Borrowers, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrowers' account therefor, such amounts to be repayable by Borrowers on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrowers. Any payment made or other action taken by Lender under this Section 7.6 shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.7 Access to Premises. From time to time as requested by Lender, at the ------------------ cost and expense of Borrowers, (a) Lender or its designee shall have complete access to all of Borrowers' premises during normal business hours and after two (2) Business Days prior notice to Borrowers, or at any time and without notice to Borrowers if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrowers' books and records, including, without limitation, the Records, and (b) Borrowers shall promptly furnish to Lender such copies of such books and records or extracts 32 therefrom as Lender may reasonably request, and (c) use during normal business hours such of Borrowers' personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts or Credit Card/Check Processing Receivables and realization of other Collateral. SECTION 8. REPRESENTATIONS AND WARRANTIES. ------------------------------- Each Borrower hereby represents and warrants to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans and the providing of Letter of Credit Accommodations by Lender to Borrowers: 8.1 Corporate Existence, Power and Authority; Subsidiaries. Each ------------------------------------------------------ Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on such Borrower's financial condition, results of operation or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements to which any Borrower is a party and the transactions contemplated hereunder and thereunder are all within such Borrower's corporate powers, have been duly authorized and are not in contravention of law or the terms of such Borrower's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which such Borrower is a party or by which such Borrower or its property are bound. This Agreement and the other Financing Agreements to which any Borrower is a party constitute legal, valid and binding obligations of such Borrower enforceable in accordance with their respective terms. Borrowers do not have any subsidiaries except as set forth on the Information Certificates. 8.2 Financial Statements; No Material Adverse Change. All financial ------------------------------------------------ statements relating to Borrowers which have been or may hereafter be delivered by Borrowers to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operations of Borrowers as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrowers to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Borrowers, since the date of the most recent audited financial statements furnished by Borrowers to Lender prior to the date of this Agreement. 8.3 Chief Executive Office; Collateral Locations. The chief executive -------------------------------------------- office of Borrowers and Borrowers' Records concerning Accounts and Credit Card/Check Processing Receivables are located only at the address set forth below and their only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificates, subject to the right of Borrowers to establish new locations in accordance with Section 9.2 below. The Information Certificates or any notices delivered pursuant to Section 9.2 correctly identify any of such locations which are not owned by Borrowers and set forth the owners and/or operators thereof and, to the best of Borrowers' knowledge, the holders of any mortgages on such locations. 8.4 Priority of Liens; Title to Properties. The security interests -------------------------------------- and liens granted to Lender under this Agreement and the other Financing Agreements to which any Borrower is a 33 party constitute valid and perfected first priority liens and security interests in and upon the Collateral to which such Borrower now has or hereafter acquires rights, subject only to the liens indicated on Schedule 8.4 hereto and the other ------------ liens permitted under Section 9.8 hereof. Each Borrower has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Schedule 8.4 ------------ hereto or permitted under Section 9.8 hereof. 8.5 Tax Returns. Each Borrower has filed, or caused to be filed, ----------- in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Each Borrower has paid or caused to be paid prior to delinquency all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 8.6 Litigation. Except as set forth on the Information Certificates, ---------- there is no present investigation by any governmental agency pending, or to the Borrowers' actual knowledge threatened, against or affecting any Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the Borrowers' actual knowledge threatened, against any Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Borrowers would result in any material adverse change in the assets or business of Borrowers or would impair the ability of any Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon a material portion of the Collateral. 8.7 Compliance with Other Agreements and Applicable Laws. Each ---------------------------------------------------- Borrower is not in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and each Borrower is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority, except with respect to the annual reporting obligations imposed by Sections 103 and 104 of ERISA and Section 6039D of the Code with respect to the Plans (as defined in Section 8.10(a) hereof), as to which obligations Borrowers shall comply promptly. 8.8 Bank Accounts. All of the deposit accounts, investment accounts ------------- or other accounts in the name of or used by Borrowers maintained at any bank or other financial institution are set forth on Schedule 8.8 hereto, subject to the ------------ right of Borrowers to establish new accounts in accordance with Section 9.13 below. 8.9 Environmental Compliance. ------------------------ (a) Except as set forth on Schedule 8.9 hereto, each Borrower ------------ has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any 34 Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of Borrowers comply in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on Schedule 8.9 hereto, there has been ------------ no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor is any pending or to the best of Borrowers' knowledge threatened, with respect to any non- compliance with or violation of the requirements of any Environmental Law by Borrowers or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects any Borrower or its business, operations or assets or any properties at which such Borrower has transported, stored or disposed of any Hazardous Materials. (c) Each Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Each Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of such Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. 8.10 Employee Benefits. ----------------- (a) Except with respect to the Creative Computers 401(k) Plan and Trust, the Creative Computers Group Welfare Benefit Plan and the Creative Computers Flexible Benefit Plan (collectively, the "Plans"), each Borrower has not engaged in any transaction in connection with which such Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, including any accumulated funding deficiency described in Section 8.10(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.10(d) hereof. With respect to the Plans, each Borrower has not engaged in any transaction in connection with which such Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code and has corrected, or undertaken reasonable efforts to promptly correct, any such transactions it has identified during the course of routine plan administration. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrowers to be incurred with respect to any employee pension benefit plan of Borrowers or any of their ERISA Affiliates. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan of Borrowers or any of their ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which Borrowers or any of their ERISA Affiliates are required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each employee pension benefit plan as contributions to such plan as 35 of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee pension benefit plan, including any penalty or tax described in Section 8.10(a) hereof and any deficiency with respect to vested accrued benefits described in Section 8.10(c) hereof. (d) The current value of all vested accrued benefits under all employee pension benefit plans maintained by Borrowers that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.10(a) hereof and any accumulated funding deficiency described in Section 8.10(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Neither Borrowers nor any of their ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.11 Year 2000 Compliance. Borrowers and any business in which any -------------------- Borrower holds a substantial interest and all customers, suppliers and vendors that are material to Borrowers' business are Year 2000 Compliant. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all ------------------- software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, are properly performing date sensitive functions during and after the year 2000. Borrowers shall, immediately upon request, provide to Lender such certifications or other evidence of Borrowers' compliance with the terms hereof as Lender may from time to time require. 8.12 Accuracy and Completeness of Information. All information ---------------------------------------- furnished by or on behalf of Borrowers in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including, without limitation, all information on the Information Certificates is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business or assets of Borrowers, which has not been fully and accurately disclosed to Lender in writing. 8.13 Survival of Warranties; Cumulative. All representations and ---------------------------------- warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrowers shall now or hereafter give, or cause to be given, to Lender. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS. ----------------------------------- 9.1 Maintenance of Existence. Each Borrower shall at all times ------------------------ preserve, renew and keep in full, force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, trade names, approvals, 36 authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. Each Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its corporate name, which notice shall set forth the new name and such Borrower shall deliver to Lender a copy of the amendment to the Certificate of Incorporation of such Borrower providing for the name change certified by the Secretary of State of the jurisdiction of incorporation of such Borrower as soon as it is available. 9.2 New Collateral Locations. Any Borrower may open any new location ------------------------ within the continental United States provided such Borrower: (a) gives Lender ten (10) days prior written notice of the intended opening of any such new location; and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including, without limitation, UCC financing statements and, if such Borrower leases such new location, provides a favorable landlord waiver or subordination. 9.3 Compliance with Laws, Regulations, Etc. -------------------------------------- (a) Each Borrower shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local governmental authority, including, without limitation, the Employee Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including, without limitation, all of the Environmental Laws. (b) Borrowers shall take prompt and appropriate action to respond to any of Borrowers' non-compliance (to the extent Borrowers have knowledge thereof or would have knowledge thereof upon due inquiry) with any of the Environmental Laws and shall report to Lender on such response. (c) Borrowers shall give both oral and written notice to Lender immediately upon Borrowers' receipt of any notice of, or Borrowers' otherwise obtaining knowledge of: (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material by any Borrower or upon any of its premises; or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by any Borrower; (B) the release, spill or discharge, threatened or actual, of any Hazardous Material by any Borrower or upon any of its premises; (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials by any Borrower or upon any of its premises; or 37 (D) any other environmental, health or safety matter, which could have a material adverse effect upon any Borrower or its business, operations or assets or any properties at which any Borrower transported, stored or disposed of any Hazardous Materials. (d) Borrowers shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material by any Borrower or upon any of its premises, including, without limitation, the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of such Borrower and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. (e) To the extent any of the provisions of this Section 9.3 as they pertain to the Real Property are inconsistent with the provisions of the deed of trust in favor of Lender on the Real Property, the provisions of such deed of trust shall govern. 9.4 Payment of Taxes and Claims. Each Borrower shall duly pay and --------------------------- discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower and with respect to which adequate reserves have been set aside on its books. Borrowers shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrowers agree to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrowers such amount shall be added and deemed part of the Loans, provided, -------- that, nothing contained herein shall be construed to require Borrowers to pay - ---- any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.5 Insurance. Borrowers shall, at all times, maintain with --------- financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrowers shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Borrowers fail to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrowers. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Borrowers in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Borrowers shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrowers shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that 38 Lender shall be paid regardless of any act or omission by Borrowers or any of their affiliates. Subject to the provisions of the deed of trust executed by Creative Computers in favor of Lender, at its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6 Financial Statements and Other Information. ------------------------------------------ (a) Borrowers shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of Borrowers and their subsidiaries (if any) in accordance with GAAP and Borrowers shall furnish or cause to be furnished to Lender: (i) within forty-five (45) days after the end of each fiscal month, monthly unaudited internally prepared consolidated and consolidating financial statements (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity) as of the end of and through such fiscal month, all in reasonable detail, which financial statements shall be prepared honestly and in good faith (provided that where such fiscal month does not end on the last day of a fiscal quarter, Lender understands that such financial statements are based upon information available at the time of preparation of such financial statements and may therefore not be accurate or complete), and where such fiscal month ends on the last day of a fiscal quarter, shall fairly present the financial position and the results of the operations of Borrowers and their subsidiaries and (ii) within one hundred twenty (120) days after the end of each fiscal year, audited consolidated and consolidating financial statements of Borrowers and their subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrowers and their subsidiaries as of the end of and for such fiscal year, together with the opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrowers and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrowers and their subsidiaries as of the end of and for the fiscal year then ended. (b) Borrowers shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim which involves an amount in excess of Five Hundred Thousand Dollars ($500,000) and relates to the Collateral or any other property which is security for the Obligations or which would result in any material adverse change in any Borrower's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (c) Borrowers shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all financial reports which Borrowers send to their stockholders generally and copies of all reports and registration statements which Borrowers file with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrowers shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information in respect of the Collateral and the business of 39 Borrowers, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrowers to any court or other government agency or, subject to Section 12.5 below, to any participant or assignee or prospective participant or assignee. Borrowers hereby irrevocably authorize and direct all accountants or auditors to deliver to Lender, at Borrowers' expense, copies of the financial statements of Borrowers and any reports or management letters prepared by such accountants or auditors on behalf of Borrowers and to disclose to Lender such information as they may have regarding the business of Borrowers. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrowers to Lender in writing. 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Each -------------------------------------------------------- Borrower shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) unless otherwise consented to by Lender in writing, which consent shall not be unreasonably withheld or delayed, sell, assign, lease, transfer, abandon or otherwise dispose of any capital stock of a subsidiary or indebtedness to any other Person or any of its assets to any other Person (except for (i) sales of Inventory in the ordinary course of business, (ii) the disposition of worn-out or obsolete Equipment or Equipment no longer used in the business of such Borrower so long as (A) if an Event of Default exists or has occurred and is continuing, any proceeds are paid to Lender and (B) such sales for all Borrowers do not involve Equipment having an aggregate fair market value in excess of One Million Dollars ($1,000,000) for all such Equipment disposed of in any single transaction or in excess of Two Million Dollars ($2,000,000) for all such Equipment disposed of in any fiscal year of Borrowers and (iii) a sale of the Real Estate for a sales price of not less than Two Million Dollars ($2,000,000) cash, so long as no Event of Default has occurred and is continuing or would result from such sale, and provided that the sale proceeds are applied first to pay in full the outstanding principal amount of the Term Loan, together with all accrued but unpaid interest thereon, and any balance is applied to the outstanding principal amount of the Revolving Loans), or (c) form or acquire any subsidiaries (except as provided in Section 9.10(d) below), or (d) wind up, liquidate or dissolve or (e) agree to do any of the foregoing. Notwithstanding the foregoing, the assets or capital stock of ecost may be sold, transferred or otherwise disposed, provided that the proceeds thereof are remitted to Lender for application to the Revolving Loans, and so long as no Event of Default has occurred and is continuing or would result therefrom. 9.8 Encumbrances. Borrowers shall not create, incur, assume or ------------ suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of their assets or properties, including, without limitation, the Collateral, except: ------ (a) the liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet delinquent or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers and with respect to which adequate reserves have been set aside on their books; (c) security deposits in the ordinary course of business; (d) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrowers' business to the extent: 40 (i) such liens secure indebtedness which is not overdue; or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer (subject to applicable deductibles) or being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on their books; (e) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of real property which do not interfere in any material respect with the use of such real property or ordinary conduct of the business of Borrowers as presently conducted thereon or materially impair the value of the real property which may be subject thereto; (f) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on real estate so long as such security interests and mortgages do not apply to any property of Borrowers other than the Equipment or real estate so acquired and any additions or accessions thereto, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; and (g) the security interests and liens set forth on Schedule 8.4 hereto. ------------ 9.9 Indebtedness. Borrowers shall not incur, create, assume, become or be ------------ liable in any manner with respect to, or permit to exist, any obligations or indebtedness, except: ------ (a) the Obligations; (b) trade obligations, operating lease obligations and other obligations incurred in the ordinary course of the Borrowers' business and not for borrowed money, together with normal accruals in the ordinary course of business not yet due and payable, or with respect to which the Borrowers are contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Borrowers, and with respect to which adequate reserves have been set aside on their books; (c) purchase money indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; (d) obligations or indebtedness set forth on Schedule 9.9 hereto; ------------ provided, that, (i) Borrowers may only make regularly scheduled payments of - -------- ---- principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof, (ii) Borrowers shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) except as otherwise permitted under this Agreement, redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrowers shall furnish to Lender all notices or demands in connection with such indebtedness either received by Borrowers or on their behalf, promptly after the receipt thereof, or sent by Borrowers or on their behalf, concurrently with the sending thereof, as the case may be; and 41 (e) indebtedness of any Borrower to another Borrower. 9.10 Loans, Investments, Guarantees, Etc. Borrowers shall not, directly or ------------------------------------ indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, except: ------ (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in: (i) short-term direct obligations of the United States Government; (ii) negotiable certificates of deposit issued by any bank satisfactory to Lender, payable to the order of the Borrowers or to bearer and delivered to Lender; (iii) commercial paper rated A1 or P1; provided, that, as to any -------- ---- of the foregoing, unless waived in writing by Lender, Borrowers shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments; (c) the guarantees set forth in the Information Certificates; (d) Borrowers may make investments in, or purchase the stock of, other Persons engaged in the same or similar business as Borrowers so long as (i) unless otherwise consented to by Lender in writing, which consent shall not be unreasonably withheld or delayed, the aggregate sum of all payments made by Borrowers on account of such investments or purchases (excluding any capital stock issued by any Borrower) shall not exceed One Million Dollars ($1,000,000) or, if the Excess Availability both immediately before and after giving effect to the investment or purchase is not less than Five Million Dollars ($5,000,000), then Five Million Dollars ($5,000,000), (ii) no Event of Default has occurred and is continuing or would result from such investments or purchases, (iii) Borrowers shall have pledged their interests in such Persons to Lender in a manner reasonably satisfactory to Lender, and (iv) to the extent any such Persons are to be a wholly owned subsidiary of Borrowers, such Persons guaranty the Obligations and pledge their assets to Lender in a manner reasonably satisfactory to Lender; (e) any Borrower may make loans or advances to, or investments in, another Borrower; and (f) Borrowers may make advances to their employees not to exceed One Million Dollars ($1,000,000) in the aggregate outstanding at any time. 9.11 Dividends and Redemptions. Borrowers shall not, directly or ------------------------- indirectly, declare or pay any dividends on account of any shares of any class of capital stock of Borrowers now or hereafter outstanding (except to IdeaMall), or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase, repurchase, recapitalize or otherwise acquire (except from IdeaMall) any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) 42 in respect of any such shares (except to IdeaMall) or agree to do any of the foregoing; provided, that, IdeaMall may repurchase a portion of its capital -------- ---- stock so long as (a) the aggregate sum of all payments made on account of such repurchases shall not exceed Three Million Dollars ($3,000,000), (b) the Excess Availability upon giving effect to such repurchases shall not be less than Five Million Dollars ($5,000,000), and (c) no Event of Default has occurred and is continuing or would result from such repurchases. 9.12 Transactions with Affiliates. Borrowers shall not enter into any ---------------------------- transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrowers' business and upon fair and reasonable terms no less favorable to the Borrowers than Borrowers would obtain in a comparable arm's length transaction with an unaffiliated person. 9.13 Additional Accounts. Borrowers shall not, directly or indirectly, ------------------- open, establish or maintain any deposit account, investment account, credit card or check processing account or any other account with any bank or other financial institution, other than the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except: (a) as to any new or additional Blocked ------------ Accounts and other such new or additional accounts which contain any Collateral or proceeds thereof, with the prior written consent of Lender and subject to such conditions thereto as Lender may establish and (b) as to any accounts used by Borrowers to make payments of payroll, taxes or other obligations to third parties, after prior written notice to Lender. 9.14 Compliance with ERISA. Borrowers shall not with respect to any --------------------- "employee pension benefit plans" maintained by Borrowers or any of their ERISA Affiliates: (a) (i) terminate any of such employee pension benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA; (ii) allow or fail to correct promptly after discovery thereof any prohibited transaction involving any of such employee pension benefit plans or any trust created thereunder which would subject Borrowers or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA; (iii) fail to pay to any such employee pension benefit plan any contribution which they are obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan; (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee pension benefit plan; (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee pension benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation; or (vi) incur any withdrawal liability with respect to any multiemployer pension plan. (b) As used in this Section 9.14, the term "employee pension benefit plans," "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have 43 the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA. 9.15 Adjusted Tangible Net Worth. Borrowers on a consolidated basis shall --------------------------- maintain Adjusted Tangible Net Worth, calculated in accordance with Exhibit C attached hereto, of not less than Six Million Two Hundred Fifteen Thousand Dollars ($6,215,000), tested as of the last day of each fiscal quarter if the Excess Availability is greater than Five Million Dollars ($5,000,000) and as of the last day of each month if the Excess Availability is equal to or less than Five Million Dollars ($5,000,000). 9.16 Costs and Expenses. Borrowers shall pay to Lender on demand all ------------------ reasonable costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including, but not limited to: (a) all reasonable costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all reasonable costs and expenses and fees for title insurance and other insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; (c) reasonable costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) customary charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations; (e) reasonable costs and expenses of preserving and protecting the Collateral; (f) reasonable costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including, without limitation, preparations for and consultations concerning any such matters); (g) all reasonable out-of-pocket expenses and costs incurred by Lender's examiners in the conduct of their periodic field examinations of the Collateral and Borrowers' operations, plus a per diem charge at the rate of Seven Hundred Fifty Dollars ($750) per person per day for Lender's examiners in the field and office; and (h) the reasonable fees and disbursements of counsel (including legal assistants) to Lender and any Participant in connection with any of the foregoing. 44 9.17 Further Assurances. At the request of Lender at any time and from ------------------ time to time, Borrowers shall, at its expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of Borrowers representing on behalf of Borrowers that all conditions precedent to the making of Loans and providing Letter of Credit Accommodations contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans or provide any further Letter of Credit Accommodations until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, Borrowers hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender as deemed appropriate by Lender to perfect its security interests in the Collateral. 9.18 DFS Intercreditor Agreement. Lender shall not give a "Stop Approval --------------------------- Notice" as defined and provided in the DFS Intercreditor Agreement unless an Event of Default has occurred and is continuing or the Excess Availability is less than Three Million Dollars ($3,000,000). Borrowers shall not borrow any moneys from DFS based upon Inventory supplied by or purchased through Apple Computer, including, but not limited to, Inventory bearing a trademark owned by Apple Computer. Borrowers shall also not borrow from DFS an aggregate outstanding principal sum in excess of One Million Dollars ($1,000,000) based upon Inventory bearing a trademark owned by Hewlett-Packard Company or its affiliates (collectively, "HP") or an aggregate outstanding principal sum in excess of One Million Dollars ($1,000,000) based upon Inventory bearing a trademark owned by International Business Machines Corporation or its affiliates (collectively, "IBM"), and the only such HP and IBM Inventory upon which Borrowers may borrow from DFS shall be Inventory that is being drop-shipped to Borrowers' customers. SECTION 10. EVENTS OF DEFAULT AND REMEDIES. ------------------------------- 10.1 Events of Default. The occurrence or existence of any one or more of ----------------- the following events are referred to herein individually as an "Event of -------- Default," and collectively as "Events of Default": - ------- ----------------- (a) (i) Borrowers fail to pay any of the Obligations within two (2) Business Days after the same become due and payable or (ii) any Borrower or any Obligor fails to perform any of the covenants contained in this Agreement or the other Financing Agreements and such failure shall continue for twenty (20) days; provided, that, such twenty (20) day period shall not apply in the case of (A) - -------- ---- any failure to observe any such covenant which is not capable of being cured at all or within such twenty (20) day period or which has been the subject of a prior failure within the preceding six (6) month period or (B) any failure by Borrowers to pursue a cure diligently and promptly during such twenty (20) day period or (iii) Borrower fails to perform any of the terms, covenants, conditions or provisions contained in this Agreement or any of the other Financing Agreements other than those described in Sections 10.1(a)(i) and 10.1(a)(ii) above; (b) any representation, warranty or statement of fact made by any Borrower to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, 45 confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect; (c) any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender; (d) any judgment for the payment of money is rendered against any of Borrowers or Obligors in excess of Five Hundred Thousand Dollars ($500,000) in any one case or in excess of One Million Dollars ($1,000,000) in the aggregate and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any material judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against any of Borrowers or Obligors or any of their assets; (e) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or any Borrower or any Obligor, which is a partnership, limited liability company, or corporation, dissolves or suspends or discontinues doing business; (f) any Borrowers or any Obligor becomes insolvent (however defined or evidenced), makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (g) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against any Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of its filing or any Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by any Borrower or any Obligor or for all or any part of its property; (i) any default by any Borrower or any Obligor under any agreement, document or instrument relating to any indebtedness for borrowed money or secured indebtedness owing to any person other than Lender (including without limitation DFS), or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in excess of Five Hundred Thousand Dollars ($500,000) in any one case or in excess of One Million Dollars ($1,000,000) in the aggregate, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by any Borrower or any Obligor under any material contract, lease, license or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; 46 (j) the acquisition by any Person (other than Frank Khulusi or Sam Khulusi) of the capital stock of IdeaMall if the effect of such acquisition is that such Person together with any of its affiliates hold, directly or indirectly, fifty percent (50%) or more of the issued and outstanding capital stock of IdeaMall; (k) the indictment or threatened indictment of any Borrower or any Obligor under any criminal statute, or the commencement or threatened commencement of criminal or civil proceedings against any Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of such Borrower or such Obligor; (l) there shall be a material adverse change in the business or assets of any Borrower or any Obligor after the date hereof; or (m) there shall be an Event of Default as defined in any of the other Financing Agreements. 10.2 Remedies. -------- (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by any Borrower or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Borrowers of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against Borrowers or any Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (provided, that, upon the occurrence of any -------- ---- Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrowers, at Borrowers' expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any 47 part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrowers, which right or equity of redemption is hereby expressly waived and released by Borrowers and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, ten (10) days prior notice by Lender to Borrowers designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrowers waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrowers waive the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrowers shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including attorneys' fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or arranging Letter of Credit Accommodations or reduce the lending formulas or amounts of Loans and Letter of Credit Accommodations available to Borrowers and/or (ii) terminate any provision of this Agreement providing for any future Loans or Letter of Credit Accommodations to be made by Lender to Borrowers. SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW. ------------------------------------------------------------- 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. --------------------------------------------------------------------- (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California (without giving effect to principles of conflicts of law). (b) Borrowers and Lender irrevocably consent and submit to the non- exclusive jurisdiction of the state courts of the County of Los Angeles, State of California and of the United States District Court for the Central District of California and waive any objection based on venue or forum non conveniens ----- --- ---------- with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Borrowers or their property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrowers or their property). 48 (c) Borrowers hereby waive personal service of any and all process upon them and consent that all such service of process may be made by certified mail (return receipt requested) directed to their address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) Business Days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Borrowers in any other manner provided under the rules of any such courts. Within thirty (30) days after such service or such other period as provided by applicable law, Borrowers shall appear in answer to such process, failing which Borrowers shall be deemed in default and judgment may be entered by Lender against Borrowers for the amount of the claim and other relief requested. (d) BORROWERS AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWERS AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWERS OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrowers (whether in tort, contract, equity or otherwise) for losses suffered by Borrowers in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. 11.2 Waiver of Notices. Borrowers hereby expressly waive demand, ----------------- presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein and except to the extent such waiver is prohibited by applicable law. No notice to or demand on Borrowers which Lender may elect to give shall entitle Borrowers to any other or further notice or demand in the same, similar or other circumstances. 11.3 Amendments and Waivers. Neither this Agreement nor any provision ---------------------- hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 49 11.4 Waiver of Counterclaims. Borrowers waive all rights to interpose any ----------------------- claims, deductions, setoffs or counterclaims of any nature (other than compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5 Indemnification. Borrowers shall indemnify and hold Lender, and its --------------- directors, agents, employees and counsel (each an "Indemnified Party"), harmless ----------------- from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them (unless arising from the gross negligence or willful misconduct of any Indemnified Party) in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including, without limitation, amounts paid in settlement, court costs, and the fees and expenses of counsel. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section 11.5 may be unenforceable because it violates any law or public policy, Borrowers shall pay the maximum portion which they are permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section 11.5. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS. --------------------------------- 12.1 Term. ---- (a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on the date three (3) years from the date hereof (the "Renewal Date"), and from year to year thereafter, unless sooner terminated pursuant to the terms hereof. Lender or Borrowers may terminate this Agreement and the other Financing Agreements effective on the Renewal Date or on the anniversary of the Renewal Date in any year by giving to the other party or parties at least sixty (60) days prior written notice. Borrowers may terminate this Agreement prior to the end of the then current term, including any renewal term, for any reason upon sixty (60) days prior written notice to Lender, and in such case Borrowers agree to pay to Lender the applicable early termination fee provided for in Section 12.1(c) hereof. Regardless of the timing of termination, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the effective date of termination or non-renewal of the Financing Agreements, Borrowers shall pay to Lender, in full, all outstanding and unpaid non-contingent Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such cash collateral shall be remitted by wire transfer in federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrowers for such purpose. Interest shall be due until and including the next Business Day, if the amounts so paid by Borrowers to the bank account designated by Lender are received in such bank account later than 12:00 noon, Los Angeles time. 50 (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrowers of their respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid, provided, that, Lender shall terminate -------- ---- its security interests in the Collateral upon the payments and furnishing of cash collateral by Borrowers to Lender in the full sums required in Section 12.1(a) above. (c) If for any reason this Agreement is terminated prior to the end of the then current term or a renewal term of this Agreement, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrowers agree to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: Amount Period ------ ------ (i) 0.50% of the Maximum Credit from the date of this Agreement to and including the day preceding the first anniversary of this Agreement (ii) 0.25% of the Maximum Credit from the first anniversary of this Agreement to and including the day preceding the second anniversary of this Agreement (iii) 0.125% of the Maximum Credit from the second anniversary of this Agreement to and including the day preceding the Renewal Date. Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and Borrowers agree that it is reasonable under the circumstances currently existing. Lender shall be entitled to such early termination fee upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if Lender does not exercise its right to terminate this Agreement, but elects, at its option, to provide financing to Borrowers or permit the use of cash collateral under the United States Bankruptcy Code. The early termination fee provided for in this Section 12.1 shall be deemed included in the Obligations. The early termination fee shall be waived if the Obligations are repaid after the first anniversary of this Agreement, from the proceeds of loans made by Reference Bank or its affiliates, or from the proceeds of unsecured loans. 12.2 Notices. All notices, requests and demands hereunder shall be in ------- writing and (a) made to Lender at its address set forth below and to Borrowers at their chief executive office set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 51 12.3 Partial Invalidity. If any provision of this Agreement is held to be ------------------ invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12.4 Successors. This Agreement, the other Financing Agreements and any ---------- other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrowers and their respective successors and assigns, except that Borrowers may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. 12.5 Assignments and Participations. ------------------------------ (a) Lender may, at any time, sell participating interests in all or a portion of its rights and obligations under this Agreement and the other Financing Agreements (including all or a part of its interest in the Obligations) to not more than three (3) Participants. In the event of any such sale by Lender of a participating interest to a Participant, Lender's obligations under this Agreement to the Borrowers shall remain unchanged, Lender shall remain solely responsible for the performance thereof, Lender shall remain the holder of any such rights and obligations for all purposes under this Agreement and the other Financing Agreements, and Borrowers shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations under this Agreement and the other Financing Agreements. (b) Lender may, at any time, assign to one or more Eligible Transferees, all (or less than all, but in no event less than $5,000,000) of its rights and obligations under this Agreement and the other Financial Agreements, pursuant to an assignment agreement, in form and substance satisfactory to Lender, executed by such Eligible Transferee and Lender, provided, that, if -------- ---- Lender shall assign any portion (other than all) of its rights and obligations to an Eligible Transferee, Lender (or such other person as Lender may designate) shall act as agent on behalf of Lender and such Eligible Transferees for all purposes hereunder. Notwithstanding anything to the contrary contained herein, Lender may assign all or any portion of its rights and obligations under this Agreement and the other Financing Agreements to any Person (i) in connection with the merger, consolidation, sale, transfer or other disposition of all or any substantial portion of its business, loan portfolio or other assets with or to such Person or (ii) at any time an Event of Default shall exist or have occurred and is continuing or (iii) with the consent of Borrowers which shall not be unreasonably withheld, delayed or conditioned. 12.6 Participant's Security Interest. If a Participant shall at any time ------------------------------- participate with Lender in the Loans, Letter of Credit Accommodations or other Obligations, Borrowers hereby grant to such Participant and such Participant shall have and is hereby given, a continuing lien on and security interest in any money, securities and other property of Borrowers in the custody or possession of the Participant, including the right of setoff, to the extent of the Participant's participation in the Obligations, and such Participant shall be deemed to have the same right of setoff to the extent of its participation in the Obligations, as it would have if it were a direct lender. 12.7 Confidentiality. --------------- (a) Lender shall use all reasonable efforts to keep confidential, in accordance with its customary procedures for handling confidential information and safe and sound lending 52 practices, any non-public information supplied to it by Borrowers pursuant to this Agreement which is clearly and conspicuously marked as confidential at the time such information is furnished by Borrowers to Lender, provided, that, -------- ---- nothing contained herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation, subpoena or court order, (ii) to bank examiners and other regulators, auditors and/or accountants, (iii) in connection with any litigation to which Lender is a party, (iv) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) shall have first agreed in writing to treat such information as confidential in accordance with this Section 12.7, or (v) to counsel for Lender or any participant or assignee (or prospective participant or assignee). (b) In no event shall this Section 12.7 or any other provision of this Agreement or applicable law be deemed (i) to apply to or restrict disclosure of information that has been or is made public by Borrowers or any third party without breach of this Section 12.7 or otherwise becomes generally available to the public other than as a result of a disclosure in violation hereof, (ii) to apply to or restrict disclosure of information that was or becomes available to Lender on a non-confidential basis from a person other than Borrowers, (iii) require Lender to return any materials furnished by Borrowers to Lender or (iv) prevent Lender from responding to routine informational requests in accordance with the Code of Ethics for the Exchange of Credit Information promulgated by ----------------------------------------------------- The Robert Morris Associates or other applicable industry standards relating to the exchange of credit information. The obligations of Lender under this Section 12.7 shall supersede and replace the obligations of Lender under any confidentiality letter signed prior to the date hereof. 12.8 Entire Agreement. This Agreement, the other Financing Agreements, any ---------------- supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. 12.9 Publicity. Borrowers consent to Lender publishing a tombstone or --------- similar advertising material relating to the financing transaction contemplated by this Agreement. SECTION 13. JOINT AND SEVERAL LIABILITY AND SURETYSHIP WAIVERS -------------------------------------------------- 13.1 Independent Obligations; Subrogation. The Obligations of each ------------------------------------ Borrower hereunder are joint and several. To the maximum extent permitted by law, each Borrower hereby waives any claim, right or remedy which either may now have or hereafter acquire against any other Borrower that arises hereunder including, without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right or remedy of Lender against any Borrower or any Collateral which Lender now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise until the Obligations are fully paid and finally discharged. In addition, each Borrower hereby waives any right to proceed against the other Borrowers, now or hereafter, for contribution, indemnity, reimbursement, and any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which any Borrower 53 may now have or hereafter have as against the other Borrowers with respect to the Obligations until the Obligations are fully paid and finally discharged. Each Borrower also hereby waives any rights of recourse to or with respect to any asset of the other Borrowers until the Obligations are fully paid and finally discharged. 13.2 Authority to Modify Obligations and Security. Each Borrower -------------------------------------------- authorizes Lender, without notice or demand and without affecting any Borrower's liability hereunder, from time to time, whether before or after any notice of termination hereof or before or after any default in respect of the Obligations, to: (a) renew, extend, accelerate, or otherwise change the time for payment of, or otherwise change any other term or condition of, any document or agreement evidencing or relating to any Obligations as such Obligations relate to the other Borrowers, including, without limitation, to increase or decrease the rate of interest thereon; (b) accept, substitute, waive, defease, increase, release, exchange or otherwise alter any Collateral, in whole or in part, securing the other Borrowers' Obligations; (c) apply any and all such Collateral and direct the order or manner of sale thereof as Lender, in its sole discretion, may determine; (d) deal with the other Borrowers as Lender may elect; (e) in Lender's sole discretion, settle, release on terms satisfactory to Lender, or by operation of law or otherwise, compound, compromise, collect or otherwise liquidate any of the other Borrowers' Obligations and/or any of the Collateral in any manner, and bid and purchase any of the collateral at any sale thereof; (f) apply any and all payments or recoveries from the other Borrowers as Lender, in its sole discretion may determine, whether or not such indebtedness relates to the Obligations; all whether such Obligations are secured or unsecured or guaranteed or not guaranteed by others; and (g) apply any sums realized from Collateral furnished by the other Borrowers upon any of its indebtedness or obligations to Lender as it in its sole discretion may determine, whether or not such indebtedness relates to the Obligations; all without in any way diminishing, releasing or discharging the liability of any Borrower hereunder. 13.3 Waiver of Defenses. Upon an Event of Default by any Borrower in ------------------ respect of any Obligations, and except as required in Section 726 of the California Code of Civil Procedure, Lender may, at its option and without additional notice to any Borrower, proceed directly against any Borrower to collect and recover the full amount of the liability hereunder, or any portion thereof, and each Borrower waives any right to require Lender to: (a) proceed against the other Borrowers or any other person whomsoever; (b) proceed against or exhaust any Collateral given to or held by Lender in connection with the Obligations; (c) give notice of the terms, time and place of any public or private sale of any of the Collateral except as otherwise provided herein; or (d) pursue any other remedy in Lender's power whatsoever. A separate action or actions may be brought and prosecuted against any Borrower whether or not action is brought against the other Borrowers and whether the other Borrowers be joined in any such action or actions; and each Borrower agrees that any payment of any Obligations or other act which shall toll any statute of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to the liability hereunder. 13.4 Exercise of Lender's Rights. Each Borrower hereby authorizes and --------------------------- empowers Lender in its sole discretion, without any notice or demand to such Borrower whatsoever and without affecting the liability of such Borrower hereunder, to exercise any right or remedy which Lender may have available to it against the other Borrowers. 13.5 Additional Waivers. Each Borrower waives any defense arising by ------------------ reason of any disability or other defense of the other Borrowers or by reason of the cessation from any cause whatsoever of the liability of the other Borrowers or by reason of any act or omission of Lender 54 or others which directly or indirectly results in or aids the discharge or release of the other Borrowers or any Obligations or any Collateral by operation of law or otherwise. The Obligations shall be enforceable against each Borrower without regard to the validity, regularity or enforceability of any of the Obligations with respect to any of the other Borrowers or any of the documents related thereto or any collateral security documents securing any of the Obligations. No exercise by Lender of, and no omission of Lender to exercise, any power or authority recognized herein and no impairment or suspension of any right or remedy of Lender against any Borrower or any Collateral shall in any way suspend, discharge, release, exonerate or otherwise affect any of the Obligations or any Collateral furnished by the Borrowers or give to the Borrowers any right of recourse against Lender. Each Borrower specifically agrees that the failure of Lender (a) to perfect any lien on or security interest in any property heretofore or hereafter given any Borrower to secure payment of the Obligations, or to record or file any document relating thereto or (b) to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of any Borrower, shall not in any manner whatsoever terminate, diminish, exonerate or otherwise affect the liability of any Borrower hereunder. 13.6 Additional Indebtedness. Additional Obligations may be created from ----------------------- time to time at the request of any Borrower and without further authorization from or notice to any other Borrowers even though the borrowing Borrowers' financial condition may deteriorate since the date hereof. Each Borrower waives the right, if any, to require Lender to disclose to such Borrower any information it may now have or hereafter acquire concerning the other Borrowers' character, credit, Collateral, financial condition or other matters. Each Borrower has established adequate means to obtain from the other Borrowers on a continuing basis financial and other information pertaining to such Borrower's business and affairs, and assumes the responsibility for being and keeping informed of the financial and other conditions of the other Borrowers and of all circumstances bearing upon the risk of nonpayment of the Obligations which diligent inquiry would reveal. Lender need not inquire into the powers of any Borrower or the authority of any of its officers, directors, partners or agents acting or purporting to act in its behalf, and any obligations created in reliance upon the purported exercise of such power or authority is hereby guaranteed. All obligations of each Borrower to Lender heretofore, now or hereafter created shall be deemed to have been granted at each Borrower's special insistence and request and in consideration of and in reliance upon this Agreement. 13.7 Subordination. Except as otherwise provided in this Section 13.7, any ------------- indebtedness of any Borrower now or hereafter owing to any other Borrowers is hereby subordinated to the Obligations, whether heretofore, now or hereafter created, and whether before or after notice of termination hereof, and, following the occurrence and during the continuation of an Event of Default, no Borrower shall, without the prior consent of Lender, pay in whole or in part any of such indebtedness nor will any such Borrower accept any payment of or on account of any such indebtedness at any time while such Borrower remains liable hereunder. At the request of Lender, after the occurrence and during the continuance of an Event of Default, each Borrower shall pay to Lender all or any part of such subordinated indebtedness and any amount so paid to Lender at its request shall be applied to payment of the Obligations. Each payment on the indebtedness of any Borrower to the other Borrowers received in violation of any of the provisions hereof shall be deemed to have been received by any other Borrowers as trustee for Lender and shall be paid over to Lender immediately on account of the Obligations, but without otherwise affecting in any manner any such Borrower's liability under any of the provisions of this Agreement. Each Borrower agrees to file all claims against the other Borrowers in any bankruptcy or other proceeding in which the filing of claims is required by law 55 in respect of any indebtedness of the other Borrowers to such Borrower, and Lender shall be entitled to all of any such Borrower's rights thereunder. If for any reason any such Borrower fails to file such claim at least thirty (30) days prior to the last date on which such claim should be filed, Lender, as such Borrower's attorney-in-fact, is hereby authorized to do so in Borrowers' name or, in Lender's discretion, to assign such claim to, and cause a proof of claim to be filed in the name of, Lender's nominee. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Lender the full amount payable on the claim in the proceeding, and to the full extent necessary for that purpose any such Borrower hereby assigns to Lender all such Borrower's rights to any payments or distributions to which such Borrower otherwise would be entitled. If the amount so paid is greater than any such Borrower's liability hereunder, Lender will pay the excess amount to the party entitled thereto. 13.8 Revival. If any payments of money or transfers of property made to ------- Lender by any Borrower should for any reason subsequently be declared to be, or in Lender's counsel's good faith opinion be determined to be, fraudulent (within the meaning of any state or federal law relating to fraudulent conveyances), preferential or otherwise voidable or recoverable in whole or in part for any reason (hereinafter collectively called "voidable transfers") under the Bankruptcy Code or any other federal or state law and Lender is required to repay or restore, or in Lender's counsel's opinion may be so liable to repay or restore, any such voidable transfer, or the amount or any portion thereof, then as to any such voidable transfer or the amount repaid or restored and all reasonable costs and expenses (including reasonable attorneys' fees) of Lender related thereto, such Borrower's liability hereunder shall automatically be revived, reinstated and restored and shall exist as though such voidable transfer had never been made to Lender. 13.9 Understanding of Waivers. Each Borrower warrants and agrees that the ------------------------ waivers set forth in this Section 13 are made with full knowledge of their significance and consequences. If any of such waivers are determined to be contrary to any applicable law or public policy, such waivers shall be effective only to the maximum extent permitted by law. 56 IN WITNESS WHEREOF, Lender and Borrowers have caused this Agreement to be duly executed as of the day and year first above written. LENDER BORROWER - ------ -------- CONGRESS FINANCIAL CORPORATION (WESTERN) IDEAMALL, INC. By: /s/ Vicky Balmot By: /s/ Ted Sanders ------------------------------- ------------------------------- Name: Vicky Balmot Name: Ted Sanders ---------------------------- Title: Executive Vice President Title: CFO and Assistant Secretary ---------------------------- Address CREATIVE COMPUTERS, INC. - ------- 251 South Lake Avenue, Suite 900 Pasadena, California 91101 By: /s/ Ted Sanders ------------------------------- Name: Ted Sanders ---------------------------- Title: CFO, Secretary and Treasurer ---------------------------- ECOST.COM, INC. By: /s/ Ted Sanders ------------------------------- Name: Ted Sanders ---------------------------- Title: CFO, Secretary and Treasurer ---------------------------- ELINUX.COM, INC. By: /s/ Ted Sanders ------------------------------- Name: Ted Sanders ---------------------------- Title: Vice President, Secretary and ----------------------------- Treasurer --------- CREATIVE COMPUTERS INTEGRATED TECHNOLOGIES, INC. By: /s/ Ted Sanders ------------------------------- Name: Ted Sanders ---------------------------- Title: CFO, Secretary and Treasurer ---------------------------- 57 COMPUTABILITY LIMITED By: /s/ Ted Sanders ------------------------------- Name: Ted Sanders ---------------------------- Title: Treasurer ---------------------------- Chief Executive Office ---------------------- 2555 West 190/th/ Street Torrance, California 90504 58 EX-10.44 5 0005.txt AGREEMENT FOR WHOLESALE FINANCING DATED MARCH 15, 2001 EXHIBIT 10.44 AGREEMENT FOR WHOLESALE FINANCING This Agreement for Wholesale Financing ("Agreement") is made as of March 15, 2001 among Deutsche Financial Services Corporation ("DFS") and IdeaMall, Inc., a Delaware corporation having a principal business located at 2555 W. 190th Street, Torrance, California 90504 ("IMI"), Creative Computers, Inc., a California corporation having a principal place of business located at 2555 W. 190th Street, Torrance, California 90504 ("CCI"), ecost.com, Inc., a Delaware corporation having a principal place of business located at 2555 W. 190th Street, Torrance, California 90504 ("ECI"), eLinux.com, Inc., a Delaware corporation having a principal place of business located at 2555 W. 190th Street, Torrance, California 90504 ("ELI"), Creative Computers Integrated Technologies, Inc., a Delaware corporation having a principal place of business located at 2555 W. 190th Street, Torrance, California 90504 ("CCIT") and ComputAbility Limited, a Delaware corporation having a principal place of business located at 2555 W. 190th Street, Torrance, California 90504 ("CAL"), (IMI, CCI, ECI, ELI, CCIT and CAL are referred to herein, individually, collectively, and jointly and severally, as "Dealer"). 1. Extension of Credit/Shared Credit Facility. Subject to the terms of this Agreement, DFS may extend credit to Dealer from time to time to purchase inventory from DFS approved vendors ("Vendors") up to a maximum amount outstanding (including, without limitation, the amount of all approvals issued by DFS to Vendors for which DFS has not transferred funds and all accrued and unpaid interest charges and unused facility fees) at any time not to exceed Twenty Million Dollars ($20,000,000.00), subject to increase pursuant to the last sentence of Section 3, below (the "Inventory Facility Amount"). If DFS advances funds to Dealer following Dealer's execution of this Agreement, DFS will be deemed to have entered into this Agreement with Dealer, whether or not executed by DFS. DFS' decision to advance funds will not be binding until the funds are actually advanced. DFS may combine all of DFS' advances to Dealer or on Dealer's behalf, whether under this Agreement or any other agreement, and whether provided by one or more of DFS' branch offices, together with all finance charges, fees and expenses related thereto, to make one debt owed by Dealer. DFS may, at any time and without notice to Dealer, elect not to finance any inventory sold by particular Vendors who are in default of their obligations to DFS, or with respect to which DFS reasonably feels insecure. This is an agreement regarding the extension of credit, and not the provision of goods or services. Each Dealer is part of an integrated family of companies, and, accordingly each Dealer desires to have the availability of one common credit facility instead of separate credit facilities, and each Dealer has requested that DFS extend such a common credit facility. Each Dealer acknowledges that DFS will be lending against, and relying on a lien upon, all of its assets even though the proceeds of any particular loan made hereunder may not be advanced directly to such Dealer, and such Dealer will nevertheless benefit by the making of all such loans by DFS and the availability of a single credit facility of a size greater than each could independently warrant. Each Dealer hereby appoints CCI as its agent ("Borrowing Agent") for the purpose of requesting and/or agreeing to changes to the credit facility provided hereunder, and for receiving all communications, notices, Statements of Transaction, billing statements, and funds transfers from DFS. DFS may rely upon the Borrowing Agent with respect to any requests or instructions and Dealer holds DFS harmless from and against any and all liabilities, expenses, losses, damages and claims arising from DFS' reliance upon the Borrowing Agent. 2. Financing Terms and Statements of Transaction. Dealer and DFS agree that certain financial terms of any advance made by DFS under this Agreement, whether regarding finance charges, other fees, maturities, curtailments or other financial terms, are not set forth herein because such terms depend, in part, upon the availability of Vendor discounts, payment terms or other incentives, prevailing economic conditions, DFS' floorplanning volume with Dealer and with Dealer's Vendors, and other economic factors which may vary over time. Dealer and DFS further 1 agree that it is therefore in their mutual best interest to set forth in this Agreement only the general terms of Dealer's financing arrangement with DFS. Upon agreeing to finance a particular item of inventory for Dealer, DFS will send Dealer a Statement of Transaction identifying such inventory and the applicable financial terms. Unless Dealer notifies DFS in writing of any objection within fifteen (15) days after a Statement of Transaction is mailed to Dealer: (a) the amount shown on such Statement of Transaction will be an account stated; (b) Dealer will have agreed to all rates, charges and other terms shown on such Statement of Transaction; (c) Dealer will have agreed that DFS is financing the items of inventory referenced in such Statement of Transaction at Dealer's request; and (d) such Statement of Transaction will be incorporated herein by reference, will be made a part hereof as if originally set forth herein, and will constitute an addendum hereto. If Dealer objects to the terms of any Statement of Transaction, Dealer agrees to pay DFS for such inventory in accordance with the most recent terms for similar inventory to which Dealer has not objected (or, if there are no prior terms, at the lesser of 16% per annum or at the maximum lawful contract rate of interest permitted under applicable law), but Dealer acknowledges that DFS may then elect to immediately terminate Dealer's financing program with the applicable Vendor for such inventory, and cease making additional advances to Dealer for Dealer's purchases of such inventory from the applicable Vendor. However, such termination will not accelerate the maturities of advances previously made, unless Dealer shall otherwise be in default of this Agreement. 3. Grant of Security Interest. To secure payment of all of Dealer's current and future debts to DFS, whether under this Agreement or any current or future guaranty or other agreement, Dealer grants DFS a security interest in all of Dealer's inventory, equipment, fixtures, accounts, contract rights, chattel paper, security agreements, instruments, deposit accounts, reserves, documents, and general intangibles; and all judgments, claims, insurance policies, and payments owed or made to Dealer thereon; all whether now owned or hereafter acquired, all attachments, accessories, accessions, returns, repossessions, exchanges, substitutions and replacements thereto, and all proceeds thereof. All such assets are collectively referred to herein as the "Collateral." All of such terms for which meanings are provided in the Uniform Commercial Code of the applicable state are used herein with such meanings. All Collateral financed by DFS, and all proceeds thereof, will be held in trust by Dealer for DFS, with such proceeds being payable in accordance with Section 10. Dealer hereby agrees to cause an institution acceptable to DFS to issue in favor of DFS one or more Irrevocable Letters of Credit (each, a "Letter of Credit"), in a total amount equal to the Inventory Facility Amount (subject to the provisions of the last sentence of the second-to-last paragraph of Section 18 below) and in the form attached hereto as Exhibit A. Dealer may cause the Inventory Facility Amount to be increased from time to time up to a maximum total Inventory Facility Amount of Forty Million Dollars ($40,000,000.00), upon delivery to DFS of a like increase in the Letter of Credit, so long as, at the time of any increase, Dealer is not in default hereunder or would be in default hereunder with the giving of notice, the passage of time, or both. 4. Affirmative Warranties and Representations. Dealer warrants and represents to DFS that: (a) Dealer has good title to all Collateral; (b) DFS' security interest in the Collateral financed by DFS is not now and will not become subordinate to the security interest, lien, encumbrance or claim of any person other than Congress Financial Corporation (Western) ("Congress"); (c) Dealer will execute all documents DFS requests to perfect and maintain DFS' security interest in the Collateral; (d) Dealer will deliver to DFS immediately upon each request, and DFS may retain, each Certificate of Title or Statement of Origin issued for Collateral financed by DFS; (e) Dealer will at all times be duly organized, existing, in good standing, qualified and licensed to do business in each state, county, or parish, in which the nature of its business or property so requires; (f) Dealer has the right and is duly authorized to enter into this Agreement; (g) Dealer's execution of this Agreement does not constitute a breach of any agreement to which Dealer is now or hereafter becomes bound; (h) there are and will be no actions or proceedings pending or threatened against Dealer which might result in any material adverse change in Dealer's financial or business condition or which might in any way adversely affect any of Dealer's assets; (i) Dealer will maintain the Collateral in good condition and repair; (j) Dealer has duly filed and will duly file all tax returns 2 required by law; (k) Dealer has paid and will pay when due all taxes, levies, assessments and governmental charges of any nature; (l) Dealer will keep and maintain all of its books and records pertaining to the Collateral at its principal place of business designated in this Agreement; (m) Dealer will promptly supply DFS with such information concerning it or any guarantor as DFS hereafter may reasonably request; (n) all Collateral will be kept at Dealer's principal place of business listed above, and such other locations, if any, which are listed on the current or any future Exhibit "B" attached hereto which Exhibit B(s) are incorporated herein by reference; (o) Dealer will give DFS thirty (30) days prior written notice of any change in Dealer's identity, name, form of business organization, ownership, management, principal place of business, Collateral locations or other business locations, and before moving any books and records to any other location; (p) Dealer will observe and perform all matters required by any lease, license, concession or franchise forming part of the Collateral in order to maintain all the rights of DFS thereunder; (q) Dealer will advise DFS of the commencement of material legal proceedings against Dealer and (r) Dealer will comply with all applicable laws and will conduct its business in a manner which preserves and protects the Collateral and the earnings and incomes thereof. 5. Negative Covenants. Dealer will not at any time (without DFS' prior written consent): (a) other than in the ordinary course of its business, sell, lease or otherwise dispose of or transfer any of its assets; (b) rent, lease, demonstrate, consign, or use any Collateral financed by DFS; or (c) merge or consolidate with another entity. 6. Unused Facility Fee. Dealer hereby agrees to pay DFS a monthly unused facility fee equal to the product of (i) the daily equivalent of an annual rate of twenty-five (25) basis points (0.02083% per month), multiplied by (ii) the difference between Forty Million Dollars and the average daily principal balance of Dealer's inventory credit facility during such month. The unused facility fee shall be calculated and payable monthly in arrears and due pursuant to DFS' monthly billing statement. 7. Insurance. Dealer will immediately notify DFS of any loss, theft or damage to any Collateral. Dealer will keep the Collateral insured for its full insurable value under an "all risk" property insurance policy with a company acceptable to DFS, naming DFS as a lender loss-payee and containing standard lender's loss payable and termination provisions (subject to the rights of other floorplan lenders regarding inventory not financed by DFS and subject to the rights of Congress). Dealer will provide DFS with written evidence of such property insurance coverage and lender's loss-payee endorsement. 8. Financial Statements. Dealer will deliver to DFS: (a) within ninety (90) days after the end of each of Dealer's fiscal years, a reasonably detailed balance sheet as of the last day of such fiscal year and a reasonably detailed income statement covering Dealer's operations for such fiscal year, in a form satisfactory to DFS; (b) within forty-five (45) days after the end of each of Dealer's fiscal quarters, a reasonably detailed balance sheet as of the last day of such quarter and an income statement covering Dealer's operations for such quarter, in a form satisfactory to DFS; and (c) within ten (10) days after request therefor by DFS, any other report requested by DFS relating to the Collateral or the financial condition of Dealer. Dealer will also deliver to DFS true copies of the Congress Loan Agreement (as defined below) and all amendments thereto, immediately upon the execution thereof, and copies of all notices of Default or Event of Default thereunder delivered by either Dealer or Congress to the other, immediately upon Dealer's delivery or receipt thereof, as applicable. In addition, Dealer will deliver to DFS copies of all covenant and other compliance certificates, immediately upon Dealer's delivery thereof to Congress. Dealer warrants and represents to DFS that all financial statements and information relating to Dealer which have been or may hereafter be delivered by Dealer are true and correct and have been and will be prepared in accordance with generally accepted accounting principles consistently applied and, with respect to such previously delivered statements or information, there has been no material adverse change in the financial or business condition of Dealer since the submission to DFS, either as of 3 the date of delivery, or, if different, the date specified therein, and Dealer acknowledges DFS' reliance thereon. 9. Reviews. Dealer grants DFS an irrevocable license to enter Dealer's business locations during normal business hours upon three (3) days' notice to Dealer (unless Dealer is in default hereunder, or would be in default hereunder with the passage of time, the giving of notice, or both, in which event no advance notice hereunder will be required) to: (a) account for and inspect all Collateral; (b) verify Dealer's compliance with this Agreement; and (c) examine and copy Dealer's books and records related to the Collateral. 10. Payment Terms. Dealer will immediately pay DFS the principal indebtedness owed DFS on each item of Collateral financed by DFS (as shown on the Statement of Transaction identifying such Collateral) on the earliest occurrence of any of the following events: (a) when such Collateral is lost, stolen or damaged; (b) for Collateral financed under Pay-As-Sold ("PAS") terms (as shown on the Statement of Transaction identifying such Collateral), when such Collateral is sold, transferred, rented, leased, otherwise disposed of or matured; (c) in strict accordance with any curtailment schedule for such Collateral (as shown on the Statement of Transaction identifying such Collateral); (d) for Collateral financed under Scheduled Payment Program ("SPP") terms (as shown on the Statement of Transaction identifying such Collateral), in strict accordance with the installment payment schedule; and (e) when otherwise required under the terms of any financing program agreed to in writing by the parties. Dealer will send all payments to DFS' branch office(s) responsible for Dealer's account. DFS may apply: (i) payments to reduce finance charges first and then principal, regardless of Dealer's instructions; and (ii) principal payments to the oldest (earliest) invoice for Collateral financed by DFS, but, in any event, all principal payments will first be applied to such Collateral which is sold, lost, stolen, damaged, rented, leased, or otherwise disposed of or unaccounted for. Any third party discount, rebate, bonus or credit granted to Dealer for any Collateral will not reduce the debt Dealer owes DFS until DFS has received payment therefor in cash. Dealer will: (1) pay DFS even if any Collateral is defective or fails to conform to any warranties extended by any third party; (2) not assert against DFS any claim or defense Dealer has against any third party; and (3) indemnify and hold DFS harmless against all claims and defenses asserted by any buyer of the Collateral relating to the condition of, or any representations regarding, any of the Collateral. Dealer waives all rights of offset Dealer may have against DFS. 11. Calculation of Charges. Dealer will pay finance charges to DFS on the outstanding principal debt which Dealer owes DFS for each item of Collateral financed by DFS at the rate(s) shown on the Statement of Transaction identifying such Collateral, unless Dealer objects thereto as provided in Section 2. The finance charges attributable to the rate shown on the Statement of Transaction will: (a) be computed based on a 360 day year; (b) be calculated by multiplying the Daily Charge (as defined below) by the actual number of days in the applicable billing period; and (c) accrue from the invoice date of the Collateral identified on such Statement of Transaction until DFS receives full payment in good funds of the principal debt Dealer owes DFS for each item of such Collateral in accordance with DFS' payment recognition policy and DFS applies such payment to Dealer's principal debt in accordance with the terms of this Agreement. The "Daily Charge" is the product of the Daily Rate (as defined below) multiplied by the Average Daily Balance (as defined below). The "Daily Rate" is the quotient of the annual rate shown on the Statement of Transaction divided by 360, or the monthly rate shown on the Statement of Transaction divided by 30. The "Average Daily Balance" is the quotient of (i) the sum of the outstanding principal debt owed DFS on each day of a billing period for each item of Collateral identified on a Statement of Transaction, divided by (ii) the actual number of days in such billing period. Dealer will also pay DFS $100 for each check returned unpaid for insufficient funds (an "NSF check") (such $100 payment repays DFS' estimated administrative costs; it does not waive the default caused by the NSF check). The annual percentage rate of the finance charges relating to any item of Collateral financed by DFS will be calculated from the invoice date of such Collateral, regardless of any period during which any finance charge subsidy shall be paid or payable by any third party. Dealer acknowledges that 4 DFS intends to strictly conform to the applicable usury laws governing this Agreement. Regardless of any provision contained herein or in any other document executed or delivered in connection herewith or therewith, DFS shall never be deemed to have contracted for, charged or be entitled to receive, collect or apply as interest on this Agreement (whether termed interest herein or deemed to be interest by judicial determination or operation of law), any amount in excess of the maximum amount allowed by applicable law, and, if DFS ever receives, collects or applies as interest any such excess, such amount which would be excessive interest will be applied first to the reduction of the unpaid principal balances of advances under this Agreement, and, second, any remaining excess will be paid to Dealer. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Dealer and DFS shall, to the maximum extent permitted under applicable law: (A) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest; (B) exclude voluntary pre-payments and the effect thereof; and (C) spread the total amount of interest throughout the entire term of this Agreement so that the interest rate is uniform throughout such term. 12. Billing Statement. DFS will send Dealer a monthly billing statement identifying all charges due on Dealer's account with DFS. The charges specified on each billing statement will be: (a) due and payable in full immediately on receipt; and (b) an account stated, unless DFS receives Dealer's written objection thereto within 15 days after it is mailed to Dealer. If DFS does not receive, by the 25th day of any given month, payment of all charges accrued to Dealer's account with DFS during the immediately preceding month, Dealer will (to the extent allowed by law) pay DFS a late fee ("Late Fee") equal to the greater of $5 or 5% of the amount of such finance charges (payment of the Late Fee does not waive the default caused by the late payment). DFS may adjust the billing statement at any time to conform to applicable law and this Agreement. 13. Default. Dealer will be in default under this Agreement if: (a) Dealer breaches any terms, warranties or representations contained herein, in any Statement of Transaction to which Dealer has not objected as provided in Section 2, or in any other agreement between DFS and Dealer (which breach is not covered by another section of this Section 13) and such breach shall continue for twenty (20) days; provided, that, such twenty (20) day period shall not apply in the case of (A) any failure to observe any such term, representation or warranty which is not capable of being cured at all or within such twenty (20) day period or which has been the subject of a prior breach within the preceding six (6) month period or (B) any failure by Dealer to pursue a cure diligently and promptly during such twenty (20) day period; (b) any representation, statement, report or certificate made or delivered by Dealer to DFS is not accurate when made; (c) Dealer fails to pay any portion of Dealer's debts to DFS within two (2) business days after the same becomes due and payable; (d) Dealer abandons any Collateral; (e) Dealer is or becomes in default in the payment of any debt owed to any third party which in the aggregate exceeds at any time Five Hundred Thousand Dollars ($500,000.00); (f) a money judgment issues against Dealer which in the aggregate exceeds at any time Five Hundred Thousand Dollars ($500,000.00); (g) an attachment, sale or seizure issues or is executed against any assets of Dealer; (h) Dealer shall cease existence as a corporation, partnership, limited liability company or trust, as applicable; (i) Dealer ceases or suspends business; (j) Dealer makes a general assignment for the benefit of creditors; (k) Dealer becomes insolvent or voluntarily or involuntarily becomes subject to the Federal Bankruptcy Code, any state insolvency law or any similar law (and, in the case of an involuntary proceeding, such proceeding has not been dismissed within ninety (90) days of the filing thereof; provided, however, that DFS' obligation to provide any financing to Dealer during such ninety (90) day period shall be subject to the terms of the Intercreditor Agreement, as defined below); (l) any receiver is appointed for any assets of Dealer;. (m) Dealer loses any material franchise, permission, license or right to sell or deal in any Collateral which DFS finances; (n) Dealer misrepresents Dealer's financial condition or organizational structure; (o) there shall occur a material adverse change in the financial or other condition or business prospects of Dealer; (p) DFS determines in good faith that it is insecure with respect to the payment of any part of Dealer's 5 obligation to DFS; (q) any Default or Event of Default occurs under the Congress Loan Agreement (as defined in that certain Intercreditor and Subordination Agreement between DFS and Congress dated even date herewith, as modified and amended from time to time (the "Intercreditor Agreement")), without giving effect to any waiver or forbearance regarding any such Default or Event of Default which may be given by Congress or any amendment to the Congress Loan Agreement which has the effect of causing such Default or Event of Default to not occur; (r) any Stop Approval Notice (as defined in the Intercreditor Agreement) is issued by Congress to DFS; (s) the Intercreditor Agreement is terminated or cancelled for any reason; or (t) thirty (30) days prior to the expiration date of any Letter of Credit or any subsequent or substitute Letter of Credit accepted by DFS, such Letter of Credit is not extended for a term of twelve (12) months or longer, or a new Letter of Credit in the amount of the Inventory Facility Amount and in form and from an institution reasonably acceptable to DFS and for a term of twelve months or longer is not provided to DFS. 14. Rights of DFS Upon Default. In the event of a default: (a) DFS may at any time at DFS' election, without notice or demand to Dealer, do any one or more of the following: declare all or any part of the debt Dealer owes DFS immediately due and payable, together with all costs and expenses of DFS' collection activity, including, without limitation, all reasonable attorneys' fees; exercise any or all rights under applicable law (including, without limitation, the right to possess, transfer and dispose of the Collateral); exercise any or all of DFS' rights to draw on any Letter of Credit or any subsequent or substitute Letter of Credit; and/or cease extending any additional credit to Dealer (DFS' right to cease extending credit shall not be construed to limit the discretionary nature of this credit facility). (b) Subject to the rights of other floorplan lenders with respect to inventory not financed by DFS and subject to the rights of Congress pursuant to terms of the Intercreditor Agreement, Dealer will segregate and keep the Collateral in trust for DFS, and in good order and repair, and will not sell, rent, lease, consign, otherwise dispose of or use any Collateral, nor further encumber any Collateral. (c) Subject to the rights of other floorplan lenders with respect to inventory not financed by DFS and subject to the rights of Congress pursuant to terms of the Intercreditor Agreement, upon DFS' oral or written demand, Dealer will immediately deliver the Collateral to DFS, in good order and repair, at a place specified by DFS, together with all related documents; or DFS may, in DFS' sole discretion and without notice or demand to Dealer, take immediate possession of the Collateral together with all related documents. (d) DFS may, without notice, apply a default finance charge to Dealer's outstanding principal indebtedness equal to the default rate specified in Dealer's financing program with DFS, if any, or if there is none so specified, at the lesser of 3% per annum above the rate in effect immediately prior to the default, or the highest lawful contract rate of interest permitted under applicable law. All of DFS' rights and remedies are cumulative. DFS' failure to exercise any of DFS' rights or remedies hereunder will not waive any of DFS' rights or remedies as to any past, current or future default. 15. Sale of Collateral. Dealer agrees that if DFS conducts a private sale of any Collateral by requesting bids from 10 or more dealers or distributors in that type of Collateral, any sale by DFS of such Collateral in bulk or in parcels within 120 days of: (a) DFS' taking possession and control of such Collateral; or (b) when DFS is otherwise authorized to sell such Collateral; whichever occurs last, to the bidder submitting the highest cash bid therefor, is a commercially reasonable sale of such Collateral under the Uniform Commercial Code. Dealer agrees that the purchase of any Collateral by a Vendor, as provided in any agreement between DFS and the Vendor, is a commercially reasonable disposition and private sale of such Collateral under the Uniform Commercial Code, and no request for bids shall be required. Dealer further agrees that 7 or more days prior written notice will be commercially reasonable notice of any public or private sale 6 (including any sale to a Vendor). Dealer irrevocably waives any requirement that DFS retain possession and not dispose of any Collateral until after an arbitration hearing, arbitration award, confirmation, trial or final judgment. If DFS disposes of any such Collateral other than as herein contemplated, the commercial reasonableness of such disposition will be determined in accordance with the laws of the state governing this Agreement. 16. Power of Attorney. Dealer grants DFS an irrevocable power of attorney to do anything to preserve and protect the Collateral (including the execution of financing statements pertaining to the Collateral) and the Letter(s) of Credit and DFS' rights and interest therein. Dealer grants DFS an irrevocable power of attorney exercisable after the occurrence and during the continuance of a default hereunder to: execute or endorse on Dealer's behalf any checks, instruments, Certificates of Title and Statements of Origin pertaining to the Collateral; supply any omitted information and correct errors in any documents between DFS and Dealer; and initiate and settle any insurance claim pertaining to the Collateral. 17. Information. With the written consent of Dealer, DFS may provide to any third party any credit, financial or other information on Dealer that DFS may from time to time possess. DFS may obtain from Congress and any Vendor any credit, financial or other information regarding Dealer that Congress or such Vendor may from time to time possess. 18. Termination. Except as set forth in this Section 18, this Agreement shall terminate on March 14, 2004 (the "Scheduled Termination Date"). Notwithstanding the foregoing, DFS may immediately terminate any financing program for particular inventory prior to the Scheduled Termination Date under any of the following circumstances: (i) in the event the Vendor for such inventory is at any time no longer a DFS approved Vendor; (ii) in accordance with the second-to-last sentence of the first paragraph of Section 1 above; or (iii) in accordance with the second-to-last sentence of Section 2 above. Notwithstanding the foregoing, DFS may terminate this Agreement prior to the Scheduled Termination Date (i) immediately, in the event of a default by Dealer, in accordance with Section 14 above, or (ii) with such termination to be effective any time on or after the date on which the Congress Loan Agreement is terminated, regardless of the length of the notice period given by DFS. Notwithstanding the foregoing, Dealer may reduce the Inventory Facility Amount, or terminate this Agreement prior to the Scheduled Termination Date, upon at least ninety (90) days' advance notice to DFS; provided, however, that Dealer may terminate this Agreement, with such termination to be effective any time on or after the date on which the Congress Loan Agreement is terminated, regardless of the length of the notice period given by Dealer. Dealer acknowledges and agrees that any notice given pursuant to the preceding sentence will be irrevocable. Dealer further acknowledges and agrees that no reduction by it of the Inventory Facility Amount will be accompanied by a reduction in the amount of the Letter(s) of Credit required under this Agreement, unless and until the outstanding balance of Dealer's obligations to DFS (including, without limitation, the amount of all approvals issued by DFS to Vendors for which DFS has not transferred funds and all accrued and unpaid interest charges and unused facility fees) is not more than the Inventory Facility Amount, as reduced. Dealer will not be relieved from any obligation to DFS arising out of DFS' advances or commitments made before the effective termination date of this Agreement. DFS will retain all of its rights, interests and remedies hereunder until Dealer has paid all of Dealer's debts to DFS. All waivers set forth within this Agreement will survive any termination of this Agreement. 7 19. Binding Effect. Dealer cannot assign its interest in this Agreement without DFS' prior written consent, although DFS may assign or participate DFS' interest, in whole or in part, without Dealer's consent, provided that in the case of a participation by DFS, Dealer will not be required to deal directly with any participant. This Agreement will protect and bind DFS' and Dealer's respective heirs, representatives, successors and assigns. 20. Notices. Except as otherwise stated herein, all notices, arbitration claims, responses, requests and documents will be sufficiently given or served if mailed or delivered: (a) to Dealer at Borrowing Agent's principal place of business specified above; and (b) to DFS at 655 Maryville Centre Drive, St. Louis, Missouri 63141-5832, Attention: General Counsel, or such other address as the parties may hereafter specify in writing. 21. NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBTS ARE NOT ENFORCEABLE. TO PROTECT DEALER AND DFS FROM MISUNDERSTANDING OR DISAPPOINTMENT, ALL AGREEMENTS COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR AS THE PARTIES MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. 22. Other Waivers. Dealer irrevocably waives notice of: DFS' acceptance of this Agreement, presentment, demand, protest, nonpayment, nonperformance, and dishonor. Dealer and DFS irrevocably waive all rights to claim any punitive and/or exemplary damages. 23. Severability. If any provision of this Agreement or its application is invalid or unenforceable, the remainder of this Agreement will not be impaired or affected and will remain binding and enforceable. 24. Supplement. If Dealer and DFS have heretofore executed other agreements in connection with all or any part of the Collateral, this Agreement shall supplement each and every other agreement previously executed by and between Dealer and DFS, and in that event this Agreement shall neither be deemed a novation nor a termination of such previously executed agreement nor shall execution of this Agreement be deemed a satisfaction of any obligation secured by such previously executed agreement. 25. Receipt of Agreement. Dealer acknowledges that it has received a true and complete copy of this Agreement. Dealer acknowledges that it has read and understood this Agreement. Notwithstanding anything herein to the contrary: (a) DFS may rely on any facsimile copy, electronic data transmission or electronic data storage of this Agreement, any Statement of Transaction, billing statement, invoice from a Vendor, financial statements or other reports, and (b) such facsimile copy, electronic data transmission or electronic data storage will be deemed an original, and the best evidence thereof for all purposes, including, without limitation, under this Agreement or any other agreement between DFS and Dealer, and for all evidentiary purposes before any arbitrator, court or other adjudicatory authority. 26. Miscellaneous. Time is of the essence regarding Dealer's performance of its obligations to DFS notwithstanding any course of dealing or custom on DFS' part to grant extensions of time. Dealer's liability under this Agreement is direct and unconditional and will not be affected by the release or nonperfection of any security interest granted hereunder. DFS will have the right to refrain from or postpone enforcement of this Agreement or any other agreements between DFS and Dealer without prejudice and the failure to strictly enforce these agreements will not be construed as having created a course of dealing between DFS and Dealer contrary to the specific terms of the 8 agreements or as having modified, released or waived the same. The express terms of this Agreement will not be modified by any course of dealing, usage of trade, or custom of trade which may deviate from the terms hereof. If Dealer fails to pay any taxes, fees or other obligations which may impair DFS' interest in the Collateral, or fails to keep the Collateral insured, DFS may, but shall not be required to, pay such taxes, fees or obligations and pay the cost to insure the Collateral, and the amounts paid will be: (a) an additional debt owed by Dealer to DFS, which shall be subject to finance charges as provided herein; and (b) due and payable immediately in full. Dealer agrees to pay all of DFS' reasonable attorneys' fees and expenses incurred by DFS in enforcing DFS' rights hereunder. The Section titles used in this Agreement are for convenience only and do not define or limit the contents of any Section. 27. Joint and Several Obligations. Each Dealer shall be jointly and severally liable with each other Dealer for the obligations of each Dealer hereunder, each Dealer shall be obligated and responsible for the performance of each other Dealer under this Agreement, and a default by any Dealer shall be a default by each other Dealer. Each Dealer waives: (i) any right of contribution from any other Dealer until all of the obligations to DFS have been paid in full; (ii) any right to require DFS to institute any action or suit or to exhaust DFS' rights and remedies against any Collateral or any Dealer before proceeding against such Dealer; and (iii) any obligation of DFS to marshal any assets in favor of any Dealer. Each Dealer consents that DFS may, without in any manner affecting such Dealer's joint and several liability for any obligations to DFS: (a) extend in whole or in part (by renewal or otherwise), modify, accelerate, change or release any obligation of any other Dealer; (b) sell, release, surrender, modify, impair, exchange, substitute or extend the duration or the time for the performance or payment of any and all Collateral or other property, of any nature and from whomsoever received, held by DFS as security for the payment or performance of any obligations to DFS of any Dealer or any obligations of any Dealer; and (c) settle, adjust or compromise any of DFS' claims against any other Dealer. 28. BINDING ARBITRATION. 28.1 Arbitrable Claims. Except as otherwise specified below, all actions, disputes, claims and controversies under common law, statutory law or in equity of any type or nature whatsoever (including, without limitation, all torts, whether regarding negligence, breach of fiduciary duty, restraint of trade, fraud, conversion, duress, interference, wrongful replevin, wrongful sequestration, fraud in the inducement, usury or any other tort, all contract actions, whether regarding express or implied terms, such as implied covenants of good faith, fair dealing, and the commercial reasonableness of any Collateral disposition, or any other contract claim, all claims of deceptive trade practices or lender liability, and all claims questioning the reasonableness or lawfulness of any act), whether arising before or after the date of this Agreement, and whether directly or indirectly relating to: (a) this Agreement and/or any amendments and addenda hereto, or the breach, invalidity or termination hereof; (b) any previous or subsequent agreement between DFS and Dealer; (c) any act committed by DFS or by any parent company, subsidiary or affiliated company of DFS (the "DFS Companies"), or by any employee, agent, officer or director of a DFS Company whether or not arising within the scope and course of employment or other contractual representation of the DFS Companies provided that such act arises under a relationship, transaction or dealing between DFS and Dealer; and/or (d) any other relationship, transaction or dealing between DFS and Dealer (collectively the "Disputes"), will be subject to and resolved by binding arbitration. 28.2 Administrative Body. All arbitration hereunder will be conducted in accordance with the Commercial Arbitration Rules of The American Arbitration Association ("AAA"). If the AAA is dissolved, disbanded or becomes subject to any state or federal bankruptcy or insolvency proceeding, the parties will remain subject to binding arbitration which will be conducted by a mutually agreeable arbitration forum. The parties agree that all arbitrator(s) selected will be attorneys with at least five (5) years secured transactions experience. The arbitrator(s) will decide if any inconsistency exists between the rules of 9 any applicable arbitration forum and the arbitration provisions contained herein. If such inconsistency exists, the arbitration provisions contained herein will control and supersede such rules. The site of all arbitration proceedings will be in the Division of the Federal Judicial District in which AAA maintains a regional office that is closest to Dealer. 28.3 Discovery. Discovery permitted in any arbitration proceeding commenced hereunder is limited as follows. No later than thirty (30) days after the filing of a claim for arbitration, the parties will exchange detailed statements setting forth the facts supporting the claim(s) and all defenses to be raised during the arbitration, and a list of all exhibits and witnesses. No later than twenty-one (21) days prior to the arbitration hearing, the parties will exchange a final list of all exhibits and all witnesses, including any designation of any expert witness(es) together with a summary of their testimony; a copy of all documents and a detailed description of any property to be introduced at the hearing. Depositions shall be permitted but no more than two (2) for each party and no single deposition shall extend for more than two (2) days nor more than seven (7) hours during any one- day period. Requests for the production of documents shall be responded to (or objected to) within twenty (20) days of the request. All objections shall be ruled upon by the arbitrator. Requests for admission shall be permitted but no more than twenty-five (25) in the aggregate. Under no circumstances will the use of interrogatories be permitted. However, in the event of the designation of any expert witness(es), the following will occur: (a) all information and documents relied upon by the expert witness(es) will be delivered to the opposing party, (b) the opposing party will be permitted to depose the expert witness(es), (c) the opposing party will be permitted to designate rebuttal expert witness(es), and (d) the arbitration hearing will be continued to the earliest possible date that enables the foregoing limited discovery to be accomplished. 28.4 Exemplary or Punitive Damages. The Arbitrator(s) will not have the authority to award exemplary or punitive damages. 28.5 Confidentiality of Awards. All arbitration proceedings, including testimony or evidence at hearings, will be kept confidential, although any award or order rendered by the arbitrator(s) pursuant to the terms of this Agreement may be entered as a judgment or order in any state or federal court and may be confirmed within the federal judicial district which includes the residence of the party against whom such award or order was entered. This Agreement concerns transactions involving commerce among the several states. The Federal Arbitration Act, Title 9 U.S.C. Sections 1 et seq., as amended ("FAA") will govern all arbitration(s) and confirmation proceedings hereunder. 28.6 Prejudgment and Provisional Remedies. Nothing herein will be construed to prevent DFS' or Dealer's use of bankruptcy, receivership, injunction, repossession, replevin, claim and delivery, sequestration, seizure, attachment, foreclosure, dation and/or any other prejudgment or provisional action or remedy relating to any Collateral for any current or future debt owed by either party to the other. Any such action or remedy will not waive DFS' or Dealer's right to compel arbitration of any Dispute. 28.7 Attorneys' Fees. If either Dealer or DFS brings any other action for judicial relief with respect to any Dispute (other than those set forth in Section 28.6), the party bringing such action will be liable for and immediately pay all of the other party's costs and expenses (including attorneys' fees) incurred to stay or dismiss such action and remove or refer such Dispute to arbitration. If either Dealer or DFS brings or appeals an action to vacate or modify an arbitration award and such party does not prevail, such party will pay all costs and expenses, including attorneys' fees, incurred by the other party in defending such action. Additionally, if either Dealer or DFS institutes any arbitration claim or counterclaim against the other party, the non-prevailing party will pay all costs and expenses (including attorneys' fees) incurred by the prevailing party in the course of bringing or defending such action or proceeding, as the case may be. 28.8 Survival After Termination. The agreement to arbitrate will survive the termination of this Agreement. 10 29. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT IS FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE WITHOUT A JURY. DEALER AND DFS WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING. 30. Governing Law. Dealer acknowledges and agrees that this and all other agreements between Dealer and DFS have been substantially negotiated, and will be substantially performed, in the State of California. Accordingly, Dealer agrees that all Disputes will be governed by, and construed in accordance with, the laws of such state, except to the extent inconsistent with the provisions of the FAA which shall control and govern all arbitration proceedings hereunder. 11 IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of the date first set forth hereinabove. THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE WAIVER PROVISIONS. DEUTSCHE FINANCIAL SERVICES IDEAMALL, INC. CORPORATION By: /s/ Kenneth C. MacDonell By: /s/ Frank Khulusi ------------------------------ ----------------------------------- Print Name: Kenneth C. MacDonell Print Name: Frank Khulusi --------------------- ----------------------------- Title: Vice President Title: CEO --------------------------- --------------------------------- ATTEST: /s/ Ted Sanders --------------------------------------- (Assistant) Secretary Print Name: Ted Sanders ---------------------------- CREATIVE COMPUTERS, INC. By: /s/ Frank Khulusi ------------------------------------ Print Name: Frank Khulusi ---------------------------- Title: CEO --------------------------------- ATTEST: /s/ Ted Sanders -------------------------------------- (Assistant) Secretary Print Name: Ted Sanders --------------------------- ECOST.COM, INC. By: /s/ Doug Falk ----------------------------------- Print Name: Doug Falk --------------------------- Title: President -------------------------------- ATTEST: /s/ Ted Sanders -------------------------------------- (Assistant) Secretary Print Name: Ted Sanders --------------------------- 12 ELINUX.COM, INC. By: /s/ Ted Sanders ------------------------------------ Print Name: Ted Sanders ---------------------------- Title: CFO --------------------------------- ATTEST: /s/ Frank Khulusi --------------------------------------- Print Name: Frank Khulusi ---------------------------- CREATIVE COMPUTERS INTEGRATED TECHNOLOGIES, INC. By: /s/ Ted Sanders ------------------------------------ Print Name: Ted Sanders ---------------------------- Title: CFO --------------------------------- ATTEST: /s/ Frank Khulusi --------------------------------------- Print Name: Frank Khulusi ---------------------------- COMPUTABIILITY LIMITED By: /s/ Ted Sanders ------------------------------------ Print Name: Ted Sanders ---------------------------- Title: CFO --------------------------------- ATTEST: /s/ Frank Khulusi --------------------------------------- Print Name: Frank Khulusi ---------------------------- 13 EX-21.1 6 0006.txt SUBSIDIARIES EXHIBIT 21.1 IDEAMALL, INC. Subsidiaries of the Registrant Creative Computers, Inc. (a California corporation) ecost.com, Inc. (a Delaware corporation) eLinux.com, Inc. (a Delaware corporation) Creative Computers Integrated Technologies, Inc. (a Delaware corporation) ComputAbility Limited (a Delaware corporation) EX-23.1 7 0007.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 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, No. 333-82257 and No. 333-38860) of IdeaMall, Inc. (formerly Creative Computers, Inc.) of our report dated January 19, 2001, except as to the second paragraph of Note 3, which is as of March 7, 2001, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----