-----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, MfN6vH24EccyNrJcj1g0zKQS+kQLNvzjDJnNWQbhByOA7KhzJ6o7F6wLKpUBswxl 3xVrnlX39ejRbL5iA3iIBA== 0001017062-99-001942.txt : 19991117 0001017062-99-001942.hdr.sgml : 19991117 ACCESSION NUMBER: 0001017062-99-001942 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE COMPUTERS INC CENTRAL INDEX KEY: 0000937941 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 954518700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25790 FILM NUMBER: 99752990 BUSINESS ADDRESS: STREET 1: 2555 WEST 190TH STREET CITY: TORRENCE STATE: CA ZIP: 90504 BUSINESS PHONE: 3103545600 MAIL ADDRESS: STREET 1: 2555 WEST 190TH STREET CITY: TORRENCE STATE: CA ZIP: 90504 10-Q 1 QUARTERLY REPORT DATED SEPTEMBER 30, 1999 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to ______ Commission file number 0-25790 CREATIVE COMPUTERS, INC. (Exact name of registrant as specified in its charter) Delaware 95-4518700 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2555 West 190th Street Torrance, California 90504 (address of principal executive offices) (310) 354-5600 (Registrant's telephone number, including area code) Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] There were 10,403,269 outstanding shares of Common Stock at November 11, 1999. 1 Creative Computers, Inc. Index to Form 10-Q
PART I - FINANCIAL INFORMATION Page ---- Item 1 - Financial Statements Consolidated Balance Sheet............................................ 3 Consolidated Statement of Operations.................................. 4 Consolidated Statement of Cash Flows.................................. 5 Condensed Notes to Consolidated Financial Statements.................. 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 PART II - OTHER INFORMATION........................................... 13 Item 6 - Exhibits and Reports on Form 8-K............................. 13 SIGNATURE............................................................. 13
2 ITEM 1 FINANCIAL STATEMENTS Creative Computers, Inc. CONSOLIDATED BALANCE SHEET (in thousands except share data)
September 30, 1999 (unaudited) December 31, 1998 ------------------ ----------------- Assets Current assets: Cash and cash equivalents $ 16,984 $ 6,442 Accounts receivable, net of allowance for doubtful accounts 46,991 39,152 Due from uBid 721 1,277 Inventories 16,818 40,736 Prepaid expenses and other current assets 3,788 3,796 Net assets of uBid discontinued segment - 18,633 Income tax refund receivable 190 190 Notes receivable from uBid 3,331 - Deferred income taxes 5,280 5,216 -------- -------- Total current assets 94,103 115,442 Notes receivable from uBid - 3,331 Property, plant and equipment, net 14,763 14,391 Goodwill, net 11,957 12,318 Deferred income taxes 1,262 1,262 Other assets 39 138 -------- -------- $122,124 $146,882 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 58,909 $ 62,129 Accrued expenses and other current liabilities 11,843 13,198 Capital leases - current portion 172 116 Notes payable - current portion 6 6 -------- -------- Total current liabilities 70,930 75,449 Capital leases 170 6 Notes payable 150 155 -------- -------- Total liabilities 71,250 75,610 -------- -------- Stockholders' equity: Common stock, $.001 par value; 15,000,000 shares authorized; 10,401,936 and 10,264,539 shares issued 11 10 Preferred stock, $.001 par value; 5,000,000 shares authorized; none issued and outstanding - - Additional paid-in capital 74,332 86,069 Treasury stock, at cost: 15,000 shares (91) (91) Retained earnings (accumulated deficit) (23,378) (14,716) -------- -------- Total stockholders' equity 50,874 71,272 -------- -------- $122,124 $146,882 ======== ========
See condensed notes to consolidated financial statements. 3 Creative Computers, Inc. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited, in thousands except per share data)
For the three months ended For the nine months ended September 30, September 30, -------------------------- --------------------------- 1999 1998 1999 1998 ---------- ------------ ------------ ----------- Net sales $ 172,377 $ 170,442 $ 510,201 $ 475,684 Cost of goods sold 154,162 150,401 452,966 421,569 Retail store closure inventory reserves - - - 3,679 ---------- ------------ ------------ ----------- Gross profit 18,215 20,041 57,235 50,436 Selling, general and administrative expenses 21,319 18,220 59,713 60,128 Expenses related to retail store closures - - - 6,773 ---------- ------------ ------------ ----------- Income (loss) from operations (3,104) 1,821 (2,478) (16,465) Interest income (expense), net 147 (28) 109 (160) ---------- ------------ ------------ ----------- Income (loss) before income taxes (2,957) 1,793 (2,369) (16,625) Income tax provision (benefit) (424) 681 53 (6,311) ---------- ------------ ------------ ----------- Income (loss) from continuing operations (2,533) 1,112 (2,422) (10,314) Loss from discontinued operations - (677) (6,240) (1,848) ---------- ------------ ------------ ----------- Net income (loss) $ (2,533) $ 435 $ (8,662) $ (12,162) ========== ============ ============ =========== Basic earnings (loss) per share Continuing operations $ (0.24) $ 0.11 $ (0.23) $ (1.02) Discontinued operations - (0.07) (0.60) (.18) ---------- ------------ ------------ ----------- $ (0.24) $ 0.04 $ (0.83) $ (1.20) ========== ============ ============ =========== Diluted earnings (loss) per share Continuing operations $ (0.24) $ 0.11 $ (0.23) $ (1.02) Discontinued operations - (0.07) (0.60) (.18) ---------- ------------ ------------ ----------- $ (0.24) $ 0.04 $ (0.83) $ (1.20) ========== ============ ============ =========== Basic weighted average number of shares outstanding 10,400 10,194 10,376 10,150 ========== ============ ============ =========== Diluted weighted average number of shares outstanding 10,400 10,353 10,376 10,150 ========== ============ ============ ===========
See condensed notes to consolidated financial statements. 4 Creative Computers, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited, in thousands)
For the nine months ended September 30, --------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income (loss) $(8,662) $(12,162) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,603 2,856 Provision (benefit) for deferred income taxes 53 (6,311) Loss on write-off of property, plant and equipment - 2,052 Loss on impairment of goodwill - 3,095 Cash flows from discontinued operations 6,240 1,848 Changes in assets and liabilities, net of divestiture: Accounts receivable (7,283) (657) Inventories 23,918 2,181 Prepaid expenses and other current assets (40) (1,260) Other assets 99 502 Accounts payable (3,220) 25,159 Accrued expenses and other current liabilities (1,664) (305) Income taxes refund receivable - (144) ------- -------- Total adjustments 21,706 29,016 ------- -------- Net cash provided by operating activities 13,044 16,854 ------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (3,566) (2,667) ------- -------- Net cash used in investing activities (3,566) (2,667) ------- -------- Cash flows from financing activities: Payments under notes payable (5) (7,352) Principal borrowings (payments) of obligations under capital leases 220 (183) Proceeds from stock issued under stock option plans 849 858 ------- -------- Net cash provided by (used in) financing activities 1,064 (6,677) ------- -------- Net increase in cash and cash equivalents 10,542 7,510 Cash and cash equivalents: Beginning of the period 6,442 8,018 ------- -------- End of the period $16,984 $ 15,528 ======= ========
See condensed notes to consolidated financial statements. 5 Creative Computers, Inc. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated interim financial statements include the accounts of Creative Computers, Inc. (a Delaware corporation) and its wholly owned subsidiaries (the "Company") and have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at September 30, 1999 and the results of operations and cash flows for the three and nine months ended September 30, 1999 and 1998. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. 2. uBid, Inc. On December 9, 1998, uBid, Inc., a subsidiary of the Company 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 $23.8 million, and were used for advertising, brand development, uBid's infrastructure, and general corporate purposes. The shares sold to the public in the offering represented approximately 19.9% of uBid's outstanding common stock. On June 7, 1999, the Company divested its ownership in uBid by means of a tax-free distribution of all of its 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. 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 been restated for the periods presented to reflect the divestiture of uBid. This transaction is a non-cash investing activity for purposes of the consolidated statement of cash flows. Net revenues for the discontinued segment were $30.5 million for the period beginning January 1, 1999 and ending June 7, 1999, and were $24.1 million for the nine months ended September 30, 1998. 3. Net Income (Loss) Per Share Basic Earnings Per Share (EPS) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock options and other commitments to issue common stock were exercised. The computation of Basic and Diluted EPS is as follows: 6
Three Months Ended Nine Months Ended September 30, September 30, ------------------ -------------------- 1999 1998 1999 1998 -------- -------- ------- --------- (in thousands except per share data) Net income (loss) $(2,533) $ 435 $(8,662) $(12,162) ======= ======= ======= ======== Weighted average shares - Basic 10,400 10,194 10,376 10,150 Effect of dilutive stock options and warrants - 159 - - ------- ------- ------- -------- Weighted average shares-Diluted 10,400 10,353 10,376 10,150 ======= ======= ======= ======== Net earnings (loss) per share-Basic $ (0.24) $ 0.04 $ (0.83) $ (1.20) ======= ======= ======= ======== Net earnings (loss) per share-Diluted $ (0.24) $ 0.04 $ (0.83) $ (1.20) ======= ======= ======= ========
4. Retail Store Closures In February 1998, the Company closed one retail store acquired from Elek- Tek and on March 20, 1998, the Company announced the closure of six retail stores to focus its efforts on its catalog, corporate and Internet channels of distribution. The closed retail stores generated 9% of the Company's first-quarter 1998 sales, but had operating losses approaching $2.0 million for that quarter. The Company recorded a one-time pretax restructuring charge of $10.5 million relating to exit costs associated with the closing of retail operations. Recorded in selling, general and administrative costs were $3.1 million in write-offs of goodwill, $1.9 million in write- offs of fixed assets, $1.5 million reserve for lease exit costs, and $0.3 million in employee-related severance costs. Recorded as cost of sales were $3.7 million of reserves for store inventory. No reserves remain at September 30, 1999 related to the retail showroom closures. In addition, during the first quarter of 1998, $7.0 million of pretax write-offs were taken primarily relating to a more rapid decline in Mac sales during the quarter and the effects on inventory and receivables of rapid price erosion and other changes in the industry during the quarter. 5. Segment Information In 1998, the Company adopted Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" (SFAS No. 131). This statement requires companies to report financial and descriptive information about its reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets, as well as information about the revenues derived from the Company's products or services, the countries in which the Company earns revenues and holds assets, and major customers. SFAS No. 131 requires the use of the management approach to determine the information to be reported. The management approach is based on the way management organizes the enterprise to assess performance and make operating decisions regarding the allocation of resources. It is management's opinion that the Company has two reportable segments: 1) a direct marketer of personal computers, hardware, software, peripheral products and consumer electronics under the PCMall, MacMall, ComputAbility and CCIT brands; and 2) a fee-based Internet retailer of multiple product categories under the eCOST.com brand. 7 Summarized segment information from continuing operations for the three months ended September 30, 1999 is as follows:
September 30, 1999 (in thousands) ---------------------------------------------- Gross Operating Total Sales Profit Profit (Loss) Assets ---------------------------------------------- Direct marketer $164,393 $18,183 $(1,264) $121,395 Fee-based Internet 7,984 32 (1,840) 729 -------- ------- ------------ -------- Consolidated $172,377 $18,215 $(3,104) $122,124 ======== ======= ============ ========
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview and Recent Developments Net sales of the Company are primarily derived from the sale of personal computer hardware, software, peripherals and accessories to large corporations, small businesses, home offices and individual consumers through the Internet, dedicated inbound and outbound telemarketing sales executives, a direct sales force, retail showrooms and direct response catalogs. During the first quarter of 1998, the Company closed seven out of eight retail stores to focus its efforts on its corporate, Internet sales channels and catalogs. In December 1998, uBid completed an initial public offering of 1,817,000 shares of its common stock. In June 1999, the Company completed a spin-off of its remaining 80.1% ownership in uBid by means of a stock dividend, which was structured as a tax-free spin-off under Section 355 of the Internal Revenue Code. Section 355 generally provides that a company that distributes shares of a subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal income tax liability if 50% or more, by vote or by value, of the capital stock of either the company making the distribution or the subsidiary is acquired by one or more persons acting pursuant to a plan or series of related transactions that include the spin-off. In order to preserve the tax-free treatment of the spin-off, the Company has entered into agreements with uBid which restrict uBid's ability to issue or repurchase its equity securities. In addition, uBid has agreed to indemnify the Company for any tax liability suffered by the Company arising out of uBid's actions that would cause the distribution to lose its tax-free treatment. In March 1999, the Company launched eCOST.com as a wholly-owned subsidiary. eCOST.com offers a broad selection of name-brand products, most of which are sold at discount prices plus itemized fees for processing and shipping the order. Results of Operations Unless otherwise stated, all comparisons are results which exclude uBid and the closed retail stores. Three Months Ended September 30, 1999 Compared to the Three Months Ended September 30, 1998 Net sales for the quarter ended September 30, 1999 were $172.4 million, a 1.1% increase over last year's third quarter. Net sales for the quarter from eCOST.com accounted for $8.0 million. PC/WINTEL sales increased 3.3% from $95.5 million in last year's comparable quarter to $98.6 million for the three months ended September 30, 1999. Apple/Macintosh- related product sales decreased 12.3% to $65.8 million for the three months ended September 30, 1999 as compared with $75.0 million for the comparable period in the prior year. PC/WINTEL sales comprised 60.0% of total net sales for the third quarter in 1999 versus 56.0% for the same quarter last year. The increase in net sales for the quarter is primarily attributable to higher Internet and Outbound business-to-business revenues, offset by a decline in Apple sales resulting from constrained product availability. Gross profit from all operations decreased $1.8 million to $18.2 million, resulting from a shift in sales mix from higher margin Apple sales to PC/WINTEL sales due to Apple product availability difficulties, as well as a general decline in gross profit margin related to Internet promotions and eCOST.com. Excluding eCOST.com, gross profit as a 8 percentage of net sales was 11.1%, a decrease from last year's third quarter gross profit of 11.8%. Including the impact of eCOST.com, gross profit as a percentage of net sales was 10.6%. The Company's gross profit percentage may vary from quarter to quarter, depending on the continuation of key vendor support programs, including price protections, rebates and return policies and based on product mix, pricing strategies and other factors. Selling, general and administrative expense for all operations during the third quarter of 1999 increased by $3.1 million from a year ago due to expenses associated with eCOST.com and Outbound business-to-business sales. Selling, general and administrative expenses as a percent of net sales, excluding eCOST.com, increased from 10.7% in last year's third quarter to 11.8% in the third quarter of this year. Selling, general and administrative expenses for the third quarter of 1999 increased $1.2 million from the prior year, excluding eCOST.com, due in part to the ramp-up in the Outbound business-to-business sales force, increased Internet marketing expenditures, as well as a one-time charge of $0.3 million related to severance costs resulting from an 18% reduction in non-sales headcount. Net interest income for the three months ended September 30, 1999 was $147,000 compared to net interest expense of $28,000 for the comparable quarter in 1998. Net interest income for 1999 resulted from the note receivable from uBid and the investment of excess cash, partially offset by expenses of borrowings under the Company's floorplan line of credit. The net interest expense for 1998 resulted from debt incurred and cash invested to acquire Elek-Tek, Inc. and ComputAbility, Inc. The Company recorded a $0.4 million income tax benefit for the three months ended September 30, 1999, compared to a provision of $0.7 million for the three months ended September 30, 1998, primarily due to changes in profitability. Net loss was $2.5 million for the three months ended September 30, 1999 compared to net income of $0.4 million for the same period last year inclusive of uBid and the closed stores. Excluding the Company's $1.8 million investment in eCOST.com, net loss would have been $0.7 million, or $0.07 per share, in the third quarter of 1999. Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September 30, 1998 Net sales for the nine months ended September 30, 1999 increased $49.3 million, or 10.7%, to $510.2 million. Including the closed retail stores, net sales increased by $34.5 million or 6.9% in the nine months ended September 30, 1999 from $475.7 million in the nine months ended September 30, 1998. Net sales for the nine-month period from eCOST.com accounted for $9.9 million. Gross profit increased from the prior year by $2.4 million to $57.2 million for the nine months ended September 30, 1999, primarily resulting from increased sales, partially offset by a decline in gross profit margin related to Internet promotions and eCOST.com. Gross profit as a percentage of net sales declined to 11.2% for the first nine months of 1999, compared to 11.9% for the first nine months of 1998. Excluding eCOST.com, gross profit as a percentage of net sales was 11.4%. Selling, general and administrative expenses from all operations excluding uBid decreased from the prior year by $0.4 million to $59.7 million for the nine months ended September 30, 1999. As a percentage of net sales, selling, general and administrative expenses were 11.7%, a 0.9% improvement over the prior year. Excluding the impact of eCOST.com, selling, general and administrative costs as a percentage of sales was 11.4% for the nine months ended September 30, 1999. Net interest income for the nine months ended September 30, 1999 was $109,000 compared to interest expense of $160,000 for the comparable period in 1998. The net interest income for 1999 resulted from the notes receivable from uBid and the investment of excess cash, partially offset by borrowings under the Company's floorplan line of credit. Net interest expense for 1998 resulted from debt incurred and cash invested to acquire Elek-Tek, Inc. and ComputAbility, Inc. The Company recorded a $53,000 income tax provision for the nine months ended September 30, 1999, compared to a benefit of $6.3 million in the prior year. The benefit in 1998 resulted primarily from the non-recurring restructuring charge in the first quarter of 1998 related to the closure of retail stores. The Company incurred a net loss of $8.7 million or $(0.83) per share, for the nine months ended September 30, 1999 compared to net loss of $12.2 million, or $1.20 per share, for the same period last year, inclusive of closed stores and the discontinued operations of uBid. Excluding the Company's investment in eCOST.com and uBid discontinued 9 operations, net income would have been $0.2 million, or $0.02 per diluted share, for the nine months ended September 30, 1999. Liquidity and Capital Resources The Company's primary capital need has been the funding of the working capital requirements created by its rapid growth in sales. Historically, the Company's primary sources of financing have been from public offerings and borrowings from its stockholders, private investors and financial institutions. As of September 30, 1999, the Company had cash and cash equivalents of $17.0 million and working capital of $23.2 million. Inventories decreased to $16.8 million at September 30, 1999 from $40.7 million at December 31, 1998 due to increased sales drop-shipped from vendors and increased order frequency. Accounts receivable increased to $47.0 million at September 30, 1999 from $39.2 million at December 31, 1998 due to an increase in business customer purchases. During the nine months ended September 30, 1999, the Company's capital expenditures were $3.6 million, versus $2.7 million for the comparable period last year. As of September 30, 1999, the Company had an existing credit facility consisting of separate credit lines totaling $60.0 million. Part of the credit facility functions in lieu of a vendor trade payable for inventory purchases, is included in accounts payable, and does not bear interest if paid within terms specific to each vendor. Part of the credit facility functions as a working capital line of credit secured by, and is limited to, a percentage of eligible inventory and accounts receivable, and bears interest at the prime rate. As of September 30, 1999, the Company had $4.6 million in total borrowings under the credit facility included in accounts payable. The overall credit facility is secured by substantially all of the Company's assets and contains certain covenants that require the Company to maintain a minimum level of tangible net worth and income and a maximum leverage ratio. At September 30, 1999, the Company is in compliance with all such covenants. The Company believes that current working capital, together with cash flows from operations and available lines of credit, will be adequate to support the Company's current operating plans through 1999. However, if the Company requires additional funds, such as for acquisitions or expansion or to fund a significant downturn in sales that causes losses, there are no assurances that adequate financing will be available at acceptable terms, if at all. In July 1996, the Company announced its plan to repurchase up to 1,000,000 shares of its Common Stock. The shares will be repurchased from time to time at prevailing market prices, through open market or negotiated transactions, depending upon market conditions. No limit was placed on the duration of the repurchase program. There is no guarantee as to the exact number of shares that the Company will repurchase. Subject to applicable securities laws, repurchases may be made at such times and in such amounts as the Company's management deems appropriate. The program can also be discontinued at any time management feels additional purchases are not warranted. The Company will finance the repurchase plan with existing working capital. As of September 30, 1999, the Company has repurchased 15,000 shares under the program. As part of its growth strategy, the Company may, in the future, acquire other companies in the same or complementary lines of business. Any such acquisition and the ensuing integration of the operations of the acquired company would place additional demands on the Company's management and operating and financial resources. The Company currently has no definitive agreements with respect to any acquisitions. Inflation Inflation has not had a material impact upon operating results, and the Company does not expect it to have such an impact in the near future. There can be no assurances, however, that the Company's business will not be so affected by inflation. Year 2000 Computer systems, software packages, and microprocessor dependent equipment may cease to function or may generate erroneous data when the year 2000 arrives. The problem affects those systems or products that are 10 programmed to accept a two-digit code in date code fields. To correctly identify the year 2000, a four-digit date code field will be required to be what is commonly termed "year 2000 compliant." The Company may realize exposure and risk if the systems for which it is dependent upon to conduct day-to-day operations are not year 2000 compliant. The potential areas of exposure include electronic data exchange systems operated by third parties with whom the Company transacts business, certain products purchased from third parties for resale, and computers, software, telephone systems, and other equipment used internally. To minimize the potential adverse affects of the year 2000 problem, the Company has established an internal project team comprised of all functional disciplines. This project team has been engaged in a three-phase process of identifying internal systems (both information technology and non-information technology systems) not year 2000 compliant, determining their significance in the effective operation of the Company, and developing plans to resolve the issues where necessary. The Company has been communicating with its suppliers and others to coordinate year 2000 readiness. The responses received by the Company to date have indicated that steps are currently being undertaken to address this concern. However, if such third parties are not able to make all systems and products year 2000 compliant, there could be a material adverse impact on the Company. Also, should products previously sold by the Company as well as products currently marketed by the Company fail to meet Y2K readiness there could be a material adverse impact on the Company to the extent not indemnified by its vendors. Review of the Company's principal application software through which nearly all of the Company's business is transacted, has determined it to be year 2000 compliant and, as such, the Company does not anticipate any material adverse operational issues to arise. The Company has completed its year 2000 compliance assessment and implemented corrective solutions for its critical systems. To date, the costs incurred by the Company with respect to this project are $0.5 million. Currently, management expects total costs in connection with the Company's year 2000 compliance project not to exceed $0.6 million; a $0.2 million decrease from second quarter 1999 estimates; however, future anticipated costs are difficult to estimate with any certainty and may differ materially from those currently projected. All costs incurred in connection with the year 2000 compliance project will be financed from general corporate funds. The anticipated costs associated with the Company's year 2000 compliance program do not include time and costs that may be incurred as a result of any potential failure of third parties to become year 2000 compliant or costs to implement the Company's future contingency plans. Management estimates that approximately one half of the expected costs will be attributed to the redeployment of internal resources and the other half will be comprised principally of external consulting fees and software upgrades. No hardware expenditures for year 2000 are contemplated. The redeployment of internal data processing resources has not, nor is expected to materially delay any significant projects. Year 2000 spending is expected to be 10% of total budgeted data processing expenditures. Contingency plans were finalized during the third quarter of 1999. Upon completion of this project, if systems material to the Company's operations have not been made year 2000 compliant, or if third parties fail to make their systems year 2000 compliant in a timely manner, the year 2000 issue could have a material adverse effect on the Company's business, financial condition and results of operations. Business Factors Except for historical information, all of the statements, expectations and assumptions contained in the foregoing are forward-looking statements. The realization of any or all of these expectations is subject to a number of risks and uncertainties and it is possible that the assumptions made by management may not materialize. There can be no assurances that the momentum in PC/Wintel sales will be sustained, that the third quarter supply shortages for Apple products will not continue, that Mac and out-bound sales trends will continue in future periods, or that the Company's Internet sales will continue to grow. There can be no assurance that the Internal Revenue Service will treat the distribution of uBid shares as a tax-free distribution for federal tax purposes. In addition, there can be no assurance that the Company's new eCOST.com subsidiary will be developed successfully, achieve market acceptance or be profitable. In addition to the factors set forth above, other important factors that could cause actual results to differ materially from the Company's expectations include competition from companies either currently in the market or entering the market, competition from other catalog and retail store resellers and price pressures related thereto, uncertainties surrounding the supply of and demand for products manufactured by and compatible with Apple Computer, the Company's reliance on Apple Computer, IBM, Hewlett Packard, Compaq and other vendors, and risks due to shifts in market demand and/or price erosion of owned inventory. This list of risk factors is not intended to be 11 exhaustive. Reference should also be made to the risk factors set forth from time to time in the Company's SEC reports, including but not limited to those set forth in the section entitled "Certain Factors Affecting Future Results" in its Annual Report on Form 10-K for 1998. 12 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits. The exhibit index attached hereto is incorporated herein by reference. b. Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CREATIVE COMPUTERS, INC. Date: November 15, 1999 By /s/ Ted Sanders -------------------------------- Ted Sanders Chief Financial Officer (Duly Authorized Officer of the Registrant and Principal Financial Officer) EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 27 Financial Data Schedule 99.1 Employment Agreement dated July 22, 1999 between the Company and Scott Klein. 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 16,984 0 47,712 0 16,818 88,030 14,763 0 122,124 70,930 0 0 0 11 50,863 122,124 172,377 172,377 154,162 154,162 21,319 0 (147) (2,957) (424) (2,533) 0 0 0 (2,533) (0.24) (0.24)
EX-99.1 3 EMPLOYMENT AGREEMENT EXHIBIT 99.1 July 22, 1999 Mr. Scott W. Klein 3604 Shantara Lane Plano, Texas 75093 Dear Scott: On behalf of Creative Computers, Inc. ("Creative," or the "Company"), it is my pleasure to confirm our offer to you of the position of President of Creative Computers under the terms and conditions outlined below. Your responsibilities generally will be to act as the President of the Company, reporting to the Chairman and Chief Executive Officer. Your duties may change from time to time as necessary. As we discussed, your position will involve and require travel and time away from your current residence. You will start your new position on July 26, 1999 ("Commencement Date"). Upon assuming your position, you will contemporaneously resign from your director and officer positions with Creative's subsidiary, eCOST.com, Inc. ("ecost"). However, you agree that you will provide transition management services to ecost until such time as a new chief executive officer is hired. If the Company terminates your employment (other than for "cause" as defined below) you will be entitled during the "Severance Period" (as defined below) to severance in an amount equal to up to six months salary (as specified below) and continuation, at the Company's expense, of health insurance benefits for you and your family, subject to your execution of a separation agreement, satisfactory to the Company's Board of Directors, containing customary mutual releases. Severance payments will be made in equal bi-monthly installments over a six- month period; provided that, if you obtain other employment during the six month period, the Company's obligation to pay the severance payments otherwise due during the remainder of the six-month period shall cease as of the date you obtain such other employment. Your employment will cease for all purposes as of the date of your termination by the Company notwithstanding the post-termination severance payments provided for in the two preceding sentences. The shorter of (i) six months after the Company terminates your employment (other than for "cause") or (ii) the period from the date of such termination until you obtain other employment is referred to in this paragraph as the "Severance Period." Notwithstanding the foregoing, in the event of termination of your employment with Creative (other than for cause), Creative may, in its sole discretion, offer to you the opportunity to return to ecost as its President and Chief Executive Officer on terms identical to those set forth in your April 15, 1999 employment letter, including the granting to you of options to purchase ecost common stock (with an exercise price equal to the then per share fair market value of ecost common stock) that will restore your current 500,000 share option position. In the event Mr. Scott W. Klein July 22, 1999 Page Two Creative so offers to you the opportunity to return to ecost, Creative shall have no severance payment obligation to you under this paragraph as a result of the termination of your Creative employment. For the purpose of the preceding paragraph, "cause" shall mean: (i) a material breach by you of your employment obligations with the Company, including your obligations hereunder, which breach is not cured within fifteen (15) days after written notice thereof from the Company; (ii) your commission of an act of personal dishonesty or breach of fiduciary duty involving personal profit in connection with your employment by the Company; (iii) your commission of an act involving willful misconduct or gross negligence on your part in the conduct of your duties as an officer of the Company; (iv) a material and willful violation of a federal or state law or regulation by you applicable to the business of the Company; (v) your conviction of, or pleading of nolo contendere to, a felony or a crime involving moral turpitude; or (vi) a diagnosis of your addiction to illegal drugs. No act, or failure to act, by you shall be considered willful unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. You agree that any dispute between you and the Company arising out of your employment will be resolved by binding arbitration in Los Angeles County pursuant to the American Arbitration Association's employment dispute resolution rules then in effect. You are going to be employed in the Company's Torrance, California facility and accordingly need to commute to that facility to work on a weekly basis (Monday through Friday). The Company will pay your coach airfare to commute from your Texas residence to the Company's Torrance, California headquarters. The Company will also arrange and pay for temporary lodging (hotel room or apartment) when you are working at the Company's Torrance office. At the Company's request, you agree to relocate your permanent residence to Southern California, and the Company will pay up to an aggregate of $150,000 of your documented out-of-pocket relocation expenses described. As compensation for your services and in consideration for your agreement to enter into the Employee Proprietary Information Agreement described below, you will earn a base salary of $309,150 per annum ($5,745.19 per week) payable in accordance with Creative's standard payroll practices. You will also be eligible to receive performance bonuses of up to $50,000 each year, in the sole discretion of the Company's Compensation Committee; provided that, for the first twelve months of your employment, your performance bonus will not be less than $12,500. Your yearly salary may be increased or decreased, by mutual agreement. You will also receive a car allowance of up to $1,450 per month plus a monthly amount to cover insurance on the Mr. Scott W. Klein July 22, 1999 Page Three automobile (to be determined at the time of employment) which amounts will be added to your salary and which amounts will be grossed up for taxes, to the extent necessary. The Company will also pay for vehicle registration fees and maintenance expenses associated with the automobile. During the term of your employment, you will also receive (i) health insurance coverage for you and the members of your family and (ii) three weeks of paid vacation during your first year of employment and four weeks per year thereafter. In addition, except for the salary, bonus, car allowance and other benefits specifically provided for in this letter, you shall be eligible to receive other benefits during the course of your employment comparable to those generally made available to other senior executives of Creative. In addition to the compensation set forth above, you will be granted on the Commencement Date an option to purchase 250,000 shares of the common stock of Creative with an exercise price equal to the closing price of the Company's common stock on such date. Vesting of your option will be at a rate of 20% per year on each anniversary date of the option. Vesting of your option will be subject to the condition that you are still employed by the Company. Generally, the option shall expire 90 days after you are no longer with the Company. Effective as of the Commencement Date, you agree that, in consideration of the Creative stock option described above, the number of shares covered by your current stock option to purchase shares of ecost Common Stock shall be reduced from 500,000 shares to 150,000 shares. Finally, upon approval by stockholders of Creative of an increase in the number of shares issuable under Creative's Stock Incentive Plan (or, if earlier, the approval by stockholders of a new stock option plan), you will be granted an option to purchase an additional 75,000 shares of Creative common stock vesting at a rate of 20% per year from the Commencement Date, with an exercise price equal to the closing price of Creative common stock on the date of such shareholder approval. In addition, you agree not to in any way jeopardize or expose the Company to liability by using for the Company's benefit trade secrets of any former employer or client. You agree that upon the Commencement Date, your April 15, 1999 employment offer letter with ecost shall be terminated and that neither ecost nor Creative will have any further obligations thereunder, other than payment thereunder of unpaid salary accruing through, and reimbursement of expenses incurred prior to, the Commencement Date. You further agree and represent that you have not entered into any agreements with any former employer or client that would affect your ability to give your full efforts to the Company, would expose the Company to any liability, or would negatively impact the Company's ability to run its business and compete effectively for personnel or for business on a go-forward basis. You further agree to sign an Employee Proprietary Mr. Scott W. Klein July 22, 1999 Page Four Information Agreement. A copy of that agreement is attached for your review and signature. We look forward to your starting your new position. If there is any matter in this letter that you want to discuss further, please do not hesitate to contact me. Sincerely, /s/ FRANK F. KHULUSI - -------------------- Frank F. Khulusi Chairman and CEO Encl: Proprietary Information Agreement Accepted and Agreed: /s/SCOTT W. KLEIN - ----------------- Scott W. Klein July 22, 1999 -----END PRIVACY-ENHANCED MESSAGE-----