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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________ to _________.
Commission file number: 0-25790
CREATIVE COMPUTERS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-4518700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2645 MARICOPA STREET, TORRANCE, CALIFORNIA 90503
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (310) 787-4500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
Common Stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 14, 1997, the aggregate market value of the Common Stock held
by non-affiliates of the Registrant was approximately $22 million. The number of
shares outstanding of the Registrant's Common Stock as of March 14, 1997 was
9,776,950.
Documents incorporated by reference into Part III: Portions of the
definitive Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
1
CREATIVE COMPUTERS, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.............................................................. 3
Item 2. Properties............................................................ 19
Item 3. Legal Proceedings..................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders................... 20
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters....................................... 20
Item 6. Selected Financial Data............................................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 22
Item 8. Financial Statements and Supplementary Data........................... 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................ 26
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 26
Item 11. Executive Compensation................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management........ 27
Item 13. Certain Relationships and Related Transactions........................ 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 28
SIGNATURES.......................................................................... 29
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PART I
ITEM 1. BUSINESS
GENERAL
Creative Computers, Inc. (the "Company") is a direct marketer of personal
computer hardware, software and peripheral products. The Company offers
products to individual consumers, home offices, small businesses and large
corporations through direct response catalogs, dedicated inbound and outbound
telemarketing sales executives, retail showrooms and advertising on the
Internet. The Company offers a broad selection of products through its
distinctive, full-color catalogs, MacMall, PC Mall and DataCom Mall, and other
promotional materials. The Company's staff of knowledgeable telemarketing sales
executives, customer service and technical support personnel work together to
serve customers by assisting in product selection and offering technical
assistance. The Company believes that its high level of customer service
results in customer loyalty and repeat customer orders. The Company also
operates four retail showrooms in Southern California under the name Creative
Computers.
STRATEGY
The Company's strategy is to be a leading high-volume, cost-effective
direct marketer of a broad range of personal computers, software and related
products. Specific elements of the Company's operating strategy include:
Focus on the Windows/Intel (WINTEL) Market. The Company launched its first
PC catalog, PC Mall, primarily for WINTEL customers, in May 1995. During 1995,
the Company published seven editions of PC Mall with a total circulation of 11.1
million copies. During 1996, the Company published thirteen editions of PC Mall
and increased its circulation to 15.3 million copies and more than doubled its
WINTEL-based revenue. In January 1996, the Company also mailed a new catalog,
DataCom Mall, featuring networking and data communications related hardware and
software products. During 1996, the Company received additional authorizations
to resell major brand name products and is currently authorized to sell IBM,
Compaq, Hewlett-Packard, NEC, Sony, Digital Equipment, AST, Hitachi, Toshiba,
Texas Instruments, Fujitsu and other name brand computers. Through these
additional authorizations and increased sales during 1996, the Company became
one of the leading catalog resellers of WINTEL products. In 1997, the Company
currently plans to increase PC Mall catalog circulation by approximately 50%
over 1996.
Expansion into the Data Communications Market. In January 1996, the Company
introduced a new catalog, DataCom Mall, featuring networking and data
communications related hardware and software products. The catalog is targeted
at LAN, MIS and Database managers located at small to medium sized businesses.
DataCom Mall currently is supported by major networking vendors such as 3COM,
Allied Telesyn, Ascend Communications and Bay Networks. During 1996 the Company
published 6 editions of its DataCom Mall catalog with a total circulation of 3.2
million copies. The Company's strategy for 1997 includes increasing circulation
of its catalog, increasing its dedicated and focused DataCom sales specialist
group and increasing brand awareness through advertising in trade magazines such
as LAN Times, Network Computing and Network Magazine.
Continued Expansion in the Macintosh Market. During 1996, the Company was a
leading direct marketer of Macintosh products offering the full line of Apple
and Apple-clone computers as well as related products. The Company currently
plans to continue its efforts in expanding its Macintosh marketshare through an
increased number of editions and circulation of its MacMall catalog. During 1996
and 1995, the Company published thirteen and ten editions annually of its
MacMall catalog, with a total circulation of 30.3 and 27.3 million copies,
respectively. The Company published five editions of MacMall in 1994 and
distributed approximately 7.7 million catalogs.
3
Database Marketing. The Company has compiled a proprietary mailing list of
previous and potential customers, and continually analyzes the database to
target customer types and increase response and purchase rates. The Company's
response rate (calculated by dividing the number of orders generated by the
number of catalogs distributed) for its proprietary mailing list during 1996 was
higher than its response rate with respect to the use of third party mailing
lists.
Expansion into Outbound Telemarketing. In the fourth quarter of 1996, the
Company established a dedicated outbound telemarketing group. By year end, this
department consisted of 27 highly trained people and represented one of the
Company's fastest growing segments. The focus of this team is on the relatively
under-serviced small and mid-sized business market. The Company believes that
these markets represent the highest growth potential and that, in this market,
the competition is less fierce from aggregators, value-added resellers (VAR's),
and corporate outside sales teams than in the highly targeted Fortune 500 types
of accounts. In 1997, the Company plans to significantly expand its outbound
telemarketing.
Relationship-Based Selling. The Company's sales executives are highly
trained in relationship building with their customers and are continuously
coached to offer higher levels of service. The sales executive is trained and
empowered to handle all the customers' needs including customer service or
returns related issues. Additionally, sales executives bring other expertise to
bear as needed from within the Company including Novell trained Certified
Network Engineers (CNE), Microsoft Windows NT specialists and Apple certified
technicians.
Focus on the Internet Market. In 1995, the Company launched its world-wide
website located at www.pcmall.com, www.datacommall.com and www.macmall.com in
order to capitalize on the growing interest and opportunity created by
electronic commerce. During 1996, the Company continued to enhance its site by
implementing on-line ordering, giving customers access to inventory availability
and greatly expanding the product selection, content and information available
on-line. In 1997 the Company plans to start advertising on other commercial
sites on the Internet, and is currently incorporating ESD (Electronic Software
Distribution) into its website to further expand its efforts on the Internet.
Broad Product Selection and Competitive Pricing. The Company seeks to offer
its customers one-stop shopping for their hardware, software, peripheral and
accessories requirements. The Company offers a large number of products to its
customers and is continually reviewing and updating the products offered. The
Company's catalogs include detailed descriptions and specifications of popular
brand name products, as well as recently introduced and difficult-to-find
products. The catalogs are designed to serve as a comprehensive reference source
that introduces new products, enhances awareness of existing products and
stimulates purchasing decisions. The Company is able to offer its customers
competitive pricing in an increasingly price sensitive market, primarily as a
result of relatively low overhead associated with its direct marketing
operations as compared to other forms of distribution.
High Quality Customer Service. The Company believes that a key element of
its success has been the high quality of its customer service. The Company makes
a substantial investment in initial and continuing education of its personnel to
enable them to provide professional service to customers. The Company is able to
offer its customers overnight delivery services by 10:30 a.m. on a cost
effective basis. The Company offers its customers other value-added services,
such as the ability to purchase systems that have been specifically configured
to meet the customer's requirements. The Company also offers its customers a 30-
day return policy on some of its products. The Company believes that its high
level of customer service results in customer loyalty and repeat customer
orders.
High-Level Technical Support. The Company offers its customers specially
trained technical support personnel to assist them in solving hardware and
software problems. The technical support line is toll free and service charge
free and is available nine hours per day, Monday through Friday.
4
MARKETING
The Company's various marketing programs are designed to attract new
customers and to stimulate additional purchases by previous customers. The
Company continuously attracts new customers by selectively mailing catalogs to
prospective customers as well as through advertising on the Internet and in
major user magazines, such as Computer Shopper, MacWorld, and MacUser. In
addition, the Company obtains the names of prospective customers through the use
of selected mailing lists acquired from various sources, including
manufacturers, suppliers and computer magazine publishers.
The Company sells its products to individual consumers, home offices, small
businesses and large corporations. During 1996, the Company shipped
approximately 931,000 mail order/catalog orders with an average order size of
$416. The Company distributes its catalogs throughout the United States.
Catalogs. The Company published thirteen editions of its PC Mall catalog
during 1996 and distributed approximately 15.3 million catalogs. The PC Mall
catalog reached 132 pages by the end of 1996. PC Mall customers receive a
catalog several times a year depending on purchasing history. In addition, the
Company includes a catalog with every order shipped, as well as special
promotional flyers and manufacturers' product brochures. The most recent edition
of PC Mall featured over 1,900 products.
In January 1996, the Company introduced a new catalog, DataCom Mall,
featuring networking and data communications related hardware and software
products. The catalog is targeted at LAN, MIS and Database managers located at
small to medium sized businesses. During 1996, the Company published 6 editions
of its DataCom Mall catalog with a total circulation of 3.2 million copies.
The Company published thirteen editions of MacMall in 1996 and distributed
approximately 30.3 million catalogs. The Company plans to increase the number
of editions to 14, and to increase the circulation of MacMall, in 1997. Active
MacMall customers receive a catalog several times a year depending upon
purchasing history and the Company includes a catalog with every order shipped,
as well as special promotional flyers and manufacturers' product brochures.
The Company creates its MacMall, PC Mall and DataCom Mall catalogs in-house
with its own design team and production artists using a computer-based desktop
publishing system. The in-house preparation of the catalogs streamlines the
production process, provides greater flexibility and creativity in catalog
production, and results in significant cost savings over outside production.
The Internet. The Company offers a world-wide website on the Internet that
can be accessed via its three catalog names, www.pcmall.com, www.datacommall.com
and www.macmall.com. The Company offers many advanced features such as on-line
ordering, access to inventory availability, a large product selection with
detailed product information and in the near future, Electronic Software
Distribution (ESD). Sales generated through the Internet are growing very
rapidly for the Company as it offers its customers a convenient means of
shopping and ordering its products. In addition, the Company's website also
serves as another source for new customers.
Inbound and Outbound Telemarketing. The Company believes that much of its
success has come from the quality and training of its telemarketing sales
executives. These sales executives are responsible for assisting customers in
purchasing decisions, answering product pricing and availability questions and
processing product orders. Telemarketing sales executives have the authority to
vary prices within specified parameters in order to meet prices of competitors.
In addition to product training, the sales executives are trained in systems and
networking solutions, sales techniques, phone etiquette and customer service.
Telemarketing sales executives attend frequent training sessions to stay up-to-
date on new products. The Company's toll-free order numbers are staffed by
sales
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executives 24 hours a day, seven days a week. Inbound and outbound telemarketing
sales executives are assisted by customer service and technical support
personnel.
The Company's phone and computer systems are used for order entry, customer
tracking and inventory management. The computer system maintains a database
listing previous customer purchases, which allows telemarketing sales executives
to make product suggestions that fit each customer's specific buying preferences
and to offer the latest upgrades for products previously purchased from the
Company.
Vendor Supported Marketing. The Company currently has a marketing team
which sells advertising space in the Company's catalogs to vendors according to
a published rate schedule. These ad sales generate revenues which offset a
substantial portion of the expense of publishing and distributing the catalogs.
The same marketing team develops marketing campaigns to maximize product sales.
National Off-Page Advertising. The Company continuously attracts new
catalog customers and generates orders through large multi-page color
advertisements in major publications such as Computer Shopper, MacWorld and
MacUser. During 1996, the Company purchased 274 pages of magazine advertising.
Corporate Sales. The specific needs of corporate buyers are fulfilled
through a combination of inbound and outbound full-time sales personnel. The
Company's sales staff builds long-term relationships with corporate customers
through regular phone contact and personalized service. Corporate customers may
choose from several purchase or lease options for financing product purchases,
and the Company extends credit terms to certain corporate customers.
Customer Return Policy. The Company offers a 30-day return policy on a
number of its products. Returns are monitored to identify trends in product
acceptance and defects, to enhance customer satisfaction and to reduce overall
returns.
PRODUCTS AND MERCHANDISING
The Company offers hardware, software, peripherals, components and
accessories for users of computer products. The Company screens new products and
selects products for inclusion in its catalogs based on features, quality, sales
trends, price, margins, cooperative/market development funds and warranties. The
Company offers its customers other value added services, such as the ability to
purchase systems that have been specifically configured to meet the customer's
requirements. Through frequent mailings of its catalogs, the Company is able to
quickly introduce new products and replace slower selling products with new
products.
6
The following table sets forth the Company's net sales and percentage of
net sales by major product category for the periods presented.
YEAR ENDED DECEMBER 31,
(IN MILLIONS OF DOLLARS)
1994 % 1995 % 1996 %
------ ----- ------ ----- ------ -----
Computer systems.......... $ 74.9 45.8% $173.0 41.1% $166.9 37.5%
Peripherals, components
and accessories.......... 73.2 44.7 193.2 45.9 227.8 51.2
Software.................. 12.3 7.5 46.7 11.1 45.4 10.2
Other(1).................. 3.3 2.0 8.0 1.9 4.9 1.1
------ ----- ------ ----- ------ -----
Total................. $163.7 100.0% $420.9 100.0% $445.0 100.0%
====== ===== ====== ===== ====== =====
(1) Other consists primarily of other electronic products, income from labor
charges and sales of extended warranties.
Computer Systems. In connection with the Company's expansion into the
WINTEL market, the Company has obtained catalog sales authorizations or
otherwise has the ability to sell WINTEL products from the major WINTEL-platform
hardware manufacturers, including IBM, Compaq, Hewlett-Packard, NEC, Sony,
Digital Equipment, AST, Hitachi, Toshiba, Texas Instruments, Fujitsu and others.
The Company also is authorized or otherwise has the ability to sell the full
line of Apple hardware as well as Apple-clone products from Motorola, Umax and
Power Computing.
Peripherals, Components and Accessories. The Company offers a large
selection of peripheral and component products from manufacturers such as Apple,
Hewlett-Packard, Sony, Epson, 3Com, US Robotics, IBM, Iomega and Compaq.
Peripherals and components include printers, modems, monitors, data storage
devices, add-on circuit boards, connectivity products and communications
products. The accessories offered by the Company include a broad range of
computer-related items and supplies such as diskettes, cables and connectors.
Software. The Company sells a wide variety of software packages in the
business and personal productivity, utility, language, educational and
entertainment categories, including word processing, spreadsheet and database
software. The Company offers a large number of software programs from
established vendors, such as Microsoft, Corel, Adobe, Symantec, Quark, Lotus,
Macromedia and Intuit as well as numerous specialty products from new and
emerging vendors. The Company also markets upgrades from certain vendors, such
as Symantec, Corel, Lotus and Microsoft, which the Company believes offer
incremental revenue opportunities.
PURCHASING AND INVENTORY
The Company believes that effective purchasing is a key element of its
business strategy to provide name brand computer products and related software
and peripherals at competitive prices. The Company believes that its high volume
of sales results in increased purchasing power with its primary suppliers,
resulting in volume discounts, favorable product return policies and vendor
promotional allowances. The Company purchases products from over 900 vendors.
During 1994, 1995 and 1996, products manufactured by Apple represented
approximately 58.7%, 45.9% and 30.1% of net sales, respectively.
7
Most key vendors have agreements to provide market development funds to the
Company, whereby such vendors finance portions of the cost of catalog
publication and distribution based upon the amount of coverage given in the
catalogs for their products. Termination or interruption of the Company's
relationships with its vendors, or modification of the terms of or
discontinuance of the Company's agreements with its vendors, could adversely
affect the Company's operating results. The Company's success is, in part,
dependent upon the ability of its vendors to develop and market products that
meet the changing requirements of the marketplace. As is customary in the
industry, the Company has no long-term supply contracts with any of its vendors.
Substantially all of the Company's contracts with its vendors are terminable
upon 30 days' notice or less.
The Company attempts to manage its inventory position to generate the
highest levels of customer satisfaction possible while limiting inventory risk.
The Company believes that it has increased its ability to provide constrained
products, an important competitive advantage, and the Company invested in this
strategy heavily during 1996. The Company's average annual inventory turns were
10.5 times during 1994 and 1995, and 7.7 times in 1996. Inventory turns were
higher in 1994 and 1995 primarily due to rapid growth in sales which lowered the
average inventory levels for those years. Inventory levels may vary from period
to period, due in part to increases or decreases in sales levels, the Company's
practice of making large-volume purchases when it deems the terms of such
purchases to be attractive and the addition of new manufacturers and products.
The Company has negotiated agreements with many of its vendors which contain
price protection provisions intended to reduce, in part, the Company's risk of
loss due to manufacturer price reductions. In addition, with many of its
vendors, the Company has the right to return a certain percentage of purchases,
subject to certain limitations.
The market for personal computers, peripherals and software is
characterized by rapid technological change and a growing diversity of products.
The Company's success depends in large part on its ability to identify and
obtain the right to market products that will meet the changing requirements of
the marketplace and to obtain sufficient quantities of product to meet changing
demands. There can be no assurance that the Company will be able to identify and
offer products necessary to remain competitive or avoid losses related to excess
or obsolete inventory.
DISTRIBUTION
The Company operates a full-service distribution center in Memphis,
Tennessee. The distribution center consists of over 220,000 square feet, and was
opened during the fourth quarter of 1995. On May 1, 1997, the Company is
obligated to lease an additional 105,000 square feet of the existing
distribution center building, which the Company plans to sublease. The
centralized distribution operations, strategically located near the Federal
Express hub in Memphis, allow most orders of in-stock product accepted by 11:00
p.m. eastern standard time to be shipped for delivery by 10:30 a.m. the
following day via Federal Express and other overnight delivery services. Upon
request, orders may also be shipped at a lower cost by United Parcel Ground
Service and are shipped on the same day if orders are accepted by 5:00 p.m.
When an order is entered into the system, a computer credit check or credit
card verification is performed and, if approved, the order is electronically
transmitted to the warehouse area and a packing slip is printed for order
fulfillment. All inventory items are bar coded and located in computer-
designated areas which are easily identified on the packing slip. All orders are
checked with bar code scanners prior to final packing to ensure that each order
is packed correctly.
The Company believes that its existing distribution facility is currently
adequate for its needs.
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MANAGEMENT INFORMATION SYSTEMS
The Company has committed significant resources to the development of a
sophisticated computer system which is used to manage all aspects of its
business. The Company's computer system supports telemarketing, marketing,
purchasing, accounting, customer service, warehousing and distribution, and
allows the preparation of daily operating control reports which provide concise
and timely information regarding key aspects of its business. The system allows
the Company to, among other things, monitor sales trends, make informed
purchasing decisions and provide product availability and order status
information. The Company's retail showrooms utilize point of sale computer
terminals which are connected to the Company's main computer via dedicated
lines. In addition to the main computer system, the Company has a system of
networked personal computers, which facilitates data sharing. The Company also
applies its management information systems to the task of managing its
inventory. The Company currently operates its management information system
using a Hewlett Packard HP995 and has a back-up system available in the event of
a system failure. The Company believes that in order to remain competitive it
will be necessary to upgrade its management information systems on a continuing
basis.
The Company's success is in part dependent on the accuracy and proper
utilization of its management information systems, including its telephone
system. In addition to the costs associated with system upgrades, the
transition to and implementation of new or upgraded hardware or software systems
can result in system delays or failures. Any interruption, corruption,
degradation or failure of the Company's management information systems could
impact its ability to receive and process customer orders on a timely basis.
RETAIL COMPUTER SHOWROOMS
The Company operates four retail computer showrooms in Southern California,
ranging in size from approximately 3,400 to 20,000 square feet of retail sales
space. These showrooms offer customers over 2,500 in-stock products, consisting
of computer hardware, software, peripherals and accessories. The Company opened
its first retail computer showroom in 1987.
Sales in the Company's retail computer showrooms have been built through
the use of newspaper and catalog advertising, as well as periodic clearance
sales and promotions. The Company's showrooms offer customers broad product
selection, competitive prices and knowledgeable sales personnel.
The Company believes that its showrooms provide it with several competitive
advantages in addition to the increased economies of scale gained by their
additional sales volume. For example, the showrooms provide the Company's
marketing staff with valuable insights into computer sales trends and consumer
attitudes regarding computers through face-to-face experience with consumers.
The Company's ability to move excess product through the showrooms also improves
operating results. In addition, the Company has a direct sales force located in
two showrooms that sell to local corporate customers.
While the showrooms are an important part of the Company's overall
marketing strategy, the Company has no plans to expand their operations and may
relocate certain showrooms in the future based on considerations such as lease
expirations, economic conditions and the performance of individual showrooms.
The Company has decided to focus its expansion efforts and resources on the
direct mail channel of distribution.
COMPETITION
The retail business for personal computers and related products is highly
competitive. The Company competes with other direct marketers, including
MicroWarehouse, CDW Computer Centers, Multiple Zones, Insight Direct, PCs
Compleat, PC Connection and Global Direct. In addition, the
9
Company competes with computer retail stores and resellers including superstores
such as CompUSA and Micro Center, corporate resellers such as Compucom, Entex,
Vanstar and Ameridata, certain hardware and software vendors such as Gateway
2000 and Dell Computer which sell directly to end users, and other direct
marketers of hardware, software and computer-related products. Barriers to entry
are relatively low in the direct marketing industry and the risk of new
competitors entering the market is high. The markets in which the Company's
retail showrooms operate are also highly competitive. The Company's retail
showrooms compete with national chains of computer and consumer electronics
retailers, such as CompUSA, Computer City, Micro Center, Circuit City and Best
Buy, as well as with smaller retail operations and direct marketers of computers
and computer products. Certain national computer resellers also have established
or acquired their own direct marketing operations.
The manner in which personal computers, software and related products are
distributed and sold is changing, and new methods of sales and distribution have
emerged, such as the Internet. Technology now allows software vendors the
ability to sell and download programs directly to consumers, if so desired. In
addition, in recent years the industry has generated a number of new, cost-
effective channels of distribution such as computer superstores, consumer
electronic and office supply superstores, national direct marketers and mass
merchants. Computer resellers are consolidating operations and acquiring or
merging with other resellers to achieve economies of scale and increased
efficiency. In addition, traditional retailers have entered and may increase
their penetration into the direct mail channel. The current industry
reconfiguration and the trend toward consolidation could cause the industry to
become even more competitive, further increase pricing pressures and make it
more difficult for the Company to maintain its operating margins or to increase
or maintain the same level of net sales or gross profit.
Although many of the Company's competitors have greater financial resources
than the Company, the Company believes that its ability to offer the consumer a
wide selection of products, at low prices, with prompt delivery and a high level
of customer service, and its good relationships with its vendors and suppliers,
allow it to compete effectively. There can be no assurance that the Company can
continue to compete effectively against existing or new competitors that may
enter the market. The Company believes that competition may increase in the
future, which could require the Company to reduce prices, increase advertising
expenditures or take other actions which may have an adverse effect on the
Company's operating results.
EMPLOYEES
As of December 31, 1996, the Company employed 847 full-time people,
including 116 people at the Company's retail computer showrooms and 164 at its
distribution center. The Company emphasizes the recruiting and training of high
quality personnel and, to the extent possible, promotes people to positions of
increased responsibility from within the Company. Each employee initially
receives training appropriate for his or her position, followed by varying
levels of training in computer technology. New account executives participate in
an intensive three week training program, during which time they are introduced
to the Company's philosophy, available resources, products and services.
Training for specific product lines and continuing education programs for all
employees are conducted on an ongoing basis, supplemented by vendor-sponsored
training programs for all sales executives and technical support personnel.
The Company's employees are generally compensated on a basis that rewards
performance and the achievement of identified goals. For example, sales
executives receive compensation pursuant to a commission schedule which is based
primarily upon aggregate gross profit dollars generated from their sales
efforts. Accounts receivable personnel are eligible for monthly bonuses based
upon certain collection criteria and late balances being held below targeted
levels, and inventory control personnel are eligible for monthly bonuses based
upon such factors as prompt vendor returns and order
10
fulfillment rates. The Company believes that these incentives positively impact
its performance and operating results.
The Company considers its employee relations to be good. None of the
Company's employees is represented by a labor union, and the Company has
experienced no work stoppages.
Since its formation, the Company has experienced rapid growth. As a result
of this growth, the Company has added a significant number of employees and has
been required to expend considerable effort in training these new employees.
PROPERTIES
The Company's facilities are as follows:
Description Sq.Ft. Location
- ----------- -------- -------------
Corporate headquarters............. 83,700 Torrance, CA
Telemarketing...................... 34,000 Los Angeles,CA
Distribution Center................ 220,000* Memphis, TN
Retail showroom #1................. 9,620 Santa Monica, CA
Retail showroom #2................. 20,000 San Diego, CA
Retail showroom #3................. 6,751 Lawndale, CA
Retail showroom #4................. 3,400 Lake Forest, CA
*On May 1, 1997 the Company's lease provides that it will take an
additional 105,000 square feet at the existing distribution center. The Company
is currently seeking to sublease that space.
The Company leases all of its facilities, except for its Santa Monica
retail showroom. In addition, the Company leases an additional 3,300 square feet
adjacent to its Santa Monica retail showroom. Except for the lease relating to
the Company's retail computer showroom in Lake Forest, all of the leases have
remaining terms in excess of two years.
The Company's distribution center serves both the Company's catalog
operations and the Company's retail showrooms. The Memphis facility includes
shipping, receiving, warehousing, and administrative space. The Company's
corporate headquarters consists of approximately 24,000 square feet of office
space and 60,000 square feet of warehouse space. The warehouse space has been
used to stage inventory prior to shipment to the Company's retail showrooms. The
Company also leases 34,000 square feet of space near its headquarters for its
telemarketing operations.
The Company believes that its existing Memphis facility is adequate for its
current needs; however, due to planned growth, its headquarters and
telemarketing facilities are not adequate. The Company has the ability to
terminate its existing headquarters and telemarketing leases with minimal
expense, and is presently looking for a larger facility to lease in the same
general area that will allow it to house all of its headquarters and
telemarketing operations under one roof if it so chooses.
11
REGULATORY AND LEGAL MATTERS
The direct response business as conducted by the Company is subject to the
Merchandise Mail Order Rule and related regulations promulgated by the Federal
Trade Commission and laws or regulations directly applicable to access to or
commerce on the Internet. While the Company believes it currently is in
compliance with such laws and regulations and has implemented programs and
systems to address its ongoing compliance with such regulations, no assurances
can be given that new laws or regulations will not be enacted or adopted which
might adversely affect the Company's operations. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet. The growth and
development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any additional
laws or regulations may decrease the growth of the Internet, which, in turn,
could decrease the demand for and growth of the Company's Internet-based sales.
The Company currently collects and remits sales tax only on sales of
products to residents of the states of California and Tennessee. Various states
have sought to impose on direct marketers the burden of collecting state sales
taxes on the sale of products shipped to those states' residents and it is
possible that such a requirement could be imposed in the future.
There are no material legal proceedings pending against the Company.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and
positions are as follows as of March 25, 1997:
Name Age Position
---- --- --------
Frank F. Khulusi............ 30 Chairman of the Board, President and
Chief Executive Officer
Richard M. Finkbeiner....... 50 Chief Financial Officer
Daniel J. DeVries........... 35 Executive Vice President - Marketing
David R. Burcham............ 32 Executive Vice President-Operations and
Sales
The following is a biographical summary of the experience of the executive
officers:
Frank F. Khulusi is a co-founder of the Company and has served as Chairman
of the Board, President and Chief Executive Officer of the Company since the
Company's inception.
Richard M. Finkbeiner joined the Company in June 1996 as Chief Financial
Officer. From January 1996 to June 1996 he was Chief Financial Officer for
Petro Stopping Centers, a national travel plaza retailer. Prior to that he was
Chief Financial Officer for NordicTrack, a direct marketer and retailer of
fitness equipment, from 1993 to 1996. From 1989 to 1993 he was Chief Financial
Officer for Current, Inc., a direct marketer of greeting cards, and from 1984 to
1989 he was Controller and then Chief Financial Officer for Fox Photo, a
photofinisher. Mr. Finkbeiner spent the first 12 years of his career with
Hallmark Cards, a manufacturer and retailer of social expression products.
12
Daniel J. DeVries has served as Executive Vice President since February
1996 and was Senior Vice President from October 1994 to that time. Mr. DeVries
is responsible for all marketing, including vendor co-op marketing,
merchandising, database marketing and Internet marketing. From April 1993 to
October 1994, he held various sales and marketing positions with the Company.
From July 1988 to April 1993, Mr. DeVries was a regional manager for Sun
Computers, a computer retailer.
David R. Burcham has served as Executive Vice President of Operations and
Sales since March 1997 and was Senior Vice President from February 1996 to that
time. Mr. Burcham is responsible for all sales, purchasing, distribution, MIS,
and retail showrooms. From June of 1990 to February of 1996, he held various
sales and operational positions for Multiple Zones International, Inc. including
Vice President of Sales and Vice President of Operations. Prior to that, he was
Vice President of Sales and Marketing for BID International, Inc., a publishing
and information services company.
CERTAIN FACTORS AFFECTING FUTURE RESULTS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for "forward-looking statements" to encourage companies to provide
prospective information, so long as such information is identified as forward
looking and is accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed in the statement. Except for historical information, certain
statements contained in this Annual Report on Form 10-K may be "forward-looking
statements" within the meaning of the Act. In order to take advantage of the
"safe harbor" provisions of the Act, the Company identifies the following
important factors which could affect the Company's actual results and cause such
results to differ materially from those projected, forecasted, estimated,
budgeted or otherwise expressed by the Company in "forward-looking statements"
made by or on behalf of the Company:
(1) The loss of a key vendor or decline in demand for products of a key
vendor, such as Apple, may reduce sales and adversely affect operating
results.
(2) Intense competition may lead to reduced prices and lower gross
margins.
(3) The Company's narrow margins magnify the impact on operating results
of variations in operating performance. A number of factors may reduce
the Company's margins even further.
(4) Seasonal variations in the demand for products and services, as well
as the introduction of new products, may cause variations in the
Company's quarterly results.
(5) The availability (or lack thereof) of capital on acceptable terms may
hamper the Company in its efforts to fund its increasing working
capital needs .
(6) The failure of the Company to adequately manage its growth may
adversely impact the Company's results of operations.
(7) A failure of the Company's information systems may adversely impact
the Company's results of operations.
(8) The loss of a key executive officer or other key employee may
adversely impact the Company's operations.
(9) The inability of the Company to obtain products on favorable terms may
adversely impact the Company's results of operations.
(10) The Company's operations may be adversely impacted by an acquisition
that is either (i) not suited for the Company or (ii) improperly
executed.
13
(11) The Company's financial condition may be adversely impacted by a
decline in value of a portion of the Company's inventory.
(12) The failure of certain shipping companies to deliver product to the
Company, or from the Company to its customers, may adversely impact
the Company's results of operations.
(13) Rapid technological change may alter the market for the Company's
products and services, requiring the Company to anticipate such
technological changes, to the extent possible.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect the Company and/or the microcomputer industry
as a whole. However, the discussion below discusses in more detail some of the
foregoing factors, as well as additional factors which may affect the Company's
actual results and cause such results to differ materially from those projected,
forecasted, estimated, budgeted or otherwise expressed in "forward-looking
statements."
Dependence on Apple
The Company is dependent on sales of Apple computers and software and
peripheral products used with Apple computers. Products manufactured by Apple
represented approximately 58.7%, 45.9% and 30.1% of the Company's net sales in
1994, 1995 and 1996, respectively. A decline in sales of Apple computers or a
decrease in supply of or demand for software and peripheral products for such
computers could have a material adverse impact on the Company's business. During
1996, certain Apple computers were in short supply. A continuation of such
shortages or future shortages could adversely affect the Company's operating
results. The Company is an authorized dealer for the full retail line of Apple
products; however, the Company's dealer agreement with Apple is terminable upon
30 days' notice. The Company's business would be adversely affected if all or a
portion of the line of Apple products were no longer available to the Company.
The Company's success is, in part, dependent upon the ability of Apple to
develop and market products that meet the changing requirements of the
marketplace. During 1995 and 1996, several companies began manufacturing, under
a license from Apple, computer hardware using the Macintosh operating system.
The Company anticipates that additional manufacturers will be licensed by Apple.
To the extent that these products are not available to the Company, the Company
could encounter increased price and other competition, which would adversely
affect operating results. The Company has had discussions with several licensees
of the Macintosh operating system, and has agreements with three such licensees
giving it the right to distribute certain products of such licensees. There can
be no assurance that the Company will be able to enter into distribution
agreements with other licensees or with respect to future products or that any
such agreements would be on terms favorable to the Company.
Rapid Growth
Since its formation, the Company has experienced rapid growth. Net sales
have grown from $8.7 million in 1990 to $445.0 million in 1996. The Company's
catalog sales grew from $37.8 million in 1993 to $ 387.1 million in 1996. As a
result of the Company's shift from the retail showroom to the catalog
distribution channel, retail showroom sales have decreased from 46.3% of net
sales in 1993 to 13.0% in 1996. In response to the growth in catalog sales, the
Company has rapidly added a significant number of employees and has been
required to expend considerable efforts in training these new employees. This
growth has placed strains on the Company's management, resources and facilities.
As part of its growth strategy, the Company may, in the future, acquire other
companies in the same or complementary lines of business. Any such acquisition
and the ensuing integration of the operations of the acquired company with those
of the Company would place additional demands on the Company's management,
operating and financial resources. The Company's success will, in part, be
dependent upon the ability of the Company to manage growth effectively. In
addition, the Company's business and growth could be affected by the spending
patterns of existing or prospective customers, the cyclical nature of capital
expenditures of businesses,
14
continued competition and pricing pressures, changes in the rate of development
of new technologies and new products by manufacturers, acceptance by end-users
and other trends in the general economy. There can be no assurance that the
Company's historical growth rates will continue in the future.
In connection with the Company's recent expansion into the WINTEL market,
the Company has obtained catalog sales authorizations or otherwise has the
ability to sell WINTEL products from certain major hardware manufacturers,
including IBM, Compaq, Hewlett-Packard, NEC, Sony, Digital Equipment, AST,
Hitachi, Toshiba, Texas Instruments, Fujitsu and others. Many of its current
vendors of peripherals, components, accessories and software also offer WINTEL
products. While the Company has been successful to date in becoming a major
catalog reseller of WINTEL products, no assurances can be given that the Company
will continue with its rapid growth.
Competition
The retail business for personal computers and related products is highly
competitive, based primarily on price, product availability, speed and accuracy
of delivery, effectiveness of sales and marketing programs, credit availability,
ability to tailor specific solutions to customer needs, quality and breadth of
product lines and services, and availability of technical or product
information. The Company competes with other direct marketers, including
MicroWarehouse, CDW Computer Centers, Multiple Zones, Insight Direct, PCs
Compleat, PC Connection and Global Direct. In addition, the Company competes
with computer retail stores and resellers, including superstores, such as
CompUSA and Micro Center, corporate resellers such as Compucom, Entex, Vanstar
and Ameridata, certain hardware and software vendors, such as Gateway 2000 and
Dell Computer, which sell directly to end users, and other direct marketers of
hardware, software and computer-related products. In the direct marketing
industry, barriers to entry are relatively low and the risk of new competitors
entering the market is high. The markets in which the Company's retail
showrooms operate are also highly competitive. The Company's retail showrooms
compete with national chains of computer and consumer electronics retailers,
such as CompUSA, Computer City, Micro Center, Circuit City and Best Buy, as well
as with smaller retail operations and direct marketers of computers and computer
products. Certain existing competitors of the Company have substantially greater
financial resources than the Company. There can be no assurance that the
Company can continue to compete effectively against existing competitors or new
competitors that may enter the market. In addition, price is an important
competitive factor in the personal computer hardware, software and peripherals
market and there can be no assurance that the Company will not be subject to
increased price competition, which may have an adverse effect on the Company's
operating results. There can be no assurance that the Company will not lose
market share or that it will not be forced in the future to reduce its prices in
response to the actions of its competitors and thereby experience a further
reduction in its gross margins.
Narrow Operating Margins
As a result of intense price competition in the microcomputer products
industry, the Company's margins have historically been narrow and are expected
to continue to be narrow. These narrow margins magnify the impact on operating
results of variations in operating costs and of adverse or unforeseen events.
15
Potential Quarterly Fluctuations
The Company experiences variability in its net sales and net income on a
quarterly basis as a result of many factors. These factors include the frequency
of catalog mailings, introduction of new catalogs such as DataCom Mall, the
introduction of new products or services by the Company and its competitors,
changes in prices from suppliers, the loss or consolidation of a significant
supplier or customer, general competitive conditions including pricing, the
Company's ability to control costs, the timing of capital expenditures, the
condition of the personal computer industry in general, seasonal shifts in
demand for hardware and software products, industry announcements and market
acceptance of new products or upgrades, including deferral of customer orders in
anticipation of new product applications, product enhancements or operating
systems, the relative mix of products sold during the period, inability of the
Company to obtain adequate quantities of products carried in its catalogs or
delays in the release by suppliers of new products and inventory adjustments.
The Company's planned operating expenditures each quarter are based on sales
forecasts for the quarter. If sales do not meet expectations in any given
quarter, operating results for the quarter may be materially adversely affected.
The Company's narrow margins may magnify the impact of these factors on the
Company's operating results. The Company believes that period-to-period
comparisons of its operating results should not be relied upon as an indication
of future performance. In addition, the results of any quarterly period are not
necessarily indicative of results to be expected for a full fiscal year. In
certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the market
price of the common stock would be materially adversely affected.
Dependence on Vendors
The Company purchases all of its products from vendors. Certain key
vendors, including IBM, Hewlett Packard and Apple, provide the Company with
trade credit as well as substantial incentives in the form of discounts, credits
and cooperative advertising. Most key vendors have agreements to provide or
otherwise have consistently provided market development funds to the Company,
whereby such vendors finance portions of the cost of catalog publication and
distribution based upon the amount of coverage given in the catalogs to their
respective products. Termination or interruption of the Company's relationships
with these vendors, including Apple, or modification of the terms or
discontinuance of the agreements with the Company, could adversely affect the
Company's operating income and cash flow. The Company's success is, in part,
dependent upon the ability of its vendors to develop and market products that
meet the changing requirements of the marketplace. Substantially all of the
Company's contracts with its vendors are terminable upon 30 days' notice or
less. In most cases, the Company has no guaranteed price or delivery
arrangements with its suppliers. As a result, the Company has experienced and
may in the future experience short-term inventory shortages on certain
products. In addition, manufacturers who currently sell their products through
the Company may decide to sell their products directly or through resellers or
channels other than the Company. Further, the personal computer industry
experiences significant product supply shortages and customer order backlogs
from time to time due to the inability of certain manufacturers to supply
certain products as needed. There can be no assurance that suppliers will be
able to maintain an adequate supply of products to fulfill the Company's
customers' orders on a timely basis or that the Company will be able to obtain
particular products or that a product line currently offered by suppliers will
continue to be available. Similarly, there can be no assurance that the Company
will be able to obtain authorizations from new vendors which may introduce new
products that create market demand.
Business Interruption; Facilities
The Company believes that its success to date has been, and future results
of operations will be, dependent in large part upon its ability to provide
prompt and efficient service to its customers. The Company has taken several
precautionary steps to help minimize the impact of disasters that might cause
business interruptions. However, any disruption of the Company's day-to-day
operations including those caused by natural disasters could have a material
adverse effect upon the Company
16
and any interruption, corruption, degradation or failure of the Company's
management information systems, distribution center or telephone system could
impair its ability to receive and process customer orders and ship products on a
timely basis. The Company does not have a redundant telephone system and does
not have a backup or redundant call center.
Changing Methods of Distribution
The manner in which personal computers and related software and products
are distributed and sold is changing, and new methods of sale and distribution,
such as the Internet, have emerged. Hardware and software vendors have sold, and
may intensify their efforts to sell, their products directly to end users. From
time to time, certain vendors have instituted programs for the direct sale of
large quantities of hardware and software to certain major corporate accounts.
These types of programs may continue to be developed and used by various
vendors. Vendors also may attempt to increase the volume of software products
distributed electronically to end users' personal computers. Any of these
competitive programs, if successful, could have a material adverse effect on the
Company's business and financial results.
Dependence on Independent Shipping Companies
The Company relies almost entirely on arrangements with independent
shipping companies, especially Federal Express, for the delivery of its
products. The disruption or termination of the Company's arrangements with
Federal Express or other shipping companies, or the failure or inability of one
or more shipping companies to deliver products from the Company to its
customers, or from suppliers to the Company, could have a material adverse
effect on the Company's business, financial condition or results of operations.
Postage, Shipping and Paper Costs
Postage and shipping are significant expenses in the operation of the
Company's business. The Company ships its products to customers by overnight
delivery and ground delivery services and generally mails its catalogs through
the U.S. Postal Service. As is customary in the direct response marketing
industry, the Company generally passes on only a portion of the costs of
overnight delivery and parcel shipments directly to customers as separate
shipping and handling charges. Any increases in postal or shipping rates in the
future could have an adverse effect on the Company's operating results. The cost
of paper is also a significant expense of the Company in printing its catalogs.
The cost of paper has fluctuated significantly over the last several years.
While the Company believes that it will be able to recoup a significant portion
of any increased postage and paper costs through increases in vendor advertising
rates, no assurance can be given that such advertising rate increases can be
sustained or that they will offset all of the increased costs.
Risk of Technological Changes and Inventory Obsolescence
The market for personal computers, peripherals and software is
characterized by rapid technological change and a growing diversity of products.
The recent growth in sales of personal computers and related software and
peripherals has been, in part, due to the introduction of new hardware and
software, including multimedia personal computer systems and upgraded Apple
computers. The Company's success depends in large part on its ability to
identify and obtain the right to market products that will meet the changing
requirements of the marketplace. In connection with the Company's recent entry
into the WINTEL, networking and data communications market, it will need to
continue to identify and purchase products from existing and new vendors for
which the Company does not have a purchasing history. There can be no assurance
that the Company will be able to identify and offer products necessary to remain
competitive or avoid losses related to excess and obsolete inventory. In 1994,
1995 and 1996, the Company recorded increases in its reserve for excess and
obsolete inventory of $234,000, $650,000 and $4,885,000, respectively. The
Company currently has return rights with respect to products which it purchases
from Apple, IBM, Compaq,
17
Hewlett Packard and certain other vendors; however, such rights vary by product
line, have other conditions and limitations and can be terminated or changed at
any time.
State Sales Tax Collection
The Company currently collects and remits sales tax only on sales of
products to residents of the states of California and Tennessee. Various states
have sought to impose on direct marketers the burden of collecting state sales
taxes on the sale of products shipped to those states' residents. The U.S.
Supreme Court has ruled that the various states, absent Congressional
legislation, may not impose tax collection obligations on an out-of-state mail
order company whose only contacts with the taxing state are distribution of
catalogs and other advertisement materials through the mail, and whose
subsequent delivery of purchased goods is by mail or interstate common carriers.
A New York Court of Appeals case imposed tax collection obligations on two
Vermont companies, one of which was a mail order company, whose contacts with
New York consisted of visiting the state several times a year to aid customers
or visiting showrooms stocking their goods. The Company believes its operations
are different from the operations of the companies in the New York case and thus
do not give rise to tax collection obligations. However, the Company cannot
predict the level of contact with any state which would give rise to future or
past tax collection obligations within the parameters of the Supreme Court case.
It is possible that federal legislation could be enacted that would permit
states to impose sales tax collection obligations on out-of-state mail order
companies and if enacted, the imposition of a tax collection obligation on the
Company may result in additional administrative expenses to the Company and
price increases to its customers that could adversely affect the Company.
Industry Evolution and Price Reductions
The personal computer industry is undergoing significant change. In
addition, in recent years a number of new, cost-effective channels of
distribution have developed in the industry, such as computer superstores,
consumer electronic and office supply superstores, national direct marketers and
mass merchants. Computer resellers are consolidating operations and acquiring or
merging with other resellers and/or direct marketers to achieve economies of
scale and increased efficiency. The current industry reconfiguration and the
trend towards consolidation could cause the industry to become even more
competitive, further increase pricing pressures and make it more difficult for
the Company to maintain its operating margins or to increase or maintain the
same level of net sales or gross profit. Declining prices, resulting in part
from technological changes, may require the Company to sell a greater number of
products to achieve the same level of net sales and gross profit. Such a trend
could make it more difficult for the Company to continue to increase its net
sales and earnings growth. In addition, the personal computer market has
experienced rapid growth. If the growth rate of the personal computer market
were to decrease, the Company's operating results could be adversely affected.
Management Information Systems
The Company's success is in part dependent on the accuracy and proper
utilization of its management information systems, including its telephone
system. The Company's ability to analyze data derived from its management
information systems to increase product promotions, manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, and to maintain cost-efficient operations are each
dependent upon the quality and utilization of the information generated by its
management information systems. During 1995, the Company significantly upgraded
its management information system hardware and software. The Company believes
that to remain competitive it will be necessary to upgrade its management
information systems on a continuing basis. In addition to the costs associated
with such upgrades, the transition to and implementation of new or upgraded
hardware or software systems can result in system delays or failures which could
impair the Company's ability to receive and process orders and ship products in
a timely manner. The Company does not currently have a redundant or back-up
18
telephone system, and any interruption in telephone service including those
caused by natural disasters could have a material adverse effect on the
Company's results of operations.
Dependence on Senior Management
The Company's future performance will depend to a significant extent upon
the efforts and abilities of certain key management personnel, including Frank
Khulusi, Chairman of the Board, President and Chief Executive Officer. The
Company has a $3 million key man life insurance policy on Mr. Khulusi. The loss
of service of one or more of the Company's key management personnel could have
an adverse effect on the Company's business. The Company's success and plans for
future growth will also depend in part on management's continuing ability to
hire, train and retain skilled personnel in all areas of its business.
Management of Growth
The rapid growth of the Company's business has required the Company to make
significant recent additions in personnel and has significantly increased the
Company's working capital requirements. Although the Company has experienced
significant sales growth in recent years, such growth should not be considered
indicative of future sales growth. Such growth has resulted in new and
increased responsibilities for management personnel and has placed and
continues to place significant strain upon the Company's management, operating
and financial systems, and other resources. There can be no assurance that this
strain will not have a material adverse effect on the Company's business,
financial condition, and results of operations, nor can there be any assurance
that the Company will be able to attract or retain sufficient personnel to
continue the expansion of its operations. Also crucial to the Company's success
in managing its growth will be its ability to achieve additional economies of
scale. There can be no assurance that the Company will be able to achieve such
economies of scale, and the failure to do so could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Potential Acquisitions
As part of its growth strategy, the Company may pursue the acquisition of
companies that would either complement or expand its existing business.
Acquisitions involve a number of risks and difficulties, including expansion
into new geographic markets and business areas, the diversion of management's
attention to the assimilation of the operations and personnel of the acquired
company, the integration of the acquired company's management information
systems with those of the Company, potential short-term adverse effects on the
Company's operating results and the amortization of acquired intangible assets.
Possible Volatility of Stock Price
The Company believes certain factors, such as sales of Common Stock into
the market by existing stockholders, fluctuations in quarterly operating results
and market conditions generally, including market conditions affecting stocks of
computer hardware and software manufacturers and resellers in particular, and
other technology or related stocks, could cause the market price of the Common
Stock to fluctuate substantially. The stock market in general, and the stocks of
computer and software resellers in particular, and other technology or related
stocks, has in the past experienced extreme price and volume fluctuations which
have been unrelated to corporate operating performance. Such market volatility
may adversely affect the market price of the Common Stock.
ITEM 2. PROPERTIES
See "Properties" in Item 1 above.
19
ITEM 3. LEGAL PROCEEDINGS
Various claims and actions, considered normal to the Company's business,
have been asserted and are pending against the Company. The Company believes
that such claims and actions should not have any material adverse effect upon
the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National
Market since the Company's initial public offering on April 4, 1995 (the "IPO").
Prior to the IPO, there was no public market for the Company's Common Stock. The
following table sets forth the range of high and low closing sales prices for
the Common Stock for the periods indicated, as reported by the Nasdaq National
Market.
Price Range of
Common Stock
-----------------
High Low
------- -------
Year Ended December 31, 1995
- ----------------------------
Second Quarter (from April 4, 1995)............. $29 1/2 $22 1/4
Third Quarter................................... 33 24 1/2
Fourth Quarter.................................. 29 3/4 16
Year Ended December 31, 1996
- ----------------------------
First Quarter................................... 18 3/4 6 3/4
Second Quarter.................................. 10 5/8 6
Third Quarter................................... 9 7/8 4 1/2
Fourth Quarter.................................. 11 3/4 7 5/16
On March 14, 1997, the closing price of the Company's Common Stock as
reported on the Nasdaq National Market was $5 per share. As of March 14, 1997,
there were approximately 50 holders of record of the Common Stock.
The Company has never paid and has no present plans to pay any cash
dividends on its capital stock. The Company intends to retain its earnings to
finance the growth and development of its business.
The Company announced in July 1996 that, depending on various factors
including market price, it would repurchase up to 1,000,000 shares of its stock.
The Company has repurchased 15,000 shares to date under this program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
herein. The selected income statement data for the years ended December 31,
1994, 1995
20
and 1996 and the selected balance sheet data as of December 31, 1995 and 1996
are derived from the Company's audited consolidated financial statements which
are included elsewhere herein. The selected income statement data for the years
ended December 31, 1992 and 1993 along with the balance sheet data as of
December 31, 1992, 1993 and 1994 are derived from the audited consolidated
financial statements of the Company which are not included herein. The selected
operating data are derived from the accounting records of the Company and have
not been audited.
Year Ended December 31,
-------------------------------------------------------
(in thousands, except per share data)
-----------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
Income Statement Data:
Net sales................................................ $37,695 $70,406 $163,706 $420,877 $444,971
Cost of goods sold....................................... 31,911 59,235 140,229 361,803 395,000
------- ------- -------- -------- --------
Gross profit............................................. 5,784 11,171 23,477 59,074 49,971
Selling, general and administrative expenses............. 5,600 11,389 19,384 48,455 60,585
Expenses associated with the relocation of the
Company's distribution center........................... -- -- -- 1,389 --
------- ------- -------- -------- --------
Income (loss) from operations before interest,
income taxes and cumulative effect of change in
accounting principle.................................... 184 (218) 4,093 9,230 (10,614)
Interest income (expense)................................ (77) (501) (759) 371 593
------- ------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle................ 107 (719) 3,334 9,601 (10,021)
Income taxes (benefit)................................... 43 (294) 1,328 3,754 (3,972)
------- ------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle................................. 64 (425) 2,006 5,847 (6,049)
Cumulative effect of change in accounting for
income taxes........................................... 526 -- -- -- --
------- ------- -------- -------- --------
Net income (loss)........................................ $590 $(425) $2,006 $5,847 $(6,049)
======= ======= ======== ======== =========
Net income (loss) per share.............................. $0.08 $(0.06) $0.29 $0.65 $(0.62)
======= ======= ======== ======== =========
Weighted average number of shares outstanding............ 6,983 6,983 6,983 9,021 9,767
======= ======= ======== ======== =========
SELECTED OPERATING DATA (IN THOUSANDS, EXCEPT
AVERAGE ORDER SIZE):
Mail order/catalog net sales............................. $17,196 $37,837 $117,863 $353,324 $387,103
Retail net sales......................................... $20,499 $32,569 $45,843 $67,553 $57,868
Number of catalogs distributed........................... -- 190 7,700 38,398 48,800
Orders filled (mail order/catalog)....................... 39 50 194 784 931
Average order size (mail order/catalog).................. $441 $757 $608 $451 $416
Mailing list size........................................ 107 151 397 1,300 2,518
BALANCE SHEET DATA (AT PERIOD END)(IN THOUSANDS):
Working capital (deficit)................................ $ (360) $(4,122) $161 $46,307 $42,600
Total assets............................................. 9,865 20,907 42,942 112,569 113,431
Short-term debt.......................................... 956 3,285 4,190 281 283
Long-term debt, excluding current portion................ 540 1,342 1,878 589 325
Subordinated debt........................................ -- -- 2,950 -- --
Stockholders' equity (deficit)........................... (741) (1,166) 890 56,560 52,805
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
OVERVIEW
The Company began operations in May 1987 as a mail-order company and then
opened its first retail computer showroom in August 1987 and a second showroom
in 1988. These showrooms and mail-order operations primarily offered Commodore
Amiga personal computers and related products. After opening its first retail
store, the Company conducted mail order operations from one of its retail
showroom locations. The Company became an authorized Apple dealer in 1991,
opened two additional retail computer showrooms in the second quarter of 1993
and relocated and expanded an existing showroom in the fourth quarter of 1993.
Net sales from the Company's retail computer showrooms as a percentage of net
sales were 28.0%, 16.0% and 13.0% in 1994, 1995 and 1996, respectively.
In the fourth quarter of 1993, the Company shifted its principal
distribution and marketing focus from retail showrooms to direct mail marketing
distribution and relocated its mail order/catalog operations to a central
location. In March 1994, the Company received authorization from Apple to offer
the full retail line of Apple products via direct mail and the Company
distributed the first edition of its MacMall catalog in April 1994. During 1994,
the Company mailed five editions of its MacMall catalog with a total circulation
of approximately 7.7 million to previous and potential customers. During 1995,
the Company distributed ten editions of its MacMall catalog with a total MacMall
circulation of approximately 27.3 million. In 1996, total MacMall circulation
increased to 30.3 million with thirteen editions.
In May 1995, the Company distributed its first PC Mall catalog focusing on
the WINTEL personal computer market. During 1995, the Company distributed seven
PC Mall catalogs to approximately 11.1 million previous and prospective
customers. In 1996, the Company distributed thirteen PC Mall catalogs with a
total circulation of 15.3 million. In January 1996, the Company mailed its first
DataCom Mall catalog and distributed 3.2 million DataCom Mall catalogs in 1996.
All catalogs feature new products and contain detailed information about
product capabilities, specifications, key features and system requirements.
Net sales from mail order/catalog operations, as a percentage of net sales,
were 72.0%, 84.0% and 87.0% in 1994, 1995 and 1996, respectively, with average
order size being $608, $451 and $416 for those same respective years. The
decrease in average order size is primarily the result of the Company's
implementation of its strategy to increase, on a percentage of sales basis, its
sales of software and peripheral products which on average sell at lower prices
than computer systems but carry higher margins.
Net sales of the Company are derived primarily from the sale of personal
computer hardware, software, peripherals and accessories to individual
consumers, home offices, small businesses and large corporations through direct
response catalogs, dedicated inbound and outbound telemarketing sales
executives, retail showrooms and advertising on the Internet. Gross profit
consists of net sales less product and shipping costs. The Company receives
marketing development funds ("MDF") from manufacturers of products included in
the Company's catalogs, as well as co-operative advertising funds ("Co-Op") on
products purchased from manufacturers and vendors.
22
The Company is dependent on sales of Apple computers and software and
peripheral products used with Apple computers. Products manufactured by Apple
represented approximately 58.7%, 45.9% and 30.1% of the Company's net sales in
1994, 1995 and 1996, respectively.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated information derived
from the Company's consolidated statement of operations expressed as a
percentage of net sales. There can be no assurance that trends in sales growth
or operating results will continue in the future.
Percentage of Net Sales
-----------------------
Year Ended December 31,
1994 1995 1996
----- ----- -----
Net sales........................................ 100.0% 100.0% 100.0%
Cost of goods sold............................... 85.7 86.0 88.8
----- ----- -----
Gross profit..................................... 14.3 14.0 11.2
Selling, general and administrative expenses..... 11.8 11.5 13.6
Expenses associated with the relocation of the
Company's distribution center................... --- 0.3 ---
----- ----- -----
Income (loss) from operations.................... 2.5 2.2 (2.4)
Interest income (expense)........................ (0.5) 0.1 0.1
----- ----- -----
Income (loss) before income taxes................ 2.0 2.3 (2.3)
Income taxes (benefit)........................... 0.8 0.9 (0.9)
----- ----- -----
Net income (loss)................................ 1.2% 1.4% (1.4)%
===== ===== =====
The Company markets its products through the distribution of catalogs,
outbound telemarketing, retail showrooms and the Internet . Net sales from the
Company's mail order/catalog operations were $117.9 million, $353.3 million and
$387.1 million for the years ended December 31, 1994, 1995 and 1996,
representing 72.0%, 84.0% and 87.0% of net sales, respectively. Net sales from
the Company's retail showroom operations were $45.8 million, $67.6 million and
$57.9 million for the years ended December 31, 1994, 1995 and 1996, representing
28.0%, 16.0% and 13.0% of net sales, respectively. Merchandise sold through both
channels of distribution is similarly priced and many retail customers also
purchase items through catalogs. Gross profit as a percentage of net sales for
the Company's mail order/catalog operations was 14.0%, 14.1% and 11.7% for the
years ended December 31, 1994 , 1995 and 1996, respectively. Gross profit as a
percentage of net sales for the Company's retail showroom operations was 15.2%,
13.6% and 8.1% for the years ended December 31, 1994, 1995 and 1996,
respectively. Income (loss) from operations for mail order/catalog operations
for the years ended December 31, 1994, 1995 and 1996 was $3.8 million, $8.6
million and $(7.4) million, or 3.2%, 2.4% and (1.9)% of net mail order/catalog
sales, respectively, after deducting the direct costs of mail order/catalog
operations and allocating indirect and corporate costs based on relative sales.
Income (loss) from operations for retail showroom operations for the years ended
December 31, 1994, 1995 and 1996 was $0.3 million, $0.6 million and $(3.2)
million, or 0.7%, 0.9% and (5.5)% of net retail sales, respectively, after
deducting the direct costs of retail showroom operations and allocating indirect
and corporate costs based on relative sales. The computation of income from
operations excludes non-operating income and expenses and income taxes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 were $445.0 million, an
increase of $24.1 million or 5.7% over net sales for the year ended December 31,
1995 of $420.9 million. Mail order/catalog sales for 1996 were $387.1 million,
an increase of $33.8 million or 9.6% over 1995 mail order/catalog
23
sales of $353.3 million. The increase in net sales was primarily due to an
increase in the number of catalogs distributed during the year, the growth from
the PC Mall catalog and the introduction of the DataCom Mall Catalog. The
Company distributed approximately 48.8 million catalogs during 1996, of which
MacMall comprised 30.3 million, PC Mall 15.3 million and DataCom Mall 3.2
million. This compared to 38.4 million catalogs distributed in 1995. Retail net
sales in 1996 were $57.9 million, a decline of $9.7 million or 14.3% from retail
net sales of $67.6 million in 1995. WINTEL net sales increased 136% to $102.4
million in 1996 versus $43.3 million in 1995. WINTEL net sales for 1996
comprised 23.0% of total net sales as compared to 10.3% in 1995. By December
1996, WINTEL net sales comprised almost 30% of total Company net sales.
Gross profit for the year ended December 31, 1996 was $50.0 million, a
decrease of $9.1 million or 15.4% from gross profit of $59.1 million for the
year ended December 31, 1995. Gross profit as a percentage of net sales was
11.2% in 1996 versus 14.0% in 1995. The decrease in gross profit dollars was
primarily due to $7.5 million in write-offs in the first and second quarters due
to unusually high theft and inventory shrinkage associated with the Company's
warehouse move in late 1995, an increase in inventory reserves for slow moving
and excessive inventory, and reserves established for products returned to
vendors for which the Company did not get paid. Excluding these write-offs,
gross profit margin for 1996 would have been 12.9% versus 14.0% in 1995. The
remaining decline in gross profit margin was primarily the result of WINTEL
products comprising a larger percentage of the Company's total net sales.
Typically, WINTEL products carry a lower profit margin than Apple and Macintosh
compatible products.
Selling, general and administrative (SG&A) expenses were $60.6 million for
the year ended December 31, 1996, an increase of $12.1 million or 25.0% over
SG&A expenses of $48.5 million for the year ended December 31, 1995 that
excluded a one time charge associated with the relocation of the Company's
distribution center. As a percentage of net sales, SG&A expenses were 13.6% in
1996 versus 11.5% in 1995. Approximately $4.0 million of the $12.1 million
increase was due to one time charges in the first and second quarters of 1996
relating to unusually high credit card losses including external fraud and those
caused by an error generated by a minor software update installed in the first
quarter, which allowed some customer orders to bypass the Company's fraud review
system, and an increase in reserves for past due accounts. Excluding these
charges, SG&A for 1996 would have been 12.7% versus 11.5% in 1995. The remaining
increase in SG&A as a percentage of net sales was primarily due to an increase
in personnel costs associated with the strengthening of the Company's management
team and laying the foundation for future growth. Net advertising expense as a
percentage of net sales declined in 1996 versus 1995.
During 1995, the Company incurred approximately $1.4 million in expenses,
or 0.3% of net sales, associated with the relocation of its distribution center
to Memphis, Tennessee from its headquarters in Torrance, California. These
charges primarily related to duplicative labor, freight and certain other costs
associated with operating dual warehouse facilities while starting operations in
Memphis.
Interest income (net of interest expense) was $0.6 million in 1996 compared
to $0.4 million in 1995. The increase was due to higher average cash balances
invested in securities in 1996. During 1995, the Company received a total of
$46.6 million in net proceeds from an initial public offering in April 1995 and
its follow-on offering in August 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Net sales increased by $257.2 million, or 157.1%, to $420.9 million for the
year ended December 31, 1995 from $163.7 million for the year ended December 31,
1994. Mail order/catalog sales increased by $235.4 million, or 199.7%, to $353.3
million from $117.9 million in 1994. The increase in net sales was primarily
attributable to an increase in the number of catalogs distributed during the
year, an increase in the average number of pages in each catalog, and the
introduction of the Company's PC Mall catalog. The Company distributed
approximately 38.4 million catalogs during the year ended December 31, 1995,
including approximately 27.3 million MacMall catalogs as
24
compared to approximately 7.7 million MacMall catalogs 1994. The Company also
experienced growth in net sales at its retail showrooms of $21.8 million, or
47.4%, to $67.6 million in 1995 from $45.8 million in 1994.
Gross profit increased by $35.6 million, or 151.6%, to $59.1 million for
the year ended December 31, 1995 from $23.5 million in 1994 as a result of the
increase in net sales. Gross profit as a percentage of net sales decreased to
14.0% for 1995 from 14.3% for 1994. The decrease in gross profit margin was the
result of a shift in the Company's product mix to a higher proportion of WINTEL
products which typically have a lower gross profit as a percentage of sales as
compared to Apple products, and sales associated with the introduction of
Microsoft Windows 95 and companion software products in the third quarter of
1995 which were at lower margins than historical levels. The Company shipped
approximately 33,000 Windows 95 and Microsoft brand Windows 95 products during
the third quarter of 1995. Corporate sales, which typically have a lower gross
margin, also continued to increase in 1995, representing over 15% of the
Company's net sales in 1995.
Selling general and administrative (SG&A) expenses increased by $29.1
million, or 150.0% to $48.5 million for the year ended December 31, 1995 from
$19.4 million in the prior year. As a percentage of net sales, SG&A expenses,
excluding one time charges associated with the relocation of the Company's
distribution center, decreased to 11.5% from 11.8% for 1994. The decrease as a
percentage of net sales was the result of the Company's increased net sales. The
increase in SG&A expenses was primarily attributable to an increase in personnel
costs associated with the increased sales volume and an increase in advertising
costs resulting from increased catalog circulation.
During 1995, the Company also incurred approximately $1.4 million in
expenses, or 0.3% of net sales, associated with the relocation of its
distribution center to Memphis, Tennessee from its headquarters in Torrance,
California. These one time charges primarily related to duplicative labor,
freight and rent costs associated with operating dual warehouse facilities while
starting operations in Memphis.
Interest income (net of interest expense) increased by $1.1 million or
148.9%, to $371,000 from ($759,000) in 1994. The increase in interest income was
primarily due to interest received on funds from the Company's initial public
offering in April 1995 and its follow-on offering in August 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital need has been funding the working capital
requirements created by its rapid growth in sales. Historically, the Company's
primary sources of financing have been borrowings from its stockholders, private
investors and financial institutions. In April and August 1995, the Company
completed an initial public offering and a follow-on offering of its common
stock which resulted in net proceeds to the Company of approximately $46.6
million. Cash flows from operations were $(767,000), $(12,790,000) and
$(7,789,000) for 1994, 1995 and 1996, respectively. Cash flows from operations
were negative primarily due to investments in inventory and accounts receivable
necessitated by the rapid sales growth of the Company, including those
associated with the introduction of the Company's MacMall, PC Mall and DataCom
Mall catalogs.
Inventories increased $3.1 million to $55.1 million at December 31, 1996
from $52.0 million at December 31, 1995 as a result of increased sales, the
purchase of inventory for PC Mall and DataCom Mall and opportunistic buys.
Accounts receivable increased $1.6 million during the year ended December 31,
1996 to $19.9 million primarily due to the Company's effort to target open
account sales to corporate customers and expand the sale of advertising space in
its catalogs.
During the year ended December 31, 1996, the Company's capital expenditures
were $2.1 million as compared to $7.9 million in 1995, primarily for
distribution and computer equipment. The Company's primary capital needs will
continue to be funding its working capital requirements for anticipated sales
growth.
25
The Company has an existing credit facility of up to $50.0 million with a
financial institution. As of December 31, 1996, the Company had $23.0 million
outstanding under this credit facility. The credit facility functions like a
trade payable for financing inventory purchases and is included in accounts
payable. The revolving credit line is cancelable upon 30 days' or less advance
notice and does not bear interest if paid within 60 days of the date inventory
is purchased. The credit facility is secured by substantially all of the
Company's assets and contains certain covenants which require the Company to
maintain a minimum level of subordinated debt plus tangible net worth of $25
million. At December 31, 1996, the Company had approximately $50 million of
subordinated debt plus tangible net worth.
At December 31, 1996, the Company had cash and short term investments of
over $17.8 million and working capital of $42.6 million.
The Company believes that current working capital, together with cash flows
from operations and available lines of credit, will be adequate to support the
Company's current operating plans through 1997. However, if the Company needs
extra funds, such as for acquisitions or expansion, there are no assurances that
adequate financing will be available at acceptable terms.
As part of its growth strategy, the Company may, in the future, acquire
other companies in the same or complementary lines of business. Any such
acquisition and the ensuing integration of the operations of the acquired
company with those of the Company would place additional demands on the
Company's management, operating and financial resources. The Company is engaged
in ongoing evaluation of and discussions with third parties regarding potential
acquisitions and from time to time has submitted, and may in the future submit,
proposals with respect to such potential acquisitions. The Company currently has
no definitive agreements with respect to any such acquisitions.
INFLATION
Inflation has not had a material impact upon operating results, and the
Company does not expect it to have such an impact in the near future. There can
be no assurances, however, that the Company's business will not be so affected
by inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes to consolidated financial
statements and report of independent accountants required hereunder are indexed
on page F-1 of this report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth under the
caption "Election of Directors," in the Company's definitive Proxy Statement to
be filed in connection with its 1997 Annual Meeting of Stockholders and such
information is incorporated herein by reference. A list of executive officers of
Registrant is included in Part I of this report.
26
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file an initial report of ownership on
Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission (the "Commission"). Such officers, directors and 10% stockholders
are also required by the Commission rules to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for such persons, the Company believes that during 1996 all Section
16(a) filing requirements applicable to its officers, directors and 10%
stockholders were complied with, except that one of the Company's directors, Sam
Khulusi, filed a late Form 3 regarding the purchase of 150,000 shares.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation and Other Information" in the Company's definitive Proxy
Statement to be filed in connection with its 1997 Annual Meeting of Stockholders
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement to be filed in connection with its 1997
Annual Meeting of Stockholders and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Executive Compensation and Other Information -- Certain Relationship and
Related Transactions and Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Stockholders and such information is
incorporated herein by reference.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following consolidated financial statements of Registrant are filed as
part of this report:
Page
----
(a)(1) Consolidated Financial Statements
---------------------------------
(1) Report of Independent Accountants - Price Waterhouse LLP F-2
(2) Consolidated Balance Sheet at December 31, 1996 and 1995 F-3
(3) Consolidated Statement of Operations for the Years Ended F-4
December 31, 1996, 1995 and 1994
(4) Consolidated Statement of Stockholders' Equity F-5
for the Years Ended December 31, 1996, 1995 and 1994
(5) Consolidated Statement of Cash Flows for the Years F-6
Ended December 31, 1996, 1995 and 1994
(6) Notes to the Consolidated Financial Statements F-7
(2) Financial Statement Schedules
-----------------------------
SCHEDULE II - Valuation and Qualifying Accounts F-17
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
consolidated financial statements and notes thereto.
(3) Exhibits
--------
Reference is made to the Exhibit Index immediately preceding the
exhibits hereto for the exhibits included herein.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fourth
quarter of the year ended December 31, 1996.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Torrance,
State of California, on March 27, 1997.
CREATIVE COMPUTERS, INC.
By: FRANK F. KHULUSI
-------------------------
Frank F. Khulusi
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- -----
FRANK F. KHULUSI Chairman of the Board of March 27, 1997
- -------------------------------- Directors, President and
Frank F. Khulusi Chief Executive Officer
(Principal Executive Officer)
RICHARD M. FINKBEINER Chief Financial Officer March 27, 1997
- -------------------------------- (Principal Financial and
Richard M. Finkbeiner Accounting Officer)
SAM U. KHULUSI* Director March 27, 1997
- --------------------------------
Sam U. Khulusi
AHMED O. ALFI* Director March 27, 1997
- --------------------------------
Ahmed O. Alfi
AL S. JOSEPH* Director March 27, 1997
- --------------------------------
Al S. Joseph
*By Richard M. Finkbeiner
Attorney-in-Fact
29
CREATIVE COMPUTERS, INC.
Exhibit Index
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
10.1 1994 Stock Incentive Plan and form of stock option agreement*
10.2 Employment Agreement dated January 1, 1995, between Creative Computers,
Inc. and Frank F. Khulusi*
10.4 Employment Agreement dated January 1, 1994, between Creative
Computers, Inc. and Dan DeVries*
10.5 Standard Industrial/Commercial Single-Tenant Lease-Net dated February 10,
1993 between Herman Platt and Marjorie Platt, as Co-Trustees of the Herman Platt
and Marjorie Platt Trust dated October 11, 1985 and Creative Computers, Inc. for
the premises located at 2645 Maricopa Street, Torrance, California**
10.6 ITT Commercial Financial Corporation ("ITT") financing arrangements:
a. Agreement for Wholesale Financing (Security Agreement-Arbitration) dated
April 4, 1991, as amended, between ITT and Creative Computers, Inc.*
10.13 Warrant to Purchase Common Stock of Creative Computers, Inc. dated
September 29, 1994 in favor of Creative Partners, L.P.*
10.14 Security Agreement dated as of September 26, 1994 by Creative computers,
Inc. in favor of Creative Partners, L.P.*
10.18 Form of Directors' Non-Qualified Stock Option Plan*
10.22 Agreement dated August 1, 1995 between Creative Computers, Inc. and
Deutsche Financial Services (formerly known as ITT Commercial Finance Corp.)**
10.25 Industrial Lease Agreement between Corporate Estates, Inc. and Creative
Computers, Inc. dated September 15, 1995 for the premises located at 4515 E. Shelby Drive,
Memphis, Tennessee, filed in connection with the Company's 10-Q for the quarter ended September 30, 1995
10.26 Employment Agreement dated February 21, 1996, between Creative Computers, Inc. and
David R. Burcham, filed in connection with the Company's 10-Q for the quarter ended
March 31, 1996 as Exhibit 10.1 thereto
10.27 Employment Agreement dated May 21, 1996, between Creative Computers, Inc. and
Richard M. Finkbeiner, filed in connection with the Company's 10-Q for the quarter ended
June 30, 1996 as Exhibit 10.1 thereto
10.28 Authorized Apple Dealer U.S. Sales Agreement dated August 29, 1996; Authorized Apple
Catalog Reseller Sales Agreement dated August 29, 1996; Dealer Apple Authorized Service
Provider Agreement dated August 29, 1996; Apple Corporate Alliance Program Addendum
to the Authorized Apple Dealer Sales Agreement dated August 29, 1996
10.29 Amendment to Agreement for Wholesale Financing dated February 25, 1997
13.1 Consolidated Financial Statements and Report of Independent Accountants
21.1 Subsidiaries**
23.1 Consent of Price Waterhouse LLP
24.1 Power of Attorney
27.1 Financial Data Schedule (filed with EDGAR version only)
* Incorporated by reference from the Company's Registration Statement on Form S-1 (33-89572)
declared effective on April 4, 1995.
** Incorporated by reference from the Company's Registration Statement on Form S-1
(33-95416) declared effective on August 23, 1995.
30