<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 33-55195
$125,000,000
[LOGO OF MERISEL]
12 1/2% SENIOR NOTES DUE 2004
----------------
Merisel, Inc. (the "Company") is offering $125,000,000 aggregate principal
amount of 12 1/2% Senior Notes Due 2004 (the "Notes")(the "Offering"). Interest
on the Notes is payable semiannually on June 30 and December 31 of each year,
commencing December 31, 1994, at the rate of 12 1/2% per annum. The Notes will
mature on December 31, 2004 and are redeemable, in whole or in part, at the
option of the Company, on or after December 31, 1999, at the redemption prices
set forth herein plus accrued interest to the redemption date. Upon an Equity
Offering (as defined in "Description of Notes--Certain Definitions") up to 35%
of the originally issued aggregate principal amount of Notes may, until
December 31, 1997, be redeemed at the option of the Company at a redemption
price of 110% of the principal amount thereof plus accrued interest to the
redemption date. See "Description of Notes--Redemption."
In the event of a Change of Control (as defined in "Description of Notes--
Certain Definitions"), the Company is obligated to make an offer to purchase
all of the Notes then outstanding at a redemption price of 101% of the
principal amount thereof plus accrued interest. In addition, the Company is
obligated upon certain sales or other dispositions of assets to make offers to
purchase the Notes at a redemption price of 100% of the principal amount
thereof plus accrued interest with the net cash proceeds of such sales or other
dispositions of assets. See "Description of Notes--Change of Control" and "--
Certain Covenants."
The Notes will be senior unsecured obligations of the Company ranking pari
passu in right of payment with all other unsubordinated indebtedness of the
Company and senior to all subordinated indebtedness of the Company. The Company
is a holding company with limited assets of its own and conducts substantially
all of its business through subsidiaries. The Notes will be effectively
subordinated to all liabilities of the Company's subsidiaries, including trade
payables. As of June 30, 1994, after giving pro forma effect to the sale of the
Notes, there would have been an aggregate of approximately $631.6 million of
indebtedness and trade payables of subsidiaries of the Company to which holders
of the Notes would have been effectively subordinated in right of payment.
SEE "CERTAIN INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................. 100.00% 3.00% 97.00%
- --------------------------------------------------------------------------------
Total.................................... $125,000,000 $3,750,000 $121,250,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $469,000.
---------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to certain
other conditions. It is expected that delivery of the Notes will be made in New
York, New York on or about October 24, 1994.
----------------
CITICORP SECURITIES, INC.
----------------
The date of this Prospectus is October 17, 1994
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Securities and Exchange
Commission (the "Commission") are incorporated herein by reference: (a) the
Annual Report of the Company on Form 10-K for the year ended December 31, 1993,
as amended; (b) the Current Report of the Company on Form 8-K dated January 31,
1994, as filed with the Commission on February 14, 1994, and as amended on
March 24, 1994 and October 4, 1994; (c) the Quarterly Report of the Company on
Form 10-Q for the quarter ended March 31, 1994; (d) the Quarterly Report of the
Company on Form 10-Q for the quarter ended June 30, 1994; and (e) the Current
Report of the Company on Form 8-K dated June 7, 1994 as filed with the
Commission on June 17, 1994.
All documents subsequently filed by the Company with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), prior to the termination of this Offering
shall be deemed to be incorporated by reference in this Prospectus. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which have been incorporated by reference
herein as set forth in this section, other than exhibits to such documents
(unless such exhibits are specifically incorporated by reference herein).
Requests for such copies should be directed to: Mr. James L. Brill, Senior Vice
President-Finance, Chief Financial Officer and Secretary, Merisel, Inc., 200
Continental Boulevard, El Segundo, California 90245, telephone number (310)
615-3080.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE NOTES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA. THE NOTES ARE
NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
THIS DOCUMENT MAY NOT BE PASSED ON IN THE UNITED KINGDOM TO ANY PERSON UNLESS
THAT PERSON IS OF A KIND DESCRIBED IN ARTICLE 9(3) OF THE FINANCIAL SERVICES
ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1988 OR IS A PERSON TO
WHOM THIS DOCUMENT MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere, or incorporated by
reference, in this Prospectus. As used herein, except as the context otherwise
requires, the terms "Company" and "Merisel" refer to Merisel, Inc., a Delaware
corporation, and its subsidiaries. The Company's fiscal year is the 52- or 53-
week period ending on the Saturday nearest to December 31, and its fiscal
quarters are the 13- or 14-week periods ending on the Saturday nearest to
March 31, June 30, September 30, and December 31. For clarity of presentation,
the Company has described year-ends presented as if the years ended on December
31 and quarter-ends presented as if the quarters ended on March 31, June 30,
September 30, and December 31.
THE COMPANY
OVERVIEW
Merisel is the largest worldwide publicly held wholesale distributor of
microcomputer hardware and software products. Through its full-line, channel-
specialized distribution business, Merisel combines the comprehensive product
selection and operational efficiency of a full-line distributor with the
customer support of a specialty distributor offering dedicated sales
organizations to each of its customer groups. On January 31, 1994, the Company
completed the acquisition (the "ComputerLand Acquisition") of certain assets of
the United States franchise and aggregator business of Vanstar Corporation
(formerly ComputerLand Corporation) (the "ComputerLand Business"). The
ComputerLand Business is a leading aggregator, or master reseller, of computer
systems and related products from major microcomputer manufacturers, including
Apple, Compaq, Hewlett-Packard and IBM, to a network of approximately 750
independently owned computer product resellers in the United States. With the
acquisition of the ComputerLand Business, the Company has become the industry's
first "Master Distributor," combining the strengths of a full-line, channel-
specialized distributor with those of a master reseller. As a Master
Distributor, the Company believes it is well positioned to offer a wider
selection of microcomputer products to more categories of customers than any of
its competitors.
At June 30, 1994, Merisel stocked over 25,000 products from more than 900 of
the microcomputer hardware and software industry's leading manufacturers
including Apple, AST, Borland, Colorado Memory Systems, Compaq, Creative Labs,
Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard, IBM, Intel,
Lotus, Microsoft, NEC, Novell, Okidata, Sun Microsystems, Symantec, Texas
Instruments, 3Com, Toshiba, WordPerfect and Wyse. Merisel sells products to
over 65,000 computer resellers worldwide, including value-added resellers,
large retail chains and franchisees, computer superstores, mass merchants,
Macintosh and UNIX resellers, system integrators and original equipment
manufacturers. In order to effectively service its large and diverse
international customer base, the Company currently maintains 20 distribution
centers that serve North America, Europe, Latin America, Australia and other
international markets. The breadth of the Company's product line, together with
its international distribution network, enable the Company to provide its
customers with a single source of supply and prompt delivery of product. For
the six months ended June 30, 1994, the Company's net sales by geographic
region were generated as follows: United States, 67.5%; Canada, 11%; Europe,
15.5%; and other international markets, 6%.
Merisel's net sales have increased from $1.6 billion in 1991 to $3.1 billion
in 1993, reflecting substantial growth in both domestic and international sales
as the worldwide market for computer products has expanded and as manufacturers
increasingly have turned to wholesale distributors for distribution of their
products. The Company's operating income has grown from $38.3 million in 1991
to $71.4 million in 1993. For the six months ended June 30, 1994, which
includes five months of operations of the ComputerLand Business, net sales were
$2.4 billion, and operating income was $35.4 million compared to $1.4 billion
and $30.8 million, respectively, for the six months ended June 30, 1993.
BUSINESS STRATEGY
Merisel has achieved its leading position by pursuing a strategy of offering
the industry's leading products and services to its customers at competitive
prices, providing cost-effective customer service through efficient operations,
expanding the Company's international business and targeting its various
customer groups using dedicated sales forces and marketing programs.
3
<PAGE>
Providing Leading Products and Services. The Company's objective is to offer
the broadest range of leading product brands in each of the product categories
it carries. By stocking the leading brands, the Company generates sales of both
those and other product brands, as reseller customers often prefer to deal with
a single source for many of their product needs. The Company continuously
evaluates new products, the demand for its current products as well as its
overall product mix and seeks to develop distribution relationships with
suppliers of products that enhance the Company's product offerings. The Company
believes that the size of its reseller customer base, its international
distribution capability and both the breadth and quality of its marketing
support programs give it a competitive advantage over smaller, regional
distributors in developing supplier relationships.
As a result of the ComputerLand Acquisition, the Company, through the
ComputerLand Business, is now able to offer to the ComputerLand Business'
franchisees and affiliates a broad range of microcomputer systems and other
products from Apple, Compaq, Hewlett-Packard and IBM. Although the Company
distributes certain products of these leading manufacturers through its
wholesale distribution arrangements, neither the Company nor its direct
wholesale distribution competitors have been authorized to sell these
manufacturers' key microcomputer systems in the United States, except on a
limited basis. Instead, these manufacturers historically have distributed their
products directly to resellers and through aggregators such as ComputerLand
Corporation.
The Company believes that an opportunity exists to generate additional,
higher-margin revenues by offering fee-based services and information to
manufacturers and resellers. In 1993, the Company formed the Channel Services
Group to provide a variety of these services, including telemarketing,
merchandising and electronic software services.
Pursuing Operational Excellence. The Company believes that high levels of
customer service and operating efficiency, or "operational excellence," are
important factors in achieving and maintaining success in the highly
competitive microcomputer products distribution industry. The Company measures
operational excellence by such standards as "ease of doing business," accuracy
and efficiency in delivering products and expediting the delivery of services
and information. Merisel maintains sufficient inventory levels in the United
States to consistently ship in excess of 95% of all units ordered on the day of
receipt. Merisel constantly strives to improve its operational processes. In
furtherance of this strategy, the Company is in the process of upgrading and
improving its computer operating systems as well as its warehouse management
systems. In addition, the Company is reorganizing its European operations,
adding new management personnel and centralizing certain functions to achieve
economies of scale. Merisel will seek to continue to refine the operational
systems at its foreign sales offices and distribution centers in order to
increase the uniformity and efficiency of the Company's worldwide operations.
These changes are intended to enhance the Company's ability to offer faster,
more efficient and accurate service to its customers.
Expanding Internationally. Merisel believes that it generates one of the
largest volumes of international sales of any U.S.-based distributor, is the
largest wholesale distributor of computer products in Canada, and is a leading
distributor in Europe, Mexico, Australia and Latin America. The Company
believes that many international markets will offer growth and profit
opportunities, due to the underdeveloped and fragmented nature of the
microcomputer distribution industry in these markets. Merisel believes it is
well positioned to capitalize on the opportunities presented in a number of
these markets because of the current scope of its international operations and
its ability to offer a broader range of products and specialized services than
many of its competitors. The Company's strategy is to expand its international
operations through internal growth and the possible acquisition of existing
distributors or the establishment of new operations in other countries.
Targeting Customer Groups. Merisel serves a variety of different reseller
channels, which have diverse product, financing and support needs. Merisel was
the first full-line distributor in the industry to offer its various customer
groups a channel-dedicated sales force as well as customized product offerings,
financing
4
<PAGE>
programs and marketing and technical support programs, all of which are
tailored to address the differing needs of these customer groups. The Company
intends to continue to monitor the markets it serves to identify customer
opportunities and develop sales and marketing programs that serve these groups
more effectively. In furtherance of this strategy, on January 31, 1994, the
Company completed the ComputerLand Acquisition.
COMPUTERLAND ACQUISITION
On January 31, 1994, the Company, through a wholly owned subsidiary, Merisel
FAB, Inc. ("Merisel FAB") (Franchisor and Aggregator Business), completed the
acquisition of the ComputerLand Business from Vanstar Corporation (formerly
ComputerLand Corporation) ("Vanstar"). Merisel paid approximately $80 million
in cash at the closing of the ComputerLand Acquisition for the acquired assets.
In addition, Merisel has agreed to make an additional payment in 1996 of up to
$30 million, the amount of which will be determined based upon the growth in
the ComputerLand Business and the Company's sales of products of designated
manufacturers to specified customers over the two-year period ending January
31, 1996. In connection with the ComputerLand Acquisition, Merisel entered into
an agreement with Vanstar(the "Services Agreement") pursuant to which Vanstar
has agreed to provide significant distribution and other support services to
the ComputerLand Business for a contractually agreed-upon fee for up to a two-
year period following the ComputerLand Acquisition. See "Business--ComputerLand
Acquisition." Under the Services Agreement, Merisel has also been granted $20
million in extended credit terms on its product purchases from Vanstar (the
"Vanstar Payable"). On a pro forma basis for the year ended December 31, 1993,
the ComputerLand Acquisition would have increased net sales by $1.1 billion,
gross profit by $54.7 million and operating income by $13.3 million.
The Company's common stock is traded on the Nasdaq National Market under the
trading symbol MSEL. The principal executive office of the Company is located
at 200 Continental Boulevard, El Segundo, California 90245, and its main
telephone number is (310) 615-3080.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Securities Offered.......... $125 million aggregate principal amount of 12
1/2% Senior Notes Due 2004.
Interest Payments........... Interest will accrue from the date of issuance
and will be payable semi-annually on each June
30 and December 31, commencing December 31,
1994.
Maturity Date............... December 31, 2004.
Optional Redemption......... The Notes are redeemable, in whole or in part,
at the option of the Company, on or after
December 31, 1999, at the redemption prices set
forth herein plus accrued interest.
Additionally, prior to December 31, 1997, the
Company may, at its option, redeem up to 35% of
the originally issued aggregate principal amount
of Notes at 110% of the principal amount thereof
plus accrued interest to the redemption date
with the proceeds of an Equity Offering (as
defined).
Change of Control........... In the event of a Change of Control (as
defined), the Company is obligated to make an
offer to purchase all the Notes then outstanding
at a redemption price of 101% of the principal
amount thereof plus accrued interest to the
redemption date.
Asset Sale Proceeds......... The Company is obligated in certain
circumstances to make offers to purchase the
Notes at a redemption price of 100% of the
principal amount thereof plus accrued interest
to the redemption date with the net cash
proceeds of certain sales or other dispositions
of assets.
Ranking..................... The Notes will represent general unsecured
senior obligations of the Company. The Company
is a holding company with limited assets of its
own and conducts substantially all of its
business through subsidiaries. The Notes will be
effectively subordinated to all liabilities of
the Company's subsidiaries, including
indebtedness and trade payables. See "Certain
Investment Considerations--Holding Company
Structure."
Certain Covenants........... The Indenture relating to the Notes will contain
certain covenants that, among other things,
limit the type and amount of additional
indebtedness that may be incurred by the Company
or any of its subsidiaries and impose
limitations on investments, loans, advances,
sales or transfers of assets, the making of
dividends and other payments, the creation of
liens, sale-leaseback transactions, certain
transactions with affiliates and certain
mergers.
</TABLE>
CERTAIN INVESTMENT CONSIDERATIONS
Prospective investors should carefully consider the information presented in
this Prospectus, particularly the matters set forth under the caption "Certain
Investment Considerations."
USE OF PROCEEDS
The Company will use the net proceeds of the Offering to repay in full the
$65 million in bank financing used to fund the ComputerLand Acquisition (the
"Acquisition Loan") and to repay approximately $55.78 million of indebtedness
under a $150 million revolving credit facility of Merisel Americas, Inc.
("Merisel Americas") and Merisel Europe, Inc. ("Merisel Europe"), wholly owned
subsidiaries of the Company (the "Revolving Credit Facility"). The resulting
increased capacity under the Revolving Credit Facility will be available for
general corporate purposes.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical and pro forma consolidated financial data set forth
below are derived from the Company's Consolidated Financial Statements. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and with "Selected Consolidated Financial Data,"
"Unaudited Pro Forma Condensed Combined Statements of Income" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------ --------------------------------
PRO FORMA(1) PRO FORMA(1)
1989 1990 1991 1992 1993 1993 1993 1994 1994
------ -------- -------- -------- -------- ------------ -------- -------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $629.4 $1,192.4 $1,585.4 $2,238.7 $3,085.9 $4,157.2 $1,405.9 $2,365.1 $2,466.9
Cost of sales........... 563.0 1,073.5 1,427.4 2,036.3 2,827.3 3,843.9 1,287.3 2,201.0 2,298.7
------ -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 66.4 118.9 158.0 202.4 258.6 313.3 118.6 164.1 168.2
Selling, general and
administrative
expenses............... 45.6 102.4 119.7 150.9 187.2 228.6 87.8 128.7 132.0
------ -------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 20.8 16.5 38.3 51.5 71.4 84.7 30.8 35.4 36.2
Interest expense........ 3.5 13.7 16.0 15.7 17.8 32.0 8.9 12.6 16.7
Other (income) expense.. 0.6 (0.8) 0.8 1.3 2.7 3.2 0.6 4.9 4.7
------ -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 16.7 3.6 21.5 34.5 50.9 49.5 21.3 17.9 14.8
Income taxes............ 6.5 3.0 10.7 14.8 20.5 19.9 8.9 6.6 5.4
------ -------- -------- -------- -------- -------- -------- -------- --------
Net income.............. $ 10.2 $ 0.6 $ 10.8 $ 19.7 $ 30.4 $ 29.6 $ 12.4 $ 11.3 $ 9.4
====== ======== ======== ======== ======== ======== ======== ======== ========
Net income per share.... $ 0.81 $ 0.03 $ 0.43 $ 0.67 $ 1.00 $ 0.97 $ 0.41 $ 0.37 $ 0.31
====== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital......... $ 89.5 $ 213.0 $ 92.5 $ 294.6 $ 359.8 $ 342.0 $ 336.9 $ 262.1 $ 326.6
Total assets............ 215.8 431.7 508.6 667.3 936.3 1,024.6 715.9 1,042.3 1,045.5
Total debt.............. 55.6 160.6 164.6 179.1 259.4 327.7 231.0 285.0 288.3
Stockholders' equity.... 48.6 114.3 125.5 198.9 223.9 223.9 208.4 238.5 238.5
OTHER DATA:
EBITDA(2)............... $ 22.0 $ 23.1 $ 45.9 $ 59.4 $ 79.1 $ 95.7 $ 35.2 $ 38.0 $ 39.1
Depreciation and
amortization........... 1.9 5.8 8.4 9.2 10.5 14.2 5.0 7.5 7.6
Capital expenditures.... 4.6 9.0 5.9 10.0 24.6 24.8 9.9 14.6 14.6
Ratio of earnings to
fixed charges(3)....... 4.69x 1.22x 2.14x 2.78x 3.25x 2.33x 2.90x 2.14x 1.75x
Ratio of EBITDA to
interest expense....... 6.35 1.68 2.87 3.77 4.44 2.99 3.95 3.03 2.34
Ratio of total debt to
EBITDA................. 2.53 6.95 3.59 3.02 3.28 3.42 N/A N/A N/A
</TABLE>
- -------
(1) The pro forma adjustments give effect to (i) the sale of the Notes, (ii)
the repayment of the Acquisition Loan and elimination of related fees,
(iii) the repayment of approximately $55.78 million of revolving credit
indebtedness and (iv) the acquisition of the ComputerLand Business, as if
each had occurred on the first day of the periods presented. See "Unaudited
Pro Forma Condensed Combined Statements of Income."
(2) EBITDA represents net income before interest, income taxes, depreciation
and amortization. EBITDA is not intended to represent and should not be
considered an alternative to, or more meaningful than, net income, cash
flow or any other measure of performance in accordance with generally
accepted accounting principles. EBITDA is included here because the Company
understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt.
(3) For purposes of computing this ratio, earnings consist of income before
income taxes and fixed charges. Fixed charges consist of interest expense,
amortization of financing costs and the portion of rental expense estimated
to be interest expense.
7
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS
Prospective purchasers should carefully consider the following in connection
with an investment in the Notes.
LEVERAGE
As of June 30, 1994, the Company's consolidated total debt was $285 million.
At such date, the Company's consolidated total assets were $1.04 billion, and
its stockholders' equity was $238 million. On an as adjusted basis, after
giving effect to the sale of the Notes and the application of the net proceeds
therefrom, the Company on June 30, 1994 would have had consolidated total debt
of $289 million and stockholders' equity of $238 million. See "Capitalization."
The ability of the Company to make cash payments with respect to the Notes
will be dependent upon its future performance, which, in turn, will be subject
to general economic conditions and to financial, business and other factors,
including factors beyond its control. The Company anticipates that cash flow,
as well as borrowings under the Revolving Credit Facility will be sufficient to
meet its and its subsidiaries' operating expenses and to service its and its
subsidiaries' debt requirements as they become due. There can be no assurance,
however, that this will be the case. As a result of this Offering, the Company
may be more leveraged than certain of its competitors, which may adversely
impact the Company's ability to respond to competitive pressures in the highly
competitive microcomputer products distribution industry. See "Business--
Competition."
If the Company and its subsidiaries are unable to comply with the terms of
their debt agreements or fail to generate sufficient cash flow from operations
in the future, they may be required to refinance all or a portion of their
existing debt or to obtain additional financing. There can be no assurance that
any such refinancing would be possible or that any additional financing could
be obtained, particularly in view of the Company's high levels of consolidated
debt, and the debt incurrence restrictions under its debt agreements. In
addition, if obtained, there can be no assurance that any such refinancing or
financing would be on terms and conditions favorable to the Company. If no such
refinancing or additional financing were available, the Company could be forced
to default on its debt obligations and, as an ultimate remedy, seek protection
under the federal bankruptcy laws. A portion of the consolidated debt of the
Company bears interest at a floating rate; therefore, the financial results of
the Company are and will continue to be affected by changes in prevailing
interest rates.
HOLDING COMPANY STRUCTURE
The Company currently conducts its operations through its subsidiaries.
Substantially all of the assets of the Company are owned by its subsidiaries.
As a holding company, the Company is dependent on dividends or other
intercompany transfers of funds from its subsidiaries to meet its debt service
and other obligations. Dividends, loans, advances and repayments of
intercompany loans from certain subsidiaries of the Company are restricted by
various debt agreements. See "Certain Indebtedness and Financing Arrangements."
The Company's rights and the rights of its creditors, including holders of
Notes, to participate in the assets of any subsidiary of the Company upon such
subsidiary's liquidation or recapitalization will be subject to the prior
claims of the subsidiary's creditors, including trade creditors. As of June 30,
1994, after giving pro forma effect to the sale of the Notes, there would have
been an aggregate of approximately $631.6 million of indebtedness and trade
payables of subsidiaries of the Company to which holders of the Notes would
have been effectively subordinated in right of payment. The Indenture limits,
but does not prohibit, the incurrence of additional indebtedness by the
Company's subsidiaries.
8
<PAGE>
DECLINING MARGINS
While the Company continued to experience increases in net sales and
operating income for the six months ended June 30, 1994, due to competitive
pricing pressures worldwide and the effect of the ComputerLand Acquisition,
gross margins continued to decrease. Selling, general and administrative
expenses as a percentage of sales also decreased during this period; however,
this decrease was more than offset by the decrease in gross margins and, as a
result, operating income as a percentage of sales decreased. The Company
anticipates that it will continue to experience downward pressure on gross
margins due to industry price competition and the ComputerLand Acquisition. To
the extent gross margins continue to decline and the Company is not successful
in reducing selling, general and administrative expenses as a percentage of
sales in an amount at least equal to such decline, the Company will continue to
experience a decline in its operating margins.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes comprise a new issue of securities for which there is currently no
public market. If the Notes are traded after their initial issuance, they may
trade at a discount from their initial public offering price, depending on
prevailing interest rates, the market for similar securities, the performance
of the Company and other factors. The Company does not intend to apply for
listing of the Notes on any securities exchange. Citicorp Securities, Inc.
("Citicorp") has informed the Company that it currently intends to make a
market in the Notes. However, Citicorp is not obligated to do so and any such
market-making may be discontinued at any time without notice. Therefore, no
assurance can be given as to whether an active trading market will develop or
be maintained for the Notes. See "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby are
estimated to be $120.78 million. The Company will use the net proceeds from the
sale of the Notes to repay the $65 million Acquisition Loan incurred to finance
the purchase of the ComputerLand Business and to repay approximately $55.78
million of bank indebtedness expected to be outstanding under the Revolving
Credit Facility on the issue date of the Notes. The resulting increased
capacity will be available for general corporate purposes.
The Acquisition Loan and the Revolving Credit Facility mature on January 31,
1995 and May 31, 1997, respectively. At September 30, 1994, the weighted
average interest rate on such outstanding borrowings was 8.375% and 6.18%,
respectively. See "Certain Indebtedness and Financing Arrangements."
9
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1994, and as adjusted to give effect to the sale of the Notes offered
hereby and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
JUNE 30, 1994
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt and current maturities of long-term debt:
Subsidiary lines of credit................................ $ 29,631 $ 29,631
Acquisition Loan.......................................... 65,000 --
Long-term debt:
Revolving Credit Facility................................. 68,400 12,619
8.58% Merisel Americas Senior Notes due 1997.............. 100,000 100,000
11.28% Merisel Americas Subordinated Notes due 2000....... 22,000 22,000
12 1/2% Senior Notes Due 2004............................. -- 125,000
-------- --------
Total debt............................................... 285,031 289,250
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 29,681,200 outstanding at June 30, 1994...... 297 297
Additional paid-in capital................................ 141,143 141,143
Retained earnings......................................... 102,826 102,826
Cumulative translation adjustment......................... (5,811) (5,811)
-------- --------
Total stockholders' equity............................... 238,455 238,455
-------- --------
Total capitalization................................... $523,486 $527,705
======== ========
</TABLE>
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from
the Company's Consolidated Financial Statements. This information should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto and with "Unaudited Pro Forma Condensed Combined Statements of Income"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------ --------------------------------
PRO FORMA(1) PRO FORMA(1)
1989 1990 1991 1992 1993 1993 1993 1994 1994
------ -------- -------- -------- -------- ------------ -------- -------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $629.4 $1,192.4 $1,585.4 $2,238.7 $3,085.9 $4,157.2 $1,405.9 $2,365.1 $2,466.9
Cost of sales........... 563.0 1,073.5 1,427.4 2,036.3 2,827.3 3,843.9 1,287.3 2,201.0 2,298.7
------ -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 66.4 118.9 158.0 202.4 258.6 313.3 118.6 164.1 168.2
Selling, general and
administrative
expenses............... 45.6 102.4 119.7 150.9 187.2 228.6 87.8 128.7 132.0
------ -------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 20.8 16.5 38.3 51.5 71.4 84.7 30.8 35.4 36.2
Interest expense........ 3.5 13.7 16.0 15.7 17.8 32.0 8.9 12.6 16.7
Other (income) expense.. 0.6 (0.8) 0.8 1.3 2.7 3.2 0.6 4.9 4.7
------ -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 16.7 3.6 21.5 34.5 50.9 49.5 21.3 17.9 14.8
Income taxes............ 6.5 3.0 10.7 14.8 20.5 19.9 8.9 6.6 5.4
------ -------- -------- -------- -------- -------- -------- -------- --------
Net income.............. $ 10.2 $ 0.6 $ 10.8 $ 19.7 $ 30.4 $ 29.6 $ 12.4 $ 11.3 $ 9.4
====== ======== ======== ======== ======== ======== ======== ======== ========
Net income per share.... $ 0.81 $ 0.03 $ 0.43 $ 0.67 $ 1.00 $ 0.97 $ 0.41 $ 0.37 $ 0.31
====== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital......... $ 89.5 $ 213.0 $ 92.5 $ 294.6 $ 359.8 $ 342.0 $ 336.9 $ 262.1 $ 326.6
Total assets............ 215.8 431.7 508.6 667.3 936.3 1,024.6 715.9 1,042.3 1,045.5
Total debt.............. 55.6 160.6 164.6 179.1 259.4 327.7 231.0 285.0 288.3
Stockholders' equity.... 48.6 114.3 125.5 198.9 223.9 223.9 208.4 238.5 238.5
OTHER DATA:
EBITDA(2)............... $ 22.0 $ 23.1 $ 45.9 $ 59.4 $ 79.1 $ 95.7 $ 35.2 $ 38.0 $ 39.1
Depreciation and
amortization........... 1.9 5.8 8.4 9.2 10.5 14.2 5.0 7.5 7.6
Capital expenditures.... 4.6 9.0 5.9 10.0 24.6 24.8 9.9 14.6 14.6
Ratio of earnings to
fixed charges(3)....... 4.69x 1.22x 2.14x 2.78x 3.25x 2.33x 2.90x 2.14x 1.75x
Ratio of EBITDA to
interest expense....... 6.35 1.68 2.87 3.77 4.44 2.99 3.95 3.03 2.34
Ratio of total debt to
EBITDA................. 2.53 6.95 3.59 3.02 3.28 3.42 N/A N/A N/A
</TABLE>
- -------
(1) The pro forma adjustments give effect to (i) the sale of the Notes, (ii)
the repayment of the Acquisition Loan and elimination of related fees,
(iii) the repayment of approximately $55.78 million of revolving credit
indebtedness and (iv) the acquisition of the ComputerLand Business, as if
each had occurred on the first day of the periods presented. See
"Unaudited Pro Forma Condensed Combined Statements of Income."
(2) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is not intended to represent and should not be
considered an alternative to, or more meaningful than, net income, cash flow
or any other measure of performance in accordance with generally accepted
accounting principles. EBITDA is included here because the Company
understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt.
(3) For purposes of computing this ratio, earnings consist of income before
income taxes and fixed charges. Fixed charges consist of interest expense,
amortization of financing costs and the portion of rental expense
estimated to be interest expense.
11
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
The following unaudited pro forma condensed combined statements of income
give effect to the ComputerLand Acquisition and the issuance of the Notes as
contemplated by this Offering as if each had occurred on the first day of the
periods presented. The ComputerLand Acquisition was accounted for under the
purchase method. See "The Company--ComputerLand Acquisition."
The unaudited pro forma condensed combined statement of income for the year
ended December 31, 1993 has been prepared based upon the historical
consolidated financial statements of Merisel for the year ended December 31,
1993 and the statement of revenues and operating expenses of the ComputerLand
Business for the year ended September 30, 1993. The unaudited pro forma
condensed combined statement of income for the six months ended June 30, 1994
combines the historical consolidated financial statements of Merisel for the
six month period ended June 30, 1994 and the statement of revenues and
operating expenses of the ComputerLand Business for the one month period ended
January 31, 1994. The results of operations for the ComputerLand Business were
consolidated with those of Merisel subsequent to the ComputerLand Acquisition
on January 31, 1994. The unaudited pro forma condensed combined statements of
income may not be indicative of the results that would have occurred if the
ComputerLand Acquisition and the sale of the Notes had been consummated on the
indicated dates, or of the operating results that may be achieved in the
future.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1993
-------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------- -------------------------------------
COMPUTERLAND COMPUTERLAND
MERISEL BUSINESS ACQUISITION ISSUANCE OF
12/31/93 9/30/93 ADJUSTMENTS(2) NOTES(3) COMBINED
---------- ------------ -------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............... $3,085,851 $1,071,306 $4,157,157
Cost of sales........... 2,827,315 1,016,584 3,843,899
---------- ---------- ----------
Gross profit............ 258,536 54,722 313,258
Selling, general and
administrative
expenses............... 187,152 38,135 $ 3,320 228,607
---------- ---------- -------- ----------
Operating income........ 71,384 $ 16,587 (3,320) 84,651
========== --------
Interest expense........ 17,810 6,431 $ 7,739 31,980
Other expense........... 2,722 950 (528) 3,144
---------- -------- ------- ----------
Income before income
taxes.................. 50,852 (10,701) (7,211) 49,527
Provision for income
taxes.................. 20,413 2,354 (2,884) 19,883
---------- -------- ------- ----------
Net income.............. $ 30,439 $(13,055) $(4,327) $ 29,644
========== ======== ======= ==========
Net income per share.... $ 1.00 $ 0.97
========== ==========
Weighted average number
of common shares
outstanding............ 30,454 30,454
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1994
-------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------- -------------------------------------
COMPUTERLAND COMPUTERLAND
MERISEL BUSINESS ACQUISITION ISSUANCE OF
6/30/94 1/31/94 ADJUSTMENTS(2) NOTES(3) COMBINED
---------- ------------ -------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............... $2,365,120 $101,732 $2,466,852
Cost of sales........... 2,201,050 97,600 2,298,650
---------- -------- ----------
Gross profit............ 164,070 4,132 168,202
Selling, general and
administrative
expenses............... 128,656 3,076 $ 276 132,008
---------- -------- ----- ----------
Operating income........ 35,414 $ 1,056 (276) 36,194
========
Interest expense........ 12,559 536 $ 3,610 16,705
Other expense........... 4,913 79 (264) 4,728
---------- ----- ------- ----------
Income before income
taxes.................. 17,942 (891) (3,346) 14,761
Provision for income
taxes.................. 6,628 66 (1,338) 5,356
---------- ----- ------- ----------
Net income.............. $ 11,314 $(957) $(2,008) $ 9,405
========== ===== ======= ==========
Net income per share.... $ 0.37 $ 0.31
========== ==========
Weighted average number
of common shares
outstanding............ 30,764 30,764
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined statements of
income.
12
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
1. GENERAL
The foregoing unaudited pro forma condensed combined statements of income il-
lustrate the effect of the acquisition by the Company, through Merisel FAB, of
the ComputerLand Business from Vanstar pursuant to an Asset Purchase Agreement
dated January 31, 1994 among ComputerLand, Merisel FAB and the Company, as well
as the issuance of $125 million principal amount of Notes as contemplated by
this Offering. The unaudited pro forma condensed combined statements of income
for the year ended December 31, 1993 and the six months ended June 30, 1994
illustrate the potential impact on the historical results of operations of
Merisel, assuming that the ComputerLand Acquisition and the issuance of the
Notes occurred as of the first day of the periods presented. It is also assumed
that the net proceeds from the issuance of the Notes were used to repay the $65
million Acquisition Loan and to repay bank indebtedness outstanding under the
Revolving Credit Facility. See "The Company--ComputerLand Acquisition," "Capi-
talization," "Selected Consolidated Financial Data" and "Management's Discus-
sion and Analysis of Financial Condition and Results of Operations."
Prior to its acquisition, the ComputerLand Business was not an incorporated
entity, and separate historical financial statements were not prepared;
accordingly, no such financial statements are readily available. The historical
income statement information included herein was obtained from the ComputerLand
Business' statement of revenues and operating expenses for the year ended
September 30, 1993 and the one month ended January 31, 1994. Such statements
present the revenues, direct expenses and general and administrative expenses
allocated from Vanstar to the ComputerLand Business. Selling, general and
administrative expenses include allocated expenses of $27,340,000 for the year
ended September 30, 1993 and $2,035,000 for the one month ended January 31,
1994, representing costs of the distribution centers and general corporate
overhead, including expenses for corporate functions and administrative
personnel. The expenses have been allocated to the ComputerLand Business based
upon such factors as the ratio of the ComputerLand Business' shipments to the
total shipments by Vanstar and Vanstar management's estimate of the time spent
by shared employees of Vanstar on work related to the ComputerLand Business.
Interest income, interest expense and income taxes were not allocated.
The statement of revenues and operating expenses, which includes Vanstar's
allocated expenses, may not necessarily reflect the results of operations that
would have been obtained had the ComputerLand Business been operated as a
separate, stand-alone entity for the period presented and may not be indicative
of future revenues and operating expenses of Merisel FAB.
2. ADJUSTMENTS RELATED TO THE COMPUTERLAND ACQUISITION
The initial purchase price for the ComputerLand Acquisition consisted of
$80.2 million in cash and $2 million in direct expenses. Under the purchase
method of accounting, an allocation of the purchase price to the Merisel FAB
assets and liabilities is required to reflect fair values. An allocation of the
purchase price has not yet been performed; however, the following sets forth
certain preliminary allocations:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Property and equipment...................................... $ 200
Intangible assets--consisting of the purchase price over the
net assets acquired ....................................... 82,000
-------
Total................................................. $82,200
=======
</TABLE>
13
<PAGE>
Adjustments for the fiscal year ended December 31, 1993 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<C> <S> <C>
a) Selling, general and administrative expenses
Amortization of the excess of purchase price over net
assets ($82 million/25 years)........................... $3,280
Depreciation of property and equipment ($200,000/5
years).................................................. 40
------
Total ............................................... $3,320
======
b) Interest expense
Interest expense on the Acquisition Loan ($65 million at
expected average rate of 8.125%)........................ $5,281
Interest expense on Vanstar Payable ($20 million at prime
less 2%, computed at an expected average rate of 5.75%). 1,150
------
Total................................................ $6,431
======
Note: A fluctuation of 0.125% in the interest rate would
result in a $106,000 change in interest expense.
c) Other expense
Amortization of financing fees associated with the
Acquisition Loan........................................ $ 950
======
d) Provision for income taxes
Income taxes have been adjusted to reflect an estimated
marginal income tax rate of 40%, net of pro forma
adjustments applied to income of the ComputerLand
Business.
Adjustments for the six months ended June 30, 1994 are as follows:
<CAPTION>
IN THOUSANDS
------------
<C> <S> <C>
a) Selling, general and administrative expenses
Amortization of the excess of purchase price over net
assets for one month ($82 million/25 years/12 months)... $ 273
Depreciation of property and equipment for one month
($200,000/5 years/12 months)............................ 3
------
Total................................................ $ 276
======
b) Interest expense
Interest expense for one month on the Acquisition Loan
($65 million at an expected average rate of 8.125%)..... $ 440
Interest expense for one month on Vanstar Payable ($20
million at prime less 2%, computed at an expected
average rate of 5.75%).................................. 96
------
Total................................................ $ 536
======
Note: A fluctuation of 0.125% in the interest rate would
result in a $53,000 change in interest expense.
c) Other expense
Amortization of financing fees associated with the
Acquisition Loan for one month ($950,000/12 months)..... $ 79
======
d) Provision for income taxes
Income taxes have been adjusted to reflect an estimated
marginal income tax rate of 40%, net of pro forma
adjustments applied to income of the ComputerLand
Business.
</TABLE>
14
<PAGE>
3. ADJUSTMENTS RELATED TO THE ISSUANCE OF $125 MILLION PRINCIPAL AMOUNT OF
NOTES
Adjustments for the fiscal year ended December 31, 1993 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<C> <S> <C>
a) Interest expense
Interest expense incurred on the issuance of the Notes
($125 million at an expected rate of 12.5%)............. $15,625
Interest expense reduction for the repayment of the
Acquisition Loan ($65 million at an expected average
rate of 8.125%)......................................... (5,281)
Interest expense reduction for the repayment of debt
outstanding under the Revolving Credit Facility
($55.78 million at an estimated weighted average
rate of 4.67%).......................................... (2,605)
-------
Total.................................................... $ 7,739
=======
Note: A fluctuation of 0.125% in the interest rate on the
Notes would result in a $156,000 change in interest
expense.
b) Other expense
Amortization of fees and expenses incurred on the
issuance of the Notes ($4.22 million/10 years).......... $ 422
Reduction in amortization of fees associated with the
Acquisition Loan ($950,000)............................. (950)
-------
Total.................................................... $ (528)
=======
c) Provisions for income taxes
Income taxes have been adjusted to reflect an estimated
marginal income tax rate of 40% of the net pro forma
adjustment for the sale of the Notes.
</TABLE>
Adjustments for the six months ended June 30, 1994 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<C> <S> <C>
a) Interest expense
Interest expense incurred on the issuance of the Notes
($125 million at an expected rate of 12.5%) X 6 months.. $ 7,813
Interest expense reduction for the repayment of the
Acquisition Loan ($65 million at an estimated average
rate of 8.125%) X 6 months.............................. (2,641)
Interest expense reduction for the repayment of a portion
of the debt outstanding under the Revolving Credit
Facility ($55.78 million at an estimated weighted
average rate of 5.60%) X 6 months....................... (1,562)
-------
Total.................................................... $ 3,610
=======
Note: A fluctuation of 0.125% in the interest rate on the
Notes would result in a $78,000 change in interest
expense.
b) Other expense
Amortization of fees and expenses incurred on the
issuance of the Notes
($4.22 million/10 years) X 6 months..................... $ 211
Reduction in amortization of fees associated with the
Acquisition Loan ($950,000) X 6 months.................. (475)
-------
Total.................................................... $ (264)
=======
c) Provisions for income taxes
Income taxes have been adjusted to reflect an estimated
marginal income tax rate of 40% of the net pro forma
adjustment for the sale of the Notes.
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and "Selected Consolidated Financial
Data" and "Unaudited Pro Forma Condensed Combined Statements of Income"
included elsewhere in this Prospectus.
OVERVIEW
The Company was founded in 1980 and has grown both through internal growth
and through acquisitions of other computer products distributors. By 1989, the
Company had achieved annual revenues of $629.4 million, principally through
internal expansion. In April 1990, the Company acquired Microamerica, Inc.
("Microamerica"), another worldwide distributor of microcomputer products, with
net sales of approximately $526 million for the year ended December 31, 1989.
In the years following the Microamerica acquisition, the Company's revenues
increased from $1.6 billion in 1991 to $2.2 billion in 1992 and to $3.1 billion
in 1993, reflecting substantial growth in both domestic and international sales
as the worldwide market for computer products expanded and manufacturers
increasingly turned to wholesale distributors for distribution of their
products. The Company's net income as a percentage of sales, or net margin,
improved over this period, largely as a result of management's success in
reducing selling, general and administrative expenses and interest expense,
expressed as a percentage of sales, to more than offset lower gross margins.
On January 31, 1994, the Company completed the acquisition of certain assets
of the ComputerLand Business from Vanstar. See "Business--ComputerLand
Business." On a pro forma basis for the year ended December 31, 1993, the
ComputerLand Acquisition would have increased net sales by $1.1 billion, gross
profit by $54.7 million and operating income by $13.3 million. See "--
Acquisition of ComputerLand Business" and "Unaudited Pro Forma Condensed
Combined Statements of Income."
The Company anticipates that it will continue to experience downward pressure
on gross margins due to industry price competition. In addition, the Company's
recently acquired ComputerLand Business generates lower gross margins than the
Company's existing wholesale distribution business. The ComputerLand Business,
however, has lower selling, general and administrative expenses as a percentage
of sales and requires a significantly lower investment in working capital than
the Company's existing wholesale distribution business. See "--Acquisition of
ComputerLand Business." Although Merisel expects that over time it will be able
to continue to reduce selling, general and administrative expenses as a
percentage of sales, through (among other things) the implementation of new
computer operating systems and warehouse management systems that will enable
the Company to utilize its existing assets more productively, no assurance can
be given as to whether such reductions will, in fact, occur or as to the actual
amount of any such reductions. See "Business--Operations and Distribution." To
the extent gross margins continue to decline and the Company is not successful
in reducing selling, general and administrative expenses as a percentage of
sales, the Company will experience a negative impact on its operating income.
See "Certain Investment Considerations--Declining Margins."
16
<PAGE>
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth selected items from
the Company's Consolidated Statements of Income, expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------
SIX MONTHS
FISCAL YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
------------------- ------------
1991 1992 1993 1993 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 90.0 91.0 91.6 91.6 93.1
----- ----- ----- ----- -----
Gross profit.......................... 10.0 9.0 8.4 8.4 6.9
Selling, general and administrative
expenses............................. 7.5 6.7 6.1 6.2 5.4
----- ----- ----- ----- -----
Operating income...................... 2.5 2.3 2.3 2.2 1.5
Interest expense...................... 1.0 0.7 0.6 0.6 0.5
Other expense......................... 0.1 0.1 0.1 0.1 0.2
----- ----- ----- ----- -----
Income before income taxes............ 1.4 1.5 1.6 1.5 0.8
Provision for income taxes............ 0.7 0.6 0.6 0.6 0.3
----- ----- ----- ----- -----
Net income............................ 0.7% 0.9% 1.0% 0.9% 0.5%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1994 Compared to Six Months Ended June 30, 1993
Net sales increased 68.2% from $1,405.9 million in 1993 to $2,365.1 million
in 1994. The increase in net sales was due to the impact of the ComputerLand
Acquisition, as well as an increase in the number of vendors and products the
Company is authorized to sell in various geographic markets. The Company also
increased its market share of certain vendor products in various geographic
markets. Net sales for Merisel FAB were $472.5 million, or 20% of consolidated
net sales, for the six months ended June 30, 1994.
Geographically, the Company's net sales for the six months ended June 30,
1994 were generated as follows: United States, $1,595.8 million, or 67.5%;
Canada, $259.4 million, or 11%; Europe, $366.4 million, or 15.5%; and other
international markets, $143.5 million, or 6%. From 1993 to 1994, these
geographic regions experienced sales growth rates as follows: United States,
82.9% (28.7% excluding Merisel FAB); Canada, 45.3%; Europe, 44.4%; and other
international markets, 38.2%.
In the United States, including Merisel FAB, hardware and accessories
accounted for 74% of net sales, and software accounted for 26% of net sales in
1994, as compared to 56% and 44%, respectively, in 1993. The increase in
hardware sales is due to the fact that the Company has obtained additional
rights to distribute hardware products throughout the world from various
vendors and to the fact that Merisel FAB's revenues are predominantly hardware-
related.
Gross profit increased 38.4% from $118.6 million in 1993 to $164.1 million in
1994. Gross profit as a percentage of sales, or gross margin, decreased from
8.4% in 1993 to 6.9% in 1994. The decrease in gross margin is principally
attributable to competitive pressures on pricing worldwide and the effect of
the ComputerLand Acquisition. Merisel FAB has lower gross margins than those of
the Company's wholesale distribution business. Merisel FAB's operating expenses
as a percentage of sales, however, are generally lower than the Company's
wholesale distribution business, which helps offset the lower gross margins.
The Company anticipates that it will continue to experience downward pressure
on gross margin due to industry price competition.
Selling, general and administrative expenses ("SG&A") increased 46.6% from
$87.8 million in 1993 to $128.7 million in 1994. SG&A decreased as a percentage
of net sales from 6.2% in 1993 to 5.4% in 1994.
17
<PAGE>
The absolute dollar increase in SG&A is primarily due to costs associated with
the Company's 68.2% increase in net sales. The decrease in SG&A as a percentage
of sales is due to Merisel FAB's lower operating expenses as a percentage of
sales compared to that of Merisel's wholesale distribution business.
Operating income increased 15.1% from $30.8 million in 1993 to $35.4 million
in 1994. Operating income as a percentage of net sales was 2.2% in 1993 and
1.5% in 1994. Operating income for the Company's U.S. distribution business
declined as a result of lower margins and higher operating expenses. In
addition, the Company's European operations continued to experience net
operating losses as a result of continued competitive pressure on margins as
well as an increase in operating costs in Europe as a result of the Company's
implementation of its long-term strategy to centralize and integrate its
European operations.
Interest expense increased 40.9% from $8.9 million in 1993 to $12.6 million
in 1994, but decreased from 0.6% to 0.5% as a percentage of net sales in 1993
compared to 1994. The increase in interest expense is primarily attributable to
the Company's higher average borrowings in 1994, which reflected the need to
finance the ComputerLand Acquisition and to finance higher levels of working
capital to support increased sales.
Other expenses increased from $0.6 million in 1993 to $4.9 million in 1994,
primarily due to fees of $2.7 million incurred in connection with accounts
receivable securitizations, a write-off of costs of $0.5 million incurred in
connection with the Company's withdrawal of its common stock offering in May
1994, and an increase in foreign currency transaction losses of $0.6 million
experienced by the Company's Mexican subsidiary.
The Company's provision for income taxes decreased 25.1% from $8.9 million in
1993 to $6.6 million in 1994, reflecting the Company's decreased income before
income taxes. The Company's effective tax rate declined from 41.6% in 1993 to
36.9% in 1994. The lower effective tax rate reflects the increased utilization
of tax loss carryforwards by certain of the Company's foreign subsidiaries in
1994.
Net income decreased 9% from $12.4 million in 1993 to $11.3 million in 1994.
Net income per share decreased from $0.41 in 1993 to $0.37 in 1994. The
Company's weighted average number of shares increased from 30,308,000 shares in
1993 to 30,764,000 shares in 1994.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
The Company's net sales increased 37.8% to $3.1 billion in 1993 from $2.2
billion in 1992, reflecting significant growth in both domestic and
international sales. The Company believes this increase is due principally to
the establishment of new relationships with manufacturers in various markets
around the world, the introduction of new products by existing manufacturers,
increased customer demand for computer products and increased use of wholesale
distribution by manufacturers in their distribution channels. The Company's
1992 fiscal year included 53 weeks due to the timing of the fiscal year end,
while the 1993 fiscal year contained 52 weeks. See Note 1 of Notes to
Consolidated Financial Statements.
Geographically, the Company's 1993 net sales were generated as follows:
United States, $1.95 billion, or 63%; Canada, $395 million, or 13%; Europe,
$532 million, or 17%; and other international markets,$207 million, or 7%. From
1992 to 1993, these geographic regions experienced sales growth rates of 32.3%,
30.7%, 64.1% and 51.4%, respectively. The Company's higher sales growth rate in
Europe resulted in part from the addition of new manufacturer relationships in
various European markets. In the United States, the Company's sales increase
was due in part to new product offerings from computer systems and other
hardware manufacturers. In the United States, hardware and accessories
accounted for 60.5% of net sales, and software accounted for 39.5% of net sales
in 1993, as compared to 55.9% and 44.1%, respectively, in 1992. For additional
information on the Company's operating results by geographic region, see Note
10 of Notes to Consolidated Financial Statements.
Gross profit increased 27.7% to $258.5 million in 1993 from $202.4 million in
1992, reflecting the higher 1993 net sales. Gross margin declined to 8.4% in
1993 from 9.0% in 1992, principally as a result of continuing competitive
pricing pressures worldwide.
18
<PAGE>
SG&A expenses increased 24.0% to $187.2 million in 1993 from $150.9 million
in 1992, primarily as a result of increased expenses associated with the
Company's 37.8% increase in net sales. SG&A expenses as a percentage of sales
declined to 6.1% in 1993 from 6.7% in 1992, reflecting economies of scale
resulting from higher sales volumes as well as improved operating efficiencies.
The Company's number of full-time equivalent employees increased from 1,939 at
December 31, 1992 to 2,502 at December 31, 1993.
Operating income increased 38.6% to $71.4 million in 1993 from $51.5 million
in 1992, despite small operating losses at the Company's Swiss, Austrian and
French operations. Operating income as a percentage of sales was 2.3% in both
1993 and 1992, as the decline in gross margin of 0.6% in 1993 was offset by a
corresponding decline in SG&A expenses as a percentage of sales.
Interest expense increased 13.1% to $17.8 million in 1993 from $15.7 million
in 1992, but declined as a percentage of sales to 0.6% in 1993 from 0.7% in
1992. The increase in interest expense reflects higher average borrowings,
principally to finance the Company's higher sales levels, offset in part by
lower average interest rates in 1993.
Other expense increased to $2.7 million in 1993 from $1.3 million in 1992,
but other expenses as a percentage of sales remained at 0.1% in both 1992 and
1993. Other expenses in 1993 included the fees paid by the Company in
connection with the sale of an interest in its trade accounts receivables
pursuant to an accounts receivable securitization program instituted in the
third quarter of 1993. See "--Liquidity and Capital Resources." The Company
intends to continue this program in future periods, and other expense is
therefore anticipated to increase as additional fees are incurred.
Provision for income taxes increased 37.8% to $20.4 million in 1993,
reflecting the Company's 47.5% increase in income before income taxes. The
Company's effective tax rate decreased to 40.1% in 1993 from 43.0% in 1992,
primarily as a result of a $1.7 million income tax benefit related to the
restructuring of the Company's Swiss operations in 1993. In addition, net
losses of certain of the Company's subsidiaries that derive no tax benefit from
such losses under local tax laws decreased in 1993.
Net income increased 54.8% to $30.4 million in 1993 from $19.7 million in
1992, while net income per share increased to $1.00 from $0.67. The Company's
weighted average number of shares outstanding increased from 29,274,000 shares
in 1992 to 30,454,000 shares in 1993, reflecting the issuance of 4,600,000
shares in a public offering of the Company's Common Stock in March 1992 and the
exercise of employee stock options.
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
Net sales increased 41.2% to $2.2 billion in 1992 from $1.6 billion in 1991.
The Company believes that this increase in net sales was due primarily to an
increase in market share, customer demand, sales of new products from existing
manufacturers and the establishment of new relationships with manufacturers and
customers. In addition, the Company's 1992 fiscal year included 53 weeks due to
the timing of the fiscal year end. See Note 1 of Notes to Consolidated
Financial Statements.
Hardware and accessories sales accounted for 56.6% of United States net sales
in 1992, with software sales accounting for the remaining 43.4%. In 1991,
hardware and accessories sales accounted for 57.6% of United States net sales,
with software sales accounting for the remaining 42.4%.
Geographically, the Company's 1992 net sales were generated as follows:
United States, $1.5 billion, or 66%; Canada, $303 million, or 14%; Europe, $324
million, or 14%; and other international markets,$137 million, or 6%. The
increase in net sales achieved by the European operations was primarily the
result of sales growth by the Company's United Kingdom and German subsidiaries.
This increase was offset in part by lower than expected sales levels in
Switzerland and France. For additional information on the Company's operating
results by geographic region, see Note 10 of Notes to Consolidated Financial
Statements.
19
<PAGE>
Gross profit increased 28.2% to $202.4 million in 1992 from $158.0 million in
1991, reflecting the increase in net sales in 1992. Gross margin decreased to
9.0% in 1992 from 10.0% in 1991, reflecting continued competitive pressures on
pricing.
SG&A expenses increased 26.1% to $150.9 million in 1992 from $119.7 million
in 1991, but declined as a percentage of net sales to 6.7% in 1992 from 7.5% in
1991. The absolute dollar increase in SG&A expenses was primarily due to costs
associated with the Company's 41.2% increase in net sales. The decrease in SG&A
expenses as a percentage of net sales was the result of economies of scale
resulting from higher sales volume as well as improved operating efficiencies.
The Company's number of full-time equivalent employees increased to 1,939 at
December 31, 1992 from 1,450 at December 31, 1991.
Operating income increased 34.6% to $51.5 million in 1992 from $38.3 million
in 1991, despite continuing operating losses in the Company's Swiss and
Austrian subsidiaries and an operating loss at the Company's French subsidiary.
Operating income as a percent of sales decreased to 2.3% in 1992 from 2.5% in
1991. The 0.2% decrease in operating income as a percent of net sales reflects
the fact that the decrease in gross margin of 1.0% more than offset the
decrease in SG&A expenses as a percentage of net sales of 0.8%.
Interest expense decreased 1.4% to $15.7 million in 1992 from $16.0 million
in 1991 and decreased as a percentage of net sales to 0.7% in 1992 from 1.0% in
1991. The decrease in interest expense is attributable to both the Company's
lower average borrowings in 1992 and a reduction in average funding cost. The
Company's average borrowings under all lines of available credit decreased 2.5%
to $151.2 million in 1992 from $155.0 million in 1991. The decrease in average
borrowings is a result of a public offering of 4,600,000 shares of the
Company's common stock in March 1992, providing net proceeds of $55.7 million,
partially offset by an increase in working capital requirements related to the
Company's growth and an increase in the Company's investing activities,
principally property and equipment expenditures.
The Company's provision for income taxes increased by 39.1% to $14.8 million
in 1992 from $10.7 million in 1991, reflecting the Company's increased income
before income taxes. The Company's effective tax rate declined to 43.0% in 1992
from 49.6% in 1991. The lower effective tax rate reflects the fact that,
although certain of the Company's foreign subsidiaries incurred losses with no
corresponding tax benefit, such losses comprised a smaller percentage of the
Company's consolidated income before taxes in 1992 as compared to 1991.
Net income increased 81.6% to $19.7 million in 1992 from $10.8 million in
1991. Net income per share increased to $0.67 in 1992 from $0.43 in 1991. The
Company's weighted average number of shares increased to 29,274,000 shares in
1992 from 24,896,600 shares in 1991, primarily as a result of a public offering
of 4,600,000 shares of the Company's common stock in March 1992.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue
in the future. Management believes that the factors influencing quarterly
variability include: (i) the overall growth in the microcomputer industry; (ii)
shifts in short-term demand for the Company's products resulting, in part, from
the introduction of new products or updates of existing products; and (iii) the
fact that virtually all sales in a given quarter result from orders booked in
that quarter. Due to the factors noted above, as well as the fact that the
Company participates in a highly dynamic industry, the Company's revenues and
earnings may be subject to material volatility, particularly on a quarterly
basis.
Additionally, the Company's net sales in the fourth quarter have been higher
than in its other three quarters. Management believes that the pattern of
higher fourth quarter sales is partially explained by customer buying patterns
relating to calendar year-end business purchases and holiday-period purchases.
For a tabular presentation of certain quarterly financial data with respect to
1992, 1993 and 1994, see Note 11 of Notes to Consolidated Financial Statements.
20
<PAGE>
ACQUISITION OF COMPUTERLAND BUSINESS
Through the ComputerLand Acquisition, Merisel now operates the ComputerLand
Business, a leading master reseller of computer systems and related products
from the major microcomputer manufacturers to a network of approximately 750
independently-owned computer products resellers, including ComputerLand
franchisees and affiliated resellers purchasing through the Datago program. See
"Business--ComputerLand Business."
On a pro forma combined basis for the year ended December 31, 1993, the
ComputerLand Acquisition would have increased net sales by $1.1 billion, gross
profit by $54.7 million and operating income by $13.3 million. See "Unaudited
Pro Forma Condensed Combined Statements of Income." Gross margin and SG&A
expenses as a percentage of net sales for this period were 5.1% and 3.9%,
respectively, reflecting the lower margins and lower SG&A expenses incurred in
the master reseller, or aggregator, business as compared to the Company's
existing wholesale distribution business. The ComputerLand Business' operating
margin as a percentage of net revenues for this period was 1.2%.
As a master reseller, the ComputerLand Business supplies a significantly
smaller number of products to a significantly smaller number of customers than
the Company's existing distribution business. See "Business--The Industry,"
"Business--Products and Manufacturer Services" and "Business--Customers and
Customer Services." Master resellers focus on supplying computer systems and
other higher-volume products to their customers while the Company's existing
business supplies a wide range of products to many different types of
customers. Certain of the larger computer manufacturers, such as Apple, Compaq,
Hewlett-Packard and IBM, have historically required resellers to purchase their
products from an affiliated aggregator, such as the ComputerLand Business.
Wholesale distributors have not been authorized to sell these manufacturers'
key microcomputer components, except on a limited basis.
For the fiscal year ended September 30, 1993, approximately 76% of the
ComputerLand Business' revenues were generated from the sale of products from
four manufacturers: Apple, Compaq, Hewlett-Packard and IBM. The loss of any one
of these four manufacturers, or a change in the way any of these manufacturers
markets, prices or distributes its products, could have a material adverse
effect on the ComputerLand Business' operations and financial results.
Specifically, to the extent that one of the leading four manufacturers changes
its current system of limiting authorization to sell its products to master
resellers, the ComputerLand Business' sales levels would be adversely affected.
The Company believes, however, that its existing wholesale distribution
business may benefit from such changes.
All of the ComputerLand Business' franchisees are electronically linked for
the purposes of order placement and other communications, reducing the need for
sales representatives and support personnel in comparison to the Company's
existing business. In addition, over 95% of the ComputerLand Business'
customers currently finance their orders through "floor plan" financing
companies or pay on a C.O.D. basis, reducing the need for credit and collection
personnel and reducing financing costs because of improved cash flow.
As a result of the foregoing as well as other factors, master resellers such
as the ComputerLand Business tend to generate both lower gross margins and
lower operating expenses as a percentage of sales than those generated by the
Company in its existing distribution business.
Competition among master resellers is intense (see "Business--Competition"),
and the ComputerLand Business may experience downward pressures on its gross
margins due to competitive pricing decisions. Under the Services Agreement,
Vanstar will perform a material portion of the ComputerLand Business'
distribution functions for a contractually agreed-upon fee for up to a two-year
period. As a result of this outsourcing arrangement, the ComputerLand Business
does not directly control the costs of those distribution functions, and
therefore will be limited in its ability to lower its costs in response to a
lower gross margin environment during the two-year term of the Services
Agreement. Due to this limitation, the Services
21
<PAGE>
Agreement provides that the service fee, as a percentage of sales volume,
decreases if the ComputerLand Business' sales volume increases over a specified
amount. Further, in the event sales volume does not increase over a specified
amount, and the ComputerLand Business' gross margin declines, the Services
Agreement provides for a limited reduction in the service fee to offset
partially the decline in gross margin. Notwithstanding these contractual
provisions, a material decline in the ComputerLand Business' gross margins
could have a material adverse effect on the Company's results of operations.
Over 76% of the ComputerLand Business' sales currently are financed on behalf
of such customers by floor plan financing companies. The ComputerLand Business
typically receives payment from these financing companies within three business
days from the date of sale, resulting in reduced cash requirements for the
ComputerLand Business as compared to the Company's existing wholesale
distribution business. This floor plan financing is typically subsidized for
the ComputerLand Business' customers by its manufacturers. Any material change
in the availability or the terms of financing offered by such financing
companies or in the subsidies provided by manufacturers could require the
ComputerLand Business to provide such financing to its customers, thereby
substantially increasing the working capital necessary to operate its business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs primarily through
borrowings, income from operations, the public and private sales of its
securities and securitizations of its accounts receivable.
Net cash used for operating activities in 1993 was $125.4 million, as
compared to net cash used for operating activities in 1992 of $58.6 million.
The primary uses of cash in 1993 were increases in accounts receivables of
$194.2 million, reflecting the Company's higher sales volumes, especially in
December 1993, and greater sales to customers with extended credit terms, and
inventories of $142.9 million, reflecting the Company's higher sales volumes.
Sources of cash from operating activities included net income, after adjustment
for non-cash items, of $55.9 million and an increase in accounts payable of
$166.3 million. Net cash used in operating activities during the six months
ended June 30, 1994 was $6.7 million. Sources of cash from operating activities
include net income and non-cash charges of $26.8 million and an increase in
accounts payable and accrued liabilities of $67.8 million. The primary uses of
cash during the period were a $47.4 million increase in accounts receivable and
a $54.6 million increase in inventories. The increase in accounts receivable
was due primarily to the increase in sales volume and the increase in inventory
was due to the current and anticipated sales growth as well as the addition of
new product lines.
Net cash used for investing activities in 1993 was $25.1 million, principally
reflecting investments in new computer systems, new warehouse management
systems and new distribution facilities and equipment. The Company presently
anticipates that its capital expenditures for 1994 will be approximately $25
million, principally for development and implementation of new computer systems
in North America, new warehouse management systems, new computer systems for
the Company's European operations and a new distribution center in Europe. Net
cash used for investing activities during the six months ended June 30, 1994
was $97.2 million, reflecting the ComputerLand Acquisition and property and
equipment expenditures. The expenditures for property and equipment were
primarily for the upgrading of existing facilities, leasehold improvements, the
upgrading of the Company's computer systems and expenditures for a new
warehouse management system. See "Business--Operations and Distribution" and
"Business--International Operations."
Net cash provided by financing activities in 1993 was $156.8 million,
composed principally of net borrowings under domestic revolving lines of credit
of $70.1 million, net borrowings under foreign bank facilities of $10.2 million
and proceeds from the sale of an interest in the Company's trade accounts
receivables of $75.0 million pursuant to a receivables securitization program.
Net cash provided by financing activities during the six months ended June 30,
1994 was $101 million, composed of borrowings of $65 million in connection with
the ComputerLand Acquisition, and proceeds from the sale of an interest in the
22
<PAGE>
Company's trade accounts receivable of $75 million pursuant to a receivables
securitization program. Net cash used for financing activities was $39.4
million representing net repayments under domestic revolving lines of credit
and various local lines of credit maintained by the Company and its
subsidiaries.
To provide capital for the Company's operating and investing activities, the
Company and its subsidiaries, including Merisel Americas, Merisel Europe and
Merisel FAB, maintain a number of credit facilities. Merisel Americas and
Merisel Europe are co-borrowers under a $150 million unsecured revolving bank
credit facility expiring on May 31, 1997. At July 31, 1994, approximately
$109.2 million was outstanding under this facility, composed of approximately
$104.2 million in direct borrowings and $5 million in outstanding letters of
credit. A portion of the net proceeds of the Offering will be used to reduce
the balance due under this facility. See "Use of Proceeds." To provide for its
anticipated working capital needs, on December 23, 1993, Merisel FAB entered
into a $10 million unsecured revolving credit agreement. This agreement expires
on January 29, 1995. At July 31, 1994, no amount was outstanding under this
agreement. The Company and its subsidiaries also maintain various local lines
of credit, primarily to facilitate overnight and other short-term borrowings.
The total amount of outstanding borrowings under these lines as of June 30,
1994 was $29.6 million.
Merisel Americas has also entered into a $150 million trade accounts
receivable securitization agreement pursuant to which it sells on an ongoing
basis an undivided interest of up to $150 million in designated trade
receivables to a syndicate of purchasers. At June 30, 1994, $150 million of net
accounts receivable were sold under this agreement. The receivables are sold at
face value and fees paid in connection with such sales are recorded by the
Company as "Other expense." This facility expires in November 1994. Merisel
Americas is currently negotiating an extension of this agreement. See "Certain
Indebtedness and Financing Arrangements--Sales of Trade Accounts Receivable."
To finance the ComputerLand Acquisition, the Company borrowed $65 million
under an unsecured credit agreement with a bank lender. This agreement expires
on January 29, 1995, but is subject to mandatory prepayment upon any debt or
equity issuance by the Company. A portion of the net proceeds of the Offering,
therefore, will be used to prepay this borrowing in full. See "Use of
Proceeds." Merisel FAB also borrowed $16 million, the balance of the
ComputerLand Acquisition purchase price, under a separate credit agreement,
which was repaid in full on February 15, 1994.
Merisel Americas also has outstanding $100 million of 8.58% senior notes due
June 30, 1997, and $22 million of 11.28% subordinated notes due in five equal
annual principal installments, beginning in March 1996. For more information
regarding the Company's credit agreements, see "Certain Indebtedness and
Financing Arrangements" and Notes 6 and 7 of Notes to Consolidated Financial
Statements.
In connection with the ComputerLand Acquisition, Merisel FAB and Vanstar
entered into the Services Agreement pursuant to which Vanstar will provide
significant distribution and other support services to Merisel FAB for up to
two years for a contractually agreed-upon fee. See "Business--ComputerLand
Business." Under the Services Agreement, Merisel FAB has been granted $20
million in extended credit terms on its product purchases from Vanstar.
Merisel believes that its existing cash balances, together with the proceeds
of the Offering, income from operations and borrowings under lines of credit
will be sufficient to meet its working capital and capital investment needs
through at least the next twelve months.
ASSET MANAGEMENT
Merisel attempts to manage its inventory position to maintain levels
sufficient to achieve high product availability and same-day order fill rates.
Inventory levels may vary from period to period, due in part to increases or
decreases in sales levels, Merisel'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 manufacturers which contain stock balancing and price protection
provisions intended to reduce, in part, Merisel's risk of loss due to slow
moving or obsolete inventory or manufacturer price reductions. In the event of
a manufacturer price reduction, the Company generally receives a credit for
products in inventory. In addition, the Company has the right to return a
certain percentage of purchases, subject to certain limitations. Historically,
price protection and stock return
23
<PAGE>
privileges as well as the Company's inventory management procedures have helped
to reduce the risk of loss of carrying inventory.
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. With respect to credit sales,
the Company attempts to control its bad debt exposure through monitoring of
customers' creditworthiness and, where practicable, through participation in
credit associations that provide credit rating information about its customers.
In certain foreign markets, the Company may elect to purchase credit insurance
for certain accounts.
24
<PAGE>
BUSINESS
OVERVIEW
Merisel is the largest worldwide publicly-held wholesale distributor of
microcomputer hardware and software products. Through its full-line, channel-
specialized distribution business, Merisel combines the comprehensive product
selection and operational efficiency of a full-line distributor with the
customer support of a specialty distributor offering dedicated sales
organizations to each of its customer groups. On January 31, 1994, the Company
completed the acquisition of the ComputerLand Business. The ComputerLand
Business is a leading aggregator, or master reseller, of computer systems and
related products from major microcomputer manufacturers, including Apple,
Compaq, Hewlett-Packard and IBM, to a network of approximately 750
independently-owned computer product resellers in the United States. With the
acquisition of the ComputerLand Business, the Company has become the industry's
first "Master Distributor," combining the strengths of a full-line, channel-
specialized distributor with those of a master reseller. As a Master
Distributor, the Company believes it is well positioned to offer a wider
selection of microcomputer products to more categories of customers than any of
its competitors.
At June 30, 1994, Merisel stocked over 25,000 products from more than 900 of
the microcomputer hardware and software industry's leading manufacturers,
including Apple, AST, Borland, Colorado Memory Systems, Compaq, Creative Labs,
Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard, IBM, Intel,
Lotus, Microsoft, NEC, Novell, Okidata, Sun Microsystems, Symantec, Texas
Instruments, 3Com, Toshiba, WordPerfect and Wyse. Merisel sells products to
over 65,000 computer resellers worldwide, including value-added resellers,
large retail chains and franchisees, computer superstores, mass merchants,
Macintosh and Unix resellers, system integrators and original equipment
manufacturers. In order to effectively service its large and diverse
international customer base, the Company currently maintains 20 distribution
centers that serve North America, Europe, Latin America, Australia and other
international markets. The breadth of the Company's product line, together with
its international distribution network, enable the Company to provide its
customers with a single source of supply and prompt delivery of product. For
the six months ended June 30, 1994, the Company's net sales by geographic
region were generated as follows: United States, 67.5%; Canada, 11%; Europe,
15.5%; and other international markets, 6%.
THE INDUSTRY
The microcomputer products distribution industry is large and growing,
reflecting both increasing demand worldwide for computer products and the
increasing use of wholesale distribution channels by manufacturers for the
distribution of their products. The industry moves product from manufacturer to
end-user through a complex combination of distribution agreements between
manufacturers, wholesale distributors, aggregators and resellers. Historically,
there have been two types of companies within the industry: those that sell
directly to the end-user ("resellers") and those that sell to resellers
("wholesale distributors" and "aggregators", which are also called "master
resellers").
Resellers sell directly to end-users, including large corporate accounts,
small- and medium-sized businesses and home users. The major reseller channels
are dealers and corporate resellers, value-added resellers ("VARs"), mail-order
firms and retailers (computer superstores, office supply chains and mass
merchants). VARs, which account for one of the largest segments of the overall
reseller channel, typically add value by combining proprietary software and/or
services with off-the-shelf hardware and software.
Wholesale distributors generally purchase a wide range of products in bulk
directly from manufacturers and then ship products in smaller quantities to
many different types of resellers, who typically include dealers, VARs, system
integrators, mail order resellers, computer products superstores and mass
merchants. Aggregators, or master resellers, are functionally similar to
wholesale distributors, but they focus on selling relatively few product lines,
typically high-volume, brand-name computer systems, to a captive network of
franchised dealers and affiliates. The larger computer manufacturers, such as
Apple, Compaq, Hewlett-Packard and IBM, have historically required resellers to
purchase their products from an affiliated aggregator,
25
<PAGE>
such as the ComputerLand Business. Wholesale distributors have not been
authorized to sell these manufacturers' key microcomputer components, except on
a limited basis. These restrictions have been eased recently, and may continue
to be eased and eventually be eliminated, with the result that the distinction
between wholesale distributors and master resellers may blur. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of ComputerLand Business."
With the acquisition of the ComputerLand Business, the Company has become the
industry's first Master Distributor, combining the strengths of a full-line,
channel-specialized distributor with those of a master reseller.
BUSINESS STRATEGY
Merisel has achieved its leading position by pursuing a strategy of offering
the industry's leading products and services to its customers at competitive
prices, providing cost-effective customer service through efficient operations,
expanding the Company's international business and targeting its various
customer groups using dedicated sales forces and marketing programs.
Providing Leading Products and Services. The Company's objective is to offer
the broadest range of leading product brands in each of the product categories
it carries. By stocking the leading brands, the Company generates sales of both
those and other product brands, as reseller customers often prefer to deal with
a single source for many of their product needs. The Company continuously
evaluates new products, the demand for its current products as well as its
overall product mix and seeks to develop distribution relationships with
suppliers of products that enhance the Company's product offerings. The Company
believes that the size of its reseller customer base, its international
distribution capability and both the breadth and quality of its marketing
support programs give it a competitive advantage over smaller, regional
distributors in developing supplier relationships.
As a result of the ComputerLand Acquisition, the Company, through the
ComputerLand Business, is now able to offer to the ComputerLand Business'
franchisees and affiliates a broad range of microcomputer systems and other
products from Apple, Compaq, Hewlett-Packard and IBM. Although the Company
distributes certain products of these leading manufacturers through its
wholesale distribution arrangements, neither the Company nor its direct
wholesale distribution competitors have been authorized to sell these
manufacturers' key microcomputer systems in the United States, except on a
limited basis. Instead, these manufacturers historically have distributed their
products directly to resellers and through aggregators such as ComputerLand
Corporation. See "--The Industry."
The Company believes that an opportunity exists to generate additional,
higher-margin revenues by offering fee-based services and information to
manufacturers and resellers. In 1993, the Company formed the Channel Services
Group to provide a variety of these services, including telemarketing,
merchandising and electronic software services.
Pursuing Operational Excellence. The Company believes that high levels of
customer service and operating efficiency, or "operational excellence," are
important factors in achieving and maintaining success in the highly
competitive microcomputer products distribution industry. The Company measures
operational excellence by such standards as "ease of doing business," accuracy
and efficiency in delivering products and expediting the delivery of services
and information. Merisel constantly strives to improve its operational
processes. In furtherance of this strategy, the Company is in the process of
upgrading and improving its computer operating systems as well as its warehouse
management systems. See "--Operations and Distribution." In addition, the
Company is reorganizing its European operations, adding new management
personnel and centralizing certain functions to achieve economies of scale.
Merisel will seek to continue to refine the operational systems at its foreign
sales offices and distribution centers in order to increase the uniformity and
efficiency of the Company's worldwide operations. See "--International
Operations." These changes are intended to enhance the Company's ability to
offer faster, more efficient and accurate service to its customers.
Expanding Internationally. Merisel believes that it generates one of the
largest volumes of international sales of any U.S.-based distributor, is the
largest wholesale distributor of computer products in Canada and
26
<PAGE>
is a leading distributor in Europe, Mexico, Australia and Latin America. See
"--International Operations." The Company believes that many international
markets will offer growth and profit opportunities due to the underdeveloped
and fragmented nature of the microcomputer distribution industry in these
markets. Merisel believes it is well positioned to capitalize on the
opportunities presented in a number of these markets because of the current
scope of its international operations and its ability to offer a broader range
of products and specialized services than many of its competitors. The
Company's strategy is to expand its international operations through internal
growth and the possible acquisition of existing distributors or the
establishment of new operations in other countries.
Targeting Customer Groups. Merisel serves a variety of reseller channels,
which have diverse product, financing and support needs. Merisel was the first
full-line distributor in the industry to offer its various customer groups a
channel-dedicated sales force as well as customized product offerings,
financing programs and marketing and technical support programs, all of which
are tailored to address the differing needs of these customer groups. The
Company intends to continue to monitor the markets it serves to identify
customer opportunities and develop sales and marketing programs that serve
these groups more effectively. In furtherance of this strategy, on January 31,
1994 the Company completed the ComputerLand Acquisition.
PRODUCTS AND MANUFACTURER SERVICES
Merisel provides its manufacturers with access to one of the largest bases of
computer resellers worldwide while offering these manufacturers the means to
reduce the inventory, credit, marketing and overhead costs associated with
establishing a direct relationship with these resellers. This factor, along
with Merisel's access to financial resources and its economies of scale, has
allowed the Company to establish and develop long-term business relationships
with many of the leading manufacturers in the microcomputer industry. Merisel
distributes over 25,000 hardware and software products, including products for
the MS-DOS, OS/2, Macintosh, Apple and UNIX operating environments. For the
fiscal year ended December 31, 1993, net worldwide sales of hardware and
accessories accounted for approximately 60% of the Company's net sales, and
sales of software products accounted for the remaining 40% of net sales. In
addition, for the three months ended June 30, 1994, the first quarter which
reflects the results of operations of the ComputerLand Business for an entire
quarter, net worldwide sales of hardware and accessories accounted for
approximately 75% of the Company's net sales, and sales of software products
accounted for the remaining 25% of net sales.
Merisel's suppliers include many of the leading microcomputer software and
hardware manufacturers, such as Apple, AST, Borland, Colorado Memory Systems,
Compaq, Creative Labs, Digital Equipment Corporation, Epson, Hayes, Hewlett-
Packard, IBM, Intel, Lotus, Microsoft, NEC, Novell, Okidata, Sun Microsystems,
Symantec, Texas Instruments, 3Com, Toshiba, WordPerfect and Wyse. In October
1993, Merisel was selected as one of two distributors in the U.S. of Sun
Microsystems' products. Software products include business applications such as
spreadsheets, word processing programs and desktop publishing and graphics
packages, as well as a broad offering of operating systems, including local
area network operating systems, advanced language and utility products.
Hardware products offered by the Company include computer systems, printers,
monitors, disk drives and other storage devices, modems and other connectivity
products, plug-in boards and accessories. The ComputerLand Acquisition
increased the Company's ability, through the ComputerLand Business, to
distribute the product offerings of Apple, Compaq, Hewlett-Packard and IBM to
the ComputerLand Business' franchisees and affiliates. See "--The Industry."
In addition to providing manufacturers access to one of the largest bases of
computer resellers worldwide, the Company also enables manufacturers to offer
efficiently a number of special promotions, training programs and marketing
services targeted to the needs of specific reseller groups. Merisel runs a
variety of special promotions for manufacturers' products, ranging from price
discounts and bundled purchase discounts to specialized computer reseller
marketing programs, including the Vantage and Frequent Buyer Programs. These
promotional programs are designed to encourage computer resellers to increase
their volume of purchases, motivate resellers to purchase within a limited time
period and highlight specific manufacturers' products or promotion
opportunities. Additionally, Merisel provides marketing consultation services
for manufacturers' strategic marketing campaigns, as well as the opportunity to
be included in
27
<PAGE>
Merisel-sponsored trade advertisements. Merisel's marketing program specialists
work with designated manufacturers to develop and carry out marketing programs
such as dealer commission programs, sales contests and other promotions.
Merisel can also provide dedicated marketing support and targeted customer
information from its database to enhance manufacturers' product promotions.
The Company also offers two exclusive training programs: Softeach, a two-day
worldwide seminar series whereby manufacturers train resellers about their
products, and Selteach, a training seminar series that gives manufacturers an
opportunity to provide product information to Merisel's United States sales
force. In 1993, Merisel offered Softeach seminars in 26 cities and 11
countries. Merisel, through third-party consultants, also conducts training
classes regarding certain Novell, 3Com, The Santa Cruz Operation, Digital
Equipment Corporation, Sun Microsystems, Microsoft and Lotus products for its
reseller customers.
Merisel generally enters into written distribution agreements with the
manufacturers of the products it distributes. As is customary in the industry,
these agreements usually provide non-exclusive distribution rights and often
contain territorial restrictions which limit the countries in which Merisel is
permitted to distribute the products. The agreements generally provide Merisel
with stock balancing and price protection provisions which reduce in part
Merisel's risk of loss due to slow-moving inventory, supplier price reductions,
product updates or obsolescence. The Company's agreements generally have a term
of at least one year, but often contain provisions permitting earlier
termination by either party upon written notice. Some of these agreements
contain minimum purchase amounts. Failure to purchase at such minimum levels
could result in the termination of the agreement.
Although Merisel regularly stocks products and accessories supplied by more
than 900 manufacturers, 45% of the Company's net sales in 1993 (as compared to
46% in 1992 and 47% in 1991) were derived from products supplied by Merisel's
ten largest manufacturers, with the sale of products manufactured by Microsoft
accounting for approximately 16% of net sales in 1993 (as compared to 17% in
1992 and 15% in 1991). The loss of the ability to distribute a particularly
popular product could result in losses of sales unrelated to that product. The
loss of a direct relationship between the Company and any of its key suppliers
could have an adverse impact on the Company's business and financial results.
CUSTOMERS AND CUSTOMER SERVICES
Merisel sells to more than 65,000 computer resellers worldwide. Merisel's
customers include VARs, large hardware and software retail chains and
franchisees, computer superstores, mass merchants, Macintosh, UNIX and other
corporate resellers, systems integrators and original equipment manufacturers
as well as independently owned retail outlets and consultants. Merisel's
smaller customers often do not have the resources to establish a large number
of direct purchasing relationships or stock significant product inventories.
Consequently, they tend to purchase a high percentage of their products from
distributors. Larger resellers often establish direct relationships with
manufacturers for their more popular products, but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products which may
not be available on a timely basis from manufacturers. No single customer
accounted for more than 3.0% of Merisel's net sales in 1991, 1992 or 1993.
In Merisel's wholesale distribution business, the Company offers its
customers a single source of supply, prompt delivery, financing programs and
customer support.
Single Source Provider. Merisel offers computer resellers a single source for
over 25,000 competitively priced hardware and software products. By purchasing
from Merisel, the reseller only needs to comply with a single set of ordering,
billing and product return procedures and may also benefit from attractive
volume pricing. In addition, resellers are typically allowed, within specified
time and dollar limits, to return slow-moving products from one manufacturer in
exchange for more popular products from other manufacturers. Merisel's policy
is to not grant cash refunds. Merisel has recently initiated a program that
provides incentives to ComputerLand franchisees and Datago affiliates to make
all their product purchases from Merisel and Merisel FAB.
28
<PAGE>
Prompt Delivery. In most areas of the world serviced by the Company, orders
received by 5:00 p.m. local time are typically shipped the same day, provided
the required inventory is in stock. Merisel maintains sufficient inventory
levels in the United States to ship consistently in excess of 95% of all units
ordered on the day of receipt. Merisel typically delivers products from its
regional warehouses via United Parcel Service and other common carriers, with
customers in most areas in the United States receiving orders within one to two
working days of shipment. Merisel also will provide overnight air handling if
requested and paid for by the customer. These services allow computer resellers
to minimize inventory investment and provide responsive service to their
customers. For larger customers in the United States, Merisel also provides a
fulfillment service so that orders are shipped directly to the computer
resellers' customer, thereby reducing the need for computer resellers to
maintain inventories of certain products. The Company's foreign subsidiaries
may have lower fill rates and longer delivery times due to differing market
requirements and the smaller size of their operations.
Financing Programs. Merisel's credit policy for qualified resellers
eliminates the need to establish multiple credit relationships with a large
number of manufacturers. In addition, the Company arranges floor plan and lease
financing through a number of credit institutions and offers a program that
permits credit card purchases by qualified customers. To allow certain
resellers to purchase larger orders in the United States, the Company offers a
"financing desk" which seeks to arrange alternative financing such as escrow
programs and special bid financing from financial institutions.
Customer Support. Merisel offers a number of customer loyalty programs,
including the Vantage and Frequent Buyer Programs, which provide incentives to
resellers to aggregate their purchases through Merisel. The Vantage Programs
offer Merisel's top-volume customers within the VAR and value-added dealer
channels increased levels of service and pricing advantages. Merisel's Frequent
Buyer Program awards resellers with credits based on the dollar amount of their
purchases from Merisel, which credits are redeemable for travel, education and
merchandise and for activities such as product promotions and advertisements.
The cost of the Frequent Buyer Program is funded by cooperative marketing
dollars paid by Merisel's suppliers.
Merisel furnishes its computer resellers with a series of publications
containing detailed information on products, pricing, promotions and
developments in the industry. Merisel publishes a Confidential Reseller Price
Book, which lists Merisel's current product offerings. Merisel also publishes
the Hot List, which ranks Merisel's current best-selling hardware and software
products in four different reseller channels. In addition, Merisel's On-Line
Literature Library offers over 20,000 data sheets of product information
literature on a fax-back system and on CD-ROM.
Merisel provides training and product information to its reseller customers
through its well-respected Softeach program, a worldwide series of training
forums whereby manufacturers conduct seminars on how to sell their products.
Softeach is held periodically in major cities throughout the United States,
Canada, Australia and Europe. In 1993, the Company believes that over 15,000
computer resellers attended Softeach seminars held in 11 countries worldwide.
Merisel also provides computer resellers with a technical support "hotline," as
well as specialized technical support for virtually all product lines sold by
Merisel. In addition, Merisel's Technical Support department provides regular
product training seminars to Merisel's sales representatives to help them
become more product-knowledgeable.
29
<PAGE>
SALES AND MARKETING
To reach diverse customer segments, the Company has organized its Sales
department for its wholesale distribution business in the United States into
nine dedicated sales divisions, which serve the dealer, VAR and consumer
channel segments.
Dealer Channel. This channel is served by the following specialized sales
divisions:
. The RETAILER division serves franchisees, independent retail chains and
storefronts, corporate resellers and direct-mail marketers.
. The RESELLER FULFILLMENT division serves the needs of direct marketers
such as Dell, IBM and Zenith through the fulfillment of orders for
third-party hardware and software products.
. The MAJOR ACCOUNTS division serves Merisel's large franchisee accounts,
computer superstores and computer retail chains through a specialized
staff that offers enhanced services, volume purchase agreements,
corporate office coordination, marketing programs and sales report data.
. The MACINTOSH division provides expertise in sales and support of third-
party Macintosh products worldwide through its own separate marketing,
sales, products and technical support and purchasing departments.
VAR Channel. This channel is served by the following specialized sales
divisions:
. The VAR division provides value-added resellers with highly
knowledgeable sales representatives, a comprehensive line of computer
systems, UNIX and connectivity products, education, financial services
and technical support.
. The ADVANCED PRODUCTS division (formerly the UNIX division) is primarily
dedicated to selling and supporting Sun Microsystems and Sun-
complementary products through its own sales, marketing, operations and
technical support departments.
. The OEM division supports Merisel's customers who integrate and/or
manufacture microprocessor-based systems and solutions utilizing OEM
versions of Merisel's hardware and software products.
. The recently created SYSTEM INTEGRATOR division supports large system
and network integrators who require specialized programs and services.
Consumer Channel.
. The CONSUMER PRODUCTS division targets mass merchants such as Circuit
City, Montgomery Ward and Office Depot by providing inventory selection
and control services, specialized marketing programs and other support
services tailored to the needs of mass-market merchandisers.
For each of the Company's international subsidiaries, the number and type of
specialized sales divisions vary based on market requirements, the size of the
subsidiary's sales force and the products carried by the subsidiary.
The Company's sales force is composed of field sales representatives who
manage relations with the larger accounts and inside telemarketing sales
representatives who receive product orders and answer customer inquiries. When
a customer calls Merisel, screen synchronization technology causes a sales
profile to appear on the sales representative's computer screen before
greetings are exchanged. Customer orders generally are placed via a toll-free
telephone call to Merisel's inside sales representatives and are entered on
Merisel's SalesNet order entry system, a proprietary local area network created
by Merisel to speed the process of taking and processing orders. Using the
SalesNet database, sales representatives can immediately enter customer orders,
obtain descriptive information regarding products, check inventory status,
determine customer credit availability and obtain special pricing and promotion
information. Merisel also offers Dial-Up
30
<PAGE>
SalesNet, a system that allows a customer, through the use of its own personal
computer and a modem, to access Merisel's database to examine pricing, credit
information, product description and availability and promotional information
and to place orders directly into Merisel's order processing system. For
certain of its larger customers, the Company has installed electronic data
interchange (EDI) systems which allow participating customers to directly
access the Company's mainframe computer system for order processing and account
information.
OPERATIONS AND DISTRIBUTION
The Company operates 20 distribution centers around the world, including
eight in the United States, two in Canada, five in Europe, four serving Latin
America and one in Australia. All of these distribution centers are leased,
except for one facility in Mexico, which is owned by the Company. In addition,
pursuant to the terms of the Services Agreement, Vanstar will continue to
provide distribution and other support services to the ComputerLand Business
operated by Merisel FAB for a period of up to two years ending January 31,
1996. See "--ComputerLand Business."
The Company's United States, Canadian and United Kingdom operations, other
than Merisel FAB, are conducted using a mainframe-based computer system,
originally implemented in the early 1980s, that operates on hardware owned and
operated by a third-party service provider. In recent years, the Company has
experienced a significant increase in both its sales volume and in the number
and types of transactions processed by the computer system. The Company
believes that the ability of its existing computer system in North America to
process the increased sales volumes contemplated for 1994 and the first three
quarters of 1995 is limited without certain modifications to the system. The
Company is in the process of implementing such modifications and believes such
modifications will be successful. If, however, there is a delay in implementing
the modifications, or if the system, as modified, performs below anticipated
service levels, the existing system may not be able to accommodate anticipated
increases in sales volumes and transaction requirements in the fourth quarter
of 1994, which in turn could have a negative effect on the Company's business
and financial results. As a result, the Company is making a significant
investment in new advanced computer and warehouse management systems for its
North American operations.
These new systems are designed to accommodate sales volumes of up to twice
current volumes as well as provide greater transaction accuracy and operating
efficiency and more flexibility to accommodate a variety of transaction types.
The Company began designing the new computer system in early 1993 and currently
anticipates that it will begin to convert to the new system in late 1994 and
will continue the conversion through 1995. The Company presently estimates that
its aggregate investment in the new computer systems, including costs of system
design, hardware, software, installation and training, will be approximately
$20 million. The Company installed its first new warehouse management system,
which includes infrared bar coding equipment and advanced computer hardware and
software systems, in one warehouse in 1993 and anticipates installation in its
remaining North American warehouses during 1994 and 1995.
The design and implementation of these new systems are complex projects and
involve risks that unanticipated problems may delay implementation of the new
systems or cause them to perform below anticipated service levels. The Company
is therefore making this substantial investment in the design and installation
of these systems and is dedicating a significant number of its personnel on a
full-time basis (82 employees and independent contractors) to these projects.
In the event the Company experiences delays in implementation of these new
systems or such systems fail to perform at anticipated service levels, the
Company may not be able to accommodate anticipated increases in sales volumes
and transaction processing requirements after the third quarter of 1995, which
in turn could have a negative effect on the Company's business and financial
results.
INTERNATIONAL OPERATIONS
The Company distributes microcomputer products throughout the world. Merisel
formed its first international subsidiary in 1982 and now operates in Canada,
the United Kingdom, France, Germany,
31
<PAGE>
Australia, Switzerland, Austria and Mexico. Merisel also has a subsidiary based
in Miami, Florida, which sells products primarily to customers in Latin America
and in other parts of the world where Merisel does not have a physical
presence. In June 1990, the Company began limited distribution of products in
Russia as part of a joint venture. The Company believes that certain of the
markets for microcomputer products outside the United States are less mature
and therefore present opportunities for further growth. Accordingly, the
Company will seek to further expand its international operations through
internal growth and the possible acquisition of existing distributors or
establishment of new operations in other countries.
The products and services offered by Merisel's international subsidiaries are
generally similar to those offered in the United States, although the breadth
of the subsidiaries' product lines and the range of manufacturers' and
customers' services offered by the subsidiaries are usually smaller due to the
smaller size of the subsidiaries and differing market requirements. Certain
subsidiaries provide products or services not offered in the United States due
to differing manufacturer relationships and market requirements. Operationally,
the management and distribution systems at the Company's international
subsidiaries vary depending on the size of the subsidiary, its length of
operation and local market requirements. As each subsidiary expands, the
Company seeks to implement systems and procedures that are more similar to
those used in the United States.
In Europe, the Company is revising its distribution strategy in response to
the reduction in cross-border shipment barriers instituted by the European
Economic Community in 1993. With the reduction of cross-border shipping
barriers, the Company believes it can more efficiently ship to a large number
of countries from a centralized master warehouse or warehouses, supplemented by
smaller warehouses in various locations across Europe. At present, the Company
maintains a full warehouse in each of the countries in which it has operations,
with the exception of Austria. The Company has begun development of a master
warehouse in Northern Europe for use beginning in mid-to-late 1995.
The Company's European operations are managed through a European
headquarters, which operates with a staff of pan-European managers to oversee
the Company's various European subsidiaries and operations. Merisel currently
is increasing its European management team and planning the computer system
revisions and other operational changes required to implement its centralized
distribution strategy.
Because the Company conducts business in a number of countries, that portion
of operating results and cash flows that is non-U.S. dollar denominated is
subject to certain currency fluctuations. The Company generally employs forward
exchange contracts to limit the impact of fluctuations in the relative values
of some of the currencies in which it does business.
In addition, international operations may also be subject to risks such as
the imposition of governmental controls, export license requirements,
restrictions on the export of certain technology, political instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
international operations and collecting accounts receivable and the impact of
local economic conditions and practices. As the Company continues to expand its
international operations, its success will be dependent, in part, on its
ability to anticipate and deal with these and other risks. There can be no
assurance that these or other factors will not have an adverse effect on the
Company's international operations.
For segment information regarding Merisel's United States and international
operations, see Note 10 of Notes to Consolidated Financial Statements.
COMPUTERLAND BUSINESS
On January 31, 1994, the Company completed the ComputerLand Acquisition. As a
result of the ComputerLand Acquisition, Merisel, through the ComputerLand
Business, will now operate as a master reseller of computer systems and related
products from the major microcomputer manufacturers to a network
32
<PAGE>
of approximately 750 independently-owned product resellers composed of two
customer groups: ComputerLand franchisees, with whom Merisel FAB acts as
franchisor by licensing the ComputerLand name and providing both product supply
and various support services, and resellers purchasing under the ComputerLand
Business' Datago program, which are independent dealers and value-added
resellers that purchase products from the ComputerLand Business on a cost-plus
basis, but do not license the ComputerLand name. On a pro forma combined basis
for the year ended December 31, 1993, the ComputerLand Acquisition would have
increased net sales by $1.1 billion, gross profit by $54.7 million and
operating income by $13.3 million. See "Unaudited Pro Forma Condensed Combined
Statements of Income" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition of ComputerLand Business."
In connection with its purchase of the ComputerLand Business, Merisel
purchased the ComputerLand Business' franchise and third-party reseller
agreements as well as the rights in the United States to ComputerLand
Corporation's trademarks, trade names, service marks, patents and logos.
Merisel paid approximately $80 million in cash at the closing of the
ComputerLand Acquisition for the acquired assets. In addition, Merisel has
agreed to make an additional payment in 1996 of up to $30 million, the amount
of which will be determined based upon the growth in Merisel FAB's and the
Company's sales of products of designated manufacturers to specified customers
over the two-year period ending January 31, 1996. Sixty-five of the
ComputerLand Business' 66 employees became employees of Merisel FAB in
connection with the ComputerLand Acquisition. Merisel did not purchase the
order fulfillment systems, warehouses or inventory used by the ComputerLand
Business. Instead, the Company eventually intends to integrate these functions
into its facilities and systems. In the interim, Merisel and Vanstar have
entered into the Services Agreement pursuant to which Vanstar will continue to
provide products and distribution and other support services to the
ComputerLand Business for a contractually agreed-upon fee for a period of up to
two years following the ComputerLand Acquisition. In addition, pursuant to the
terms of the Services Agreement, Merisel has been granted $20 million in
extended credit terms on its product purchases from Vanstar.
Following its sale of the ComputerLand Business, Vanstar continues to operate
as a reseller of computer products and services through its company-owned
locations throughout the United States and also retains its international
operations.
The ComputerLand Business' franchisees operate locations under the
ComputerLand name. The ComputerLand Business currently sells products to
franchisees at cost and receives a royalty based upon gross sales of the
franchisee, irrespective of whether the products sold were purchased from the
ComputerLand Business. During 1994, the ComputerLand Business has offered to
certain franchisees the opportunity to revise such franchisees' pricing
structure by selling products to franchisees at cost plus a mark-up and
reducing or eliminating the royalty on overall franchisee sales provided the
franchisee achieves minimum purchase targets. The franchise agreements
purchased as part of the ComputerLand Acquisition typically provide for a ten-
year exclusive contract, renewable at the option of the franchisee. In addition
to the use of the ComputerLand name, the ComputerLand Business provides
franchisees a range of services including sales and marketing materials,
management and sales support services and a proprietary-dealer management
software system. At February 1, 1994, the ComputerLand Business had agreements
with franchisee groups operating 198 locations, located primarily in secondary
metropolitan markets in the United States.
The ComputerLand Business' Datago resellers are independent dealers and
value-added resellers. These resellers generally enter into non-exclusive one-
year renewable contracts cancelable at the option of either party on short
notice. These contracts typically entitle Datago resellers to purchase the full
range of the ComputerLand Business' products at cost plus a mark-up, depending
on the dollar volume of products purchased. At February 1, 1994, the
ComputerLand Business had approximately 549 active Datago resellers. During the
six months ended June 30, 1994, no individual franchisee or Datago reseller
accounted for more than 5% of the ComputerLand Business' revenues.
33
<PAGE>
Following the ComputerLand Acquisition, the Company has undertaken an effort
to add additional resellers as customers of the ComputerLand Business under its
Datago program. Later in 1994, the Company intends to begin adding new
ComputerLand franchisees throughout the United States, focusing in particular
on locations where no reseller is using the ComputerLand name. The Company
currently expects that such new franchisees, as well as renewing franchisees,
will enter into three-year franchise agreements that allow a franchisee the
option to convert to a Datago affiliate for the third year.
The ComputerLand Business offers its franchisees and Datago resellers a
selection of major microcomputer equipment and peripherals provided by
approximately 70 suppliers. For its fiscal year ended September 30, 1993,
approximately 76% of the ComputerLand Business' revenues were generated by
sales of Apple, Compaq, Hewlett-Packard and IBM products. The loss of any one
of these four manufacturers, or a change in the way any of these manufacturers
markets, prices or distributes its products, could have a material adverse
effect on the ComputerLand Business' operations and financial results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of ComputerLand Business." In addition to the products
supplied directly by the ComputerLand Business, franchisees and Datago
resellers may purchase other products offered by the Company's wholesale
distribution business pursuant to separate agreements negotiated on their
behalf by Merisel FAB.
Under the two-year Services Agreement, Vanstar will continue to purchase and
warehouse manufacturers' products and fulfill reseller orders for the products
offered by Merisel FAB. Merisel FAB will purchase such products from Vanstar,
rather than directly from the supplier, and will pay Vanstar a service fee for
performing these distribution functions. Resellers will continue to place
product orders with Merisel FAB through the order placement system operated by
Vanstar. Vanstar will typically ship products to a customer within two days of
receipt of an order. During the term of the Services Agreement, Merisel FAB
will be dependent upon Vanstar to purchase and maintain inventories of products
sufficient to meet resellers' requirements and to receive and fulfill orders at
acceptable service levels. Merisel FAB and Vanstar will jointly maintain
supplier relationships. While the Company has no reason to believe that Vanstar
will not be able to perform its obligations under the Services Agreement, in
the event that Vanstar becomes unable to perform such obligations, there may be
an adverse effect on the operations and financial results of the Company. The
Services Agreement contains provisions for monetary penalties in the event that
Vanstar fails to achieve agreed-upon service levels, as well as provisions
permitting Merisel FAB to take over a portion of Vanstar's operations to
fulfill such obligations under certain circumstances.
Over 76% of the ComputerLand Business' sales to its customers currently are
financed on behalf of such customers by floor plan financing companies, and the
ComputerLand Business typically receives payment from these financing companies
within three business days from the date of sale. Such floor plan financing is
typically subsidized for the ComputerLand Business' customers by its suppliers.
Any material change in the availability or the terms of financing offered by
such financing companies or the subsidies provided by suppliers could require
Merisel FAB to provide such financing to its customers, thereby substantially
increasing the working capital necessary to operate its business.
The Company does not have experience in operating a master reseller business
such as the ComputerLand Business, with its different merchandising strategy
and customer base. While the Company believes that the personnel hired as part
of the ComputerLand Acquisition, together with the Company's senior management,
will successfully manage the ComputerLand Business, no assurances can be given
as to the future performance levels or operating results of the ComputerLand
Business.
COMPETITION
Competition in the microcomputer products distribution industry is intense
and is based primarily on price, brand selection, breadth and availability of
product offering, speed of delivery, level of training and technical support,
marketing services and programs and ability to influence a buyer's decision.
34
<PAGE>
Certain of Merisel's competitors have substantially greater financial
resources than Merisel. Merisel's principal competitors include large United
States-based international distributors such as Ingram Micro and Tech Data
Corporation, non-U.S. based international distributors such as Computer 2000,
national distributors such as Gates/FA Distributing, Inc. and Robec, Inc., and
regional distributors and franchisors. The Company competes internationally
with a variety of national and regional distributors on a country-by-country
basis.
Merisel also competes with manufacturers that sell directly to computer
resellers, sometimes at prices below those charged by Merisel for similar
products. The Company believes its broad product offering, product
availability, prompt delivery and support services may offset a manufacturer's
price advantage. In addition, many manufacturers focus their direct sales to
large computer resellers because of the high costs associated with dealing with
a large number of small-volume computer reseller customers.
The ComputerLand Business is subject to competition from other franchisors
and aggregators in obtaining and retaining franchisees and third-party
resellers, as well as competition from wholesale distributors with respect to
sales of products to customers in the ComputerLand Business' network. See "--
The Industry." The Company believes that the ComputerLand Business' pricing,
brand selection, product availability and service levels are competitive with
the industry. With respect to brand selection, the Company believes that an
important factor in the ComputerLand Business' ability to attract customers is
the fact that it is able to offer computer systems and other hardware products
from Apple, Compaq, Hewlett-Packard and IBM. These manufacturers historically
have sold their products directly to resellers and through a limited number of
master resellers such as the ComputerLand Business. The loss of any of these
manufacturers, or any change in the way any such manufacturer's markets, prices
or distributes its products, could have a material adverse effect on the
ComputerLand Business' operations and financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of ComputerLand Business." The ComputerLand Business' principal
competitors are Intelligent Electronics, MicroAge and Inacom, all of which
maintain networks of franchisees and third-party dealers and which carry
products of one or more of the Company's major manufacturers. Certain of the
ComputerLand Business' competitors have greater financial resources than the
Company.
LEGAL MATTERS
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to represent a class of all persons who purchased
Merisel common stock between February 1, 1994 andJune 7, 1994 (the "Class
Period"). The complaints allege that the defendants inflated the market price
of Merisel's common stock with material misrepresentations and omissions during
the Class Period. Plaintiffs contend that such alleged misrepresentations are
actionable under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder. Plaintiffs filed a consolidated amended complaint on
August 15, 1994. Merisel believes that it has meritorious defenses to this
lawsuit and intends to defend the action vigorously. Management believes that
the outcome of this matter will not have a material adverse effect on the
consolidated financial position or results of operations of the Company and,
accordingly, no provision for loss has been made in the accompanying financial
statements.
The Company is also involved in certain legal proceedings arising in the
ordinary course of its business, none of which is expected to have a material
impact on the financial condition or business of Merisel.
EMPLOYEES
As of June 30, 1994, Merisel had 2,940 employees. Merisel considers its
relations with its employees to be good.
35
<PAGE>
MANAGEMENT
The current executive officers and directors of the Company are listed below,
together with their ages and all Company positions and offices held by them.
<TABLE>
<CAPTION>
NAME AGE* POSITION
---- ---- --------
<C> <C> <S>
Michael D. Pickett 47 Co-Chairman of the Board of Directors,
President
and Chief Executive Officer
Robert S. Leff 47 Co-Chairman of the Board of Directors and
Senior
Vice President-Business Development
David S. Wagman 43 Vice Chairman of the Board of Directors
James L. Brill 43 Senior Vice President-Finance, Chief Financial
Officer, Secretary and Director
Joseph Abrams 58 Director
David L. House 51 Director
Dr. Arnold Miller 66 Director
Lawrence J. Schoenberg 62 Director
Dwight A. Steffensen 51 Director
John J. Connors 39 Senior Vice President-U.S. Operations
John F. Thompson 49 Senior Vice President-Worldwide Operations
Susan J. Miller-Smith 42 Senior Vice President-European Operations
Thomas P. Reeves 33 Senior Vice President-Canadian Operations
Paul M. Lemerise 49 Senior Vice President-Worldwide Information
Services
Martin D. Wolf 35 Senior Vice President-Franchise and Aggregator
Operations
</TABLE>
- --------
*As of August 1, 1994
The business experience, principal occupations and employment of each of the
executive officers and directors, together with their periods of service as
directors and executive officers during the past five years, are set forth
below.
Michael D. Pickett joined the Company in October 1983 as Vice President-
Finance and Chief Financial Officer and was appointed President and Chief
Operating Officer effective April 1986 and Chief Executive Officer in June
1988. He was elected a director in December 1987 and became Co-Chairman of the
Board of Directors in May 1992. Prior to joining the Company, Mr. Pickett was a
partner of Deloitte & Touche, a public accounting firm.
Robert S. Leff co-founded the Company with David S. Wagman in October 1980
and was its President from that time until May 1985, at which time he became
Co-Chairman of the Board of Directors. Mr. Leff has been a director of the
Company since its inception. Mr. Leff assumed the role of Senior Vice
President-Business Development in May 1992.
David S. Wagman co-founded the Company with Mr. Leff in October 1980, was the
Chairman of the Board of Directors from that time until May 1985 and was its
Co-Chairman with Mr. Leff from May 1985 to May 1992, at which time he became
Vice Chairman of the Board. He retired from full-time employment with the
Company in December 1990. Mr. Wagman has also been a director of the Company
since its inception and served as the Company's Secretary from formation until
May 1992.
James L. Brill joined the Company in May 1988 as Vice President-Finance,
Chief Financial Officer and Assistant Secretary. He was elected a director in
April 1990 and, while retaining his position as Chief Financial Officer, became
Senior Vice President-Finance and Secretary in May 1992. For eight years prior
to joining the Company, Mr. Brill was employed at Union Bank, one of the
Company's lending banks, where his most recent position was Regional Vice
President. At Union Bank, Mr. Brill was responsible for the lending
relationship with the Company.
36
<PAGE>
Joseph Abrams was elected a director of the Company following the acquisition
of Microamerica in April 1990. Mr. Abrams had previously served as a director
of Microamerica from 1983 to April 1990 and also served as President, Chief
Operating Officer and Secretary of AGS Computers, Inc., a software development
company, which was a subsidiary of NYNEX Corp., a telecommunications company,
from 1988 through 1993 ("AGS"). Mr. Abrams retired from AGS in January 1991. He
is also a director of Spectrum Signal Processing, a hardware and software
electronics company.
David L. House was elected to the Board of Directors in March 1994 to fill a
vacancy. Since 1987, Mr. House has served as Senior Vice President and Director
of Corporate Strategy of Intel Corporation, a manufacturer of microprocessing
systems, where he has been employed in various capacities since 1974.
Dr. Arnold Miller was elected to the Board of Directors in August 1989. Since
its formation in 1987, he has been President of Technology Strategy Group, a
consulting firm organized to assist businesses and government in the fields of
corporate strategy development, international technology transfer and joint
ventures, as well as business operations support. Prior to joining Technology
Strategy Group, Dr. Miller was employed at Xerox Corporation, a consumer
products and information services company, for 14 years, where his most recent
position was Corporate Vice President with responsibility for worldwide
electronics operations.
Lawrence J. Schoenberg was elected a director of the Company following the
acquisition of Microamerica in April 1990. Mr. Schoenberg had previously served
as a director of Microamerica from 1983 to April 1990. From 1967 through 1990,
Mr. Schoenberg served as Chairman of the Board and Chief Executive Officer of
AGS. From January to December 1991, Mr. Schoenberg served as Chairman and as a
member of the executive committee of the Board of Directors of AGS. Mr.
Schoenberg retired from AGS in 1992. He is also a director of Sungard Data
Services Inc., a computer services company, Government Technology Services
Inc., a microcomputer reseller, Image Business Systems Inc., an imaging
software company and Penn-America Group, Inc., a casualty insurance company.
Dwight A. Steffensen was elected to the Board of Directors in August 1990.
From January 1985 to March 1992, Mr. Steffensen served as a director and
Executive Vice President of Bergen Brunswig Corporation, a pharmaceuticals
distributor. In April 1992, Mr. Steffensen assumed the position of President
and Chief Operating Officer for that entity.
John J. Connors joined Microamerica in October 1979 where he held various
sales positions and became Senior Vice President-United States Sales of
Microamerica in March 1988. He became Senior Vice President, Products and
Marketing of the Company following the acquisition of Microamerica in April
1990, Senior Vice President-Sales of the Company in May 1991 and Senior Vice
President-U.S. Operations in May 1992.
John F. Thompson joined the Company in April 1983 as Vice President-
Operations, became Senior Vice President-Operations in April 1989 and became
Senior Vice President-Worldwide Operations in May 1992. Prior to joining the
Company, Mr. Thompson was Vice President, Manufacturing and Distribution, of
Vidal Sassoon, Inc., a consumer products company.
Susan J. Miller-Smith joined Merisel in 1987 as President of the Company's
Canadian subsidiary. In May 1992, Ms. Miller-Smith became the Company's Senior
Vice President in charge of Canadian Operations. In August 1994, Ms. Miller-
Smith became the Company's Senior Vice President in charge of European
Operations.
Thomas P. Reeves joined Merisel in 1987 as director of International
Strategic Planning. From March 1990 to February 1992, Mr. Reeves served as
Managing Director of the Company's United Kingdom subsidiary. In February 1992,
Mr. Reeves became Managing Director of the Company's operations in Europe, and
in May 1992 he became the Company's Senior Vice President-European Operations.
In August 1994, Mr. Reeves became the Company's Senior Vice President in charge
of Canadian Operations.
37
<PAGE>
Paul M. Lemerise joined Merisel in May 1992 as Senior Vice President-
Worldwide Information Services. From February 1990 to April 1992, Mr. Lemerise
served as Vice President of Management Information Systems at Marshall
Industries, an industrial distributor of electronic components. From 1984 to
1990, Mr. Lemerise served as Divisional Vice President, Information Services,
at Carter Hawley Hale Corporation, a major California retailer.
Martin D. Wolf joined Merisel FAB in February 1994 as its President and in
March 1994 was appointed Senior Vice President-Franchise and Aggregator
Operations of Merisel. Mr. Wolf joined ComputerLand Corporation, a computer
products reseller, in July 1988 and served as President of the ComputerLand
Business from October 1992 to February 1994.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for each of
the last three fiscal years awarded to or earned by the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS(3)
------------------------ ------------ ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION YEAR SALARY($)(2) BONUS($)(2) OPTIONS(#) ($)(4)
------------------ ---- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael D. Pickett, 1993 490,066 279,688 -0- 18,739
Co-Chairman of the Board
of Directors, Chief 1992 440,000 303,025(5) 150,000 17,157
Executive Officer
and President(7) 1991 349,997 168,500 124,871(6) --
John J. Connors, 1993 297,984 87,500 -0- 4,915
Senior Vice President-
U.S. Operations(8) 1992 257,017 116,656 75,000 198
1991 200,000 46,850 133,909(6) --
James L. Brill, 1993 207,503 72,656 -0- 4,122
Senior Vice President-
Finance, Chief 1992 190,000 75,281 55,000 3,447
Financial Officer
and Secretary 1991 167,798 64,110 120,888(6) --
Susan J. Miller-Smith, 1993 166,346 95,112 -0- 5,944
Senior Vice President-
European Operations(9) 1992 162,071 87,345 55,000 4,510
John F. Thompson, 1993 187,005 52,818 -0- 3,970
Senior Vice President-
Worldwide Operations(10) 1992 175,000 65,550 55,000 3,201
1991 154,798 59,500 115,294(6) --
</TABLE>
- --------
(1) While the named executive officers enjoyed certain perquisites commensurate
with their positions with the Company, such perquisites did not exceed the
lesser of $50,000 or ten percent (10%) of such officer's salary and bonus.
(2) Portions of the salary and/or bonus earned by named executive officers may
be deferred pursuant to the Company's executive deferred compensation plan
(the "Deferred Compensation Plan"), which was adopted by the Board of
Directors in 1990. Under the Deferred Compensation Plan, executive officers
may elect on an annual basis to defer any portion of their pre-tax
compensation until retirement or termination of employment. The Company
will pay participants in the Deferred Compensation Plan, upon retirement or
termination of employment, an amount equal to the amount of deferred
compensation plus a guaranteed return at a specified rate that is no less
than a base interest rate. In addition, upon the death of a participant the
Company will pay a death benefit to a named beneficiary.
38
<PAGE>
(3) The Company does not have a restricted stock award program and does not
presently compensate its executive officers pursuant to any long-term
incentive plans as defined in Item 402(a)(7)(iii) of Regulation S-K. The
only long-term compensatory arrangement the Company has for its executive
officers is the Company's stock option plan, grants under which are listed
in the Summary Compensation Table for completeness of presentation.
(4) For Mr. Pickett, amount listed for 1993 includes the Company's
contributions on behalf of Mr. Pickett of (a) $13,500 to Mr. Pickett's
split-dollar life insurance policy, (b) $4,717 to the Merisel, Inc. 401(k)
Retirement Savings Plan (the "401(k) Plan") and (c) $522 of premiums paid
with respect to the Company's group term life insurance policy (the "Term
Life Policy"). For Mr. Connors, amount listed for 1993 includes the
Company's contributions on behalf of Mr. Connors of (a) $4,717 to the
401(k) Plan and (b) $198 to the Term Life Policy. For Mr. Brill, amount
listed for 1993 includes the Company's contributions on behalf of Mr. Brill
of (a) $3,816 to the 401(k) Plan and (b) $306 to the Term Life Policy. For
Ms. Miller-Smith, amount listed for 1993 includes (a) $4,449 in imputed
interest with respect to a relocation loan as further described below, and
(b) the Company's contribution on behalf of Ms. Miller-Smith of $1,495 to
the Term Life Policy. For Mr. Thompson, amount listed for 1993 includes the
Company's contributions on behalf of Mr. Thompson of (a) $3,448 to the
401(k) Plan and (b) $522 to the Term Life Policy. Itemized disclosure of
amounts of other compensation in 1992, as well as disclosure of amounts of
other compensation in 1991, are not required. Disclosure of amounts for the
1991 fiscal year is not required.
(5) Includes a bonus paid to Mr. Pickett in the amount of $56,775 to allow Mr.
Pickett to pay the interest due on a promissory note issued by him to the
Company, which note was paid in full in March 1992.
(6) A portion of such options was issued to Messrs. Pickett, Connors, Brill and
Thompson in April 1991 in exchange for the cancellation of options to
purchase 146,400, 140,000, 100,000 and 100,000 shares of Common Stock,
respectively.
(7) In addition to his positions as Merisel's Chief Executive Officer and
President, Mr. Pickett became Co-Chairman of the Company's Board of
Directors in May 1992.
(8) Mr. Connors became Senior Vice President-U.S. Operations in May 1992. Mr.
Connors' employment with Merisel commenced on April 9, 1990 in connection
with the Company's acquisition of Microamerica.
(9) Ms. Miller-Smith became Senior Vice President-European Operations in August
1994.
(10) Mr. Thompson became Senior Vice President-Worldwide Operations in May
1992.
39
<PAGE>
CERTAIN INFORMATION REGARDING STOCK OPTIONS
The following tables summarize option exercises during the twelve months
ended June 30, 1994 by the executive officers named in the Summary Compensation
Table above, and the value of the options held by such persons at June 30,
1994. No option grants were made during the twelve months ended June 30, 1994
to the executive officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES DURING THE TWELVE MONTHS
ENDED JUNE 30, 1994 AND VALUE OF OPTIONS AT JUNE 30, 1994
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT JUNE 30, 1994 JUNE 30, 1994($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Pickett...... -0- -0- 499,871 75,000 3,011,508 -0-
John J. Connors......... 24,000 299,000 104,409 37,500 384,727 -0-
James L. Brill.......... -0- -0- 148,388 27,500 704,106 -0-
Susan J. Miller-Smith... -0- -0- 51,147 27,500 135,970 -0-
John F. Thompson........ 50,000 525,000 52,794 27,500 145,440 -0-
</TABLE>
- --------
(1) Value is determined by subtracting the exercise price of each option held
by the named executive officer from $8.75, the fair market value of the
Common Stock as of June 30, 1994, and multiplying the resulting number by
the number of underlying shares of Common Stock.
EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
In April 1992, the Company and Mr. Pickett entered into a five-year
employment agreement. Pursuant to the terms of that agreement, Mr. Pickett will
serve as the Co-Chairman of the Board of Directors, President and Chief
Executive Officer of Merisel with an annual salary (subject to discretionary
increases approved by the Board of Directors) of $493,500 (as of April 1, 1993)
and, if predetermined objectives are achieved, an annual performance bonus of
at least $295,000 under any management bonus plan adopted by the Board of
Directors. The agreement provides Mr. Pickett with certain other benefits,
including up to $15,000 per year for personal legal and accounting expenses,
reimbursement of business and automobile expenses and certain other benefits.
If Merisel terminates Mr. Pickett's employment without cause, his employment
agreement provides that he will receive, among other things, a severance
payment equal to his base salary for eighteen months ($740,250 based on his
current salary) and a prorated portion of his annual performance bonus. In the
event of a sale of all or substantially all of Merisel's operating assets to an
unrelated party or a reorganization, merger or consolidation in which the
capital stock of Merisel is exchanged for or converted into less than a
majority of the voting stock of the surviving entity, Mr. Pickett would be able
to terminate his employment agreement within six months of such event and
receive the same severance payments and other benefits as would be provided had
Merisel terminated his employment without cause. In the event of Mr. Pickett's
death or disability, Merisel would be obligated to make a severance payment
equal to, among other things, Mr. Pickett's base salary for six months
($246,750 based on his current salary) and a prorated portion of his annual
performance bonus.
In addition, Mr. Thompson currently serves as the Company's Senior Vice
President-Worldwide Operations under an agreement whereby in 1994 Mr. Thompson
may make an election to either leave the Company, with a termination payment
equal to one year's base salary, or remain with the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1990, Microamerica advanced $65,000 to Mr. Connors pursuant to a
one-year note bearing interest at the rate of 10% per annum. Merisel became the
lender under this note in March 1991 when Microamerica was acquired by the
Company. In March 1992, Mr. Connors paid the Company approximately $77,000 to
cover such advance, plus all accrued interest due thereon. In addition, in
October 1990, Merisel
40
<PAGE>
advanced $427,000 to Mr. Connors in connection with his relocation. In 1991,
as part of his relocation agreement, the Company forgave $127,000 of such
advance to reimburse Mr. Connors for the loss on the sale of his prior
residence. In April 1991, Mr. Connors delivered a promissory note to the
Company with regard to the $300,000 remaining balance of such advance. In
January 1994, Mr. Connors repaid the note in full.
In April 1988, the Company advanced Ms. Miller-Smith $100,000 Canadian
dollars as part of a relocation allowance. Such advance was made on an
interest-free basis and is evidenced by a fully-secured demand note payable on
the termination of Ms. Miller-Smith's employment. In September 1994, Ms.
Miller-Smith repaid the note in full.
Merisel has entered into an indemnity agreement with each of its directors
which requires Merisel, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors,
officers, employees or agents of Merisel (other than liabilities arising from
conduct in bad faith or which is knowingly fraudulent or deliberately
dishonest), and, under certain circumstances, to advance their expenses
incurred as a result of proceedings brought against them.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 1, 1994, (i) by each
stockholder known by the Company to be the beneficial owner of more than 5% of
the Company's Common Stock as of such date, (ii) by each of the Company's
directors, (iii) certain executive officers of the Company and (iv) by all
executive officers and directors of the Company as a group. Unless otherwise
indicated, the shareholders have sole voting and investment power with respect
to shares beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENT OF
NAME AND ADDRESS BENEFICIALLY OWNED SHARES OWNED
---------------- ------------------ ------------
<S> <C> <C>
David S. Wagman(1)
Merisel, Inc.
200 Continental Boulevard
El Segundo, California 90245................ 2,322,000 7.8%
Robert S. Leff(2)
Merisel, Inc.
200 Continental Boulevard
El Segundo, California 90245................ 2,096,848 7.1%
Michael D. Pickett(3)....................... 499,871 1.7%
James L. Brill(3)........................... 148,388 *
John J. Connors(3).......................... 104,409 *
Susan J. Miller-Smith(3).................... 51,147 *
John F. Thompson(3)......................... 52,794 *
David L. House(3)........................... 1,000 *
Joseph Abrams(4)............................ 598,560 2.0%
Dr. Arnold Miller(4)........................ 5,000 *
Lawrence J. Schoenberg(4)................... 362,884 1.2%
Dwight A. Steffensen(3)..................... 3,000 *
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109(5).............. 2,660,500 9.0%
State of Wisconsin Investment Board
P.O. Box 7842
Madison, Wisconsin 53707(6)................. 2,325,000 7.8%
Wellington Management Company
75 State Street
Boston, Massachusetts 02109(7).............. 2,928,680 9.9%
All Directors and Executive Officers as a
Group
(15 persons)(8)............................ 6,369,472 21.5%
</TABLE>
- --------
* Percentage of Common Stock owned is less than one percent.
(1) Shares are held by Mr. Wagman as Trustee of the David S. Wagman Trust dated
March 3, 1982; includes 2,000 shares issuable with respect to stock options
exercisable within 60 days after August 1, 1994.
(2) Shares are held by Mr. Leff as Trustee of the Robert S. Leff Trust dated
February 23, 1990. Mr. Leff's share holdings include 9,290 and 7,500 shares
held by his wife and his minor sons, respectively.
(3) Represents shares issuable with respect to stock options exercisable within
60 days after August 1, 1994.
(4) Includes 3,000 shares issuable with respect to stock options exercisable
within 60 days after August 1, 1994.
42
<PAGE>
(5) Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp. and an investment advisor, may be deemed to be the beneficial owner
of 1,666,200 shares of Common Stock, or 5.63%, as a result of acting as
investment advisor to several investment companies. Fidelity Management
Trust Company, a wholly-owned subsidiary of FMR Corp. and a bank (as
defined in the Exchange Act), may be deemed to be the beneficial owner of
218,200 shares of Common Stock, or 0.74%, as a result of its serving as
investment manager of several institutional accounts. Edward C. Johnson 3d
owns 34.0% of the outstanding voting stock of FMR Corp. All of the above
information is taken from and furnished in reliance upon the Schedule 13G,
as amended to date, filed by FMR Corp. and Mr. Johnson pursuant to Section
13(g) of the Exchange Act, and the Form 13F-E report for the Quarter Ended
June 30, 1994 pursuant to Section 13(f) of the Exchange Act.
(6) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G, as amended to date, filed by the
stockholder pursuant to Section 13(g) of the Exchange Act.
(7) All information regarding share ownership is taken from and furnished in
reliance upon the Form 13F report for the Quarter Ended June 30, 1994
pursuant to Section 13(f) of the Exchange Act.
(8) Includes 987,180 shares issuable with respect to stock options exercisable
within 60 days after August 1, 1994.
CERTAIN INDEBTEDNESS AND FINANCING ARRANGEMENTS
The following is a summary of certain indebtedness and other financing
arrangements of the Company or its subsidiaries. The following descriptions of
the Revolving Credit Facility, the 8.58% Senior Notes, the 11.28% Subordinated
Notes, the Sale of Trade Accounts Receivable and the Merisel FAB Credit
Facility are qualified in their entirety by reference to the definitive
agreements and instruments governing such financing arrangements, copies of
which have been filed or incorporated as exhibits to the Registration Statement
of which this Prospectus is a part. As a holding company, the Company is
dependent on dividends or other intercompany transfers of funds from its
subsidiaries to meet its debt service and other obligations. Dividends, loans,
advances and repayments of intercompany loans from certain subsidiaries of the
Company are restricted, and may under certain circumstances be prohibited, by
the debt agreements described below.
In December 1993, all of the assets and liabilities of Merisel, Inc. (the
"Parent") were transferred to and assumed by two newly-formed, wholly-owned
subsidiaries--Merisel Americas and Merisel Europe (the "Reorganization"). The
Reorganization was undertaken to more closely align the Company's corporate
structure with its operating and management structure and to facilitate
domestic and international borrowing. Following the Reorganization, the
Company's United States operations are conducted through Merisel Americas, and
Merisel Americas also serves as a holding company for all of the Company's
Pacific Rim and North and South American subsidiaries. Merisel FAB is a direct
subsidiary of the Parent. Merisel Europe serves as a holding company for the
Company's European subsidiaries.
REVOLVING CREDIT FACILITY
Merisel Americas and Merisel Europe are co-borrowers under the $150 million
unsecured Revolving Credit Facility, with a $15 million sublimit for letters of
credit. The facility bears interest, at the option of the borrower, at either
(i) a floating rate tied to the base rate as announced from time to time by
Citibank, N.A., (ii) a floating Eurodollar rate or (iii) a quoted rate agreed
upon by the borrower and lenders, which weighted average rate was 6.18% at
September 30, 1994. The facility also provides for payment of a commitment fee
on the unused portion of the facility at a rate per annum ranging from 0.25% to
0.50%. The interest rate and commitment fee vary depending on either the co-
borrowers' joint leverage ratio or the consolidated leverage ratio of the
Parent. The facility is guaranteed by both the Parent and, up to a limited
amount, by Merisel Americas' Canadian subsidiary ("Merisel Canada"). The
facility expires May 31, 1997.
43
<PAGE>
The Revolving Credit Facility contains a number of covenants that restrict
the co-borrowers and their subsidiaries, and in certain instances, the Parent,
including restrictions on, among other things, (i) payment of dividends or
other distributions; (ii) the acquisition or redemption of equity securities;
(iii) the disposition of assets; (iv) the incurrence or existence of liens; (v)
the incurrence or existence of indebtedness; (vi) fundamental changes in
corporate structure or business activities, including certain mergers,
consolidations, liquidations and dissolutions; (vii) investments, loans and
advances and acquisitions; (viii) transactions with affiliates and
shareholders; and (ix) the prepayment, purchase or redemption of indebtedness
subordinate to indebtedness incurred pursuant to the Revolving Credit Facility
or amendment or modification of certain provisions of other credit agreements.
In addition, the Revolving Credit Facility incorporates all covenants contained
in the Senior Notes and Subordinated Notes.
The co-borrowers are also obligated to meet joint and/or separate financial
covenants relating to (i) tangible net worth; (ii) minimum interest coverage
ratios; (iii) maximum leverage ratios; and(iv) minimum inventory turnover
ratios. In particular, the co-borrowers are obligated to maintain, for the four
quarters preceding the measurement date, a ratio of Consolidated EBITDA (as
defined) to Consolidated Interest Charges (as defined) of not less than 2.25 to
1.00 through April 1, 1995, 2.50 to 1.00 through March 31, 1996, and 2.75 to
1.00 thereafter. The co-borrowers are also obligated to maintain a ratio of
Consolidated Debt Equivalents (as defined) to the sum of Consolidated Debt
Equivalents plus Consolidated Net Worth (as defined) of not more than 0.625 to
1.00 at any time. In addition, the Parent is obligated to meet financial
covenants relating to (i) minimum interest coverage ratios and (ii) maximum
leverage ratios. In particular, the Parent is obligated to maintain a ratio of
Consolidated Debt Equivalents (as defined) to the sum of Consolidated Debt
Equivalents plus Consolidated Net Worth (as defined) of not more than 0.70 to
1.00 at any time. The Parent is also obligated to maintain a ratio of
Consolidated EBITDA to Consolidated Interest Charges of not less than 2.25 to
1.00 at any time.
The Revolving Credit Facility contains the following events of default,
together with other events of default: (i) material adverse change in the
business, earnings, properties, condition (financial or otherwise) or
operations of any co-borrower and its subsidiaries or of Parent and its
subsidiaries; (ii) change of control (as defined); (iii) certain events of
bankruptcy; (iv) payment, covenant and warranty defaults; (v) cross defaults
under certain agreements; (vi) certain uncured judgments; and (vii) the
occurrence of certain material events regarding pension or environmental
liabilities. Upon an occurrence of a default or an event of default under the
Revolving Credit Facility, the co-borrowers will be prohibited from paying
dividends or certain other distributions, including payments of intercompany
debt, to the Parent. Any indebtedness of the co-borrowers to the Parent is
required to be subordinated to the payment, in full, of the Revolving Credit
Facility.
8.58% SENIOR NOTES AND 11.28% SUBORDINATED NOTES
In connection with the Reorganization, the Parent's outstanding $100 million
of 8.58% senior notes, due June 30, 1997 (the "Senior Notes"), were transferred
to Merisel Americas. The Senior Notes are unsecured and are guaranteed by the
Parent, Merisel Europe and, up to a limited amount, Merisel Canada. The Senior
Notes may be prepaid, subject to payment of a make-whole premium. The Senior
Notes impose a number of restrictive, financial and other covenants on Merisel
Americas and its subsidiaries with respect to, among other things, Merisel
Americas' consolidated net worth, leverage ratio and interest coverage ratio
and limitations with respect to (among others) mergers and asset sales, payment
of dividends, investments, liens, incurrence of debt, restricted payments,
operating leases, sale and leaseback transactions and transactions with
affiliates. In particular, Merisel Americas and its subsidiaries may not incur,
guarantee or allow to exist any indebtedness unless the ratio of Consolidated
Debt (as defined) to Total Capitalization (as defined) does not exceed 0.60 to
1.00 and must maintain a minimum Interest Coverage Ratio (as defined) of
between 2.00 to 1.00 and 2.75 to 1.00, depending on the amount of Excess
Restricted Payments (as defined) made by Merisel Americas to the Parent. Any
indebtedness of Merisel Americas to the Parent is required to be subordinated
to the payment, in full, of the Senior Notes. The Senior Notes contain the
following events of default, together with other events of default: (i)
payment, covenant and warranty defaults; (ii) cross defaults
44
<PAGE>
under certain agreements; (iii) certain uncured judgments; (iv) the occurrence
of certain material events regarding pension liabilities; and (v) certain
events of bankruptcy. Merisel Americas may pay dividends to Parent and make
payments on account of intercompany debt owing to Parent for the sole purpose
of permitting the Parent to make scheduled interest payments with respect to
the Notes so long as no default or event of default shall have occurred and be
continuing under the Senior Notes and if at least ten days before any such
dividend or payment, Merisel Americas delivers an officer's certificate to each
holder of Senior Notes to the effect that such officer has reviewed the terms
of the Senior Notes, that before and after giving effect to such dividend or
payment, Merisel Americas is, and in good faith believes it will remain, in
compliance with the requirements of the Senior Notes and that there exists no
default or event of default under the Senior Notes. Holders of the Senior Notes
may accelerate payment of the Senior Notes, together with a credit integrity
premium, upon the occurrence and during the continuance of certain events of
default.
In connection with the Reorganization, the Parent's outstanding $22 million
of 11.28% subordinated notes, due in five equal annual principal installments
beginning in March 1996 (the "Subordinated Notes"), were transferred to Merisel
Americas. The Subordinated Notes are unsecured and are subordinated to certain
senior debt. The Subordinated Notes may be prepaid, subject to payment of a
make-whole premium. The Subordinated Notes contain a number of restrictive,
financial and other covenants on Merisel Americas and its subsidiaries which,
while similar to those contained in the Senior Notes, are generally less
restrictive. In addition, the Subordinated Notes require Merisel Americas to
maintain a consolidated current ratio and contain additional indebtedness
limitations. Any indebtedness of Merisel Americas to the Parent is required to
be subordinated to the payment, in full, of the Subordinated Notes. The
Subordinated Notes contain the following events of default, together with other
events of default: (i) payment, covenant and warranty defaults; (ii) cross
defaults under certain agreements; (iii) certain uncured judgments; (iv) the
occurrence of certain material events regarding pension liabilities; and (v)
certain events of bankruptcy. Merisel Americas may pay dividends to Parent and
make payments on account of intercompany debt owing to Parent for the sole
purpose of permitting the Parent to make scheduled interest payments with
respect to the Notes so long as no default or event of default shall have
occurred and be continuing under the Subordinated Notes and if at least ten
days before any such dividend or payment, Merisel Americas delivers an
officer's certificate to each holder of Subordinated Notes to the effect that
such officer has reviewed the terms of the Subordinated Notes, that before and
after giving effect to such dividend or payment, Merisel Americas is, and in
good faith believes it will remain, in compliance with the requirements of the
Subordinated Notes and that there exists no default or event of default under
the Subordinated Notes. Subject to a blockage period, holders of the
Subordinated Notes may accelerate payment upon the occurrence and during the
continuation of certain events of default. Upon a change of control, each
holder of a Subordinated Note may elect to accelerate payment of all or a
portion of the amount then due such holder.
SALES OF TRADE ACCOUNTS RECEIVABLE
In connection with the Reorganization, the Parent's trade accounts receivable
securitization agreement with a securitization company (the "Receivables
Securitization Agreement") was transferred to Merisel Americas. During the term
of the Receivables Securitization Agreement, the securitization company may
purchase on a continuing basis an undivided interest in up to $150 million of
designated Merisel Americas' trade receivables. The purchaser has retained
Merisel Americas to collect the receivables and remit the appropriate amounts
due the purchaser.
The undivided interest in receivables is sold by Merisel Americas at face
value. The Company pays a yield to the purchaser that approximates the A1/P1
commercial paper rate. In the event the purchaser is unable to purchase
receivables, the Company has entered into a back-up purchase agreement (the
"Back-Up Agreement") with a group of banks. Under the Back-Up Agreement, such
banks may elect to purchase an undivided interest in Merisel Americas'
receivables. Under this agreement, the Company pays a higher yield than under
the Receivables Securitization Agreement. To date, Merisel Americas has not
been required to utilize the Back-Up Agreement. In addition to the yields
realized by the purchasers, Merisel Americas pays an agency fee under the
Receivables Securitization Agreement and under the Back-Up Agreement and a
liquidity fee under the Back-Up Agreement. Both the Receivables Securitization
Agreement and the Back-Up
45
<PAGE>
Agreement currently expire on November 30, 1994, subject to earlier
termination upon an event of default. Merisel Americas is currently
negotiating an extension of the Receivables Securitization Agreement and the
Back-up Agreement to October 6, 1995. Merisel Americas' failure to pay certain
amounts under the Revolving Credit Facility, or certain defaults under
covenants contained in the Revolving Credit Facility (among other events),
will cause the termination of the Receivables Securitization Agreement.
MERISEL FAB CREDIT FACILITY
To provide for its anticipated working capital needs, on December 23, 1993,
Merisel FAB entered into a $10 million unsecured revolving credit agreement,
which expires on January 29, 1995 (the "FAB Revolver"). At July 31, 1994, no
amount was outstanding under the FAB Revolver.
The FAB Revolver contains a number of restrictive covenants that, among
other things, place limitations on Merisel FAB and the Parent (and, in certain
cases, the Parent's direct and indirect subsidiaries) with respect to liens,
indebtedness and transactions with affiliates, and contains financial
covenants requiring Merisel FAB to meet certain leverage ratio, net worth and
net income requirements. In addition, the Parent is subject to certain
consolidated leverage ratio and interest coverage ratio requirements. The FAB
Revolver also contains certain events of default, including upon a change in
control of the Parent. The FAB Revolver is guaranteed by the Parent.
LINES OF CREDIT
The Company and its subsidiaries also maintain various local lines of
credit, which typically do not contain material covenants, primarily to
facilitate overnight and other short-term borrowings. The total amount of
outstanding borrowings under these lines as of June 30, 1994 was $29.6
million.
DESCRIPTION OF NOTES
The Notes will be issued under an indenture to be dated as of October 15,
1994 (the "Indenture") between the Company and NationsBank of Texas, N.A., as
trustee (the "Trustee"). A copy of the form of the Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The following summary of certain provisions of the Indenture does not purport
to be complete and is subject to, and qualified in its entirety by reference
to, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
and to all of the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of the
Indenture. The definitions of certain capitalized terms used in the following
summary are set forth below under "Certain Definitions."
GENERAL
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Notes may be
presented for transfer at the corporate trust office or agency of the Trustee
in the City of New York maintained for such purposes at 40 Broad Street, 22nd
Floor, New York, New York 10004. Interest may be paid by wire transfer or
check mailed to the person entitled thereto as shown on the register for the
Notes. No service charge will be made for any registration of transfer or
exchange of the Notes, except for any tax or other governmental charge that
may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes will be general unsecured obligations of the Company, limited to
$125,000,000 aggregate principal amount, and will mature on December 31, 2004.
Interest on the Notes will accrue at the rate of 12 1/2% per annum and will be
payable semiannually on each June 30 and December 31, commencing December 31,
1994, to the holders of record of Notes at the close of business on the June
15 and December 15 immediately preceding such interest payment date. Interest
on the Notes will accrue from the most recent date to which
46
<PAGE>
interest has been paid or, if no interest has been paid, from the original
date of issuance (the "Issue Date"). Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months. Interest on overdue
principal and (to the extent permitted by law) on overdue installments of
interest will accrue at the rate of interest borne by the Notes.
REDEMPTION
Optional Redemption. All or any of the Notes will be redeemable, in whole or
in part, at the option of the Company, at any time on or after December 31,
1999 at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest to the date of redemption, if
redeemed during the 12-month period beginning on December 31 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1999................................... 106.25
2000................................... 104.17
2001................................... 102.08
2002 and thereafter.................... 100.00%
</TABLE>
In addition to the optional redemption of the Notes in accordance with the
provisions of the preceding paragraph, prior to December 31, 1997, the Company
may use the net proceeds of an Equity Offering to redeem up to 35% of the
originally issued aggregate principal amount of Notes at a redemption price of
110% of the principal amount thereof plus accrued and unpaid interest to the
redemption date.
Selection and Notice. In the event that less than all of the Notes are to be
redeemed at any time, selection of Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes
are not listed on a national securities exchange by lot or by such method as
the Trustee shall deem fair and appropriate, provided, however, that no Note
of $1,000 or less shall be redeemed in part. Notice of redemption shall be
mailed by first-class mail at least 30 days but not more than 60 days before
the date of redemption to each holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. On and after the date of redemption,
interest will cease to accrue on Notes or portions thereof called for
redemption unless the Company defaults in making the redemption payment.
CHANGE OF CONTROL
In the event of a Change of Control (the date of such occurrence, the
"Change of Control Date"), the Company shall notify the holders of Notes in
writing of such occurrence and shall make an offer to purchase (the "Change of
Control Offer") on a business day (the "Change of Control Payment Date") not
later than 60 days following the Change of Control Date all Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the Change of Control Payment
Date.
Notice of a Change of Control Offer shall be mailed by the Company to the
holders of Notes not less than 30 days nor more than 60 days before the Change
of Control Payment Date. The Change of Control Offer is required to remain
open for at least 20 business days and until the close of business on the
business day next preceding the Change of Control Payment Date.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including but not limited to Rule 14e-1, in
connection with any Change of Control Offer required to be made by the Company
as a result of a Change of Control.
RANKING
The indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to all subordinated indebtedness of the Company and pari
passu in right of payment with all other existing and future unsubordinated
indebtedness of the Company.
47
<PAGE>
The Company is a holding company with limited assets of its own and conducts
substantially all of its business through subsidiaries. Any right of the
Company and its creditors, including holders of the Notes, to participate in
the assets of any of the Company's subsidiaries upon any liquidation of any
such subsidiary will be subject to the prior claims of the subsidiary's
creditors, including trade creditors. Accordingly, after giving effect to the
sale of the Notes, as of June 30, 1994, holders of the Notes would have been
effectively subordinated to approximately $631.6 million of indebtedness and
trade payables of subsidiaries of the Company. See "Certain Investment
Considerations--Holding Company Structure."
CERTAIN COVENANTS
Set forth below are certain covenants which will be contained in the
Indenture.
Limitation on Additional Indebtedness. The Indenture will provide that the
Company shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, create, incur, assume, issue, guarantee, or in any manner become
liable for or with respect to the payment of ("incur"), any Indebtedness
(including Acquired Indebtedness), except for (each of which shall be given
independent effect):
(a) Indebtedness of the Company if, at the time of incurrence and after
giving pro forma effect to the incurrence thereof, the EBITDA Coverage
Ratio of the Company would be greater than or equal to 2.50:1;
(b) Indebtedness of the Company or its Subsidiaries outstanding from time
to time pursuant to the Revolving Credit Agreement (including Indebtedness
in the nature of obligations with respect to overdraft protection) in a
principal amount not to exceed in the aggregate (x) 75% of the net book
value of the accounts receivable of the Company and its Subsidiaries at the
time of the incurrence of such Indebtedness calculated on a consolidated
basis in accordance with GAAP, minus (y) $100,000,000;
(c) Indebtedness under the Notes and the Indenture;
(d) Indebtedness not otherwise referred to in this covenant and
outstanding on the Issue Date;
(e) Indebtedness of a Wholly-Owned Subsidiary issued to and held by the
Company or another Wholly-Owned Subsidiary of the Company or Indebtedness
of the Company issued to and held by a Wholly-Owned Subsidiary of the
Company;
(f) Indebtedness in the nature of or in connection with any Sale-
Leaseback Transaction permitted under "Limitation on Sale-Leaseback
Transactions" below;
(g) Purchase Money Indebtedness of the Company or its Subsidiaries or
Indebtedness of the Company or its Subsidiaries incurred in connection with
or arising out of Capitalized Lease Obligations; provided that the
aggregate principal amount and/or liquidation preference of Indebtedness
incurred pursuant to this clause (g) shall not exceed, in the aggregate,
10% of the Company's Consolidated Net Worth;
(h) the guarantee by the Company or by any Subsidiary of the Company of
Indebtedness of any Subsidiary of the Company, which Indebtedness is
otherwise permitted to be incurred pursuant to this "Limitation on
Additional Indebtedness" covenant;
(i) Indebtedness of a Subsidiary of the Company (which is not a Wholly-
Owned Subsidiary of the Company) issued to and held by the Company or a
Subsidiary of the Company; provided that such Indebtedness constitutes an
Investment made pursuant to and in compliance with clause (v) of the
"Limitation on Investments, Loans and Advances" covenant;
(j) any deferrals, renewals, extensions, replacements, refinancings or
refundings of, amendments, modifications or supplements to, Indebtedness
incurred under clauses (a), (c) and (d) above and under clause (l) below,
whether involving the same or any other lender or creditor or group of
lenders or creditors; provided that any such deferrals, renewals,
extensions, replacements, refinancings, refundings, amendments,
modifications or supplements (i) shall not provide for any mandatory
redemption,
48
<PAGE>
amortization or sinking fund requirement in an amount greater than, or at a
time prior to, the amounts and times specified in the Indebtedness being
deferred, renewed, extended, replaced, refinanced, refunded, amended,
modified or supplemented, (ii) shall not exceed the principal amount and/or
liquidation preference (plus accrued dividends and interest and repayment
premium, if any) of the Indebtedness being deferred, renewed, extended,
replaced, refinanced, refunded, amended, modified or supplemented, and
(iii) shall be contractually subordinated in right of payment to the Notes
at least to the same extent as the Indebtedness being deferred, renewed,
extended, replaced, refinanced, refunded, amended, modified or
supplemented; provided that any Indebtedness of the Company that is
deferred, renewed, extended, replaced, refinanced, refunded, amended,
modified or supplemented ("Refinanced Company Indebtedness") shall
subsequent to any such deferral, renewal, extension, replacement,
refinancing, refunding, amendment, modification or supplement be solely the
obligation of the Company (provided that, to the extent that any such
Refinanced Company Indebtedness was previously guaranteed by a Subsidiary
of the Company, the Indebtedness represented by such guarantee may also be
refinanced pursuant to and subject to the other terms and provisions of
this clause (j));
(k) Acquired Indebtedness of a Subsidiary of the Company (other than any
such Acquired Indebtedness incurred in connection with or in anticipation
of any Asset Acquisition) if, at the time of incurrence and after giving
pro forma effect to the incurrence thereof, the EBITDA Coverage Ratio of
the Company would be greater than or equal to 2.50:1;
(l) Indebtedness of the Company or a Subsidiary of the Company incurred
pursuant to any overnight or other short-term line of credit as in
existence on the Issue Date; and
(m) other Indebtedness of the Company that does not exceed $20,000,000 in
aggregate principal amount and/or liquidation preference at any one time
outstanding.
Limitation on Restricted Payments. The Indenture will provide that the
Company shall not make, and shall not cause, suffer or permit any of its
Subsidiaries to make, directly or indirectly, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Restricted Payment;
(b) at the time of and after giving effect to any such Restricted
Payment, the Company could incur at least $1 of Indebtedness pursuant to
clause (a) of the "Limitation on Additional Indebtedness" covenant; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
through and including the date of such Restricted Payment (the "Base
Period") does not exceed the sum of (i) 50% of the Company's cumulative
Consolidated Net Income during the Base Period (or in the event such
Consolidated Net Income shall be a deficit, minus 100% of such deficit)
plus (ii) 100% of the aggregate Net Proceeds and the Fair Market Value of
marketable securities and property received by the Company from the issue
or sale, after the Issue Date, of Capital Stock (other than Disqualified
Stock) of the Company or of any Indebtedness or other securities of the
Company convertible into or exercisable or exchangeable for Capital Stock
(other than Disqualified Stock) of the Company which have been so
converted, exercised or exchanged, as the case may be. For purposes of
determining under this clause (c) the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its Fair Market Value.
The provisions of this covenant will not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at such date
of declaration such payment would comply with the provisions of the Indenture;
(ii) the retirement of any shares of Capital Stock or subordinated Indebtedness
of the Company in exchange for, by conversion into, or out of the Net Proceeds
of the substantially concurrent sale (other than to a Subsidiary of the
Company) of other shares of Capital Stock of the Company (other than
49
<PAGE>
Disqualified Stock); and (iii) the redemption or retirement of subordinated
Indebtedness of the Company in exchange for, by conversion into, or out of the
Net Proceeds of the substantially concurrent incurrence of subordinated
Indebtedness of the Company (other than any such subordinated Indebtedness
owing to a Subsidiary of the Company) that is contractually subordinated in
right of payment to the Notes and that is permitted to be incurred in
accordance with the covenant described under "Limitation on Additional
Indebtedness" above.
In determining the amount of Restricted Payments permissible under clause (c)
above, the amounts expended pursuant to clauses (i) and (ii) above shall be
included as Restricted Payments.
Limitation on Investments, Loans and Advances. The Indenture will provide
that the Company shall not make and shall not permit any of its Subsidiaries to
make any capital contributions, advances or loans to (including, without
duplication, any guarantees of loans to), or investments in, or purchases of
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by, any Person (collectively, "Investments"), except: (i)
Investments by the Company in any Wholly-Owned Subsidiary of the Company and
Investments in the Company or a Wholly-Owned Subsidiary of the Company by any
Subsidiary of the Company; (ii) Investments represented by either Capital Stock
received in connection with a settlement of debts owing to the Company or any
of its Subsidiaries or accounts receivable created or acquired in the ordinary
course of business; (iii) advances or loans to employees in the ordinary course
of business; (iv) Investments under or pursuant to interest rate protection
agreements; (v) Investments made after the Issue Date in joint ventures,
partnerships or Persons that are not Wholly-Owned Subsidiaries that are made
solely for the purpose of acquiring businesses related to the Company's or its
Subsidiaries' businesses in an aggregate amount not to exceed, when made, 10%
of the Company's Consolidated Net Worth; (vi) loans or advances to franchisees
and Datago affiliates made in the ordinary course of business; (vii) Cash
Equivalents; and (viii) Investments permitted to be made under the "Limitation
on Restricted Payments" covenant.
Limitation on Liens. The Indenture will provide that the Company shall not,
and shall not permit, cause or suffer any of its Subsidiaries to, create, incur
or assume or, other than with respect to Liens created, incurred or assumed
pursuant to clause (k) below, suffer to exist any Lien of any kind upon any of
its property or assets now owned or hereafter acquired by it, unless the Notes
also are equally and ratably secured by such Lien, except for:
(a) Permitted Liens;
(b) Liens existing as of the Issue Date;
(c) Liens securing Purchase Money Indebtedness, provided that (i) the
Indebtedness secured by such Liens shall have otherwise been permitted to
be incurred under the Indenture, and (ii) such Liens shall not encumber any
other assets or property of the Company and its Subsidiaries (other than
the assets or property purchased or constructed with the proceeds of such
Purchase Money Indebtedness), and shall attach to such assets or property
within 60 days of the acquisition or construction of such assets or
property;
(d) Liens on the assets or property of a Subsidiary of the Company
existing at the time such Subsidiary became a Subsidiary of the Company and
not incurred as a result of (or in connection with or in anticipation of)
such Subsidiary becoming a Subsidiary of the Company, provided such Liens
do not extend to or cover any property or assets of the Company or any of
its other Subsidiaries (other than the property or assets so acquired);
(e) Liens on the accounts receivable and inventory of the Company and its
Subsidiaries securing Indebtedness under the Revolving Credit Agreement;
(f) Liens to secure Capitalized Lease Obligations, provided (i) such
Liens do not extend to or cover any property or assets of the Company or
any of its Subsidiaries (other than the property or assets subject to such
Capitalized Lease Obligations) and (ii) the Capitalized Lease Obligations
secured by such Liens shall have otherwise been permitted to be incurred
under the Indenture;
50
<PAGE>
(g) Liens arising under leases and subleases of real property by the
Company or any of its Subsidiaries as tenants which Liens do not interfere
with the ordinary conduct of the business of the Company or any of its
Subsidiaries, and which are made on customary and usual terms applicable to
similar properties;
(h) Liens securing Indebtedness which is incurred to refinance
Indebtedness which has been secured by a Lien permitted under the Indenture
and is permitted to be refinanced under the Indenture, provided that such
Liens do not extend to or cover any property or assets of the Company or
any of its Subsidiaries not securing the Indebtedness so refinanced;
(i) Liens in favor of customs and revenue authorities arising by
operation of law to secure payment of customs duties in connection with the
importation of goods, which custom duties are not overdue for a period of
more than 60 days;
(j) Liens in favor of the Company or any Subsidiary of the Company on the
assets of any Subsidiary of the Company;
(k) Liens securing Indebtedness of the Company and its Subsidiaries,
provided that the aggregate amount of outstanding Indebtedness secured by
such Liens plus the aggregate amount of outstanding Attributable
Indebtedness of the Company and its Subsidiaries shall not exceed at any
one time 10% of the Consolidated Net Worth of the Company and its
Subsidiaries;
(l) Liens in the form of cash collateral pledged by Subsidiaries of the
Company to support their reimbursement obligations under letters of credit
entered into in the ordinary course of business in connection with the
purchase of inventory and Liens securing reimbursement obligations under
letters of credit but only to the extent such Liens are in or upon
inventory the purchase of which was financed by such letters of credit;
(m) Liens on inventory granted pursuant to "flooring arrangements"
entered into in the ordinary course of business and consistent with past
business practices;
(n) Liens on accounts receivable (or interests therein) and on property
securing or otherwise supporting accounts receivable granted pursuant to
any accounts receivable securitization transaction or other sale or
transfer of accounts receivable (or interests therein) that is not a part
of a transfer of the business from which such accounts receivable arose;
and
(o) Liens on property or assets, other than accounts receivable, and on
property securing or otherwise supporting such property or assets granted
pursuant to any asset securitization transaction; provided that any such
asset securitization transaction complies with the applicable provisions of
"Disposition of Proceeds of Asset Sales."
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture will provide that the Company shall not, and shall
not permit any Subsidiary of the Company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective, or enter into any
agreement with any Person that would cause or create, any consensual
encumbrance or restriction of any kind on the ability of any Subsidiary of the
Company to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock or any other interest or participation in,
or measured by, its profits owned by the Company or a Subsidiary of the
Company, (b) make any loans or advances to, or pay any Indebtedness owed to,
the Company or any Subsidiary of the Company or (c) transfer any of its
properties or assets to the Company or to any Subsidiary of the Company,
except, in each case, for such encumbrances or restrictions existing under or
contemplated by or by reason of (i) any agreements in effect on the Issue Date
(including the Notes and the Indenture); (ii) any Person or the property or
assets of such Person acquired by the Company or any Subsidiary of the Company
and existing at the time of such acquisition (but not created in contemplation
of such acquisition), which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such Person (or
any Subsidiary of such Person) or the property or assets of such Person so
acquired; (iii) any restrictions existing under any agreement that renews,
51
<PAGE>
refinances, defers, extends, amends, modifies, supplements, or replaces an
agreement containing a restriction permitted by clause (i) or (ii) above,
provided that the terms and conditions of any such restrictions are not
materially less favorable in the aggregate to the holders of the Notes than
those under or pursuant to the agreement being renewed, refinanced, deferred,
extended, amended, modified, supplemented or replaced; and (iv) restrictions
contained in agreements evidencing Indebtedness of a Subsidiary of the Company
issued to and held by the Company or a Subsidiary of the Company, provided that
the terms and conditions of any such restrictions are not materially less
favorable in the aggregate to the holders of the Notes than those contained in
that certain Promissory Note of Merisel Americas in favor of the Company, as in
effect on the Issue Date.
Limitation on Sale-Leaseback Transactions. The Indenture will provide that
the Company will not, and will not permit any of its Subsidiaries to, enter
into any Sale-Leaseback Transaction, unless at least one of the following
conditions is satisfied:
(i) the lease with respect to such Sale-Leaseback Transaction is between
the Company and a Wholly-Owned Subsidiary of the Company or between Wholly-
Owned Subsidiaries of the Company;
(ii) the Company or a Subsidiary of the Company could create a Lien to
secure Indebtedness in an amount at least equal to the Attributable
Indebtedness in connection with such Sale-Leaseback Transaction; or
(iii) the Company or a Subsidiary of the Company within 90 days of the
effective date of such Sale-Leaseback Transaction makes an optional
prepayment of principal with respect to any Indebtedness which, to the
extent such Indebtedness is Indebtedness of the Company, ranks pari passu
with the Notes and in any event is in an amount at least equal to the
Attributable Indebtedness in connection with such Sale-Leaseback
Transaction (less any transaction costs actually incurred in connection
with such Sale-Leaseback Transaction).
Disposition of Proceeds of Asset Sales. The Indenture will provide that the
Company shall not, and shall not permit any of its Subsidiaries to, make any
Asset Sale unless (a) such Asset Sale is for Fair Market Value, (b) the
consideration received therefor consists of at least 85% cash or Cash
Equivalents (with Indebtedness of the Company or its Subsidiaries assumed by
the purchaser being counted as cash for such purposes if the Company and its
Subsidiaries are released from all liability therefor), and (c) the Company
shall commit to apply or shall cause its Subsidiary to commit to apply the Net
Cash Proceeds of such Asset Sale within 270 days of such Asset Sale and shall
apply such Net Cash Proceeds within 360 days of such Asset Sale as follows:
(i) to prepay any Indebtedness of a Subsidiary of the Company; provided
that the Net Cash Proceeds of any Asset Sale involving any property or
asset of Merisel FAB, Inc. shall be used to prepay Indebtedness of Merisel
FAB, Inc. only;
(ii) to acquire or construct property or assets in lines of business
related to the Company's and its Subsidiaries' business on the Issue Date;
or
(iii) to make an offer to purchase (the "Asset Sale Offer") from all
holders of Notes, up to a maximum principal amount (expressed as a multiple
of $1,000) of Notes equal to, to the extent the Company elects not to apply
Net Cash Proceeds pursuant to the preceding clauses (i) and (ii), 100% of
such Net Cash Proceeds or to the extent the Company elects to apply Net
Cash Proceeds pursuant to the preceding clauses (i) and (ii), the amount of
any Net Cash Proceeds remaining after such application (the "Available
Amount"). Any Asset Sale Offer shall be at a purchase price per Note equal
to 100% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of purchase, provided that the Company may
defer any Asset Sale Offer until there is an aggregate unutilized Available
Amount equal to or in excess of $5,000,000 resulting from one or more Asset
Sales (at which time the entire unutilized Available Amount, and not just
the amount in excess of $5,000,000, shall be applied as required pursuant
to this paragraph). The Asset Sale Offer shall remain open for a period of
20 business days or such longer period as may be required by law. To the
extent the Asset Sale Offer is
52
<PAGE>
not fully subscribed to by the holders of the Notes, the Company may
retain, subject to the other provisions contained in the Indenture, any
unutilized portion of the Net Cash Proceeds.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including but not limited to Rule 14e-1, in
connection with the repurchase of the Notes pursuant to any Asset Sale Offer
required to be made by the Company.
Restriction on Sale or Transfer of Assets. In addition to any restrictions
set forth under "Disposition of Proceeds of Asset Sales," the Indenture will
provide that the Company shall not, directly or indirectly, convey, transfer,
lease (including by means of sale-leaseback) or otherwise dispose of, to any
Person, any of its assets or property owned as of the Issue Date or with
respect to any corporate management information systems assets only, any
improvements or additions thereto, other than dispositions of any Capital Stock
of any Person or of any obsolete equipment in the ordinary course of business.
Ownership of Stock of Wholly-Owned Subsidiaries. The Indenture will provide
that the Company shall at all times maintain ownership, directly or indirectly
through one or more other Wholly-Owned Subsidiaries, of 100% of each class of
voting securities of, and all other equity securities in, each Wholly-Owned
Subsidiary of the Company existing on the Issue Date (other than any such
securities representing any director's qualifying shares or investments by
foreign nationals mandated by applicable law), except any Wholly-Owned
Subsidiary that shall be disposed of in its entirety or consolidated or merged
with or into the Company or another Wholly-Owned Subsidiary of the Company, in
each case in accordance with the provisions described under "Consolidation,
Merger, Conveyance, Transfer or Lease" below and "Disposition of Proceeds of
Asset Sales" above.
Limitation on Transactions with Affiliates. The Indenture will provide that
the Company shall not, and shall not permit, cause or suffer any Subsidiary of
the Company to, conduct any business or enter into any transaction or series of
transactions with or for the benefit of any Affiliate of the Company or any of
its Subsidiaries (each an "Affiliate Transaction"), except in good faith and on
terms that are no less favorable to the Company or such Subsidiary, as the case
may be, than those that could have been obtained in a comparable transaction on
an arm's-length basis from a Person not an Affiliate of the Company or such
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other market value in excess of $1,000,000 shall be approved by the
Board of Directors of the Company, such approval to be evidenced by a Board
Resolution stating that the Board of Directors has, in good faith, determined
that such transaction complies with the foregoing provisions. Notwithstanding
the foregoing, the restrictions set forth in this covenant shall not apply to
customary directors' fees and consulting fees, transactions between or among
the Company and one or more Wholly-Owned Subsidiaries of the Company or
transactions between or among one or more Wholly-Owned Subsidiaries of the
Company.
Securities Owned by the Company or an Affiliate of the Company. The Indenture
will provide that the Company shall promptly as reasonably practicable notify
the Trustee of any Notes owned by the Company or any Affiliate of the Company
and that the Trustee shall provide to each holder upon the request of such
holder all such information furnished to the Trustee.
REPORTS
Pursuant to the Indenture, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will file with the Commission and the Trustee and distribute to holders
of the Notes copies of the financial information that would have been contained
in such annual reports, quarterly reports and other documents that the Company
would have been required to file with the Commission pursuant to the Exchange
Act. Such financial information shall include annual reports containing
consolidated financial statements and notes thereto, together with an opinion
thereon expressed by an independent public accounting firm, management's
discussion and analysis of financial condition and
53
<PAGE>
results of operations as well as quarterly reports containing unaudited
condensed consolidated financial statements for the first three quarters of
each fiscal year.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Indenture will provide that the Company shall not consolidate with or
merge with or into or sell, assign, convey, lease or transfer all or
substantially all of its properties and assets as an entirety to any Person or
group of affiliated Persons in a single transaction or through a series of
transactions, and the Company will not permit any of its Subsidiaries to enter
into any such transaction or series of transactions, if such transaction or
series of transactions would result in a sale, assignment, conveyance, lease or
transfer of all or substantially all of the properties and assets of the
Company and its Subsidiaries taken as a whole, unless after giving effect
thereto: (a) the Company shall be the continuing Person, or the resulting,
surviving or transferee Person (the "surviving entity") shall be a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia, (b) the surviving entity shall expressly assume,
by a supplemental indenture executed and delivered to the Trustee in form and
substance reasonably satisfactory to the Trustee, all of the obligations of the
Company under the Notes and the Indenture; (c) immediately before and
immediately after giving effect to such transaction or series of transactions
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing; (d) the Company or the surviving entity shall, immediately after
giving effect to such transaction or series of transactions, have a
Consolidated Net Worth (including, without limitation, any Indebtedness
incurred or anticipated to be incurred in connection with or in respect of such
transaction or series of transactions) equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction or
series of transactions; (e) immediately after giving effect to such transaction
or series of transactions on a pro forma basis, the Company or the surviving
entity could incur $1.00 of Indebtedness pursuant to clause (a) of the
"Limitation on Additional Indebtedness" covenant above; and (f) the Company or
the surviving entity shall have delivered to the Trustee an Officers'
Certificate stating that such consolidation, merger, sale, assignment,
conveyance, transfer or lease and, if a supplemental indenture is required in
connection with such transaction or series of transactions, such supplemental
indenture complies with this covenant and that all conditions precedent
provided for in the Indenture relating to such transaction or series of
transactions have been satisfied.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) default in the payment of any interest on the Notes when it becomes
due and payable and the continuance of any such default for a period of 30
days; or
(ii) default in the payment of the principal of or premium, if any, on
the Notes when due and payable at maturity, upon redemption, pursuant to an
offer to purchase required under the Indenture, by acceleration or
otherwise; or
(iii) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i) or (ii) above), and
the continuance of such default or breach for a period of 30 days after
written notice thereof has been given to the Company by the Trustee or to
the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes; or
(iv) failure by the Company or any Subsidiary (a) to make any payment
when due, after giving effect to any applicable periods of grace, with
respect to any other Indebtedness under one or more classes or issues of
Indebtedness in an aggregate principal amount of $10,000,000 or more; or
(b) to perform any term, covenant, condition or provision of one or more
classes or issues of Indebtedness in
54
<PAGE>
an aggregate principal amount of $10,000,000 or more, which failure, in the
case of this clause (b), results in an acceleration of the maturity
thereof; or
(v) one or more judgments, orders or decrees for the payment of money in
excess of $10,000,000, either individually or in an aggregate amount, shall
be entered against the Company, any of its Subsidiaries or any of their
respective properties and shall not be satisfied or discharged, and there
shall have been a period of 60 days during which a stay of enforcement of
such judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; or
(vi) certain events of bankruptcy or insolvency, reorganization or
similar proceedings with respect to the Company or any Material Subsidiary
shall have occurred.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then the
holders of at least 25% in aggregate principal amount of the outstanding Notes
may, by written notice to the Company and the Trustee, or the Trustee may, and
upon the request of the holders of not less than 25% in aggregate principal
amount of the outstanding Notes shall, declare the principal of, premium, if
any, and accrued interest on all the Notes to be due and payable immediately.
Upon any such declaration, such principal, premium, if any, and accrued
interest shall become due and payable immediately. If an Event of Default
specified in clause (vi) occurs with respect to the Company then the principal
of, premium, if any, and accrued interest on all the Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of the outstanding Notes may, by written notice to the
Trustee, rescind such declaration of acceleration if all existing Events of
Default have been cured or waived, other than non-payment of principal of,
premium, if any, and accrued interest on the Notes that has become due solely
as a result of such acceleration and if the rescission of acceleration would
not conflict with any judgment or decree. The holders of a majority in
aggregate principal amount of the outstanding Notes also have the right to
waive existing defaults under the Indenture except a default in the payment of
the principal of, premium, if any, or interest on any Note or in respect of any
covenant or a provision of the Indenture which cannot be modified or amended
without the consent of all holders.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder unless such holder gives to
the Trustee written notice of a continuing Event of Default, the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request and offered satisfactory indemnity to the Trustee (it being
understood that the Trustee will not unreasonably withhold its satisfaction) to
institute such proceeding as Trustee, the Trustee does not pursue the remedy
addressed in such request within 30 days after receipt of such notice and
offer, and the Trustee has not within such 30-day period received directions
inconsistent with such written request from holders of a majority in principal
amount of the outstanding Notes. Such limitations do not apply, however, to a
suit instituted by a holder of a Note for the enforcement of the payment of the
principal of, premium, if any, or accrued interest on such Note on or after the
due date expressed in such Note (including acceleration thereof) or the
institution of any proceeding with respect to the Indenture or any remedy
thereunder, including acceleration, by the holders of a majority in principal
amount of outstanding Notes with respect to such holders' Notes, provided that
upon institution of any proceeding or exercise of any remedy such holders
provide the Trustee with prompt notice.
Except as set forth in the last sentence of this paragraph, during the
existence of an Event of Default known to the Trustee, the Trustee is required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction
55
<PAGE>
of any of the holders unless such holders shall have offered satisfactory
indemnity to the Trustee (it being understood that the Trustee will not
unreasonably withhold such satisfaction). Subject to certain provisions
concerning the rights of the Trustee, the holders of a majority in aggregate
principal amount of the outstanding Notes have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect to
the Notes ("legal defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain agencies in respect of the Notes. The Company may
at any time terminate its obligations under certain covenants set forth in the
Indenture, some of which are described under "Certain Covenants" above, and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes issued under the Indenture
("covenant defeasance"). In order to exercise either legal defeasance or
covenant defeasance, the Company must irrevocably deposit in trust with the
Trustee, for the benefit of the holders of the Notes, money or U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient to
pay the principal of, premium, if any, and interest on the Notes to redemption
or maturity and comply with certain other conditions, including the delivery of
an opinion as to certain tax and bankruptcy matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to certain surviving rights or registration of transfer or exchange
of Notes) as to all outstanding Notes when either (a) all such Notes
theretofore authenticated and delivered (except lost, stolen or destroyed Notes
which have been replaced or paid) have been delivered to the Trustee for
cancellation and the Company has paid all sums payable by it under the
Indenture or (b)(i) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable pursuant to the redemption provisions
of the Indenture, and the Company has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose an amount of
money or U.S. government obligations sufficient to pay and discharge the entire
Indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation for principal, premium, if any, and accrued interest to the date
of maturity or redemption, and (ii) the Company has delivered irrevocable
instructions to the Trustee to apply the deposited money or U.S. government
obligations toward the payment of the Notes at maturity or on the redemption
date, as the case may be. In addition, the Company must deliver an Officers'
Certificate and an Opinion of Counsel stating that all conditions precedent to
satisfaction and discharge have been complied with.
AMENDMENTS AND WAIVERS
From time to time the Company, when authorized by a Board Resolution, and the
Trustee may, without the consent of the holders of the Notes, amend, waive or
supplement the Indenture or the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act or
making any change that does not adversely affect the rights of any holder.
Other amendments and modifications of the Indenture or the Notes may be made by
the Company and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby, (i) reduce the principal
amount outstanding, extend the fixed maturity or alter the redemption
provisions of the Notes,(ii) change the currency in which any Notes or any
premium or accrued interest thereon is payable, (iii) reduce the percentage in
principal amount outstanding of Notes necessary for consent to an amendment,
supplement or waiver or consent to take any action under the Indenture or the
Notes, (iv) impair the right to
56
<PAGE>
institute suit for the enforcement of any payment on or with respect to the
Notes, (v) waive a default in payment with respect to the Notes, (vi) reduce
the rate or extend the time for payment of interest on the Notes, or (vii)
amend, change or modify the obligation of the Company to make and consummate a
Change of Control Offer or Asset Sale Offer or modify any of the provisions or
definitions with respect thereto.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of the Company or assumed in connection with
an Asset Acquisition of such Person, including, without limitation,
Indebtedness incurred in connection with, or in anticipation of, such Person's
becoming a Subsidiary of the Company.
"Affiliate" of any specified Person means any other Person which, directly or
indirectly, controls, is controlled by or is under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of transfers
of cash or other property to others or payments for property or services for
the account or use of others or otherwise) or purchase or acquisition of
Capital Stock by the Company or any of its Subsidiaries to or in any other
Person, in either case as a result of which such Person shall become a
Subsidiary of the Company or any of its Subsidiaries or shall be merged with or
into the Company or any of its Subsidiaries or (ii) any acquisition by the
Company or any of its Subsidiaries of the assets of any Person which constitute
substantially all of an operating unit or business of such Person.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(including by means of sale- leaseback) or other disposition to any Person
other than the Company or a Subsidiary of the Company, in one transaction or a
series of related transactions, of (i) any Capital Stock of any Subsidiary of
the Company (including by way of issuance by such Subsidiary) or (ii) any other
property or asset of the Company or any Subsidiary of the Company, in each case
other than inventory or obsolete or excess equipment sold in the ordinary
course of business, inventory sold to vendors or flooring companies whether or
not in the ordinary course of business and other than such isolated
transactions which do not exceed $1,000,000 individually. For the purposes of
this definition, the term "Asset Sale" shall not include (i) any sale, transfer
or securitization of receivables or interests therein (and of property securing
or otherwise supporting such receivables) not a part of a sale or transfer of
the business from which such receivables arose, (ii) any disposition of
properties and assets of the Company or any Subsidiary that is governed by and
complies with the "Consolidation, Merger, Conveyance, Transfer or Lease"
covenant or clause (iii) of the "Limitations on Sale Lease-Back Transactions"
covenant described above, (iii) rights granted to franchisees pursuant to
franchise agreements entered into in the ordinary course of business or (iv)
any sale of the Company's Capital Stock.
"Attributable Indebtedness" means in respect of a Sale-Leaseback Transaction,
as at the time of determination, the greater of (i) the fair value of the
property subject to such Sale-Leaseback Transaction or (ii) the present value
(discounted at the interest rate borne by the Notes, compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale-Leaseback Transaction (including any
period for which such lease has been extended).
57
<PAGE>
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification and delivered to the
Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or nonvoting) of, such Person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights, warrants or options exchangeable for or convertible into such capital
stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the
purpose of the Indenture, the amount of such obligation at any date shall be
the capitalized amount thereof at such date, determined in accordance with
GAAP.
"Cash Equivalents" means, at any time, (i) commercial paper, bankers
acceptances, time deposits, and certificates of deposit with final maturities
of one year or less issued by banks, trust companies, and savings and loan
institutions organized under the laws of a jurisdiction within the United
States of America or, with respect to a Subsidiary of the Company, under the
laws of the country in which such Subsidiary operates having (x) capital and
surplus at the end of its most recently ended fiscal year in excess of U.S.
$100,000,000 and (y) in the case of any United States entities, a commercial
paper rating of "A-1" or better by Standard and Poor's Corporation or "P-1" or
better by Moody's Investors Service, Inc.; (ii) direct obligations of the
United States of America or obligations of any instrumentality or agency
thereof, with respect to which the payment of principal and interest is
unconditionally guaranteed by the United States of America; provided however,
that any such obligation shall be payable in U.S. dollars and shall have a
final maturity date no more than one year after the acquisition thereof; (iii)
repurchase agreements of banks or brokerage institutions organized under the
laws of a jurisdiction within the United States of America or, with respect to
a Subsidiary of the Company, under the laws of the country in which such
Subsidiary operates having capital and surplus at the end of its most recently
ended fiscal year in excess of U.S. $100,000,000; provided however, that any
such agreement shall be payable in U.S. dollars or, with respect to a
Subsidiary of the Company, the applicable local currency, shall have a final
maturity date no more than one year after the acquisition thereof, and shall be
fully collaterized; (iv) time deposits, eurodollar certificates of deposit of
foreign branches of the institutions described in clause (iii) above and
obligations of money market funds which invest in any such time deposits and
eurodollar certificates of deposit; provided however, that any such deposit or
obligation shall be payable in U.S. dollars or, with respect to a Subsidiary of
the Company, the applicable local currency, and shall have a final maturity
date no more than one year after the acquisition thereof.
"Change of Control" means (a) all or substantially all of the assets of the
Company are sold, leased, exchanged, or otherwise transferred to any person or
entity or group of persons or entities acting in concert as a partnership or
other group (a "Group of Persons") other than an Affiliate of the Company, (b)
the Company is merged or consolidated with or into another corporation with the
effect that the then-existing equity holders of the Company hold less than 50%
of the combined voting power of the then-outstanding securities of the
surviving corporation of such merger or the corporation resulting from such
consolidation ordinarily (and apart from rights arising under special
circumstances) having the right to vote in the election of directors,(c) a
majority of the Board of Directors of the Company shall be replaced, over a
two-year period, from the directors who constituted the Board of Directors of
the Company at the beginning of such period, and such replacement shall not
have been approved by a vote of at least a majority of the Board of Directors
then still in office who were either members of such Board of Directors at the
beginning of such period or whose election as a member of such Board of
Directors was previously so approved, or (d) a Person or Group of Persons
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of the securities of
the Company representing 50% or more of the combined voting power of
58
<PAGE>
the then-outstanding securities of the Company ordinarily (and apart from
rights arising under special circumstances) having the right to vote in the
election of directors.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
Consolidated Net Income of such Person for such period, increased (to the
extent deducted in determining Consolidated Net Income) by the sum of the
following items for such Person and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP: (i) depreciation,
(ii) amortization, including, without limitation, amortization of capitalized
debt issuance costs, (iii) Consolidated Interest Expense, (iv) all United
States Federal, state and foreign income taxes paid or accrued (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses), and (v) any other noncash charges to the extent deducted from
Consolidated Net Income.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, all cash and noncash interest expense (including capitalized interest,
amortization of original issue discount and the interest portion of deferred
payment obligations) of such Person and its Subsidiaries determined in
accordance with GAAP (exclusive of deferred financing fees of such Person and
its Subsidiaries) and the aggregate amount of cash dividends or other
distributions accrued, declared or paid on Capital Stock (other than Common
Stock) of such Person and its Subsidiaries.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
however, that (a) the Net Income of any Person (the "Other Person") in which
the Person in question or any of its Subsidiaries has a joint interest with a
third party (which interest does not allow the Net Income of such Other Person
to be consolidated into the Net Income of the Person in question in accordance
with GAAP) shall be included only to the extent of the amount of dividends or
distributions actually paid to the Person in question or to the Subsidiary, (b)
other than with respect to the calculation of the "EBITDA Coverage Ratio," the
Net Income (or loss) of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (c) any net gain (but not net loss) resulting from an Asset Sale by
the Person in question or any of its Subsidiaries other than in the ordinary
course of business shall be excluded, and (d) extraordinary gains and losses
and any one-time increase or decrease to Net Income that is required to be
recorded because of the adoption of new accounting policies, practices or
standards required by GAAP shall be excluded.
"Consolidated Net Worth" means, with respect to any Person at any date of
determination, the consolidated stockholders' equity represented by the shares
of such Person's Capital Stock (other than Disqualified Stock) outstanding at
such date, as determined on a consolidated basis in accordance with GAAP.
"Default" means any event that is, or after notice or passage of time or both
would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking-fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, in each case on or
prior to the final maturity date of the Notes.
"EBITDA Coverage Ratio" means, with respect to any Person, the ratio of (i)
Consolidated EBITDA of such Person for the four full fiscal quarters for which
financial statements are available that immediately precede the date of the
transaction or other circumstances giving rise to the need to calculate the
EBITDA Coverage Ratio (the "Transaction Date") to (ii) Consolidated Interest
Expense of such Person for such four full fiscal quarter period. For purposes
of this definition, if the Transaction Date occurs prior to the date on which
the Company's consolidated financial statements for the four full fiscal
quarters subsequent to the Issue
59
<PAGE>
Date are first available, then "Consolidated EBITDA" and "Consolidated Interest
Expense" shall be calculated, in the case of the Company, after giving effect
on a pro forma basis as if the Notes outstanding on the Transaction Date were
issued and as if any Indebtedness repaid with the proceeds of the Notes was
repaid on the first day of such four-full-fiscal-quarter period. In addition to
and without limitation of the foregoing two sentences, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Interest Expense" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to (i) the incurrence of or permanent redemption or repayment of
any Indebtedness of such Person or any of its Subsidiaries at any time during
the period (the "Reference Period") (A) commencing on the first day of the
four-full-fiscal-quarter period for which financial statements are available
that precedes the Transaction Date and (B) ending on and including the
Transaction Date, as if the incurrence of any Indebtedness giving rise to the
need to make such calculation, as well as the incurrence of any other
Indebtedness or the permanent redemption or repayment of any Indebtedness
occurred on the first day of the Reference Period; provided, that if such
Person or any of its Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the above clause shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or Subsidiary had
directly incurred such guaranteed Indebtedness and (ii) any Asset Sales or
Asset Acquisitions (including, without limitation, any Asset Acquisition giving
rise to the need to make such calculation as a result of the Company or any of
its Subsidiaries (including any Person who becomes a Subsidiary as a result of
the Asset Acquisition) incurring Acquired Indebtedness) occurring during the
Reference Period and any retirement of Indebtedness in connection therewith as
if such Asset Sale or Asset Acquisition and/or retirement occurred on the first
day of the Reference Period. Furthermore, in calculating the denominator (but
not the numerator) of this "EBITDA Coverage Ratio," (1) subject to the next
succeeding clause (2), interest on Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to accrue at a fixed rate per annum equal to the
rate of interest on such Indebtedness in effect on the Transaction Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements
relating to interest rate protection obligations, shall be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.
"Equity Offering" means any public or private offering of Capital Stock
(other than Disqualified Stock) of the Company.
"Fair Market Value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free-market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under undue pressure or compulsion to complete the transaction. Fair
Market Value shall be determined by the Board of Directors of the Company
acting in good faith and shall be evidenced by a Board Resolution delivered to
the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as of the Issue Date.
"Indebtedness" means, with respect to any Person, without duplication (i) any
liability, contingent or otherwise, of such Person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof) or (B) evidenced by a note, debenture
or similar instrument or letters of credit (excluding undrawn documentary
letters of credit for trade payables arising in the ordinary course of
business), including a purchase money obligation or other obligation relating
to the deferred purchase price of property (other than trade payables incurred
in the ordinary course of business but including any liability for the payment
of money relating to a Capitalized Lease Obligation); (ii) any liability of
others of the kind described in the preceding clause (i), which the Person has
guaranteed or which is otherwise its legal liability (excluding accounts
payable of the Company or any of its Subsidiaries incurred in the ordinary
course of business); (iii) any obligation secured by a Lien to which the
property or assets of
60
<PAGE>
such Person are subject, whether or not the obligations secured thereby shall
have been assumed by or shall otherwise be such Person's legal liability
(excluding Liens on inventory sold pursuant to flooring arrangements or assets
sold pursuant to any securitization transaction); and (iv) any and all
deferrals, renewals, extensions, replacements, refinancing and refundings of,
or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (i), (ii) or (iii). In addition,
Indebtedness shall include, with respect to the Company, any Disqualified Stock
of the Company and with respect to a Subsidiary of the Company, any Preferred
Stock of such Subsidiary. Indebtedness shall not include any obligations under
interest rate protection agreements entered into to protect against changes in
interest rates or currency hedging agreements entered into to protect against
changes or fluctuations in currencies.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, hypothecation, assignment for security or other security
agreement of any kind or nature whatsoever. For purposes of the Indenture, a
Person shall be deemed to own subject to a Lien any property that it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such Person.
"Material Subsidiary" means a Subsidiary of the Company which would
constitute a "significant subsidiary" of the Company within the meaning of
Regulation S-X of the Commission. In any event, for purposes of the Indenture,
Merisel Europe, Merisel Americas and Merisel FAB shall be deemed to be Material
Subsidiaries of the Company.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof received by the Company or any Subsidiary of the Company in the form of
cash or Cash Equivalents, including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (except to
the extent that such obligations with respect to Indebtedness are financed or
sold with recourse to the Company or any of its Subsidiaries) net of (i)
brokerage commissions and other reasonable fees and expenses (including
reasonable fees and expenses of counsel and investment bankers) related to such
Asset Sale; (ii) provisions for all taxes payable as a result of such Asset
Sale; (iii) payments made to retire Indebtedness secured by the assets subject
to such Asset Sale to the extent required pursuant to the terms of such
Indebtedness; and(iv) appropriate amounts to be provided by the Company or any
of its Subsidiaries, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any of its Subsidiaries, as the case may be, after such Asset Sale,
including, without limitation, pension and other postemployment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale.
"Net Income" means, with respect to any Person for any period, the net income
(loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock (other than
Disqualified Stock) by the Company, the aggregate net proceeds received by the
Company, after payment of expenses (including legal and accounting fees),
commissions and the like incurred in connection therewith, whether such
proceeds are in cash or in property (valued at the Fair Market Value thereof,
as determined in good faith by the Board of Directors of the Company, at the
time of receipt), (b) in the case of any exchange, exercise or conversion of
outstanding securities of any kind of the Company for or into shares of Capital
Stock of the Company that is not Disqualified Stock, the net book value of such
outstanding securities on the date of such exchange, exercise, conversion or
surrender (plus any additional amount required to be paid by the holder to the
Company upon such exchange, exercise, conversion or surrender, less any and all
payments made to the holders, e.g., on account of fractional shares, and less
all expenses incurred by the Company in connection therewith), and (c) in the
case of the issuance of any subordinated Indebtedness by the Company, the
61
<PAGE>
aggregate net cash proceeds received by the Company, after payment of expenses
(including legal and accounting fees), commissions and the like incurred in
connection therewith.
"Permitted Liens" means, with respect to any Person, any lien arising by
reason of (a) any attachment, judgment, decree or order of any court, so long
as such Lien is being contested in good faith and is either adequately bonded
or execution thereon has been stayed pending appeal or review, and any
appropriate legal proceedings that may have been duly initiated for the review
of such attachment, judgment, decree or order shall not have been finally
terminated, or the period within which such proceedings may be initiated shall
not have expired; (b) taxes, assessments or governmental charges not yet
delinquent or that are being contested in good faith; (c) security for payment
of workers' compensation or other insurance; (d) security for the performance
of tenders, bids, leases and contracts (other than contracts for the payment of
money);(e) deposits to secure public or statutory obligations or in lieu of
surety or appeal bonds or to secure permitted contracts for the purchase or
sale of any currency entered into in the ordinary course of business; (f)
operation of law in favor of carriers, warehousemen, landlords, mechanics,
materialmen, laborers, employees or suppliers, incurred in the ordinary course
of business for sums that are not yet delinquent or are being contested in good
faith by negotiations or by appropriate proceedings that suspend the collection
thereof;(g) security for surety or appeal bonds; and (h) easements, rights-of-
way, zoning and similar covenants and restrictions and other similar
encumbrances or title defects which, in the aggregate, are not substantial in
amount and which do not in any case materially interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Purchase Money Indebtedness" means any Indebtedness incurred in the ordinary
course of business by a Person to finance the cost (including the cost of
construction) of an item of property, the principal amount and/or liquidation
preference of which does not exceed the sum of (i) 100% of such cost and (ii)
the reasonable fees and expenses of such Person (including any sales taxes)
incurred in connection therewith.
"Restricted Investment" means an Investment other than an Investment
permitted by clauses (i)-(vii) of the covenant described under "Limitation on
Investments, Loans and Advances."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Company or any Subsidiary of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Subsidiary of the Company (other than (x) dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase Capital Stock (other than Disqualified
Stock) and (y) in the case of Subsidiaries of the Company, dividends or
distributions payable to the Company or to a Subsidiary of the Company), (ii)
the purchase, redemption or other acquisition or retirement for value of any
Capital Stock of the Company or any of its Subsidiaries (other than any such
Capital Stock owned by the Company or any of its Wholly-Owned Subsidiaries),
(iii) the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking-fund payment,
of any Indebtedness that is subordinated in right of payment to the Notes
(other than Indebtedness acquired in anticipation of satisfying a sinking-fund
obligation, principal installment or final maturity, in each case due within
one year of the date of acquisition) and (iv) the making of any Restricted
Investment.
62
<PAGE>
"Revolving Credit Agreement" means, collectively, the credit agreements to
which the Company or any of its Subsidiaries is or becomes a party
(irrespective of the term of any such credit agreement), in each case providing
for short-term working capital financing, as any such credit agreement may at
any time be amended, amended and restated, supplemented or otherwise modified,
including any refinancing, refunding, renewal, deferral, replacement, or
extension thereof by the same or any other lender or group of lenders.
"Sale-Leaseback Transaction" means any arrangement with any Person providing
for the leasing by the Company or any Subsidiary of the Company of any real or
tangible personal property owned by the Company or a Subsidiary of the Company
as of the Issue Date or thereafter acquired, which property has been or is to
be sold or transferred by the Company or such Subsidiary to a Person and leased
back from such Person.
"Subsidiary" means, with respect to any Person, (i) any corporation of which
the outstanding Capital Stock having more than 50% of the votes entitled to be
cast in the election of directors under ordinary circumstances shall at the
time be owned, directly or indirectly, by such Person, by a Subsidiary of such
Person or by such Person and a Subsidiary of such Person, or (ii) any other
Person (other than a corporation) of which more than 50% of the voting interest
is at the time, directly or indirectly, owned by such Person, by a Subsidiary
of such Person or by such Person and a Subsidiary of such Person.
"Wholly-Owned Subsidiary" means any Subsidiary of the Company, 100% of the
Capital Stock of which (other than shares of Capital Stock representing any
director's qualifying shares or investments by foreign nationals mandated by
applicable law) is owned by the Company, by a Wholly-Owned Subsidiary of the
Company or by the Company and a Wholly-Owned Subsidiary of the Company.
63
<PAGE>
UNDERWRITING
Citicorp Securities, Inc. ("Citicorp"), Citibank Canada Securities Limited
and Citibank International plc (collectively, the "Underwriters") have agreed,
subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and the Underwriters, to purchase from the Company the
aggregate principal amount of Notes set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
<S> <C>
Citicorp Securities, Inc................................. $ 41,666,668
Citibank Canada Securities Limited....................... 41,666,666
Citibank International plc............................... 41,666,666
------------
Total................................................ $125,000,000
============
</TABLE>
The nature of the Underwriters' obligation is such that they are committed to
purchase all of the Notes if any are purchased.
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page of this Prospectus. The
Underwriters have advised the Company that sales of the Notes may be made to
certain selected dealers at a concession not in excess of 0.25% per Note, and
that the Underwriters may allow, and such dealers may reallow, a concession not
in excess of 0.125% per Note to certain other dealers. After the initial public
offering of the Notes, the public offering price, concessions and reallowances
with respect to the Notes may be changed.
The Company has been advised by Citicorp that it presently intends to make a
market in the Notes; however, Citicorp is not obligated to do so and any
market-making activities with respect to the Notes may be discontinued at any
time without notice. There can be no assurance that an active public market for
the Notes will develop or be maintained. See "Certain Investment
Considerations--Absence of Public Market for the Notes."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), or to contribute to payments the Underwriters may be
required to make in respect of such liabilities.
Citibank International plc and Citibank Canada Securities Limited have each
agreed that, as part of the distribution of the Notes offered hereby and
subject to certain exceptions, it will not offer or sell any Notes within the
United States, its territories or possessions or to persons who are residents
therein.
Each Underwriter has represented and agreed that it (or any affiliate) (i)
has not offered or sold and will not offer or sell in the United Kingdom, by
means of any document, any Notes other than to persons whose ordinary business
is to buy or sell shares or debentures, whether as principal or agent (except
in circumstances which do not constitute an offer to the public within the
meaning of the Company Act 1985, as amended), (ii) has complied with and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Notes in, from, or otherwise
involving, the United Kingdom and (iii) has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issue of the Notes to a person who is of a kind described
in Article 9(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1988 or is a person to whom the document may otherwise
lawfully be issued or passed on.
Citicorp USA, Inc., an affiliate of the Underwriters, is the agent under the
Revolving Credit Facility. Citicorp North America, Inc., an affiliate of the
Underwriters, is the agent under the Receivables Securitization Agreement. In
addition, from time to time, certain affiliates of the Underwriters have
entered into financing arrangements with certain affiliates of the Company.
Customary fees have been received in connection with all of the foregoing
services.
64
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Riordan &
McKinzie, a Professional Corporation, and for the Underwriters by Cahill Gordon
& Reindel (a partnership including a professional corporation).
EXPERTS
The Consolidated Financial Statements of the Company included in this
Prospectus, and the Consolidated Financial Statements and the related Financial
Statement Schedules incorporated by reference from the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31, 1993 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and incorporated herein by reference, and are included
herein and incorporated herein by reference in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
The statements of revenues and operating expenses of the United States
Franchise and Distribution Division of ComputerLand Corporation for the years
ended September 30, 1993 and 1992, appearing in the Company's Current Report on
Form 8-K dated January 31, 1994, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act,
and the rules and regulations thereunder, and in accordance therewith files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following Regional Offices of the Commission: Suite 1400, Northwest Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511; and 13th Floor,
7 World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
reports, proxy statements and other information concerning the Company are also
available for inspection at the offices of The Nasdaq Stock Market, Inc.,
Reports Section, 1735 K Street, Washington, D.C. 20006.
Whether or not required by the rules and regulations of the Commission, the
Company is obligated under the indenture pursuant to which the Notes will be
issued to file with the Commission and to distribute or cause to be distributed
to holders of the Notes copies of the annual reports, quarterly reports and
other reports required to be filed with the Commission pursuant to Sections 13
or 15 of the Exchange Act.
The Company has filed with the Commission a Registration Statement on Form S-
3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets at December 31, 1992 and 1993 and June 30, 1994
(unaudited)............................................................... F-3
Consolidated Statements of Income for each of the three years in the period
ended December 31, 1993 and for the six months ended June 30, 1993 and
1994 (unaudited).......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 1993 and for the six months
ended June 30, 1994 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1993 and for the six months ended
June 30, 1993 and 1994 (unaudited)........................................ F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel, Inc.
and subsidiaries as of December 31, 1992 and 1993, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merisel, Inc. and subsidiaries at
December 31, 1992 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles.
Deloitte & Touche llp
Los Angeles, California
February 22, 1994
F-2
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
------------------ -----------
1992 1993 1994
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................... $ 133 $ 14 $ 212
Accounts receivable (net of allowance for
doubtful accounts of $11,160, $16,543 and
$15,332 at December 31, 1992, 1993 and June
30, 1994, respectively)...................... 296,192 393,252 357,275
Inventories................................... 299,526 442,392 497,003
Prepaid expenses and other current assets..... 5,029 15,443 9,668
Deferred income tax benefit................... 5,620 8,942 8,917
-------- -------- ----------
Total current assets..................... 606,500 860,043 873,075
PROPERTY AND EQUIPMENT, NET.................... 24,857 39,858 50,026
COST IN EXCESS OF NET ASSETS ACQUIRED, NET..... 34,186 32,832 113,701
OTHER ASSETS................................... 1,770 3,550 5,468
-------- -------- ----------
TOTAL ASSETS................................... $667,313 $936,283 $1,042,270
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................. $248,545 $414,841 $ 467,361
Accrued liabilities........................... 30,149 26,811 45,766
Short-term bank debt.......................... 25,691 50,929 94,631
Income taxes payable.......................... 7,489 7,697 3,200
-------- -------- ----------
Total current liabilities................ 311,874 500,278 610,958
-------- -------- ----------
DEFERRED INCOME TAX LIABILITY.................. 916 1,787 1,618
-------- -------- ----------
LONG-TERM DEBT................................. 131,433 186,500 168,400
-------- -------- ----------
SUBORDINATED DEBT.............................. 22,000 22,000 22,000
-------- -------- ----------
MINORITY INTEREST.............................. 2,208 1,861 839
-------- -------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; none issued or outstanding
Common stock, $.01 par value; authorized
50,000,000 shares; outstanding 29,297,200,
29,604,300 and 29,681,200 at December 31,
1992, 1993 and June 30, 1994,
respectively................................. 293 296 297
Additional paid-in capital.................... 139,319 140,775 141,143
Retained earnings............................. 61,073 91,512 102,826
Cumulative translation adjustment............. (1,803) (8,726) (5,811)
-------- -------- ----------
Total stockholders' equity............... 198,882 223,857 238,455
-------- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $667,313 $936,283 $1,042,270
======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- ---------------------
1991 1992 1993 1993 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............... $1,585,446 $2,238,715 $3,085,851 $1,405,880 $2,365,120
COST OF SALES........... 1,427,491 2,036,292 2,827,315 1,287,325 2,201,050
---------- ---------- ---------- ---------- ----------
GROSS PROFIT............ 157,955 202,423 258,536 118,555 164,070
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 119,682 150,905 187,152 87,779 128,656
---------- ---------- ---------- ---------- ----------
OPERATING INCOME........ 38,273 51,518 71,384 30,776 35,414
INTEREST EXPENSE........ 15,972 15,742 17,810 8,916 12,559
OTHER EXPENSE........... 823 1,299 2,722 577 4,913
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES.................. 21,478 34,477 50,852 21,283 17,942
PROVISION FOR INCOME
TAXES.................. 10,652 14,812 20,413 8,858 6,628
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 10,826 $ 19,665 $ 30,439 $ 12,425 $ 11,314
========== ========== ========== ========== ==========
NET INCOME PER SHARE.... $ 0.43 $ 0.67 $ 1.00 $ 0.41 $ 0.37
========== ========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES.............. 24,896,600 29,274,000 30,454,000 30,308,000 30,764,000
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL CUMULATIVE RECEIVABLE
----------------- PAID-IN RETAINED TRANSLATION COMMON
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
---------- ------ ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER
31, 1990............... 24,261,400 $243 $ 82,473 $ 30,582 $ 1,566 $(581) $114,283
Exercise of stock
options and other..... 189,500 2 204 206
Amortization of
deferred compensation. 148 148
Cumulative translation
adjustment............ 74 74
Net income............. 10,826 10,826
---------- ---- -------- -------- ------- ----- --------
BALANCE AS OF DECEMBER
31, 1991............... 24,450,900 245 82,825 41,408 1,640 (581) 125,537
Exercise of stock
options and other..... 246,300 2 676 678
Amortization of
deferred compensation. 124 124
Payments on notes due
from sale of stock.... 581 581
Issuance of common
stock from public
offering.............. 4,600,000 46 55,694 55,740
Cumulative translation
adjustment............ (3,443) (3,443)
Net income............. 19,665 19,665
---------- ---- -------- -------- ------- ----- --------
BALANCE AS OF DECEMBER
31, 1992............... 29,297,200 293 139,319 61,073 (1,803) 198,882
Exercise of stock
options and other..... 307,100 3 1,456 1,459
Cumulative translation
adjustment............ (6,923) (6,923)
Net income............. 30,439 30,439
---------- ---- -------- -------- ------- ----- --------
BALANCE AS OF DECEMBER
31, 1993 .............. 29,604,300 296 140,775 91,512 (8,726) 223,857
Unaudited:
Exercise of stock
options and other..... 76,900 1 368 369
Cumulative translation
adjustment............ 2,915 2,915
Net income............. 11,314 11,314
---------- ---- -------- -------- ------- ----- --------
BALANCE AS OF JUNE 30,
1994 (unaudited)....... 29,681,200 $297 $141,143 $102,826 $(5,811) -- $238,455
========== ==== ======== ======== ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS ENDED JUNE
DECEMBER 31, 30,
--------------------------- ------------------
1991 1992 1993 1993 1994
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $10,826 $19,665 $30,439 $12,425 $11,314
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization........ 8,420 9,185 10,476 4,979 7,540
Provision for bad debts.............. 13,404 15,471 17,441 7,373 8,130
Deferred income taxes................ (1,182) (789) (2,451) (1,234) (143)
Amortization of deferred
compensation........................ 148 124
Changes in assets and liabilities,
net of the effects from
acquisitions:
Accounts receivable................ (60,785) (91,298) (194,214) (22,924) (47,398)
Inventories........................ (34,267) (72,010) (142,866) (16,550) (54,612)
Prepaid expenses and other assets.. 70 (1,257) (6,613) (10,870) 5,168
Accounts payable................... 54,644 59,080 166,296 (7,384) 52,520
Accrued liabilities................ 3,292 2,592 (4,124) (1,425) 15,275
Income taxes payable............... 6,785 629 208 (3,644) (4,497)
------- -------- -------- -------- --------
Net cash provided by (used for)
operating activities............. 1,355 (58,608) (125,408) (39,254) (6,703)
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment..... (5,938) (9,969) (24,576) (9,927) (14,561)
Proceeds from sale of property and
equipment............................. 1,004
Investments in unconsolidated
affiliates............................ (844)
Acquisitions, net of cash acquired..... (685) (82,686)
Cash acquired in connection with
acquisition of subsidiary............. 15
------- -------- -------- -------- --------
Net cash used for investing
activities....................... (5,938) (9,954) (25,101) (9,927) (97,247)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings (repayments) under
subsidiaries bank facilities.......... 7,197 12,790 10,237 10,549 (6,298)
Borrowings under revolving line of
credit ............................... 437,400 912,830
Repayments under revolving line of
credit ............................... (396,100) (945,930)
Net (repayments) borrowings under new
or existing revolving lines of
credit................................ (3,162) 29,500 70,067
Repayment of prior revolving lines of
credit................................ (128,394)
Borrowings under senior notes.......... 100,000
Borrowings in connection with
ComputerLand Acquisition.............. 65,000
Proceeds from sale of accounts
receivable............................ 75,000 75,000
Net proceeds from sale of common
stock................................. 55,740
Proceeds from issuance of common
stock................................. 206 679 1,459 730 369
Payments received from notes due from
sale of stock......................... 581
------- -------- -------- -------- --------
Net cash provided by financing
activities....................... 4,241 70,896 156,763 52,579 100,971
------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH. 74 (2,742) (6,373) (3,448) 3,177
------- -------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ (268) (408) (119) (50) 198
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................. 809 541 133 133 14
------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................. $ 541 $ 133 $ 14 $ 83 $ 212
======= ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--
Cash paid (received) during the year
for:
Interest $15,125 $10,582 $20,741 $ 12,409 $ 13,325
Income taxes (927) 14,811 20,924 13,026 7,486
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY--On April 1, 1992, the
Company purchased a 50% interest in a Mexican distribution company. The Company
paid cash in exchange for newly issued stock. As of June 30, 1994, the Company
paid $214,000 and accrued $2,786,000 to reflect its minimum liability for the
acquisition of an additional 30% interest in the Mexican distributor. (See Note
2).
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General--Merisel, Inc. ("Merisel" or the "Company") is a worldwide
distributor of microcomputer hardware and software products. In addition, as a
result of its acquisition of the United States franchise and aggregator
business of Vanstar Corporation (formerly ComputerLand Corporation) ("the
ComputerLand Business") the Company is a leading aggregator, or master
reseller, of computer systems and related products from major microcomputer
manufacturers to ComputerLand franchises and Datago affiliates. The
consolidated financial statements include the accounts of Merisel and its
consolidated subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim Period Presentation--The consolidated financial statements for the
six-month periods ended June 30, 1994 and June 30, 1993 are unaudited, but
include all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the
consolidated financial statements for the periods presented. The results of
operations for the six-month period ended June 30, 1994 are not necessarily
indicative of results that may be expected for future periods.
Revenue Recognition, Returns and Sales Incentives--The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds available
for cooperative promotion of product sales. Customers earn credit under such
programs based upon volume of purchases. The cost of these programs is
partially subsidized by marketing allowances provided by the Company's
manufacturers. The allowance for sales returns and costs of customer incentive
programs is accrued concurrently with the recognition of revenue.
Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
Inventories--Inventories are valued at the lower of cost or market; cost is
determined on the average cost method.
Property and Depreciation--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are amortized over the shorter of the life of the lease
or the improvement.
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
results principally from the acquisition in 1990 of Microamerica, Inc. and the
acquisition in January 1994 of the ComputerLand Business. The cost in excess of
assets acquired from the MicroAmerica, Inc. acquisition is being amortized over
a period of forty years. Based on a preliminary allocation, the cost in excess
of net assets acquired from the ComputerLand Business is being amortized over
an aggregate period of 25 years. Accumulated amortization was $2,533,000 and
$3,468,000 at December 31, 1992 and 1993, respectively.
Income Taxes--Deferred income taxes represent the amounts which will be paid
or received in future periods based on the income tax rates that are expected
to be in effect when the temporary differences are scheduled to reverse.
At December 31, 1992 and 1993, the cumulative amount of undistributed
earnings on which the Company has not recognized United States income taxes was
approximately $11 million and $15 million, respectively. The Company intends to
invest the undistributed earnings of its foreign subsidiaries indefinitely.
Accordingly, the Company has not provided United States income taxes for such
amounts.
F-7
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
The Company adopted Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," effective January 1, 1992. The adoption of this
statement had no material effect on the Company's financial statements.
Disclosures about the Fair Values of Financial Instruments--The fair values
of financial instruments, other than long-term debt, closely approximate their
carrying value. The estimated fair value of long-term debt including current
maturities, based on reference to quoted market prices, exceeded the carrying
value by approximately $6,000,000 and $8,700,000 as of December 31, 1992 and
1993, respectively.
Foreign Currency Translation--Assets and liabilities of foreign subsidiaries
are translated into United States dollars at the exchange rate in effect at the
close of the period. Revenues and expenses of these subsidiaries are translated
at the average exchange rate during the period. The aggregate effect of
translating the financial statements of foreign subsidiaries is included in a
separate component of stockholders' equity entitled Cumulative Translation
Adjustment. In the normal course of business, the Company advances funds to
certain of its foreign subsidiaries, which are not expected to be repaid in the
foreseeable future. Translation adjustments resulting from these advances are
included in Cumulative Translation Adjustment. In an attempt to minimize
foreign exchange transaction gains and losses, forward contracts are used to
hedge short-term advances to foreign subsidiaries and inventory purchases.
Gains and losses on the transactions being hedged are offset by the gains or
losses on these contracts. At December 31, 1993, the Company had approximately
$85 million of short-term forward contracts outstanding. In 1991, 1992 and
1993, there were net foreign currency gains of $70,000, $843,000 and $283,000,
respectively.
Net Income per Share--Net income per share is computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents (common stock options) outstanding during the related period,
unless such inclusion is antidilutive. The weighted average number of shares
includes shares issuable upon the assumed exercise of stock options less the
number of shares assumed purchased with the proceeds available from such
exercise.
Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending
on the Saturday nearest to December 31, and its fiscal quarters are the 13- or
14-week periods ending on the Saturday nearest to March 31, June 30, September
30, and December 31. For clarity of presentation, the Company has described
year-ends presented as if the years ended on December 31 and quarter-ends
presented as if the quarters ended on March 31, June 30, September 30, and
December 31. The 1991 and 1993 fiscal years were 52 weeks, while the 1992
fiscal year was 53 weeks in duration. The six-month periods ended June 30, 1993
and June 30, 1994 were 26 week periods. All quarters during 1992, 1993 and the
six months ended June 30, 1994 were 13 weeks except for the quarter ended
December 31, 1992, which was 14 weeks in duration.
2. ACQUISITIONS
On January 31, 1994, the Company, through its wholly owned subsidiary,
Merisel FAB, Inc. ("Merisel FAB"), acquired certain assets of the United States
Franchise and Distribution Division (the "F&D Division") of Vanstar Corporation
(formerly ComputerLand Corporation) (the "ComputerLand Acquisition"). The
Company paid $80.2 million in cash at closing for the acquired assets and $2.5
million of direct acquisition and financing costs. In addition, the Company has
agreed to make an additional payment in 1996 of up to $30 million. The amount
of such payment will be based upon the growth of the Company's and Merisel
FAB's sales of products of designated vendors to specified customers over the
two-year period ending January 31, 1996. The acquisition has been accounted for
as a purchase. Under the purchase method of accounting, an allocation of the
purchase price to the Merisel FAB assets and liabilities is required to reflect
F-8
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
fair values. Based on a preliminary allocation, $82 million of the purchase
price has been allocated to intangible assets with an estimated aggregate life
of 25 years. A final allocation of the purchase price has not yet been
performed.
Merisel FAB has also entered into a Distribution and Services Agreement (the
"Agreement") with Vanstar Corporation ("Vanstar") whereby Vanstar will provide
products and distribution and other support services to Merisel FAB for two
years following the ComputerLand Acquisition. Under the Agreement, Merisel has
been granted $20 million in extended credit terms on its product purchases from
Vanstar (the "Vanstar Payable"). The Vanstar Payable accrues interest at prime
rate less 2% per annum (5.25% at June 30, 1994), payable monthly, with the
principal balance due on February 1, 1996).
Following is summarized pro forma operating results assuming that the Company
had acquired the F&D Division on January 1, 1993 (such amounts exclude the
effect of the issuance of the Notes as contemplated by the Offering).
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30,
---------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net Sales................................................ $2,466,852 $1,929,638
Income before taxes...................................... 18,107 24,567
Net income............................................... 11,413 14,396
Net income per share..................................... 0.37 0.47
Weighted average shares outstanding...................... 30,764 30,308
</TABLE>
Prior to its acquisition, the ComputerLand Business was not an incorporated
entity, and separate historical financial statements were not prepared.
Accordingly, no such financial statements were readily available. The
summarized pro forma operating results are based, in part, on historical income
statement information obtained from the F&D Division's unaudited statement of
revenues and operating expenses for the month ended January 31, 1994, and the
six months ended June 30, 1993. Such historical statements present the
revenues, direct expenses and general and administrative expenses allocated
from Vanstar. The pro forma information for 1994 includes the historical
operating results for the period from February 1, 1994 to June 30, 1994 (during
such period the financial statements of the ComputerLand Business were
consolidated with those of the Company). In addition, the summarized pro forma
information for the F&D Division, prior to its acquisition by the Company,
includes adjustments to reflect the allocation of general and administrative
expenses, such as the costs of the distribution centers and general corporate
functions and expenses and administrative personnel. Such expenses have been
allocated based upon such factors as the ratio of shipments by the F&D Division
to total shipments by Vanstar and Vanstar's management's estimate of the time
spent by shared employees of Vanstar. The pro forma results also include
adjustments for interest expense on debt incurred in connection with the
acquisition, amortization of intangible assets and provision for income taxes,
assuming a 40% marginal income tax rate. In addition, the summarized pro forma
information also includes the potential impact from the sale of the Notes as
contemplated by this Offering. The summarized pro forma information may not be
indicative of the results that would have occurred if the acquisition had been
consummated on January 1, 1994 or 1993, or which may be achieved in the future.
Effective April 1, 1992, the Company purchased a fifty percent interest in a
computer products distribution company in Mexico. Merisel paid cash, which was
retained by the Mexican distributor in exchange for newly issued common stock.
As of June 30, 1994, the Company paid $214,000 and has accrued $2,786,000 to
reflect its minimum liability for the acquisition of an additional 30% interest
in the Mexican distributor.
F-9
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
In August 1994, the Company acquired the remaining 20% interest. Pro forma
income statement information related to this acquisition has not been provided
as the financial statement impact is not significant.
3. SALE OF ACCOUNTS RECEIVABLE
In September 1993, the Company entered into a trade accounts receivable
securitization agreement with a securitization company. As amended in March
1994, the securitization company may purchase on an ongoing basis for a one-
year period up to $150 million of an undivided interest in designated accounts
receivable. At December 31, 1993 and June 30, 1994, $75 million and $150
million, respectively, of net accounts receivable were sold under this
agreement. Fees of $685,000 and $2,679,000 incurred in connection with the sale
of these receivables were included in Other Expense in the year ended December
31, 1993 and the six months ended June 30, 1994, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
------------------
1992 1993
-------- --------
<S> <C> <C>
Land and building..................................... $ 478 $ 390
Equipment............................................. 28,731 37,988
Furniture and fixtures................................ 5,749 7,886
Leasehold improvements................................ 9,991 11,514
Construction in progress.............................. 2,265 10,687
-------- --------
Total................................................. 47,214 68,465
Less accumulated depreciation and amortization........ (22,357) (28,607)
-------- --------
Property and equipment, net........................... $ 24,857 $ 39,858
======== ========
</TABLE>
5. INCOME TAXES
The components of income before income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Domestic................................. $ 20,723 $ 31,208 $ 46,080
Foreign.................................. 755 3,269 4,772
---------- ---------- ----------
Total.................................. $ 21,478 $ 34,477 $ 50,852
========== ========== ==========
</TABLE>
F-10
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................ $ 8,772 $10,046 $15,552
State.............................................. 2,137 2,596 3,994
Foreign............................................ 925 2,341 3,318
------- ------- -------
Total current...................................... 11,834 14,983 22,864
------- ------- -------
Deferred:
Domestic........................................... (1,944) (744) (2,636)
Foreign............................................ 762 573 185
------- ------- -------
Total deferred..................................... (1,182) (171) (2,451)
------- ------- -------
Total provision................................ $10,652 $14,812 $20,413
======= ======= =======
</TABLE>
Deferred tax liabilities and assets were comprised of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1992 1993
------- -------
<S> <C> <C>
Deferred tax liabilities
State taxes........................................... $ 138 $ 203
Depreciation.......................................... 1,468 3,343
------- -------
Total............................................... $ 1,606 $ 3,546
======= =======
Deferred tax assets
Net operating loss of foreign subsidiaries............ $ 5,200 $ 3,200
Expense accruals...................................... 5,104 8,642
Other, net............................................ 1,206 2,059
------- -------
11,510 13,901
Valuation allowances.................................. (5,200) (3,200)
------- -------
Total............................................... $ 6,310 $10,701
======= =======
</TABLE>
The major elements contributing to the difference between the federal
statutory tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Statutory rate...................................... 34.0% 34.0% 35.0%
Foreign income subject to tax at other than
statutory rate..................................... 1.1 1.2 1.0
Utilization of net operating losses of foreign
subsidiary......................................... (3.3)
State income taxes, less effect of federal
deduction.......................................... 6.0 4.6 4.1
Foreign losses without tax benefits................. 5.5 3.7 2.6
Goodwill amortization............................... 1.4 0.7 0.5
Other............................................... 1.6 (1.2) 0.2
------ ------ ------
Effective tax rate.................................. 49.6% 43.0% 40.1%
====== ====== ======
</TABLE>
F-11
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
6. DEBT
At December 31, 1993, the Company's subsidiaries Merisel Americas, Inc.
("Merisel Americas") and Merisel Europe, Inc. ("Merisel Europe") had unsecured
senior borrowing commitments of $250 million, which consisted of $100 million
of 8.58% senior notes ("Senior Notes") by Merisel Americas, and a $150 million
revolving credit agreement ("Revolver") by Merisel Americas and Merisel Europe.
The Senior Notes are due on June 30, 1997, and the Revolver is due on May 31,
1997.
At December 31, 1993 and June 30, 1994, there was $100 million outstanding
under the Senior Notes, and $86.5 million and $68.4 million, respectively,
outstanding under the Revolver. In addition, the Company had $5 million in
outstanding letters of credit under its Revolver at December 31, 1993 and June
30, 1994. Advances under the Revolver bear interest at specific rates based
upon market reference rates and the Company's performance relative to specific
levels of debt to total capitalization. The combined average interest rate at
December 31, 1993 was approximately 4.7%. The Company is also required to pay a
commitment fee on the unused available funds on the Revolver.
The Senior Notes and Revolver agreements both contain various covenants,
including those which prohibit the payment of cash dividends, require a minimum
amount of tangible net worth and place limitations on the acquisition of
assets. The agreements also require the Company to maintain certain specified
financial ratios, including interest coverage, total debt to total
capitalization and inventory turnover.
To finance the ComputerLand Acquisition, the Company borrowed $65 million
under an unsecured credit agreement with a bank. The loan agreement provides
for periodic interest payments prior to maturity, starting at the prime rate,
with quarterly increases of 0.5% until maturity. This agreement expires on
January 29, 1995, but is subject to mandatory prepayment upon any debt or
equity issuance by the Company.
At December 31, 1993, approximately $102 million of outstanding debt was
advanced to foreign subsidiaries. In addition, the Company and its subsidiaries
have various unsecured lines of credit denominated in their local currencies
under which they may borrow an aggregate of $81 million. The Company had
borrowings under the lines of credit of $27.6 million, $50.9 million and $29.6
million outstanding at December 31, 1992, 1993 and June 30, 1994, respectively.
7. LONG-TERM SUBORDINATED DEBT
On March 30, 1990, the Company sold an aggregate of $22,000,000 of privately
placed subordinated notes. The notes provide for interest at the rate of 11.28%
per annum and are repayable in five equal annual installments beginning March
1996. These notes were assigned to the Company's subsidiary Merisel Americas in
December 1993. The subordinated debt agreement contains certain restrictive
covenants, including those that limit the ability of Merisel Americas to incur
debt, acquire the stock of or merge with other corporations, or sell certain
assets, and prohibits the payment of dividends. The subordinated debt agreement
also requires Merisel Americas to maintain specified financial ratios similar
in nature, but generally less restrictive, than those described in Note 6.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
operating leases. Future minimum rental payments, under leases that have
initial or remaining noncancelable lease terms in excess of one year are
$12,333,000 in 1994, $9,409,000 in 1995, $8,707,000 in 1996, $7,712,000 in
1997, $7,420,000 in 1998 and $22,402,000 thereafter. Certain of the leases
contain inflation escalation clauses and requirements for the payment of
property taxes, insurance, and maintenance expenses. Rent expense for 1991,
1992 and 1993 was $8,889,000, $11,007,000, and $12,617,000, respectively.
F-12
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to represent a class of all persons who purchased
Merisel common stock between February 1, 1994 and June 7, 1994 (the "Class
Period"). The complaints allege that the defendants inflated the market price
of Merisel's common stock with material misrepresentations and omissions during
the Class Period. Plaintiffs contend that such alleged misrepresentations are
actionable under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. Plaintiffs filed a consolidated
amended complaint on August 15, 1994. Merisel believes that it has meritorious
defenses to this lawsuit and intends to defend the action vigorously.
Management believes that the outcome of this matter will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company, and accordingly, no provision for loss has been made in the
accompanying financial statements.
The Company is also involved in certain legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
impact on the Company's financial statements.
9. EMPLOYEE STOCK OPTIONS AND BENEFIT PLANS
Under the Company's stock option plans, incentive stock options may be
granted to employees and nonqualified options may be granted to employees,
directors, and consultants. The plans authorized the issuance of an aggregate
of 4,616,200 shares upon exercise of options granted thereunder. The optionees,
option prices, vesting provisions, dates of grant and number of shares granted
under the plans are determined primarily by the Board of Directors, though
incentive stock options must be granted at prices which are no less than the
fair market value of the Company's common stock at the date of grant. Options
granted under the plans expire ten years from the date of grant. The following
summarizes activity in the plans for the three years ended December 31, 1993:
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS OPTION EXERCISES PRICE
---------- ------------------------
PER SHARE TOTAL
---------- ------------
<S> <C> <C> <C>
Outstanding, December 31, 1990..... 1,734,790 $1.11--$8.41 $ 9,157,000
Granted............................ 1,048,830 3.00 3,147,000
Exercised.......................... (58,110) 1.11--3.00 (123,000)
Canceled........................... (1,285,080) 2.20--8.41 (7,924,000)
---------- -----------
Outstanding, December 31, 1991..... 1,440,430 1.11--8.41 4,257,000
Granted............................ 741,500 11.38 8,434,000
Exercised.......................... (239,580) 1.11--6.25 (685,000)
Canceled........................... (78,810) 3.00--6.25 (446,000)
---------- -----------
Outstanding, December 31, 1992..... 1,863,540 1.11--11.38 11,560,000
Granted............................ 327,000 11.75--11.88 3,883,000
Exercised.......................... (307,100) 1.11--11.38 (1,051,000)
Canceled........................... (27,300) 3.00--11.38 (266,000)
---------- -----------
Outstanding, December 31, 1993..... 1,856,140 2.20--11.88 $14,126,000
========== ===========
</TABLE>
A total of 1,032,000 and 1,089,500 options were exercisable under the stock
option plans at December 31, 1992 and 1993, respectively.
F-13
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
During 1987, the Company's Board of Directors authorized the issuance of
350,000 nonqualified stock options to an officer of the Company for the
purchase of common stock at an exercise price of $.01 per share. The options
vested over five years from the date of grant and are exercisable for a period
of up to ten years. The difference between the fair market value of the common
stock underlying the nonqualified stock options as of the date of grant and
the exercise price, an aggregate of $1,484,000, was amortized as compensation
expense over the five-year vesting period. Compensation expense related to
these stock options was $148,000 and $124,000 in 1991 and 1992, respectively.
As of December 31, 1993, 150,000 options remained outstanding.
The Company offers a 401(k) savings plan under which all employees who are
21 years of age with at least one month of service are eligible to
participate. The plan permits eligible employees to make contributions up to
certain limitations, with the Company matching certain of those contributions.
The Company's contributions vest 25% per year. The Company contributed
$285,000, $378,000 and $443,000 to the plan during the years ended December
31, 1991, 1992 and 1993, respectively.
10. SEGMENT INFORMATION
The Company's operations involve a single industry segment -- the wholesale
distribution of micro-computer hardware and software products. The geographic
areas in which the Company operates are the United States, Canada, Europe
(United Kingdom, France, Germany, Switzerland, and Austria), and Other
International (Latin America and Australia in 1991, and Latin America,
Australia and Mexico in 1992 and 1993). Net sales, operating income (before
interest, other nonoperating expenses and income taxes) and identifiable
assets by geographical area were as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER CON-
STATES CANADA EUROPE INTERNATIONAL ELIMINATIONS SOLIDATED
---------- -------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1991:
Net sales:
Unaffiliated
customers............. $1,045,161 $257,718 $211,215 $ 71,352 $1,585,446
Transfers between
geographical areas.... 36,142 28 $(36,170)
---------- -------- -------- -------- -------- ----------
Total................ $1,081,303 $257,718 $211,215 $ 71,380 $(36,170) $1,585,446
========== ======== ======== ======== ======== ==========
Operating income
(loss)................ $ 34,430 $ 3,091 $ 1,416 $ (664) $ 38,273
========== ======== ======== ======== ==========
Identifiable assets.... $ 333,964 $ 87,810 $ 81,218 $ 24,782 $(19,188) $ 508,586
========== ======== ======== ======== ======== ==========
1992:
Net sales:
Unaffiliated
customers............. $1,475,222 $302,512 $324,180 $136,801 $2,238,715
Transfers between
geographical areas.... 39,047 502 $(39,549)
---------- -------- -------- -------- -------- ----------
Total................ $1,514,269 $302,512 $324,180 $137,303 $(39,549) $2,238,715
========== ======== ======== ======== ======== ==========
Operating income
(loss)................ $ 45,151 $ 5,489 $ (664) $ 1,542 $ 51,518
========== ======== ======== ======== ==========
Identifiable assets.... $ 414,161 $100,592 $126,953 $ 50,917 $(25,310) $ 667,313
========== ======== ======== ======== ======== ==========
1993:
Net sales:
Unaffiliated
customers............. $1,951,411 $395,375 $531,938 $207,127 $3,085,851
Transfers between
geographical areas.... 40,193 113 $(40,306)
---------- -------- -------- -------- -------- ----------
Total................ $1,991,604 $395,375 $531,938 $207,240 $(40,306) $3,085,851
========== ======== ======== ======== ======== ==========
Operating income....... $ 59,945 $ 7,421 $ 372 $ 3,646 $ 71,384
========== ======== ======== ======== ==========
Identifiable assets..... $ 588,711 $123,844 $192,097 $ 68,951 $(37,320) $ 936,283
========== ======== ======== ======== ======== ==========
</TABLE>
F-14
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED INSOFAR AS THESE NOTES RELATE TO THE SIX MONTHS ENDED JUNE 30, 1993
AND JUNE 30, 1994)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods for the fiscal years
ended 1992, 1993 and 1994 is presented below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1992
----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales..................... $ 487,103 $ 512,735 $554,250 $684,627
Gross profit.................. 46,442 47,920 47,749 60,312
Net income.................... 4,140 4,442 3,535 7,548
Net income per share.......... 0.16 0.15 0.12 0.25
<CAPTION>
1993
----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales..................... $ 692,458 $ 713,422 $731,442 $948,529
Gross profit.................. 59,423 59,132 61,556 78,425
Net income.................... 6,353 6,072 6,108 11,906
Net income per share.......... 0.21 0.20 0.20 0.39
<CAPTION>
1994
---------------------
MARCH 31 JUNE 30
---------- ----------
<S> <C> <C>
Net sales..................... $1,154,622 $1,210,498
Gross profit.................. 82,306 81,764
Net income.................... 8,596 2,718
Net income per share.......... 0.28 0.09
</TABLE>
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any
security other than the Notes offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of an offer to buy the Notes by
anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that
information herein is correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Documents Incorporated by Reference........................................ 2
Prospectus Summary......................................................... 3
Certain Investment Considerations.......................................... 8
Use of Proceeds............................................................ 9
Capitalization............................................................. 10
Selected Consolidated Financial Data ...................................... 11
Unaudited Pro Forma Condensed
Combined Statements of Income............................................. 12
Notes to the Unaudited Pro Forma
Condensed Combined Statements
of Income................................................................. 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ............................................................ 16
Business................................................................... 25
Management................................................................. 36
Executive Compensation..................................................... 38
Principal Shareholders..................................................... 42
Certain Indebtedness and Financing
Arrangements ............................................................. 43
Description of Notes....................................................... 46
Underwriting............................................................... 64
Legal Matters.............................................................. 65
Experts.................................................................... 65
Available Information...................................................... 65
Index to Consolidated Financial Statements................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$125,000,000
[LOGO OF MERISEL]
12 1/2% Senior Notes Due 2004
---------------------
PROSPECTUS
---------------------
CITICORP SECURITIES, INC.
October 17, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
