<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
-------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from _______________ to ___________
Commission File Number 0-17156
-------
MERISEL, INC.
-------------
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
--------------
________________________________________________________________________________
Former name, former address, and former fiscal year, if changed since last year
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Number of Shares Outstanding
Class November 10, 1997
- ----- -----------------------------
<S> <C>
Common Stock, $.01 par value 36,064,116 Shares
</TABLE>
<PAGE>
MERISEL, INC.
-------------
INDEX
-----
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 1-2
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1997
and 1996 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-21
PART II OTHER INFORMATION 22
SIGNATURES 26
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
--------------------
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 66,325 $ 44,678
Accounts receivable (net of allowances
of $16,144 and $23,684 for 1997 and
1996, respectively) 210,798 168,295
Inventories 375,662 392,557
Prepaid expenses and other current assets 16,167 16,925
Income taxes receivable 2,183
Deferred income tax benefit 477 482
-------- --------
Total current assets 669,429 625,120
PROPERTY AND EQUIPMENT, NET 53,969 61,430
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 25,701 41,724
OTHER ASSETS 7,402 2,765
-------- --------
TOTAL ASSETS $756,501 $731,039
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable 416,275 $ 383,548
Accrued liabilities 44,142 37,544
Income taxes payable 1,488
Convertible Notes - current 128,300
Long-term debt - current 1,677 9,084
Subordinated debt - current 4,400
--------- ---------
Total current liabilities 591,882 434,576
Convertible Notes - long term 8,800
Long-term debt 132,296 268,079
Subordinated debt 13,200
Capitalized lease obligations 187
--------- ---------
TOTAL LIABILITIES 732,978 716,042
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; 34,979,810 and
30,078,495 shares outstanding for 1997
and 1996, respectively 350 301
Additional paid-in capital 157,152 142,300
Accumulated deficit (127,065) (121,164)
Cumulative translation adjustment (6,914) (6,440)
--------- ---------
Total stockholders' equity 23,523 14,997
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 756,501 $ 731,039
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $965,238 $1,393,532 $2,974,093 $4,372,789
COST OF SALES 906,730 1,336,339 2,794,954 4,148,786
-------- ---------- ---------- ----------
GROSS PROFIT 58,508 57,193 179,139 224,003
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 48,697 84,082 143,518 245,640
IMPAIRMENT LOSS 40,000 40,000
-------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 9,811 (66,889) 35,621 (61,637)
LOSS ON SALE OF EUROPEAN, MEXICAN
AND LATIN AMERICAN OPERATIONS 33,455 33,455
INTEREST EXPENSE 7,029 9,613 23,412 29,085
OTHER EXPENSE 4,329 5,726 10,248 16,492
DEBT RESTRUCTURING COSTS 3,630 3,630
-------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (5,177) (115,683) (1,669) (140,669)
INCOME TAX PROVISION 156 1,455 488 1,381
-------- ---------- ---------- ----------
NET LOSS BEFORE
EXTRAORDINARY ITEM $ (5,333) $ (117,138) $ (2,157) $ (142,050)
EXTRAORDINARY LOSS ON
EXTINGUISHMENT OF DEBT 3,744 3,744
-------- ---------- ---------- ----------
NET LOSS $ (9,077) $ (117,138) $ (5,901) $ (142,050)
======== ========== ========== ==========
EARNINGS PER SHARE:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.17) $ (3.90) $ (0.07) $ (4.75)
EXTRAORDINARY ITEM (0.12) (0.12)
-------- ---------- ---------- ----------
NET LOSS PER SHARE $ (0.29) $ (3.90) $ (0.19) $ (4.75)
======== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 30,895 30,038 30,351 29,924
======== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
--------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,901) $ (142,050)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 8,655 15,584
Provision for doubtful accounts 11,255 15,451
Deferred income taxes 1,086
Impairment loss 40,000
Loss on sale of European, Mexican and Latin American businesses 33,455
Gain on sale of property (1,530)
Changes in assets and liabilities:
Accounts receivable (60,262) 103,639
Inventories 16,894 205,450
Prepaid expenses and other assets (3,903) (15,274)
Income taxes receivable/payable 3,676 30,913
Accounts payable 55,267 (242,084)
Accrued liabilities 6,085 (3,064)
--------- -----------
Net cash provided by operating activities 30,236 43,106
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,439) (9,052)
Proceeds from the sale of property 5,020 5,976
Earn out obligation - ComputerLand acquisition (13,409)
Cash proceeds from sale of Australian business 8,515
Other investing activities 1,811
--------- -----------
Net cash provided by (used for) investing activities 581 (6,159)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 726,308 1,192,650
Repayments under revolving line of credit (811,516) (1,166,650)
Proceeds from Convertible Notes 137,100
Net repayments under other bank facilities (1,176) (15,170)
Repayment of senior notes (56,805) (14,000)
Repayment of subordinated debt (17,600) (4,400)
Proceeds from issuance of Common Stock 14,900 215
--------- -----------
Net cash used in financing activities (8,789) (7,355)
--------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (381) (4,047)
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,647 25,545
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 44,678 1,378
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,325 $ 26,923
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
- ------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware, networking equipment and software products. Through its primary
operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries (collectively, the "Operating Company"), the Company markets
products and services throughout North America and is a valued partner to a
broad range of computer resellers, including value-added resellers (VARs),
retailers, and commercial/dealers. The Company also has established the Merisel
Open Computing Alliance (MOCA(TM)), which primarily supports Sun Microsystems'
UNIX-based product sales and installations.
The information for the three and nine months ended September 30, 1997 and 1996
has not been audited by independent accountants, but includes all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for such periods.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities and
Exchange Commission, although the Company believes that the disclosures included
in these financial statements are adequate to make the information not
misleading. The consolidated financial statements as presented herein should be
read in conjunction with the consolidated financial statements and notes thereto
included in Merisel's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
1997 Business Strategy--The Company has developed and is implementing a business
strategy for 1997 (the "1997 Business Strategy") that focuses on profitable
North American revenue growth. Under the 1997 Business Strategy, Merisel is
concentrating on strengthening and building its sales infrastructure for the
purpose of increasing revenues, improving gross margins, and controlling
operating expenses. Other priorities include continuing efforts to achieve
operational excellence and implementing a strategy focused on the United States
and Canada.
Liquidity--In 1996, the Company incurred a net loss of $140,375,000 which
includes impairment losses of $42,033,000 and a loss on the sale of the
Company's European, Mexican and Latin American Business (such businesses are
referred to herein as "EML") of $33,455,000. The impairment losses were
associated with the intangible assets of the Company's wholly owned subsidiary
Merisel FAB, Inc. ("Merisel FAB") which operated the Company's Franchise and
Aggregation Business ("FAB"). As of March 28, 1997, the Company sold
substantially all of the assets of Merisel FAB to SYNNEX Information
Technologies, Inc. ("Synnex"). EML was sold as of September 27, 1996 to CHS
Electronics, Inc. ("CHS") (See Note 5--"Dispositions"). In addition to the
losses associated with the sale of EML and impairment losses, 1996 operations
were impacted by significant charges related to customer disputes, vendor
reconcilement and other issues, costs associated with the improvement of
certain business processes, and the impact of liquidity constraints on the
Company's ability to purchase inventory on favorable terms.
5
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Debt Restructuring--Although the Company was profitable in the fourth quarter of
1996, the Company did not believe that it could satisfy its debt obligations
without a restructuring of its $125,000,000 principal amount of 12 1/2% Senior
Notes due 2004 (the "12.5% Notes") and/or the approximately $150,000,000 of
outstanding indebtedness of certain subsidiaries of the Company (the "Operating
Company Debt"), which required principal repayments of $40,000,000 if the
Company made the June 30, 1997 interest payment on the 12.5% Notes, and an
additional $30,000,000 if the Company made its December 31, 1997 interest
payment on the 12.5% Notes.
Accordingly, Merisel commenced negotiations with an ad hoc committee of holders
of the 12.5% Notes and, effective April 14, 1997, entered into a Limited Waiver
and Voting Agreement (the "Limited Waiver Agreement") with holders of more than
75% of the outstanding principal amount of the 12.5% Notes. Pursuant to the
terms of the Limited Waiver Agreement, upon the fulfillment of certain
conditions, holders of the 12.5% Notes would exchange (the "Exchange") their
12.5% Notes for common stock of the Company (the "Common Stock"), which would
equal approximately 80% of the outstanding shares of Common Stock immediately
after the Exchange. The Limited Waiver Agreement provided that, immediately
after the consummation of the Exchange, the Company would issue warrants (the
"Warrants") to purchase up to 17.5% of the shares of Common Stock outstanding
immediately after the Exchange to the existing holders of Common Stock. The
Warrants would be issued in two series and would have exercise prices of $1.34
and $1.74 per share, respectively. While the Limited Waiver Agreement was in
effect, the Consenting Noteholders agreed to waive any default arising from the
nonpayment of interest due in 1997 on the 12.5% Notes, but upon the occurrence
of an Agreement Termination Event (as defined in the Limited Waiver Agreement),
the interest would be due and payable immediately in accordance with the terms
of the Indenture governing the 12.5% Notes. The conditions to the Exchange were
not met and, on September 19, 1997, the Limited Waiver Agreement terminated in
accordance with its terms and the Company paid the interest due with respect to
the 12.5% Notes.
On September 19, 1997 the Company and Merisel Americas entered into a definitive
Stock and Note Purchase Agreement with Phoenix Acquisition Company II, L.L.C.
("Phoenix"), a Delaware limited liability company whose sole member is
Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and Note
Purchase Agreement, on September 19, 1997 Phoenix acquired a Convertible Note
for $137,100,000 (the "Convertible Note") and 4,901,316 shares of Common Stock
(the "Initial Shares") for $14,900,000. The Convertible Note is an unsecured
obligation of the Company and Merisel Americas with an initial principal payment
of $123,900,000 due January 31, 1998 and additional principal payments of
$4,400,000 due on each of March 10, 1998, 1999, and 2000 if the Convertible Note
is not earlier converted to equity. The Convertible Note provides that, upon
the satisfaction of certain conditions, including obtaining stockholder
approval, the Convertible Note will automatically convert into 45,098,684 shares
of Common Stock (the "Conversion Shares"). The Conversion Shares and Initial
Shares would together represent 50,000,000 shares of Common Stock, or
approximately 62.4% of the Common Stock outstanding immediately following the
issuance of the Conversion Shares (based on the number of shares of Common Stock
outstanding as of November 10, 1997).
6
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The Company used the proceeds from the issuance of the Initial Shares and the
Convertible Note to repay all of the Operating Company Debt.
Recent Developments--On October 10, 1997, Phoenix exercised its option to
convert, without any additional payment, $3,296,286 principal amount of the
Convertible Note into 1,084,305 shares of Common Stock, representing the maximum
amount that could be converted prior to obtaining stockholder approval. As of
November 10, 1997, Phoenix owned 16.60% of the outstanding Common Stock.
2. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings per Share" (SFAS 128) which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 simplifies the previous standards for computing earnings per
share and requires the disclosure of basic and diluted earnings per share. For
the year ended December 31, 1996 and for the subsequent interim period reported,
the amount reported as net income per common and common equivalent share is not
materially different than that which would have been reported for basic and
diluted earnings per share in accordance with SFAS 128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting for Comprehensive Income" and
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
These statements are effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not yet analyzed the impact
of adopting these statements.
3. Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The Company's third quarter is the 13-week period
ending on the Saturday nearest to September 30. For simplicity of presentation,
the Company has described the interim periods and year-end period as of
September 30, and December 31, respectively.
4. Extraordinary Item
On September 19, 1997, the Company received aggregate proceeds of $152,000,000
from the issuance of the Initial Shares and the Convertible Note. Pursuant to
the terms of the Stock and Note Purchase Agreement with Phoenix, the Company
used substantially all of such proceeds to repay the Operating Company Debt. In
connection with these repayments, the Company recorded an extraordinary loss on
the extinguishment of debt of $3,744,000. This amount consisted of a "make
whole" premium of $960,000 required to be paid with respect to the Subordinated
Notes of Merisel Americas, unamortized prepaid financing fees totaling
approximately $2,546,000 and other costs totaling $238,000.
7
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Because of the losses that the Company sustained in fiscal 1995 and 1996, the
Company has utilized all of its NOL carryback capacity in prior years and
accordingly, no income tax benefit has been recorded on the loss.
5. Dispositions
In March 1996, effective as of January 1, 1996, the Company sold its interest in
its wholly owned Australian subsidiary, Merisel Pty Ltd. ("Australia"), to Tech
Pacific Holdings Ltd. Under the terms of the agreement, the Company received
consideration of $9,900,000 in the form of repayment of certain intercompany
debt obligations. The Company recognized a $1,900,000 charge as an impairment
loss for the write down of the Australian net assets to their net realizable
value in the fourth quarter of 1995.
On October 4, 1996, Merisel completed the sale of EML to CHS. The sale was
effective as of September 27, 1996. A loss of $33,455,000, which includes
approximately $7,400,000 of direct costs related to the sale, was recorded on
such sale. The sale price, computed based on the combined closing balance sheet
of EML, was $147,631,000, consisting of (i) $110,379,000 in cash, (ii) the
assumption of Merisel's European asset securitization agreement against which
$26,252,000 was outstanding at closing and (iii) a receivable for $11,000,000,
which has been paid in full.
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of Merisel FAB to a wholly owned subsidiary of Synnex. The sale price,
computed based upon the February 21, 1997 balance sheet of Merisel FAB, was
$31,992,000 consisting of the assumption by the buyer of $11,992,000 of trade
payables and accrued liabilities and a $20,000,000 extended payable due to
Vanstar Corporation. As part of the sale, the Company agreed to extend rebates
to Synnex on future purchases at a defined rate per dollar of purchases, not to
exceed $2,000,000 in aggregate rebates. In the quarter ended December 31, 1996,
the Company recorded an impairment charge of $2,033,000 to adjust Merisel FAB's
assets to their estimated fair market value.
8
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Following is summarized pro forma operating results assuming that the Company
had sold the assets of Merisel FAB and EML as of January 1, 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Net Sales $2,536,878 $2,771,915
Gross Profit 122,813 171,461
Net Income (loss) (62,524) (8,055)
========== ==========
Net Income (loss) per share $ (2.09) $ (0.27)
========== ==========
Weighted Average Shares Outstanding 29,924 30,351
</TABLE>
EML is not an incorporated entity for which historical financial statements were
prepared. The historical balances used in preparing the above pro forma balances
represent combined balances obtained from the separate unaudited financial
statements for the individual entities comprising EML. The pro forma results
include adjustments for general and administrative expenses that would not have
been eliminated due to the sale of EML. The pro forma adjustments also include
adjustments for amortization of intangible assets and for interest expense on
debt repaid with a portion of the proceeds from the sale, net of the effect of
an interest rate increase resulting from the renegotiation of certain debt
agreements as a result of the sale. Historical balances obtained from FAB's
unaudited financial statements were also used in preparing the pro forma
balances above.
6. Debt
On September 19, 1997, the Company and Merisel Americas issued to Phoenix
the Convertible Note in an aggregate principal amount of $137,100,000. The
Convertible Note is an unsecured obligation of the Company and Merisel Americas
with an initial principal payment of $123,900,000 due January 31, 1998 and
additional principal payments of $4,400,000 due on each of March 10, 1998, 1999
and 2000 if the Convertible Note is not earlier converted into Common Stock.
The Convertible Note provides that, upon the satisfaction of certain conditions,
including obtaining stockholder approval, the Convertible Note will
automatically convert into 45,098,684 shares of Common Stock. The Convertible
Note bears interest at a rate of 11.5% per annum, which rate increases by an
additional 1% per annum each month commencing at the end of November 1997, up to
a maximum of 18% per annum. As permitted under the terms of the Convertible
Note, the Company and Merisel Americas have elected to defer payment of interest
on the Convertible Note. Upon the conversion of the Convertible Note into
Common Stock, the deferred and unpaid interest due thereon will be forgiven.
9
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
On September 19, 1997, the Company used substantially all of the $152,000,000 in
proceeds from the issuance of the Initial Shares and the Convertible Note to
repay indebtedness of its operating subsidiaries consisting of $80,697,000
principal amount outstanding under a revolving credit agreement, $53,798,000
principal amount of 11.5% Notes, and $13,200,000 principal amount of
Subordinated Notes. In connection with the repayment of such indebtedness in
full, the Company recorded an extraordinary loss on the extinguishment of debt
of $3,744,000. This amount consisted of a "make whole" premium of $960,000
required to be paid with respect to the Subordinated Notes, unamortized prepaid
financing fees totaling approximately $2,546,000 and other costs totaling
$238,000.
At September 30, 1997, the Company had outstanding $125,000,000 principal amount
of the 12.5% Notes which mature on December 31, 2004. Additionally, at
September 30, 1997, the Company had promissory notes outstanding with an
aggregate balance of $8,974,000. Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 to 60 monthly installments
commencing February 1, 1996, with balloon payments due at maturity. The notes
are collateralized by certain of the Company's real property and equipment.
On October 10, 1997, Phoenix exercised its option to convert, without any
additional payment, $3,296,286 principal amount of the Convertible Note into
1,084,305 shares of Common Stock, representing the maximum amount that could be
converted prior to obtaining stockholder approval. As of November 10, 1997,
Phoenix owned 16.60% of the outstanding Common Stock.
See Note 1--"Debt Restructuring Liquidity" for a discussion of the Company's
proposed debt restructuring.
7. Earnings Per Share
Earnings per share is computed by dividing earnings by the weighted average
number of shares of Common Stock outstanding during the related period,
including Common Stock options when dilutive.
8. Supplemental Disclosure of Cash Flow Information
Cash paid (received) in the nine month periods ended September 30 for interest
and income taxes was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Interest $18,412 $ 36,208
Income taxes $(6,687) $(30,370)
</TABLE>
Effective March 28, 1997, the Company sold substantially all of the assets of
Merisel FAB. The recorded sale price was $31,992,000, consisting of the
assumption of $11,992,000 of trade payables and accrued liabilities and a
$20,000,000 extended payable due to a third party, in full consideration for the
assets (See Note 5-"Dispositions").
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
GENERAL
- -------
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware, networking equipment and software products. Through its primary
operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries (collectively, the "Operating Company"), the Company markets
products and services throughout North America and is a valued partner to a
broad range of computer resellers, including value-added resellers (VARs),
commercial resellers/dealers, and retailers. The Company also has established
the Merisel Open Computing Alliance (MOCA(TM)), a division which primarily
supports Sun Microsystems' UNIX-based product sales and installations.
The statement of operations for the current year and quarter, reflect charges
and extraordinary losses associated with the Company's efforts to restructure
its debt, which resulted in the issuance to Phoenix of the Convertible Note and
the Initial Shares for aggregate proceeds of $152,000,000. These charges total
$9,324,000 and consist of the following: $1,950,000 in accrued compensation
related to the debt restructuring which is included as part of selling, general
and administrative expenses; $3,630,000 in expenses that resulted from
transaction costs relating to professional fees and other costs associated with
the terminated Limited Waiver Agreement with the holders of the 12.5% Notes,
which are considered non-operating expenses and are shown separately below
operating income (loss); and an extraordinary loss on extinquishment of debt of
$3,744,000 resulting from the repayment of the Operating Company Debt. See
further discussion under the caption "Debt Restructuring" in Note 1 of the
financial statements.
During 1996, the Company pursued a business plan that was developed to address
capital structure issues by curtailing non-essential capital expenditures and
disposing of assets. Effective January 1, 1996, the Company sold its Australian
operations. As of September 27, 1996, the Company completed the sale of its
European, Mexican and Latin American businesses (referred to herein as "EML").
In addition, as of March 28, 1997, the Company completed the sale of
substantially all of the assets of Merisel FAB to a wholly owned subsidiary of
SYNNEX Information Technologies, Inc. ("Synnex").
As a result of these asset dispositions, the Company's operations are now
focused exclusively in North America. In the year ended December 31, 1996, the
North American Business (as defined below) produced $3.4 billion in revenues,
and the Former Operations (as defined below) produced $2.1 billion in revenue.
As the North American Business represents the ongoing business of the Company,
the following discussion and analysis will compare the components of operating
income for the three months and nine months ended September 30, 1997 for the
North American Business only. As used in this discussion and analysis, the term
"North American Business" refers to Merisel's United States and Canadian
distribution businesses, and the term "Former Operations" refers to those
operations disposed of by Merisel during 1996 and the first quarter of 1997,
namely the Australian Business, EML, and Merisel FAB's franchise and aggregation
businesses ("FAB").
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1997 as Compared to the Three Months Ended
- ---------------------------------------------------------------------------
September 30, 1996.
- ---------------------
The quarter ended September 30, 1997 represents the second quarter in which the
consolidated results of operations include only the Company's North American
Business. The following table sets forth the unaudited results of operations
for the North American Business and Former Operations for the three months ended
September 30, 1996 and the results of operations for the three months ended
September 30, 1997 for comparative purposes.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
(In Thousands) (Unaudited) (In Thousands) (Unaudited)
------------------------------------------- ---------------------------------------------------
North North
American Former Consolidated American Former Consolidated
Business Operations Total Business Operations Total
-------- ---------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $965,238 $ $965,238 $826,359 $567,173 $1,393,532
Cost of Sales 906,730 906,730 799,100 537,239 1,336,339
-------- ---------- -------- -------- --------- ----------
Gross Profit 58,508 58,508 27,259 29,934 57,193
SG&A Expenses 48,697 48,697 51,881 32,201 84,082
Impairment Loss 40,000 40,000
-------- ---------- -------- -------- --------- ----------
Operating
Income $ 9,811 $ $ 9,811 $(24,622) $(42,267) $ (66,889)
======== ========== ======== ======== ========= ==========
</TABLE>
Net sales for the North American Business increased 16.8% from $826,359,000 in
the quarter ended September 30, 1996 to $965,238,000 in the quarter ended
September 30, 1997. The increase resulted from a 16.6% increase in net sales
for the U.S. and a 17.9% increase in Canada. The U.S. growth over the prior
period was particularly strong in its VAR and Commercial/Dealer segments.
Overall growth was offset to a small degree by a decrease in retail sales. The
decline in retail sales reflects the Company's decision to substantially reduce
its sales in the retail segment industry in early 1996, in part to address cash
management objectives and constraints. The Company has recommitted significant
resources to rebuilding its retail customer base in 1997, which is evidenced by
an increase in retail sales from the second quarter of 1997 to the third quarter
of 1997 of approximately 60%.
In the North American Business, hardware and accessories accounted for 78% of
net sales and software accounted for 22% of net sales in the third quarter of
1997, as compared to 75% and 25% for the same categories, respectively, in the
third quarter of 1996.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Gross profit for the North American Business increased 114.6% or $31,249,000
from $27,259,000 in 1996 to $58,508,000 in 1997. Gross profit as a percentage
of sales, or gross margin, increased from 3.3% in 1996 to 6.1% in 1997. Gross
profit in the prior year reflects third quarter charges of $19,700,000 related
to customer disputes, vendor reconciliations, and other issues. Excluding these
factors, gross margins would have been approximately 5.68% for the North
American business in the third quarter of 1996. In the current quarter, margins
were favorably affected by the favorable resolution of customer dispute and
vendor reconciliation issues totaling $3,955,000. On an adjusted basis,
excluding these adjustments, gross margins would have been 5.65% for the third
quarter of 1997. Gross margins in the United States and Canada, excluding the
impact of these adjustments, were 5.5% and 6.2%, respectively, for the third
quarter of 1997, compared to 5.6% and 5.9%, respectively, for the same period of
1996. On an ongoing basis, the Company is continuing the process of resolving
outstanding vendor reconciliation and customer dispute issues, the resolution of
which may or may not favorably affect margins in subsequent periods. Merisel has
pursued a strategy to increase revenue, which includes growing its retail and
commercial sales segments, which segments have generally lower gross margins
than other business segments. The Company is addressing this by targeting
specific areas for margin improvement including sales execution, product mix,
pricing and customer mix. However, the Company continues to face intense
competitive pricing pressures.
Selling, general and administrative expenses for the North American Business
decreased by 6.1% from $51,881,000 in the third quarter of 1996 to $48,697,000
in the third quarter of 1997. Selling, general and administrative expenses as a
percentage of sales decreased from 6.3% of sales in 1996 to 5.1% for the same
period in 1997. Expenses for the third quarter of 1997 include accrued
compensation charges of $1,950,000 that were incurred pursuant to
employment contracts of certain executive officers of the Company and were
related to the proposed restructuring of the Company's debt. Excluding these
charges, selling, general and administrative expense as a percentage of sales
would have been 4.8% of sales in the current quarter. The higher level of
expenses in the 1996 period was primarily attributable to costs associated with
carrying out the Company's 1996 business plan and strategies, such as severance
costs, professional fees and other costs incurred to develop business plans and
strategies and to improve certain business processes in 1996.
As a result of the above items, operating income for the North American Business
improved by $34,433,000 from a loss of $24,622,000 for the third quarter of 1996
to income of $9,811,000 for the third quarter of 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Nine Months Ended September 30, 1997 as Compared to the Nine Months Ended
- -------------------------------------------------------------------------
September 30, 1996.
- ---------------------
The following table sets forth the unaudited results of operations for the North
American Business and Former Operations for the nine months ended September 30,
1997 and September 30, 1996.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
(In Thousands) (Unaudited) (In Thousands) (Unaudited)
------------------------------------------ ------------------------------------------
North North
American Former Consolidated American Former Consolidated
Business Operations Total Business Operations Total
-------- ---------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $2,771,915 $202,178 $2,974,093 $2,536,878 $1,835,911 $4,372,789
Cost of Sales 2,600,454 194,499 2,794,953 2,414,065 1,734,721 4,148,786
---------- -------- ---------- ---------- ---------- ----------
Gross Profit 171,461 7,679 179,140 122,813 101,190 224,003
SG&A Expenses 137,318 6,200 143,518 150,213 95,427 245,640
Impairment Loss 40,000 40,000
---------- -------- ---------- ---------- ---------- ----------
Operating
Income $ 34,143 $ 1,479 $ 35,622 $ (27,400) $ (34,237) $ (61,637)
========== ======== ========== ========== ========== ==========
</TABLE>
Net sales for the North American Business increased 9.3% from $2,536,878,000 for
the nine months ended September 30, 1996 to $2,771,915,000 for the nine months
ended September 30, 1997. The increase resulted from a 6.8% increase in net
sales for the U.S. division and a 20.6% increase in Canada. The growth rate in
the U.S. reflects steadily improving year-over-year performance in the second
and third quarters due to those factors summarized in the discussion of sales
for the three months ended September 30, 1997 and 1996.
In the North American Business, hardware and accessories accounted for 77% of
net sales and software accounted for 23% of net sales in the first nine months
of 1997, as compared to 75% and 25% for the same categories, respectively, in
the first nine months of 1996.
Gross profit for the North American Business increased 39.6% or $48,648,000 from
$122,813,000 in 1996 to $171,461,000 in 1997. Gross profit as a percentage of
sales, or gross margin, increased from 4.8% in 1996 to 6.2% in 1997. Gross
profit in the prior year period includes charges of $24,100,000 related to
customer disputes, vendor reconciliations, and other issues. Excluding these
factors, gross margins would have been approximately 5.8% for the North American
business for the first nine months of 1996. In the 1997 period, margins were
favorably affected by the resolution of customer disputes and vendor
reconciliations totaling $7,245,000. On an adjusted basis, excluding these
adjustments, gross margins would have been 5.9% for the nine months ended
September 30, 1997. Gross margins in the United States and Canada, excluding the
impact of these adjustments, were 5.9% and 6.1%, respectively, for the first
nine months of 1997, compared to 5.8% and 5.9%, respectively, for the same
period of 1996.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
On an ongoing basis, the Company is continuing the process of resolving
outstanding vendor reconciliation and customer disputes, the resolution of which
may or may not favorably affect margins in subsequent periods. Merisel has
pursued a strategy to increase revenue, which includes growing its retail and
commercial sales segments, which segments have generally lower gross margins
than other business segments. The Company is addressing this by targeting
specific areas for margin improvement including sales execution, product mix,
pricing and customer mix. However, the Company continues to face intense
competitive pricing pressures.
Selling, general and administrative expenses for the North American Business
decreased by 8.6% from $150,213,000 in the nine months ended 1996 to
$137,318,000 for the same period of 1997. Selling, general and administrative
expenses as a percentage of sales decreased from 5.9% of sales in 1996 to 5.0%
for the same period in 1997. Expenses for the 1997 period include accrued
compensation charges of $1,950,000 that were incurred pursuant to employment
contracts of certain executive officers, and were related to the proposed
restructuring of the Company's debt. Excluding these charges, selling, general
and administrative charges as a percentage of sales would have been 4.9% of
sales in the 1997 period. The higher level of expenses in the 1996 period was
primarily attributable to costs associated with carrying out the Company's 1996
business plan and strategies, such as severance costs, professional fees and
other costs incurred to develop business plans and strategies and to improve
certain business processes in 1996.
As a result of the above items, operating income for the North American Business
improved by $61,543,000 from a loss of $27,400,000 for the first nine months of
1996 to income of $34,143,000 for the first nine months of 1997.
INTEREST EXPENSE; OTHER EXPENSE; AND INCOME TAX PROVISION
Interest expense for the Company, including Former Operations, decreased 26.9%
from $9,613,000 in the quarter ended September 30, 1996 to $7,029,000 in the
quarter ended September 30, 1997. For the nine months ended September 30, 1996,
interest expense decreased 19.5% from $29,085,000 in the 1996 period to
$23,412,000 in the 1997 period. The decrease in interest expense resulted from
the amortization and paydown of the Company's debt by approximately $104,225,000
from the end of September 1996 through the end of September 1997, which was
offset in part by an increase in interest rates under the Company's 11.5% Notes,
Revolving Credit Agreement and Subordinated Notes. Approximately $72,500,000 of
the paydown occurred in October 1996 using proceeds from the sale of EML.
Interest expense related to the extinguished operating debt totaled $3,764,000
and $12,404,000 for the three and nine months ended September 30, 1997. (see
"EXTRAORDINARY ITEM" below)
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Other expenses for the Company, including Former Operations, decreased from
$5,726,000 and $16,492,000 for the three and nine months ended September 30,
1996, respectively, to $4,329,000 and $10,248,000 for the three and nine months
ended September 30, 1997, respectively. The decrease over the prior year relates
primarily to a loss of $730,000 recorded in September 1996 in connection with
the disposition of a portion of land held for sale, and to income of $220,000
recorded in the 1997 quarter related to the disposal of other assets held by
the Company. For the nine month period, in addition to the effects of disposed
land and other assets described above, the expenses for the 1997 period are
lower in comparison to the prior year period primarily due to a $1,530,000 gain
on the sale of land in the second quarter of 1997 and one time financing charges
of approximately $3,125,000 paid to negotiate amendments to the Company's
financing agreements in the first quarter of 1996.
During the quarter ended September 30, 1997, the Company recognized as expenses
$3,630,000 of transaction costs relating to professional fees and other costs
associated with the terminated Limited Waiver Agreement with the holders of the
12.5% Notes.
The income tax provision decreased from an expense of $1,455,000 and $1,381,000
for the three and nine months ended September 30, 1996, respectively, to an
expense of $156,000 and $489,000 for the same periods in 1997. In the current
year, the income tax rate reflects only the minimum statutory tax requirements
in the various states and provinces in which the Company conducts business, as
the Company has sufficient net operating loss provisions from prior year losses
to offset federal income taxes related to 1997 income. In the prior year, the
Company recognized a tax provision expense that primarily represents the
establishment of a valuation allowance against a previously recognized state
deferred tax asset.
Upon the issuance of the Conversion Shares, the Company will undergo an
ownership change for Federal income tax purposes and, accordingly, the Company
will be limited in its ability to use its net operating loss carryovers ("NOLs")
to offset future taxable income. Such limitation will generally be determined
by multiplying the value of the Company's equity before the ownership change by
the long-term tax-exempt rate (currently 5.27%). This is likely to limit
significantly the Company's use of its NOLs in any one year.
EXTRAORDINARY ITEM
The Company used substantially all of the $152,000,000 in received aggregate
proceeds from the issuance of the Initial Shares and the Convertible Note to
repay the Operating Company Debt on September 19, 1997. In connection with these
repayments, the Company recorded an extraordinary loss on the extinguishment of
debt of $3,744,000. This amount consisted of a "make whole" premium of $960,000
required to be paid with respect to the Subordinated Notes of Merisel Americas,
unamortized prepaid financing fees totaling approximately $2,546,000 and other
costs totaling $238,000.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Because of the losses that the Company sustained in fiscal 1995 and 1996, the
Company has utilized all of its NOL carryback capacity in prior years and,
accordingly, no income tax benefit has been recorded on the loss.
CONSOLIDATED LOSS
On a consolidated basis, net income for the Company, including Former
Operations, increased from losses of $117,137,000 and $142,050,000 for the
three and nine months ended September 30, 1996, respectively, to losses of
$9,077,000 and $5,902,000 for the three and nine months ended September 30,
1997, due to the factors described above. Net loss per share increased from
losses of $3.90 and $4.75 per share for the three and nine months ended
September 30, 1996, respectively, to losses of $.29 and $.19 per share for the
same periods of 1997.
SYSTEMS AND PROCESSES
- ---------------------
Merisel has made significant investments in new, advanced computer and warehouse
management systems for its North American operations to support sales growth and
improve service levels. All of Merisel's nine North American warehouses now
utilize Merisel's Information and Logistical Efficiency System ("MILES"), a
computerized warehouse management system, which uses infrared bar coding and
advanced computer hardware and software to maintain high picking, receiving and
shipping accuracy rates.
Merisel is in the process of converting its North American operations to the SAP
client/server operating system. SAP is an enterprise-wide system which
integrates all functional areas of the business including order entry, inventory
management and finance in a real-time environment. The Company converted its
Canadian operations from a mainframe to the client/server operating system in
August 1995. The new system is designed to provide greater transaction accuracy,
flexibility, and custom pricing applications. The Company plans to convert its
U.S. operations to the SAP system no later than the first part of 1999. The
design and implementation of this new system is a complex project and involves
certain risks. Until such implementation, the Company will continue to modify
its existing U.S. systems and may experience difficulty in processing
transactions, which could adversely affect operating income and cash flows. See
"LIQUIDITY AND CAPITAL RESOURCES" below.
The design and implementation of these new systems are complex projects and
involve certain risks. Until such implementation, the Company will continue
to modify its existing U.S. systems and may experience difficulty in processing
transactions, which could adversely affect operating income and cash flows.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
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 computer 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 dynamic
characteristics of the computer product distribution industry, the Company's
revenues and earnings may be subject to material volatility, particularly on a
quarterly basis.
Additionally, in the U.S. and Canada, the Company's net sales in the fourth
quarter have been historically 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 and
holiday purchases. As a result of this pattern the Company's working capital
requirements in the fourth quarter have typically been greater than other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year, which is primarily due to buying patterns
of Canadian Government Agencies. See "Liquidity and Capital Resources" below.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has financed its growth and cash needs primarily through borrowings,
securitizations of its trade receivables, and public and private sales of its
securities.
Net cash provided by operating activities during the nine months ended September
30, 1997 was $30,236,000. The primary use of cash was an increase in accounts
receivable of $60,262,000. Sources of cash included a decrease in inventory of
$16,894,000, an increase in accrued liabilities of $6,085,000, and an increase
in accounts payable of $55,267,000. The increase in accounts receivable is
primarily the result of increased sales of 16.8% in the current quarter,
decreased utilization of the accounts receivable securitization facility towards
the end of September due to a decreased need for cash, and a decreased
utilization of early payment incentives offered to customers. The decreased
inventory from the fourth quarter of 1996 is primarily the result of seasonal
fluctuations on inventory needs. The increase in accounts payable primarily
reflects improvement in payment terms with vendors and increased credit limits.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Net cash provided by investing activities was $581,000 consisting of proceeds
from the sale of land held in North Carolina totaling $5,020,000, which was
offset by capital expenditures of $4,439,000. The expenditures were primarily
for the maintenance and improvement of existing facilities. The Company
presently anticipates that its capital expenditures will be between $9,000,000
and $12,000,000 for 1997 and between $20,000,000 and $30,000,000 for 1998,
primarily consisting of costs of implementing the SAP operating system,
expenditures for upgrading warehouse systems and other Company facilities, and
expenditures related to building the sales infrastructure. However, aggregate
costs could exceed these estimates, depending on the timing and scope of the SAP
implementation. Capital expenditures will also be made for initiatives to
develop the Company's channel assembly capabilities and in the area of
electronic services including expanded EDI capabilities, internet applications
and automated order processing. The Company believes that implementation of the
SAP operating system will address its major "year 2000 issues", which arise in
cases where the Company's systems use two digit data fields that recognize dates
using the assumption that the first two digits are "19" (i.e., the number 97 is
recognized as the year 1997). The Company is currently engaged in a review of
its ancillary computer systems and applications, including packaged software
used by the Company, and expects to make any modifications required to resolve
year 2000 issues in a timely manner. The Company does not expect that such
review and modifications will require significant additional capital
expenditures, however, if the Company is unable to successfully implement the
SAP operating system sufficiently in advance of the year 2000, additional
expenditures could be required and such expenditures could be substantial.
Net cash used in financing was $8,789,000 and consists of aggregate proceeds of
$152,000,000 from the sale of the Initial Shares and the Convertible Note,
offset by amortization payments and the repayment in full in September 1997 of
the Operating Company Debt, which payments aggregated $159,613,000, and
scheduled payments of $1,176,000 with respect to other indebtedness of the
Company.
Funds are also generated through the sale of receivables by Merisel Capital
Funding, Inc., a wholly owned subsidiary of the Company's Merisel Americas,
Inc. operating subsidiary. Merisel Capital Funding's sole business is the
ongoing purchase of trade receivables from Merisel Americas. Merisel Capital
Funding sells these receivables, in turn, under an agreement with a
securitization company, whose purchases yield proceeds of up to $300,000,000 at
any point in time. Merisel Capital Funding is a separate corporate entity with
separate creditors who, upon its liquidation, are entitled to be satisfied out
of Merisel Capital Funding's assets prior to any value in the subsidiary
becoming available to the subsidiary's equity holder. As a result of losses the
Company incurred in fiscal year 1996, Merisel Americas and Merisel Capital
Funding were obliged to and did obtain amendments and waivers with respect to
certain covenants under this facility, which expires in October 2000.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for its operations. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
150,000,000 Canadian dollars. The facility expires December 12, 2000, but is
extendible by notice from the securitization company, subject to the Company's
approval.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of September
30, 1997, the total amount outstanding under these facilities was $240,016,000.
Fees incurred in connection with the sale of accounts receivable for the three
months and nine months ended September 30, 1997 were $4,066,000, and
$11,416,000, respectively, compared to $3,746,000 and $12,273,000 incurred for
the three months and nine months ended September 30, 1996 and are recorded as
other expense.
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 to factors including increases or
decreases in sales levels, Merisel's practice of making large-volume purchases
when it deems 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. The Company is not assured
that these agreements will succeed in reducing this risk. 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 privileges, as well as the Company's inventory
management procedures, have helped to reduce the risk of loss of carrying
inventory.
The Company has purchased foreign exchange contracts whenever available to
minimize foreign exchange transaction gains and losses. Such contracts were
temporarily not available to the Company beginning in the latter part of 1996.
The Company experienced net transaction losses of approximately $350,000 in the
first quarter of 1997, prior to the renewed availability of foreign exchange
contracts. The Company plans to continue to use foreign exchange contracts in
the future, to the extent they are available and necessary.
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. The Company also offers
financing for its sales to certain of its customers through various floor plan
financing companies. With respect to credit sales, the Company attempts to
control its bad debt exposure by monitoring customers' creditworthiness and,
where practicable, through participation in credit associations that provide
customer credit rating information for certain accounts. In addition, the
Company purchases credit insurance as it deems appropriate.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
COMPETITION
- -----------
Traditionally, competition in the computer products distribution industry is
intense. Competitive factors include price, brand selection, breadth and
availability of product offering, financing options, shipping and packaging
accuracy, speed of delivery, level of training and technical support, marketing
services and programs and ability to influence a buyer's decision.
Certain of Merisel's competitors have substantially greater financial resources
than Merisel. Merisel's principal competitors include large United States-based
distributors and aggregators such as Gates/Arrow, Inacom, Ingram Micro, MicroAge
and Tech Data Corporation, as well as regional distributors and franchisers.
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 concentrate their direct sales on
large computer resellers because of the relatively high costs associated with
dealing with small-volume computer reseller customers.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In June 1994, Merisel 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 November 8, 1993 and June 7, 1994 (the "Class Period"). The
complaint, as amended and consolidated, alleges 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 Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Following
the granting of defendant's first motion to dismiss on December 5, 1994,
plaintiffs filed a second consolidated and amended complaint December 22, 1994.
On April 3, 1995, Federal District Judge Real dismissed the complaint with
prejudice. On August 8, 1997 the Court of Appeals for the Ninth Circuit (the
"Court of Appeals") reversed the dismissal and remanded the case to the trial
court. On August 22, 1997, the Company filed a petition for rehearing and
suggestion of rehearing en banc (the "Petition") with the Court of Appeals. On
September 27, 1997, the Plaintiffs-Appellants filed a response to the Petition
and at the date of this report, the Court of Appeals is still considering the
Petition. The Company intends to defend itself vigorously against this claim.
In January 1997, the Company received notice that Tech Pacific had brought a
claim in the Supreme Court of New South Wales, Sydney Registry Commercial
Division, against Merisel; its subsidiary Merisel Asia, Inc. ("Merisel Asia");
Patrick T. Woods, former managing director of Merisel Australia and Michael D.
Pickett, former CEO and Chairman of Merisel, in a proceeding captioned Tech
Pacific Holdings Limited, v. Merisel, Inc., et. al. In March 1996, Tech Pacific
purchased Merisel Pty, Ltd ("Merisel Australia"), Merisel's Australian
subsidiary, for a purchase price of $9,900,000 pursuant to the Share Purchase
Agreement dated as of March 7, 1996 between Merisel Asia and Tech Pacific. The
claim asserts various breaches of representations and warranties as well as
misleading and deceptive conduct under relevant provisions of Australian law
with respect to the financial position of Merisel Australia as represented by
oral and written disclosures. The plaintiffs seek to recover specified damages
exceeding $8 million as well as unspecified damages plus costs and expenses
associated with the claim; however, the Company is unable at this preliminary
point in the proceedings to reasonably estimate the probable loss, if any, that
would be incurred. The Company intends to defend itself vigorously against this
claim.
22
<PAGE>
Prior to the termination of the Limited Waiver Agreement on September 19, 1997,
certain disagreements arose between the Company and certain holders of the
Company's 12.5% Notes ("Noteholders) over the interpretation of the Company's
obligations under the Limited Waiver Agreement, including that the Limited
Waiver Agreement did not require either the Board of Directors of the Company
(the "Board") or the Company to recommend to its stockholders proposals relating
to the proposed debt restructuring in which the Noteholders would have exchanged
their 12.5% Notes for Common Stock (the "Noteholder Restructuring") and that the
Company was not obligated to seek confirmation of a "prepackaged plan" of
reorganization by means of the "cramdown" provisions of the Bankruptcy Code. On
September 4, 1997, the Company filed suit in Delaware Chancery Court (the
"Delaware Action") seeking a declaratory judgment with respect to these issues.
The Company believes its claims are meritorious and intends to vigorously
prosecute its claim in the Delaware Action. There can be no assurance, however,
that the Company will ultimately be successful with respect to its claims.
On September 11, 1997, certain Noteholders filed an answer to the Company's
complaint in the Delaware Action as well as a counterclaim against the Company
asserting claims for breach of the Limited Waiver Agreement, unjust enrichment
and a declaratory judgment (the "Noteholder Suit"). The Noteholder Suit also
asserts a claim for unjust enrichment against Dwight A. Steffensen, the
Company's Chief Executive Officer. The Noteholder Suit seeks damages in excess
of $100 million from the Company. The Company's alleged breaches include, among
other things, that the Board changed its recommendation with respect to
proposals relating to the Noteholder Restructuring. The Company and Mr.
Steffensen filed a motion for judgment on the pleadings on October 7, 1997
seeking to have the Noteholder Suit dismissed. The Company and Mr. Steffensen
believe that they have strong defenses to each of the claims asserted and intend
to defend themselves vigorously.
In addition, on September 19, 1997, the Company received notice from
representatives of the lenders under the agreements relating to the Operating
Company Debt that, in connection with the Company's repayment of such
indebtedness, such lenders believe that they are owed approximately $2.7 million
in fees. On October 31, 1997 the Company received a further letter demanding
payment of such fees. The Company does not believe any such fees are owed and
has so notified the lenders.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Information on the issuance of 4,901,316 shares of Common Stock to
Phoenix on September 19, 1997 pursuant to the Stock and Note Purchase Agreement
and the issuance of an additional 1,084,305 shares of Common Stock pursuant to
Phoenix's conversion of part of its Convertible Note on October 10, 1997 is
contained in Note 1 to Consolidated Financial Statements in Part I of this Form
10-Q and is incorporated herein by reference. These issuances of Common Stock
to Phoenix were exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, because the transactions constituted a private
placement of Common Stock to Phoenix and did not involve a public offering.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<C> <S>
10.1 First Amendment to Employment Agreement dated as of July 26,
1997 between the Company, Merisel Americas, Inc. and James E.
Illson.
10.2 Change of Control Agreement dated as of July 26, 1997 between
the Company, Merisel Americas, Inc. and Timothy N. Jenson.
10.3 First Amendment to Employment Agreement dated as of July 26,
1997 between the Company, Merisel Americas, Inc. and Robert J.
McInerney.
10.4 Change of Control Agreement dated as of June 23, 1997 between
the Company, Merisel Americas, Inc. and Karen A. Tallman.
10.5 Stock and Note Purchase Agreement, dated September 19, 1997,
among Phoenix Acquisition Company II, L.L.C, Merisel, Inc. and
Merisel Americas, Inc., incorporated by reference to exhibit
99.2 to the Company's Current Report on Form 8-K dated
September 19, 1997.*
10.6 Convertible Promissory Note dated September 19, 1997 of
Merisel, Inc. and Merisel Americas, Inc., incorporated by
reference to exhibit 99.3 to the Company's Current Report on
Form 8-K dated September 19, 1997.*
10.7 Registration Rights Agreement, dated September 19, 1997, by
and among Merisel, Inc., Merisel Americas, Inc. and Phoenix
Acquisition Company II, L.L.C., incorporated by reference to
exhibit 99.4 to the Company's Current Report on Form 8-K dated
September 19, 1997.*
27 Financial Data Schedule
</TABLE>
(b) The following Reports on Form 8-K were filed during the quarter ended
September 30, 1997.
Current Report on Form 8-K, dated July 15, 1997, which reports the
Company's receipt from Stonington Partners, Inc. of a proposal to make
an equity investment in the Company.
Current Report on Form 8-K, dated July 16, 1997, which reports that
the Company issued a press release announcing the response of
representatives of the Company's 12.5% Senior Noteholders to the
proposed equity investment in the Company by Stonington Partners, Inc.
Current Report on Form 8-K, dated August 4, 1997, which reports that
the Company issued a press release announcing its results of
operations for the second quarter of 1997.
Current Report on Form 8-K, dated August 26, 1997, which reports that
the Company issued a press release relating to its proposed debt
restructuring and related special meeting of stockholders.
- --------------
*Incorporated by reference
24
<PAGE>
Current Report on Form 8-K, dated August 29, 1997, which reports that
the Company issued a press release relating to its proposed debt
restructuring and the proposed equity investment by Stonington
Partners, Inc.
Current Report on Form 8-K filed on September 11, 1997, which reports
that the Company issued a press release announcing that certain
holders of the Company's 12.5% Senior Notes had filed suit against the
Company.
Current Report on Form 8-K filed on September 17, 1997, which reports
that the Company issued a press release announcing that the Company
had postponed its special meeting of stockholders.
Current Report on Form 8-K, dated September 19, 1997, which reports
that the Company had entered into a Stock and Note Purchase Agreement
and a Registration Rights Agreement with a subsidiary of Stonington
Partners, Inc. pursuant to which such subsidiary had loaned $137.1
million to the Company in the form of a convertible note and made an
equity investment of $14.9 million in the Company.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 11, 1997
Merisel, Inc.
By: /s/ James E. Illson
------------------------------
James E. Illson
Senior Vice President, Finance,
Chief Financial Officer and
Assistant Secretary
26
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of July 26, 1997 between Merisel, Inc., a Delaware corporation (the "Company" or
"Merisel"), Merisel Americas, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ("Americas"), and James E. Illson ("Executive").
BACKGROUND
WHEREAS, the Company and Executive entered into an Employment Agreement
dated as of August 19, 1996 (the "Agreement") pursuant to which the terms and
conditions governing the Executive's employment by the Company as Chief
Financial Officer and Senior Vice President were set forth; and
WHEREAS, the Company and Executive desire to modify the terms of the
Agreement as set forth herein; and
WHEREAS, Executive is also serving as Chief Financial Officer of Americas,
through which substantially all of the Company's U.S. operations are conducted,
and Americas desires to recognize the services performed by Executive and to
retain Executive in such position;
NOW, THEREFORE, the Company, Americas and Executive hereby agree to amend
the Agreement as set forth below.
AGREEMENT
1. Section 4.3 shall be amended by adding the following sentence at the
end thereof:
"The bonus described above shall also be payable upon a Sale of the
Company (as defined below), provided that such bonus shall not be
payable more than one time."
2. Section 5.2(c) of the Agreement is hereby amended to read in its
entirety as follows:
"(c) The Company will recommend to the Company's Option Committee for
such Option Committee to cause all remaining unvested options to purchase
1
<PAGE>
the Common Stock of the Company previously granted to Executive to vest
upon the date of such Covered Termination."
3. Section 5.5(a) of the Agreement is hereby amended to read in its
entirety as follows:
"5.5 Definitions. (a) An "Americas Change of Control" shall have
-----------
occurred if (i) any person, corporation, partnership, trust, association,
enterprise or group, other than the Company, shall become the beneficial
owner, directly or indirectly, of outstanding capital stock of Americas
possessing at least 50% of the voting power (for the election of directors)
of the outstanding capital stock of Americas, or (ii) there shall be a sale
of all or substantially all of Americas' assets or Americas shall merge or
consolidate with another corporation and the stockholders of Americas
immediately prior to such transaction do not own, immediately after such
transaction, stock of the purchasing or surviving corporation in the
transaction (or of the parent corporation of the purchasing or surviving
corporation) possessing more than 50% of the voting power (for the election
of directors) of the outstanding capital stock of that corporation, which
ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stock holders of Americas
before the transaction. A "Company Change of Control" shall have occurred
if (i) any person, corporation, partnership, trust, association, enterprise
or group shall become the beneficial owner, directly or indirectly, of
outstanding capital stock of the Company possessing at least 50% of the
voting power (for the election of directors) of the outstanding capital
stock of the Company, or (ii) there shall be a sale of all or substantially
all of the Company's assets or the Company shall merge or consolidate with
another corporation and the stockholders of the Company immediately prior
to such transaction do not own, immediately after such transaction, stock
of the purchasing or surviving corporation in the transaction (or of the
parent corporation of the purchasing or surviving corporation) possessing
more than 50% of the voting power (for the election of directors) of the
outstanding capital stock of that corporation, which ownership shall be
measured without regard to any stock of the purchasing, surviving or parent
corporation owned by the stockholders of the Company before the
transaction, or (iii) within one year following a transaction in which the
holders of the Company's 12.5% Senior Notes due 2004 (the "Senior Notes")
exchange all or a substantial portion of the Senior Notes for Common Stock
of the Company, Dwight A. Steffensen is terminated by the Company's Board
of Directors as Chief Executive Officer of the Company or the Company
breaches its employment agreement with Mr. Steffensen in any material
respect. A "Sale" of the Company shall be the first to occur of a Company
Change of Control or an Americas Change of Control. It is expressly
understood that, for purposes of this Section 1(c), the holders of
indebtedness of the Company or its subsidiaries shall not be deemed to
constitute a "group" solely by virtue of their roles as debtholders or by
exercising their rights with respect thereto.
2
<PAGE>
4. The following shall be added to the Agreement as Section 5.6.
"5.6 Obligations of the Company and Americas. The Company and
---------------------------------------
Americas shall be jointly and severally liable for all obligations to
the Executive hereunder."
5. Section 7.1 of the Agreement is hereby amended to read in its entirety
as follows:
"7.1 Executive agrees that during the Employment Term and, if
Executive is entitled to payments pursuant to Section 5.3, during the 180
day period following Executive's receipt of payment under Section 5.3(a),
Executive will not directly or indirectly (a) own or control any debt,
equity, or other interest in (except as a passive investor of less than 5%
of the capital stock or publicly traded notes or debentures of a publicly
held company); or (b) act as director, officer, manager, employee,
participant or consultant to; or (c) be obligated to or connected in any
advisory business enterprise or ownership capacity with, any of Tech Data
Corp., Ingram Micro, Inc., Computer 2000 AG (C2000), Arrow Electronics,
Inc., Intelligent Electronics, Inc., MicroAge, Inc., Inacom Corp.,
Compucom, Entex Information Services, Inc., SYNNEX Technologies, Inc.,
ComputerLand Corporation or Vanstar Corp. or with any subsidiary, division
or successor of any of them or with any entity that acquires, whether by
acquisition, merger or otherwise, any significant amount of the assets or
substantial part of any of the business of any of them or any other
wholesale distributor of micro computer products or otherwise engage or
participate in any business that is in competition in any manner whatsoever
with the business of the Company."
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this First Amendment to Employment Agreement, as of the day and year first
written above.
MERISEL, INC. JAMES E. ILLSON
By: /s/ DWIGHT A. STEFFENSEN /s/ JAMES E. ILLSON
------------------------------ -------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
MERISEL AMERICAS, INC.
By: /s/ DWIGHT A. STEFFENSEN
------------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
3
<PAGE>
EXHIBIT 10.2
CHANGE OF CONTROL AGREEMENT
---------------------------
This Change of Control Agreement is dated as of July 26, 1997 and is
between Merisel, Inc., a Delaware corporation (the "Company"), Merisel Americas,
Inc., a Delaware corporation ("Americas"), and Timothy N. Jenson ("Executive").
The Company and Americas desire to retain Executive. Accordingly,
Executive, the Company and Americas desire to set forth the terms and conditions
governing Executive's employment by the Company and Americas following a Change
of Control (as defined below). Accordingly, Executive, the Company and
Americas hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
-----------
shall have the meanings set forth below:
(a) "Base Salary" shall mean Executive's annual base salary as in effect
on the business day preceding a Change of Control or as the same may be
increased thereafter from time to time, exclusive of any bonus or incentive
compensation, benefits (whether standard or special), automobile allowances,
relocation or tax equalization payments, pension payments or reimbursements for
professional services.
(b) The "Company" shall mean Merisel, Inc., a Delaware corporation, and
each of its successor enterprises that result from any merger, consolidation,
reorganization, sale of assets or otherwise. As used herein, the term "Americas"
shall also include each successor enterprise of Merisel Americas, Inc. that
results from any merger, consolidation, reorganization, sale of assets or
otherwise.
(c) An "Americas Change of Control" shall have occurred if (i) any
person, corporation, partnership, trust, association, enterprise or group, other
than the Company, shall become the beneficial owner, directly or indirectly, of
outstanding capital stock of Americas possessing at least 50% of the voting
power (for the election of directors) of the outstanding capital stock of
Americas, or (ii) there shall be a sale of all or substantially all of
Americas's assets or Americas shall merge or consolidate with another
corporation and the stockholders of Americas immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in the transaction (or of the parent
corporation of the purchasing or surviving corporation) possessing more than 50%
of the voting power (for the election of directors) of the outstanding capital
stock of that corporation, which ownership shall be measured without regard to
any stock of the purchasing, surviving or parent corporation owned by the stock
holders of Americas before the transaction. A "Company Change of Control" shall
have occurred if (i) any person, corporation, partnership, trust, association,
enterprise or group shall become the beneficial owner, directly or indirectly,
of outstanding capital stock of the Company possessing at least 50% of the
voting power (for the election of directors) of the outstanding capital stock of
the Company, or (ii) there shall be a sale of all or substantially all of the
Company's assets or the Company shall merge or consolidate with another
1
<PAGE>
corporation and the stockholders of the Company immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in the transaction (or of the parent
corporation of the purchasing or surviving corporation) possessing more than 50%
of the voting power (for the election of directors) of the outstanding capital
stock of that corporation, which ownership shall be measured without regard to
any stock of the purchasing, surviving or parent corporation owned by the
stockholders of the Company before the transaction, or (iii) within one year
following a transaction in which the holders of the Company's 12.5% Senior Notes
due 2004 (the "Senior Notes") exchange all or a substantial portion of the
Senior Notes for Common Stock of the Company, Dwight A. Steffensen is terminated
by the Company's Board of Directors as Chief Executive Officer of the Company or
the Company breaches its employment agreement with Mr. Steffensen in any
material respect. A "Change of Control" shall be the first to occur of a Company
Change of Control or an Americas Change of Control. It is expressly understood
that, for purposes of this Section 1(c), the holders of indebtedness of the
Company or its subsidiaries shall not be deemed to constitute a "group" solely
by virtue of their roles as debtholders or by exercising their rights with
respect thereto.
(d) "Covered Termination" shall mean any cessation of the Executive's
employment by the Company that occurs after a Change of Control other than as a
result of (i) Termination for Cause, (ii) Executive's death or permanent
disability, or (iii) Executive's resignation without Good Reason (as hereinafter
defined).
(e) A resignation by Executive shall be with "Good Reason" if after a
Change of Control (i) there has been a material reduction in Executive's job
responsibilities from those that existed immediately prior to the Change of
Control, it being understood that a mere change in title alone shall not
constitute a material reduction in Executive's job responsibilities, (ii)
without Executive's prior written approval, the Company requires Executive to be
based anywhere other than the Executive's then current location, it being
understood that required travel on the Company's business to an extent
consistent with Executive's business travel obligation prior to the Change of
Control does not constitute "Good Reason", (iii) there is a reduction in
Executive's Base Salary, except that an across-the-board reduction in the
salary level of all of the Company's Executives in the same percentage amount as
part of a general salary level reduction shall not constitute "Good Reason," or
(iv) a successor to all or substantially all of the business and assets of the
Company fails to furnish Executive with the assumption agreement required by
Section 7 hereof.
(f) "Termination for Cause" shall mean if the Company terminates
Executive's employment for any of the following reasons: Executive misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Executive in violation of the Company's policies); excessive absenteeism; abuse
of sick time; or Executive's conviction for or a plea of nolo contendere by
Executive to a felony or any crime involving moral turpitude.
2
<PAGE>
(g) "Expiration Date" shall mean July 31, 1999.
2. AT-WILL EMPLOYEE. Subject to the express provisions of this Agreement,
----------------
the Company shall have no obligation to retain or continue Executive as an
employee and Executive's employment status as an "at-will" employee of Company
is not affected by this Agreement.
3. CHANGE OF CONTROL COVERED TERMINATION. If a Change of Control shall
-------------------------------------
occur on or before the Expiration Date and if a Covered Termination shall occur
within one year after the Change of Control, then: (A) on the effective date of
such Covered Termination, the Company shall make a lump sum payment to
Executive equal to (i) twelve (12) months of Executive's Base Salary plus (ii)
an amount equal to one times the annual performance bonus received by the
Executive during the year preceding the effective date of the Covered
Termination, less (iii) the total of any amounts payable to Executive pursuant
to the letter agreement dated November 29, 1995 between the Company and
Executive, as amended (the "Letter Agreement"), other than amounts payable for
reimbursement of COBRA payments; and (B) to the extent not payable under the
Letter Agreement, the Company will reimburse Executive for the cost of
Executive's COBRA payments (at the level of coverage, including dependent care
coverage, as in effect immediately prior to such Covered Termination) under the
Company's health insurance plans for a twelve (12) month period following the
date of the Covered Termination. The amount of such reimbursement will be
grossed up so that Executive will receive an amount equal to the COBRA payments,
after taking into account all applicable taxes. The payments to be made to
Executive upon a Covered Termination are in addition to the payments made to
employees by the Company upon termination in the ordinary course, such as
reimbursement for business expenses and vacation pay through the date of
termination.The obligations of the Company and Americas hereunder shall be joint
and several.
4. WITHHOLDING. The Company or Americas, as applicable, shall deduct from
-----------
all payments paid to Executive under this Agreement any required amounts for
social security, federal and state income tax withholding, federal or state
unemployment insurance contributions, and state disability insurance or any
other required taxes.
5. BENEFIT REDUCTION. In the event any payments are required to be made
------------------
pursuant to Section 3 hereof, the first dollar amount of such payments shall be
reduced to the extent necessary to assure that the payments that are received
pursuant to the terms and conditions of this Agreement which are "parachute
payments" under Internal Revenue Code Section 280G (or any successor section)
and the Department of Treasury regulations issued thereunder do not exceed the
maximum amount which may be paid hereunder without such amounts being treated as
an "excess parachute payment" under such section.
3
<PAGE>
6. MITIGATION. Executive shall have no obligation to mitigate the amount
----------
of any payment provided for in this Agreement by seeking employment or
otherwise.
7. EXECUTIVE'S OBLIGATIONS. In exchange for the Company or Americas
-----------------------
providing the above described benefits to Executive, Executive agrees that prior
to receiving any severance compensation from Company or Americas in respect of
such Covered Termination, whether under this Agreement or otherwise, Executive
will execute and deliver to the Company a Release and a Confidentiality
Agreement, each substantially in the form provided to Executive with this
Agreement.
8. ASSUMPTION AGREEMENT. The Company or Americas will require any
--------------------
successor (whether direct or indirect, by purchase, merger consolidation or
otherwise) to all or substantially all of the business and assets of the Company
or Americas, as the case may be, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company or Americas
would be required to perform it whether or not such succession had taken place.
9. ARBITRATION. Any dispute that may arise between you and the Company
------------
and/or Americas in connection with or relating to this Agreement, including any
monetary claim arising from or relating to this Agreement, will be submitted to
final and binding arbitration in Los Angeles, California, in accordance with the
rules of the American Arbitration Association ("AAA") then in effect. Such
arbitration shall proceed before a single arbitrator who shall be selected by
the mutual agreement of the parties. If the parties are unable to agree on the
selection of an arbitrator, such arbitrator shall be selected in accordance with
the Employment Dispute Resolution Rules and procedures of the AAA. The decision
of the the arbitrator, including determination of the amount of any damages
suffered, shall be conclusive, final and binding on such arbitrating parties,
their respective heirs, legal representatives, successors, and assigns. Each
party to any such arbitration proceeding shall bear her or his own attorney's
fees and costs in connection with any such arbitration and each party shall pay
half of all costs associated with the arbitration including the arbitrator's
fees.
10. MISCELLANEOUS. This Agreement shall be binding upon and inure to the
-------------
benefit of Company, Americas and Executive; provided that Executive shall not
assign any of Executive's rights or duties under this Agreement without the
express prior written consent of the Company. This Agreement sets forth the
parties' entire agreement with regard to the subject matter hereof. No other
agreements, representations, or warranties have been made by either party to the
other with respect to the subject matter of this Agreement. This Agreement may
be amended only by a written agreement signed by the parties hereto. This
Agreement shall be governed by and construed in accordance with the laws of the
State of California. Any waiver by either party of any breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach. If any legal action is necessary to enforce the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees in addition to any other relief to which that party may be entitled.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the day and year first written above.
MERISEL, INC. TIMOTHY N. JENSON
By:/S/ DWIGHT A. STEFFENSEN /S/ TIMOTHY N. JENSON
------------------------ ---------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
MERISEL AMERICAS, INC.
By: /S/ DWIGHT A. STEFFENSEN
-------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
5
<PAGE>
EXHIBIT 10.3
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as
of July 26, 1997 between Merisel, Inc., a Delaware corporation (the "Company" or
"Merisel"), Merisel Americas, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ("Americas"), and Robert J. McInerney ("Executive").
BACKGROUND
WHEREAS, the Company and Executive entered into an Employment Agreement
dated as of February 3, 1997 (the "Agreement") pursuant to which the terms and
conditions governing the Executive's employment by the Company as President and
Chief Operating Officer were set forth; and
WHEREAS, the Company and Executive desire to modify the terms of the
Agreement as set forth herein; and
WHEREAS, Executive is also serving as President and Chief Operating
Officer of Americas, through which substantially all of the Company's U.S.
operations are conducted, and Americas desires to recognize the services
performed by Executive and to retain Executive in such positions;
NOW, THEREFORE, the Company, Americas and Executive hereby agree to amend
the Agreement as set forth below.
AGREEMENT
1. Section 5.4(c) of the Agreement is hereby amended to read in its
entirety as follows:
"(c) The Company will recommend to the Company's Option Committee for
such Option Committee to cause all remaining unvested options to purchase
the Common Stock of the Company previously granted to Executive to vest
upon the date of such termination."
2. Section 5.5(c) of the Agreement is hereby amended to read in its
entirety as follows:
"(c) The Company will recommend to the Company's Option Committee for
such Option Committee to cause all remaining unvested options to purchase
1
<PAGE>
the Common Stock of the Company previously granted to Executive to vest
upon the date of such termination."
3. The second paragraph of Section 5.5 of the Agreement is hereby
amended to read in its entirety as follows:
"An "Americas Change of Control" shall have occurred if (i) any
person, corporation, partnership, trust, association, enterprise or group,
other than the Company, shall become the beneficial owner, directly or
indirectly, of outstanding capital stock of Americas possessing at least
50% of the voting power (for the election of directors) of the outstanding
capital stock of Americas, or (ii) there shall be a sale of all or
substantially all of Americas' assets or Americas shall merge or
consolidate with another corporation and the stockholders of Americas
immediately prior to such transaction do not own, immediately after such
transaction, stock of the purchasing or surviving corporation in the
transaction (or of the parent corporation of the purchasing or surviving
corporation) possessing more than 50% of the voting power (for the election
of directors) of the outstanding capital stock of that corporation, which
ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stock holders of Americas
before the transaction. A "Company Change of Control" shall have occurred
if (i) any person, corporation, partnership, trust, association, enterprise
or group shall become the beneficial owner, directly or indirectly, of
outstanding capital stock of the Company possessing at least 50% of the
voting power (for the election of directors) of the outstanding capital
stock of the Company, or (ii) there shall be a sale of all or substantially
all of the Company's assets or the Company shall merge or consolidate with
another corporation and the stockholders of the Company immediately prior
to such transaction do not own, immediately after such transaction, stock
of the purchasing or surviving corporation in the transaction (or of the
parent corporation of the purchasing or surviving corporation) possessing
more than 50% of the voting power (for the election of directors) of the
outstanding capital stock of that corporation, which ownership shall be
measured without regard to any stock of the purchasing, surviving or parent
corporation owned by the stockholders of the Company before the
transaction, or (iii) within one year following a transaction in which the
holders of the Company's 12.5% Senior Notes due 2004 (the "Senior Notes")
exchange all or a substantial portion of the Senior Notes for Common Stock
of the Company, Dwight A. Steffensen is terminated by the Company's Board
of Directors as Chief Executive Officer of the Company or the Company
breaches its employment agreement with Mr. Steffensen in any material
respect. A "Sale of the Company" shall be the first to occur of a Company
Change of Control or an Americas Change of Control. It is expressly
understood that, for purposes of this Section 1(c), the holders of
indebtedness of the Company or its subsidiaries shall not be deemed to
constitute a "group" solely by virtue of their roles as debtholders or by
exercising their rights with respect thereto.
2
<PAGE>
4. The following shall be added to the Agreement as Section 5.7.
"5.7 Obligations of the Company and Americas. The Company and
---------------------------------------
Americas shall be jointly and severally liable for all obligations to
the Executive hereunder."
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this First Amendment to Employment Agreement, as of the day and year first
written above.
MERISEL, INC. ROBERT J. MCINERNEY
By: /S/ DWIGHT A. STEFFENSEN By: /S/ ROBERT J. MCINERNEY
------------------------ -----------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
MERISEL AMERICAS, INC.
By: /S/ DWIGHT A. STEFFENSEN
------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
3
<PAGE>
EXHIBIT 10.4
CHANGE OF CONTROL AGREEMENT
---------------------------
This Change of Control Agreement is dated as of June 23, 1997 and is
between Merisel, Inc., a Delaware corporation (the "Company"), Merisel Americas,
Inc., a Delaware corporation ("Americas"), and Karen A. Tallman ("Executive").
The Company and Americas desire to employ Executive. Accordingly,
Executive, the Company and Americas desire to set forth the terms and conditions
governing Executive's employment by the Company and Americas following a Change
of Control (as defined below). Accordingly, Executive, the Company and
Americas hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall
-----------
have the meanings set forth below:
(a) "Base Salary" shall mean Executive's annual base salary as in effect
on the business day preceding a Change of Control or as the same may be
increased thereafter from time to time, exclusive of any bonus or incentive
compensation, benefits (whether standard or special), automobile allowances,
relocation or tax equalization payments, pension payments or reimbursements for
professional services.
(b) The "Company" shall mean Merisel, Inc., a Delaware corporation, and
each of its successor enterprises that result from any merger, consolidation,
reorganization, sale of assets or otherwise. As used herein, the term "Americas"
shall also include each successor enterprise of Merisel Americas, Inc. that
results from any merger, consolidation, reorganization, sale of assets or
otherwise.
(c) An "Americas Change of Control" shall have occurred if (i) any person,
corporation, partnership, trust, association, enterprise or group, other than
the Company, shall become the beneficial owner, directly or indirectly, of
outstanding capital stock of Americas possessing at least 50% of the voting
power (for the election of directors) of the outstanding capital stock of
Americas, or (ii) there shall be a sale of all or substantially all of
Americas's assets or Americas shall merge or consolidate with another
corporation and the stockholders of Americas immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in the transaction (or of the parent
corporation of the purchasing or surviving corporation) possessing more than 50%
of the voting power (for the election of directors) of the outstanding capital
stock of that corporation, which ownership shall be measured without regard to
any stock of the purchasing, surviving or parent corporation owned by the stock
holders of Americas before the transaction. A " Company Change of Control"
shall have occurred if (i) any person, corporation, partnership, trust,
association, enterprise or group shall become the beneficial owner, directly or
indirectly, of outstanding capital stock of the Company possessing at least 50%
of the voting power (for the election of directors) of the outstanding capital
stock of the Company, or (ii) there shall be a sale of all or substantially all
of the Company's assets or the Company shall merge or consolidate with another
1
<PAGE>
corporation and the stockholders of the Company immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in the transaction (or of the parent
corporation of the purchasing or surviving corporation) possessing more than 50%
of the voting power (for the election of directors) of the outstanding capital
stock of that corporation, which ownership shall be measured without regard to
any stock of the purchasing, surviving or parent corporation owned by the
stockholders of the Company before the transaction, or (iii) within one year
following a transaction in which the holders of the Company's 12.5% Senior Notes
due 2004 (the "Senior Notes") exchange all or a substantial portion of the
Senior Notes for Common Stock of the Company, Dwight A. Steffensen is terminated
by the Company's Board of Directors as Chief Executive Officer of the Company or
the Company breaches its employment agreement with Mr. Steffensen in any
material respect. A "Change of Control" shall be the first to occur of a Company
Change of Control or an Americas Change of Control. It is expressly understood
that, for purposes of this Section 1(c), the holders of indebtedness of the
Company or its subsidiaries shall not be deemed to constitute a "group" solely
by virtue of their roles as debtholders or by exercising their rights with
respect thereto.
(d) "Covered Termination" shall mean any cessation of the Executive's
employment by the Company that occurs after a Change of Control other than as a
result of (i) Termination for Cause, (ii) Executive's death or permanent
disability, or (iii) Executive's resignation without Good Reason (as hereinafter
defined).
(e) A resignation by Executive shall be with "Good Reason" if after a
Change of Control (i) there has been a material reduction in Executive's job
responsibilities from those that existed immediately prior to the Change of
Control, it being understood that a mere change in title alone shall not
constitute a material reduction in Executive's job responsibilities, (ii)
without Executive's prior written approval, the Company requires Executive to be
based anywhere other than the Executive's then current location, it being
understood that required travel on the Company's business to an extent
consistent with Executive's business travel obligation prior to the Change of
Control does not constitute "Good Reason", (iii) there is a reduction in
Executive's Base Salary, except that an across-the-board reduction in the
salary level of all of the Company's Executives in the same percentage amount as
part of a general salary level reduction shall not constitute "Good Reason," or
(iv) a successor to all or substantially all of the business and assets of the
Company fails to furnish Executive with the assumption agreement required by
Section 7 hereof.
(f) "Termination for Cause" shall mean if the Company terminates
Executive's employment for any of the following reasons: Executive misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Executive in violation of the Company's policies); excessive absenteeism; abuse
of sick time; or Executive's conviction for or a plea of nolo contendere by
Executive to a felony or any crime involving moral turpitude.
2
<PAGE>
(g) "Expiration Date" shall mean July 31, 1999.
2. AT-WILL EMPLOYEE. Subject to the express provisions of this Agreement,
----------------
the Company shall have no obligation to retain or continue Executive as an
employee and Executive's employment status as an "at-will" employee of Company
is not affected by this Agreement.
3. CHANGE OF CONTROL COVERED TERMINATION. If a Change of Control shall
-------------------------------------
occur on or before the Expiration Date and if a Covered Termination shall occur
within one year after the Change of Control, then: (A) on the effective date of
such Covered Termination, the Company or Americas shall make a lump sum payment
to Executive equal to (i) twelve (12) months of Executive's Base Salary plus
(ii) an amount equal to one times the annual performance bonus received by the
Executive during the year preceding the effective date of the Covered
Termination; and (B) the Company or Americas will reimburse Executive for the
cost of Executive's COBRA payments (at the level of coverage, including
dependent care coverage, as in effect immediately prior to such Covered
Termination) under the Company's health insurance plans for a twelve (12) month
period following the date of the Covered Termination. The amount of such
reimbursement will be grossed up so that Executive will receive an amount equal
to the COBRA payments, after taking into account all applicable taxes. The
payments to be made to Executive upon a Covered Termination are in addition to
the payments made to employees by the Company upon termination in the ordinary
course, such as reimbursement for business expenses and vacation pay through the
date of termination. The obligations of the Company and Americas hereunder shall
be joint and several.
4. WITHHOLDING. The Company or Americas, as applicable, shall deduct from
-----------
all payments paid to Executive under this Agreement any required amounts for
social security, federal and state income tax withholding, federal or state
unemployment insurance contributions, and state disability insurance or any
other required taxes.
5. BENEFIT REDUCTION. In the event any payments are required to be made
-----------------
pursuant to Section 3 hereof, the first dollar amount of such payments shall be
reduced to the extent necessary to assure that the payments that are received
pursuant to the terms and conditions of this Agreement which are "parachute
payments" under Internal Revenue Code Section 280G (or any successor section)
and the Department of Treasury regulations issued thereunder do not exceed the
maximum amount which may be paid hereunder without such amounts being treated as
an "excess parachute payment" under such section.
6. MITIGATION. Executive shall have no obligation to mitigate the amount
----------
of any payment provided for in this Agreement by seeking employment or
otherwise.
7. EXECUTIVE'S OBLIGATIONS. In exchange for the Company or Americas
-----------------------
providing the above described benefits to Executive, Executive agrees that prior
to
3
<PAGE>
receiving any severance compensation from Company or Americas in respect of
such Covered Termination, whether under this Agreement or otherwise, Executive
will execute and deliver to the Company a Release and a Confidentiality
Agreement, each substantially in the form provided to Executive with this
Agreement.
8. ASSUMPTION AGREEMENT. The Company or Americas will require any
--------------------
successor (whether direct or indirect, by purchase, merger consolidation or
otherwise) to all or substantially all of the business and assets of the Company
or Americas, as the case may be, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company or Americas
would be required to perform it whether or not such succession had taken place.
9. ARBITRATION. Any dispute that may arise between you and the Company
------------
and/or Americas in connection with or relating to this Agreement, including any
monetary claim arising from or relating to this Agreement, will be submitted to
final and binding arbitration in Los Angeles, California, in accordance with the
rules of the American Arbitration Association ("AAA") then in effect. Such
arbitration shall proceed before a single arbitrator who shall be selected by
the mutual agreement of the parties. If the parties are unable to agree on the
selection of an arbitrator, such arbitrator shall be selected in accordance with
the Employment Dispute Resolution Rules and procedures of the AAA. The decision
of the the arbitrator, including determination of the amount of any damages
suffered, shall be conclusive, final and binding on such arbitrating parties,
their respective heirs, legal representatives, successors, and assigns. Each
party to any such arbitration proceeding shall bear her or his own attorney's
fees and costs in connection with any such arbitration and each party shall pay
half of all costs associated with the arbitration including the arbitrator's
fees.
10. MISCELLANEOUS. This Agreement shall be binding upon and inure to the
-------------
benefit of Company, Americas and Executive; provided that Executive shall not
assign any of Executive's rights or duties under this Agreement without the
express prior written consent of the Company. This Agreement sets forth the
parties' entire agreement with regard to the subject matter hereof. No other
agreements, representations, or warranties have been made by either party to the
other with respect to the subject matter of this Agreement. This Agreement may
be amended only by a written agreement signed by the parties hereto. This
Agreement shall be governed by and construed in accordance with the laws of the
State of California. Any waiver by either party of any breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach. If any legal action is necessary to enforce the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees in addition to any other relief to which that party may be entitled.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the day and year first written above.
MERISEL, INC. KAREN A. TALLMAN
By: /s/ DWIGHT A. STEFFENSEN /s/ KAREN A. TALLMAN
--------------------------- ------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
MERISEL AMERICAS, INC.
By: /s/ DWIGHT A. STEFFENSEN
---------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 66,325
<SECURITIES> 0
<RECEIVABLES> 226,942
<ALLOWANCES> 16,144
<INVENTORY> 375,662
<CURRENT-ASSETS> 669,429
<PP&E> 113,589
<DEPRECIATION> 59,621
<TOTAL-ASSETS> 756,501
<CURRENT-LIABILITIES> 591,882
<BONDS> 0
0
0
<COMMON> 350
<OTHER-SE> 23,173
<TOTAL-LIABILITY-AND-EQUITY> 756,501
<SALES> 2,974,093
<TOTAL-REVENUES> 2,974,093
<CGS> 2,794,954
<TOTAL-COSTS> 143,518
<OTHER-EXPENSES> 13,878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,412
<INCOME-PRETAX> (1,669)
<INCOME-TAX> 488
<INCOME-CONTINUING> (2,157)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,744)
<CHANGES> 0
<NET-INCOME> (5,901)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
