<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1997
REGISTRATION NO. 333-27369
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MERISEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5045 95-4172359
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
200 CONTINENTAL BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
(310) 615-3080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
KAREN A. TALLMAN, ESQ.
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
MERISEL, INC.
200 CONTINENTAL BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
(310) 615-3080
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JOSEPH J. GIUNTA, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE
LOS ANGELES, CA 90071-3144
(213) 687-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The
expiration date of the Exchange Offer of the Registrant described in the
Supplement included as a part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRIVILEGED AND CONFIDENTIAL
SUBJECT TO ATTORNEY/CLIENT PRIVILEGE
[LOGO OF MERISEL(SM))
September [ ], 1997
Dear Stockholder:
Enclosed you will find a Supplement (the "Supplement") to the Proxy
Statement/Prospectus, dated July 31, 1997 (the "Proxy Statement/Prospectus"),
which describes several important recent developments that you should consider
when voting on the matters to be considered at the Special Meeting of
Stockholders which has been rescheduled to be held at 10:00 a.m., Los Angeles
time, on September 18, 1997 at the Company's headquarters located at 200
Continental Boulevard, El Segundo, California (the "Stockholders' Meeting")
and on the prepackaged plan of bankruptcy described in the Proxy
Statement/Prospectus (the "Prepackaged Plan"). To allow Stockholders adequate
time to review the enclosed information, the Company intends to adjourn the
Special Meeting of Stockholders to 10:00 a.m., Los Angeles time on October
[ ], 1997 (the "Adjournment"). The Board of Directors therefore recommends
that Stockholders vote in favor of the Adjournment on the enclosed Proxy.
As described in the Supplement, Merisel, Inc. (the "Company") has recently
received a revised proposal (the "Revised Stonington Proposal") from
Stonington Partners, Inc. ("Stonington"). Pursuant to the terms of the Revised
Stonington Proposal, as an alternative to a direct equity investment of $152
million in the Company, Stonington would lend $152 million to the Company in
the form of a convertible debt instrument in order to refinance substantially
all of the indebtedness of the operating subsidiaries of the Company. A
portion of this debt would be immediately convertible into 19% of the common
stock of the Company and the remainder of the debt would be convertible
(subject to stockholder approval in a separate stockholders' meeting) into
shares of common stock that, together with the initial conversion amount,
would aggregate 62.4% of the common stock of the Company. Under the Revised
Stonington Proposal, existing Stockholders would retain 37.6% of the common
stock of the Company.
The Revised Stonington Proposal differs significantly from the financial
restructuring described in the Proxy Statement/Prospectus (the
"Restructuring") and being voted upon at the Stockholders' Meeting. Under the
Restructuring, stockholders would retain 20% of the common equity of the
Company and would receive, for each share of common stock held, certificates
for .0875 of each of two series of warrants to purchase, in the aggregate, an
additional 17.5% of the common stock of the Company outstanding immediately
after the Restructuring at exercise prices per share (after giving effect to
the proposed one-for-five reverse stock split) of $7.15 and $8.68,
respectively. Upon exercise of the Warrants, existing Stockholders would own
31.9% of the New Common Stock.
IN EVALUATING THESE TWO PROPOSALS, THE BOARD OF DIRECTORS OF THE COMPANY
(THE "BOARD") HAS DETERMINED THAT THE REVISED STONINGTON PROPOSAL IS
SIGNIFICANTLY MORE ATTRACTIVE TO THE STOCKHOLDERS IN ECONOMIC TERMS THAN THE
RESTRUCTURING AND, IN LIGHT OF THE COMPANY'S INABILITY TO NEGOTIATE AN
IMPROVEMENT IN THE TERMS OF THE RESTRUCTURING, THE BOARD HAS WITHDRAWN ITS
RECOMMENDATION RELATING TO THE STOCKHOLDER VOTE APPROVING THE ISSUANCE OF 80%
OF THE COMPANY'S COMMON STOCK IN THE RESTRUCTURING (THE "NEW COMMON STOCK
ISSUANCE") AND ACCEPTING THE PREPACKAGED PLAN. THE BOARD CONTINUES TO
RECOMMEND THE PROPOSED AMENDMENT TO THE COMPANY'S CHARTER (THE "CHARTER
AMENDMENT"), WHICH WOULD EFFECT A ONE-FOR-FIVE REVERSE STOCK SPLIT, BECAUSE IT
WOULD PROVIDE THE COMPANY WITH MORE SHARES OF AUTHORIZED STOCK TO ISSUE IN ANY
FINANCIAL RESTRUCTURING WHICH MAY TAKE PLACE INCLUDING, BUT NOT LIMITED TO,
THE RESTRUCTURING.
The Revised Stonington Proposal is subject to certain conditions, including
execution of definitive agreements and a negative stockholder vote on the
Restructuring or the termination of the Limited Waiver and Voting Agreement,
dated April 14, 1997 (the "Limited Waiver Agreement") in accordance with its
terms. Should such a negative stockholder vote occur, the Company intends to
enter into definitive agreements with respect to the Revised Stonington
Proposal as soon as possible thereafter. Alternatively, the Company may
consider other means of refinancing its indebtedness. Stonington has advised
the Company that all funds necessary to fund the Revised Stonington Proposal
are presently available.
<PAGE>
Stockholders should be aware that rejection of the Restructuring involves
certain risks. The Ad Hoc Noteholders' Committee (the "Ad Hoc Noteholders'
Committee") of holders of the Company's 12 1/2% of Senior Notes due 2004 (the
"12.5% Notes") has informed the Company of its belief that the Limited Waiver
Agreement requires the Board to recommend the New Common Stock Issuance and
the Charter Amendment. Furthermore, the Ad Hoc Noteholders' Committee has
interpreted the Limited Waiver Agreement to require the Company to file the
Prepackaged Plan and, if the Prepackaged Plan is not accepted by the requisite
number of Stockholders, to seek confirmation pursuant to the "cramdown"
provisions of Section 1129(b) of the Bankruptcy Code if any of the conditions
to the Exchange Offer (as described in the Proxy Statement/Prospectus) are not
met.
The Company strongly disputes these interpretations of the Limited Waiver
Agreement and is seeking a declaratory judgment in Delaware Chancery Court
confirming its interpretation of the Company's duties under the Limited Waiver
Agreement. However, it is almost certain that the court will not rule before
the Stockholders' Meeting.
ACCORDINGLY, THE BOARD BELIEVES THAT STOCKHOLDERS SHOULD MAKE THEIR OWN
DECISION REGARDING THE BENEFITS AND RISKS OF THE RESTRUCTURING AND HAS DECIDED
TO WITHDRAW ITS RECOMMENDATION AND NOT TO TAKE A POSITION WITH RESPECT TO THE
STOCKHOLDER VOTES ON THE NEW COMMON STOCK ISSUANCE AND THE PREPACKAGED PLAN.
HOWEVER, STOCKHOLDERS SHOULD BE AWARE THAT DUE TO THE SIGNIFICANT DISPARITY IN
VALUE BETWEEN THE RESTRUCTURING AND THE REVISED STONINGTON PROPOSAL, THE
INDIVIDUAL MEMBERS OF THE BOARD AND SENIOR MANAGEMENT OF THE COMPANY THAT OWN
COMMON STOCK OF THE COMPANY HAVE INFORMED THE COMPANY THAT THEY INTEND TO VOTE
THEIR SHARES AGAINST THE NEW COMMON STOCK ISSUANCE AND THE PREPACKAGED PLAN.
The following table summarizes the Board's positions described above with
respect to the Stockholder votes on each of the Proposals and the solicitation
of acceptances with respect to the Prepackaged Plan:
<TABLE>
<CAPTION>
ITEM: BOARD POSITION:
----- ---------------
<S> <C>
Charter Amendment.................................. Recommends a vote "FOR"
New Common Stock Issuance.......................... Neutral
Stock Award and Incentive Plan..................... Recommends a vote "FOR"
Adjournment........................................ Recommends a vote "FOR"
Prepackaged Plan................................... Neutral
</TABLE>
You should carefully consider the information contained in the Supplement,
whether or not you have signed and returned your ballot relating to the
Prepackaged Plan and proxy relating to the proposals to be considered and
voted upon at the Stockholders' Meeting. A properly completed and signed proxy
or ballot that has been previously returned will continue to be valid and will
be voted at the Stockholders' Meeting and any adjournment thereof or counted
with respect to the Prepackaged Plan, respectively, unless revoked by such
stockholders prior to the Stockholders' Meeting (or any adjournment thereof)
or the Voting Deadline, respectively. Proxies or ballots may be revoked by
returning a proxy or ballot, respectively, bearing a later date or, for
proxies, by giving written notice of revocation to the Secretary of the
Company or by attending the Stockholders' Meeting (or any adjournment thereof)
and voting in person. If you have already signed and returned a properly
completed ballot for the Prepackaged Plan, that ballot will continue to be
valid and will be counted unless revoked before 5:00 p.m., New York City time,
on October , 1997 by returning a ballot bearing a later date or by giving
written notice of revocation to the Voting Agent. An additional proxy and
ballot are enclosed herewith. The record date of July 22, 1997 for the
proposals to be voted upon at the Stockholders' Meeting and the solicitation
of acceptances for the Prepackaged Plan will remain the same.
FOR A COMPLETE DISCUSSION OF THESE NEW DEVELOPMENTS AND RELATED MATTERS,
PLEASE READ THE ATTACHED SUPPLEMENT. STOCKHOLDERS SHOULD CONSIDER THESE NEW
DEVELOPMENTS CAREFULLY BEFORE VOTING ON THE PROPOSALS OR ON THE PREPACKAGED
PLAN OR DECIDING WHETHER TO CHANGE THEIR VOTE ON THE PROPOSALS OR THE
PREPACKAGED PLAN.
Sincerely,
/s/ Dwight A. Steffensen
Dwight A. Steffensen
Chairman of the Board and Chief
Executive Officer
<PAGE>
IMPORTANT
For your convenience in voting, a new proxy card and new ballot have been
enclosed with this Supplement. However, if you have already returned and not
revoked the proxy card and/or ballot included with the Proxy
Statement/Prospectus and you do not wish to change your vote, your previously
executed proxy card and/or ballot will be voted at the Stockholders' Meeting
or any further adjournment thereof in accordance with the instructions
contained therein.
As described in the Proxy Statement/Prospectus, approval of the Proposals
requires the presence of a quorum at the Stockholders' Meeting, either in
person or by proxy. Thus, withholding of a proxy may result in preventing the
presence of a quorum. However, voting on the Prepackaged Plan and the
Adjournment does not require the presence of a quorum, so withholding a ballot
or proxy or submitting a ballot or proxy marked "abstain" will not have any
effect on the outcome of the voting on the Prepackaged Plan. With respect to
the Prepackaged Plan only ballots marked "accept" or "reject" will be counted.
If you have any questions regarding the terms of the Proposals, the
Adjournment or the Prepackaged Plan, the procedure for voting your shares of
Old Common Stock with respect to either the Proposals, the Adjournment or the
Prepackaged Plan, or any other aspect of the Restructuring, please call the
Information Agent:
[LOGO OF MACKENZIE PARTNERS, INC.]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
CALL TOLL FREE (800) 322-2885
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUPPLEMENT TO
OFFER TO EXCHANGE AND
SOLICITATION OF ACCEPTANCES OF
PREPACKAGED PLAN OF REORGANIZATION
AND
SUPPLEMENT TO
PROXY STATEMENT/PROSPECTUS AND
SOLICITATION OF PREPACKAGED PLAN ACCEPTANCES
OF
MERISEL, INC.
THE SPECIAL MEETING OF STOCKHOLDERS HAS BEEN RESCHEDULED FOR 10:00 A.M.,
LOS ANGELES TIME, ON SEPTEMBER 18, 1997, HOWEVER, TO ALLOW STOCKHOLDERS
ADEQUATE TIME TO REVIEW THE ENCLOSED INFORMATION, THE COMPANY INTENDS TO
ADJOURN THE SPECIAL MEETING OF STOCKHOLDERS TO 10:00 A.M., LOS ANGELES TIME ON
OCTOBER , 1997.* THE VOTING DEADLINE TO ACCEPT OR REJECT THE PREPACKAGED PLAN
AND THE DEADLINE FOR THE EXCHANGE OFFER HAS BEEN EXTENDED TO 5:00 P.M., NEW
YORK CITY TIME, ON OCTOBER , 1997, UNLESS EXTENDED.
All capitalized terms used but not otherwise defined herein shall have the
meanings given to them in the Exchange Restructuring Prospectus, dated July 31,
1997.
Whether or not you have signed and returned your proxy (for Stockholders)
relating to the proposals to be considered and voted upon at the Special
Meeting of Stockholders, which has been rescheduled to be held on September 18,
1997 at 10:00 a.m., Los Angeles time, at the Company's headquarters located at
200 Continental Boulevard, El Segundo, California (the "Stockholders'
Meeting"), your letter of transmittal for tendering 12.5% Notes pursuant to the
Exchange Offer (for Noteholders), and/or ballot (for both Stockholders and
Noteholders) relating to the Prepackaged Plan, you should carefully consider
the changes to the Exchange Offer and Prepackaged Plan described herein. To
allow Stockholders adequate time to review the enclosed information, the
Company intends to adjourn (the "Adjournment") the Special Meeting of
Stockholders to 10:00 a.m., Los Angeles time on October [ ], 1997 (the
"Adjournment"). See "Adjournment of the Stockholders' Meeting." With respect to
Stockholders who have already signed or returned a properly completed proxy,
that proxy will continue to be valid and be voted at the Stockholders' Meeting
unless revoked by such Stockholders prior to the Stockholders' Meeting. Proxies
may be revoked by returning a proxy bearing a later date, by giving written
notice of revocation to the Secretary of the Company or by attending the
Stockholders' Meeting and voting in person. The Company intends to vote proxies
it has already received in favor of the Adjournment, unless such proxies are
revoked prior to the Stockholders' Meeting. With respect to Noteholders who
have already signed or returned a properly completed letter of transmittal,
that letter of transmittal will continue to be valid and 12.5% Notes tendered
pursuant thereto will be tendered upon consummation of the Exchange Offer
unless withdrawn prior thereto. Letters of transmittal may be withdrawn,
subject to the procedures described in Part A to the Exchange Restructuring
Prospectus, at any time before they are accepted for exchange by the Company.
With respect to both Stockholders and Noteholders who have already signed and
returned a properly completed ballot for the Prepackaged Plan, that ballot will
continue to be valid and will be counted unless revoked before 5:00 p.m., New
York City time, on October , 1997 by returning a ballot bearing a later date
or by giving written notice of revocation to the Voting Agent. An additional
proxy (for Stockholders) or letter of transmittal (for Noteholders) and ballot
(for Stockholders and Noteholders) are enclosed herewith. The record date of
July 22, 1997 for all matters will remain the same.
The Exchange Offer is subject to certain terms and conditions. See "Changes
in Terms and Conditions of Exchange Offer and Prepackaged Restructuring" below
and "Tendering and Voting Procedures--Conditions" in the Exchange Restructuring
Prospectus, dated July 31, 1997.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------
The date of this Supplement is September [ ], 1997
- -----
*At least twenty days after the date this Supplement is being mailed to
Stockholders.
<PAGE>
This supplement (the "Supplement") amends and supplements the Proxy
Statement/Prospectus and Solicitation of Prepackaged Plan Acceptances, dated
July 31, 1997 (the "Proxy Statement/Prospectus"), and the Offer to Exchange
and Solicitation of Acceptances of Prepackaged Plan of Reorganization, dated
July 31, 1997 (the "Exchange Restructuring Prospectus") of Merisel, Inc., a
Delaware corporation ("Merisel" or the "Holding Company" and together with its
operating subsidiaries, unless the context otherwise requires, the "Company").
Except as set forth in this Supplement, the terms and conditions of the
Restructuring remain as stated in the Proxy Statement/Prospectus and the
Exchange Restructuring Prospectus.
COPIES OF THE PROXY STATEMENT/PROSPECTUS AND/OR THE EXCHANGE RESTRUCTURING
PROSPECTUS ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS SUPPLEMENT IS DELIVERED UPON WRITTEN OR ORAL
REQUEST DIRECTED TO THE INFORMATION AGENT, MACKENZIE PARTNERS, INC., AT
156 FIFTH AVENUE, NEW YORK 10010, TELEPHONE NUMBER (800) 322-2885 OR COLLECT
AT (212) 929-5500.
Subsequent to the mailing of the Proxy Statement/Prospectus and the Exchange
Restructuring Prospectus, the Company has disclosed that it has been in active
discussions with the Ad Hoc Noteholders' Committee with regard to improving
the terms of the Restructuring for Stockholders. Unfortunately, after more
than three weeks of discussions, the Company and the Ad Hoc Noteholders'
Committee have been unable to reach an agreement. The Company also disclosed
that it has received several revised proposals from Stonington which the
Company believes must be considered by Stockholders in deciding how to vote.
These developments are summarized below.
No person has been authorized to give any information or to make any
representation in connection with the Proposals, the Restructuring, the
Prepackaged Plan or the solicitation of votes for the Proposals or the
Prepackaged Plan, other than those contained in the Proxy
Statement/Prospectus, the Exchange Restructuring Prospectus and this
Supplement and the exhibits attached hereto or incorporated by reference or
referred to herein. If given or made, such other information or representation
may not be relied upon as having been authorized by the Company. This
Supplement does not constitute an offer to sell or the solicitation of an
offer to buy any securities other than those to which it relates, or an offer
to sell or a solicitation of an offer to buy any securities in any
jurisdiction in which, or to any person to whom, it is unlawful to make such
offer or solicitation. Neither the delivery of this Supplement nor any
distribution of securities hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof or that there has been no change in the
information set forth herein or in the affairs of the Company since the date
hereof. Any estimates of Claims (as defined in the Disclosure Statement) and
Interests (as defined in the Disclosure Statement) set forth in this
Supplement may vary from the final amounts of Claims or Interests allowed by
the Bankruptcy Court.
FORWARD LOOKING INFORMATION
Certain of the financial information contained herein constitutes forward
looking information, and actual results could differ materially from current
expectations. Factors that could impact actual results include unanticipated
adjustments related to the Company's trade accounts payable, customer
disputes, disruption to the Company's computer systems, adjustments related to
previously disposed assets, or potential restructuring and any reduction in
customer demand or deterioration of margins.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. RECENT DEVELOPMENTS............................................... 4
The August 8 Stonington Proposal.................................. 4
The August 11 Stonington Proposal................................. 4
The Revised Stonington Proposal................................... 5
Discussions with the Ad Hoc Noteholders' Committee................ 5
2. ADJOURNMENT OF THE STOCKHOLDERS' MEETING.......................... 7
3. RECOMMENDATION OF THE BOARD....................................... 7
4. ADDITIONAL RISK FACTORS........................................... 9
Risk of Litigation with Noteholders............................... 9
Elimination of Waivers............................................ 9
Potential De-listing of the Common Stock.......................... 10
5. REVISED UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION....... 10
6. NONCONSENSUAL CONFIRMATION OF THE PREPACKAGED PLAN................ 17
7. REVISED LIQUIDATION ANALYSIS...................................... 18
8. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 18
General........................................................... 18
Results of Operations............................................. 19
Interest Expense; Other Expense; and Income Tax Provision......... 21
Consolidated Income (Loss)........................................ 21
Systems and Processes............................................. 22
Variability of Quarterly Results and Seasonality.................. 22
Liquidity and Capital Resources................................... 22
Asset Management.................................................. 24
Competition....................................................... 25
9. LEGAL PROCEEDINGS................................................. 25
10. MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY............... 26
ANNEX
FORM OF PROXY CARD................................................ I
</TABLE>
3
<PAGE>
1. RECENT DEVELOPMENTS
The August 8 Stonington Proposal
On August 8, 1997, the Company received a new proposal from Stonington (the
"August 8 Stonington Proposal") which amended the original Stonington Proposal
discussed in the Proxy Statement/Prospectus and the Exchange Restructuring
Prospectus. The August 8 Stonington Proposal was made subject to execution of
definitive agreements and the termination of the Limited Waiver Agreement
either with the Noteholders' consent or by a negative Stockholder vote with
respect to the New Common Stock Issuance and the Prepackaged Plan. Assuming
such conditions were met, under the August 8 Stonington Proposal, as an
alternative to a direct equity investment of $152 million in the Company,
Stonington would loan $152 million to the Company in the form of a convertible
debt instrument to refinance the debt outstanding under the Operating
Companies' Loan Agreements. A portion of the convertible debt would be
immediately convertible into 19% of the common stock of the Company and the
remainder of the debt would be convertible (subject to Stockholder approval in
a separate Stockholders' meeting) for an aggregate total of 63.5% of the
common stock of the Company with Stockholders retaining 36.5% of the common
stock of the Company. Thus, the convertible debt would be convertible into an
aggregate of 10,482,800 shares of New Common Stock at $14.50 per share (after
giving effect to the Reverse Split). The August 8 Stonington Proposal also
permitted the Company to offer certain incentives to the Noteholders,
including (i) the conversion of up to $67.5 million in principal amount of
12.5% Notes into common stock of the Company at $14.50 per share (the
"Conversion"), (ii) the payment of $100 per $1,000 face amount of 12.5% Notes
outstanding, and (iii) the elimination of the optional redemption feature of
the indenture (the "Indenture") governing the 12.5% Notes, in exchange for
their agreement to terminate the Limited Waiver Agreement. As an additional
incentive to Noteholders, Stonington permitted the Company to offer an
additional $100 per $1,000 face amount of 12.5% Notes to Noteholders holding
12.5% Notes that were not converted to common stock pursuant to the
Conversion.
The convertible debt would act as a bridge loan, with $138.8 million of such
notes maturing on January 31, 1998 (the "Maturity Date") and the remaining
$13.2 million to mature over the period between the Maturity Date and March
10, 2000. The convertible debt would bear an initial interest rate of 11.5%
per annum, increasing at the rate of an additional 1% per month commencing two
months after the issuance of the convertible debt, subject to a cap of 18% per
annum. Such interest would be payable either in cash or with additional debt
which would likewise be convertible into common stock of the Company. The
convertible debt would be redeemable in whole but not in part at any time
prior to maturity at the option of the Company at par plus accrued interest
plus a prepayment premium of 8% (the "Redemption Price"). Upon a change of
control of the Company or an agreement by the Company to effect a change of
control, the holders of the convertible debt would have the right to require
the Company to purchase the convertible debt at the Redemption Price. In
addition, Stonington continued to agree to provide the Company with a $50
million bridge loan and would assist the Company in obtaining a permanent
working capital facility as originally proposed in the Stonington Proposal.
The Company shared the August 8 Stonington Proposal with the Ad Hoc
Noteholders' Committee, and presented to them for their consideration the
incentives described in the August 8 Stonington Proposal. Representatives of
the Ad Hoc Noteholders' Committee advised the Company that they would not
terminate the Limited Waiver Agreement to permit the August 8 Stonington
Proposal to be implemented and they rejected the incentives offered thereby.
The August 11 Alternative Stonington Proposal
On August 11, 1997, Stonington made an alternative proposal (the "August 11
Alternative Stonington Proposal"), conditioned on execution of definitive
documentation and on Noteholders agreeing (i) to terminate the Limited Waiver
Agreement, and (ii) not to exercise their right under the Indenture to cause
the Company to purchase their 12.5% Notes upon a Change of Control such as the
acquisition contemplated by the August 8 Proposal. Assuming such conditions
were met, the August 11 Alternative Proposal provided that Stonington would
loan $152 million to the Company in the form of a convertible debt instrument
to refinance the debt outstanding under the Operating Companies' Loan
Agreements. Pursuant to the terms of this convertible debt instrument,
Stonington would be able to convert such debt into 10,059,563 shares of New
Common Stock at
4
<PAGE>
to the Reverse Split and assuming 100% of the 12.5% Notes are tendered in the
Exchange Offer). Stockholders would also receive warrants to purchase up to
7.5% of the shares of New Common Stock outstanding immediately following
consummation of the Restructuring at an exercise price of $13.71 per share
(after giving effect to the Reverse Split). This proposal would also have
reduced the Minimum Tender Condition from 100% to 80% of the outstanding
principal amount of 12.5% Notes, and would have released the Company from any
liability to the Consenting Noteholders with respect to the original
Restructuring. The proposal also contemplated a rights offering following the
Restructuring to allow holders of New Common Stock to purchase $50 million of
New Common Stock from the Company at 15% below the market price of the New
Common Stock at such time. In the event Stockholders elected to purchase less
than $50 million of New Common Stock, the Noteholders would have been
obligated to make such purchase up to a maximum of $25 million.
The proposal would have prohibited the Company from engaging in discussions
with or providing any information to any party seeking to enter into an
alternative restructuring plan with the Company (including Stonington).
Furthermore, in the event that the requisite number of Stockholders did not
vote in favor of the Charter Amendment and the New Common Stock Issuance and
an amended prepackaged plan which reflected the terms of the revised
agreement, the Company would have been required to seek confirmation of the
amended prepackaged plan pursuant to the "cramdown" provision of Section
1129(b) of the Bankruptcy Code. Finally, in the event that the restructuring
contemplated by this proposal was not confirmed by a Bankruptcy Court and the
Company entered into a change of control transaction (as defined in the
proposal) with any other party, the Noteholders would have had the option of
requiring the Company to purchase their 12.5% Notes for 120% of their par
value (or $150 million) plus accrued and unpaid interest (the "Change of
Control Put").
The Company expressed its willingness to enter into this agreement, the
definitive terms of which had been fully negotiated. However, the Ad Hoc
Noteholders' Committee conditioned its willingness to execute such an
agreement upon the written agreement of Stonington to withdraw all outstanding
proposals and Stonington's agreement not to purchase or make any offers to
purchase any stock of the Company until the earlier of (i) the consummation of
the Restructuring and (ii) June 25, 1998, in exchange for a release from the
Noteholders of their claims against Stonington for tortious interference of
contract. The Company and representatives of the Ad Hoc Noteholders' Committee
requested such an agreement from Stonington but Stonington declined to sign
such an agreement. Notwithstanding this rejection by Stonington, the Company
reiterated its willingness to enter into the previously negotiated agreement,
and reaffirmed its willingness to cease all further discussions with
Stonington with respect to any alternative transaction. However, the Ad Hoc
Noteholders' Committee continued to insist on an agreement from Stonington or,
as an alternative to an agreement by Stonington, the Ad Hoc Noteholders'
Committee proposed that the Company agree to pay a termination fee of $25
million (the "Termination Fee"), in addition to the Change of Control Put, if
the Company terminated its agreement with the Noteholders in order to pursue a
transaction with any other party or if the revised Prepackaged Plan was not
confirmed by the Bankruptcy Court.
The Company rejected the Noteholders' proposal and discussed several
alternatives with the Noteholders, but no agreement was reached. Accordingly,
the Company informed the Ad Hoc Noteholders' Committee that it intends to
proceed with the Stockholder vote on the Restructuring as originally proposed
in the Proxy Statement/Prospectus and the Exchange Restructuring Prospectus.
To that end, the Company has obtained an extension of the agreement
termination event date to September 18, 1997 from 100% of the original parties
to the Limited Waiver Agreement, and is seeking a waiver of the agreement
termination event date under the Extension of the Operating Companies' Loan
Agreements to October 15, 1997 but has not yet received such a waiver.
In order to allow Stockholders to have sufficient time to review the
material disclosed herein, the Company has informed the Ad Hoc Noteholders'
Committee of its intention to adjourn the Stockholders' Meeting to October ,
1997. The Company has requested that the Ad Hoc Noteholders' Committee execute
another waiver under the Limited Waiver Agreement of the agreement termination
event that would otherwise occur on September 18, 1997 to October 15, 1997.
There can be no assurance that the members of the Ad Hoc Noteholders'
Committee will execute such a waiver, and in the event that no waiver is given
the Limited Waiver Agreement will terminate. In the event that the Company
does not receive a waiver, the Company intends (i) to pay approximately $8
million of accrued and unpaid interest that would be due with respect to the
12.5% Notes,
<PAGE>
to the Reverse Split and assuming 100% of the 12.5% Notes are tendered in the
Exchange Offer). Stockholders would also receive warrants to purchase up to
7.5% of the shares of New Common Stock outstanding immediately following
consummation of the Restructuring at an exercise price of $13.71 per share
(after giving effect to the Reverse Split). This proposal would also have
reduced the Minimum Tender Condition from 100% to 80% of the outstanding
principal amount of 12.5% Notes, and would have released the Company from any
liability to the Consenting Noteholders with respect to the original
Restructuring. The proposal also contemplated a rights offering following the
Restructuring to allow holders of New Common Stock (which would include
existing Stockholders) to purchase $50 million of New Common Stock from the
Company at 15% below the market price of the New Common Stock at such time. In
the event Stockholders elected to purchase less than $50 million of New Common
Stock, the Noteholders would have been obligated to make such purchase up to a
maximum of $25 million.
The proposal would have prohibited the Company from engaging in discussions
with or providing any information to any party seeking to enter into an
alternative restructuring plan with the Company (including Stonington).
Furthermore, in the event that the requisite number of Stockholders did not
vote in favor of the Charter Amendment and the New Common Stock Issuance and
an amended prepackaged plan which reflected the terms of the revised
agreement, the Company would have been required to seek confirmation of the
amended prepackaged plan pursuant to the "cramdown" provision of Section
1129(b) of the Bankruptcy Code. Finally, in the event that the restructuring
contemplated by this proposal was not confirmed by a Bankruptcy Court and the
Company entered into a change of control transaction (as defined in the
proposal) with any other party, the Noteholders would have had the option of
requiring the Company to purchase their 12.5% Notes for 120% of their par
value (or $150 million) plus accrued and unpaid interest (the "Change of
Control Put").
The Company expressed its willingness to enter into this agreement, the
definitive terms of which had been fully negotiated. However, the Ad Hoc
Noteholders' Committee conditioned its willingness to execute such an
agreement upon the written agreement of Stonington to withdraw all outstanding
proposals and Stonington's agreement not to purchase or make any offers to
purchase any stock of the Company until the earlier of (i) the consummation of
the Restructuring and (ii) June 25, 1998, in exchange for a release from the
Noteholders of their claims against Stonington for tortious interference of
contract. The Company and representatives of the Ad Hoc Noteholders' Committee
requested such an agreement from Stonington but Stonington declined to sign
such an agreement. Notwithstanding this rejection by Stonington, the Company
reiterated its willingness to enter into the previously negotiated agreement,
and reaffirmed its willingness to cease all further discussions with
Stonington with respect to any alternative transaction. However, the Ad Hoc
Noteholders' Committee continued to insist on an agreement from Stonington or,
as an alternative to an agreement by Stonington, the Ad Hoc Noteholders'
Committee proposed that the Company agree to pay a termination fee of $25
million (the "Termination Fee"), in addition to the Change of Control Put, if
the Company terminated its agreement with the Noteholders in order to pursue a
transaction with any other party or if the revised Prepackaged Plan was not
confirmed by the Bankruptcy Court.
The Company rejected the Noteholders' proposal and discussed several
alternatives with the Noteholders, but no agreement was reached. Accordingly,
the Company informed the Ad Hoc Noteholders' Committee that it intends to
proceed with the Stockholder vote on the Restructuring as originally proposed
in the Proxy Statement/Prospectus and the Exchange Restructuring Prospectus.
To that end, the Company has obtained an extension of the agreement
termination event date to September 18, 1997 from 100% of the original parties
to the Limited Waiver Agreement, and is seeking a waiver of the agreement
termination event date under the Extension of the Operating Companies' Loan
Agreements to October 15, 1997 but has not yet received such a waiver.
In order to allow Stockholders to have sufficient time to review the
material disclosed herein, the Company has informed the Ad Hoc Noteholders'
Committee of its intention to adjourn the Stockholders' Meeting to October ,
1997. The Company has requested that the Ad Hoc Noteholders' Committee execute
another waiver under the Limited Waiver Agreement of the agreement termination
event that would otherwise occur on September 18, 1997 to October 15, 1997.
There can be no assurance that the members of the Ad Hoc Noteholders'
Committee will execute such a waiver, and in the event that no waiver is given
the Limited Waiver Agreement will terminate. In the event that the Company
does not receive a waiver, the Company intends (i) to pay approximately $8
million of accrued and unpaid interest that would be due with respect to the
12.5% Notes,
6
<PAGE>
(ii) to pay approximately $40 million of amortization payments that would be
due under the Operating Companies' Loan Agreements, and (iii) and to consider
the refinancing alternatives available to the Company at such time. See "4.
Additional Risk Factors--Elimination of Waivers."
The members of the Ad Hoc Noteholders' Committee have reiterated their
threat to commence legal action against the Company if their original
Restructuring proposal is not implemented, alleging that the Company has
breached the Limited Waiver Agreement. The Company does not believe that the
Ad Hoc Noteholders' Committee members' claims for breach are valid, and it
intends to defend itself vigorously should a suit be commenced. See "4.
Additional Risk Factors--Risk of Litigation with Noteholders" below.
The Ad Hoc Noteholders' Committee has also informed the Company of its
members' intent to cause the acceleration of all outstanding indebtedness
under the 12.5% Notes in the event that the Stockholders fail to approve the
Charter Amendment and the Company does not immediately seek to implement the
Restructuring through the Prepackaged Plan. In order to minimize the effect of
this threat, the Company has deposited unpaid interest of approximately $8
million with the trustee for the 12.5% Notes and has instructed the trustee to
pay this money immediately to the Noteholders if an agreement termination
event occurs under the Limited Waiver Agreement. In addition, the Company
intends to pay the $40 million of amortization payments due to the lenders
under the Operating Companies' Loan Agreements on the date any such interest
payment is made. Upon such payments, the Company believes it will be in full
compliance with all of its outstanding debt obligations. Accordingly, the
Company does not believe the Noteholders will be able to cause the
acceleration of their indebtedness. However, should the Company be unable to
refinance a substantial portion of its remaining debt during the fourth
quarter, the Company's ability to maintain adequate trade credit and inventory
levels could be adversely affected, which would in turn have an adverse impact
on the Company's operations. See "4. Additional Risk Factors--Elimination of
Waivers" below.
2. ADJOURNMENT OF THE STOCKHOLDERS' MEETING
In order to allow Stockholders adequate time to review the material herein,
the Board of Directors proposes to the Stockholders that the Stockholders'
Meeting be adjourned to October [ ], 1997. Unless instructed to the contrary
in the Proxy, the shares represented by the Proxies will be voted FOR the
Adjournment. The Company intends to vote proxies it has already received in
favor of the Adjournment, unless such proxies are revoked prior to the
Stockholders' Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADJOURNMENT.
3. RECOMMENDATION OF THE BOARD
The Board has compared the terms of the Restructuring and the Revised
Stonington Proposal in light of a financial analysis provided by its financial
advisor, DLJ. The financial analysis calculated the equity value attributable
to existing Stockholders at total equity values of the Company of $200
million, $250 million and $300 million. The calculations are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such calculations. DLJ did not attribute
any particular weight or importance to any assumptions used in such
calculations.
The per share equity value and the aggregate equity value attributable to
the existing Stockholders were calculated by adding the existing Stockholders'
share of the pro forma equity to the estimated value of the warrants. The
estimated value of the warrants under the Restructuring was calculated in two
ways: (i) by estimating the market value of the warrants and (ii) by
determining the intrinsic value of the warrants. The market value of the
warrants was estimated using the Black-Scholes option valuation model assuming
(i) a volatility of Merisel of 50.2%, which equals the average of the
volatility of Ingram Micro, Inc. (from Ingram Micro, Inc's initial public
offering on November 1, 1996 through September 2, 1997) and Tech Data
Corporation (from August 30, 1996 through September 2, 1997) and (ii) a seven
year risk free treasury rate of 6.255%. The intrinsic value of the warrants
was determined by subtracting the exercise price of the warrants from the
market price of the common stock where the market price of the common stock
exceeded the exercise price of the warrants.
7
<PAGE>
The following table presents a summary of the calculations considered by the
Board.
<TABLE>
<CAPTION>
ASSUMING $200 MILLION ASSUMING $250 MILLION ASSUMING $300 MILLION
EQUITY VALUE EQUITY VALUE EQUITY VALUE
------------------------ ------------------------ ------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVISED REVISED REVISED
STONINGTON NOTEHOLDER STONINGTON NOTEHOLDER STONINGTON NOTEHOLDER
PROPOSAL RESTRUCTURING PROPOSAL RESTRUCTURING PROPOSAL RESTRUCTURING
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Shares of Common
Stock Outstanding:
Pre-Reverse Split(1)... 80.1 150.4 80.1 150.4 80.1 150.4
Post-Reverse Split..... 16.0 30.1 16.0 30.1 16.0 30.1
Total Shares of Common
Stock Held by
Stockholders of Record
on July 22, 1997:
Pre-Reverse Split...... 30.1 30.1 30.1 30.1 30.1 30.1
Post-Reverse Split..... 6.0 6.0 6.0 6.0 6.0 6.0
Total Warrants
Outstanding:
Pre-Reverse Split...... 0 26.3 0 26.3 0 26.3
Post-Reverse Split..... 0 5.3 0 5.3 0 5.3
Existing Stockholder
Ownership Percentage
Post-Transaction....... 37.6% 20.0%(2) 37.6% 26.4%(3) 37.6% 31.9%(4)
EQUITY VALUE
ATTRIBUTABLE TO
EXISTING STOCKHOLDERS:
Per-Share Equity Value
Including Estimated
Market Value of
Warrants:
Pre-Reverse Split...... $ 2.50 $1.93 $ 3.12 $ 2.48 $ 3.75 $ 3.05
Post-Reverse Split..... $12.49 $9.65 $15.61 $12.42 $18.73 $15.23
Per-Share Equity Value
Including Estimated
Intrinsic Value of
Warrants:
Pre-Reverse Split...... $ 2.50 $1.33 $ 3.12 $ 1.74 $ 3.75 $ 2.24
Post-Reverse Split..... $12.49 $6.65 $15.61 $ 8.69 $18.73 $11.20
Aggregate Equity Value
Including Estimated
Market Value of
Warrants............... $ 75.1 $58.0 $ 93.9 $ 74.7 $112.7 $ 91.6
Aggregate Equity Value
Including Estimated
Intrinsic Value of
Warrants............... $ 75.1 $40.0 $ 93.9 $ 52.3 $112.7 $ 67.4
</TABLE>
- --------
(1) References to a Reverse Split are to a one-for-five reverse split of the
common stock of the Company.
(2) Assumes both the Series A Warrants and the Series B Warrants are "out of
the money" and unexercised.
(3) Assumes only the Series A Warrants are "in the money" and exercised for an
aggregate exercise price of $18.8 million.
(4) Assumes both the Series A Warrants and the Series B Warrants are "in the
money" and exercised for an aggregate exercise price of $41.7 million.
IN LIGHT OF THIS ANALYSIS, THE BOARD HAS DETERMINED THAT THE REVISED
STONINGTON PROPOSAL IS ECONOMICALLY MORE ATTRACTIVE TO THE STOCKHOLDERS THAN
THE RESTRUCTURING, ALTHOUGH SUCH PROPOSAL, BY ITS TERMS, CANNOT BE ACCEPTED
UNLESS THE LIMITED WAIVER AGREEMENT IS TERMINATED WITH NOTEHOLDER CONSENT OR
BY A NEGATIVE STOCKHOLDER VOTE WITH RESPECT TO THE NEW COMMON STOCK ISSUANCE
AND THE PREPACKAGED PLAN. ACCORDINGLY, THE BOARD HAS DECIDED TO PROCEED WITH
THE VOTE ON THE RESTRUCTURING AND TO WITHDRAW ITS RECOMMENDATION AND BE
NEUTRAL WITH RESPECT TO THE STOCKHOLDER VOTES ON THE NEW COMMON STOCK ISSUANCE
AND THE PREPACKAGED PLAN.
Accordingly, the Board believes that Stockholders should make their own
decision regarding the benefits and risks of the Restructuring and has decided
to withdraw its recommendation and not to take a position with respect to the
Stockholder votes on the New Common Stock Issuance and the Prepackaged Plan.
However, Stockholders should be aware that due to the significant disparity in
value between the Restructuring and the Revised Stonington Proposal, the
individual members of the Board and senior management of the Company that own
common stock of the Company have informed the Company that they intend to vote
their shares against the New Common Stock Issuance and the Prepackaged Plan.
8
<PAGE>
Because the Charter Amendment would provide the Company with more shares of
authorized stock to issue in any financial restructuring which may take place,
the Board continues to recommend that Stockholders vote FOR this proposal.
However, Stockholders should be aware that should the Charter Amendment
receive the requisite number of affirmative votes, and should 100% of the
12.5% Notes be tendered in the Exchange Offer, the Company will be obligated
to consummate the Exchange Restructuring under the terms of the Limited Waiver
Agreement (as described in the Proxy Statement/Prospectus). The Company
believes that the tender of 100% of the 12.5% Notes is unlikely and the
Company does not presently intend to waive this condition.
In the event that less than 100% of the 12.5% Notes are tendered in the
Exchange Offer, and the requisite number of Stockholders do not vote in favor
of the New Common Stock Issuance and the Prepackaged Plan, the Company intends
to enter into definitive agreements with respect to the Revised Stonington
Proposal as soon as possible. Alternatively, the Company may consider other
means of refinancing its indebtedness. Stonington has advised the Company that
all funds necessary to fund the Revised Stonington Proposal are presently
available.
The Company believes, however, that even if it were to seek confirmation of
the Prepackaged Plan pursuant to the "cramdown" provisions of the Bankruptcy
Code, there are significant doubts as to the ability of the Company to confirm
the Prepackaged Plan for the reasons described below. See "6. Nonconsensual
Confirmation of the Prepackaged Plan."
4. ADDITIONAL RISK FACTORS
The following risk factors amend and supplement the risk factors contained
in the Proxy Statement/Prospectus and the Exchange Restructuring Prospectus
and should be read in conjunction with such risk factors to understand the
risks associated with the Restructuring.
Risk of Litigation with Noteholders
The Ad Hoc Noteholders' Committee has informed the Company of its belief
that the Limited Waiver Agreement requires the Company to recommend the
Proposals and, in the event that Stockholders do not vote in favor of the
Charter Amendment or the Prepackaged Plan, to file the Prepackaged Plan and to
seek confirmation pursuant to the "cramdown" provisions of Section 1129(b) of
the Bankruptcy Code.
The Company strongly disputes this interpretation of the Limited Waiver
Agreement and is seeking a declaratory judgment in Delaware Chancery Court
confirming that (i) neither the Board nor the Company is obligated under the
Limited Waiver Agreement to recommend the Restructuring, and (ii) the Company
is not obligated to seek confirmation of the Prepackaged Plan by means of the
"cramdown" provisions of the Bankruptcy Code. However, it is almost certain
that the court will not rule before the Stockholders' Meeting.
Should the Exchange Offer not be consummated and the Company not file the
Prepackaged Plan, the Company believes it is likely that a lawsuit will be
filed against the Company by certain holders of the Company's 12.5% Notes.
Regardless of the ultimate outcome, this lawsuit could create uncertainty over
the financial condition of the Company, which may cause vendors to restrict
the terms on which they supply products to the Company. In addition, the
Company believes that it is likely that its competitors will try to use any
publicity regarding the litigation to their advantage with respect to
Merisel's customers. Any restrictions imposed by vendors or loss of customers
could cause the Company to suffer a material adverse change in its operations
and financial stability. Moreover, no assurance can be given that the ultimate
outcome of such a dispute would not be materially adverse to the Company.
Elimination of Waivers
The Ad Hoc Noteholders' Committee has also informed the Company of its
members' intent to cause the acceleration of the maturity of all outstanding
indebtedness under the 12.5% Notes in the event that the Stockholders fail to
approve the Charter Amendment and the Company does not immediately seek to
implement the Restructuring through the Prepackaged Plan.
9
<PAGE>
However, the Company has deposited the accrued but unpaid interest with
respect to the interest payment originally due on June 30, 1997 of
approximately $8 million with the trustee for the 12.5% Notes and has
instructed the trustee to pay this money to the Noteholders if an agreement
termination event occurs under the Limited Waiver Agreement. In addition, the
Company will make the $40 million of amortization payments due under the
Operating Companies' Loan Agreements on the date any such interest payment is
made. Upon such payments, the Company believes it will be in full compliance
with all of its outstanding debt obligations and will continue to explore its
refinancing options. Accordingly, upon payment of such interest, the Company
does not believe the Noteholders will have the right to accelerate the payment
of their indebtedness. Should the Company be required to make the payments
described above, and should the Company be unable to refinance a substantial
portion of its remaining debt during the fourth quarter, the Company's ability
to maintain adequate trade credit and inventory levels would be adversely
affected, which would in turn have an adverse impact on the Company's
operations.
Potential De-listing of the Common Stock
On August 7, 1997, the Company met with representatives of the NASD
regarding the potential de-listing of the Old Common Stock in connection with
the Company's current non-compliance with the net tangible assets test
required for continued listing on the Nasdaq National Market. At that hearing,
the Company presented the terms of the Restructuring to the NASD and indicated
that, should the Restructuring be consummated, the Company would then be in
full compliance with all of the NASD's requirements for continued listing on
the Nasdaq National Market. The NASD responded by granting the Company an
exception with respect to such test until October 1, 1997, by which time the
Company must make a public filing with the Securities and Exchange Commission
and the NASD demonstrating compliance with all requirements for continued
listing on the Nasdaq National Market (the "Exception"). In addition, should
the Company accept the Revised Stonington Proposal, Stonington has indicated
its willingness to consider the immediate conversion of approximately $15
million of debt to common equity, which would bring the Company into
compliance with all applicable listing criteria of the Nasdaq National Market.
Should the Company fail to so demonstrate full compliance by such date, the
NASD has indicated that the Company's securities will be immediately de-listed
from the Nasdaq National Market. In light of the Company's proposal to adjourn
the Stockholders' Meeting, the Company has requested that the NASD extend the
Exception until October 31, 1997. See "2. Adjournment of the Stockholders'
Meeting." However, no assurance can be given that such an extension will be
granted. If the common stock of the Company were de-listed from the Nasdaq
National Market, there could be an adverse effect on the liquidity of the
market for the Company's common stock.
5. REVISED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 1997 and the Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the fiscal year ended December 31, 1996 and the six-month
period ended June 30, 1997 are based upon the historical financial position
and results of operations as of and for the periods then ended. The pro forma
adjustments to the historical consolidated statements of operations, which
give effect to the sale of EML and FAB (referred to in the tables as "former
operations") as if each had occurred prior to January 1, 1996, include the
impact of amendment to existing debt agreements that were entered into as a
direct consequence of the sale of these businesses and related assets.
Additional pro forma adjustments to the historical results of operations
(based on the assumptions set forth below) give effect to the Exchange
Restructuring transactions, including (i) the issuance of 24.1 million shares,
after giving effect to the Reverse Split, of New Common Stock to Noteholders
upon consummation of the Exchange Restructuring, (ii) the payment of
termination fees due to Stonington upon consummation of the Exchange
Restructuring, (iii) the extension of the maturity dates of the Revolving
Credit Agreement and the 11.5% Notes to January 31, 1999, (iv) the payment of
3.5% modification fees and other fees and expenses of 1% associated with the
Extension of the Revolving Credit Agreement and 11.5% Notes, and (v) the
interest rate increases on the Revolving Credit Agreement, 11.5% Notes and
Subordinated Notes associated with the Extension, as if each had occurred on
January 1, 1996. The following Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of June 30, 1997 includes pro forma adjustments as if the
Exchange Restructuring had been completed on that date.
10
<PAGE>
The pro forma adjustments are based on available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances. The unaudited pro forma condensed consolidated financial
statements and accompanying notes should be read in conjunction with the
historical consolidated financial statements of the Company, including the
notes thereto, and the other information pertaining to the Company appearing
elsewhere in this Prospectus or incorporated herein.
THESE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE
INDICATIVE OF THE FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS OF THE COMPANY
HAD THE TRANSACTIONS DESCRIBED THEREIN BEEN CONSUMMATED ON THE RESPECTIVE
DATES INDICATED AND ARE NOT INTENDED TO BE PREDICTIVE OF THE FINANCIAL
CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY AT ANY FUTURE DATE OR FOR
ANY FUTURE PERIOD.
11
<PAGE>
MERISEL, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
JUNE 30, PRO FORMA JUNE 30,
1997 ADJUSTMENTS 1997
---------- ----------- ---------
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............... $ 48,563 $ (8,972)(1) $ 39,591
Accounts receivable (net of allowances
of $23,105)............................ 181,809 181,809
Inventories............................. 346,730 346,730
Prepaid expenses and other current
assets................................. 20,912 $ (4,959)(2) 15,953
Deferred income tax benefit............. 478 478
--------- --------- ---------
Total current assets.................. 598,492 (13,931) 584,561
PROPERTY AND EQUIPMENT, NET............... 54,866 54,866
COST IN EXCESS OF NET ASSETS ACQUIRED,
NET...................................... 25,914 25,914
OTHER ASSETS.............................. 7,805 7,805
--------- --------- ---------
TOTAL ASSETS............................ $ 687,077 $ (13,931) $ 673,146
========= ========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................ $ 347,627 $ 347,627
Accrued liabilities..................... 37,517 $ (7,769)(3) 29,748
Long-term debt--current................. 10,645 10,645
Subordinated Debt--Current.............. 4,400 4,400
--------- --------- ---------
Total Current Liabilities............. 400,189 (7,769) 392,420
LONG TERM DEBT............................ 259,723 (125,000)(4) 134,723
SUBORDINATED DEBT......................... 8,800 8,800
--------- --------- ---------
TOTAL LIABILITIES....................... $ 668,712 $(132,769) $ 535,943
STOCKHOLDERS' EQUITY:
Preferred stock.........................
Common stock............................ 301 1,203 (5) 1,504
Additional paid-in capital.............. 142,300 127,035 (6) 269,335
Retained earnings (accumulated deficit). (117,988) (9,400)(7) (127,388)
Cumulative translation adjustment....... (6,248) (6,248)
--------- --------- ---------
Total stockholders' equity............ 18,365 118,838 137,203
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY.... $ 687,077 $ (13,931) $ 673,146
========= ========= =========
</TABLE>
See notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet.
12
<PAGE>
MERISEL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED PRO FORMA PRO FORMA YEAR ENDED
DECEMBER 31, FORMER PRO FORMA ADJUSTED PRO FORMA DECEMBER 31,
1996 OPERATIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS 1996
------------ ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $5,522,824 $2,081,481 $3,441,343 $3,441,343
Cost of sales........... 5,233,570 1,971,465 3,262,105 3,262,105
---------- ---------- ---------- ----------
Gross profit............ 289,254 110,016 179,238 179,238
Selling, general, and
administrative
expenses............... 295,021 104,986 (3,486)(8) 193,521 $ 3,000 (10) 196,521
Impairment losses....... 42,033 42,033
---------- ---------- ------- ---------- ------- ----------
Operating loss.......... (47,800) (37,003) 3,486 (14,283) (3,000) (17,283)
Loss on sale of
European, Mexican, and
Latin American
operations............. 33,455 33,455
Interest expense........ 37,431 7,530 2,238 (9) 27,663 (8,148) 19,515
Other expense........... 20,150 2,183 17,967 17,967
---------- ---------- ------- ---------- ------- ----------
Loss before income
taxes.................. (138,836) (80,171) 1,248 (59,913) 5,148 (54,675)
Income tax
provision(12).......... 1,539 717 822 822
---------- ---------- ------- ---------- ------- ----------
Net loss................ $ (140,375) $ (80,888) $ 1,248 $ (60,735) $ 5,148 $ (55,587)
========== ========== ======= ========== ======= ==========
Net loss per share(13).. $ (23.40) $ (10.12) $ (1.85)
========== ========== ==========
Average outstanding and
equivalent common
shares(13)............. 6,000 6,000 24,063 30,063
========== ========== ======= ==========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
13
<PAGE>
MERISEL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL SIX SIX MONTHS
MONTHS ENDED ENDED
JUNE 30 FORMER ADJUSTED PRO FORMA JUNE 30
1997 OPERATIONS SUBTOTAL ADJUSTMENTS 1997
-------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales................ $2,008,855 $202,177 $1,806,678 $1,806,678
Cost of sales............ 1,888,224 194,500 1,693,724 1,693,724
---------- -------- ---------- ------- ----------
Gross profit............. 120,631 7,677 112,954 112,954
Selling, general, and
administrative expenses. 94,820 6,199 88,621 88,621
---------- -------- ---------- ------- ----------
Operating income......... 25,811 1,478 24,333 24,333
Interest expense......... 16,383 297 16,086 $(4,653)(11) 11,433
Other expense............ 5,919 (988) 6,907 6,907
---------- -------- ---------- ------- ----------
Income before income
taxes................... 3,509 2,169 1,340 4,653 5,993
Income tax provision(12). 333 15 318 318
---------- -------- ---------- ------- ----------
Net Income............... $ 3,176 $ 2,154 $ 1,022 $ 4,653 $ 5,675
========== ======== ========== ======= ==========
Net income per share(13). $ 0.53 $ 0.17 $ 0.19
========== ========== ==========
Average outstanding and
equivalent common
shares(13).............. 6,016 6,016 24,063 30,079
========== ========== ======= ==========
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
14
<PAGE>
MERISEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Adjustments for the Sale of Assets
The pro forma adjustments related to the sale of assets (specifically, the
sale of EML, which took effect on September 27, 1996, and the sale of FAB,
which took effect on March 28, 1997) are to the statement of operations for
the year ended December 31, 1996 and for the three months ended March 28, 1997
in order to illustrate the effect that would have been given if these assets
had been sold as of January 1, 1996. The assumptions underlying the pro forma
adjustments also take into account the effect of certain amendments to
existing debt agreements that were entered into as a direct consequence of the
sale of these businesses and related assets. These adjustments are summarized
in the following tables and more fully described in the notes thereto.
Adjustments for the Exchange Restructuring
The pro forma adjustments related to the Exchange Restructuring and related
transactions are summarized in the following tables and are more fully
described in the notes thereto. The following pro forma adjustments assume
that the Exchange Restructuring will be accomplished as outlined in
"BACKGROUND OF THE RESTRUCTURING" in the Exchange Restructuring Prospectus.
If less than 100% of the Noteholders tender in the Exchange Restructuring,
the Company may affect the transaction via the Prepackaged Restructuring
whereby the Holding Company would file the Prepackaged Plan as outlined in
"BACKGROUND OF THE RESTRUCTURING" in the Exchange Restructuring Prospectus.
Under the Prepackaged Restructuring, in addition to the following pro forma
adjustments, the Company would incur additional estimated professional and
legal fees and expenses of approximately $3 million related to the filing.
These fees would be expensed and would increase the pro forma net loss for the
pro forma year ended December 31, 1996 by $3 million.
Accounting Treatment
In connection with the Exchange Restructuring, the Company would record an
extraordinary loss on the retirement of the 12.5% Notes to the extent that the
fair market value of the New Common Stock received by the Noteholders exceeds
the adjusted carrying value of the 12.5% Notes. The amount of the
extraordinary loss would depend on the market value of the New Common Stock at
the time of issuance. Although the Company believes that the adjusted carrying
value of the 12.5% Notes is significantly less than the fair market value of
the New Common Stock, it is unable to reasonably estimate the amount of this
difference and, therefore, has not recorded any extraordinary loss at this
time.
The Exchange Restructuring assumes that the transaction will be consummated
outside of a Chapter 11 case. If the Prepackaged Restructuring is used, the
Company would implement the provisions of SOP 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." Pursuant to SOP 90-7,
the Company assumes that the reorganization value of the Company on the
effective date of the Prepackaged Plan will exceed the amount of affected
claims and expected post petition liabilities. Under SOP 90-7, if the
reorganization value of the Company is greater than the sum of the affected
claims and post petition liabilities, fresh start accounting would not apply.
As such, the Company presently assumes that fresh start accounting will not be
implemented.
15
<PAGE>
MERISEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(CONTINUED)
BALANCE SHEET
Column numbers refer to footnotes from the Unaudited Pro Forma Condensed
Consolidated Balance Sheet.
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
ADDITIONAL
PREPAID ACCRUED LONG-TERM COMMON PAID-IN RETAINED
FOOTNOTE NUMBER CASH ASSETS LIABILITIES DEBT STOCK CAPITAL EARNINGS
--------------- ------- ------- ----------- --------- ------ ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
(a)..................... $(3,000) $(3,000)
(b)..................... (4,080) $ 4,080
(c)..................... (1,892) (4,508) (6,400)
(d)..................... (4,531) $(7,769) $(125,000) 1,203 $127,035
------- ------- ------- --------- ----- -------- -------
Total................... $(8,972) $(4,959) $(7,769) $(125,000) 1,203 $127,035 $(9,400)
</TABLE>
(a) To record payment of termination fees due to Stonington upon consummation
of the Exchange Restructuring.
(b) To record remaining payments of the 3.5% modification and other fees and
expenses of 1% associated with the Extension of the Revolving Credit
Agreement and the 11.5% Notes.
(c) To record remaining payment and write-off of estimated deferred
professional fees and expenses totaling approximately $6.4 million related
to the Exchange Restructuring.
(d) To reflect the issuance of approximately 24.1 million shares, after giving
effect to the Reverse Split, of New Common Stock to the Noteholders, and
the related write-off of accrued interest and unamortized deferred
financing cost on the 12.5% Notes.
STATEMENTS OF OPERATIONS
(8) Represents costs allocated by Merisel to former operations that would not
have been eliminated due to the sale of such operations.
(9) Interest expense is adjusted to reflect the effect of the amendments to
the 11.5% notes and the RCA agreement that were entered into by the
Company as a result of the sale of EML. Specifically, the adjustment
represents the savings from the aggregate reduction in principal of $72.5
million net of the effect of an average increase in interest rate on the
instruments of approximately 2.25% . The adjustment is for the period from
January 1, 1996 through the end of September when the sale of EML
effectively took place, and is set forth below:
<TABLE>
<S> <C>
Interest reduction from $72,500,000 combined repayment of debt on
RCA and 11.5% Notes............................................... $ 5,914
Additional interest expense from increased rate of interest on RCA
and 11.5% Notes as amended........................................ (3,676)
-------
Net pro forma savings in interest expense for 1996................. $ 2,238
=======
</TABLE>
(10) To record payment of termination fees due to Stonington upon consummation
of the Exchange Restructuring.
16
<PAGE>
(11) The following table details the incremental net adjustment to interest
expense related to the exchange of 100% of the outstanding principal
balance of $125 million of the 12.5% Notes for approximately 24.1 million
shares of New Common Stock after giving effect to the Reverse Split,
pursuant to the terms of the Exchange Restructuring.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER, JUNE 30,
1996 1997
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
Elimination of amortization of deferred financing
costs on $125 million of 12.5% Notes retired through
the Exchange Restructuring.......................... $ (546) $ (312)
Elimination of interest on $125 million of 12.5%
Notes retired through the Exchange Restructuring.... (15,625) (7,813)
Change in amortization of deferred financing costs
related to extension of maturity dates of the
Revolving Credit Agreement and the 11.5% Notes to
January 31, 1999.................................... (113) 27
Amortization of 3.5% modification fee and other fees
and expenses of 1% over the remaining life of 37
months of the Revolving Credit Agreement and the
11.5% Notes based upon actual amounts paid and
expected to be paid in 1997......................... 2,064 1,032
Amortization of estimated deferred financing costs
over remaining life of 37 months of the Revolving
Credit Agreement and 11.5% Notes.................... 195 97
Additional modification fees relating to the
Extension of maturity dates of the Revolving Credit
Agreement and the 11.5% Notes....................... 2,715
Increase in interest rate of 0.5% per quarter, for
pro forma purposes assumed to begin 6 months after
the Exchange Restructuring Date, on the Revolving
Credit Agreement, 11.5% Notes, and the Subordinated
Notes............................................... 3,162 2,316
-------- -------
Net adjustment to interest expense................... $ (8,481) $(4,653)
======== =======
</TABLE>
(12) Due to the Company's net operating losses, on a pro forma basis, the
Company would not owe additional taxes nor receive additional tax
benefits as a result of the decreases in interest expense and net loss or
increases in net income.
(13) Net income (loss) per share and weighted average number of shares
outstanding have been adjusted to reflect the Reverse Split.
6. NONCONSENSUAL CONFIRMATION OF THE PREPACKAGED PLAN
In the event that Impaired Class 6 (Old Common Stock) does not accept the
Prepackaged Plan, the Bankruptcy Court may nevertheless confirm the
Prepackaged Plan at the Company's request pursuant to the "cramdown"
provisions of the Bankruptcy Code. The Prepackaged Plan may be confirmed
pursuant to these provisions if Class 4 (12.5% Notes) has accepted the
Prepackaged Plan and the Bankruptcy Court determines that the Prepackaged Plan
"does not discriminate unfairly" and is "fair and equitable" with respect to
Class 6. This "fair and equitable" test has been interpreted to require the
Bankruptcy Court to determine that no class of creditors or interest holders
that is senior to the nonaccepting class receives or retains more under the
plan than the allowed amount of its claims or interests, as the case may be.
See 7 L. King, Collier on Bankruptcy (P) 1129.04[4][a][ii] (15th rev. ed.
1997). Here, the aggregate claims of Class 4 are $125 million (the par value
of the 12.5% Notes) plus accrued and unpaid interest.
The Consenting Noteholders have rejected incentives proposed by Stonington
in the August 11 Alternative Stonington Proposal that, together with the
market value of 12.5% Notes, the Company believes aggregate in excess of 150%
of the par value of the 12.5% Notes. The Company believes that this strongly
implies that the Consenting Noteholders believe the value to be received by
them in the Restructuring provides a significant premium over the outstanding
principal and accrued interest owed on the 12.5% Notes (which would be
reinstated under the Revised Stonington Proposal) and, accordingly, creates
great uncertainty over the ability of a Bankruptcy Court to confirm the
Prepackaged Plan on a nonconsensual basis.
17
<PAGE>
7. REVISED LIQUIDATION ANALYSIS
The "best interest" test that must be met in order to confirm a chapter 11
reorganization plan compares the value of recoveries that Classes of Claims
and Classes of Interests are to receive under a plan with what they would
receive in a hypothetical liquidation of the debtor in a chapter 7 case on the
date of confirmation of the chapter 11 plan. In the Restructuring, the assets
of Merisel would consist principally of the stock of the Operating Companies.
Therefore, the evaluation of the recoveries of Classes of Claims and Interests
both under the Prepackaged Plan and upon a hypothetical liquidation of Merisel
starts with a valuation of the stock of the Operating Companies as a going
concern. In addition, the liquidation analysis on which application of the
"best interest" test in chapter 11 is based assumes a hypothetical analysis,
not an analysis based on an actual, pending alternative sale of the assets of
the debtor if the chapter 11 plan is not confirmed.
The hypothetical liquidation value analysis contained in the Disclosure
Statement was calculated on Merisel's estimate of a total enterprise value for
the Company derived as a market-based multiple of projected earnings before
interest, taxes, depreciation and amortization ("EBITDA"), less a discount of
25% resulting from a hypothetical rapid sale in a chapter 7 case. While an
EBITDA-multiple valuation is one accepted method of valuing an operating
company, such as the Operating Companies that would be sold in a hypothetical
liquidation of Merisel, it is not the only accepted method, nor is the
hypothetical Discount for Chapter 7 Sale of 25% assumed in the analysis for a
chapter 7 liquidation the only accepted factor used in determining
hypothetical liquidation proceeds.
The Chapter 7 Liquidation Analysis set forth in the Disclosure Statement did
not consider any valuation of the Operating Companies implied by the original
Stonington Proposal. However, as described above in this Supplement, there
have been additional developments since the completion of that liquidation
analysis. The Revised Stonington Proposal could be read to imply a total
enterprise value for the Company of approximately $400 million (rather than
the EBITDA-multiple based value of $276.8 million stated in the liquidation
analysis). In addition, the rejection by members of the Ad Hoc Noteholders'
Committee of certain incentives proposed by Stonington in the August 11
Alternative Stonington proposal could be interpreted to imply a total
enterprise value for the Company of over $400 million.
The presence of the recent developments described above and the current
situation, in which matters relating to valuation have not been resolved,
suggest that it would be difficult to determine now with reasonable certainty
a hypothetical liquidation value in a chapter 7 case for Merisel and therefore
whether the Prepackaged Plan meets the best interest test as to Class 6. If
the Bankruptcy Court were to substitute the Total Enterprise Value of
$400 million in lieu of the $276.8 million EBITDA-multiple based valuation,
then the determination of whether the Prepackaged Plan satisfies the "best
interest test" could depend on the size of the discount factor, if any,
applied to such hypothetical valuation. Such valuation could also depend on
numerous other factors, including the interest of potential acquirors in
purchasing the stock of the Operating Companies at that time.
8. 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
operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries (collectively, the "Operating Company"), the Company markets
products and services throughout North America 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.
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
18
<PAGE>
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 six months ended June 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").
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 as Compared to the Three Months Ended June
30, 1996.
The quarter ended June 30, 1997, represented the first period in which the
consolidated results of operations included 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 June 30, 1996 and the results of operations for the three months ended
June 30, 1997 for comparative purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
-------------------------------- ---------------------------------
NORTH NORTH
AMERICAN FORMER CONSOLIDATED AMERICAN FORMER CONSOLIDATED
BUSINESS OPERATIONS TOTAL BUSINESS OPERATIONS TOTAL
-------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............... $895,754 $ $895,754 $828,954 $613,714 $1,442,668
Cost of Sales........... 840,101 840,101 784,982 578,099 1,363,081
-------- -------- -------- -------- -------- ----------
Gross Profit............ 55,653 55,653 43,972 35,615 79,587
SG& A Expenses.......... 43,299 43,299 48,047 30,375 78,422
-------- -------- -------- -------- -------- ----------
Operating Income........ $ 12,354 $ $ 12,354 $ (4,075) $ 5,240 $ 1,165
======== ======== ======== ======== ======== ==========
</TABLE>
Net sales for the North American Business increased 8.1% from $828,954,000
in the quarter ended June 30, 1996 to $895,754,000 in the quarter ended June
30, 1997. The increase resulted from a 5.2% increase in net sales for the U.S.
division and a 23.0% increase in Canada. The U.S. division experienced growth
over the prior period, with particularly strong growth in its MOCA(TM) and VAR
segments, but overall growth was partially offset 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.
In the North American Business, hardware and accessories accounted for 78%
of net sales and software accounted for 22% of net sales in the second quarter
of 1997, as compared to 75% and 25% for the same categories, respectively, in
the second quarter of 1996.
Gross profit for the North American Business increased 26.6% or $11,682,000
from $43,972,000 in 1996 to $55,654,000 in 1997. Gross profit as a percentage
of sales, or gross margin, increased from 5.3% in 1996 to 6.2% in 1997. Gross
profit in the prior year includes a second quarter charge of $2,200,000
related to vendor reconciliation issues. Of the remaining $9,482,000
improvement in gross profit, $3,543,000 is due to the growth in sales volume
and $3,290,000 is due to favorable resolutions of vendor reconciliation issues
as a result of improved processes. The resolution of future vendor
reconciliation issues may or may not favorably affect margins in subsequent
periods. The remaining increase in gross profit is attributable to efforts to
sustain stronger margins on a long-term basis through improved controls over
margin management related activities such as
19
<PAGE>
greater focus on sales execution, increased participation in vendor rebate
programs, improved utilization of vendor purchasing discounts and an increased
attention on more profitable product lines. The Company believes that its
gross margins have been below the industry average, and as such, these
corrective actions have been undertaken as part of the overall business
strategy to concentrate on profitability in 1997. Gross margins in the United
States and Canada were 6.2% and 6.3%, respectively, for the second quarter of
1997, compared to 5.2% and 6.1%, respectively, for the first quarter of 1996.
Excluding the effect of the both the $2,200,000 charge in 1996 and the
$3,290,000 benefit in 1997 related to accounts payable and vendor
reconciliation issues as noted above, the margin in the U.S. would have been
5.8% for the second quarter of 1997 compared to 5.5% for the same quarter of
1996. Despite the improved margin performance experienced in the first half of
1997, the Company expects that it will continue to face intense competitive
pricing pressures.
Selling, general and administrative expenses for the North American Business
decreased by 9.9% from $48,047,000 in the second quarter of 1996 to
$43,299,000 in the second quarter of 1997. The higher level of expenses in the
1996 period was primarily attributable to expenses 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 as well as increased
expenses associated with the Company's new computer operating system in 1996.
As a result of the above items, operating income for the North American
Business improved by $16,430,000 from a loss of $4,075,000 for the second
quarter of 1996 to income of $12,354,000 for the second quarter of 1997.
Six Months Ended June 30, 1997 as Compared to the Six Months Ended June 30,
1996.
The following table sets forth the unaudited results of operations for the
North American Business and Former Operations for the six months ended June
30, 1997 and June 30, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 (IN THOUSANDS) JUNE 30, 1996 (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
---------------------------------- -----------------------------------
NORTH NORTH
AMERICAN FORMER CONSOLIDATED AMERICAN FORMER CONSOLIDATED
BUSINESS OPERATIONS TOTAL BUSINESS OPERATIONS TOTAL
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............... $1,806,677 $202,178 $2,008,855 $1,710,519 $1,268,738 $2,979,257
Cost of Sales........... 1,693,724 194,500 1,888,224 1,614,966 1,197,481 2,812,447
---------- -------- ---------- ---------- ---------- ----------
Gross Profit............ 112,953 7,678 120,631 95,553 71,257 166,810
SG&A Expenses........... 88,620 6,200 94,820 98,332 63,226 161,558
---------- -------- ---------- ---------- ---------- ----------
Operating Income........ $ 24,333 $ 1,478 $ 25,811 $ (2,779) $ 8,031 $ 5,252
========== ======== ========== ========== ========== ==========
</TABLE>
Net sales for the North American Business increased 5.6% from $1,710,519,000
for the six months ended June 30, 1996 to $1,806,677,000 for the six months
ended June 30, 1997. The increase resulted from a 2.0% increase in net sales
for the U.S. division and a 21.9% increase in Canada. The growth rate in the
U.S. reflects improved year-over-year performance in the second quarter due to
those factors summarized in the discussion of sales for the three months ended
June 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 six
months of 1997, as compared to 75% and 25% for the same categories,
respectively, in the first six months of 1996.
Gross profit for the North American Business increased 18.2% or $17,400,000
from $95,553,000 in 1996 to $112,953,000 in 1997. Gross profit as a percentage
of sales, or gross margin, increased from 5.6% in 1996 to 6.3% in 1997. Gross
profit in the prior year period includes a charge totaling $4,400,000 related
to vendor reconciliation issues. Of the remaining $13,000,000 improvement in
gross profit, $5,614,000 is due to the growth in sales volume, and $3,290,000
is due to favorable resolutions of vendor reconciliation issues realized in
the
20
<PAGE>
second quarter, as a result of improved processes. The resolution of future
vendor reconciliation issues may or may not favorably affect margins in
subsequent periods. The remaining increase is attributable to the same factors
summarized in the discussion of gross profit for the three months ended June
30, 1997 and 1996. Gross margins in the U.S. and Canada were 6.3% and 6.1%,
respectively, for the first half of 1997, compared to 5.5% and 6.0%,
respectively, for the first half of 1996. Excluding the effect of both the
$4,400,000 of charges in 1996 and the $3,290,000 benefit in 1997 related to
accounts payable and vendor reconciliation issues as noted above, the margin
in the U.S. would have been 6.1% for the first half of 1997 compared to 5.8%
for the same period of 1996. Despite the improved margin performance
experienced in the first half of 1997, the Company expects that it will
continue to face intense competitive pricing pressures.
Selling, general and administrative expenses for the North American Business
decreased by 9.9% from $98,332,000 in the six months ended June 30, 1996 to
$88,621,000 in the six months ended June 30, 1997. The higher level of
expenses in the 1996 period was primarily attributable to expenses 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 as
well as increased expenses associated with its new computer operating system
in 1996.
As a result of the above items, operating income for the North American
Business improved by $27,111,000 from a loss of $2,779,000 for the first six
months of 1996 to income of $24,332,000 for the first six months of 1997.
INTEREST EXPENSE; OTHER EXPENSE; AND INCOME TAX PROVISION
Interest expense for the Company, including Former Operations, decreased
19.1% from $9,595,000 in the quarter ended June 30, 1996 to $7,760,000 in the
quarter ended June 30, 1997. For the six months ended June 30, 1996, interest
expense decreased 15.9% from $19,472,000 in the 1996 period to $16,383,000 in
the 1997 period. The decrease in interest expense is attributable to the
amortization and paydown of the Company's debt by approximately $104,225,000
from the end of June of 1996 through the end of June, 1997, and is offset 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 of 1996 using proceeds from the sale of EML.
Interest expense for the three and six months ended June 30, 1997 includes
interest accruals related to the 12.5% Notes of $3,906,000 and $7,813,000,
respectively, which the Company will not be obligated to pay if the Exchange
is consummated. See Note 1--"Liquidity" for a discussion of the Company's
proposed debt restructuring.
Other expenses for the Company, including Former Operations, decreased from
$3,528,000 and $10,766,000 for the three and six months ended June 30, 1996,
respectively, to $2,389,000 and $5,919,000 for the three and six months ended
June 30, 1997, respectively. The decrease for the quarter was primarily due to
the recording of a gain on the sale of property held in North Carolina for
$1,530,000. For the six month period, in addition to the effect of the gain on
the sale of property, the decrease was also attributable to increased expenses
in the first quarter of 1996 related to one time financing charges of
approximately $3,125,000 paid to negotiate amendments of the Company's
financing agreements.
The income tax provision increased from a benefit of $554,000 and $74,000
for the three and six months ended June 30, 1996, respectively, to an expense
of $159,000 and $333,000 for the same periods of 1997. In 1996 the Company was
able to realize some benefit related to available net operating loss carry
back provisions. In the current year, the income tax rate reflects only the
minimal 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.
CONSOLIDATED INCOME (LOSS)
On a consolidated basis, net income for the Company, including Former
Operations, increased from losses of $11,404,000 and $24,912,000 for the three
and six months ended June 30, 1996, respectively, to income of
21
<PAGE>
$2,046,000 and $3,176,000 for the three and six months ended June 30, 1997,
due to the factors described above. Net income per share increased from losses
of $.83 and $.38 per share for the three and six months ended June 30, 1996 to
income of $ .07 and $.11 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 began
designing the new system in 1993 and 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 these new
systems are complex projects and involve certain risks. As a result, the U.S.
system implementation will be delayed beyond 1997. 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.
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. This 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 the public and
private sales of its securities.
Net cash provided by operating activities during the six months ended June
30, 1997 was $12,635,000. The primary uses of cash were a decrease in accounts
payable of $13,381,000, an increase in accounts receivable of $24,715,000, and
an increase in prepaid and other assets of $9,050,000. Sources of cash
included a decrease in inventory of $45,826,000 and net profit of $3,176,000
which included depreciation expense of $5,971,000. The decreased inventory and
accounts payable from the fourth quarter of 1996 is primarily the result of
the effect of
22
<PAGE>
seasonal fluctuations on inventory needs. The increase in accounts receivable
relates to a very strong final week of sales in the quarter, particularly from
its MOCA(TM) segment, which also was a factor in driving inventory down beyond
the decrease in accounts payable. The increase in prepaid and other assets
includes professional fees paid related to the debt restructuring of
approximately $5,100,000.
Net cash provided by investing activities was $2,189,000 consisting of
proceeds from the sale of land held in North Carolina totaling $5,020,000,
offset by capital expenditures of $2,831,000. The expenditures were primarily
for the maintenance and improvements of existing facilities. The Company
presently anticipates that its capital expenditures for 1997 will be between
$15,000,000 and $18,000,000, primarily consisting of costs of upgrading and
modifying existing computer systems, warehouse systems and other Company
facilities, and capital expenditures related to building the sales
infrastructure. Net cash used in financing activities was $11,195,000 and was
comprised primarily of scheduled payments under the Company's various debt
facilities.
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.
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
June 30, 1997, the total amount outstanding under these facilities was
$247,445,000. Fees incurred in connection with the sale of accounts receivable
for the three months and six months ended June 30, 1997, were $3,776,000, and
$7,350,000, respectively, compared to $3,931,000 and $8,526,000 incurred for
the three months and six months ended June 30, 1996 and are recorded as other
expense.
At June 30, 1997, two of the Company's subsidiaries, Merisel Americas and
Merisel Europe, Inc. ("Merisel Europe"), had unsecured senior borrowings
consisting of $54,398,000 principal amount of 11.5% notes issued by Merisel
Americas and an $81,597,000 principal amount incurred under the Revolving
Credit Agreement by Merisel Americas and Merisel Europe. Advances under the
Revolving Credit Agreement bear interest at specific rates based upon market
reference rates plus a specified percentage. The average interest rate for the
Revolving Credit Agreement at June 30, 1997 was approximately 11.0%. On
October 4, 1996, the Company amended the 11.5% Notes and the Revolving Credit
Agreement in connection with the sale of EML and permanently reduced the
outstanding borrowings on the 11.5% Notes and the Revolving Credit Agreement
by $29,000,000 and $43,500,000, respectively. As a result of the sale of EML,
Merisel Europe no longer is an operating entity.
As amended, the agreement relating to the 11.5% notes and the Revolving
Credit Agreement require that the Company make an aggregate of five
consecutive principal payments of $1,500,000 each on the last calendar day of
each month from February through June 1997 plus an additional principal
repayment of $7,500,000 on January 2, 1998. The Company has made these
payments as scheduled through the date of this report. The agreements also
provide that certain tax refunds and asset sale proceeds received by the
Company shall be used to permanently prepay the 11.5% Notes and Revolving
Credit Agreement. The principal repayments will be shared ratably by the
lenders under the Revolving Credit Agreement and the holders of the 11.5%
Notes. Pursuant to the Extension, the maturities of the 11.5% Notes and
borrowings under the Revolving Credit
23
<PAGE>
Agreement have been extended from January 31, 1998 to January 31, 1999. If the
Company makes the June 30, 1997 interest payment on its $125,000,000 principal
amount 12.5% Notes at any time before January 31, 1998, then the Company is
required to make an aggregate principal repayment of an additional $40,000,000
on the 11.5% Notes and the Revolving Credit Agreement. Further, if the Company
makes the December 31, 1997 interest payment on its 12.5% Notes at any time
before January 31, 1998, the Company must make an additional aggregate
principal payment of $30,000,000 on the 11.5% Notes and the Revolving Credit
Agreement. As of the date of this report, the Company has not made the June
30, 1997 interest payment on the 12.5% Notes, and such payment has been waived
by in excess of 75% of the holders of the 12.5% Notes. Should the Limited
Waiver Agreement terminate without the consummation of the proposed debt
restructuring, the Company believes it has sufficient cash resources to make
both the outstanding interest payment on the 12.5% Notes, and the $40,000,000
aggregate principal payment that would then be due on the 11.5% Notes and
under the Revolving Credit Agreement, however, should the Company be unable to
refinance some portion of its remaining debt during the fourth quarter, the
Company's ability to maintain adequate trade credit and inventory levels would
be adversely affected, which would in turn have an adverse impact on the
Company's operations.
The 11.5% Notes and the Revolving Credit Agreement contain various
covenants, including those which prohibit the payment of cash dividends,
require that a minimum amount of tangible net worth, and place limitations on
the acquisition of assets. These agreements also require the Company or
certain of its subsidiaries to maintain certain specified financial ratios.
Such financial ratios include: minimum interest coverage; minimum adjusted
tangible net worth; minimum earnings before interest, taxes, depreciation,
amortization and securitization expense; maximum total debt equivalents to
adjusted tangible net worth; minimum inventory turnover; minimum accounts
payable; and minimum accounts payable to inventory. In connection with the
sale of EML and as a result of the substantial losses incurred by the Company
for the years ended December 31, 1996, and December 31, 1995, the Company was
required to obtain and did obtain waivers of various covenants, including
financial ratio covenants, contained in the 11.5% Notes and the Revolving
Credit Agreement for the Company's third fiscal quarter of 1996, and
amendments of such covenants for future periods. See Note 1--"Liquidity" for a
discussion of the Company's proposed debt restructuring.
At June 30, 1997, Merisel Americas had outstanding an aggregate of
$13,200,000 of privately placed subordinated notes (the "Subordinated Notes").
The Subordinated Notes, as amended during 1996, provide for an interest rate
increase of .50% to 11.78% per annum effective April 15, 1996, and are
repayable in three remaining equal annual installments of $4,400,000 due in
March of 1998, 1999 and 2000. The Company has made these payments as scheduled
through the date of this report. Accrued interest on the Subordinated Notes is
required to be paid quarterly. The Subordinated Notes contain certain
restrictive covenants, including those that limit the Company's ability to
incur debt, acquire the stock of or merge with other corporations, sell
certain assets and prohibit the payment of dividends. The Subordinated Notes
also incorporate the financial covenants contained in the Senior Notes and the
Revolving Credit Agreement. In connection with the amendment of the Revolving
Credit Agreement and the Senior Notes described above, the Company was
required to obtain and did obtain an amendment of the Subordinated Note
Purchase Agreement. See Note 1--"Liquidity" for a discussion of the Company's
proposed debt restructuring.
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.
24
<PAGE>
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.
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 franchisors.
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.
9. 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 Ninth Circuit reversed the
dismissal and remanded the case to the trial court. On August 22, 1997, the
Company filed a petition for a rehearing en banc with the Ninth Circuit Court
of Appeals and such petition is currently pending. 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 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
25
<PAGE>
misleading and deceptive conduct under relevant provisions of Australian law
with respect to the financial position of Merisel Australia as represented by
the disclosure documents. 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.
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.
10. MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY
The following table sets forth the quarterly high and low sale prices for
the Old Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1995
First quarter............................................ 8 1/2 3 7/8
Second quarter........................................... 7 3/4 4 1/2
Third quarter............................................ 8 3/8 5 1/2
Fourth quarter........................................... 6 5/8 4 1/8
FISCAL YEAR 1996
First quarter............................................ 5 7/8 2 1/4
Second quarter........................................... 5 1/16 2 1/4
Third quarter............................................ 3 13/16 1 13/16
Fourth quarter........................................... 2 5/16 1 5/8
FISCAL YEAR 1997
First quarter............................................ 2 1/2 1 9/16
Second quarter........................................... 2 7/16 1 1/32
Third quarter (through September , 1997)................ [4] [1 7/8]
</TABLE>
On April 11, 1997, the trading day immediately prior to the date that the
Company announced its intention to pursue the Restructuring, the closing sale
price for the Old Common Stock was $1 15/16 per share. On July 14, 1997, the
trading day immediately prior to the date that the Company announced the terms
of the original Stonington Proposal, the closing sale price for the Old Common
Stock was $2 1/32 per share. On August 29, 1997, the trading day immediately
prior to the date that the Company announced the terms of the Revised
Stonington Proposal, the closing sale price for the Old Common Stock was $3
9/16 per share. On September , 1997, the closing sale price for the Old
Common Stock was $ per share.
The Old Common Stock is currently traded on the over-the-counter market and
is quoted on the Nasdaq National Market System under the symbol "MSEL." As of
the Record Date, 30,078,495 shares of Old Common Stock were outstanding, and
there were approximately 1,255 record holders of Old Common Stock. Merisel has
never declared or paid and does not expect to declare or pay dividends on the
outstanding Old Common Stock. Restrictions contained in the instruments
governing the outstanding indebtedness of Merisel restrict its ability to
provide funds that might otherwise be used by Merisel for the payment of
dividends on the Old Common Stock. See "8. Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Liquidity and
Capital Resources."
September [ ], 1997
26
<PAGE>
ANNEX I
PROXY MERISEL, INC.
IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSALS REFERRED
TO IN (1), (2), (3), AND (4)
The undersigned hereby appoints Dwight A. Steffensen and James E. Illson and
each of them the undersigned's true and lawful attorneys and proxies (with full
power of substitution in each) to vote all Common Stock of Merisel, Inc. (the
"Company"), standing in the undersigned's name, at the Special Meeting of
Stockholders (the "Stockholders' Meeting") of the Company to be held at 200
Continental Boulevard, El Segundo, California, on September 18, 1997 at
10:00 a.m., Los Angeles time, and any adjournments or postponements thereof,
upon those matters as described in the Proxy Statement/Prospectus for the
Stockholders' Meeting and the Supplement thereto and such other matters as may
properly come before such meeting and any adjournments or postponements
thereof. The Stockholder votes with respect to the New Common Stock Issuance
will not be effective unless and until the Charter Amendment is approved at the
Stockholders' Meeting and filed with the Secretary of State of Delaware and the
Exchange Restructuring has been consummated, in which event the Charter
Amendment will become effective either immediately prior to or
contemporaneously with the consummation of the Exchange Restructuring. The
Board of Directors has reserved the right, pursuant to Delaware law, to abandon
the Charter Amendment even if the Company's Stockholders authorize the Charter
Amendment.
A vote FOR the Charter Amendment, the Stock Award and Incentive Plan and the
Adjournment as described in the Proxy Statement/Prospectus for the
Stockholders' Meeting and the Supplement thereto is recommended. The Board
makes no recommendation with respect to the New Common Stock Issuance.
1. Approve the Charter Amendment
[_] FOR [_] AGAINST [_] ABSTAIN
2. Approve the New Common Stock Issuance
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approve the Stock Award and Incentive Plan
[_] FOR [_] AGAINST [_] ABSTAIN
4. Approve the Adjournment
[_] FOR[_] AGAINST[_] ABSTAIN
If any other business is transacted at the Stockholders' Meeting, the Proxy
shall be voted in accordance with the best judgment of the above-named
attorneys and proxies.
Continued on Reverse Side
MERISEL, INC.
PROXY FOR COMMON STOCK
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 18, 1997 AND ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF
Dated: ________________, 1997
-----------------------------
(Signature of Stockholder)
-----------------------------
(Signature of Stockholder)
Please sign your name
exactly as it appears
hereon. If acting as
attorney, executor, trustee,
or in other representative
capacity, please sign name
and title. If stock is held
jointly, each joint owner
should sign.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED
ENVELOPE
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 48,563 $ 44,678
Accounts receivable (net of allowances of $23,105 and
$23,684 for 1997 and 1996, respectively).............. 181,809 168,295
Inventories............................................ 346,730 392,557
Prepaid expenses and other current assets.............. 20,912 16,925
Income taxes receivable................................ 2,183
Deferred income tax benefit............................ 478 482
--------- ---------
Total current assets................................. 598,492 625,120
PROPERTY AND EQUIPMENT, NET............................ 54,866 61,430
COST IN EXCESS OF NET ASSETS ACQUIRED, NET............. 25,914 41,724
OTHER ASSETS........................................... 7,805 2,765
--------- ---------
TOTAL ASSETS........................................... $ 687,077 $ 731,039
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................................... $ 347,627 $ 383,548
Accrued liabilities.................................... 37,517 37,544
Long-term debt-current................................. 10,645 9,084
Subordinated debt-current.............................. 4,400 4,400
--------- ---------
Total current liabilities............................ 400,189 434,576
Long-term debt......................................... 259,723 268,079
Subordinated debt...................................... 8,800 13,200
Capitalized lease obligations.......................... 187
--------- ---------
TOTAL LIABILITIES...................................... 668,712 716,042
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; 30,078,500
shares outstanding for 1997 and 1996, respectively.... 301 301
Additional paid-in capital............................. 142,300 142,300
Accumulated deficit.................................... (117,988) (121,164)
Cumulative translation adjustment...................... (6,248) (6,440)
--------- ---------
Total stockholders' equity........................... 18,365 14,997
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 687,077 $ 731,039
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------------
1997 1996 1997 1996
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES......................... $895,754 $1,442,668 $2,008,855 $2,979,257
COST OF SALES..................... 840,101 1,363,081 1,888,224 2,812,447
-------- ---------- ---------- ----------
GROSS PROFIT...................... 55,653 79,587 120,631 166,810
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES......................... 43,299 78,422 94,820 161,558
-------- ---------- ---------- ----------
OPERATING INCOME.................. 12,354 1,165 25,811 5,252
INTEREST EXPENSE.................. 7,760 9,595 16,383 19,472
OTHER EXPENSE..................... 2,389 3,528 5,919 10,766
-------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES. 2,205 (11,958) 3,509 (24,986)
INCOME TAX PROVISION(BENEFIT)..... 159 (554) 333 (74)
-------- ---------- ---------- ----------
NET INCOME (LOSS)................. $ 2,046 $ (11,404) $ 3,176 $ (24,912)
======== ========== ========== ==========
NET INCOME (LOSS) PER SHARE....... $ 0.07 $ (0.38) $ 0.11 $ (0.83)
======== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING...................... 30,078 29,878 30,078 29,871
======== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 3,176 $ (24,912)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization....................... 5,971 11,171
Provision for doubtful accounts..................... 4,692 8,006
Deferred income taxes............................... 396
Gain/Loss Sale of Property and Equipment.............. (1,530)
Changes in assets and liabilities:
Accounts receivable................................. (24,715) 66,641
Inventories......................................... 45,826 161,757
Prepaid expenses and other assets................... (9,050) (6,968)
Income taxes receivable/payable..................... 3,767 28,804
Accounts payable.................................... (13,381) (183,659)
Accrued liabilities................................. (2,121) (510)
--------- ---------
Net cash provided by operating activities............. 12,635 60,726
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (2,831) (4,817)
Proceeds from sale of property........................ 5,020
Earn out obligation--ComputerLand acquisition......... (13,409)
Cash proceeds from sale of Australian business........ 8,515
Other investing activities............................ 1,721
--------- ---------
Net cash provided by (used for) investing activities . 2,189 (7,990)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit............. 484,708 785,850
Repayments under revolving line of credit............. (488,319) (750,850)
Net repayments under other bank facilities ........... (777) (21,487)
Proceeds from issuance of promissory notes............ 8,790
Repayment of senior notes............................. (2,407) (8,000)
Proceeds from sale of accounts receivable............. (24,540)
Repayment under subordinated debt agreement .......... (4,400) (4,400)
Proceeds from issuance of Common Stock................ 217
--------- ---------
Net cash used in financing activities................. (11,195) (14,420)
EFFECT OF EXCHANGE RATE CHANGES ON CASH............... 256 (3,735)
--------- ---------
NET INCREASE IN CASH AND.............................. 3,885 34,581
CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ........................................... 44,678 1,378
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 48,563 $ 35,959
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<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
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 six months ended June 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.
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 4--"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.
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 intends to
concentrate 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.
In order to meet its debt obligations, Merisel is actively pursuing a
restructuring plan with the debtholders under its various financing
agreements. Effective April 14, 1997, the Company entered into a Limited
Waiver and Voting Agreement (the "Limited Waiver Agreement") with holders of
more than 75% of the outstanding principal amount of its 12.5% Senior Notes
("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. Contemporaneously with
the Exchange, the holders of Common Stock immediately prior to the Exchange
would receive warrants (the "Warrants") to purchase Common Stock constituting
17.5% of the Common Stock outstanding immediately after giving effect to the
Exchange.
F-4
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Consummation of the Exchange is subject to certain conditions including (i)
stockholder approval of an amendment to the Certificate of Incorporation of
the Company to effect a one-for-five reverse split of the Common Stock and
(ii) 100% of the outstanding 12.5% Notes being validly tendered in exchange
for Common Stock. On August 1, 1997, the Company commenced the solicitation of
stockholder proxies and the noteholder exchange offer with respect to the
proposed debt restructuring plan. If less than 100% of the holders tender
their 12.5% Notes pursuant to the exchange offer but acceptances of a
"prepackaged" plan (as described below) are received from at least two-thirds
in principal amount and a majority in number of holders of the 12.5% Notes,
and the holders of at least two-thirds of the Common Stock voting, Merisel,
Inc., the parent company, intends to file a "prepackaged" plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code to effect the
proposed debt restructuring on the same terms as proposed under the Exchange
(the "Prepackaged Plan"). The Operating Company would not be a party to any
Prepackaged Plan which may be required. Any such Prepackaged Plan, if filed,
would affect Merisel, Inc. only and as such would not affect the continuing
and timely payment in full of the Operating Company's obligations to
suppliers, employees and other creditors. In addition, such a Prepackaged Plan
would be subject only to the approval of the holders of the 12.5% Notes and
the Company's stockholders, as no other creditors or security holders of the
Company or the Operating Company would be impaired by the plan as
contemplated. The holders of the required percentage of the outstanding
principal amount of 12.5% Notes have agreed to vote in favor of the
Prepackaged Plan subject to fulfillment of certain other conditions to the
Exchange.
Also effective April 14, 1997, the Company entered into an agreement (the
"Extension") in principle with 100% of the holders of the loans made and notes
issued under financing agreements to which the Company's operating
subsidiaries are parties. Pursuant to such agreement, holders of the
$84,297,000 principal amount outstanding under a revolving credit agreement
(the "Revolving Credit Agreement") and the $56,198,000 principal amount of
11.5% Senior Notes outstanding under a senior note purchase agreement (the
"11.5% Notes") have agreed, subject to execution of definitive documentation,
to execute amendments to extend the respective maturities of such debt to
January 31, 1999, provided that none of the amendments will become effective
unless the Exchange is closed on or prior to August 31, 1997 or the
Prepackaged Plan or a similar plan has been substantially consummated on or
prior to October 31, 1997. The Company would have the right to prepay such
debt at any time without penalty. On August 31, 1997, the Extension terminated
in accordance with its terms. The Company has requested a further extension
until October 15, 1997, but such extension has not yet been granted. The
Company believes that, assuming it achieves its 1997 Business Strategy, it
will have reasonable prospects for a refinancing of the operating company
indebtedness (as described above) in the latter half of 1997, particularly if
the Exchange or a comparable restructuring is consummated prior to or
concurrently with such refinancing.
Pursuant to the Limited Waiver Agreement, throughout the period the Company
is implementing the proposed restructuring, in excess of 75% of the holders of
the 12.5% Notes have agreed to waive any default arising from the nonpayment
of interest that was due on June 30, 1997 on the 12.5% Notes. In consideration
of the Extension, Merisel Americas has agreed to pay certain fees to the
holders of the Revolving Credit Agreement and the 11.5% Notes, and, subject to
the Extension becoming effective, to increase the interest rate by 0.5% per
quarter during 1998 on such debt and, in the case of the Revolving Credit
Agreement and the 11.5% Notes only, to pay additional fees each quarter, in
each case while such debt remains outstanding. The Company may incur certain
additional incremental costs if it receives a further extension of the
Operating Companies Loan Agreements. Interest will continue to be due and
payable on the outstanding 12.5% Notes that have not consented to the waiver
at the time such payments are due; however, such holders will not be able to
accelerate the payment of the principal of the 12.5% Notes under the terms of
the Indenture governing the 12.5% Notes.
F-5
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On July 15, 1997, Merisel announced that it had received a proposal from
Stonington Partners, Inc., a New York-based investment firm, to invest
$152,000,000 in order to acquire 70% of the Company's Common Stock. Current
stockholders would retain their shares which would represent 30% of the then
outstanding Common Stock after the equity investment. Under the proposal, the
12.5% Senior Notes would remain outstanding in lieu of the exchange of such
indebtedness for equity as proposed under the existing debt restructuring plan,
and the cash investment would be used to eliminate substantially all of the
approximately $150,000,000 in outstanding debt of the operating subsidiaries.
The Stonington offer was subject to certain conditions, including termination
or modification of the Limited Waiver Agreement.
On July 16, 1997, representatives of the Ad Hoc Noteholders' Committee for
its 12.5% Senior Notes advised the Company that they would not agree with the
Company to terminate or modify the Limited Waiver Agreement. Accordingly, on
the morning of July 16, 1997, the Company issued a press release reiterating
its intention to submit the existing Restructuring plan to a stockholder vote
in accordance with its agreement with the Noteholders. Additionally, on July
24, 1997, Stonington advised the Company that it had received a summons and
complaint from counsel to the Ad Hoc Noteholders' Committee alleging tortious
interference by Stonington with the Limited Waiver Agreement and seeking
damages. Stonington has indicated that it intends to defend the suit
vigorously.
At June 30, 1997, the Company had cash and cash equivalents of approximately
$48,563,000. In the opinion of management, as a result of the agreement reached
with the holders of the 12.5% Notes and the waivers received from the holders
of indebtedness outstanding under the Revolving Credit Agreement, the 11.5%
Notes and the Subordinated Notes, cash on hand, additional permitted sales of
accounts receivable under the securitization facilities, together with
anticipated cash flow in 1997 will be sufficient to meet the Company's
liquidity requirements for the next 12 months. Should the Limited Waiver
Agreement terminate without the consummation of the proposed debt
restructuring, the Company believes it has sufficient cash resources to make
both the outstanding interest payment on the 12.5% Notes, and the $40,000,000
aggregate principal payment that would then be due on the 11.5% Notes and under
the Revolving Credit Agreement, however, should the Company be unable to
refinance some portion of its remaining debt during the fourth quarter, the
Company's ability to maintain adequate trade credit and inventory levels would
be adversely affected, which would in turn have an adverse impact on the
Company's operations.
Recent Developments--See "Recent Developments" in the Exchange Restructuring
Prospectus and Supplement thereto.
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.
F-6
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 second quarter is the 13-week period
ending on the Saturday nearest to June 30. For simplicity of presentation, the
Company has described the interim periods and year-end period as of June 30,
and December 31, respectively.
F-7
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. 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.
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>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1997
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net Sales......................................... $1,710,519 $1,806,677
Gross Profit...................................... 95,553 112,952
Net Income (loss)................................. (25,448) 1,022
---------- ----------
Net Income (loss) per share....................... $ (0.85) $ 0.03
========== ==========
Weighted Average Shares Outstanding............... 29,871 30,078
========== ==========
</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.
F-8
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. DEBT
At June 30, 1997, two of the Company's subsidiaries, Merisel Americas and
Merisel Europe, Inc. ("Merisel Europe"), had outstanding unsecured senior
borrowings consisting of $54,398,000 principal amount of 11.5% Notes issued by
Merisel Americas and $81,597,000 principal amount incurred under a Revolving
Credit Agreement by Merisel Americas and Merisel Europe. Advances under the
Revolving Credit Agreement bear interest at specific rates based upon market
reference incurred rates plus a specified percentage. The average interest
rate for borrowings under the Revolving Credit Agreement at June 30, 1997 was
approximately 11.0%. At June 30, 1997, Merisel Americas also had outstanding
$13,200,000 principal amount of 11.8% subordinated notes. Additionally, at
June 30, 1997, Merisel, Inc. had outstanding $125,000,000 principal amount of
the 12.5% Notes. As a result of the sale of EML, Merisel Europe is no longer
an operating entity.
At June 30, 1997, the Company had promissory notes outstanding with an
aggregate balance of $9,373,000. Such notes provide for interest at the rate
of approximately 7.7% per annum and are repayable in 48 and 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.
See Note 1--"Liquidity" for a discussion of the Company's proposed debt
restructuring.
6. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income(loss) by the
weighted average number of shares of Common Stock outstanding during the
related period, including Common Stock options when dilutive.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) in the six month periods ended June 30 for interest and
income taxes was as follows:
<TABLE>
<CAPTION>
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest............................................... $14,245 $ 21,452
Income taxes........................................... $(3,401) $(28,006)
</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 4--"Dispositions").
F-9
<PAGE>
[LOGO OF MERISEL(SM)]
July 31, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting (the "Stockholders'
Meeting") of the stockholders of Merisel, Inc. (the "Company") to be held at
the Company's headquarters located at 200 Continental Boulevard, El Segundo,
California on August 29, 1997, at 10:00 a.m., Los Angeles time. At the
Stockholders' Meeting, you will be asked to consider and vote on certain
proposals relating to the financial restructuring (the "Exchange
Restructuring") of the Company whereby holders of 12 1/2% Senior Notes due
2004 ("12.5% Notes") immediately prior to the Exchange Restructuring would
exchange their 12.5% Notes for shares of common stock, par value $.05 per
share, of the Company ("New Common Stock") and stockholders of the Company
("Stockholders") as of immediately prior to the Exchange Restructuring would
receive shares of New Common Stock, as well as warrants (the "Warrants") to
purchase additional shares of New Common Stock.
Stockholders will be asked to consider and vote upon proposals (the
"Proposals") to implement (i) the Exchange Restructuring, consisting of (a) an
amendment (the "Charter Amendment") of the Company's Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), to effect a
one-for-five reverse stock split (the "Reverse Split") of each outstanding
share of Common Stock, par value $.01 per share (the "Old Common Stock"), into
one-fifth of a share of New Common Stock; and (b) authorization for the
issuance (the "New Common Stock Issuance") of shares of New Common Stock to
holders of 12.5% Notes in exchange for their 12.5% Notes upon consummation of
the Exchange Restructuring (such shares of New Common Stock being hereinafter
referred to as the "Exchange Shares") and to holders of Warrants upon exercise
of their Warrants (such shares of New Common Stock being hereinafter referred
to as the "Warrant Shares"); and (ii) the adoption of the Merisel, Inc. 1997
Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"). The
Charter Amendment would have the effect of increasing the number of shares of
common stock of the Company authorized but not issued or reserved for issuance
to a level sufficient for the New Common Stock Issuance and the issuance of
New Common Stock in exchange for the Warrants upon their exercise.
Assuming all of the conditions to the consummation of the Exchange
Restructuring are fulfilled, the New Common Stock Issuance will result in the
holders of the 12.5% Notes (the "Noteholders") receiving approximately 80% of
the outstanding shares of New Common Stock (excluding the Warrants).
Stockholders would receive 20% of the outstanding shares of New Common Stock
as a result of the Reverse Split and, upon exchange of certificates of their
Old Common Stock, would receive Warrants which, upon exercise, would represent
approximately 17.5% of the New Common Stock outstanding immediately after
giving effect to the Exchange Restructuring and the Reverse Split. Each holder
of Old Common Stock would receive, for each share of Old Common Stock held,
.0875 Series A Warrants and .0875 Series B Warrants in addition to retaining
his current stock interest as adjusted for the Reverse Split equal to one-
fifth of a share of New Common Stock for each share of Old Common Stock. The
Warrants would be exercisable for seven years from the date of the Exchange
Restructuring and would be issued in two separately traded series. The
Warrants would have an exercise price ("Exercise Price") of $7.15 per share,
in the case of the Series A Warrants, and $8.68 per share, in the case of the
Series B Warrants, and each Warrant would be exercisable for one share of New
Common Stock, in each case subject to adjustment. Stockholders will not be
entitled to receive Warrants unless and until they exchange their certificates
of Old Common Stock for certificates of New Common Stock.
The accompanying Proxy Statement/Prospectus serves as a prospectus for the
Exchange Shares and the Warrants and Warrant Shares, and will also serve as
the Company's Annual Report to Stockholders for the fiscal year ended December
31, 1996.
<PAGE>
The stockholder votes with respect to the New Common Stock Issuance will not
be effective unless and until the Charter Amendment is approved at the
Stockholders' Meeting and filed with the Secretary of State of the State of
Delaware and the Exchange Restructuring has been consummated. If approved, the
Stock Award and Incentive Plan will be effective immediately, regardless of
whether the Exchange Restructuring is consummated.
The Exchange Restructuring is conditioned on, among other things, 100% of
the outstanding 12.5% Notes being validly tendered pursuant to the Exchange
Restructuring. If less than 100% of the holders tender their 12.5% Notes
pursuant to the Exchange Restructuring but the requisite acceptances of the
Prepackaged Plan are received from both Noteholders and Stockholders, the
Company intends instead to pursue the financial restructuring of the Company
by means of the filing of a petition under Chapter 11 of the United States
Bankruptcy Code (the "Prepackaged Restructuring") and of a "Prepackaged Plan"
(the "Prepackaged Plan" and together with Exchange Restructuring, the
"Restructuring"). The Prepackaged Restructuring may be effected with the
approval of a minimum of two-thirds of the principal amount and a majority in
number of the Noteholders voting on the Prepackaged Plan and of a minimum of
at least two-thirds in number of shares of Old Common Stock voting on the
Prepackaged Plan. If the Prepackaged Restructuring is pursued, the Company
expects that the New Common Stock Issuance and an amendment to the Company's
Certificate of Incorporation substantially similar to the Charter Amendment
will be implemented pursuant to the Prepackaged Plan.
The Company has reserved the right to seek confirmation of the Prepackaged
Plan under the "cram-down" provisions of the United States Bankruptcy Code.
However, if a majority of Stockholders elect not to support the Restructuring
after their review of all the facts and circumstances existing at that time,
the Company does not presently believe that attempting to force confirmation
of the Prepackaged Plan under the "cram-down" provisions would necessarily be
in the best interests of the Company and the Company has no present intention
to do so. Although the Limited Waiver Agreement requires, if consistent with
the Company's obligations under applicable law (which the Company believes
includes its fiduciary obligations), the filing of a Chapter 11 petition on
the Prepackaged Plan and that the Company take steps that are both necessary
and desirable to confirm the Prepackaged Plan, the Agreement does not by its
terms require that the Company seek confirmation of the Prepackaged Plan under
the cram-down provisions of the Bankruptcy Code if the Stockholders vote to
reject the Prepackaged Plan. Moreover, the Company has specifically rejected
requests by representatives of the Ad Hoc Noteholders' Committee, both before
and after the execution of the Limited Waiver Agreement, for the Company's
agreement to proceed with confirmation of the Prepackaged Plan under those
provisions. Accordingly, for the foregoing reasons, unless the requisite
Stockholder acceptances have been obtained for the Prepackaged Plan, the
Company does not currently believe filing a Chapter 11 petition to seek
confirmation of the Prepackaged Plan under the cram-down provisions would be
consistent with its fiduciary obligations as presently conceived or be both
necessary and desirable.
The Ad Hoc Noteholders Committee has advised the Company that it disputes
the Company's interpretation of the Limited Waiver Agreement in this regard
and believes that the Company is obligated to file and confirm the Prepackaged
Plan regardless of the outcome of the Stockholder vote.
NONE OF THE COMPANY'S WHOLLY OWNED OPERATING SUBSIDIARIES, INCLUDING MERISEL
AMERICAS, INC. AND MERISEL CANADA, INC. (COLLECTIVELY, THE "OPERATING
COMPANIES"), WOULD BE A PARTY TO THE PREPACKAGED PLAN AND THE COMPANY'S
BUSINESS WOULD THEREFORE CONTINUE TO BE OPERATED IN THE ORDINARY COURSE. AS
SUCH, THE PREPACKAGED PLAN WOULD NOT AFFECT THE CONTINUING AND TIMELY PAYMENT
IN FULL OF THE OPERATING COMPANIES' OBLIGATIONS TO SUPPLIERS, EMPLOYEES, AND
OTHER CREDITORS.
The purpose of the Restructuring is to enhance the long-term viability and
to contribute to the success of the Company by adjusting the Company's
capitalization, including reduction of debt levels, extension of principal
repayments and relaxation of operating covenants, to reflect current and
expected operating performance levels. Specifically, the Restructuring is
designed to reduce the Company's outstanding debt obligations by $125 million
to levels which the Company believes can be supported by its projected cash
flow. Interest charges will be substantially reduced and stockholders' equity
will be substantially increased as a result of the Restructuring.
<PAGE>
In addition, implementation of the Restructuring will enable the Company to
avoid certain significant amortization payments totalling $40 million which
would be due under the Operating Companies' senior debt obligations if the
Company were to pay interest on the 12.5% Notes that was due on June 30, 1997,
subject to a 30 day grace period. If the Company has not paid the interest due
on the 12.5% Notes by July 30, 1997, an event of default will occur with
respect to the 12.5% Notes entitling the holders to accelerate the maturity
thereof. While the Limited Waiver Agreement is in effect, such interest
payments have been waived by the holders of in excess of 75% of the
outstanding principal amount of the 12.5% Notes and the holders of the
Operating Companies' indebtedness have waived any cross-default arising from
the non-payment of such interest. Failure to consummate the Restructuring
could result in such amortization payments becoming due as well as interest
payment obligations on the 12.5% Notes being reinstated. The Company has been
informed by holders of in excess of 25% of the 12.5% Notes that if the
Stockholders fail to approve the Charter Amendment, and the Company does not
immediately seek to implement the Restructuring through the Prepackaged Plan,
such holders intend to accelerate all of the indebtedness outstanding under
the 12.5% Notes. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT
WILL BE ABLE TO SATISFY SUCH OBLIGATIONS WITHOUT A REFINANCING OF THE
COMPANY'S INDEBTEDNESS UNDER THE OPERATING COMPANIES' LOAN AGREEMENTS OR
OBTAINING ADDITIONAL WAIVERS OR AMENDMENTS TO SUCH AGREEMENTS, AND THERE CAN
BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING,
WAIVERS OR AMENDMENTS.
Should the Stock Award and Incentive Plan be approved by the Stockholders,
the Company intends to issue options or stock appreciation rights (together,
"New Options") for up to 8% of the shares of New Common Stock to be
outstanding immediately following the Restructuring with approximately an
additional 2% available for future issuance. All options outstanding prior to
the Restructuring ("Old Options") would be cancelled in exchange for New
Options exercisable for the same or a greater number of shares (after
adjustment for the Reverse Split) of New Common Stock. New Options issued
immediately following the Restructuring would have an exercise price equal to
the average closing price of the New Common Stock for the first 30 trading
days following the Restructuring, provided that such exercise price will not
vary more than 10% from the average closing price for the first five trading
days following the Restructuring. Holders of Old Options will not be entitled
to receive Warrants pursuant to the Restructuring unless such holders exercise
their Old Options prior to the consummation of the Restructuring.
IN ORDER TO EXPEDITE THE SOLICITATION OF ACCEPTANCES UNDER THE PREPACKAGED
PLAN, SHOULD IT BE NECESSARY, THE COMPANY IS CONCURRENTLY SOLICITING SUCH
ACCEPTANCES TOGETHER WITH PROXIES FOR THE STOCKHOLDERS' MEETING. ACCORDINGLY,
THIS PROXY STATEMENT/PROSPECTUS ALSO SERVES AS A SOLICITATION BY THE COMPANY
FOR ACCEPTANCE OF THE PREPACKAGED PLAN. Stockholders may vote in favor of the
Prepackaged Plan by signing, marking and returning the enclosed ballot for
that purpose in the enclosed envelope. Unlike the proxy, the ballot must be
marked FOR or AGAINST acceptance for it to be counted for any purpose.
IF STOCKHOLDERS DO NOT APPROVE THE CHARTER AMENDMENT, OR DO NOT EXECUTE THE
REQUISITE ACCEPTANCES OF THE PREPACKAGED PLAN, THEN, UNDER THE TERMS OF THE
AGREEMENT REACHED WITH CERTAIN HOLDERS OF 12.5% NOTES, SUCH NOTEHOLDERS WILL
NOT BE BOUND TO THE TERMS OF THE RESTRUCTURING. MOREOVER, ON JULY 22, 1997,
HOLDERS OF OVER 25% IN AGGREGATE PRINCIPAL AMOUNT OF THE 12.5% NOTES INFORMED
THE COMPANY OF THEIR INTENT TO ACCELERATE THE INDEBTEDNESS OUTSTANDING UNDER
THE 12.5% NOTES IN THE EVENT THAT THEIR AGREEMENT TERMINATES, WHICH COULD
RESULT IN A FILING OF A CASE UNDER THE BANKRUPTCY CODE CONCERNING THE COMPANY.
ANY SUBSEQUENT RESTRUCTURING OF THE COMPANY COULD RESULT IN STOCKHOLDERS OF
THE COMPANY RETAINING OR RECEIVING SUBSTANTIALLY LESS THAN THE CONSIDERATION
PROVIDED FOR IN THE RESTRUCTURING. ACCORDINGLY, YOUR BOARD OF DIRECTORS
BELIEVES THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING ARE IN
THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE PROPOSALS AND FOR THE
ACCEPTANCE OF THE PREPACKAGED PLAN.
<PAGE>
As you may be aware, on July 14, 1997, the Company received a formal
proposal from Stonington Partners, Inc. (the "Stonington Proposal") to make a
substantial equity investment in the Company which is described in the Proxy
Statement/Prospectus. The proposal, however, by its terms cannot be accepted
without the consent of the holders of its 12.5% Notes to a termination or
modification of their existing agreement with the Company. An Ad Hoc Committee
of Noteholders has advised the Company that they will not modify their
agreement with the Company to permit the Company to accept the Stonington
Proposal, and, accordingly, the Stonington Proposal cannot be accepted in its
current form. In view of that fact, the Board of Directors continues to
recommend the Restructuring as the best alternative available to the Company.
Regardless of the size of your holdings, it is important that your shares be
voted at the Stockholders' Meeting and with respect to the Prepackaged Plan.
Whether or not you plan to attend the Stockholders' Meeting, please sign and
return both your proxy and ballot in the enclosed envelope by no later than
August 22, 1997 to assure that your shares will be voted with respect to the
Charter Amendment, the New Common Stock Issuance, the Stock Award and
Incentive Plan and the Prepackaged Plan. Your vote on the Prepackaged Plan
will not be counted unless you return a properly completed ballot.
Sincerely,
/s/ Dwight A. Steffensen
Dwight A. Steffensen
Chairman of the Board and Chief
Executive Officer
<PAGE>
MERISEL, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 29, 1997
NOTICE IS HEREBY GIVEN that a special meeting of stockholders
("Stockholders") of Merisel, Inc. (the "Company") will be held at the
Company's headquarters located at 200 Continental Boulevard, El Segundo,
California on August 29, 1997, at 10:00 a.m., Los Angeles time (the
"Stockholders' Meeting"), for the purpose of implementing a financial
restructuring (the "Exchange Restructuring") of the Company whereby holders
(the "Noteholders") of 12 1/2% Senior Notes due 2004 ("12.5% Notes") would
exchange their 12.5% Notes for shares of common stock, par value $.05 per
share ("New Common Stock"), of the Company and Stockholders immediately prior
to the Exchange Restructuring would receive shares of New Common Stock as well
as warrants ("Warrants") to purchase additional shares of New Common Stock.
Specifically, Stockholders will be asked to consider and vote upon the
following, all of which are more fully described in the accompanying Proxy
Statement/Prospectus:
1. An amendment (the "Charter Amendment") of the Company's Restated
Certificate of Incorporation, as amended, which would authorize (i) a
one-for-five reverse stock split of the Company's outstanding shares of
Old Common Stock (the "Reverse Split") and (ii) the simultaneous
increase of the par value of the authorized common stock of the Company
from $.01 per share to $.05 per share;
2. The issuance of shares of New Common Stock (the "New Common Stock
Issuance") to Noteholders in exchange for their 12.5% Notes pursuant to
the terms of the Exchange Restructuring and to holders of Warrants upon
exercise of their Warrants;
3. The Merisel, Inc. 1997 Stock Award and Incentive Plan (the "Stock Award
and Incentive Plan"); and
4. Such other business as may properly come before the Stockholders' Meeting
or any adjournments or postponements thereof.
The proposed text of the Charter Amendment is set forth in Annex I of the
accompanying Proxy Statement/Prospectus. The text of the Exchange
Restructuring Prospectus pursuant to which, if the Exchange Restructuring is
consummated, the Noteholders would receive shares of New Common Stock is set
forth in Annex IV to the accompanying Proxy Statement/Prospectus. The proposed
text of the Stock Award and Incentive Plan is set forth in Annex III of the
accompanying Proxy Statement/Prospectus.
The New Common Stock Issuance will not become effective unless and until the
Charter Amendment is approved at the Stockholders' Meeting and filed with the
Secretary of State of the State of Delaware and the Exchange Restructuring is
consummated. The Stock Award and Incentive Plan, however, if approved, will be
implemented pursuant to this stockholder vote regardless of whether such
Exchange Restructuring is implemented.
The Board of Directors of the Company has fixed the close of business on
July 22, 1997 as the record date ("Record Date") for the determination of
Stockholders entitled to notice of and to vote at the Stockholders' Meeting
and any adjournments or postponements thereof. Only Stockholders of record at
the close of business on such date are entitled to notice of and to vote at
the Stockholders' Meeting.
Common Stock, par value $.01 per share, of the Company is the only security
of the Company whose holders are entitled to vote upon the proposals to be
presented at the Stockholders' Meeting.
<PAGE>
Your vote is important regardless of the number of shares you own. Each
Stockholder, even though he or she now plans to attend the Stockholders'
Meeting, is requested to sign, date and return the enclosed proxy, without
delay in the enclosed postage-paid envelope. You may revoke your proxy at any
time prior to its exercise. Any Stockholder present at the Stockholders'
Meeting or at any adjournments or postponements thereof may revoke his or her
proxy and vote personally on each matter brought before the Stockholders'
Meeting.
By Order of the Board of Directors,
/s/ James E. Illson
James E. Illson
Senior Vice President Finance, and Chief
Financial Officer
July 31, 1997
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR EACH OF THE PROPOSALS
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE
<PAGE>
MERISEL, INC.
[LOGO OF MERISEL, INC.]
PROXY STATEMENT/PROSPECTUS
AND SOLICITATION OF PREPACKAGED PLAN ACCEPTANCES
This Proxy Statement/Prospectus (this "Proxy Statement/Prospectus") is being
furnished to holders ("Stockholders") of common stock, par value $.01 per
share ("Old Common Stock"), of Merisel, Inc., a Delaware corporation (the
"Company"), in connection with (A) the solicitation of proxies by the Board of
Directors of the Company (the "Board") for use at a special meeting of
Stockholders to be held on August 29, 1997 at 10:00 a.m., Los Angeles time, at
the Company's headquarters located at 200 Continental Boulevard, El Segundo,
California, and any adjournments or postponements thereof (the "Stockholders'
Meeting"), and (B) the solicitation of acceptances of a prepackaged plan of
reorganization of the Company under Chapter 11 of the United States Bankruptcy
Code (the "Prepackaged Plan"). References herein to the "Company" shall,
unless the context otherwise require, refer to Merisel, Inc. and its operating
subsidiaries. References to the "Holding Company" shall refer only to Merisel,
Inc. and not to its subsidiaries. References to the "Operating Companies"
shall mean the operating subsidiaries of the Company.
The Board is soliciting proxies to be voted at the Stockholders' Meeting.
The Stockholders' Meeting will be held to consider the proposals (the
"Proposals") described herein to implement a financial restructuring (the
"Exchange Restructuring") of the Company whereby holders (the "Noteholders")
of 12 1/2% Senior Notes due 2004 ("12.5% Notes") immediately prior to the
Exchange Restructuring would exchange their 12.5% Notes for shares of common
stock, par value $.05 per share, of the Company ("New Common Stock") and
Stockholders immediately prior to the Exchange Restructuring would receive, in
the aggregate, 6,015,699 shares of New Common Stock as well as an aggregate of
5,263,736 warrants (the "Warrants") to purchase an aggregate of 5,263,736
additional shares of New Common Stock (subject to adjustment). Specifically,
the Proxy Statement/Prospectus seeks Stockholder approval of Proposals (A) to
amend the Company's Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), to effect a one-for-five reverse stock split
(the "Reverse Split") of each outstanding share of Old Common Stock into one-
fifth of a share of New Common Stock, (the "Charter Amendment"), (B) to
approve the issuance (the "New Common Stock Issuance") of New Common Stock
pursuant to the Exchange Restructuring, including the shares of New Common
Stock issuable to the Noteholders upon consummation of the Exchange
Restructuring (the "Exchange Shares") and the shares of New Common Stock
issuable upon exercise of the Warrants (the "Warrant Shares") (such issuance
pursuant to either the Exchange Restructuring or the Prepackaged Restructuring
(as herein after defined)), and (C) to adopt the Merisel, Inc. 1997 Stock
Award and Incentive Plan (the "Stock Award and Incentive Plan"). If the
Prepackaged Restructuring is pursued and a petition is filed under the
Bankruptcy Code, the Company expects that the New Common Stock Issuance and an
amendment substantially similar to the Charter Amendment will be implemented
pursuant to the Prepackaged Plan. The Company's executive officers and
directors, as a group, own 958,894 shares of the outstanding Old Common Stock
and have advised the Company that they intend to vote in favor of each of the
Charter Amendment, the New Common Stock Issuance, the Stock Award and
Incentive Plan and the Prepackaged Plan.
Assuming all of the conditions to consummation are fulfilled, the Exchange
Restructuring will result in the Noteholders receiving an aggregate of
24,062,796 shares of New Common Stock. Based upon the current number of shares
of Old Common Stock outstanding, approximately 80% of the outstanding shares
of New Common Stock (excluding the New Common Stock issuable upon exercise of
the Warrants) would be issued to Noteholders in the Exchange Restructuring,
and Stockholders would receive 20% of the outstanding New Common Stock as a
result of the Reverse Split as well as Warrants which, upon exercise, would
represent approximately 17.5% of the New Common Stock outstanding immediately
after giving effect to the Exchange Restructuring and the Reverse Split. The
Warrants would be exercisable for seven years from the date of the Exchange
Restructuring and would be issued in two separately traded series. Each holder
of Old Common Stock would receive, for each share of Old Common Stock held,
.0875 Series A Warrants and .0875 Series B Warrants in addition to retaining
such holders' current stock interest as adjusted for the Reverse Split to
equal one-fifth of a share of New Common Stock for each share of Old Common
Stock. The Warrants would have an exercise price ("Exercise Price") of $7.15,
in the case of the Series A Warrants, and $8.68, in the case of the Series B
Warrants, and each Warrant would be exercisable for one share of New Common
Stock, in each case subject to adjustment.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE RESTRUCTURING AND A DISCUSSION OF
CERTAIN CONSEQUENCES OF THE EXCHANGE RESTRUCTURING TO HOLDERS OF OLD COMMON
STOCK. SEE "RISK FACTORS" IN PART B TO THE EXCHANGE RESTRUCTURING PROSPECTUS,
ATTACHED HERETO AS ANNEX IV, FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH
SHOULD BE CONSIDERED IN CONNECTION WITH THE PREPACKAGED RESTRUCTURING.
NEITHER THE SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE
TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(Cover continued on the following page)
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY 31, 1997.
<PAGE>
(Cover continued from previous page)
(Cover continued on the following page)
The Company's obligation to accept 12.5% Notes tendered pursuant to the
Exchange Restructuring is conditioned, among other things, on (a) 100% of the
12.5% Notes being validly tendered and not withdrawn prior to the Expiration
Date (as defined herein) (the "Minimum Tender Condition") and (b) approval by
the Stockholders of the Charter Amendment and (c) consent of 100% of certain
debtholders of the Operating Companies to an extension of their indebtedness,
or a refinancing of such indebtedness on terms reasonably acceptable to the
Noteholders and the Company (the "Extension"). The Company reserves the right
to waive any of the conditions to the Exchange Restructuring but does not
currently intend to waive any condition. The New Common Stock Issuance will
not become effective unless and until the Charter Amendment is approved at the
Stockholders' Meeting and filed with the Secretary of State of the State of
Delaware and the Exchange Restructuring is consummated. If, but only if, the
Minimum Tender Condition and the other conditions to the consummation of the
Exchange Restructuring are satisfied or waived, the Company intends to
consummate the Exchange Restructuring.
Should less than 100% of the Noteholders tender their 12.5% Notes pursuant
to the Exchange Restructuring, but sufficient acceptances of the Prepackaged
Plan be received, the Company would be obligated under the terms of the
Limited Waiver Agreement (as defined herein) to instead pursue the financial
restructuring of the Company by means of the filing of the Prepackaged Plan
(the "Prepackaged Restructuring" and, together with the Exchange
Restructuring, the "Restructuring"). The Company's ability to seek
confirmation of the Prepackaged Plan depends upon certain minimum levels of
acceptance thereof, as further set forth in this Proxy Statement/Prospectus.
In the event that the requisite percentage and number of Noteholders and
Stockholders have executed acceptances of the Prepackaged Plan, but the
Minimum Tender Condition has not been satisfied or the Company determines in
its sole discretion that it is unlikely to be satisfied at or prior to the
Expiration Date, the Company may elect to terminate the Exchange Offer at or
prior to its scheduled expiration and proceed directly to the Prepackaged
Plan.
THE OPERATING COMPANIES (INCLUDING MERISEL AMERICAS AND MERISEL CANADA,
WHICH ARE SUBSIDIARIES THROUGH WHICH THE HOLDING COMPANY'S DISTRIBUTION
BUSINESS IS CONDUCTED) WOULD NOT BE A PARTY TO THE PREPACKAGED PLAN, AND WOULD
THEREFORE CONTINUE TO OPERATE IN THE ORDINARY COURSE OF BUSINESS. AS SUCH, THE
PREPACKAGED PLAN WOULD NOT AFFECT THE CONTINUING AND TIMELY PAYMENT IN FULL OF
THE OPERATING COMPANIES' OBLIGATIONS TO SUPPLIERS OR OTHER CREDITORS. IN
ADDITION, THE PREPACKAGED PLAN PROVIDES FOR ALL PREPETITION UNSECURED
CREDITORS OF THE HOLDING COMPANY, INCLUDING, WITHOUT LIMITATION, TRADE
CREDITORS OF THE HOLDING COMPANY, TO BE PAID IN FULL IN ACCORDANCE WITH THEIR
TERMS, AND SUCH CREDITORS WILL NOT, THEREFORE, BE IMPAIRED AND WOULD BE DEEMED
TO ACCEPT THE PREPACKAGED PLAN.
The purpose of the Restructuring is to enhance the long-term viability and
to contribute to the success of the Company by adjusting the Company's
capitalization (including debt levels and principal repayment schedules) to
reflect current and expected operating performance levels. Specifically, the
Restructuring is designed to reduce the Company's debt obligations by $125
million to levels which the Company believes can be supported by its projected
cash flow, and to replace a significant portion of the Company's indebtedness
with New Common Stock. Interest charges will be substantially reduced and
stockholders' equity will be substantially increased as a result of the
Restructuring.
In addition, implementation of the Restructuring will enable the Company to
avoid certain significant amortization payments totalling $40 million that
would be due under the Operating Companies' senior debt obligations if the
Company were to pay interest on the 12.5% Notes that was due on June 30, 1997,
subject to a 30 day grace period. If the Company has not paid the interest due
on the 12.5% Notes by July 30, 1997, an event of default will occur with
respect to the 12.5% Notes entitling the holders to accelerate the maturity
thereof. While the Limited Waiver Agreement is in effect, such interest
payments have been waived by in excess of 75% of the holders of 12.5% Notes
and the holders of the Operating Companies' indebtedness have waived any
cross-default arising from the non-payment of such interest. Failure to
consummate the Restructuring could result in
ii
<PAGE>
(Cover continued from previous page)
(Cover continued on the following page)
such amortization payments becoming due as well as interest payments on the
12.5% Notes being reinstated. The Company has been informed by holders of in
excess of 25% of the 12.5% Notes that if the Stockholders fail to approve the
Charter Amendment, and the Company does not immediately seek to implement the
Restructuring through the Prepackaged Plan, such holders intend to accelerate
all of the indebtedness outstanding under the 12.5% Notes. ABSENT THE
RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY SUCH
OBLIGATIONS WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE
OPERATING COMPANIES' LOAN AGREEMENTS OR OBTAINING ADDITIONAL WAIVERS OR
AMENDMENTS TO SUCH AGREEMENTS, AND THERE CAN BE NO ASSURANCE THAT THE COMPANY
WILL BE ABLE TO OBTAIN SUCH REFINANCING WAIVERS OR AMENDMENTS.
A copy of the proposed text of the Charter Amendment is attached hereto as
Annex I and is incorporated herein by reference. A copy of the Exchange
Restructuring Prospectus pursuant to which, if the Exchange Restructuring is
consummated, New Common Stock will be issued to holders of 12.5% Notes is
attached hereto as Part A to Annex IV. A copy of the Warrant Agreement
pursuant to which the Warrants would be issued upon consummation of the
Restructuring is attached hereto as Annex II. A copy of the Stock Award and
Incentive Plan is attached hereto as Annex III. A copy of the Disclosure
Statement with respect to the Prepackaged Plan is attached hereto as Part B to
Annex IV. A copy of the Prepackaged Plan is attached as Appendix I to Annex
IV.
This Proxy Statement/Prospectus also constitutes the Company's Prospectus,
filed with the Securities and Exchange Commission (the "Commission") as part
of a Registration Statement (the "Registration Statement") on Form S-4 under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the New Common Stock and Warrants (and the New Common Stock issuable upon
exercise of the Warrants) to be issued to holders of Old Common Stock in the
Exchange Restructuring and also will serve as the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
The Old Common Stock is listed for trading on the Nasdaq National Market.
Application will be made to list (i) the New Common Stock to be issued to
Noteholders and holders of Old Common Stock and (ii) Warrants to be issued in
two series as separately traded securities to the holders of Old Common Stock
pursuant to the Restructuring (as defined herein) for trading on the Nasdaq
National Market. On July 24, 1997, the closing sale price for the Old Common
Stock on the Nasdaq National Market was $2 9/16 per share.
THE SOLICITATION PERIOD FOR ACCEPTANCES OF THE PREPACKAGED PLAN WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 29, 1997, UNLESS EXTENDED (THE
"EXPIRATION DATE"). VOTES ON THE PREPACKAGED PLAN MAY BE REVOKED, SUBJECT TO
THE PROCEDURES DESCRIBED HEREIN, AT ANY TIME PRIOR TO THE EXPIRATION DATE. IF
A BANKRUPTCY CASE HAS BEEN COMMENCED, REVOCATIONS OF SUCH VOTES THEREAFTER MAY
BE EFFECTED ONLY WITH THE APPROVAL OF THE APPROPRIATE BANKRUPTCY COURT.
The record date for purposes of determining which holders of Old Common
Stock are eligible to vote on the Prepackaged Plan and at the Stockholders'
Meeting is July 22, 1997 (the "Record Date"). Stockholders are not required to
vote at the Stockholders' Meeting in order to vote on the Prepackaged Plan. It
is important that all Stockholders vote to accept or to reject the Prepackaged
Plan because, under the Bankruptcy Code, for purposes of determining whether
the requisite acceptances have been received, only holders who vote will be
counted. Failure by a holder to send a duly completed and signed Ballot will
be deemed to constitute an abstention by such holder with respect to a vote on
the Prepackaged Plan. Abstentions as a result of not submitting a duly
completed and signed Ballot will not be counted as votes for or against the
Prepackaged Plan. Any Ballot which is executed by a holder but does not
indicate an acceptance or rejection of the Prepackaged Plan will not be
counted as a vote for or against the Prepackaged Plan. See "TENDERING AND
VOTING PROCEDURES" in Part A to the Exchange Restructuring Prospectus,
attached hereto as Annex IV and "VOTING PROCEDURES AND REQUIREMENTS" in Part B
thereto.
iii
<PAGE>
(Cover continued from previous page)
STOCKHOLDERS WHO COMPLETE A PROXY ("PROXY") WITH RESPECT TO THE
STOCKHOLDERS' MEETING SHOULD ALSO DULY COMPLETE AND SIGN A BALLOT ("BALLOT")
IN ORDER TO VOTE ON THE PREPACKAGED PLAN.
BECAUSE NO PREPACKAGED BANKRUPTCY CASE HAS BEEN FILED, THIS PROXY
STATEMENT/PROSPECTUS AND THE DISCLOSURE STATEMENT ATTACHED HERETO HAVE NOT
BEEN APPROVED BY ANY BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF THE
INFORMATION CONTAINED HEREIN OR THEREIN. IF SUCH A CASE IS SUBSEQUENTLY
COMMENCED, THE COMPANY INTENDS TO SEEK AN ORDER OF SUCH COURT THAT THE
SOLICITATION OF VOTES ON THE PREPACKAGED PLAN BY MEANS OF THIS PROXY
STATEMENT/PROSPECTUS AND THE DISCLOSURE STATEMENT WAS IN COMPLIANCE WITH
SECTION 1126(b) OF THE BANKRUPTCY CODE WHICH PERMITS VOTES RECEIVED BEFORE THE
FILING OF A CHAPTER 11 PETITION TO BE COUNTED FOR PURPOSES OF CONFIRMATION OF
A PLAN IF CERTAIN DISCLOSURE REQUIREMENTS HAVE BEEN MET.
This Proxy Statement/Prospectus, the Proxy and the applicable Ballot and
Master Ballot are first being mailed to Stockholders on or about August 1,
1997.
iv
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Commission under the Securities Act, with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Proxy Statement/Prospectus omits certain
information, exhibits and undertakings contained in the Registration
Statement. Such additional information, exhibits and undertakings can be
inspected at and obtained from the Commission in the manner set forth below.
For further information with respect to the securities offered hereby and the
Company, reference is made to the Registration Statement, and the financial
schedules and exhibits filed as a part thereof and the exhibits thereto.
Statements contained in this Proxy Statement/Prospectus as to the terms of any
contract or other documents are not necessarily complete and, in each case,
reference is made to the copy of each such contract or other document that has
been filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports, proxy statements and other
information with the Commission. Such reports and other information filed with
the Commission, as well as the Registration Statement and the exhibits
thereto, can be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at the
Commission's regional offices located at 5670 Wilshire Boulevard, 11th Floor,
Los Angeles, California 90036-3648, at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and at 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can also be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains an
Internet Web Site that contains reports, proxy and information statements, and
other information regarding the Company and other registrants that file
electronically with the Commission. The address of such site is:
http://www.sec.gov. In addition, the Old Common Stock is listed and traded on
the Nasdaq National Market, and such reports, proxy statements and other
information concerning the Company should be available for inspection and
copying at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
The following documents filed by the Company with the Commission are
incorporated herein by reference and shall be deemed to be a part hereof:
1. Annual Report of the Company on Form 10-K for the fiscal year ended
December 31, 1996;
2. Amendment No. 1 to the Annual Report of the Company on Form 10-K/A for
the year ended December 31, 1996;
3. Quarterly Report of the Company on Form 10-Q for the fiscal quarter
ended March 31, 1997;
4. Amendment No. 1 to the Quarterly Report of the Company on Form 10-Q/A
for the fiscal quarter ended March 31, 1997;
5. Current Reports of the Company on Form 8-K dated April 15, July 15 and
July 16, 1997;
6. The description of the Old Common Stock contained in its Registration
Statement on Form 8-A filed on August 30, 1988 and declared effective on
October 19, 1988; and
7. The description of the 12.5% Notes contained in its Registration
Statement on Form S-3, as amended, filed on August 24, 1994 and declared
effective on October 17, 1994.
All documents and reports filed by the Company with the Commission after the
date of this Proxy Statement/Prospectus and prior to the termination of the
Exchange Restructuring shall be deemed incorporated herein by reference and
shall be deemed to be a part hereof from the date of filing of such documents
and reports. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that
a
v
<PAGE>
statement contained herein or in any subsequently filed document or report
that also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY
REQUESTED), ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED UPON
WRITTEN OR ORAL REQUEST DIRECTED TO MERISEL, INC., ATTENTION: KAREN A.
TALLMAN, VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, 200 CONTINENTAL
BOULEVARD, EL SEGUNDO, CALIFORNIA 90245; TELEPHONE NUMBER (310) 615-6811. IN
ORDER TO ASSURE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE STOCKHOLDERS'
MEETING, ANY REQUEST SHOULD BE RECEIVED BY AUGUST 22, 1997. COPIES OF SUCH
DOCUMENTS WILL ALSO BE AVAILABLE UPON REQUEST THEREAFTER UNTIL THE EFFECTIVE
TIME (AS HEREINAFTER DEFINED).
No person has been authorized to give any information or to make any
representation in connection with the Proposals, the Restructuring, the
Prepackaged Plan or the solicitation of votes for the Proposal or the
Prepackaged Plan, other than those contained in this Proxy
Statement/Prospectus and the exhibits attached hereto or incorporated by
reference or referred to herein. If given or made, such other information or
representation may not be relied upon as having been authorized by the
Company. This Proxy Statement/Prospectus does not constitute an offer to sell
or the solicitation of an offer to buy any securities other than those to
which it relates, or an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities hereunder shall
under any circumstances create any implication that the information contained
herein is correct as of any time subsequent to the date hereof or that there
has been no change in the information set forth herein or in the affairs of
the Company since the date hereof. Any estimates of Claims (as defined herein)
and Interests (as defined herein) set forth in this Proxy Statement/Prospectus
may vary from the final amounts of Claims or Interests allowed by the
Bankruptcy Court.
FORWARD LOOKING INFORMATION
Certain of the financial information contained herein constitutes forward
looking information, and actual results could differ materially from current
expectations. Factors that could impact actual results include unanticipated
adjustments related to the Company's trade accounts payable, customer
disputes, disruption to the Company's computer systems, adjustments related to
previously disposed assets, or potential restructuring and any reduction in
customer demand or deterioration of margins.
vi
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................... v
FORWARD LOOKING INFORMATION................................................ vi
INDEX OF CERTAIN DEFINED TERMS............................................. ix
SUMMARY.................................................................... 1
The Company.............................................................. 1
Recent Developments...................................................... 1
The Exchange Restructuring and Prepackaged Restructuring................. 4
Summary Distribution Table............................................... 5
Comparison of Exchange Restructuring and Prepackaged Restructuring....... 8
Purposes of the Exchange Restructuring................................... 8
Risk Factors............................................................. 9
Stockholders' Meeting.................................................... 10
Voting Procedures for the Prepackaged Plan............................... 12
Description of Warrants.................................................. 12
Summary Historical Consolidated Financial Information.................... 14
Summary Unaudited Pro Forma Condensed Consolidated Financial Data........ 16
Cash Debt Service Obligations............................................ 18
RISK FACTORS............................................................... 19
Risk of Nonconsummation of the Restructuring............................. 19
High Leverage After Exchange Restructuring............................... 19
Market Factors And Seasonality May Adversely Affect Cash Flow............ 19
Restrictions Under Operating Companies' Loan Agreements.................. 20
Limitation on Use of Net Operating Losses................................ 20
Market Value of the Company May Fluctuate................................ 21
Capital Expenditures..................................................... 21
Dividend Restrictions.................................................... 21
Dilution................................................................. 21
Need for Sustained Trade Support......................................... 22
New or Intensified Competition........................................... 22
Lack of Trading Market; Volatility....................................... 22
Concentrated Ownership of New Common Stock............................... 22
Potential De-listing of the Common Stock................................. 22
History of Net Operating Losses.......................................... 22
MARKET AND TRADING INFORMATION............................................. 23
STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES........................... 23
Date, Time and Place of Stockholders' Meeting............................ 23
Solicitation of Proxies; Record Date..................................... 24
Purpose of Stockholders' Meeting......................................... 25
The Charter Amendment.................................................... 25
The New Common Stock Issuance............................................ 25
The Stock Award and Incentive Plan....................................... 26
Voting of Proxies........................................................ 26
Voting Rights; Quorum.................................................... 27
No Dissenters' Rights.................................................... 27
Revocation of Proxies.................................................... 27
Prepackaged Plan......................................................... 27
BACKGROUND OF RESTRUCTURING................................................ 28
The Limited Waiver Agreement............................................. 29
The Extension Under the Operating Companies' Loan Agreements............. 30
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PURPOSE OF THE RESTRUCTURING.............................................. 31
Restructuring Financial Considerations.................................. 32
DISCUSSION OF THE PROPOSALS............................................... 33
Charter Amendment....................................................... 33
New Common Stock Issuance............................................... 34
Certain Consequences of the Restructuring............................... 34
Stock Award and Incentive Plan.......................................... 35
DESCRIPTION OF THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED PLAN........ 41
DESCRIPTION OF NEW COMMON STOCK........................................... 41
Distributions........................................................... 41
Voting.................................................................. 41
Election of Directors................................................... 41
DESCRIPTION OF WARRANTS................................................... 42
General................................................................. 42
Adjustments............................................................. 43
Reorganizations......................................................... 44
Amendment............................................................... 44
Governing Law........................................................... 44
BUSINESS AND PROPERTIES OF THE COMPANY.................................... 45
LEGAL PROCEEDINGS......................................................... 45
SELECTED HISTORICAL FINANCIAL DATA........................................ 45
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION....................... 45
PROJECTED CONSOLIDATED FINANCIAL INFORMATION.............................. 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 45
MANAGEMENT................................................................ 46
Directors............................................................... 46
Post Restructuring Board Configuration.................................. 47
Executive Officers...................................................... 47
Section 16 Matters...................................................... 48
MANAGEMENT COMPENSATION................................................... 49
Employment and Change-in-Control Arrangements........................... 49
OWNERSHIP OF COMMON STOCK................................................. 50
CERTAIN AFFILIATE TRANSACTIONS............................................ 51
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 51
Federal Income Tax Consequences to Stockholders......................... 51
Federal Income Tax Consequences to the Company.......................... 52
ADVISORS AND REPRESENTATIVES.............................................. 52
LEGAL MATTERS............................................................. 52
EXPERTS................................................................... 53
OTHER MATTERS............................................................. 53
ANNEXES
Proposed Text of the Charter Amendment.................................. I
Form of Warrant Agreement for Series A and Series B Warrants............ II
Stock Award and Incentive Plan.......................................... III
The Exchange Restructuring Prospectus................................... IV
Form of Proxy Card...................................................... V
</TABLE>
viii
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
CERTAIN DEFINED TERMS NOT LISTED BELOW MAY BE FOUND ON THE INDEX OF DEFINED
TERMS TO THE DISCLOSURE STATEMENT, ATTACHED HERETO AS PART B TO ANNEX IV.
As used in this Proxy Statement/Prospectus, the following are the meanings
for the terms set forth below:
"Ad Hoc Noteholders means the committee of holders of the 12.5%
Committee" Notes with which the terms of the Exchange
Offer and the Prepackaged Plan were negotiated.
"Ballots" means ballots to vote on the Prepackaged Plan
included herewith.
"Bankruptcy Code" means the United States Bankruptcy Code 11
U.S.C. (S) (S) 101-1330, as amended.
"Board" means the Board of Directors of the Company.
"1996 Business Plan" means the business plan for the remainder of
fiscal 1996 the Company developed and
implemented in connection with negotiations
with the lenders under its various financing
agreements.
"1997 Business Strategy" means the Company's business strategy for 1997
that builds upon the actions taken under its
1996 Business Plan.
"Certificate of means the Restated Certificate of Incorporation
Incorporation" of the Company, as amended.
"Charter Amendment" means the proposed Certificate of Amendment to
the Certificate of Incorporation, as more fully
described herein.
"Claims" has the meaning given in the Disclosure
Statement, included as Part B to the Exchange
Restructuring Prospectus, attached hereto as
Annex IV.
"Commission" means the Securities and Exchange Commission.
"Company" means, unless the context otherwise requires,
Merisel, Inc., a Delaware corporation, and its
operating subsidiaries.
"Depositary" means U.S. Stock Transfer Corporation with
respect to the Old Common Stock and The Bank of
New York with respect to the 12.5% Notes.
"Disclosure Statement" means Part B of the Exchange Restructuring
Prospectus, entitled "THE PREPACKAGED
RESTRUCTURING DISCLOSURE STATEMENT," including
the appendices attached thereto.
"DLJ" means Donaldson, Lufkin & Jenrette Securities
Corporation, financial advisor to the Company
in connection with the Restructuring.
"EML"
means the European, Mexican and Latin American
businesses formerly of the Company that the
Company sold to CHS Electronics, Inc.
ix
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Offer" means the Company's offer to exchange shares of
New Common Stock for the 12.5% Notes pursuant
to the terms of the Exchange Restructuring.
"Exchange Restructuring" means the proposed financial restructuring of
the Company pursuant to the consummation of the
Exchange Offer, as more fully set forth herein.
"Exchange Restructuring means the Prospectus to be delivered to the
Prospectus" Noteholders in connection with the Exchange
Offer and the Prepackaged Plan, attached hereto
as Annex IV.
"Exchange Shares" means the shares of New Common Stock issued to
Stockholders and Noteholders in exchange for
their Old Common Stock.
"Exercise Price" means (i) $7.15 per share, in the case of the
Series A Warrants, and (ii) $8.68 per share, in
the case of the Series B Warrants, in each case
subject to adjustment.
"Expiration Date" means, with respect to the Exchange Offer and
the solicitation of acceptances of the
Prepackaged Plan, 5:00 p.m., New York City
time, on August 29, 1997, unless the Company,
in its sole discretion, extends the Exchange
Offer or solicitation period, in which case the
term "Expiration Date" for the Exchange Offer
or solicitation period shall mean the last time
and date to which the Exchange Offer or
solicitation period is extended.
"Extension" means the agreement in principle executed by
100% of the lenders under the Operating
Companies' Senior Debt to an extension of the
maturity of such indebtedness to January 31,
1999 or a refinancing of such indebtedness
prior to October 31, 1997
"F&D Division" means the United States Franchise and
Distribution Division of Vanstar Corporation.
"FAB" means the ComputerLand Franchise and Datago
Aggregation Business.
"GAAP" means generally accepted accounting principles.
"Holding Company" means Merisel, Inc., a Delaware corporation.
"Indenture" means the Indenture dated October 15, 1994, as
amended, between the Company and The Bank of
New York, as successor Trustee, relating to the
12.5% Notes.
"Information Agent" means MacKenzie Partners, Inc., Information
Agent in connection with the Exchange Offer and
the solicitation of acceptances of the
Prepackaged Plan.
x
<PAGE>
"Interests" has the meaning given in the Disclosure
Statement, included as Part B to the Exchange
Restructuring Prospectus, attached hereto as
Annex IV.
"Limited Waiver Agreement" means, the agreement, effective April 14, 1997,
by and between the Company and holders of more
than 75% of the outstanding principal amount of
its 12.5% Notes as described in "BACKGROUND OF
RESTRUCTURING".
"Master Ballots" means ballots to be voted on behalf of
beneficial owners of Old Common Stock with
respect to the Prepackaged Plan by such
beneficial owners' broker or other record
holder of such shares.
"Merisel Americas" means Merisel Americas, Inc., a subsidiary of
the Holding Company.
"Merisel Canada" means Merisel Canada, Inc., a subsidiary of
Merisel Americas.
"Minimum Tender Condition" means the condition to the Exchange Offer
requiring 100% of the aggregate principal
amount of the 12.5% Notes to be validly
tendered and not withdrawn prior to the
Expiration Date.
"NASD" means the National Association of Securities
Dealers, Inc.
"New Common Stock" means shares of common stock, par value $.05
per share of the Company.
"New Common Stock Issuance" means the issuance of New Common Stock pursuant
to the Exchange Offer, including New Common
Stock to be issued upon exercise of the
Warrants.
"Noteholders" means the holders of 12.5% Notes.
"Old Common Stock" means the issued and outstanding common stock,
par value $.01 per share, of the Company
authorized prior to the Restructuring.
"Operating Companies" means Merisel Americas and its consolidated
subsidiaries (including without limitation
Merisel Canada, Inc.)
"Operating Companies' Loan means the Subordinated Note Purchase Agreement,
Agreements" the Senior Note Purchase Agreement, and the
Revolving Credit Agreement.
"Operating Companies' Senior means the indebtedness of the Operating
Debt" Companies under the Revolving Credit Agreement
and the Senior Note Purchase Agreement.
"Prepackaged Plan" means the prepackaged plan of reorganization of
the Company under Chapter 11 of the Bankruptcy
Code contemplated by the Prepackaged
Restructuring and attached hereto as Appendix I
to Annex IV.
"Prepackaged Restructuring" means the proposed financial restructuring of
the Company pursuant to the Prepackaged Plan,
as more fully described herein.
"Proposals" means the proposals of the Board that are
described herein (A) to amend the Company's
Certificate of Incorporation, (B) to approve
the New Common Stock Issuance and (C) to
approve the Stock Award and Incentive Plan.
xi
<PAGE>
"Proxy" means the proxy card mailed to Stockholders
together with the Proxy Statement/Prospectus.
"Proxy Statement/Prospectus" means the Proxy Statement/Prospectus of the
Company mailed to Stockholders in connection
with the Stockholders' Meeting.
"Record Date" July 22, 1997.
"Registration Statement" means the Registration Statement on Form S-4
the Company filed with the Commission under the
Securities Act, with respect to the securities
offered hereby.
"Reverse Split" means the one-for-five reverse stock split of
the Company's common stock pursuant to the
Charter Amendments.
"Revolving Credit Agreement" means the $80,700,000 Amended and Restated
Revolving Credit Agreement, dated as of
December 23, 1993, as amended, among Merisel
Americas and Merisel Europe, as borrowers, the
Company, as guarantor, and the lender parties
thereto.
"Restructuring" means the financial restructuring of the
Company pursuant to either the Exchange
Restructuring or the Prepackaged Restructuring,
as the case may be.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Note Purchase means the Amended and Restated Senior Note
Agreement" Purchase Agreement, dated as of December 23,
1993, as amended, by and among each of the
purchasers named therein, Merisel Americas, as
issuer, and the Company relating to the 11.5%
Notes.
"Series A Warrants" means the warrants issued under the Series A
Warrant Agreement, as more fully described
herein.
"Series B Warrants" means the warrants issued under the Series B
Warrant Agreement, as more fully described
herein.
"Service Agreement" means, in connection with the ComputerLand
acquisition, the Distribution and Services
Agreement by and between Merisel FAB and
Vanstar.
"Stock Award and Incentive means the Merisel, Inc. 1997 Stock Award and
Plan" Incentive Plan.
"Stockholders" means the holders of Old Common Stock.
"Stockholders' Meeting" means the Special Meeting of Stockholders of
the Company to be held on August 29, 1997, at
10:00 a.m., Los Angeles time.
"Stonington" means Stonington Partners, Inc., a Delaware
corporation.
"Stonington Proposal" means the letter dated July 14, 1997, from
Stonington to the Company, and filed as an
exhibit to the Company's Current Report on Form
8-K, filed July 15, 1997.
"Subordinated Note Purchase
Agreement" means the Amended and Restated Subordinated
Note Purchase Agreement, dated as of December
23, 1993, as amended, by and among each of the
purchasers named therein and Merisel Americas
relating to the Subordinated Notes.
xii
<PAGE>
"Subordinated Notes" means the subordinated notes issued by Merisel
Americas pursuant to the Subordinated Note
Purchase Agreement.
"Warrant Agreements" means the Warrant Agreements under which the
Warrants will be issued.
"Warrant Shares" means shares of New Common Stock issued to
holders of Warrants upon exercise of their
Warrants.
"Warrants" means the Series A Warrants and the Series B
Warrants exercisable for shares of New Common
Stock and issued in accordance with the Warrant
Agreements.
"11.5% Notes" means the 11 1/2% Senior Notes issued by
Merisel Americas.
"12.5% Notes" means the 12 1/2% Senior Notes due 2004 issued
by the Holding Company.
xiii
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in this Proxy
Statement/Prospectus, the Annexes hereto and the documents incorporated by
reference herein. Stockholders are urged to read this Proxy
Statement/Prospectus and the Annexes hereto in their entirety. References
herein to the "Company" shall, unless the context otherwise requires, refer to
Merisel, Inc. and its operating subsidiaries. References to the "Holding
Company" shall refer only to Merisel, Inc. and not to its subsidiaries.
References to the "Operating Companies" shall mean the operating subsidiaries
of the Company.
THE COMPANY
The Company is a leading distributor of computer hardware, networking
equipment and software products. Through its main operating subsidiary, Merisel
Americas, Inc. ("Merisel Americas"), and its other subsidiaries (collectively
the "Operating Companies"), the Company markets products and services
throughout North America and has achieved operational efficiencies that have
made it 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 Company was originally incorporated in California in October 1980, was
reincorporated in Delaware in August 1988, and changed its name from Softsel
Computer Products, Inc. to Merisel, Inc. in August 1990.
The Company's principal executive offices are located at 200 Continental
Boulevard, El Segundo, California 90245. Its telephone number is (310) 615-
3080.
For additional information concerning the Company and its business, financial
position and operations, see "SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS AND PROPERTIES OF THE COMPANY," each in
Part A to the Exchange Restructuring Prospectus, attached to this Proxy
Statement/Prospectus as Annex IV.
RECENT DEVELOPMENTS
BACKGROUND OF THE STONINGTON PROPOSAL
In late May of 1997, the Company decided to explore with potential new
lenders and investors the possibility of an equity infusion or debt financing
following, or in conjunction with, the consummation of the Restructuring. The
Company intended to use any investment to reduce the outstanding debt
obligations of the Operating Companies and to implement its business strategy
following the Restructuring. On June 12, 1997, the Company met for the first
time with Stonington Partners, Inc., a New York-based investment firm
("Stonington"), for the purpose of making an informational presentation.
Stonington suggested to the Company that an equity investment which would
allow the Company to repay the debt outstanding under the Operating Companies'
Loan Agreements and leave the existing 12.5% Notes outstanding might be an
alternative to the Restructuring, if it could be accomplished consistent with
the terms of the Limited Waiver Agreement. In order to determine the financial
feasibility of such an alternative, the Company and Stonington entered into a
confidentiality agreement, and Stonington commenced a due diligence
investigation of the Company to determine its willingness to make such an
investment. During the course of its due diligence investigation,
representatives of the Company and Stonington discussed the need to obtain the
approval of the Noteholders to any transaction which would be an alternative to
the Restructuring and that Stonington should also consider whether it would be
interested in an equity investment which would be a supplement to, rather than
be in lieu of, the Restructuring.
1
<PAGE>
In early July, Stonington met with the Company to discuss the terms on which
it might be willing to make an equity investment in the Company. In addition,
on July 3, 1997, the Company informed Stonington that no proposal would be
considered unless Stonington were able to provide a commitment for working
capital financing for the Operating Companies which would enhance the capital
structure of the Company.
On July 11, 1997, Stonington presented the Company with a form of proposal to
invest $152 million in cash in exchange for 70% of the Company's common stock,
which was subject to the approval of the Noteholders and Stockholders and which
included an offer to make a six-month bridge loan for $50 million to the
Operating Companies to fund their working capital requirements. The Board of
Directors of the Company met on July 12, 1997 to discuss the general terms of
the form of proposal. The Board of Directors reviewed the terms and conditions
of the form of proposal, including the amount of equity to be invested, the
bridge financing to be provided, the percentage dilution to existing
stockholders, and the amount of the termination fees and the expenses, if any,
that would be payable should the Company enter into a restructuring transaction
with the Noteholders or a third-party on terms more favorable to the Company
than the Restructuring. The Board of Directors expressed concern with respect
to certain of the terms and conditions of the proposal and subsequently the
Company and its representatives negotiated with Stonington with respect to such
terms and conditions. On July 13, 1997, two Noteholders who were subject to a
confidentiality agreement were contacted and informed that the Company expected
to receive a proposal for an equity infusion, and the general terms thereof.
On the evening of July 14, 1997, the Company received a formal proposal from
Stonington in the form filed in the Current Report on Form 8-K, filed with the
SEC on July 15, 1997 (the "Stonington Proposal"). That same evening, the Board
of Directors of the Company met and discussed the merits of the Stonington
Proposal and received the preliminary view of the Company's financial and legal
advisors with respect to such proposal. The Board also reviewed and considered
a letter received from counsel to the Ad Hoc Noteholders Committee objecting to
the consideration by the Board of the Stonington Proposal, although the
Committee had not yet received the written proposal with the specific terms and
conditions thereof. After the Board's consideration of the foregoing and other
factors, the Board of Directors of the Company voted in favor of agreeing to
give Stonington the exclusivity arrangements and to pay the termination fees
and expenses required in the Stonington Proposal in order to allow it to remain
open. By granting such exclusivity and agreeing to pay such termination fees,
under the terms of the Stonington Proposal, it would remain open until
September 4, 1997, unless terminated earlier by the Company or by Stonington as
permitted by the occurrence of certain events (as described in "Summary of the
Stonington Proposal," below).
In reaching its decision to grant the requested exclusivity which would
enable the Stonington Proposal to remain open, the Board of Directors
considered, among other things, that the Stonington Proposal had the potential
to provide greater benefits to the Company than the Restructuring, principally
because of the substantial cash infusion of new equity capital to be used to
retire substantially all of the Operating Company Indebtedness, the addition of
new working capital and the increase in the amount of equity to be retained
initially by current Stockholders. The Board of Directors also considered that
the Stonington Proposal had the potential of avoiding a subsequent refinancing
of the Operating Company Indebtedness after the Restructuring which could cause
further dilution to the then existing equity interests, including those of the
Noteholders, if the Restructuring is implemented. In addition, the Board of
Directors considered that the reinstatement of the 12.5% Notes and payment of
interest in cash to the Noteholders, as contemplated by the Stonington
Proposal, could, based on prevailing interest rates, be a more attractive
alternative to some Noteholders than exchanging their debt for equity. The
Board was also aware that the Stonington Proposal by its terms could be
implemented without the need for a prepackaged bankruptcy filing. However, the
Board decided that if the Consenting Noteholders determined not to consent to a
modification of their agreement with the Company, the Company would continue to
proceed to submit the Restructuring to a vote of Stockholders. The Board of
Directors also considered that the Company could elect to terminate its
interest in the transaction contemplated by the Stonington Proposal without
cost to the Company if it notified Stonington by the date described below.
2
<PAGE>
On the evening of July 15, 1997, the Ad Hoc Noteholders Committee informed
the Company in a letter that they would not agree with the Company to terminate
or modify their agreement with the Company regarding the Restructuring in order
to allow the Stonington Proposal to be accepted. Accordingly, on the morning of
July 16, 1997, the Company issued a press release reiterating its intention to
submit the existing Restructuring plan to a Stockholder vote in accordance with
its agreement with the Noteholders.
On July 20, 1997, Stonington advised the Company in a letter that it is
continuing to review alternative financing which could be provided to the
Company in the event the Limited Waiver Agreement is terminated in accordance
with its terms without the Restructuring having been implemented and that it
was extending the date by which the Company could notify it of a termination of
its interest in the Stonington Proposal without cost to the Company from July
28, 1997 to August 11, 1997. There can be no assurance that any such
alternative financing on terms acceptable to the Company can be arranged, and,
in view of the fact that the Stonington Proposal by its current terms cannot be
accepted, the Board of Directors continues to recommend the Restructuring as
the best alternative presently available to the Company.
On July 24, 1997, Stonington advised the Company that it had received a
summons and complaint from counsel to the Ad Hoc Noteholders Committee alleging
tortious interference by Stonington with the Limited Waiver Agreement and
seeking damages. Stonington has indicated that it intends to defend the suit
vigorously.
SUMMARY OF THE STONINGTON PROPOSAL
The Stonington Proposal calls for Stonington to invest $152 million in
exchange for 70% of the Company's Common Stock, with current Stockholders
retaining their shares which would represent 30% of the then outstanding common
stock after the equity investment. Under the Stonington Proposal, the $125
million principal amount of the 12.5% Notes would remain outstanding in lieu of
the exchange of such indebtedness for equity as currently proposed in the
Restructuring. In addition, under the Stonington Proposal, the proceeds of the
equity investment would be used to eliminate substantially all of the Operating
Company Indebtedness and Stonington would provide the Company with a
$50 million six-month bridge loan to fund working capital requirements pending
the Company obtaining a longer term working capital facility, which Stonington
committed to assist the Company in obtaining. Upon consummation of the
transaction contemplated by the Stonington Proposal, Stonington would be
entitled to receive a transaction fee of $3 million from the Company.
The Stonington Proposal is subject to certain conditions, including the
execution of a definitive agreement, stockholder approval and agreement of the
Consenting Noteholders to a termination or modification of the Company's
existing agreement with the Noteholders. Stonington has agreed to keep the
Stonington Proposal available until September 4, 1997. Stonington may terminate
its offer in the event that a change occurs in the business of the Company
which has, or would reasonably be expected to have, a material adverse effect,
and in the event that any pending or threatened litigation seeks injunctive or
monetary relief in connection with the transactions contemplated by the
Stonington Proposal.
Pursuant to the Stonington Proposal the Company has agreed to pay Stonington
termination fees and expenses of up to $3 million (plus commitment fees
incurred at the Company's request) in the event that the Company terminates the
Stonington Proposal and executes or consummates a restructuring transaction on
terms more favorable than the Restructuring within six months of such
termination. The Company has also agreed that, should the Restructuring in its
current form be implemented, it will pay up to $500,000 (plus commitment fees
incurred at the Company's request) of Stonington's expenses, provided that the
Company may terminate the Stonington Proposal without incurring such costs
prior to August 11, 1997.
CORRESPONDENCE WITH NOTEHOLDERS
On July 22, 1997, holders of in excess of 25% in aggregate principal amount
of the 12.5% Notes informed the Company of their intent to accelerate all
outstanding indebtedness under the 12.5% Notes in the event that the
Stockholders fail to approve the Charter Amendment and the Company does not
immediately thereafter seek to implement the Restructuring through the
Prepackaged Plan.
3
<PAGE>
THE EXCHANGE RESTRUCTURING AND PREPACKAGED RESTRUCTURING
Consideration Offered:
To holders of Old
Common Stock................ For each share of Old Common Stock, holders will
retain their common stock interest and will be
entitled to receive upon exchange for each share
of their Old Common Stock a certificate for one-
fifth of one share of New Common Stock
reflecting the one-for-five reverse stock split
(the "Reverse Split") together with certificates
for .0875 of each of Series A and Series B
Warrants to purchase shares of New Common Stock.
Each Warrant shall be exercisable for one share
of New Common Stock. As a result, Stockholders
in the aggregate, as of the date of consummation
of the Restructuring (the "Exchange Date"), will
retain 20% of the then outstanding common equity
and will receive Warrants to purchase New Common
Stock constituting approximately 17.5% of the
New Common Stock of the Company outstanding
immediately after giving effect to the Exchange
Restructuring, in each case based on the number
of shares of outstanding Old Common Stock as of
the Record Date. The Warrants would be
exercisable for seven years from the date of the
exchange and would be issued in two separately
trading series, Series A and Series B, of equal
size with exercise prices of $7.15 and $8.68 per
share, respectively, in each case subject to
adjustment. In lieu of issuing any fractional
shares of New Common Stock or fractional
Warrants in the Restructuring, fractional
interests in New Common Stock and Warrants will
be aggregated and sold by the Company, with the
proceeds to be distributed to the holders in
proportion to the amount of fractional shares of
New Common Stock and fractional Warrants such
holders would otherwise be entitled to receive.
Should the Prepackaged Restructuring be
consummated, the holders of Old Common Stock
will receive consideration substantially similar
to that such holders would receive in the
Exchange Restructuring.
To holders of 12.5%
Notes....................... For each $1,000 principal amount of 12.5% Notes
(plus accrued but unpaid interest), Noteholders
would receive 192.5 shares of New Common Stock.
In lieu of issuing any fractional shares of New
Common Stock in the Restructuring, fractional
interests in New Common Stock will be aggregated
and sold by the Company, with the proceeds to be
distributed to the holders in proportion to the
amount of fractional shares of New Common Stock
such holders would otherwise be entitled to
receive. As a result of the Exchange
Restructuring, Noteholders in the aggregate, as
of the Exchange Date, will receive shares of
New Common Stock equivalent to approximately 80%
of the New Common Stock outstanding immediately
after giving effect to the Exchange
Restructuring, based on the number of shares of
outstanding Old Common Stock as of the Record
Date.
4
<PAGE>
Noteholders will not be entitled to receive
Warrants. Should the Prepackaged Restructuring
be consummated, the Noteholders will receive
consideration substantially similar to that
which such holders would receive in the Exchange
Restructuring.
SUMMARY DISTRIBUTION TABLE
<TABLE>
<CAPTION>
EXISTING NEW COMMON SERIES A SERIES B
SECURITY STOCK WARRANTS WARRANTS
------------ ---------- --------- ---------
<S> <C> <C> <C> <C>
To holders of Old Common Stock:
Per 1,000 Shares.................. 1,000 200 87.5 87.5
In Aggregate...................... 30,078,495 6,015,699 2,631,868 2,631,868
To holders of 12.5% Notes:
Per Note.......................... $ 1,000 192.5 -- --
In Aggregate...................... $125,000,000 24,062,796 -- --
</TABLE>
For more information on consideration offered pursuant to the Restructuring,
see the Exchange Restructuring Prospectus, attached hereto as Annex IV.
Expiration Date............. With respect to the Exchange Restructuring and
the solicitation of acceptances of the
Prepackaged Plan, the term "Expiration Date"
shall mean 5:00 p.m., New York City time, on
August 29, 1997, unless the Company, in its sole
discretion, extends the Exchange Restructuring
or solicitation period, in which case the term
"Expiration Date" for the Exchange Restructuring
or solicitation period shall mean the last time
and date to which the Exchange Offer or
solicitation period is extended. See "TENDERING
AND VOTING PROCEDURES" in Part A to the Exchange
Restructuring Prospectus, attached hereto as
Annex IV, and "VOTING PROCEDURES AND
REQUIREMENTS" in Part B to the Exchange
Restructuring Prospectus, attached hereto as
Annex IV.
Old Common Stock............ As of the Record Date, there were 50,000,000
shares of Old Common Stock authorized for
issuance, of which 30,078,495 shares were issued
and outstanding (or 6,015,699 shares of New
Common Stock after the giving effect to the
Reverse Split). As part of the Exchange
Restructuring, holders of Old Common Stock will
be asked to consider and approve the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. See
"STOCKHOLDERS' MEETING" and "DESCRIPTION OF THE
PROPOSALS." If the Prepackaged Restructuring is
consummated, the Company expects that similar
actions will be implemented pursuant to the
Prepackaged Plan.
Conditions to Exchange
Restructuring.............. The Company's obligation to accept 12.5% Notes
tendered pursuant to the Exchange Restructuring
is conditioned, among other things, on (a) the
Minimum Tender Condition, and (b) approval by
the
5
<PAGE>
Company's stockholders of the Charter Amendment.
The Company has reserved the right to waive or
seek the waiver of any one or more of these
conditions but does not currently intend to
waive or seek the waiver of any condition except
that the Company may seek the waiver of the
Minimum Tender Condition in the event that the
Company receives tenders of approximately 95% or
more, but less than 100%, of the 12.5% Notes. No
decision has been made to seek such a waiver,
and there can be no assurance that such waiver,
if sought, would be obtained. In the event that
the requisite percentage and number of
Noteholders and Stockholders have executed
acceptances of the Prepackaged Plan, but the
Minimum Tender Condition has not been satisfied,
or the Company determines, in its sole
discretion, that the Minimum Tender Condition is
not likely to be satisfied at or prior to the
Expiration Date, the Company may elect to
terminate the Exchange Offer at or prior to its
scheduled expiration and proceed directly to the
Prepackaged Plan. See "TENDERING AND VOTING
PROCEDURES" in Part A to the Exchange
Restructuring Prospectus, attached hereto as
Annex IV.
Conditions to Prepackaged
Restructuring.............. The Bankruptcy Code requires that the Bankruptcy
Court determine that the Prepackaged Plan
complies with the requirements of Section 1129
of the Bankruptcy Code. Approval of two-thirds
of the voting principal amount and a majority in
number of the Noteholders voting on the
Prepackaged Plan, and two-thirds of the shares
of Old Common Stock voting on the Prepackaged
Plan is required for the consummation of the
Prepackaged Restructuring. See "SUMMARY OF THE
PLAN" in Part B to the Exchange Restructuring
Prospectus, attached hereto as Annex IV.
Certain Federal Income Tax
Considerations............. In general, the receipt of New Common Stock and
Warrants by Stockholders pursuant to the
Restructuring will not be a taxable event. The
Company will realize cancellation of
indebtedness income for Federal income tax
purposes as a result of the Restructuring. In
the event of an Exchange Restructuring, the
Company anticipates that such income would
likely be offset by the Company's net operating
losses and net operating loss carryovers
("NOLs"). In the event of a Prepackaged
Restructuring, such income would not be
recognized for Federal income tax purposes. As a
result of the Restructuring, the Company will
undergo an "ownership change" for Federal income
tax purposes and will be limited in its ability
to use its NOLs and certain tax credit
carryforwards to offset future taxable income.
See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
6
<PAGE>
Market and Trading Information:
Old Common Stock.......... The Old Common Stock is currently traded on the
over-the-counter market and is quoted on the
Nasdaq National Market under the symbol "MSEL."
See "MARKET AND TRADING INFORMATION" and "RISK
FACTORS--Potential De-Listing of the Common
Stock."
Warrants.................. Application will be made to list the Warrants for
trading on the Nasdaq National Market. There can
be no assurance that such application will be
approved or that an active market for the
Warrants will develop or as to the prices at
which they might be traded. See "RISK FACTORS."
Post-Restructuring Board.... Pursuant to the terms of the Limited Waiver
Agreement, upon consummation of the
Restructuring, the Board of Directors of the
Company is to be reconstituted so as to be
comprised of members acceptable to the Company
and the Ad Hoc Noteholders Committee. No
financial advisors nor legal advisors will be
named to the Board. The Company and the Ad Hoc
Noteholders Committee have been in discussions
regarding the composition of the Board, but no
agreement has been reached. The Company has
proposed that Dwight A. Steffensen, Dr. Arnold
Miller and James E. Illson be named to the
Board, however, until any such agreement is
reached, the Company intends that the existing
Board will continue as the Board of Directors of
the Company.
Depositary/Voting Agent/
Warrant Agent.............. U.S. Stock Transfer Corporation has been
appointed as Depositary with respect to the Old
Common Stock for the Restructuring (the
"Depositary") and as Voting Agent (as defined
herein) for the tabulation of proxies with
respect to the Stockholders' Meeting and Ballots
and Master Ballots from the Stockholders with
respect to the Prepackaged Plan and as Warrant
Agent with respect to the Warrants. Questions
and requests for assistance may be directed to
the Depositary at one of its addresses and
telephone numbers set forth on the back cover of
this Proxy Statement/Prospectus. See "ADVISORS
AND REPRESENTATIVES."
Information Agent........... MacKenzie Partners, Inc. is serving as
Information Agent in connection with the
Stockholders' Meeting and the solicitation of
acceptances of the Prepackaged Plan (the
"Information Agent"). Any questions regarding
how to vote at the Stockholders' Meeting and on
the Prepackaged Plan, and any requests for
additional copies of the Proxy
Statement/Prospectus, Proxies, Ballots or Master
Ballots should be directed to the Information
Agent at its address and telephone number set
forth on the back cover of this Proxy
Statement/Prospectus. See "ADVISORS AND
REPRESENTATIVES."
7
<PAGE>
COMPARISON OF EXCHANGE RESTRUCTURING
AND PREPACKAGED RESTRUCTURING
See "Comparison of Exchange Restructuring and Prepackaged Restructuring" in
Part A to the Exchange Restructuring Prospectus, attached hereto as Annex IV.
STOCKHOLDERS WHO COMPLETE A PROXY WITH RESPECT TO THE STOCKHOLDERS' MEETING
SHOULD ALSO DULY COMPLETE AND SIGN A BALLOT IN ORDER TO VOTE ON THE PREPACKAGED
PLAN.
PURPOSES OF THE EXCHANGE RESTRUCTURING
The purpose of the Restructuring is to enhance the long-term viability and to
contribute to the success of the Company by adjusting the Company's
capitalization (including debt levels and principal repayment schedules) to
reflect current and expected operating performance levels. Specifically, the
Restructuring is designed to reduce the Company's debt obligations by $125
million to levels which the Company believes can be supported by its projected
cash flow and to replace a significant portion of the Company's indebtedness
with New Common Stock. Interest charges will be substantially reduced and the
amount of outstanding capital stock of the Company will be substantially
increased as a result of the Restructuring.
In addition, implementation of the Restructuring will enable the Company to
avoid certain significant amortization payments totalling $40 million that
would be due under the Operating Companies' senior debt obligations if the
Company were to pay interest on the 12.5% Notes that was due on June 30, 1997,
subject to a 30 day grace period. If the Company has not paid the interest due
on the 12.5% Notes by July 30, 1997, an event of default will occur with
respect to the 12.5% Notes entitling the holders to accelerate the maturity
thereof. While the Limited Waiver Agreement is in effect, such interest
payments have been waived by in excess of 75% of the holders of 12.5% Notes and
the holders of the Operating Companies' indebtedness have waived any cross-
default arising from the non-payment of such interest. Failure to consummate
the Restructuring could result in such amortization payments becoming due as
well as interest payment obligations on the 12.5% Notes being reinstated. The
Company has been informed by holders of in excess of 25% of the 12.5% Notes
that if the Stockholders fail to approve the Charter Amendment, and the Company
does not immediately seek to implement the Restructuring through the
Prepackaged Plan, such holders intend to accelerate all of the indebtedness
outstanding under the 12.5% Notes. ABSENT THE RESTRUCTURING, THE COMPANY DOES
NOT BELIEVE IT WILL BE ABLE TO SATISFY SUCH OBLIGATIONS WITHOUT A REFINANCING
OF THE COMPANY'S INDEBTEDNESS UNDER THE OPERATING COMPANIES' LOAN AGREEMENTS OR
OBTAINING ADDITIONAL WAIVERS OR AMENDMENTS TO SUCH AGREEMENTS AND THERE CAN BE
NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING, WAIVERS
OR AMENDMENTS.
For additional information on the purposes and effects of the restructuring,
see "PURPOSES OF THE EXCHANGE RESTRUCTURING."
8
<PAGE>
RISK FACTORS
Under the Restructuring, the holders of Old Common Stock would give up their
shares of Old Common Stock in exchange for New Common Stock and Warrants. There
are certain risks associated with the holding of Warrants. Prior to deciding
whether to (a) vote on the Charter Amendment, the New Common Stock Issuance and
the Stock Award and Incentive Proposal and/or (b) vote on the Prepackaged Plan,
each holder of Old Common Stock should carefully consider all of the
information contained in this Proxy Statement/Prospectus, especially the
factors outlined below and described under "RISK FACTORS."
Risk Factors Relating to the Exchange Restructuring and the Prepackaged
Restructuring. Stockholders should consider that (a) in the event that the
Stockholders do not approve the Restructuring, the Noteholders have expressed
their intention to accelerate the outstanding indebtedness under the 12.5%
Notes, (b) the Company is currently highly leveraged and will continue to have
a high level of indebtedness following the Exchange Restructuring or
Prepackaged Restructuring, as applicable, approximately $134.5 million of which
is indebtedness under the Operating Companies' Loan Agreements that will need
to be refinanced or repaid by January 31, 1999, (c) seasonality and economic,
market or other conditions may adversely affect cash flow and there can be no
assurance that such conditions will not have an adverse effect on the Company's
financial projections, (d) the Operating Companies' Loan Agreements contain
restrictions on the Company's operations and requirements that the Company
achieve and maintain certain financial ratios which the Company may not be able
to achieve or maintain, and which, if not maintained or achieved, may result in
a default and could lead to the acceleration of the Company's obligations under
the Operating Companies' Loan Agreements as well as the acceleration of other
indebtedness of the Company, (e) market forces, such as interest rates, affect
the value of securities and are influenced by conditions beyond the Company's
control, (f) the Company's capital expenditure levels assumed in preparation of
the projected financial data contained herein may be inadequate to maintain the
Company's long-term competitive position, (g) the Company is and, after
consummation of the Exchange Restructuring or Prepackaged Restructuring, as
applicable, will continue to be, restricted in its ability to declare and pay
cash dividends on the common stock of the Company, (h) the issuance of New
Common Stock and Warrants pursuant to the Exchange Restructuring or the
Prepackaged Plan, as applicable, will result in significant dilution of the
equity interests of the existing holders of Old Common Stock as a percentage of
the total number of outstanding shares of the common stock of the Company, and
no assurance can be made that the Warrants will ever be "in the money," (i) if
certain of the major suppliers and vendors that the Company currently deals
with were to change the terms or credit limits or product availability that
they currently extend to the Company, it could have a significant negative
impact on the Company's sales, cash position and liquidity, (j) the Company is
subject to the risk of increased competition, which could affect its sales
volume, pricing and margins, (k) there is currently no trading market for the
Warrants and there is no assurance that a trading market will develop,
(l) there are certain Federal income tax considerations with respect to the
Restructuring, including limiting the use of, or reducing, the Company's net
operating loss carryovers, although such limit would be greater under the
Exchange Restructuring than under the Prepackaged Restructuring, (m) following
the Restructuring the ownership of New Common Stock may be substantially more
concentrated than the current ownership of Old Common Stock, which may result
in an attempt to influence the direction of the Company by one or more large
stockholders, (n) the Company is not in compliance with the continuing listing
requirements of the Nasdaq National Market, and de-listing from the Nasdaq
National Market could adversely affect the liquidity of the market for their
shares of common stock of the Company, and (o) the Company has recently
suffered significant net operating losses.
Additional Risk Factors Relating to the Prepackaged Restructuring.
Stockholders should consider that (a) commencement of bankruptcy proceedings,
even if only to confirm the Prepackaged Plan, could adversely affect the
relationship between the Holding Company and its subsidiaries, employees,
customers and suppliers which, in turn, could adversely affect the Company's
ability to complete the Solicitation or obtain confirmation of the Prepackaged
Plan, (b) even if all classes of impaired creditors and equity interest holders
accept the Prepackaged Plan, the Prepackaged Plan might not be confirmed by the
Bankruptcy Court and (c) there can be no assurance that the Bankruptcy Court
will decide that the Proxy Statement/Prospectus and the Disclosure Statement
meets the disclosure requirements of the Bankruptcy Code.
9
<PAGE>
STOCKHOLDERS' MEETING
Date, Time and Place of
Stockholders' Meeting......
The Stockholders' Meeting to consider and to vote
upon the Charter Amendment, the New Common Stock
Issuance and the Stock Award and Incentive Plan
will be held at the Company's headquarters
located at 200 Continental Boulevard, El
Segundo, California, on August 29, 1997 at
10:00 a.m., Los Angeles time. The stockholder
votes with respect to the New Common Stock
Issuance will not be effective unless and until
the Charter Amendment is approved at the
Stockholders' Meeting and the Exchange
Restructuring has been consummated and the
Charter Amendment has been filed. If the
Prepackaged Restructuring is pursued and a
petition is filed under the Bankruptcy Code, the
Company expects that the New Common Stock
Issuance and an amendment substantially similar
to the Charter Amendment will be implemented
pursuant to the Prepackaged Plan.
Record Date; Stockholders
Entitled to Vote; Quorum...
Holders of record of Old Common Stock at the
close of business on the Record Date will be
entitled to vote at the Stockholders' Meeting.
Holders of Old Common Stock will be entitled to
one vote per share with respect to the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. On the Record
Date there were 30,078,495 shares of Old Common
Stock outstanding, of which there were 1,255
holders of record. The presence, either in
person or by properly executed proxy, of the
holders of a majority of the shares of Old
Common Stock outstanding and entitled to vote is
necessary to constitute a quorum at the
Stockholders' Meeting.
Purpose of Stockholders' The purpose of the Stockholders' Meeting is to
Meeting..................... consider the proposals to approve the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. The Board has
unanimously adopted a resolution proposing that
the Company's Charter be amended by the Charter
Amendment to, (i) effect a one-for-five reverse
stock split of the Company's outstanding shares
of Old Common Stock and (ii) increase the par
value of the authorized common stock of the
Company from $.01 per share to $.05 per share.
The Charter Amendment is set forth in its
entirety in Annex I to this Proxy
Statement/Prospectus. The Charter Amendment is
necessary to permit the Company to consummate
the Exchange Restructuring on the terms
contemplated by the Exchange Offer. In addition,
assuming the aggregate market capitalization of
the Company remains constant, the Reverse Split
as implemented pursuant to the Charter Amendment
should have the effect of increasing the trading
price of the common stock of the Company from
where it would otherwise trade in the absence of
the Reverse Split. The Board has also
unanimously adopted resolutions approving the
New
10
<PAGE>
Common Stock Issuance. The approval of the New
Common Stock Issuance by the Stockholders may be
required by the applicable rules of the National
Association of Securities Dealers, Inc. (the
"NASD").
The Board has also unanimously adopted
resolutions approving the Stock Award and
Incentive Plan. The approval of the Stock Award
and Incentive Plan by the Stockholders is
necessary to provide appropriate incentives for
those eligible to participate thereunder. If
approved by the Stockholders, the Stock Award
and Incentive Plan would permit grants of stock
options, stock appreciation rights ("SARs") and
other stock-based awards covering a maximum of
3,000,000 shares of the Company's Common Stock.
If the Restructuring is consummated the Company
intends to grant options under the Stock Award
and Incentive Plan in exchange for all then
outstanding employee stock options and SARs,
which would then be cancelled. The number of
shares available under the Stock Award and
Incentive Plan will be reduced to the extent
that shares of the Company's Common Stock remain
subject to outstanding option grants under any
of the Company's other stock-based incentive
plans. See "DISCUSSION OF THE PROPOSALS--Stock
Award and Incentive Plan."
Votes Required.............. Under the Delaware General Corporation Law (the "
DGCL") and the Company's Certificate of
Incorporation, the Charter Amendment must be
approved by a majority of the voting power of
the Old Common Stock entitled to vote at the
Special Meeting. The New Common Stock Issuance
and the Stock Award and Incentive Plan must be
approved by the affirmative vote of the holders
of a majority of the voting power of the Old
Common Stock represented at the meeting. As of
the record date, the Company's executive
officers and directors, as a group, beneficially
owned approximately 958,894 shares of the
outstanding Old Common Stock. Such officers and
directors have advised the Company that they
intend to vote in favor of the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. See "OWNERSHIP
OF COMMON STOCK". The Stockholder votes with
respect to the New Common Stock Issuance will
not become effective unless and until the
Charter Amendment is approved at the
Stockholders' Meeting and filed with the
Secretary of State of Delaware and the Exchange
Restructuring has been consummated. The Stock
Award and Incentive Plan will become effective
regardless of whether the Exchange Restructuring
is implemented. The Board of Directors has
reserved the right, pursuant to Section 242(c)
of the DGCL, to abandon the Charter Amendment
even if the Company's Stockholders authorize the
Charter Amendment. However, the Board of
Directors intends to file the Charter
11
<PAGE>
Amendment with the Secretary of State of
Delaware if the Exchange Restructuring is
consummated.
Dissenters' Rights.......... Stockholders will not be entitled to dissenters'
rights or rights of appraisal in connection with
the Charter Amendment, the New Common Stock
Issuance or the Stock Award and Incentive Plan.
Dilution.................... Assuming 100% acceptance of the Exchange Offer,
the Company expects to issue 24,062,796 shares
of New Common Stock directly to exchanging
Noteholders, 6,015,699 shares of New Common
Stock directly to existing Stockholders, and
Warrants to purchase 5,263,736 additional shares
of New Common Stock (subject to adjustment) to
existing Stockholders. Based on the number of
shares of outstanding Old Common Stock as of the
Record Date, the 24,062,796 shares issued
directly to Noteholders will represent
approximately 80% of the total outstanding
shares of New Common Stock after giving effect
to the Exchange Restructuring, but excluding
shares obtainable upon exercise of Warrants.
Upon consummation of the Exchange Restructuring,
the equity interests of the existing holders of
Old Common Stock, as a percentage of the total
number of outstanding shares of the common stock
of the Company, will be significantly diluted.
Consummating the Prepackaged Plan will have a
similar dilutive effect. See "PURPOSE OF THE
RESTRUCTURING" and "RISK FACTORS."
VOTING PROCEDURES FOR THE PREPACKAGED PLAN
For a description of the voting procedures for the Prepackaged Plan, see
"VOTING PROCEDURES AND REQUIREMENTS" in Part B to the Exchange Restructuring
Prospectus, attached hereto as Annex IV.
DESCRIPTION OF WARRANTS
The following is a brief description of certain provisions of the Warrants.
The Warrants will be issued under the Warrant Agreements, to be dated on or
about the date of consummation of the Restructuring, between the Company and
the Warrant Agent (as defined herein). The following description of such
provisions does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the detailed provisions of the Warrant
Agreements pursuant to which such securities will be issued. See "DESCRIPTION
OF WARRANTS" and the Form of Warrant Agreement, attached hereto as Annex II.
Issue....................... Up to 2,631,868 Series A Warrants and 2,631,868
Series B Warrants (together, the "Warrants")
will be issued to holders of Old Common Stock
upon consummation of the Exchange Restructuring
and after giving effect to the Reverse Split.
Each Warrant will be exercisable for a period of
seven years from the Exchange Date and shall be
exercisable for one share of New Common Stock,
subject to adjustment unless redeemed or
exchanged earlier by the Company.
12
<PAGE>
Exercise Price.............. Each Warrant will be exercisable at an exercise
price ("Exercise Price") of (i) $7.15 per share,
in the case of the Series A Warrants, and (ii)
$8.68 per share, in the case of the Series B
Warrants. Holders of Old Common Stock will
receive, for each share of Old Common Stock,
.0875 Series A Warrants and .0875 Series B
Warrants exercisable, in the aggregate, for
5,263,736 shares of New Common Stock or
approximately 17.5% of the New Common Stock
outstanding immediately after giving effect to
the Exchange Restructuring, based on the number
of shares of outstanding Old Common Stock as of
the Record Date. The Exercise Price and the
number of shares of New Common Stock purchasable
upon exercise of the Warrants ("Warrant Shares")
are both subject to adjustment in certain cases
referred to below.
No Rights Generally as No holder of Warrants will be entitled to any
Stockholders................ rights generally as a stockholder of the Company
unless and until such holder has obtained shares
of New Common Stock upon the exercise of the
Warrants for New Common Stock. Stockholders will
not be entitled to receive warrants unless and
until they exchange their Old Common Stock for
New Common Stock.
Adjustment of Exercise
Price and Number of Shares
of New Common Stock
Obtainable Upon Exercise....
The number of shares of New Common Stock
obtainable upon exercise of each Warrant, and
correspondingly the Exercise Price, will be
proportionately adjusted pursuant to standard
antidilution provisions at any time the Company
pays stock dividends, subdivides, combines or
reclassifies its New Common Stock; distributes
evidences of indebtedness or assets of the
Company, or rights for such assets; issues New
Common Stock for less than market value; issues
options, warrants or other securities
convertible for New Common Stock for less than
market value; or effects similar dilutive
transactions. Upon the consummation of any
Extraordinary Transaction (as defined in the
Warrant Agreements) prior to January 1, 1998,
including a merger or sale of substantially all
of the assets of the Company, or the agreement
of the Company to perform an Extraordinary
Transaction entered into prior to January 1,
1998, the Warrants must remain outstanding and
be exercisable in exchange for common stock of
the Company or common stock of the acquiring
company unless such Extraordinary Transaction is
approved by at least 85% of the outstanding New
Common Stock then outstanding.
13
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following Summary Historical Consolidated Financial Information of the
Company should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto, and other financial
data included elsewhere herein. The summary financial information presented
below as of and for the years ended December 31, 1992, 1993, 1994, 1995 and
1996 are derived from the audited consolidated financial statements of the
Company. The summary financial information presented below as of and for the
three months ended March 31, 1996 and 1997 have been derived from the Company's
unaudited financial statements. Operating results for the three months ended
March 31, 1997 may not be indicative of the results that may be expected for
the year ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------- ----------------------
MARCH 31, MARCH 31,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
(1)
Net sales............... $2,238,715 $3,085,851 $5,018,687 $5,956,967 $5,522,824 $1,536,589 $1,113,100
Cost of sales........... 2,036,292 2,827,315 4,676,164 5,633,278 5,233,570 1,449,366 1,048,124
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 202,423 258,536 342,523 323,689 289,254 87,223 64,976
Selling, general &
administrative
expenses............... 150,905 187,152 281,796 317,195 295,021 83,136 51,520
Impairment losses (2) 51,383 42,033
Restructuring charge
(3).................... 9,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss). 51,518 71,384 60,727 (54,222) (47,800) 4,087 13,456
Interest expense........ 15,742 17,810 29,024 37,583 37,431 9,877 8,623
Loss on sale of
European, Mexican and
Latin American
operations (4)......... 33,455
Other expense........... 1,299 2,722 11,752 13,885 20,150 7,238 3,530
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 34,477 50,852 19,951 (105,690) (138,836) (13,028) 1,303
Provision (benefit) for
income taxes........... 14,812 20,413 8,341 (21,779) 1,539 480 173
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 19,665 $ 30,439 $ 11,610 $ (83,911) $ (140,375) $ (13,508) $ 1,130
========== ========== ========== ========== ========== ========== ==========
SHARE DATA: (5)
Net income (loss) per
share.................. $ 0.67 $ 1.00 $ 0.38 $ (2.82) $ (4.68) $ (0.45) $ 0.04
Weighted average number
of shares.............. 29,274 30,454 30,389 29,806 30,001 29,863 30,078
Other Data:
EBITDA(6)............... $ 59,528 $ 79,138 $ 65,076 $ (47,598) $ (82,616) $ 2,608 $ 13,106
BALANCE SHEET DATA:
Working capital......... $ 294,626 $ 359,765 $ 399,848 $ 280,864 $ 190,544 $ 250,442 $ 193,512
Total assets............ 667,313 936,283 1,191,870 1,230,334 731,039 1,158,676 706,020
Long-term and
subordinated debt...... 153,433 208,500 357,685 356,271 294,763 403,861 288,331
Total debt.............. 179,124 259,429 395,556 382,395 294,950 409,564 288,331
Stockholders' equity.... 198,882 223,857 236,164 154,466 14,997 138,794 15,814
</TABLE>
- --------
(1) The Company's fiscal year is the 52- or 53-week period ending on the
Saturday nearest to December 31. For clarity of presentation throughout
this document, the Company has described year-ends and quarter-ends
presented as if the period ended on the last day of the month. Except for
1992, all fiscal years presented were 52 weeks in duration. The summary
historical consolidated financial information as set forth above includes
those balances and activities related to the Company's Australian business
until its disposal on January 1, 1996 and the Company's European, Mexican
and Latin American businesses until their disposal on October 4, 1996,
effective as of September 27, 1996. It also includes Merisel FAB from the
date such business was acquired on January 31, 1994, through the end of
March 28, 1997, the date of sale of Merisel FAB. (See Note 12 to the
consolidated financial statements--"Subsequent Events"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
14
<PAGE>
(2) During 1995 and 1996, the Company determined that the carrying value for
certain of its capitalized costs relating to the installation of a new
computer operating system and identifiable intangible assets relating to
Merisel FAB would not be recovered from their use in future operations.
Accordingly, these assets were written down to their fair values as of the
impairment dates.
Additionally, in 1995 and 1996, the Company recognized impairment losses on
the assets of Merisel FAB and Merisel Pty Ltd. (a wholly owned Australian
subsidiary) related to the expected sale of substantially all of the assets
of such subsidiaries. (See Note 4 to the consolidated financial
statements--"Impairment Losses").
(3) During 1995, the Company recorded a restructuring charge associated with
the resizing of the Company's operations. (See Note 2 to the consolidated
financial statements--"Restructuring Charge").
(4) In October 1996, the Company completed the sale of substantially all of its
European, Mexican and Latin American businesses to CHS Electronics, Inc. A
loss of $33,455,000, which includes approximately $7,400,000 of direct
costs related to the sale, was recorded on such sale. (See Note 5 to the
consolidated financial statements--"Dispositions").
(5) Net income (loss) per share and weighted average number of shares have not
been adjusted to reflect the Reverse Split.
(6) EBITDA is the sum of income before income taxes and interest, depreciation
and amortization expense. EBITDA should not be considered as an alternative
to income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity. However, EBITDA is presented
because it is a widely used financial indicator of a company's ability to
service indebtedness and other factors.
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following table sets forth the Summary Unaudited Pro Forma Condensed
Consolidated Financial Data for the fiscal year ended December 31, 1996 and the
three months ended March 31, 1997, after giving effect to (i) the sale of EML
and FAB as if each had occurred as of January 1, 1996 including the effect of
any amendment to existing debt agreements that were entered into as a direct
consequence of the sale of their businesses and related assets, (ii) the
issuance of 24.1 million shares of New Common Stock to the Noteholders, and the
Reverse Split, (iii) the extension of the maturity dates of the Revolving
Credit Agreement and the 11.5% Notes to January 31, 1999, (iv) the payment of
3.5% modification fees and other fees associated with the Extension to the
holders of the Revolving Credit Agreement and 11.5% Notes, and (v) the interest
rate increases on the Revolving Credit Agreement, 11.5% Notes, and Subordinated
Notes associated with the Extension, as if each of the foregoing transactions
had occurred on January 1, 1996 with respect to the statement of operations
data and as of March 31, 1997 with respect to the balance sheet data. The pro
forma data should be read in conjunction with the "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of the Company and related notes thereto,
included elsewhere herein. The data set forth below is not necessarily
indicative of the results that actually would have been achieved had such
transactions been consummated as of the dates indicated or that may be achieved
in future periods.
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
INCOME STATEMENT DATA: (1)
Net sales................................. $3,441,343 $910,923
Cost of sales............................. 3,262,105 853,624
---------- --------
Gross profit.............................. 179,238 57,299
Selling, general & administrative
expenses.................................. 193,521 45,321
---------- --------
Operating (loss) income................... (14,283) 11,978
Interest expense.......................... 18,018 5,497
Other expense............................. 17,967 4,518
---------- --------
(Loss) income before income taxes......... (50,268) 1,963
Provision for income taxes................ 822 158
---------- --------
Net (loss) income......................... $ (51,090) $ 1,805
========== ========
SHARE DATA:
Net (loss) income per share (2)........... $ (1.70) $ 0.06
Weighted average number of shares (2)..... 30,063 30,079
OTHER DATA:
EBITDA (3)................................ $ (19,890) $ 10,366
BALANCE SHEET DATA:
Working capital........................... $187,331
Total assets.............................. 695,933
Long-term and subordinated debt........... 163,331
Stockholders' equity...................... 134,633
</TABLE>
- --------
(1) The Company's fiscal year is the 52- or 53-week period ending on the
Saturday nearest to December 31. For clarity of presentation throughout
this document, the Company has described year-ends and quarter-ends
presented as if the period ended on the last day of the month. The summary
unaudited condensed consolidated financial data as set forth above includes
those balances and activities related to the Company's
16
<PAGE>
European, Mexican and Latin American businesses until their disposal on
October 4, 1996, effective as of September 27, 1996. It also includes
Merisel FAB until its disposal on March 28, 1997. (See Note 12 to the
accompanying consolidated financial statements--"Subsequent Events"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Net income (loss) per share and weighted average number of shares have
been adjusted to reflect the Reverse Split.
(3) EBITDA is the sum of income before income taxes and interest, depreciation
and amortization expense. EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. However, EBITDA is
presented because it is a widely used financial indicator of a company's
ability to service indebtedness and other factors.
17
<PAGE>
CASH DEBT SERVICE OBLIGATIONS
The following table sets forth certain historical financial information with
respect to the Company's continuing operations for Fiscal 1996 and certain
projected financial information with respect to the Company for Fiscal 1997
through Fiscal 2002 assuming that the Exchange Restructuring is completed.
<TABLE>
<CAPTION>
TOTAL
CASH DEBT TOTAL TOTAL DEBT DEBT
SERVICE PRINCIPAL INTEREST (AT YEAR
YEARS ENDING DECEMBER 31 OBLIGATIONS (1) PAYMENTS (2) EXPENSE (3) END) (4)
- ------------------------ --------------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Historical:
1996......................... $113,585 $83,129 $29,901 $294,763
Projected:
1997 (5)..................... 36,100 13,483 22,617 156,280
1998......................... 33,698 13,610 20,088 142,670
1999......................... 22,346 6,246 16,100 136,424
2000......................... 20,963 5,511 15,452 130,913
2001......................... 18,531 3,900 14,631 127,013
</TABLE>
- --------
(1) Cash debt service obligations in 1997 include all cash interest and
scheduled principal payments but exclude accrued but unpaid interest
expense on the 12.5% Notes through July 31, 1997 totaling $9.1 million.
Assuming the Exchange Restructuring is consummated, unpaid interest expense
on the 12.5% Notes will not need to be paid.
(2) Included in total principal payments are scheduled net repayments under the
Revolving Credit Agreement, the 11.5% Notes, the Subordinated Debt and
other promissory notes.
(3) Total debt interest expense excludes interest expense of $9.1 million for
1997 related to accrued but unpaid interest expense on the 12.5% Notes
through July 31, 1997.
(4) Total debt represents the principal amount of debt outstanding at year end,
assuming that the Exchange Restructuring is consummated on July 31, 1997.
(5) The following table sets forth certain financial information with respect
to 1997 assuming the Company does not complete the Exchange Restructuring
and thus is required to make the scheduled $70 million amortization
payments on the Operating Company's Senior Debt, and the $125 million 12.5%
Notes would remain on the balance sheet as debt:
<TABLE>
<CAPTION>
TOTAL
CASH DEBT TOTAL TOTAL DEBT DEBT (AT
SERVICE PRINCIPAL INTEREST YEAR
OBLIGATIONS PAYMENTS EXPENSE END)
----------- --------- ---------- --------
<S> <C> <C> <C>
$116,085 $83,483 $32,602 $211,280
</TABLE>
18
<PAGE>
RISK FACTORS
Investment in the New Common Stock and Warrants involves a high degree of
risk. Prior to deciding whether to (a) participate in the Exchange Offer
and/or (b) vote to accept the Prepackaged Plan, each Noteholder should
carefully consider all of the information contained in this Prospectus,
especially the factors described in the following paragraphs.
Risk of Nonconsummation of the Restructuring
On July 22, 1997, holders of in excess of 25% in aggregate principal amount
of the 12.5% Notes informed the Company of their intent to accelerate all
outstanding indebtedness under the 12.5% Notes in the event that the
Stockholders fail to approve the Charter Amendment and the Company does not
immediately seek to implement the Restructuring through the Prepackaged Plan.
Such an acceleration could result in the Company becoming subject to a
proceeding under the Federal Bankruptcy laws.
High Leverage After Exchange Restructuring
At March 31, 1997, the Company had $288.3 million in total debt plus $259.8
million of asset securitization and a stockholders' equity of $15.8 million.
Interest payments following the Restructuring will be high in relation to
projected EBITDA, and the Company expects to have to make aggregate cash
interest payments of $31.7 million and $20.1 million in each of fiscal 1997
and fiscal 1998, respectively. On a pro forma basis at March 31, 1997, the
Company would have approximately $163.3 million of total debt plus the same
assets securitized following completion of the Exchange Restructuring and
stockholders' equity of $136.1 million and would be able to incur additional
debt, provided that the proceeds thereof are first used to repay the
indebtedness under the Operating Companies' Loan Agreements. See "PURPOSE OF
THE RESTRUCTURING." Following the Restructuring, on a pro forma basis as of
March 31, 1997, the Company would have had approximately $134.5 million of
debt outstanding under the Operating Companies' Loan Agreements, which, as a
result of the Extension, will need to be refinanced or repaid by January 31,
1999. The Company has been involved in preliminary discussions regarding
possible debt and equity financing, however; no agreement has been reached and
there can be no assurance that the Company will be able to obtain such
financing on acceptable terms, if at all. While the stockholders' equity would
be substantially increased as a result of the Exchange Restructuring, the
continued high level of the Company's debt following completion of the
Exchange Restructuring will pose substantial risks to holders of the Company's
New Common Stock, including, but not limited to, risks which may adversely
affect or impair the following: (i) the ability of the Company to pay when due
principal of and cash interest on its debt securities; (ii) the ability of the
Company to obtain additional financing in the future, as needed; (iii) the
ability of the Company to withstand competitive pressures or a continuation or
worsening of current unfavorable economic conditions, to expand its product
lines or markets or to take advantage of significant new business
opportunities that may arise; and (iv) the marketability, price and future
value of the Company's securities, which could result in the loss of a
securityholder's entire investment in the Company. See "--Market Factors and
Seasonality May Adversely Affect Cash Flow."
Market Factors And Seasonality May Adversely Affect Cash Flow
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; (iii)
virtually all sales in a given quarter result from orders booked in that
quarter; (iv) changes in short and long term demand for computer products, and
national, regional and local economic conditions; and (v) unfavorable trends
or developments concerning factors such as inflation, increased costs of
components, labor and employees, regional weather or other conditions which
could adversely effect the availability and cost of the Company's inventory.
The factors noted above could result in a failure to achieve the Company's
business plan, which calls
19
<PAGE>
for movement toward current market growth levels, thereby affecting the
resulting profitability of the Company and its cash resources.
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. This is primarily
due to buying patterns of Canadian government agencies. The financial results
projected herein assume that seasonality will not have a material adverse
affect on the Company's financial projections. Following the Restructuring, on
a pro forma basis as of March 31, 1997, the Company would have approximately
$134.5 million of debt outstanding under the Operating Companies' Loan
Agreements, which, as a result of the Extension, will need to be refinanced or
repaid by January 31, 1999. While the Company believes the consummation of the
Exchange Restructuring will enable it to meet its scheduled interest and
principal payments when due, there can be no assurance that the Company will
be able to make such payments. In the event that the Company is unable to make
such payments, it may seek to refinance or restructure its debt obligations,
and failing such refinancing or restructuring, the Company may seek protection
under Chapter 11 of the United States Bankruptcy Code. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"BACKGROUND OF THE RESTRUCTURING," each in the Disclosure Statement included
as Part B to the Exchange Restructuring Prospectus, attached hereto as Annex
IV, and "FINANCIAL PROJECTIONS," "PURPOSE OF THE RESTRUCTURING" and "UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION."
Restrictions Under Operating Companies' Loan Agreements
The Operating Companies' Loan Agreements contain certain restrictions on the
Company's operations and contain requirements that the Company achieve and
maintain certain financial ratios. Such restrictions include, among other
things, limitations on the ability of the Company and its subsidiaries to
incur additional indebtedness, to create, incur or permit the existence of
certain liens, to make certain investments, to make capital expenditures above
certain levels, to make certain sales of assets, to make certain payments with
respect to its outstanding stock, to effect certain fundamental changes and to
enter into certain types of transactions. Although the Company was in
compliance with these restrictions as of March 31, 1997 (the last reporting
date under the Operating Companies' Loan Agreements), there can be no
assurance that the Company will be able to maintain compliance with the
prescribed financial ratio tests or other requirements of the Operating
Companies' Loan Agreements. Failure to maintain compliance with such financial
ratio tests or other requirements under the Operating Companies' Loan
Agreements would result in a default and could lead to the acceleration of the
Company's obligations under the Operating Companies' Loan Agreements as well
as the acceleration of other indebtedness of the Company which, by the terms
of the instruments creating, evidencing or governing such indebtedness, would
be triggered upon an acceleration under the Operating Companies' Loan
Agreements. The acceleration of any such indebtedness would result in its
becoming immediately due and payable and could result in the Company becoming
subject to a proceeding under the Federal bankruptcy laws. See "DESCRIPTION OF
INDEBTEDNESS OF THE COMPANY" in the Disclosure Statement, included as Part B
to the Exchange Restructuring Prospectus, attached hereto as Annex IV.
Limitation on Use of Net Operating Losses
As a result of the receipt by Noteholders of New Common Stock in exchange
for the 12.5% Notes pursuant to the Restructuring, the Company will undergo an
"ownership change" for Federal income tax purposes. Accordingly, the Company
will be limited in its ability to use its net operating loss carryovers and
certain tax credit carryforwards to offset future taxable income. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS." Under the Exchange Restructuring, the
limitation imposed upon the Company's use of its net operating loss carryovers
would be more restrictive than under the Prepackaged Restructuring.
20
<PAGE>
Market Value of the Company May Fluctuate
The market value of the securities to be issued in the Exchange
Restructuring will depend on the future performance of the Company and on
factors generally affecting the securities markets (including, for example,
interest rates), which factors are influenced by conditions beyond the
Company's control.
Capital Expenditures
During 1996, the Company made capital expenditures totaling approximately
$9,652,000 for the upgrading of the Company's computer systems, expenditures
for a new warehouse management system, and the upgrading of existing
facilities and leasehold improvements. The Company believes that the capital
expenditure levels assumed in the preparation of the projected financial data
contained herein will be adequate to maintain the Company's long-term
competitive position, but there can be no assurance thereof. In the event that
such capital expenditure levels are not adequate, the Company's competitive
position in its industry and consequently the Company's results of operations
could be adversely affected. Further, the fair value of capital expenditures
recorded may be impaired, resulting in the recognition of additional losses.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" in Part A to the Exchange Restructuring Prospectus, attached
hereto as Annex IV and "FINANCIAL PROJECTIONS."
Dividend Restrictions
The Company does not intend to, nor does it expect to be able to, pay any
cash dividends on the New Common Stock in the foreseeable future, and the
Operating Companies' Loan Agreements currently restrict the payment of cash
dividends on the Old Common Stock by the Company and would similarly restrict
the payment of dividends on the New Common Stock. For a description of the
limitations contained in the Operating Companies' Loan Agreements, see
"DESCRIPTION OF INDEBTEDNESS OF THE COMPANY" in Part B to the Exchange
Restructuring Prospectus, attached hereto as Annex IV.
Dilution
Upon completion of the Exchange Offer or the Prepackaged Plan, as
applicable, the Company will issue 24,062,796 shares of New Common Stock
directly to exchanging Noteholders, and 6,015,699 shares of New Common Stock
to Stockholders, and will reserve 5,263,736 shares of New Common Stock for
issuance upon exercise of the Warrants. The issuance of the 24,062,796 shares
to Noteholders upon the New Common Stock Issuance will result in dilution of
the equity interests of the holders of Old Common Stock (as a percentage of
outstanding shares of common stock) which could adversely affect the market
price and the value of the New Common Stock. Immediately following the
consummation of the Exchange Restructuring or the Prepackaged Restructuring,
as applicable, the 24,062,796 shares issued directly to Noteholders will,
after giving effect to the Restructuring, represent approximately 80% of the
total outstanding shares of New Common Stock excluding shares obtainable upon
exercise of Warrants, based on the number of shares of Old Common Stock
outstanding as of the Record Date. Upon consummation of the Restructuring,
holders of Old Common Stock will receive, for each share of Old Common Stock
held, .0875 Series A Warrants with an exercise price of $7.15 (subject to
adjustment) and .0875 Series B Warrants with an exercise price of $8.68
(subject to adjustment). Based upon the current market price of the Old Common
Stock (giving effect to the Reverse Split), the Warrants may be "out of the
money" immediately following the Restructuring, and no assurance can be made
that the Warrants will ever be "in the money." If all Warrants are exercised,
the percentage of New Common Stock held by exchanging Noteholders would be
reduced from 80% to 68%. See "PURPOSE OF THE RESTRUCTURING." In addition,
there can be no assurance that the Company will not need to issue additional
Common Stock in the future in order to achieve its business plan or if it does
not achieve its projected results, which could lead to further dilution to
holders of the Company's Common Stock.
21
<PAGE>
Need for Sustained Trade Support
The Company's ability to achieve sales growth and profitability includes
significant reliance on continued support from its vendors. If the Company's
major vendors reduce their credit lines or product availability to the
Company, it could have a material adverse effect on the Company's sales, cash
position and liquidity.
New or Intensified Competition
The Company operates in an industry that is made up of several high growth
oriented competitors. As such the Company is subject to the possibility of new
or intensified competition in the regions in which the Company operates as a
result of efforts by direct competitors to grow, consolidate with other
competitors, or gain market share in those regions. Such activities may affect
the Company's sales volume, pricing and/or margins. See "BUSINESSES AND
PROPERTIES OF THE COMPANY" in Part A to the Exchange Restructuring Prospectus,
attached hereto as Annex IV.
Lack of Trading Market; Volatility
There can be no assurance that an active market for the Warrants will
develop or, if any such market does develop, that it will continue to exist.
Further, the degree of price volatility in any such market that does develop
may be significant. Accordingly, no assurance can be give as to the liquidity
of the market for any of the Warrants or the price at which any sales may
occur.
Concentrated Ownership of New Common Stock
Following consummation of the Restructuring, the ownership of the New Common
Stock will likely be more concentrated than was the ownership of the Old
Common Stock. Although the Company expects that, following the Restructuring,
it will continue to be controlled by a disaggregated group of stockholders,
one or more former holders of a substantial amount of 12.5% Notes who continue
to hold New Common Stock after the Restructuring may seek to influence the
direction of the Company, and the Company has agreed to appoint a nominee of
the Noteholders to the Board of Directors following the Restructuring. See
"MANAGEMENT--Post Restructuring Board Configuration." The Company does not
have complete information regarding the beneficial ownership of the 12.5%
Notes and is not aware of any agreement among Noteholders to seek to influence
the direction of the Company or to otherwise act in concert following the
Restructuring. There can be no assurance, however, that no such agreements
exist or that a concentrated number of holders of New Common Stock might not
attempt to influence the Company following the Restructuring.
Potential De-listing of the Common Stock
The Company is currently not in compliance with the net tangible assets test
required for continued listing on the Nasdaq National Market. The NASD has
postponed action to seek the de-listing of the Old Common Stock pending an
oral hearing scheduled for August 7, 1997, at which the Company will request
that the NASD waive compliance with such test until consummation of the
Restructuring.
Should the Restructuring be consummated, the Company expects to be in full
compliance with all of the NASD's requirements for continued listing on the
Nasdaq National Market. See "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS" in Part A to the Exchange Restructuring Prospectus,
attached hereto as Annex IV. There can be, however, no assurance that the NASD
will waive compliance of such test. If the common stock of the Company were
de-listed, there could be an adverse effect on the liquidity of the market for
such common stock.
History of Net Operating Losses
In 1995 and 1996, the Company experienced significant losses totalling
$83,911,000 and $140,375,000, respectively. Additionally, on a pro forma
basis, excluding the operating performance of FAB, which was sold
22
<PAGE>
effective March 28, 1997, the Company would have had a net operating loss for
the first quarter of 1997 of $1,024,000. Although a large portion of the
losses in 1995 and 1996 relate to the operations of and impairments or other
adjustments associated with assets or businesses that the Company has since
disposed of, a portion of the losses are also attributable to expenses and
adjustments associated with ongoing systems and processes of the Company.
These include adjustments to trade accounts payable balances related to price
protection, returns to vendors by Merisel and inventory receipt related
issues, such as short shipments, identified through the vendor reconciliation
process in 1995 and 1996. They also include impairment charges taken in 1995
in order to bring total capitalized development costs for the Company's
computer system in line with the estimated fair value of such assets.
Increased professional fees and other expenses associated with the development
of the 1996 business plan, process improvement efforts, lender negotiations
prompted by the prior year's losses, and severance costs related to management
changes also contributed to losses in 1996.
The Company experienced sales growth and decreased expenses in the first
quarter of 1997, and although this resulted in operating results that were
consistent with management's expectation and showed considerable improvement
over the previous year, the risk exists that the Company may continue to
experience losses, and that such continued losses will have a negative impact
of the Company's liquidity.
In order to return to profitability, the Company has pursued a strategy that
included the sale of several of its business segments. In the fourth quarter
of 1995, the Company recorded a $1,900,000 asset impairment related to the
sale of its Australian business. In September of 1996, the Company sold its
European, Mexican, and Latin American businesses at a loss of $33,400.00.
Additionally the Company recorded asset impairments of $30,000,000 in 1995 and
$42,033,000 in 1996 against the intangible assets of FAB, which it sold in the
first quarter of 1997. Of the Company's net sales of $5.5 billion in 1996,
these disposed businesses accounted for $2.1 billion. As such, it is likely
that revenues will be substantially lower in 1997. See "PROJECTED FINANCIAL
INFORMATION" in Part A of the Exchange Restructuring Prospectus, attached
hereto as Annex IV.
FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH VOTING ON THE PREPACKAGED PLAN, SEE "RISK
FACTORS" IN PART B TO THE EXCHANGE RESTRUCTURING PROSPECTUS, ATTACHED HERETO
AS ANNEX IV.
MARKET AND TRADING INFORMATION
The Old Common Stock is currently traded on the over-the-counter market and
is quoted on the Nasdaq National Market System under the symbol "MSEL." On
April 11, 1997, the day immediately prior to the date that the Company
announced its intention to pursue the Restructuring, the closing sale price
for the Old Common Stock was $1 15/16 per share. On July 24, 1997, the closing
sale price for the Old Common Stock was $2 9/16 per share. See "RISK FACTORS--
POTENTIAL DE-LISTING OF THE COMMON STOCK." See also "MARKET PRICES OF OLD
COMMON STOCK; DIVIDEND HISTORY" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATION--LIQUIDITY AND CAPITAL
RESOURCES" in Part A to the Exchange Restructuring Prospectus, attached hereto
as Annex IV.
Application will be made to list the Warrants for trading on the Nasdaq
National Market. There can be no assurance that such application will be
approved or that an active market for the Warrants will develop or as to the
prices at which they might be traded. See "RISK FACTORS."
STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES
DATE, TIME AND PLACE OF STOCKHOLDERS' MEETING
The Stockholders' Meeting (the "Stockholders' Meeting") will be held at the
Company's headquarters located at 200 Continental Boulevard, El Segundo,
California, on August 29, 1997, at 10:00 a.m., Los Angeles
23
<PAGE>
time. The Stockholder votes with respect to the New Common Stock Issuance will
not be effective unless and until the Charter Amendment is approved at the
Stockholders' Meeting and the Exchange Restructuring has been consummated and
the Charter Amendment has been filed with the Delaware Secretary of State. If
approved, the stockholder votes with respect to the Stock Award and Incentive
Plan will be effective regardless of whether the Exchange Restructuring is
consummated or the Charter Amendment is filed. Should less than the requisite
100% of the holders of the 12.5% Notes tender their 12.5% Notes pursuant to
the Exchange Restructuring, but the Company receives sufficient acceptances of
the Prepackaged Plan to seek confirmation thereof by the Bankruptcy Court, the
Company expects that it will instead pursue the Prepackaged Restructuring. If
the Prepackaged Restructuring is pursued and a petition is filed under the
Bankruptcy Code, the Company expects that the New Common Stock Issuance and an
amendment substantially similar to the Charter Amendment will be implemented
pursuant to the Prepackaged Plan. See "SUMMARY OF THE PLAN" in Part B to the
Exchange Restructuring Prospectus attached hereto as Annex IV.
SOLICITATION OF PROXIES; RECORD DATE
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of proxies to be voted at the Stockholders' Meeting.
In addition, this Proxy Statement/Prospectus is furnished in connection with
the solicitation by the Board of Ballots to be voted in connection with the
Prepackaged Plan. YOU MUST COMPLETE AND RETURN BOTH THE PROXY AND THE BALLOT
IN ORDER TO VOTE ON BOTH THE PROPOSALS AND THE PREPACKAGED PLAN. THE BOARD
RECOMMENDS A VOTE "FOR" BOTH THE PROPOSALS AND THE PREPACKAGED PLAN.
The record date for purposes of determining which holders of Old Common
Stock are eligible to vote on the Prepackaged Plan and at the Stockholders'
Meeting is July 22, 1997 (the "Record Date"). On the Record Date there were
30,078,495 shares of Old Common Stock outstanding, of which there were 1,255
holders of record. Stockholders are not required to vote at the Stockholders'
Meeting in order to vote on the Prepackaged Plan. It is important that all
Stockholders vote to accept or to reject the Prepackaged Plan because, under
the Bankruptcy Code, for purposes of determining whether the requisite
acceptances have been received, only holders who vote will be counted. Failure
by a holder to send a duly completed and signed Ballot will be deemed to
constitute an abstention by such holder with respect to a vote on the
Prepackaged Plan. Abstentions as a result of not submitting a duly completed
and signed Ballot will not be counted as votes for or against the Prepackaged
Plan. Any Ballot which is executed by a holder but does not indicate an
acceptance or rejection of the Prepackaged Plan will not be counted as a vote
for or against the Prepackaged Plan. See "TENDERING AND VOTING PROCEDURES" in
Part A to the Exchange Restructuring Prospectus, attached hereto as Annex IV,
and "VOTING PROCEDURES AND REQUIREMENTS" in Part B to the Exchange
Restructuring Prospectus, attached hereto as Annex IV.
WHETHER OR NOT YOU ARE ABLE TO ATTEND THE STOCKHOLDERS' MEETING, YOUR VOTE
BY PROXY IS VERY IMPORTANT. STOCKHOLDERS ARE ENCOURAGED TO MARK, SIGN AND DATE
THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
STOCKHOLDERS WHO COMPLETE A PROXY WITH RESPECT TO THE STOCKHOLDERS' MEETING
SHOULD ALSO DULY COMPLETE AND SIGN A BALLOT IN ORDER TO VOTE ON THE
PREPACKAGED PLAN.
Proxies and Ballots are being solicited by and on behalf of the Board. All
expenses of this solicitation, including the cost of preparing and mailing
this Proxy Statement/Prospectus, will be borne by the Company. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of the Company in person or by telephone, telegram or
other means of communication. Such directors, officers and employees will not
be additionally compensated, but may be reimbursed for out-of-pocket expenses
in connection with such solicitation. Arrangements will also be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
material to beneficial owners of Old Common Stock held of record by such
persons, and the Company may reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith. To
assure the presence in person or by proxy of the largest number of
Stockholders possible, MacKenzie Partners, Inc., the Information Agent, has
been engaged to solicit Proxies on behalf of the Company for a customary fee
plus reasonable out-of-pocket expenses.
24
<PAGE>
PURPOSE OF STOCKHOLDERS' MEETING
The purpose of the Stockholders' Meeting is to consider the proposals (the
"Proposals") set forth in this Proxy Statement/Prospectus to approve the
Charter Amendment, to approve the New Common Stock Issuance, and to approve
the Stock Award and Incentive Plan. Approval of the Charter Amendment is a
condition to the consummation of the Exchange Restructuring.
THE CHARTER AMENDMENT
The Board has unanimously adopted a resolution approving, subject to
consummation of the Exchange Restructuring, the amendment of Article IV of the
Company's Certificate of Incorporation as more fully described herein (the
"Charter Amendment"). The purposes and effects of the Charter Amendment are,
among other things, to reduce the number of outstanding shares of common stock
in order to have enough authorized and unissued shares to issue shares of New
Common Stock in the Exchange Restructuring in exchange for the 12.5% Notes and
the Warrant Shares to be issued pursuant to the exercise of the Warrants, such
Warrants to be issued to Stockholders on the Restructuring Date. In order to
provide for the authorization of a sufficient number of shares of New Common
Stock that are unissued (and not reserved for issuance pursuant to stock
options or other rights), the Charter Amendment will effect the Reverse Split.
The Reverse Split will likely also have the effect of increasing the trading
price of the common stock of the Company from where it would otherwise trade
in the absence of the Reverse Split assuming the aggregate market
capitalization of the Company remains constant. Such increase may, although
there is no assurance that it will, (i) enhance the attractiveness of such
common stock to certain institutional investors whose investing guidelines
require that the securities that they purchase meet certain minimum trading
price criteria, (ii) permit investors to purchase such common stock from
broker/dealers on margin in accordance with applicable regulations and
(iii) militate in favor of continued listing of such common stock on the
Nasdaq National Market. In addition, the Charter Amendment will increase the
par value of the authorized common stock of the Company from $.01 per share to
$.05 per share so as to preserve the value of the Company's Stated Capital on
the Company's Balance Sheet. The Charter Amendment is set forth in its
entirety in Annex I to this Proxy Statement/Prospectus. The Charter Amendment
is necessary to permit the Company to consummate the Exchange Restructuring.
THE AFFIRMATIVE VOTE OF THE MAJORITY OF THE OUTSTANDING SHARES OF OLD COMMON
STOCK ENTITLED TO VOTE ON THE PROPOSALS IS REQUIRED FOR APPROVAL OF THE
CHARTER AMENDMENT. ACCORDINGLY, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE
EFFECT OF A VOTE AGAINST THE PROPOSAL. UNLESS INSTRUCTED TO THE CONTRARY IN
THE PROXY, THE SHARES REPRESENTED BY THE PROXIES WILL BE VOTED FOR THE CHARTER
AMENDMENT.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE CHARTER AMENDMENT.
THE NEW COMMON STOCK ISSUANCE
The Board has unanimously adopted a resolution approving, as part of the
Exchange Restructuring, the issuance of up to 35,482,632 shares of New Common
Stock pursuant to the Exchange Restructuring. Upon exchange of their 12.5%
Notes, the Noteholders, in the aggregate and as of the Exchange Date, would
receive 24,062,796 shares of New Common Stock, which would represent 80% of
the outstanding shares of New Common Stock after giving effect to the Exchange
Restructuring (excluding the New Common Stock issuable upon exercise of the
Warrants) based on the number of shares outstanding as of the Record Date. As
a result of the Reverse Split, holders of Old Common Stock immediately prior
to the Restructuring would receive, in the aggregate, 6,015,699 shares of New
Common Stock, which would represent 20% of the outstanding shares of New
Common Stock after giving effect to the Exchange Restructuring. In addition,
the holders of Old Common Stock would receive Warrants exercisable for an
additional 5,263,736 shares of New Common Stock (subject to adjustment)
immediately after consummation of the Restructuring. The approval by the
Stockholders of the New Common Stock Issuance may be required by the
applicable rules of the National Association of Securities Dealers, Inc. (the
"NASD").
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The New Common Stock Issuance will not take effect unless and until the
Charter Amendment is approved and filed with the Secretary of the State of
Delaware and the Exchange Restructuring has been consummated.
THE NEW COMMON STOCK ISSUANCE REQUIRES THE APPROVAL OF A MAJORITY OF THE
HOLDERS OF THE OLD COMMON STOCK REPRESENTED AT THE STOCKHOLDERS' MEETING.
ACCORDINGLY, ABSTENTIONS OR BROKER NON-VOTES WILL NOT AFFECT THE OUTCOME OF
THE VOTE ON THE PROPOSAL. UNLESS INSTRUCTED TO THE CONTRARY IN THE PROXY, THE
SHARES REPRESENTED BY THE PROXIES WILL BE VOTED FOR THE PROPOSAL TO APPROVE
THE NEW COMMON STOCK ISSUANCE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NEW COMMON STOCK
ISSUANCE.
THE STOCK AWARD AND INCENTIVE PLAN
Should the Stock Award and Incentive Plan be approved by the Stockholders,
the Company would be permitted to grant options, stock appreciation rights and
other stock-based awards (together, "New Options") for up to 3,000,000 shares
of the Company's Common Stock (approximately 10% of the New Common Stock
outstanding immediately following the Restructuring). Holders of options
outstanding prior to the Restructuring ("Old Options") will not be entitled to
receive Warrants pursuant to the Restructuring unless such holders exercise
their Old Options prior to the consummation of the Restructuring. Grants of
New Options and vesting schedules with respect to New Options are to be
determined by the Board. If the Restructuring is consummated the Company
intends to grant New Options in exchange for all then outstanding employee
stock options and stock appreciation rights ("SARs"), which would then be
cancelled. The number of shares available under the Stock Award and Incentive
Plan will be reduced to the extent that shares of the Company's Common Stock
remain subject to outstanding option grants under any of the Company's other
stock-based incentive plans.
Promptly following the consummation of the Restructuring, the Company's
management intends to propose to the reconstituted board of directors a
management incentive plan which will consist primarily of options to purchase
New Common Stock in accordance with the Stock Award and Incentive Plan. The
proposed details of such plan are set forth more fully in "Discussion of
Proposals--Stock Award and Incentive Plan."
If approved by a majority of the voting Old Common Stock represented at the
Stockholders' Meeting, the Stock Award and Incentive Plan will be effected
regardless of whether or not the Restructuring is effected or the Charter
Amendment is approved and filed. For more information on the Stock Award and
Incentive Plan, see "STOCK AWARD AND INCENTIVE PLAN."
THE AFFIRMATIVE VOTE OF THE MAJORITY OF THE SHARES OF OLD COMMON STOCK
ENTITLED TO VOTE AND REPRESENTED AT THE STOCKHOLDERS' MEETING ON THE PROPOSALS
IS REQUIRED FOR APPROVAL OF THE STOCK AWARD AND INCENTIVE PLAN. ACCORDINGLY,
ABSTENTIONS WILL HAVE THE EFFECT OF A VOTE AGAINST THE PROPOSAL WHILE BROKER
NON-VOTES WILL NOT AFFECT THE OUTCOME OF THE VOTE ON THE PROPOSAL. UNLESS
INSTRUCTED TO THE CONTRARY IN THE PROXY, THE SHARES REPRESENTED BY THE PROXIES
WILL BE VOTED FOR THE PROPOSAL TO APPROVE THE STOCK AWARD AND INCENTIVE PLAN.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE STOCK AWARD AND INCENTIVE
PLAN.
VOTING OF PROXIES
All shares represented by a properly executed Proxy will be voted at the
Stockholders' Meeting in accordance with the directions on such Proxy. If no
direction is indicated on a properly executed Proxy, the shares covered
thereby will be voted in favor of the Charter Amendment, the New Common Stock
Issuance and the Stock Award and Incentive Plan.
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In the event that sufficient votes in favor of the Charter Amendment and the
New Common Stock Issuance are not received by the time scheduled for the
Stockholders' Meeting, or if any of the other conditions to the consummation
of the Exchange Restructuring and the other elements of the Exchange
Restructuring are not satisfied, the persons named as proxies may propose one
or more adjournments of the Stockholders' Meeting to permit further
solicitation of Proxies with respect to such proposals or to permit the
satisfaction of any such condition. Any such adjournment will require the
affirmative vote of a majority of the voting power present or represented at
the Stockholders' Meeting.
VOTING RIGHTS; QUORUM
Pursuant to the Company's Restated Certificate of Incorporation, as amended,
Stockholders will be entitled to one vote per share at the Stockholders'
Meeting. The presence, either in person or by properly executed Proxy, of the
holders of a majority of the shares of Old Common Stock outstanding and
entitled to vote is necessary to constitute a quorum at the Stockholders'
Meeting. There is no quorum or minimum number of votes required to be cast
with respect to the Prepackaged Plan.
NO DISSENTERS' RIGHTS
Stockholders have no appraisal or dissenters' rights with respect to the
Charter Amendment, the New Common Stock Issuance or the Stock Award and
Incentive Plan.
REVOCATION OF PROXIES
A stockholder who has executed and returned a Proxy may revoke it at any
time before it is voted by executing and returning a Proxy bearing a later
date, by giving written notice of revocation to the Secretary of the Company
or by attending the Stockholders' Meeting and voting in person.
PREPACKAGED PLAN
The Exchange Restructuring is conditioned on, among other things, 100% of
the outstanding 12.5% Notes being validly tendered pursuant to the Exchange
Restructuring. If less than 100% of the holders tender their 12.5% Notes
pursuant to the Exchange Restructuring but the requisite acceptances of the
Prepackaged Plan are received from both Noteholders and Stockholders, the
Company intends instead to pursue the financial restructuring of the Company
by means of the filing of a petition under Chapter 11 of the United States
Bankruptcy Code and of a "Prepackaged Plan." The Prepackaged Restructuring may
be effected with the approval of a minimum of two-thirds of the principal
amount and a majority in number of the Noteholders voting on the Prepackaged
Plan and of a minimum of at least two-thirds in number of shares of Old Common
Stock voting on the Prepackaged Plan. If the Prepackaged Restructuring is
pursued, the Company expects that the New Common Stock Issuance and an
amendment to the Company's Certificate of Incorporation substantially similar
to the Charter Amendment will be implemented pursuant to the Prepackaged Plan.
Accordingly, this Proxy Statement/Prospectus also serves as a solicitation of
acceptances by the Company for the acceptance of the Prepackaged Plan. See
"SUMMARY OF THE PLAN" in Part B to the Exchange Restructuring Prospectus,
attached hereto as Annex IV and Plan of Reorganization of Merisel, Inc., under
Chapter 11 of the Bankruptcy Code, attached to the Exchange Restructuring
Prospectus as Appendix I.
The Company has reserved the right to seek confirmation of the Prepackaged
Plan under the "cram-down" provisions of the United States Bankruptcy Code.
However, if a majority of Stockholders elect not to support the Restructuring
after their review of all the facts and circumstances existing at that time,
the Company does not presently believe that attempting to force confirmation
of the Prepackaged Plan under the "cram-down" provisions would necessarily be
in the best interests of the Company and the Company has no present intention
to do so. Although the Limited Waiver Agreement requires, if consistent with
the Company's obligations under applicable law (which the Company believes
includes its fiduciary obligations), the filing of a Chapter 11 petition on
the Prepackaged Plan and that the Company take steps that are both necessary
and desirable to confirm the Prepackaged Plan, the Agreement does not by its
terms require that the Company seek confirmation of the
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Prepackaged Plan under the cram-down provisions of the Bankruptcy Code if the
Stockholders vote to reject the Prepackaged Plan. Moreover, the Company has
specifically rejected requests by representatives of the Ad Hoc Noteholders'
Committee, both before and after the execution of the Limited Waiver
Agreement, for the Company's agreement to proceed with confirmation of the
Prepackaged Plan under those provisions. Accordingly, for the foregoing
reasons, unless the requisite Stockholder acceptances have been obtained for
the Prepackaged Plan, the Company does not currently believe filing a Chapter
11 petition to seek confirmation of the Prepackaged Plan under the cram-down
provisions would be consistent with its fiduciary obligations as presently
conceived or be both necessary and desirable.
The Ad Hoc Noteholders Committee has advised the Company that it disputes
the Company's interpretation of the Limited Waiver Agreement in this regard
and believes that the Company is obligated to file and confirm the Prepackaged
Plan regardless of the outcome of the Stockholder vote.
BACKGROUND OF RESTRUCTURING
In 1995, the Company incurred a net loss of $83.9 million. This loss was
principally the result of several large fourth quarter adjustments totaling
$89.4 million. Approximately $25,800,000 of the fourth quarter adjustments
related to adjustments to trade accounts payable balances for price
protection, return to vendors and inventory receipt related issues, such as
short shipments, identified through the vendor reconciliation process. An
additional $8,200,000 charge was taken due to changes made in estimates to
certain asset and liability values. The Company also determined that portions
of the carrying values of certain of its long-lived assets and identifiable
intangibles would not be recovered from their use in future operations.
Accordingly, these assets were written down to their fair values as of
December 31, 1995, for a total adjustment of $51,400,000. Of that amount,
$30,000,000 represented an impairment of long-lived assets associated with the
Company's Computerland franchise business, and $1,900,000 represents an
impairment loss for the writedown of the net assets in the Company's
Australian business to their realizable value. The Computerland franchise
business and the Australian businesses were both subsequently sold. The
remaining impairment charge for $19,500,000 was taken against costs associated
with the Company's ongoing computer system conversion. The Company recorded
this charge in order to adjust capitalized development and implementation
costs to their estimated fair value. Additionally, the Company's European
distribution center experienced system software start-up problems which
created shipping and receiving errors that resulted in a charge of $1.5
million, while another $2.5 million charge was taken to expense such start-up
costs.
Due to these substantial losses, the Company was required in April 1996 to
negotiate with the lenders under its various financing agreements to amend
such agreements and to waive certain defaults, which amendments and waivers
were obtained.
In connection with such negotiations, the Company developed and implemented
a business plan for the remainder of fiscal 1996 (the "1996 Business Plan")
that focused on maximizing cash flow by controlling costs, curtailing non-
essential capital expenditures, limiting investments and concentrating on its
more profitable areas of operations and product lines and slowing growth in
its less profitable areas of operations. The 1996 Business Plan assumed that
the Company would not return to profitability until the fourth quarter of
1996. At the same time, the Company recognized that, in order to meet its
obligations in 1997, it needed to engage in some combination of asset sales,
refinancing of its borrowings and obtaining new sources of financing.
Concurrently with the implementation of the 1996 Business Plan, the Company
actively explored all of its strategic options, including the sale of the
Company, with the assistance of Merrill Lynch & Co. This ultimately led to the
Company's sale of its European, Mexican and Latin American operations in
September of 1996 after attempts to sell the entire Company proved
unsuccessful. In connection with this sale Merisel Americas and certain of its
lenders agreed in October 1996 to amend (1) the Amended and Restated Revolving
Credit Agreement, dated as of December 23, 1993, as amended, among Merisel
Americas and Merisel Europe as borrowers, the Company as guarantor, and the
lenders party thereto (the "Revolving Credit Agreement"), and (2) the Amended
and Restated Senior Note Purchase Agreement, dated as of December 23, 1993, as
amended,
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by and among each of the purchasers named therein, Merisel Americas as issuer,
and the Company (the "Senior Note Purchase Agreement, and, together with the
Revolving Credit Agreement, the "Operating Companies' Senior Debt") relating
to the 11.5% Notes to extend the final maturities of such indebtedness until
January 31, 1998. In connection with such amendments, the Company was required
to obtain, and did obtain, an amendment of the Amended and Restated
Subordinated Note Purchase Agreement, dated as of December 23, 1993, as
amended, by and among each of the purchasers named therein and Merisel
Americas (the "Subordinated Note Purchase Agreement" and, together with the
Operating Companies' Senior Debt, the "Operating Companies' Loan Agreements")
relating to the Subordinated Notes.
These Operating Companies' Loan Agreements permitted the Company to make
interest payments on the 12.5% Notes with the provision that if the interest
payments due on June 30, 1997 and December 31, 1997 were paid, an additional
$40,000,000 and $30,000,000 of the indebtedness under the Operating Companies'
Loan Agreements would be required to be amortized in each of these periods,
respectively. The Company did not believe that it could satisfy these
obligations without a restructuring of the 12.5% Notes and the Operating
Companies' Loan Agreements.
In January 1997, along with its emphasis on rebuilding profitable sales
growth, the Company retained Donaldson, Lufkin and Jenrette Securities
Corporation ("DLJ") as financial advisor to assist it in restructuring its
debt. The Company did not seek or obtain any opinion from DLJ as to the
fairness of the Restructuring or otherwise in connection with their
engagement. See "ADVISORS AND REPRESENTATIVES" in Part A of the Exchange
Restructuring Prospectus, attached hereto as Annex IV.
Shortly thereafter, the Company commenced negotiations with an ad hoc
committee of holders of 12.5% Notes (the "Ad Hoc Noteholders Committee").
Effective April 14, 1997, the Company and holders of more than 75% of the
outstanding principal amount of its 12.5% Notes entered into the Limited
Waiver Agreement, as described below. The following are the members of the Ad
Hoc Noteholders Committee: Turnberry Capital Management, Baker Nye Advisers,
Inc., Monarch Management Group Limited, Robert Fleming, Inc., Fisher Ewing
Partners and York Capital Management. The Company does not have complete
information regarding the beneficial ownership of the 12.5% Notes (including,
without limitation, the identity of the Consenting Noteholders), and is
unaware of any affiliations between the Noteholders, on the one hand, and the
officers and directors of the Company, on the other hand. The Limited Waiver
Agreement requires that, on the Exchange Date, the Board shall be composed of
members acceptable to the Ad Hoc Noteholders Committee and the Company. See
"MANAGEMENT--Post-Restructuring Board Configuration." The Ad Hoc Noteholders
Committee was assisted in analyzing and negotiating the Restructuring with the
Company by Chanin and Company LLC ("Chanin"), but did not seek or obtain any
opinion from Chanin as to the fairness of the Restructuring or otherwise in
connection with their engagement. See "ADVISORS AND REPRESENTATIVES" in Part A
to the Exchange Restructuring Prospectus, attached hereto as Annex IV.
THE LIMITED WAIVER AGREEMENT
Effective April 14, 1997, the Company entered into an agreement (the
"Limited Waiver Agreement") with holders of more than 75% of the outstanding
principal amount of its 12.5% Notes (the "Consenting Noteholders"). Pursuant
to the terms of the Limited Waiver Agreement, upon the fulfillment of certain
conditions, the Consenting Noteholders would exchange their 12.5% Notes for
New Common Stock in accordance with the terms of the Restructuring. The
Limited Waiver Agreement provides that, immediately after the consummation of
the Exchange Restructuring, the Company would issue to the holders of Old
Common Stock Warrants to purchase shares of New Common Stock. See "DESCRIPTION
OF THE WARRANTS."
In the event that less than 100% of the aggregate principal amount of the
12.5% Notes are tendered in the Exchange Offer but at least two-thirds in
principal amount and a majority in number of the holders of the 12.5% Notes
and at least two-thirds of the Stockholders voting have voted in favor of the
Prepackaged Plan, the Holding Company has agreed to file the Prepackaged Plan
under Chapter 11 of the U.S. Bankruptcy Code and the Consenting Noteholders
have agreed to vote in favor of the Prepackaged Plan.
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While the Limited Waiver Agreement is in effect, the Consenting Noteholders
have agreed to waive any default arising from the nonpayment of interest due
in 1997 on the 12.5% Notes. Interest will continue to be due and payable on
the outstanding 12.5% Notes that have not consented to the waiver at the time
such payments are due; however, such holders will not be able to accelerate
the payment of the principal of the 12.5% Notes under the terms of the
Indenture governing the 12.5% Notes.
The Limited Waiver Agreement also requires that, on the Exchange Date, the
Board shall be composed of members acceptable to the Ad Hoc Noteholder
Committee and the Company. See "MANAGEMENT--Post Restructuring Board
Configuration." Upon the consummation of any extraordinary transaction (as
defined in the Warrant Agreements) prior to January 1, 1998, including a
merger or sale of substantially all of the assets of the Company, or the
agreement of the Company to perform an extraordinary transaction entered into
prior to January 1, 1998, the Warrants must remain outstanding and be
exercisable in exchange for common stock of the Company or common stock of the
acquiring company unless such extraordinary transaction is approved by at
least 85% of the outstanding New Common Stock then outstanding.
The Limited Waiver Agreement shall terminate and the obligations to pay
interest on the 12.5% Notes shall be reinstated if (a) on the earliest to
occur of (i) the day before the first date on which the Exchange Offer could
be closed, (ii) the day before the last date on which ballots in respect of
the Prepackaged Plan may be submitted, and (iii) October 31, 1997, (1) the
Company and the other parties to the Operating Companies Loan Agreements shall
have failed to enter into the Extension (as described below) or (2) the
Company shall have failed to consummate a refinancing of all of the
indebtedness outstanding under the Operating Companies' Loan Agreements on
terms satisfactory to the Consenting Noteholders; (b) the Exchange
Restructuring is not closed by August 31, 1997, unless Chapter 11 proceedings
relating to the Prepackaged Plan have commenced; (c) in the event Chapter 11
proceedings are commenced, the Prepackaged Plan is not substantially
consummated by October 31, 1997; (d) the Company has changed the terms of the
Exchange Restructuring or Prepackaged Plan so as to be inconsistent with the
terms contemplated by the Limited Waiver Agreement; (e) there occurs an "Event
of Default" under any of the Operating Companies' Loan Agreements after the
date specified in the Limited Waiver Agreement; (f) the Company's Certificate
of Incorporation shall not have been amended so as to authorize enough shares
of common stock to effectuate the Exchange Restructuring; or (g) there shall
have occurred any material adverse change in the Company's business, assets,
operations or condition.
Certain Noteholders have threatened to sue the Company regarding a purported
breach of the Limited Waiver Agreement. The Company does not believe that the
Noteholders' claims for breach are valid, and it intends to defend itself
vigorously should a suit be commenced. Due to the fact that no suit has yet
been filed and no discovery has taken place, it is premature to predict the
outcome with any certainty.
THE EXTENSION UNDER THE OPERATING COMPANIES' LOAN AGREEMENTS
As of April 14, 1997, the Company had entered into an agreement in principle
(the "Extension") with 100% of the holders of the loans made and notes issued
under the Operating Companies' Loan Agreements, pursuant to which all of such
holders have agreed, subject to execution of definitive documentation and
certain other conditions, to extend the maturities under their respective
Operating Companies Loan Agreements to January 31, 1999. In consideration of
the Extension, the Company has agreed to pay certain fees and additional
interest, as described below.
While the Restructuring is being implemented, all of the holders of loans
made and notes issued under the Operating Companies' Loan Agreements have
agreed to waive any default or cross-default resulting from the non-payment of
interest in respect of the 12.5% Notes, the commencement of either the
Exchange Restructuring or the Prepackaged Plan, or certain other events that
might otherwise cause the Company to default under the relevant agreements. In
addition, all of the holders of indebtedness under the Operating Companies
Loan Agreements have agreed to execute amendments to the relevant agreements
to reflect the extension of their indebtedness provided that (i) the
amendments with respect to the Revolving Credit Agreement and the Senior Note
Purchase Agreement shall not become effective until they have been signed by
the holders of all such
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instruments, and (ii) none of the amendments shall become effective unless the
Exchange is closed on or prior to August 31, 1997 or the Prepackaged Plan or a
similar plan has been substantially consummated on or prior to October 31,
1997.
In consideration for the waivers, the Company has agreed to pay certain fees
and additional interest, as described below. The fees payable under the
Extension include a fee equal to 1.5% of the outstanding principal amount owed
to each holders of indebtedness under the Operating Companies' Loan Agreement.
In addition, the Company will owe to the holders of Operating Companies'
Senior Debt a 2% fee upon the closing of the Restructuring, as well as fees of
(i) .25% on January 31, 1998, (ii) 0.5% on April 30, 1998 and (iii) .75% on
July 31, 1998. The interest rate on the Operating Companies' Senior Debt will
increase 0.5% each quarter commencing January 31, 1998 on the debt that
remains outstanding at that time. The interest rate on the Subordinated Notes
will also increase by 0.5% each quarter commencing January 31, 1998 and
continuing for three quarters thereafter. The Company would have the right to
prepay such debt at anytime without penalty.
The Extension shall terminate if (a) the Exchange Restructuring is not
closed by August 31, 1997, unless Chapter 11 proceedings pursuant to the
Prepackaged Plan have been commenced, (b) in the event Chapter 11 proceedings
are commenced, the Prepackaged Plan is not substantially consummated by
October 31, 1997; (c) the Company has changed the terms of the Exchange Offer
or Prepackaged Plan so as to be inconsistent with the terms contemplated by
the Extension; (d) there occurs an "Event of Default" under any of the
Operating Companies' Loan Agreements or certain other agreements; (e) the
Company's Certificate of Incorporation shall not have been amended so as to
authorize enough shares of common stock to effectuate the Exchange
Restructuring; (f) there shall have occurred any material adverse change in
the Company's business, assets, operations or condition; or (g) the Company,
Merisel Americas and Merisel Europe materially breach any obligations under
the Extension.
PURPOSE OF THE RESTRUCTURING
The purpose of the Restructuring is to enhance the long-term viability and
to contribute to the success of the Company by adjusting the Company's
capitalization (through a reduction of debt levels, an extension of principal
repayments and a relaxation of operating covenants) to reflect current and
expected operating performance levels. Specifically, the Restructuring is
designed to reduce the Company's outstanding debt obligations by $125 million,
to levels which the Company believes can be supported by its projected cash
flow, to replace a significant portion of the Company's indebtedness with New
Common Stock and to amend the covenants and final maturity on its Operating
Companies' indebtedness. Interest charges will be substantially reduced and
stockholders' equity will be substantially increased as a result of the
Restructuring.
In addition, implementation of the Restructuring will enable the Company to
avoid certain significant amortization payments totalling $40 million which
would be due under the Operating Companies' Loan Agreements if the Company
were to pay interest on the 12.5% Notes that was due on June 30, 1997, subject
to a 30 day grace period. If the Company has not paid the interest due on the
12.5% Notes by July 30, 1997, an event of default will occur with respect to
the 12.5% Notes entitling the holders to accelerate the maturity thereof.
While the Limited Waiver Agreement is in effect, such interest payments have
been waived by in excess of 75% of the holders of 12.5% Notes and the holders
of the Operating Companies' indebtedness have waived any cross-default arising
from the non-payment of such interest. Failure to consummate the Restructuring
could result in such amortization payments becoming due as well as interest
payment obligations on the 12.5% Notes being reinstated. The Company has been
informed by holders of in excess of 25% of the 12.5% Notes that if the
Stockholders fail to approve the Charter Amendment, and the Company does not
immediately seek to implement the Restructuring through the Prepackaged Plan,
such holders intend to accelerate all of the indebtedness outstanding under
the 12.5% Notes. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT
WILL BE ABLE TO SATISFY SUCH OBLIGATIONS WITHOUT A REFINANCING OF THE
COMPANY'S INDEBTEDNESS UNDER THE OPERATING COMPANIES' LOAN AGREEMENTS OR
OBTAINING ADDITIONAL WAIVERS OR AMENDMENTS TO SUCH AGREEMENTS, AND THERE CAN
BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING,
WAIVERS OR AMENDMENTS.
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If the Company determines that it is, or will be unable to complete the
Restructuring, the Company will consider all financial alternatives available
to it at such time, which may include the sale of all or part of the Company's
business, the implementation of an alternative restructuring arrangement
outside of bankruptcy, (including refinancing the indebtedness under the
Operating Companies' Loan Agreements or seeking waivers thereunder) or the
commencement of a Chapter 11 case with or without a preapproved plan of
reorganization. There can be no assurance, however, that any alternative
restructuring would result in a reorganization of the Company rather than a
liquidation, or that any such reorganization would be on terms as favorable to
the Noteholders and Stockholders as the terms of the Prepackaged
Restructuring. If a liquidation or a protracted and non-orderly reorganization
were to occur, there is a risk that the ability of the Noteholders and
Stockholders to recover their investments would be even more impaired than
under the Prepackaged Restructuring and would be substantially delayed. A non-
consensual restructuring would likely have a material adverse impact on the
Company and its employees, suppliers and customers.
RESTRUCTURING FINANCIAL CONSIDERATIONS
In connection with the development of its Restructuring proposal, the Board,
with the assistance of DLJ, conducted a review of certain financial
information with respect to the Company and the proposed transactions
contemplated by the Restructuring. The Company did not seek or obtain any
opinion from DLJ as to the fairness of the Restructuring or otherwise in
connection with their engagement, and DLJ did not make any assessment or
recommendation to the Company with respect to the Restructuring. DLJ relied
upon and assumed the accuracy and completeness of all the financial
projections and other information that was available to it from public sources
or that was provided to or discussed with it by the Company, the Board or
their respective representatives. The Board also reviewed a liquidation
analysis prepared by the Company's management. Based upon the foregoing, the
Board determined that, in its judgment, the terms of the Restructuring are in
the best interests of the Company and its shareholders. The following
paragraphs summarize the financial information reviewed by the Board and the
factors the Board considered.
Background of the Restructuring Financial Analysis. The Board reviewed the
Company's business plan and projections and the various factors influencing
the computer products distribution industry which historically had affected
the Company's operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Board also was aware of
the significant amortization payments that would otherwise be required upon
the payment of interest on the 12.5% Notes next due on July 30, 1997 absent a
Restructuring, and that the Company's projected cash flow would be
insufficient to satisfy such debt service requirements during 1997.
Restructuring Valuation. The Board evaluated the Restructuring in the
context of the implied value of the Common Stock proposed to be exchanged for
12.5% Notes based on recent trading prices of the 12.5% Notes and the amount
owed on the 12.5% Notes. The 12.5% Notes were trading at 93.5% of principal
amount on May 13, 1997 in the over-the-counter market which values the 12.5%
Notes at $116.9 million in the aggregate. See "MARKET AND TRADING
INFORMATION." Based on their receiving 80% of the restructured equity of the
Company, this value would imply an equity valuation for 100% of the equity at
$146.1 million. Assuming the Restructuring closed on June 30, 1997, the
accrued claim of principal and interest on the 12.5% Notes would be $132.8
million. Based on the 12.5% Notes receiving 80% of the restructured equity of
the Company, this would imply an equity valuation of $166.0 million if the
12.5% Notes were to receive a full recovery. In preparing and reviewing such
analysis, the Company reviewed financial and operating performance of the
Company and its principal competitors, including growth rates, working capital
utilization, margins, profitability and capitalization. In addition, the
Company reviewed implied valuation multiples of the Company and the market
multiples of its principal competitors based upon trailing and projected
financial performance, and reviewed valuation multiples of companies in other
distribution industries by comparing how their valuation was impacted by,
among other things, size, margins, leverage and growth rates. The Company also
reviewed recoveries of various classes of creditors in other restructurings.
The market analysis of competitors' multiples showed average market multiples
for total enterprise value to EBITDA for the preceding twelve months
("LTM EBITDA") of 11.4x for comparable full-line distributors, 6.3x for
comparable aggregators and 7.4x for
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comparable electronics distributors. Based on these market multiples and
observations regarding factors that influence such valuation multiples, the
Company used a 7.5x total enterprise value to LTM EBITDA multiple in the
preparation of the liquidation analysis described below.
Liquidation Analysis. Based on its own projections and the market analysis
of competitors' multiples described above, the Company prepared a liquidation
analysis, which is included in the Disclosure Statement. See "LIQUIDATION
ANALYSIS" in Part B to the Exchange Restructuring Prospectus, attached hereto
as Annex IV. The liquidation analysis compares the consideration estimated to
be available for distribution in the event of a liquidation proceeding of the
Company under Chapter 7 of the Bankruptcy Code to the economic terms of the
Restructuring. The liquidation analysis estimates the gross value available
for distribution in such a liquidation at $63.1 million, less administrative
expenses including trustee and professional fees of $7.4 million. Accordingly,
under such analysis the net proceeds available to Noteholders and Stockholders
would be $55.7 million. Based on the Noteholders claim of $125 million plus
accrued and unpaid interest to the date of liquidation, the liquidation would
net such Noteholders less than a 42% recovery on their claims and leave
existing holders of Old Common Stock with no consideration, assuming a strict
priority distribution.
The liquidation analysis makes numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of
which are beyond the Company's control. Moreover, the methods and assumptions
used in preparing the liquidation analysis involve significant elements of
subjective judgment on the part of the Company and may or may not prove to be
correct. Estimates contained in the liquidation analysis are not necessarily
indicative of future results or actual values, which may be significantly more
or less favorable than such estimates. For a discussion of the assumptions
used in preparing the liquidation analysis, see "LIQUIDATION ANALYSIS--Notes
to Liquidation Analysis" in the Disclosure Statement.
DISCUSSION OF THE PROPOSALS
CHARTER AMENDMENT
The Board has unanimously adopted resolutions proposing that the Company's
Restated Certificate of Incorporation, as amended, be amended by the Charter
Amendment. The purpose of the Charter Amendment is to increase the number of
authorized but unissued shares of common stock of the Company so as to ensure
that a sufficient number of such shares are available for issuance pursuant to
the Exchange Restructuring. Should the Exchange Restructuring be accepted by
the requisite 100% of Noteholders and thereafter consummated, an aggregate of
24,062,796 shares of New Common Stock will be issued to the Noteholders in
exchange for their 12.5% Notes and 6,015,699 shares of New Common Stock will
be issued to existing Stockholders. In addition, 5,263,736 Warrants,
exercisable for an aggregate of 5,263,736 shares of New Common Stock (subject
to adjustment), will be issued to the Company's Stockholders.
The Charter Amendment will not be effective unless and until it is filed
with the Secretary of State of Delaware. The Board has reserved the right,
pursuant to Section 242(c) of the DGCL, to abandon such amendment even if the
Charter Amendment is authorized by the Stockholders. However, if the Charter
Amendment is authorized by a vote of the Company's Stockholders, the Board
intends to file the Charter Amendment with the Secretary of State of Delaware
if the Exchange Restructuring is consummated.
The Charter Amendment, if filed with the Secretary of State of Delaware,
would amend the Certificate of Incorporation to (i) effect a one-for-five
reverse stock split of the Company's outstanding shares of Old Common Stock
such that each share of Old Common Stock immediately prior to the Effective
Time will automatically convert into one-fifth of one share of New Common
Stock immediately thereafter and (ii) increase the par value of the authorized
common stock from $.01 per share to $.05 per share so as to preserve value of
the Company's Stated Capital on the Company's Balance Sheet.
The Company currently has authorized capital stock of 51,000,000 shares,
including 50,000,000 shares of Old Common Stock and 1,000,000 shares of
preferred stock, $.01 par value. The Charter Amendment will not affect the
number of authorized shares of common or preferred stock of the Company.
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Article IV of the Company's Certificate of Incorporation as proposed to be
amended and restated pursuant to the Charter Amendment is set forth in its
entirety in Annex I to this Proxy Statement/Prospectus. The final text of the
Charter Amendment is subject to change in order to meet the requirements as to
form that may be requested or required by the Secretary of State's Office of
the State of Delaware.
If the requisite approval by the Stockholders is obtained, the Charter
Amendment will be effective upon the close of business on the date of filing
of the Charter Amendment with the Delaware Secretary of State. Each
certificate representing shares of Old Common Stock immediately prior to the
Exchange Restructuring will be deemed automatically, without any action on the
part of the Stockholders, to represent one-fifth the number of shares of New
Common Stock immediately after the Effective Time. A Stockholder's
proportionate ownership interest in the Company will remain unchanged by the
Charter Amendment. The New Common Stock issued pursuant to the Charter
Amendment will be fully paid and nonassessable. The voting and other rights of
the Old Common Stock will not be altered by the Charter Amendment except that
each share of the Old Common Stock will represent one-fifth of a share New
Common Stock.
In lieu of issuing any fractional shares of New Common Stock in the Exchange
Restructuring, fractional interests in New Common Stock will be aggregated and
sold by the Company, with the proceeds to be distributed to the holders in
proportion to the amount of fractional shares of New Common Stock such holders
would otherwise be entitled to receive. When the Charter Amendment becomes
effective, Stockholders will be asked to surrender certificates representing
shares of Old Common Stock in accordance with the procedures set forth in a
letter of transmittal to be sent by the Company. Upon such surrender, a
certificate representing the shares of New Common Stock will be issued and
forwarded to the Stockholders; however, each certificate representing shares
of Old Common Stock will continue to be valid and represent shares of New
Common Stock equal to one-fifth the number of shares of Old Common Stock
(rounded to the nearest whole number). Persons who hold their shares in
brokerage accounts or "street name" will not be required to take any further
actions to effect the exchange of their certificates.
IF THE STOCKHOLDERS DO NOT APPROVE THE CHARTER AMENDMENT OR DO NOT EXECUTE
THE REQUISITE ACCEPTANCES OF THE PREPACKAGED PLAN, THEN, UNDER THE TERMS OF
THE LIMITED WAIVER AGREEMENT, SUCH NOTEHOLDERS WILL NOT BE BOUND TO THE TERMS
OF THE RESTRUCTURING. ANY SUBSEQUENT RESTRUCTURING OF THE COMPANY COULD RESULT
IN STOCKHOLDERS OF THE COMPANY RETAINING OR RECEIVING SUBSTANTIALLY LESS THAN
THE CONSIDERATION PROVIDED FOR IN THE RESTRUCTURING.
THE BOARD RECOMMENDS A VOTE FOR THIS PROPOSAL.
NEW COMMON STOCK ISSUANCE
The Stockholder votes with respect to the New Common Stock Issuance will
become effective at such time as the Charter Amendment has been filed with the
Secretary of State of Delaware and the Exchange Restructuring has been
consummated and will not be effective otherwise. The Board has unanimously
adopted a resolution approving, as part of the Exchange Restructuring, the New
Common Stock Issuance. The approval of the New Common Stock Issuance by the
Company's Stockholders may be required by the applicable rules of the NASD.
THE BOARD RECOMMENDS A VOTE FOR THIS PROPOSAL
CERTAIN CONSEQUENCES OF THE RESTRUCTURING
Stockholders should carefully consider the following material disadvantages
to the proposal relating to the Restructuring:
(a) The issuance of New Common Stock and Warrants pursuant to the
Exchange Restructuring or the Prepackaged Plan, as applicable, will result
in significant dilution of the equity interests of the existing
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holders of Old Common Stock as a percentage of the total number of
outstanding shares of the common stock of the Company.
(b) Based upon the current market price of the Old Common Stock (after
giving effect to the Reverse Split), the Warrants may be "out of the money"
immediately following the Restructuring, and no assurance can be made that
the Warrants will ever be "in the money."
(c) There is currently no trading market for the Warrants and there is no
assurance that a trading market will develop.
(d) There are certain Federal income tax considerations with respect to
the Restructuring, including limiting the use of, or reducing, the
Company's net operating loss carryovers, although such limit would be
greater under the Exchange Restructuring than under the Prepackaged
Restructuring.
(e) Following the Restructuring the ownership of New Common Stock may be
substantially more concentrated than the current ownership of Old Common
Stock, which may result in an attempt to influence the direction of the
Company by one or more large stockholders.
(f) Commencement of bankruptcy proceedings, even if only to confirm the
Prepackaged Plan, could adversely affect the relationship between the
Holding Company and its subsidiaries, employees, customers and suppliers.
(g) After the Restructuring is consummated, the Company will still need
to refinance its indebtedness under the Operating Companies' Loan
Agreements and such refinancing could cause further dilution to holders of
the then existing equity interests of the Company, including those of the
Noteholders.
For additional information on the consequences of implementing the
Restructuring, see "RISK FACTORS."
STOCK AWARD AND INCENTIVE PLAN
The Board has adopted, subject to Stockholder approval, the Merisel, Inc.
1997 Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"),
which provides for the grant of various types of stock-based compensation to
directors, officers and employees of the Holding Company and its subsidiaries
which have participants in the Stock Award and Incentive Plan. The Stock Award
and Incentive Plan is designed to comply with the requirements for
"performance-based compensation" under Section 162(m) ("Section 162(m)") of
the Internal Revenue Code of 1986, as amended (the "Code"), and the conditions
for exemption from the short-swing profit recovery rules under Rule 16b-3
("Rule 16b-3") of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The summary that follows is subject to the actual terms of
the Stock Award and Incentive Plan, a copy of which is attached hereto as
Annex III. Capitalized terms used but not otherwise defined in the summary
that follows shall have the respective meanings ascribed to them in the Stock
Award and Incentive Plan.
The Stock Award and Incentive Plan provides for the granting of "incentive
stock options" as described in Section 422 of the Code ("ISOs"), non-qualified
stock options ("NSOs") or both (collectively, "Options"). Options granted
under the Stock Award and Incentive Plan may be accompanied by stock
appreciation rights ("SARs"), limited stock appreciation rights ("LSARs") or
both (collectively, "Rights"). Rights may also be granted independently of
Options. NSOs and Rights may also be accompanied by dividend equivalents
("Dividend Equivalents"). The Stock Award and Incentive Plan also provides for
the granting of restricted stock, deferred stock and performance shares
(collectively, "Restricted Awards") and other stock- and cash-based awards.
The Stock Award and Incentive Plan also permits the plan administrator to
authorize loans to Grantees in connection with the grant of awards, on terms
and conditions determined solely by the plan administrator. Each of the
foregoing awards ("Awards") will be evidenced by an agreement setting forth
the terms and conditions applicable thereto.
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Purposes of the Stock Award and Incentive Plan
The purposes of the Stock Award and Incentive Plan are to reinforce the
long-term commitment to the Company's success of those directors, officers,
and employees of the Company and its subsidiaries who are or will be
responsible for such success; to facilitate the ownership of the Company's
stock by such individuals, thereby aligning their interests with those of the
Company's stockholders; and to assist the Company in attracting and retaining
officers and other employees with experience and ability.
Eligibility
Awards may be made by the Committee to any director, officer, or other
employee of the Company who is eligible to participate in the Stock Award and
Incentive Plan, consistent with the purposes of the Plan; provided that, ISOs
may only be granted to employees of the Company.
Plan Administration
The Stock Award and Incentive Plan is administered by the Board or a
committee of the Board the composition of which will at all times comply with
the requirements of Rule 16b-3 under the Exchange Act (the "Committee").
Subject to the terms of the Stock Award and Incentive Plan, the Committee has
the right to grant awards to eligible participants and to determine the terms
and conditions of Award agreements, including the vesting schedule and
exercise price of such Awards, and the effect, if any, of a Change in Control
(as defined in the Stock Award and Incentive Plan annexed hereto) on such
Awards.
Shares Subject to the Stock Award and Incentive Plan
The Stock Award and Incentive Plan covers a maximum of 3,000,000 shares of
Old Common Stock and, after the Reverse Split, 3,000,000 shares of New Common
Stock, in each case representing approximately 10% of the shares then
outstanding; provided that, such number of shares shall be decreased to the
extent that shares of New Common Stock remain subject to outstanding Option
grants under any of the Company's other stock-based incentive plans. Shares
obtainable upon exercise may be treasury, authorized but unissued shares or
shares reacquired by the Company. In order to prevent dilution or enlargement
of the rights of Grantees, the Stock Award and Incentive Plan permits the
Committee to make adjustments to the aggregate number of shares subject to the
Stock Award and Incentive Plan or any Award, and to the purchase price to be
paid or the amount to be received in connection with the realization of any
Award. The Committee has the authority, in the event of any such adjustment,
to provide for the cancellation of any outstanding award in exchange for
payment in cash or other property.
Terms and Conditions of Options
Options will vest and become exercisable over the exercise period, at such
times and upon such conditions as the Committee determines and sets forth in
the Award agreement. The Committee may accelerate the exercisability of any
outstanding Option at such time and under such circumstances as it deems
appropriate. Options that are not exercised within ten years from the date of
grant, however, will expire without value. Options are exercisable during a
Grantee's lifetime only by the Grantee. The Award agreements will contain
provisions regarding the exercise of Options following termination of
employment with or service to the Company, including terminations due to the
death, disability or retirement of the Grantee, or upon a Change in Control.
In addition to the terms and conditions governing NSOs, ISOs awarded under the
Stock Award and Incentive Plan must comply with the requirements of Section
422 of the Code.
The Option Price will be as determined by the Committee and may be fully
paid in cash, by delivery of New Common Stock previously owned by the Grantee
equal in value to the Option Price, by means of a loan from the Company, or by
having shares of Common Stock with a Fair Market Value (on the date of
exercise), equal to the Option Price, withheld by the Company or sold by a
broker-dealer under qualifying circumstances
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(or in any combination of the foregoing). A Grantee of an Option Award (and
any tandem SAR or LSAR) will not have the rights of a stockholder until
certificates for the option shares are actually received.
Stock Appreciation Rights and Limited Stock Appreciation Rights
Unless the Committee determines otherwise, a SAR or LSAR (1) granted in
tandem with an NSO may be granted at the time of grant of the related NSO or
at any time thereafter or (2) granted in tandem with an ISO may be granted
only at the time of grant of the related ISO. A SAR will be exercisable only
to the extent the underlying Option is exercisable. Tandem SARs and LSARs will
terminate upon the termination or exercise of the pertinent portion of the
related Option, and the pertinent portion of the related Option will terminate
upon the exercise of any such SAR or LSAR.
Upon exercise of a SAR, the Grantee will receive, with respect to each share
subject thereto, an amount equal in value to the excess of (1) the Fair Market
Value of one share of New Common Stock on the date of exercise over (2) the
grant price of the SAR (which in the case of a SAR granted in tandem with an
Option will be the Option Price, and which in the case of any other SAR will
be the price determined by the Committee).
Upon exercise of a LSAR, the grantee will receive, with respect to each
share subject thereto, automatically upon the occurrence of a Change in
Control, an amount equal in value to the excess of (1) the Change in Control
Price of one share of Common Stock on the date of such Change in Control
(which in the case of a LSAR granted in tandem with an ISO will be the Fair
Market Value), over (2) the grant price of the LSAR (which in the case of a
LSAR granted in tandem with an Option will be the Option Price, and which in
the case of any other LSAR will be the price determined by the Committee). An
LSAR Grantee who is subject to the reporting requirements of Section 16(a) of
the Exchange Act, however, will only be entitled to receive such amount if the
LSAR has been outstanding for at least six (6) months on the Change in Control
date.
Restricted Awards
A restricted stock award is an award of New Common Stock that may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of
for a period of ten years, or such shorter period as the Committee determines,
from the date on which the Award is granted (the "Restricted Period"). The
Committee may also impose such other restrictions and conditions on such Award
as it deems appropriate. The Committee may provide that the foregoing
restrictions will lapse with respect to specified percentages of the awarded
shares on successive anniversaries of the date of the Award. In addition, the
Committee has the authority to cancel all or any portion of any restrictions
prior to the expiration of the Restricted Period. A grant of deferred stock
creates a right to receive New Common Stock at the end of a specified deferral
period. Performance shares are shares of Common Stock subject to restrictions
based upon the attainment of performance objectives. Such performance
objectives may be based on various financial measures of the Company's
performance. In addition, performance goals may be based upon a Grantee's
attainment of specific objectives set by the Company for that Grantee's
performance.
Upon the award of any restricted stock or performance shares, the Grantee
will have the rights of a stockholder with respect to the shares, including
dividend rights, subject to the conditions and restrictions generally
applicable to restricted stock or specifically set forth in the Grantee's
Award agreement. Upon an award of deferred stock, the Grantee will not have
stockholder rights, other than the right to receive dividends, during the
specified deferral period.
Dividend Equivalents
Dividend Equivalents may be granted in conjunction with NSOs and in
conjunction with Rights that do not relate to ISOs. The value of a Dividend
Equivalent is equal to the product of (1) the number of shares of Common Stock
subject to the related NSO or Right and (2) the cash dividend payable per
share of such Common Stock. Dividend Equivalents may be payable either in cash
or in shares of New Common Stock, and payment
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may occur either as the Dividend Equivalents accrue or at such later time as
the related NSO or Right is exercised. Dividend Equivalents expire at the time
the related NSO or Right expires, and no dividends are payable or credited
with respect to the Dividend Equivalents themselves.
Other Stock- or Cash-Based Awards
The Committee may grant New Common Stock as a bonus or in lieu of Company
commitments to pay cash under other plans or compensatory arrangements of the
Company. The Committee may also grant other stock- or cash-based awards as an
element of or supplement to any other Award under the Stock Award and
Incentive Plan. Such Awards may be granted with value and payment contingent
upon the attainment of specified individual or Company financial goals, or
upon any other factors designated by the Committee The Committee may determine
the terms and conditions of such Awards at the date of grant or thereafter.
Death--Termination of Employment--Restrictions on Transfer
The Award agreements will state whether and to what extent Awards will be
exercisable upon termination of employment or service for any reason,
including death or disability. In no event may any Option be exercisable more
than ten years from the date it is granted. Except as otherwise determined by
the Committee in accordance with Rule 16b-3, Options and Rights are not
transferable and are exercisable during the Grantee's lifetime only by the
Grantee.
Amendment; Termination
The Board may terminate or amend the Stock Award and Incentive Plan at any
time, except that stockholder approval is required for any such amendment
required to fulfill the conditions of Rule 16b-3, Section 162(m) and any other
applicable laws (but only if the Company intends to fulfill such
requirements). Termination or amendment of the Stock Award and Incentive Plan
will not affect previously granted Awards, which will continue in effect in
accordance with their terms.
Anti-Takeover Effect
The Stock Award and Incentive Plan is designed to provide incentive
compensation to management employees of the Company while aligning the
interests of management with that of the Stockholders. To achieve these goals,
the Stock Award and Incentive Plan provides for the distribution of up to 10%
of the outstanding shares of the Company's common stock. Although such options
may vest automatically upon a change of control of the Company and may
increase the cost of a takeover of the Company, however, the Company does not
believe that the implementation and operation of the Stock Award and Incentive
Plan will have any material anti-takeover effect.
Certain Federal Income Tax Considerations
THE FOLLOWING DISCUSSION OF CERTAIN RELEVANT FEDERAL INCOME TAX EFFECTS
APPLICABLE TO AWARDS GRANTED UNDER THE STOCK AWARD AND INCENTIVE PLAN IS A
SUMMARY ONLY, AND REFERENCE IS MADE TO THE CODE FOR A COMPLETE STATEMENT OF
ALL RELEVANT FEDERAL TAX PROVISIONS. HOLDERS OF AWARDS SHOULD CONSULT THEIR
TAX ADVISORS BEFORE REALIZATION OF ANY SUCH AWARDS, AND HOLDERS OF COMMON
STOCK PURSUANT TO AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE DISPOSING OF
ANY SUCH SHARES. SECTION 16 INDIVIDUALS SHOULD NOTE THAT SOMEWHAT DIFFERENT
RULES THAN THOSE DESCRIBED BELOW MAY APPLY TO THEM. Under current Federal
income tax laws, Awards under the Stock Award and Incentive Plan will
generally have the following tax consequences:
Non-Qualified Stock Options. A Grantee will generally not be taxed upon the
grant of an NSO. Rather, at the time of exercise of such NSO (and in the case
of an untimely exercise of an ISO), the Grantee will recognize ordinary income
for Federal income tax purposes in an amount equal to the excess, if any, of
the Fair Market Value of the shares purchased, over the Option Price and will
have a tax basis in such shares equal to the Option
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Price, plus the amount taxable as ordinary income to the Grantee. The Company
will generally be entitled to a tax deduction at such time and in the same
amount as the Grantee recognizes ordinary income.
If shares acquired upon exercise of an NSO (or upon untimely exercise of an
ISO) are later sold or exchanged, then the difference between the sales price
and the Fair Market Value of such shares on the date that ordinary income was
recognized with respect thereto will generally be taxable as long-term or
short-term capital gain or loss (if the Common Stock is a capital asset of the
Grantee) depending upon whether the such shares have been held for more than
one year after such date.
Incentive Stock Options. A Grantee will generally not be taxed upon the
grant of an ISO or upon its timely exercise. Exercise of an ISO will be timely
if made during its term and if the Grantee remains an employee of the Company
at all times during the period beginning on the date of grant of the ISO and
ending on the date three months before the date of exercise (or one year
before the date of exercise in the case of a disabled employee). Exercise of
an ISO will also be timely, if made by the legal representative of a Grantee
who dies (1) while in the employ of the Company or (2) within three months
after termination of employment. The tax consequences of an untimely exercise
of an ISO is the same as those described for NSOs above.
If New Common Stock acquired pursuant to a timely exercised ISO is later
disposed of, the Grantee will, except as noted below with respect to a
"disqualifying disposition," recognize long-term capital gain or loss at the
time of the disposition (if the Common Stock is a capital asset of the
employee) equal to the difference between the amount realized upon such sale
and the Option Price. The Company, under these circumstances, will not be
entitled to any Federal income tax deduction in connection with either the
exercise of the ISO or the sale of such New Common Stock by the Grantee.
If, however, a Grantee disposes of New Common Stock acquired pursuant to the
exercise of an ISO (1) prior to the expiration of two years from the date of
grant of the ISO or (2) within one year from the date such New Common Stock is
transferred to him upon exercise (a "disqualifying disposition"), generally
(a) the Grantee will realize ordinary income at the time of the disposition in
an amount equal to the excess, if any, of the Fair Market Value of the shares
at the time of exercise (or, if less, the amount realized on such
disqualifying disposition) over the Option Price, and (b) if the New Common
Stock is a capital asset of the Grantee, any additional gain recognized will
be taxed as short-term or long-term capital gain. At the time of such
disqualifying disposition, the Company may claim a Federal income tax
deduction only for the amount taxable to the Grantee as ordinary income. Any
capital gain recognized by the Grantee will be long-term capital gain if the
Grantee's holding period for the shares at the time of disposition is more
than one year; otherwise, it will be short-term.
The amount by which the Fair Market Value of the shares on the exercise date
of an ISO exceeds the Option Price will be an item of adjustment for purposes
of the "alternative minimum tax" imposed by Section 55 of the Code.
Exercise with Shares. Special rules may pertain to a Grantee who exercises
an Option and pays the Option Price with shares already owned.
Rights. A Grantee will not be taxed at the time of grant of SARs or LSARs.
Upon the exercise of SARs or LSARs (other than a Free Standing Right that is
an LSAR), the amount of any cash and the Fair Market Value as of the date of
exercise of Common Stock received is taxable to the Grantee as ordinary
income. With respect to a Free Standing Right that is an LSAR, however, a
Grantee should be required to include as taxable income on the date of a
Change in Control an amount equal to the amount of cash that could be received
upon the exercise of the LSAR, even if the LSAR is not exercised until a date
subsequent to the Change in Control date. The Company will generally be
entitled to a deduction at the same time and in an amount equal to the amount
included in the Grantee's income. Upon the sale of shares acquired upon the
exercise of SARs or LSARs, a Grantee will recognize capital gain or loss
(assuming such Common Stock was held as a capital asset) in an amount equal to
the difference between the amount realized upon such sale and the Fair Market
Value of such New Common Stock on the date that governs the determination of
his ordinary income. The capital gain or loss
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will be long-term or short-term depending upon whether the shares have been
held for more than one year after the date on which the income was realized by
the Grantee.
Dividend Equivalents. A Grantee will not be taxed upon the award of a
Dividend Equivalent, but will recognize ordinary income in an amount equal to
the value of the Dividend Equivalent at the time the Dividend Equivalent
becomes payable. The Company will be entitled to a deduction at such time and
in the same as the Grantee recognizes ordinary income with respect to the
Dividend Equivalent.
Restricted Awards. In the case of a restricted award, generally, a Grantee
will not be taxed upon the grant of such an Award. The Grantee will recognize
ordinary income in an amount equal to (i) the Fair Market Value of the Common
Stock at the time the shares become transferable or are otherwise no longer
subject to a substantial risk of forfeiture (as defined in the Code), minus
(ii) the price, if any, paid by the Grantee to purchase such stock. The
Company will be entitled to a deduction at the time when, and in the amount
that, the Grantee recognizes ordinary income. However, a Grantee may elect
(not later than 30 days after acquiring such shares) to recognize ordinary
income at the time the restricted shares are awarded in an amount equal to
their Fair Market Value at that time, notwithstanding the fact that such
shares are subject to restrictions on transfer and a substantial risk of
forfeiture. If such an election is made, no additional taxable income will be
recognized by the Grantee at the time the restrictions lapse. The Company will
be entitled to a tax deduction at the time when, and to the extent that,
income is recognized by the Grantee. However, if shares in respect of which
such election was made are later forfeited, no tax deduction is allowable to
the Grantee for the forfeited shares, and the Company will be deemed to
recognize ordinary income equal to the amount of the deduction allowed to the
Company at the time of the election.
Post-Restructuring Stock Option Grants. No awards have been made under the
Stock Award and Incentive Plan. However, if the Restructuring is consummated
the Company intends, subject to the approval of the post-restructuring Board
of Directors, to issue options (the "New Options") to purchase between
2,200,000 and 2,406,280 shares of New Common Stock in exchange for employee
stock options and stock appreciation rights that are currently outstanding,
which would then be cancelled. If the Restructuring is consummated, the New
Options issued immediately after the Effective Date would have an exercise
price equal to the average closing price of the New Common Stock on Nasdaq (or
such other exchange or over the counter market on which the New Common Stock
is trading) over the 30 trading days immediately following the Effective Date
provided that the exercise price may not vary more than 10% from the average
closing price for the five trading days immediately following the Effective
Date. Each issuance of New Options would be exercisable for seven years and
would vest 20% on the date such options are granted and 20%, 20% and 40% on
the first, second and third anniversary of such date, respectively (with the
exception of New Options to purchase approximately 500,000 shares of New
Common Stock which would be granted in exchange for options granted generally
to all employees except the Chief Executive Officer in January 1997 and which
would vest 20% on the date such options are granted and 30% and 50% on the
six-month and 12-month anniversary of such date, respectively). The New
Options issued immediately after the Effective Date of the Restructuring would
include a provision providing for automatic acceleration of vesting in the
event of a Change in Control (as defined in the Stock Award and Incentive
Plan).
40
<PAGE>
The options issued to the Company's executive officers and executive
officers as a group in exchange for options and stock appreciation rights
currently held are set forth in the table below. The New Options issued
immediately after the Effective Date of the Restructuring would include a
provision providing for automatic acceleration of vesting in the event of a
Change in Control (as defined in the Stock Award and Incentive Plan).
<TABLE>
<CAPTION>
AVERAGE
CURRENT EXERCISE PRICE OPTIONS TO
NUMBER OF OF CURRENT BE GRANTED
OPTIONS AND OPTIONS AND UNDER THE
NAME SARS SARS NEW PLAN
---- ----------- -------------- ----------
<S> <C> <C> <C>
Dwight A. Steffensen................... 500,000 $2.81 500,000
James E. Illson........................ 85,000 2.59 250,000
Timothy N. Jenson...................... 44,500 6.48 75,000
Robert J. McInerney.................... 200,000 2.00 250,000
Thomas P. Reeves....................... 205,571 6.29 205,571
Karen A. Tallman....................... 75,000 1.63 75,000
James D. Wittry........................ 85,000 2.48 85,000
Executive officers as a group.......... 1,195,071 3.30 1,440,571
</TABLE>
THE BOARD OF DIRECTORS BELIEVES THAT THE IMPLEMENTATION OF THE STOCK AWARD
AND INCENTIVE PLAN IS IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND
RECOMMENDS ITS APPROVAL BY THE STOCKHOLDERS.
Vote
The affirmative vote of the majority of the shares of Old Common Stock
entitled to vote and represented at the Stockholders' Meeting, provided a
quorum is present, is required for approval of the Stock Award and Incentive
Plan. Accordingly, abstentions will have the effect of a vote against the
proposal while broker non-votes will not affect the outcome of the vote on the
proposal. Unless instructed to the contrary in the proxy, the shares
represented by the proxies will be voted "FOR" the proposal to approve the
Stock Award and Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
DESCRIPTION OF THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED PLAN
For a description of the Exchange Restructuring and the Prepackaged Plan,
see the Exchange Restructuring Prospectus attached hereto as Annex IV. Also
see "Plan of Reorganization of Merisel, Inc., under Chapter 11 of the
Bankruptcy Code," attached to the Exchange Restructuring Prospectus as
Appendix I.
DESCRIPTION OF NEW COMMON STOCK
The following summary description of the New Common Stock does not purport
to be complete and is qualified in its entirety by this reference to the
Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part. The New Common Stock is identical in all
material respects to the Old Common Stock except for the effects of the
Reverse Split and change in par value described herein.
Immediately after the Restructuring, the Company will have 50,000,000
authorized shares of New Common Stock, and 1,000,000 authorized shares of
preferred stock, par value $.01 per share. As of such time, 30,078,495 shares
of New Common Stock will be issued and outstanding to approximately 1,255
holders of record, and no shares of preferred stock will be issued and
outstanding. 24,062,796 shares of New Common Stock will be issued to
Noteholders as of immediately prior to the Restructuring and 6,015,699 shares
of New Common Stock will be issued to Stockholders as of immediately prior to
the Restructuring in connection with the Restructuring
41
<PAGE>
(not including Warrant Shares and shares issuable upon the exercise of stock
options granted to the Company's employees and directors under the Stock Award
and Incentive Plan). All of the New Common Stock issued and outstanding as of
the Effective Date will be fully paid and nonassessable.
Distributions
Subject to such preferential rights as may be granted by the Board of
Directors in connection with future issuances of preferred stock, holders of
shares of New Common Stock will be entitled to receive ratably such dividends
as may be declared by the Board of Directors in its discretion from funds
legally available therefor. The Operating Companies' Loan Agreements contain
negative covenants that restrict, among other things, the ability of the
Company to pay dividends. In the event of a liquidation, dissolution or
winding up of the Company, the holders of New Common Stock will be entitled to
share ratably in all assets remaining after payment of liabilities and any
liquidation preference owed to holders of any preferred stock. Holders of New
Common Stock will have no preemptive rights and have no rights to convert
their New Common Stock into any other securities.
Voting
Subject to any preferential rights of holders of preferred stock,
stockholders are entitled to one vote per share on all matters to be voted on
by stockholders. Matters submitted for stockholder approval require a majority
vote of the shares represented and entitled to vote, except, as described
below, with respect to the election of directors and the inability of
stockholders to take action by written consent, or where the vote of a greater
number is required by the DGCL. Article IX of the Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company must be effected at a duly called annual or special meeting of
such holders and may not be effected by written consent of the Stockholders.
Article IX may not be repealed or amended in any respect except with the
approval of 67% of the outstanding shares of New Common Stock.
Election of Directors
Article VIII of the Certificate of Incorporation divides the Board of
Directors into three classes, with each class serving a three year term. Any
vacancies in the Board of Directors for any reason, and any directorships
resulting from any increase in the number of directors, may be filled only by
the Board of Directors. Article VIII may not be repealed or amended in any
respect except with the approval of 67% of the outstanding shares of New
Common Stock and subject to the provisions of any preferred stock outstanding.
DESCRIPTION OF WARRANTS
The following is a summary of certain provisions of the Series A Warrant
Agreement and the Series B Warrant Agreement (together, the "Warrant
Agreements"), and the Warrants (as defined below) to be issued thereunder. For
more complete information regarding the Warrant Agreements and the Warrants,
reference is made to the Warrant Agreements, a copy of the form of each of
which has been filed as an exhibit to the Registration Statement of which this
Proxy Statement/Prospectus is a part and which is incorporated herein by
reference. Capitalized terms used but not defined herein shall have the
meanings assigned to them in the Warrant Agreements.
This Proxy Statement/Prospectus constitutes the Company's Prospectus with
respect to the Warrants (and the New Common Stock issuable upon exercise of
the Warrants) to be issued to holders of Old Common Stock immediately after
the consummation of the Restructuring.
General
Immediately after the consummation of the Restructuring and the Reverse
Split, the Company will issue to the holders of Old Common Stock upon
surrender of such holders' Old Common Stock certificates, shares of
42
<PAGE>
New Common Stock and warrants to purchase shares of New Common Stock ("Warrant
Shares") at an exercise price ("Exercise Price") of (i) $7.15 per share, in
the case of the Warrants issued under the Series A Warrant Agreement ("Series
A Warrants"), and (ii) $8.68 per share, in the case of Warrants issued under
the Series B Warrant Agreement ("Series B Warrants"). Holders of Old Common
Stock will receive, for each share of Old Common Stock held, one-fifth of a
share of New Common Stock, .0875 Series A Warrants and .0875 Series B
Warrants. The holders of Old Common Stock will receive, in the aggregate,
2,631,868 Series A Warrants and 2,631,868 Series B Warrants, exercisable, for
5,263,736 shares of New Common Stock or approximately 17.5% of the New Common
Stock after giving effect to the Restructuring, based on 30,078,495
outstanding shares of Old Common Stock as of the Record Date. In lieu of
issuing any fractional Warrants in the Restructuring, fractional interests in
Warrants will be aggregated and sold by the Company, with the proceeds to be
distributed to the holders in proportion to the amount of fractional Warrants
such holders would otherwise be entitled to receive. The Exercise Price and
the number of Warrant Shares are both subject to adjustment in certain cases
referred to below. Following the consummation of the Exchange Restructuring,
holders of Old Common Stock will be issued Warrants upon receipt by the
Depositary of a duly completed letter of transmittal (to be sent to the
Stockholders by the Company promptly after consummation of the Restructuring).
The terms of the Warrant Agreements and the Warrants, other than the
Exercise Price, are identical.
The Warrants will be exercisable immediately after the consummation of the
Restructuring and prior to 5:00 p.m., New York time, on the seventh
anniversary of the date of issuance (the "Expiration Date"). The exercise and
transfer of the Warrants will be subject to applicable Federal and state
securities laws.
The Warrants may be exercised by surrendering to the Company at its office
designated for such purpose the warrant certificates ("Warrant Certificates")
evidencing the Warrants to be exercised with the accompanying form of election
to purchase properly completed and executed, together with payment of the
Exercise Price. Payment of the aggregate Exercise Price may be made in cash or
by certified or official bank check payable to the order of the Company. Upon
surrender of the Warrant Certificate and payment of the Exercise Price, the
Company will deliver or cause to be delivered, to or upon the written order of
such holder, stock certificates representing the number of full Warrant Shares
to which such holder is entitled. No fractional Warrant Shares will be issued
upon exercise of the Warrants. If less than all of the Warrants evidenced by a
Warrant Certificate are to be exercised, a new Warrant Certificate will be
issued for the remaining number of Warrants. The Warrant Shares to be issued
upon exercise of the Warrants will be registered under the Securities Act.
The holders of the Warrants will have no right to vote on matters submitted
to the stockholders of the Company and will have no right to receive
dividends. In the event of the liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Warrants will be entitled to
receive, in lieu of each share of New Common Stock such holders would
otherwise be entitled to receive upon exercise of the Warrants, the same kind
and amount of any stock, securities or assets as may be issuable,
distributable or payable in such event with respect to each share of New
Common Stock. In the event a bankruptcy or reorganization subsequent to the
Restructuring is commenced by or against the Company, a bankruptcy court may
hold that unexercised Warrants are executory contracts which may be subject to
rejection by the Company with approval of the bankruptcy court, and the
holders of the Warrants may, even if sufficient funds are available, receive
nothing or a lesser amount as a result of any such bankruptcy case than they
would be entitled to if they had exercised their Warrants prior to the
commencement of any such case.
In the event of a taxable distribution to holders of New Common Stock that
results in an adjustment to the number of shares of New Common Stock or other
consideration for which a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States Federal income tax as a dividend. See
"Certain Federal Income Tax Considerations."
Adjustments
The number of shares of New Common Stock purchasable upon exercise of
Warrants and the Exercise Price will be subject to adjustment in certain
events including: (i) the issuance by the Company of dividends (and other
43
<PAGE>
distributions) on its New Common Stock payable in New Common Stock or other
capital stock of the Company, (ii) subdivisions, combinations and
reclassification of New Common Stock, (iii) the issuance to all holders of New
Common Stock of rights, options, warrants or other securities convertible into
New Common Stock entitling them to subscribe for or purchase shares of New
Common Stock at a price which is less than the market price per share (as
specified in the Warrant Agreements) of New Common Stock, and (iv) the
distribution to all holders of New Common Stock of evidences of the Company's
indebtedness or assets of the Company or rights, options or warrants to
acquire such items.
No adjustment in the Exercise Price will be required if the transaction
giving rise to the adjustment is cancelled or to the extent the warrants
become convertible into cash. In addition, the Company shall be entitled, but
not required, to make such reductions in the Exercise Price as it in its
discretion shall determine to be advisable.
Reorganizations
In case of an Extraordinary Transaction (as defined in the Warrant
Agreements) (or an agreement by the Company that would result in an
Extraordinary Transaction) prior to January 1, 1998, the Warrants shall remain
outstanding and be convertible into New Common Stock or into common stock of
the acquiring company representing the same percentage of such Common Stock as
the Warrants would have received in the Company immediately prior to the
consummation of the Extraordinary Transaction (subject to equitable
adjustment), unless 85% of the then outstanding New Common Stock approves such
transaction.
In the case of an Extraordinary Transaction agreed to or entered into after
January 1, 1998 or to which an 85% vote of the stockholders has been obtained,
the Warrants shall be exercisable for the kind and amount of securities, cash
or other assets that the holder of the Warrant would have owned immediately
prior to the transaction had such holder exercised the Warrant immediately
before the consummation of the transaction.
Amendment
No provision of the Warrant Agreements may be amended without the consent of
a majority of the Warrants where such amendment would have a material adverse
effect on the rights of holders of Warrants. In the absence of such a material
adverse effect, the Warrant Agreements may be amended by agreement between the
Company and the Warrant Agent.
Governing Law
The Warrant Agreements and the Warrants will be governed by and construed in
accordance with, the laws of the State of Delaware, without regard to the
principles of conflicts of law.
44
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY
For a description of the business and properties of the Company, see
"BUSINESS AND PROPERTIES OF THE COMPANY" in the Exchange Restructuring
Prospectus, attached hereto as Annex IV.
LEGAL PROCEEDINGS
For a description of material pending legal proceedings of the Company, see
"BUSINESS AND PROPERTIES OF THE COMPANY--Legal Proceedings" in the Exchange
Restructuring Prospectus, attached hereto as Annex IV.
SELECTED HISTORICAL FINANCIAL DATA
See "SELECTED HISTORICAL FINANCIAL DATA," in Part A to the Exchange
Restructuring Prospectus attached hereto as Annex IV.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
See "PRO FORMA FINANCIAL STATEMENTS," in Part A to the Exchange
Restructuring Prospectus, attached hereto as Annex IV.
PROJECTED CONSOLIDATED FINANCIAL INFORMATION
See "PROJECTED CONSOLIDATED FINANCIAL INFORMATION" in Part A to the Exchange
Restructuring Prospectus, attached hereto as Annex IV.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS," in Part A to the Exchange Restructuring Prospectus, attached
hereto as Annex IV.
45
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers and officers of the Company.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION
- ---- ------- --------
<S> <C> <C>
Dwight A. Steffensen.... 53 Chairman of the Board of Directors and Chief Executive Officer
Robert J. McInerney (2). 51 President and Chief Operating Officer
James E. Illson (3)..... 44 Chief Financial Officer, Senior Vice President and Assistant Secretary
Timothy N. Jenson....... 38 Vice President-Finance, Treasurer and Assistant Secretary
Karen A. Tallman........ 39 Vice President, General Counsel and Secretary
Joseph Abrams........... 61 Director
David L. House.......... 54 Director
Dr. Arnold Miller....... 69 Director
Lawrence J. Schoenberg.. 65 Director
Thomas P. Reeves........ 35 President, Merisel Canada, Inc.
James D. Wittry (4)..... 43 Senior Vice President, Merisel Americas, Inc.
</TABLE>
- --------
(1) As of July 22, 1997
(2) Mr. McInerney was appointed to his position as President and Chief
Operating Officer as of February 3, 1997, pursuant to an employment
agreement with the Company which has an initial term of three years.
(3) Mr. Illson was appointed to his position as Chief Financial Officer,
Senior Vice President and Assistant Secretary as of August 12, 1996,
pursuant to an employment agreement with the Company which has an initial
term of three years.
(4) Mr. Wittry was appointed to his position as Senior Vice President, Merisel
Americas, Inc. as of August 29, 1996, pursuant to an employment agreement
with the Company which has an initial term of three years.
DIRECTORS
The Board presently consists of five members divided into three classes
serving staggered terms, with one class of directors elected annually. Class I
consists of one director, and Class II and Class III each consist of two
directors. The term of the director constituting Class I will expire this
year. The term of the directors in Class II extends through 1998, and the term
of the directors in Class III extends through 1999. The table below indicates
the names of the directors in each class and the expiration of the terms of
the directors in each class.
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C>
(TERMS EXPIRING IN 1997) (TERMS EXPIRING IN 1998) (TERMS EXPIRING IN 1999)
Lawrence J. Schoenberg Joseph Abrams David L. House
Dr. Arnold Miller Dwight A. Steffensen
</TABLE>
No arrangement or understanding exists between any director or officer and
any other person or persons pursuant to which any such person was or is to be
selected as a director or officer. None of the directors or officers has any
family relationship between them.
The business experience, principal occupations and employment during the
past five years of each of the directors, together with their periods of
service as directors and executive officers of the Company, as applicable, are
set forth below.
Dwight A. Steffensen was elected as Chief Executive Officer and Chairman of
the Board in February 1996. Mr. Steffensen has been a member of the Board
since August 1990. From January 1985 to March 1992, Mr. Steffensen served as a
director and Executive Vice President of Bergen Brunswig Corporation
("Bergen"), a pharmaceuticals distributor. From April 1992 to October 1995,
Mr. Steffensen served as President and Chief Operating Officer for Bergen. In
January 1996, he resigned from Bergen's Board of Directors.
46
<PAGE>
Joseph Abrams was elected a director of the Company following the
acquisition of Microamerica, Inc. ("Microamerica") by the Company in April
1990. Mr. Abrams had previously served as a director of Microamerica from 1983
to April 1990 and also served as President, Chief Operating Officer and
Secretary of AGS Computers, Inc. ("AGS"), a software development company,
which was a subsidiary of NYNEX Corp., a telecommunications company, from 1988
until his retirement in 1991. He is also a director of Spectrum Signal
Processing, a hardware and software electronics company and Phonetel
Technologies, a provider of pay telephone services.
David L. House was appointed to the Board of Directors in March 1994 to fill
a vacancy. In October 1996, Mr. House was named Chairman of the Board,
President and Chief Executive Officer of Bay Networks, Inc., a marketer of
internet working products. From 1974 to 1996, he was employed by Intel
Corporation, a manufacturer of microprocessing systems, most recently as
Senior Vice President and General Manager of the Enterprise Server group.
Dr. Arnold Miller was elected to the Board of Directors in August 1989 and
was appointed the Governance Director in May 1995. Since its formation in
1987, he has been President of Technology Strategy Group, a consulting firm
organized to assist businesses and government in the fields of corporate
strategy development, international technology transfer and joint ventures, as
well as business operations support. Prior to joining Technology Strategy
Group, Dr. Miller was employed at Xerox Corporation, a consumer products and
information services company, for 14 years, where his most recent position was
Corporate Vice President with responsibility for worldwide electronics
operations.
Lawrence J. Schoenberg was elected a director of the Company following the
acquisition of Microamerica in April 1990. Mr. Schoenberg had previously
served as a director of Microamerica from 1983 to April 1990. From 1967
through 1990, Mr. Schoenberg served as Chairman of the Board and Chief
Executive Officer of AGS. From January to December 1991, Mr. Schoenberg served
as Chairman and as a member of the executive committee of the Board of
Directors of AGS. Mr. Schoenberg retired from AGS in 1992. He is also a
director of Sungard Data Services, Inc., a computer services company,
Government Technology Services, Inc., a microcomputer reseller, Penn-America
Group, Inc., a casualty insurance company, and Cellular Technology Services, a
provider of systems to cellular telephone service providers.
The Board maintains an Audit Committee, comprised of Dr. Miller and Mr.
Schoenberg; an Organization and Compensation Committee, comprised of Messrs.
Abrams, House and Schoenberg; an Option Committee, comprised of Messrs.
Abrams, House and Schoenberg; and a Nominating Committee, comprised of Dr.
Miller, Mr. Schoenberg and Mr. Steffensen.
POST RESTRUCTURING BOARD CONFIGURATION
Pursuant to the terms of the Limited Waiver Agreement, upon consummation of
the Restructuring, the Board of Directors of the Company is intended to be
reconstituted so as to be comprised of members acceptable to the Company and
the Ad Hoc Noteholders Committee. No financial advisors nor legal advisors
will be named to the Board. The Company and the Ad Hoc Noteholders Committee
have been in discussions regarding the composition of the Board, but no
agreement has been reached. The Company has proposed that Dwight A.
Steffensen, Dr. Arnold Miller and James E. Illson be named to the Board,
however, until any such agreement is reached, the Company intends that the
existing Board will continue as the Board of Directors of the Company.
EXECUTIVE OFFICERS
Executive officers of the Company are elected by and serve at the discretion
of the Board. Set forth below is a brief description of the business
experience for the previous five years of all executive officers except those
who are also directors. For information concerning the business experience of
Mr. Steffensen see "Directors" above.
47
<PAGE>
Robert J. McInerney. Mr. McInerney joined the Company in February of 1997 in
the capacity of President and Chief Operating Officer. From 1994 to 1996 Mr.
McInerney served as Executive Vice President at United Capital Corporation, a
Long Island based multinational holding company. He was responsible for the
P&L, structure and strategy of the corporation's three manufacturing groups.
Mr. McInerney is credited with achieving record operating results and
increasing profitability for all three groups. From 1981 to 1994 Mr. McInerney
was employed by Arrow Electronics, Inc., a distributor of electronic
components and systems. He served as president of Arrow's Commercial Systems
Group (CSG) from 1987 to 1994 and was responsible for sales, marketing,
finance and operations, marketing communications and advertising.
Mr. James E. Illson. Prior to joining Merisel in August 1996, Mr. Illson
served as Senior Vice President and Chief Financial Officer for the Southern
California-based grocery chain, Bristol Farms. Mr. Illson was responsible for
managing all financial operations. This included implementing business plans,
reporting and control systems, and developing short-term and long-term capital
strategies. He joined Bristol Farms in 1995. From 1992 to 1995, Mr. Illson was
a partner with Kidd, Kamm & Co., a private equity investment firm where he was
responsible for activities relating to the acquisition and expansion of
portfolio companies. Prior to that, Mr. Illson spent more than 13 years with
Deloitte & Touche, most recently as a partner in Deloitte & Touche's
reorganization advisory services group.
Timothy N. Jenson. Mr. Jenson joined the Company in 1993 as Vice President
and Treasurer. In 1996, he was promoted to Vice President-Finance, Treasurer
and Assistant Secretary. From 1989 to 1993, Mr. Jenson served as Vice
President at Citicorp North America, Inc. where he provided financial
services, banking products and advisory services to large multinational
corporations. He previously served at Bank of America as Vice President of
corporate banking, where he was responsible for the financing and banking
activities of a portfolio of Corporate Clients.
Karen A. Tallman. Ms. Tallman joined Merisel in 1997 as Vice President,
General Counsel and Secretary. From 1992 to 1997, Ms. Tallman was employed by
CB Commercial Real Estate Group, Inc., most recently in the positions of Vice
President, Secretary and Senior Counsel. Previously Ms. Tallman was a
corporate attorney for nine years at the law firm of Skadden, Arps, Slate,
Meagher, Flom LLP.
Thomas P. Reeves. Mr. Reeves joined Merisel in 1987 as director of
International Strategic Planning. From March 1990 to February 1992, Mr. Reeves
served as Managing Director of the Company's United Kingdom subsidiary. From
February 1992 until August 1994, Mr. Reeves served as the Company's Managing
Director of operations in Europe. Mr. Reeves was named Senior Vice President-
European Operations in May 1992. In August 1994, he became Senior Vice
President-Canadian Operations as well as President of the Company's Canadian
subsidiary.
James D. Wittry. Mr. Wittry joined the Company in August 1996 as Senior Vice
President, Sales of Merisel Americas, Inc. From 1994 to 1995, Mr. Wittry was
with AST Research as Senior Vice President of the Americas. From 1991 to 1994
he was employed by Ingram Micro. At Ingram Micro, Mr. Wittry held the office
of Senior Vice President, U.S. Sales where he managed 800 U.S. Sales and
Service associates. Prior to that, Mr. Wittry spent 10 years with Avnet
Computers, where he rose to the position of National Computer Sales Director.
SECTION 16 MATTERS
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the Nasdaq National Market, and to
furnish the Company with copies of all Section 16(a) forms they file.
Based on its review of the copies of such forms received by it and on
written representations from such persons that no Forms 5 were required for
those persons, the Company believes that, during the fiscal year ended
December 31, 1996, all filing requirements applicable to its directors and
executive officers were complied with.
48
<PAGE>
MANAGEMENT COMPENSATION
EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
In October 1995, the Company entered into a retention agreement with Mr.
Reeves. The retention agreement provides that if, within one year after a
Change of Control of the Company (as defined in the agreement) and prior to
August 15, 1998, Mr. Reeves' employment is terminated other than as a result
of (i) a "Termination for Cause" (as defined in the agreement), (ii) his death
or permanent disability or (iii) his resignation without "Good Reason" (as
defined in the agreement), the Company will continue to pay Mr. Reeves' Base
Salary for the 180 day-period following such termination and will make a lump-
sum payment to Mr. Reeves equal to one-half of the average annual performance
bonus received by Mr. Reeves over the three years preceding his termination
date.
The Company intends to enter into an amendment to its retention agreement
with Mr. Reeves that will (1) extend its expiration date to July 31, 1999, (2)
provide that in the event of a Covered Termination (as defined in the
agreement) within one year following a Change of Control he is entitled to a
lump sum payment equal to one year's salary plus an amount equal to the
average annual performance bonus paid to him over the previous three years and
(3) amend the definition of "Change of Control" to provide that, in addition
to the other events that are deemed to constitute a "Change of Control", a
"Change of Control" shall be deemed to have occurred if within one year
following consummation of the Restructuring either (i) Mr. Steffensen is
terminated as Chief Executive Officer by the Company's Board of Directors or
(ii) the Company breaches its employment agreement with Mr. Steffensen in any
material respect.
The Company intends to enter into a Retention Agreement with Mr. Jenson
which provides that if, within one year of a Change of Control of the Company
(as defined in the agreement), Mr. Jenson's employment is terminated other
than as a result of (i) a "Termination for Cause" (as defined in the
agreement), (ii) his death or permanent disability or (iii) his resignation
without "Good Reason" (as defined in the agreement), the Company will make a
lump-sum payment to Mr. Jenson equal to one year's salary plus an amount equal
to his annual performance bonus for the prior year less any amounts payable to
Mr. Jenson pursuant to his employment agreement with the Company.
In addition, the Company intends to amend the change of control provisions
in its existing employment and retention agreements to conform to the amended
definition in Mr. Reeves's retention agreement as described above.
Additional information relating to compensation of current officers and
directors of the Company is incorporated herein by reference to "EXECUTIVE
COMPENSATION" in Amendment No. 1 to the Annual Report of the Company on Form
10-K/A for the year ended December 31, 1996.
49
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth as of July 21, 1997 certain information
regarding beneficial ownership of Common Stock by each stockholder known by
the Company to be the beneficial owner of more than 5% of Common Stock as of
such date, each director, certain executive officers of the Company and all
directors and executive officers, as a group. Unless otherwise indicated, the
stockholders have sole voting and investment power with respect to shares
beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
COMMON STOCK PERCENTAGE AFTER
NAME AND ADDRESS (1) BENEFICIALLY OWNED PERCENT RESTRUCTURING (8)
- -------------------- ------------------ ------- -----------------
<S> <C> <C> <C>
Dwight A. Steffensen............ 4,000 (2) * *
James E. Illson................. 18,750 (2) * *
Timothy N. Jenson............... 23,325 (3) * *
Thomas Reeves................... 157,141 (4) * *
James Wittry.................... 18,750 (2) * *
Lawrence Schoenberg............. 364,584 (5) 1.20% *
Arnold Miller................... 6,000 (2) * *
David House..................... 2,000 (2) * *
Joseph Abrams................... 599,460 (5) 1.99% *
Dimensional Fund Advisors....... 1,793,560 (6)(7) 5.96% 1.01%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
All Directors and Executive
Officers as a Group (11
Persons)........................ 1,194,010 (8) 3.97% *
</TABLE>
- --------
(1) Unless otherwise indicated, the address of each person listed is Merisel,
Inc. 200 Continental Blvd., El Segundo, CA 90245-0984.
(2) All shares held by the beneficial owner are shares issuable with respect
to stock options exercisable within 60 days after July 21, 1997.
(3) Includes 20,750 shares issuable with respect to stock options exercisable
within 60 days after July 21, 1997.
(4) Includes 155,571 shares issuable with respect to stock options exercisable
within 60 days of July 21, 1997.
(5) Includes 4,000 shares issuable with respect to stock options exercisable
within 60 days after July 21, 1997.
(6) All information regarding share ownership is taken from and furnished in
reliance upon the Schedule 13G, as amended to date, filed by the
stockholder pursuant to Section 13(g) of the Exchange Act.
(7) Dimensional Fund Advisors, Inc. in its capacity as investment advisor may
be deemed beneficial owner of such shares, which are owned by certain of
its investment counseling clients.
(8) Includes 458,672 shares issuable with respect to stock options exercisable
within 60 days after July 21, 1997.
(9) Gives effect to the Charter Amendment, the New Stock Issuance and the
exercise of all of the Warrants.
50
<PAGE>
CERTAIN AFFILIATE TRANSACTIONS
The Company has entered into Indemnity Agreements with each of its directors
and certain of its officers, which agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors, officers, employees or agents of the
Company (other than liabilities arising from conduct in bad faith or which is
knowingly fraudulent or deliberately dishonest), and, under certain
circumstances, to advance their expenses incurred as a result of proceedings
brought against them.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain Federal income tax consequences of the
Restructuring to the Stockholders and the Company and is for general
information purposes only. This summary is based on the Federal income tax law
now in effect, which is subject to change, possibly retroactively. This
summary does not discuss all aspects of Federal income taxation which may be
important to particular Stockholders in light of their individual investment
circumstances, including holders who acquired their Old Common Stock pursuant
to the exercise of stock options or otherwise as compensation, or to
Stockholders subject to special tax rules (e.g., financial institutions,
broker-dealers, insurance companies, tax-exempt organizations and foreign
taxpayers). In addition, this summary does not address state, local or foreign
tax consequences. This summary assumes that Stockholders hold their Old Common
Stock, and will hold their New Common Stock and Warrants, as "capital assets"
(generally, property held for investment) under the Internal Revenue Code of
1986, as amended (the "Code"). No rulings have been or will be requested from
the Internal Revenue Service with respect to any of the matters discussed
herein. Stockholders are urged to consult their tax advisors regarding the
specific Federal, state, local and foreign income and other tax consequences
of the Restructuring.
FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS
General. In general, the receipt of New Common Stock and Warrants by
Stockholders pursuant to the Restructuring will not be a taxable event, except
that Stockholders will recognize gain or loss to the extent of any cash
received in lieu of a fractional share or fractional warrant. Stockholders
will generally be required to allocate the tax basis in their Old Common Stock
(reduced by any basis apportionable to any fractional share or fractional
warrant settled in cash as described above) between the New Common Stock and
the Warrants on the basis of their respective fair market values on the date
of distribution. The holding period of the New Common Stock and the Warrants
will include the holding period of the Old Common Stock.
Disposition. Upon a sale, exchange, or other disposition of the New Common
Stock or Warrants, a Stockholder will recognize a capital gain or loss in an
amount equal to the difference between the amount realized and the
Stockholder's adjusted tax basis in such stock or Warrants. Such gain or loss
will be long-term if the stock or Warrants have been held for more than one
year.
Exercise or Lapse of Warrants. Upon the exercise of a Warrant, a Stockholder
will not recognize gain or loss and will have a tax basis in the Warrant
Shares received equal to the tax basis in such holder's Warrant plus the
exercise price thereof. The holding period for the Warrant Shares received
pursuant to the exercise of the Warrant will begin on the day following the
date of exercise and will not include the period that the holder held his
Warrant.
In the event that a Warrant lapses unexercised, a Stockholder will recognize
a long-term capital loss in an amount equal to his tax basis in the Warrant.
Adjustment to Exercise Price. If at any time the Company makes a
distribution of property to shareholders that would be taxable to such
shareholders as a dividend for Federal income tax purposes and, in accordance
with the antidilution provisions of the Warrants, the Exercise Price is
decreased, the amount of such decrease may be deemed to be the payment of a
taxable dividend to holders of the Warrants. For example, a decrease in
51
<PAGE>
the Exercise Price in the event of distributions of cash or indebtedness of
the Company will generally result in deemed dividend treatment to holders, but
generally a decrease in the event of stock dividends or the distribution of
rights to subscribe for shares of New Common Stock will not.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
Cancellation of Indebtedness Income. The Company will realize cancellation
of indebtedness ("COI") income, for Federal income tax purposes, in an amount
equal to the excess, if any, of the adjusted issue price of the 12.5% Notes
(including any accrued but unpaid interest) over the fair market value of the
New Common Stock received by Noteholders pursuant to the Restructuring. The
Company anticipates that any COI income that is recognized will likely be
offset by the Company's operating losses and net operating loss carryovers
("NOLs"). If COI income is realized in a case under the Bankruptcy Code (i.e.,
pursuant to the Prepackaged Restructuring), then such income would not be
recognized under section 108 of the Code. In such event, the Company would be
required, however, to reduce certain of its tax attributes, such as its NOLs,
certain tax credits, and the basis of its assets, by the amount of the COI
income that is not recognized.
Limitation on Net Operating Loss Carryovers. As a result of the receipt by
Noteholders of New Common Stock in exchange for the 12.5% Notes pursuant to
the Restructuring, the Company will undergo an "ownership change" (generally,
a 50% change in ownership) for purposes of section 382 of the Code and,
accordingly, the Company will be limited in its ability to use its NOLs and
certain tax credit carryforwards (the "Section 382 Limitation") to offset
future taxable income. The Section 382 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 5.64%). This is likely to limit
significantly the Company's use of its NOLs in any one year. If an ownership
change occurs in a case under the Bankruptcy Code, the value of a
corporation's equity for purposes of determining the Section 382 Limitation
would be adjusted to reflect any increase in such value arising from the
cancellation of debt as a result of the ownership change. Because the Company
anticipates that the value of its equity would be increased as a result of the
cancellation of the 12.5% Notes, the Company's ability to use its NOLs would
be less limited under the Prepackaged Restructuring than under the Exchange
Restructuring.
ADVISORS AND REPRESENTATIVES
DLJ is serving as financial advisor to the Company in connection with the
Restructuring. Chanin is serving as financial advisor to the Ad Hoc
Noteholders Committee, and the Company has agreed to pay all expenses of the
Ad Hoc Noteholders Committee related to the Restructuring. See "ADVISORS AND
REPRESENTATIVES" in Part A to the Exchange Restructuring Prospectus, attached
hereto as Annex IV.
MacKenzie Partners, Inc. is serving as Information Agent in connection with
the Exchange Offer and the solicitation of acceptances of the Prepackaged Plan
(the "Information Agent"). Any questions regarding how to tender or consent in
the Exchange Offer or how to vote on the Prepackaged Plan, and any requests
for additional copies of this Proxy Statement/Prospectus, Ballots or Master
Ballots should be directed to the Information Agent at its address and
telephone number set forth on the back cover of this Proxy
Statement/Prospectus. See "ADVISORS AND REPRESENTATIVES" in Part A to the
Exchange Restructuring Prospectus, attached hereto as Annex IV. U.S. Stock
Transfer Corp. has been appointed as Depositary with respect to the
Stockholders for the Exchange Offer (the "Depositary") and as Voting Agent (as
defined herein) for the solicitation of acceptances of the Prepackaged Plan
with respect to the Stockholders. Questions and requests for assistance may be
directed to the Depositary at one of its addresses and telephone numbers set
forth on the back cover of this Prospectus. See "ADVISORS AND REPRESENTATIVES"
in Part A to the Exchange Restructuring Prospectus, attached hereto as Annex
IV.
LEGAL MATTERS
See "LEGAL MATTERS," in Part A to the Exchange Restructuring Prospectus
attached hereto as Annex IV.
52
<PAGE>
EXPERTS
See "EXPERTS," in Part A to the Exchange Restructuring Prospectus attached
hereto as Annex IV.
OTHER MATTERS
The Board does not know of any other matters which may properly be presented
for consideration at the Stockholders' Meeting. If any business not described
herein should come before the Stockholders' Meeting, the persons named in the
enclosed Proxy will vote on those matters in accordance with their best
judgment.
53
<PAGE>
ANNEX I
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
MERISEL, INC.
----------------
PURSUANT TO SECTION 242 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
----------------
Merisel, Inc., a Delaware corporation (hereinafter called the
"Corporation"), does hereby certify as follows:
FIRST: Article IV of the Corporation's Certificate of Incorporation is
hereby amended to read in its entirety as set forth below:
"IV
The total number of shares of all classes of stock that the corporation
shall have authority to issue is fifty-one million (51,000,000) shares,
consisting of fifty million (50,000,000) shares of Common Stock, par value
$.05 per share, and one million (1,000,000) shares of Preferred Stock, par
value $.05 per share.
At the time this amendment becomes effective, and without any further
action on the part of the Corporation or its stockholders, each five shares
of Common Stock, par value $.01 per share, then issued and outstanding,
shall be changed and reclassified into one fully paid and nonassessable
share of Common Stock, par value $.05. The capital account of the
Corporation shall not be increased or decreased by such change and
reclassification. To reflect the said change and reclassification, each
certificate representing shares of Common Stock, par value $.01 per share,
theretofore issued and outstanding, shall represent one-fifth the number of
shares of Common Stock with a par value of $.05 per share, issued and
outstanding after such change and reclassification; and the holder of
record of each such certificate shall be entitled to receive a new
certificate representing a number of shares of Common Stock, par value
$.05, of the kind authorized by this amendment, equal to one-fifth the
number of shares represented by said certificate for theretofore issued and
outstanding shares, so that upon this amendment becoming effective each
holder of record of five shares of the Common Stock with a par value of
$.01 will have or be entitled a certificate representing one share of
Common Stock with par value $.05 of the kind authorized by this amendment.
The Board of Directors (the "Board") is authorized to determine the
number of series into which shares of Preferred Stock may be divided, and
the Board is authorized to determine the rights, preferences, privileges
and restrictions granted to or imposed upon the Preferred Stock or any
series thereof or any holders thereof, to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock or the holders thereof, to fix
the number of shares constituting any series prior to the issue of shares
of that series, and to increase or decrease, within the limits stated in
any resolution or resolutions of the Board originally fixing the number of
shares constituting any series (but not below the number of shares of such
series then outstanding), the number of shares of any such series
subsequent to the issue of shares of that series."
SECOND: The foregoing amendment was duly adopted in accordance with Section
242 of the General Corporation Law of the State of Delaware.
ANNEX I
1
<PAGE>
IN WITNESS WHEREOF, Merisel, Inc. has caused this Certificate of Amendment to
be duly executed in its corporate name this [ ] day of August, 1997.
Merisel, Inc.
By:
-------------------------------
Name: Dwight A. Steffensen
Title: Chief Executive Officer
ANNEX I
2
<PAGE>
ANNEX II
FORM OF
WARRANT AGREEMENT
SEE EXHIBIT A TO APPENDIX I TO ANNEX IV.
ANNEX II
1
<PAGE>
ANNEX III
MERISEL, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
<PAGE>
MERISEL, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<C> <S> <C>
1. Purpose; Types of Awards; Construction.......................... 1
2. Definitions..................................................... 1
3. Administration.................................................. 4
4. Eligibility..................................................... 4
5. Stock Subject to the Plan....................................... 4
6. Specific Terms of Awards........................................ 5
7. Change in Control Provisions.................................... 8
8. Loan Provisions................................................. 9
9. General Provisions.............................................. 9
</TABLE>
ANNEX III
i
<PAGE>
MERISEL, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
1. Purpose; Types of Awards; Construction.
The purposes of the 1997 Stock Award and Incentive Plan of Merisel, Inc.
(the "Plan") is to afford an incentive to reinforce the long-term commitment
to the Company's success of those directors, officers and other employees of
the Company and its Subsidiaries who are or will be responsible for such
success; to facilitate the ownership of the Company's stock by such
individuals, thereby aligning their interests with those of the Company's
stockholders; and to assist the Company in attracting and retaining directors,
officers and other employees with experience and ability. Pursuant to Section
6 of the Plan, there may be granted Stock Options (including "incentive stock
options" and "nonqualified stock options"), stock appreciation rights and
limited stock appreciation rights (either in connection with options granted
under the Plan or independently of options), restricted stock, restricted
stock units, dividend equivalents, performance shares and other stock- or
cash-based awards. The Plan also provides the authority to make loans to
purchase shares of common stock of the Company. The Plan is designed to comply
with the requirements of Regulation G (12 C.F.R. (S)207) regarding the
purchase of shares on margin, the requirements for "performance-based
compensation" under Section 162(m) of the Code and the conditions for
exemption from short-swing profit recovery rules under Rule 16b-3 of the
Exchange Act, and shall be interpreted in a manner consistent with the
requirements thereof.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Award" means any Option, SAR (including a Limited SAR), Restricted
Stock, Restricted Stock Unit, Dividend Equivalent, Performance Share or
Other Stock-Based Award or Other Cash-Based Award granted under the Plan.
(b) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
(c) "Beneficiary means the person, persons, trust or trusts which have
been designated by a Grantee in his or her most recent written beneficiary
designation filed with the Company to receive the benefits specified under
the Plan upon his or her death, or, if there is no designated Beneficiary
or surviving designated Beneficiary, then the person, persons, trust or
trusts entitled by will or the laws of descent and distribution to receive
such benefits.
(d) "Board" means the Board of Directors of the Company.
(e) "Change in Control" means a change in control of the Company which
will be deemed to have occurred if:
(i) any "person," as such term is used in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof
except that such term shall not include (A) the Company or any of its
subsidiaries, (B) any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its affiliates,
(C) an underwriter temporarily holding securities pursuant to an
offering of such securities, (D) any corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of Stock, or (E) any person or
group as used in Rule 13d-1(b) under the Exchange Act, is or becomes
the Beneficial Owner, as such term is defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates other
than in connection with the acquisition by the Company or its
affiliates of a business) representing 50% or more of the combined
voting power of the Company's then outstanding securities;
ANNEX III
1
<PAGE>
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board, and any new director
(other than (A) a director designated by a person who has entered into
an agreement with the Company to effect a transaction described in
clause (i), (iii), or (iv) of this Section 2(f) or (B) other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the
Company) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute
at least a majority thereof;
(iii) there is consummated a merger or consolidation of the Company
or any or any direct or indirect subsidiary of the Company with any
other corporation, other than (A) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity or
any parent thereof) in combination with the ownership of any trustee or
other fiduciary holding securities under an employee benefit plan of
the Company or any subsidiary of the Company, at least 75% of the
combined voting power of the securities of the Company or such
surviving entity or any parent thereof outstanding immediately after
such merger or consolidation, or (B) a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction)
in which no person (as defined above) is or becomes the beneficial
owner, directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such person any
securities acquired directly from the Company or its affiliates other
than in connection with the acquisition by the Company or its
affiliates of a business) representing 25% or more of the combined
voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets (or any transaction having a
similar effect) other than a sale or disposition by the Company of all
or substantially all of the Company's assets to an entity, at least 75%
of the combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the same
proportions as their ownership of the Company immediately prior to such
sale.
(f) "Change in Control Price" means the higher of (i) the highest price
per share paid in any transaction constituting a Change in Control or (ii)
the highest Fair Market Value per share at any time during the 60-day
period preceding or following a Change in Control.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(h) "Committee" means the Board or the committee established by the Board
to administer the Plan, the composition of which shall at all times satisfy
the provisions of Rule 16b-3.
(i) "Company" means Merisel, Inc., a corporation organized under the laws
of the State of Delaware, or any successor corporation.
(j) "Dividend Equivalent" means a right, granted to a Grantee under
Section 6(g), to receive cash, Stock, or other property equal in value to
dividends paid with respect to a specified number of shares of Stock.
Dividend Equivalents may be awarded on a free-standing basis or in
connection with another Award, and may be paid currently or on a deferred
basis.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and as now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
(l) "Fair Market Value" means, with respect to Stock or other property,
the fair market value of such Stock or other property determined by such
methods or procedures as shall be established from time to time by the
Committee. Unless otherwise determined by the Committee in good faith, the
per share Fair Market
ANNEX III
2
<PAGE>
Value of Stock as of a particular date shall mean (i) the closing sales
price per share of Stock on the national securities exchange on which the
Stock is principally traded, for the last preceding date on which there was
a sale of such Stock on such exchange, or (ii) if the shares of Stock are
then traded in an over-the-counter market, the average of the closing bid
and asked prices for the shares of Stock in such over-the-counter market
for the last preceding date on which there was a sale of such Stock in such
market, or (iii) if the shares of Stock are not then listed on a national
securities exchange or traded in an over-the-counter market, such value as
the Committee, in its sole discretion, shall determine.
(m) "Grantee" means a person who, as an employee or independent
contractor of the Company, a Subsidiary or an Affiliate, has been granted
an Award or Loan under the Plan.
(n) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(o) "Limited SAR" means a right granted pursuant to Section 6(c) which
shall, in general, be automatically exercised for cash upon a Change in
Control.
(p) "Loan" means the proceeds from the Company borrowed by a Plan
participant under Section 8 of the Plan.
(q) "NQSO" means any Option that is designated as a nonqualified stock
option.
(r) "Option" means a right, granted to a Grantee under Section 6(b), to
purchase shares of Stock. An Option may be either an ISO or an NQSO;
provided that, ISO's may be granted only to employees of the Company or a
Subsidiary.
(s) "Other Cash-Based Award" means cash awarded under Section 6(h),
including cash awarded as a bonus or upon the attainment of specified
performance criteria or otherwise as permitted under the Plan.
(t) "Other Stock-Based Award" means a right or other interest granted to
a Grantee under Section 6(h) that may be denominated or payable in, valued
in whole or in part by reference to, or otherwise based on, or related to,
Stock, including, but not limited to (1) unrestricted Stock awarded as a
bonus or upon the attainment of specified performance criteria or otherwise
as permitted under the Plan, and (2) a right granted to a Grantee to
acquire Stock from the Company for cash and/or a promissory note containing
terms and conditions prescribed by the Committee.
(u) "Performance Share" means an Award of shares of Stock to a Grantee
under Section 6(h) that is subject to restrictions based upon the
attainment of specified performance criteria.
(v) "Plan" means this Merisel, Inc. 1997 Stock Award and Incentive Plan,
as amended from time to time.
(w) "Restricted Stock" means an Award of shares of Stock to a Grantee
under Section 6(d) that may be subject to certain restrictions and to a
risk of forfeiture.
(x) "Restricted Stock Unit" means a right granted to a Grantee under
Section 6(e) to receive Stock or cash at the end of a specified deferral
period, which right may be conditioned on the satisfaction of specified
performance or other criteria.
(y) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
promulgated by the Securities and Exchange Commission under Section 16 of
the Exchange Act, including any successor to such Rule.
(z) "Stock" means shares of the common stock, par value $.01 per share,
of the Company.
(aa) "SAR" or "Stock Appreciation Right" means the right, granted to a
Grantee under Section 6(c), to be paid an amount measured by the
appreciation in the Fair Market Value of Stock from the date of grant to
the date of exercise of the right, with payment to be made in cash, Stock,
or property as specified in the Award or determined by the Committee.
(ab) "Securities Act" means the Securities Act of 1933, as amended from
time to time, and as now or hereafter construed, interpreted and applied by
regulations, rulings and cases.
ANNEX III
3
<PAGE>
(ac) "Subsidiary" means any corporation in an unbroken chain of
corporations beginning with the Company if, at the time of granting of an
Award, each of the corporations (other than the last corporation in the
unbroken chain) owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in
the chain.
3. Administration.
The Plan shall be administered by the Committee. The Committee shall have
the authority in its discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, the authority to grant Awards and make Loans; to determine the
persons to whom and the time or times at which Awards shall be granted and
Loans shall be made; to determine the type and number of Awards to be granted
and the amount of any Loan, the number of shares of Stock to which an Award
may relate and the terms, conditions, restrictions and performance criteria
relating to any Award or Loan; and to determine whether, to what extent, and
under what circumstances an Award may be settled, cancelled, forfeited,
exchanged, or surrendered; to make adjustments in the terms and conditions of,
and the criteria and performance objectives (if any) included in, Awards and
Loans in recognition of unusual or non-recurring events affecting the Company
or any Subsidiary or Affiliate or the financial statements of the Company or
any Subsidiary or Affiliate, or in response to changes in applicable laws,
regulations, or accounting principles; to construe and interpret the Plan and
any Award or Loan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the Award
Agreements and any promissory note or agreement related to any Loan (which
need not be identical for each Grantee); and to make all other determinations
deemed necessary or advisable for the administration of the Plan.
The Committee may appoint a chairperson and a secretary and may make such
rules and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings. All determinations of the
Committee shall be made by a majority of its members either present in person
or participating by conference telephone at a meeting or by written consent.
The Committee may delegate to one or more of its members or to one or more
agents such administrative duties as it may deem advisable, and the Committee
or any person to whom it has delegated duties as aforesaid may employ one or
more persons to render advice with respect to any responsibility the Committee
or such person may have under the Plan. All decisions, determinations and
interpretations of the Committee shall be final and binding on all persons,
including the Company, and any Subsidiary or Grantee (or any person claiming
any rights under the Plan from or through any Grantee) and any stockholder.
No member of the Board or Committee shall be liable for any action taken or
determination made in good faith with respect to the Plan or any Award granted
or Loan made hereunder.
4. Eligibility.
Subject to the conditions set forth below, Awards and Loans may be granted
to directors and selected employees of the Company and its present or future
Subsidiaries, in the discretion of the Committee. In determining the persons
to whom Awards and Loans shall be granted and the type of any Award or the
amount of any Loan (including the number of shares to be covered by such
Award), the Committee shall take into account such factors as the Committee
shall deem relevant in connection with accomplishing the purposes of the Plan.
5. Stock Subject to the Plan.
The maximum number of shares of Stock reserved for the grant of Awards under
the Plan shall be 3,000,000 (shares of Stock, subject to adjustment as
provided herein); provided that, such number of shares shall be
ANNEX III
4
<PAGE>
decreased to the extent that shares of Stock remain subject to outstanding
options or other stock-based awards under any other incentive or bonus plan of
the Company. No more than 100% of the total shares available for grant may be
awarded to a single individual in a single year. Such shares may, in whole or
in part, be authorized but unissued shares or shares that shall have been or
may be reacquired by the Company in the open market, in private transactions
or otherwise. If any shares subject to an Award are forfeited, cancelled,
exchanged or surrendered or if an Award otherwise terminates or expires
without a distribution of shares to the Grantee, the shares of stock with
respect to such Award shall, to the extent of any such forfeiture,
cancellation, exchange, surrender, termination or expiration, again be
available for Awards under the Plan; provided that, in the case of forfeiture,
cancellation, exchange or surrender of shares of Restricted Stock or
Restricted Stock Units with respect to which dividends or Dividend Equivalents
have been paid or accrued, the number of shares with respect to such Awards
shall not be available for Awards hereunder unless, in the case of shares with
respect to which dividends or Dividend Equivalents were accrued but unpaid,
such dividends and Dividend Equivalents are also forfeited, cancelled,
exchanged or surrendered. Upon the exercise of any Award granted in tandem
with any other Awards or awards, such related Awards or awards shall be
cancelled to the extent of the number of shares of Stock as to which the Award
is exercised and, notwithstanding the foregoing, such number of shares shall
no longer be available for Awards under the Plan.
In the event that the Committee shall determine that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Grantees under the Plan, then the Committee shall make such
equitable changes or adjustments as it deems necessary or appropriate to any
or all of (i) the number and kind of shares of Stock which may thereafter be
issued in connection with Awards, (ii) the number and kind of shares of Stock
issued or issuable in respect of outstanding Awards, and (iii) the exercise
price, grant price, or purchase price relating to any Award; provided that,
with respect to ISOs, such adjustment shall be made in accordance with Section
424(h) of the Code.
6. Specific Terms of Awards.
(a) General. The term of each Award shall be for such period as may be
determined by the Committee. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a Subsidiary
or Affiliate upon the grant, maturation, or exercise of an Award may be made
in such forms as the Committee shall determine at the date of grant or
thereafter, including, without limitation, cash, Stock, or other property, and
may be made in a single payment or transfer, in installments, or on a deferred
basis. The Committee may make rules relating to installment or deferred
payments with respect to Awards, including the rate of interest to be credited
with respect to such payments. In addition to the foregoing, the Committee may
impose on any Award or the exercise thereof, at the date of grant or
thereafter, such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine .
(b) Options. The Committee is authorized to grant Options to Grantees on the
following terms and conditions:
(i) Type of Award. The Award Agreement evidencing the grant of an Option
under the Plan shall designate the Option as an ISO or an NQSO.
(ii) Exercise Price. The exercise price per share of Stock purchasable
under an Option shall be determined by the Committee; provided that, in the
case of an ISO, such exercise price shall be not less than the Fair Market
Value of a share on the date of grant of such Option, and in no event shall
the exercise price for the purchase of shares be less than par value. The
exercise price for Stock subject to an Option may be paid in cash or by an
exchange of Stock previously owned by the Grantee, or a combination of
both, in an amount having a combined value equal to such exercise price. A
Grantee may also elect to pay all or a portion of the aggregate exercise
price by having shares of Stock with a Fair Market Value on the
ANNEX III
5
<PAGE>
date of exercise equal to the aggregate exercise price withheld by the
Company or sold by a broker-dealer under circumstances meeting the
requirements of 12 C.F.R. (S)220 or any successor thereof.
(iii) Term and Exercisability of Options. Unless otherwise provided in an
Award Agreement, the date on which the Committee adopts a resolution
expressly granting an Option shall be considered the day on which such
Option is granted. Options shall be exercisable over the exercise period
(which shall not exceed ten years from the date of grant), at such times
and upon such conditions as the Committee may determine, as reflected in
the Award Agreement; provided that, the Committee shall have the authority
to accelerate the exercisability of any outstanding Option at such time and
under such circumstances as it, in its sole discretion, deems appropriate.
An Option may be exercised to the extent of any or all full shares of Stock
as to which the Option has become exercisable, by giving written notice of
such exercise to the Committee or its designated agent.
(iv) Termination of Employment, etc. An Option may not be exercised
unless the Grantee is then in the employ of, or then maintains an
independent contractor relationship with, the Company or a Subsidiary or an
Affiliate (or a company or a parent or subsidiary company of such company
issuing or assuming the Option in a transaction to which Section 424(a) of
the Code applies), and unless the Grantee has remained continuously so
employed, or continuously maintained such relationship, since the date of
grant of the Option; provided that, the Award Agreement may contain
provisions extending the exercisability of Options, in the event of
specified terminations, to a date not later than the expiration date of
such Option.
(v) Other Provisions. Options may be subject to such other conditions
including, but not limited to, restrictions on transferability of the
shares acquired upon exercise of such Options, as the Committee may
prescribe in its discretion or as may be required by applicable law.
(c) SARs and Limited SARs. The Committee is authorized to grant SARs and
Limited SARs to Grantees on the following terms and conditions:
(i) In General. Unless the Committee determines otherwise, an SAR or a
Limited SAR (1) granted in tandem with an NQSO may be granted at the time
of grant of the related NQSO or at any time thereafter or (2) granted in
tandem with an ISO may only be granted at the time of grant of the related
ISO. An SAR or Limited SAR granted in tandem with an Option shall be
exercisable only to the extent the underlying Option is exercisable.
(ii) SARs. An SAR shall confer on the Grantee a right to receive an
amount with respect to each share subject thereto, upon exercise thereof,
equal to the excess of (1) the Fair Market Value of one share of Stock on
the date of exercise over (2) the grant price of the SAR (which in the case
of an SAR granted in tandem with an Option shall be equal to the exercise
price of the underlying Option, and which in the case of any other SAR
shall be such price as the Committee may determine).
(iii) Limited SARs. A Limited SAR shall confer on the Grantee a right to
receive with respect to each share subject thereto, automatically upon the
occurrence of a Change in Control, an amount equal in value to the excess
of (1) the Change in Control Price (in the case of a LSAR granted in tandem
with an ISO, the Fair Market Value), of one share of Stock on the date of
such Change in Control over (2) the grant price of the Limited SAR (which
in the case of a Limited SAR granted in tandem with an Option shall be
equal to the exercise price of the underlying Option, and which in the case
of any other Limited SAR shall be such price as the Committee determines);
provided that, in the case of a Limited SAR granted to a Grantee who is
subject to the reporting requirements of Section 16(a) of the Exchange Act
(a "Section 16 Individual"), such Section 16 Individual shall only be
entitled to receive such amount if such Limited SAR has been outstanding
for at least six (6) months as of the date of the Change in Control.
(d) Restricted Stock. The Committee is authorized to grant Restricted Stock
to Grantees on the following terms and conditions:
ANNEX III
6
<PAGE>
(i) Issuance and Restrictions. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any, as the
Committee may impose at the date of grant or thereafter, which restrictions
may lapse separately or in combination at such times, under such
circumstances, in such installments, or otherwise, as the Committee may
determine. Such restrictions may include factors relating to the increase
in the value of the Stock or to individual or Company performance such as
the attainment of certain specified individual, divisional or Company-wide
performance goals, sales volume increases or increases in earnings per
share. Except to the extent restricted under the Award Agreement relating
to the Restricted Stock, a Grantee granted Restricted Stock shall have all
of the rights of a stockholder including, without limitation, the right to
vote Restricted Stock and the right to receive dividends thereon.
(ii) Forfeiture. Upon termination of employment with or service to the
Company, or upon termination of the independent contractor relationship, as
the case may be, during the applicable restriction period, Restricted Stock
and any accrued but unpaid dividends or Dividend Equivalents that are at
that time subject to restrictions shall be forfeited; provided that, the
Committee may provide, by rule or regulation or in any Award Agreement, or
may determine in any individual case, that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in part
in the event of terminations resulting from specified causes, and the
Committee may in other cases waive in whole or in part the forfeiture of
Restricted Stock.
(iii) Certificates for Stock. Restricted Stock granted under the Plan may
be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Grantee, such certificates shall bear an appropriate legend referring
to the terms, conditions, and restrictions applicable to such Restricted
Stock, and the Company shall retain physical possession of the certificate.
(iv) Dividends. Dividends paid on Restricted Stock shall be either paid
at the dividend payment date, or deferred for payment to such date as
determined by the Committee, in cash or in shares of unrestricted Stock
having a Fair Market Value equal to the amount of such dividends. Stock
distributed in connection with a stock split or stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a
risk of forfeiture to the same extent as the Restricted Stock with respect
to which such Stock or other property has been distributed.
(e) Restricted Stock Units. The Committee is authorized to grant Restricted
Stock Units to Grantees, subject to the following terms and conditions:
(i) Award and Restrictions. Delivery of Stock or cash, as determined by
the Committee, will occur upon expiration of the deferral period specified
for Restricted Stock Units by the Committee. In addition, Restricted Stock
Units shall be subject to such restrictions as the Committee may impose, at
the date of grant or thereafter, which restrictions may lapse at the
expiration of the deferral period or at earlier or later specified times,
separately or in combination, in installments or otherwise, as the
Committee may determine. Such restrictions may include factors relating to
the increase in the value of the Stock or to individual or Company
performance such as the attainment of certain specified individual,
divisional or Company-wide performance goals, sales volume increases or
increases in earnings per share.
(ii) Forfeiture. Upon termination of employment or termination of the
independent contractor relationship during the applicable deferral period
or portion thereof to which forfeiture conditions apply, or upon failure to
satisfy any other conditions precedent to the delivery of Stock or cash to
which such Restricted Stock Units relate, all Restricted Stock Units that
are then subject to deferral or restriction shall be forfeited; provided
that, the Committee may provide, by rule or regulation or in any Award
Agreement, or may determine in any individual case, that restrictions or
forfeiture conditions relating to Restricted Stock Units will be waived in
whole or in part in the event of termination resulting from specified
causes, and the Committee may in other cases waive in whole or in part the
forfeiture of Restricted Stock Units.
ANNEX III
7
<PAGE>
(f) Stock Awards in Lieu of Cash Awards. The Committee is authorized to
grant Stock as a bonus, or to grant other Awards, in lieu of Company
commitments to pay cash under other plans or compensatory arrangements. Stock
or Awards granted hereunder shall have such other terms as shall be determined
by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to Grantees. The Committee may provide, at the date of grant or
thereafter, that Dividend Equivalents shall be paid or distributed when
accrued or shall be deemed to have been reinvested in additional Stock, or
other investment vehicles as the Committee may specify, provided that Dividend
Equivalents (other than freestanding Dividend Equivalents) shall be subject to
all conditions and restrictions of the underlying Awards to which they relate.
(h) Performance Shares and Other Stock- or Cash-Based Awards. The Committee
is authorized to grant to Grantees Performance Shares and/or Other Stock-Based
Awards or Other Cash-Based Awards as an element of or supplement to any other
Award under the Plan, as deemed by the Committee to be consistent with the
purposes of the Plan. Such Awards may be granted with value and payment
contingent upon performance of the Company or any other factors designated by
the Committee, or valued by reference to the performance of specified
Subsidiaries. The Committee shall determine the terms and conditions of such
Awards at the date of grant or, to the extent permitted by Section 162(m) of
the Code, thereafter; provided, that performance objectives for each year
shall be established by the Committee not later than the latest date
permissible under Section 162(m) of the Code. Such performance objectives may
be expressed in terms of one or more financial or other objective goals.
Financial goals may be expressed, for example, in terms of sales, earnings per
share, stock price, return on equity, net earnings growth, net earnings,
related return ratios, cash flow, earnings before interest, taxes,
depreciation and amortization (EBITDA), return on assets or total stockholder
return. Other objective goals may include the attainment of various
productivity and long-term growth objectives, including, without limitation
reductions in the Corporation's overhead ratio and expense to sales ratios.
Any criteria may be measured in absolute terms or as compared to another
corporation or corporations. To the extent applicable, any such performance
objective shall be determined (i) in accordance with the Corporation's audited
financial statements and generally accepted accounting principles and reported
upon by the Corporation's independent accountants or (ii) so that a third
party having knowledge of the relevant facts could determine whether such
performance objective is met. Performance objectives shall include a threshold
level of performance below which no Award payment shall be made, levels of
performance above which specified percentages of target Awards shall be paid,
and a maximum level of performance above which no additional Award shall be
paid. Performance objectives established by the Committee may be (but need not
be) different from year-to-year and different performance objectives may be
applicable to different Grantees.
7. Change in Control Provisions. The following provisions shall apply in the
event of a Change of Control unless otherwise determined by the Committee or
the Board in writing at the time of the grant of an Award:
(a) any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested; and
(b) the restrictions, deferral limitations, payment conditions, and
forfeiture conditions applicable to any other Award granted under the Plan
shall lapse and such Awards shall be deemed fully vested, and any
performance conditions imposed with respect to Awards shall be deemed to be
fully achieved.
(c) any indebtedness incurred pursuant to Section 8 of this Plan shall be
forgiven and the collateral pledged in connection with any such Loan shall
be released; and
(d) the value of all outstanding Awards shall, to the extent determined
by the Committee at or after grant, be cashed out on the basis of the
Change of Control Price as of the date the Change of Control occurs or such
other date as the Committee may determine prior to the Change of Control.
ANNEX III
8
<PAGE>
8. Loan Provisions. Subject to the provisions of the Plan and all applicable
federal and state laws, rules and regulations (including the requirements of
Regulation G (12 C.F.R. (S)207)), the Committee shall have the authority to
make Loans to Grantees (on such terms and conditions as the Committee shall
determine), to enable such Grantees to purchase shares in connection with the
realization of Awards under the Plan. Loans shall be evidenced by a promissory
note or other agreement, signed by the borrower, which shall contain
provisions for repayment and such other terms and conditions as the Committee
shall determine.
9. General Provisions.
(a) Approval of Shareholders. The Plan shall take effect upon its adoption
by the Board but the Plan (and any grants of Awards made prior to the
shareholder approval mentioned herein) shall be subject to ratification by the
holder(s) of a majority of the issued and outstanding shares of voting
securities of the Company entitled to vote, which ratification must occur
within twelve (12) months of the date that the Plan is adopted by the Board.
In the event that the shareholders of the Company do not ratify the Plan at a
meeting of the shareholders at which such issue is considered and voted upon,
then upon such event the Plan and all rights hereunder shall immediately
terminate and no Grantee (or any permitted transferee thereof) shall have any
remaining rights under the Plan or any Award Agreement entered into in
connection herewith.
(b) Nontransferability. Awards shall not be transferable by a Grantee except
by will or the laws of descent and distribution or, if then permitted under
Rule 16b-3, pursuant to a qualified domestic relations order as defined under
the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder, and shall be exercisable during the lifetime
of a Grantee only by such Grantee or his guardian or legal representative.
(c) No Right to Continued Employment, etc. Nothing in the Plan or in any
Award or Loan granted or any Award Agreement, promissory note or other
agreement entered into pursuant hereto shall confer upon any Grantee the right
to continue in the employ of or to continue as an independent contractor of
the Company, any subsidiary or any Affiliate or to be entitled to any
remuneration or benefits not set forth in the Plan or such Award Agreement,
promissory note or other agreement or to interfere with or limit in any way
the right of the Company or any such Subsidiary or Affiliate to terminate such
Grantee's employment or independent contractor relationship.
(d) Taxes. The Company or any Subsidiary or Affiliate is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Stock, or any other payment to a
Grantee, amounts of withholding and other taxes due in connection with any
transaction involving an Award, and to take such other action as the Committee
may deem advisable to enable the Company and Grantees to satisfy obligations
for the payment of withholding taxes and other tax obligations relating to any
Award. This authority shall include authority to withhold or receive Stock or
other property and to make cash payments in respect thereof in satisfaction of
a Grantee's tax obligations.
(e) Amendment and Termination of the Plan. The Board may at any time and
from time-to-time alter, amend, suspend, or terminate the Plan in whole or in
part; provided that, no amendment which requires stockholder approval in order
for the Plan to continue to comply with Rule 16b-3, shall be effective unless
the same shall be approved by the requisite vote of the stockholders of the
Company entitled to vote thereon. Notwithstanding the foregoing, no amendment
shall affect adversely any of the rights of any Grantee, without such
Grantee's consent, under any Award or Loan theretofore granted under the Plan.
(f) No Rights to Awards or Loans; No Stockholder Rights. No Grantee shall
have any claim to be granted any Award or Loan under the Plan, and there is no
obligation for uniformity of treatment of Grantees. Except as provided
specifically herein, a Grantee or a transferee of an Award shall have no
rights as a stockholder with respect to any shares covered by the Award until
the date of the issuance of a stock certificate to him for such shares.
ANNEX III
9
<PAGE>
(g) Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Grantee pursuant to an Award, nothing contained in
the Plan or any Award shall give any such Grantee any rights that are greater
than those of a general creditor of the Company.
(h) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu
of such fractional shares or whether such fractional shares or any rights
thereto shall be forfeited or otherwise eliminated.
(i) Regulations and Other Approvals.
(I) The obligation of the Company to sell or deliver Common Stock with
respect to any Award granted under the Plan shall be subject to all applicable
laws, rules and regulations, including all applicable federal and state
securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
(II) Each Award is subject to the requirement that, if at any time the
Committee determines, in its absolute discretion, that the listing,
registration or qualification of Common Stock issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Award or
the issuance of Common Stock, no such Award shall be granted or payment made
or Common Stock issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of any
conditions not acceptable to the Committee.
(III) In the event that the disposition of Common Stock acquired pursuant to
the Plan is not covered by a then current registration statement under the
Securities Act and is not otherwise exempt from such registration, such Common
Stock shall be restricted against transfer to the extent required by the
Securities Act or regulations thereunder, and the Committee may require a
Grantee receiving Common Stock pursuant to the Plan, as a condition precedent
to receipt of such Common Stock, to represent to the Company in writing that
the Common Stock acquired by such Grantee is acquired for investment only and
not with a view to distribution.
(j) Governing Law. The Plan and all determinations made and actions taken
pursuant hereto shall be governed by the laws of the State of Delaware without
giving effect to the conflict of laws principles thereof.
(k) Effective Date; Plan Termination. The Plan shall take effect upon its
adoption by the Board (the "Effective Date"), but the Plan (and any grants of
Awards made prior to the stockholder approval mentioned herein), shall be
subject to the approval of the holder(s) of a majority of the issued and
outstanding shares of voting securities of the Company entitled to vote, which
approval must occur within twelve months of the date the Plan is adopted by
the Board. In the absence of such approval, such Awards shall be null and
void.
ANNEX III
10
<PAGE>
ANNEX IV
PROSPECTUS
MERISEL, INC.
[LOGO OF MERISEL, INC.]
OFFER TO EXCHANGE AND SOLICITATION OF ACCEPTANCES
OF PREPACKAGED PLAN OF REORGANIZATION
Merisel, Inc. (the "Holding Company"), upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal and Ballot, as the same may be amended from time to time, hereby
(A) offers to issue the following consideration in exchange for its
outstanding 12 1/2% Senior Notes due 2004 (the "Exchange Offer") and (B)
solicits acceptances of a prepackaged plan of reorganization (the "Prepackaged
Plan") of the Company under Chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") under which such securities would be exchanged for the
same consideration offered in the Exchange Offer:
FOR EACH $1,000 PRINCIPAL THE EXCHANGING NOTEHOLDER (AS DEFINED HEREIN)
AMOUNT (TOGETHER WITH ALL WILL RECEIVE:
ACCRUED AND UNPAID INTEREST)
OF:
The Company's 12 1/2% Senior 192.5 shares of common stock, par value $.05
Notes due 2004 (the "12.5% per share (the "New Common Stock"), of the
Notes") Company or, in the aggregate, up to 24,062,796
shares of New Common Stock. As a result of the
Exchange Offer, each Noteholder will receive
such Noteholder's pro rata portion (sharing
with all other Noteholders) of shares of New
Common Stock equivalent to approximately 80%
of the outstanding New Common Stock after
giving effect to the Exchange Restructuring
(as defined herein), based on the number of
shares of Old Common Stock (as defined herein)
outstanding as of July 22, 1997.
THE EXCHANGE OFFER AND THE SOLICITATION PERIOD FOR ACCEPTANCES OF THE
PREPACKAGED PLAN WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST
29, 1997, UNLESS EXTENDED (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION
DATE").
The Exchange Offer is conditioned upon, among other things, 100 percent of
the aggregate principal amount of the 12.5% Notes being validly tendered and
not withdrawn prior to the Expiration Date (the "Minimum Tender Condition").
The Company's ability to seek confirmation of the Prepackaged Plan also
depends upon certain minimum levels of acceptance thereof, as further set
forth in this Prospectus. If the Minimum Tender Condition and all other
conditions to the consummation of the Exchange Offer are satisfied or waived,
the Company intends to consummate the Exchange Offer. If the Exchange Offer is
not consummated, but the Company receives sufficient acceptances of the
Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court (as
defined herein), then the Holding Company (as defined herein) plans to pursue
obtaining said confirmation under Chapter 11 of the Bankruptcy Code (as
defined herein) and to attempt to use such acceptances to obtain confirmation
of the Prepackaged Plan.
A Special Meeting of stockholders of the Company will be held on August 29,
1997, at 10:00 a.m., Los Angeles time (the "Stockholders' Meeting"), to
consider and vote upon proposals (i) to amend the Company's Certificate of
Incorporation (the "Charter Amendment"), (ii) to approve the issuance of
shares of New Common Stock (the "New Common Stock Issuance"), and (iii) to
approve the establishment of a new stock award and incentive plan for the
Company (the "Stock Award and Incentive Plan"). A Proxy Statement/Prospectus
(the "Proxy Statement/Prospectus"), further describing the proposals, will be
mailed to each stockholder of the Company. If the Prepackaged Restructuring
(as defined herein) is pursued and a petition is filed under the Bankruptcy
Code, the Company expects that the New Common Stock Issuance and an amendment
substantially similar to the Charter Amendment will be implemented pursuant to
the Prepackaged Plan.
NONE OF THE HOLDING COMPANY'S WHOLLY OWNED OPERATING SUBSIDIARIES, INCLUDING
MERISEL AMERICAS, INC. AND MERISEL CANADA, INC. (COLLECTIVELY, THE "OPERATING
COMPANIES"), WOULD BE A PARTY TO THE PREPACKAGED PLAN, AND THE HOLDING
COMPANY'S BUSINESS WOULD THEREFORE CONTINUE TO BE OPERATED IN THE ORDINARY
COURSE. AS SUCH, THE PREPACKAGED PLAN WOULD NOT AFFECT THE CONTINUING AND
TIMELY PAYMENT IN FULL OF THE OPERATING COMPANIES' OBLIGATIONS TO SUPPLIERS,
EMPLOYEES, AND OTHER CREDITORS.
The date of this Prospectus is July 31, 1997.
(Cover continued on the following page)
<PAGE>
(Cover continued from previous page)
SEE "RISK FACTORS" IN PART A (AS DEFINED HEREIN) FOR A DISCUSSION OF CERTAIN
RISK FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE
RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING. SEE "RISK FACTORS" IN THE
DISCLOSURE STATEMENT (AS DEFINED HEREIN) FOR A DISCUSSION OF CERTAIN
ADDITIONAL RISK FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE
PREPACKAGED RESTRUCTURING.
NEITHER THE SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE
TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The terms of the Exchange Offer and the Prepackaged Plan have been developed
in the course of negotiations with an ad hoc committee of holders of the 12.5%
Notes (the "Ad Hoc Noteholders Committee"). Pursuant to an agreement (the
"Limited Waiver Agreement") between the Company and members of the Ad Hoc
Noteholders Committee, (a) holders of more than 75% of the total principal
amount outstanding of the 12.5% Notes have agreed to tender their 12.5% Notes
pursuant to the Exchange Offer and to vote such 12.5% Notes in favor of the
Prepackaged Plan and (b) holders of the common stock, par value $.01 per share
(the "Old Common Stock"), of the Company prior to the Record Date (as defined
herein) will receive from the Company shares of New Common Stock constituting
20% of the New Common Stock to be outstanding immediately after giving effect
to the Exchange Offer (together with the shares of New Common Stock issuable
to the Noteholders pursuant to the Exchange Restructuring, the "Exchange
Shares") and warrants (the "Warrants") to purchase New Common Stock (the
"Warrant Shares," the issuance of such shares together with the issuance of
the Exchange Shares, the "New Common Stock Issuance") constituting 17.5% of
the New Common Stock to be outstanding immediately after giving effect to the
Exchange Offer. The Warrants will be exercisable for seven years from the date
of the exchange and will be issued in equal amounts in two separately trading
series, Series A and Series B, with exercise prices at $7.15 and $8.68 per
share, respectively, in each case subject to adjustment.
12.5% NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN,
SUBJECT TO THE PROCEDURES DESCRIBED HEREIN, AT ANY TIME BEFORE THEY ARE
ACCEPTED FOR EXCHANGE BY THE COMPANY. VOTES ON THE PREPACKAGED PLAN MAY BE
REVOKED, SUBJECT TO THE PROCEDURES DESCRIBED HEREIN, AT ANY TIME PRIOR TO THE
EXPIRATION DATE. IF A BANKRUPTCY CASE HAS BEEN COMMENCED, REVOCATIONS OF SUCH
VOTES THEREAFTER MAY BE EFFECTED ONLY WITH THE APPROVAL OF THE APPROPRIATE
BANKRUPTCY COURT.
THE COMPANY'S OBLIGATION TO ACCEPT 12.5% NOTES TENDERED PURSUANT TO THE
EXCHANGE OFFER IS CONDITIONED, AMONG OTHER THINGS, ON (A) THE MINIMUM TENDER
CONDITION AND (B) APPROVAL BY THE COMPANY'S STOCKHOLDERS OF THE CHARTER
AMENDMENT. THE COMPANY RESERVES THE RIGHT TO WAIVE ANY OF THE CONDITIONS TO
THE EXCHANGE OFFER BUT DOES NOT CURRENTLY INTEND TO WAIVE ANY CONDITION.
This Prospectus includes information relating to the Exchange Offer and the
Prepackaged Plan and is organized into a Summary followed by Parts A and B.
Part A to this Prospectus, entitled "The Exchange Restructuring" ("Part A"),
contains information principally relevant to Noteholders in deciding whether
to tender their 12.5% Notes pursuant to the Exchange Offer. Part B to this
Prospectus, entitled "Disclosure
(Cover continued on the following page)
ANNEX IV
ii
<PAGE>
(Cover continued from previous page)
Statement with respect to Plan of Reorganization of Merisel, Inc.," including
the appendices attached thereto (the "Disclosure Statement"), contains
additional information principally relevant to Noteholders and holders of Old
Common Stock in deciding whether to vote for or against the Prepackaged Plan.
Much of the information contained in the Disclosure Statement is also relevant
to Noteholders in deciding whether to tender their 12.5% Notes pursuant to the
Exchange Offer, and various sections of the Disclosure Statement are
explicitly referenced, but are not repeated, in Part A. Although each part of
this Prospectus is relevant principally to the persons described in the
preceding sentences, all recipients are urged to review this Prospectus in its
entirety.
Regardless of whether a Noteholder completes a Letter of Transmittal, such
Noteholder should duly complete and sign a Ballot in order to vote on the
Prepackaged Plan. If the Exchange Offer is not consummated but the Prepackaged
Plan is confirmed by the Bankruptcy Court and consummated, each Noteholder
would receive substantially the same consideration offered in the Exchange
Offer whether or not such Noteholder tendered in the Exchange Offer or voted
to accept the Prepackaged Plan.
Noteholders as of the Record Date are eligible to vote on the Prepackaged
Plan. Only registered holders of 12.5% Notes, or persons who have obtained a
properly completed bond power from the registered holders thereof (for
purposes of the Exchange Offer, each a "Noteholder" and collectively, the
"Noteholders"), may tender in the Exchange Offer. NOTEHOLDERS ARE NOT REQUIRED
TO TENDER THEIR 12.5% NOTES IN THE EXCHANGE OFFER IN ORDER TO VOTE ON THE
PREPACKAGED PLAN. FAILURE BY A HOLDER TO SEND A DULY COMPLETED AND SIGNED
BALLOT WILL BE DEEMED TO CONSTITUTE AN ABSTENTION BY SUCH HOLDER WITH RESPECT
TO A VOTE ON THE PREPACKAGED PLAN. Abstentions will not be counted as votes
for or against the Prepackaged Plan. Any Ballot which is executed by a holder
but does not indicate an acceptance or rejection of the Prepackaged Plan will
not be counted as a vote for or against the Prepackaged Plan. See "TENDERING
AND VOTING PROCEDURES" in Part A and "VOTING PROCEDURES AND REQUIREMENTS" in
the Disclosure Statement.
The Board of Directors of the Company (the "Board") is separately soliciting
proxies to be voted at the Stockholders' Meeting, which will be held to
consider proposals briefly described in the Summary hereof (A) to approve the
Charter Amendment, (B) to approve the New Common Stock Issuance pursuant to
the Exchange Offer (including New Common Stock for issuance upon exercise of
the Warrants) and (C) to approve the establishment of the Stock Award and
Incentive Plan. The Charter Amendment would convert the total number of shares
of Old Common Stock outstanding immediately prior to the date of consummation
of the Exchange Offer (the "Exchange Restructuring Date") into one-fifth that
number of shares of New Common Stock by amending and restating Article IV of
the Company's Charter to (i) authorize a one-for-five reverse stock split of
the Company's outstanding shares of Old Common Stock and (ii) simultaneously
increase the par value of the authorized common stock of the Company from $.01
per share to $.05 per share. Noteholders may obtain more detailed information
with respect to the Stockholders' Meeting from the Proxy Statement/Prospectus
which has been delivered to each stockholder of the Company. Included with the
Proxy Statement/Prospectus is a Proxy and Ballot for use by stockholders (i)
to vote on the stockholder proposals and (ii) to vote on the Prepackaged Plan.
Copies of the Proxy Statement/Prospectus and the accompanying Proxy and Ballot
may be obtained from the Company upon request to the Company at its principal
executive offices. The stockholder votes with respect to the New Common Stock
Issuance will not be effective unless and until the Charter Amendment is
approved at the Stockholders' Meeting and filed with the Secretary of State of
the State of Delaware and the Exchange Offer has been consummated. If the
Prepackaged Restructuring is pursued and a petition is filed under the
Bankruptcy Code, the Company expects that the New Common Stock Issuance and an
amendment substantially similar to the Charter Amendment will be implemented
pursuant to the Prepackaged Plan.
(Cover continued on the following page)
ANNEX IV
iii
<PAGE>
(Cover continued from previous page)
Because the terms of the Restructuring may create a potential conflict of
interest between the interests of Stockholders and Noteholders, the Board
makes no recommendation as to whether Noteholders should tender their 12.5%
Notes in the Exchange Restructuring.
The proposed financial restructuring of the Company in connection with the
Exchange Offer, as described herein, is referred to as the "Exchange
Restructuring." The proposed financial restructuring of the Company pursuant
to the Prepackaged Plan, as described herein, is referred to as the
"Prepackaged Restructuring." The term "Restructuring" as used herein means the
financial restructuring of the Company pursuant to either the Exchange
Restructuring or the Prepackaged Restructuring.
The Old Common Stock is currently traded on the over-the-counter market and
is quoted on the Nasdaq National Market under the symbol "MSEL." On July 24,
1997, the closing sale price for the Old Common Stock was $2 9/16 per share.
BECAUSE NO PREPACKAGED BANKRUPTCY CASE HAS BEEN FILED, THIS PROSPECTUS AND
THE DISCLOSURE STATEMENT INCLUDED HEREIN HAVE NOT BEEN APPROVED BY ANY
BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF THE INFORMATION CONTAINED
HEREIN OR THEREIN. IF SUCH A CASE IS SUBSEQUENTLY COMMENCED, THE COMPANY
INTENDS TO SEEK AN ORDER OF SUCH COURT THAT THE SOLICITATION OF VOTES ON THE
PREPACKAGED PLAN WAS IN COMPLIANCE WITH SECTION 1126(b) OF THE BANKRUPTCY
CODE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
This Prospectus, the Letter of Transmittal and the applicable Ballot and
Master Ballot are first being mailed to Noteholders on or about August 1,
1997.
ANNEX IV
iv
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus omits certain
information, exhibits and undertakings contained in the Registration
Statement. Such additional information, exhibits and undertakings can be
inspected at and obtained from the Commission in the manner set forth below.
For further information with respect to the securities offered hereby and the
Company, reference is made to the Registration Statement, and the financial
schedules and exhibits filed as a part thereof and the exhibits thereto.
Statements contained in this Prospectus as to the terms of any contract or
other documents are not necessarily complete and, in each case, reference is
made to the copy of each such contract or other document that has been filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports, proxy statements and other
information with the Commission. Such reports and other information filed with
the Commission, as well as the Registration Statement and the exhibits
thereto, can be inspected and copied at the public reference facilities of the
Commission at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036-3648, at 450 Fifth Street, N.W., Washington, D.C. 20549, at the
Commission's regional offices located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and at 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can also be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains an
Internet Web Site that contains reports, proxy and information statements, and
other information regarding Merisel and other registrants that file
electronically with the Commission. The address of such site is:
http://www.sec.gov. In addition, the Old Common Stock is listed and traded on
the Nasdaq National Market, and such reports, proxy statements and other
information concerning the Company should be available for inspection and
copying at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W. Washington, D.C. 20006.
The following documents filed by the Company with the Commission are
incorporated herein by reference and shall be deemed to be a part hereof:
1. Annual Report of the Company on Form 10-K for the fiscal year ended
December 31, 1996;
2. Amendment No. 1 to the Annual Report of the Company on Form 10-K/A for
the fiscal year ended December 31, 1996;
3. Quarterly Report of the Company on Form 10-Q for the fiscal quarter
ended March 31, 1997;
4. Amendment No. 1 to the Quarterly Report of the Company on Form 10-Q/A
for the fiscal quarter ended March 31, 1997;
5. Current Reports of the Company on Form 8-K dated April 15, July 15 and
July 16, 1997;
6. The description of the Old Common Stock contained in its Registration
Statement on Form 8-A filed on August 30, 1988 and declared effective on
October 19, 1988; and
7. The description of the 12.5% Notes contained in its Registration
Statement on Form S-3, as amended, filed on August 24, 1994 and declared
effective October 17, 1994.
All documents and reports filed by the Company with the Commission after the
date of this Prospectus and prior to the termination of the Exchange Offer
shall be deemed incorporated herein by reference and shall be deemed to be a
part hereof from the date of filing of such documents and reports. Any
statement contained in a
ANNEX IV
v
<PAGE>
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
or report that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN
EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY REQUESTED),
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST DIRECTED TO
MERISEL, INC., ATTENTION: KAREN A. TALLMAN, VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY, 200 CONTINENTAL BOULEVARD, EL SEGUNDO, CALIFORNIA 90245;
TELEPHONE NUMBER (310) 615-6811. IN ORDER TO ASSURE TIMELY DELIVERY OF SUCH
DOCUMENTS PRIOR TO THE EXPIRATION DATE, ANY REQUEST SHOULD BE RECEIVED BY
AUGUST 22, 1997. COPIES OF SUCH DOCUMENTS WILL ALSO BE AVAILABLE UPON REQUEST
THEREAFTER UNTIL THE EFFECTIVE DATE (AS HEREINAFTER DEFINED).
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer, the Prepackaged Plan or
the solicitation of votes for the Prepackaged Plan, other than those contained
in this Prospectus and the exhibits attached hereto or incorporated by
reference or referred to herein. If given or made, such other information or
representation may not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than those to which it
relates, or an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any distribution of securities hereunder shall under any
circumstances create any implication that the information contained herein is
correct as of any time subsequent to the date hereof or that there has been no
change in the information set forth herein or in the affairs of the Company
since the date hereof. Any estimates of Claims (as defined herein) and
Interests (as defined herein) set forth in this Prospectus may vary from the
final amounts of Claims or Interests allowed by the Bankruptcy Court.
FORWARD LOOKING INFORMATION
Certain of the financial information contained herein constitutes forward
looking information, and actual results could differ materially from current
expectations. Factors that could impact actual results include unanticipated
adjustments related to the Company's trade accounts payable, customer
disputes, disruption to the Company's computer systems, adjustments related to
previously disposed assets, or potential restructuring and any reduction in
customer demand or deterioration of margins.
ANNEX IV
vi
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
AVAILABLE INFORMATION............................................. v
INDEX OF CERTAIN DEFINED TERMS.................................... xii
SUMMARY........................................................... 1
The Company..................................................... 1
Recent Developments............................................. 1
The Exchange Offer and Prepackaged Plan......................... 4
Comparison of Exchange Restructuring and Prepackaged
Restructuring................................................... 10
Purposes and Effects of the Restructuring....................... 11
Risk Factors.................................................... 11
Tendering and Voting Procedures................................. 13
Stockholders' Meeting........................................... 16
Description of Warrants......................................... 18
Summary Historical Consolidated Financial Information........... 20
Summary Unaudited Pro Forma Condensed Consolidated Financial
Data............................................................ 22
Cash Debt Service Obligations................................... 24
PART A--THE EXCHANGE RESTRUCTURING
TABLE OF CONTENTS................................................. A-i
RISK FACTORS...................................................... A-1
BACKGROUND OF RESTRUCTURING....................................... A-5
The Limited Waiver Agreement.................................... A-6
The Extension Under the Operating Companies' Loan Agreements.... A-7
PURPOSE OF THE RESTRUCTURING...................................... A-9
Restructuring Financial Considerations.......................... A-9
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS... A-12
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION............ A-18
PROJECTED CONSOLIDATED FINANCIAL INFORMATION...................... A-20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ A-28
Overview........................................................ A-28
Results of Operations........................................... A-28
Comparison of the Three Months Ended March 31, 1997 and March
31, 1996....................................................... A-29
Comparison of Fiscal Years Ended December 31, 1996 and December
31, 1995....................................................... A-30
Comparison of Fiscal Years Ended December 31, 1995 and December
31, 1994....................................................... A-32
Variability of Quarterly Results and Seasonality................ A-33
Liquidity and Capital Resources................................. A-33
Recent Developments............................................. A-34
First Quarter, 1997............................................. A-34
Fiscal Year Ended 1996.......................................... A-34
Liquidity and Borrowings........................................ A-35
Inflation....................................................... A-37
Asset Management................................................ A-37
</TABLE>
ANNEX IV
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<TABLE>
<CAPTION>
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<S> <C>
BUSINESS AND PROPERTIES OF THE COMPANY..................................... A-38
Business Overview........................................................ A-38
Significant Events of 1996 and 1997...................................... A-39
The Industry............................................................. A-40
Business Strategy........................................................ A-40
Products and Manufacturer Services....................................... A-41
Customers and Customer Services.......................................... A-42
Sales and Marketing...................................................... A-43
Configuration............................................................ A-44
Operations, Distribution and Investment in Systems....................... A-44
Disposed Operations...................................................... A-45
Competition.............................................................. A-45
Variability of Quarterly Results and Seasonality......................... A-46
Employees................................................................ A-46
Environmental Compliance................................................. A-46
Properties............................................................... A-46
Legal Proceedings........................................................ A-46
TENDERING AND VOTING PROCEDURES............................................ A-48
The Restructuring........................................................ A-48
General.................................................................. A-48
Interest on 12.5% Notes.................................................. A-48
Expiration Date; Extensions; Amendments.................................. A-49
How to Tender in the Exchange Offer...................................... A-49
Tenders--Additional Information.......................................... A-50
Withdrawal of Tenders and Revocation of Votes............................ A-52
Conditions............................................................... A-52
Voting on the Prepackaged Plan........................................... A-54
DESCRIPTION OF 12.5% NOTES................................................. A-55
DESCRIPTION OF NEW COMMON STOCK............................................ A-55
DESCRIPTION OF INDEBTEDNESS OF THE COMPANY................................. A-56
General.................................................................. A-56
Revolving Credit Agreement............................................... A-56
11.5% Notes.............................................................. A-57
Subordinated Notes....................................................... A-58
Canada Receivables Securitization........................................ A-59
U.S. Receivables Securitization.......................................... A-59
Promissory Notes......................................................... A-59
MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY........................ A-60
MARKET PRICES OF 12.5% NOTES............................................... A-60
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. A-61
Federal Income Tax Consequences to Noteholders........................... A-61
Federal Income Tax Consequences to the Company........................... A-61
MANAGEMENT................................................................. A-62
Post Restructuring Board Configuration................................... A-62
Post Restructuring Stock Option Grants................................... A-62
MANAGEMENT COMPENSATION.................................................... A-63
Employment and Change-in-Control Arrangements............................ A-63
OWNERSHIP OF COMMON STOCK.................................................. A-64
</TABLE>
ANNEX IV
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<TABLE>
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<S> <C>
CERTAIN AFFILIATE TRANSACTIONS............................................. A-64
ADVISORS AND REPRESENTATIVES............................................... A-64
Financial Advisor........................................................ A-64
Financial Advisor to Noteholders......................................... A-65
Information Agent........................................................ A-65
Depositary............................................................... A-65
Estimated Fees and Expenses.............................................. A-65
LEGAL MATTERS.............................................................. A-66
EXPERTS.................................................................... A-66
</TABLE>
PART B--THE PREPACKAGED RESTRUCTURING DISCLOSURE STATEMENT
<TABLE>
<S> <C> <C> <C>
TABLE OF CONTENTS...................................................................... B-ii
I. INTRODUCTION........................................................................... B-1
A. General............................................................................ B-1
B. The Company........................................................................ B-2
C. The Restructuring.................................................................. B-2
1. Exchange Restructuring.......................................................... B-2
2. Prepackaged Restructuring....................................................... B-2
D. Summary Of Classification And Treatment Of Claims And Interests.................... B-4
E. Notice To Holders Of Claims And Interests.......................................... B-4
II. BUSINESS AND PROPERTIES OF THE COMPANY................................................. B-5
III. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION................................. B-5
IV. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. B-5
V. BACKGROUND OF THE RESTRUCTURING........................................................ B-5
VI. PURPOSES AND EFFECTS OF THE PREPACKAGED RESTRUCTURING.................................. B-5
A. Purpose Of The Prepackaged Restructuring........................................... B-5
B. Effects Of The Prepackaged Restructuring........................................... B-6
1. Dilution Of Equity Interests.................................................... B-7
2. Provisions For Trade Creditors, Other Unsecured Creditors And Secured Creditors. B-7
3. Provisions For Employees........................................................ B-8
VII. THE REORGANIZATION CASE................................................................ B-8
A. Timetable For Reorganization Case.................................................. B-8
B. Advisors To The Company............................................................ B-8
C. Committees......................................................................... B-9
D. Actions To Be Taken Upon Commencement Of Case...................................... B-9
VIII. OFFICERS AND DIRECTORS OF THE COMPANY.................................................. B-11
IX. SUMMARY OF THE PLAN.................................................................... B-11
A. Brief Explanation Of Chapter 11.................................................... B-11
B. General Information Concerning Treatment Of Claims And Interests................... B-11
C. Classification And Treatment Of Claims And Interests............................... B-12
1. Unclassified Claims............................................................. B-13
2. Classified Claims And Interests................................................. B-14
3. Additional Information Regarding Treatment Of Certain Claims.................... B-15
</TABLE>
ANNEX IV
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<TABLE>
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D. Securities To Be Issued And Transferred Under The Plan......................... B-16
1. The New Common Stock........................................................ B-17
2. The Warrants................................................................ B-17
3. Market And Trading Information.............................................. B-17
E. Sources Of Cash To Make Plan Distributions..................................... B-17
F. Conditions Precedent To Confirmation And Consummation Of The Plan.............. B-17
G. Modification Or Revocation Of The Plan; Severability........................... B-17
H. Distributions Under The Plan................................................... B-17
I. Objections To Claims And Authority To Prosecute Objections; Claims Resolution.. B-17
J. Setoffs........................................................................ B-17
K. Executory Contracts And Unexpired Leases....................................... B-17
L. Continued Corporate Existence; Vesting Of Assets In Reorganized Merisel........ B-18
M. Preservation Of Rights Of Action Held By Merisel Or Reorganized Merisel........ B-18
N. Discharge Of Claims And Termination Of Interests; Related Injunction........... B-18
O. Releases And Certain Settlements Under The Plan; Related Injunction; Indemnity. B-18
P. Limitation Of Liability........................................................ B-19
Q. Retention Of Bankruptcy Court Jurisdiction..................................... B-19
X. RISK FACTORS....................................................................... B-20
A. Disruption Of Operations Relating To Bankruptcy Filing......................... B-20
B. Certain Risks Of Non-Confirmation.............................................. B-20
C. Certain Bankruptcy Considerations.............................................. B-21
1. Treatment Of The Warrants................................................... B-21
2. Failure To File Prepackaged Plan............................................ B-21
3. Effect On Operations........................................................ B-22
4. Nonconsensual Confirmation.................................................. B-22
XI. OWNERSHIP OF CAPITAL SECURITIES.................................................... B-23
XII. MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY................................ B-23
XIII. MARKET PRICES OF 12.5% NOTES....................................................... B-23
XIV. APPLICATION OF SECURITIES ACT...................................................... B-23
A. The Solicitation............................................................... B-23
B. Issuance Of New Securities Pursuant To The Plan................................ B-23
XV. PREPACKAGED RESTRUCTURING ACCOUNTING TREATMENT..................................... B-24
XVI. DESCRIPTION OF INDEBTEDNESS OF THE COMPANY......................................... B-24
XVII. DESCRIPTION OF 12.5% NOTES......................................................... B-24
XVIII. FINANCIAL PROJECTIONS AND ASSUMPTIONS USED......................................... B-25
XIX. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION....................................... B-25
XX. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN................................ B-25
A. Federal Income Tax Consequences To The Company................................. B-25
B. Federal Income Tax Consequences To Holders Of 12.5% Notes...................... B-26
C. Federal Income Tax Consequences To Holders Of Old Common Stock................. B-26
</TABLE>
ANNEX IV
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<TABLE>
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<S> <C> <C> <C>
XXI. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST................... B-27
A. Feasibility Of The Plan........................................................ B-27
B. Best Interests Test............................................................ B-27
C. Chapter 7 Liquidation Analysis................................................. B-28
1. Liquidation Value Of The Company............................................ B-30
a. Estimated Liquidation Proceeds.............................................. B-30
b. Impact on Merisel's Operations Of The Conversion To A Chapter 7 Liquidation. B-30
c. Nature And Timing Of The Liquidation Process................................ B-31
d. Additional Liabilities And Reserves......................................... B-31
e. Distributions; Absolute Priority............................................ B-31
2. Conclusion.................................................................. B-31
XXII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN.......................... B-33
A. Continuation Of The Chapter 11 Case............................................ B-33
B. Liquidation Under Chapter 7 Or Chapter 11...................................... B-33
XXIII. VOTING AND CONFIRMATION OF THE PLAN................................................ B-34
A. Voting Procedures And Requirements............................................. B-34
B. Who May Vote................................................................... B-35
C. Voting Procedures For Holders Of Old Securities................................ B-35
D. Beneficial Owners Of Old Securities............................................ B-36
E. Brokerage Firms, Banks And Other Nominees...................................... B-37
F. Securities Clearing Agent...................................................... B-37
G. Incomplete Ballots (Consent Solicitation Forms)................................ B-37
H. Voting Deadline And Extensions................................................. B-38
I. Withdrawal Of Votes On The Plan................................................ B-38
J. Information Agent.............................................................. B-38
K. Acceptance Or Cramdown......................................................... B-38
XXIV. CONCLUSION......................................................................... B-40
APPENDIX
Plan of Reorganization of Merisel, Inc. ........................................... I
EXHIBITS
Form of Series A Warrant Agreement................................................. A
Form of Series B Warrant Agreement................................................. B
Form of Amended and Restated Certificate of Incorporation of Merisel, Inc.......... C
</TABLE>
ANNEX IV
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<PAGE>
INDEX OF CERTAIN DEFINED TERMS
CERTAIN DEFINED TERMS NOT LISTED BELOW MAY BE FOUND ON THE
INDEX OF DEFINED TERMS OF THE PREPACKAGED PLAN BEGINNING ON PAGE I-4.
As used in this Prospectus, the following are the meanings for the terms set
forth below:
"Ad Hoc Noteholders means the committee of holders of the 12.5%
Committee" Notes with which the terms of the Exchange
Offer and the Prepackaged Plan were negotiated.
"Ballots" means ballots to vote on the Prepackaged Plan
included herewith.
"Bankruptcy Code" means the United States Bankruptcy Code 11
U.S.C. (S) (S) 101-1330, as amended.
"Bankruptcy Court" means the United States Bankruptcy Court for
the judicial district in which a case under the
Bankruptcy Code is filed to effect the
Prepackaged Restructuring.
"Board" means the Board of Directors of the Company.
"1996 Business Plan" means the business plan for the remainder of
fiscal 1996 the Company developed and
implemented in connection with negotiations
with the lenders under its various financing
agreements.
"1997 Business Strategy" means the Company's business strategy for 1997
that builds upon the actions taken under its
1996 Business Plan.
"Certificate of means the Restated Certificate of Incorporation
Incorporation" of the Company, as amended.
"Charter Amendment" means the proposed Certificate of Amendment to
the Certificate of Incorporation, as more fully
described herein.
"Claims" has the meaning given in the Disclosure
Statement, included as Part B to this
Prospectus.
"Commission" means the Securities and Exchange Commission.
"Company" means, unless the context otherwise requires,
Merisel, Inc., a Delaware corporation, and its
operating subsidiaries.
"Depositary" means U.S. Stock Transfer Corporation with
respect to the Old Common Stock and The Bank of
New York with respect to the 12.5% Notes.
"Disclosure Statement" means Part B of the Exchange Restructuring
Prospectus, entitled "THE PREPACKAGED
RESTRUCTURING DISCLOSURE STATEMENT," including
the appendices attached thereto.
"DLJ" means Donaldson, Lufkin & Jenrette Securities
Corporation, financial advisor to the Company
in connection with the Restructuring.
"DTC" The Depositary Trust Company.
"Effective Date" means the date of Consummation of the
Prepackaged Plan.
"EML" means the former European, Mexican and Latin
American businesses of the Company that the
Company sold to CHS Electronics, Inc.
ANNEX IV
xii
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Date" means the date of consummation of the
Restructuring.
"Exchange Offer" means the Company's offer to exchange shares of
New Common Stock for the 12.5% Notes pursuant
to the terms of the Exchange Restructuring.
"Exchange Restructuring" means the proposed financial restructuring of
the Company pursuant to the consummation of the
Exchange Offer, as more fully set forth herein.
"Exchange Restructuring means the date of consummation of the
Date" Restructuring.
"Exchange Restructuring means the Prospectus to be delivered to the
Prospectus" Noteholders in connection with the Exchange
Offer and the Prepackaged Plan, included herein
as Part A.
"Exchange Shares" means the shares of New Common Stock issued to
Stockholders in exchange for their Old Common
Stock and Warrants, as applicable.
"Exercise Price" means (i) $7.15 per share, in the case of the
Series A Warrants, and (ii) $8.68 per share, in
the case of the Series B Warrants, in each case
subject to adjustment.
"Expiration Date" means, with respect to the Exchange Offer and
the solicitation of acceptances of the
Prepackaged Plan, 5:00 p.m., New York City
time, on August 29, 1997, unless the Company,
in its sole discretion, extends the Exchange
Offer or solicitation period, in which case the
term "Expiration Date" for the Exchange Offer
or solicitation period shall mean the last time
and date to which the Exchange Offer or
solicitation period is extended.
"Extension" means the agreement in principle executed by
100% of the lenders under the Operating
Companies' Senior Debt to an extension of the
maturity of such indebtedness to January 31,
1999 or a refinancing of such indebtedness
prior to October 31, 1997.
"F&D Division" means the United States Franchise and
Distribution Division of Vanstar Corporation.
"FAB" means the ComputerLand Franchise and Datago
Aggregation Business.
"GAAP" means generally accepted accounting principles.
"Holding Company" means Merisel, Inc., a Delaware corporation.
"Indenture" means the Indenture dated October 15, 1994, as
amended, between the Company and The Bank of
New York, as successor Trustee, relating to the
12.5% Notes.
ANNEX IV
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<PAGE>
"Information Agent" means MacKenzie Partners, Inc., Information
Agent in connection with the Exchange Offer and
the solicitation of acceptances of the
Prepackaged Plan.
"Interests" has the meaning given in the Disclosure
Statement, included herein as Part B.
"Letter of Transmittal" means the letter of transmittal mailed to the
Stockholders with the Proxy
Statement/Prospectus or to the Noteholders with
the Exchange Prospectus, as applicable.
"Limited Waiver Agreement" means, the agreement, effective April 14, 1997,
by and between the Company and holders of more
than 75% of the outstanding principal amount of
its 12.5% Notes as described in "BACKGROUND OF
RESTRUCTURING".
"Master Ballots" means ballots to be voted on behalf of
beneficial owners of Old Common Stock with
respect to the Prepackaged Plan by such
beneficial owners' broker or other record
holder of such shares.
"Merisel Americas" means Merisel Americas, Inc., a subsidiary of
the Holding Company.
"Merisel Canada" means Merisel Canada, Inc., a subsidiary of
Merisel Americas.
"Minimum Tender Condition" means the condition to the Exchange Offer
requiring 100% of the aggregate principal
amount of the 12.5% Notes to be validly
tendered and not withdrawn prior to the
Expiration Date.
"NASD" means the National Association of Securities
Dealers, Inc.
"New Common Stock" means shares of common stock, par value $.05
per share of the Company.
"New Common Stock Issuance" means the issuance of New Common Stock pursuant
to the Exchange Offer, including New Common
Stock to be issued upon exercise of the
Warrants.
"Noteholders" means the holders of 12.5% Notes.
"Old Common Stock" means the issued and outstanding common stock,
par value $.01 per share, of the Company
authorized prior to the Restructuring.
"Operating Companies" means Merisel Americas and its consolidated
subsidiaries (including without limitation
Merisel Canada, Inc.)
"Operating Companies' Loan means the Subordinated Note Purchase Agreement,
Agreements" the Senior Note Purchase Agreement, and the
Revolving Credit Agreement.
"Operating Companies' Senior means the indebtedness of the Operating
Debt" Companies under the Credit Agreement and the
Senior Note Purchase Agreement.
"Prepackaged Plan" means the prepackaged plan of reorganization of
the Company under Chapter 11 of the Bankruptcy
Code contemplated by the Prepackaged
Restructuring and attached hereto as Appendix
I.
"Prepackaged Restructuring" means the proposed financial restructuring of
the Company pursuant to the Prepackaged Plan,
as more fully described herein.
ANNEX IV
xiv
<PAGE>
"Promissory Notes" Those certain promissory notes, dated December
29, 1995, by Merisel Properties, Inc., in favor
of Heller Financial, Inc. secured by certain
equipment and real estate, to Heller Financial,
Inc.
"Proposals" means the proposals of the Board that are
described herein (A) to amend the Company's
Certificate of Incorporation, (B) to approve
the New Common Stock Issuance and (C) to
approve the Stock Award and Incentive Plan.
"Proxy" means the proxy card mailed to Stockholders
together with the Proxy Statement/Prospectus
which also serves as a Letter of Transmittal
for the Stockholder.
"Proxy Statement/Prospectus" means the Proxy Statement/Prospectus of the
Company mailed to Stockholders in connection
with the Stockholders' Meeting.
"Record Date" July 22, 1997.
"Registration Statement" means the Registration Statement on Form S-4
the Company filed with the Commission under the
Securities Act, with respect to the securities
offered hereby.
"Reverse Split" means the one-for-five reverse stock split of
the Company's common stock to be effected
pursuant to the Charter Amendments.
"Revolving Credit Agreement" means the Amended and Restated Revolving Credit
Agreement, dated as of December 23, 1993, as
amended, among Merisel Americas and Merisel
Europe, as borrowers, the Company, as
guarantor, and the lender parties thereto.
"Restructuring" means the financial restructuring of the
Company pursuant to either the Exchange
Restructuring or the Prepackaged Restructuring,
as the case may be.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Note Purchase means the Amended and Restated Senior Note
Agreement" Purchase Agreement dated as of December 23,
1993, as amended, by and among each of the
purchasers named therein, Merisel Americas, as
issuer, and the Company relating to the 11.5%
Notes.
"Series A Warrants" means the warrants issued under the Series A
Warrant Agreement, as more fully described
herein.
"Series B Warrants" means the warrants issued under the Series B
Warrant Agreement, as more fully described
herein.
"Service Agreement" means, in connection with the ComputerLand
acquisition, the Distribution and Services
Agreement by and between Merisel FAB and
Vanstar.
"Stock Award and Incentive means the Merisel, Inc. 1997 Stock Award and
Plan" Incentive Plan.
"Stockholders" means the holders of Old Common Stock.
"Stockholders' Meeting" means the Special Meeting of Stockholders of
the Company to be held on August 29, 1997, at
10:00 a.m., Los Angeles time.
ANNEX IV
xv
<PAGE>
"Stonington" means Stonington Partners, Inc., a Delaware
corporation.
"Stonington Proposal" means the letter dated July 14, 1997, from
Stonington to the Company, and filed as an
exhibit to the Company's Current Report on Form
8-K, filed July 15, 1997.
"Subordinated Note Purchase means the Amended and Restated Subordinated
Agreement" Note Purchase Agreement, dated as of December
23, 1993, as amended, by and among each of the
purchasers named therein and Merisel Americas
relating to the Subordinated Notes.
"Subordinated Notes" means the subordinated notes issued by Merisel
Americas pursuant to the Subordinated Note
Purchase Agreement.
"Trustee" means The Bank of New York, as trustee for the
12.5% Notes.
"Warrant Agreements" means the Warrant Agreements under which the
Warrants will be issued.
"Warrant Shares" means shares of New Common Stock issued to
holders of Warrants upon exercise of their
Warrants.
"Warrants" means the Series A Warrants and the Series B
Warrants exercisable for shares of New Common
Stock and issued in accordance with the Warrant
Agreements.
"11.5% Notes" means the 11 1/2% Senior Notes due 1998 issued
by Merisel Americas.
"12.5% Notes" means the 12 1/2% Senior Notes due 2004 issued
by the Holding Company.
ANNEX IV
xvi
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Prospectus. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in this
Prospectus, the Annexes hereto and the documents incorporated by
reference herein. Noteholders are urged to read this Prospectus and the
Annexes hereto in their entirety. References herein to the "Company"
shall, unless the context otherwise requires, refer to Merisel, Inc.
and its operating subsidiaries. References to the "Holding Company"
shall refer only to Merisel, Inc. and not to its subsidiaries.
References to the "Operating Companies" shall mean the operating
subsidiaries of the Company.
THE COMPANY
The Company is a leading distributor of computer hardware, networking
equipment and software products. Through its main operating subsidiary,
Merisel Americas, Inc. ("Merisel Americas") and its subsidiaries (the
"Operating Companies"), the Company markets products and services
throughout North America and has achieved operational efficiencies that
have made it 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 Company was originally incorporated in California in October
1980, was reincorporated in Delaware in August 1988, and changed its
name from Softsel Computer Products, Inc. to Merisel, Inc. in August
1990. The Company's principal executive offices are located at 200
Continental Boulevard, El Segundo, California 90245. Its telephone
number is (310) 615-3080.
For additional information concerning the Company and its business,
financial position and operations, see "SELECTED HISTORICAL
CONSOLIDATED FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS AND PROPERTIES OF THE COMPANY."
RECENT DEVELOPMENTS
BACKGROUND OF THE STONINGTON PROPOSAL
In late May of 1997, the Company decided to explore with potential new
lenders and investors the possibility of an equity infusion or debt financing
following, or in conjunction with, the consummation of the Restructuring. The
Company intended to use any investment to reduce the outstanding debt
obligations of the Operating Companies and to implement its business strategy
following the Restructuring. On June 12, 1997, the Company met for the first
time with Stonington Partners, Inc., a New York-based investment firm
("Stonington"), for the purpose of making an informational presentation.
Stonington suggested to the Company that an equity investment which would
allow the Company to repay the debt outstanding under the Operating Companies'
Loan Agreements and leave the existing 12.5% Notes outstanding might be an
alternative to the Restructuring, if it could be accomplished consistent with
the terms of the Limited Waiver Agreement. In order to determine the financial
feasibility of such an alternative, the Company and Stonington entered into a
confidentiality agreement, and Stonington commenced a due diligence
investigation of the Company to determine its willingness to make such an
investment. During the course of its
ANNEX IV
1
<PAGE>
due diligence investigation, representatives of the Company and Stonington
discussed the need to obtain the approval of the Noteholders to any transaction
which would be an alternative to the Restructuring and that Stonington should
also consider whether it would be interested in an equity investment which
would be a supplement to, rather than be in lieu of, the Restructuring.
In early July, Stonington met with the Company to discuss the terms on which
it might be willing to make an equity investment in the Company. In addition,
on July 3, 1997, the Company informed Stonington that no proposal would be
considered unless Stonington were able to provide a commitment for working
capital financing for the Operating Companies which would enhance the capital
structure of the Company.
On July 11, 1997, Stonington presented the Company with a form of proposal to
invest $152 million in cash in exchange for 70% of the Company's common stock,
which was subject to the approval of the Noteholders and Stockholders and which
included an offer to make a six-month bridge loan for $50 million to the
Operating Companies to fund their working capital requirements. The Board of
Directors of the Company met on July 12, 1997 to discuss the general terms of
the form of proposal. The Board of Directors reviewed the terms and conditions
of the form of proposal, including the amount of equity to be invested, the
bridge financing to be provided, the percentage dilution to existing
stockholders, and the amount of the termination fees and the expenses, if any,
that would be payable should the Company enter into a restructuring transaction
with the Noteholders or a third-party on terms more favorable to the Company
than the Restructuring. The Board of Directors expressed concern with respect
to certain of the terms and conditions of the proposal and subsequently the
Company and its representatives negotiated with Stonington with respect to such
terms and conditions. On July 13, 1997, two Noteholders who were subject to a
confidentiality agreement were contacted and informed that the Company expected
to receive a proposal for an equity infusion, and the general terms thereof.
On the evening of July 14, 1997, the Company received a formal proposal from
Stonington in the form filed in the current Report on Form 8-K, filed with the
SEC on July 15, 1997 (the "Stonington Proposal"). That same evening, the Board
of Directors of the Company met and discussed the merits of the Stonington
Proposal and received the preliminary view of the Company's financial and legal
advisors with respect to such proposal. The Board also reviewed and considered
a letter received from counsel to the Ad Hoc Noteholders Committee objecting to
the consideration by the Board of the Stonington Proposal, although the
Committee had not yet received the written proposal with the specific terms and
conditions thereof. After the Board's consideration of the foregoing and other
factors, the Board of Directors of the Company voted in favor of agreeing to
give Stonington the exclusivity arrangements and to pay the termination fees
and expenses required in the Stonington Proposal in order to allow it to remain
open. By granting such exclusivity and agreeing to pay such termination fees,
under the terms of the Stonington Proposal, it would remain open until
September 4, 1997, unless terminated earlier by the Company or by Stonington as
permitted by the occurrence of certain events (as described in "Summary of the
Stonington Proposal," below).
In reaching its decision to grant the requested exclusivity which would
enable the Stonington Proposal to remain open, the Board of Directors
considered, among other things, that the Stonington Proposal had the potential
to provide greater benefits to the Company than the Restructuring, principally
because of the substantial cash infusion of new equity capital to be used to
retire substantially all of the Operating Company Indebtedness, the addition of
new working capital and the increase in the amount of equity to be retained
initially by current Stockholders. The Board of Directors also considered that
the Stonington Proposal had the potential of avoiding a subsequent refinancing
of the Operating Company Indebtedness after the Restructuring which could cause
further dilution to the then existing equity interests, including those of the
Noteholders, if the Restructuring is implemented. In addition, the Board of
Directors considered that the reinstatement of the 12.5% Notes and payment of
interest in cash to the Noteholders, as contemplated by the Stonington
Proposal, could, based on prevailing interest rates, be a more attractive
alternative to some Noteholders than exchanging their debt for
ANNEX IV
2
<PAGE>
equity. The Board was also aware that the Stonington Proposal by its terms
could be implemented without the need for a prepackaged bankruptcy filing.
However, the Board decided that if the Consenting Noteholders determined not to
consent to a modification of their agreement with the Company, the Company
would continue to proceed to submit the Restructuring to a vote of
Stockholders. The Board of Directors also considered that the Company could
elect to terminate its interest in the transaction contemplated by the
Stonington Proposal without cost to the Company if it notified Stonington by
the date described below.
On the evening of July 15, 1997, the Ad Hoc Noteholders Committee informed
the Company in a letter that they would not agree with the Company to terminate
or modify their agreement with the Company regarding the Restructuring in order
to allow the Stonington Proposal to be accepted. Accordingly, on the morning of
July 16, 1997, the Company issued a press release reiterating its intention to
submit the existing Restructuring plan to a Stockholder vote in accordance with
its agreement with the Noteholders.
On July 20, 1997, Stonington advised the Company in a letter that it is
continuing to review alternative financing which could be provided to the
Company in the event the Limited Waiver Agreement is terminated in accordance
with its terms without the Restructuring having been implemented and that it
was extending the date by which the Company could notify it of a termination of
its interest in the Stonington Proposal without cost to the Company from July
28, 1997 to August 11, 1997. There can be no assurance that any such
alternative financing on terms acceptable to the Company can be arranged, and,
in view of the fact that the Stonington Proposal by its current terms cannot be
accepted, the Board of Directors continues to recommend the Restructuring as
the best alternative presently available to the Company.
On July 24, 1997, Stonington advised the Company that it had received a
summons and complaint from counsel to the Ad Hoc Noteholders Committee alleging
tortious interference by Stonington with the Limited Waiver Agreement and
seeking damages. Stonington has indicated that it intends to defend the suit
vigorously.
SUMMARY OF THE STONINGTON PROPOSAL
The Stonington Proposal calls for Stonington to invest $152 million in
exchange for 70% of the Company's Common Stock, with current Stockholders
retaining their shares which would represent 30% of the then outstanding common
stock after the equity investment. Under the Stonington Proposal, the $125
million principal amount of the 12.5% Notes would remain outstanding in lieu of
the exchange of such indebtedness for equity as currently proposed in the
Restructuring. In addition, under the Stonington Proposal, the proceeds of the
equity investment would be used to eliminate substantially all of the Operating
Company Indebtedness and Stonington would provide the Company with a
$50 million six-month bridge loan to fund working capital requirements pending
the Company obtaining a longer term working capital facility, which Stonington
committed to assist the Company in obtaining. Upon consummation of the
transaction contemplated by the Stonington Proposal, Stonington would be
entitled to receive a transaction fee of $3 million from the Company.
The Stonington Proposal is subject to certain conditions, including the
execution of a definitive agreement, stockholder approval and agreement of the
Consenting Noteholders to a termination or modification of the Company's
existing agreement with the Noteholders. Stonington has agreed to keep the
Stonington Proposal available until September 4, 1997. Stonington may terminate
its offer in the event that a change occurs in the business of the Company
which has, or would reasonably be expected to have, a material adverse effect,
and in the event that any pending or threatened litigation seeks injunctive or
monetary relief in connection with the transactions contemplated by the
Stonington Proposal.
Pursuant to the Stonington Proposal the Company has agreed to pay Stonington
termination fees and expenses of up to $3 million (plus commitment fees
incurred at the Company's request) in the event that the
ANNEX IV
3
<PAGE>
Company terminates the Stonington Proposal and executes or consummates a
restructuring transaction on terms more favorable than the Restructuring within
six months of such termination. The Company has also agreed that, should the
Restructuring in its current form be implemented, it will pay up to $500,000
(plus commitment fees incurred at the Company's request) of Stonington's
expenses, provided that the Company may terminate the Stonington Proposal
without incurring such costs prior to August 11, 1997.
CORRESPONDENCE WITH NOTEHOLDERS
On July 22, 1997, holders of in excess of 25% in aggregate principal amount
of the 12.5% Notes informed the Company of their intent to accelerate all
outstanding indebtedness under the 12.5% Notes in the event that the
Stockholders fail to approve the Charter Amendment and the Company does not
immediately seek to implement the Restructuring through the Prepackaged Plan.
THE EXCHANGE OFFER AND PREPACKAGED PLAN
Consideration Offered....... For each $1,000 principal amount of 12.5% Notes
(plus accrued but unpaid interest), 192.5 shares
of New Common Stock. In lieu of issuing any
fractional shares of New Common Stock or
fractional warrants in the Restructuring,
fractional interests in New Common Stock and
Warrants will be aggregated and sold by the
Company, with the proceeds to be distributed to
the holders in proportion to the amount of
fractional shares of New Common Stock and
fractional warrants such holders would otherwise
be entitled to receive. As a result of the
Exchange Restructuring, Noteholders as of the
date of consummation of the Restructuring ("the
Exchange Date") will receive, in the aggregate,
shares of New Common Stock equivalent to
approximately 80% of the New Common Stock
outstanding immediately after giving effect to
the Exchange Restructuring, based on the
outstanding Old Common Stock as of the Record
Date. Noteholders will not be entitled to
receive Warrants. Should the Prepackaged
Restructuring be consummated, the holders of Old
Common Stock and the Noteholders will receive
consideration substantially similar to that
which such holders would receive in the Exchange
Restructuring.
SUMMARY DISTRIBUTION TABLE
<TABLE>
<CAPTION>
EXISTING NEW SERIES A SERIES B
SECURITY COMMON STOCK WARRANTS WARRANTS
-------- ------------ --------- ---------
<S> <C> <C> <C> <C>
To holders of Old Common
Stock:
Per 1,000 Shares....... 1,000 200 87.5 87.5
In Aggregate........... 30,078,495 6,015,699 2,631,868 2,631,868
To holders of 12.5%
Notes:
Per Note............... $ 1,000 192.5 -- --
In Aggregate........... $125,000,000 24,062,796 -- --
</TABLE>
For more information on consideration offered
pursuant to the Restructuring, see Part A.
ANNEX IV
4
<PAGE>
Expiration Date............. With respect to the Exchange Offer and the
solicitation of acceptances of the Prepackaged
Plan, the term "Expiration Date" shall mean 5:00
p.m., New York City time, on August 29, 1997,
unless the Company, in its sole discretion,
extends the Exchange Offer or solicitation
period, in which case the term "Expiration Date"
for the Exchange Offer or solicitation period
shall mean the last time and date to which the
Exchange Offer or solicitation period is
extended. See "TENDERING AND VOTING PROCEDURES"
in Part A and "VOTING PROCEDURES AND
REQUIREMENTS" in the Disclosure Statement.
Interest on 12.5% Notes..... The consideration to be paid pursuant to the
Exchange Offer or the Prepackaged Plan will be
paid in respect of each $1,000 principal amount
of 12.5% Notes (together with all accrued and
unpaid interest) tendered pursuant to the
Exchange Restructuring and accepted for exchange
or exchanged pursuant to the Prepackaged
Restructuring. By tendering 12.5% Notes pursuant
to the Exchange Restructuring, and pursuant to
the terms of the Prepackaged Restructuring, a
Noteholder waives all rights to receive any
payments with respect to accrued but unpaid
interest on such 12.5% Notes, other than the New
Common Stock to be paid pursuant to the Exchange
Restructuring or the Prepackaged Restructuring.
The Company has paid interest on the 12.5% Notes
through December 31, 1996, and, assuming the
Restructuring is consummated on July 31, 1997,
additional interest of $72.92 per $1,000
principal amount of 12.5% Notes of $72.92 will
have accrued since December 31, 1996 .
Outstanding 12.5% Notes at
March 31, 1997............. As of March 31, 1997, there were outstanding $125
million aggregate principal amount of 12.5%
Notes (plus accrued but unpaid interest thereon
of approximately $3,906,250).
Classification and
Treatment of Claims and
Interests Under the
Prepackaged Plan
(capitalized terms used in
this section and not
otherwise defined herein
are defined in the
Prepackaged Plan).......... The classification and treatment of Claims and
Interests pursuant to the Prepackaged Plan is as
follows:
Administrative Claims....... Allowed Administrative Claims are to be paid in
full, in cash, on the later of the consummation
of the Prepackaged Restructuring (the "Effective
Date") or the date on which such Administrative
Claims become Allowed, unless the Holder of such
Claim agrees to different treatment; provided,
however, that if incurred in the ordinary course
of business or otherwise assumed by the Holding
Company pursuant to the Prepackaged Plan
(including Administrative Claims of governmental
units for taxes), an
ANNEX IV
5
<PAGE>
Allowed Administrative Claim will be paid,
performed or settled by Reorganized Merisel when
due in accordance with the terms and conditions
of the particular agreements governing the
obligation.
Priority Tax Claims....... Allowed Priority Tax Claims are to be paid (i) in
full in cash on the later of the Effective Date
or when such Claims become Allowed, or (ii) will
be paid at such time as specified under
applicable laws, unless the Holder of such Claim
agrees to different treatment.
Class 1: Secured Claims
(Unimpaired)........... On the Effective Date, or as soon thereafter as
practicable, the Holder of an Allowed Secured
Claim, in the sole discretion of Merisel, (i)
will have its Secured Claim Reinstated or (ii)
receive such other treatment as the Holding
Company and such Holder have agreed upon in
writing as announced at or prior to the
Confirmation Hearing. The Holding Company is not
aware of any material Secured Claims.
Class 2: Priority Claims
(Unimpaired)........... Class 2 Priority Claims are to be paid in full in
cash on the latest of (i) the Effective Date or
as soon as practicable thereafter, (ii) the date
when such Claim becomes Allowed or (iii) the
date when such Claim would be paid in accordance
with any terms and conditions of any agreements
or understandings between the Holding Company
and the Holder of such Claim, unless such Holder
and Reorganized Merisel agree to a different
treatment.
Class 3: Subsidiary Debt
Guaranty Claims
(Unimpaired)........... On the Effective Date, or as soon thereafter as
practicable, the Holder of an Allowed Subsidiary
Debt Guaranty Claim shall, in the sole
discretion of Merisel, (i) have its Claim
Reinstated or (ii) receive such other treatment
as the Holding Company and such Holder have
agreed upon in writing as announced at or prior
to the Confirmation Hearing.
Class 4: 12.5% Notes
Claims (Impaired)...... On the Effective Date or as soon as practicable
thereafter, each Holder of an Allowed Class 4
Claim shall receive on account of the unpaid
principal amount plus unpaid interest which
accrued prior to the Petition Date on its 12.5%
Notes and any Claims under the 12.5% Notes,
192.5 shares of New Common Stock for each $1,000
of 12.5% Notes held by such Holder.
Class 5: General
Unsecured Claims
(Unimpaired)........... Unless otherwise agreed to by the parties, the
legal, equitable and contractual rights of each
Holder of an Allowed General Unsecured Claim
will either (i) not be altered by the Plan or
(ii) at the option of the Holding Company,
receive such other treatment that will result in
such Allowed Claim being deemed Unimpaired. The
Company is not aware of any material amount of
undisputed General Unsecured Claims.
ANNEX IV
6
<PAGE>
Class 6: Old Common Stock
Interests (Impaired)... On the Effective Date or as soon as practicable
thereafter, each Holder of an Allowed Class 6
Old Common Stock Interest will receive, on a Pro
Rata basis, on account of each share of Old
Common Stock which it holds: (i) one-fifth of a
share of New Common Stock, (ii) .0875 Series A
Warrants to purchase New Common Stock, and (iii)
.0875 Series B Warrants to purchase New Common
Stock. Each Warrant entitles the holder to
purchase one share of New Common Stock.
For a more detailed description of the foregoing
Classes of Claims and Interests, see "SUMMARY OF
PLAN" in the Disclosure Statement.
Conditions to Exchange The Company's obligation to accept 12.5% Notes
Restructuring............... tendered pursuant to the Exchange Restructuring
is conditioned, among other things, on (a) the
Minimum Tender Condition and (b) approval by the
Company's stockholders (the "Stockholders") of
the Charter Amendment. The Company has reserved
the right to waive or seek the waiver of any one
or more of these conditions but does not
currently intend to waive or seek the waiver of
any condition, except that the Company may seek
a waiver of the Minimum Tender Condition in the
event that it receive tenders of approximately
95% or more, but less than 100%, of the 12.5%
Notes. No decision has been made to seek such a
waiver, and there can be no assurance that such
waiver, if sought, would be obtained. In the
event that the requisite percentage and number
of Noteholders and Stockholders have executed
acceptances of the Prepackaged Plan, but the
Company determines, in its sole discretion, that
Minimum Tender Condition has not been satisfied,
or is not likely to be satisfied, at or prior to
the Expiration Date, the Company may elect to
terminate the Exchange Offer at or prior to its
scheduled expiration and proceed directly to the
Prepackaged Plan. See "TENDERING AND VOTING
PROCEDURES--Conditions" in Part A.
Conditions to Prepackaged
Restructuring.............. The Bankruptcy Code requires that the Bankruptcy
Court determine that the Prepackaged Plan
complies with the requirements of Section 1129
of the Bankruptcy Code. Approval of two-thirds
of the principal balance and a majority in
number of the Noteholders, and two-thirds of the
shares of Old Common Stock, in each case of
those voting on the Prepackaged Plan, is
required for the consummation of the Prepackaged
Restructuring. See "SUMMARY OF THE PLAN" in the
Disclosure Statement.
ANNEX IV
7
<PAGE>
Certain Federal Income Tax
Considerations............. Noteholders will generally recognize no gain or
loss upon the receipt of New Common Stock in
exchange for the 12.5% Notes pursuant to the
Restructuring. The Company will realize
cancellation of indebtedness income for Federal
income tax purposes as a result of the
Restructuring. In the event of an Exchange
Restructuring, the Company anticipates that such
income would likely be offset by the Company's
net operating losses and net operating loss
carryovers ("NOLs"). In the event of a
Prepackaged Restructuring, such income would not
be recognized for Federal Income Tax purposes.
As a result of the Restructuring, the Company
will undergo an "ownership change" for Federal
income tax purposes and will be limited in its
ability to use its NOLs and certain tax credit
carryforwards to offset future taxable income.
See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS"
in Part A.
Old Common Stock............ As of the Record Date, there were 50,000,000
shares of Old Common Stock authorized for
issuance, of which 30,078,495 shares were issued
and outstanding (or 6,015,699 shares of New
Common Stock after the giving effect to the
Reverse Split). As part of the Exchange
Restructuring, holders of Old Common Stock will
be asked to consider and approve the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. If the
Prepackaged Restructuring is consummated, the
Company expects that the New Common Stock
Issuance and an amendment substantially similar
to the Charter Amendment will be implemented
pursuant to the Prepackaged Plan. See "PURPOSES
AND EFFECTS OF THE PREPACKAGED RESTRUCTURING" in
the Disclosure Statement.
Market and Trading Information:
12.5% Notes............... The 12.5% Notes are traded in the over-the-
counter market by certain dealers who from time
to time are willing to make a market in such
securities. Trading of the 12.5% Notes is,
however, extremely limited and prices and
trading volume are not reported and are
difficult to monitor. See "MARKET PRICES OF
12.5% NOTES" in Part A.
Old Common Stock.......... The Old Common Stock is currently traded on the
over-the-counter market and is quoted on the
Nasdaq National Market under the symbol "MSEL."
See "MARKET PRICES OF OLD COMMON STOCK; DIVIDEND
HISTORY" in Part A and "RISK FACTORS" in Part A
and the Disclosure Statement.
ANNEX IV
8
<PAGE>
Post-Restructuring Board.... Pursuant to the terms of the Limited Waiver
Agreement, upon consummation of the
Restructuring, the Board of Directors of the
Company is intended to be reconstituted so as to
be comprised of members acceptable to the
Company and the Ad Hoc Noteholders Committee. No
financial advisors nor legal advisors will be
named to the Board. The Company and the Ad Hoc
Noteholders Committee have been in discussions
regarding the composition of the Board, but no
agreement has been reached. The Company has
proposed that Dwight A. Steffensen, Dr. Arnold
Miller and James E. Illson be named to the
Board, however, until any such agreement is
reached, the Company intends that the existing
Board will continue as the Board of Directors of
the Company.
Depositary/Voting Agent..... The Bank of New York has been appointed as
Depositary with respect to the 12.5% Notes for
the Exchange Restructuring (the "Depositary"),
and as Voting Agent (as defined herein) with
respect to the 12.5% Notes for the solicitation
of acceptances of the Prepackaged Plan.
Questions and requests for assistance may be
directed to the Depositary at one of its
addresses and telephone numbers set forth on the
back cover of this Prospectus. See "ADVISORS AND
REPRESENTATIVES" in Part A.
Information Agent........... MacKenzie Partners, Inc. is serving as
Information Agent in connection with the
Exchange Restructuring and the solicitation of
acceptances of the Prepackaged Plan (the
"Information Agent"). Any questions regarding
how to tender in the Exchange Offer or how to
vote on the Prepackaged Plan, and any requests
for additional copies of the Prospectus, Ballots
or Master Ballots should be directed to the
Information Agent at its address and telephone
number set forth on the back cover of Part A to
the Exchange Restructuring Prospectus. See also
"ADVISORS AND REPRESENTATIVES" in Part A.
ANNEX IV
9
<PAGE>
COMPARISON OF EXCHANGE RESTRUCTURING
AND PREPACKAGED RESTRUCTURING
The following is a comparison of certain of the elements of, and differences
between, the Exchange Restructuring and the Prepackaged Restructuring.
<TABLE>
<CAPTION>
EXCHANGE RESTRUCTURING PREPACKAGED RESTRUCTURING
---------------------- -------------------------
<S> <C> <C>
APPROVAL REQUIRED....... 100 percent of the aggregate Acceptances must be received
principal amount of the 12.5% from holders of at least
Notes must be tendered and not two-thirds in dollar amount
withdrawn and a majority of the and more than one-half in
voting power of the outstanding number of 12.5% Notes,
Old Common Stock must approve the counting only holders who
Charter Amendment. vote, and from the holders
of at least two-thirds in
amount of the Old Common
Stock, counting only holders
who vote.
EFFECT ON NOTEHOLDERS
WHO DO NOT
PARTICIPATE............ Not applicable, as the Exchange Upon receipt of the
Restructuring is conditioned requisite acceptances and
upon, among other things, 100 consummation of the
percent of the aggregate Prepackaged Restructuring,
principal amount of the 12.5% all 12.5% Notes would be
Notes being tendered and not cancelled and holders of
withdrawn. The Company does not such 12.5% Notes would
intend to waive or seek the receive the same
waiver of the Minimum Tender consideration as the holders
Condition, except that the who voted in favor of the
Company may seek a waiver of the Prepackaged Restructuring.
Minimum Tender Condition in the
event that it receives tenders of
approximately 95% or more, but
less than 100%, of the 12.5%
Notes.
SPECIAL MEETING OF
STOCKHOLDERS........... At the Stockholders' Meeting, At the Stockholders'
holders of Old Common Stock will Meeting, holders of Old
be asked to consider and vote Common Stock will be asked
upon the Charter Amendment, the to consider and vote upon
New Common Stock Issuance and the the Charter Amendment, the
Stock Award and Incentive Plan. New Common Stock Issuance
The stockholder votes with and the Stock Award and
respect to the New Common Stock Incentive Plan, but if the
Issuance will not be effective Prepackaged Restructuring is
unless and until the Charter pursued and a petition is
Amendment is approved at the filed under the Bankruptcy
Stockholders' Meeting and filed Code, the Company expects
with the Delaware Secretary of that the New Common Stock
State and the Exchange Offer has Issuance and an amendment
been consummated. similar to the Charter
Amendment will be
implemented pursuant to the
Prepackaged Restructuring.
</TABLE>
ANNEX IV
10
<PAGE>
<TABLE>
<S> <C> <C>
MECHANICS OF
PARTICIPATION.......... Noteholders who desire to Impaired creditors and
participate in the Exchange Offer equity interest holders who
must properly complete a Letter desire to vote on the
of Transmittal and deliver it, Prepackaged Plan must
together with the 12.5% Notes and properly complete a Ballot
any other required documents, to or Master Ballot, as the
the Depositary. Only a registered case may be, and deliver it
Noteholder, or persons who have in accordance with voting
obtained a properly completed instructions. Only
bond power from a registered beneficial owners of Claims
Noteholder, may tender in the or Interests or, if
Exchange Offer. applicable, nominees who are
voting at the instruction of
the beneficial owners and
make a certification with
respect thereto, may vote on
the Prepackaged Plan.
PREFERRED STOCK
VOTING RIGHTS.......... There is currently no preferred The Charter will provide
stock of the Company outstanding, that any preferred stock to
but any subsequently issued be issued will have certain
shares of preferred stock may or specified minimum voting
may not have voting rights after rights, as required by the
consummation of the Exchange Bankruptcy Code.
Restructuring.
</TABLE>
PURPOSES AND EFFECTS OF THE RESTRUCTURING
The purpose of the Restructuring is to enhance the long-term viability and to
contribute to the success of the Company by adjusting the Company's
capitalization (including debt levels and principal repayment schedules) to
reflect current and expected operating performance levels. Specifically, the
Restructuring is designed to reduce the Company's debt obligations by $125
million, to levels which the Company believes can be supported by its projected
cash flow, and to replace a significant portion of the Company's indebtedness
with New Common Stock. Interest charges will be substantially reduced. The
amount of outstanding capital stock of the Company will be substantially
increased as a result of the Restructuring. For more information, see "PURPOSES
AND EFFECTS OF THE PREPACKAGED RESTRUCTURING" in the Disclosure Statement.
RISK FACTORS
Investment in the New Common Stock involves a high degree of risk. Prior to
deciding whether to (a) participate in the Exchange Offer and/or (b) vote to
accept the Prepackaged Plan, each Noteholder should carefully consider all of
the information contained in this Prospectus, especially the factors outlined
below and described under "RISK FACTORS" in each of Part A and the Disclosure
Statement, to the extent applicable.
Risk Factors Relating to the Exchange Restructuring and the Prepackaged
Restructuring. Stockholders should consider that (a) in the event that the
Stockholders do not approve the Restructuring, the Noteholders have expressed
their intention to accelerate the outstanding indebtedness under the 12.5%
Notes, (b) the Company is currently highly leveraged and will continue to have
a high level of indebtedness following the Exchange Restructuring or
Prepackaged Restructuring, as applicable, (c) seasonality and economic, market
or other conditions may adversely affect cash flow and there can be no
assurance that such conditions will not have
ANNEX IV
11
<PAGE>
an adverse effect on the Company's financial projections, (d) the Operating
Companies' Loan Agreements contain restrictions on the Company's operations and
requirements that the Company achieve and maintain certain financial ratios
which the Company may not be able to achieve or maintain, and which, if not
maintained or achieved, may result in a default and could lead to the
acceleration of the Company's obligations under the Operating Companies' Loan
Agreements as well as the acceleration of other indebtedness of the Company,
(e) market forces, such as interest rates, affect the value of securities and
are influenced by conditions beyond the Company's control, (f) the Company's
capital expenditure levels assumed in preparation of the projected financial
data contained herein may be inadequate to maintain the Company's long-term
competitive position, (g) the Company is and, after consummation of the
Exchange Restructuring or Prepackaged Restructuring, as applicable, will
continue to be, restricted in its ability to declare and pay cash dividends on
the common stock of the Company, (h) if certain of the major suppliers and
vendors that the Company currently deals with were to change the terms or
credit limits or product availability that they currently extend to the
Company, it could have a significant negative impact on the Company's sales,
cash position and liquidity, (i) the Company is subject to the risk of
increased competition, which could affect its sales volume, pricing and margins
and (j) there are certain Federal income tax considerations with respect to the
Restructuring, including limiting the use of, or reducing, the Company's net
operating loss carryovers, although such limit would be greater under the
Exchange Restructuring than under the Prepackaged Restructuring, (k) following
the Restructuring the ownership of New Common Stock may be substantially more
concentrated than the current ownership of Old Common Stock, which may result
in an attempt to influence the direction of the Company by one or more large
stockholders, (l) the Company is not in compliance with the continuing listing
requirements of the Nasdaq National Market, and de-listing from the Nasdaq
National Market could adversely affect the liquidity of the market for their
shares of common stock of the Company and (m) the Company has recently suffered
significant net operating losses.
Additional Risk Factors Relating to the Prepackaged
Restructuring. Stockholders should consider that (a) commencement of bankruptcy
proceedings, even if only to confirm the Prepackaged Plan, could adversely
affect the relationship between the Holding Company and its subsidiaries,
employees, customers and suppliers which, in turn, could adversely affect the
Company's ability to complete the Solicitation or obtain confirmation of the
Prepackaged Plan, (b) even if all classes of impaired creditors and equity
interest holders accept the Prepackaged Plan, the Prepackaged Plan may not be
confirmed by the Bankruptcy Court and (c) there can be no assurance that the
Bankruptcy Court will decide that the Exchange Restructuring and the Disclosure
Statement meets the disclosure requirements of the Bankruptcy Code.
For a discussion of certain additional risk factors that should be
considered in connection with voting on the Prepackaged Plan, see "RISK
FACTORS" in the Disclosure Statement.
ANNEX IV
12
<PAGE>
TENDERING AND VOTING PROCEDURES
How to Tender in the
Exchange Offer............. ONLY NOTEHOLDERS, OR PERSONS WHO HAVE OBTAINED A
PROPERLY COMPLETED BOND POWER FROM THE
REGISTERED HOLDERS THEREOF, MAY TENDER IN THE
EXCHANGE OFFER. Any beneficial holder whose
12.5% Notes are registered or held of record in
the name of such holder's broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender 12.5% Notes should
contact such Noteholder of record and instruct
such Noteholder to tender 12.5% Notes.
To tender 12.5% Notes pursuant to the Exchange
Offer, a properly completed and duly executed
Letter of Transmittal (or a manually signed
facsimile thereof) or an Agent's Message (as
defined herein) in the case of a book-entry
transfer of 12.5% Notes, together with any
signature guarantees and any other documents
required by the Instructions to the Letter of
Transmittal, must be received by the Depositary
at one of its addresses set forth on the back
cover page of this Prospectus prior to the
Expiration Date and either (i) certificates
representing such 12.5% Notes must be received
by the Depositary at one of its addresses or
(ii) such 12.5% Notes must be transferred
pursuant to the procedures for book-entry
transfer set forth under "TENDERING AND VOTING
PROCEDURES" in Part A, and the book-entry
transfer of such 12.5% Notes into the
Depositary's account at a Book-Entry Transfer
Facility (as defined herein) must be confirmed,
in each case, prior to the Expiration Date.
THERE IS NO PROCEDURE FOR TENDERING BY
GUARANTEED DELIVERY. TENDERS BY GUARANTEED
DELIVERY WILL NOT BE ACCEPTED. Noteholders will
not be obligated to pay the Company any
brokerage commissions or solicitation fees in
connection with the Exchange Offer. See
"TENDERING AND VOTING PROCEDURES" in Part A.
How to Vote on the
Prepackaged Plan
(capitalized terms used in
this section and not
otherwise defined herein
are defined in the
Disclosure Statement)...... The following Classes of Claims and Interests are
impaired under the Prepackaged Plan and all
Holders of Claims or Interests in such Classes
as of the Record Date are entitled to vote to
accept or to reject the Prepackaged Plan: Claims
of Holders of 12.5% Notes and Interests of
Holders of Old Common Stock. To be entitled to
vote to accept or to reject the Prepackaged
Plan, a Holder of 12.5% Notes or Old Common
Stock must be the Beneficial Interest Holder of
such security or other Claims at the close of
business on the Record Date, whether such Claims
or Interests are held of record on the Record
Date in such Holder's name or in the name of
such Holder's broker, dealer, commercial bank,
trust company or other nominee. For purposes of
ANNEX IV
13
<PAGE>
determining whether the requisite number of
acceptances is received to approve the
Prepackaged Plan, only votes which are cast at
the direction of Beneficial Interest Holders in
accordance with the procedures set forth in the
Disclosure Statement may be counted, and only
the votes of Holders of Allowed Claims or
Interests will be counted. Ballots are to be
used by Beneficial Interest Holders whether such
Beneficial Interest Holders are also Record
Holders or hold through other Record Holders.
Master Ballots are to be used by Record Holders
of 12.5% Notes and/or Old Common Stock which
hold such 12.5% Notes and/or Old Common Stock
for the account of one or more Beneficial
Interest Holders. A Record Holder which holds
12.5% Notes and/or Old Common Stock on behalf of
one or more Beneficial Interest Holders should
collect completed Ballots from such Beneficial
Interest Holders and should complete a Master
Ballot reflecting the votes of such Beneficial
Interest Holders, as indicated on their
respective Ballots.
Holders of Claims and/or Interests should
complete an appropriate Ballot and, where
appropriate, Master Ballot, for each class of
Claims and Interests held by such Holders in
accordance with the instructions set forth
thereon and the procedures set forth in the
Disclosure Statement and in the Prepackaged
Plan.
The Ballots require voting Holders to make
certain certifications, including with respect
to casting other votes pursuant to the
Solicitation. Each Beneficial Interest Holder of
12.5% Notes and each Beneficial Interest Holder
of Interests who holds Claims or Interests in
more than one Class is required to vote
separately with respect to each Class in which
such Beneficial Interest Holder holds Claims or
Interests in aggregate amounts not in excess of
the amounts which were beneficially owned as of
the Record Date. A separate Ballot of the
appropriate form should be used to vote on the
Prepackaged Plan with respect to each Impaired
Class of Claims or Interests. Votes must be made
on the appropriate Ballots in order to be
counted. The vote of a Holder of 12.5% Notes
will be counted only once in determining whether
the requisite number of Holders in such Class
have voted to accept the Prepackaged Plan,
regardless of the number of Ballots relating to
such Class submitted by or on behalf of such
Holder. A Holder may not split its vote within a
Class of Impaired Claims or Interests.
Under the Bankruptcy Code, for purposes of
determining whether the requisite acceptances
have been received from an Impaired Class of
Claims or Interests, the vote will be tabulated
based on the ratio of (i) Allowed Claims and/or
Interests with respect to which a vote to accept
was received to (ii) all Allowed Claims and/or
Interests of such Impaired Class with respect to
which any
ANNEX IV
14
<PAGE>
valid vote was received. Therefore, it is
possible that the Prepackaged Plan could be
approved by any Impaired Class of Claims with
the affirmative vote of significantly less than
two-thirds in amount and one-half in number of
the entire Class of Claims, or by any Impaired
Class of Interests with the affirmative vote of
significantly less than two-thirds in amount of
the entire Class of Interests. Failure by a
Holder of an Impaired Claim or an Impaired
Interests to submit a properly executed Ballot
or Master Ballot (as appropriate) or to indicate
acceptance or rejection of the Prepackaged Plan
in accordance with the instructions set forth
thereon and the procedures set forth in the
Disclosure Statement shall be deemed to
constitute an abstention by such Holder with
respect to a vote regarding the Prepackaged
Plan. Abstentions as a result of failing to
submit a properly executed Ballot or Master
Ballot (as appropriate) or failing to indicate a
vote either for acceptance or rejection of the
Prepackaged Plan will not be counted as votes
for or against the Prepackaged Plan. The
Company, in its sole discretion, may waive any
defect in any Ballot or Master Ballot at any
time, either before or after the close of
voting, and without notice. Except as otherwise
ordered by the Bankruptcy Court, a Ballot or
where appropriate, Master Ballot, which is
either (i) not submitted to the Voting Agent,
(ii) submitted to the Voting Agent without
proper execution or (iii) executed and submitted
to the Voting Agent without properly indicating
acceptance or rejection of the Prepackaged Plan
will constitute an abstention with respect to a
vote on the Prepackaged Plan under section
1126(b) of the Bankruptcy Code for purposes of
confirmation of the Prepackaged Plan. See
"VOTING AND CONFIRMATION OF THE PLAN" in the
Disclosure Statement.
Withdrawal Rights and
Revocation of Votes........ Tenders of 12.5% Notes may be withdrawn, subject
to the procedures described in Part A, at any
time before they are accepted for exchange by
the Company. Votes on the Prepackaged Plan may
be revoked, subject to the procedures described
in the Disclosure Statement, at any time prior
to the earlier of (i) the Filing Date and (ii)
the Expiration Date. Revocations of such votes
thereafter may be effected only with the
approval of the Bankruptcy Court. See "TENDERING
AND VOTING" in Part A and "VOTING AND
CONFIRMATION OF THE PLAN--Withdrawal Of Votes on
the Plan" in the Disclosure Statement.
Acceptance of 12.5% Notes
and Delivery of New Common
Stock...................... Subject to the satisfaction or waiver of all
conditions to the Exchange Offer, the Company
will accept all 12.5% Notes validly tendered on
or prior to the Expiration Date. The New Common
Stock will be delivered in exchange for the
12.5% Notes accepted
ANNEX IV
15
<PAGE>
in the Exchange Offer promptly after acceptance
on the Expiration Date. Pursuant to the
Prepackaged Plan, 12.5% Notes will be exchanged
following the Effective Date (as defined herein)
upon the receipt by the Company of such 12.5%
Notes.
In lieu of issuing any fractional shares of New
Common Stock in the Restructuring, fractional
interests in New Common Stock will be aggregated
and sold by the Company, with the proceeds to be
distributed to the holders in proportion to the
amount of fractional shares of New Common Stock
such holders would otherwise be entitled to
receive.
STOCKHOLDERS' MEETING
Date, Time and Place of
Stockholders' Meeting...... The Stockholders' Meeting to consider and to vote
upon the Charter Amendment, the New Common Stock
Issuance and the Stock Award and Incentive Plan
will be held at the Company's headquarters
located at 200 Continental Boulevard, El
Segundo, California, on August 29, 1997 at 10:00
a.m. Los Angeles time. The stockholder votes
with respect to the New Common Stock Issuance
will not be effective unless and until the
Charter Amendment is approved at the
Stockholders' Meeting and filed with the
Delaware Secretary of State and the Exchange
Restructuring has been consummated and the
Charter Amendment has been filed. If the
Prepackaged Restructuring is pursued and a
petition is filed under the Bankruptcy Code, the
Company expects that the New Common Stock
Issuance and an amendment substantially similar
to the Charter Amendment will be implemented
pursuant to the Prepackaged Plan.
Record Date; Stockholders
Entitled to Vote; Quorum... Holders of record of Old Common Stock at the
close of business on the Record Date, will be
entitled to vote at the Stockholders' Meeting.
Holders of Old Common Stock will be entitled to
one vote per share with respect to the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. On the Record
Date there were 30,078,495 shares of Old Common
Stock outstanding, of which there were 1,255
holders of record. The presence, either in
person or by properly executed proxy, of the
holders of a majority of the shares of Old
Common Stock outstanding and entitled to vote is
necessary to constitute a quorum at the
Stockholders' Meeting.
Purpose of Stockholders'
Meeting..................... The purpose of the Stockholders' Meeting is to
consider the proposals to approve the Exchange
Restructuring Proposal and the Stock Award and
Incentive Plan. The Board has unanimously
adopted a resolution proposing that the
Company's Charter be
ANNEX IV
16
<PAGE>
amended by the Charter Amendment to (i) effect a
one-for-five reverse stock split of the
Company's outstanding shares of Old Common Stock
and (ii) increase the par value of the
authorized common stock of the Company from $.01
per share to $.05 per share. The Charter
Amendment is set forth in its entirety in Annex
I to this Proxy Statement/Prospectus. The
Charter Amendment is necessary to permit the
Company to consummate the Exchange Restructuring
on the terms contemplated by the Exchange Offer.
The approval of the Stock Award and Incentive
Plan by the Stockholders is necessary to provide
appropriate incentives for those eligible to
participate thereunder. The Board has also
unanimously adopted resolutions approving the
Charter Amendment, the New Common Stock Issuance
and the Stock Award and Incentive Plan. The
approval of the New Common Stock Issuance by the
Stockholders may be required by the applicable
rules of the National Association of Securities
Dealers, Inc. (the "NASD").
Votes Required.............. Under the Delaware General Corporation Law (the
"DGCL") and the Company's Certificate of
Incorporation, the Charter Amendment must be
approved by a majority of the voting power of
the Old Common Stock entitled to vote at the
Special Meeting. The New Common Stock Issuance
and the Stock Award and Incentive Plan must be
approved by the affirmative vote of the holders
of a majority of the voting power of the Old
Common Stock represented at the meeting. The
Company's executive officers and directors, as a
group, beneficially own less than 458,672 shares
of the outstanding Old Common Stock. Such
officers and directors have advised the Company
that they intend to vote in favor of the Charter
Amendment, the New Common Stock Issuance and the
Stock Award and Incentive Plan. See "OWNERSHIP
OF COMMON STOCK". The Stockholder votes with
respect to the Charter Amendment will not be
effective unless and until the Charter Amendment
has been filed with the Secretary of State of
Delaware and the Exchange Restructuring has been
consummated, in which event the Charter
Amendment will become effective either
immediately prior to or contemporaneously with
the consummation of the Exchange Restructuring.
The Stock Award and Incentive Plan will become
effective regardless of whether the Exchange
Restructuring is implemented. The Board of
Directors has reserved the right, pursuant to
Section 242(c) of the DGCL, to abandon the
Charter Amendment even if the Company's
Stockholders authorize the Charter Amendment.
However, the Board of Directors intends to file
the Charter Amendment with the Secretary of
State of Delaware if the Exchange Restructuring
is consummated.
ANNEX IV
17
<PAGE>
Dissenters' Rights.......... Stockholders will not be entitled to dissenters'
rights or rights of appraisal in connection with
the Charter Amendment, the New Common Stock
Issuance or the Stock Award and Incentive Plan.
Dilution.................... Assuming 100% acceptance of the Exchange Offer,
the Company expects to issue 24,062,796 shares
of New Common Stock directly to exchanging
Noteholders and 5,263,736 additional shares of
New Common Stock obtainable upon exercise of the
Warrants issued to Stockholders if the Exchange
Restructuring is consummated. The 24,062,796
shares issued directly to Noteholders will
represent approximately 80% of the total
outstanding shares of New Common Stock after
giving effect to the Exchange Restructuring, but
excluding shares obtainable upon exercise of
Warrants, based on the outstanding Old Common
Stock as of the Record Date. Upon consummation
of the Exchange Restructuring, the equity
interests of the existing holders of Old Common
Stock, as a percentage of the total number of
outstanding shares of the common stock of the
Company, will be significantly diluted.
Consummating the Prepackaged Plan will have a
similar dilutive effect. See "PURPOSE OF THE
RESTRUCTURING" and "RISK FACTORS."
DESCRIPTION OF WARRANTS
The following is a brief description of certain provisions of the Warrants.
The Warrants will be issued to holders of Old Common Stock under the Warrant
Agreements to be dated on or about the Restructuring Closing Date between the
Company and the Warrant Agent (as defined herein). The following description of
such provisions does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the detailed provisions of the
Warrant Agreements pursuant to which such securities will be issued.
Issue....................... Up to 2,631,868 Series A Warrants and 2,631,868
Series B Warrants (together, the "Warrants")
will be issued to holders of Old Common Stock
upon consummation of the Exchange Restructuring
and after giving effect to the Reverse Split.
Each Warrant will be exercisable for a period of
seven years from the Exchange Date and shall be
exercisable for one share of New Common Stock,
subject to adjustment unless redeemed or
exchanged earlier by the Company.
Exercise Price.............. Each Warrant will be exercisable at an exercise
price ("Exercise Price") of (i) $7.15 per share,
in the case of the Series A Warrants, and (ii)
$8.68 per share, in the case of the Series B
Warrants. Holders of Old Common Stock will
receive, for each share of Old Common Stock,
.0875 Series A Warrants and .0875 Series B
Warrants exercisable, in the aggregate, for
5,263,736 shares of New Common Stock or
approximately 17.5% of the New Common Stock
immediately after giving effect to the
ANNEX IV
18
<PAGE>
Exchange Restructuring, based on the outstanding
Old Common Stock as of the Record Date. The
Exercise Price and the number of shares of New
Common Stock purchasable upon exercise of the
Warrants ("Warrant Shares") are both subject to
adjustment in certain cases referred to below.
No Rights Generally as
Stockholders................ No holder of Warrants will be entitled to any
rights generally as a stockholder of the Company
unless and until such holder has obtained shares
of New Common Stock upon the exercise of the
Warrants for New Common Stock. Stockholders will
not be entitled to receive warrants unless and
until they submit to the Depositary duly
completed Letters of Transmittal.
Adjustment of Exercise
Price and Number of Shares
of New Common Stock
Obtainable Upon Exercise... The number of shares of New Common Stock
obtainable upon exercise of each Warrant and
correspondingly the Exercise Price, will be
proportionately adjusted subject to standard
antidilution provisions at any time the Company
pays stock dividends, subdivides, combines or
reclassifies its New Common Stock; distributes
evidences of indebtedness or assets of the
Company, or rights for such assets; issues New
Common Stock for less than market value; issues
options, warrants or other securities
convertible for New Common Stock for less than
market value; or effects similar dilutive
transactions. Upon the consummation of any
Extraordinary Transaction (as defined in the
Warrant Agreements), including a merger or sale
of substantially all of the assets of the
Company, agreed to by the Company, prior to
January 1, 1998, the Warrants must remain
outstanding and be exercisable in exchange for
common stock of the Company or common stock of
the acquiring company unless such Extraordinary
Transaction is approved by at least 85% of the
outstanding New Common Stock then outstanding.
ANNEX IV
19
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following Summary Historical Consolidated Financial Information of the
Company should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto, and other financial
data included elsewhere herein. The summary financial information presented
below as of and for the years ended December 31, 1992, 1993, 1994, 1995 and
1996 is derived from the audited consolidated financial statements of the
Company. The summary financial information presented below as of and for the
three months ended March 31, 1996 and 1997 has been derived from the Company's
unaudited financial statements. Operating results for the three months ended
March 31, 1997 may not be indicative of the results that may be expected for
the year ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------- ----------------------
MARCH 31, MARCH 31,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:(1)
Net sales.............. $2,238,715 $3,085,851 $5,018,687 $5,956,967 $5,522,824 $1,536,589 $1,113,100
Cost of sales.......... 2,036,292 2,827,315 4,676,164 5,633,278 5,233,570 1,449,366 1,048,124
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 202,423 258,536 342,523 323,689 289,254 87,223 64,976
Selling, general &
administrative
expenses.............. 150,905 187,152 281,796 317,195 295,021 83,136 51,520
Impairment losses(2)... 51,383 42,033
Restructuring
charge(3)............. 9,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Income
(loss)................ 51,518 71,384 60,727 (54,222) (47,800) 4,087 13,456
Interest expense....... 15,742 17,810 29,024 37,583 37,431 9,877 8,623
Loss on sale of
European, Mexican,
and Latin American
operation (4)......... 33,455
Other expense.......... 1,299 2,722 11,752 13,885 20,150 7,238 3,530
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes.......... 34,477 50,852 19,951 (105,690) (138,836) (13,028) 1,303
Provision (benefit)
for income taxes...... 14,812 20,413 8,341 (21,779) 1,539 480 173
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 19,665 $ 30,439 $ 11,610 $ (83,911) $ (140,375) $ (13,508) $ 1,130
========== ========== ========== ========== ========== ========== ==========
SHARE DATA:(5)
Net income (loss) per
share................. $ 0.67 $ 1.00 $ 0.38 $ (2.82) $ (4.68) $ (0.45) $ 0.04
Weighted average
number of shares...... 29,274 30,454 30,389 29,806 30,001 29,863 30,078
OTHER DATA:
EBITDA(6).............. $ 59,528 $ 79,138 $ 65,076 $ (47,598) $ (82,616) $ 2,608 $ 13,106
BALANCE SHEET DATA:
Working capital......... $ 294,626 $ 359,765 $ 399,848 $ 280,864 $ 190,544 $ 250,442 $ 193,512
Total assets............ 667,313 936,283 1,191,870 1,230,334 731,039 1,158,676 706,020
Long-term and
subordinated debt...... 153,433 208,500 357,685 356,271 294,763 403,861 288,331
Total debt.............. 179,124 259,429 395,556 382,395 294,950 409,564 288,331
Stockholders' equity.... 198,882 223,857 236,164 154,466 14,997 138,794 15,814
</TABLE>
(footnotes on following page)
ANNEX IV
20
<PAGE>
- --------
(1) The Company's fiscal year is the 52- or 53-week period ending on the
Saturday nearest to December 31. For clarity of presentation throughout
this document, the Company has described year-ends and quarter-ends
presented as if the period ended on the last day of the month. Except for
1992, all fiscal years presented were 52 weeks in duration. The summary
historical consolidated financial information as set forth above includes
those balances and activities related to the Company's Australian business
until its disposal on January 1, 1996 and the Company's European, Mexican
and Latin American businesses until their disposal on October 4, 1996,
effective as of September 27, 1996. It also includes Merisel FAB from the
date such business was acquired on January 31, 1994, through the end of
March 28, 1997, the date of sale of Merisel FAB. (See Note 12 to the
consolidated financial statements --"Subsequent Events"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) During 1995 and 1996, the Company determined that the carrying value for
certain of its capitalized costs relating to the installation of a new
computer operating system and identifiable intangible assets relating to
Merisel FAB would not be recovered from their use in future operations.
Accordingly, these assets were written down to their fair values as of the
impairment dates.
Additionally, in 1995 and 1996, the Company recognized impairment losses on
the assets of Merisel FAB and Merisel Pty Ltd. (a wholly owned Australian
subsidiary) related to the expected sale of substantially all of the assets
of such subsidiaries. (See Note 4 to the consolidated financial
statements--"Impairment Losses").
(3) During 1995, the Company recorded a restructuring charge associated with
the resizing of the Company's operations. (See Note 2 to the consolidated
financial statements--"Restructuring Charge").
(4) In October 1996, the Company completed the sale of substantially all of its
European, Mexican, and Latin American businesses to CHS Electronics, Inc. A
loss of $33,455,000, which includes approximately $7,400,000 of direct
costs related to the sale, was recorded on such sale. (See Note 5 to the
consolidated financial statements--"Dispositions").
(5) Net income (loss) per share and weighted average number of shares have not
been adjusted to reflect the Reverse Split.
(6) EBITDA is the sum of income before income taxes and interest, depreciation
and amortization expense. EBITDA should not be considered as an alternative
to income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity. However, EBITDA is presented
because it is a widely used financial indicator of a company's ability to
service indebtedness and other factors.
ANNEX IV
21
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following table sets forth the Summary Unaudited Pro Forma Condensed
Consolidated Financial Data for the fiscal year ended December 31, 1996 and the
three months ended March 31, 1997, after giving effect to (i) the sale of EML
and FAB as if each had occurred as of January 1, 1996 including the effect of
any amendment to existing debt agreements that were entered into as a direct
consequence of the sale of their business and related assets, (ii) the issuance
of 24.1 million shares of New Common Stock to the Noteholders, and the Reverse
Split, (iii) the extension of the maturity dates of the Revolving Credit
Agreement and the 11.5% Notes to January 31, 1999, (iv) the payment of 3.5%
modification fees and other fees associated with the Extension to the holders
of the Revolving Credit Agreement and 11.5% Notes, and (v) the interest rate
increases on the Revolving Credit Agreement, 11.5% Notes, and Subordinated
Notes associated with the Extension, as if each of the foregoing transactions
had occurred on January 1, 1996 with respect to the statement of operations
data and as of March 31, 1997 with respect to the balance sheet data. The pro
forma data should be read in conjunction with the "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements of the Company and related notes thereto,
included elsewhere herein. The data set forth below is not necessarily
indicative of the results that actually would have been achieved had such
transactions been consummated as of the dates indicated or that may be achieved
in future periods.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1996 1997
------------ ---------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
INCOME STATEMENT DATA: (1)
Net sales........................................ $3,441,343 $910,923
Cost of sales.................................... 3,262,105 853,624
---------- --------
Gross profit..................................... 179,238 57,299
Selling, general & administrative expenses....... 193,521 45,321
---------- --------
Operating (loss) income.......................... (14,283) 11,978
Interest expense................................. 18,018 5,497
Other expense.................................... 17,967 4,518
---------- --------
(Loss) income before income taxes................ (50,268) 1,963
Provision for income taxes....................... 822 158
---------- --------
Net (loss) income.............................. $ (51,090) $ 1,805
========== ========
SHARE DATA:
Net (loss) income per share (2).................. $ (1.70) $ 0.06
Weighted average number of shares (2)............ 30,063 30,079
OTHER DATA:
EBITDA (3)....................................... $ (19,890) $ 10,366
BALANCE SHEET DATA:
Working capital.................................. $187,331
Total assets..................................... 695,933
Long-term and subordinated debt.................. 163,331
Stockholders' equity............................. 134,633
</TABLE>
(footnotes on following page)
ANNEX IV
22
<PAGE>
- --------
(1) The Company's fiscal year is the 52- or 53-week period ending on the
Saturday nearest to December 31. For clarity of presentation throughout
this document, the Company has described year-ends and quarter-ends
presented as if the period ended on the last day of the month. The summary
unaudited condensed consolidated financial data as set forth above includes
those balances and activities related to the Company's European, Mexican
and Latin American businesses until their disposal on October 4, 1996,
effective as of September 27, 1996. It also includes Merisel FAB until its
disposal on March 28, 1997. (See Note 12 to the accompanying consolidated
financial statements--"Subsequent Events"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(2) Net income (loss) per share and weighted average number of shares have been
adjusted to reflect the Reverse Split.
(3) EBITDA is the sum of income before income taxes and interest, depreciation
and amortization expense. EBITDA should not be considered as an alternative
to income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity. However, EBITDA is presented
because it is a widely used financial indicator of a company's ability to
service indebtedness and other factors.
ANNEX IV
23
<PAGE>
CASH DEBT SERVICE OBLIGATIONS
The following table sets forth certain historical financial information with
respect to the Company's continuing operations for Fiscal 1996 and certain
projected financial information with respect to the Company for Fiscal 1997
through Fiscal 2002 assuming that the Exchange Restructuring is completed.
<TABLE>
<CAPTION>
YEARS ENDING CASH DEBT TOTAL PRINCIPAL TOTAL DEBT TOTAL DEBT
DECEMBER 31 SERVICE OBLIGATIONS(1) PAYMENTS(2) INTEREST EXPENSE(3) (AT YEAR END)(4)
------------ --------------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
(In thousands) Histori-
cal:
1996.................. $113,585 $83,129 $29,901 $294,763
Projected:
1997(5)............... 36,100 13,483 22,617 156,280
1998.................. 33,698 13,610 20,088 142,670
1999.................. 22,346 6,246 16,100 136,424
2000.................. 20,963 5,511 15,452 130,913
2001.................. 18,531 3,900 14,631 127,013
</TABLE>
- --------
(1) Cash debt service obligations in 1997 include all cash interest and
scheduled principal payments but exclude accrued but unpaid interest
expense on the 12.5% Notes through July 31, 1997 totaling $9.1 million.
Assuming the Exchange is consummated, unpaid interest expense on the 12.5%
Notes will not need to be paid.
(2) Included in total principal payments are scheduled net repayments under the
Revolving Credit Agreement, the 11.5% Notes, the Subordinated Debt, and
other promissory notes.
(3) Total debt interest expense excludes interest expense of $9.1 million for
1997 related to accrued but unpaid interest expense on the 12.5% Notes
through July 31, 1997.
(4) Total debt represents the principal amount of debt outstanding at year end,
assuming that the Exchange Restructuring is consummated on July 31, 1997.
(5) The following table sets forth certain financial information with respect
to 1997 assuming the Company does not complete the Exchange Restructuring
and thus is required to make the scheduled $70 million amortization
payments on the Operating Company's Senior Debt, and the $125 million 12.5%
Notes would remain on the balance sheet as debt:
<TABLE>
<CAPTION>
CASH DEBT TOTAL PRINCIPAL TOTAL DEBT TOTAL DEBT
SERVICE OBLIGATIONS PAYMENTS INTEREST EXPENSE (AT YEAR END)
------------------- --------------- ---------------- ------------
<S> <C> <C> <C>
$116,085 $83,483 $32,602 $211,280
</TABLE>
ANNEX IV
24
<PAGE>
PART A
PART A--THE EXCHANGE RESTRUCTURING
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RISK FACTORS.............................................................. A-1
BACKGROUND OF RESTRUCTURING............................................... A-5
The Limited Waiver Agreement............................................ A-6
The Extension Under the Operating Companies' Loan Agreements............ A-7
PURPOSE OF THE RESTRUCTURING.............................................. A-9
Restructuring Financial Considerations.................................. A-9
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS..................................................... A-12
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.................... A-18
PROJECTED CONSOLIDATED FINANCIAL INFORMATION.............................. A-20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... A-28
Overview................................................................ A-28
Results of Operations................................................... A-28
Comparison of the Three Months Ended March 31, 1997 and March 31, 1996.. A-29
Comparison of the Three Months Ended March 31, 1996 and March 31, 1995.. A-30
Comparison of the Fiscal Years Ended December 31, 1995 and December 31,
1994................................................................... A-32
Variability of Quarterly Results and Seasonality........................ A-33
Liquidity and Capital Resources......................................... A-33
Recent Developments..................................................... A-34
First Quarter, 1997..................................................... A-34
Fiscal Year Ended 1996.................................................. A-34
Liquidity and Borrowings................................................ A-35
Inflation............................................................... A-37
Asset Management........................................................ A-37
BUSINESS AND PROPERTIES OF THE COMPANY.................................... A-38
Business Overview....................................................... A-38
Significant Events of 1996 and 1997..................................... A-39
The Industry............................................................ A-40
Business Strategy....................................................... A-40
Products and Manufacturer Services...................................... A-41
Customers and Consumer Services......................................... A-42
Sales and Marketing..................................................... A-43
Configuration........................................................... A-44
Operations, Distributions and Investments in Systems.................... A-44
Disposed Operations..................................................... A-45
Competition............................................................. A-45
Variability of Quarterly Results and Seasonality........................ A-46
Employees............................................................... A-46
</TABLE>
ANNEX IV
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Environmental Compliance................................................. A-46
Properties............................................................... A-46
Legal Proceedings........................................................ A-46
TENDERING AND VOTING PROCEDURES............................................ A-48
The Restructuring........................................................ A-48
General.................................................................. A-48
Interest on 12.5% Notes.................................................. A-48
Expiration Date; Extensions; Amendments.................................. A-49
How to Tender in the Exchange Offer...................................... A-49
Tenders--Additional Information.......................................... A-50
Withdrawal of Tenders and Revocation of Votes............................ A-52
Conditions............................................................... A-52
Voting on the Prepackaged Plan........................................... A-54
DESCRIPTION OF 12.5% Notes................................................. A-55
DESCRIPTION OF NEW COMMON STOCK............................................ A-55
DESCRIPTION OF INDEBTEDNESS OF THE COMPANY................................. A-56
General.................................................................. A-56
Revolving Credit Agreement............................................... A-56
11.5% Notes.............................................................. A-57
Subordinated Notes....................................................... A-58
Canada Receivables Securitization........................................ A-59
U.S. Receivables Securitization.......................................... A-59
Promissory Notes......................................................... A-59
MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY........................ A-60
MARKET PRICES OF 12.5% Notes............................................... A-60
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. A-61
Federal Income Tax Consequences to Noteholders........................... A-61
Federal Income Tax Consequences to the Company........................... A-61
MANAGEMENT................................................................. A-62
Post Restructuring Board Configuration................................... A-62
Post Restructuring Stock Option Grants................................... A-62
MANAGEMENT COMPENSATION.................................................... A-63
Employment and Change-in-Control Arrangements............................ A-63
OWNERSHIP OF COMMON STOCK.................................................. A-64
CERTAIN AFFILIATE TRANSACTIONS............................................. A-64
ADVISORS AND REPRESENTATIVES............................................... A-64
Financial Advisor........................................................ A-64
Financial Advisor to Noteholders......................................... A-65
Information Agent........................................................ A-65
Depositary............................................................... A-65
Estimated Fees and Expenses.............................................. A-65
LEGAL MATTERS.............................................................. A-66
EXPERTS.................................................................... A-66
</TABLE>
ANNEX IV
A-ii
<PAGE>
RISK FACTORS
Investment in the New Common Stock involves a high degree of risk. Prior to
deciding whether to (a) participate in the Exchange Offer and/or (b) vote to
accept the Prepackaged Plan, each Noteholder should carefully consider all of
the information contained in this Prospectus, especially the factors described
in the following paragraphs.
Risk of Nonconsummation of the Restructuring
On July 22, 1997, holders of in excess of 25% in aggregate principal amount
of the 12.5% Notes informed the Company of their intent to accelerate all
outstanding indebtedness under the 12.5% Notes in the event that the
Stockholders fail to approve the Proposals and the Company does not
immediately seek to implement the Restructuring through the Prepackaged Plan.
Such an acceleration could result in the Company becoming subject to a
proceeding under the Federal bankruptcy laws.
High Leverage After Exchange Restructuring
At March 31, 1997, the Company had $288.3 million in total debt plus $259.8
million of asset securitization and a stockholders' equity of $15.8 million.
Interest payments following the Restructuring will be high in relation to
projected EBITDA, and the Company expects to have to make aggregate cash
interest payments of $31.7 million and $20.1 million in each of fiscal 1997
and fiscal 1998, respectively. On a pro forma basis at March 31, 1997, the
Company would have approximately $163.3 million of total debt plus the same
assets securitized following completion of the Exchange Restructuring and
stockholders' equity of $134.6. See "PURPOSE OF THE RESTRUCTURING." Following
the Restructuring, on a pro forma basis as of March 31, 1997, the Company
would have had approximately $134.5 million of debt outstanding under the
Operating Companies' Loan Agreements, which, as a result of the Extension,
which would need to be refinanced or repaid by January 31, 1999. The Company
has been involved in preliminary discussions regarding possible debt and
equity financing after the Restructuring, however; no agreement has been
reached and there can be no assurance that the Company will be able to obtain
such financing on acceptable terms, if at all. While the stockholders' equity
would be substantially increased as a result of the Exchange Restructuring,
the continued high level of the Company's debt following completion of the
Exchange Restructuring will pose substantial risks to holders of the Company's
New Common Stock, including, but not limited to, risks which may adversely
affect or impair the following: (i) the ability of the Company to pay when due
principal of and cash interest on its debt securities; (ii) the ability of the
Company to obtain additional financing in the future, as needed; (iii) the
ability of the Company to withstand competitive pressures or a continuation or
worsening of current unfavorable economic conditions, to expand its product
lines or markets or to take advantage of significant new business
opportunities that may arise; and (iv) the marketability, price and future
value of the Company's securities, which could result in the loss of a
securityholder's entire investment in the Company. See "--Market Factors and
Seasonality May Adversely Affect Cash Flow."
Market Factors And Seasonality May Adversely Affect Cash Flow
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; (iii)
virtually all sales in a given quarter result from orders booked in that
quarter; (iv) changes in short and long term demand for computer products, and
national, regional and local economic conditions; and (v) unfavorable trends
or developments concerning factors such as inflation, increased costs of
components, labor and employees, regional weather or other conditions which
could adversely effect the availability and cost of the Company's inventory.
The factors noted above could result in a failure to achieve the Company's
business plan, which calls
ANNEX IV
A-1
<PAGE>
for movement toward current market growth levels, thereby affecting the
resulting profitability of the Company and its cash resources.
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. Following the
Restructuring, on a pro forma basis as of March 31, 1997, the Company would
have approximately $134.5 million of debt outstanding under the Operating
Companies' Loan Agreements, which, as a result of the Extension, which would
need to be refinanced or repaid by January 31, 1999. This is primarily due to
buying patterns of Canadian government agencies. The financial results
projected herein assume that seasonality will not have a material adverse
affect on the Company's financial projections. While the Company believes the
consummation of the Exchange Restructuring will enable it to meet its
scheduled interest and principal payments when due, there can be no assurance
that the Company will be able to make such payments. In the event that the
Company is unable to make such payments, it may seek to refinance or
restructure its debt obligations, and failing such refinancing or
restructuring, the Company may seek protection under Chapter 11 of the United
States Bankruptcy Code. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "BACKGROUND OF THE RESTRUCTURING,"
each in the Disclosure Statement, and "PROJECTED FINANCIAL INFORMATION,"
"PURPOSE OF THE RESTRUCTURING" and "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS."
Restrictions Under Operating Companies' Loan Agreements
The Operating Companies' Loan Agreements contain certain restrictions on the
Company's operations and contain requirements that the Company achieve and
maintain certain financial ratios. Such restrictions include, among other
things, limitations on the ability of the Company and its subsidiaries to
incur additional indebtedness, to create, incur or permit the existence of
certain liens, to make certain investments, to make capital expenditures above
certain levels, to make certain sales of assets, to make certain payments with
respect to its outstanding stock, to effect certain fundamental changes and to
enter into certain types of transactions. Although the Company was in
compliance with these restrictions as of March 31, 1997 (the last reporting
date under the Operating Companies' Loan Agreements), there can be no
assurance that the Company will be able to maintain compliance with the
prescribed financial ratio tests or other requirements of the Operating
Companies' Loan Agreements. Failure to maintain compliance with such financial
ratio tests or other requirements under the Operating Companies' Loan
Agreements would result in a default and could lead to the acceleration of the
Company's obligations under the Operating Companies' Loan Agreements as well
as the acceleration of other indebtedness of the Company which, by the terms
of the instruments creating, evidencing or governing such indebtedness, would
be triggered upon an acceleration under the Operating Companies' Loan
Agreements. The acceleration of any such indebtedness would result in its
becoming immediately due and payable and could result in the Company becoming
subject to a proceeding under the Federal bankruptcy laws. See "DESCRIPTION OF
INDEBTEDNESS OF THE COMPANY" in the Disclosure Statement.
Limitation on Use of Net Operating Losses
As a result of the receipt by Noteholders of New Common Stock in exchange
for the 12.5% Notes pursuant to the Restructuring, the Company will undergo an
"ownership change" for Federal income tax purposes. Accordingly, the Company
will be limited in its ability to use its net operating loss carryovers and
certain tax credit carryforwards to offset future taxable income. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS." Under the Exchange Restructuring, the
limitation imposed upon the Company's use of its net operating loss carryovers
would be more restrictive than under the Prepackaged Restructuring.
ANNEX IV
A-2
<PAGE>
Market Value of the Securities May Fluctuate
The market value of the securities to be issued in the Exchange
Restructuring will depend on the future performance of the Company and on
factors generally affecting the securities markets (including, for example,
interest rates), which factors are influenced by conditions beyond the
Company's control.
Capital Expenditures
During 1996, the Company made capital expenditures totaling approximately
$9,652,000 for the upgrading of the Company's computer systems, expenditures
for a new warehouse management system and the upgrading of existing facilities
and leasehold improvements. The Company believes that the capital expenditure
levels assumed in the preparation of the projected financial data contained
herein will be adequate to maintain the Company's long-term competitive
position, but there can be no assurance thereof. In the event that such
capital expenditure levels are not adequate, the Company's competitive
position in its industry and consequently the Company's results of operations
could be adversely affected. Further, the fair value of capital expenditures
recorded may be impaired, resulting in the recognition of additional losses.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND "PROJECTED FINANCIAL INFORMATION" in Part A.
Dividend Restrictions
The Company does not intend to, nor does it expect it to be able to, pay any
cash dividends on the New Common Stock in the foreseeable future, and the
Operating Companies' Loan Agreements currently restrict the payment of cash
dividends on the Old Common Stock by the Company and would similarly restrict
the payment of dividends on the New Common Stock. For a description of the
limitations contained in the Operating Companies' Loan Agreements, see
"DESCRIPTION OF INDEBTEDNESS OF THE COMPANY" in Part B.
Dilution
Upon completion of the Exchange Offer or the Prepackaged Plan, as
applicable, the Company will issue approximately 24,062,796 shares of New
Common Stock directly to exchanging Noteholders and 6,015,699 shares of New
Common Stock directly to exchanging Stockholders, and will reserve 5,263,736
shares of New Common Stock for issuance upon exercise of the Warrants. The
issuance of such shares upon exercise of the Warrants will result in dilution
of the equity interests of the holders of New Common Stock (as a percentage of
outstanding shares of New Common Stock) which could adversely affect the
market price and the value of the New Common Stock. Immediately following the
consummation of the Exchange Restructuring or the Prepackaged Plan, as
applicable, the 24,062,796 shares issued directly to exchanging Noteholders
will represent approximately 80% of the total outstanding shares of New Common
Stock, excluding shares obtainable upon exercise of Warrants. Based on the
number of shares of Old Common Stock outstanding as of the Record Date (after
giving effect to the Reverse Split and the Exchange Restructuring), if all
such Warrants are exercised, such percentage would drop to 68.1%. See
"PURPOSES AND EFFECTS OF THE EXCHANGE RESTRUCTURING." In addition, there can
be no assurance that the Company will not need to issue additional Common
Stock in the future in order to achieve its business plan or if it does not
achieve its projected results, which could lead to further dilution to
Noteholders.
Need for Sustained Trade Support
The Holding Company and its subsidiaries' ability to achieve sales growth
and profitability includes significant reliance on continued support from its
vendors. If the Company's major vendors reduce their credit lines or product
availability to the Company, it could have a material adverse effect on the
Company's sales, cash position and liquidity.
ANNEX IV
A-3
<PAGE>
New or Intensified Competition
The Company operates in an industry that is made up of several high growth-
oriented competitors. As such the Company is subject to the possibility of new
or intensified competition in the regions in which the Company operates as a
result of efforts by direct competitors to grow, consolidate with other
competitors, or gain market share in those regions. Such activities may affect
the Company's sales volume, pricing and/or margins.
Concentrated Ownership of New Common Stock
Following consummation of the Restructuring, the ownership of the New Common
Stock will likely be more concentrated than was the ownership of the Old
Common Stock. Although the Company expects that, following the Restructuring,
it will continue to be controlled by a disaggregated group of stockholders,
one or more former holders of a substantial amount of 12.5% Notes who continue
to hold New Common Stock after the Restructuring may seek to influence the
direction of the Company, and the Company has agreed to appoint a nominee of
the Noteholders to the Board of Directors following the Restructuring. See
"MANAGEMENT--Post Restructuring Board Configuration." The Company does not
have complete information regarding the beneficial ownership of the 12.5%
Notes and is not aware of any agreement among Noteholders to seek to influence
the direction of the Company or to otherwise act in concert following the
Restructuring. There can be no assurance, however, that no such agreements
exist or that a concentrated number of holders of New Common Stock might not
attempt to influence the Company following the Restructuring.
Potential De-Listing of the Common Stock
The Company is currently not in compliance with the net tangible assets test
required for continued listing on the Nasdaq National Market. The NASD has
postponed action to seek the de-listing of the Old Common Stock pending an
oral hearing, currently scheduled for August 7, at which the Company will
request that the NASD waive compliance with such test until consummation of
the Restructuring.
Should the Restructuring be consummated, the Company expects to be in full
compliance with all of the NASD's requirements for continued listing on the
Nasdaq National Market. See "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS" in Part A. There can be, however, no assurance that the
NASD will waive compliance of such test. If the common stock of the Company
were de-listed, there could be an adverse effect on the liquidity of the
market for such common stock.
History of Net Operating Losses
In 1995 and 1996, the Company experienced significant losses totalling
$83,911,000 and $140,375,000, respectively. Additionally, on a pro forma
basis, excluding the operating performance of FAB, which was sold effective
March 28, 1997, the Company would have had a net operating loss for the first
quarter of 1997 of $1,024,000. Although a large portion of the losses in 1995,
and 1996 relate to the operations of, and impairments or other adjustments
associated with assets or businesses that the Company has since disposed of, a
portion of the losses are also attributable to expenses and adjustments
associated with ongoing systems and processes of the Company. These include
adjustments to trade accounts payable balances related to price protection,
returns to vendors by Merisel and inventory receipt related issues, such as
short shipments, identified through the vendor reconciliation process in 1995
and 1996. They also include impairment charges taken in 1995 in order to bring
total capitalized development costs for the Company's computer system in line
with the estimated fair value of such assets. Increased professional fees and
other expenses associated with the development of the 1996 business plan,
process improvement efforts, lender negotiations prompted by the prior year's
losses, and severance costs related to management changes also contributed to
losses in 1996. The Company experienced sales growth and decreased expenses in
the first quarter of 1997, and although this resulted in operating results
that were consistent with management's expectation and showed considerable
improvement over the previous year, the risk exists that the Company may
continue to experience losses, and that such continued losses will have a
negative impact of the Company's liquidity.
ANNEX IV
A-4
<PAGE>
In order to return to profitability, the company has pursued a strategy that
included the sale of several of its business segments. In the fourth quarter
of 1995, the Company recorded a $1,900,000 asset impairment related to the
sale of its Australian business. In September of 1996, the Company sold its
European, Mexican, and Latin American businesses at a loss of $33,400,000.
Additionally the Company recorded asset impairments of $30,000,000 in 1995 and
$42,033,000 in 1996 against the intangible assets of FAB, which it sold in the
first quarter of 1997. Of the Company's net sales of $5.5 billion in 1996,
these disposed businesses accounted for $2.1 billion. As such, it is likely
that revenues will be substantially lower in 1997. See "PROJECTED FINANCIAL
INFORMATION."
FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH VOTING ON THE PREPACKAGED PLAN, SEE "RISK
FACTORS" IN THE DISCLOSURE STATEMENT.
BACKGROUND OF RESTRUCTURING
In 1995, the Company incurred a net loss of $83.9 million. This loss was
principally the result of several large fourth quarter adjustments totaling
$89.4 million. Approximately $25,800,000 of the fourth quarter adjustments
related to adjustments to trade accounts payable balances for price
protection, return to vendors and inventory receipt related issues, such as
short shipments, identified through the vendor reconciliation process. An
additional $8,200,000 charge was taken due to changes made in estimates to
certain asset and liability values. The Company also determined that portions
of the carrying values of certain of its long lived assets and identifiable
intangibles would not be recovered from their use in future operations.
Accordingly, these assets were written down to their fair values as of
December 31, 1995, for a total adjustment of $51,400,000. Of that amount,
$30,000,000 represented an impairment of long-lived assets associated with the
Company's Computerland franchise business, and $1,900,000 represents an
impairment loss for the writedown of the net assets in the Company's
Australian business, to their realizable value. The Computerland franchise
business and the Australian businesses were both subsequently sold. The
remaining impairment charge for $19,500,000 was taken against costs associated
with the Company's ongoing computer system conversion. The Company recorded
this charge in order to adjust capitalized development and implementation
costs to their estimated fair value. Additionally, the Company's European
distribution center experienced system software start-up problems which
created shipping and receiving errors that resulted in a charge of $1.5
million, while another $2.5 million charge was taken to expense such start-up
costs.
Due to these substantial losses, the Company was required in April 1996 to
negotiate with the lenders under its various financing agreements to amend
such agreements and to waive certain defaults, which amendments and waivers
were obtained.
In connection with such negotiations, the Company developed and implemented
a business plan for the remainder of fiscal 1996 (the "1996 Business Plan")
that focused on maximizing cash flow by controlling costs, curtailing non-
essential capital expenditures, limiting investments, concentrating on its
more profitable areas of operations and product lines and slowing growth in
its less profitable areas of operations. The 1996 Business Plan assumed that
the Company would not return to profitability until the fourth quarter of
1996. At the same time, the Company recognized that, in order to meet its
obligations in 1997, it needed to engage in some combination of asset sales,
refinancing of its borrowings and obtaining new sources of financing.
Concurrently with the implementation of the 1996 Business Plan, the Company
actively explored all of its strategic options, including the sale of the
Company, with the assistance of Merrill Lynch & Co. This ultimately led to the
Company's sale of its European, Mexican and Latin American operations in
September of 1996 after attempts to sell the entire Company proved
unsuccessful. In connection with this sale, Merisel Americas and certain of
its lenders agreed in October 1996 to amend (1) the Amended and Restated
Revolving Credit Agreement, dated as of December 23, 1993, as amended, among
Merisel Americas and Merisel Europe, as
ANNEX IV
A-5
<PAGE>
borrowers, the Company, as guarantor, and the lenders party thereto (the
"Revolving Credit Agreement"), and (2) the Amended and Restated Senior Note
Purchase Agreement, dated as of December 23, 1993, as amended, by and among
each of the purchasers named therein, Merisel Americas, as issuer, and the
Company (the "Senior Note Purchase Agreement, and, together with the Revolving
Credit Agreement, the "Operating Companies' Senior Debt") relating to the
11.5% Notes to extend the final maturities of such indebtedness until January
31, 1998. In connection with such amendments, the Company was required to
obtain, and did obtain an amendment of the Amended and Restated Subordinated
Note Purchase Agreement, dated as of December 23, 1993, as amended, by and
among each of the purchasers named therein and Merisel Americas (the
"Subordinated Note Purchase Agreement" and, together with the Operating
Companies' Senior Debt, the "Operating Companies' Loan Agreements") relating
to the Subordinated Notes.
These Operating Companies' Loan Agreements permitted the Company to make
interest payments on the 12.5% Notes with the provision that if the interest
payments due on June 30, 1997 and December 31, 1997 were paid, an additional
$40,000,000 and $30,000,000 of the indebtedness under the Operating Companies'
Loan Agreements would be required to be amortized in each of these periods,
respectively. The Company did not believe that it could satisfy these
obligations without a restructuring of the 12.5% Notes and the Operating
Companies' Loan Agreements.
In January 1997, along with its emphasis on rebuilding profitable sales
growth, the Company retained Donaldson, Lufkin and Jenrette Securities
Corporation ("DLJ") as financial advisor to assist it in restructuring its
debt. The Company did not seek or obtain any opinion from DLJ as to the
fairness of the Restructuring or otherwise in connection with their
engagement. See "ADVISORS AND REPRESENTATIVES."
Shortly thereafter, the Company commenced negotiations with the Ad Hoc
Noteholders Committee. Effective April 14, 1997, the Company and holders of
more than 75% of the outstanding principal amount of its 12.5% Note entered
into the Limited Waiver Agreement, as described below. The following are the
members of Ad Hoc Noteholders Committee: Turnberry Capital Management, Baker
Nye Advisors, Inc., Monarch Management Group Limited, Robert Fleming, Inc.,
Fisher Ewing Partners and York Capital Management. The Company does not have
complete information regarding the beneficial ownership of the 12.5% Notes
(including, without limitation, the identity of the Consenting Noteholders),
and is unaware of any affiliations between the Noteholders, on the one hand,
and the officers and directors of the Company, on the other hand, except as
follows. The Limited Waiver Agreement requires that, on the Exchange Date, the
Board shall be composed of members acceptable to the Ad Hoc Noteholders
Committee and the Company. See "--Post-Restructuring Board Configuration." The
Ad Hoc Noteholders Committee was assisted in analyzing and negotiating the
Restructuring with the Company by Chanin and Company LLC ("Chanin"). The Ad
Hoc Noteholders Committee did not seek or obtain any opinion from Chanin as to
the fairness of the restructuring or otherwise in connection with their
engagement. See "ADVISORS AND REPRESENTATIVES."
THE LIMITED WAIVER AGREEMENT
Effective April 14, 1997, the Company entered into an agreement (the
"Limited Waiver Agreement") with holders of more than 75% of the outstanding
principal amount of its 12.5% Notes (the "Consenting Noteholders"). Pursuant
to the terms of the Limited Waiver Agreement, upon the fulfillment of certain
conditions, the Consenting Noteholders would exchange their 12.5% Notes for
New Common Stock in accordance with the terms of the Restructuring. The
Limited Waiver Agreement provides that, immediately after the consummation of
the Exchange Restructuring, the Company would issue to the holders of Old
Common Stock Warrants to purchase shares of New Common Stock.
In the event that less than 100% of the aggregate principal amount of the
12.5% Notes are tendered in the Exchange Offer but at least two-thirds in
principal amount and a majority in number of the holders of the 12.5% Notes
and at least two-thirds of the Stockholders voting have voted in favor of the
Prepackaged Plan, the
ANNEX IV
A-6
<PAGE>
Holding Company has agreed to file the Prepackaged Plan under Chapter 11 of
the U.S. Bankruptcy Code and the Consenting Noteholders have agreed to vote in
favor of the Prepackaged Plan.
While the Limited Waiver Agreement is in effect, the Consenting Noteholders
have agreed to waive any default arising from the nonpayment of interest due
in 1997 on the 12.5% Notes. Interest will continue to be due and payable on
the outstanding 12.5% Notes that have not consented to the waiver at the time
such payments are due; however, such holders will not be able to accelerate
the payment of the principal of the 12.5% Notes under the terms of the
Indenture governing the 12.5% Notes.
The Limited Waiver Agreement also requires that, on the Exchange
Restructuring Date, the Board shall be composed of members acceptable to the
Ad Hoc Noteholder Committee and the Company. Upon the consummation of any
Extraordinary Transaction (as defined in the Warrant Agreements) prior to
January 1, 1998, including a merger or sale of substantially all of the assets
of the Company, or the agreement of the Company to perform an Extraordinary
Transaction entered into prior to January 1, 1998, the Warrants must remain
outstanding and be exercisable in exchange for common stock of the Company or
common stock of the acquiring company unless such Extraordinary Transaction is
approved by at least 85% of the outstanding New Common Stock then outstanding.
The Limited Waiver Agreement shall terminate and the obligations to pay
interest shall be reinstated if (a) on the earliest to occur of (i) the day
before the first date on which the Exchange Offer could be closed, (ii) the
day before the last date on which ballots in respect of the Prepackaged Plan
may be submitted, and (iii) October 31, 1997, (1) the Company and the other
parties to the Operating Companies Loan Agreements shall have failed to enter
into the Extension (as described below) or (2) the Company shall have failed
to consummate a refinancing of all of the indebtedness outstanding under the
Operating Companies' Loan Agreements on terms satisfactory to the Consenting
Noteholders; (b) the Exchange Restructuring is not closed by August 31, 1997,
unless Chapter 11 proceedings relating to the Prepackaged Plan have commenced;
(c) in the event Chapter 11 proceedings are commenced, the Prepackaged Plan is
not substantially consummated by October 31, 1997; (d) the Company has changed
the terms of the Exchange Restructuring or Prepackaged Plan so as to be
inconsistent with the terms contemplated by the Limited Waiver Agreement; (e)
there occurs an "Event of Default" under any of the Operating Companies' Loan
Agreements after the date specified in the Limited Waiver Agreement; (f) the
Company's Certificate of Incorporation shall not have been amended so as to
authorize enough shares of common stock to effectuate the Exchange
Restructuring; or (g) there shall have occurred any material adverse change in
the Company's business, assets, operations or condition.
Certain Noteholders have threatened to sue the Company regarding a purported
breach of the Limited Waiver Agreement. The Company does not believe that the
Noteholders' claims for breach are valid, and it intends to defend itself
vigorously should a suit be commenced. Due to the fact that no suit has yet
been filed and no discovery has taken place, it is premature to predict the
outcome with any certainty.
THE EXTENSION UNDER THE OPERATING COMPANIES' LOAN AGREEMENTS
As of April 14, 1997, the Company had entered into an agreement in principle
(the "Extension") with 100% of the holders of the loans made and notes issued
under the Operating Companies' Loan Agreements, pursuant to which all of such
holders have agreed, subject to execution of definitive documentation and
certain other conditions, to extend the maturities under their respective
Operating Companies Loan Agreements to January 31, 1999. In consideration of
the Extension, the Company has agreed to pay certain fees and additional
interest, as described below.
While the Restructuring is being implemented, all of the holders of loans
made and notes issued under the Operating Companies' Loan Agreements have
agreed to waive any default or cross-default resulting from the non-payment of
interest in respect of the 12.5% Notes, the commencement of either the
Exchange Restructuring
ANNEX IV
A-7
<PAGE>
or the Prepackaged Plan, or certain other events that might otherwise cause
the Company to default under the relevant agreements. In addition, all of the
holders of indebtedness under the Operating Companies Loan Agreements have
agreed to execute amendments to the relevant agreements to reflect the
extension of their indebtedness provided that (i) the amendments with respect
to the Revolving Credit Agreement and the Senior Note Purchase Agreement shall
not become effective until they have been signed by the holders of all such
instruments, and (ii) none of the amendments shall become effective unless the
Exchange is closed on or prior to August 31, 1997 or the Prepackaged Plan or a
similar plan has been substantially consummated on or prior to October 31,
1997.
In consideration for the waivers, the Company has agreed to pay certain fees
and additional interest, as described below. The fees payable under the
Extension include a fee equal to 1.5% of the outstanding principal amount owed
to each holders of indebtedness under the Operating Companies' Loan Agreement.
In addition, the Company will owe to the holders of Operating Companies'
Senior Debt a 2% fee upon the closing of the Restructuring, as well as fees of
(i) .25% on January 31, 1998, (ii) 0.5% on April 30, 1998 and (iii) .75% on
July 31, 1998. The interest rate on the Operating Companies' Senior Debt will
increase 0.5% each quarter commencing January 31, 1998 on the debt that
remains outstanding at that time. The interest rate on the Subordinated Notes
will also increase by 0.5% each quarter commencing January 31, 1998 and
continuing for three quarters thereafter. The Company would have the right to
prepay such debt at anytime without penalty.
The Extension shall terminate if (a) the Exchange Restructuring is not
closed by August 31, 1997, unless Chapter 11 proceedings pursuant to the
Prepackaged Plan have been commenced, (b) in the event Chapter 11 proceedings
are commenced, the Prepackaged Plan is not substantially consummated by
October 31, 1997; (c) the Company has changed the terms of the Exchange Offer
or Prepackaged Plan so as to be inconsistent with the terms contemplated by
the Extension; (d) there occurs an "Event of Default" under any of the
Operating Companies' Loan Agreements or certain other agreements; (e) the
Company's Certificate of Incorporation shall not have been amended so as to
authorize enough shares of common stock to effectuate the Exchange
Restructuring; (f) there shall have occurred any material adverse change in
the Company's business, assets, operations or condition; or (g) the Company,
Merisel Americas and Merisel Europe materially breach any obligations under
the Extension.
ANNEX IV
A-8
<PAGE>
PURPOSE OF THE RESTRUCTURING
The purpose of the Restructuring is to enhance the long-term viability and
to contribute to the success of the Company by adjusting the Company's
capitalization (through a reduction of debt levels, an extension of principal
repayments and a relaxation of operating covenants) to reflect current and
expected operating performance levels. Specifically, the Restructuring is
designed to reduce the Company's outstanding debt obligations by $125 million,
to levels which the Company believes can be supported by its projected cash
flow, to replace a significant portion of the Company's indebtedness with New
Common Stock and to amend the covenants and final maturity on its Operating
Companies' indebtedness. Interest charges will be substantially reduced and
stockholders' equity will be substantially increased as a result of the
Restructuring.
In addition, implementation of the Restructuring will enable the Company to
avoid certain significant amortization payments totaling $40 million that
would be due under the Operating Companies' senior debt obligations if the
Company were to pay interest on the 12.5% Notes that was due on June 30, 1997,
subject to a 30 day grace period. If the Company has not paid the interest due
on the 12.5% Notes by July 30, 1997, an event of default will occur with
respect to the 12.5% Notes entitling the holders to accelerate the maturity
thereon. While the Limited Waiver Agreement is in effect, such interest
payments have been waived by in excess of 75% of the holders of 12.5% Notes
and the holders of the Operating Companies' indebtedness have waived any
cross-default arising from the non-payment of such interest. Failure to
consummate the Restructuring could result in such amortization payments
becoming due as well as interest payment obligations on the 12.5% Notes being
reinstated. The Company has informed by holders of in excess of 25% of the
12.5% Notes, that if the Stockholders fail to approve the Charter Amendment,
and the Company does not immediately seek to implement the Restructuring
through the Prepackaged Plan, such holders intend to accelerate all of the
indebtedness outstanding under the 12.5% Notes. ABSENT THE RESTRUCTURING, THE
COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY SUCH OBLIGATIONS WITHOUT A
REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE OPERATING COMPANIES' LOAN
AGREEMENTS OR OBTAINING ADDITIONAL WAIVERS OR AMENDMENTS TO SUCH AGREEMENTS,
AND THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH
REFINANCING, WAIVERS OR AMENDMENTS.
If the Company determines that it is or will be unable to complete the
Restructuring, the Company will consider all financial alternatives available
to it at such time, which may include the sale of all or part of the Company's
business, the implementation of an alternative restructuring arrangement
outside of bankruptcy, (including refinancing the indebtedness under the
Operating Companies' Loan Agreements or seeking waivers thereunder) or the
commencement of a Chapter 11 case with or without a preapproved plan of
reorganization. There can be no assurance, however, that any alternative
restructuring would result in a reorganization of the Company rather than a
liquidation, or that any such reorganization would be on terms as favorable to
the Noteholders and Stockholders as the terms of the Prepackaged
Restructuring. If a liquidation or a protracted and non-orderly reorganization
were to occur, there is a risk that the ability of the Noteholders and
Stockholders to recover their investments would be even more impaired than
under the Prepackaged Restructuring and would be substantially delayed. A non-
consensual restructuring would likely have a material adverse impact on the
Company and its employees, suppliers and customers.
RESTRUCTURING FINANCIAL CONSIDERATIONS
In connection with the development of its Restructuring proposal, the Board,
with the assistance of DLJ, conducted a review of certain financial
information with respect to the Company and the proposed transactions
contemplated by the Restructuring. The Company did not seek or obtain any
opinion from DLJ as to the fairness of the Restructuring or otherwise in
connection with their engagement, and DLJ did not make any assessment or
recommendation to the Company with respect to the Restructuring. DLJ relied
upon and assumed the accuracy and completeness of all the financial
projections and other information that was available to it from public sources
or that was provided to or discussed with it by the Company, the Board or
their respective representatives. The Board also reviewed a liquidation
analysis prepared by the Company's management. Based
ANNEX IV
A-9
<PAGE>
upon the foregoing, the Board determined that, in its judgment, the terms of
the Restructuring are in the best interests of the Company and its
stockholders. The following paragraphs summarize the financial information
reviewed by the Board and the factors the Board considered.
Background of the Restructuring Financial Analysis. The Board reviewed the
Company's business plan and projections and the various factors influencing
the computer products distribution industry which historically had affected
the Company's operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Board also was aware of
the significant amortization payments that would otherwise be required upon
the payment of interest on the 12.5% Notes on June 30, 1997 absent a
Restructuring, and that the Company's projected cash flow would be
insufficient to satisfy such debt service requirements during 1997.
Restructuring Valuation. The Board evaluated the Restructuring in the
context of the implied value of the Common Stock proposed to be exchanged for
12.5% Notes based on recent trading prices of the 12.5% Notes and the amount
owed on the 12.5% Notes. The 12.5% Notes were trading at 93.5% of principal
amount on May 13, 1997 in the over-the-counter market which values the 12.5%
Notes at $116.9 million in the aggregate. See "MARKET AND TRADING
INFORMATION." Based on their receiving 80% of the restructured equity of the
Company, this value would imply an equity valuation for 100% of the equity at
$146.1 million. Assuming the Restructuring closed on June 30, 1997, the
accrued claim of principal and interest on the 12.5% Notes would be $132.8
million. Based on the 12.5% Notes receiving 80% of the restructured equity of
the Company, this would imply an equity valuation of $166.0 million if the
12.5% Notes were to receive a full recovery. In preparing and reviewing such
analysis, the Company reviewed financial and operating performance of the
Company and its principal competitors, including growth rates, working capital
utilization, margins, profitability and capitalization. In addition, the
Company reviewed implied valuation multiples of the Company and the market
multiples of its principal competitors based upon trailing and projected
financial performance, and reviewed valuation multiples of companies in other
distribution industries by comparing how their valuation was impacted by,
among other things, size, margins, leverage and growth rates. The Company also
reviewed recoveries of various classes of creditors in other restructurings.
The market analysis of competitors' multiples showed average market
multiples for total enterprise value to EBITDA for the preceding twelve months
("LTM EBITDA") of 11.4x for comparable full-line distributors, 6.3x for
comparable aggregators and 7.4x for comparable electronics distributors. Based
on these market multiples and observations regarding factors that influence
such valuation multiples, the Company used a 7.5x total enterprise value to
LTM EBITDA multiple in the preparation of the liquidation analysis described
below.
Liquidation Analysis. Based on its own projections and the market analysis
of competitors' multiples described above, the Company prepared a liquidation
analysis, which is included in the Disclosure Statement. See "CHAPTER 7
LIQUIDATION ANALYSIS" in the Disclosure Statement. This liquidation assumes
that the Company's operating subsidiaries are sold as a going concern. A
forced asset liquidation of these entities could result in substantially lower
recoveries. The liquidation analysis compares the consideration estimated to
be available for distribution in the event of a liquidation proceeding of the
Company under Chapter 7 of the Bankruptcy Code to the economic terms of the
Restructuring. The liquidation analysis estimates the gross value available
for distribution in such a liquidation at $63.1 million, less administrative
expenses including trustee and professional fees of $7.4 million. Accordingly,
under such analysis the net proceeds available to Noteholders and Stockholders
would be $55.7 million. Based on the Noteholders claim of $125 million plus
accrued and unpaid interest to the date of liquidation, the liquidation would
net such Noteholders less than a 42% recovery on their claims and leave
existing holders of Old Common Stock with no consideration, assuming a strict
priority distribution.
The liquidation analysis makes numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of
which are beyond the Company's control. Moreover, the methods
ANNEX IV
A-10
<PAGE>
and assumptions used in preparing the liquidation analysis involve significant
elements of subjective judgment on the part of the Company and may or may not
prove to be correct. Estimates contained in the liquidation analysis are not
necessarily indicative of future results or actual values, which may be
significantly more or less favorable than such estimates. For a discussion of
the assumptions used in preparing the liquidation analysis, see "CHAPTER 7
LIQUIDATION ANALYSIS--Notes to Liquidation Analysis" in the Disclosure
Statement.
While the Board has determined that, in its judgment, the terms of the
Restructuring are in the best interests of the Company and its Stockholders,
because the terms of the Restructuring may create a potential conflict of
interest between the interests of Stockholders and Noteholders, the Board
makes no recommendation as to whether Noteholders should tender their 12.5%
Notes in the Exchange Restructuring.
ANNEX IV
A-11
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1997 and the Unaudited Pro Forma Condensed Consolidated Statements
of Operations for the fiscal year ended December 31, 1996 and the three-month
period ended March 31, 1997 are based upon the historical financial position
and results of operations as of and for the periods then ended. There are pro
forma adjustments to the historical consolidated statements of operations,
which give effect to sale of EML and FAB (referred to in the tables as "former
operations") as if each had occurred prior to January 1, 1996 including any
amendment to existing debt agreements that were entered into as a direct
consequence of the sale of these businesses and related assets. Additional pro
forma adjustments to the historical results of operations (based on the
assumptions set forth below) give affect to the Exchange Restructuring
transactions, including (i) the issuance of 24.1 million shares, after giving
affect to the Reverse Split, of New Common Stock to Noteholders, (ii) the
extension of the maturity dates of the Revolving Credit Agreement and the
11.5% Notes to January 31, 1999, (iii) the payment of 3.5% modification fees
and other fees associated with the Extension to the holders of the Revolving
Credit Agreement and 11.5% Notes, and (iv) the interest rate increases on the
Revolving Credit Agreement, 11.5% Notes and Subordinated Notes associated with
the Extension, as if each had occurred on January 1, 1996. The following
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997
includes pro forma adjustments as if the Exchange Restructuring had been
completed on that date.
The pro forma adjustments are based on available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances. The unaudited pro forma condensed consolidated financial
statements and accompanying notes should be read in conjunction with the
historical consolidated financial statements of the Company, including the
notes thereto, and the other information pertaining to the Company appearing
elsewhere in this Prospectus or incorporated herein.
THESE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE
INDICATIVE OF THE FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS OF THE COMPANY
HAD THE TRANSACTIONS DESCRIBED THEREIN BEEN CONSUMMATED ON THE RESPECTIVE
DATES INDICATED AND ARE NOT INTENDED TO BE PREDICTIVE OF THE FINANCIAL
CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY AT ANY FUTURE DATE OR FOR
ANY FUTURE PERIOD.
ANNEX IV
A-12
<PAGE>
MERISEL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
MARCH 31, 1997 ADJUSTMENTS MARCH 31, 1997
-------------- ----------- --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.... $ 47,930 $ (10,775)(1) $ 37,155
Accounts receivable (net of
allowances of $23,206)...... 189,376 189,376
Inventories.................. 358,208 358,208
Prepaid expenses and other
current assets.............. 17,371 688 (2) 18,059
Income taxes receivable...... 1,404 1,404
Deferred income tax benefit.. 482 482
--------- --------- ---------
Total current assets....... 614,771 (10,087) 604,684
PROPERTY AND EQUIPMENT, NET.... 58,763 58,763
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET................. 26,108 26,108
OTHER ASSETS................... 6,378 6,378
--------- --------- ---------
TOTAL ASSETS............... $ 706,020 $ (10,087) $ 695,933
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable............. $ 367,634 $ 367,634
Accrued liabilities.......... 34,241 $ (3,906)(3) 30,335
Long-term debt--current...... 14,984 14,984
Subordinated Debt--Current... 4,400 4,400
--------- --------- ---------
Total Current Liabilities.. 421,259 (3,906) 417,353
LONG TERM DEBT................. 260,147 (125,000)(4) 135,147
SUBORDINATED DEBT.............. 8,800 8,800
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock..............
Common stock................. 301 1,203 (5) 1,504
Additional paid-in capital... 142,300 123,016 (6) 265,316
Retained earnings
(accumulated deficit)....... (120,034) (5,400)(7) (125,434)
Cumulative translation
adjustment.................. (6,753) (6,753)
--------- --------- ---------
Total stockholders' equity... 15,814 118,819 134,633
--------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY...... $ 706,020 $ (10,087) $ 695,933
========= ========= =========
</TABLE>
See notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements.
ANNEX IV
A-13
<PAGE>
MERISEL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
YEAR PRO FORMA YEAR
ENDED DECEMBER FORMER PRO FORMA ADJUSTED PRO FORMA ENDED DECEMBER
31, 1996 OPERATIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS 31, 1996
-------------- ---------- ----------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $5,522,824 $2,081,481 $3,441,343 $3,441,343
Cost of sales........... 5,233,570 1,971,465 3,262,105 3,262,105
---------- ---------- ------ ---------- ------- ----------
Gross profit............ 289,254 110,016 179,238 179,238
Selling, general and
administrative......... 295,021 104,986 (3,486)(8) 193,521 193,521
Impairment loss......... 42,033 42,033
---------- ---------- ------ ---------- ------- ----------
Operating (loss)........ (47,800) (37,003) 3,486 (14,283) (14,283)
Loss on sale of Europe,
Mexico and Latin Ameri-
can operations......... 33,455 33,455 --
Interest expense........ 37,431 7,530 2,238 (9) 27,663 9,645 (10) 18,018
Other expense........... 20,150 2,183 17,967 17,967
---------- ---------- ------ ---------- ------- ----------
Loss before income tax-
es..................... (138,836) (80,171) 1,248 (59,913) (9,645) (50,268)
Provision for income
taxes (11)............. 1,539 717 822 822
---------- ---------- ------ ---------- ------- ----------
Net (loss).............. $ (140,375) $ (80,888) $1,248 $ (60,735) $(9,645) $ (51,090)
---------- ---------- ------ ---------- ------- ----------
Net (loss) per share
(12)................... $ (23,40) $ (10.12) $ (1.70)
---------- ---------- ------ ---------- ------- ----------
Weighted average number
of shares outstanding
(12)................... 6,000 6,000 24,063 30,063
========== ========== ====== ========== ======= ==========
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<CAPTION>
HISTORICAL
THREE MONTHS PRO FORMA THREE
ENDED MARCH FORMER PRO FORMA ADJUSTED PRO FORMA MONTHS ENDED
31, 1997 OPERATIONS ADJUSTMENTS TOTAL ADJUSTMENTS MARCH 31, 1997
-------------- ---------- ----------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $1,113,100 $ 207,177 $ 910,923 $ 910,923
Cost of sales........... 1,048,124 194,500 853,624 853,624
---------- ---------- ------ ---------- ------- ----------
Gross profit............ 64,976 7,677 -- 57,299 -- 57,299
Selling, general and
administrative......... 51,520 6,199 -- 45,321 -- 45,321
---------- ---------- ------ ---------- ------- ----------
Operating income........ 13,456 1,478 -- 11,978 -- 11,976
Interest expense........ 8,623 297 -- 8,326 2,829 (10) 5,497
Other expense........... 3,530 (988) 4,518 -- 4,518
---------- ---------- ------ ---------- ------- ----------
Income before income
taxes.................. 1,303 2,169 -- (866) (2,829) 1,983
Provision for income
taxes (11)............. 173 15 -- 158 -- 158
---------- ---------- ------ ---------- ------- ----------
Net income.............. $ 1,130 $ 2,154 $ -- $ (1,024) $(2,829) 1,805
---------- ---------- ------ ---------- ------- ----------
Net income per share
(12)................... $ 0.19 -- -- $ (0.17) -- 0.06
---------- ---------- ------ ---------- ------- ----------
Weighted average number
of
shares outstanding
(12)................... 6,016 -- -- 6,016 24,063 30,079
========== ========== ====== ========== ======= ==========
</TABLE>
ANNEX IV
A-14
<PAGE>
MERISEL, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Adjustments for the Sale of Assets
The pro forma adjustments related to the sale of assets (specifically, the
sale of EML, which took effect on September 27, 1996, and the sale of FAB,
which took effect on March 28, 1997) are made to the statement of operations
for the year ended December 31, 1996, and for the three months ended March 28,
1997 in order to illustrate the effect that would have been given if these
assets had been sold as of January 1, 1996. The assumptions underlying the pro
forma adjustments also take into account the effect of certain amendments to
existing debt agreements that were entered into as a direct consequence of the
sale of these businesses and related assets. These adjustments are summarized
in the following tables and more fully described in the notes thereto.
Adjustments for the Exchange Restructuring
The pro forma adjustments related to the Exchange Restructuring and related
transactions are summarized in the following tables and are more fully
described in the notes thereto. The following pro forma adjustments assume
that the Exchange Restructuring will be accomplished as outlined in
"BACKGROUND OF THE RESTRUCTURING."
If less than 100% of the Noteholders tender in the Exchange Restructuring,
the Company may affect the transaction via the Prepackaged Restructuring
whereby the Holding Company would file the Prepackaged Plan as outlined in
"BACKGROUND OF THE RESTRUCTURING". Under the Prepackaged Restructuring, in
addition to the following pro forma adjustments, the Company would incur
additional estimated professional and legal fees and expenses of approximately
$3 million related to the filing. These fees would be expensed and would
increase the pro forma net loss for the pro forma year ended December 31, 1996
by $3 million.
Accounting Treatment
The Company assumes that the adjusted carrying value of the 12.5% Notes
(including accrued interest less unamortized debt issuance costs) will
approximately equal the fair market value of the New Common Stock received by
the Noteholders pursuant to the Exchange Restructuring. Accordingly, the
Company currently anticipates that no extraordinary gain or loss will be
recognized in connection with the Exchange Restructuring.
The Exchange Restructuring assumes that the transaction will be consummated
outside of a Chapter 11 case. If the Prepackaged Restructuring is used, the
Company would implement the provisions of SOP 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code". Pursuant to SOP 90-7,
the Company assumes that the reorganization value of the Company on the
effective date of the Prepackaged Plan will exceed the amount of affected
claims and expected post petition liabilities. Under SOP 90-7, if the
reorganization value of the Company is greater than the sum of the affected
claims and post petition liabilities, fresh start accounting would not apply.
As such, the Company presently assumes that fresh start accounting will not be
implemented.
ANNEX IV
A-15
<PAGE>
MERISEL, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BALANCE SHEET
Column numbers reflect the footnotes from the Unaudited Pro Forma Condensed
Consolidated Balance Sheet.
<TABLE>
<CAPTION>
FOOTNOTE NUMBER (1) (2) (3) (4) (5) (6) (7)
PREPAID ACCRUED LONG-TERM COMMON ADDITIONAL RETAINED
CASH ASSETS LIABILITIES DEBT STOCK PAID-IN CAPITAL EARNINGS
-------- ------- ----------- --------- ------ --------------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
(a)..................... $ (4,775) $4,775
(b)..................... (6,000) 600 $(5,400)
(c)..................... (4,687) $(3,906) $(125,000) $1,203 $123,016
-------- ------ ------- --------- ------ -------- -------
Total................... $(10,775) $ 688 $(3,906) $(125,000) $1,203 $123,016 $(5,400)
</TABLE>
- --------
(a) To record payment of the 3.5% modification fee associated with the
Extension to the holders of the Revolving Credit Agreement and the 11.5%
Notes.
(b) To record estimated professional fees and expenses totaling approximately
$6 million. The fees and expenses consist of estimated deferred financing
costs of $600,000 related to the extension of maturities on the Revolving
Credit Agreement and 11.5% Notes, and estimated direct expenses of $5.4
million related to the Exchange Restructuring.
(c) To reflect the issuance of 24.1 million shares, after giving effect to the
Reverse Split, of New Common Stock to the Noteholders and the related
write-off of accrued interest and unamortized deferred financing cost on
the 12.5% Notes.
ANNEX IV
A-16
<PAGE>
MERISEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(CONTINUED)
STATEMENTS OF OPERATIONS
(8) Represents costs allocated by Merisel to former operations that would not
have been eliminated due to the sale of such operations.
(9) Interest expense is adjusted to reflect the effect of the amendments to
the 11.5% notes and the RCA agreement that were entered into by the
Company as a result of the sale of EML. Specifically the adjustment
represents the savings from the aggregate reduction in principal of $72.5
million net of the effect of an average increase in interest rate on the
instruments of approximately 2.25%. The adjustment is for the period from
January 1, 1996 through the end of September when the sale of EML
effectively took place, and is set forth below:
<TABLE>
<S> <C>
Interest saved from $72,500,000 combined paydown of debt on the
RCA and 11.5% notes............................................ 5,914
Additional interest expense from increased rate of interest on
RCA and 11.5% notes as amended................................. (3,676)
------
Net pro forma savings in interest expense for 1996.............. 2,238
======
</TABLE>
(10) The following table details the net adjustment to interest expense
related to the exchange of the outstanding principal balance of $125
million of the 12.5% Notes for 24.1 million shares of New Common Stock
after giving effect to the Reverse Split, pursuant to the terms of the
Exchange Restructuring.
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER, 1996 MARCH 31, 1997
-------------- --------------
($ IN THOUSANDS)
<S> <C> <C>
Elimination of amortization of deferred
financing costs on $125 million of 12.5%
Notes retired through the Exchange Re-
structuring............................. $ (547) $ (156)
Elimination of interest on $125 million
of 12.5% Notes retired through the Ex-
change Restructuring.................... (15,625) (3,906)
Change in amortization of deferred fi-
nancing costs related to extension of
maturity dates of the Revolving Credit
Agreement and the 11.5% Notes to January
31, 1999................................ (113) 14
Amortization of 3.5% modification fee
over the remaining life of 37 months of
the Revolving Credit Agreement and the
11.5% Notes based upon actual amounts
paid and expected to be paid in 1997.... 1,548 387
Amortization of estimated deferred fi-
nancing costs over remaining life of 37
months of the Revolving Credit Agree-
ment, and 11.5% Notes................... 195 49
Additional modification fees relating to
the Extension of maturity dates of the
Revolving Credit Agreement and the 11.5%
Notes................................... 2,716
Increase in interest rate of 0.5% per
quarter, for pro forma purposes assumed
to begin 6 months after the Exchange Re-
structuring Date, on the Revolving
Credit Agreement, 11.5% Notes, and the
Subordinated Notes...................... 2,181 783
-------- -------
Net adjustment to interest expense....... $ (9,645) $(2,829)
======== =======
</TABLE>
(11) Due to the Company's net operating losses, on a pro forma basis, the
Company would not owe additional taxes nor receive additional tax
benefits as a result of the decreases in interest expense and net loss or
increases in net income.
(12) Net income (loss) per share and weighted average number of shares
outstanding have been adjusted to reflect the Reverse Split.
ANNEX IV
A-17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following Selected Historical Consolidated Financial Information of the
Company should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto, and other financial
data included elsewhere herein. The summary financial information presented
below as of and for the years ended December 31, 1992, 1993, 1994, 1995 and
1996 are derived from the audited consolidated financial statements of the
Company. The summary financial information presented below as of and for the
three months ended March 31, 1996 and 1997 has been derived from the Company's
unaudited financial statements. Operating results for the three months ended
March 31, 1997 may not be indicative of the results that may be expected for
the year ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------- ----------------------
MARCH 31, MARCH 31,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:(1)
Net sales.............. $2,238,715 $3,085,851 $5,018,687 $5,956,967 $5,522,824 $1,536,589 $1,113,100
Cost of sales.......... 2,036,292 2,827,315 4,676,164 5,633,278 5,233,570 1,449,366 1,048,124
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 202,423 258,536 342,523 323,689 289,254 87,223 64,976
Selling, general &
administrative
expenses.............. 150,905 187,152 281,796 317,195 295,021 83,136 51,520
Impairment losses(2)... 51,383 42,033
Restructuring
charge(3).............. 9,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Income
(loss)................. 51,518 71,384 60,727 (54,222) (47,800) 4,087 13,456
Interest expense....... 15,742 17,810 29,024 37,583 37,431 9,877 8,623
Loss on sale of
European, Mexican,
and Latin American
operations(4)......... 33,455
Other expense.......... 1,299 2,722 11,752 13,885 20,150 7,238 3,530
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 34,477 50,852 19,951 (105,690) (138,836) (13,028) 1,303
Provision (benefit)
for income taxes....... 14,812 20,413 8,341 (21,779) 1,539 480 173
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 19,665 $ 30,439 $ 11,610 $ (83,911) $ (140,375) $ (13,508) $ 1,130
========== ========== ========== ========== ========== ========== ==========
SHARE DATA:(5)
Net income (loss) per
share.................. $ 0.67 $ 1.00 $ 0.38 $ (2.82) $ (4.68) $ (0.45) $ 0.04
Weighted average
number of shares....... 29,274 30,454 30,389 29,806 30,001 29,863 30,078
OTHER DATA:
EBITDA(6).............. $ 59,528 $ 79,138 $ 65,076 $ (47,598) $ (82,616) $ 2,608 $ 13,106
BALANCE SHEET DATA:
Working capital......... $ 294,626 $ 359,765 $ 399,848 $ 280,864 $ 190,544 $ 250,442 $ 193,512
Total assets............ 667,313 936,283 1,191,870 1,230,334 731,039 1,158,676 706,020
Long-term and
subordinated debt....... 153,433 208,500 357,685 356,271 294,763 403,861 288,331
Total debt.............. 179,124 259,429 395,556 382,395 294,950 409,564 288,331
Stockholders' equity.... 198,882 223,857 236,164 154,466 14,997 138,794 15,814
</TABLE>
- --------
(1) The Company's fiscal year is the 52- or 53-week period ending on the
Saturday nearest to December 31. For clarity of presentation throughout
this document, the Company has described year-ends and quarter-ends
presented as if the period ended on the last day of the month. Except for
1992, all fiscal years presented were 52 weeks in duration. The summary
historical consolidated financial information as set forth above includes
those balances and activities related to the Company's Australian business
until its disposal on January 1, 1996 and the Company's European, Mexican
and Latin American businesses until their disposal on October 4, 1996,
effective as of September 27, 1996. It also includes Merisel FAB from the
date such business was acquired on January 31, 1994, through the end of
March 28, 1997, the date of sale of Merisel FAB. (See Note 12 to the
consolidated financial statements--"Subsequent Events"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) During 1995 and 1996, the Company determined that the carrying value for
certain of its capitalized costs relating to the installation of a new
computer operating system and identifiable intangible assets relating to
ANNEX IV
A-18
<PAGE>
Merisel FAB would not be recovered from their use in future operations.
Accordingly, these assets were written down to their fair values as of the
impairment dates. Additionally, in 1995 and 1996, the Company recognized
impairment losses on the assets of Merisel FAB and Merisel Pty Ltd. (a
wholly owned Australian subsidiary) related to the expected sale of
substantially all of the assets of such subsidiaries. (See Note 4 to the
consolidated financial statements--"Impairment Losses").
(3) During 1995, the Company recorded a restructuring charge associated with
the resizing of the Company's operations. (See Note 2 to the consolidated
financial statements--"Restructuring Charge").
(4) In October 1996, the Company completed the sale of substantially all of
its European, Mexican, and Latin American businesses to CHS Electronics,
Inc. A loss of $33,455,000, which includes approximately $7,400,000 of
direct costs related to the sale, was recorded on such sale. (See Note 5
to the consolidated financial statements--"Dispositions").
(5) Net income (loss) per share and weighted average number of shares have not
been adjusted to reflect the Reverse Split.
(6) EBITDA is the sum of income before income taxes and interest, depreciation
and amortization expense. EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. However, EBITDA is
presented because it is a widely used financial indicator of a company's
ability to service indebtedness and other factors.
ANNEX IV
A-19
<PAGE>
PROJECTED CONSOLIDATED FINANCIAL INFORMATION
The Company does not as a matter of course make public projections as to
future sales, earnings or other results. However, the management of the
Company has prepared the projected consolidated financial information set
forth below to present the anticipated effects of the expected Exchange
Restructuring. These projections were not prepared with a view toward public
disclosure or with a view towards complying with the guidelines established by
the American Institute of Certified Public Accountants with respect to
prospective financial information, but, in the view of the Company's
management, were prepared on a reasonable basis, reflect the best currently
available estimates and judgments and present, to the best of management's
knowledge and belief, the expected course of action and the expected future
financial performance of the Company assuming the consummation of the expected
Exchange Restructuring. However, this information is not fact and should not
be relied upon as necessarily indicative of future results, and readers of
this Prospectus are cautioned not to place undue reliance on the projected
consolidated financial information.
During the first quarter of 1997, in connection with the planning and
development of the Exchange Restructuring, the Company prepared five year
financial projections with 1996 as the base period. In preparing the
projections, the historical 1996 operating results have been adjusted to
remove the operations and balances of businesses that the Company has disposed
of including EML and FAB and certain adjustments made to accounts payable,
accounts receivable and certain expense accounts in 1996 which the Company
does not expect to recur in the future. These projections have not been
updated to reflect the actual operating results for the quarter ended March
31, 1997. (See Note 15 below for a comparison of projected first quarter 1997
operating results to the actual operating results.) The projections have been
updated to reflect the expected date of consummation of the Exchange
Restructuring of July 31, 1997, and present the effects of (i) the conversion
of the 12.5% Notes to New Common Stock, (ii) the amendments of the Revolving
Credit Agreement and the 11.5% Notes and (iii) the payment of fees and
expenses related to the Exchange Restructuring. The projections assume the
Exchange Restructuring will be implemented in accordance with its terms, and
present the anticipated effects of the consummation of the Exchange
Restructuring and various other factors on the Company's consolidated
financial condition and results of operations for 1997 through 2001.
THE ASSUMPTIONS AND ESTIMATES UNDERLYING THE PROJECTIONS ARE INHERENTLY
UNCERTAIN AND, THOUGH CONSIDERED REASONABLE BY THE MANAGEMENT OF THE COMPANY
AS OF THE DATE HEREOF, ARE SUBJECT TO A WIDE VARIETY OF SIGNIFICANT BUSINESS,
ECONOMIC AND COMPETITIVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING, AMONG OTHERS,
RISKS AND UNCERTAINTIES INCLUDING THE FOLLOWING: (A) THE COMPANY IS CURRENTLY
HIGHLY LEVERAGED WITH $288.3 MILLION IN TOTAL DEBT AND $259.8 MILLION
ADDITIONAL ASSET SECURITIZATION OBLIGATIONS RELATED TO THE SALE OF ACCOUNTS
RECEIVABLE AS OF MARCH 31, 1997 AND WILL CONTINUE TO HAVE A HIGH LEVEL OF
INDEBTEDNESS FOLLOWING THE EXCHANGE RESTRUCTURING OR PREPACKAGED RESTRUCTURING
AS APPLICABLE, (B) ON AN ESTIMATED BASIS, INTEREST FOLLOWING THE COMPLETION OF
THE EXCHANGE RESTRUCTURING OR PREPACKAGED RESTRUCTURING AS APPLICABLE, WILL
CONTINUE TO BE HIGH IN RELATION TO THE COMPANY'S LEVEL OF PROJECTED EBITDA,
WITH PROJECTED PRINCIPAL AND INTEREST PAYMENTS OF $36,100,000 IN FISCAL 1997
AND $33,698,000 IN FISCAL 1998, (C) SEASONALITY AND MARKET FACTORS MAY AFFECT
CASH FLOW AND THERE CAN BE NO ASSURANCE THAT SUCH CONDITIONS WILL NOT HAVE AN
ADVERSE EFFECT ON THE COMPANY'S FINANCIAL PROJECTIONS, (D) IF CERTAIN OF THE
MAJOR SUPPLIERS AND VENDORS THAT THE COMPANY CURRENTLY DEALS WITH WERE TO
CHANGE THE TERMS ON WHICH THEY CURRENTLY DEAL WITH THE COMPANY OR CREDIT
LIMITS OR PRODUCT AVAILABILITY THAT THEY CURRENTLY EXTEND TO THE COMPANY, IT
COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON THE COMPANY'S SALES, CASH POSITION
AND LIQUIDITY, (E) THE COMPANY IS SUBJECT TO THE POSSIBILITY OF NEW OR
INTENSIFIED
ANNEX IV
A-20
<PAGE>
COMPETITION IN THE REGIONS IN WHICH THE COMPANY OPERATES AS A RESULT OF
EFFORTS BY DIRECT COMPETITORS TO GROW OR GAIN MARKET SHARE IN THOSE REGIONS
WHICH MAY IN TURN EFFECT THE COMPANY'S SALES VOLUME, PRICING AND/OR MARGINS IN
THOSE REGIONS, (F) THERE IS A RISK THAT THE COMPANY'S FINANCIAL PERFORMANCE
COULD BE IMPACTED BY A RECESSION OR DEPRESSION, (G) THE LOAN AGREEMENTS
CONTAIN RESTRICTIONS AND REQUIREMENTS THAT THE COMPANY ACHIEVE AND MAINTAIN
CERTAIN FINANCIAL RATIOS WHICH THE COMPANY MAY NOT BE ABLE TO ACHIEVE AND
MAINTAIN, AND WHICH, IF NOT MAINTAINED OR ACHIEVED, MAY RESULT IN A DEFAULT
AND COULD LEAD TO THE ACCELERATION OF THE COMPANY'S OBLIGATIONS UNDER THE LOAN
AGREEMENTS AS WELL AS THE ACCELERATION OF OTHER INDEBTEDNESS OF THE COMPANY,
(H) MARKET FORCES (SUCH AS INTEREST RATES) AFFECT THE VALUE OF SECURITIES AND
ARE INFLUENCED BY CONDITIONS BEYOND THE COMPANY'S CONTROL, AND (I) THE
COMPANY'S CAPITAL EXPENDITURE LEVELS ASSUMED IN PREPARATION OF THE PROJECTED
FINANCIAL DATA CONTAINED HEREIN MAY BE INADEQUATE TO MAINTAIN THE COMPANY'S
LONG-TERM COMPETITIVE POSITION. SEE "RISK FACTORS." ACCORDINGLY, THERE CAN BE
NO ASSURANCE THAT PROJECTED RESULTS ARE INDICATIVE OF THE FUTURE PERFORMANCE
OF THE COMPANY OR THAT ACTUAL RESULTS WILL NOT BE MATERIALLY HIGHER OR LOWER
THAN THOSE PROJECTIONS. INCLUSION OF THESE PROJECTIONS IN THIS PROSPECTUS
SHOULD NOT BE REGARDED AS A REPRESENTATION BY ANY PERSON THAT THE PROJECTED
RESULTS WILL BE ACHIEVED.
The Company does not generally publish its business plans and strategies or
make external projections of its anticipated financial position or results of
operations. Accordingly, after the expected date of consummation of the
Exchange Restructuring, the Company does not intend to update or otherwise
revise the projections to reflect circumstances existing since their
preparation or to reflect the occurrence of unanticipated events, even in the
event that any or all of the underlying assumptions are shown to be in error.
Furthermore, the Company does not intend to update or revise the projections
to reflect changes in general economic or industry conditions. However, the
Company's regular quarterly and annual financial statements, and the
accompanying discussion and analysis, contained in the Company's Quarterly
Reports on Form 10-Q and Annual Reports on Form 10-K, will contain disclosure
concerning the Company's actual financial condition and results of operations
during the periods covered by the projections.
Neither the Company's independent auditors, nor any other independent
accountants or financial advisors, have compiled, examined, or performed any
procedures with respect to the projected consolidated financial information
contained herein, nor have they expressed any opinion or any other form of
assurance on such information or its achieveability, and assume no
responsibility for, and disclaim any association with, the projected
consolidated financial information.
Projected income statement, balance sheet and cash flow statements for the
Company are included for each of the twelve month periods ending December 31,
1997, 1998, 1999, 2000 and 2001.
Additional information relating to the principal assumptions used in
preparing the projections is set forth below. See "Risk Factors" for a
discussion of various factors that could materially affect the Company's
financial condition, results of operations, business, prospects and
securities.
ANNEX IV
A-21
<PAGE>
PROJECTED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
HISTORICAL PROJECTED
---------- ------------------------------------------------------
1996(A) 1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............... $3,441,343 $4,092,093 $4,888,215 $5,807,495 $6,863,985 $8,084,100
Cost of Sales........... 3,262,105 3,830,788 4,571,957 5,430,392 6,417,644 7,557,905
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit............ 179,238 261,305 316,258 377,103 446,341 526,195
Selling, General and
Administrative Expenses. 193,521 210,897 246,095 287,665 334,928 391,133
---------- ---------- ---------- ---------- ---------- ----------
Operating (Loss) Income. (14,283) 50,408 70,163 89,438 111,413 135,062
Interest Expense........ 29,901 30,947 19,488 15,500 14,852 14,031
Other Expense........... 17,992 16,049 19,906 27,125 33,207 39,744
---------- ---------- ---------- ---------- ---------- ----------
(Loss) Income before
Income Taxes............ (62,176) 3,412 30,769 46,813 63,354 81,287
Provision for Income
Taxes................... 823 7,736 11,838 26,293 33,646
---------- ---------- ---------- ---------- ---------- ----------
Net (Loss) Income....... $ (62,999) $ 3,412 $ 23,033 $ 34,975 $ 37,061 $ 47,641
========== ========== ========== ========== ========== ==========
Net (Loss) Income per
Share(16)............... $ (10.50) $ 0.11 $ 0.77 $ 1.16 $ 1.23 $ 1.58
========== ========== ========== ========== ========== ==========
Shares Outstanding(16).. 6,000 30,078 30,078 30,078 30,078 30,078
========== ========== ========== ========== ========== ==========
Other Data:
EBITDA(17)............. $ 48,868 $ 64,956 $ 82,149 $ 104,678 $ 132,432
</TABLE>
- --------
(a) Historical 1996 balances represent unaudited balances for the continuing
operations of the Company and, as such, do not reflect the results of
operations for EML and Merisel FAB.
ANNEX IV
A-22
<PAGE>
PROJECTED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
PROJECTED
HISTORICAL --------------------------------------------------
1996(A) 1997 1998 1999 2000 2001
---------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................ $ 44,678 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000
Accounts receivable--
net of allowances.... 161,445 210,494 275,338 306,846 346,164 404,636
Inventories........... 390,567 442,661 523,494 621,785 734,827 865,388
Prepaid expenses and
other current
assets............... 19,577 10,671 9,970 12,678 15,799 19,404
-------- -------- -------- ---------- ---------- ----------
Total current
assets............. 616,267 683,826 828,802 961,309 1,116,790 1,309,428
PROPERTY AND EQUIPMENT,
NET................... 60,888 63,505 74,231 84,361 92,984 97,067
COSTS IN EXCESS OF NET
ASSETS ACQUIRED, NET.. 26,351 25,367 24,383 23,455 22,679 21,903
OTHER ASSETS........... 1,244 1,500 1,500 1,500 1,500 1,500
-------- -------- -------- ---------- ---------- ----------
TOTAL ASSETS........ $704,750 $774,198 $928,916 $1,070,625 $1,233,953 $1,429,898
======== ======== ======== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...... $359,365 $421,318 $558,693 $ 663,594 $ 784,236 $ 923,577
Accrued liabilities... 35,624 48,555 56,475 64,554 75,690 88,553
Long-term debt--
current.............. 13,483 13,610 6,246 5,511 3,900
-------- -------- -------- ---------- ---------- ----------
Total current
liabilities........ 408,472 483,483 621,414 733,659 863,826 1,012,130
LONG-TERM DEBT......... 268,080 133,870 132,024 130,913 127,013 127,013
SUBORDINATED DEBT...... 13,200 8,800 4,400
STOCKHOLDERS' EQUITY... 14,998 148,045 171,078 206,053 243,114 290,755
-------- -------- -------- ---------- ---------- ----------
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY............ $704,750 $774,198 $928,916 $1,070,625 $1,233,953 $1,429,898
======== ======== ======== ========== ========== ==========
</TABLE>
- --------
(a) Historical 1996 balances represent unaudited balances related to the
continuing operations of the Company and, as such, do not include Merisel
FAB balances.
ANNEX IV
A-23
<PAGE>
PROJECTED STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net Income................. $ 3,412 $ 23,033 $ 34,975 $ 37,061 $ 47,641
Adjustments:
Depreciation and
amortization............ 14,509 14,700 19,835 26,472 37,113
Provision for doubtful
accounts................ 23,768 28,361 33,694 39,823 46,902
Accounts receivable...... (72,817) (93,205) (65,202) (79,141) (105,374)
Inventories.............. (52,094) (80,833) (98,291) (113,042) (130,561)
Prepaid expenses & other
current assets.......... 8,906 701 (2,708) (3,121) (3,605)
Accounts payable......... 61,953 137,375 104,901 120,642 139,341
Accrued liabilities...... 12,931 7,920 8,079 11,136 12,863
-------- -------- -------- --------- ---------
Net cash provided by
operating activities.. 568 38,052 35,283 39,830 44,320
Cash Flows From Investing
Activities
Purchase of property and
equipment............... (16,142) (24,442) (29,037) (34,319) (40,420)
Other investing
activities.............. (256)
-------- -------- -------- --------- ---------
Net cash used for
investing activities.. (16,398) (24,442) (29,037) (34,319) (40,240)
Cash Flows From Financing
Activities
Repayments under
revolving line of
credit.................. (4,500) (4,500)
Repayments under senior
notes................... (3,000) (3,000)
Repayment under
subordinated debt
agreement............... (4,400) (4,400) (4,400) (4,400)
Other.................... 3,052 (1,710) (1,846) (1,111) (3,900)
-------- -------- -------- --------- ---------
Net cash used for
financing activities.. (8,848) (13,610) (6,246) (5,511) (3,900)
-------- -------- -------- --------- ---------
Net decrease in cash and
cash equivalents.......... (24,678) 0 0 0 0
Cash and cash equivalents,
beginning of period....... 44,678 20,000 20,000 20,000 20,000
-------- -------- -------- --------- ---------
Cash and cash equivalents,
end of period............. $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ========= =========
</TABLE>
ANNEX IV
A-24
<PAGE>
(1) Accounting Treatment. The Company has assumed that the adjusted carrying
value of the 12.5% Notes (including accrued interest less unamortized debt
issuance costs) will approximately equal the fair market value of the New
Common Stock received by the Noteholders pursuant to the Exchange
Restructuring. Accordingly, the Company currently anticipates that no
extraordinary gain or loss will be recognized in connection with the Exchange
Restructuring.
The Exchange Restructuring assumes that the Exchange Restructuring will be
consummated outside of a prepackaged plan of reorganization. If the
Prepackaged Plan is filed, the Company would implement the provisions of SOP
90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code." Pursuant to SOP 90-7, the Company has assumed that the reorganization
value of the Company on the expected date of consummation of the Prepackaged
Restructuring will exceed the amount of affected claims and expected post
petition liabilities. Under SOP 90-7, if the reorganization value of the
Company is greater than the sum of affected claims and post petition
liabilities, fresh start accounting would not apply. As such, the Company
presently assumes that fresh start accounting will not be implemented.
(2) Effective Date and Terms of the Exchange Restructuring. The projections
assume that the Exchange Restructuring will be confirmed in accordance with
its terms, and that all transactions contemplated by the Exchange
Restructuring will be consummated as of July 31, 1997. The actual date of
consummation of the Exchange Restructuring is not known, however, the Company
expects it to occur at or near August 29, 1997. Any significant delay in the
expected date of consummation of the Exchange Restructuring of the plan could
have a significant unfavorable impact on financial performance, including net
income for the year ended December 31, 1997, and could result in additional
professional and other fees.
(3) General Economic Conditions. The projections were prepared assuming
economic conditions, including prevailing inflation rates, computer industry
growth rates, labor costs, interest rates and other factors, in the markets
served by the Company do not differ materially over the next five years from
current economic conditions.
(4) Revenue. The projected net revenues are assumed to increase 18.9% in
1997, 19.5% in 1998, 18.8% in 1999, 18.2% in 2000, and 17.8% in 2001. The
project revenue increases have been developed based on (a) historical growth
rates within different markets of the Company's business (US distribution,
MOCATM and Canada), (ii) expected market growth rates and (iii) expected sales
growth by customer type (Commercial, VAR and Retail).
(5) Gross Margin. The gross profit margin is expected to be 6.4% for 1997
and 6.5% in 1998 through 2001. The projected increase in gross profit margin
is due to an anticipated focus on higher margin product lines.
(6) Selling, General and Administrative Exprenses. Projected selling,
general and administrative expenses are assumed at 5.2% of revenues for 1997.
For 1998 through 2001, selling general and administrative expenses as a
percentage of revenues are projected at 5.0% for 1998, 5.0% for 1999, 4.9% for
2000, and 4.8% for 2001. Selling, general and administrative expenses are
expected to grow at rates somewhat lower than the increase in sales because
(i) certain fixed cost infrastructure expenses are in place and will not
increase as a result of additional sales and (ii) starting in 1999, the
Company expects to begin to realize the cost savings associated with its
planned SAP computer system implementation. The Company projects cost savings
from the system implementation of $2 million in 1999 and $4 million per year
thereafter.
(7) Interest Expense. The projections reflect a reduction in interest
expense resulting from the lower levels of indebtedness after the conversion
of $ 125 million of 12.5% Notes to New Common Stock and the projected debt
repayments of $13.5 million in 1997, $13.6 million in 1998, $6.2 million in
1999, $5.5 million in 2000 and $3.9 million in 2001. 1997 projected interest
expense includes $9.1 million of interest expense accrued on the 12.5% Notes
which will not be paid if the Exchange Restructuring is consummated.
(8) Interest Income. Interest income at a rate of 3.0% is assumed to be
earned on excess cash balances. Excess cash balances are assumed to
approximate $20 million throughout the projection period.
ANNEX IV
A-25
<PAGE>
(9) Other Expense. Other expense includes asset securitization fees related
to the sale of trade accounts receivables increasing from $16.0 million in
1997 to $39.7 million in 2001. The increase in securitization fees reflects
the Company's anticipated use of its securitization facilities as a primary
source of cash to support its growth. The Company assumes that it will
successfully renegotiate its asset securitization facilities to provide
additional capacity at various points throughout the projection period.
(10) Income Taxes. Projected income taxes are based on an assumed federal
tax rate of 35% and a blended state effective income tax rate of 6% offset by
the utilization of net operating loss carryforwards (NOLs) of $3 .3 million in
1997 and $16.3 million in 1998. The Company's projections assume available
NOLs totaling $42.3 million after the Exchange Restructuring, the utilization
of $24.8 million of which will be limited as required by Section 382 of the
Internal Revenue Code. See "Certain Federal Income Tax Considerations". See
14--"Prepackaged Plan of Reorganization" for potential impact a Prepackaged
Plan would have upon NOL availability. For financial accounting purposes it is
assumed that at the time of the Exchange Restructuring, the Company will
provide a valuation allowance equal to the NOLs. In 1999, after achieving
consistent profitability, the Company assumed that the remaining valuation
allowance established against the deferred tax asset associated with the NOLs
will be reversed, thereby reducing the projected income tax provision in 1999
by $7.7 million.
(11) Balance Sheet Considerations. Projections of changes in certain balance
sheet accounts such as accounts receivable, inventory and accounts payable are
primarily based upon historical ratios.
(12) Long-Term Debt. The projections assume that the maturity date of both
the Revolving Credit Agreement and 11.5% Notes, both currently due in January
1998 will be extended to January 31, 1999 in accordance with the Extension and
that the Company will pay the related fees and increased interest rates in
accordance with the Extension. The projections assume that this debt will
further be extended or refinanced beyond December 31, 2001 and will bear
effective interest at 11.5% annually.
(13) Capital Expenditures. Cash capital expenditures of $16.1 million in
1997 are expected to increase to $24.4 million. $29.0 million, $34.3 million
and $40.4 million in 1998, 1999, 2000 and 2001.
(14) Prepackaged Plan of Reorganization. The Prepackaged Plan, if required,
would have a significant impact upon the projections. The most significant
impacts include additional professional fees and other fees which are
currently estimated to be $3 million and the amount of available NOLs. The
amount of gross NOLs available to the Company after a prepackaged filing could
be significantly greater than that outside of a filing by as much as $81
million based upon an assumed equity increase of approximately $120 million.
If the Company consummates the Prepackaged Plan, net income and net income per
share in 1997 would decrease by approximately $3 million or $0.10 per share as
a result of the increased professional fees and expenses in connection with
the Prepackaged Plan. In 1999, after achieving consistent profitability, the
Company would reverse the established valuation allowance equal to the amount
of unused NOLs, thereby increasing net income by approximately $27 million or
$0.90 per share.
ANNEX IV
A-26
<PAGE>
(15) The following table compares the Company's adjusted unaudited
historical condensed consolidated results of operations to the projected
condensed consolidated results of operations for the three months ended March
31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------
ADJUSTED
HISTORICAL(A) PROJECTED DIFFERENCE
------------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
NET SALES................................... $910,923 $902,930 $7,993
COST OF SALES............................... 853,624 845,930 7,694
-------- -------- ------
GROSS PROFIT................................ 57,299 57,000 299
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 45,322 49,686 4,364
-------- -------- ------
OPERATING INCOME............................ 11,977 7,314 4,663
INTEREST EXPENSE............................ 8,325 8,183 142
OTHER EXPENSE............................... 4,518 3,528 990
-------- -------- ------
INCOME (LOSS) BEFORE INCOME TAXES........... (866) (4,397) 3,531
PROVISION FOR INCOME TAXES.................. 158 158
-------- -------- ------
NET INCOME (LOSS)........................... $ (1,024) $ (4,397) $3,373
======== ======== ======
NET INCOME (LOSS) PER SHARE (16)............ $ (0.17) (0.73) 0.56
======== ======== ======
WEIGHTED AVERAGE NUMBER OF SHARES (16)...... 6,016 6,016
======== ======== ======
</TABLE>
- --------
(a) The Adjusted Historical 1997 balances for the three months ended March 31,
1997 presented above represent unaudited balances for the continuing
operations of the Company and, as such, do not reflect the results of
operations for Merisel FAB. The favorable variance between projected and
actual results is primarily due to better than projected management of
operating expenses.
(16) Net income (loss) per share and weighted average number of shares have
been adjusted to reflect the Reverse Split.
(17) EBITDA is the sum of income before income taxes and interest,
depreciation and amortization expense. EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. However, EBITDA is
presented because it is a widely used financial indicator of a company's
ability to service indebtedness and other factors.
ANNEX IV
A-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements and
other more detailed financial information appearing elsewhere herein. For
information concerning the Reorganization and its pro forma effect on the
Company, see "Pro Forma Financial Statements" appearing elsewhere in this
Prospectus.
OVERVIEW
The Company was founded in 1980 as Softsel, Inc. and has grown through
internal growth and acquisitions of other computer products distributors. By
1989, the Company had achieved annual revenues of $629,400,000 principally
through internal expansion. In April 1990, the Company acquired Microamerica,
Inc. ("Microamerica"), another distributor of computer products with net sales
of approximately $526,000,000 for the year ended December 31, 1989. In
connection with this acquisition, the Company changed its name to Merisel,
Inc. In the years following the Microamerica acquisition, the Company's
revenues increased rapidly, reaching $5.0 billion in 1994 and $6.0 billion in
1995. This increase partially reflected the substantial growth in both
domestic and international sales as the worldwide market for computer products
expanded and manufacturers increasingly turned to wholesale distributors for
product distribution. The growth also reflected the acquisition of certain
assets of the United States Franchise and Distribution Division (the "F&D
Division") of Vanstar Corporation (formerly ComputerLand Corporation) (the
"ComputerLand Acquisition") from Vanstar Corporation, which contributed
additional revenues in excess of $1 billion during each of the three years
ended 1994, 1995, and 1996. Despite the revenues generated by Merisel FAB,
sales in 1996 decreased to $5.5 billion, primarily due to the sale of certain
businesses during such period.
RESULTS OF OPERATIONS
Net losses for 1996 were $140,375,000 or 2.5% of net sales. The losses
include $42,033,000 or 0.8% of sales related to the recognition of asset
impairment losses at Merisel FAB, $33,455,000 or 0.6% of sales related to a
loss on the sale of its European, Mexican and Latin American operations
("EML"), $13,400,000 or 0.2% of sales due to customer dispute issues in the
United States, $8,129,000 or 0.1% of net sales related to operating losses
generated by businesses that were sold during the year, $9,600,000 or 0.2% of
sales related to vendor reconciliation and other margin issues in Canada, and
$4,400,000 or 0.1% of sales due to vendor reconciliation issues in the United
States.
During 1996, the Company pursued a business plan that was developed to
address capital structure issues by curtailing non-essential capital
expenditures, eliminating investments, 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"). The sales price, computed based upon the February 21, 1997
balance sheet of Merisel FAB was $31,992,000 consisting of the buyer assuming
$11,992,000 of trade payables and accrued liabilities, and a $20,000,000
extended payable due to Vanstar Corporation.
As a result of these asset dispositions, the Company's operations are now
focused exclusively in North America. In 1996, the North American Business (as
defined below) produced approximately $3.4 billion in revenues and the Former
Operations (as defined below) produced approximately $2.1 billion in revenue.
As the North American Business now represents the ongoing business of the
Company, the following discussion and analysis will compare the results of
operations solely for the North American Business.
As used in this discussion and analysis, the term "North American Business"
refers to Merisel's United States and Canadian operations, and the term
"Former Operations" refers to those operations disposed of since the beginning
of 1996, namely EML, FAB and the Australian operations.
ANNEX IV
A-28
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
The following table sets forth the unaudited results of operations for the
North American Business and for the Former Operations for the three months
ended March 31, 1997 and March 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 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............... $910,923 $202,177 $1,113,100 $881,565 $655,024 $1,536,589
Cost of Sales........... 853,624 194,500 1,048,124 829,984 619,382 1,449,366
-------- -------- ---------- -------- -------- ----------
Gross Profit............ 57,299 7,677 64,976 51,581 35,642 87,223
SG&A Expenses........... 45,321 6,199 51,520 50,163 32,973 83,136
-------- -------- ---------- -------- -------- ----------
Operating (Loss) Income. $ 11,978 $ 1,478 $ 13,456 $ 1,418 $ 2,669 $ 4,087
======== ======== ========== ======== ======== ==========
</TABLE>
For the quarter ended March 31, 1997, net sales for the North American
Business increased by 3.3% from $881,565,000 in the quarter ended March 31,
1996 to $910,923,000 in the quarter ended March 31, 1997. Net sales decreased
by 1.1% in the United States, and increased by 21.1% in Canada. The Company
lost market share in the United States due to competitive pressures, liquidity
constraints and cost controls implemented by the Company, which curtailed
sales growth. Canadian sales growth for the quarter was in line with industry
growth rates.
In the North American Business, hardware and accessories accounted for 75%
of net sales, and software accounted for 25% of net sales in the first quarter
of 1997, as compared to 76% and 24% for the same categories, respectively, in
the first quarter of 1996.
Gross profit for the North American Business increased 11.1% from
$51,581,000 in 1996 to $57,299,000 in 1997. Gross profit as a percentage of
sales or gross margin increased from 5.9% in 1996 to 6.3% in 1997. The
increase in gross profit is in part attributable to a concentrated effort in
the United States and Canada to focus attention on more profitable product
lines, and improved controls over margin management related activities such as
sales execution, improved processes, vendor rebate programs and purchasing
discounts. The improved margins also reflect the continued growth in the
Company's MOCA division, which has historically achieved higher average
margins. MOCA sales were equal to 9.9% of total North American business sales
in the current quarter as compared to 7.7% in the first quarter of 1996. The
Company believes that in the past, its gross margins have been below the
industry average, and as such, corrective actions have been undertaken as part
of the overall business strategy to concentrate on profitability for 1997.
Gross margins in the United States and Canada were 6.40% and 5.94%,
respectively, for the first quarter of 1997, compared to 5.85% and 5.87%,
respectively, for the first quarter of 1996. Despite the improved margin
performance experienced in the first three months of 1997, the Company expects
that it will continue to face intense competitive pricing pressures.
Selling, general and administrative expenses for the North American Business
decreased by 9.7% from $50,163,000 in the first quarter of 1996 to $45,321,000
in the first quarter of 1997. The $4,842,000 decrease is due to several
factors in the first quarter of 1996. These factors include increased expenses
such as severance costs associated with carrying out the Company's 1996
business plan and strategies, continuing professional fees and other costs
incurred to develop business plans and strategies and to improve certain
business processes. Additionally, the Company incurred increased expenses
associated with its new computer operating system in 1996.
As a result of the above items, operating income for the North American
Business improved by $10,559,000 from $1,418,000 for the first quarter of 1996
to $11,977,000 for the first quarter of 1997.
ANNEX IV
A-29
<PAGE>
Interest Expense; Other Expense; And Income Tax Provision
Interest expense for the Company, including former operations, decreased
12.7% from $9,877,000 in 1996 to $8,623,000 in 1997. The decrease in interest
expense is attributable to the amortization and paydown of the Company's debt
by approximately $122,918,000 from April of 1996 through the end of March,
1997 and is offset by an increase in interest rates under the Company's 11.5%
Notes, Revolving Credit Agreement and the Subordinated Notes, of 2.9%, 3.3%
and .05%, respectively. Approximately $72,500,000 of the paydown was affected
in October of 1996, using proceeds from the sales of EML.
Other Expenses for the Company, including Former Operations, decreased from
$7,238,000 in the three months ended March 31, 1996, to $3,530,000 for the
same period in 1997. This decrease is due primarily to one time financing
charges in the first quarter of 1996, for approximately $3,125,000 related to
amendments of the Company's financing agreements. Additionally, securitization
fees, which are included in Other Expenses, decreased by approximately
$1,022,000, partially due to lower average borrowings in the North American
Business, and to the disposal of the European asset securitization facility,
as part of the divestiture of EML, in the third quarter of 1996. The average
month end proceeds from the accounts receivable sales under all of the
Company's various securitization facilities decreased from $289,113,000 for
the three months ended March 31, 1996 to $251,294,000 in for the same period
in 1997.
The income tax provision decreased from an expense of $480,000 for the three
months ended March 31, 1996, to an expense of $173,000 for the same period in
1997. In both periods the income tax rate reflects only the minimal statutory
tax requirements in the various locations in which the Company conducts
business, as the Company has sufficient net operating loss provisions to
offset federal income taxes.
Consolidated Income (Loss)
On a consolidated basis, net income for the Company, including the Former
Operations, increased from a loss of $13,508,000 for the three months ended
March 31, 1996, to income of $1,130,000 for the three months ended March 31,
1997, due to the factors described above. Net income per share increased from
a loss of $0.45 per share in 1996 to income of $0.04 per share in 1997.
The following table sets forth the results of operations for the North
American Business and for the Former Operations for the fiscal years
indicated.
<TABLE>
<CAPTION>
(IN THOUSANDS)
NORTH AMERICAN BUSINESS FORMER OPERATIONS CONSOLIDATED TOTAL
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------------------- --------------------------------- ---------------------------------
1994 1995 1996 1994 1995 1996 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales....... $2,876,074 $3,427,821 $3,441,343 $2,142,613 $2,529,146 $2,081,481 $5,018,687 $5,956,967 $5,522,824
Cost of Sales... 2,665,059 3,242,903 3,262,105 2,011,105 2,390,375 1,971,465 4,676,164 5,633,278 5,233,570
Gross Profit.... 211,015 184,918 179,238 131,508 138,771 110,016 342,523 323,689 289,254
SG&A............ 163,278 181,042 193,521 118,518 136,153 101,500 281,796 317,195 295,021
Impairment loss. 19,500 31,883 42,033 51,383 42,033
Restructuring
charge......... 5,228 4,105 9,333
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating (loss)
Income......... $ 47,737 $ (20,852) $ (14,283) $ 12,990 $ (33,370) $ (33,517) $ 60,727 $ (54,222) $ (47,800)
========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
The Company's net sales for the North American Business increased 0.4% from
$3,427,821,000 in 1995 to $3,441,343,000 for the year ended December 31, 1996.
This increase resulted from increased sales of 12.4% in Canada offset by a
2.0% decrease in sales in the United States. In the third quarter of 1995, the
North American Business sold approximately $124,000,000 of Microsoft Windows
'95 following its launch in August 1995. Excluding the effect of this
additional revenue, net sales would have increased 2.0% in the United States
and 14.5% in Canada. The Canadian sales increase is in line with the growth in
the industry for the markets in which
ANNEX IV
A-30
<PAGE>
that subsidiary competes. In the United States, the Company did not keep pace
with industry growth rates, due to liquidity constraints, cost controls which
Merisel implemented to conserve cash outflow and competitive pressures.
In the North American Business, hardware and accessories accounted for 75%
of net sales, and software accounted for 25% of net sales for the year ended
December 31, 1996 as compared to 69% and 31% for the same categories
respectively, for the year ended December 31, 1995. Software sales were a
larger percentage of total sales in the prior year due to the sales generated
from the Microsoft Windows '95 launch in August 1995.
Gross profit for the North American Business decreased 3.1% from
$184,918,000 in 1995 to $179,238,000 in 1996. Gross profit as a percentage of
sales, or gross margin, decreased from 5.4% in 1995 to 5.2% in 1996. Both
years were affected by large margin adjustments. In 1995, the Company recorded
a $25,800,000 charge to margin in the United States related to accounts
payable reconcilement issues. In 1996, $17,750,000 was charged related to
customer disputes, vendor reconciliations and other issues in the United
States, and $9,588,000 was charged for similar issues in Canada. Excluding the
effect of these margin adjustments, gross profit would have been $174,079,000
or 6.1% of net sales and $36,639,000 or 6.4% of net sales in the United States
and Canada, respectively, for the year ended December 31, 1995, as compared to
$168,531,000 or 6.0% of net sales and $38,045,000 or 5.9% of net sales in the
United States and Canada, respectively, for the year ended December 31, 1996.
The decrease in adjusted gross profit is primarily attributable to the impact
of liquidity constraints on the Company's ability to purchase on favorable
terms and competitive pricing pressures, each of which, in the absence of the
Restructuring, is expected to continue in 1997.
In 1996, a total charge of $17,750,000 was recorded to margin in the United
States of which $13,400,000 related to customer dispute issues with the
remaining $4,340,000 relating to vendor reconcilement issues. A total charge
of $9,588,000 was recorded to margin in Canada of which $8,092,000 related to
vendor reconcilement issues, $1,173,000 to customer dispute issues and
$323,000 to other margin issues. Customer dispute issues relate primarily to
adjustments for deductions taken by customers on payments for which the
Company does not believe it will be able to collect. Vendor reconcilement
issues relate to adjustments for price protection, returns to vendors by
Merisel and inventory receipt related issues, such as short shipments
identified through the vendor reconcilement process. The charge for other
margin issues primarily relate to adjustments to the value of liabilities.
Selling, general and administrative expenses for the North American Business
increased by 6.9% from $181,042,000 for the year ended December 31, 1995 to
$193,521,000 for the year ended December 31, 1996. Selling, general
administrative expenses in 1995 include a fourth quarter charge of $8,200,000
to adjust the value of certain assets and liabilities. Excluding this fourth
quarter 1995 charge, selling, general and administrative expense levels have
increased approximately $20,679,000 from the prior year. Of this increase,
$10,500,000 related to professional fees incurred as part of the development
of the 1996 Business Plan, process improvements and lender negotiations and
severance charges related to management changes. Selling General and
Administrative charges in 1996 excluding these charges were $183,021,000. The
remaining increase in expenses is related to higher operating costs associated
with the installation of new computer systems. Selling, general and
administrative costs include depreciation and amortization expense totaling
$11,756,000 in 1995 and $12,360,000 in 1996.
In the fourth quarter of 1995, the North American business recorded an asset
impairment charge for $19,500,000 in order to adjust capitalized system
development costs related to the installation of new computer systems. Also in
1995, $5,228,000 in restructuring charges were recorded in the North American
Business as a result of the planned closure of a warehouse and other
restructuring activities. As of December 31, 1996 the company has used
$4,747,000 of this charge and the remaining amount of $481,000 is included in
accrued liabilities. No such charge was deemed necessary in 1996.
As a result of the above items, the operating loss for the North American
Business of $20,852,000 for the year ended December 31, 1995 decreased to an
operating loss of $14,283,000 for the year ended December 31,
ANNEX IV
A-31
<PAGE>
1996. Excluding the margin adjustments taken in both years, the professional
fees and severance costs incurred in 1996, the fourth quarter charges taken to
operating expense in 1995, the impairment charge in 1995, and the
restructuring charge in 1995, all of which are quantified above, the North
American Business would have had operating income of $37,876,000 in 1995 as
compared to operating income of $23,555,000 in 1996.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company, including Former Operations, decreased
0.4% from $37,583,000 for the year ended December 31, 1995 to $37,431,000 for
the year ended December 31, 1996. The decrease resulted from lower average
borrowings in the fourth quarter of 1996, offset by higher average interest
rates and higher average borrowings in the first three quarters of the year.
Other expense for the Company, including Former Operations, increased from
$13,885,000 for the year ended December 31, 1995 to $20,150,000 for the year
ended December 31,1996. The increase was primarily attributable to fees
incurred in connection with an increase in the Company's trade receivable
securitizations in 1996. The increase in securitization fees is primarily
attributable to an increase in the amount of net receivables sold.
The income tax provision increased from a benefit of $21,779,000 for the
year ended December 31, 1995 to an expense of $1,539,000 for the same period
in 1996. The Company has not recognized a tax provision benefit with respect
to its current losses, having fully utilized its ability to carryback those
losses and obtain refunds of taxes paid in prior years. Further, the Company
has recognized tax provision expense that primarily represents the
establishment of a valuation allowance against a previously recognized state
deferred tax asset. (See "Notes to Consolidated Financial Statements--Note
8.")
Consolidated Loss
The Company, including Former Operations, reported an increase in its net
loss from $83,911,000 in 1995 to $140,375,000 in 1996. The net loss per share
increased from $2.82 in 1995 to $4.68 in 1996.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
The Company's net sales for the North American Business increased 19.2% from
$2,876,074,000 in 1994 to $3,427,821,000 for the year ended December 31, 1995.
The gain was due to increased sales of 21.0% in the United States and 10.8% in
Canada. These increases were primarily due to growth in existing distribution
operations resulting from the growth of the overall market for hardware and
software products, as well as an increase in the number of products certain
vendors are selling through distribution.
In the North American Business, hardware and accessories accounted for 69%
of net sales, and software accounted for 31% of net sales for the year ended
December 31, 1995, as compared to 68% and 32% for the same categories,
respectively, for the year ended December 31, 1994.
Gross profit for the North American Business decreased 12.4% from
$211,015,000 in 1994 to $184,918,000 in 1995. Gross profit as a percentage of
sales or gross margin, decreased from 7.3% in 1994 to 5.4% in 1995. The
decrease in gross margin was principally attributable to competitive pricing
pressures. In addition, a portion of the fourth quarter 1995 adjustments was
charged to cost of sales, which further contributed to the decrease in gross
profit.
Selling, general and administrative expenses for the North American Business
increased 10.9% from $163,378,000 for the year ended December 31, 1994 to
$181,042,000 for the year ended December 31, 1995. The increase was primarily
due to costs associated with the Company's 19.2% increase in net sales, and
fourth quarter charges taken in 1995, including adjustments to the values of
certain assets and liabilities for $8,200,000.
ANNEX IV
A-32
<PAGE>
In the fourth quarter of 1995, the North American business recorded an asset
impairment charge of $19,500,000 in order to adjust capitalized system
development costs related to the installation of new computer systems.
During 1995, $5,228,000 in restructuring charges were recorded in the North
American Business related to the planned closure of a warehouse and other
restructuring activities.
As a result of the above items, operating income for the North American
Business of $47,737,000 for the year ended December 31, 1994 decreased to an
operating loss of $20,852,000 for the year ended December 31, 1995.
Interest Expense; Other Expense; Income Tax Provision
Interest for the Company, including Former Operations, increased 29.5% from
$29,024,000 for the year ended December 31, 1994 to $37,583,000 for the year
ended December 31, 1995. The increase is primarily attributable to the
Company's higher debt levels and, to a lessor extent, an increase in interest
rates.
Other expense for the Company, including Former Operations, increased from
$11,752,000 for the year ended December 31, 1994 to $13,885,000 for the year
ended December 31, 1995. The increase in other expense in 1995 primarily
related to an increase of $3,000,000 in fees incurred in connection with
accounts receivable securitizations.
The income tax provision decreased from an expense of $8,341,000 for the
year ended December 31, 1994 to a benefit of $21,779,000 for the year ended
December 31, 1995, reflecting the Company's loss position in 1995 and the
utilization of loss carryback provisions. The decrease in the effective tax
rate was principally the result of an increase in the valuation allowance
related to United States deferred tax assets.
Consolidated Loss
On a consolidated basis for the Company, including Former Operations, net
income decreased from $11,610,000 for the year ended December 31, 1994 to a
net loss of $83,911,000 for the year ended December 31, 1995. Net income per
share decreased from $.38 in 1994 to a net loss per share of $2.82 in 1995.
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. This 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 sale of assets.
ANNEX IV
A-33
<PAGE>
RECENT DEVELOPMENTS
Effective April 14th, 1997, the Company entered into certain agreements
relating to the restructuring of its debt obligations, and to amend certain
covenants contained in its debt instruments. (See "Background of the
Restructuring.") Accordingly, the Company believes that it will be able to
satisfy all of its material debt obligations under such instruments in 1997
pending the consummation of the Restructuring and the Extension. Interest will
continue to be due and payable on the outstanding 12.5% Notes that have not
consented to the waiver by the time such payments are due; however, such
holders will not be able to accelerate the payment of the principal of the
12.5% Notes under the terms of the Indenture governing the 12.5% Notes.
FIRST QUARTER, 1997
Net cash provided by operating activities during the three months ended
March 31, 1997, was $10,577,000. The primary sources of cash from operating
activities was a decrease in inventory of $34,348,000, increased accounts
payable of $6,626,000 and a profit of and $1,131,000. The primary use of cash
during the period was a $32,384,000 increase in accounts receivable. The
primary use of cash during the period was a $32,384,000 increase in accounts
receivable. This increase was the primarily the result of normal seasonal
fluctuations in the Company's Canadian operations and higher than normal sales
during the last few days of the quarter. This increase is not expected to have
a material impact on the Company's future results or financial condition. The
increase in accounts payable related primarily to the purchasing activities of
Merisel FAB during the quarter and prior to the sale of substantially all of
the assets of Merisel FAB. The accounts payable levels for the North American
Business did not change significantly from the end of 1996.
Net cash used in investing activities for the three months ended March 31,
1997, was $648,000 consisting entirely of leasehold improvements and equipment
expenditures. The expenditures were primarily for the maintenance and
improvements of existing facilities. The Company presently anticipates that
its capital expenditures for 1997 will be between $15,000,000 and $18,000,000
consisting of costs of upgrading and modifying existing computer systems,
warehouse systems, and facilities in Canada and the United States. Net cash
used in financing activities was $6,432,000 and was comprised primarily of
scheduled payments under the Company's various debt facilities.
FISCAL YEAR ENDED 1996
Net cash provided by operating activities during the year ended December 31,
1996 was $29,249,000. The primary sources of cash from operating activities
were decreases in accounts receivable, inventories, and income taxes
receivable of $132,480,000, $91,059,000 and $33,470,000, respectively. The
primary use of cash from operations during the period was a decrease in
accounts payable of $179,304,000. Lower inventory and accounts receivable
levels resulted primarily from improved management of inventories and
collections. The decrease in inventories also contributed to the decrease in
accounts payable.
Net cash provided from investing activities in 1996 was $101,041,000,
consisting of proceeds from the sale of EML and the Company's Australian
business of $110,379,000 and $8,515,000, respectively, partially offset by the
Company's earn out obligation under the ComputerLand Acquisition of
$13,409,000 and property and equipment expenditures of $9,652,000, net of
proceeds from the sale of property and equipment of $5,975,000. Expenditures
for property and equipment were primarily attributed to the upgrading of the
Company's computer systems, expenditures for a new warehouse management system
and the upgrading of existing facilities and leasehold improvements.
Net cash used in financing activities was $82,765,000, related primarily to
repayments of the 11.5% Notes of $43,195,000, net repayments under the
Revolving Credit Agreement (as defined below) of $17,792,000, the payment of
the first installment of $4,400,000 of the Subordinated Notes (as defined
below), and repayment of $17,741,000 under other bank facilities.
ANNEX IV
A-34
<PAGE>
LIQUIDITY AND BORROWINGS
Funds are also generated through the sale of receivables by Merisel Capital
Funding, Inc., a wholly owned subsidiary of the Company's Merisel America's,
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 and did obtain amendments and waivers
with respect to certain covenants under this facility, which expires October
2000.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel's Canadian subsidiary. 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.
Effective October 16, 1995, Merisel U.K. Ltd. ("Merisel U.K.") entered into
a receivables purchase agreement with a securitization company to provide
funding for Merisel's U.K. subsidiary. This facility, including $26,300,000
outstanding thereunder, was assumed by CHS in connection with the purchase of
EML.
Under these securitization facilities, the receivables are sold at face
value with payment of a portion of the purchase price being deferred. As of
March 31, 1997, the total amount outstanding under these facilities was
$259,830,000. Fees incurred in connection with the sale of accounts receivable
are recorded as other expense and for the three months ended March 31, 1997
and 1996 were, $3,573,000, and $4,544,000 respectively. For the years ended
December 31, 1996 and December 31, 1995, these fees totalled $16,029,000 and
$10,291,000 respectively.
At March 31, 1997, the Company's subsidiaries, Merisel Americas and Merisel
Europe had unsecured senior borrowings which, as amended, consisted of
$56,198,000 of 11.5% Notes by Merisel Americas, and an $84,297,000 the
Revolving Credit Agreement, all of which were outstanding. Advances under the
Revolving Credit Agreement bear interest at specific rates based upon market
reference rates plus a specified percentage. The average interest rate for the
Revolving Credit Agreement at March 31, 1997 was approximately 10.8%. On
October 4, 1996, the Company amended the 11.5% Notes and the Revolving Credit
Agreement in connection with the sale of EML and permanently reduced the
outstanding borrowings on the 11.5% Notes and the Revolving Credit Agreement
by $29,000,000 and $43,500,000, respectively. As a result of the sale of EML,
Merisel Europe no longer is an operating entity.
As amended, these agreements require that the Company make an aggregate of
five consecutive principal payments of $1,500,000 each on the last calendar
day of each month from February through June 1997 plus an additional principal
repayment of $7,500,000 on January 2, 1998. The Company has made these
payments as scheduled through the current period. In the absence of the
Restructuring, the 11.5% Notes and the Revolving Credit Agreement provide that
if the Company makes the June 30, 1997 interest payment on its 12.5% Notes at
any time before January 31, 1998, then the Company shall make an aggregate
principal repayment of an additional $40,000,000 on the 11.5% Notes and the
Revolving Credit Agreement. Further, if the Company makes the December 31,
1997 interest payment on its 12.5% Notes at anytime before January 31, 1998,
the Company must make an additional aggregate principal payment of $30,000,000
on the 11.5% Notes and the Revolving Credit Agreement. The 11.5% Notes and the
Revolving Credit Agreement are due in full on January 31, 1998. The amendments
also provide that certain tax refunds and asset sale proceeds when received by
the Company shall be used to permanently prepay the 11.5% Notes and Revolving
Credit Agreement. The principal repayments will be shared ratably by the
lenders under the Revolving Credit Agreement and the holders of the 11.5%
Notes.
ANNEX IV
A-35
<PAGE>
The 11.5% Notes and the Revolving Credit Agreement contain various
covenants, including those which prohibit the payment of cash dividends,
require a minimum amount of tangible net worth, and place limitations on the
acquisition of assets. These agreements also require the Company or certain of
its subsidiaries to maintain certain specified financial ratios. Such
financial ratios include: interest coverage; minimum adjusted tangible net
worth; minimum earnings before interest, taxes, depreciation, amortization and
securitization expense; total debt equivalents to adjusted tangible net worth;
inventory turnover; minimum accounts payable; and minimum accounts payable to
inventory. In connection with the sale of EML and as a result of the
substantial losses incurred by the Company for the years ended December 31,
1996 and December 31, 1995, the Company was required to obtain and did obtain
waivers of various covenants, including financial ratio covenants, contained
in the Senior Notes and the Revolving Credit Agreement for the Company's third
fiscal quarter of 1996, and amendments of such covenants for future periods.
At March 31, 1997, Merisel Americas had outstanding an aggregate of
$13,200,000 of Subordinated Notes. The Subordinated Notes, as amended during
1996, provide for an interest rate increase of .50% to 11.78% per annum
effective April 15, 1996, and are repayable in three remaining equal annual
installments of $4,400,000 due in March 1998, March 1999 and in March 2000.
The Company has made all of these payments as scheduled to date. Commencing on
September 10, 1996, accrued interest on the Subordinated Notes is required to
be paid quarterly, rather than semi-annually. The Subordinated Notes contain
certain restrictive covenants, including those that limit the Company's
ability to incur debt, acquire the stock of or merge with other corporations,
or sell certain assets and those that prohibit the payment of dividends. The
Subordinated Notes also incorporate the financial covenants contained in the
Senior Notes and the Revolving Credit Agreement. In connection with the
amendment of the Revolving Credit Agreement and the Senior Notes described
above, the Company was required to obtain and did obtain an amendment of the
Subordinated Note Purchase Agreement.
At March 31, 1997, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of
12.5% payable semi-annually. By virtue of being an obligation of Merisel,
Inc., the 12.5% Notes are effectively subordinated to all liabilities of the
Company's subsidiaries, including trade payables and are not guaranteed by any
of the Company's operating entities. The Indenture relating to the 12.5% Notes
contains certain covenants that, among other things, limit the type and amount
of additional indebtedness that may be incurred by the Company or any of its
subsidiaries and imposes limitations on investments, loans, advances, asset
sales or transfers, dividends and other payments, the creation of liens, sale-
leaseback transactions with affiliates and certain mergers. Without a
restructuring or refinancing of the Company's debt, the Company may be unable
to make its June 30, 1997 and December 31, 1997 interest payments on the 12.5%
Notes and the additional $40,000,000 and $30,000,000 repayments on the 11.5%
Notes and the Revolving Credit Agreement required before such interest
payments on the 12.5% Notes can be made. In addition, the restriction on
dividend payments contained in the 11.5% Notes and the Revolving Credit
Agreement could limit the ability of the Company to repay principal and
interest on the 12.5% Notes if, and to the extent that, such limitations
prevent cash or other dividends from being paid to the Company. Further, in
the event of a default under the 11.5% Notes and the Revolving Credit
Agreement, payments of principal and interest on the 12.5% Notes are
prohibited.
At March 31, 1997, the Company had promissory notes outstanding with an
aggregate balance of $9,635,000. Such notes provide for interest at the rate
of approximately 7.7% per annum and are repayable in 48 and 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.
In connection with the ComputerLand acquisition, Merisel FAB and Vanstar
entered into the Distribution and Services Agreement (the "Service Agreement")
which as extended and amended provided significant distribution and other
support services to Merisel FAB for a contractually agreed upon fee. Also
under the terms of the Services Agreement, Vanstar agreed to provide extended
credit to Merisel FAB (the "Vanstar Payable") which was to be reduced by
scheduled payment amounts. At December 31, 1995 and 1996, $23,500,000 and
$20,000,000 was outstanding on the Vanstar payable and is included in accounts
payable. The Vanstar Payable
ANNEX IV
A-36
<PAGE>
was assumed by, and the Service Agreement was assigned to, Synnex pursuant to
the sale of substantially all of the assets of Merisel FAB as of March 28,
1997.
At March 31, 1997, the Company had cash and cash equivalents of
approximately $47,930,000. In the opinion of management, as a result of the
Agreement reached with the holders of the 12.5% Notes and the waivers received
from the holders of the Revolving Credit Agreement, the 11.5% Notes and the
Subordinated Notes, cash on hand, together with anticipated cash flow in 1997
will be sufficient to meet the Company's liquidity requirements for the next
12 months.
INFLATION
Due to the short-term nature of the Company's contracts and agreements with
customers and vendors, the Company does not believe that inflation had a
material impact on its operations.
ASSET MANAGEMENT
The Company 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, the Company'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, the Company'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.
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.
ANNEX IV
A-37
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY
BUSINESS OVERVIEW
Merisel, Inc., a Delaware holding company (the "Company"), is a leading
distributor of computer hardware, networking equipment and software products.
Through its main operating subsidiary, Merisel Americas, and its subsidiaries,
the Company markets products and services throughout North America and has
achieved operational efficiencies that have made it 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.
At December 31, 1996, the Company stocked more than 25,000 products from
more than 500 of the computer hardware and software industry's leading
manufacturers, including American Power Conversion, Apple, AST, Compaq,
Creative Labs, Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard,
IBM/Lotus, Intel, Kingston Technology, Microsoft, NEC, Novell, Okidata, Sony,
Sun Microsystems, Symantec, Texas Instruments, 3Com, Toshiba and U.S.
Robotics. Merisel sells products to more than 45,000 computer resellers
throughout North America, including VARs, large retail chains, dealers,
computer superstores, mass merchants, Macintosh and Sun Microsystems
resellers, system integrators and original equipment manufacturers ("OEMs").
The breadth of the Company's product line, together with its extensive
distribution network, enable the Company to provide its customers with a
single supply source and prompt product delivery. The Company's sales were
$3.4 billion for 1996, after excluding revenues from operations sold in the
third quarter of 1996 and in the first quarter of 1997. Of these sales, 81%
were generated in the United States and 19% were generated in Canada.
During 1996, the Company determined to sell substantially all of its assets
and operations outside of North America. In addition the Company also
developed a plan that called for the downsizing of remaining operations in
order to conserve cash. As of January 1, 1996, the Company sold its Australian
operations to Tech Pacific Holdings Ltd. ("Tech Pacific"). On October 4, 1996,
the Company completed the sale of substantially all of its European, Mexican
and Latin American businesses (such businesses are referred to herein as
"EML") to CHS Electronics, Inc. ("CHS"). In addition, as of March 28, 1997,
the Company completed the sale of substantially all of the assets of its
wholly owned subsidiary, Merisel FAB, Inc. ("Merisel FAB"), which operated the
ComputerLand Franchise and Datago Aggregation Business ("FAB"), to a wholly
owned subsidiary of SYNNEX Information Technologies, Inc. ("Synnex"). The
Company sold its minority interest in a corporation engaged in the
distribution of computer hardware and software products in the former Soviet
Union; the transaction is expected to close in the second quarter of 1997. As
a result of the foregoing transactions, the Company's operations are now
focused exclusively in North America.
The Company has developed and is implementing a business strategy for 1997
(the "1997 Business Strategy") that builds upon the actions taken under its
1996 Business Plan (as described below). Significantly, the 1997 Business
Strategy now focuses on profitable North American revenue growth instead of
managing for cash. Under the 1997 Business Strategy, Merisel intends to
concentrate on strengthening and building its sales infrastructure, improving
gross margins and controlling operating expenses. The Company's efforts in
buildings its sales infrastructure will focus upon selective additions to its
sales function primarily in the areas of sales management as well as
additional personnel in inside and field sales. The Company is actively
working to improve its gross margin through changes in sales compensation by
incentivizing margin performance as well as revenue growth. Further, the
Company is improving its gross margin reporting to allow for more effective
evaluation of margin related activities. At the same time the Company is
focusing on sales growth and margin improvement, procedures have been
established to control and analyze operating expenses. Most specifically, the
Company is operating the business to a comprehensive expense budget and all
nonbudgeted expenses require senior management approval. Other priorities
include continuing efforts to achieve operational excellence, addressing
financial controls and policies by emphasizing margin improvements and tight
expense control, and implementing a strategy focused on the United States and
Canada. At the same time, in order to meet its debt
ANNEX IV
A-38
<PAGE>
obligations in mid-1997, the Company is actively pursuing the Restructuring.
While the Company believes that it will be able to successfully implement its
1997 Business Strategy and the Restructuring so as to enable it to meet all of
its financial obligations, there can be no assurance that it will be able to
do so.
The 1997 Business Strategy assumes that the Company will not experience any
significant changes in payment terms to, or product availability from, its key
vendors. While management does not expect, and there has not been, any
material deterioration in such credit terms or product availability, there can
be no assurance that significant changes will not occur. Any such
deterioration in the absence of the development of alternate financing sources
could adversely impact the Company's cash flow and its future results of
operations.
SIGNIFICANT EVENTS OF 1996 AND 1997
In February 1996, the Company engaged Merrill Lynch & Co. to assist the
Company in assessing its strategic options in order to maximize stockholder
value. On March 7, 1996, Merisel sold its interest in its wholly owned
Australian subsidiary, Merisel Pty Ltd. ("Merisel Australia"), to Tech
Pacific. The sale was effective as of January 1, 1996. Under the terms of the
agreement, the Company received consideration of $9,900,000 in the form of
repayment of certain intercompany debt obligations for $8,500,000, and
$1,400,000 in non-cash asset transfers. 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. These net assets,
after the write down, totaled $9,900,000 and were classified in the December
31, 1995 consolidated balance sheet as other current assets. Prior to the
$1,900,000 charge in the fourth quarter of 1995, Merisel Australia had
reported a loss of $6,100,000 for 1995. See "Legal Proceedings."
Due to substantial losses for the fourth quarter and fiscal year ended
December 31, 1995, the Company was required in April 1996 to negotiate with
the lenders under its various financing agreements to amend such agreements
and to waive certain defaults, which amendments and waivers were obtained.
In connection with such negotiations, the Company developed and implemented
the 1996 Business Plan, that focused on maximizing cash flow by controlling
costs, curtailing non-essential capital expenditures, limiting investments and
concentrating on its more profitable areas of operations and product lines and
slowing growth in its less profitable areas of operations. The 1996 Business
Plan assumed that the Company would not return to profitability until the
fourth quarter of 1996. At the same time, the Company recognized that, in
order to meet its obligations in 1997, it needed to engage in some combination
of asset sales, refinancing of its borrowings and obtaining new sources of
financing.
Concurrently with the implementation of the 1996 Business Plan, the Company
actively explored all of its strategic options with the assistance of Merrill
Lynch & Co., including the sale of the Company. This ultimately led to the
Company's sale of EML to CHS, after attempts to sell the entire Company proved
unsuccessful. The sale was effective as of September 27, 1996. A loss of
approximately $33,455,000, which includes approximately $7,400,000 of direct
costs related to the sale, was recorded in connection with the sale. The final
sales price, computed based on the combined closing balance sheet, was
$147,631,000, consisting of (i) $110,379,000 in cash, (ii) the assumption of
the Company's European asset securitization agreement, against which
$26,252,000 was outstanding at closing, and (iii) a receivable of $11,000,000
payable in three installments of $3,000,000, $4,000,000 and $4,000,000, due at
various dates through 1997. The initial cash inflow of $110,379,000 was used
to reduce the Company's debt and improve its working capital.
In connection with the Company's sale of EML, the Company and certain of its
lenders agreed in October 1996 to amend (1) the Revolving Credit Agreement and
(2) the Senior Note Purchase Agreement to extend the final maturities of those
agreements until January 31, 1998. In connection with such amendments, the
Company was required to obtain, and did obtain, an amendment of the
Subordinated Note Purchase Agreement. In addition, such amendments required a
waiver of certain provisions of the Indenture. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
ANNEX IV
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<PAGE>
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 buyer assuming $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 the
Synnex on future purchases at a defined rate per dollar of purchases, not to
exceed $2,000,000. The purchase price is subject to adjustments based upon
Merisel FAB's March 28, 1997 balance sheet. 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 fair value.
THE INDUSTRY
The computer products distribution industry is large and growing, reflecting
both the growing use of wholesale distribution channels by manufacturers for
the distribution of their products and increasing worldwide demand for
computer products. The industry moves product from manufacturer to end-user
through a sophisticated combination of distribution agreements between
manufacturers, wholesale distributors, aggregators and resellers.
Historically, there have been two types of companies within the industry:
those that sell directly to the end-user ("resellers") and those that sell to
resellers ("wholesale distributors" and "aggregators").
Reseller customers include large corporate accounts, small and medium-sized
businesses and home users. The major reseller channels are VARs, commercial
resellers/dealers (corporate resellers and mail-order firms), and retailers
(computer superstores, office supply chains and mass merchants). VARs, which
account for one of the largest segments of the overall reseller channel,
typically add value by combining proprietary software and/or services with
off-the-shelf hardware and software.
Wholesale distributors generally purchase a wide range of products in bulk
directly from manufacturers and then ship products in smaller quantities to a
wide spectrum of resellers. Aggregators are functionally similar to wholesale
distributors, but they focus on selling relatively few product lines
(typically high-volume, brand name computer systems) to a captive network of
franchised dealers and affiliates. Aggregators typically work on a lower cost
model with a high proportion of electronic commerce and vendor flooring to
minimize working capital requirements. The larger computer manufacturers, such
as Apple, Compaq, Hewlett-Packard and IBM, have historically required
resellers to purchase their products from an affiliated aggregator. In recent
years, manufacturers have increasingly offered products through wholesale
distributors' aggregation divisions. The result of this practice is increasing
similarity between wholesale distributors and aggregators.
BUSINESS STRATEGY
The Company offers leading products and services to customers at competitive
prices. The Company provides cost-effective customer service to targeted
customer groups through its inside and field sales forces and specialized
marketing programs. In 1996, the Company continued to actively pursue sales
via "electronic commerce," which encompasses the internet and other electronic
interfaces to market products, establish accounts and take orders at typically
lower operating costs than traditional sales methods.
Providing Leading Products and Services. The Company's objective is to offer
a broad range of leading brands in each of the product categories it carries.
By stocking a broad mix of products, the Company meets the needs of resellers
who prefer to deal with a single source for many of their product needs. The
Company continually evaluates new products, the demand for current products,
and its overall product mix and seeks to develop distribution relationships
with suppliers of products that enhance the Company's product offerings. The
Company believes that the size of its reseller customer base, combined with
the breadth and quality of its marketing support programs, give Merisel a
competitive advantage over smaller, regional distributors in developing and
maintaining supplier relationships.
Customer Service and Satisfaction. The Company believes that a high level of
customer satisfaction is important to achieve and maintain success in the
highly competitive microcomputer products distribution industry. The Company
measures customer satisfaction by such standards as the customer's "ease of
doing
ANNEX IV
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<PAGE>
business," accuracy and efficiency in delivering products and expediting the
delivery of services and information. It was with these objectives in mind
that the company established its Vantage Loyalty incentive program to provide
increased services, support and better pricing to large volume customers.
Merisel constantly strives to improve its operational processes in order to
achieve increasingly high levels of customer satisfaction.
Targeting Customer Groups. The Company serves a variety of reseller
channels, which have diverse product, financing and support requirements. The
Company was among the first major wholesale distributors in the industry to
offer its various customer groups a channel-dedicated sales force as well as
customized product offerings, financing programs and marketing and technical
support programs, all of which are tailored to address the differing needs of
these customer groups. The Company intends to continue focusing on the
profitability of the markets it serves to identify customer opportunities and
develop sales and marketing programs that serve these groups more effectively.
PRODUCTS AND MANUFACTURER SERVICES
The Company distributes more than 25,000 hardware and software products for
MS-DOS, Windows NT, OS/2, Macintosh, Apple and Sun Microsystems/UNIX operating
environments. Hardware products include computer components such as servers,
printers, monitors, disk drives and other storage devices, modems and other
connectivity devices, routers, switching products, communication/networking
(local and wide area) products, plug-in boards and accessories. The Company's
software mix includes business application software for spreadsheets, word
processing programs, desktop publishing and graphics packages, educational
software and games, as well as a broad offering of operating systems,
including local area networks, advanced language and utility products.
In fiscal 1996 for the Company's ongoing U.S. and Canadian distribution
businesses, net sales of hardware and accessories accounted for approximately
75% of sales, while software product sales accounted for the remaining 25% of
sales.
The Company has established and developed long-term business relationships
with many of the leading manufacturers in the computer industry. The Company's
suppliers include American Power Conversion, Apple, AST, Compaq, Creative
Labs, Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard, IBM/Lotus,
Intel, Kingston Technology, Microsoft, NEC, Novell, Okidata, Sony, Sun
Microsystems, Symantec, Texas Instruments, 3Com/U.S. Robotics and Toshiba. The
Company is one of only three distributors in the United States authorized to
sell Sun Microsystems products.
The Company provides its manufacturers with access to one of the largest
bases of computer resellers in North America, as well as the means to reduce
inventory, credit, marketing, and overhead costs typically associated with
maintaining direct reseller relationships. Through its product marketing
group, the Company develops and implements promotional programs for specific
manufacturers to increase customer purchasing depth and breadth. Promotional
programs include bundle offers, growth goal incentives, reseller training
events, as well as channel communication vehicles such as target direct mail,
fax and advertising.
The Company offers one of the industry's largest reseller forums,
Softeach(TM), a two-day seminar series in which more than 50 manufacturers
host training seminars on product usage. In 1996, the Company offered
Softeach(TM) seminars in 12 cities in the United States and Canada. More than
7,000 resellers enrolled for Softeach(TM) seminars in 1995 and 1996. The
Company's educational services division, in conjunction with third-party
consultants, also conducts training and certification classes on a fee basis
for resellers of certain Digital Equipment, Lotus, Microsoft, Novell, Santa
Cruz Operation, Sun and 3Com products.
The Company enters into written distribution agreements with the
manufacturers of the products it distributes. As is customary in the industry,
these agreements usually provide non-exclusive distribution rights and often
contain territorial restrictions that limit the countries in which Merisel is
permitted to distribute the products. The agreements generally provide the
Company with stock balancing and price protection provisions
ANNEX IV
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<PAGE>
which partially reduce the Company's risk of loss due to slow-moving
inventory, supplier price reductions, product updates or obsolescence. The
Company's agreements which generally have a term of at least one year, may
contain minimum purchase amounts and often contain provisions permitting
earlier termination by either party upon written notice.
Although the Company regularly stocks products and accessories supplied by
more than 500 manufacturers, 60% of the Company's net sales in 1996 (as
compared to 63% in 1995 and 56% in 1994) were derived from products supplied
by Merisel's 10 largest manufacturers, with the sale of products manufactured
by Hewlett-Packard, Microsoft and Compaq accounting for approximately 9%, 14%
and 10%, respectively, of net sales in 1996 (as compared to 16%, 14% and 11%
respectively in 1995, and 12%, 12% and 11%, respectively, in 1994). Because
reseller customers often prefer to deal with a single source for many of their
product needs, the loss of the ability to distribute a particularly popular
product could result in losses of sales unrelated to that product. The loss of
a direct relationship between the Company and any of its key suppliers could
have an adverse impact on the Company's business and financial results.
In the course of its business, the Company reconciles its accounts payable
balances to statements provided by its vendors. During the fourth quarter of
1995 and the first three quarters of 1996, the Company incurred charges
resulting from adjustments to trade accounts payable balances. These charges
were related to adjustments for price protection, returns to vendors by the
Company and inventory receipt-related issues, such as short-shipments
identified through the reconciliation process. In order to minimize further
supplier account reconciliation losses, the Company began implementing
processes and procedures to address current system deficiencies and engaged
the assistance of outside consultants. By the end of 1996, substantial
progress was made in the implementation of these processes and procedures, and
the Company believes that it is adequately reserved.
CUSTOMERS AND CUSTOMER SERVICES
In 1996, the Company sold products and services to more than 45,000 computer
resellers worldwide. the Company's smaller customers often do not have the
resources to establish a large number of direct purchasing relationships or
stock significant product inventories, nor can they meet minimum purchase
requirements or obtain acceptable credit. Consequently, they tend to purchase
a high percentage of their products from distributors such as the Company,
which can meet their inventory needs quickly and efficiently. Larger resellers
often establish direct relationships with manufacturers for their more popular
products but utilize distributors for slower-moving products and for fill-in
orders of fast-moving products which may not be available on a timely basis
from manufacturers. No single customer accounted for more than 4% of the
Company's net sales in 1994, 1995 or 1996.
Single Source Provider. The Company offers computer resellers a single
source for more than 25,000 competitively priced hardware and software
products. By purchasing from the Company, the reseller only needs to comply
with a single set of ordering, billing and product return procedures and may
also benefit from attractive volume pricing and third-party financing
programs. In addition, certain resellers are allowed, within specified time
limits, and/or specified volume limits, to return slow-moving products from
one manufacturer in exchange for more popular products from other
manufacturers.
Prompt Delivery. In the United States and Canada, orders received by 5:00
p.m. local time are typically shipped the same day, provided the required
inventory is in stock. The Company maintains sufficient inventory levels in
the United States to fill consistently in excess of 95% of all units ordered
on the day of receipt. As part of a continuing effort to improve accuracy, the
Company's Information and Logistical Efficiency System (MILES) was first
installed in the Company's Atlanta warehouse in early 1994. In 1996,
installation of this custom computerized warehouse management system was
completed in all nine of the Company's North American warehouses. The
successful implementation of MILES has resulted in significant improvements in
shipping accuracy rates. The Company believes that its inventory and shipping
accuracy rates are among the highest in the industry.
ANNEX IV
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<PAGE>
The Company typically delivers products from its regional warehouses via
FedEx, United Parcel Service and other common carriers. Most customers in the
United States receive orders within one or two working days of shipment. The
Company also provides customer-paid overnight air handling upon request. These
services allow resellers to minimize inventory investment and serve their
customers responsively. For larger customers in the United States, the Company
also provides a fulfillment service to ship orders directly to resellers'
customers to speed delivery and further minimize reseller inventories.
Financing Programs. The Company's credit policy for qualified resellers
eliminates the need for them to establish multiple credit relationships with a
large number of manufacturers. In addition, the Company arranges floor plan,
credit card and lease financing through a number of credit institutions and
offers a program for credit card purchases by qualified customers. To allow
certain resellers to purchase larger orders in the United States, the Company
offers to arrange alternative financing such as escrow programs and special
bid financing.
Customer Support. The Company offers a number of customer loyalty programs,
which provide incentives to resellers to aggregate their purchases through the
Company. Through its customer information services group, the Company
furnishes its computer resellers with a series of publications containing
detailed information on products, pricing, promotions and developments in the
industry. The Company publishes a Merisel Product Catalog, as well as a
monthly Promo Pak and VARfile publication. The Company also publishes the Hot
List(R), which ranks the Company's current best-selling hardware and software
products in four different reseller channels. In addition, the Company's On-
Line Literature Library offers more than 40,000 data sheets of product
information literature via a fax-back system and CD-ROM. Information is also
provided electronically through the Company's Web site (www.merisel.com) and
proprietary SELline(R) Electronic Service.
The Company provides training and product information to its reseller
customers through its well-respected Softeach(TM) program, a series of
manufacturer hosted training forums. See "Products and Manufacturer Services."
The Company also provides computer resellers with pre-sale technical support
for virtually all product lines. In addition, the Company's technical support
services department provides pre-and post-sale technical support to the
Company's customers, as well as regular product training seminars to the
Company's sales representatives.
SALES AND MARKETING
During 1996, the Company's sales department for its core distribution
business in the United States was organized into four sales divisions to serve
the VAR, retail, commercial reseller/dealer and Sun Microsystems reseller
market segments. The VAR division offers specialized services and technical
products to value-added resellers, system integrators and OEMs who offer
service, support and consulting to clients in addition to selling computer
products. The Company's MOCA(TM) division is a division dedicated primarily to
selling and supporting Sun Microsystems and products through its own sales,
marketing, operations and technical support departments. The retail division
primarily services mass merchants and computer chain stores, while the
commercial reseller/dealer division offers direct fulfillment services,
electronic data interchange (EDI) transaction support and dedicated field and
inside support to large-volume national accounts. Additionally, the Company's
value-added services department offers telemarketing, educational and
merchandising services to resellers and retailers.
The Company's sales department for its distribution business in Canada was
also structured in 1996 to reflect VAR, retail, dealer and national
account/commercial customer segments. The sales organization was enhanced
through the addition of six national sales directors to reflect market needs,
and a new regional sales office was opened in Halifax, Nova Scotia.
Additionally, in February 1997, the Company launched its MOCA(TM) division in
Canada.
The Company's sales force is composed of field sales representatives who
manage relations with the larger accounts and inside telemarketing sales
representatives who receive product orders and answer customer inquiries. When
a customer calls the Company, screen synchronization technology automatically
causes a sales
ANNEX IV
A-43
<PAGE>
profile to appear on the sales representative's computer screen. Customer
orders generally are placed via a toll-free telephone call to the Company's
inside sales representatives and, in the United States, are entered on the
Company's SalesNet for Windows order entry system, a proprietary local area
network created by the Company to speed the process of taking and processing
orders. Using the SalesNet for Windows database, sales representatives can
immediately enter customer orders, obtain descriptive information regarding
products, check inventory status, determine customer credit availability and
obtain special pricing and promotion information.
In 1993, the Company introduced its Vantage Loyalty incentive program to
provide increased services, support and better pricing to larger volume
customers. The Vantage program was enhanced in late 1996 with the launch of
the "Vantage Visa" card as a frequent buyer program to reward resellers for
more frequent and higher volume purchases. The Vantage Visa program offers
unique promotional and bundling opportunities to resellers.
In line with its strategy of making the Company the easiest distributor with
which to do business, the Company is continuing to expand its participation in
"electronic commerce" and the "electronic marketplace," which represents
growing sales opportunities in the computer products distribution industry.
Electronic commerce is the overall term applied to the development and
maintenance of business-to-business relationships via such electronic services
as EDI, on-line systems, electronic mail, and Internet Web sites. Electronic
commerce can simplify account set up, ordering, shipping, and support and
thereby facilitate sales while it decreases both selling and purchasing costs.
Electronic commerce is likely to become a significant factor as the computer
products distribution industry evolves.
The Company began to actively promote its electronic commerce offering with
the introduction of SELline in 1994. This system was the industry's first
graphical user interface (GUI) application to allow customers to access
specific, customized information directly from various databases owned and
maintained by the Company. This includes access to real-time pricing, credit,
product descriptions, and availability information. The Company also utilizes
EDI systems to allow large volume customers to communicate with the Company's
mainframe computer system directly for order processing and account data.
SELline usage increased with the 1996 introduction of "@Merisel," the
Company's first World Wide Web site that allows customers internet access to
key technical information and hyperlink access to more than 400 manufacturer
internet sites from one location. In November 1996, the Web site enabled the
Company to introduce the distribution industry's first national web-based
order-entry system that features a SELline interface for 24-hour, secure order
processing. The site facilitates new customer enrollment and currently serves
more than 21,000 reseller enrollees.
CONFIGURATION
Configuration involves the assembly of computer products from multiple
vendors into a single unit or system. While at one time configuration was a
very minor aspect of a wholesale distributor's business, it has become a major
initiative as manufacturers outsource this segment of production to wholesale
distributors.
In 1996, the Company conducted its configuration business by outsourcing to
two third-party providers, the Cerplex Group, Inc. and Vanstar Corporation.
The Company intends to implement an internal configuration operation during
the latter part of fiscal year 1997.
OPERATIONS, DISTRIBUTION AND INVESTMENT IN SYSTEMS
Locations. At December 31, 1996, the Company operated nine distribution
centers throughout North America: seven in the United States and two in
Canada. All of these distribution centers are leased.
Systems. The Company 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
ANNEX IV
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<PAGE>
of the Company's nine North American warehouses now utilize the MILES
computerized warehouse management system, which uses infrared bar coding and
advanced computer hardware and software to improve shipping, receiving and
picking accuracy rates.
The Company 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 began
designing the new system in 1993 and 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. In the early implementation stages, the Canadian
conversion produced results below the Company's expectations. These results
added to the Company's fourth quarter 1995 net operating loss. This system is
now fully implemented in Canada and is performing to expectations.
The Company plans to convert its United States operations to the SAP system
in the future. The design and implementation of these new systems are complex
projects and involve certain risks. As a result, the United States system
implementation will be delayed beyond 1997. Until such implementation, the
Company will continue to modify its existing United States systems and may
experience difficulty in processing transactions, which could adversely affect
operating income and cash flows.
DISPOSED OPERATIONS
International Operations. The Company formed its first international
subsidiary in 1982 and began 1996 with International operations as a leading
distributor of computer hardware and software products in Australia, Austria,
Canada, France, Germany, Holland, Latin America, Mexico, Switzerland and the
United Kingdom. Effective January 1, 1996, the Company sold its operations in
Australia. In September 1996, the Company sold certain assets and businesses
that included its operations in all of its remaining foreign locations with
the exception of Canada. In addition, the Company is in the process of selling
its minority stock interest in a corporation engaged in the distribution of
computer hardware and software products in the former Soviet Union; the
transaction is expected to close in the second quarter of fiscal 1997. As a
result, the Company's operations are now focused exclusively in North America.
For more information concerning the divestiture of foreign businesses, see
Note 5, Dispositions, in the Notes to Consolidated Financial Statements.
Because the Company conducted business in a number of countries, that
portion of operating results and cash flows that is non-United States dollar
denominated is subject to certain currency fluctuations. The Company generally
employs forward exchange contracts to limit the impact of fluctuations in the
relative values of some of the currencies in which it does business. In 1995,
the Company incurred foreign currency losses due primarily to declines in
values of the Mexican Peso and other foreign currencies against the United
States dollar. In 1996, the net impact of foreign currency transactions for
the year was insignificant.
Domestic Operations. In March 1997, the Company sold substantially all of
the assets of Merisel FAB, to Synnex. Merisel FAB operated the Company's
Franchise and Aggregation business. The sale of this business marks the
Company's return to a primary focus on computer hardware and software
distribution, which has been its core business.
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 the Company's competitors have substantially greater financial
resources than the Company. The Company'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 franchisors.
ANNEX IV
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<PAGE>
The Company also competes with manufacturers that sell directly to computer
resellers, sometimes at prices below those charged by the Company 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.
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) 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 qualities of
the computer products 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. This is primarily
due to buying patterns of Canadian Government Agencies. See "Liquidity and
Capital Resources."
EMPLOYEES
As of December 31, 1996, the Company had approximately 2,000 employees. The
Company believes it has good relations with its employees and currently has no
collective bargaining agreements in place.
ENVIRONMENTAL COMPLIANCE
The Company believes that it is in substantial compliance with all
environmental laws applicable to it and its operations.
PROPERTIES
At December 31, 1996, the Company maintained distribution centers in seven
locations throughout the United States and in two locations in strategic areas
of Canada. All of the Company's distribution centers are leased. Additionally
the Company maintains United States administrative and sales offices in El
Segundo, California; Marlborough, Massachusetts; and Cary, North Carolina; as
well as Canadian administrative and sales offices in Toronto, Ontario;
Montreal, Quebec; Vancouver, British Columbia; and Halifax, Nova Scotia.
The Company's headquarters are located in El Segundo, California, where the
Company owns a 112,500 square-foot facility and leases another 50,700 square-
foot facility. Merisel also maintains sales offices throughout the United
States and Canada. In addition, the Company owns undeveloped land in Cary,
North Carolina of which a substantial portion it intends to sell. The Company
believes that its facilities provide sufficient space for its present needs,
and that additional suitable space will be available on reasonable terms, if
needed.
LEGAL PROCEEDINGS
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to
ANNEX IV
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<PAGE>
represent a class of all persons who purchased Old 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 Old 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
Exchange Act 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. Plaintiffs
filed a notice of appeal of the District Court's decision on April 26, 1995.
The Ninth Circuit heard oral arguments on June 4, 1996. As of the date of this
report there has been no decision from the Ninth Circuit.
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 the Company; 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 Australia, Merisel's Australian
subsidiary, for a purchase price of $9.9 million 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.
The plaintiffs seek to recover specified damages exceeding $8 million as well
as unspecified damages plus interest and costs and expenses associated with
the claim. The Company intends to defend itself vigorously against this 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.
Both the securities class action claims and the Tech Pacific claims are
included in Class 5, general unsecured claims, in the Prepackaged Plan, and
would be left unimpaired if the Plan were confirmed. Thus, the filing of the
Prepackaged Restructuring would have no effect on the claims, if either is
ultimately determined to be a liability of the Company.
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.
The filing of the Prepackaged Plan could have an adverse impact on certain
aspects of the business of the Company as described above. See "RISK FACTORS."
ANNEX IV
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<PAGE>
TENDERING AND VOTING PROCEDURES
THE RESTRUCTURING
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company is offering in the
Exchange Offer to issue to each Noteholder 192.5 shares (adjusted to reflect
the one-for-five reverse stock split described herein) of New Common Stock,
for each $1,000 principal amount of 12.5% Notes (together with all accrued and
unpaid interest) which is validly tendered and not withdrawn (as described
below) prior to the Expiration Date. Nominees or other record holders of 12.5%
Notes that hold for more than one beneficial owner will be entitled to make
elections that reflect the elections of each of the beneficial holders for
whom they exchange 12.5% Notes. The Company is also soliciting from the
holders of 12.5% Notes acceptances of the Prepackaged Plan, under which the
12.5% Notes would be exchanged for the same consideration offered in the
Exchange Offer. Instructions for voting on the Prepackaged Plan are contained
in the Disclosure Statement and in the instructions attached to the Ballots
and Master Ballots. See "VOTING PROCEDURES AND REQUIREMENTS" in the Disclosure
Statement.
This Prospectus and the Letter of Transmittal are first being mailed to
registered Noteholders on or about August 1, 1997.
GENERAL
As of March 31, 1997, there were outstanding $125 million aggregate
principal amount of 12.5% Notes (plus accrued but unpaid interest thereon of
approximately $3.9 million).
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange, and to have exchanged, validly tendered 12.5% Notes in
the Exchange Offer when, as and if the Company has given oral or written
notice thereof to the Depositary. The Depositary will act as agent for the
tendering Noteholders for the purposes of receiving New Common Stock from the
Company and transmitting such New Common Stock to tendering Noteholders.
The New Common Stock will be delivered in exchange for 12.5% Notes accepted
in the Exchange Offer promptly after acceptance on the Expiration Date or, in
the event of confirmation of the Prepackaged Plan, promptly after the
Effective Date as described in the Prepackaged Plan. The Company's obligation
to accept 12.5% Notes for exchange in the Exchange Offer is subject to the
satisfaction of the conditions set forth below under "Conditions." The Company
reserves the right, in its sole discretion, to waive any or all of the
conditions to the Exchange Offer or amend the terms of the Exchange Offer but
does not currently intend to waive any condition or amend any of the terms of
the Exchange Offer. The Exchange Offer is subject to extension of the time
period during which it is open. See "Expiration Date; Extensions; Amendments"
below.
New Common Stock will be rounded up or down to the nearest whole number in
the Prepackaged Restructuring, but not in the Exchange Restructuring. In lieu
of issuing any fractional shares of New Common Stock in the Exchange
Restructuring, fractional interests in New Common Stock will be aggregated and
sold by the Company, with the proceeds to be distributed to the holders in
proportion to the amount of fractional shares of New Common Stock such holders
would otherwise be entitled to receive.
Noteholders who receive New Common Stock pursuant to the Exchange
Restructuring will not be required to pay brokerage commissions or fees to the
Company or, subject to the instructions in the Letter of Transmittal, transfer
taxes with respect to the receipt of New Common Stock pursuant to the Exchange
Restructuring. The Company will pay all charges and expenses, other than
certain applicable taxes, in connection with the Exchange Restructuring.
INTEREST ON 12.5% NOTES
Exchange Offer consideration will be paid in respect of each $1,000
principal amount of 12.5% Notes, together with all accrued and unpaid
interest, tendered and accepted for exchange. By tendering 12.5% Notes, a
Noteholder waives all rights to receive any payments with respect to accrued
but unpaid interest on such 12.5%
ANNEX IV
A-48
<PAGE>
Notes other than the New Common Stock to be issued pursuant to the Exchange
Offer. The Company has paid interest on the 12.5% Notes through December 31,
1996. Assuming the Exchange Restructuring is consummated on July 31, 1997,
additional interest will have accrued in the amount of $72.92 per $1,000
principal amount of 12.5% Notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
With respect to the Exchange Offer and the solicitation of acceptance of the
Prepackaged Plan, the term "Expiration Date" shall mean 5:00 p.m., New York
City time, on August 29, 1997, unless the Company, in its sole discretion,
extends the Exchange Offer or solicitation period, in which case the term
"Expiration Date" for such Exchange Offer or solicitation period shall mean
the last time and date to which the Exchange Offer or solicitation period is
extended.
The Company expressly reserves the right, at any time or from time to time,
to extend the period during which the Exchange Offer is open. In order to
extend the Expiration Date, the Company will notify the Depositary of any
extension by oral or written notice and will make a public announcement
thereof, the announcement to be issued no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
Such announcement may state that the Company is extending the Exchange Offer
for a specified period or on a daily basis.
The Company also expressly reserves the right to (a) delay accepting any
12.5% Notes, to extend the Exchange Offer and the solicitation period for
acceptances of the Prepackaged Plan or to terminate the Exchange Offer and the
solicitation period for acceptances of the Prepackaged Plan and not accept
12.5% Notes not previously accepted, if any of the conditions set forth herein
under "Conditions" shall not have been satisfied or validly waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Depositary or (b) amend, at any time or from time to time,
the terms of the Exchange Offer and the Prepackaged Plan in any respect. The
Company also expressly reserves the right to terminate the Exchange Offer at
any time as described herein under "Conditions." Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as
practicable by public announcement thereof. If the terms of the Exchange Offer
or the Prepackaged Plan are amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the affected Noteholders
of such amendment and the Company will extend the Exchange Offer or the
solicitation period for acceptances of the Prepackaged Plan for a period which
the Company in its discretion deems appropriate, depending upon the
significance of the amendment and the manner of disclosure to Noteholders, if
the Exchange Offer or the solicitation period for acceptances of the
Prepackaged Plan would otherwise expire during such period. Any such extension
shall, in the case of the Exchange Offer and, prior to the filing of the
Prepackaged Plan, in the case of the Prepackaged Plan, be in compliance with
any applicable rules and regulations of the Commission.
Without limiting the manner in which the Company may choose to make a public
announcement of any extension, amendment or termination of the Exchange Offer
or the solicitation period for acceptances of the Prepackaged Plan, the
Company shall have no obligation, unless otherwise required by law, to
publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to the Dow Jones News Service.
HOW TO TENDER IN THE EXCHANGE OFFER
To tender 12.5% Notes pursuant to the Exchange Offer, a properly completed
and duly executed Letter of Transmittal (or a manually signed facsimile
thereof) or an Agent's Message (as defined herein) in the case of a book-entry
transfer of 12.5% Notes, together with any signature guarantees and any other
documents required by the Instructions to the Letter of Transmittal, must be
received by the Depositary at one of its addresses set forth on the back cover
page of this Prospectus prior to the Expiration Date and either (i)
certificates representing
ANNEX IV
A-49
<PAGE>
such 12.5% Notes must be received by the Depositary at one of its addresses or
(ii) such 12.5% Notes must be transferred pursuant to the procedures for book-
entry transfer set forth below and the book-entry transfer of such 12.5% Notes
into the Depositary's account at a Book-Entry Transfer Facility must be
confirmed, in each case, prior to the Expiration Date. LETTERS OF TRANSMITTAL
AND ANY 12.5% NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER SHOULD BE SENT
ONLY TO THE DEPOSITARY, NOT TO THE COMPANY, THE TRUSTEE, THE INFORMATION AGENT
OR THE FINANCIAL ADVISOR.
ONLY REGISTERED NOTEHOLDERS, OR PERSONS WHO HAVE OBTAINED A PROPERLY
COMPLETED BOND POWER FROM THE REGISTERED NOTEHOLDERS THEREOF, MAY TENDER IN
THE EXCHANGE OFFER. Any beneficial holder whose 12.5% Notes are registered in
the name of his broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender 12.5% Notes should contact such registered
Noteholder and instruct such registered Noteholder to tender 12.5% Notes on
his behalf. If such beneficial holder wishes to tender 12.5% Notes on his own
behalf, such beneficial holder must, prior to completing and executing the
Letter of Transmittal and delivering his 12.5% Notes, either make appropriate
arrangements to register ownership of the 12.5% Notes in such beneficial
holder's name or obtain a properly completed bond power from the Noteholder.
The transfer of record ownership of 12.5% Notes may take considerable time
and, depending on when such transfer is requested, may not be accomplished
prior to the Expiration Date.
The Depositary and The Depository Trust Company's ("DTC") have confirmed
that the Exchange Offer is eligible to ATOP. Accordingly, DTC participants may
electronically transmit their acceptance of the Exchange Offer by causing DTC
to transfer 12.5% Notes to the Depositary in accordance with DTC's ATOP
procedures for transfer. DTC will then send an Agent's Message to the
Depositary.
The term "Agent's Message" means a message transmitted by DTC, received by
the Depositary and forming part of the confirmation of book-entry transfer,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering 12.5% Notes which are the subject of such
confirmation of book-entry transfer that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
TENDERS--ADDITIONAL INFORMATION
The tender by a Noteholder pursuant to one of the procedures set forth
herein will constitute an agreement between such Noteholder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
The method of delivery of 12.5% Notes, the Letter of Transmittal and all
other required documents to be delivered to the Depositary, including delivery
through a Book-Entry Transfer Facility and any acceptance or Agent's Message
transmitted through ATOP, is at the election and risk of each Noteholder.
Except as otherwise provided herein, such delivery will be deemed made only
when actually received by the Depositary. If such delivery is by mail,
registered mail, with return receipt requested, properly insured, is
recommended, and sufficient time should be allowed to assure timely delivery.
No documents should be sent to the Company, the financial advisor, the
Information Agent, the Trustee or the transfer agent for the New Common Stock.
The Depositary will establish accounts with respect to the 12.5% Notes
within two business days after the date of this Prospectus at DTC and the
Philadelphia Depository Trust Company ("Philadep," and together with DTC,
collectively referred to as the "Book-Entry Transfer Facilities") for the
purpose of the Exchange Offer. Any financial institution that is a participant
in any of the Book-Entry Transfer Facilities' systems may make book entry
delivery of the 12.5% Notes by causing DTC or Philadep to transfer such 12.5%
Notes into the Depositary's account in accordance with such Book-Entry
Transfer Facility's procedure for such transfer. Although delivery of 12.5%
Notes may be effected through book entry transfer in the Depositary's account
at DTC or Philadep, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, or an Agent's
Message, must in any case, be transmitted to and received or confirmed
ANNEX IV
A-50
<PAGE>
by the Depositary at one of its addresses set forth on the back cover of this
Prospectus prior to the Expiration Date. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY
TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE
DELIVERY TO THE DEPOSITARY.
Signatures on each Letter of Transmittal must be guaranteed by an Eligible
Institution (as defined herein) unless the 12.5% Notes delivered pursuant
thereto are delivered (a) by a Noteholder (or a participant in one of the
Book-Entry Transfer Facilities whose name appears on a security position
listing as the owner of 12.5% Notes) who has not completed the boxes on the
Letter of Transmittal entitled "Special Issuance Instructions" or "Special
Delivery Instructions" or (b) for the account of an Eligible Institution. An
"Eligible Institution" means a participant in the Security Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program. If the 12.5% Notes are registered in the
name of a person other than the signer of the Letter of Transmittal, then the
signatures on the Letters of Transmittal accompanying the tendered 12.5% Notes
must be guaranteed by an Eligible Institution as described above. See
Instructions to the Letter of Transmittal.
If the Letter of Transmittal with respect to any 12.5% Notes is signed by a
person other than the Noteholder of any certificate(s) listed thereon, such
certificate(s) must be endorsed or accompanied by appropriate bond powers
signed exactly as the name or names of the Noteholder or Noteholders appear on
the certificate(s) with the signature(s) on the 12.5% Notes or instruments of
transfer guaranteed as provided herein. If the exchanging holder is not the
registered holder of the 12.5% Notes, then the registered holder must also
sign a valid proxy in favor of the exchanging holder. If the Letter of
Transmittal, or any certificates, bond powers, stock powers or proxies are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
Tenders of 12.5% Notes for exchange may be made only in principal amounts of
$1,000 and integral multiples thereof.
If a Noteholder desires to tender 12.5% Notes, but the certificates
evidencing such 12.5% Notes have been mutilated, lost, stolen or destroyed,
such Noteholder should contact The Bank of New York to receive information
about the procedures for obtaining replacement certificates for 12.5% Notes at
one of its addresses or telephone numbers set forth on the back cover of this
Prospectus.
Notwithstanding any other provision hereof, payment for 12.5% Notes tendered
and accepted for exchange pursuant to the Exchange Offer will, in all cases,
be made only after timely receipt by the Depositary of such 12.5% Notes (or
confirmation of a book-entry transfer of such 12.5% Notes into the
Depositary's account at a Book-Entry Transfer Facility as described above) and
a Letter of Transmittal (or facsimile thereof) with respect to such 12.5%
Notes, properly completed and duly executed, with any required signature
guarantees and any other documents required by the Letter of Transmittal, or
an Agent's Message in the case of a book-entry transfer of the 12.5% Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered 12.5% Notes will
be resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders and
withdrawals of 12.5% Notes that are not in proper form or the acceptance of
which would, in the opinion of the Company or counsel for the Company, be
unlawful. The Company also reserves the absolute right, in its sole
discretion, to waive any defect or irregularity in any tender as to particular
12.5% Notes, whether or not similar defects or irregularities are waived in
the case of other 12.5% Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding. Unless waived, any irregularities in
connection with tenders and withdrawals of 12.5% Notes must be cured within
such time as the Company shall determine. None of the Company, the Depositary,
the Trustee or any other person shall be under any duty to give notification
of defects in such tenders, withdrawals, deliveries or revocations or shall
incur
ANNEX IV
A-51
<PAGE>
any liability for failure to give such notification. Tenders and withdrawals
of 12.5% Notes will not be deemed to have been made until such irregularities
have been cured or waived. Any 12.5% Notes received by the Depositary that are
not properly tendered or delivered and as to which the irregularities have not
been cured or waived will be returned by the Depositary to the tendering
Noteholders unless otherwise provided in the Letter of Transmittal as soon as
practicable following the Expiration Date.
THERE IS NO PROCEDURE FOR TENDERING BY GUARANTEED DELIVERY. TENDERS BY
GUARANTEED DELIVERY WILL NOT BE ACCEPTED.
WITHDRAWAL OF TENDERS AND REVOCATION OF VOTES
Tenders of 12.5% Notes may be withdrawn, subject to the procedures described
herein, at any time before they are accepted for exchange by the Company. The
Company shall be deemed to have accepted for exchange, and to have exchanged,
validly tendered 12.5% Notes in the Exchange Offer when, as and if the Company
has given oral or written notice thereof to the Depositary.
Any Noteholder who has tendered 12.5% Notes, or who succeeds to the record
ownership of 12.5% Notes in respect of which such tenders have previously been
given, may withdraw such 12.5% Notes by delivery of a written notice of
withdrawal or revocation. To be effective, a written, telegraphic or facsimile
transmission notice of withdrawal or revocation of a tender must (a) be timely
received by the Depositary at one of its addresses specified on the back cover
of this Prospectus, before such 12.5% Notes are accepted for exchange by the
Company, (b) specify the name of the person who tendered the 12.5% Notes to be
withdrawn, (c) contain the description of the 12.5% Notes to be withdrawn, the
certificate numbers shown on the particular certificates evidencing such 12.5%
Notes (unless the 12.5% Notes were tendered by book-entry transfer) and the
aggregate principal amount represented by such 12.5% Notes and (d) be signed
by such Noteholder in the same manner as the original signature on the Letter
of Transmittal (including any required signature guarantees), or be
accompanied by documents of transfer sufficient to have the Trustee register
the transfer of such 12.5% Notes into the name of the person withdrawing 12.5%
Notes. The signature(s) on the notice of withdrawal must be guaranteed by an
Eligible Institution unless such 12.5% Notes have been tendered (a) by a
registered Noteholder who has not completed the boxes on the Letter of
Transmittal entitled "Special Issuance Instructions" or "Special Delivery
Instructions" or (b) for the account of an Eligible Institution. If the 12.5%
Notes to be withdrawn have been delivered or otherwise identified to the
Depositary, a properly completed and signed notice of withdrawal shall be
effective immediately upon receipt thereof even if physical release is not yet
effected. A withdrawal of 12.5% Notes can only be accomplished in accordance
with the foregoing procedures.
Any 12.5% Notes which have been tendered for exchange but which are not
exchanged will be returned to the Noteholder without cost to such Noteholder
as soon as practicable following the Expiration Date. Properly withdrawn 12.5%
Notes may be retendered at any time prior to the Expiration Date by following
one of the procedures described under "How to Tender in the Exchange Offer."
Votes on the Prepackaged Plan may be revoked, subject to the procedures
described in the Disclosure Statement at any time prior to the earlier of (i)
the Filing Date and (ii) the Expiration Date. If a bankruptcy case has been
commenced, revocations of such votes thereafter may be effected only with the
approval of the appropriate bankruptcy court. See "VOTING PROCEDURES AND
REQUIREMENTS" in the Disclosure Statement.
CONDITIONS
The obligation of the Company to accept for exchange any 12.5% Notes validly
tendered pursuant to the Exchange Offer is subject to the satisfaction of the
following conditions:
(1) the Minimum Tender Condition (requiring 100 percent of the aggregate
principal amount of the 12.5% Notes being validly tendered and not
withdrawn prior to the Expiration Date); and
ANNEX IV
A-52
<PAGE>
(2) the approval by the Company's stockholders of the Charter Amendment.
In addition, notwithstanding any other provisions of the Exchange Offer and
without prejudice to the Company's other rights under the Exchange Offer, the
Company, in its sole discretion, may amend, extend or terminate the Exchange
Offer, or may delay or refrain from accepting for exchange or exchanging any
12.5% Notes subject to the Exchange Offer, in each event subject to Rule 14e-
1(c) under the Exchange Act, if, at any time prior to the Expiration Date, any
of the following shall occur:
(a) there shall be threatened, instituted, or pending any action,
proceeding, application, claim or counterclaim before any court or
governmental regulatory or administrative agency, authority or tribunal,
domestic or foreign, which in the sole judgment of the Company (i)
challenges or makes or seeks to make illegal the acceptance for exchange,
or exchange of, any of the 12.5% Notes pursuant to the Exchange Offer, (ii)
could result in a delay in the ability of the Company to accept for
exchange or exchange some or all of the 12.5% Notes, (iii) imposes or seeks
to impose limitations on the ability of the Company to acquire, hold or
exercise full rights of ownership of the 12.5% Notes or (iv) may prohibit,
restrict or delay consummation of, or otherwise have a material adverse
effect on the contemplated benefits to the Company of, the Exchange Offer
or the Exchange Restructuring;
(b) any change (or any condition, event or development involving a
prospective change) shall have occurred or be threatened in the general
economic, financial, currency exchange or market conditions in the United
States or abroad that, in the sole judgment of the Company, has or may have
a material adverse effect upon (i) the market prices of the 12.5% Notes,
(ii) the trading in the 12.5% Notes or (iii) the value of the 12.5% Notes
to the Company;
(c) a general deterioration in the prices of equity or debt (including
high-yield debt) securities in the United States from levels prevailing at
the date hereof shall have occurred which, in the sole judgment of the
Company, may have a material adverse effect on the contemplated benefits
of, or otherwise may make it inadvisable for the Company to proceed with,
the Exchange Offer;
(d) (i) any general suspension of or limitation on times for trading in,
or limitation on prices for, securities on the New York Stock Exchange, the
Nasdaq Stock Market, the American Stock Exchange or in the over-the-counter
market, (ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation
(whether or not mandatory) by any federal, state or foreign governmental
authority on, or any other event which might affect, the extension of
credit by banks or other financial institutions, (iii) a commencement of a
war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, (iv) a material adverse change
(or development or threatened development including a prospective material
adverse change) in United States or any other currency exchange rates or a
suspension of or limitation on the markets therefor or (v) in the case of
any of the foregoing existing at the date hereof, a material acceleration
or worsening thereof;
(e) any statute, order, rule or regulation shall have been proposed or
enacted or deemed applicable, or any action shall have been taken by any
governmental authority, that would or might prohibit, restrict or delay
consummation of the Exchange Restructuring or, in the sole judgment of the
Company, materially affect the contemplated benefits to the Company of the
Exchange Restructuring;
(f) there exists, in the sole judgment of the Company, any other actual
or threatened legal impediment (including a default under an agreement,
indenture (including the 12.5% Note Indenture) or other instrument or
obligation to which the Company is a party, or by which it is bound) to the
acceptance for exchange, or exchange of, any of the 12.5% Notes pursuant to
the Exchange Offer;
(g) a preliminary or permanent injunction or other order by any court or
governmental agency shall have been issued and remain in effect which
restrains or prohibits the consummation of any component of the Exchange
Restructuring; or
(h) any change shall occur or be threatened in the business, assets,
properties, liabilities, condition (financial or other), income, results of
operations or prospects of the Company or any of its Subsidiaries, which,
in the sole judgment of the Company, is or may be material to the Company.
ANNEX IV
A-53
<PAGE>
The conditions (a) through (h) set forth above are for the sole benefit of
the Company. Each such condition may be asserted by the Company regardless of
the circumstances, including any action or inaction by the Company giving rise
thereto, and each may be waived by the Company with respect to the 12.5% Notes
subject to the Exchange Offer in whole or in part at any time, and from time
to time, in its sole discretion.
If any of the conditions set forth herein is not satisfied, the Company may
(a) refuse to accept any 12.5% Notes and return all tendered 12.5% Notes to
tendering Noteholders, (b) extend the Exchange Offer and retain all 12.5%
Notes previously tendered or (c) waive or modify any of such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
12.5% Notes. If such waiver constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver in a manner reasonably
calculated to inform Noteholders of such waiver, and the Company will extend
the Exchange Offer for a period which the Company in its discretion deems
appropriate, subject to any applicable laws, depending on the significance of
the waiver or amendment and the manner of disclosure to Noteholders. In the
event the Company waives or modifies any of such conditions, the Company
and/or Noteholders may be exposed to additional risks which cannot currently
be predicted or evaluated. See "Expiration Date; Extensions; Amendments."
In addition, the Company may, in its sole discretion, (a) terminate the
Exchange Offer at any time prior to the Expiration Date for any reason
(whether or not the Registration Statement of which this Prospectus is a part
has become effective under the Securities Act) or (b) amend, at any time or
from time to time, the terms of the Exchange Offer. The Company has no present
intention of terminating or amending the terms of the Exchange Offer, except
that the Company may seek a waiver from the Ad Hoc Noteholder Committee of the
Minimum Tender Condition in the event that it receives tenders of
approximately 95% or more, but less than 100%, of the 12.5% Notes. No decision
has been made to seek a waiver, and there can be no assurance that such
waiver, if sought, would be obtained.
VOTING ON THE PREPACKAGED PLAN
Instructions for voting on the Prepackaged Plan are contained in the
Disclosure Statement and in the instructions attached to the Ballots and
Master Ballots. See "VOTING PROCEDURES" in the Disclosure Statement.
Under the Bankruptcy Code, for purposes of determining whether the requisite
acceptances of the classes of Claims and Interests have been received, only
Holders who vote will be counted. Failure of a Holder to send duly completed
and signed Ballots or Master Ballots will be deemed to constitute an
abstention by such Holder with respect to a vote regarding the Prepackaged
Plan. Abstentions as a result of not submitting duly signed Ballots or Master
Ballots will not be counted as votes for or against the Prepackaged Plan. Any
Ballot or Master Ballot which is validly executed by a Holder but does not
indicate an acceptance or rejection of the Prepackaged Plan will not be
counted as a vote for or against the Prepackaged Plan. Any Ballot or Master
Ballot which is validly executed by a Holder and which indicates both
acceptance and rejection of the Prepackaged Plan will not be counted as a vote
for or against the Prepackaged Plan.
ANNEX IV
A-54
<PAGE>
DESCRIPTION OF 12.5% NOTES
The 12.5% Notes were issued under an indenture dated as of October 15, 1994
(the "Indenture") between the Company, as issuer, and The Bank of New York (as
successor to NationsBank of Texas, N.A.), as trustee (the "Trustee"). A
summary of the terms of the 12.5% Notes is incorporated herein by reference to
the Registration Statement on Form S-3, as amended, filed on August 24, 1994
and declared effective October 17, 1994.
DESCRIPTION OF NEW COMMON STOCK
The following summary description of the New Common Stock does not purport
to be complete and is qualified in its entirety by this reference to the
Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part. The New Common Stock is identical in all
material respects to the Old Common Stock except for the effects of the
Reverse Split and change in par value described herein.
Immediately after the Restructuring, the Company will have 50,000,000
authorized shares of New Common Stock, and 1,000,000 authorized shares of
preferred stock, par value $.01 per share. As of such time, 30,078,495 shares
of New Common Stock will be issued and outstanding to approximately 1,255
holders of record, and no shares of preferred stock will be issued and
outstanding. 24,062,796 shares of New Common Stock will be issued to
Noteholders as of immediately prior to the Restructuring and 6,015,699 shares
of New Common Stock will be issued to Stockholders as of immediately prior to
the Restructuring in connection with the Restructuring (not including Warrant
Shares and shares issuable upon the exercise of stock options granted to the
Company's employees and directors under the Stock Award and Incentive Plan).
All of the New Common Stock issued and outstanding as of the Effective Date
will be fully paid and nonassessable.
Distributions
Subject to such preferential rights as may be granted by the Board of
Directors in connection with future issuances of preferred stock, holders of
shares of New Common Stock will be entitled to receive ratably such dividends
as may be declared by the Board of Directors in its discretion from funds
legally available therefor. The Operating Companies' Loan Agreements contain
negative covenants that restrict, among other things, the ability of the
Company to pay dividends. In the event of a liquidation, dissolution or
winding up of the Company, the holders of New Common Stock will be entitled to
share ratably in all assets remaining after payment of liabilities and any
liquidation preference owed to holders of any preferred stock. Holders of New
Common Stock will have no preemptive rights and have no rights to convert
their New Common Stock into any other securities.
Voting
Subject to any preferential rights of holders of preferred stock,
stockholders are entitled to one vote per share on all matters to be voted on
by stockholders. Matters submitted for stockholder approval require a majority
vote of the shares represented and entitled to vote, except, as described
below, with respect to the election of directors and the inability of
stockholders to take action by written consent, or where the vote of a greater
number is required by the DGCL. Article IX of the Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company must be effected at a duly called annual or special meeting of
such holders and may not be effected by written consent of the Stockholders.
Article IX may not be repealed or amended in any respect except with the
approval of 67% of the outstanding shares of New Common Stock.
Election of Directors
Article VIII of the Certificate of Incorporation divides the Board of
Directors into three classes, with each class serving a three year term. Any
vacancies in the Board of Directors for any reason, and any directorships
resulting from any increase in the number of directors, may be filled only by
the Board of Directors. Article VIII may not be repealed or amended in any
respect except with the approval of 67% of the outstanding shares of New
Common Stock and subject to the provisions of any preferred stock outstanding.
ANNEX IV
A-55
<PAGE>
DESCRIPTION OF INDEBTEDNESS OF THE COMPANY
The following summary of the principal terms of the indebtedness of the
Company does not purport to be complete and is qualified in its entirety by
reference to the documents governing such indebtedness, including the
definitions of certain terms therein, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Whenever particular provisions of such documents are referred to herein, such
provisions are incorporated by reference, and the statements are qualified in
their entirety by such reference.
GENERAL
The following is a summary of certain indebtedness and other financing
arrangements of the Company or its subsidiaries. The descriptions of the loans
outstanding under the Revolving Credit Agreement, the 11.5% Notes, the
Subordinated Notes, the U.S. Receivables Facility, the Canada Receivables
Facility and the Mortgage Notes (each as defined below) are qualified in their
entirety by reference to the agreements and instruments governing such
financing arrangements. Noteholders are referred to the Revolving Credit
Agreement, the Senior Note Purchase Agreement, the Subordinated Note Purchase
Agreement, the U.S. Receivables Facilities Agreements, the Canada Receivables
Facility Agreement and the Mortgage Documents (each as defined below) for a
statement of their terms.
The holders of the obligations outstanding under the Revolving Credit
Agreement, Senior Note Purchase Agreement and Subordinated Note Purchase
Agreement have agreed to permit certain amendments to those agreements. Those
amendments, which are summarized below, will become effective upon
consummation of the Restructuring. Such holders have also agreed to grant
waivers of certain events of default arising out of the Restructuring or in
respect of the covenants that such holders have agreed to amend. In partial
consideration of such waivers and amendments, the Company and Merisel Americas
have paid the holders of the loans outstanding under the Revolving Credit
Agreement and holders of 11.5% Notes a fee equal to 1 1/2% of the principal
amount of such obligations at signing, and they have agreed to pay additional
fees equal to 2% of the principal amount outstanding upon the consummation of
the Restructuring, 1/4% on January 31, 1998, 1/2% on April 30, 1998 and 3/4%
on July 31, 1998.
The statements under this caption are summaries and do not purport to be
complete. Such summaries make use of certain terms defined in those agreements
and instruments, and are qualified in their entirety by express reference
thereto. Copies of the above agreements and instruments have been filed or
incorporated as exhibits to the Registration Statement of which this
Prospectus is a part.
REVOLVING CREDIT AGREEMENT
Merisel Americas and Merisel Europe (collectively, the "Borrowers") are co-
obligors on loans outstanding under the Revolving Credit Agreement, dated June
30, 1992. As of March 31, 1997, loans having an aggregate principal amount of
$84,297,000 were outstanding. Such loans currently bear interest at either (i)
Citibank's base rate plus 3.35% or (ii) the London Interbank Offered Rate plus
5.35%. The weighted average interest rate borne by loans outstanding under the
Revolving Credit Agreement as of March 31, 1997 was approximately 10.8%.
The Revolving Credit Agreement requires that $900,000 of principal be repaid
on each of May 31, 1997 and June 30, 1997 and that $4,500,000 be repaid on
January 2, 1998. The Revolving Credit Agreement requires the Borrowers to use
a portion of the proceeds from certain asset sales and from certain tax
refunds to pay amounts outstanding under the Revolving Credit Agreement. The
current final stated maturity of loans outstanding under the Revolving Credit
Agreement is January 31, 1998. Loans under the Revolving Credit Agreement are
guaranteed by the Company and Merisel Canada, Inc., which is a subsidiary of
Merisel Americas. The guaranty by the Company is pari passu with its guaranty
of the 11.5% Notes.
The Revolving Credit Agreement imposes a number of restrictive covenants
that affect the Borrowers and their subsidiaries, and, in many instances, the
Company with respect to, among other things, (i) creating liens,
ANNEX IV
A-56
<PAGE>
(ii) incurring indebtedness and contingent obligations, (iii) paying dividends
and redeeming capital stock, (iv) merging and selling assets, (v) engaging in
sale and leaseback transactions, (vi) engaging in certain intercompany
transactions, (vii) making investments in other persons, (viii) making capital
expenditures, (ix) entering into operating leases, (x) selling accounts
receivable, (xi) making payment on the Subordinated Notes, (xii) amending
certain of its debt instruments and making payment in respect of the
obligations represented thereby and (xiii) engaging in transactions with
stockholders and affiliates. In addition, the Borrowers are required to meet a
number of financial ratios.
The Revolving Credit Agreement contains a number of events of default,
including the following: (i) failure to make payments of interest and
principal when due, (ii) a material error in any representation, warranty or
certificate made under the Revolving Credit Agreement, (iii) failure of a
Borrower, the Company or Merisel Canada to perform any of their respective
agreement under the Revolving Credit Agreement, (iv) default in the payment of
any obligation of a Borrower, the Company or any of their subsidiaries on
indebtedness in excess of $5,000,000 and any other default in respect of
indebtedness if the maturity thereof can be accelerated, (v) entry of judgment
in excess of $5,000,000, (vi) certain events of insolvency and bankruptcy of a
Borrower, the Company or any of their subsidiaries, (vii) certain events in
respect of pension plans, (viii) the incurrence of environmental liability,
(ix) certain change of control events and (x) a material adverse change in the
condition (financial or otherwise) or operations of the Borrower, the Company
or Merisel Canada.
Effective April 14, 1997, the holders of loans outstanding under the
Revolving Credit Agreement have entered into the Extension. See "BACKGROUND OF
THE RESTRUCTURING--The Extension." Pending the effectiveness of such
amendments, such holders have granted waivers of certain defaults arising as a
result of the Restructuring and in respect of the covenants that they have
agreed to amend. As a part of such amendment, the final stated maturity of the
loans outstanding under the Revolving Credit Agreement will be extended to
January 31, 1999. The Company agreed to apply a portion of tax refunds
received in respect of tax loss carrybacks to repay principal outstanding
under the Revolving Credit Agreement. In addition, the rate of interest borne
by the loans will increase by .5% on January 31, 1998 and by an additional .5%
on each of April 30, 1998, July 31, 1998 and October 31, 1998. The holders
agreed to release Merisel Europe as a Borrower under the Revolving Credit
Agreement.
11.5% NOTES
Merisel Americas is the obligor on the 11.5% Notes outstanding pursuant to a
Senior Note Purchase Agreement dated as of June 30, 1992 (as subsequently
amended, the "Senior Note Purchase Agreement"). The 11.5% Notes currently bear
interest at 11.5%. As of March 31, 1997, the aggregate principal amount of
11.5% Notes outstanding was $56,198,000.
The Senior Note Purchase Agreement requires that $600,000 of principal be
repaid on each of May 31, 1997 and June 30, 1997 and that $3,000,000 be repaid
on January 2, 1998. The Senior Note Purchase Agreement requires Merisel
Americas to use a portion of the proceeds from certain asset sales and from
certain tax refunds to pay amounts outstanding under the 11.5% Notes. The
current final stated maturity of loans outstanding under the 11.5% Notes is
January 31, 1998. Currently, voluntary prepayments of the 11.5% Notes must be
accompanied by a voluntary Make-Whole Premium. The 11.5% Notes are guaranteed
by the Company, Merisel Canada and Merisel Europe. The guaranty by the Company
is pari passu with its guaranty of the loans outstanding under the Revolving
Credit Agreement.
The Senior Note Purchase Agreement imposes a number of restrictive covenants
that affect Merisel Americas and its subsidiaries, and, in many instances, the
Company and its subsidiaries with respect to, among other things, (i)
incurring indebtedness, (ii) creating liens, (iii) merging and selling assets,
(iv) engaging in sale and leaseback transactions, (v) entering into operating
leases, (vi) selling accounts receivable, (vii) amending certain of its debt
instruments, (viii) incurring contingent obligations, (ix) paying dividends
and redeeming
ANNEX IV
A-57
<PAGE>
capital stock, (x) engaging in certain intercompany transactions, (xi) making
investments in other persons, (xii) making payments on the Subordinated Notes
and (xiii) engaging in transactions with stockholders and affiliates. In
addition, the Borrowers are required to meet a number of financial ratios.
The Senior Note Purchase Agreement contains a number of events of default,
including the following: (i) failure to make payments of interest, Make-Whole
Premium and principal when due, (ii) default in the payment of any obligation
of the Borrower, the Company or any of their subsidiaries on indebtedness in
excess of $5,000,000 and any other default in respect of indebtedness if the
maturity thereof can be accelerated, (iii) failure of the Borrower or the
Company to perform any of its respective agreements under the Senior Note
Purchase Agreement, (iv) a material error in any representation, warranty or
certificate made under the Senior Note Purchase Agreement, (v) entry of
judgment in excess of $1,000,000, (vi) certain events in respect of pension
plans, (vii) failure by the Company, Merisel Canada or Merisel Europe to
perform in respect of their respective guaranties and (viii) certain events of
insolvency and bankruptcy of Merisel Americas, the Company or any of their
subsidiaries.
Effective April 14, 1997, the holders of the 11.5% Notes have entered into
the Extension. See "BACKGROUND OF THE RESTRUCTURING--The Extension." Pending
the effectiveness of such amendments, such holders have granted waivers of
certain defaults arising as a result of the Restructuring and in respect of
the covenants that they have agreed to amend. As a part of such amendment, the
final stated maturity of the 11.5% Notes will be extended to January 31, 1999.
The Company agreed to apply a portion of tax refunds received in respect of
tax loss carrybacks to repay principal of the 11.5% Notes. In addition, the
rate of interest borne by the 11.5% Notes will increase by .5% on January 31,
1998 and by an additional .5% on each of April 30, 1998, July 31, 1998 and
October 31, 1998. As amended, the 11.5% Notes may be prepaid at any time
without the payment of the Make-Whole Premium.
SUBORDINATED NOTES
Merisel Americas is the obligor on the Subordinated Notes outstanding
pursuant to the Note Purchase Agreement, dated as of March 30, 1990 (as
subsequently amended, the "Subordinated Note Purchase Agreement"). The
Subordinated Notes currently bear interest at 11.78%. As of March 31, 1997,
the aggregate principal amount of Subordinated Notes outstanding was
$13,200,000.
Principal of the Subordinated Notes in the three equal installments of
$4,400,000 will be payable in March of 1998, 1999 and 2000. They may be
prepaid, subject to payment of a Make-Whole Amount (as defined therein). The
Subordinated Notes are unsecured and rank subordinate to the loan outstanding
under the Revolving Credit Agreement and to the 11.5% Notes and senior to the
indebtedness of Merisel Americas to the Company.
The Subordinated Notes contain or incorporate many of the covenants
contained in the Senior Note Purchase Agreement.
The Subordinated Note Purchase Agreement contains a number of events of
default, including the following: (i) failure to make payments of interest and
principal when due, (ii) a material error in any representation, warranty or
certificate made under the Subordinated Note Purchase Agreement, (iii) failure
of Merisel Americas to perform any of its agreements under the Subordinated
Note Purchase Agreement, (iv) default in the payment of any obligation of the
Borrower, the Company or any of their subsidiaries on indebtedness in excess
of $5,000,000 and any other default in respect of indebtedness if the maturity
thereof has been accelerated, (v) entry of judgment in excess of $5,000,000,
(vi) certain events of insolvency and bankruptcy of Merisel Americas and its
significant subsidiaries and (vii) certain events in respect of pension plans.
Effective April 14, 1997, the holders of the Subordinated Notes have agreed
(as have the holders of Operating Companies' Senior Debt) to waive certain
cross-defaults relating to the Indenture. See
ANNEX IV
A-58
<PAGE>
"BACKGROUND OF THE RESTRUCTURING--The Extension." Pending the effectiveness of
such amendments, such holders have granted waivers of certain defaults arising
as a result of the Restructuring and in respect of the covenants that they
holders have agreed to amend. The rate of interest borne by the Subordinated
Notes will increase by .5% on January 31, 1998 and by an additional .5% on
each of April 30, 1998, July 31, 1998 and October 31, 1998. Merisel Americas
has agreed that if the loan outstanding under the Revolving Credit Agreement
and the 11.5% Notes are redeemed in whole, the Subordinated Notes will be
redeemed within 90 days thereafter.
CANADA RECEIVABLES SECURITIZATION
Effective December 15, 1995, Merisel Canada entered into a receivables
purchase agreement (the "Canada Receivables Facility Agreement") with a
securitization company to provide funding for Merisel Canada. 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 extendable by notice from the
securitization company, subject to the Company's approval.
U.S. RECEIVABLES SECURITIZATION
Funds from operations are generated in part through the sale of receivables
by Merisel Capital Funding, Inc., a wholly owned subsidiary of Merisel
America. Merisel Capital Funding's sole business is the ongoing purchase of
trade receivables form Merisel Americas. Merisel Capital Funding sells these
receivables, in turn, under an agreement with a securitization company (the
"Canada Receivables Facility Agreement"), 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 obtained amendments and waivers with
respect to certain covenants under this facility, which expires October 2000.
PROMISSORY NOTES
Merisel Properties, Inc., a wholly-owned subsidiary of the Company, issued
two promissory notes to the order of Heller Financial, Inc. on December 29,
1995 (collectively, the "Promissory Notes"). The first, in the principal
amount of $6,500,000, bears interest at a rate of 7.71% per annum and is due
in 2001. The second, in the principal amount of $5,000,000, bears interest at
a fixed rate of 7.66% per annum and is due in 2000.
The payment of the Promissory Notes is secured by a Deed of Trust, Security
Agreement, Assignment of Leases and Rents and Fixture Filing, dated December
29, 1995 (collectively, with the Promissory Notes, the "Mortgage Documents"),
by which Merisel Properties mortgaged the property it owns at 2101 East El
Segundo Boulevard, El Segundo, Los Angeles County, California. The Promissory
Notes are guaranteed by the Company.
ANNEX IV
A-59
<PAGE>
MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY
The following table sets forth the quarterly high and low sale prices for
the Old Common Stock as reported by the Nasdaq National Market System.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1995
First quarter........................................... 8 1/2 3 7/8
Second quarter.......................................... 7 3/4 4 1/2
Third quarter........................................... 8 3/8 5 1/2
Fourth quarter.......................................... 6 5/8 4 1/8
FISCAL YEAR 1996
First quarter........................................... 5 7/8 2 1/4
Second quarter.......................................... 5 1/16 2 1/4
Third quarter........................................... 3 13/16 1 13/16
Fourth quarter.......................................... 2 5/16 1 5/8
FISCAL YEAR 1997
First quarter........................................... 2 1/2 1 9/16
Second quarter.......................................... 2 7/16 1 1/32
Third quarter (through July 22, 1997)................... 3 1/16 1 7/8
</TABLE>
On April 11, 1997, the day immediately prior to the date that the Company
announced its intention to pursue the Restructuring, the closing sale price
for the Old Common Stock was $1 15/16 per share. On July 24, 1997, the closing
sale price for the Old Common Stock was $2 9/16 per share.
The Old Common Stock is currently traded on the over-the-counter market and
is quoted on the Nasdaq National Market System under the symbol "MSEL." As of
the Record Date, 30,078,495 shares of Old Common Stock were outstanding, and
there were approximately 1,255 record holders of Old Common Stock. Merisel has
never declared or paid and does not expect to declare or pay dividends on the
outstanding Old Common Stock. Restrictions contained in the instruments
governing the outstanding indebtedness of Merisel restrict its ability to
provide funds that might otherwise be used by Merisel for the payment of
dividends on the Old Common Stock. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources" and "RISK FACTORS--Potential De-Listing of the Common Stock."
MARKET PRICES OF 12.5% NOTES
The 12.5% Notes are traded in the over-the-counter market by certain dealers
who from time to time are willing to make a market in such securities. Trading
of the 12.5% Notes is, however, extremely limited. Prices and trading volume
of the 12.5% Notes in the over-the-counter market are not reported and are
difficult to monitor. To the extent that 12.5% Notes are traded, prices may
fluctuate widely depending on, among other things, the trading volume and the
balance between buy and sell orders.
ANNEX IV
A-60
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain Federal income tax consequences of the
Restructuring to the Noteholders and the Company and is for general
information purposes only. This summary is based on the Federal income tax law
now in effect, which is subject to change, possibly retroactively. This
summary does not discuss all aspects of Federal income taxation which may be
important to particular Noteholders in light of their individual investment
circumstances or to Noteholders subject to special tax rules (e.g., financial
institutions, broker-dealers, insurance companies, tax-exempt organizations
and foreign taxpayers). In addition, this summary does not address state,
local or foreign tax consequences. This summary assumes that Noteholders hold
their 12.5% Notes, and will hold their New Common Stock, as "capital assets"
(generally, property held for investment) under the Internal Revenue Code of
1986, as amended (the "Code"). No rulings have been or will be requested from
the Internal Revenue Service with respect to any of the matters discussed
herein. Noteholders are urged to consult their tax advisors regarding the
specific Federal, state, local and foreign income and other tax consequences
of the Restructuring.
FEDERAL INCOME TAX CONSEQUENCES TO NOTEHOLDERS
General. The Restructuring, if consummated as described herein, will
constitute a tax-free recapitalization for purposes of the Code. Accordingly,
for Federal income tax purposes:
(i) no gain or loss will be recognized by a Noteholder upon the receipt
of New Common Stock pursuant to the Restructuring, except that the
Noteholder will (a) recognize gain or loss to the extent of any cash
received in lieu of a fractional share and (b) recognize income to the
extent of the value of the shares of New Common Stock received in the
Restructuring which are allocable to any interest on the 12.5% Notes that
accrued on or after the beginning of the Noteholder's holding period and
which interest was not previously included in the Noteholder's taxable
income (the "Accrued Interest");
(ii) the aggregate tax basis of the New Common Stock received by a
Noteholder in the Restructuring will be the same as the aggregate tax basis
of the 12.5% Notes exchanged therefor (reduced by any basis apportionable
to any fractional share settled in cash as described above), except that
the basis of the shares of New Common Stock received which are treated as
attributable to Accrued Interest will be equal to the fair market value of
the shares on the Exchange Date; and
(iii) the holding period of the shares of New Common Stock in the hands
of the Noteholders will include the holding period of their 12.5% Notes
exchanged therefor, except that the holding period of the shares of New
Common Stock treated as attributable to Accrued Interest will begin the day
after the Exchange Date .
Market Discount. Noteholders who acquired their 12.5% Notes at a "market
discount" subsequent to the initial offering of the 12.5% Notes may be
required to carry over any accrued (but unrecognized) market discount to the
New Common Stock received in the Restructuring, which discount will be
recognized as ordinary income upon disposition of such New Common Stock.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
Cancellation of Indebtedness Income. The Company will realize cancellation
of indebtedness ("COI") income, for Federal income tax purposes, in an amount
equal to the excess, if any, of the adjusted issue price of the 12.5% Notes
(including any accrued but unpaid interest) over the fair market value of the
New Common Stock received by Noteholders pursuant to the Restructuring. The
Company anticipates that any COI income that is recognized will likely be
offset by the Company's operating losses and net operating loss carryovers
("NOLs"). If COI income is realized in a case under the Bankruptcy Code (i.e.,
pursuant to the Prepackaged Restructuring), then such income would not be
recognized under section 108 of the Code. In such event, the Company would be
required, however, to reduce certain of its tax attributes, such as its NOLs,
certain tax credits, and the basis of its assets, by the amount of the COI
income that is not recognized.
ANNEX IV
A-61
<PAGE>
Limitation on Net Operating Loss Carryovers. As a result of the receipt by
Noteholders of New Common Stock in exchange for the 12.5% Notes pursuant to
the Restructuring, the Company will undergo an "ownership change" (generally,
a 50% change in ownership) for purposes of section 382 of the Code and,
accordingly, the Company will be limited in its ability to use its NOLs and
certain tax credit carryforwards (the "Section 382 Limitation") to offset
future taxable income. The Section 382 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 5.64%). This is likely to limit
significantly the Company's use of its NOLs in any one year. If an ownership
change occurs in a case under the Bankruptcy Code, the value of a
corporation's equity for purposes of determining the Section 382 Limitation
would be adjusted to reflect any increase in such value arising from the
cancellation of debt as a result of the ownership change. Because the Company
anticipates that the value of its equity would be increased as a result of the
cancellation of the 12.5% Notes, the Company's ability to use its NOLs would
be less limited under the Prepackaged Restructuring than under the Exchange
Restructuring.
MANAGEMENT
See "Directors and Executive Officers of Registrant" in Amendment No. 1 to
the Annual Report of the Company on Form 10-K/A for the fiscal year ended
December 31, 1996, incorporated herein by reference.
POST RESTRUCTURING BOARD CONFIGURATION
Pursuant to the terms of the Limited Waiver Agreement, upon consummation of
the Restructuring, the Board of Directors of the Company is intended to be
reconstituted so as to be comprised of members acceptable to the Company and
the Ad Hoc Noteholders Committee. The Company and the Ad Hoc Noteholders
Committee have agreed that the post-restructuring Board will be composed of
four nominees of the Ad Hoc Noteholders Committee (one of whom may be a
Noteholder and three of whom shall be unaffiliated with any Noteholder) and
three other members from the current Board of Directors or their designees.
Nominees of the Ad Hoc Noteholders Committee will be reasonably acceptable to
the three members designated by the current Board of Directors and will not be
legal or financial advisors of either the Company or the Noteholders. As soon
as practicable after the consummation of the Restructuring, three members of
the current Board of Directors will resign, one new board member will be
appointed, and the remainder of the Board of Directors will appoint the four
Ad Hoc Noteholders Committee nominees to the Board of Directors. The Company
is currently in discussions with the Ad Hoc Noteholders Committee regarding
the identity and composition of the post-Restructuring Board. At this time, no
agreement regarding the identities of the Ad Hoc Noteholders Committee
nominees has been reached, however, the parties have agreed that
Mr. Steffensen and Dr. Miller will continue to serve as directors and
Mr. Illson will be appointed to serve as a director following the consummation
of the Restructuring.
POST RESTRUCTURING STOCK OPTION GRANTS
No awards have been made under the Stock Award and Incentive Plan. However,
if the Restructuring is consummated the Company intends, subject to the
approval of the post-restructuring Board of Directors, to issue options (the
"New Options") to purchase between 2,200,000 and 2,406,280 shares of New
Common Stock in exchange for employee stock options and stock appreciation
rights that are currently outstanding, which would then be cancelled. If the
Restructuring is consummated, the New Options issued immediately after the
Effective Date would have an exercise price equal to the average closing price
of the New Common Stock on Nasdaq (or such other exchange or over the counter
market on which the New Common Stock is trading) over the 30 trading days
immediately following the Effective Date provided that the exercise price may
not vary more than 10% from the average closing price for the five trading
days immediately following the Effective Date. Each issuance of New Options
would be exercisable for seven years and would vest 20% on the date such
options are granted and 20%, 20% and 40% on the first, second and third
anniversary of such date, respectively (with the exception
ANNEX IV
A-62
<PAGE>
of New Options to purchase approximately 500,000 shares of New Common Stock
which would be granted in exchange for options granted generally to all
employees except the Chief Executive Officer in January 1997 and which would
vest 20% on the date such options are granted and 30% and 50% on the six-month
and 12-month anniversary of such date, respectively). The New Options issued
immediately after the Effective Date of the Restructuring would include a
provision providing for automatic acceleration of vesting in the event of a
Change in Control (as defined in the Stock Award and Incentive Plan).
The options issued to the Company's executive officers and executive
officers as a group in exchange for options and stock appreciation rights
currently held are set forth in the table below. The New Options issued
immediately after the Effective Date of the Restructuring would include a
provision providing for automatic acceleration of vesting in the event of a
Change in Control (as defined in the Stock Award and Incentive Plan).
<TABLE>
<CAPTION>
AVERAGE
CURRENT EXERCISE PRICE OPTIONS TO
NUMBER OF OF CURRENT BE GRANTED
OPTIONS AND OPTIONS AND UNDER THE
NAME SARS SARS NEW PLAN
---- ----------- -------------- ----------
<S> <C> <C> <C>
Dwight A. Steffensen................... 500,000 $2.81 500,000
James E. Illson........................ 85,000 2.59 250,000
Timothy N. Jenson...................... 44,500 6.48 75,000
Robert J. McInerney.................... 200,000 2.00 250,000
Thomas P. Reeves....................... 205,571 6.29 205,571
Karen A. Tallman....................... 75,000 1.63 75,000
James D. Wittry........................ 85,000 2.48 85,000
Executive officers as a group.......... 1,195,071 3.30 1,440,571
</TABLE>
MANAGEMENT COMPENSATION
EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
In October 1995, the Company entered into a retention agreement with Mr.
Reeves. The retention agreement provides that if, within one year after a
Change of Control of the Company (as defined in the agreement) and prior to
August 15, 1998, Mr. Reeves' employment is terminated other than as a result
of (i) a "Termination for Cause" (as defined in the agreement), (ii) his death
or permanent disability or (iii) his resignation without "Good Reason" (as
defined in the agreement), the Company will continue to pay Mr. Reeves' Base
Salary for the 180 day-period following such termination and will make a lump-
sum payment to Mr. Reeves equal to one-half of the average annual performance
bonus received by Mr. Reeves over the three years preceding his termination
date.
The Company intends to enter into an amendment to its retention agreement
with Mr. Reeves that will (1) extend its expiration date to July 31, 1999, (2)
provide that in the event of a Covered Termination (as defined in the
agreement) within one year following a Change of Control he is entitled to a
lump sum payment equal to one year's salary plus an amount equal to the
average annual performance bonus paid to him over the previous three years and
(3) amend the definition of "Change of Control" to provide that, in addition
to the other events that are deemed to constitute a "Change of Control", a
"Change of Control" shall be deemed to have occurred if within one year
following consummation of the Restructuring either (i) Mr. Steffensen is
terminated as Chief Executive Officer by the Company's Board of Directors or
(ii) the Company breaches its employment agreement with Mr. Steffensen in any
material respect.
The Company intends to enter into a Retention Agreement with Mr. Jenson
which provides that if, within one year of a Change of Control of the Company
(as defined in the agreement), Mr. Jenson's employment is terminated other
than as a result of (i) a "Termination for Cause" (as defined in the
agreement), (ii) his death or permanent disability or (iii) his resignation
without "Good Reason" (as defined in the agreement), the Company
ANNEX IV
A-63
<PAGE>
will make a lump-sum payment to Mr. Jenson equal to one year's salary plus an
amount equal to his annual performance bonus for the prior year less any
amounts payable to Mr. Jenson pursuant to his employment agreement with the
Company.
In addition, the Company intends to amend the change of control provisions
in its existing employment and retention agreements to conform to the amended
definition in Mr. Reeves's retention agreement as described above.
Additional information relating to compensation of current officers and
directors of the Company is incorporated herein by reference to "EXECUTIVE
COMPENSATION" in Amendment No. 1 to the Annual Report of the Company on Form
10-K/A for the year ended December 31, 1996.
OWNERSHIP OF COMMON STOCK
See Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996, incorporated herein by reference.
CERTAIN AFFILIATE TRANSACTIONS
The Company has entered into Indemnity Agreements with each of its directors
and certain of its officers, which agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors, officers, employees or agents of the
Company (other than liabilities arising from conduct in bad faith or which is
knowingly fraudulent or deliberately dishonest), and, under certain
circumstances, to advance their expenses incurred as a result of proceedings
brought against them.
ADVISORS AND REPRESENTATIVES
FINANCIAL ADVISOR
Pursuant to an agreement effective as of January 16, 1997, as amended on
March 20, 1997 between DLJ and the Company (the "DLJ Agreement"), the Company
has engaged DLJ to act as its exclusive financial advisor in connection with
the Restructuring.
Pursuant to the DLJ Agreement, the Company has agreed to pay DLJ a
restructuring fee in the amount of $1.25 million, half of which is payable
upon receipt of a sufficient number of Ballots from creditors to consummate
the Restructuring and the other half of which is payable upon consummation of
the Restructuring. The Company also has agreed to pay DLJ a modification fee
of $750,000, payable upon the modification of the indebtedness of Merisel
Americas if such indebtedness is to mature during or after 1999, or $375,000
if such indebtedness is modified to mature before 1999. The Company paid a fee
of $100,000 upon execution of the DLJ Agreement, such amount to be credited
against the restructuring and modification fees. In addition, the Company has
agreed to pay a monthly fee of $75,000 (which commenced February 15, 1997),
such fee to be credited against accruals of the restructuring and modification
fees. The Company has also agreed to pay DLJ reasonable out-of-pocket costs.
The Company has agreed to indemnify DLJ and its affiliates from and against
all claims, liabilities, losses, damages, and expenses relating to the
Restructuring, except for any claims, liabilities, losses, damages or expenses
that result from the willful misconduct or gross negligence of DLJ or
materially untrue statement or omission with respect to information provided
by DLJ expressly for use in offering documents. The Company has also agreed to
make payments in respect of contributions to DLJ or its affiliates where
indemnification is unavailable.
ANNEX IV
A-64
<PAGE>
FINANCIAL ADVISOR TO NOTEHOLDERS
Pursuant to an agreement (the "Chanin Agreement") effective as of March 1,
1997, between the Company and Chanin and Company LLC, the financial advisor to
the Noteholders, ("Chanin"), the Company has agreed to provide certain
compensation and indemnification to Chanin in connection with its services to
the Noteholders. Such services include the analysis, consideration and
formulation of a potential recapitalization of the Company, such as the
proposed Restructuring. As consideration for Chanin's performing such
services, the Company agreed to pay Chanin financial advisory fees of $100,000
payable each month until the consummation of a recapitalization of the Company
that is approved by its Board of Directors, and an additional $12,500 per
month to accrue and be payable upon such consummation.
The Company has also agreed to pay Chanin's reasonable out-of-pocket
expenses. The Company has agreed to indemnify Chanin and its affiliates from
and against all claims, liabilities, losses damages, and expenses relating to
its services to the Noteholders as set forth in the Chanin Agreement, except,
among other things, for any claims, liabilities, losses, damages or expenses
that result from the willful misconduct or gross negligence or materially
untrue statement or omission.
INFORMATION AGENT
MacKenzie Partners, Inc. has been appointed as Information Agent in
connection with the Exchange Offer and the solicitation of acceptances of the
Prepackaged Plan. Any questions regarding how to tender in the Exchange Offer
or how to vote on the Prepackaged Plan and any requests for additional copies
of this Prospectus, Letters of Transmittal, Ballots or Master Ballots should
be directed to the Information Agent at its address and telephone number set
forth on the back cover of this Prospectus.
DEPOSITARY
The Bank of New York has been appointed as Depositary for the Exchange Offer
and as voting agent in connection with the solicitation of acceptances of the
Prepackaged Plan. Questions and requests for assistance may be directed to the
Depositary at one of its addresses and telephone numbers set forth on the back
cover of this Prospectus.
ESTIMATED FEES AND EXPENSES
The Company estimates that fees and expenses incurred in connection with the
Restructuring will be approximately $10.8 million, including financial
advisory fees, commitment fees, legal fees, printing fees, accounting fees,
Depositary fees, Information Agent fees, out-of-pocket expenses, retention
payments and other fees and expenses. The Company will also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable out-of-
pocket expenses incurred by them in forwarding copies of this Prospectus and
related documents to the beneficial owners of the 12.5% Notes and Old Common
Stock and in handling or forwarding tenders of their customers.
Below is a breakdown of the estimated fees and expenses related to the
Restructuring (in thousands):
<TABLE>
<S> <C>
Bank Fees and Expenses........................................... $ 4,775
Investment Banking Services...................................... 3,000
Legal Services................................................... 1,600
Accounting Services.............................................. 800
Other Fees and Expenses.......................................... 600
-------
Total.......................................................... $10,775
=======
</TABLE>
- --------
As of April 30, 1997, approximately $2,943,000 million of such fees and
expenses had been accrued by the Company. The Company intends to pay the fees
and expenses with cash from operations, cash on hand and additional borrowings
as necessary.
ANNEX IV
A-65
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the New Common Stock and the
Warrants offered hereby will be passed upon by Skadden, Arps, Slate, Meagher &
Flom LLP, special counsel to the Company.
EXPERTS
The Company's financial statements as of December 31, 1996 and 1995 and for
the years ended December 31, 1996, 1995 and 1994 included in this Prospectus
and incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and related supplemental schedules
incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 in the Registration Statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and incorporated by reference in the Registration
Statement, and have been so included herein and incorporated by reference in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
ANNEX IV
A-66
<PAGE>
PART B
THE PREPACKAGED RESTRUCTURING DISCLOSURE STATEMENT
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN COMMENCED AS OF THE DATE OF THE
DISTRIBUTION OF THIS DOCUMENT.
DISCLOSURE STATEMENT WITH RESPECT TO PLAN OF REORGANIZATION DATED JULY 31, 1997
OF MERISEL, INC.
Date: July 31, 1997
ANNEX IV
B-i
<PAGE>
PART B
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
I. INTRODUCTION....................................................... B-1
A. General....................................................... B-1
B. The Company................................................... B-2
C. The Restructuring............................................. B-2
1. Exchange Restructuring..................................... B-2
2. Prepackaged Restructuring.................................. B-2
D. Summary Of Classification And Treatment Of Claims And
Interests..................................................... B-4
E. Notice To Holders Of Claims And Interests..................... B-4
II. BUSINESS AND PROPERTIES OF THE COMPANY............................. B-5
III. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION............. B-5
IV. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. B-5
V. BACKGROUND OF THE RESTRUCTURING.................................... B-5
VI. PURPOSES AND EFFECTS OF THE PREPACKAGED RESTRUCTURING.............. B-5
A. Purpose Of The Prepackaged Restructuring...................... B-5
B. Effects Of The Prepackaged Restructuring...................... B-6
1. Dilution Of Equity Interests............................... B-7
2. Provisions For Trade Creditors, Other Unsecured Creditors
And Secured Creditors...................................... B-7
3. Provisions For Employees................................... B-8
VII. THE REORGANIZATION CASE............................................ B-8
A. Timetable For Reorganization Case............................. B-8
B. Advisors To The Company....................................... B-8
C. Committees.................................................... B-9
D. Actions To Be Taken Upon Commencement Of Case................. B-9
VIII. OFFICERS AND DIRECTORS OF THE COMPANY.............................. B-11
IX. SUMMARY OF THE PLAN................................................ B-11
A. Brief Explanation Of Chapter 11............................... B-11
B. General Information Concerning Treatment Of Claims And
Interests..................................................... B-11
C. Classification And Treatment Of Claims And Interests.......... B-12
1. Unclassified Claims........................................ B-13
2. Classified Claims And Interests............................ B-14
3. Additional Information Regarding Treatment Of Certain
Claims..................................................... B-15
D. Securities To Be Issued And Transferred Under The Plan........ B-16
1. The New Common Stock....................................... B-17
2. The Warrants............................................... B-17
3. Market And Trading Information............................. B-17
E. Sources Of Cash To Make Plan Distributions.................... B-17
F. Conditions Precedent To Confirmation And Consummation Of The
Plan.......................................................... B-17
G. Modification Or Revocation Of The Plan; Severability.......... B-17
H. Distributions Under The Plan.................................. B-17
I. Objections To Claims And Authority To Prosecute Objections;
Claims Resolution............................................. B-17
J. Setoffs....................................................... B-17
K. Executory Contracts And Unexpired Leases...................... B-17
L. Continued Corporate Existence; Vesting Of Assets In
Reorganized Merisel........................................... B-18
</TABLE>
ANNEX IV
B-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
M. Preservation Of Rights Of Action Held By Merisel Or Reorganized Merisel........ B-18
N. Discharge Of Claims And Termination Of Interests; Related Injunction........... B-18
O. Releases And Certain Settlements Under The Plan; Related Injunction; Indemnity. B-18
P. Limitation Of Liability........................................................ B-19
Q. Retention Of Bankruptcy Court Jurisdiction..................................... B-19
X. RISK FACTORS....................................................................... B-20
A. Disruption Of Operations Relating To Bankruptcy Filing......................... B-20
B. Certain Risks Of Non-Confirmation.............................................. B-20
C. Certain Bankruptcy Considerations.............................................. B-21
1. Treatment Of The Warrants................................................... B-21
2. Failure To File Prepackaged Plan............................................ B-21
3. Effect On Operations........................................................ B-22
4. Nonconsensual Confirmation.................................................. B-22
XI. OWNERSHIP OF CAPITAL SECURITIES.................................................... B-23
XII. MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY................................ B-23
XIII. MARKET PRICES OF 12.5% NOTES....................................................... B-23
XIV. APPLICATION OF SECURITIES ACT...................................................... B-23
A. The Solicitation............................................................... B-23
B. Issuance Of New Securities Pursuant To The Plan................................ B-23
XV. PREPACKAGED RESTRUCTURING ACCOUNTING TREATMENT..................................... B-24
XVI. DESCRIPTION OF INDEBTEDNESS OF THE COMPANY......................................... B-24
XVII. DESCRIPTION OF 12.5% NOTES......................................................... B-24
XVIII. FINANCIAL PROJECTIONS AND ASSUMPTIONS USED......................................... B-25
XIX. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION....................................... B-25
XX. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN................................ B-25
A. Federal Income Tax Consequences To The Company................................. B-25
B. Federal Income Tax Consequences To Holders Of 12.5% Notes...................... B-26
C. Federal Income Tax Consequences To Holders Of Old Common Stock................. B-26
XXI. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST................... B-27
A. Feasibility Of The Plan........................................................ B-27
B. Best Interests Test............................................................ B-27
C. Chapter 7 Liquidation Analysis................................................. B-28
1. Liquidation Value Of The Company............................................ B-30
a. Estimated Liquidation Proceeds.............................................. B-30
b. Impact on Merisel's Operations Of The Conversion To A Chapter 7 Liquidation. B-30
c. Nature And Timing Of The Liquidation Process................................ B-31
d. Additional Liabilities And Reserves......................................... B-31
e. Distributions; Absolute Priority............................................ B-31
2. Conclusion.................................................................. B-31
XXII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN.......................... B-33
A. Continuation Of The Chapter 11 Case............................................ B-33
B. Liquidation Under Chapter 7 Or Chapter 11...................................... B-33
XXIII. VOTING AND CONFIRMATION OF THE PLAN................................................ B-34
A. Voting Procedures And Requirements............................................. B-34
B. Who May Vote................................................................... B-35
</TABLE>
ANNEX IV
B-iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
C. Voting Procedures For Holders Of Old Securities............... B-35
D. Beneficial Owners Of Old Securities........................... B-36
E. Brokerage Firms, Banks And Other Nominees..................... B-37
F. Securities Clearing Agent..................................... B-37
G. Incomplete Ballots (Consent Solicitation Forms)............... B-37
H. Voting Deadline And Extensions................................ B-38
I. Withdrawal Of Votes On The Plan............................... B-38
J. Information Agent............................................. B-38
K. Acceptance Or Cramdown........................................ B-38
XXIV. CONCLUSION......................................................... B-40
APPENDIX
Plan of Reorganization of Merisel, Inc. ........................... I
EXHIBITS
Form of Series A Warrant Agreement............................ A
Form of Series B Warrant Agreement............................ B
Form of Amended and Restated Certificate of Incorporation of
Merisel, Inc.................................................. C
</TABLE>
ANNEX IV
B-iv
<PAGE>
IMPORTANT
A BANKRUPTCY CASE HAS NOT BEEN COMMENCED
AS OF THE DATE OF THE DISTRIBUTION OF THIS DOCUMENT.
THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT. IF
MERISEL, INC. FILES A PETITION FOR RELIEF UNDER CHAPTER 11 OF THE BANKRUPTCY
CODE AND SEEKS CONFIRMATION OF ITS PREPACKAGED PLAN OF REORGANIZATION, THIS
DISCLOSURE STATEMENT WILL BE SUBMITTED TO THE BANKRUPTCY COURT.
DISCLOSURE STATEMENT, DATED JULY 31, 1997
SOLICITATION OF ACCEPTANCES WITH RESPECT
TO REORGANIZATION PLAN OF
REORGANIZATION OF MERISEL, INC.
FROM THE HOLDERS OF ITS OUTSTANDING
12 1/2% SENIOR NOTES DUE 2004
AND
COMMON STOCK
AS OF THE CLOSE OF BUSINESS ON JULY 22, 1997
THE VOTING DEADLINE TO ACCEPT OR REJECT
THE PLAN OF REORGANIZATION IS 5:00 P.M.,
EASTERN TIME, ON AUGUST 29, 1997, UNLESS EXTENDED.
ANNEX IV
B-v
<PAGE>
MERISEL, INC. ("MERISEL") HAS NOT COMMENCED A CASE UNDER THE BANKRUPTCY CODE
AT THIS TIME, BUT IS SOLICITING ACCEPTANCES OF THE PLAN FROM THE FOLLOWING
HOLDERS OF IMPAIRED CLAIMS AGAINST AND IMPAIRED INTERESTS IN MERISEL: HOLDERS
OF 12.5% NOTES AND HOLDERS OF OLD COMMON STOCK. SIMULTANEOUSLY WITH THE
SOLICITATION OF ACCEPTANCES OF THE PLAN FROM MERISEL'S IMPAIRED CREDITORS AND
INTEREST HOLDERS, MERISEL IS (I) SOLICITING TENDERS FROM THE HOLDERS OF 12.5%
NOTES IN THE EXCHANGE OFFER AND (II) SOLICITING PROXIES FROM MERISEL'S
STOCKHOLDERS TO APPROVE THE CHARTER AMENDMENT, THE NEW COMMON STOCK ISSUANCE,
AND THE STOCK AWARD AND INCENTIVE PLAN PROPOSAL (EACH AS DEFINED IN PART A OF
THE EXCHANGE RESTRUCTURING PROSPECTUS).
IF LESS THAN 100% OF THE HOLDERS OF THE 12.5% NOTES TENDER THEIR 12.5% NOTES
UNDER THE EXCHANGE RESTRUCTURING, BUT SUFFICIENT VOTES FOR ACCEPTANCE OF THE
PLAN ARE RECEIVED, MERISEL INTENDS TO FILE THE REORGANIZATION CASE AND TO SEEK
CONFIRMATION OF THE PLAN. IF MERISEL DOES NOT RECEIVE THE REQUISITE
ACCEPTANCES OF THE PLAN BY THE VOTING DEADLINE (AS DEFINED BELOW), MERISEL
INTENDS TO EVALUATE OTHER AVAILABLE OPTIONS TO REORGANIZE MERISEL'S
LIABILITIES, INCLUDING PURSUING THE POSSIBLE SALE OF AN EQUITY INTEREST IN
MERISEL OR COMMENCEMENT OF A NON-PREPACKAGED CHAPTER 11 REORGANIZATION CASE.
The Company has reserved the right to seek confirmation of the Prepackaged
Plan under the "cram-down" provisions of the United States Bankruptcy Code.
However, if a majority of Stockholders elect not to support the Restructuring
after their review of all the facts and circumstances existing at that time,
the Company does not presently believe that attempting to force confirmation
of the Prepackaged Plan under the "cram-down" provisions would necessarily be
in the best interests of the Company and the Company has no present intention
to do so. Although the Limited Waiver Agreement requires, if consistent with
the Company's obligations under applicable law (which the Company believes
includes its fiduciary obligations), the filing of a Chapter 11 petition on
the Prepackaged Plan and that the Company take steps that are both necessary
and desirable to confirm the Prepackaged Plan, the Agreement does not by its
terms require that the Company seek confirmation of the Prepackaged Plan under
the cram-down provisions of the Bankruptcy Code if the Stockholders vote to
reject the Prepackaged Plan. Moreover, the Company has specifically rejected
requests by representatives of the Ad Hoc Noteholders' Committee, both before
and after the execution of the Limited Waiver Agreement, for the Company's
agreement to proceed with confirmation of the Prepackaged Plan under those
provisions. Accordingly, for the foregoing reasons, unless the requisite
Stockholder acceptances have been obtained for the Prepackaged Plan, the
Company does not currently believe filing a Chapter 11 petition to seek
confirmation of the Prepackaged Plan under the cram-down provisions would be
consistent with its fiduciary obligations as presently conceived or be both
necessary and desirable.
The Ad Hoc Noteholders Committee has advised the Company that it disputes
the Company's interpretation of the Limited Waiver Agreement in this regard
and believes that the Company is obligated to file and confirm the Prepackaged
Plan regardless of the outcome of the Stockholder vote.
MERISEL'S OPERATING COMPANIES, INCLUDING WITHOUT LIMITATION MERISEL
AMERICAS, INC. AND MERISEL CANADA, INC., ARE NOT CHAPTER 11 DEBTORS, AND
MERISEL DOES NOT CURRENTLY INTEND TO COMMENCE A CASE UNDER CHAPTER 11 OF THE
BANKRUPTCY CODE WITH RESPECT TO ANY OF ITS OPERATING COMPANIES OR TO INCLUDE
ANY OF ITS OPERATING COMPANIES IN MERISEL'S PREPACKAGED CHAPTER 11 CASE.
MERISEL'S OPERATING COMPANIES INTEND TO CONTINUE OPERATING THEIR BUSINESSES IN
THE ORDINARY COURSE AND TO PAY THEIR EMPLOYEES, TRADE AND CERTAIN OTHER
CREDITORS IN FULL AND ON TIME. SUCH CREDITORS ARE NOT IMPAIRED UNDER THE PLAN.
THIS DISCLOSURE STATEMENT, WHICH HAS NOT BEEN REVIEWED OR APPROVED BY THE
BANKRUPTCY COURT, SOLICITS (THE "SOLICITATION") YOUR ACCEPTANCE OF THE
ATTACHED PLAN AND CONTAINS INFORMATION RELEVANT TO YOUR DECISION. PLEASE READ
THIS DISCLOSURE STATEMENT, THE PLAN AND THE OTHER SOLICITATION MATERIALS
ANNEX IV
B-vi
<PAGE>
COMPLETELY AND CAREFULLY. MERISEL BELIEVES THAT ACCEPTANCE OF THE PLAN IS IN
THE BEST INTERESTS OF ITS CREDITORS AND EQUITY HOLDERS. THE PLAN IS ATTACHED
AS APPENDIX I TO THIS DISCLOSURE STATEMENT. ALTHOUGH THIS DISCLOSURE STATEMENT
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THE
PROSPECTUS, NEITHER THE PLAN NOR THE SECURITIES TO BE ISSUED THEREUNDER HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THE PLAN
OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE ONLY CLASSES OF CLAIMS AND INTERESTS IMPAIRED (AS DEFINED IN THE
BANKRUPTCY CODE) UNDER THE PLAN, AND ENTITLED TO VOTE ON THE PLAN, ARE CLASS 4
12.5% NOTES CLAIMS AND CLASS 6 OLD COMMON STOCK INTERESTS. BECAUSE NO OTHER
CLASSES ARE IMPAIRED, ALL HOLDERS OF CLAIMS IN SUCH OTHER CLASSES ARE NOT
ENTITLED TO VOTE ON, AND ARE CONCLUSIVELY PRESUMED TO HAVE ACCEPTED, THE PLAN.
HOLDERS OF IMPAIRED CLAIMS AND INTERESTS ARE ENCOURAGED TO READ AND CAREFULLY
CONSIDER THE MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT, INCLUDING THOSE
UNDER "RISK FACTORS," PRIOR TO SUBMITTING BALLOTS OR MASTER BALLOTS PURSUANT
TO THE SOLICITATION.
MERISEL HAS NEGOTIATED THE TERMS OF THE PLAN WITH THE AD HOC NOTEHOLDERS
COMMITTEE. THE AD HOC NOTEHOLDERS COMMITTEE HAS UNANIMOUSLY AGREED TO VOTE IN
FAVOR OF THE PLAN.
FOR THE PLAN TO BE CONFIRMED BY THE BANKRUPTCY COURT AS A CONSENSUAL PLAN,
(I) THE HOLDERS (OTHER THAN ANY HOLDER DESIGNATED UNDER SUBSECTION 1126(E) OF
THE BANKRUPTCY CODE) OF CLASS 4 12.5% NOTES CLAIMS WHO CAST VOTES IN FAVOR OF
THE PLAN MUST HOLD (A) AT LEAST TWO-THIRDS IN DOLLAR AMOUNT OF THE ALLOWED
CLAIMS ACTUALLY VOTING IN SUCH CLASS AND (B) MORE THAN ONE-HALF IN NUMBER OF
THE ALLOWED CLAIMS ACTUALLY VOTING IN SUCH CLASS, AND (II) THE HOLDERS (OTHER
THAN ANY HOLDER DESIGNATED UNDER SUBSECTION 1126(E) OF THE BANKRUPTCY CODE) OF
CLASS 6 OLD COMMON STOCK INTERESTS WHO CAST VOTES IN FAVOR OF THE PLAN MUST
HOLD AT LEAST TWO-THIRDS IN AMOUNT OF ALLOWED INTERESTS ACTUALLY VOTING IN
SUCH CLASS. THERE IS NO MINIMUM LEVEL OF VOTING PARTICIPATION REQUIRED FOR
CONFIRMATION OF THE PLAN.
IF THE REORGANIZATION CASE IS COMMENCED, THE REQUISITE ACCEPTANCES TO THE
PLAN ARE RECEIVED, THE PLAN IS CONFIRMED BY THE BANKRUPTCY COURT AND THE
EFFECTIVE DATE OCCURS, ALL HOLDERS OF ALLOWED 12.5% NOTES CLAIMS AND HOLDERS
OF ALLOWED OLD COMMON STOCK INTERESTS (INCLUDING THOSE WHO DO NOT SUBMIT
BALLOTS OR MASTER BALLOTS TO ACCEPT OR TO REJECT THE PLAN AND THE TRANSACTIONS
CONTEMPLATED THEREBY) WILL BE BOUND BY THE PLAN AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE
DATE HEREOF AND NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT NOR ANY
DISTRIBUTION OF PROPERTY PURSUANT TO THE PLAN WILL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
EACH CREDITOR AND EQUITY SECURITY HOLDER OF MERISEL SHOULD CONSULT WITH SUCH
CREDITOR'S OR EQUITY SECURITY HOLDER'S LEGAL, BUSINESS, FINANCIAL AND TAX
ADVISORS AS TO ANY SUCH MATTERS CONCERNING THE SOLICITATION, THE PLAN AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
ANNEX IV
B-vii
<PAGE>
I. INTRODUCTION
A. GENERAL
This Disclosure Statement is being furnished by Merisel, Inc. ("Merisel"), a
Delaware corporation, pursuant to section 1126(b) of the United States
Bankruptcy Code (the "Bankruptcy Code") and Bankruptcy Rule 3018(b), in
connection with the solicitation of acceptances, prior to the commencement of
the Reorganization Case, of Merisel's prepackaged plan of reorganization (the
"Plan") attached as Appendix I hereto (as it may be altered, amended, modified
or supplemented as described herein) from Holders of (i) 12.5% Notes and (ii)
Old Common Stock (the "Solicitation"). Capitalized terms not otherwise defined
herein shall have the respective meanings ascribed to them in the Plan.
The Plan is intended to enhance the long-term viability and contribute to
the success of Merisel by adjusting Merisel's capitalization (including debt
levels and principal repayment schedules) to reflect current and projected
operating performance levels. The Plan is designed to reduce Merisel's debt
service obligations to levels which can be supported by its projected cash
flow and to replace a significant portion of Merisel's indebtedness with New
Common Stock. Interest charges, required principal payments and total debt
outstanding will be substantially reduced if the Plan is approved and
consummated. See "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION" herein.
The Plan provides for, among other things: (i) issuing and distributing New
Common Stock to Holders of 12.5% Notes; and (ii) issuing and distributing New
Common Stock and the Warrants to Holders of Old Common Stock. In consideration
of such distributions, the 12.5% Notes and Old Common Stock will be cancelled.
MERISEL'S OPERATING SUBSIDIARIES, INCLUDING WITHOUT LIMITATION MERISEL
AMERICAS, INC. AND MERISEL CANADA, INC., ARE NOT CHAPTER 11 DEBTORS AND DO NOT
INTEND TO COMMENCE CASES UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. MERISEL'S
OPERATING SUBSIDIARIES INTEND TO CONTINUE TO DO BUSINESS IN THE ORDINARY
COURSE IF MERISEL COMMENCES THE REORGANIZATION CASE.
Holders of the 12.5% Notes and Holders of Old Common Stock should read this
Prospectus and Disclosure Statement, together with the Plan, the form of
Ballot and/or Master Ballot, as applicable, and the applicable Voting
Instructions (collectively, the "Solicitation Materials"), in their entirety
before voting on the Plan.
Pursuant to the provisions of the Bankruptcy Code, only Impaired Classes of
Claims and Interests are entitled to vote to accept or reject the Plan. The
only Class of Claims impaired under the Plan consists of the Holders of Class
4 12.5% Notes Claims. The only Class of Interests impaired under the Plan
consists of the Holders of Class 6 Old Common Stock Interests. See "SUMMARY OF
PLAN" herein for a description of these Classes. Merisel is seeking acceptance
of the Plan by Holders of Class 4 12.5% Notes Claims and Holders of Class 6
Old Common Stock Interests. ALL OTHER CLASSES ARE UNIMPAIRED AND HOLDERS OF
CLAIMS IN SUCH CLASSES ARE CONCLUSIVELY PRESUMED TO HAVE ACCEPTED THE PLAN
PURSUANT TO SECTION 1126(F) OF THE BANKRUPTCY CODE.
UNLESS OTHERWISE DIRECTED BY THE BANKRUPTCY COURT, ONLY VOTES CAST BY OR AT
THE DIRECTION OF BENEFICIAL INTEREST HOLDERS OF OLD SECURITIES IN ACCORDANCE
WITH THE VOTING INSTRUCTIONS WILL BE COUNTED FOR PURPOSES OF VOTING ON THE
PLAN. SEE "VOTING AND CONFIRMATION OF THE PLAN" HEREIN.
The Solicitation will expire at 5:00 p.m., Eastern time on the Voting
Deadline, August 29, 1997, unless the Voting Deadline is extended or waived by
Merisel. After carefully reviewing this Disclosure Statement, the Plan and the
other applicable Solicitation Materials, each Holder of a 12.5% Notes Claim
and each Holder of an Old Common Stock Interest should vote to accept or
reject the Plan in accordance with the Voting Instructions, and return the
appropriate Ballot(s) or Master Ballot(s) in accordance with the instructions
set forth therein so they are received prior to the Expiration Date. For
further information, see "VOTING AND CONFIRMATION OF THE PLAN" herein.
ANNEX IV
B-1
<PAGE>
B. THE COMPANY
Merisel, a holding company, is a leading distributor of computer hardware,
networking equipment and software products. Through its main operating
Subsidiary, Merisel Americas, Inc. ("Merisel Americas") and its other
operating Subsidiaries (collectively, the "Operating Companies"), Merisel
markets products and services throughout North America and has achieved
operational efficiencies that have made it a valued partner to a broad range
of computer resellers, including value-added resellers (VARs), commercial
resellers/dealers, and retailers. Merisel also has established the Merisel
Open Computing Alliance (MOCA(TM)), a division which primarily supports Sun
Microsystems' UNIX-based product sales and installations.
Merisel was originally incorporated in California in October 1980, was
reincorporated in Delaware in August 1988, and changed its name from Softsel
Computer Products, Inc. to Merisel, Inc. in August 1990.
In this Disclosure Statement, unless the context otherwise requires, Merisel
and its Subsidiaries are referred to as the "Company." The Company's principal
executive offices are located at 200 Continental Boulevard, El Segundo,
California 90245. Its telephone number is (310) 615-3080.
C. THE RESTRUCTURING
Merisel is simultaneously proposing alternative means of accomplishing its
financial restructuring. The proposed financial restructuring of Merisel
pursuant to the Plan is referred to as the "Prepackaged Restructuring." The
proposed financial restructuring of Merisel pursuant to the Exchange Offer and
without commencement of a bankruptcy case is referred to as the "Exchange
Restructuring." The term "Restructuring" as used herein means the financial
restructuring of Merisel pursuant to either the Exchange Restructuring or the
Prepackaged Restructuring. The term "Restructuring Closing Date" as used
herein means either the consummation of the Exchange Offer or the occurrence
of the Effective Date under the Plan, as the case may be.
1. EXCHANGE RESTRUCTURING
The Exchange Restructuring is designed to accomplish the Restructuring
without the commencement of a bankruptcy case. Before the Exchange
Restructuring can be consummated (but subject to Merisel's right to amend
and/or waive conditions to the Exchange Offer), Holders of 12.5% Notes must
tender (and not subsequently withdraw) by the expiration date for the Exchange
Offer one hundred percent (100%) of the aggregate principal amount of the
12.5% Notes pursuant to Merisel's offer to all such Holders to effect the
exchange described below. The Exchange Restructuring would permit Holders of
12.5% Notes to exchange their 12.5% Notes for New Common Stock.
In connection with the Exchange Restructuring, Merisel is soliciting proxies
from Merisel's stockholders and is holding a Special Meeting of Stockholders
to consider and vote upon the New Common Stock Issuance, the Charter
Amendment, and the Stock Award and Incentive Plan Proposal (each as defined in
Part A of this Prospectus). For additional information concerning the terms of
the Exchange Restructuring, recipients of this Disclosure Statement are
referred to Part A of this Prospectus.
2. PREPACKAGED RESTRUCTURING
The Prepackaged Restructuring would be accomplished by obtaining an order of
a bankruptcy court confirming the Plan as to which acceptances in sufficient
number and amount have been solicited and received prior to filing the
Reorganization Case. The Prepackaged Restructuring generally would give effect
to the same transactions contemplated in the Exchange Restructuring, including
(i) the exchange of 12.5% Notes for New Common Stock on similar terms as
provided in the Exchange Offer, (ii) a distribution of New Common Stock and
Warrants to holders of Old Common Stock, and (iii) changes to Merisel's
Certificate of Incorporation similar
ANNEX IV
B-2
<PAGE>
to the Charter Amendment. See "PURPOSES AND EFFECTS OF THE PREPACKAGED
RESTRUCTURING" and "SUMMARY OF THE PLAN" herein.
If the Plan is confirmed and the Effective Date occurs, (i) all 12.5% Notes
will be cancelled and satisfied in full by the issuance of New Common Stock to
holders of 12.5% Notes and (ii) Holders of Old Common Stock will receive New
Common Stock and the Warrants, and (iii) the Reorganized Merisel Certificate
of Incorporation will become effective.
Under the terms of both the Prepackaged Restructuring and the Exchange
Restructuring, Holders of 12.5% Notes would receive, in the aggregate,
approximately 80% of the New Common Stock. All Priority Claims, Unsecured
Claims and Secured Claims will remain unimpaired.
Generally, for the Plan to be approved, acceptances must be received from
(i) the Holders of Class 4 Claims constituting at least two-thirds in dollar
amount of such Allowed Claims and more than one-half in number of the Allowed
Class 4 Claims, in each case, counting only Holders that vote, and (ii) the
Holders of at least two-thirds in amount of the Allowed Old Common Stock
Interests in Class 6, counting only Holders of such Interests that vote. There
is no minimum level of voting participation required for confirmation of the
Plan. See "SUMMARY OF THE PLAN" herein. For a discussion of the procedures for
voting on the Plan, see "VOTING AND CONFIRMATION OF THE PLAN" herein.
Holders are not required to tender their 12.5% Notes and Old Common Stock to
vote on the Plan. It is important, however, that all Holders of 12.5% Notes
(whether or not they tender their 12.5% Notes in the Exchange Offer) and all
Holders of Old Common Stock vote to accept or reject the Plan, because under
the Bankruptcy Code, for purposes of determining whether the requisite
acceptance of Holders has been received with respect to an Impaired Class of
Claims or an Impaired Class of Interests, the vote will be tabulated based on
the ratio of accepting Holders of each Class of Claims or Interests to all
voting Holders of such Class of Claims or Interests. In each case, only the
votes of Holders of Allowed Claims and Interests are counted. Abstentions, as
a result of failing to submit a Ballot or Master Ballot (as applicable) or
submitting a Ballot or Master Ballot (as applicable) which has not been
properly executed and completed with respect to voting, will not be counted as
votes for or against the Plan. See "VOTING AND CONFIRMATION OF THE PLAN"
herein.
If Merisel receives the Minimum Tender of 12.5% Notes and has satisfied or
waived all conditions required to consummate the Exchange Restructuring and
also receives sufficient acceptances of the Plan, Merisel intends to
consummate the Exchange Restructuring. If Merisel does not receive the Minimum
Tender pursuant to the Exchange Offer to permit its consummation, but does
obtain sufficient acceptances in the amounts set forth above of the Plan to
seek confirmation thereof by a bankruptcy court, Merisel expects to seek
relief under Chapter 11 of the Bankruptcy Code and attempt to use such
acceptances to obtain confirmation of the Plan. If the requisite number and
amount of votes for acceptance of the Plan are not received (or if received,
are subsequently revoked or withdrawn) by the Expiration Date, Merisel will
consider all financial alternatives available to it at such time, which may
include the sale of all or part of Merisel's business or an equity interest in
Merisel, the implementation of an alternative restructuring arrangement
outside of bankruptcy (including refinancing the indebtedness under the
Operating Companies Loan Agreements or seeking waivers thereunder) or the
filing of a Chapter 11 case without a pre-approved plan of reorganization. See
"ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN" herein. Merisel
hereby reserves the absolute right to use any votes which have been received
(and not subsequently revoked or withdrawn) pursuant to the Solicitation to
seek confirmation of the Plan (or any modification thereof) if it has not
received the acceptance of all Impaired Classes of Interests in the amounts
set forth above.
Confirmation of the Plan is conditioned on satisfaction of all substantive
confirmation requirements of section 1129 of the Bankruptcy Code, the
Confirmation Order being acceptable in form and substance to Merisel, and
entry of a Confirmation Order expressly authorizing and directing Merisel to
perform therein. Consummation of the Plan is conditioned on the Confirmation
Order having become a Final Order, and payment of all statutory
ANNEX IV
B-3
<PAGE>
fees owing the United States Trustee. Merisel, in its sole discretion, may
waive any of the conditions to Confirmation and/or the Effective Date of the
Plan at any time, without notice or an order of the Bankruptcy Court and
without any formal action other than proceeding to confirm and/or consummate
the Plan. See "SUMMARY OF THE PLAN" herein.
At the closing of the Prepackaged Restructuring, which would occur on the
Effective Date (i.e., the date selected by Merisel, which shall be as soon as
reasonably practicable but that is at least 11 days after the Confirmation
Date and on which all conditions to the Effective Date set forth in the Plan
have been satisfied or, if permitted, waived by Merisel), among other things,
the Plan would become effective, the New Common Stock and Warrants would
become issuable, the 12.5% Notes and the Old Common Stock would be cancelled
and Merisel's obligations thereunder would be discharged, and the Reorganized
Merisel Certificate of Incorporation would become effective.
D. SUMMARY OF CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
The Plan categorizes into six Classes the Claims against and Interests in
Merisel which will exist on the date Merisel files its voluntary petition for
reorganization relief under Chapter 11 of the Bankruptcy Code. The Plan also
provides that Administrative Expenses incurred by Merisel during the
Reorganization Case will be paid in full and specifies the manner in which the
Claims and Interests in each Class are to be treated. The table below provides
a summary of the classification and treatment of, and distributions to, Claims
and Interests under the Plan:
<TABLE>
<CAPTION>
TYPE OF CLAIM
CLASS OR EQUITY INTEREST DISTRIBUTION
----- ------------------ ------------
<S> <C> <C>
Class 1 Secured Claims Reinstated
Class 2 Priority Claims Paid in full
Class 3 Subsidiary Debt Guaranty Claims Reinstated
Class 4 12.5% Notes Claims Will receive 80% of New Common Stock
Class 5 General Unsecured Claims Paid in full
Class 6 Old Common Stock Interests Will receive 20% of New Common Stock
and Warrants
</TABLE>
For a more detailed description of the foregoing Classes of Claims and
Equity Interests, see "SUMMARY OF THE PLAN" herein.
E. NOTICE TO HOLDERS OF CLAIMS AND INTERESTS
This Disclosure Statement is being transmitted only to holders of Impaired
Claims against and Impaired Interests in Merisel who are entitled to vote to
accept or reject the Plan.
WHEN CONFIRMED BY THE BANKRUPTCY COURT, THE PLAN WILL BIND ALL HOLDERS OF
CLAIMS AGAINST AND INTERESTS IN MERISEL, WHETHER OR NOT THEY ARE ENTITLED TO
VOTE OR DID VOTE ON THE PLAN AND WHETHER OR NOT THEY RECEIVE OR RETAIN ANY
DISTRIBUTIONS OR PROPERTY UNDER THE PLAN. THUS, ALL HOLDERS OF IMPAIRED CLAIMS
AGAINST AND IMPAIRED INTERESTS IN MERISEL ARE ENCOURAGED TO READ THE PROXY
STATEMENT/PROSPECTUS, THE EXCHANGE RESTRUCTURING PROSPECTUS, THIS DISCLOSURE
STATEMENT AND ITS EXHIBITS CAREFULLY AND IN THEIR ENTIRETY BEFORE VOTING TO
ACCEPT OR TO REJECT THE PLAN. THIS DISCLOSURE STATEMENT CONTAINS IMPORTANT
INFORMATION ABOUT THE PLAN, CONSIDERATIONS PERTINENT TO ACCEPTANCE OR
REJECTION OF THE PLAN, AND DEVELOPMENTS CONCERNING THE REORGANIZATION CASE.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS BY ITS
NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS, AND PROJECTIONS
THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL, FUTURE RESULTS.
ANNEX IV
B-4
<PAGE>
Except with respect to the projections referenced in "FINANCIAL PROJECTIONS
AND ASSUMPTIONS USED" herein (the "Projections") and except as otherwise
specifically and expressly stated herein, this Disclosure Statement does not
reflect any events that may occur subsequent to the date hereof. Such events
may have a material impact on the information contained in this Disclosure
Statement. Merisel and Reorganized Merisel do not intend to update the
Projections. Thus, the Projections will not reflect the impact of any
subsequent events not already accounted for in the assumptions underlying the
Projections. Further, Merisel does not anticipate that any amendments or
supplements to this Disclosure Statement will be distributed to reflect such
occurrences. Accordingly, the delivery of this Disclosure Statement shall not
under any circumstance imply that the information herein is correct or
complete as of any time subsequent to the date hereof.
EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED HEREIN
HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT AND HAS NOT BEEN
PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
If you did not receive a Ballot in your package of Solicitation Materials
and believe that you should have, please contact the Information Agent named
below at the address or telephone number set forth in Section XXIII.J of this
Disclosure Statement.
II. BUSINESS AND PROPERTIES OF THE COMPANY
For a discussion of the business and properties of the Company, see
"BUSINESS AND PROPERTIES OF THE COMPANY" in Part A of the Exchange
Restructuring Prospectus.
III. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
For selected financial data concerning the Company for each of the five
years ended December 31, 1996, see "SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION" in Part A of the Exchange Restructuring Prospectus.
IV. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For management's discussion and analysis of the Company's financial
condition and the results of its operations, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in Part A of the
Exchange Restructuring Prospectus.
V. BACKGROUND OF THE RESTRUCTURING
For a discussion of the background of and events leading to the
Restructuring, see "BACKGROUND OF THE RESTRUCTURING" in Part A of the Exchange
Restructuring Prospectus.
VI. PURPOSES AND EFFECTS OF THE PREPACKAGED RESTRUCTURING
A. PURPOSE OF THE PREPACKAGED RESTRUCTURING
The Plan is intended to enhance the long-term viability and contribute to
the success of Merisel by adjusting Merisel's capitalization (including debt
levels and principal repayment schedules) to reflect current and projected
operating performance levels. Specifically, the Plan is designed to reduce
Merisel's debt obligations by $125 million, to levels which Merisel believes
can be supported by its projected cash flow and to replace a significant
portion of Merisel's indebtedness with New Common Stock. Interest charges will
be substantially reduced if the Plan is approved and consummated. In addition,
required principal payments and total debt outstanding will be substantially
reduced. The amount of outstanding Capital Stock of Merisel will be
substantially increased as a result of the Prepackaged Restructuring. See "PRO
FORMA CONSOLIDATED FINANCIAL
ANNEX IV
B-5
<PAGE>
INFORMATION" herein. For a discussion of the purpose and effects of the
Exchange Restructuring, see "PURPOSES OF THE RESTRUCTURING" in Part A of the
Exchange Restructuring Prospectus.
THE OPERATING COMPANIES, INCLUDING WITHOUT LIMITATION MERISEL AMERICAS, INC.
AND MERISEL CANADA, INC., ARE NOT CHAPTER 11 DEBTORS AND DO NOT INTEND TO
COMMENCE CASES UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. MERISEL'S OPERATING
COMPANIES WILL CONTINUE TO DO BUSINESS IN THE ORDINARY COURSE IF MERISEL
COMMENCES THE REORGANIZATION CASE.
Merisel believes that the Prepackaged Restructuring is a significantly more
attractive alternative than a bankruptcy case without a pre-approved plan of
reorganization. Merisel believes that acceptance of the Plan before a
bankruptcy case is commenced would be more beneficial to Merisel and all of
its creditors, equity security holders and other constituents than seeking to
obtain confirmation of a plan having the same terms as the Plan after a
bankruptcy case is commenced, because the Plan should minimize disputes during
such case concerning the reorganization of Merisel, significantly shorten the
time required to accomplish the reorganization, reduce the expenses of a case
under Chapter 11 of the Bankruptcy Code, minimize the disruption of Merisel's
business that would result from a protracted and contested bankruptcy case,
and therefore result in a larger distribution to Merisel's creditors and
equity security holders than would any non-prepackaged reorganization under
Chapter 11 of the Bankruptcy Code or a liquidation under Chapter 7 of the
Bankruptcy Code. See Section XXI.C--"Chapter 7 Liquidation Analysis" herein.
There can be no assurance, however, that even if all requisite acceptances
of the Plan are received and the Reorganization Case is commenced, the
Prepackaged Restructuring would ever be completed, that Merisel could
successfully be reorganized under Chapter 11 of the Bankruptcy Code, that
Merisel would not suffer a disruption in its business operations as a result
of filing the Reorganization Case or, even if the Prepackaged Restructuring
were eventually completed, that the time period which it would take Merisel to
emerge from the Reorganization Case in connection with the Plan would be
significantly shorter than under a non-prepackaged Chapter 11 case. If Merisel
determines that it is or will be unable to complete the Restructuring, Merisel
will consider all financial alternatives available to it at such time, which
may include the sale of all or part of Merisel's business or an equity
interest in Merisel, the implementation of an alternative restructuring
arrangement outside of bankruptcy (including refinancing the indebtedness
under the Operating Companies Loan Agreement or seeking waivers thereunder) or
the commencement of a Chapter 11 case without a pre-approved plan of
reorganization. See "ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE
PLAN" herein. There can be no assurance, however, that any alternative
restructuring would result in a reorganization of Merisel rather than a
liquidation, or that any such reorganization would be on terms as favorable to
the Holders of Claims and Holders of Interests as the terms of the Prepackaged
Restructuring. If a liquidation or a protracted and non-orderly reorganization
were to occur, there is a risk that the ability of the Holders of Claims and
Interests to recover their investments would be even more impaired than under
the Prepackaged Restructuring and would be substantially delayed and a non-
consensual restructuring would likely have a material adverse impact on the
Company and its employees, suppliers and customers. See "RISK FACTORS" herein.
B. EFFECTS OF THE PREPACKAGED RESTRUCTURING
If confirmed, the Plan will implement the Prepackaged Restructuring by
providing for, among other things (i) the exchange of 12.5% Notes for New
Common Stock on substantially the same terms as provided in the Exchange Offer
and (ii) the issuance of New Common Stock and Warrants to holders of Old
Common Stock.
If the Reorganization Case is commenced and the Plan is confirmed, all
Holders of 12.5% Notes and Holders of Old Common Stock will be bound by the
terms of the Plan whether or not they have voted to accept the Plan in
accordance with the Plan and the Voting Instructions. To be counted, Ballots
and Master Ballots to vote to accept or reject the Plan described herein must
be submitted in accordance with the Voting Instructions. See "VOTING AND
CONFIRMATION OF THE PLAN" herein.
ANNEX IV
B-6
<PAGE>
1. DILUTION OF EQUITY INTERESTS
Under the Plan, each Holder of 12.5% Notes will be entitled to receive, in
full and final satisfaction of such Holder's Allowed Class 4 Claim, 192.5
shares of New Common Stock for each $1,000 of 12.5% Notes held by such Holder,
thus enabling such Holders to participate in the economic results and any
future growth of Reorganized Merisel. The issuance to Holders of 12.5% Notes
of shares of New Common Stock upon consummation of the Plan will result in
significant dilution of the equity interests of the existing holders of Common
Stock. Following consummation of the Plan, the 24,062,796 shares issued
directly to Holders of Allowed 12.5% Note Claims will represent approximately
80 percent of the total outstanding shares of New Common Stock (excluding
shares obtainable upon exercise of Warrants) and the 35,342,232 million total
shares (including those obtainable upon exercise of the Warrants) will
represent 68.1 percent of the total outstanding shares of New Common Stock, in
each case based on shares that will be issued and outstanding as of the
Effective Date. See "Section IX.E" herein "--Securities To Be Issued Under The
Plan."
2. PROVISIONS FOR TRADE CREDITORS, OTHER UNSECURED CREDITORS AND SECURED
CREDITORS
DURING THE PENDENCY OF THE REORGANIZATION CASE AND THEREAFTER, MERISEL
INTENDS TO CONTINUE TO OPERATE ITS BUSINESS IN THE ORDINARY COURSE AND MAKE
PAYMENT IN FULL ON A TIMELY BASIS TO ITS POSTPETITION TRADE CREDITORS. MERISEL
ALSO EXPECTS THAT IMMEDIATELY UPON FILING THE PREPACKAGED CHAPTER 11 CASE, IT
WILL REQUEST AUTHORITY FROM THE BANKRUPTCY COURT TO PAY ALL UNDISPUTED TRADE
CLAIMS AND CERTAIN OTHER CLASS 5 CLAIMS IN THE ORDINARY COURSE OF ITS
BUSINESS.
If Merisel commences the Reorganization Case, Merisel intends and the Plan
provides that Class 1 Secured Claims and Class 5 General Unsecured Claims
(including Trade Claims) will be unimpaired and that after confirmation of the
Plan Creditors holding such Claims will be entitled to assert their Claims to
the full extent of the legal and equitable rights of such Creditors as they
existed immediately prior to the commencement of the Reorganization Case, but
subject to all of the legal and equitable rights of the parties with respect
to such Claims as such rights existed immediately prior to the filing of the
Reorganization Case. Because Merisel is a holding company whose operating
businesses are conducted by Merisel's Operating Companies, Merisel has few
trade creditors. Merisel's Operating Companies, including, without limitation,
Merisel Americas, Inc. and Merisel Canada, Inc., do not intend to commence
Chapter 11 cases.
Subject to Bankruptcy Court approval, the legal, equitable and contractual
rights of the Holders of Class 1 Claims and Class 5 Claims are unaltered by
the Plan and the maturity date or dates of such Claims shall be reinstated to
the date or dates which existed in the agreements evidencing such Claims prior
to any acceleration of such Claims, subject to the legal and equitable rights
of the parties with respect to such Claims as they existed immediately prior
to the filing of the Plan. Holders of Class 1 Claims and/or Class 5 Claims
under rejected executory contracts and unexpired leases must file proofs of
claim, and will be subject to the provisions of the Bankruptcy Code, however.
Merisel will make payments required by section 1124(2) of the Bankruptcy Code
to Holders of Class 1 Claims and Class 5 Claims on the Effective Date or as
soon thereafter as is practicable, but in no event later than thirty days
after the Effective Date. See "SUMMARY OF THE PLAN" herein.
Under the Plan, Holders of Secured Claims and Unsecured Claims do not have
to file, and should not file, proofs of claims with the court and no bar date
will be enforced as to their Claims. Notwithstanding the previous sentence,
any Holder of a Claim under an executory contract or an unexpired lease which
has been rejected by Merisel must file a proof of claim with the Bankruptcy
Court, a bar date will be enforced as to such Claims and Holders of such
Claims will be subject to the provisions of the Bankruptcy Code. It is the
intention of Merisel that, subject to successful Confirmation and consummation
of the Plan, disputes, if any, relating to Secured Claims and Unsecured Claims
(other than claims under rejected executory contracts or unexpired leases)
will be determined, resolved or adjudicated in accordance with applicable law
as if the Reorganization Case had not been filed.
ANNEX IV
B-7
<PAGE>
3. PROVISIONS FOR EMPLOYEES
If Merisel files the Plan, Merisel intends for salaries or wages, as the
case may be, accrued paid vacation, health-related benefits, severance
benefits and similar employee benefits to be unaffected. Employee benefit
claims that accrue prior to the Petition Date will receive unimpaired
treatment under the terms of the Plan. See "SUMMARY OF THE PLAN" herein.
The Holding Company, has only four (4) employees, three of whom are senior
executive officers. In order to ensure the continuity of this work force and
to further accommodate the unimpaired treatment of employee benefits, Merisel
intends to seek the approval of the Bankruptcy Court, immediately upon
commencement of the Prepackaged Chapter 11 Case, to honor payroll checks
outstanding as of the Petition Date, to permit Merisel employees to utilize
their paid vacation time which was accrued prior to the commencement of the
Reorganization Case and to continue paying medical benefits under applicable
employee health plans. Merisel also intends to seek authorization from the
Bankruptcy Court to honor, pay and/or perform in the ordinary course, wages,
salaries, paid vacation and other employee benefits which accrue after the
Petition Date. There can be no assurance, however, that any necessary approval
will be obtained. Employee claims and benefits not paid or honored, as the
case may be, prior to the consummation of the Plan, will be paid or honored
upon consummation or as soon thereafter as such payment or other obligation
becomes due or payable. Merisel also intends to leave unaltered all other
legal, equitable and contractual rights of employees under its employment and
severance policies, compensation and benefit plans including any employee
stock options or stock appreciation right agreement, and all other agreements,
contracts and programs applicable to its employees. See "SUMMARY OF THE PLAN"
herein.
VII. THE REORGANIZATION CASE
A. TIMETABLE FOR REORGANIZATION CASE
Following the Petition Date, Merisel expects the Reorganization Case to
proceed on the following estimated timetable. There can be no assurance,
however, that the Bankruptcy Court's Orders to be entered on or after the
Petition Date will permit the Reorganization Case to proceed as expeditiously
as anticipated.
Merisel anticipates that the hearing on confirmation of the Plan, at which
the Bankruptcy Court would also consider whether the Solicitation complied
with Section 1126(b) of the Bankruptcy Code so as to permit the prepetition
votes on the Plan to be counted towards Confirmation, would occur on or about
day 30 of the Reorganization Cases following at least 25 days notice of the
Confirmation Hearing and of the time for filing objections to Confirmation of
the Plan.
Assuming that the Plan is confirmed at the initial Confirmation Hearing, the
Plan provides that the Effective Date will be a Business Day, as determined by
Merisel, that is as soon as reasonably practicable but that is at least 11
days after the Confirmation Date and on which: (a) no stay of the Confirmation
Order is in effect and (b) all conditions to the Effective Date set forth in
Section IX of the Plan have been satisfied or waived (if available) pursuant
to Section IX.C of the Plan.
Under the foregoing timetable, Merisel would emerge from the Reorganization
Case within 45 to 60 days after the Petition Date. There can be no assurance,
however, that this projected timetable will be achieved.
B. ADVISORS TO THE COMPANY
Merisel intends to seek bankruptcy court authorization to retain certain
professionals to represent it and assist it in connection with the
Reorganization Case. These professionals were consulted in connection with the
negotiation and development of the Plan. These professionals may include,
among others: (i) Skadden, Arps, Slate, Meagher & Flom LLP, as counsel for
Merisel; (ii) Donaldson, Lufkin & Jenrette ("DLJ"), as financial advisors to
Merisel, and (iii) Deloitte & Touche LLP, as accountants to Merisel.
ANNEX IV
B-8
<PAGE>
For additional discussion of professional advisors retained by Merisel in
connection with the Restructuring, see "ADVISORS AND REPRESENTATIVES" in Part
A of the Exchange Restructuring Prospectus.
C. COMMITTEES
To facilitate negotiations and otherwise provide for a unified and efficient
representation of unsecured creditors and equity interest holders with similar
rights and interests, the U.S. Trustee will generally appoint one or more
statutory committees as soon as practicable after the Filing Date, pursuant to
section 1102 of the Bankruptcy Code. Ordinarily, one committee will be
appointed to represent unsecured creditors, but the U.S. Trustee may appoint
additional committees to represent equity interest holders and/or creditors if
deemed necessary to assure adequate representation of creditors or equity
interest holders. A creditors committee will ordinarily consist of those
creditors willing to serve who hold the seven largest claims against Merisel
of those claims to be represented by the committee, or of the members of a
prepetition committee if it was fairly chosen and is representative. The fees
and expenses of such committees, including those of legal counsel and
financial advisors, are paid for from Merisel's Estate.
Merisel expects that, if the Reorganization Case is commenced, a request may
be made to the U.S. Trustee to appoint the Ad Hoc Noteholders Committee as the
official committee of unsecured creditors during the Reorganization Case.
Holders of equity interests are not ordinarily represented by an official
committee, but such a committee may be appointed if the Bankruptcy Court
determines such an official committee to be necessary to assure the adequate
representation of Interest Holders. Committees appointed by the U.S. Trustee
would be considered parties in interest and would have a right to be heard on
all matters concerning the Chapter 11 cases, including the Confirmation of the
Plan and, additionally, would be entitled to consult with Merisel concerning
the administration of the Reorganization Case and perform such other functions
and services that would further the interests of those creditors or Interest
Holders they represent.
D. ACTIONS TO BE TAKEN UPON COMMENCEMENT OF CASE
Merisel does not expect the Reorganization Case to be protracted. To
expedite its emergence from Chapter 11, Merisel intends to seek the relief
detailed below, among other relief, from the Bankruptcy Court on the Petition
Date. Such relief, if granted, will facilitate the administration of the
Reorganization Case, but there can be no assurance, however, that the
Bankruptcy Court will grant the relief sought.
APPLICATIONS TO RETAIN PROFESSIONALS. Upon commencement of the
reorganization Case, Merisel intends to file applications to retain the
reorganization professionals who will assist and advise Merisel in connection
with administration of the Reorganization Case. Merisel also intends to seek
authority to retain certain professionals to assist with the operations of the
Company's businesses in the ordinary course. Such so-called "ordinary course
professionals" will not be involved in the administration of the
Reorganization Case.
MOTION TO WAIVE FILING OF SCHEDULES AND STATEMENT OF FINANCIAL
AFFAIRS. Section 521 of the Bankruptcy Code and Bankruptcy Rule 1007 direct
that debtors must prepare and file certain schedules of claims, executory
contracts and unexpired leases and related information (the "Schedules") and a
statement of financial affairs (the "Statement") when a Chapter 11 case is
commenced. The purpose of filing the Schedules and the Statement is to provide
a debtor's creditors, equity interest holders and other interested parties
with sufficient information to make informed decisions regarding the debtor's
reorganization. Filing the Schedules and the Statement, however, is not
mandatory. A bankruptcy court may modify or dispense with the filing of the
Schedules and the Statement pursuant to section 521 of the Bankruptcy Code.
Merisel believes that the Reorganization Case constitutes an ideal case
wherein the filing of the Statement and the Schedules should not be required.
Therefore, Merisel intends to request that the Bankruptcy Court waive the
necessity of filing the Schedules and the Statement.
MOTION TO MAIL NOTICES AND TO PROVIDE ONLY PUBLICATION NOTICE OF MEETING OF
CREDITORS TO UNIMPAIRED CREDITORS. Pursuant to the Bankruptcy Rules, the Clerk
of the Bankruptcy Court, or another party that the
ANNEX IV
B-9
<PAGE>
Court may direct, must provide notice of the commencement of the
Reorganization Cases and of the first statutory meeting of creditors held
pursuant to section 341 of the Bankruptcy Code (the "Section 341 Meeting") to
all creditors. In addition, at least two other notices, notice of the hearing
on approval of Confirmation of the Plan and notice of the entry of an Order
Confirming the Plan, must be given to all creditors and equity security
Holders. Due to the size of the Reorganization Case and the large number of
creditors and equity security holders, Merisel will request that Merisel, or
its noticing agent, be authorized to mail all required notices in the
Reorganization Case. In addition, because several classes of claims are not
impaired under the Plan and will pass through the Reorganization Case
unaffected, Merisel will request that it be authorized to provide only
publication notice of the events set forth above, in one or more newspapers of
national circulation, to Holders of Unimpaired Claims.
MOTION TO CONTINUE USING EXISTING CASH MANAGEMENT SYSTEM. Because Merisel
expects the Reorganization Case to be pending for less than two months, and
because of the administrative hardship that any operating changes would impose
on it, Merisel intends to seek authority to continue using its existing cash
management system, bank accounts and business forms and to follow its internal
investment and deposit guidelines. Absent the Bankruptcy Court's authorization
of the continued use of Merisel's current cash management system, cash flow
among Merisel and its Operating Companies would be impeded, to the detriment
of Merisel's Estate and its creditors and shareholders.
Continued use of its existing cash management system will facilitate
Merisel's smooth and orderly transition into Chapter 11, minimize the
disruption to its businesses while in Chapter 11, and expedite Merisel's
emergence from Chapter 11. Requiring Merisel to adopt and implement a new cash
management system would likely increase the costs of the Reorganization Case.
For the same reasons, requiring Merisel to cancel its existing bank accounts
and establish new accounts or create new business forms would only frustrate
Merisel's efforts to reorganize expeditiously.
In the event that the Bankruptcy Court authorizes Merisel to continue using
its existing cash management system, Merisel will continue its pre-Petition
Date, ordinary course practice of obtaining unsecured credit from, and
incurring unsecured debt to, certain of its Subsidiaries. Merisel believes
that such intercompany borrowing and cash management transactions will qualify
as "ordinary course of business" credit transactions within the meaning of
section 364(a) of the Bankruptcy Code.
MOTION FOR AUTHORITY TO PAY PREPETITION TRADE CLAIMS. Trade Claims are
defined in the Plan as prepetition General Unsecured Claims against Merisel
arising from or with respect to the delivery of goods or services to Merisel
in the ordinary course of Merisel's business. Trade Claims are included in
Class 5. Notwithstanding provisions of the Bankruptcy Code that would
otherwise require Merisel to defer payment of Trade Claims until the Effective
Date, Merisel intends to seek authority from the Bankruptcy Court to pay Trade
Claims in the ordinary course of its businesses.
MOTION FOR AUTHORITY TO PAY PREPETITION EMPLOYEE WAGES AND ASSOCIATED
BENEFITS. Merisel believes that any delay in paying prepetition compensation
or benefits to its employees would destroy Merisel's relationships with
employees and irreparably harm employee morale at a time when the dedication,
confidence and cooperation of Merisel's employees are most critical.
Accordingly, Merisel will seek authority to pay compensation and benefits
which were accrued but unpaid as of the Petition Date.
MOTION FOR AUTHORITY TO MAINTAIN WORKERS' COMPENSATION INSURANCE POLICIES
AND TO PAY PREPETITION WORKERS' COMPENSATION CLAIMS. To ensure that Merisel's
workers' compensation, automobile and general liability insurance coverages
remain in effect, Merisel shall seek authority to assume and maintain their
workers' compensation, automobile and general liability insurance policies.
Likewise, to the extent necessary, Merisel shall also seek authority to pay
retroactive prepetition premiums on certain other workers' compensation
insurance policies and to honor prepetition workers' compensation claims. The
failure to maintain such insurance by the payment of the premiums could
subject Merisel or their officers to criminal penalties.
ANNEX IV
B-10
<PAGE>
VIII. OFFICERS AND DIRECTORS OF THE COMPANY
For a discussion of the officers and directors of Merisel, see "MANAGEMENT"
and "MANAGEMENT COMPENSATION" in Part A of the Exchange Offer.
OFFICERS AND DIRECTORS OF REORGANIZED MERISEL. As of the Effective Date, the
Persons identified in the Proxy Statement/Prospectus will serve as the initial
members of the Board of Directors of Reorganized Merisel. Such Persons shall
be deemed elected to the Board of Directors, and such elections shall be
deemed effective as of the Effective Date, without any requirement of further
action by stockholders of Merisel or Reorganized Merisel. The Persons
identified in the Proxy Statement/Prospectus as the current officers of
Merisel will serve as the initial officers of Reorganized Merisel as of the
Effective Date. Subject to any requirement of Bankruptcy Court approval under
section 1129(a) of the Bankruptcy Code, those persons designated as directors
and officers of Reorganized Merisel in the Proxy Statement/Prospectus shall
assume their offices as of the Effective Date and shall continue to serve in
such capacities thereafter, pending further action of the Board of Directors
or stockholders or Reorganized Merisel in accordance with the Reorganized
Merisel Bylaws, Reorganized Merisel Certificate of Incorporation and
applicable state law.
IX. SUMMARY OF THE PLAN
A. BRIEF EXPLANATION OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is
authorized to reorganize its business for the benefit of itself and its
creditors and stockholders. In addition to permitting rehabilitation of the
debtor, another goal of Chapter 11 is to promote equality of treatment of
creditors and equity security holders, respectively, who hold substantially
similar claims or interests with respect to the distribution of the value of a
debtor's assets. In furtherance of these two goals, upon the filing of a
petition for relief under Chapter 11, section 362 of the Bankruptcy Code
generally provides for an automatic stay of substantially all acts and
proceedings against the debtor and its property, including all attempts to
collect claims or enforce liens that arose prior to the commencement of the
debtor's Chapter 11 case.
The consummation of a plan of reorganization is the principal objective of a
Chapter 11 case. A plan of reorganization sets forth the means for satisfying
claims against and interests in a debtor. Confirmation of a plan of
reorganization by the Bankruptcy Court makes the plan binding upon the debtor,
any issuer of securities under the plan, any person or entity acquiring
property under the plan and any creditor of or equity security holder in the
debtor, whether or not such creditor or equity security holder (i) is impaired
under or has accepted the plan or (ii) receives or retains any property under
the plan. Subject to certain limited exceptions and other than as provided in
the plan itself or the confirmation order, the confirmation order discharges
the debtor from any debt that arose prior to the date of confirmation of the
plan and substitutes therefor the obligations specified under the confirmed
plan and terminates all rights and interests of prepetition equity security
holders.
The following is an overview of certain material provisions of the Plan. The
following summaries of the material provisions of the Plan do not purport to
be complete and are qualified in their entirety by reference to all the
provisions of the Plan, including all exhibits thereto, all documents
described therein and the definitions therein of certain terms used below.
B. GENERAL INFORMATION CONCERNING TREATMENT OF CLAIMS AND INTERESTS
The Plan provides for payment in full or other Reinstatement of
Administrative Claims, Priority Tax Claims, Priority Claims, Secured Claims,
Subsidiary Debt Guaranty Claims and General Unsecured Claims. The Plan
provides that Holders of Allowed Impaired 12.5% Notes Claims will receive New
Common Stock in exchange for their Allowed Claims. The Plan also provides that
Holders of Old Common Stock, which will be cancelled pursuant to the Plan,
will receive New Common Stock and Warrants on account of their Allowed Old
Common Stock. See "Securities To Be Issued And Transferred Under The Plan" in
this Article X for a description of the
ANNEX IV
B-11
<PAGE>
New Common Stock, and "Description of Warrants" for a description of the New
Series A Warrants and New Series B Warrants.
To allow Merisel to complete a financial restructuring in the manner which
will maximize its enterprise value, Merisel is soliciting prepetition
acceptances of the Plan from Holders of Impaired 12.5% Notes Claims and Old
Common Stock Interests prior to filing the Reorganization Case. Merisel
presently intends to seek to consummate the Plan and to cause the Effective
Date to occur as soon as practicable. There can be no assurance, however, as
to when the Effective Date will actually occur. Procedures for the
distribution of cash and securities pursuant to the Plan, including matters
that are expected to affect the timing of the receipt of distributions by
Holders of Claims and Interests in certain Classes and that could affect the
amount of distributions ultimately received by such Holders, are described in
"Distributions Under The Plan" in this Article X.
Management of Merisel believes that the Plan provides consideration to all
Classes of Claims and Interests reflecting an appropriate resolution of their
Claims and Interests, taking into account the differing nature and priority of
such Claims and Interests. The Bankruptcy Court must find, however, that a
number of statutory tests are met before it may confirm the Plan. Many of
these tests are designed to protect the interests of Holders of Claims or
Interests who do not vote to accept the Plan, but who will be bound by the
provisions of the Plan if it is confirmed by the Bankruptcy Court. The
"cramdown" provisions of section 1129(b) of the Bankruptcy Code, for example,
permit confirmation of a Chapter 11 plan of reorganization in certain
circumstances even if the plan is not accepted by all impaired classes of
claims and interests. See Article XXIII herein--"Voting And Confirmation Of
The Plan."
Merisel reserves the right to request confirmation of the Plan pursuant to
the cramdown provisions of section 1129(b) of the Bankruptcy Code and to amend
the Plan if, and to the extent necessary, Class 6 Old Common Stock Interests
fail to accept the Plan. Although Merisel believes that, if necessary, the
Plan could be confirmed under the cramdown provisions of the Bankruptcy Code
if certain Class 6 Common Stock Interests do not accept the Plan, there can be
no assurance that the requirements of such provisions would be satisfied. If
Class 4 12.5% Notes Claims do not vote to accept the Plan, cramdown of Class 6
Old Common Stock Interests is not possible.
C. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
Section 1123 of the Bankruptcy Code provides that a plan of reorganization
shall classify the claims of a debtor's creditors and equity interest holders.
In compliance therewith, the Plan divides Claims and Interests into six
Classes and sets forth the treatment for each Class. In accordance with
section 1123(a), Administrative Claims and Priority Tax Claims have not been
classified. Merisel also is required, under section 1122 of the Bankruptcy
Code, to classify Claims against and Interests in Merisel into Classes that
contain Claims and Interests that are substantially similar to the other
Claims and Interests in such Classes. Merisel believes that the Plan has
classified all Claims and Interests in compliance with the provisions of
section 1122, but once the Reorganization Case has been commenced, it is
possible that a Holder of a Claim or Interest may challenge the classification
of Claims and Interests and that the Bankruptcy Court may find that a
different classification is required for the Plan to be Confirmed. In such
event, Merisel intends, to the extent permitted by the Bankruptcy Court and
the Plan, to make such reasonable modifications of the classifications under
the Plan to permit Confirmation and to use the Plan acceptances received in
this solicitation for the purpose of obtaining the approval of the
reconstituted Class or Classes of which the accepting Holder is ultimately
deemed to be a member. Any such reclassification could adversely affect the
Class in which such Holder was initially a member, or any other Class under
the Plan, by changing the composition of such Class and the vote required of
that Class for approval of the Plan. Furthermore, a reclassification of a
Claim or Interest after approval of the Plan could necessitate a
resolicitation of acceptances of the Plan.
The classification of Claims and Interests and the nature of distributions
to Holders of Impaired Claims or Impaired Interests in each Class are
summarized below. See "Securities To Be Issued And Transferred Under The Plan"
in this Article X for a description of the manner in which the number of
shares of New Common
ANNEX IV
B-12
<PAGE>
Stock will be determined and "RISK FACTORS" herein for a discussion of various
other factors that could materially affect the value of the New Common Stock
distributed pursuant to the Plan.
Except for Disputed Claims, distributions will be deemed made on the
Effective Date if made on the Effective Date or as promptly thereafter as
practicable, but in any event no later than (i) 10 days after the Effective
Date or (ii) such later date when the applicable conditions under the Plan
relating to such distributions are satisfied. See "Distributions Under The
Plan" in this Article X for a discussion of Plan provisions that may affect
the timing of distributions under the Plan. Distributions on account of Claims
that become Allowed Claims after the Effective Date will be made pursuant to
Section V.B of the Plan (relating to timing and calculation of amounts to be
distributed under the Plan) and Section V.I of the Plan (relating to
distributions on account of Disputed Claims once they are Allowed). See
Section X.J herein.
1. UNCLASSIFIED CLAIMS
The Bankruptcy Code does not require classification of certain priority
claims against a debtor. In this case, these unclassified claims include
Administrative Claims and Priority Tax Claims. All distributions referred to
below that are scheduled for the Effective Date will be made on the Effective
Date or as soon as practicable thereafter.
ADMINISTRATIVE CLAIMS. Under the Plan, each Holder of an Allowed
Administrative Claim will receive cash equal to the unpaid portion of such
Allowed Administrative Claim on the latest of (i) the Effective Date, (ii) the
date on which such Claim becomes an Allowed Administrative Claim and (iii) the
date on which such Claim becomes payable pursuant to any agreement between the
Holder of such Claim and Merisel. Holders of Administrative Claims (other than
Trade Claims arising in the ordinary course of business and employee claims)
shall have until 60 days after the Effective Date to file requests for
payment. Subject to certain additional requirements for professionals and
certain other entities, each Holder of an Allowed Administrative Claim will
receive on the Effective Date cash equal to the amount of such Allowed
Administrative Claim, unless the Holder and Merisel or Reorganized Merisel
agree to other terms; provided, however, that if incurred in the ordinary
course of business or otherwise assumed by Merisel pursuant to the Plan
(including Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be paid, performed or settled by Reorganized Merisel
when due in accordance with the terms and conditions of the particular
agreement(s) governing the obligation.
CLAIMS BY PROFESSIONALS. Professionals or other entities requesting
compensation or reimbursement of expenses pursuant to sections 327, 328, 330,
331, 503(b) and 1103 of the Bankruptcy Code for post-petition services
rendered before the Effective Date (including compensation requested pursuant
to section 503(b)(4) of the Bankruptcy Code by any professional or other
entity for making a substantial contribution in the Reorganization Case) must
file and serve on Reorganized Merisel and counsel for Reorganized Merisel an
application for final allowance of compensation and reimbursement of expenses
no later than 60 days after the Effective Date, unless such filing and service
deadline is extended by the Bankruptcy Court; provided, however, that any
professional who may receive compensation or reimbursement of expenses
pursuant to the Ordinary Course Professionals Order without having filed an
application may continue to receive compensation or reimbursement for services
rendered before the Effective Date without further Bankruptcy Court review or
approval pursuant to the Ordinary Course Professionals Order. Objections to
applications of professionals or other entities for compensation or
reimbursement of expenses must be filed and served on Merisel, counsel for
Reorganized Merisel and the requesting professional or other entity no later
than 30 days after the date on which the applicable application for
compensation or reimbursement was filed.
PRIORITY TAX CLAIMS. Unless otherwise agreed to by Merisel and a Holder of a
Priority Tax Claim, each Holder of an Allowed Priority Tax Claim shall receive
(i) Cash equal to the unpaid portion of such Allowed Priority Tax Claim on the
later of (a) the Effective Date and (b) the date on which such Claim becomes
an Allowed Priority Tax Claim; or (ii) payment at such time as specified under
applicable laws. The foregoing
ANNEX IV
B-13
<PAGE>
treatment of Allowed Priority Tax Claims is consistent with the provisions of
section 1129(a)(9)(C) of the Bankruptcy Code, and the Holders of Allowed
Priority Tax Claims are not entitled to vote on the Plan.
The Internal Revenue Service has issued to the Company a report proposing
the assessment of an additional income tax liability, including interest, of
approximately $1.7 million in respect of the 1992 and 1993 taxable years. The
Company has filed with the Internal Revenue Service an administrative appeal
of the proposed assessment, intends to continue to vigorously contest the
matter, and believes that it will ultimately prevail.
2. CLASSIFIED CLAIMS AND INTERESTS
CLASS 1--SECURED CLAIMS. Class 1 consists of each Secured Claim secured by a
security interest in or lien upon property in which Merisel's Estate has an
interest. To the extent, if any, that the value of the collateral securing a
Class 1 Secured Claim is less than the amount of such Allowed Claim, the
difference will be treated as a Class 5 General Unsecured Claim.
Class 1 Secured Claims are Unimpaired and, accordingly, are not entitled to
vote for or against the Plan and will be deemed to have accepted the Plan.
Holders of Claims in Class 1 will not be required to file proofs of claim, and
no bar date will be enforced as to such Claims. Merisel is unaware of any
material Secured Claims.
On the Effective Date, or as soon thereafter as practicable, the Holder of
an Allowed Class 1 Secured Claim, in full satisfaction, settlement, release
and discharge of and in exchange for such Allowed Class 1 Secured Claim,
shall, in the sole discretion of Merisel, (a) have its Allowed Class 1 Secured
Claim Reinstated, or (b) receive such other treatment as Merisel and such
holder shall have agreed upon in writing as announced at or prior to the
Confirmation Hearing.
CLASS 2--UNSECURED PRIORITY CLAIMS. Class 2 Claims are Unimpaired. Class 2
consists of all Allowed Unsecured Priority Claims. A Priority Claim is a Claim
for an amount entitled to priority under Sections 507(a)(3), 507(a)(4),
507(a)(5) or 507(a)(6) of the Bankruptcy Code, and does not include any
Administrative Claim or Tax Claim. These Unsecured Priority Claims include,
among others: (a) unsecured Claims for accrued employee compensation earned
within 90 days prior to the Petition Date, to the extent of $4,000 per
employee; and (b) contributions to employee benefit plans arising from
services rendered within 180 days prior to the Petition Date, but only for
such plans to the extent of (i) the number of employees covered by such plans
multiplied by $4,000, less (ii) the aggregate amount paid to such employees
under Section 507(a)(3) of the Bankruptcy Code, plus the aggregate amount paid
by the estate on behalf of such employees to any other employee benefit plan.
The Plan provides that, unless otherwise agreed to by the parties, each
Holder of an Allowed Claim in Class 2 will be paid the Allowed Amount of such
Claim in full in Cash by Reorganized Merisel on the latest of (i) the
Effective Date or as soon as practicable thereafter, (ii) the date such Claim
becomes an Allowed Priority Claim, and (iii) the date that such Claim would be
paid in accordance with any terms and conditions of any agreements or
understandings relating thereto between Merisel and the Holder of such Claim.
Allowed Claims in Class 2 are not Impaired under the Plan and the Holders of
Allowed Claims in Class 2 will be deemed to have accepted the Plan.
CLASS 3--SUBSIDIARY DEBT GUARANTY CLAIMS. Class 3 consists of each
Subsidiary Guaranty Claim. Class 3 Claims are Unimpaired and, accordingly,
Holders of such Claims are not entitled to vote for or against the Plan and
will be deemed to have accepted the Plan. On the Effective Date, each
Subsidiary Debt Guaranty Claim will be Reinstated or receive such other
treatment agreed to by the Holder of such Claim. Under the Plan, Holders of
Claims in Class 3 are not required to file proofs of claim with the Bankruptcy
Court and no bar date would be enforced as to such Claims.
CLASS 4--CLAIMS ARISING FROM 12.5% NOTES. Class 4 will consist of Claims
arising under or related to the 12.5% Notes, including an aggregate principal
amount of $125 million and aggregate accrued and unpaid interest of
approximately $9.1 million through, but not including, the Petition Date
(assuming the Petition Date
ANNEX IV
B-14
<PAGE>
occurs on July 31, 1997), plus all other amounts, if any, which accrued prior
to the Petition Date on the 12.5% Notes. Class 4 is Impaired. Each Holder of
an Allowed Class 4 Claim will receive on the Effective Date or as soon as
practicable thereafter, on account of the unpaid principal amount plus unpaid
interest and all other amounts, if any, which accrued prior to the Petition
Date on its 12.5% Notes, 192.5 shares of New Common Stock for each $1,000 of
12.5% Notes held by such Holder.
CLASS 5--GENERAL UNSECURED CLAIMS. Class 5 is Unimpaired. Class 5 consists
of all Claims against Merisel, except Administrative Claims, Tax Claims and
Claims in Classes 1 through 4, and including, but not limited to, Claims
arising under damages resulting from the rejection of leases or executory
contracts. Class 5 also includes Trade Claims, Securities Claims and pre-
Petition Date Claims for indemnification of the kind described in Section X.D
of the Plan.
The Plan provides that unless otherwise agreed to by the parties, the legal,
equitable and contractual rights of each Holder of an Allowed Claim in Class 5
will either (a) not be altered by the Plan or (b) at the option of Merisel,
receive such other treatment that will result in such Allowed Claim being
deemed unimpaired under Section 1124 of the Bankruptcy Code. Allowed Claims in
Class 5 are not Impaired under the Plan and the Holders of Claims in Class 5
will be deemed to have accepted the Plan.
Under the Plan, Holders of Claims in Class 5 would not be required to file
proofs of claim with the Bankruptcy Court and no bar date would be enforced as
to such Claims.
CLASS 6--INTERESTS OF HOLDERS OF OLD COMMON STOCK. Class 6 is Impaired.
Class 6 consists of Allowed Interests of Holders of Old Common Stock. On the
Effective Date or as soon as practicable thereafter, each Holder of an Allowed
Class 6 Claim will receive, on a Pro Rata basis, on account of each share of
Old Common Stock which it holds: (i) .2 shares of New Common Stock, (ii) .0875
New Series A Warrants and (iii) .0875 New Series B Warrants.
3. ADDITIONAL INFORMATION REGARDING TREATMENT OF CERTAIN CLAIMS
PROVISIONS FOR TRADE CREDITORS. If and when Merisel files the Plan, Merisel
intends that all Claims of its trade creditors will be unimpaired and paid in
full.
A Trade Claim is defined in the Plan as any unsecured Claim against Merisel
arising from (i) the delivery of goods or services in the ordinary course of
business or (ii) insurance-related service (including insurance premiums).
Trade Claim excludes Claims (i) arising under Section 502(g) and 502(e) of the
Bankruptcy Code, (ii) of the type described in Section 726(a)(4) of the
Bankruptcy Code, or (iii) arising in tort for personal injury or property
loss.
The Plan sets forth Merisel's intention to treat Trade Claims as if the
Reorganization Case had never been commenced. Accordingly, after commencement
of the Reorganization Cases, Merisel will seek Bankruptcy Court approval to
pay in the ordinary course of business all outstanding Trade Claims to trade
creditors who continue to provide normal trade credit terms to Merisel.
Because Merisel is a holding company whose operating businesses are conducted
by its Operating Companies, Merisel has few trade creditors. In any event, all
Allowed Trade Claims in Class 5 that have become due and owing on or before
the Effective Date (unless previously paid during the Reorganization Cases)
will be paid in full, in cash (with interest, to the extent permitted by the
Bankruptcy Court), on or as soon as practicable after the Effective Date, or
at such other time as is mutually agreed upon by Merisel and the Holder of
such Claim. If not due and owing on the Effective Date, Trade Claims will be
Reinstated and paid in full in accordance with their respective terms or
otherwise rendered Unimpaired in accordance with section 1124 of the
Bankruptcy Code. The legal, equitable, and contractual rights of the Holders
of these Claims will be unaffected by the Plan.
If the Plan is confirmed, Holders of Trade Claims will not be required to
file proofs of claim with the Bankruptcy Court and no bar date will be
enforced as to such Trade Claims. On and after the Effective Date
ANNEX IV
B-15
<PAGE>
(and, subject to Bankruptcy Court approval, prior to the Effective Date), all
undisputed, non-contingent and liquidated Trade Claims not already paid will
be paid in full or in the ordinary course of business of Reorganized Merisel.
If Merisel disputes any Trade Claim, such dispute will be determined, resolved
or adjudicated, as the case may be, in the manner in which such dispute would
have been determined, resolved or adjudicated if the Reorganization Case had
not been commenced, and will survive the Effective Date and the consummation
of the Plan as if the Reorganization Case had not been commenced.
Any Claim arising from the rejection of an executory contract or unexpired
lease under the Plan does not constitute a Trade Claim and will be paid when
such Claim is Allowed by the Bankruptcy Court. See "Executory Contracts and
Unexpired Leases" in this Article X.
PROVISIONS FOR EMPLOYEES. If and when Merisel files the Plan, Merisel
intends that salaries or wages, as the case may be, accrued paid vacation,
health related benefits, severance benefits, field management and
executive/administrative management incentive plans and similar employee
benefits will be unaffected. Employee Claims that accrue pre-petition will
receive Unimpaired treatment under the terms of the Plan. To ensure the
continuity of Merisel's work force and to further accommodate the unimpaired
treatment of employee benefits, Merisel intends to seek immediate
authorization from the Bankruptcy Court to honor payroll checks outstanding as
of the Petition Date (or to issue replacement checks), to permit employees to
utilize paid vacation time accrued prior to the Petition Date (so long as they
remain employees of Merisel) and to continue paying medical and other benefits
under all applicable insurance plans. All undisputed, non-contingent and
liquidated Employee Claims and benefits not paid or honored prior to
consummation of the Plan will be paid or honored upon consummation of the Plan
or as soon thereafter as such payment or other obligation becomes due or
performable. Employees will not be required to file proofs of claim on account
of Employee Claims. If Merisel disputes any Employee Claim, such dispute will
be determined, resolved or adjudicated, as the case may be, in the manner in
which such dispute would have been determined, resolved or adjudicated if the
Reorganization Case had not been commenced, and will survive the Effective
Date and the consummation of the Plan as if the Reorganization Case had not
been commenced.
TREATMENT OF LITIGATION CLAIMS. See "BUSINESS AND PROPERTIES OF THE
COMPANY--Legal Proceedings" in Part A of the Exchange Offer for a description
of the Securities Litigation and the Tech Pacific Claim.
Under the Plan, all Claims asserted in or arising out of disputed litigation
pending on the Petition Date, including ordinary course legal proceedings, the
Securities Litigation and the Tech Pacific Litigation (collectively, the
"Disputed Litigation Claims"), will be treated as Class 5 General Unsecured
Claims. Accordingly, if the Plan is confirmed, Holders of such Disputed
Litigation Claims will not be required to file proofs of claim with the
Bankruptcy Court and no bar date will be enforced as to such Claims. Disputed
Litigation Claims will be determined, resolved or adjudicated, as the case may
be, in the manner in which such litigation would have been determined,
resolved or adjudicated, if the Reorganization Case had not been commenced,
and will survive the Effective Date and the consummation of the Plan as if the
Reorganization Case had not been commenced.
D. SECURITIES TO BE ISSUED AND TRANSFERRED UNDER THE PLAN
A DESCRIPTION OF THE NEW COMMON STOCK AND WARRANTS TO BE ISSUED AND
TRANSFERRED UNDER THE PLAN IS SET FORTH BELOW.
As of the Effective Date, Reorganized Merisel will issue the New Common
Stock and the Warrants. The New Common Stock will be issued for distribution
in accordance with the Plan to Holders of Allowed Class 4 Claims and Allowed
Class 6 Interests. The Warrants will be issued for distribution in accordance
with the Plan to Holders of Allowed Class 6 Interests.
ANNEX IV
B-16
<PAGE>
1. THE NEW COMMON STOCK
For a description of the New Common Stock, see "DESCRIPTION OF NEW COMMON
STOCK" in Part A of the Exchange Restructuring Prospectus.
2. THE WARRANTS
For a description of the Warrants, see "DESCRIPTION OF WARRANTS" in the
Proxy Statement/ Prospectus.
3. MARKET AND TRADING INFORMATION
For information relating to the market for the New Common Stock and
Warrants, see "MARKET AND TRADING INFORMATION" in the Proxy
Statement/Prospectus.
E. SOURCES OF CASH TO MAKE PLAN DISTRIBUTIONS
Except as otherwise provided in the Plan or the Confirmation Order, all cash
necessary for Reorganized Merisel to make payments pursuant to the Plan will
be obtained from Reorganized Merisel's cash balances and the operations of
Merisel or Reorganized Merisel.
F. CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Plan provides for certain conditions precedent to Confirmation and the
Effective Date of the Plan. The Plan also provides for waiver of such
conditions. See Article X of the Plan.
G. MODIFICATION OR REVOCATION OF THE PLAN; SEVERABILITY
The Plan provides that Merisel may seek to amend, modify or revoke the Plan
at any time prior to the Confirmation Date in the manner provided for by
section 1127 of the Bankruptcy Code or as otherwise permitted by law without
additional disclosure pursuant to section 1125 of the Bankruptcy Code, except
as the Bankruptcy Court may otherwise order. The Plan also provides for
severability of Plan provisions. See Sections XI.B, XI.C and XI.D of the Plan.
H. DISTRIBUTIONS UNDER THE PLAN
The Plan contains provisions for distributions of Cash, New Common Stock and
Warrant as required under the Plan. See Sections V.A-G of the Plan.
I. OBJECTIONS TO CLAIMS AND AUTHORITY TO PROSECUTE OBJECTIONS; CLAIMS
RESOLUTION
The Plan provides for objections to Claims, Disputed Claims, resolution of
Disputed Claims and distributions on account of Disputed Claims, once they are
Allowed. See Sections V.H-I of the Plan.
J. SETOFFS
The Plan makes provisions for setoffs pursuant to section 553 of the
Bankruptcy Code and applicable nonbankruptcy law. See Section V.J of the Plan.
K. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Under section 365 of the Bankruptcy Code, Merisel has the right, subject to
Bankruptcy Court approval, to assume or reject any executory contracts or
unexpired leases. If an executory contract or unexpired lease entered into
before the Petition Date is rejected by Merisel, it will be treated as if
Merisel breached such contract or
ANNEX IV
B-17
<PAGE>
lease on the date immediately preceding the Petition Date, and the other party
to the agreement may assert an Unsecured Claim for damages incurred as a
result of the rejection. In the case of rejection of employment agreements and
real property leases, damages are subject to certain limitations imposed by
sections 365 and 502 of the Bankruptcy Code. See Article VII of the Plan.
L. CONTINUED CORPORATE EXISTENCE; VESTING OF ASSETS IN REORGANIZED MERISEL
Reorganized Merisel will exist after the Effective Date as a separate
corporate entity, with all of the powers of a corporation under the general
corporation law of Delaware, and without prejudice to any right to alter or
terminate its existence (whether by merger or otherwise). The Reorganized
Merisel Certificate of Incorporation and the Reorganized Merisel Bylaws will
be substantially similar to the current Restated Certificate of Incorporation
and Bylaws of Merisel, copies of which are attached as exhibits to this
Prospectus is a part. Pursuant to section 1123 of the Bankruptcy Code, the
Reorganized Merisel Certificate of Incorporation will prohibit the issuance of
nonvoting equity securities. Accordingly, any preferred stock issued by
Reorganized Merisel will have minimum voting rights as required by the
Bankruptcy Code.
Except as otherwise provided in the Plan, on and after the Effective Date,
all property of the Estate, including all claims, rights and causes of action
(other than those released pursuant to Section XI.C of the Plan), and any
property acquired by Merisel or Reorganized Merisel under or in connection
with the Plan, will vest in Reorganized Merisel free and clear of all Claims,
liens, charges, encumbrances and Interests. On and after the Effective Date,
Reorganized Merisel may operate its businesses and may use, acquire and
dispose of property and compromise or settle any Claims or Interests without
supervision or approval by the Bankruptcy Court and free of any restrictions
of the Bankruptcy Code or Bankruptcy Rules, other than restrictions expressly
imposed by the Plan or the Confirmation Order. Without limiting the foregoing,
Reorganized Merisel may pay the charges that it incurs on or after the
Effective Date for professionals' fees, disbursements, expenses or related
support services without application to the Bankruptcy Court, except for
compensation or reimbursement of expenses for any services rendered after the
Effective Date in connection with any applications for compensation and
reimbursement pending on the Effective Date or Filed and served after the
Effective Date pursuant to Section IV.A.1.C.(2) of the Plan.
M. PRESERVATION OF RIGHTS OF ACTION HELD BY MERISEL OR REORGANIZED MERISEL
Except as provided in the Plan, or in any contract, instrument, release,
indenture or other agreement entered into in connection with the Plan, in
accordance with section 1123(b) of the Bankruptcy Code, Reorganized Merisel
will retain and may enforce any claims, rights and causes of action that
Merisel or its Estate may hold against any entity. Reorganized Merisel or its
successors may pursue such retained claims, rights or causes of action, as
appropriate, in accordance with the best interests of Reorganized Merisel.
N. DISCHARGE OF CLAIMS AND TERMINATION OF INTERESTS; RELATED INJUNCTION
The Plan provides for discharge of Claims against and Interests in Merisel
and a related injunction pursuant to section 524 of the Bankruptcy Code. See
Section X.A of the Plan.
O. RELEASES AND CERTAIN SETTLEMENTS UNDER THE PLAN; RELATED INJUNCTION;
INDEMNITY
On the Effective Date, Merisel will release unconditionally (i) each of
Merisel's officers, directors, shareholders, employees, consultants,
attorneys, accountants, financial advisors and other representatives, (ii) the
Creditors' Committee and, solely in their capacity as members or
representatives of the Creditors' Committee, each member, consultant,
attorney, accountant or other representative of the Creditors' Committee,
(iii) Ad Hoc Noteholders Committee and, solely in their capacity as members or
representatives of the Ad Hoc Noteholders Committee, each member, consultant,
attorney, accountant or other representative of the Ad Hoc Debentureholders
Committee and (iv) the Indenture Trustees, in their respective capacities as
Indenture Trustee (the entities specified in clauses (i), (ii), (iii), and
(iv) and their respective Designated Professionals are referred
ANNEX IV
B-18
<PAGE>
to collectively as the "Releasees"), from any and all claims, obligations,
suits, judgments, damages, rights, causes of action and liabilities
whatsoever, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, in law, equity or otherwise, based in whole or in part upon
any act or omission, transaction, event or other occurrence taking place on or
prior to the Effective Date in any way relating to the Releasees, Merisel, the
Reorganization Case or the Plan. Merisel is unaware of and does not believe
that there are any particular claims against any of the Releasees and
therefore is not receiving any consideration for the releases. Provision for
such releases may be part of a plan under the Bankruptcy Code. The proposed
releases will not be effectuated absent Bankruptcy Court approval of the Plan,
and Merisel does not intend to seek independent or separate Bankruptcy Court
approval of the releases.
Merisel has indemnified its officers, directors, employees, consultants,
attorneys, financial advisors, accountants and other representatives for any
matter in connection with or related to the Plan and the reorganization other
than matters arising from such person's gross negligence or willful
misconduct. The indemnification obligations will be assumed by Reorganized
Merisel. Merisel is not aware of any claims against any of the entities that
it has indemnified, other than the Securities Litigation and Tech Pacific
Claim described in "BUSINESS AND PROPERTIES OF THE COMPANY--Legal Proceedings"
in Part A of the Exchange Restructuring Prospectus.
P. LIMITATION OF LIABILITY
Section 1125(e) of the Bankruptcy Code provides in general that a person
who, in good faith and in compliance with the applicable provisions of the
Bankruptcy Code, either (i) solicits acceptance or rejection of a plan of
reorganization or (ii) participates in the offer, issuance, sale or purchase
of a security under a plan, is not liable on account of such solicitation or
participation for violation of any applicable law governing solicitation of
acceptance or rejection of a plan of reorganization or the offer, issuance,
sale or purchase of securities under a plan. If Merisel commences the
Reorganization Case and files the Plan with the Bankruptcy Court, Merisel will
be able to confirm the Plan based on the prepetition acceptances that it has
solicited only if the Bankruptcy Court finds that the solicitation of
acceptances and rejections from Holders of Claims and Holders of Interests was
in compliance with applicable bankruptcy law including the Securities Act and
the Exchange Act and the rules and regulations thereunder and the provisions
of sections 1125 and 1126 of the Bankruptcy Code. If the Bankruptcy Court
makes such a finding, management of Merisel believes that the limitations of
liability provided under section 1125(e) of the Bankruptcy Code will be
applied to this solicitation of acceptances of the Plan.
In addition, section 1123(b)(6) of the Bankruptcy Code provides that a plan
of reorganization may contain any appropriate provision that is not
inconsistent with the applicable provisions of the Bankruptcy Code. Pursuant
to this provision, the Plan provides for a limitation of liability for certain
participants in the Plan process. Specifically, Merisel, Reorganized Merisel,
the Ad Hoc Noteholders Committee, any of their respective post-Petition Date
employees, officers, directors, agents, or representatives, and any
professional persons employed by any of them (a "Plan Participant") will
neither have nor incur any liability to any entity, including, specifically
any Holder of a Claim or Interest, for any act taken or omitted to be taken in
connection with or related to the formulation, preparation, dissemination,
implementation, Confirmation or consummation of the Plan, the Proxy
Statement/Prospectus, the Confirmation Order or any contract, instrument,
release or other agreement or document created or entered into, or any other
act taken or omitted to be taken in connection with the Plan. Reorganized
Merisel will also indemnify each Plan Participant, hold each Plan Participant
harmless from, and reimburse each Plan Participant for, any and all losses,
costs, expenses (including attorneys' fees and expenses), liabilities and
damages sustained by a Plan Participant arising from any liability described
in Section X.B of the Plan.
Q. RETENTION OF BANKRUPTCY COURT JURISDICTION
The Plan provides that, with respect to certain matters, the Bankruptcy
Court will retain jurisdiction over the Reorganization Case after the
Effective Date. See Section X.G of the Plan.
ANNEX IV
B-19
<PAGE>
X. RISK FACTORS
THE NEW COMMON STOCK AND THE WARRANTS TO BE ISSUED PURSUANT TO THE PLAN ARE
SUBJECT TO A NUMBER OF MATERIAL RISKS. THE HOLDER OF AN IMPAIRED CLAIM AGAINST
OR IMPAIRED INTEREST IN MERISEL SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS BEFORE DECIDING WHETHER TO VOTE TO ACCEPT OR TO REJECT THE PLAN. FOR
DISCUSSION OF ADDITIONAL RISKS ASSOCIATED WITH THE RESTRUCTURING, SEE "RISK
FACTORS" IN PART A OF THE EXCHANGE RESTRUCTURING PROSPECTUS.
A. DISRUPTION OF OPERATIONS RELATING TO BANKRUPTCY FILING
Merisel's solicitation of acceptances of the Plan, or any subsequent
commencement of the Reorganization Case, even in connection with the Plan,
could adversely affect Merisel's and its Operating Companies' relationships
with their customers, suppliers or employees. If Merisel's and its Operating
Companies' relationships with customers, suppliers or employees are adversely
affected, the Company's operations could be materially affected. Weakened
operating results could adversely affect Merisel's ability to obtain
confirmation of the Plan or to avoid financial difficulties after consummation
of the Plan. Merisel anticipates, however, that it will have sufficient cash
to service the obligations that it intends to pay during the period prior to
and through the consummation of the Plan.
MERISEL DOES NOT CURRENTLY INTEND TO COMMENCE A CASE UNDER CHAPTER 11 OF THE
BANKRUPTCY CODE WITH RESPECT TO ANY OF ITS OPERATING COMPANIES OR TO INCLUDE
ANY OF ITS OPERATING COMPANIES IN MERISEL'S PREPACKAGED CHAPTER 11 CASE.
B. CERTAIN RISKS OF NON-CONFIRMATION
Even if the requisite acceptances are received, there can be no assurance
that the Bankruptcy Court will confirm the Plan. A non-accepting creditor of
Merisel or a stockholder of Merisel might challenge the adequacy of the
disclosure or the balloting procedures and results as not being in compliance
with the Bankruptcy Code. Even if the Bankruptcy Court were to determine that
the disclosure and the balloting procedures and results were appropriate, the
Bankruptcy Court could still decline to confirm the Plan if it were to find
that any statutory conditions to confirmation had not been met. Section 1129
of the Bankruptcy Code sets forth the requirements for confirmation and
requires, among other things, a finding by the Bankruptcy Court that the
confirmation of the Plan is not likely to be followed by a liquidation or a
need for further financial reorganization and that the value of distributions
to non-accepting creditors and Interest Holders will not be less than the
value of distributions such creditors and Interest Holders would receive if
the debtor were liquidated under Chapter 7 of the Bankruptcy Code. See
Sections XXI.B, "Best Interest Test" and Section XXI.C, "Chapter 7 Liquidation
Analysis." There can be no assurance that the Bankruptcy Court will conclude
that these requirements have been met, but Merisel believes that the
Bankruptcy Court should be able to find that the Plan will not be followed by
a need for further financial reorganization and that non-accepting creditors
and Interest Holders will receive distributions at least as great as would be
received following a liquidation pursuant to Chapter 7 of the Bankruptcy Code.
See "VOTING AND CONFIRMATION OF THE PLAN" herein.
Additionally, even if the required acceptances of each of Class 4 and Class
6 are received, the Bankruptcy Court might find that the Solicitation did not
comply with the solicitation requirements made applicable by subsection
1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b). In such an event,
Merisel may seek to resolicit acceptances, but confirmation of the Plan could
be substantially delayed and possibly jeopardized. Merisel believes that its
Solicitation of acceptances of the Plan complies with the requirements of
subsection 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b), that
duly executed Ballots and Master Ballots will be in compliance with applicable
provisions of the Bankruptcy Code and the Bankruptcy Rules, and that, if
sufficient acceptances are received, the Plan should be confirmed by the
Bankruptcy Court. Merisel, however, expressly reserves the right not to file
the Plan and to pursue other alternatives.
Should the Bankruptcy Court fail to confirm the Plan after the
Reorganization Case has been filed, Merisel would then consider all financial
alternatives available to it at the time, which may include an effort to sell
in the
ANNEX IV
B-20
<PAGE>
Chapter 11 case all or a part of Merisel's business or an equity interest in
Merisel and the negotiation and filing of an alternative reorganization plan.
Pursuit of any such alternative could result in a protracted and non-orderly
reorganization with all the attendant risk of adverse consequences to its and
its Operating Companies' businesses, operations, employees, customers and
supplier relations and their ultimate ability to function effectively and
competitively.
Even if the Plan is confirmed by the Bankruptcy Court, there can be no
assurance that Merisel would not thereafter suffer a disruption in its
business operations as a result of filing the Reorganization Case.
The confirmation and consummation of the Plan are also subject to certain
conditions. See Section IX.G herein, "Conditions Precedent To Confirmation And
Consummation Of The Plan."
If the Plan, or a plan determined not to require resolicitation of any
Classes by the Bankruptcy Court, were not to be confirmed, it is unclear
whether a reorganization could be implemented and what holders of Claims and
Interests would ultimately receive with respect to their Claims and Interests.
If an alternative reorganization could not be agreed to, it is possible that
Merisel would have to liquidate its assets, in which case Holders of Claims
and Interests could receive less than they would have received pursuant to the
Plan.
C. CERTAIN BANKRUPTCY CONSIDERATIONS
1. TREATMENT OF THE WARRANTS
In the event of a subsequent bankruptcy case involving Merisel, it is likely
that the Warrants, which will be received by Holders of Old Common Stock in
partial consideration for dilution of their ownership interest in Merisel,
would be treated as equity securities, and that the equity interests of
holders of the Warrants would be of similar priority to the equity interests
of holders of New Common Stock. Despite the similar priority, however, the
Warrants may receive less favorable treatment than the New Common Stock in a
subsequent bankruptcy case, because the equity interests in Reorganized
Merisel represented by the Warrants would not be so direct as the equity
interests in Reorganized Merisel represented by the New Common Stock.
2. FAILURE TO FILE PREPACKAGED PLAN
Absent the Restructuring, Merisel does not believe it will be able to
satisfy its debt obligations without a refinancing of its indebtedness under
the Operating Companies' Loan Agreements or obtaining additional waivers or
amendments to such agreements, and there can be no assurance that the Company
will be able to obtain such refinancing, waivers or amendments. If the
Exchange Restructuring is not consummated, but Ballots and Master Ballots
containing votes to accept the Plan are received in sufficient amounts and
numbers, in Merisel's judgment, to confirm the Plan, Merisel expects to (but
expressly reserves the right not to) file a prepackaged Chapter 11 case and
use such Ballots and Master Ballots to confirm the Plan. Merisel believes that
obtaining sufficient acceptances before commencing a bankruptcy case would be
preferable from the point of view of its creditors, stockholders and other
constituents because such acceptances can reduce disputes during such a case
concerning the reorganization of Merisel and should, therefore, substantially
reduce the time and costs of such a case, result in a larger distribution to
Merisel's creditors and stockholders than would be available under a non-
prepackaged reorganization under Chapter 11 of the Bankruptcy Code or a
liquidation under Chapter 7 of the Bankruptcy Code (in the absence of other
alternatives) and afford Merisel the best opportunity to accomplish the
Restructuring in a bankruptcy case. If the Exchange Restructuring is not
consummated and Merisel does not have the necessary acceptances to confirm the
Plan, Merisel might nevertheless file a petition for relief under Chapter 11
of the Bankruptcy Code and seek confirmation of the Plan notwithstanding the
dissent of certain Class 6 Old Common Stock Interests. See "Section XXIII.K",
"Acceptance Or Cramdown." In such event, Merisel would seek to satisfy the
Bankruptcy Code standards for confirmation by means of a "cramdown," which
could require that the Plan be modified in a manner which would be material to
any class which has rejected the Plan and any class junior to any class which
has rejected the Plan. Alternatively, Merisel may seek to accomplish an
alternative restructuring of its capitalization and its obligations to its
stockholders
ANNEX IV
B-21
<PAGE>
and creditors and obtain their consent to any such restructuring plan with or
without a pre-approved plan of reorganization or otherwise. See "ALTERNATIVES
TO CONFIRMATION AND CONSUMMATION OF THE PLAN" herein. There can, however, be
no assurance that any alternative restructuring arrangement or plan would
result in a reorganization of Merisel other than a liquidation, or that any
such reorganization would be on terms as favorable to the Holders of Claims
and Holders of Interests as the terms of the Plan. There is a risk that
distributions to Holders of Claims and Interests under a liquidation or under
a protracted and non-orderly reorganization would be substantially delayed and
diminished.
For purposes of comparison with the anticipated distributions under the
Prepackaged Plan, the Corporation has prepared an analysis of estimated
recoveries in a liquidation under Chapter 7 of the Bankruptcy Code. See
"Section XXI.C" herein, "Chapter 7 Liquidation Analysis." A description of
procedures followed and the assumptions and qualifications in connection with
this analysis is set forth in the notes thereto. See "Best Interests Test"
under "SUMMARY OF PREPACKAGED PLAN--Confirmation of the Prepackaged Plan," for
a general discussion of the liquidation analysis.
3. EFFECT ON OPERATIONS
Merisel believes that the Solicitation and any subsequent commencement of a
Chapter 11 Case in connection with the Plan should not materially adversely
affect Merisel's and its Operating Companies' relationships with customers,
employees and suppliers, provided that Merisel can demonstrate sufficient
liquidity to continue to operate the business and a likelihood of success for
the Prepackaged Restructuring in a reasonably short time frame. Merisel
believes that the Solicitation offers the most expeditious means to achieve
the Prepackaged Restructuring.
It is possible that despite the belief and intent of the Company, the
Solicitation or any subsequent commencement of a Chapter 11 case could
adversely affect the relationships between Merisel, its Operating Companies
and their employees, customers and suppliers. There is a risk that, due to
uncertainty about Merisel's future, (i) employees may be distracted from
performance of their duties or more easily attracted to other career
opportunities, (ii) customers may seek alternative sources of supply or
require financial assurances of future performance and (iii) suppliers may
restrict ordinary credit terms or require financial assurances of performance.
If such relationships were adversely affected, Merisel and its Operating
Companies' financial performance and working capital position could materially
deteriorate. This deterioration could adversely affect Merisel's ability to
complete the Solicitation or, if such Solicitation is successfully completed,
to obtain confirmation of the Plan.
4. NONCONSENSUAL CONFIRMATION
In the event that Impaired Class 6 Old Equity Interests do not accept the
Plan, pursuant to the "cramdown" provisions of the Bankruptcy Code, the
Bankruptcy Court may nevertheless confirm the Plan at Merisel's request if
Class 4 12.5% Notes Claims have accepted the Plan (with such acceptance being
determined without including the acceptance of any "insider" in such Class),
and the Bankruptcy Court determines that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to Class 6. See Section
XXI.C herein, "Chapter 7 Liquidation Analysis." In the event that Class 6 Old
Common Stock Interests fail to accept the Plan in accordance with subsection
1129(a)(8) of the Bankruptcy Code, the Company reserves the right to request
Confirmation of the Plan without the acceptance of Class 6 in accordance with
subsection 1129(b) of the Bankruptcy Code. Merisel, however, will not seek
Confirmation of the Plan unless it is accepted by Class 4.
The Company has reserved the right to seek confirmation of the Prepackaged
Plan under the "cram-down" provisions of the United States Bankruptcy Code.
However, if a majority of Stockholders elect not to support the Restructuring
after their review of all the facts and circumstances existing at that time,
the Company does not presently believe that attempting to force confirmation
of the Prepackaged Plan under the "cram-down" provisions would necessarily be
in the best interests of the Company and the Company has no present intention
ANNEX IV
B-22
<PAGE>
to do so. Although the Limited Waiver Agreement requires, if consistent with
the Company's obligations under applicable law (which the Company believes
includes its fiduciary obligations), the filing of a Chapter 11 petition on
the Prepackaged Plan and that the Company take steps that are both necessary
and desirable to confirm the Prepackaged Plan, the Agreement does not by its
terms require that the Company seek confirmation of the Prepackaged Plan under
the cram-down provisions of the Bankruptcy Code if the Stockholders vote to
reject the Prepackaged Plan. Moreover, the Company has specifically rejected
requests by representatives of the Ad Hoc Noteholders' Committee, both before
and after the execution of the Limited Waiver Agreement, for the Company's
agreement to proceed with confirmation of the Prepackaged Plan under those
provisions. Accordingly, for the foregoing reasons, unless the requisite
Stockholder acceptances have been obtained for the Prepackaged Plan, the
Company does not currently believe filing a Chapter 11 petition to seek
confirmation of the Prepackaged Plan under the cram-down provisions would be
consistent with its fiduciary obligations as presently conceived or be both
necessary and desirable.
The Ad Hoc Noteholders Committee has advised the Company that it disputes
the Company's interpretation of the Limited Waiver Agreement in this regard
and believes that the Company is obligated to file and confirm the Prepackaged
Plan regardless of the outcome of the Stockholder vote.
XI. OWNERSHIP OF CAPITAL SECURITIES
For a discussion of the ownership of Capital Securities, see "OWNERSHIP OF
COMMON STOCK" in Part A of the Exchange Restructuring Prospectus.
XII. MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY
For a discussion of the market prices of the Old Common Stock and its
dividend history, see "MARKET PRICES OF OLD COMMON STOCK; DIVIDEND HISTORY" in
Part A of the Prospectus.
XIII. MARKET PRICES OF 12.5% NOTES
For a discussion of the market prices of the 12.5% Notes, see "MARKET PRICES
OF 12.5% NOTES" in Part A of the Exchange Restructuring Prospectus.
XIV. APPLICATION OF SECURITIES ACT
A. THE SOLICITATION
The Company has registered under the Securities Act of 1933, as amended (the
"Securities Act"), the offer to exchange New Common Stock and Warrants for
12.5% Notes and Old Common Stock which may be deemed to be made by the Company
pursuant to the Solicitation.
B. ISSUANCE OF NEW SECURITIES PURSUANT TO THE PLAN
Generally, section 1145(a)(1) of the Bankruptcy Code exempts the issuance of
securities from the registration requirements of the Securities Act and
equivalent state securities and "blue sky" laws if all of the following
conditions are satisfied: (i) the securities are issued by a debtor (or its
successor) under a plan of reorganization; (ii) the recipients of the
securities hold a claim against, an interest in, or a claim for an
administrative expense against, the debtor; and (iii) the securities are
issued entirely in exchange for the recipient's claim against or interest in
the debtor, or are issued "principally" in such exchange and "partly" for cash
or property. The Company believes that the distribution of the New Common
Stock and the Warrants pursuant to the Plan would satisfy the aforementioned
requirements, and the Company may rely on the section 1145 exemption in
respect of such issuance.
ANNEX IV
B-23
<PAGE>
Any New Common Stock and Warrants issued pursuant to the section 1145
exemption may be resold by the holders thereof without restriction, unless, as
more fully described below, any such holder is deemed to be an "underwriter"
with respect to such securities, as defined in section 1145(b)(1) of the
Bankruptcy Code. Generally, section 1145(b)(1) of the Bankruptcy Code defines
an "underwriter" as any person who (A) purchases a claim against, or interest
in, a bankruptcy case, with a view towards the distribution of any security to
be received in exchange for such claim or interest, (B) offers to sell
securities issued under a bankruptcy plan on behalf of the holders of such
securities, (C) offers to buy securities issued under a bankruptcy plan from
persons receiving such securities, if the offer to buy is made with a view
towards distribution of such securities, or (D) is an issuer as contemplated
by section 2(11) of the Securities Act. Although the definition of the term
"issuer" appears in section 2(4) of the Securities Act, the reference
(contained in section 1145(b)(1)(D) is an issuer as contemplated by section
2(11) of the Securities Act purports to include as "underwriters" all persons
who, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with, an issuer of securities.
"Control" (as such term is defined in Rule 405 of Regulation C under the
Securities Act) means the possession, directly or indirectly, of the power to
direct or cause the direction of the policies of a person, whether through the
ownership of voting securities, by contract, or otherwise. Accordingly, an
officer or director of a reorganized debtor (or its successor) under a plan or
reorganization may be deemed to be a "control person," particularly if such
management position is coupled with the ownership of a significant percentage
of the debtor's (or successor's) voting securities. Moreover, the legislative
history of section 1145 of the Bankruptcy Code suggests that a creditor who
owns at least 10 percent of the securities of a reorganized debtor may be
presumed to be a "control person."
BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR HOLDER MAY BE AN UNDERWRITER, MERISEL MAKES NO REPRESENTATION
CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE SECURITIES TO BE
DISTRIBUTED UNDER THE PLAN.
MOREOVER, SUCH SECURITIES, OR THE DOCUMENTS THAT ESTABLISH THE TERMS AND
PROVISIONS THEREOF, MAY CONTAIN TERMS AND LEGENDS THAT RESTRICT OR INDICATE
THE EXISTENCE OF RESTRICTIONS ON THE TRANSFERABILITY OF SUCH SECURITIES.
MERISEL RECOMMENDS THAT RECIPIENTS OF SECURITIES UNDER THE PLAN CONSULT WITH
LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO DISPOSE OF SUCH
SECURITIES.
There can be no assurance that an active market for any of the securities to
be distributed under the Plan will develop and no assurance can be given as to
the prices at which they might be traded.
XV. PREPACKAGED RESTRUCTURING ACCOUNTING TREATMENT
For a discussion of pertinent accounting treatment of the Prepackaged
Restructuring, see "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION" and "PROJECTED CONSOLIDATED FINANCIAL INFORMATION" in Part A of
the Exchange Restructuring Prospectus.
XVI. DESCRIPTION OF INDEBTEDNESS OF THE COMPANY
For a description of the principal terms of the indebtedness of the Company,
see "DESCRIPTION OF INDEBTEDNESS OF THE COMPANY" of Part A of the Exchange
Restructuring Prospectus.
XVII. DESCRIPTION OF 12.5% NOTES
For a description of the 12.5% Notes, see "DESCRIPTION OF 12.5% NOTES" in
Part A of the Exchange Restructuring Prospectus.
ANNEX IV
B-24
<PAGE>
XVIII. FINANCIAL PROJECTIONS AND ASSUMPTIONS USED
For Merisel's financial projections and the assumptions underlying them, See
"PROJECTED CONSOLIDATED FINANCIAL PROJECTIONS" in Part A of the Exchange
Restructuring Prospectus.
XIX. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
For a discussion of the Company's pro forma financial statements, See "PRO
FORMA CONSOLIDATED FINANCIAL INFORMATION" in Part A of the Exchange
Restructuring Prospectus.
XX. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following is a summary of certain Federal income tax consequences
expected to result from the consummation of the Plan to Holders of 12.5%
Notes, Holders of Old Common Stock, and the Company and is for general
information purposes only. This summary is based on the Federal income tax law
now in effect, which is subject to change, possibly retroactively. This
summary does not discuss all aspects of Federal income taxation which may be
important to particular Holders of 12.5% Notes or Holders of Old Common Stock
in light of their individual investment circumstances, including Holders who
acquired their Old Common Stock pursuant to the exercise of stock options or
otherwise as compensation, or to Holders of 12.5% Notes or Holders of Old
Common Stock subject to special tax rules (e.g., financial institutions,
broker-dealers, insurance companies, tax-exempt organizations, and foreign
taxpayers). In addition, this summary does not address state, local or foreign
tax consequences. This summary assumes that Holders hold their 12.5% Notes or
Old Common Stock, and will hold their New Common Stock and, in the case of
Holders of Old Common Stock, Warrants, as "capital assets" (generally,
property held for investment) under the Internal Revenue Code of 1986, as
amended (the "Code"). No rulings have been or will be requested from the
Internal Revenue Service with respect to any of the matters discussed herein.
Holders of 12.5% Notes and Holders of Old Common Stock are urged to consult
their tax advisors regarding the specific Federal, state, local, and foreign
income and other tax consequences resulting from the consummation of the Plan.
A. FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
CANCELLATION OF INDEBTEDNESS INCOME. Merisel will realize cancellation of
indebtedness ("COI") income, for Federal income tax purposes, in an amount
equal to the excess, if any, of the adjusted issue price of the 12.5% Notes
(including any accrued but unpaid interest) over the fair market value of the
New Common Stock received by Holders of 12.5% Notes pursuant to the Plan. COI
income that is realized in a case under the Bankruptcy Code (i.e., pursuant to
the Plan) will not be recognized under section 108 of the Code. Merisel will
be required, however, to reduce certain of its tax attributes, such as its
operating losses and net operating loss carryovers ("NOLs"), certain tax
credits, and the basis of its assets, by the amount of the COI income that is
not recognized.
LIMITATION ON NET OPERATING LOSS CARRYOVERS. As a result of the confirmation
and consummation of the Plan, Merisel will undergo an "ownership change"
(generally, a 50% change in ownership) for purposes of section 382 of the Code
and, accordingly, Merisel will be limited in its ability to use its NOLs and
certain tax credit carryforwards (the "Section 382 Limitation") to offset
future taxable income. The Section 382 Limitation will generally be determined
by multiplying the value of Merisel's equity before the ownership change by
the long-term tax-exempt rate (currently 5.64%). Because Merisel will undergo
an ownership change in a case under the Bankruptcy Code, however, Merisel
anticipates that the value of its equity for purposes of determining the
Section 382 Limitation would be adjusted to reflect the increase in such value
arising from the cancellation of the 12.5% Notes.
ANNEX IV
B-25
<PAGE>
B. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF 12.5% NOTES
GENERAL. The Plan, if confirmed and consummated as described herein, will
constitute a tax-free recapitalization for purposes of the Code. Accordingly,
for Federal income tax purposes:
(i) no gain or loss will be recognized by a Holder of 12.5% Notes upon
the receipt of New Common Stock pursuant to the Plan, except that the
Holder will (a) recognize gain or loss to the extent of any cash received
in lieu of a fractional share or fractional Warrant and (b) recognize
income to the extent of the value of the New Common Stock received pursuant
to the Plan which is allocable to any interest on the notes that accrued on
or after the beginning of the holder's holding period and which was not
previously included in the Holder's taxable income (the "Accrued
Interest");
(ii) the aggregate tax basis of the New Common Stock received by a Holder
of 12.5% Notes pursuant to the Plan will be the same as the aggregate tax
basis of the notes exchanged therefor (reduced by any basis apportionable
to any fractional share settled in cash as described above), except that
the basis of the shares of New Common Stock received which are treated as
attributable to Accrued Interest will be equal to the fair market value of
such shares on the Effective Date; and
(iii) the holding period of the New Common Stock in the hands of a Holder
of 12.5% Notes will include the holding period of the notes exchanged
therefor, except that the holding period of the New Common Stock treated as
attributable to Accrued Interest will begin the day after the Effective
Date.
Market Discount. Holders of 12.5% Notes who acquired their notes at a
"market discount" subsequent to the initial offering of the notes may be
required to carry over any accrued (but unrecognized) market discount to the
New Common Stock received pursuant to the Plan, which discount will be
recognized as ordinary income upon disposition of such New Common Stock.
C. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF OLD COMMON STOCK
GENERAL. In general, the receipt of New Common Stock and Warrants by Holders
of Old Common Stock pursuant to the Plan will not be a taxable event, except a
Holder will recognize gain or loss to the extent of any cash received in lieu
of a fractional share or a fractional Warrant. Holders of Old Common Stock
will be required to allocate the adjusted tax basis in their Old Common Stock
(reduced by any basis apportionable to any fractional share settled in cash as
described above) between the New Common Stock and the Warrants on the basis of
their respective fair market values on the date of distribution. The holding
period of the New Common Stock and the Warrants will include the holding
period of the Old Common Stock.
DISPOSITION. Upon a sale, exchange, or other disposition of the New Common
Stock or the Warrants, a Holder will recognize a capital gain or loss in an
amount equal to the difference between the amount realized and the Holder's
adjusted tax basis in such New Common Stock or Warrants. Such gain or loss
will be long-term if the New Common Stock or Warrants have been held for more
than one year.
EXERCISE OR LAPSE OF WARRANTS. Upon the exercise of a Warrant, a Holder will
not recognize gain or loss and will have a tax basis in the New Common Stock
received equal to the tax basis in such Holder's Warrant plus the exercise
price thereof. The holding period for the New Common Stock received pursuant
to the exercise of the Warrant will begin on the day following the date of
exercise and will not include the period that the Holder held his Warrant.
In the event that a Warrant lapses unexercised, a Holder will recognize a
long-term capital loss in an amount equal to his tax basis in such Warrant.
ADJUSTMENT TO EXERCISE PRICE. If at any time Reorganized Merisel makes a
distribution of property to shareholders that would be taxable to such
shareholders as a dividend for Federal income tax purposes and, in
ANNEX IV
B-26
<PAGE>
accordance with the antidilution provisions of the Warrants, the Exercise
Price is decreased, the amount of such decrease may be deemed to be the
payment of a taxable dividend to Holders of the Warrants. For example, a
decrease in the Exercise Price in the event of distributions of cash or
indebtedness of Reorganized Merisel will generally result in deemed dividend
treatment to Holders, but generally a decrease in the event of stock dividends
or the distribution of rights to subscribe for shares of New Common Stock will
not.
XXI. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST
A. FEASIBILITY OF THE PLAN
In connection with confirmation of the Plan, Section 1129(a)(11) requires
that the Bankruptcy Court find that confirmation of the Plan is not likely to
be followed by the liquidation or the need for further financial
reorganization of Merisel. This is the so-called "feasibility" test.
To support its belief in the feasibility of the Plan, Merisel, with the
assistance of the professionals retained in connection with the Exchange
Restructuring, has prepared financial Projections for the period January 1,
1997 through December 31, 2001. The professionals have not performed an
independent investigation of the accuracy or completeness of such financial
Projections. See "FINANCIAL PROJECTIONS" in Part A of the Exchange
Restructuring Prospectus.
The Projections indicate that Reorganized Merisel should have sufficient
cash flow to make the payments required under the Plan on the Effective Date
and to repay and service its debt obligations and to maintain its operations.
Accordingly, Merisel believes that the Plan complies with the standard of
section 1129(a)(11) of the Bankruptcy Code. As noted in the Projections,
however, Merisel cautions that no representations can be made as to the
accuracy of the Projections or as to Reorganized Merisel's ability to achieve
the projected results. Many of the assumptions upon which the Projections are
based are subject to uncertainties outside the control of Merisel. Some
assumptions inevitably will not materialize, and events and circumstances
occurring after the date on which the Projections were prepared may be
different from those assumed or may be unanticipated, and may adversely affect
Merisel's financial results. As discussed elsewhere in this Disclosure
Statement, there are numerous circumstances that may cause actual results to
vary from the projected results, and the variations may be material and
adverse. See "RISK FACTORS" herein for a discussion of certain risk factors
that may affect financial feasibility of the Plan.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE
GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION REGARDING PROJECTIONS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN
AUDITED BY MERISEL'S INDEPENDENT CERTIFIED ACCOUNTANTS. ALTHOUGH PRESENTED
WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED UPON A VARIETY OF
ASSUMPTIONS, SOME OF WHICH HAVE NOT BEEN ACHIEVED TO DATE AND MAY NOT BE
REALIZED IN THE FUTURE, AND ARE SUBJECT TO SIGNIFICANT BUSINESS, LITIGATION,
ECONOMIC, AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE
BEYOND THE CONTROL OF MERISEL. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE
REGARDED AS A REPRESENTATION OR WARRANTY BY MERISEL, OR ANY OTHER PERSON, THAT
THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM
THOSE PRESENTED IN THE PROJECTIONS.
B. BEST INTERESTS TEST
Even if the Plan is accepted by Impaired Class 4 Claims and Impaired Class 6
Interests, the Bankruptcy Code requires that the Bankruptcy Court find either
that all members of an impaired class of Claims or Interests
ANNEX IV
B-27
<PAGE>
have accepted the plan or that the plan will provide a member who has not
accepted the plan with a recovery of property of a value, as of the effective
date of the plan, that is not less than the amount that such holder would
receive or retain if the debtor were liquidated under Chapter 7 of the
Bankruptcy Code.
To calculate the probable distribution to members of each impaired class of
holders of Claims or Interests if a debtor were liquidated under Chapter 7,
the Bankruptcy Court must first determine the aggregate dollar amount that
would be generated from the debtor's assets if its Chapter 11 case were
converted to a Chapter 7 case under the Bankruptcy Code. This "liquidation
value" would consist primarily of the proceeds from a sale of the debtor's
assets by a Chapter 7 trustee.
The amount of liquidation value available to unsecured creditors would be
reduced by, first, the claims of secured creditors to the extent of the value
of their collateral, and, second, by the costs and expenses of liquidation, as
well as by other administrative expenses and costs (including any break up or
termination fees approved by the Bankruptcy Court) of both the Chapter 7 case
and the Chapter 11 Case. Costs of liquidation under Chapter 7 of the
Bankruptcy Code would include the compensation of a trustee, as well as of
counsel and other professionals retained by the trustee, asset disposition
expenses, all unpaid expenses incurred by the debtor in its Chapter 11 case
(such as compensation of attorneys, financial advisors, and accountants) that
are allowed in the Chapter 7 case, litigation costs, and claims arising from
the operations of the debtor during the pendency of the Chapter 11 case. The
liquidation itself could trigger certain priority payments that otherwise
would be due in the ordinary course of business. Those priority claims would
be paid in full from the liquidation proceeds before the balance would be made
available to pay general claims or to make any distribution in respect of
equity interests. The liquidation would also prompt the rejection of executory
contracts and unexpired leases and thereby create a higher amounts of
Unsecured Claims.
Section 510(a) of the Bankruptcy Code provides that subordination agreements
are enforceable in a bankruptcy case to the same extent that such
subordination is enforceable under applicable non-bankruptcy law. Therefore,
no class of claims that is contractually subordinated to another class would
receive any payment on account of its claims, unless and until such senior
class were paid in full.
Once the Bankruptcy Court ascertains the recoveries in liquidation of
secured creditors and priority claimants, it must determine the probable
distribution to general unsecured creditors from the remaining available
proceeds in liquidation. If such probable distribution has a value greater
than the distributions to be received by such creditors under the Plan, then
the Plan is not in the best interests of creditors and cannot be confirmed by
the Bankruptcy Court. Under a Chapter 7 liquidation, no class of claims that
is junior to a class of claims may be paid unless the senior class of claims
is paid in full. As shown in the Liquidation Analysis, Merisel currently
believes that each Holder of 12.5% Notes in Impaired Class 4 and each Holder
of Old Common Stock in Class 6 will likely receive more under the Plan than
they would receive if Merisel were liquidated and that the Plan should
therefore meet the requirements of Section 1129(a)(7).
C. CHAPTER 7 LIQUIDATION ANALYSIS
The liquidation proceeds available to Merisel for distribution to Holders of
Claims against and Interests in Merisel would consist of net proceeds from the
disposition of the continuing operations of its wholly-owned Subsidiary,
Merisel Americas, Inc., augmented by other cash held and generated during the
assumed holding period stated herein by Merisel and after deducting the
incremental expenses of operating the businesses pending disposition. To
estimate the potential returns to Holders of Claims and Interests in a Chapter
7 liquidation, Merisel determined, as might a Bankruptcy Court conducting such
an analysis, the amount of liquidation proceeds that might be available for
distribution and the allocation of such proceeds among the Classes of Claims
and Interests based on their relative priority. Merisel considered a number of
factors and data, including the market value based on a multiple of EBITDA,
defined as earnings before interest, taxes, depreciation and
ANNEX IV
B-28
<PAGE>
amortization (EBITDA), of publicly traded companies reasonably comparable to
the operating businesses of the Company. Merisel has valued the Company in its
entirety based on a multiple of EBITDA.
For the purposes of this analysis, Merisel has not considered any valuation
of the Operating Companies implied by the offer received by Merisel from
Stonington Partners, Inc., see "RECENT DEVELOPMENTS" in Part A of the Exchange
Restructuring Prospectus. There can be no assurance, however, that a
Bankruptcy Court would exclude consideration of an offer to purchase all or
substantially all of the assets of Merisel or its Subsidiaries or to make an
equity investment in Merisel if such an offer were presented to the Court at
the time of the confirmation hearing. If such an offer were presented and if
the Bankruptcy Court considered such an offer, it could have a material effect
on the outcome of the liquidation analysis, and there can be no assurance that
the Plan would meet the best interest test.
The relative priority of distribution of liquidation proceeds with respect
to any Claim or Interest depends on (i) its status as secured, priority
unsecured or nonpriority unsecured and (ii) its relative subordination. The
capital structure of the Company's Subsidiary, Merisel Americas, includes
substantial debt. Consequently, the estimated net proceeds from the assumed
liquidation of Merisel Americas as a going concern were first applied to its
existing indebtedness. Proceeds in excess of Merisel Americas' debt were
assumed available for distribution to the Holders of Claims against and
Interests in Merisel.
In general, liquidation proceeds would be allocated in the following
priority: (i) first, to the Claims of secured creditors to the extent of the
value of their collateral; (ii) second, to the costs, fees and expenses of the
liquidation, as well as other administrative expenses of Merisel's
hypothetical Chapter 7 case, including tax liabilities; (iii) third, to the
unpaid Administrative Claims of the Reorganization Case (if commenced); (iv)
fourth, to Priority Tax Claims and other Claims entitled to priority in
payment under the Bankruptcy Code; (v) fifth, to General Unsecured Claims,
including the 12.5% Notes Claims and the Tech Pacific Claims; (vi) sixth, to
Subsidiary Guaranty Claims; (vii) seventh, to Holders of Old Common Stock and
subordinated Securities Litigation claims. Merisel's liquidation costs in a
Chapter 7 case would include the compensation of a bankruptcy trustee, as well
as compensation of counsel and of other professionals retained by such
trustee, asset disposition expenses, applicable taxes, litigation costs,
Claims arising from the operation of Merisel during the pendency of the
Chapter 7 case and all unpaid Administrative Claims incurred by Merisel during
the Reorganization Case (if commenced) that are Allowed in the Chapter 7 case.
The liquidation itself might trigger certain Priority Claims, such as Claims
for severance pay, and would likely accelerate or, in the case of taxes, make
it likely that the Internal Revenue Service would assert all of its claims as
Priority Tax Claims rather than asserting them in due course as is expected to
occur under the Reorganization Case. These Priority Claims would be paid in
full out of the net liquidation proceeds, after payment of secured Claims,
Chapter 7 costs of administration and other Administrative Claims, before the
balance would be made available to pay Unsecured Claims or to make any
distribution in respect of Interests.
The following Chapter 7 liquidation analysis is provided solely to discuss
the effects of a hypothetical Chapter 7 liquidation of Merisel and is subject
to the assumptions set forth herein. There can be no assurance that such
assumptions would be accepted by a Bankruptcy Court. The Chapter 7 Liquidation
Analysis has not been independently audited or verified.
THE FOLLOWING LIQUIDATION ANALYSIS ASSUMES A LIQUIDATION SALE OF MERISEL'S
OPERATING COMPANIES AS A GOING CONCERN. A FORCED ASSET LIQUIDATION SALE,
HOWEVER, MIGHT RESULT IN THE REALIZATION OF SUBSTANTIALLY LOWER SALE PROCEEDS.
ANNEX IV
B-29
<PAGE>
1. LIQUIDATION VALUE OF THE COMPANY
The table below details the computation of Merisel's liquidation value and
the estimated distributions to Holders of Impaired Claims and Impaired
Interests in a Chapter 7 liquidation of Merisel. This analysis is based upon a
number of estimates and assumptions that are inherently subject to significant
uncertainties and contingencies, many of which would be beyond the control of
Merisel. Accordingly, while the analyses that follow are necessarily presented
with numerical specificity, there can be no assurance that the values assumed
would be realized if Merisel were in fact liquidated, nor can there be any
assurance that a Bankruptcy Court would accept this analysis or concur with
such assumptions in making its determinations under section 1129(a) of the
Bankruptcy Code. ACTUAL LIQUIDATION PROCEEDS COULD BE MATERIALLY LOWER OR
HIGHER THAN THE AMOUNTS SET FORTH BELOW; NO REPRESENTATION OR WARRANTY CAN BE
OR IS BEING MADE WITH RESPECT TO THE ACTUAL PROCEEDS THAT COULD BE RECEIVED IN
A CHAPTER 7 LIQUIDATION OF MERISEL. The liquidation valuations have been
prepared solely for purposes of estimating proceeds available in a Chapter 7
liquidation of the Estate and do not represent values that may be appropriate
for any other purpose. Nothing contained in these valuations is intended or
may constitute a concession or admission of Merisel for any other purpose.
In addition to the specific assumptions described in the footnotes to the
table below, the following general assumptions were used in formulating the
liquidation analysis:
A. ESTIMATED LIQUIDATION PROCEEDS
While Merisel is knowledgeable and experienced in operating a significant
distribution company, it is not experienced in selling or attempting to sell
all or substantially all of the assets or stock of the enterprise, or any
material portion thereof, as is contemplated in this hypothetical liquidation
analysis. The following information and factors, not listed in order of
importance, were among others, generally considered by Merisel in estimating
the proceeds which might be received from the liquidation sale:
(a) Merisel's operating and projected financial performance.
(b) The attractiveness of the Company to potential buyers.
(c) The potential universe of buyers.
(d) The potential impact of a Chapter 7 case upon the Company, as well as
possible buyers' pricing strategies.
(e) The relative timing of the potential sale of the Company.
(f) Analysis of the liabilities and obligations of the Company.
In estimating the liquidation proceeds and applying the foregoing factors
and considerations to make such estimate, both the general economic
environment as well as the current condition of Merisel's businesses were
considered. See "BUSINESS AND PROPERTIES OF THE COMPANY" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in
Part A of the Exchange Restructuring Prospectus.
B. IMPACT ON MERISEL'S OPERATIONS OF THE CONVERSION TO A CHAPTER 7
LIQUIDATION.
Management believes that a conversion to a Chapter 7 liquidation and the
resulting pendency of a liquidation sale of the Operating Companies would
adversely affect the morale of Merisel's and its Operating Companies'
management and employees as well as significantly impair their ability to
maintain adequate working capital. There can be no assurance that the
conversion to a Chapter 7 liquidation would not result in the inability of the
Operating Companies to continue to raise working capital under the Revolving
Credit Agreement and related securitization of accounts receivables.
ANNEX IV
B-30
<PAGE>
C. NATURE AND TIMING OF THE LIQUIDATION PROCESS.
Under section 704 of the Bankruptcy Code, a Chapter 7 trustee must, among
other duties, collect and convert the property of the debtor's estate to cash
and close the estate as expeditiously as is compatible with the best interests
of the parties in interest. Solely for purposes of preparing this liquidation
analysis, it is assumed that Merisel would file the Reorganization Cases on
July 31, 1997 and the case would be converted to a Chapter 7 liquidation on
July 31, 1997. Merisel assumed disposition of its assets in a sale of its
Operating Companies' ongoing operations to a single buyer.
D. ADDITIONAL LIABILITIES AND RESERVES.
Merisel believes that there would be certain actual and contingent
liabilities and expenses for which provision would be required in a Chapter 7
liquidation before distributions could be made to creditors in addition to the
expenses that would be incurred in a Chapter 11 reorganization, including: (a)
Administrative Claims including the fees of a trustee and of counsel and other
professionals (including financial advisors and accountants) and other
liabilities (including retirement, vacation pay, and other employee-related
administrative costs and liabilities) that would be funded from continuing
operations if Merisel were reorganized as a going concern; and (b) certain
administrative costs including the incremental expenses of continuing to
operate the businesses pending disposition. Management believes that there is
significant uncertainty as to the reliability of Merisel's estimates of the
amounts related to the foregoing that have been assumed in the liquidation
analysis.
E. DISTRIBUTIONS; ABSOLUTE PRIORITY.
Under a Chapter 7 liquidation all secured claims are required to be
satisfied from the proceeds of the collateral securing such claims before any
such proceeds would be distributed to any other claim holders. The following
analysis assumes the application of the rule of absolute priority of
distributions with respect to the remaining proceeds of Merisel. Under that
rule, no junior creditor receives any distribution until all senior creditors
are paid in full. Proceeds remaining after satisfaction of all secured claims
would first be distributed to the Administrative and Priority Claimants, then
to unsecured claimants, and finally to subordinated claimants and
stockholders.
2. CONCLUSION
In summary, subject to all of the assumptions, conditions and limitations
set forth above, Merisel believes that a Chapter 7 liquidation of Merisel
could result in a diminution in the value to be realized by the Holders of
Claims and Interests and, as set forth in the table below, Merisel's
management estimates that the total liquidation proceeds available for
distribution to unsecured creditors would aggregate approximately $55.7
million. If this estimate proves accurate, Old Common Stock Interests likely
would be entitled to no distribution in the event of a Chapter 7 liquidation
of Merisel. IN THE EVENT OF A FORCED ASSET LIQUIDATION SALE, THE ACTUAL AMOUNT
OF LIQUIDATION PROCEEDS AVAILABLE TO CREDITORS AND STOCKHOLDERS MIGHT BE
CONSIDERABLY LESS.
ANNEX IV
B-31
<PAGE>
MERISEL, INC.
LIQUIDATION ANALYSIS
($ IN MILLIONS)
I. STATEMENT OF ASSETS
<TABLE>
<CAPTION>
NOTE
REFERENCE $
--------- ------
<S> <C> <C>
EBITDA.................................................. (1) 36.9
EBITDA Multiple......................................... (2) 7.5X
Total Enterprise Value.................................. 276.8
Discount for Chapter 7 Sale............................. (3) 25.0%
------
Adjusted Enterprise Value............................... 207.6
Less: Operating Losses During Liquidation............... (4) (7.4)
Plus: Cash.............................................. (5) 20.0
------
Sub-Total............................................... 220.2
Less: Operating Company Debt............................ (6) (157.1)
------
Estimated Proceeds From Asset Liquidation............... 63.1
</TABLE>
II. DISTRIBUTION OF ESTIMATED PROCEEDS OF ASSET LIQUIDATION
<TABLE>
<CAPTION>
ESTIMATED
LIQUIDATION
ESTIMATED RECOVERY
NOTE AMOUNT -----------------
REFERENCE OF CLAIM PERCENTAGE AMOUNT
--------- --------- ---------- ------
<S> <C> <C> <C> <C>
Estimated Proceeds of Asset Liquidation... $63.1
Secured Claims............................ (7) $ 0.0 0.0% 0.0
Chapter 7 Administrative Expenses......... (8) 4.4 100.0% 4.4
Chapter 11 Administrative Expenses........ (9) 3.0 100.0% 3.0
Pre-Petition Priority Claims.............. (10) 0.0 0.0% 0.0
Contingent Administrative Claims.......... (11) 0.0 0.0% 0.0
Priority Tax Claims....................... (12) 0.0 0.0% 0.0
-----
Total Secured Administrative and
Priority Claims........................ 7.4
Net Proceeds for Distribution to Unsecured
Creditors................................ $55.7
Claims Classification (13)
Class 4 12.5% Noteholder Claims........... (14) 134.1 41.5% 55.7
Class 6 Old Common Stock Interests........ Unknown 0.0% 0.0
</TABLE>
Notes to Liquidation Analysis
(1) Estimated EBITDA is for Merisel's continuing Operating Companies only.
Historical results for Q3 1996 have been adjusted for certain charges made
to accounts receivable, accounts payable and certain expense accounts which
the Company does not expect to recur. The EBITDA projections are based on
actual results for the third quarter of 1996 through the first quarter of
1997, and planned results for the second quarter of 1997. The analysis
assumes Liquidation started July 31, 1997 and is completed in 90 days. It
also assumes that Merisel Americas, Inc. and Merisel Canada, Inc. (the
Operating Companies) will be liquidated as going concerns with all debt and
other liabilities (including trade claims and the asset securitization
facilities) assumed and/or paid in full.
(2) The EBITDA multiple is based on a market analysis of competitors'
Enterprise Value/EBITDA multiples, adjusted for Merisel's historical
performance and the multiples of potential acquirors.
ANNEX IV
B-32
<PAGE>
(3) The analysis assumes that a potential buyer would apply a discount to the
purchase price in order to accomplish a rapid acquisition of the Operating
Companies in a 90-day time frame under a Chapter 7 liquidation.
(4) The Operating Companies are projected to incur a loss of $7.4 million
during a Chapter 7 liquidation due to loss of customers and trade vendor
support resulting from a sales decline of 20% during this 90-day sale
period.
(5) A minimum cash balance of $20 million was assumed to be maintained for
day-to-day operations.
(6) The Operating Company Debt includes the Revolving Credit Agreement; 11.5%
Senior Notes, 11.78% Subordinated Notes and the Promissory notes.
(7) No material secured claims exist at the Holding Company.
(8) These fees include a Trustee fee of 3% of proceeds available from the
Liquidation and fees for the Trustee's legal and financial professionals.
(9) These fees represent the remaining professional fees from the Chapter 11
proceeding.
(10) The analysis assumes no material pre-petition Priority Claims exist at
the Holding Company.
(11) The analysis assumes no material Contingent Priority Claims exist at the
Holding Company.
(12) The analysis assumes no material Priority Tax Claims exist at the Holding
Company.
(13) The analysis excludes any potential recovery for the Tech Pacific
litigation or any other Merisel litigation claims which may be contingent
liabilities
(14) This includes the $125 million principal balance and 7 months of accrued,
but unpaid interest on the 12.5% Senior Notes.
XXII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
If the Plan is not confirmed, the theoretical alternatives include (a)
continuation of the Reorganization Case and formulation of an alternative plan
or plans of reorganization or (b) liquidation of Merisel under Chapter 7 or
Chapter 11 of the Bankruptcy Code.
A. CONTINUATION OF THE CHAPTER 11 CASE
If Merisel were to commence the Reorganization Case and remain in Chapter
11, Merisel could continue to operate its businesses and manage its properties
as a debtor-in-possession, but it would remain subject to the restrictions
imposed by the Bankruptcy Code. It is not clear whether Merisel could survive
as a going concern in a protracted Chapter 11 case. Merisel could have
difficulty sustaining the high costs, operating financing, and the confidence
of Merisel's and its Operating Companies' customers and trade vendors, of
Merisel remaining in Chapter 11. Ultimately, Merisel (or other parties in
interest) could propose another plan or attempt to liquidate Merisel under
Chapter 7 or Chapter 11. Such plans might involve either a reorganization and
continuation of Merisel's business, or an orderly liquidation of its assets,
or a combination of both.
B. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11
If the Plan is not confirmed, Merisel's Reorganization Case could be
converted to a liquidation case under Chapter 7 of the Bankruptcy Code. In a
Chapter 7 case, a trustee would be appointed to liquidate promptly the assets
of Merisel.
Merisel believes that in liquidation under Chapter 7, before creditors
received any distribution, additional administrative expenses involved in the
appointment of a trustee and attorneys, accountants, and other professionals
to assist such trustees, along with an increase in expenses associated with an
increase in the number
ANNEX IV
B-33
<PAGE>
of unsecured claims such as warranty claims that would be expected, would
cause a substantial diminution in the value of the Estate. The assets
available for distribution to creditors would be reduced by such additional
expenses and by Claims, some of which would be entitled to priority, which
would arise by reason of the liquidation and from the rejection of leases and
other executory contracts in connection with the cessation of Merisel
operations and the failure to realize the greater going concern value of
Merisel's assets.
Merisel could also be liquidated pursuant to the provisions of a Chapter 11
plan of reorganization. In a liquidation under Chapter 11, Merisel assets
could be sold in a more orderly fashion over a longer period of time than in a
liquidation under Chapter 7. Thus, Chapter 11 liquidation might result in
larger recoveries than in a Chapter 7 liquidation, but the delay in
distributions could result in lower present values received and higher
administrative costs. Because a trustee is not required in a Chapter 11 case,
expenses for professional fees could be lower than in a Chapter 7 case, in
which a trustee must be appointed. Any distribution to the holders of Claims
under a Chapter 11 liquidation plan probably would be delayed substantially.
Merisel's liquidation analysis, prepared with its financial advisors and
included above in this Disclosure Statement, is by law premised upon a
liquidation in a Chapter 7 case. In that analysis, Merisel has taken into
account the nature, status, and underlying value of its assets, the ultimate
realizable value of its assets, and the extent to which such assets are
subject to liens and security interests.
XXIII. VOTING AND CONFIRMATION OF THE PLAN
The Bankruptcy Code requires that, in order to confirm the Plan, the
Bankruptcy Court must make a series of findings concerning the Plan and
Merisel, including, without limitation, that (i) the Plan has classified
Claims and Interests in a permissible manner, (ii) the Plan complies with
applicable provisions of the Bankruptcy Code, (iii) Merisel has complied with
applicable provisions of the Bankruptcy Code, (iv) Merisel has proposed the
Plan in good faith and not by any means forbidden by law, (v) the disclosure
required by Section 1125 of the Bankruptcy Code has been made, (vi) the Plan
has been accepted by the requisite votes of creditors (except to the extent
that cramdown is available under section 1129(b) of the Bankruptcy Code) (see
"Acceptance or Cramdown"), (vii) the Plan is feasible and Confirmation is not
likely to be followed by the liquidation or the need for further financial
reorganization of Merisel, (viii) the Plan is in the "best interests" of all
Holders of Claims or Interests in an impaired Class by providing to such
Holders on account of their Claims or Interests property of a value, as of the
Effective Date, that is not less than the amount that such Holder would
receive or retain in a Chapter 7 liquidation, unless each Holder of a Claim or
Interest in such Class has accepted the Plan, (ix) all fees and expenses
payable under 28 U.S.C. (S) 1930, as determined by the Bankruptcy Court at the
hearing on Confirmation, have been paid or the Plan provides for the payment
of such fees on the Effective Date, and (x) the Plan provides for the
continuation after the Effective Date of all retiree benefits, as defined in
section 1114 of the Bankruptcy Code, at the level established at any time
prior to Confirmation pursuant to sections 1114(e)(1)(B) or 1114(g) of the
Bankruptcy Code, for the duration of the period that Merisel has obligated
itself to provide such benefits.
A. VOTING PROCEDURES AND REQUIREMENTS
Pursuant to the Bankruptcy Code, only Classes of Claims and Interests that
are "impaired," as defined in section 1124 of the Bankruptcy Code, under the
Plan are entitled to vote to accept or reject the Plan. A Class is impaired if
the legal, equitable or contractual rights to which the Claims or Interests of
that Class entitle the Holders of such Claims or Interests are modified, other
than by curing defaults and reinstating the debt or by payment in full in
cash. Classes of Claims and Interests that are not impaired are conclusively
presumed to have accepted the Plan and are not entitled to vote on the Plan.
Classes of Claims and Interests whose Holders receive or retain no property
under the Plan are deemed to have rejected the Plan and are not entitled to
vote on the Plan. The classification of Claims and Interests is summarized,
together with notations as to whether each Class of Claims or Interests is
impaired or unimpaired, in Section IX.C herein, "Classification And Treatment
Of
ANNEX IV
B-34
<PAGE>
Claims And Interests." Additional information regarding voting is contained in
the instructions accompanying the ballots.
Under section 1126(b) of the Bankruptcy Code, a Holder of a claim or
interest that has accepted a plan of reorganization before the commencement of
a Chapter 11 case will be deemed to have accepted the plan for purposes of
confirmation under Chapter 11 of the Bankruptcy Code if the bankruptcy court
determines that the solicitation of such acceptance was in compliance with any
applicable nonbankruptcy law governing the adequacy of disclosure in
connection with such a solicitation. Solicitations of acceptances of a plan of
reorganization before the commencement of a Chapter 11 case shall be rejected
by a Bankruptcy Court if the court finds that (i) the plan was not transmitted
to substantially all creditors and equity interest holders of the same class,
(ii) an unreasonably short time was prescribed for such creditors or equity
interest holders to vote on the plan or (iii) the solicitation was not in
compliance with section 1126(b) of the Bankruptcy Code. Merisel believes that
its solicitation of acceptances of the Plan complies with the requirements of
section 1126(b) and all applicable federal and state securities laws for
purposes of solicitation of acceptances or rejections of the Plan. If the
Bankruptcy Court finds such compliance, then Holders casting ballots to accept
or reject the Plan will be deemed by the Bankruptcy Court to have accepted or
rejected the Plan. Unless the Bankruptcy Court later determines that any
acceptances of the Plan may be revoked, all such acceptances will remain in
full force and effect until the Bankruptcy Court determines whether such
acceptances constitute acceptances or rejections for purposes of Confirmation
under the Bankruptcy Code. Merisel also reserves the right to use acceptances
of the Plan received in this solicitation to seek Confirmation under any other
circumstances, including the filing of an involuntary bankruptcy petition
against Merisel. For a discussion of other significant conditions to
Confirmation under the Bankruptcy Code, see "Acceptance or Cramdown" below.
This Disclosure Statement and the appropriate ballot are being distributed
to all Holders of Class 4 Claims and Class 6 Interests, the only Holders who
are entitled to vote on the Plan. There is a separate ballot designated for
each Class of Claims and Interests in order to facilitate vote tabulation;
however, all ballots are substantially similar in form and substance and the
term "ballot" is used without intended reference to the ballot of any specific
Class of Claims or Interests.
B. WHO MAY VOTE
Under the Plan, the Claims against and the Interests in Merisel are divided
into six Classes. Pursuant to the Bankruptcy Code, only Classes of Claims or
Interests that are Impaired are entitled to vote on the Plan. Claims or
Interests in the following Classes are Impaired under the Plan and therefore
may vote on the Plan:
Class 4: 12.5% Notes Claims
Class 6: Old Common Stock Interests.
Only beneficial owners of 12.5% Notes and Old Common Stock (the "Old
Securities") on the Distribution Record Date, or their authorized signatories,
are eligible to vote on the Plan. The Distribution Record Date is July 22,
1997.
C. VOTING PROCEDURES FOR HOLDERS OF OLD SECURITIES
If you are a registered Holder of Old Securities, you will receive the
ballot relating to the securities you hold of record. Registered Holders may
include brokerage firms, commercial banks, trust companies or other nominees.
If such entities do not hold Old Securities for their own account, they should
provide copies of this Prospectus and an appropriate ballot to their customers
and to beneficial owners. For further instructions, see "Beneficial Owners Of
Old Securities" below. Any beneficial owner who has not received a prospectus
or ballot should contact their brokerage firm or nominee or the Information
Agent.
ANNEX IV
B-35
<PAGE>
All votes to accept or reject the Plan must be cast by using the ballot or,
in the case of a brokerage firm or other nominee holding Old Securities in its
own name on behalf of a beneficial owner, the Master Ballot, enclosed with
this Disclosure Statement (or original, manually executed facsimiles thereof).
Brokerage firms or other nominees holding Old Securities for the account of
only one beneficial owner may use a ballot. Purported votes which are cast in
any other manner will not be counted. Ballots and Master Ballots must be
received by the voting agent (the "Voting Agent") at its address set forth on
the applicable ballot no later than 5:00 p.m., Eastern Time, on August 29,
1997 (the "Voting Deadline"), which may be extended at the Company's
discretion.
You may receive a ballot relating to Old Securities that you did not
beneficially own on the applicable record date. You should complete only the
ballot corresponding to each class of Old Securities which you beneficially
owned on the Distribution Record Date. Holders who purchase or whose purchase
is registered after the Distribution Record Date, and who wish to vote on the
Plan must arrange with their seller to receive a proxy from the Holder of
record on such record date, a form of which is provided with each ballot and
Master Ballot.
Holders of Old Securities who elect to vote on the Plan should complete and
sign the ballot in accordance with the instructions thereon being sure to
check the appropriate box entitled "Accept the Plan" or "Reject the Plan."
Holders may not split their vote on the Plan with respect to a particular
class of Old Securities. A Holder must vote all securities beneficially owned
in a particular class in the same way (i.e., all "accept" or all "reject")
even if such Old Securities are owned through more than one broker or bank.
Delivery of all documents must be made to the Voting Agent at its address
set forth on the applicable ballot. The method of such delivery is at the
election and risk of the Holder. If such delivery is by mail, it is
recommended that Holders use an air courier with a guaranteed next day
delivery or registered mail, properly insured, with return receipt requested.
In all cases, sufficient time should be allowed to assure timely delivery.
YOU MAY RECEIVE MULTIPLE MAILINGS OF THIS DISCLOSURE STATEMENT, ESPECIALLY
IF YOU OWN YOUR OLD SECURITIES THROUGH MORE THAN ONE BROKER OR BANK. IF YOU
SUBMIT MORE THAN ONE BALLOT FOR A CLASS OR ISSUE OF OLD SECURITIES BECAUSE YOU
BENEFICIALLY OWN SUCH OLD SECURITIES THROUGH MORE THAN ONE BROKER OR BANK, BE
SURE TO INDICATE IN ITEM 3 OF THE BALLOT(S), THE NAME OF ALL BROKER DEALERS OR
OTHER INTERMEDIATES WHO HOLD OLD SECURITIES FOR YOU.
D. BENEFICIAL OWNERS OF OLD SECURITIES
Section 1126(b) of the Bankruptcy Code has been interpreted to require that
a solicitation for acceptances prior to filing a plan of reorganization must
include the beneficial owners of securities, regardless of whether such
beneficial owners are the holders of record. Accordingly, a beneficial owner
of Old Securities on the Record Date is eligible to vote on the Plan, whether
the Old Securities were held on the Distribution Record Date in such
beneficial owner's name or in the name of a brokerage firm, commercial bank,
trust company or other nominee.
Any beneficial owner holding Old Securities in its own name can vote by
completing and signing the enclosed Consent Solicitation form and returning it
directly to the Voting Agent using the enclosed pre-addressed stamped
envelope.
A beneficial owner holding Old Securities in "street name" (i.e., through a
brokerage firm, bank, trust company or other nominee) or a beneficial owner's
authorized signatory (a broker or other intermediary having power of attorney
to vote on behalf of a beneficial owner) can vote by following the
instructions set forth below:
1. Review the enclosed Ballot Instructions and the certification set
forth in the Instructions.
ANNEX IV
B-36
<PAGE>
2. Sign the Consent Solicitation form, which serves as a ballot (unless
it has already been signed by the bank, trust company or other nominee).
3. Return the Consent Solicitation form to the addressee in the
preaddressed, stamped envelope enclosed with the form. If no envelope was
enclosed, contact the Information Agent (identified below) or the Voting
Agent identified on the applicable Ballot Instructions.
Authorized signatories voting on behalf of more than one beneficial owner
must complete a separate Consent Solicitation form for each such beneficial
owner. Any Consent Solicitation form submitted to a brokerage firm or proxy
intermediary will not be counted until such brokerage firm or proxy
intermediary (i) properly executes and delivers such Consent Solicitation form
to the Voting Agent or (ii) properly completes and delivers a corresponding
Master Ballot to the Voting Agent.
By submitting a vote for or against the Plan, you are certifying that you
are the beneficial owner of the Old Securities being voted or an authorized
signatory for such a beneficial owner. Your submission of a Consent
Solicitation form will also constitute a request that you (or in the case of
an authorized signatory, the beneficial owner) be treated as the record holder
of such securities for purposes of voting on the Plan.
E. BROKERAGE FIRMS, BANKS AND OTHER NOMINEES
A brokerage firm, commercial bank, trust company or other nominee which is
the registered holder of an Old Security for a beneficial owner, or is a
participant in a securities clearing agency and is authorized to vote in the
name of such securities clearing agency pursuant to an omnibus proxy (as
described below) and is acting for a beneficial owner, can vote on behalf of
such beneficial owner by (i) distributing a copy of this Prospectus and all
appropriate Consent Solicitation forms to such owner, (ii) collecting all such
Consent Solicitation forms, (iii) completing a Master Ballot compiling the
votes and other information from the Consent Solicitation forms collected, and
(iv) transmitting such completed Master Ballot to the Voting Agent. A proxy
intermediary acting on behalf of a brokerage firm or bank may follow the
procedures outlines in the preceding sentence to vote on behalf of such
beneficial owner. A brokerage firm, commercial bank, trust company or other
nominee which is the registered holder of an Old Security for only one
beneficial owner also may arrange for such beneficial owner to vote by
executing the appropriate Consent Solicitation form and by distributing a copy
of the Prospectus and such executed ballot to such beneficial owner for voting
and returning such Consent Solicitation form to the Voting Agent at the
address set forth on the applicable ballot.
F. SECURITIES CLEARING AGENT
Any nominee holder of Old Securities will execute an omnibus proxy in favor
of its respective participants. As a result of the omnibus proxy, each such
participant will be authorized to vote the securities owned by it and held in
the name of such securities clearing agency.
G. INCOMPLETE BALLOTS (CONSENT SOLICITATION FORMS)
It is important that all Class 4 creditors and all Class 6 Interest Holders
vote to accept or to reject the Plan, because under the Bankruptcy Code, for
purposes of determining whether the requisite acceptances have been received
from an Impaired Class of Claims or Interests, the vote will be tabulated
based on the ratio of (i) Allowed Claims or Interests with respect to which a
vote to accept was received to (ii) all Allowed Claims or Interests of such
Impaired Class with respect to which any valid vote was received. Therefore,
it is possible that the Plan could be approved with the affirmative vote of
significantly less than two-thirds in amount and one-half in number of the
entire Class of 12.5% Notes Claims, or by Class 6 Old Common Stock Interests
with the affirmative vote of significantly less than two-thirds in amount of
the entire Class of Old Common Stock Interests. Failure by a Holder of an
Impaired Class 4 Claim or an Impaired Class 6 Interest to submit a properly
ANNEX IV
B-37
<PAGE>
executed Consent Solicitation form or Master Ballot (as appropriate) or to
indicate acceptance or rejection of the Plan in accordance with the
instructions set forth in the Ballot Instructions and the procedures set forth
herein shall be deemed to constitute an abstention by such Holder with respect
to a vote regarding the Plan. Abstentions as a result of failing to submit a
properly executed Consent Solicitation form or Master Ballot (when
appropriate) or failing to indicate a vote either for acceptance or rejection
of the Plan will not be counted as votes for or against the Plan. The Company,
in its sole discretion, may waive any defect in any Consent Solicitation form
or Master Ballot at any time, either before or after the close of voting, and
without notice.
EXCEPT AS OTHERWISE ORDERED BY THE BANKRUPTCY COURT, A CONSENT SOLICITATION
FORM OR, WHERE APPROPRIATE, MASTER BALLOT, WHICH IS EITHER (I) NOT TIMELY
SUBMITTED TO THE VOTING AGENT AT THE ADDRESS SET FORTH ON THE APPLICABLE
BALLOT INSTRUCTIONS, (II) SUBMITTED TO SUCH VOTING AGENT WITHOUT PROPER
EXECUTION OR (III) EXECUTED AND SUBMITTED TO SUCH VOTING AGENT WITHOUT
PROPERLY INDICATING ACCEPTANCE OR REJECTION OF THE PLAN WILL CONSTITUTE AN
ABSTENTION WITH RESPECT TO A VOTE ON THE PLAN UNDER SECTION 1126(B) OF THE
BANKRUPTCY CODE FOR PURPOSES OF CONFIRMATION OF THE PLAN.
H. VOTING DEADLINE AND EXTENSIONS
In order to be counted for purposes of Voting on the Plan, all of the
information requested on the applicable ballot must be provided by the Voting
Deadline. THE VOTING DEADLINE IS AUGUST 29, 1997, 5:00 P.M., EASTERN TIME.
Ballots must be received by the Voting Agent at its address set forth on the
applicable ballot. Merisel reserves the right, in its sole discretion, to
extend the Voting Deadline, in which case the term "Voting Deadline" shall
mean the latest date on which a ballot will be accepted. To extend the Voting
Deadline, Merisel will make an announcement thereof, prior to 9:00 p.m.,
Eastern Time, not later than the next business day immediately preceding the
previously scheduled Voting Deadline. Such announcement may state that Merisel
is extending the Voting Deadline for a specified period of time or on a daily
basis until 5:00 p.m., Eastern Time, on the date on which sufficient
acceptances required to seek Confirmation of the Plan have been received.
I. WITHDRAWAL OF VOTES ON THE PLAN
The solicitation of acceptances of the Plan will expire on the Voting
Deadline. A properly submitted ballot may be withdrawn only with the approval
of the Bankruptcy Court.
J. INFORMATION AGENT
MacKenzie Partners, Inc. has been appointed as Information Agent for the
Plan. Questions and requests for assistance may be directed to the Information
Agent. Requests for additional copies of this Prospectus, the Consent
Solicitation forms or the Master Ballots should be directed to the Information
Agent. Such requests should be addressed to the Information Agent as follows:
MacKenzie Partners, Inc., 156 Fifth Avenue, New York, New York 10010 (Phone:
(800) 322-2885).
K. ACCEPTANCE OR CRAMDOWN
A plan is accepted by an impaired class of claims if holders of at least
two-thirds in dollar amount and more than one-half in number of claims of that
class vote to accept the plan. A plan is accepted by an impaired class of
interests if holders of at least two-thirds of the number of shares in such
class vote to accept the plan. Only those holders of claims or interests who
actually vote count in these tabulations.
ANNEX IV
B-38
<PAGE>
The Bankruptcy Code contains the so-called "cramdown" provisions of section
1129(b) authorizing the confirmation of a plan even if it is not accepted by
all impaired classes, as long as at least one impaired class of claims
(without including any acceptance of the plan by an insider) has accepted it.
In the event that Class 4 12.5% Notes Claims votes to accept the Plan (and at
least one impaired Class either votes to reject the Plan or is deemed to have
rejected the Plan), Merisel reserves the right to request the Bankruptcy Court
to confirm the Plan under the cramdown provisions of the Bankruptcy Code. In
that event, Merisel has reserved the right to modify the Plan to the extent,
if any, that Confirmation pursuant to section 1129(b) of the Bankruptcy Code
requires or permits modification of the Plan. If a request to confirm the Plan
pursuant to the cramdown provisions of the Bankruptcy Code were to be granted
by the Bankruptcy Court and, if necessary, corresponding modifications of the
Plan were to be made in connection therewith, the dissenting Classes could
receive, in certain circumstances, alternative treatment under the Plan. IF
MERISEL SEEKS CONFIRMATION PURSUANT TO SUCH ALTERNATIVE CRAMDOWN PROVISIONS,
THERE CAN BE NO ASSURANCE THAT THE REQUIREMENTS OF SUCH PROVISIONS WILL BE
SATISFIED OR, EVEN IF SUCH REQUIREMENTS ARE SATISFIED, THAT SUCH ALTERNATIVE
TREATMENT WILL NOT MATERIALLY AFFECT THE PROPOSED CONSIDERATION TO BE
DISTRIBUTED TO CERTAIN HOLDERS OF CLAIMS AND INTERESTS.
The Company has reserved the right to seek confirmation of the Prepackaged
Plan under the "cram-down" provisions of the United States Bankruptcy Code.
However, if a majority of Stockholders elect not to support the Restructuring
after their review of all the facts and circumstances existing at that time,
the Company does not presently believe that attempting to force confirmation
of the Prepackaged Plan under the "cram-down" provisions would necessarily be
in the best interests of the Company and the Company has no present intention
to do so. Although the Limited Waiver Agreement requires, if consistent with
the Company's obligations under applicable law (which the Company believes
includes its fiduciary obligations), the filing of a Chapter 11 petition on
the Prepackaged Plan and that the Company take steps that are both necessary
and desirable to confirm the Prepackaged Plan, the Agreement does not by its
terms require that the Company seek confirmation of the
Prepackaged Plan under the cram-down provisions of the Bankruptcy Code if the
Stockholders vote to reject the Prepackaged Plan. Moreover, the Company has
specifically rejected requests by representatives of the Ad Hoc Noteholders'
Committee, both before and after the execution of the Limited Waiver
Agreement, for the Company's agreement to proceed with confirmation of the
Prepackaged Plan under those provisions. Accordingly, for the foregoing
reasons, unless the requisite Stockholder acceptances have been obtained for
the Prepackaged Plan, the Company does not currently believe filing a Chapter
11 petition to seek confirmation of the Prepackaged Plan under the cram-down
provisions would be consistent with its fiduciary obligations as presently
conceived or be both necessary and desirable.
The Ad Hoc Noteholders Committee has advised the Company that it disputes
the Company's interpretation of the Limited Waiver Agreement in this regard
and believes that the Company is obligated to file and confirm the Prepackaged
Plan regardless of the outcome of the Stockholder vote.
As indicated above, a plan may be confirmed under the cramdown provisions
if, in addition to satisfying the other requirements of section 1129 of the
Bankruptcy Code, it (i) is "fair and equitable" and (ii) "does not
discriminate unfairly" with respect to each class of claims or interests that
is impaired under, and has not accepted, the plan. The "fair and equitable"
standard, also known as the "absolute priority rule," requires, among other
things, that unless a dissenting class of claims or a class of interests
receives full compensation for its allowed claims or allowed interests, no
holder of claims or interests in any junior class may receive or retain any
property on account of such claims. The Bankruptcy Code establishes different
"fair and equitable" tests for secured creditors, unsecured creditors and
equity holders, as follows:
(a) Secured Creditors: either (i) each impaired secured creditor retains
its liens securing its secured claim and receives on account of its secured
claim deferred cash payments having a percent value equal to the amount of
its allowed secured claim, (ii) each impaired secured creditor realizes the
"indubitable equivalent" of its allowed secured claim, or (iii) the
property securing the claim is sold free and clear of
ANNEX IV
B-39
<PAGE>
liens with such liens to attach to the proceeds, and the liens against such
proceeds are treated in accordance with clause (i) or (ii) of this
subparagraph (a).
(b) Unsecured Creditors: either (i) each impaired unsecured creditor
receives or retains under the plan or reorganization property of a value
equal to the amount of its allowed claim, or (ii) the holders of claims and
equity interests that are junior to the claims of the nonaccepting class do
not receive any property under the plan of reorganization on account of
such claims and equity interests.
(c) Equity Holders: either (i) each equity holder will receive or retain
under the plan of reorganization property of a value equal to the greater
of (a) the fixed liquidation preference or redemption price, if any, of
such stock or (b) the value of the stock, or (ii) the holders of interests
that are junior to the nonaccepting class will not receive any property
under the plan of reorganization.
The "fair and equitable" standard has also been interpreted to prohibit any
class senior to a dissenting class from receiving under a plan more than 100%
of its allowed claims. The requirement that a plan not "discriminate unfairly"
means, among other things, that a dissenting class must be treated
substantially equally with respect to other classes of equal rank.
If Class 6 fails to accept the Plan, Merisel reserves its right to amend the
Plan to permit cramdown of Class 6 Old Common Stock Interests. Even if Class 6
were not to accept the Plan and Merisel were to elect to cram down Class 6,
there can be no assurance that the requirements of section 1129(b) of the
Bankruptcy Code would be satisfied even if the Plan treatment provisions were
amended or withdrawn as to Class 6 Old Common Stock Interests.
Merisel does not believe that the Plan unfairly discriminates against any
Class that may not accept or otherwise consent to the Plan. A plan of
reorganization "does not discriminate unfairly" if (i) the legal rights of a
nonaccepting class are treated in a manner that is consistent with the
treatment of other classes whose legal rights are similarly situated to those
of the nonaccepting class, and (ii) no class receives payments in excess of
that which it is legally entitled to receive for its claims or equity
interests. Merisel believes the Plan does not discriminate unfairly.
MERISEL RESERVES THE ABSOLUTE RIGHT TO SEEK CONFIRMATION OF THE PLAN UNDER
SECTION 1129(B) OF THE BANKRUPTCY CODE IN THE EVENT THE PLAN IS NOT ACCEPTED
BY ALL IMPAIRED CLASSES OF INTERESTS.
Subject to the conditions set forth in the Plan, a determination by the
Bankruptcy Court that the Plan is not confirmable pursuant to section 1129 of
the Bankruptcy Code will not limit or affect Merisel's ability to modify the
Plan to satisfy the Confirmation requirements of section 1129 of the
Bankruptcy Code.
XXIV. CONCLUSION
BASED ON ALL OF THE FACTS AND CIRCUMSTANCES, MERISEL CURRENTLY BELIEVES THAT
THE CONFIRMATION OF THE PLAN IS IN THE BEST INTERESTS OF MERISEL, ITS
CREDITORS AND ITS ESTATE. The Plan provides for an equitable and early
distribution to creditors and stockholders, and preserves the going concern
value of Merisel. Merisel believes that alternatives to confirmation of the
Plan could result in significant delays, litigation, and costs, as well as a
reduction in the going concern value of Merisel and a loss of jobs by many
Merisel employees. FOR THESE REASONS, MERISEL URGES YOU TO RETURN YOUR BALLOT
AND VOTE TO ACCEPT THE PLAN.
ANNEX IV
B-40
<PAGE>
APPENDIX I
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF -------
- -------------------------------------
IN RE
CASE NO. [ ]
MERISEL, INC., CHAPTER 11
DEBTOR
- -------------------------------------
PLAN OF REORGANIZATION OF MERISEL, INC.
DATED AS OF JULY 31, 1997
IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN FILED
AS OF THE DATE OF DISTRIBUTION OF THIS DOCUMENT
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071-3144
(213) 687-5000
919 Third Avenue
New York, New York 10022
(212) 735-3000
-- and --
One Rodney Square
Wilmington, Delaware 19899-0636
(302) 651-3000
Attorneys for Merisel, Inc.
--------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
I. INTRODUCTION....................................................... I-4
II. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION.............. I-4
A. Scope of Definitions............................................ I-4
B. Definitions..................................................... I-4
C. Rules of Interpretation......................................... I-9
D. Computation of Time............................................. I-10
III. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS..................... I-10
A. Introduction.................................................... I-10
B. Claims.......................................................... I-10
C. Interests....................................................... I-10
IV. TREATMENT OF CLAIMS AND INTERESTS.................................. I-11
A. Treatment of Unclassified Claims................................ I-11
1. Administrative Claims........................................... I-11
a. General......................................................... I-11
b. Payment of Statutory Fees....................................... I-11
c. Bar Date for Administrative Claims.............................. I-11
(1) General Provisions............................................. I-11
(2) Professionals.................................................. I-11
(3) Ordinary Course Liabilities.................................... I-12
2. Priority Tax Claims............................................. I-12
B. Treatment of Secured Claims..................................... I-12
1. Class 1: Secured Claims......................................... I-12
2. Class 2: Priority Claims........................................ I-12
3. Class 3: Subsidiary Debt Guaranty Claims........................ I-12
4. Class 4: 12.5% Notes Claims..................................... I-13
5. Class 5: General Unsecured Claims............................... I-13
C. Treatment of Interests.......................................... I-13
1. Class 6: Old Common Stock Interests............................. I-13
D. Treatment of Trade Creditors and Employees under the Plan....... I-14
1. Treatment of Trade Claims....................................... I-14
2. Treatment of Employee Claims.................................... I-14
E. Modification of Treatment of Claims............................. I-14
F. Listing of New Common Stock..................................... I-14
V. DISTRIBUTIONS UNDER THE PLAN....................................... I-15
A. Disbursing Agent................................................ I-15
B. Timing of Distributions......................................... I-15
C. Methods of Distributions........................................ I-15
1. Cash Payments................................................... I-15
2. Transfers of New Common Stock and New Warrants.................. I-15
3. Compliance with Tax Requirements................................ I-16
D. Pro Rata Distribution........................................... I-16
E. Distribution Record Date........................................ I-16
F. Surrender of Cancelled Old Securities........................... I-16
1. Special Procedures for Lost, Stolen, Mutilated or Destroyed
Instruments..................................................... I-16
2. Failure to Surrender Cancelled Instrument....................... I-17
G. Undeliverable or Unclaimed Distributions........................ I-17
H. Objections to Claims and Authority to Prosecute Objections;
Claims Resolution............................................... I-17
1. Generally....................................................... I-17
2. Professionals, Administration Claims, Trade Claims and Employee
Claims.......................................................... I-18
</TABLE>
ANNEX IV
I-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
I. Disputed Claims; Reserve and Estimations........................ I-18
1. Treatment of Disputed Claims.................................... I-18
2. Distributions on Account of Disputed Claims Once They Are
Allowed......................................................... I-18
J. Setoffs......................................................... I-18
VI. INDIVIDUAL HOLDER PROOFS OF INTEREST............................... I-19
VII. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES.............. I-19
A. Assumptions..................................................... I-19
B. Cure of Defaults in Connection with Assumption.................. I-19
C. Rejections...................................................... I-19
D. Bar Date for Rejection Damages.................................. I-20
VIII. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN................. I-20
A. Corporate Action................................................ I-20
1. Cancellation of Old Securities and Related Agreements........... I-20
2. Certificate of Incorporation Amendments......................... I-20
3. Management of Reorganized Merisel............................... I-20
B. Implementation.................................................. I-20
C. Payment of Statutory Fees....................................... I-21
D. No Interest..................................................... I-21
E. Retiree Benefits................................................ I-21
F. Issuance of New Securities...................................... I-21
IX. CONFIRMATION AND EFFECTIVE DATE CONDITIONS......................... I-21
A. Conditions to Confirmation...................................... I-21
B. Conditions to Effective Date.................................... I-21
C. Waiver of Conditions to Confirmation and Effective Date......... I-22
X. EFFECTS OF PLAN CONFIRMATION....................................... I-22
A. Discharge of Debtor and Injunction.............................. I-22
B. Limitation of Liability......................................... I-22
C. Releases........................................................ I-23
D. Indemnification................................................. I-23
E. Vesting of Assets............................................... I-24
F. Preservation of Causes of Action................................ I-24
G. Retention of Bankruptcy Court Jurisdiction...................... I-24
H. Failure of Bankruptcy Court to Exercise Jurisdiction............ I-25
I. Committees...................................................... I-25
XI. MISCELLANEOUS PROVISIONS........................................... I-25
A. Final Order..................................................... I-25
B. Modification of The Plan........................................ I-26
C. Revocation of the Plan.......................................... I-26
D. Severability of Plan Provisions................................. I-26
E. Successors and Assigns.......................................... I-26
F. Saturday, Sunday or Legal Holiday............................... I-26
G. Post-Effective Date of Evidences of Claims or Interests......... I-27
H. Headings........................................................ I-27
I. Governing Law................................................... I-27
J. No Liability for Solicitation or Participation.................. I-27
K. No Admissions or Waiver of Objections........................... I-27
L. Confirmability of Plan and Cramdown............................. I-28
</TABLE>
ANNEX IV
I-3
<PAGE>
I.
INTRODUCTION
Merisel, Inc. (defined herein as "Merisel") hereby proposes the following
Plan of Reorganization (defined herein as the "Plan") for the resolution of
Merisel's outstanding creditor claims and equity interests and requests
Confirmation of the Plan pursuant to Section 1129 of the Bankruptcy Code.
All Holders of Claims and Interests are encouraged to read the Plan and the
accompanying solicitation materials in their entirety before voting to accept
or reject the Plan. No materials, other than the accompanying solicitation
materials and any exhibits and schedules attached thereto or referenced
therein, have been approved by Merisel for use in soliciting acceptances or
rejections of the Plan.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, ALL STATEMENTS IN THIS PLAN
AND THE ACCOMPANYING SOLICITATION MATERIALS CONCERNING THE HISTORY OF
MERISEL'S BUSINESSES, THE PAST OR PRESENT FINANCIAL CONDITION OF MERISEL,
TRANSACTIONS TO WHICH MERISEL WAS OR IS A PARTY, OR THE EFFECT OF CONFIRMATION
OF THE PLAN ON SECURED CREDITORS, UNSECURED CREDITORS OR EQUITY SECURITY
HOLDERS ARE ATTRIBUTABLE EXCLUSIVELY TO MERISEL AND NOT TO ANY OTHER PARTY.
II.
DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
A. SCOPE OF DEFINITIONS.
For purposes of this Plan, except as expressly provided in other sections of
the Plan or unless the context otherwise requires, all capitalized terms not
otherwise defined shall have the meanings ascribed to them in this Article II
of the Plan. Any term used in this Plan that is not defined herein, but is
defined in the Bankruptcy Code or the Bankruptcy Rules, shall have the meaning
ascribed to that term in the Bankruptcy Code or the Bankruptcy Rules.
B. DEFINITIONS.
1. "12.5% NOTES" means the $125 million aggregate principal amount of 12.5%
Senior Notes due on December 31, 2004, issued by Merisel on or about October
24, 1994.
2. "11.5% SENIOR NOTES" means the Amended and Restated 11.5% Senior Notes
due on January 31, 1998, authorized and issued by Merisel Americas.
3. "11.5% SENIOR NOTES GUARANTY CLAIM" means any unsecured Claim against
the Company arising out of Merisel's guaranty of the obligations of Merisel
Americas under the 11.5% Senior Notes.
4. "AD HOC NOTEHOLDERS COMMITTEE" means Turnberry Capital Management, Baker
Nye Advisors, Inc., Monarch Management Group Limited, Robert Fleming, Inc.,
Fisher Ewing Partners, and York Capital Management, and/or such other
representatives of the 12.5% Notes Claims as may be designated from time to
time.
5. "ADMINISTRATIVE CLAIM" means a Claim for payment of an administrative
expense of a kind specified in section 503(b) of the Bankruptcy Code and
entitled to priority pursuant to Section 507(a)(1) of the Bankruptcy Code,
including, without limitation, the actual and necessary costs and expenses
incurred after the commencement of a Chapter 11 case of preserving the estate
or operating the business of Merisel (including wages, salaries and
commissions for services), loans and advances to Merisel made after the
Petition Date, compensation for legal and other services and reimbursement of
expenses awarded or allowed under Section 330(a) or 331 of the Bankruptcy
Code, certain retiree benefits, certain reclamation claims, and all fees and
charges against the estate under chapter 123 of Title 28, United States Code.
ANNEX IV
I-4
<PAGE>
6. "ALLOWED CLAIM" or "ALLOWED INTEREST" means a Claim against or Interest
in Merisel to the extent that
a. A proof of such Claim or Interest
(1) was timely Filed and no objection to the Claim or Interest is
Filed within the time fixed by the Bankruptcy Court for such
objections; or
(2) is deemed Filed under applicable law or pursuant to a Final Order
of the Bankruptcy Court and no objection to the Claim or Interest is
Filed within the time fixed by the Bankruptcy Court for such
objections; or
(3) is Allowed pursuant to subparagraphs b or c immediately below.
b. If Merisel files an objection to a proof of Claim or Interest within a
time fixed by the Bankruptcy Court, the Claim or Interest shall be Allowed
to the extent of
(1) any amount of such Claim or Interest to which Merisel did not
object;
(2) any amount otherwise authorized by Final Order or the Plan; or
(3) any amount temporarily allowed by an Order for purposes of voting
on the Plan.
c. Upon the execution of the Stipulations of Amount and Nature of Claim
referred to in Section V.I.1 hereof, the relevant claimant's claim shall be
deemed allowed for all purposes under this Plan, including but not limited
to voting on this Plan and receiving distributions under this Plan, without
the necessity of filing any proofs of Claim with respect thereto.
"ALLOWED ADMINISTRATIVE CLAIM," "ALLOWED PRIORITY TAX CLAIM," "ALLOWED
SECURED CLAIM" and "ALLOWED UNSECURED CLAIM" have correlative meanings.
7. "ALLOWED CLASS ... CLAIM" means an Allowed Claim in the particular Class
described.
8. "ALLOWED CLASS ... INTEREST" means an Allowed Interest in the particular
Class described.
9. "BANKRUPTCY CODE" means title 11 of the United States Code, as now in
effect or hereafter amended if such amendments are made applicable to the
Reorganization Case.
10. "BANKRUPTCY COURT" means the United States Bankruptcy Court for the
District in which the Reorganization Case is Filed, or if such Court ceases to
exercise jurisdiction over the Reorganization Case, such court or adjunct
thereof that exercises jurisdiction over the Reorganization Case in lieu of
the United States Bankruptcy Court for such District.
11. "BANKRUPTCY RULES" means the Federal Rules of Bankruptcy Procedure, as
applicable from time to time in the Reorganization Case.
12. "BUSINESS DAY" means any day other than a Saturday, a Sunday or a "Legal
Holiday" (as defined in Bankruptcy Rule 9006(a)).
13. "CASH" means currency, a certified check, a cashier's check or a wire
transfer of good funds from any source, or a check drawn on a domestic bank
from Reorganized Merisel or other Person making any distribution under the
Plan.
14. "CLAIM" means a claim against Merisel, whether or not asserted or
allowed, as defined in section 101(5) of the Bankruptcy Code.
15. "CLASS" means a class of Claims or Interests designated pursuant to the
Plan.
16. "CLERK" means the Clerk of the Bankruptcy Court.
17. "COMMITTEE" means any statutory committee of creditors or equity
interest Holders of Merisel appointed by the United States Trustee pursuant to
Section 1102 of the Bankruptcy Code.
ANNEX IV
I-5
<PAGE>
18. "CONFIRMATION" means the entry by the Bankruptcy Court of the
Confirmation Order.
19. "CONFIRMATION DATE" means the date on which the Clerk enters the
Confirmation Order on the Docket.
20. "CONFIRMATION HEARING" means the hearing on confirmation of the Plan, as
the Plan may be modified hereafter.
21. "CONFIRMATION ORDER" means the Order of the Bankruptcy Court confirming
the Plan under section 1129 of the Bankruptcy Code.
22. "CREDITORS COMMITTEE" means the official committee of creditors of
Merisel appointed by the United States Trustee pursuant to Section 1102 of the
Bankruptcy Code or, if no such committee is appointed, the Ad Hoc Noteholders
Committee.
23. "DEBTOR" means Merisel, as debtor.
24. "DEBTOR IN POSSESSION" means the Debtor, when acting in the capacity of
representative of the Estate in the Reorganization Case.
25. "DESIGNATED PROFESSIONAL" means Skadden, Arps, Slate, Meagher & Flom LLP
and its affiliates; Donaldson, Lufkin & Jenrette Securities Corporation; and
Deloitte & Touche LLP.
26. "DISBURSING AGENT" means the Person responsible for making distributions
under the Plan. Reorganized Merisel, or such Person(s) as Merisel may employ
in their sole discretion, will serve as Disbursing Agent.
27. "DISCLOSURE STATEMENT" means the Disclosure Statement With Respect To
Plan Of Reorganization Of Merisel, Inc. (and all exhibits and schedules
annexed thereto or referred to therein), as it may be amended or supplemented
from time to time.
28. "DISPUTED CLAIM" means a Claim, not otherwise Allowed or paid pursuant
to the Plan, as to which (i) a proof of claim has been Filed or deemed Filed
and (ii) an objection has been Filed timely or deemed Filed timely and which
objection has not been withdrawn on or before any date fixed for Filing such
objections by the Plan or Order of the Bankruptcy Court and (if not withdrawn)
has not been overruled or denied by a Final Order. A Claim shall be considered
a Disputed Claim to the extent of any Filed or deemed Filed objection.
29. "DISPUTED INTEREST" means an Interest as to which an objection has been
or may be timely Filed or deemed timely Filed and which objection has not been
withdrawn on or before any date fixed for Filing such objections by the Plan
or Order of the Bankruptcy Court and (if not withdrawn) has not been overruled
or denied by a Final Order. An Interest shall be considered a Disputed
Interest to the extent of any Filed or deemed Filed objection.
30. "DISTRIBUTION RECORD DATE" means the date or dates fixed by the
Bankruptcy Court as the record date for determining the Holders of 12.5% Notes
and Old Common Stock, respectively, who are entitled to receive distributions
under this Plan.
31. "DOCKET" means the docket in the Reorganization Case maintained by the
Clerk.
32. "EFFECTIVE DATE" means a Business Day, as determined by Merisel, that is
as soon as reasonably practicable but that is at least 11 days after the
Confirmation Date and on which all conditions to the Effective Date set forth
herein have been satisfied or, if permitted, waived by Merisel, and on which
no stay of the Confirmation Order is in effect; provided, however, that, upon
request of Merisel or Reorganized Merisel, the Bankruptcy Court may extend the
deadline for the Effective Date to occur following notice and a hearing.
ANNEX IV
I-6
<PAGE>
33. "EMPLOYEE CLAIMS" means Claims which are asserted by employees of
Merisel in connection with their employment including, without limitation,
Claims arising from or relating to salaries or wages, accrued paid vacation,
health related benefits, severance benefits, field management and
executive/administrative management incentive plans and similar employee
benefits.
34. "ESTATE" means the estate created in the Reorganization Case under
section 541 of the Bankruptcy Code.
35. "FILE" or "FILED" means filed with the Bankruptcy Court in the
Reorganization Case.
36. "FINAL ORDER" means an order or judgment of the Bankruptcy Court, as
entered on the Docket in the Reorganization Case, which has not been reversed,
stayed, modified or amended, and as to which (a) the time to appeal or seek
certiorari has expired and no appeal or petition for certiorari has been
timely filed, or (b) any appeal that has been or may be taken or any petition
for certiorari that has been or may be filed has been resolved by the highest
court to which the order or judgment was appealed or from which certiorari was
sought.
37. "HOLDER" means a Person who holds a Claim or Interest. Where the
identity of the Holder of a Claim or Interest is set forth on a register or
other record maintained by or at the direction of Merisel, the Holder of such
Claim or Interest shall be deemed to be the holder as identified on such
register or record unless Merisel is otherwise notified in a writing
authorized by such Holder.
38. "IMPAIRED" shall have the definition given to it in Section 1124 of the
Bankruptcy Code.
39. "INDENTURE TRUSTEE" means The Bank of New York, as successor indenture
trustee for the 12.5% Notes.
40. "INDENTURE TRUSTEE EXPENSES" means any unpaid Indenture Trustee's fees,
and reasonable unpaid out-of-pocket costs or expenses incurred through the
Effective Date by an Indenture Trustee, including, without limitation,
reasonable out-of-pocket costs and expenses and reasonable fees of legal
counsel to the Indenture Trustee, which are secured or which are entitled to
be secured under the Indenture by a lien or other priority in payment against
distributions to be made to Holders of Claims under the respective Indenture.
41. "INSTRUMENT" means any share of stock, security, promissory note or
other "Instrument," within the meaning of that term, as defined in section
9105(1) (i) of the UCC.
42. "INTEREST" means the interest, whether or not asserted, of any equity
security Holder of Merisel.
43. "LOCAL BANKRUPTCY RULES" means the local rules of the Bankruptcy Court,
as applicable from time to time in the Reorganization Case.
44. "MERISEL" means Merisel, Inc., a Delaware corporation.
45. "NEW COMMON STOCK" means common stock of Reorganized Merisel, par value
$.10 per share, which may be issued by Reorganized Merisel on and after the
Effective Date pursuant to the Plan or otherwise.
46. "NEW WARRANTS" means, collectively, the New Series A Warrants and New
Series B Warrants to purchase New Common Stock representing in the aggregate
approximately 17.5% of the New Common Stock on a fully diluted basis as of the
Effective Date.
47. "NEW SERIES A WARRANTS" means the warrants to purchase New Common Stock
issued under the Series A Warrant Agreement.
48. "NEW SERIES B WARRANTS" means the warrants to purchase New Common Stock
issued under the Series B Warrant Agreement.
49. "OLD COMMON STOCK" means the common stock of Merisel, par value $.01 per
share, issued and outstanding as of the Petition Date.
ANNEX IV
I-7
<PAGE>
50. "OLD PREFERRED STOCK" means the authorized preferred stock of Merisel,
par value $.01 per share, none of which is issued and outstanding.
51. "OLD SECURITIES" means, collectively, the 12.5% Notes and the Old Common
Stock.
52. "ORDER" means an order or judgment of the Bankruptcy Court as entered on
the Docket.
53. "ORDINARY COURSE PROFESSIONALS ORDER" means the order which, if entered
by the Clerk, will authorize Merisel to (a) employ various professionals who
are not directly working to implement the Reorganization Case and (b) pay such
professionals without need for application, hearing and Final Order.
54. "PERSON" means any person, governmental unit, official committee
appointed by the United States Trustee in the Reorganization Case, unofficial
committee of Holders of Claims or Interests, or other entity (all as defined
in the Bankruptcy Code).
55. "PETITION DATE" means the date on which the petition commencing
Reorganization Case is Filed.
56. "PLAN" means this Plan of Reorganization of Merisel, Inc. and all
exhibits and schedules annexed hereto or referred to herein, as such may be
amended, modified or supplemented from time to time.
57. "PRIORITY CLAIM" means an Allowed Claim entitled to priority under
sections 507(a)(3) through 507(a)(9) of the Bankruptcy Code, but excludes
Priority Tax Claims.
58. "PRIORITY TAX CLAIM" means an Allowed Claim for an amount entitled to
priority under section 507(a)(8) of the Bankruptcy Code.
59. "PRO RATA" means proportionately so that, with respect to any Class, the
ratio of (a) the amount of consideration distributed on account of a
particular Allowed Claim or Allowed Interest to (b) the amount of the Allowed
Claim or Allowed Interest, is the same as the ratio of (x) the amount of
consideration distributed on account of all Allowed Claims or Allowed
Interests of the Class in which the particular Allowed Claim or Allowed
Interest is included to (y) the aggregate amount of all Allowed Claims or
Allowed Interests of that Class.
60. "REINSTATED" or "REINSTATEMENT" means, with respect to any Allowed Claim
or Allowed Interest, that such Claim or Interest is treated as Unimpaired
under the Plan. "REINSTATED" or "REINSTATEMENT" also means (i) leaving
unaltered the legal, equitable, and contractual rights to which a Claim
entitles the holder of such Claim so as to leave such Claim unimpaired in
accordance with section 1124 of the Bankruptcy Code or (ii) notwithstanding
any contractual provision or applicable law that entitles the holder of such
Claim to demand or receive accelerated payment of such Claim after the
occurrence of a default (a) curing any such default that occurred before or
after the Petition Date, other than a default of a kind specified in section
365(b)(2) of the Bankruptcy Code; (b) reinstating the maturity of such Claim
as such maturity existed before such default; (c) compensating the holder of
such Claim for any damages incurred as a result of any reasonable reliance by
such holder on such contractual provision or such applicable law; and (d) not
otherwise altering the legal, equitable, or contractual rights to which such
Claim entitles the holder of such Claim; provided, however, that any
contractual right that does not pertain to the payment when due of principal
and interest on the obligation on which such Claim is based, including, but
not limited to, financial covenant ratios, negative pledge covenants,
covenants or restrictions on merger or consolidation, and affirmative
covenants regarding corporate existence prohibiting certain transactions or
actions contemplated by the Plan, or conditioning such transactions or actions
on certain factors, shall not be required to be reinstated in order to
accomplish Reinstatement.
61. "REORGANIZATION CASE" means Merisel's case under chapter 11 of the
Bankruptcy Code.
62. "REORGANIZED MERISEL" means Merisel, as reorganized on and after the
Effective Date.
ANNEX IV
I-8
<PAGE>
63. "REORGANIZED MERISEL CERTIFICATE OF INCORPORATION" means the amended and
restated certificate of incorporation that will be effective on the Effective
Date, in the form which will be Filed at or prior to the Confirmation Hearing.
64. "SECURED CLAIM" means any Claim that is secured by a lien on property in
which the Estate has an interest or that is subject to setoff under section
553 of the Bankruptcy Code, to the extent of the value of the Claim Holder's
interest in the Estate's interest in such property or to the extent of the
amount subject to setoff, as applicable, as determined pursuant to section
506(a) of the Bankruptcy Code.
65. "SECURITIES CLAIM" means (a) any Claim arising from rescission of a
purchase or sale of Old Common Stock or for damages arising from the purchase
or sale of Old Common Stock, or (b) any Claim for indemnity, reimbursement, of
contribution on account of any such Claim.
66. "SERIES A WARRANT AGREEMENT" means the warrant agreement in
substantially the form annexed as Exhibit A to the Plan.
67. "SERIES B WARRANT AGREEMENT" means the warrant agreement in
substantially the form annexed as Exhibit B to the Plan.
68. "SUBSIDIARY" means any directly or indirectly wholly-owned subsidiary of
Merisel.
69. "SUBSIDIARY DEBT GUARANTY CLAIM" means any unsecured Claim against the
Company arising out of any guaranty by Merisel of any debt repayment
obligation of any Subsidiary.
70. "TRADE CLAIMS" means any unsecured Claim against the Company arising
from (i) the delivery of goods or services in the ordinary course of business
or (ii) insurance-related service (including insurance premiums). "Trade
Claim" excludes Claims (i) arising under Sections 502(e) or 502(g) of the
Bankruptcy Code, (ii) of the type described in Section 726(a)(4) of the
Bankruptcy Code, or (iii) arising in tort for personal injury or property
loss.
71. "UCC" means the Uniform Commercial Code, as in effect at any relevant
time.
72. "U.S. TRUSTEE" means the United States Trustee for the Region in which
the Reorganization Case is pending.
73. "UNIMPAIRED" means, with reference to a Class of Claims or Interests,
that the Class is not Impaired.
74. "UNSECURED CLAIM" means any Claim that is not an Administrative Claim,
Priority Claim, Priority Tax Claim or Secured Claim.
75. "VOTING DEADLINE" means the date on which ballots must be received by
the Voting Agent at the address set forth on the applicable ballot used for
voting on the Plan. For purposes of the Plan, the Voting Deadline is August
29, 1997, or, if Merisel extends the Voting Deadline, the latest date on which
a ballot will be accepted.
C. RULES OF INTERPRETATION.
For purposes of the Plan (a) whenever it appears appropriate from the
context, each term, whether stated in the singular or the plural, shall
include both the singular and the plural and; the masculine gender shall
include the feminine, and the feminine gender shall include the masculine, (b)
any reference in the Plan to a contract, instrument, release or other
agreement or document being in a particular form or on particular terms and
conditions means that such document shall be substantially in such form or
substantially on such terms and
ANNEX IV
I-9
<PAGE>
conditions; provided, however, that any change to such form, terms, or
conditions which is material to a party to such document shall not be made
without such party's consent; (c) any reference in the Plan to an existing
document or exhibit Filed or to be Filed means such document or exhibit, as it
may have been or (to the extent otherwise permitted, hereafter) may be
amended, modified or supplemented from time to time; (d) unless otherwise
specified in a particular reference, all references in the Plan to Sections,
Articles, Schedules, and Exhibits are references to Sections, Articles,
Schedules and Exhibits of or to the Plan; (e) the words "herein," "hereof,"
"hereto," "hereunder" and others of similar import refer to the Plan in its
entirety rather than to only a particular portion of the Plan; (f) captions
and headings to Articles and Sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the
interpretations of the Plan; (g) the rules of construction set forth in
section 102 of the Bankruptcy Code shall apply; and (h) all exhibits to the
Plan are incorporated into the Plan, and shall be deemed to be included in the
Plan, provided that they are Filed no later than the Confirmation Hearing.
D. COMPUTATION OF TIME.
In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
III.
DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS
A. INTRODUCTION.
Set forth below is a designation of the Classes of Claims and Interests
under the Plan. All Claims and Interests, except Administrative Claims and
Priority Tax Claims, are placed in the classes designated below. In accordance
with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and
Priority Tax Claims have not been classified and are excluded from the
following Classes.
A Claim or Interest is classified in a particular Class only to the extent
that the Claim or Interest qualifies within the description of that Class, and
is classified in another Class or Classes to the extent that any portion of
the Claim or Interest falls within the description of such other Class or
Classes.
A Claim or Interest is classified in a particular Class only to the extent
that the Claim or Interest is an Allowed Claim or Allowed Interest in that
Class and has not been paid, released or otherwise satisfied before the
Effective Date; a Claim or Interest which is not an Allowed Claim or Allowed
Interest is not in any Class. A Disputed Claim or Disputed Interest, to the
extent that it subsequently becomes an Allowed Claim or Allowed Interest,
shall be included in the Class for which it would have qualified had it not
been disputed.
Notwithstanding anything to the contrary contained in the Plan, no
distribution shall be made on account of any Claim or Interest which is not an
Allowed Claim or an Allowed Interest.
B. CLAIMS.
CLASS 1: SECURED CLAIMS (UNIMPAIRED--NOT ENTITLED TO VOTE)
CLASS 2: PRIORITY CLAIMS (UNIMPAIRED--NOT ENTITLED TO VOTE)
CLASS 3: SUBSIDIARY DEBT GUARANTY CLAIMS--(UNIMPAIRED--NOT ENTITLED TO VOTE)
CLASS 4: 12.5% NOTES CLAIMS (IMPAIRED--ENTITLED TO VOTE)
CLASS 5: GENERAL UNSECURED CLAIMS (UNIMPAIRED--NOT ENTITLED TO VOTE)
C. INTERESTS.
CLASS 6: OLD COMMON STOCK INTERESTS (IMPAIRED--ENTITLED TO VOTE)
ANNEX IV
I-10
<PAGE>
IV.
TREATMENT OF CLAIMS AND INTERESTS
A. TREATMENT OF UNCLASSIFIED CLAIMS.
1. ADMINISTRATIVE CLAIMS.
A. GENERAL.
Subject to certain additional requirements for professionals and certain
other entities set forth below, Reorganized Merisel shall pay to each Holder
of an Allowed Administrative Claim, on account of its Administrative Claim and
in full satisfaction thereof, Cash equal to the amount of such Allowed
Administrative Claim, unless such Holder and Merisel or Reorganized Merisel
agree or shall have agreed to other treatment of such Claim; provided,
however, that if incurred in the ordinary course of business or otherwise
assumed by Merisel pursuant to the Plan, an Allowed Administrative Claim
(including Administrative Claims of governmental units for taxes), will be
paid, performed or settled by Reorganized Merisel when due in accordance with
the terms and conditions of the particular agreement(s) governing the
obligation in the absence of the Reorganization Case.
B. PAYMENT OF STATUTORY FEES.
On or before the Effective Date, all fees payable pursuant to 28 U.S.C. (S)
1930, as determined by the Bankruptcy Court at the Confirmation Hearing, shall
be paid in Cash equal to the amount of such Administrative Claims.
C. BAR DATE FOR ADMINISTRATIVE CLAIMS.
(1) GENERAL PROVISIONS.
Except as provided below for non-tax liabilities incurred in the ordinary
course of business by the Debtor in Possession, requests for payment of
Administrative Claims must be Filed and served on counsel for Merisel and
Reorganized Merisel no later than (x) sixty (60) days after the Effective
Date, or (y) such later date, if any, as the Bankruptcy Court shall order upon
application made prior to the end of such 60-day period. Holders of
Administrative Claims (including, without limitation, professionals requesting
compensation or reimbursement of expenses and the Holders of any Claims for
federal, state or local taxes) that are required to File a request for payment
of such Claims and that do not File such requests by the applicable bar date
shall be forever barred from asserting such Claims against Merisel or
Reorganized Merisel, or any of their respective properties.
(2) PROFESSIONALS.
All professionals or other Persons requesting compensation or reimbursement
of expenses pursuant to any of sections 327, 328, 330, 331, 503(b) and 1103 of
the Bankruptcy Code for services rendered on or before the Effective Date
(including, without limitation, any compensation requested by any professional
or any other Person for making a substantial contribution in the
Reorganization Case) shall File and serve on Reorganized Merisel and counsel
for Reorganized Merisel an application for final allowance of compensation and
reimbursement of expenses no later than (i) sixty (60) days after the
Effective Date, or (ii) such later date, if any, as the Bankruptcy Court shall
order upon application made prior to the end of such 60-day period; provided,
however, that any Professional who may receive compensation or reimbursement
of expenses pursuant to the Ordinary Course Professionals Order without having
filed an application may continue to receive compensation or reimbursement for
services rendered before the Effective Date without further Bankruptcy Court
review or approval pursuant to the Ordinary Course Professionals Order.
Objections to applications of professionals for compensation or reimbursement
of expenses must be Filed and served on Reorganized Merisel, counsel for
Reorganized Merisel and the professionals to whose application the objections
are addressed on or before the later of (x) ninety (90) days after the
Effective Date and (y) thirty (30) days after such date as the Bankruptcy
Court shall establish as the bar date for such applications. Any professional
fees and reimbursements or expenses incurred by Reorganized Merisel subsequent
to the Effective Date may be paid by Reorganized Merisel without application
to the Bankruptcy Court.
ANNEX IV
I-11
<PAGE>
(3) ORDINARY COURSE LIABILITIES.
Holders of Administrative Claims based on liabilities incurred in the
ordinary course of Merisel's businesses (other than Claims of governmental
units for taxes or Claims and/or penalties related to such taxes) shall not be
required to File any request for payment of such Claims. Such Administrative
Claims shall be assumed and paid by Reorganized Merisel pursuant to the terms
and conditions of the particular transaction giving rise to such
Administrative Claim, without any further action by the Holders of such
Claims.
2. PRIORITY TAX CLAIMS.
Unless otherwise agreed to by Merisel and a Holder of a Priority Tax Claim,
each Holder of an Allowed Priority Tax Claim shall receive (i) Cash equal to
the unpaid portion of such Allowed Priority Tax Claim on the later of (a) the
Effective Date and (b) the date on which such Claim becomes an Allowed
Priority Tax Claim; or (ii) payment at such time as specified under applicable
laws. Pursuant to Section 1123(a)(1) of the Bankruptcy Code, Priority Tax
Claims are not designated a Class of Claims for purposes of the Plan, and the
Holders of Allowed Priority Tax Claims are not entitled to vote on the Plan.
B. TREATMENT OF SECURED CLAIMS.
1. CLASS 1: SECURED CLAIMS
Class 1 consists of each Secured Claim secured by a security interest in or
lien upon property in which Merisel's Estate has an interest. To the extent,
if any, that the value of the collateral securing a Class 1 Secured Claim is
less than the amount of such Allowed Claim, the difference shall be treated as
a Class 5 General Unsecured Claim.
Class 1 Secured Claims are Unimpaired and, accordingly, Holders of Class 1
Secured Claims will not be entitled to vote for or against the Plan and will
be deemed to have accepted the Plan. Holders of Claims in Class 1 are not
required to file proofs of claim with the Bankruptcy Court, and no bar date
will be enforced as to such claims.
Notwithstanding any provision of this Plan to the contrary, nothing herein
shall affect the right or ability of Merisel or Reorganized Merisel to avoid
any purported lien or security interest.
On the Effective Date, or as soon thereafter as practicable, the holder of
an Allowed Class 1 Secured Claim, in full satisfaction, settlement, release,
and discharge of and in exchange for such Allowed Class 1 Secured Claim,
shall, in the sole discretion of Merisel, (a) have its Allowed Class 1 Secured
Claim Reinstated, or (b) receive such other treatment as Merisel and such
holder shall have agreed upon in writing as announced at or prior to the
Confirmation Hearing.
2. CLASS 2: PRIORITY CLAIMS
Class 2 consists of all Priority Claims. Class 2 Claims are Unimpaired and,
accordingly, Holders of Allowed Class 2 Claims are not entitled to vote for or
against the Plan, and will be deemed to have accepted the Plan.
Each Holder of an Allowed Class 2 Claim shall be entitled to receive Cash
equal to the amount of such Claim, unless the Holder of such Claim and
Reorganized Merisel agree to a different treatment, on the latest of (a) the
Effective Date or as soon as practicable thereafter, (b) the date such Claim
becomes an Allowed Priority Claim, and (c) the date that such Claim would be
paid in accordance with any terms and conditions of any agreements or
understandings relating thereto between Merisel and the Holder of such Claim.
3. CLASS 3: SUBSIDIARY DEBT GUARANTY CLAIMS
Class 3 consists of each Subsidiary Debt Guaranty Claim. Class 3 Claims are
Unimpaired and, accordingly, Holders of Allowed Class 3 Claims are not
entitled to vote for or against the Plan, and will be deemed to have
ANNEX IV
I-12
<PAGE>
accepted the Plan. Holders of Claims in Class 3 are not required to file
proofs of claim with the Bankruptcy Court and no bar date will be enforced as
to such Claims.
On the Effective Date, or as soon thereafter as practicable, the holder of
an Allowed Class 3 Subsidiary Debt Guaranty Claim, in full satisfaction,
settlement, release, and discharge of and in exchange for such Allowed Class 3
Claim, shall, in the sole discretion of Merisel, (a) have its Allowed Class 3
Claim Reinstated, or (b) receive such other treatment as Merisel and such
holder shall have agreed upon in writing as announced at or prior to the
Confirmation Hearing.
4. CLASS 4: 12.5% NOTES CLAIMS
Class 4 consists of all 12.5% Notes Claims. Class 4 is Impaired and,
accordingly, Holders of Allowed Class 4 Claims are entitled to vote for or
against the Plan.
On the Effective Date or as soon as practicable thereafter, each Holder of
an Allowed Class 4 Claim shall receive on account of all Claims arising under
or related to the 12.5% Notes, including the unpaid principal amount plus
unpaid interest plus all other amounts, if any, which accrued prior to the
Petition Date on its 12.5% Notes, 192.5 shares of New Common Stock for each
$1,000 of 12.5% Notes held by such Holder.
5. CLASS 5: GENERAL UNSECURED CLAIMS
Class 5 consists of all Claims, except Administrative Claims, Priority Tax
Claims and Claims in Classes 1 through 4, and including, but not limited to,
Claims for damages arising or resulting from the rejection of leases or
executory contracts, Securities Claims and pre-Petition Date Claims for
indemnification of the kind described in Section X.D hereof.
Class 5 Claims are Unimpaired and, accordingly, Holders of Allowed Class 5
Claims are not entitled to vote for or against the Plan and will be deemed to
have accepted the Plan. Holders of Claims in Class 5 are not required to file
proofs of claim with the Bankruptcy Court, and no bar date will be enforced as
to such Claims.
Unless otherwise agreed to by the parties, the legal, equitable and
contractual rights of each Holder of an Allowed Claim in Class 5 will either
(a) not be altered by this Plan or (b) at the option of Merisel, receive such
other treatment that will result in such Allowed Claim being deemed
Unimpaired.
Class 5 also includes Trade Claims. As set forth in Section IV.D.1 below,
Merisel intends to seek Bankruptcy Court approval to pay in the ordinary
course of business all outstanding Trade Claims to trade creditors who
continue to provide normal trade credit terms to or have reinstated normal
trade credit terms for the Company or who have previously agreed to compromise
their Claims in a manner acceptable to Merisel. In any event, all Allowed
Claims in Class 5 that have become due and owing on or before the Effective
Date (unless previously paid during the Reorganization Case) will be paid in
full, in Cash (with interest, to the extent permitted by the Bankruptcy
Court), on or as soon as practicable after the Effective Date, or at such
other time as is mutually agreed upon by Merisel and the Holder of such Claim,
or if not due and owing on the Effective Date, such Trade Claims shall be
Reinstated and paid in full in accordance with their respective terms or
otherwise rendered Unimpaired.
C. TREATMENT OF INTERESTS
1. CLASS 6: OLD COMMON STOCK INTERESTS.
CLASS 6 consists of the Allowed Interests of Holders of Old Common Stock.
Class 6 Interests are Impaired and, accordingly, Holders of Allowed Class 6
Interests are entitled to vote for or against the Plan.
On the Effective Date or as soon as practicable thereafter, each Holder of
an Allowed Class 6 Claim shall receive, on a Pro Rata basis, on account of
each share of Old Common Stock which it holds (i) .2 shares of New Common
Stock, (ii) .0875 New Series A Warrants, and (iii) .0875 New Series B
Warrants.
ANNEX IV
I-13
<PAGE>
D. TREATMENT OF TRADE CREDITORS AND EMPLOYEES UNDER THE PLAN
1. TREATMENT OF TRADE CLAIMS.
Trade Claims are Unimpaired and will be paid in full under the Plan.
Notwithstanding provisions of the Bankruptcy Code that may defer payment of
the Trade Claims until the effectiveness of the Plan, Merisel has sought or,
simultaneously with the Filing of this Plan, will seek authority from the
Bankruptcy Court to pay immediately Holders of Trade Claims arising in the
ordinary course who, following commencement of the Reorganization Case, agree
to continue to provide the Company with customary trade terms or to reinstate
customary trade terms or who have previously agreed to compromise their Claims
in a manner acceptable to Merisel.
Holders of Trade Claims will not be required to file proofs of claim with
the Bankruptcy Court and no bar date will be enforced as to such Trade Claims.
On and after the Effective Date, all undisputed, noncontingent and liquidated
Trade Claims not already paid will be paid in full or in the ordinary course
of business of Reorganized Merisel. If the Company or Reorganized Merisel
disputes any Trade Claim, such dispute will be determined, resolved or
adjudicated, as the case may be, in the manner in which such dispute would
have been determined, resolved or adjudicated if the Reorganization Case had
not been commenced, and will survive the Effective Date and the consummation
of the Plan as if the Reorganization Case had not been commenced.
Any Claim arising from the rejection of an executory contract or unexpired
lease under the Plan shall not be treated as a Trade Claim, will be determined
in accordance with the procedures set forth in Section VII.D. hereof, and will
be paid as a Class 5 Claim when and to the extent such Claim is Allowed by the
Bankruptcy Court.
2. TREATMENT OF EMPLOYEE CLAIMS.
Employee Claims that accrue pre-petition will receive Unimpaired treatment
under the terms of the Plan. To ensure the continuity of Merisel's work force
and to further accommodate the Unimpaired treatment of Employee Claims,
Merisel has sought or, simultaneous with the Filing of this Plan, will seek
immediate authorization from the Bankruptcy Court to honor payroll checks
outstanding as of the Petition Date (or to issue replacement checks), to
permit employees to utilize paid vacation time accrued prior to the Petition
Date (so long as they remain employees of Merisel or Reorganized Merisel) and
to continue paying medical and other benefits under all applicable insurance
plans. Employee Claims and benefits not paid or honored prior to the Effective
Date will be paid or honored upon the Effective Date or as soon thereafter as
such payment or other obligation becomes due or performable. Employees will
not be required to file proofs of claim on account of Employee Claims. If the
Company or Reorganized Merisel disputes any Employee Claim, such dispute will
be determined, resolved or adjudicated, as the case may be, in the manner in
which such dispute would have been determined, resolved or adjudicated if the
Reorganization Case had not been commenced, and will survive the Effective
Date and the consummation of the Plan as if the Reorganization Case had not
been commenced.
E. MODIFICATION OF TREATMENT OF CLAIMS.
Merisel reserves the right to modify the treatment of any Allowed Claim or
Interest in any manner adverse only to the Holder of such Claim or Interest at
any time after the Effective Date upon the consent of the creditor or interest
holder whose Allowed Claim or Interest, as applicable, is being adversely
affected.
F. LISTING OF NEW COMMON STOCK.
Reorganized Merisel shall use its best efforts to cause the shares of New
Common Stock to be listed on the NASDAQ National Market.
ANNEX IV
I-14
<PAGE>
V.
DISTRIBUTIONS UNDER THE PLAN
A. DISBURSING AGENT.
Reorganized Merisel, or such Person(s) as Merisel may employ in its sole
discretion, will act as Disbursing Agent under the Plan. The Disbursing Agent
will make all distributions of Cash, New Common Stock and New Warrants
required to be distributed under the applicable provisions of the Plan. Any
Disbursing Agent may employ or contract with other entities to assist in or
make the distributions required by the Plan. Each Disbursing Agent will serve
without bond, and each Disbursing Agent, other than Reorganized Merisel, will
receive, without further Bankruptcy Court approval, reasonable compensation
for distribution services rendered pursuant to the Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services
from Reorganized Merisel on terms acceptable to Reorganized Merisel.
B. TIMING OF DISTRIBUTIONS.
Property to be distributed hereunder on account of Allowed Claims and
Allowed Interests in an Impaired Class (a) shall be distributed on the
Effective Date or as soon as practicable thereafter to each Holder of an
Allowed Claim or an Allowed Interest in that Class that is an Allowed Claim or
an Allowed Interest as of the Effective Date, and (b) shall be distributed to
each Holder of an Allowed Claim or an Allowed Interest of that Class that
becomes an Allowed Claim or Allowed Interest after the Effective Date, as soon
as practicable after the order of the Bankruptcy Court allowing such Claim or
Interest becomes a Final Order. Property to be distributed under the Plan on
account of Claims in a Class that are not Impaired or on account of an
Administrative Claim shall be distributed on the later of (i) the Effective
Date or as soon as practicable thereafter, or if any Claim is not an Allowed
Claim, on the date the order allowing such Claim becomes a Final Order and
(ii) the date on which the distribution to the Holder of the Claim would have
been due and payable in the ordinary course of business or under the terms of
the Claim if the Reorganization Case had not been commenced.
C. METHODS OF DISTRIBUTIONS.
1. CASH PAYMENTS.
Cash payments made pursuant to the Plan will be in U.S. dollars. Cash
payments of $1,000,000 or more to be made pursuant to the Plan will, to the
extent requested in writing no later than five days after the Confirmation
Date, be made by wire transfer from a domestic bank. Cash payments to foreign
creditors may be made, at the option of Merisel or Reorganized Merisel, in
such funds and by such means as are necessary or customary in a particular
foreign jurisdiction. Cash payments made pursuant to the Plan in the form of
checks issued by Reorganized Merisel shall be null and void if not cashed
within 90 days of the date of the issuance thereof. Requests for reissuance of
any check shall be made directly to the Disbursing Agent as set forth in
Section V.G below.
2. TRANSFERS OF NEW COMMON STOCK AND NEW WARRANTS.
Notwithstanding any other provision of the Plan, only whole numbers of
shares of New Common Stock and New Warrants will be issued or transferred, as
the case may be, pursuant to the Plan. When any distribution on account of an
Allowed Claim or Interest pursuant to the Plan would otherwise result in the
issuance or transfer of a number of shares of New Common Stock that is not a
whole number, fractional interests in New Common Stock will be aggregated and
sold by Reorganized Merisel, with the proceeds to be distributed to Holders of
such interests in proportion to the amount of fractional shares of New Common
Stock such Holders would otherwise be entitled to receive. When any
distribution on account of an Allowed Class 6 Interest would otherwise result
in the issuance or transfer of a number of New Warrants that is not a whole
number, fractional interests in New Warrants will be aggregated and sold by
Reorganized Merisel, with the proceeds to be distributed to Holders of such
interests in proportion to the fractional number of New Warrants such Holders
would otherwise be entitled to receive.
ANNEX IV
I-15
<PAGE>
3. COMPLIANCE WITH TAX REQUIREMENTS.
In connection with the distributions set forth herein, to the extent
applicable, the Disbursing Agent shall comply with all tax withholding and
reporting requirements imposed on it by any governmental unit, and all
distributions pursuant to this Plan will be subject to such withholding and
reporting requirements. The Disbursing Agent will be authorized to take any
and all actions that may be necessary or appropriate to comply with such
withholding and reporting requirements.
Notwithstanding any other provision contained herein: (i) each Holder of an
Allowed Claim or Interest that is to receive a distribution of Cash, New
Common Stock or New Warrants pursuant to the Plan will have sole and exclusive
responsibility for the satisfaction and payment of any tax obligations imposed
by any governmental unit, including income, withholding and other tax
obligations, on account of such distribution; and (ii) no distribution will be
made to or on behalf of such Holder pursuant to the Plan unless and until such
Holder has made arrangements satisfactory to the Disbursing Agent for the
payment and satisfaction of such tax obligations. Any Cash, New Common Stock
or New Warrants to be distributed pursuant to the Plan will, pending the
implementation of such arrangements, be treated as an undeliverable
distribution pursuant to Section V.G of the Plan.
D. PRO RATA DISTRIBUTION.
Where the Plan provides for Pro Rata distribution, the property to be
distributed under this Plan shall be divided Pro Rata among the Holders of
Allowed Claims or Allowed Interests of the relevant Class.
E. DISTRIBUTION RECORD DATE.
As of the close of business on the Distribution Record Date, the transfer
registers for the 12.5% Notes and Old Common Stock maintained by Merisel, or
its respective agents, will be closed. The Disbursing Agent and its respective
agents will have no obligation to recognize the transfer of any 12.5% Notes or
Old Common Stock occurring after the Distribution Record Date and will be
entitled for all purposes relating to this Plan to recognize and deal only
with those Holders of record as of the close of business on the Distribution
Record Date.
F. SURRENDER OF CANCELLED OLD SECURITIES.
As a condition precedent to receiving any distribution pursuant to this Plan
on account of an Allowed 12.5% Notes Claim or Allowed Old Common Stock
Interest evidenced by the Instruments cancelled pursuant to Section VIII.A.1
hereof, the Holder of such Claim or Interest shall tender the applicable
Instruments evidencing such Claim or Interest to the Disbursing Agent pursuant
to a letter of transmittal furnished by the Disbursing Agent. Any Cash, New
Common Stock or New Warrants to be distributed pursuant to this Plan on
account of any such Claim or Interest will, pending such surrender, be treated
as an undeliverable distribution pursuant to Section V.G below.
1. SPECIAL PROCEDURES FOR LOST, STOLEN, MUTILATED OR DESTROYED INSTRUMENTS.
In addition to any requirements under Merisel's pre-petition Certificate of
Incorporation or Bylaws, any Holder of a Claim or an Interest evidenced by an
Instrument that has been lost, stolen, mutilated or destroyed will, in lieu of
surrendering such Instrument, deliver to the Disbursing Agent: (a) evidence
satisfactory to the Disbursing Agent of the loss, theft, mutilation or
destruction; and (b) such security or indemnity as may be required by the
Disbursing Agent to hold the Disbursing Agent harmless from any damages,
liabilities or costs incurred in treating such individual as a Holder of an
Instrument. Upon compliance with this Section, the Holder of a Claim or
Interest evidenced by any such lost, stolen, mutilated or destroyed Instrument
will, for all purposes under the Plan, be deemed to have surrendered such
Instrument.
ANNEX IV
I-16
<PAGE>
2. FAILURE TO SURRENDER CANCELLED INSTRUMENT.
Any Holder of an Instrument that fails to surrender or be deemed to have
surrendered such Instrument within two years after the Effective Date will
have its claim for a distribution pursuant to the Plan on account of such
Instrument discharged and shall be forever barred from asserting any such
claim against Reorganized Merisel or its property. In such cases, any Cash,
New Common Stock or New Warrants held for distribution on account of such
claim will be disposed of pursuant to the provisions of Section V.G hereof.
G. UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS.
Any Person that is entitled to receive a Cash distribution under this Plan
but that fails to cash a check within 90 days of its issuance shall be
entitled to receive a reissued check from Reorganized Merisel for the amount
of the original check, without any interest, if such person requests the
Disbursing Agent to reissue such check and provides the Disbursing Agent with
such documentation as the Disbursing Agent requests to verify that such Person
is entitled to such check, prior to the second anniversary of the Effective
Date. If a Person fails to cash a check within 90 days of its issuance and
fails to request reissuance of such check prior to the second anniversary of
the Effective Date, such Person shall not be entitled to receive any
distribution under this Plan. If the distribution to any Holder of an Allowed
Claim or Allowed Interest is returned to a Disbursing Agent as undeliverable,
no further distributions will be made to such Holder unless and until the
applicable Disbursing Agent is notified in writing of such Holder's then-
current address. Undeliverable distributions will remain in the possession of
the applicable Disbursing Agent pursuant to Section V.A. of the Plan until
such time as a distribution becomes deliverable. Undeliverable Cash will be
held in trust in segregated bank accounts in the name of the applicable
Disbursing Agent for the benefit of the potential claimants of such funds, and
will be accounted for separately. Any Disbursing Agent holding undeliverable
Cash shall invest such Cash in a manner consistent with Merisel's investment
and deposit guidelines. Undeliverable New Common Stock and New Warrants will
be held in trust for the benefit of the potential claimants of such securities
and rights by the applicable Disbursing Agent in principal amounts or number
of shares sufficient to fund the unclaimed amounts of such securities and
rights, and shall be accounted for separately.
Pending the distribution of any New Common Stock, pursuant to the Plan, the
Disbursing Agent will cause the New Common Stock held by it in its capacity as
Disbursing Agent to be: (i) represented in person or by proxy at each meeting
of the stockholders of Reorganized Merisel; and (ii) voted with respect to any
matter of Reorganized Merisel, proportionally with the votes cast by other
stockholders of Reorganized Merisel.
All claims for undeliverable distributions shall be made on or before the
second (2nd) anniversary of the Effective Date. After such date, all unclaimed
property shall revert to Reorganized Merisel and the claim of any holder or
successor to such holder with respect to such property shall be discharged and
forever barred notwithstanding any federal or state escheat laws to the
contrary.
H. OBJECTIONS TO CLAIMS AND AUTHORITY TO PROSECUTE OBJECTIONS; CLAIMS
RESOLUTION.
1. GENERALLY.
Except as otherwise provided in Section V.H.2 below and except as otherwise
ordered by the Bankruptcy Court after notice and a hearing, objections to
Claims, including without limitation Administrative Claims, shall be Filed and
served upon the Holder of such Claim or Administrative Claim no later than the
later of (a) 60 days after the Effective Date, and (b) 60 days after a proof
of claim or request for payment of such Claim is Filed, unless this period is
extended by the Bankruptcy Court. Such extension may be granted on an ex parte
basis without notice or hearing. After the Confirmation Date, only Merisel and
Reorganized Merisel will have the authority to File objections, settle,
compromise, withdraw or litigate to judgment objections to Claims and
Interests. From and after the Confirmation Date, Merisel and Reorganized
Merisel may settle or compromise any Disputed Claim or Disputed Interest
without approval of the Bankruptcy Court.
ANNEX IV
I-17
<PAGE>
2. PROFESSIONALS, ADMINISTRATION CLAIMS, TRADE CLAIMS AND EMPLOYEE CLAIMS.
Except as otherwise ordered by the Bankruptcy Court, objections to claims of
professionals shall be governed by the provisions of Section IV.A.1.c.(2)
hereof. Objections to Administrative Claims based upon ordinary course
liabilities, Trade Claims and Employee Claims shall be governed by applicable
law as if the Reorganization Case had not been commenced.
I. DISPUTED CLAIMS; RESERVE AND ESTIMATIONS.
1. TREATMENT OF DISPUTED CLAIMS.
Notwithstanding any other provisions of this Plan, no payments or
distributions will be made on account of a Disputed Claim or a Disputed
Interest until such Claim or Interest becomes an Allowed Claim or Allowed
Interest. Prior to the Petition Date, Merisel will deliver Stipulations of
Amount and Nature of Claim to the Indenture Trustees. Such Stipulations, once
executed and to the extent unpaid, will be treated as Allowed Claims as of the
Petition Date in the amounts set forth in such Stipulation of Amount and
Nature of Claim and will not be treated as Disputed Claims. Merisel or
Reorganized Merisel may, at any time, request that the Bankruptcy Court
estimate any contingent or unliquidated Claim pursuant to section 502(c) of
the Bankruptcy Code, irrespective of whether Merisel or Reorganized Merisel
has previously objected to such Claim or whether the Bankruptcy Court has
ruled on any such objection unless such ruling has become a final order. The
Bankruptcy Court will retain jurisdiction to estimate any contingent or
unliquidated Claim at any time during litigation concerning any objection to
the Claim, including during the pendency of any appeal relating to any such
objection. If the Bankruptcy Court estimates any contingent or unliquidated
Claim, that estimated amount will constitute either the amount of such Allowed
Claim or a maximum limitation on such Claim, as determined by the Bankruptcy
Court. If the estimated amount constitutes a maximum limitation on such Claim,
Merisel or Reorganized Merisel may elect to pursue any supplemental
proceedings to object to any ultimate payment on account of such Claim. All of
these Claims objection, estimation and resolution procedures are cumulative
and not necessarily exclusive of one another. In addition to seeking
estimation of Claims as provided in this Section, Merisel or Reorganized
Merisel may resolve or adjudicate certain Disputed Claims of Holders in
Unimpaired Classes in the manner in which the amount of such Claim and the
rights of the Holder of such Claim would have been resolved or adjudicated if
the Reorganization Case had not been commenced; provided, however, that the
amount of such claim and the remedies available shall not be limited by
discharge pursuant to section 1141(d)(1) of the Bankruptcy Code and other
applicable bankruptcy law. Claims may be subsequently compromised, settled,
withdrawn or resolved by Merisel or Reorganized Merisel pursuant to Section
V.H hereof.
2. DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS ONCE THEY ARE ALLOWED.
Within 30 days after the end of each calendar quarter following the
Effective Date, the applicable Disbursing Agent will make all distributions on
account of any Disputed Claim or Disputed Interest that has become an Allowed
Claim or Allowed Interest during the preceding calendar quarter. Such
distributions will be made pursuant to the provisions of the Plan governing
the applicable Class. Holders of Disputed Claims or Disputed Interests that
are ultimately allowed will also be entitled to receive, on the basis of the
amount ultimately allowed: (i) matured and payable interest, if any, at the
rate provided for the consideration payable to the Class to which such Claim
belongs; and (ii) any dividends or other payments made on account of New
Common Stock held pending distribution.
J. SETOFFS.
Except with respect to claims of Merisel or Reorganized Merisel released
pursuant to the Plan or any contract, instrument, release, indenture or other
agreement or document created in connection with the Plan, Merisel or
Reorganized Merisel may, pursuant to section 553 of the Bankruptcy Code or
applicable nonbankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim), the claims, rights and
causes
ANNEX IV
I-18
<PAGE>
of action of any nature that Merisel or Reorganized Merisel may hold against
the Holder of such Allowed Claim; provided, however, that neither the failure
to effect such a setoff nor the Allowance of any Claim hereunder will
constitute a waiver or release by Merisel or Reorganized Merisel of any such
claims, rights and causes of action that Merisel or Reorganized Merisel may
possess against such Holder.
VI.
INDIVIDUAL HOLDER PROOFS OF INTEREST
Individual Holders of Class 6 Old Common Stock are not required to File
proofs of Interests unless they disagree with the number of shares set forth
on Merisel's stock register.
VII.
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
A. ASSUMPTIONS.
Except as otherwise provided herein, or in any contract, instrument,
release, indenture or other agreement or document entered into in connection
with this Plan, on the Effective Date, pursuant to section 365 of the
Bankruptcy Code, Merisel will assume each executory contract and unexpired
lease entered into by Merisel prior to the Petition Date, including any
employee stock options or stock appreciation right agreement, that has not
previously (a) expired or terminated pursuant to its own terms or (b) been
assumed or rejected pursuant to section 365 of the Bankruptcy Code. The
Confirmation Order will constitute an Order of the Bankruptcy Court approving
the assumptions described in this Section, pursuant to section 365 of the
Bankruptcy Code, as of the Effective Date.
B. CURE OF DEFAULTS IN CONNECTION WITH ASSUMPTION.
Any monetary amounts by which each executory contract and unexpired lease to
be assumed pursuant to the Plan is in default will be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, at the option of Merisel or
Reorganized Merisel (a) by payment of the default amount in Cash on the
Effective Date or as soon as practicable thereafter or (b) on such other terms
as are agreed to by the parties to such executory contract or unexpired lease.
If there is a dispute regarding (i) the amount of any cure payments, (ii) the
ability of Reorganized Merisel to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (iii) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code will be made following the entry of a Final Order resolving the dispute
and approving the assumption.
C. REJECTIONS.
Except as otherwise provided herein or in any contract, instrument, release,
indenture or other agreement or document entered into in connection with the
Plan, on the Effective Date, pursuant to section 365 of the Bankruptcy Code,
Merisel will reject each of the executory contracts and unexpired leases
listed on a schedule to be filed prior to the Confirmation Hearing (the
"Schedule") hereto; provided, however, that Merisel reserves the right, at any
time prior to the Effective Date, to amend such schedule to delete any
executory contract or unexpired lease listed therein, thus providing for its
assumption pursuant to Sections VII.A and VII.B above. Each contract and lease
listed on the Schedule will be rejected only to the extent that any such
contract or lease constitutes an executory contract or unexpired lease.
Listing a contract or lease on the Schedule does not constitute an admission
by Merisel or Reorganized Merisel that such contract or lease is an executory
contract or unexpired lease, or that Merisel or Reorganized Merisel has any
liability thereunder. The Confirmation Order shall constitute an Order of the
Bankruptcy Court approving such rejections, pursuant to section 365 of the
Bankruptcy Code, as of the Effective Date.
ANNEX IV
I-19
<PAGE>
D. BAR DATE FOR REJECTION DAMAGES.
If the rejection of an executory contract or unexpired lease pursuant to the
preceding Section VII.C gives rise to a Claim by the non-Debtor party or
parties to such contract or lease, such Claim shall be forever barred and
shall not be enforceable against Merisel, Reorganized Merisel, or its
successors or properties unless (a) a Stipulation of Amount and Nature of
Claim has been entered into with respect to the rejection of such executory
contract or unexpired lease or (b) a proof of Claim is Filed and served on
Reorganized Merisel and counsel for Reorganized Merisel within 30 days after
the Effective Date or such earlier date as established by the Bankruptcy
Court.
VIII.
MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
A. CORPORATE ACTION.
1. CANCELLATION OF OLD SECURITIES AND RELATED AGREEMENTS.
On the Effective Date, the 12.5% Notes and the Old Common Stock, and all
obligations of Merisel under all of the foregoing, shall be terminated,
canceled and extinguished.
2. CERTIFICATE OF INCORPORATION AMENDMENTS.
On the Effective Date, Reorganized Merisel shall be deemed to have adopted
the Reorganized Merisel Certificate of Incorporation pursuant to applicable
non-bankruptcy law and section 1123(a)(5)(I) of the Bankruptcy Code. The
Reorganized Merisel Certificate of Incorporation will, among other provisions:
(i) authorize the issuance of the New Common Stock, and (ii) prohibit the
issuance of nonvoting equity securities to the extent required by section
1123(a)(6) of the Bankruptcy Code. The Reorganized Merisel Certificate of
Incorporation, in substantially the form attached hereto as Exhibit C, will
become effective upon the last to occur of the following: (1) Confirmation of
the Plan, (2) the occurrence of the Effective Date and (3) the filing with the
Delaware Secretary of State of the Reorganized Merisel Certificate of
Incorporation.
3. MANAGEMENT OF REORGANIZED MERISEL.
As of the Effective Date, the Persons identified in the Proxy
Statement/Prospectus will serve as the initial members of the Board of
Directors of Reorganized Merisel. Such Persons shall be deemed elected to the
Board of Directors, and such elections shall be deemed effective as of the
Effective Date, without any requirement of further action by stockholders of
Merisel or Reorganized Merisel. The Persons identified as such in the Proxy
Statement/Prospectus will serve as the initial officers of Reorganized Merisel
as of the Effective Date. Subject to any requirement of Bankruptcy Court
approval under Section 1129(a)(5) of the Bankruptcy Code, those persons
designated as directors and officers of Reorganized Merisel in the Proxy
Statement/Prospectus shall assume their offices as of the Effective Date and
shall continue to serve in such capacities thereafter, pending further action
of the Board of Directors or stockholders of Reorganized Merisel in accordance
with the Reorganized Merisel Bylaws, Reorganized Merisel Certificate and
applicable state law.
B. IMPLEMENTATION.
Merisel shall be authorized to take all necessary steps, and perform all
necessary acts, to consummate the terms and conditions of the Plan. On or
before the Effective Date, Merisel may file with the Bankruptcy Court such
agreements and other documents as may be necessary or appropriate to
effectuate or further evidence the terms and conditions of this Plan and the
other agreements referred to herein. Merisel and Reorganized Merisel
ANNEX IV
I-20
<PAGE>
may, and shall, execute such documents and take such other actions as are
necessary to effectuate the transactions provided for in the Plan.
C. PAYMENT OF STATUTORY FEES.
All fees payable to the U.S. Trustee pursuant to 28 U.S.C. (S) 1930 as
determined by the Bankruptcy Court at the Confirmation Hearing shall be paid
by Merisel on or before the Effective Date.
D. NO INTEREST.
Except as expressly provided herein, no Holder of an Allowed Class or
Allowed Interest shall receive interest on the distribution to which such
Holder is entitled hereunder, regardless of whether such distribution is made
on the Effective Date or thereafter.
E. RETIREE BENEFITS.
On and after the Effective Date, to the extent required by section
1129(a)(13) of the Bankruptcy Code, Reorganized Merisel shall continue to pay
all retiree benefits (if any), as the term "retiree benefits" is defined in
section 1114(a) of the Bankruptcy Code, maintained or established by Merisel
prior to the Confirmation Date.
F. ISSUANCE OF NEW SECURITIES.
The issuance and distribution of the following securities by Reorganized
Merisel is hereby authorized and directed without further act or action under
applicable law, regulation, order or rule:
a. 50,000,000 shares of New Common Stock, of which approximately
35,482,632 shares shall be issued and distributed pursuant to the Plan; and
b. 2,631,868 New Series A Warrants.
c. 2,631,868 New Series B Warrants.
IX.
CONFIRMATION AND EFFECTIVE DATE CONDITIONS
A. CONDITIONS TO CONFIRMATION.
Confirmation of this Plan cannot occur until all of the substantive
confirmation requirements under the Bankruptcy Code have been satisfied
pursuant to section 1129 of the Bankruptcy Code. In addition, the Bankruptcy
Court will not enter the Confirmation Order unless the Confirmation Order is
acceptable in form and substance to Merisel, and the Confirmation Order
expressly authorizes and directs Merisel and Reorganized Merisel to perform
those actions specified herein.
B. CONDITIONS TO EFFECTIVE DATE.
The Effective Date will not occur and the Plan will not be consummated
unless and until each of the following conditions has been satisfied or waived
by Merisel:
(i) The Confirmation Order shall authorize and direct that Merisel and
Reorganized Merisel take all actions necessary or appropriate to enter
into, implement and consummate the contracts, instruments, releases,
leases, and other agreements or documents created in connection with the
Plan, including those actions contemplated by the provisions of this Plan
set forth in Section X hereof.
ANNEX IV
I-21
<PAGE>
(ii) The Confirmation Order shall have become a Final Order.
(iii) The statutory fees owing the U.S. Trustee shall have been paid in
full.
(iv) All other actions and documents necessary to implement the
provisions of the Plan shall have been effected or executed or, if
waivable, waived by the Person or Persons entitled to the benefit thereof.
C. WAIVER OF CONDITIONS TO CONFIRMATION AND EFFECTIVE DATE.
Each of the conditions to Confirmation and the Effective Date, other than
the conditions set forth in Section IX.B.iii of the Plan, may be waived in
whole or in part by Merisel at any time, without notice or an Order of the
Bankruptcy Court. The failure to satisfy or to waive any condition may be
asserted by Merisel regardless of the circumstances giving rise to failure of
such condition to be satisfied (including any action or inaction by Merisel).
The failure of Merisel to exercise any of the foregoing rights will not be
deemed a waiver of any other rights, and each such right will be deemed an
ongoing right that may be asserted at any time.
If each condition to the Effective Date has not been satisfied or duly
waived within 60 days after the Confirmation Date, then (unless the period for
satisfaction or waiver of conditions has been extended at the option of
Merisel for a period not exceeding 120 days) upon motion by any party in
interest, made before the time that each of the conditions has been satisfied
or duly waived and upon notice to such parties in interest as the Bankruptcy
Court may direct, the Confirmation Order will be vacated by the Bankruptcy
Court; provided, however, that notwithstanding the Filing of such motion, the
Confirmation Order may not be vacated if each of the conditions to the
Effective Date is either satisfied or duly waived before the Clerk enters a
Final Order granting such motion. If the Confirmation Order is vacated
pursuant to this Section IX.C., the Plan shall be deemed null and void in all
respects, including without limitation the discharge of Claims and termination
of Interests pursuant to section 1141 of the Bankruptcy Code and the
assumptions or rejections of executory contracts and unexpired leases provided
for herein, and nothing contained herein shall (1) constitute a waiver or
release of any claims by or against, or any interests in, Merisel or (2)
prejudice in any manner the rights of Merisel.
X.
EFFECTS OF PLAN CONFIRMATION
A. DISCHARGE OF DEBTOR AND INJUNCTION.
Except as otherwise provided in the Plan or the Confirmation Order, on the
Effective Date, Merisel shall be discharged and released to the fullest extent
permitted by section 1141 of the Bankruptcy Code from all Claims and
Interests.
Except as otherwise provided in the Plan or the Confirmation Order, on and
after the Effective Date, all Persons who have held, currently hold or may
hold a debt, Claim or Interest discharged pursuant to the terms of the Plan
are permanently enjoined from taking any action to the fullest extent
permitted by section 524 of the Bankruptcy Code. Any Person injured by any
willful violation of such injunction shall recover actual damages, including
costs and attorneys' fees, and, in appropriate circumstances, may recover
punitive damages, from the willful violator.
B. LIMITATION OF LIABILITY.
Neither Merisel nor Reorganized Merisel nor the Ad Hoc Noteholders
Committee, nor any of their respective post-Petition Date employees, officers,
directors, agents or representatives, or any professional persons employed by
any of them (a "Plan Participant"), shall have or incur any liability to any
Person whatsoever, including, specifically, any Holder of a Claim or Interest,
under any theory of liability (except for any claim based upon willful
misconduct or gross negligence), for any act taken or omission made in good
faith directly related to formulating, preparing, disseminating, implementing,
confirming, or consummating the Plan, the Proxy
ANNEX IV
I-22
<PAGE>
Statement/Prospectus, the Confirmation Order, or any contract, instrument,
release, or other agreement or document created or entered into, or any other
act taken or omitted to be taken in connection with the Plan, provided that
nothing in this paragraph shall limit the liability of any Person for breach
of any express obligation it has under the terms of this Plan or under any
agreement or other document entered into by such Person either post-petition
or in accordance with the terms of this Plan or for any breach of a duty of
care owed to any other Person occurring after the Effective Date. Reorganized
Merisel shall also indemnify each Plan Participant, hold each Plan Participant
harmless from, and reimburse each Plan Participant for, any and all losses,
costs, expenses (including attorneys' fees and expenses), liabilities and
damages sustained by a Plan Participant arising from any liability described
above.
C. RELEASES.
On the Effective Date, the Company will release unconditionally, and hereby
is deemed to release unconditionally (i) each of the Company's officers,
directors, shareholders, employees, consultants, attorneys, accountants,
financial advisors and other representatives (including without limitation
their respective Designated Professionals), (ii) the Creditors' Committee and,
solely in their capacity as members of representatives of the Creditors'
Committee, each member, consultant, attorney, accountant or other
representative of the Creditors' Committee (including without limitation their
respective Designated Professionals), (iii) the Ad Hoc Noteholders Committee
and, solely in their capacity as members or representatives of the Ad Hoc
Noteholders Committee, each member, consultant, attorney, accountant or other
representative of the Ad Hoc Noteholders Committee (including without
limitation their respective Designated Professionals), and (iv) the Indenture
Trustees, in their respective capacity as Indenture Trustee (the entities
specified in clauses (i), (ii), (iii), and (iv) are referred to collectively
as the "Releasees"), from any and all claims, obligations, suits, judgments,
damages, rights, causes of action and liabilities whatsoever, whether known or
unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity
or otherwise, based on whole or in part upon any act or omission, transaction,
event or other occurrence taking place on or prior to the Effective Date in
any way relating to the Releasees, the Company, the Reorganization Case or the
Plan.
D. INDEMNIFICATION.
The obligations of Merisel as of the Petition Date to indemnify its present,
and any individuals who formerly were, directors or officers, respectively,
against any obligations pursuant to Merisel's certificates of incorporation,
by-laws, applicable state law or specific agreement, or any combination of the
foregoing, shall survive confirmation of the Plan, remain unaffected thereby,
be assumed by Reorganized Merisel and not be discharged. Merisel shall fully
indemnify and Reorganized Merisel shall assume Merisel's obligations to
indemnify any person by reason of the fact that he or she is or was a
director, officer, employee or agent, Designated Professional, member of other
authorized representative of Merisel, the Creditors Committee, or the
Indenture Trustees (the "Indemnitees") against any claims, liabilities,
actions, suits, damages, fines, judgments or expenses (including reasonable
attorney's fees), arising during the course of, or otherwise in connection
with or in any way related to, the negotiation, preparation, formulation,
solicitation, dissemination, implementation, confirmation and consummation of
the Plan and the transactions contemplated thereby; provided, however, that
the foregoing indemnification shall not apply to any liabilities arising from
the gross negligence or wilful misconduct of any Indemnitee. If any claim,
action or proceeding is brought or asserted against an Indemnitee in respect
of which indemnity may be sought from Reorganized Merisel, the Indemnitee
shall promptly notify Reorganized Merisel in writing and Reorganized Merisel
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Indemnitee, and the payment of all expenses.
The Indemnitee shall have the right to employ separate counsel in any such
claim, action or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the Indemnitee
unless (a) Reorganized Merisel has agreed to pay the fees and expenses of such
counsel, or (b) Reorganized Merisel shall have failed promptly to assume the
defense of such claim, action or proceeding and employ counsel reasonably
satisfactory to the Indemnitee in any such claim, action or proceeding, or (c)
the named parties to any such claim, action or proceeding (including any
impleaded parties) include both the
ANNEX IV
I-23
<PAGE>
Indemnitee and Reorganized Merisel, and the Indemnitee believes, in the
exercise of its business judgment and in the opinion of its legal counsel,
reasonably satisfactory to Reorganized Merisel, that the joint representation
of Reorganized Merisel and the Indemnitee will likely result in a conflict of
interest (in which case, if the Indemnitee notifies Reorganized Merisel in
writing that it elects to employ separate counsel at the expense of
Reorganized Merisel, Reorganized Merisel shall not have the right to assume
the defense of such action or proceeding on behalf of the Indemnitee). In
addition, Reorganized Merisel shall not effect any settlement or release from
liability in connection with any matter for which the Indemnitee would have
the right to indemnification from Reorganized Merisel, unless such settlement
contains a full and unconditional release of the Indemnitee, or a release of
the Indemnitee reasonably satisfactory in form and substance to the
Indemnitee.
E. VESTING OF ASSETS.
Except as otherwise provided in any provision of the Plan, on the Effective
Date, all property of the Estate shall vest in Reorganized Merisel, all free
and clear of all Claims, liens, encumbrances and Interests of Holders of
Claims and Holders of Old Common Stock. From and after the Effective Date,
Reorganized Merisel may operate its business and use, acquire, and dispose of
property and settle and compromise claims or interests arising post-
Confirmation without supervision by the Bankruptcy Court and free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan
and the Confirmation Order.
F. PRESERVATION OF CAUSES OF ACTION.
Except as otherwise provided herein, or in any contract, instrument,
release, or other agreement entered into in connection with the Plan, in
accordance with section 1123(b) of the Bankruptcy Code, Reorganized Merisel
shall retain (and may enforce) any claims, rights and causes of action that
Merisel or the Estate may hold against any Person, including, inter alia, any
claims, rights or causes of action under sections 544 through 550 of the
Bankruptcy Code or any similar provisions of state law, or any other statute
or legal theory.
G. RETENTION OF BANKRUPTCY COURT JURISDICTION.
Notwithstanding the entry of the Confirmation Order, the occurrence of the
Effective Date, and the closing of the Reorganization Case, the Bankruptcy
Court will retain such jurisdiction over the Reorganization Case after the
Effective Date as is legally permissible, including, without limitation,
jurisdiction to:
(i) Allow, disallow, determine, liquidate, classify, estimate or
establish the priority or secured or unsecured status of any Claim or
Interest, including the resolution of any request for payment of any
Administrative Claim, the resolution of any objections to the allowance or
priority of Claims or Interests and the resolution of any dispute as to the
treatment necessary to Reinstate a Claim pursuant to the Plan;
(ii) Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending before the Effective Date;
(iii) Resolve any matters related to the assumption or rejection of any
executory contract or unexpired lease to which Merisel is a party or with
respect to which Merisel may be liable, and to hear, determine and, if
necessary, liquidate any Claims arising therefrom;
(iv) Ensure that distributions to Holders of Allowed Claims or Allowed
Interests are accomplished pursuant to the provisions of the Plan;
(v) Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving Merisel or Reorganized Merisel that may be pending on the
Effective Date;
(vi) Enter such Orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in
connection with the Plan, the Disclosure Statement or the Confirmation
Order, except as otherwise provided herein;
ANNEX IV
I-24
<PAGE>
(vii) Resolve any cases, controversies, suits or disputes that may arise
in connection with the consummation, interpretation or enforcement of the
Plan or the Confirmation Order, including the release and injunction
provisions set forth in and contemplated by the Plan and the Confirmation
Order, or any entity's rights arising under or obligations incurred in
connection with this Plan or the Confirmation Order;
(viii) Subject to any restrictions on modifications provided in any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, modify this Plan before or after the
Effective Date pursuant to section 1127 of the Bankruptcy Code or modify
the Disclosure Statement, the Confirmation Order or any contract,
instrument, release or other agreement or document created in connection
with the Plan, the Disclosure Statement or the Confirmation Order; or
remedy any defect or omission or reconcile any inconsistency in any
Bankruptcy Court Order, this Plan, the Disclosure Statement, the
Confirmation Order or any contract, instrument, release or other agreement
or document created in connection with the Plan, the Disclosure Statement
or the Confirmation Order, in such manner as may be necessary or
appropriate to consummate this Plan, to the extent authorized by the
Bankruptcy Code;
(ix) Issue injunctions, enter and implement other Orders or take such
other actions as may be necessary or appropriate to restrain interference
by any entity with consummation, implementation or enforcement of the Plan
or the Confirmation Order;
(x) Enter and implement such orders as are necessary or appropriate if
the Confirmation Order is for any reason modified, stayed, reversed,
revoked or vacated;
(xi) Determine any other matters that may arise in connection with or
relating to the Plan, the Disclosure Statement, the Confirmation Order or
any contract, instrument, release or other agreement or document created in
connection with this Plan, the Disclosure Statement or the Confirmation
Order, except as otherwise provided in this Plan; and
(xii) Enter an Order Closing the Reorganization Case.
H. FAILURE OF BANKRUPTCY COURT TO EXERCISE JURISDICTION.
If the Bankruptcy Court abstains from exercising or declines to exercise
jurisdiction, or is otherwise without jurisdiction over any matter arising out
of the Reorganization Case, including the matters set forth in Section X.G
above. Section X.G shall not prohibit or limit the exercise of jurisdiction by
any other court having competent jurisdiction with respect to such matter.
I. COMMITTEES.
On the Effective Date, all Committees, if any, shall be dissolved, and the
members of such Committees shall be released and discharged from all further
rights and duties arising from or related to the Reorganization Case. The
professionals retained by such Committees and the members thereof shall not be
entitled to compensation or reimbursement of expenses incurred for services
rendered after the Effective Date other than for services rendered pursuant to
the Plan or in connection with other activities reserved to such Committees or
such professionals under the Plan or the Confirmation Order or in connection
with any application for allowance of compensation and reimbursement of
expenses pending as of, or Filed after, the Effective Date.
XI.
MISCELLANEOUS PROVISIONS
A. FINAL ORDER.
Any requirement in this Plan that an Order be a Final Order may be waived by
Merisel, provided that nothing contained herein or elsewhere in this Plan
shall prejudice the right of any party in interest to seek a stay pending
appeal with respect to such order.
ANNEX IV
I-25
<PAGE>
B. MODIFICATION OF THE PLAN.
Merisel reserves the right to amend or modify the Plan at any time prior to
the Confirmation Date in the manner provided for by Section 1127 of the
Bankruptcy Code or as otherwise permitted by law without additional disclosure
pursuant to Section 1125 of the Bankruptcy Code, except as the Bankruptcy
Court may otherwise order. If any of the terms of the Plan are amended in a
manner determined by Merisel to constitute a material adverse change, Merisel
will promptly disclose any such amendment in the manner reasonably calculated
to inform the Holders of Old Securities of such amendment, and Merisel will
extend the solicitation period for acceptances of this Plan for a period which
Merisel, in its sole discretion, deems appropriate, depending upon the
significance of the amendment and the manner of disclosure to Holders of the
Old Securities, if the solicitation period would otherwise expire during such
period.
Merisel reserves the right to amend the terms of the Plan or waive any
conditions thereto if and to the extent Merisel determines, after consultation
with the Ad Hoc Noteholders Committee, that such amendments or waivers are
necessary or desirable in order to consummate the Plan. Merisel will give all
Holders of Claims and Interests notice of such amendments or waivers as may be
required by applicable law and the Bankruptcy Court. If, after receiving
sufficient acceptances but prior to Confirmation of the Plan, Merisel seeks to
modify the Plan, Merisel can only use such previously solicited acceptances to
the extent permitted by applicable law. Merisel reserves the right to use
acceptances of the Plan received during its pre-petition solicitation of
acceptances under any other circumstances, including the filing of an
involuntary petition, subject to approval of the Bankruptcy Court.
C. REVOCATION OF THE PLAN.
Merisel reserves the right to revoke or withdraw the Plan prior to the
Confirmation Date. If Merisel revokes or withdraws the Plan, or if
Confirmation does not occur, then the Plan shall be null and void, and nothing
contained in the Plan shall: (i) constitute a waiver or release of any Claims
by or against, or any Interests in, Merisel, or (ii) prejudice in any manner
the rights of Merisel in any further proceedings involving Merisel.
D. SEVERABILITY OF PLAN PROVISIONS.
If any term or provision of the Plan is held by the Bankruptcy Court to be
invalid, void or unenforceable, the Bankruptcy Court will have the power, upon
the request of Merisel, to alter and interpret such term or provision to make
it valid or enforceable to the maximum extent practicable, consistent with the
original purpose of the term or provision held to be invalid, void or
unenforceable, and such term or provision will then be applicable as altered
or interpreted. Notwithstanding any such holding, alteration or
interpretation, the remainder of the terms and provisions of this Plan will
remain in full force and effect and will in no way be affected, impaired or
invalidated by such holding, alteration or interpretation. The Confirmation
Order will constitute a judicial determination and will provide that each term
and provision of this Plan, as it may have been altered or interpreted in
accordance with the foregoing, is valid and enforceable pursuant to its terms.
E. SUCCESSORS AND ASSIGNS.
The rights, benefits and obligations of any Person named or referred to in
the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, trustee, administrator, successor or assign of such Person.
F. SATURDAY, SUNDAY OR LEGAL HOLIDAY.
If any payment or act under the Plan is required to be made or performed on
a date that is not a Business Day, then the making of such payment or the
performance of such act may be completed on the next succeeding Business Day,
but shall be deemed to have been completed as of the required date.
ANNEX IV
I-26
<PAGE>
G. POST-EFFECTIVE DATE OF EVIDENCES OF CLAIMS OR INTERESTS.
Notes, bonds, stock certificates and other evidences of Claims against or
Interests in Merisel, and all Instruments of Merisel (in either case, other
than those executed and delivered as contemplated hereby in connection with
the consummation of the Plan), shall, effective upon the Effective Date,
represent only the right to participate in the distributions contemplated by
the Plan.
H. HEADINGS.
The headings used in the Plan are inserted for convenience only and neither
constitute a portion of the Plan nor in any manner affect the provisions of
the Plan.
I. GOVERNING LAW.
Unless a rule of law or procedure is supplied by (i) federal law (including
Bankruptcy Code, the Bankruptcy Rules or the Local Bankruptcy Rules), (ii) an
express choice of law provision in any agreement, contract, instrument, or
document provided for, or executed in connection with, the Plan or (iii)
applicable non-bankruptcy law, the rights and obligations arising under the
Plan and any agreements, contracts, documents and instruments executed in
connection with the Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of Delaware without giving effect to
the principles of conflict of laws thereof.
J. NO LIABILITY FOR SOLICITATION OR PARTICIPATION.
As specified in section 1125(e) of the Bankruptcy Code, Persons that solicit
acceptances or rejections of the Plan and/or that participate in the offer,
issuance, sale, or purchase of securities offered or sold under the Plan, in
good faith and in compliance with the applicable provisions of the Bankruptcy
Code, shall not be liable, on account of such solicitation or participation,
for violation of any applicable law, rule, or regulation governing the
solicitation of acceptances or rejections of the Plan or the offer, issuance,
sale, or purchase or securities.
K. NO ADMISSIONS OR WAIVER OF OBJECTIONS.
Notwithstanding anything herein to the contrary, nothing contained in the
Plan shall be deemed as an admission by Merisel or any other party with
respect to any matter set forth herein including, without limitation,
liability on any Claim or the propriety of any Claims classification.
ANNEX IV
I-27
<PAGE>
L. CONFIRMABILITY OF PLAN AND CRAMDOWN.
In the event at least one impaired Class of Claims votes to accept the Plan
(and at least one impaired Class either votes to reject the Plan or is deemed
to have rejected the Plan), Merisel reserves the right to request the
Bankruptcy Court to confirm the Plan under section 1129(b) of the Bankruptcy
Code.
Dated: July 31, 1997
Merisel, Inc., a Delaware
corporation
By: _________________________________
[Name: ]
[Title: ]
Presented By:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071-3144
(213) 687-5000
919 Third Avenue
New York, New York 10022-3897
(212) 735-3000
-- and --
One Rodney Square
Wilmington, Delaware 19899-0636
(302) 651-3000
Attorneys for Merisel, Inc.
ANNEX IV
I-28
<PAGE>
EXHIBIT A
FORM OF
WARRANT AGREEMENT
DATED AS OF
[ ], 1997
BETWEEN
MERISEL, INC.
AND
U.S. STOCK TRANSFER CORP.
AS WARRANT AGENT
-------------------------------------
WARRANTS FOR
COMMON STOCK OF
MERISEL, INC.
-------------------------------------
ANNEX IV
I-A-i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
ARTICLE I
Definitions
Section 1.1 Definitions................................................ I-A-1
Section 1.2 Rules of Construction...................................... I-A-2
ARTICLE II
Warrant Certificates
Section 2.1 Form of Warrant Certificates............................... I-A-2
Section 2.2 Execution and Delivery of Warrant Certificates............. I-A-3
Section 2.3 Loss or Mutilation......................................... I-A-3
ARTICLE III
Exercise Terms
Section 3.1 Exercise Price............................................. I-A-3
Section 3.2 Expiration................................................. I-A-4
Section 3.3 Manner of Exercise......................................... I-A-4
Section 3.4 Issuance of Warrant Shares................................. I-A-4
Section 3.5 Fractional Warrant Shares.................................. I-A-4
Section 3.6 Reservation of Warrant Shares.............................. I-A-4
Section 3.7 Compliance with Law........................................ I-A-5
ARTICLE IV
Antidilution Provisions
Section 4.1 Adjustment of Exercise Price and Warrant Number............ I-A-5
Section 4.2 Minimum Adjustment......................................... I-A-9
Section 4.3 Notice of Adjustment....................................... I-A-9
Section 4.4 Notice of Certain Transactions............................. I-A-10
Section 4.5 Adjustment to Warrant Certificate.......................... I-A-10
Section 4.6 Issuance of Due Bills...................................... I-A-10
ARTICLE V
Transferability
Section 5.1 Transfer and Exchange...................................... I-A-11
Section 5.2 Registration, Registration of Transfer and Exchange........ I-A-11
Section 5.3 Surrender of Warrant Certificates.......................... I-A-11
ARTICLE VI
Warrant Agent
Section 6.1 Appointment of Warrant Agent............................... I-A-11
Section 6.2 Rights and Duties of Warrant Agent......................... I-A-12
Section 6.3 Individual Rights of Warrant Agent......................... I-A-12
Section 6.4 Warrant Agent's Disclaimer................................. I-A-12
Section 6.5 Compensation and Indemnity................................. I-A-13
Section 6.6 Successor Warrant Agent.................................... I-A-13
</TABLE>
ANNEX IV
I-A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
ARTICLE VII
Miscellaneous
Section 7.1 Company Resales........................................... I-A-14
Section 7.2 SEC Reports and Other Information......................... I-A-14
Section 7.3 Persons Benefitting....................................... I-A-14
Section 7.4 Rights of Holders......................................... I-A-14
Section 7.5 Amendment................................................. I-A-14
Section 7.6 Notices................................................... I-A-15
Section 7.7 Governing Law............................................. I-A-15
Section 7.8 Successors................................................ I-A-16
Section 7.9 Multiple Originals........................................ I-A-16
Section 7.10 Table of Contents......................................... I-A-16
Section 7.11 Severability.............................................. I-A-16
Section 7.12 Further Assurances........................................ I-A-16
EXHIBIT A-1 FORM OF WARRANT CERTIFICATE............................... I-A-17
</TABLE>
ANNEX IV
I-A-iii
<PAGE>
WARRANT AGREEMENT (this "Agreement") dated as of [ ], 1997, between MERISEL,
INC., a Delaware corporation (together with its permitted successors and
assigns, the "Company"), and U.S. Stock Transfer Corp., a California
corporation, as Warrant Agent (together with its permitted successors and
assigns, the "Warrant Agent").
WHEREAS, the Company will undergo a financial restructuring wherein the
Company will issue, to holders of Common Stock, par value $.01 per share ("Old
Common Stock") of the Company Warrants, as hereinafter described ("Warrant"
or, taken collectively, the "Warrants"), to purchase shares of Common Stock,
par value $.05 per share, of the Company (the "Common Stock").
WHEREAS, the Company desires that the Warrant Agent act on behalf of the
Company in connection with the issuances, division, transfer, exchange,
substitution and exercise of the Warrants, and the Warrant Agent is willing so
to act.
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the holders of Warrants:
ARTICLE I
Definitions
Section 1.1 Definitions.
"Board" means the Board of Directors of the Company or any committee thereof
duly authorized to act on behalf of such Board of Directors.
"Business Day" means each day that is not a Saturday, a Sunday or a day on
which banking institutions are not required to be open in New York City or in
the city where the Warrant Agent's principal corporate trust office is
located.
"Certificated Warrants" means certificated Warrants in fully registered
definitive form.
"Common Stock" has the meaning ascribed thereto in the preamble to this
Agreement.
"Exercise Price" shall have the meaning set forth in Section 3.1.
"Expiration Date" shall have the meaning set forth in Section 3.3.
"Extraordinary Transaction" shall have the meaning set forth in Section
4.1(l).
"Fair Market Value" means, with respect to any asset or Property, the price
which could be negotiated in an arm's-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair Market Value
will be determined, except as otherwise provided, (i) if such property or
asset has a Fair Market Value of less than $1 million, by any Officer of the
Company or (ii) if such property or asset has a Fair Market Value in excess of
$1 million, by a majority of the Board of Directors of the Company and
evidenced by a Board Resolution, dated within 30 days of the relevant
transaction.
"Issue Date" means the date on which Warrants are initially issued.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer or the Treasurer of the Company.
"Old Common Stock" has the meaning ascribed thereto in the preamble to this
Agreement.
ANNEX IV
I-A-1
<PAGE>
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof.
"Record Date" shall mean July 22, 1997.
"Redeemable Stock" means, with respect to any Person, any capital stock that
by its terms (or by the terms of any security into which it is convertible or
exchangeable) or otherwise (i) matures or is mandatorily redeemable pursuant
to a sinking fund obligation or otherwise, (ii) is or may become redeemable or
repurchaseable at the option of the holder thereof, in whole or in part, or
(iii) is convertible or exchangeable for indebtedness.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Voting Stock" means all classes of capital stock of a corporation then
outstanding and normally entitled to vote in the election of directors.
"Warrant Shares" means the Common Stock (and other securities) issuable upon
the exercise of the Warrants.
Section 1.2 Rules of Construction. Unless the text otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned to it
in accordance with generally accepted accounting principles as in effect from
time to time;
(iii) "or" is not exclusive;
(iv) "including" means including, without limitation; and
(v) words in the singular include the plural and words in the plural include
the singular.
ARTICLE II
Warrant Certificates
Section 2.1 Form of Warrant Certificates. Certificates representing the
Warrants (the "Warrant Certificates") shall be in registered form only and
substantially in the form attached hereto as Exhibit A-1. The Warrant
Certificates shall be dated the date on which countersigned by the Warrant
Agent and shall have such insertions as are appropriate or required or
permitted by this Agreement and may have such letters, numbers or other marks
of identification and such legends and endorsements typed, stamped, printed,
lithographed or engraved thereon as the Company may deem appropriate and as
are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation pursuant
thereto, or to conform to usage. The Company shall approve the form of the
Warrant Certificates and any notation, legend or endorsement on them.
The terms and provisions contained in the forms of the Warrant Certificates
annexed hereto as Exhibit A-1 shall constitute, and are hereby expressly made,
a part of this Agreement.
The definitive Warrant Certificates shall be typed, printed, lithographed or
engraved or produced by any combination of these methods, all as determined by
the officer of the Company executing such Warrant Certificates, as evidenced
by such officer's execution of such Warrant Certificates.
ANNEX IV
I-A-2
<PAGE>
Pending the preparation of definitive Warrant Certificates, temporary
Warrant Certificates may be issued, which may be printed, lithographed,
typewritten, mimeographed or otherwise produced, and which will be
substantially of the tenor of the definitive Warrant Certificates in lieu of
which they are issued.
If temporary Warrant Certificates are issued, the Company will cause
definitive Warrant Certificates to be prepared without unreasonable delay.
After the preparation of definitive Warrant Certificates, the temporary
Warrant Certificates shall be exchangeable for definitive Warrant Certificates
upon surrender of the temporary Warrant Certificates to the Warrant Agent,
without charge to the Holder. Until so exchanged the temporary Warrant
Certificates shall in all respects be entitled to the same benefits under this
Agreement as definitive Warrant Certificates.
Section 2.2 Execution and Delivery of Warrant Certificates. Warrant
Certificates evidencing 2,631,868 Warrants to purchase initially an aggregate
of up to 2,631,868 Warrant Shares shall be executed on or prior to the Issue
Date, by the Company and delivered to the Warrant Agent for countersignature,
and the Warrant Agent shall immediately after the filing of the Charter
Amendment countersign and deliver such Warrant Certificates upon the order and
at the direction of the Company to the holders of Old Common Stock on the
Record Date. The Warrant Agent is hereby authorized to countersign and deliver
Warrant Certificates as required hereby.
The Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President, either manually or by
facsimile signature printed thereon. The Warrant Certificates shall be
countersigned manually by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company whose
signature shall have been placed upon any of the Warrant Certificates shall
cease to be such officer of the Company before countersignature by the Warrant
Agent and issuance and delivery thereof, such Warrant Certificates may,
nevertheless, be countersigned by the Warrant Agent and issued and delivered
with the same force and effect as though such person had not ceased to be such
officer of the Company.
Section 2.3 Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership and the loss, theft,
destruction or mutilation of any Warrant Certificate and of indemnity
satisfactory to them and (in the case of mutilation) upon surrender and
cancellation thereof, then, in the absence of notice to the Company or the
Warrant Agent that the Warrants represented thereby have been acquired by a
bona fide purchaser, the Company shall execute and the Warrant Agent shall
countersign and deliver to the registered Holder of the lost, stolen,
destroyed or mutilated Warrant Certificate, in exchange for or in lieu
thereof, a new Warrant Certificate of the same tenor and for a like aggregate
number of Warrants. Upon the issuance of any new Warrant Certificate under
this Section 2.3, the Company may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and other expenses (including the reasonable fees and expenses of the
Warrant Agent and of counsel to the Company) in connection therewith. Every
new Warrant Certificate executed and delivered pursuant to this Section 2.3 in
lieu of any lost, stolen or destroyed Warrant Certificate shall constitute a
contractual obligation of the Company, whether or not the allegedly lost,
stolen or destroyed Warrant Certificates shall be at any time enforceable
under applicable law, and shall be entitled to the benefits of this Agreement
equally and proportionately with any and all other Warrant Certificates duly
executed and delivered hereunder. The provisions of this Section 2.3 are
exclusive and shall preclude (to the extent lawful) all other rights or
remedies with respect to the replacement of mutilated, lost, stolen or
destroyed Warrant Certificates.
ARTICLE III
Exercise Terms
Section 3.1 Exercise Price. The number of Warrant Shares into which each
Warrant will be exercisable (subject to adjustment as provided in this
Agreement) shall be one. The Warrants will be exercisable on or after the
Issue Date, initially at a price per Warrant Share of $[ ]/1/ (the "Exercise
Price").
- --------
/1/ The Exercise Price will be $7.15 per share for the Series A Warrants and
$8.68 per share for the Series B Warrants.
ANNEX IV
I-A-3
<PAGE>
Section 3.2 Expiration. A Warrant shall terminate and become void as of the
earlier of (i) the close of business on the seventh anniversary of the Issue
Date ("the Expiration Date") or (ii) the date such Warrant is exercised.
Section 3.3 Manner of Exercise. Warrants may be exercised, subject to
Section 3.7 upon surrender to the Warrant Agent of the Warrant Certificates,
together with the form of election to purchase Common Stock on the reverse
thereof duly filled in and signed by the registered holder ("Holders")
thereof. The rights represented by the Warrants shall be exercisable at the
election of the Holders thereof either in full or from time to time in part
and in the event that a Warrant Certificate is surrendered for exercise in
respect of less than all the Warrant Shares purchasable on such exercise at
any time prior to the Expiration Date a new Warrant Certificate exercisable
for the remaining Warrant Shares will be issued. The Warrant Agent shall
countersign and deliver the required new Warrant Certificates, and the
Company, at the Warrant Agent's request, shall supply the Warrant Agent with
Warrant Certificates duly signed on behalf of the Company for such purpose.
Section 3.4 Issuance of Warrant Shares. Upon the surrender of Warrant
Certificates, as set forth in Section 3.3, the Company shall issue and cause
the Warrant Agent or, if appointed, a transfer agent for the Common Stock
("Stock Transfer Agent") to countersign and deliver to or upon the written
order of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of such Warrants or other securities or property to which it
is entitled, registered or otherwise, to the Person or Persons entitled to
receive the same, together with cash as provided in Section 3.5 in respect of
any fractional Warrant Shares otherwise issuable upon such exercise. Such
certificate or certificates shall be deemed to have been issued and any Person
so designated to be named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrant
Certificates and payment of the per share Exercise Price, as aforesaid;
provided, however, that if, at such date, the transfer books for the Warrant
Shares shall be closed, the certificates for the Warrant Shares in respect of
which such Warrants are then exercised shall be issuable as of the date on
which such books shall next be opened and until such date the Company shall be
under no duty to deliver any certificates for such Warrant Shares; provided,
further, however, that such transfer books, unless otherwise required by law,
shall not be closed at any one time for a period longer than 20 calendar days.
Section 3.5 Fractional Warrant Shares. The Company shall not be required to
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be exercised in full at the same time by the same Holder, the
number of full Warrant Shares which shall be issuable upon such exercise shall
be computed on the basis of the aggregate number of Warrant Shares purchasable
pursuant thereto. If any fraction of a Warrant Share would, except for the
provisions of this Section 3.5, be issuable on the exercise of any Warrant (or
specified portion thereof), the Company shall pay an amount in cash equal to
the market price for one Warrant Share on the trading day immediately
preceding the date the Warrant is exercised, multiplied by such fraction,
computed to the nearest whole cent.
Section 3.6 Reservation of Warrant Shares. The Company shall at all times
keep reserved out of its authorized shares of Common Stock a number of shares
of Common Stock sufficient to provide for the exercise of all outstanding
Warrants. The registrar for the Common Stock (the "Registrar") shall at all
times until the Expiration Date reserve such number of authorized shares as
shall be required for such purpose. The Company will keep a copy of this
Agreement on file with the Stock Transfer Agent. The Company will supply such
Stock Transfer Agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash which may be
payable as provided in Section 3.5. The Company will furnish to such Stock
Transfer Agent a copy of all notices of adjustments and certificates related
thereto transmitted to each Holder.
Before taking any action which would cause an adjustment pursuant to Article
IV to reduce the Exercise Price below the then par value (if any) of the
Common Stock, the Company shall take any and all corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
at the Exercise Price as so adjusted.
ANNEX IV
I-A-4
<PAGE>
The Company covenants that all shares of Common Stock which may be issued
upon exercise of Warrants will, upon issue, be fully paid, nonassessable, free
of preemptive rights, free from all taxes and free from all liens, charges and
security interests, created by or through the Company, with respect to the
issue thereof.
Section 3.7 Compliance with Law. (a) Notwithstanding anything in this
Agreement to the contrary, in no event shall a Holder be entitled to exercise
a Warrant unless (i) a registration statement filed under the Securities Act
in respect of the issuance of the Warrant Shares is then effective or (ii) in
the opinion of counsel to the Company addressed to the Warrant Agent an
exemption from the registration requirements is available under the Securities
Act or otherwise for the issuance of the Warrant Shares (and the delivery of
any other securities for which the Warrants may at the time be exercisable) at
the time of such exercise.
(b) If any shares of Common Stock required to be reserved for purposes of
exercise of Warrants require, under any other Federal or state law or
applicable governing rule or regulation of any national securities exchange,
registration with or approval of any governmental authority, or listing on any
such national securities exchange before such shares may be issued upon
exercise, the Company will in good faith and as expeditiously as possible
endeavor also to cause such shares to be duly registered or approved by such
governmental authority or listed on the relevant national securities exchange,
as the case may be.
ARTICLE IV
Antidilution Provisions
Section 4.1 Adjustment of Exercise Price and Warrant Number. The number of
Warrant Shares issuable upon the exercise of each Warrant (the "Warrant
Number") is subject to adjustment from time to time upon the occurrence of the
events enumerated in, or as otherwise provided in, this Section 4.1.
(a) Adjustment for Change in Capital Stock
If the Company:
(1) pays a dividend (excluding regular cash dividends payable out of
earnings or surplus and made in the ordinary course of business) or makes a
distribution on its Common Stock in shares of its Common Stock;
(2) subdivides or reclassifies its outstanding shares of Common Stock
into a greater number of shares;
(3) combines or reclassifies its outstanding shares of Common Stock into
a smaller number of shares;
(4) makes a distribution on Common Stock in shares of its capital stock
other than Common Stock; or
(5) issues by reclassification of its Common Stock any shares of its
capital stock (other than reclassification arising solely as a result of a
change in the par value or no par value of the Common Stock);
then the Warrant Number in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which it would have owned immediately following such action if
such Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event listed above
shall occur.
The Company shall not issue shares of Common Stock as a dividend or
distribution on any class of capital stock other than Common Stock with the
intention of denying the Warrant Holders the benefit of the foregoing
provisions unless the Warrant Holders also receive such dividend or
distribution on a ratable basis or the appropriate adjustment to the Warrant
Number is made under this Section 4.1.
ANNEX IV
I-A-5
<PAGE>
(b) Adjustment for Rights Issue or Convertible Securities Issue
If the Company distributes (and receives no consideration therefor) any
rights, options, warrants or securities convertible into or exchangeable or
exercisable for Common Stock (whether or not immediately exercisable) to all
holders of any class of its Common Stock entitling them to purchase shares of
Common Stock at a price per share less than the Specified Value (as defined in
Section 4.1(g) hereof) per share on the record date relating to such
distribution, the Warrant Number shall be adjusted in accordance with the
formula:
W' = W x O + N
-----
O + N x P
-----
M
where:
W' = the adjusted Warrant Number.
W = the Warrant Number immediately prior to the record date for any
such distribution.
O = the number of shares of Common Stock outstanding on the record
date for any such distribution.
N = the number of additional shares of Common Stock issuable upon
exercise of such rights, options, warrants or upon conversion of
such securities.
P = the exercise or conversion price per share of such rights,
options, warrants or convertible securities.
M = the Specified Value per share of Common Stock on the record date
for any such distribution.
The adjustment shall be made successively whenever any such rights, options,
warrants or convertible securities are issued and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive the rights, options or warrants or convertible securities.
If at the end of the period during which such rights, options, warrants or
convertible securities are exercisable or convertible, not all rights,
options, warrants or convertible securities shall have been exercised or
converted the adjusted Warrant Number shall be immediately readjusted to what
it would have been if "N" in the above formula had been the number of shares
actually issued.
(c) Adjustment for Other Distributions
If the Company distributes to all holders of any class of its Common Stock
(i) any evidences of indebtedness of the Company or any of its subsidiaries,
(ii) any assets of the Company or any of its subsidiaries (excluding regular
cash dividends payable out of earnings or surplus and made in the ordinary
course of business), or (iii) any rights, options or warrants to acquire any
of the foregoing or to acquire any other securities of the Company, the
Warrant Number shall be adjusted in accordance with the formula:
W' = W x M
-----
M - F
where:
W' = the adjusted Warrant Number.
W = the Warrant Number immediately prior to the record date mentioned
below.
M = the Specified Value per share of Common Stock on the record date
mentioned below.
F = the fair market value on the record date mentioned below of the
shares, the indebtedness, assets, rights, options or warrants
distributable to the holder of one share of Common Stock.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the
ANNEX IV
I-A-6
<PAGE>
distribution. If an adjustment is made pursuant to this subsection (c) as a
result of the issuance of rights, options or warrants and at the end of the
period during which any such rights, options or warrants are exercisable, not
all such rights, options or warrants shall have been exercised, the adjusted
Warrant Number shall be immediately readjusted as if "F" in the above formula
was the fair market value on the record date of the indebtedness or assets
actually distributed upon exercise of such rights, options or warrants divided
by the number of shares of Common Stock outstanding on the record date.
This subsection does not apply to any transaction described in subsection
(a) of this Section 4.1 or to rights, options warrants or convertible
securities referred to in subsection (b) of this Section 4.1.
(d) "Specified Value" per share of Common Stock or of any other security
(herein collectively referred to as a "Security") at any date shall be:
(i) if the Security is not registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the value of the Security
determined in good faith by a majority of the independent members of the
Board of Directors of the Company and certified in a board resolution, or
(ii) if the Security is registered under the Exchange Act, the average of
the daily market prices for each business day during the period commencing
10 business days before such date and ending on the date one day prior to
such date or, if the Security has been registered under the Exchange Act
for less than 30 consecutive business days before such date, then the
average of the daily market prices (as hereinafter defined) for all of the
business days before such date for which daily market prices are available.
If the market price is not determinable for at least 15 business days in
such period, the Specified Value of the Security shall be determined as if
the Security was not registered under the Exchange Act.
The "market price" for any Security on each business day means:
(A) such Security's closing sales price on the principal nationally
recognized domestic securities exchange (including the Nasdaq Stock
Market--National Market recognized domestic securities exchange
(including the Nasdaq Stock Market--National Market tier) on which such
Security may, at the time, be listed, or if there have been no sales on
any such exchange on any day, the average or the highest bid and lowest
asked prices on all exchanges on which such Security may, at the time,
be listed, at the end of such day, or
(B) if on any day such Security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ Inter-Dealer
Quotation System (the "NASDAQ System") as of the close of trading in
New York, New York on such day, or
(C) if on any day such security is not quoted in the NASDAQ System,
the average of the high and low bid and asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, as
reported on the date of the applicable issuance or sale or deemed
issuance or sale, as the case may be, provided that if such date is not
a Trading Day, as reported on the Trading Day immediately preceding
such date. As used herein, the term "Trading Day" shall mean any day on
which trading takes place on the applicable securities exchange or the
NASDAQ System on which the Common Stock is listed or traded, as the
case may be.
In the case of Common Stock, if more than one class of Common Stock is
outstanding, the "Specified Value" shall be the highest of the Specified
Values per share of such classes of Common Stock.
(e) Consideration Received
For purposes of any computation respecting consideration received pursuant
to subsection (b) of this Section 4.1, the aggregate consideration received
upon the issuance of options, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock shall be deemed to be
the consideration received by the Company for the issuance of such securities
plus the additional minimum consideration, if any, to be received by the
Company upon the conversion, exchange or exercise thereof (without deduction
being made for
ANNEX IV
I-A-7
<PAGE>
any commissions, discounts or other expenses incurred by the company for any
underwriting of the issue or otherwise in connection therewith).
(f) Adjustment to Exercise Price
Upon each adjustment to the Warrant Number pursuant to this Section 4.1, the
Exercise Price shall be adjusted so that it is equal to the Exercise Price in
effect immediately prior to such adjustment multiplied by a quotient, the
numerator of which is the Warrant Number in effect immediately prior to such
adjustment, and the denominator of which is the Warrant Number in effect
immediately after such adjustment.
(g) When No Adjustment Required
If an adjustment is made upon the establishment of a record date for a
distribution subject to subsection (a), (b) or (c) hereof and such
distribution is subsequently cancelled, the Warrant Number and Exercise Price
then in effect shall be readjusted, effective as of the date when the Board of
Directors determines to cancel such distribution, to that which would have
been in effect if such record date had not been fixed.
To the extent the Warrants become convertible into cash, no adjustment need
be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(h) Excluded Transactions
The following securities shall be excluded from the operation of Section
4.1:
(i) [the Series A Warrants] [the Series B Warrants]; and
(ii) any grant or exercise of options to purchase Common Stock pursuant
to any employee stock plan or non-employee director stock plan approved by
the Board of Directors and, if required, by the stockholders of the
Company.
(i) Reorganizations
(1) If, prior to January 1, 1998, the Company consolidates or merges with or
into, or transfers or leases all or substantially all its assets to, any
person (each an "Extraordinary Transaction") or agrees to do any of the
foregoing, upon consummation of such Extraordinary Transaction the Warrants
shall remain outstanding and continue, (A) in the case of a merger in which
the Company is the surviving company, to be convertible into Common Stock or,
(B) in any other type of Extraordinary Transaction, to be convertible into a
number of shares of common stock of the acquiring or surviving company
representing the same percentage of such common stock as the Warrants would
have received in the Company immediately prior to the consummation of the
Extraordinary Transaction (subject to equitable adjustment as the Board deems
necessary), provided, however, that the requirements of this clause (1) will
not apply in the event that the holders of 85% of the outstanding Common Stock
vote to approve the Extraordinary Transaction prior to the consummation of
such transaction.
(2) Unless previously approved by 85% of the outstanding Common Stock, the
Company shall not enter into any agreement that would result in an
Extraordinary Transaction that provides for the holders of Warrants to receive
consideration other than as set forth in clause (1) above. If the Company
should enter into any agreement in contravention of this clause (2), such
agreement shall be void ab initio.
(3) Upon the consummation of an Extraordinary Transaction which is not
subject to the restrictions of clause (1) above, the Warrants shall
automatically become exercisable for the kind and amount of securities, cash
or other assets that the holder of a Warrant would have owned immediately
after the Extraordinary Transaction if the holder had exercised the Warrant
immediately before the effective date of the Extraordinary Transaction.
Concurrently with the consummation of such transaction, the corporation formed
by or surviving any such consolidation or merger if other than the Company, or
the person to which such sale or conveyance shall have been made, shall enter
into a supplemental Warrant Agreement so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section. The successor Company shall mail to
Warrant holders a notice describing the supplemental Warrant Agreement.
ANNEX IV
I-A-8
<PAGE>
If the issuer of securities deliverable upon exercise of Warrants under the
supplemental Warrant Agreement is an affiliate of the formed, surviving,
transferee or lessee corporation, that issuer shall join in the supplemental
Warrant Agreement. If this subsection (h) applies to any transaction,
subsections (a), (b), (c), (e) or (f) of this Section shall not apply to such
transaction.
(j) Form of Warrants
Irrespective of any adjustments in the Exercise Price or the number or kind
of shares purchasable upon the exercise of the Warrants, Warrants theretofore
or thereafter issued may continue to express the same price and number and
kind of shares as are stated in the Warrants initially issuable pursuant to
this Agreement.
(k) Other Dilutive Events
In case any event shall occur as to which the provisions of this Section 4.1
are not strictly applicable but the failure to make any adjustment would not,
in the good faith judgment of the Board of Directors, fairly protect the
purchase rights represented by the Warrants in accordance with the essential
intent and principles of such section, then, in each such case, such Board of
Directors shall make a good faith adjustment to the Exercise Price and Warrant
Number into which each Warrant is exercisable in accordance with the intent of
this Section 4.1.
(l) Miscellaneous
For purpose of this Section 4.1, the term "shares of Common Stock" shall
mean (i) shares of any class of stock designated as Common Stock of the
Company as of the date of this Agreement and (ii) shares of any other class of
stock resulting from successive changes or reclassification of such shares
consisting solely of changes in par value, or from par value to no par value,
or from no par value to par value. In the event that at any time, as a result
of an adjustment made pursuant to this Section 4.1, the holders of Warrants
shall become entitled to purchase any securities of the Company other than, or
in addition to, shares of Common Stock, thereafter the number or amount of
such other securities so purchasable upon exercise of each Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in subsections (a) through (j) of this Section 4.1, inclusive, and
the other provisions hereof with respect to the Warrant Shares or the Common
Stock shall apply on like terms to any such other securities.
Section 4.2 Minimum Adjustment. The adjustments required by the preceding
Section of this Article IV shall be made whenever and as often as any
specified event requiring an adjustment shall occur, except that no adjustment
of the Exercise Price or the number of shares of Common Stock purchasable upon
exercise of Warrants that would otherwise be required shall be made (except in
the case of a subdivision or combination of shares of Common Stock, as
provided for in Section 4.1) unless and until such adjustment either by itself
or with other adjustments not previously made increases or decreases by at
least 1% of the number of shares of Common Stock purchasable upon exercise of
Warrants immediately prior to the making of such adjustment; provided,
however, that any adjustment pursuant to this Article IV (including those that
require an increase or decrease in the Exercise Price or the number of shares
of Common Stock purchasable upon exercise of Warrants of less than 1%) shall
be made no later than the earlier of three years from the date of the
transaction that mandates such adjustment and the Expiration Date. Any
adjustment representing a change of less than such minimum amount shall be
carried forward and made as soon as such adjustment, together with other
adjustments required by this Article IV and not previously made, would result
in a minimum adjustment. For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close of business on the date of
its occurrence. In computing adjustments under this Article IV, fractional
interests in Common Stock shall be taken into account to the nearest one-
hundredth of a share.
Section 4.3 Notice of Adjustment. Whenever the Exercise Price or the number
of shares of Common Stock and other property, if any, purchasable upon
exercise of Warrants is adjusted, as herein provided, the Company shall
deliver to the Warrant Agent a certificate of an officer of the Company
setting forth, in reasonable detail, the event requiring the adjustment and
the method by which such adjustment was calculated (including a description of
the basis on which the Board of Directors of the Company determined the fair
market value of
ANNEX IV
I-A-9
<PAGE>
any evidences of indebtedness, other securities or property or warrants or
other subscription or purchase rights), and specifying the Exercise Price and
the number of shares of Common Stock purchasable upon exercise of Warrants
after giving effect to such adjustment. The Company shall promptly cause the
Warrant Agent to mail a copy of such certificate to each Holder in accordance
with Section 7.6. The Warrant Agent shall be entitled to rely on such
certificate and shall be under no duty or responsibility with respect to any
such certificate, except to exhibit the same from time to time, to any Holder
desiring an inspection thereof during reasonable business hours. The Warrant
Agent shall not at any time be under any duty or responsibility to any Holder
to determine whether any facts exist which may require any adjustment of the
Exercise Price or the number of shares of Common Stock or other stock or
property, purchasable on exercise of the Warrants, or with respect to the
nature or extent of any such adjustment when made, or with respect to the
method employed in making such adjustment or the validity or value of any
shares of Common Stock.
Section 4.4 Notice of Certain Transactions. In the event that the Company
shall propose (a) to pay any dividend payable in securities of any class to
the holders of its Common Stock or to make any other distribution (excluding
regular cash dividends payable out of earnings or surplus and made in the
ordinary course of business) to the holders of its Common Stock, (b) to offer
the holders of its Common Stock rights to subscribe for or to purchase any
securities convertible into shares of Common Stock or shares of stock of any
class or any other securities, rights or options, (c) to effect any
Extraordinary Transaction or (d) to effect the voluntary or involuntary
dissolution, liquidation or winding-up of the Company, the Company shall
within 5 days send to the Warrant Agent and the Warrant Agent shall within 5
days send the Holders a notice (in such form as shall be furnished to the
Warrant Agent by the Company) of such proposed action or offer, such notice to
be mailed by the Warrant Agent to the Holders at their addresses as they
appear in the Certificate register, which shall specify the record date for
the purposes of such dividend, distribution or rights, or the date such
issuance or event is to take place and the date of participation therein by
the holders of Common Stock, if any such date is to be fixed, and shall
briefly indicate the effect of such action on the Common Stock and on the
number and kind of any other shares of stock and on other property, if any,
and the number of shares of Common Stock and other property, if any,
purchasable upon exercise of each Warrant and the Exercise Price after giving
effect to any adjustment, if any, which will be required as a result of such
action. Such notice shall be given by the Company as promptly as possible and,
in the case of any action covered by clause (a) or (b) above, at least 10 days
prior to the record date for determining holders of the Common Stock for
purposes of such action and, in the case of any other such action, at least 20
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier.
Section 4.5 Adjustment to Warrant Certificate. The form of Warrant
Certificate need not be changed because of any adjustment made pursuant to
this Article IV, and Warrant Certificates issued after such adjustment may
state the same Exercise Price and the same number of shares of Common Stock as
are stated in the Warrant Certificates initially issued pursuant to this
Agreement. The Company, however, may at any time in its sole discretion make
any change in the form of Warrant Certificate that it may deem appropriate to
give effect to such adjustments and that does not affect the substance of the
Warrant Certificate, and any Warrant Certificate thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
Section 4.6 Issuance of Due Bills. In any case in which this Article IV
shall require that adjustment in the Exercise Price be made as of the record
date for a specified event, (x) the Company may elect to defer until the
occurrence of such event the issuance to the holder of any Warrant exercised
after such record date the shares of Common Stock and other capital stock of
the Company, if any, issuable upon such exercise over and above the shares of
Common Stock and other capital stock of the Company, if any, issuable upon
such exercise upon the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the effectiveness of the event requiring
such adjustment and (y) the Common Stock transfer books of the Company shall
be deemed to have been opened immediately prior to such record date, whether
or not such transfer books were in fact open.
ANNEX IV
I-A-10
<PAGE>
ARTICLE V
Transferability
Section 5.1 Transfer and Exchange. The Warrant Certificates shall be issued
in registered form only. The Company shall cause to be kept at the office of
the Warrant Agent a register in which, subject to such reasonable regulations
as it may prescribe, the Company shall provide for the registration of Warrant
Certificates and transfers or exchanges of Warrant Certificates as herein
provided. All Warrant Certificates issued upon any registration of transfer or
exchange of Warrant Certificates shall be the valid obligations of the
Company, evidencing the same obligations, and entitled to the same benefit
under this Agreement, as the Warrant Certificates surrendered for such
registration of transfer or exchange.
A Holder may transfer its Warrants only by complying with the terms of this
Agreement. No such transfer shall be effected until, and such transferee shall
succeed to the rights of a Holder only upon, final acceptance and registration
of the transfer by the Warrant Agent in the register. Prior to the
registration of any transfer of Warrants by a Holder as provided herein, the
Company, the Warrant Agent, any agent of the Company or the Warrant Agent may
treat the Person in whose name the Warrants are registered as the owner
thereof for all purposes and as the Person entitled to exercise the rights
represented thereby, any notice to the contrary notwithstanding. When Warrant
Certificates are presented to the Warrant Agent with a request to register the
transfer or to exchange them for an equal amount of Warrants of other
authorized denominations, the Warrant Agent shall register the transfer or
make the exchange in accordance with the provisions hereof.
Section 5.2 Registration, Registration of Transfer and Exchange.
When Certificated Warrants are presented to the Warrant Agent with a request
from the Holder of such Warrants to register the transfer or to exchange them
for an equal number of Warrants of other authorized denominations, the Warrant
Agent shall register the transfer or make the exchange as requested; provided,
however, that every Warrant presented and surrendered for registration of
transfer or exchange shall be duly endorsed and be accompanied by a written
instrument of transfer in form satisfactory to the Company, duly executed by
the Holder thereof or the Holder's attorneys duly authorized in writing.
To permit registrations of transfer and exchanges, the Company shall make
available to the Warrant Agent a sufficient number of executed Warrant
Certificates to effect such registrations of transfers and exchanges. No
service charge shall be made to the Holder for any registration of transfer or
exchange of Warrants, but the Company may require from the transferring or
exchanging Holder payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable upon exchanges pursuant to Section 2.3 and
exchanges in respect of portions of Warrants not exercised and the Company may
deduct such taxes from any payment of money to be made and such transfer or
exchange shall not be consummated (if such taxes are not deducted in full)
unless or until the Holder shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company and the
Warrant Agent that such tax has been paid.
Section 5.3 Surrender of Warrant Certificates. Any Warrant Certificate
surrendered for registration of transfer, exchange, exercise or repurchase of
the Warrants represented thereby shall, if surrendered to the Company, be
delivered to the Warrant Agent, and all Warrant Certificates surrendered or so
delivered to the Warrant Agent shall be promptly canceled by the Warrant Agent
and shall not be reissued by the Company and, except as provided in this
Article V in case of an exchange or in Article III hereof in case of the
exercise or repurchase of less than all the Warrants represented thereby or in
case of a mutilated Warrant Certificate, no Warrant Certificate shall be
issued hereunder in lieu thereof. The Warrant Agent shall deliver to the
Company from time to time such canceled Warrant Certificates.
ARTICLE VI
Warrant Agent
Section 6.1 Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with provisions of
this Agreement and the Warrant Agent hereby accepts such appointment.
ANNEX IV
I-A-11
<PAGE>
Section 6.2 Rights and Duties of Warrant Agent.
(a) Agent for the Company. In acting under this Warrant Agreement and in
connection with the Warrant Certificates, the Warrant Agent is acting solely
as agent of the Company and does not assume any obligation or relationship or
agency or trust for or with any of the holders of Warrant Certificates or
beneficial owners of Warrants.
(b) Counsel. The Warrant Agent may consult with counsel satisfactory to it,
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the advice of such counsel.
(c) Documents. The Warrant Agent shall be protected and shall incur no
liability for or in respect of any action taken or thing suffered by it in
reliance upon any Warrant Certificate, notice, direction, consent,
certificate, affidavit, statement or other paper or document reasonably
believed by it to be genuine and to have been presented or signed by the
proper parties.
(d) No Implied Obligations. The Warrant Agent shall be obligated to perform
only such duties as are herein and in the Warrant Certificates specifically
set forth and no implied duties or obligations shall be read into this
Agreement or the Warrant Certificates against the Warrant Agent. The Warrant
Agent shall not be under any obligation to take any action hereunder which may
tend to involve it in any expense or liability for which it does not receive
indemnity if such indemnity is reasonably requested. The Warrant Agent shall
not be accountable or under any duty or responsibility for use by the Company
of any of the Warrant Certificates countersigned by the Warrant Agent and
delivered by it to the Holders or on behalf of the Holders pursuant to this
Agreement or for the application by the Company of the proceeds of the
Warrants. The Warrant Agent shall have no duty or responsibility in case of
any default by the Company in the performance of its covenants or agreements
contained herein or in the Warrant Certificates or in the case of the receipt
of any written demand from a Holder with respect to such default, including
any duty or responsibility to initiate or attempt to initiate any proceedings
at law or otherwise.
(e) Not Responsible for Adjustments or Validity of Stock. The Warrant Agent
shall not at any time be under any duty or responsibility to any Holder to
determine whether any facts exist that may require an adjustment of the number
of shares of Common Stock purchasable upon exercise of each Warrant or the
Exercise Price, or with respect to the nature or extent of any adjustment when
made, or with respect to the method employed, or herein or in any supplemental
agreement provided to be employed, in making the same. The Warrant Agent shall
not be accountable with respect to the validity or value of any shares of
Common Stock or of any securities or property which may at any time be issued
or delivered upon the exercise of any Warrant or upon any adjustment pursuant
to Article IV, and it makes no representation with respect thereto. The
Warrant Agent shall not be responsible for any failure of the Company to make
any cash payment or to issue, transfer or deliver any shares of Common Stock
or stock certificates upon the surrender of any Warrant Certificate for the
purpose of exercise or upon any adjustment pursuant to Article IV, or to
comply with any of the covenants of the Company contained in Article IV.
Section 6.3 Individual Rights of Warrant Agent. The Warrant Agent and any
stockholder, director, officer or employee of the Warrant Agent may buy, sell
or deal in any of the Warrants or other securities of the Company or its
affiliates or become pecuniarily interested in transactions in which the
Company or its affiliates may be interested, or contract with or lend money to
the Company or its affiliates or otherwise act as fully and freely as though
it were not the Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company
or for any other legal entity.
Section 6.4 Warrant Agent's Disclaimer. The Warrant Agent shall not be
responsible for and makes no representation as to the validity or adequacy of
this Agreement or the Warrant Certificates and it shall not be responsible for
any statement in this Agreement or the Warrant Certificates other than its
countersignature thereon.
ANNEX IV
I-A-12
<PAGE>
Section 6.5 Compensation and Indemnity. The Company agrees to pay the
Warrant Agent from time to time such compensation for its services as the
Company and the Warrant Agent shall agree from time to time and to reimburse
the Warrant Agent upon request for all reasonable out-of-pocket expenses
incurred by it, including the reasonable compensation and expenses of the
Warrant Agent's agents and counsel. The Company shall indemnify the Warrant
Agent against any loss, liability or expense (including reasonable agents' and
attorneys' fees and expenses) incurred by it without negligence or bad faith
on its part arising out of or in connection with the acceptance or performance
of its duties under this Agreement. The Warrant Agent shall notify the Company
promptly of any claim for which it may seek indemnity. The Company need not
reimburse any expense or indemnify against any loss or liability incurred by
the Warrant Agent through willful misconduct, negligence or bad faith. The
Company's payment obligations pursuant to this Section 6.5 shall survive the
termination of this Agreement.
To secure the Company's payment obligations under this Agreement, the
Warrant Agent shall have a lien prior to the Warrant Holders on all money or
property held or collected by the Warrant Agent.
Section 6.6 Successor Warrant Agent.
(a) The Company To Provide Warrant Agent. The Company agrees for the benefit
of the Holders that there shall at all times be a Warrant Agent hereunder
until all the Warrants have been exercised or are no longer exercisable.
(b) Resignation and Removal. The Warrant Agent may at any time resign by
giving written notice to the Company of such intention on its part, specifying
the date on which its desired resignation shall become effective; provided,
however, that such date shall not be less than 60 days after the date on which
such notice is given unless the Company otherwise agrees. The Warrant Agent
hereunder may be removed at any time by the filing with it of an instrument in
writing signed by or on behalf of the Company and specifying such removal and
the date when it shall become effective, which date shall not be less than 60
days after such notice is given unless the Warrant Agent otherwise agrees. Any
removal under this Section 6.6 shall take effect upon the appointment by the
Company as hereinafter provided of a successor Warrant Agent (which shall be a
bank or trust company authorized under the laws of the jurisdiction of its
organization to exercise corporate trust powers) and the acceptance of such
appointment by such successor Warrant Agent.
(c) The Company To Appoint Successor. In case at any time the Warrant Agent
shall resign, or shall be removed, or shall become incapable of acting, or
shall be adjudged a bankrupt or insolvent, or shall commence a voluntary case
under the Federal bankruptcy laws, as now or hereafter constituted, or under
any other applicable Federal or state bankruptcy, insolvency or similar law or
shall consent to the appointment of or taking possession by a receiver,
custodian, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Warrant Agent or its property or affairs, or shall make an
assignment for the benefit of creditors, or shall admit in writing its
inability to pay its debts generally as they become due, or shall take
corporate action in furtherance of any such action, or a decree or order for
relief by a court having jurisdiction in the premises shall have been entered
in respect of the Warrant Agent in an involuntary case under the Federal
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal or State bankruptcy, insolvency or similar law; or a decree order by a
court having jurisdiction in the premises shall have been entered for the
appointment of a receiver, custodian, liquidator, assignee, trustee,
sequestrator (or similar official) of the Warrant Agent or of its property or
affairs, or any public officer shall take charge or control of the Warrant
Agent or of its property or affairs for the purpose of rehabilitation,
conservation, winding up of or liquidation, a successor Warrant Agent,
qualified as aforesaid, shall be appointed by the Company by an instrument in
writing, filed with the successor Warrant Agent (or, in the absence of such
appointment within 60 days after the notice of resignation or removal, either
party hereto may petition the appointment of a successor by a court of
competent jurisdiction). Upon the appointment as aforesaid of a successor
Warrant Agent and acceptance by the successor Warrant Agent of such
appointment, the Warrant Agent shall cease to be Warrant Agent hereunder;
provided, however, that in the event of the resignation of the Warrant Agent
under this subsection (c), such resignation shall be effective on the earlier
of (i) the date specified in the Warrant Agent's notice of resignation and
(ii) the appointment and acceptance of a successor Warrant Agent hereunder.
ANNEX IV
I-A-13
<PAGE>
(d) Successor To Expressly Assume Duties. Any successor Warrant Agent
appointed hereunder shall execute, acknowledge and deliver to its predecessor
and to the Company an instrument accepting such appointment hereunder, and
thereupon such successor Warrant Agent, without any further act, deed or
conveyance, shall become vested with all the rights and obligations of such
predecessor with like effect as if originally named as Warrant Agent
hereunder, and such predecessor, upon payment of its charges and disbursements
then unpaid, shall thereupon become obligated to transfer, deliver and pay
over, and such successor Warrant Agent shall be entitled to receive, all
monies, securities and other property on deposit with or held by such
predecessor, as Warrant Agent hereunder.
(e) Successor by Merger. Any corporation into which the Warrant Agent
hereunder may be merged or consolidated, or any corporation resulting from any
merger or consolidation to which the Warrant Agent shall be a party, or any
corporation to which the Warrant Agent shall sell or otherwise transfer all or
substantially all of its corporate trust business; provided that it shall be
qualified as aforesaid, shall be the successor Warrant Agent under this
Agreement without the execution or filing of any paper or any further act on
the part of any of the parties hereto.
ARTICLE VII
Miscellaneous
Section 7.1 Company Resales. The Company hereby agrees with each Holder,
that the Company shall not resell any Warrants or Warrant Shares it acquires,
by purchase or otherwise, except pursuant to an effective registration
statement.
Section 7.2 SEC Reports and Other Information. Notwithstanding that the
Company may not be subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company shall, for all periods ending after the
date of this Warrant Agreement, file with the SEC and thereupon provide the
Warrant Agent and Holders with such annual reports and such information,
documents and other reports are as specified in Sections 13 and 15(d) of the
Exchange Act and applicable to a U.S. corporation subject to such Sections,
such information, documents and other reports to be so filed and provided at
the times specified for the filing of such information, documents and reports
under such Sections.
Section 7.3 Persons Benefitting. Nothing in this Agreement is intended or
shall be construed to confer upon any Person other than the Company, the
Warrant Agent and the Holders any right, remedy or claim under or by reason of
this agreement or any part hereof.
Section 7.4 Rights of Holders. Except as expressly contemplated herein,
holders of unexercised Warrants are not entitled (i) to receive dividends or
other distributions, (ii) to receive notice of or vote at any meeting of the
stockholders, (iii) to consent to any action of the stockholders, (iv) to
exercise any preemptive right or to receive notice of any other proceedings of
the Company or (v) to exercise any other rights whatsoever as stockholders of
the Company.
Section 7.5 Amendment. This Agreement may be amended by the parties hereto
without the consent of any Holder for the purpose of curing any ambiguity, or
of curing, correcting or supplementing any defective provision contained
herein or making any other provisions with respect to matters or questions
arising under this Agreement as the Company and the Warrant Agent may deem
necessary or desirable; provided, however, that the Company determines, and
the Warrant Agent may rely on such determination, that such action shall not
affect adversely the rights of the Holders. Any amendment or supplement to
this Agreement that has a material adverse effect on the interests of the
Holders shall require the written consent of the Holders of a majority of the
then outstanding Warrants. The consent of each Holder affected shall be
required for any amendment pursuant to which the Exercise Price would be
increased or the number of Warrant Shares purchasable upon exercise of
Warrants would be decreased (other than pursuant to adjustments provided in
Article IV). In determining whether the Holders of the required number of
Warrants have concurred in any direction, waiver or consent, Warrants
ANNEX IV
I-A-14
<PAGE>
owned by the Company or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company
shall be disregarded and deemed not to be outstanding, except that, for the
purpose of determining whether the Warrant Agent shall be protected in relying
on any such direction, waiver or consent, only Warrants which the Warrant
Agent knows are so owned shall be so disregarded. Also, subject to the
foregoing, only Warrants outstanding at the time shall be considered in any
such determination.
Section 7.6 Notices. Any notice or communication shall be in writing and
delivered in Person or mailed by first-class mail addressed as follows:
if to the Company:
Merisel, Inc. 200 Continental Boulevard El Segundo, California 90245
Attention: Karen A. Tallman
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue Los
Angeles, California 90071 Attention: Joseph J. Giunta
if to the Warrant Agent:
U.S. Stock Transfer Corp. 1745 Gardena Avenue Suite 200 Glendale,
California 91204
Attention: Richard Brown
The Company or the Warrant Agent by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Holder shall be mailed to the Holder
at the Holder's address as it appears on the register in which the Company
shall provide for the registration of Warrants and Warrant Shares and of
transfers and exchanges of Warrants and Warrant Shares and shall be
sufficiently given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.
Section 7.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND DELAWARE STATE COURTS
LOCATED IN THE CITY OF WILMINGTON IN CONNECTION WITH ANY SUIT, ACTION OR
PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS CONTEMPLATED
HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER
APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT
HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
ANNEX IV
I-A-15
<PAGE>
Section 7.8 Successors. All agreements of the Company in this Agreement and
the Warrant Certificates shall bind its successors. All agreements of the
Warrant Agent in this Agreement shall bind its successors.
Section 7.9 Multiple Originals. The parties may sign any number of copies of
this Agreement. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Agreement.
Section 7.10 Table of Contents. The table of contents and headings of the
Articles and Sections of this Agreement have been inserted for convenience of
reference only, are not intended to be considered a part hereof and shall not
modify or restrict any of the terms or provisions hereof.
Section 7.11 Severability. The provisions of this Agreement are severable,
and if any clause or provision shall be held invalid, illegal or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Agreement in any jurisdiction.
Section 7.12 Further Assurances. From time to time on and after the date
hereof, the Company shall deliver or cause to be delivered to the Warrant
Agent such further documents and instruments and shall do and cause to be done
such further acts as the Warrant Agent shall reasonably request (it being
understood that the Warrant Agent shall have no obligation to make such
request) to carry out more effectively the provisions and purposes of this
Agreement, to evidence compliance herewith or to assure itself that it is
protected hereunder.
IN WITNESS WHEREOF, the parties have caused this Warrant Agreement to be
duly executed as of the date first written above.
Merisel, Inc.
By: _________________________________
Name:
Title:
U.S. Stock Transfer Corp., as
Warrant Agent,
By: _________________________________
Name:
Title:
ANNEX IV
I-A-16
<PAGE>
EXHIBIT A-1
FORM OF WARRANT CERTIFICATE
No. [ ] Certificate for Warrants
CUSIP No.
WARRANTS TO PURCHASE COMMON STOCK OF
MERISEL, INC.
THIS CERTIFIES THAT [ ], or its registered assigns, is the
registered holder of the number of Warrants set forth above (the "Warrants").
Each Warrant entitles the holder thereof (the "Holder"), at its option and
subject to the provisions contained herein and in the Warrant Agreement
referred to below, to purchase from Merisel, Inc., a Delaware corporation
("the Company"), shares of Common Stock, $0.05 par value, of the Company (the
"Common Stock") at the per share exercise price of $[ ] (the "Exercise
Price"). The number of shares of Common Stock into which each Warrant will be
exercisable (subject to adjustment as provided in the Warrant Agreement) shall
be [ ]. This Warrant Certificate shall terminate and become void as of the
close of business on [ ], 2004 (the "Expiration Date") or upon the
exercise hereof as to all the shares of Common Stock subject hereto. The
number of shares purchasable upon exercise of the Warrants and the Exercise
Price per share shall be subject to adjustment from time to time as set forth
in the Warrant Agreement.
This Warrant Certificate is issued under and in accordance with a Warrant
Agreement dated as of [ ], 1997 (the "Warrant Agreement"), between the
Company and U.S. Stock Transfer Corp., a California corporation (the "Warrant
Agent," which term includes any successor Warrant Agent under the Warrant
Agreement), and is subject to the terms and provisions contained in the
Warrant Agreement, to all of which terms and provisions the Holder of this
Warrant Certificate consents by acceptance hereof. The Warrant Agreement is
hereby incorporated herein by reference and made a part hereof. Reference is
hereby made to the Warrant Agreement for a full statement of the respective
rights, limitations of rights, duties and obligations of the Company, the
Warrant Agent and the Holders of the Warrants. Capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Warrant
Agreement.
As provided in the Warrant Agreement and subject to the terms and conditions
therein set forth, the Warrants shall be exercisable at any time or from time
to time on any Business Day on or after [ ], 1997; provided, however,
that no Warrant shall be exercisable after [ ], 2004. Subject to the
terms of the Warrant Agreement, the Warrants may be exercised in whole or in
part by presentation of this Warrant Certificate.
If, prior to January 1, 1998, the Company consolidates or merges with or
into, or transfers or leases all or substantially all its assets to, any
person (each an "Extraordinary Transaction") or agrees to do any of the
foregoing, upon consummation of such Extraordinary Transaction the Warrants
shall remain outstanding and continue, in the case of a merger in which the
Company is the surviving company, to be convertible into Common Stock or, in
any other type of Extraordinary Transaction, to be convertible into a number
of shares of common stock of the acquiring or surviving company representing
the same percentage of such common stock as the Warrants would have received
in the Company immediately prior to the consummation of the Extraordinary
Transaction, provided, however, that the requirements of this paragraph will
not apply in the event that the holders of 85% of the outstanding Warrants
vote to approve the Extraordinary Transaction prior to the consummation of
such transaction.
Upon the consummation of an Extraordinary Transaction which is not subject
to the restrictions of the immediately preceding paragraph above, the Warrants
shall automatically become exercisable for the kind and amount of securities,
cash or other assets that the holder of a Warrant would have owned immediately
after the Extraordinary Transaction if the holder had exercised the Warrant
immediately before the effective date of the Extraordinary Transaction.
Concurrently with the consummation of such transaction, the corporation formed
by or surviving any such consolidation or merger if other than the Company, or
the person to which such sale or
ANNEX IV
I-A-17
<PAGE>
conveyance shall have been made, shall enter into a supplemental Warrant
Agreement so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section. The successor Company shall mail to Warrant holders a notice
describing the supplemental Warrant Agreement.
The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with the transfer or
exchange of the Warrant Certificates pursuant to Section 5.2 of the Warrant
Agreement but not for any exchange or original issuance (not involving a
transfer) with respect to temporary Warrant Certificates, the exercise of the
Warrants or the Warrant Shares.
Upon any partial exercise of the Warrants, there shall be countersigned and
issued to the Holder hereof a new Warrant Certificate in respect of the shares
of Common Stock as to which the Warrants shall not have been exercised. This
Warrant Certificate may be exchanged at the office of the Warrant Agent by
presenting this Warrant Certificate properly endorsed with a request to
exchange this Warrant Certificate for other Warrant Certificates evidencing an
equal number of Warrants. No fractional Warrant Shares will be issued upon the
exercise of the Warrants, but the Company shall pay an amount in cash equal to
the market price for one Warrant Share on the trading day immediately
preceding the date the Warrant is exercised, multiplied by the fraction of a
Warrant Share that would be issuable on the exercise of any Warrant.
All shares of Common Stock issuable by the Company upon the exercise of the
Warrants shall, upon such issue, be duly and validly issued and fully paid and
nonassessable.
The Holder in whose name the Warrant Certificate is registered may be deemed
and treated by the Company and the Warrant Agent as the absolute owner of the
Warrant Certificate for all purposes whatsoever and neither the Company nor
the Warrant Agent shall be affected by notice to the contrary.
The Warrants do not entitle any holder hereof to any of the rights of a
stockholder of the Company.
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.
Merisel, Inc.
By: _________________________________
Title:
Attest:
_____________________________________
Assistant Secretary
DATED:
Countersigned:
U.S. Stock Transfer Corp., as
Warrant Agent,
By: _________________________________
Authorized Signatory
ANNEX IV
I-A-18
<PAGE>
EXHIBIT B
The Form of Series B Warrant Agreement is substantially similar in all
material respects to the Form of Series A Warrant Agreement included herein as
Exhibit A, except that the Series B Warrant Agreement contains an Exercise
Price of $8.68 per share.
ANNEX IV
I-B-1
<PAGE>
EXHIBIT C
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
MERISEL, INC.
DWIGHT A. STEFFENSEN and KAREN A. TALLMAN certify that:
1. They are the Chairman of the Board and Secretary, respectively, of
Merisel, Inc. a Delaware corporation (the "Corporation").
2. The original Certificate of Incorporation of Merisel, Inc. was filed with
the Secretary of State of the State of Delaware on July 29, 1987 under its
former name, Softsel Computer Products, Inc.
3. The following Amended and Restated Certificate of Incorporation is
authorized by [insert decree or order of court or judge having jurisdiction of
a proceeding under applicable statute of the United States for the
reorganization of Merisel, Inc.] and, therefore, the following Amended and
Restated Certificate of Incorporation is adopted in accordance with Section
303 of the Delaware General Corporation Law.
4. The Certificate of Incorporation of the Corporation is amended in its
entirety to read as follows:
I
The name of the Corporation is Merisel, Inc.
II
The registered office of the Corporation in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801,
County of New Castle. The name of the Corporation's registered agent at such
address is the Corporation Trust Company.
III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
IV
The total number of shares of all classes of stock that the Corporation
shall have authority to issue is fifty-one million (51,000,000) shares,
consisting of fifty million (50,000,000) shares of Common Stock par value $.05
per share, and one million (1,000,000) shares of Preferred Stock, par value
$.05 per share.
At the time this amendment becomes effective, and without any further action
on the part of the Corporation or its stockholders, each five shares of Common
Stock, par value $.01 per share, then issued and outstanding shall be changed
and reclassified into one fully paid and non-assessable share of Common Stock,
par value $.05. The Capital account of the Corporation shall not be increased
or decreased by such change and reclassification. To reflect the said change
and reclassification, each certificate representing shares of Common Stock,
par value $.01 per share, theretofore issued and outstanding shall represent
one-fifth the number of shares of Common Stock with a par value of $.05 per
share, issued and outstanding after such change and reclassification; and the
holder of record of each such certificate shall be entitled to receive a new
certificate representing a number of shares of Common Stock, par value $.05,
of the kind authorized by this amendment, equal to one-fifth the number of
shares represented by said certificate for theretofore issued and outstanding
shares, so that upon this amendment becoming effective each holder of record
of five shares of the Common Stock with a par value of $.01 will have or be
entitled a certificate representing one share of Common Stock with par value
$.05 of the kind authorized by this amendment.
ANNEX IV
I-C-1
<PAGE>
Except as provided by Article V, below, the Board of Directors (the "Board")
is authorized to determine the number of series into which shares of Preferred
Stock may be divided, and the Board is authorized to determine the rights,
preferences, privileges and restrictions granted to or imposed upon the
Preferred Stock or any series thereof or any holders thereof, to determine and
alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock or the holders
thereof, to fix the number of shares constituting any series prior to the
issue of shares of that series, and to increase or decrease, within the limits
stated in any resolution or resolutions of the Board originally fixing the
number of shares constituting any series (but not below the number of shares
of such series then outstanding), the number of shares of any such series
subsequent to the issue of shares of that series.
ARTICLE V
Notwithstanding anything else herein, the Corporation shall not issue
nonvoting equity securities to the extent prohibited by Section 1123 of the
United States Bankruptcy Code (the "Bankruptcy Code") as in effect on the
effective date of the Plan of Reorganization; provided, however, that this
Article V (a) will have no further force and effect beyond that required under
Section 1123 of the Bankruptcy Code, (b) will have such force and effect, if
any, only for so long as such section of the Bankruptcy Code is in effect and
applicable to the Corporation, and (c) in all events may be amended or
eliminated in accordance with applicable law as from time to time in effect.
VI
The Board shall have the power to amend the Bylaws of the corporation.
VII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as the same exists or hereafter may be amended, or (iv) for any
transaction from which the director derived an improper benefit. No amendment
to or repeal of this Article VII shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
VIII
Section 1. Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, may be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General
Corporation Law, against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such person in
connection therewith. Such indemnification may continue as to a person who has
ceased to be a director, officer, employee or agent and
ANNEX IV
I-C-2
<PAGE>
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board. The indemnification set forth in this Article VIII
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that if the Delaware General Corporation Law requires the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, such payment shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it shall ultimately be determined
that such director or officer is not entitled to be indemnified under this
Article VIII or otherwise. Such expenses incurred by other employees and
agents of the Corporation may be paid upon such terms and condition, if any,
as the Board deems appropriate.
To the extent that a director, officer, employee or agent of the Corporation
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to above, or in defense or any claim, issue or matter
therein, he or she shall be indemnified by the Corporation against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
Section 2. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
Section 3. Other Indemnification. The Corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee, fiduciary or agent of another corporation, partnership,
joint venture, trust, enterprise or non-profit entity shall be reduced by any
amount such person may collect as indemnification from such other corporation,
partnership, joint venture, trust, enterprise or non-profit enterprise.
Section 4. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article VIII shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
IX
Section 1. Classification of Board of Directors. The Board shall be divided
into three classes, as nearly equal in number as the then total number of
directors constituting the entire Board permits with the term of office of one
class expiring each year. At the annual meeting of stockholders in 1990
directors of the first class shall be elected to hold office for a term
expiring at the next succeeding annual meeting, directors of the second class
shall be elected to hold office for a term expiring at the second succeeding
annual meeting and directors of the third class shall be elected to hold
office for a term expiring at the third succeeding annual meeting. Any
vacancies in the Board for any reason, and any directorships resulting from
any increase in the number of directors, may be filled only by the Board,
acting by a majority of the directors then in office, although less than a
quorum, and any directors so chosen shall hold office until the next election
of the class for which such directors shall have been chosen and until their
successors shall be elected and qualified. Notwithstanding the foregoing, and
except as otherwise required by law, whenever the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a class,
to elect one or more directors of the Corporation, the terms of the director
or directors elected by such holders shall expire at the next succeeding
annual meeting of stockholders. Subject to the foregoing, at each annual
meeting of stockholders the successors to the class of directors whose term
shall then expire shall be elected to hold office for a term expiring at the
third succeeding annual meeting.
ANNEX IV
I-C-3
<PAGE>
Section 2. Removal for Cause. Notwithstanding any other provisions of this
Certificate of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law,
this Restated Certificate of Incorporation or the Bylaws of the Corporation),
any director or the entire Board of the Corporation may be removed at any
time, but only for cause. Notwithstanding the foregoing, and except as
otherwise required by law, whenever the holders of any one or more series of
Preferred Stock shall have the right, voting separately as a class, to elect
one or more directors of the Corporation, the provisions of Section 2 of this
Article shall not apply with respect to the director or directors elected by
such holders of Preferred Stock.
Section 3. Amendment or Repeal. The provisions set forth in this Article IX
may not be repealed or amended in any respect, unless such action is approved
by the affirmative note of the holders of not less than 67 percent of the
outstanding shares of Common Stock of this corporation, subject to the
provisions of any series of Preferred Stock which may at the time be
outstanding.
X
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
such holders and may not be effected by a consent in writing by any such
holders. This Article X may not be repealed or amended in any respect, unless
such action is approved by the affirmative vote of the holders of not less
than 67 percent of the outstanding shares of Common Stock of this corporation,
subject to the provisions of any series of Preferred Stock which may at the
time be outstanding.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth herein are true and correct of our own
knowledge.
Dated: [ ], 1997
-------------------------------------
Dwight A. Steffensen,
Chairman of the Board
ATTEST
- -------------------------------------
Karen A. Tallman
Secretary
ANNEX IV
I-C-4
<PAGE>
ANNEX V
PROXY MERISEL, INC.
IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSALS REFERRED
TO IN (1), (2), AND (3)
The undersigned hereby appoints Dwight A. Steffensen and James E. Illson and
each of them the undersigned's true and lawful attorneys and proxies (with full
power of substitution in each) to vote all Common Stock of Merisel, Inc. (the
"Company"), standing in the undersigned's name, at the Special Meeting of
Stockholders (the "Stockholders' Meeting") of the Company to be held at 200
Continental Boulevard, El Segundo, California, on August 29, 1997 at
10:00 a.m., Los Angeles time, upon those matters as described in the Proxy
Statement/Prospectus for the meeting and such other matters as may properly
come before such meeting or any adjournments thereof. The Stockholder votes
with respect to the New Common Stock Issuance will not be effective unless and
until the Charter Amendment is approved at the Stockholders' Meeting and filed
with the Secretary of State of Delaware and the Exchange Restructuring has been
consummated, in which event the Charter Amendment will become effective either
immediately prior to or contemporaneously with the consummation of the Exchange
Restructuring. The Board of Directors has reserved the right, pursuant to
Delaware law, to abandon the Charter Amendment even if the Company's
Stockholders authorize the Charter Amendment:
A vote FOR the following proposals described in the Proxy
Statement/Prospectus for the Stockholders' Meeting is recommended:
1. Approve the Charter Amendment
[_] FOR[_] AGAINST[_] ABSTAIN
2. Approve the New Common Stock Issuance
[_] FOR[_] AGAINST[_] ABSTAIN
3. Approve the Stock Award and Incentive Plan
[_] FOR[_] AGAINST[_] ABSTAIN
If any other business is transacted at the Stockholders' Meeting, the Proxy
shall be voted in accordance with the best judgment of the above-named
attorneys and proxies.
Continued on Reverse Side
MERISEL, INC.
PROXY FOR COMMON STOCK
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL MEETING OF STOCKHOLDERS
AUGUST 29, 1997
Dated: ________________, 1997
-----------------------------
(Signature of Stockholder)
-----------------------------
(Signature of Stockholder)
Please sign your name
exactly as it appears
hereon. If acting as
attorney, executor, trustee,
or in other representative
capacity, please sign name
and title. If stock is held
jointly, each joint owner
should sign.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED
ENVELOPE
<PAGE>
PART 1. FINANCIAL INFORMATION
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Merisel, Inc. and
subsidiaries at December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Los Angeles, California
April 14, 1997
F-1
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 1,378 $ 44,678
Accounts receivable (net of allowances of $24,786 and
$23,684 at December 31, 1995 and 1996, respectively).. 413,057 168,295
Inventories............................................ 561,230 392,557
Prepaid expenses and other current assets.............. 17,919 16,925
Income taxes receivable................................ 35,116 2,183
Deferred income tax benefit............................ 6,657 482
---------- --------
Total current assets................................. 1,035,357 625,120
PROPERTY AND EQUIPMENT, NET.............................. 90,381 61,430
COST IN EXCESS OF NET ASSETS ACQUIRED, NET............... 93,287 41,724
OTHER ASSETS............................................. 11,309 2,765
---------- --------
TOTAL ASSETS......................................... $1,230,334 $731,039
========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................................... $ 621,990 $383,548
Accrued liabilities.................................... 71,483 37,544
Short-term debt........................................ 21,620
Long-term debt--current................................ 35,000 9,084
Subordinated debt--current............................. 4,400 4,400
---------- --------
Total current liabilities............................ 754,493 434,576
LONG-TERM DEBT........................................... 299,271 268,079
SUBORDINATED DEBT........................................ 17,600 13,200
CAPITALIZED LEASE OBLIGATIONS............................ 4,504 187
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000
shares; none issued or outstanding....................
Common stock, $.01 par value; authorized 50,000,000
shares; outstanding 29,863,500 and $30,078,500 at
December 31, 1995 and 1996, respectively.............. 299 301
Additional paid-in capital............................. 141,938 142,300
Retained earnings (accumulated deficit)................ 19,211 (121,164)
Cumulative translation adjustment...................... (6,982) (6,440)
---------- --------
Total stockholders' equity........................... 154,466 14,997
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $1,230,334 $731,039
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES................................... $5,018,687 $5,956,967 $5,522,824
COST OF SALES............................... 4,676,164 5,633,278 5,233,570
---------- ---------- ----------
GROSS PROFIT................................ 342,523 323,689 289,254
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 281,796 317,195 295,021
IMPAIRMENT LOSSES........................... 51,383 42,033
RESTRUCTURING CHARGE........................ 9,333
---------- ---------- ----------
OPERATING INCOME (LOSS)..................... 60,727 (54,222) (47,800)
INTEREST EXPENSE............................ 29,024 37,583 37,431
LOSS ON SALE OF EUROPEAN, MEXICAN AND LATIN
AMERICAN OPERATIONS........................ 33,455
OTHER EXPENSE............................... 11,752 13,885 20,150
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........... 19,951 (105,690) (138,836)
PROVISION (BENEFIT) FOR INCOME TAXES........ 8,341 (21,779) 1,539
---------- ---------- ----------
NET INCOME (LOSS)........................... $ 11,610 $ (83,911) $ (140,375)
========== ========== ==========
NET INCOME (LOSS) PER SHARE................. $ 0.38 $ (2.82) $ (4.68)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES........... 30,389 29,806 30,001
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE
----------------- PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
---------- ------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993................... 29,604,300 $296 $140,775 $ 91,512 $(8,726) $ 223,857
Exercise of stock
options and other.... 112,300 1 474 475
Cumulative translation
adjustment........... 222 222
Net income............ 11,610 11,610
---------- ---- -------- --------- ------- ---------
BALANCE AT DECEMBER 31,
1994................... 29,716,600 297 141,249 103,122 (8,504) 236,164
Exercise of stock
options and other.... 146,900 2 689 691
Cumulative translation
adjustment........... 1,522 1,522
Net loss.............. (83,911) (83,911)
---------- ---- -------- --------- ------- ---------
BALANCE AT DECEMBER 31,
1995................... 29,863,500 299 141,938 19,211 (6,982) 154,466
Exercise of stock
options and other.... 215,000 2 362 364
Cumulative translation
adjustment........... 542 542
Net loss.............. -- -- -- (140,375) (140,375)
---------- ---- -------- --------- ------- ---------
BALANCE AT DECEMBER 31,
1996................... 30,078,500 $301 $142,300 $(121,164) $(6,440) $ 14,997
========== ==== ======== ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 11,610 $ (83,911) $ (140,375)
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization........... 16,101 20,509 18,789
Provision for doubtful accounts......... 18,851 16,335 17,421
Impairment losses....................... 51,383 42,033
Loss on Sale of European, Mexican and
Latin American businesses.............. 33,455
Deferred income taxes................... (4,973) 5,471 6,175
Changes in assets and liabilities, net
of the effects from acquisitions:
Accounts receivable.................... (152,912) (103,553) 132,480
Inventories............................ (75,314) (43,524) 91,059
Prepaid expenses and other current
assets................................ (6,604) (8,186) (14,612)
Income taxes receivable................ (35,116) 33,470
Accounts payable....................... 94,385 98,756 (179,304)
Accrued liabilities.................... 19,690 23,872 (11,342)
Income taxes payable................... (3,275) (4,422)
----------- --------- -----------
Net cash (used for) provided by
operating activities................. (82,441) (62,386) 29,249
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....... (40,163) (49,082) (9,652)
Proceeds from sale of property and
equipment............................... 5,975
Payment of earn out obligation from
ComputerLand acquisition................ (13,409)
Cash proceeds from sale of Australian
business................................ 8,515
Cash proceeds from sale of European,
Mexican and Latin American businesses... 110,379
Acquisitions, net of cash acquired....... (86,343)
Other investing activities............... (767)
----------- --------- -----------
Net cash (used for) provided by
investing activities................. (126,506) (49,082) 101,041
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of
credit.................................. 1,766,300 937,275 1,448,358
Repayments under revolving line of
credit.................................. (1,742,114) (944,960) (1,466,150)
Net borrowings (repayments) under foreign
bank facilities......................... (13,058) (9,980) (17,742)
Borrowings (repayments) under senior
notes................................... 125,000 (43,195)
Repayment under subordinated debt
agreement............................... (4,400)
Proceeds from sale of accounts
receivable.............................. 75,000 125,320
Proceeds from issuance of common stock... 475 691 364
----------- --------- -----------
Net cash provided by financing
activities........................... 211,603 108,346 (82,765)
----------- --------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH... 863 967 (4,225)
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 3,519 (2,155) 43,300
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................... 14 3,533 1,378
----------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.. $ 3,533 $ 1,378 $ 44,678
=========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid (received) during the year for:
Interest (net of interest capitalized of
$1,053 and $3,281 for 1994 and 1995,
respectively. No interest was
capitalized in 1996)................... $ 21,237 $ 27,118 $ 30,456
Income taxes............................ 11,185 10,747 (36,068)
Noncash activities:
Capital lease obligations entered into.. 5,708 187
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 main operating subsidiary, Merisel Americas, Inc. ("Merisel
Americas") and its subsidiaries (the "Operating Company"), the Company markets
products and services throughout North America, and has achieved operational
efficiencies that have made it 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'
product sales and installations.
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") (See Note 12--"Subsequent Events"). EML was sold
as of September 27, 1996 to CHS Electronics, Inc. ("CHS") (See Note 5--
"Dispositions"). Management believes that a substantial portion of operating
losses incurred in 1996 relate to the implementation of its 1996 Business Plan
which focused upon the conservation of cash, the sale of assets, and the
improvement of business processes, particularly in the area of accounts
payable.
The Company has developed and is implementing a business strategy for 1997
(the "1997 Business Strategy") that focuses on profitable North American
revenue growth instead of managing for cash. Under the 1997 Business Strategy,
Merisel intends to concentrate on strengthening and building its sales
infrastructure, improving gross margins, and controlling operating expenses.
Other priorities include continuing efforts to achieve operational excellence,
addressing financial controls and policies by emphasizing margin improvements
and tight expense control, and implementing a strategy focused on the United
States and Canada.
In order to meet its debt obligations in mid-1997 (See Note 9--"Debt").
Merisel is actively pursuing a restructuring plan with the debtholders under
its various financing agreements. Effective April 14, 1997, the Company
entered into an agreement (the "Agreement") with holders of more than 75% of
the outstanding principal amount of its 12.5% Senior Notes ("12.5% Notes")
Pursuant to the terms of the Agreement, upon the fulfillment of certain
conditions, holders of the 12.5% Notes would exchange (the "Exchange") their
12.5% Notes for common stock, par value $.01 per share, of the Company (the
"Common Stock"), which would equal 80% of the outstanding shares of Common
Stock immediately after the Exchange. Contemporaneously with the Exchange, the
holders of Common Stock would receive warrants (the "Warrants") to purchase
Common Stock constituting 17.5% of the Common Stock outstanding immediately
after giving effect to the Exchange.
The Exchange is subject to certain conditions including (i) stockholder
approval of an amendment to the Certificate of Incorporation of the Company to
authorize the additional shares of Common Stock, and (ii) consents to
amendments of the $85,208,000 Revolving Credit Agreement ("Revolving Credit
Agreement") and the agreement governing the $56,805,000 principal amount of
the 11.5% Senior Note Purchase Agreement ("11.5% Notes") by 100% of the
lenders under such agreements to extend the maturity of such indebtedness to
January 31, 1999 (the "Extension"), or a refinancing of such indebtedness
prior to October 31, 1997. The Company intends to effectuate the Exchange by
commencing a registered exchange offer which would be conditioned on 100% of
the holders of the 12.5% Notes tendering such notes for Common Stock. If less
than 100% of the holders of the 12.5% Notes tender in the exchange offer,
Merisel, Inc., the parent company, intends to file a "prepackaged" plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Merisel Americas
F-6
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and Merisel Canada (the subsidiaries through which the Company's distribution
business is conducted) would not be a party to any prepackaged plan which may
be required. Any such prepackaged plan, if filed, would affect Merisel, Inc.
only, and as such would not affect the continuing and timely payment in full
of such subsidiaries' obligations to suppliers, employees and other creditors.
In addition, such a prepackaged plan would be subject only to the approval of
the holders of the 12.5% Notes, as no other creditors of the Company or its
operating subsidiaries would be impaired by the plan as contemplated. The
holders of the required percentage of the outstanding principal amount of
12.5% Notes have agreed to vote in favor of the prepackaged plan subject to
fulfillment of the other conditions to the Exchange.
In connection with the Extension, the Company has entered into an agreement
in principle with the holders of in excess of 60% of the outstanding principal
amount of the Revolving Credit Agreement and 66 2/3% of the 11.5% Notes,
pursuant to which such holders have agreed, subject to execution of definitive
documentation, to extend the respective maturities to January 31, 1999. In
consideration of such Extension, the Company has agreed to pay certain fees
related to the Extension and, commencing in 1998, additional fees payable
quarterly together with an increase in the interest rate of 0.5% per quarter
for each quarter that the debt remains outstanding. The Company would have the
right to prepay such debt at anytime without penalty. There can be no
assurance that the remaining creditors under the Revolving Credit Agreement
and the 11.5% Notes (all of whom must approve the Extension for it to be
effective) will approve the Extension. In the event that the Extension does
not become effective, the Company believes that, assuming it achieves its 1997
Business Strategy, it will have reasonable prospects for a refinancing of such
indebtedness in the latter half of 1997, particularly if the Exchange is
consummated concurrently with such refinancing.
Effective immediately, and throughout the period the Company is implementing
the Exchange and Extension, in excess of 75% of the holders of the 12.5% Notes
have agreed to waive any default arising from the nonpayment of interest due
in 1997 on the 12.5% Notes, and the required percentage of holders of the
Revolving Credit Agreement, the 11.5% Notes, and the Subordinated Notes of
Merisel Americas have agreed to waive any cross-default resulting from such
non-payment. In consideration for such waivers, Merisel Americas has agreed to
pay certain fees to the holders of the Revolving Credit Agreement and the
11.5% Notes, and, subject to the Extension becoming effective, to increase the
interest rate by 0.5% per quarter during 1998 on the Subordinated Notes while
such debt remains outstanding. Accordingly, the Company believes that it will
be able to satisfy all of its material debt obligations under such instruments
in 1997 pending the consummation of the Exchange and the Extension. Interest
will continue to be due and payable on the outstanding 12.5% Notes that have
not consented to the waiver at the time such payments are due; however, such
holders will not be able to accelerate the payment of the principal of the
12.5% Notes under the terms of the Indenture governing the 12.5% Notes.
At December 31, 1996, the Company had cash and cash equivalents of
approximately $44,700,000. In the opinion of management, as a result of the
Agreement reached with the holders of the 12.5% Notes and the waivers received
from the holders of the Revolving Credit Agreement, the 11.5% Notes and the
Subordinated Notes, cash on hand, together with anticipated cash flow in 1997
will be sufficient to meet the Company's liquidity requirements for the next
12 months.
Risks and Uncertainties. The Company believes that the diversity and breadth
of the Company's product and service offerings, customers, and the general
stability of the economies in the markets in which it operates significantly
mitigate the risk that a severe impact will occur in the near term as a result
of changes in its customer base, competition, or composition of its markets.
Although Merisel regularly stocks products and accessories supplied by more
that 500 manufacturers, 60% of the Company's net sales in 1996 (as compared to
63% in 1995, and 56% in 1994) were derived from products supplied by Merisel's
ten largest manufacturers.
F-7
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include collectibility of accounts receivable,
inventory, deferred income taxes, accounts payable, sales returns and
recoverability of long-term assets.
New Accounting Pronouncement. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." (SFAS 123) encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. Although adoption of SFAS 123 is optional,
pro forma disclosures illustrating the effect on net income and earnings per
share as if the provisions of SFAS 123 had been adopted, are required and are
presented in Note 11 "Employee Stock Options and Benefit Plans".
Revenue Recognition, Returns and Sales Incentives. The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds available
for cooperative promotion of product sales. Customers earn credit under such
programs based upon the volume of purchases. The cost of these programs is
partially subsidized by marketing allowances provided by the Company's
manufacturers. The allowances for sales returns and costs of customer
incentive programs are accrued concurrently with the recognition of revenue.
The Company does not have any arrangements with customers whereby it
recognizes revenue from the shipment of any product that is subject to sell-
through arrangements with resellers.
In connection with FAB, the Company collected initial franchise fees, "cost
plus" markups and royalties. Initial franchise fees, were recognized as income
when substantially all services and conditions relating to the sale of the
franchise had been performed or satisfied. "Cost plus" markups, which range
from 1.95% to 3.10%, were charged to franchisees for products purchased from
ComputerLand. These markups, as well as royalties, which range from 0.5% to
5.0% of franchise sales were recognized as such sales occur. Royalty revenues
were $5,812,000 and $10,500,000 in 1996 and 1995 respectively. Franchise
agreements range from one to ten years in length. As of March 28th, 1997 the
Company completed the sale of substantially all of the assets of Merisel FAB.
(See Note 12--"Subsequent Events")
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with initial maturities of three months or less to be
cash equivalents.
Inventories. Inventories are valued at the lower of cost or market; cost is
determined on the average cost method.
Property and Depreciation. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are amortized over the shorter of the life of the lease
or the improvement.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and warehouse
management systems. Such amounts include the costs of materials and other
direct construction costs, purchased computer hardware and software, outside
programming and consulting fees, direct employee salaries and interest.
F-8
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cost in Excess of Net Assets Acquired. Cost in excess of net assets acquired
resulted from the acquisition in January 1994 of FAB and the acquisition in
1990 of Microamerica, Inc. The cost in excess of net assets acquired from
Microamerica, Inc. is being amortized over a period of 40 years using the
straight line method. The cost in excess of net assets acquired from FAB was
being amortized over an aggregate period of 25 years (see Note 3--
"Acquisitions"). As of March 28, 1997, the Company completed the sale of
substantially all of the assets of Merisel FAB. In connection with such sale,
the cost in excess of net assets acquired related to Merisel FAB will be
written off (see Note 12--"Subsequent Events"). Accumulated amortization was
$12,186,000 and $14,429,000 at December 31, 1995 and 1996 respectively.
The Company reviews the recoverability of intangible assets to determine if
there has been any permanent impairment. This assessment is performed based on
the estimated undiscounted future cash flows from operating activities
compared with the carrying value of intangible assets. If the undiscounted
future cash flows are less than the carrying value, an impairment loss is
recognized, measured by the difference between the carrying value and fair
value of the assets (see Note 4--"Impairment Losses").
Income Taxes. Deferred income taxes represent the amounts which will be paid
or received in future periods based on the tax rates that are expected to be
in effect when the temporary differences are scheduled to reverse.
At December 31, 1995, the cumulative amount of undistributed earnings on
which the Company has not recognized United States income taxes was
approximately $7,000,000, representing primarily earnings in the Company's
Canadian subsidiary. No undistributed foreign earnings remained in the Company
as of December 31, 1996.
Concentration of Credit Risks. Financial instruments which subject the
Company to credit risk consist primarily of cash equivalents, trade accounts
receivable, and forward foreign currency exchange contracts. Concentration of
credit risk with respect to trade accounts receivable are generally
diversified due to the large number of entities comprising the Company's
customer base and their geographic dispersion. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential
credit losses, and in certain locations maintains credit insurance as the
Company deems appropriate. The Company diversifies its credit risk with
respect to forward foreign exchange contracts due to the number of
institutions with which it enters into contracts. The Company actively
evaluates the creditworthiness of the financial institutions with which it
conducts business.
Fair Values of Financial Instruments. The fair values of financial
instruments, other than long-term debt, closely approximate their carrying
value. The estimated fair value of long-term debt including current
maturities, based on reference to quoted market prices, was less than the
carrying value by approximately $32,300,000 and $60,776,000 as of December 31,
1995 and 1996, respectively.
Foreign Currency Translation. Assets and liabilities of foreign subsidiaries
are translated into United States dollars at the exchange rate in effect at
the close of the period. Revenues and expenses of these subsidiaries are
translated at the average exchange rate during the period. The aggregate
effect of translating the financial statements of foreign subsidiaries at the
above rates is included in a separate component of stockholders' equity
entitled Cumulative Translation Adjustment. In addition, the Company advances
funds in the normal course of business to certain of its foreign subsidiaries
which are not expected to be repaid in the foreseeable future. Translation
adjustments resulting from these advances are also included in Cumulative
Translation Adjustment.
Foreign Exchange Instruments. The Company's use of derivatives is limited to
the purchase of foreign exchange contracts in order to minimize foreign
exchange transaction gains and losses. The Company purchases forward dollar
contracts to hedge short-term advances to its foreign subsidiary and to hedge
commitments to
F-9
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquire inventory for sale and does not use the contracts for trading
purposes. The Company's foreign exchange rate contracts minimize the Company's
exposure to exchange rate movement risk, as any gains or losses on these
contracts are offset by gains and losses on the transactions being hedged. At
December 31, 1995, the Company had approximately $131,000,000 of foreign
exchange contracts outstanding, the carrying value of which does not differ
significantly from their fair value. There were no outstanding foreign
exchange contracts as of December 31, 1996. In 1994 and 1995 there was a net
foreign currency loss of $1,422,000, and $806,000 respectively. These losses
were primarily due to the devaluation of the Mexican Peso. In 1996 the Company
recorded a net foreign currency gain of $161,000 which was also primarily
related to the performance of the Mexican Peso against the United States
dollar. These amounts are recorded as other expense.
Net Income (Loss) Per Share. Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock and common stock equivalents (common stock options) outstanding during
the related period, unless such inclusion is antidilutive. The weighted
average number of shares includes shares issuable upon the assumed exercise of
stock options less the number of shares assumed purchased with the proceeds
available from such exercise.
Fiscal Periods. The Company's fiscal year is the 52- or 53-week period
ending on the Saturday nearest to December 31 and its fiscal quarters are the
13- or 14-week periods ending on the Saturday nearest to March 31, June 30,
September 30 and December 31. For clarity of presentation, the Company has
described year-ends presented as if the years ended on December 31 and
quarter-ends presented as if the quarters ended on March 31, June 30,
September 30 and December 31. The 1994, 1995 and 1996 fiscal years were 52
weeks in duration. All quarters presented for 1995 and 1996 were 13 weeks in
duration.
2. RESTRUCTURING CHARGE
During the first six months of 1995, the Company recorded charges of
$9,333,000 associated with resizing and restructuring several of the Company's
operations. The charge consisted of $4,578,000 of severance charges for the
involuntary termination of approximately 240 employees, $2,830,000 for
anticipated warehouse closures in North America and $1,925,000 for the
anticipated consolidation of certain warehouses in Europe. As of December 31,
1995, $4,543,000 of these charges remained in accrued liabilities.
As a result of the Company's sale of EML, the Company's plans regarding the
consolidation of certain warehouses in Europe were no longer necessary. (see
Note 5--"Dispositions") As a result, approximately $1,925,000 of the unused
restructuring charge provided in 1995 was offset against the loss on the sale
of EML. The remaining unused restructuring charge of approximately $2,200,000
was used to offset severance costs associated with corporate downsizing as a
result of the sale of EML. As of December 31, 1996, $481,000 of restructuring
charges remained in accrued liabilities.
3. ACQUISITIONS
On January 31, 1994, the Company, through its wholly-owned subsidiary,
Merisel FAB, acquired certain assets of the United States Franchise and
Distribution Division (the "F&D Division") of Vanstar Corporation (formerly
ComputerLand Corporation) (the "ComputerLand Acquisition"). The Company paid
$80,200,000 in cash at closing for the acquired assets and $2,100,000 of
direct acquisition costs. In addition, the Company paid Vanstar a negotiated
settlement of $13,400,000 in earn out obligations under the original purchase
agreement, net of rebates. The acquisition was accounted for as a purchase.
Based on an independent valuation prepared for the company, $96,300,000 of the
purchase price was allocated to intangible assets with an estimated aggregate
life of 25 years. The intangible assets were subsequently written down by
$30,000,000 in the fourth quarter of 1995, $40,000,000 in the third quarter of
1996, and $2,033,000 in the fourth quarter of 1996 (See Note 4--"Impairment
Losses").
F-10
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the ComputerLand Acquisition, Merisel FAB and Vanstar
entered into the Distribution and Services Agreement (the "Service Agreement")
which as extended and amended provided significant distribution and other
support services to Merisel FAB for a contractually agreed upon fee. Also
under the terms of the Services Agreement, Vanstar agreed to provide extended
credit to Merisel FAB (the "Vanstar Payable") which was to be reduced by
scheduled payment amounts. At December 31, 1995 and 1996, $23,500,000 and
$20,000,000, respectively, was outstanding on the Vanstar Payable and is
included in accounts payable. The Vanstar Payable was assumed by, and the
Service Agreement was assigned to, Synnex pursuant to the sale of
substantially all of the assets of Merisel FAB as of March 28, 1997. (See Note
12--"Subsequent Events.")
4. IMPAIRMENT LOSSES
In the quarter ended September 30, 1996, the Company determined that a
portion of the carrying value for certain of its identifiable intangible
assets would not be recovered from their use in future operations.
Accordingly, these assets were written down to their fair values as of
September 30, 1996. An impairment was recognized on the intangible assets of
the Franchise and Aggregation Business (FAB), due to declining sales growth,
margins and earnings, and the resulting negative trend in projected cash
flows. The intangible assets of FAB were acquired in January 1994 (see Note 3)
and had a net book value of $57,600,000 at September 30, 1996, prior to the
write down. Fair value of the intangible assets was measured by discounting
future expected cash flows, which resulted in a required write down of
$40,000,000. In December 1996, the Company recorded an additional $2,033,000
charge to adjust FAB assets to their fair value based on the provisions of a
definitive agreement to sell such assets in the first quarter of 1997. (See
Note 12--"Subsequent Events.") An impairment loss of $30,000,000 associated
with these assets was previously recorded in the fourth quarter of 1995.
The Company undertook the process of converting its North American
operations to new computer operating systems from 1993 through 1995. Such
undertaking was completed in the Canadian subsidiary, for a substantially
higher cost than anticipated. In addition, the Company has decided to delay
the installation of these systems in the United States beyond 1997. As a
result of the cost overruns, the Company's experience in Canada and the
decision to delay installation in the United States, it was determined that
the value of these assets had been impaired, which resulted in a write down at
the end of the fourth quarter of 1995 of $19,500,000 in capitalized costs. The
book value of these capitalized costs was $44,600,000 at December 31, 1995
prior to the write down, and $25,100,000 subsequent to the write down. The
write down was determined by identifying certain cost categories that would be
duplicated with future development efforts and which would not provide value
to the Company.
In March 1996, 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. These net assets, after write down,
totaled $9,900,000 and were classified in the December 31, 1995 consolidated
balance sheet as other current assets. Prior to the $1,900,000 charge, the
Australian subsidiary reported a loss of $6,100,000 for 1995.
5. DISPOSITIONS
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
F-11
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
securitization agreement against which $26,252,000 was outstanding at closing
and (iii) a receivable for $11,000,000, payable in three installments of
$3,000,000, $4,000,000, and $4,000,000, due at various date through 1997.
In addition, effective January 1, 1996 the Company completed the sale of its
Australian Subsidiary ("see Note 4"). Following is summarized pro forma
operating results assuming that the Company had sold EML and its Austrailian
subsidiary as of January 1, 1995.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net Sales........................................ $4,568,915 $4,462,653
Gross Profit..................................... 228,293 216,032
Net loss......................................... (67,737) (100,052)
========== ==========
Net loss per share............................... $ (2.27) $ (3.33)
========== ==========
Weighted Average Shares Outstanding.............. 29,806 30,001
========== ==========
</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 Australia's unaudited financial statements were also
used in preparing the pro forma balances above.
Effective March 28, 1997, Merisel completed the sale of substantially all of
the assets of Merisel FAB to a wholly owned subsidiary of Synnex. The purchase
price was approximately $31,992,000. (See Note 12-- "Subsequent Events".)
6. SALE OF ACCOUNTS RECEIVABLE
The Company's wholly owned subsidiary, Merisel Americas, sells trade
receivables on an ongoing basis to its wholly owned subsidiary, Merisel
Capital Funding, Inc. ("Merisel Capital Funding"). Pursuant to an agreement
with a securitization Company (the "Receivables Purchase and Servicing
Agreement"), Merisel Capital Funding, in turn, sells such receivables to the
securitization Company on an ongoing basis, which yields proceeds of up to
$300,000,000 at any point in time. Merisel Capital Funding's sole business is
the purchase of trade receivables from Merisel Americas. Merisel Capital
Funding is a separate corporate entity with its own separate creditors, which
upon its liquidation will be entitled to be satisfied out of Merisel Capital
Funding's assets prior to any value in Merisel Capital Funding becoming
available to Merisel Capital Funding's equity holders. This facility expires
in October 2000. In connection with the sale of EML and as a result of the
substantial losses incurred by the Company, Merisel Americas and Merisel
Capital Funding were required to, and did obtain, amendments and waivers with
respect to certain covenants under this facility.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization Company to provide
funding for Merisel's Canadian subsidiary. 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.
F-12
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective October 16, 1995, Merisel U.K. Ltd. ("Merisel U.K.") entered into
a receivables purchase agreement with a securitization Company to provide
funding for Merisel's U.K. subsidiary. This facility, including $26,252,000
outstanding thereunder, was assumed by CHS in connection with the purchase of
EML.
Under these securitization facilities, the receivables are sold at face
value with payment of a portion of the purchase price being deferred. As of
December 31, 1996 the total amount outstanding under these facilities was
$248,820,000. Fees incurred in connection with the sale of accounts receivable
for the years ended December 31, 1994, 1995 and 1996 were $7,151,000,
$10,291,000 and $16,029,000, respectively, and are recorded as other expense.
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ------------------
(IN YEARS) 1995 1996
----------- -------- --------
<S> <C> <C> <C>
Land..................................... $ 9,678 $ 5,818
Building................................. 20 3,880 3,880
Equipment................................ 3 to 7 76,918 65,628
Furniture and fixtures................... 3 to 5 13,777 8,575
Leasehold improvements................... 3 to 20 15,963 9,025
Construction in progress................. 21,365 21,850
-------- --------
Total.................................. 141,581 114,776
Less accumulated depreciation and amorti-
zation.................................. (51,200) (53,346)
-------- --------
Property and equipment, net.............. $ 90,381 $ 61,430
======== ========
</TABLE>
8. INCOME TAXES
The components of income (loss) before income taxes consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
------- --------- ---------
<S> <C> <C> <C>
Domestic................................... $23,430 $ (71,884) $(100,139)
Foreign.................................... (3,479) (33,806) (38,697)
------- --------- ---------
Total...................................... $19,951 $(105,690) $(138,836)
======= ========= =========
</TABLE>
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $10,675 $(24,627) $(1,706)
State....................................... 2,429 130 360
Foreign..................................... 210 (2,753) (3,290)
------- -------- -------
Total Current............................... 13,314 (27,250) (4,636)
------- -------- -------
Deferred:
Domestic.................................... (4,325) 7,120 4,659
Foreign..................................... (648) (1,649) 1,516
------- -------- -------
Total deferred.............................. (4,973) 5,471 6,175
------- -------- -------
Total provision (benefit)................... $ 8,341 $(21,779) $ 1,539
======= ======== =======
</TABLE>
F-13
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities and assets were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets
Net operating loss.................................. $ 2,350 $ 26,328
Expense accruals.................................... 9,886 11,919
State taxes......................................... 1,056 (372)
Property and goodwill............................... 3,648 10,697
Other, net.......................................... 1,999 2,033
-------- --------
18,939 50,605
Valuation allowances................................ (12,282) (50,123)
-------- --------
Total............................................. $ 6,657 $ 482
======== ========
Net deferred tax asset................................ $ 6,657 $ 482
======== ========
</TABLE>
The major elements contributing to the difference between the federal
statutory tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
-------------------
1994 1995 1996
---- ----- -----
<S> <C> <C> <C>
Statutory rate..................................... 35.0% (35.0)% (35.0)%
Increase in U.S. valuation allowance............... 9.3 27.3
State income taxes, less effect of federal
deduction......................................... 4.0 0.1 .2
Foreign income subject to tax at other than
statutory rate.................................... 2.5 3.2
Goodwill amortization.............................. 1.3 0.4 .2
Foreign losses with benefits at less than statutory
rate.............................................. 6.7 0.1 7.2
Utilization of net operating losses of foreign
subsidiary........................................ (5.3) (1.0)
Other.............................................. (2.4) 1.3 2.2
---- ----- -----
Effective tax rate................................. 41.8% (20.6)% 1.1 %
==== ===== =====
</TABLE>
At December 31, 1995 and December 31, 1996, the Company had available net
operating loss carryforwards of $6,671,000 and $77,643,000, respectively which
expire at various dates through December 31, 2011.
9. DEBT
At December 31, 1996, the Company's subsidiaries, Merisel Americas and
Merisel Europe, Inc. ("Merisel Europe") had unsecured senior borrowings, which
as amended, consisted of $56,805,000 of 11.5% notes by Merisel Americas, and a
$85,208,000 Revolving Credit Agreement by Merisel Americas and Merisel Europe,
all of which were outstanding. Advances under the Revolving Credit Agreement
bear interest at specific rates based upon market reference rates plus a
specified percentage. The average interest rate for the Revolving Credit
Agreement at December 31, 1996 was approximately 10.85%. In the year ended
December 31, 1996, the Company paid a total of $35,000,000 in aggregate
scheduled amortization payments under the 11.5% Notes and Revolving Credit
Agreement. Additionally, on October 4, 1996, the Company amended the 11.5%
Notes and the Revolving Credit Agreement in connection with the sale of EML
and permanently reduced the outstanding borrowings on the 11.5% Notes and the
Revolving Credit Agreement by $29,000,000 and $43,500,000, respectively. As a
result of the sale of EML, Merisel Europe no longer is an operating entity.
F-14
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As amended, these agreements require that the Company make an aggregate of
five consecutive principal payments of $1,500,000 each on the last calendar
day of each month from February through June 1997 plus an additional principal
repayment of $7,500,000 on January 2, 1998. As amended, the 11.5% Notes and
the Revolving Credit Agreement provide that if the Company makes the June 30,
1997 interest payment on its $125,000,000 principal amount 12.5% Notes at any
time before January 31, 1998, then the Company shall make an aggregate
principal repayment of an additional $40,000,000 on the 11.5% Notes and the
Revolving Credit Agreement. Further, if the Company makes the December 31,
1997 interest payment on its 12.5% Notes at anytime before January 31, 1998,
the Company must make an additional aggregate principal payment of $30,000,000
on the 11.5% Notes and the Revolving Credit Agreement. The 11.5% Notes and the
Revolving Credit Agreement are due in full on January 31, 1998. The amendments
also provide that certain tax refunds and asset sale proceeds when received by
the Company shall be used to permanently prepay the 11.5% Notes and Revolving
Credit Agreement. The principal repayments will be shared ratably by the
lenders under the Revolving Credit Agreement and the holders of the 11.5%
Notes.
The 11.5% Notes and the Revolving Credit Agreement contain various covenants
including those which prohibit the payment of cash dividends, require a
minimum amount of tangible net worth, and place limitations on the acquisition
of assets. These agreements also require the Company or certain of its
subsidiaries to maintain certain specified financial ratios. Such financial
ratios include: interest coverage; adjusted tangible net worth; earnings
before interest, taxes, depreciation, amortization and securitization expense;
total debt equivalents to adjusted tangible net worth; inventory turnover;
accounts payable; and minimum accounts payable to inventory. In connection
with the sale of EML, and as a result of the substantial losses incurred by
the Company, the Company was required to obtain, and did obtain waivers of
various covenants, including financial ratio covenants, contained in the 11.5%
Notes and the Revolving Credit Agreement and amendments of such covenants for
future periods.
At December 31, 1996, Merisel Americas had outstanding an aggregate of
$17,600,000 of privately placed subordinated notes (the "Subordinated Notes").
The Subordinated Notes, as amended during 1996, provide for an interest rate
increase of .50% to 11.78% per annum effective April 15, 1996, and are
repayable in four remaining equal annual installments of $4,400,000 which was
due and paid in January 1997, and $4,400,000 due in March 1998, March 1999 and
in March 2000. Accrued interest on the Subordinated Notes is required to be
paid quarterly. The Subordinated Notes contain certain restrictive covenants,
including those that limit the Company's ability to incur debt, acquire the
stock of or merge with other corporations, sell certain assets and prohibit
the payment of dividends. The Subordinated Notes also incorporate the
financial covenants contained in the Senior Notes and the Revolving Credit
Agreement. In connection with the amendment of the Revolving Credit Agreement
and the Senior Notes described above, the Company was required to obtain and
did obtain an amendment of the Subordinated Note Purchase Agreement.
On April 14, 1997 the Company obtained the Limited Waiver and Agreement to
Amend from the required number of holders of the 11.5% Notes, the Revolving
Credit Agreement and the Subordinated Notes. Under the Limited Waiver and
Agreement to Amend, the Company obtained certain waivers and consents
necessary to facilitate its debt restructuring. Among other items, the lenders
agreed to waive any default that may arise from the non-payment of interest on
the 12.5% Notes, the commencement of a "prepackaged" plan of reorganization
under Chapter 11 of the U.S. Bankruptcy Code and certain other events of
default and financial covenants. In addition, the lenders have agreed subject
to execution of definitive documentation and certain other conditions, to
extend the maturities of the Revolving Credit Agreement and the 11.5% Notes to
January 31, 1999. (See Note 1--"Liquidity")
At December 31, 1996, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of
12.5% payable semiannually. By virtue of being an obligation of Merisel, Inc.,
the 12.5% Notes are effectively subordinated to all liabilities of the
Company's subsidiaries,
F-15
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
including trade payables and are not guaranteed by any of the Company's
operating entities. The Indenture relating to the 12.5% Notes contains certain
covenants that, among other things, limit the type and amount of additional
indebtedness that may be incurred by the Company or any of its subsidiaries
and impose limitations on investments, loans, advances, sales or transfers of
assets, the making of dividends and other payments, the creation of liens,
sale-leaseback transactions with affiliates and certain mergers. Without a
restructuring or refinancing of the Company's debt, the Company may be unable
to make its June 30, 1997 and December 31, 1997 interest payments on the 12.5%
Notes and the additional $40,000,000 and $30,000,000 repayments which would be
due on June 30, 1997 and December 31, 1997, respectively, on the 11.5% Notes
and the Revolving Credit Agreement required before such interest payments can
be made. In addition, the restriction on dividend payments contained in the
11.5% Notes and the Revolving Credit Agreement could limit the ability of the
Company to repay principal and interest on the 12.5% Notes if, and to the
extent that, such limitations prevent cash or other dividends from being paid
to the Company. Further, in the event of a default under the 11.5% Notes and
the Revolving Credit Agreement, payments of principal and interest on the
12.5% Notes are prohibited.
On April 14, 1997, the Company obtained a Limited Waiver and Voting
Agreement from the required number of holders of the 12.5% Notes. Under the
Limited Waiver and Voting Agreement, the holders have agreed to exchange the
12.5% Notes into approximately 80% of the Company's Common Stock. The Company
intends to effect the exchange through an exchange offer requiring the tender
of 100% of the 12.5% Notes. If less than 100% of the note holders tender such
notes, the Company intends to file a "prepacked" plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. The holders of the required percentage
of the outstanding principal amount of 12.5% Notes have agreed to vote in
favor of the prepackaged plan subject to fulfillment of the other conditions
to the Exchange. In addition, the holders have agreed to waive any defaults
arising from the non-payment of interest due in 1997. (See Note 1--
"Liquidity").
At December 31, 1996, the Company had promissory notes outstanding with an
aggregate balance of $10,150,000. Such notes provide for interest at the rate
of approximately 7.7% per annum and are repayable in 48 and 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.
At December 31, 1995, the Company leased certain warehouse and computer
equipment under long-term leases and has the option to purchase the equipment
for a nominal cost at the termination of the lease. All such leases were
related to EML and were assumed by CHS. At December 31, 1996, the Company's
only capital lease obligations were $187,000 related to FAB's operations.
These obligations were assumed by Synnex as part of the sale of Merisel FAB in
the first quarter of 1997. (See Note 12--"Subsequent Events.")
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancellable
operating leases. Future minimum rental payments, under leases that have
initial or remaining noncancellable lease terms in excess of one year are
$8,148,000 in 1997, $6,920,000 in 1998, $6,367,000 in 1999, $4,218,000 in
2000, $3,279,000 in 2001 and $4,717,000 thereafter. Certain of the leases
contain inflation escalation clauses and requirements for the payment of
property taxes, insurance, and maintenance expenses. Rent expense for 1994,
1995 and 1996 was $13,447,000, $14,840,000 and $16,284,000, respectively.
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to represent a class of all persons who purchased
Merisel common stock between November 8, 1993 and June 7, 1994 (the "Class
Period"). The complaint, as amended and consolidated, alleges that the
defendants inflated the
F-16
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market price of Merisel's common stock with material misrepresentations and
omissions during the Class Period. Plaintiffs contend that such alleged
misrepresentations are actionable under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Following the granting of defendant's first motion to dismiss on December 5,
1994, plaintiffs filed a second consolidated and amended complaint on December
22, 1994. On April 3, 1995, Federal District Judge Real dismissed the
complaint with prejudice. The plaintiffs have appealed the dismissal. The
parties' appellate briefing to the Ninth Circuit was completed on November 6,
1995. The Ninth Circuit heard oral arguments on June 4, 1996. As of the date
of this report there has been no decision from the Ninth Circuit.
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 the Company, 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 Australia, Merisel's Australian
subsidiary for a purchase price of $9.9 million, 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.
The plaintiffs seek to recover specific damages exceeding $8 million as well
as unspecific damages plus interest and costs and expenses associated with the
claim. The Company intends to defend itself vigorously against this 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 is involved in certain other legal proceedings arising in the
ordinary course of business, none of which management expects to have a
material impact on the Company's financial statements.
11. EMPLOYEE STOCK OPTIONS AND BENEFIT PLANS
The Company's stock option plans, incentive stock options and nonqualified
stock options may be granted to employees, directors, and consultants. The
plans authorize the issuance of an aggregate of 4,616,200 shares upon exercise
of options granted thereunder. The optionees, option prices, vesting
provisions, dates of grant and number of shares granted under the plans are
determined primarily by the Board of Directors or the option committee under
the stock option plans, though incentive stock options must be granted at
prices which are no less than the fair market value of the Company's Common
Stock at the date of grant. The following summarizes activity in the plans for
the three years ended December 31, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ----------------------- ------------------------
WGTD. AVG. WGTD. AVG. WGTD. AVG.
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
---------- ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,856,140 $ 7.61 1,902,625 $ 9.03 3,191,289 $ 7.30
Granted................. 243,500 18.45 1,680,241 5.91 354,500 2.45
Exercised............... (112,300) 4.23 (112,422) 2.99 (215,000) .67
Canceled................ (84,715) 11.25 (279,155) 12.43 (1,812,444) 7.04
---------- ---------- -----------
Outstanding at end of
year................... 1,902,625 9.03 3,191,289 7.30 1,518,345 7.48
---------- ---------- -----------
Option price range for
Exercised shares....... $2.00-$11.88 $2.20-$6.25 $0.01-$2.20
------------ ----------- -----------
Weighted average fair
value of options
granted during the
year................... $ 3.80 $ 1.61
---------- -----------
</TABLE>
F-17
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE IN EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/96 YEARS PRICE AT 12/31/96 PRICE
------------------------ ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 7.7800 to $ 8.4100.... 11,970 4 $ 8.3958 11,970 $ 8.3958
3.0000 to $ 3.0000.... 173,500 5 3.0000 173,500 3.0000
11.3750 to $11.3750.... 182,250 6 11.3750 163,900 11.3750
11.7500 to $11.8750.... 126,500 7 11.8711 95,875 11.8698
15.0000 to $19.8750.... 91,250 8 19.6078 60,250 19.4704
4.5790 to $ 6.3125.... 587,875 9 5.7827 217,750 5.7049
1.8750 to $ 3.7500.... 345,000 10 2.4586 0 0.0000
--------- --- -------- ------- --------
$ 1.8750 to $19.8750.... 1,518,345 723,245
========= =======
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plans
been determined based on their fair value at the grant date for options
granted in 1995 and 1996 consistent with the provisions of SFAS No. 123, the
Corporation's net loss and loss per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net Loss--As Reported................................ $(83,911) $(140,375)
Net Loss--Pro Forma.................................. (84,480) (140,994)
Loss Per Share--As Reported.......................... (2.82) (4.68)
Loss Per Share--Pro Forma............................ (2.83) (4.70)
</TABLE>
The fair value of each option granted during 1995 and 1996 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Expected life............................................... 5.0 5.0
Expected volatility......................................... 72.41% 72.69%
Risk-free interest rate..................................... 6.27% 6.32%
Dividend Yield.............................................. 0.00% 0.00%
</TABLE>
The Company offers a 401(k) savings plan under which all employees who are
21 years of age with at least one year of service are eligible to participate.
The plan permits eligible employees to make contributions up to certain
limitations, with the Company matching certain of those contributions. The
Company's contributions vest 25% per year. The Company contributed $579,000
and $125,000 to the plan during the years ended December 31, 1994 and 1995,
respectively. The Company did not make any matching contributions on behalf of
its employees in 1996.
F-18
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS
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 buyer assuming $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. The purchase price is subject to adjustments based upon
Merisel FAB's March 28, 1997 balance sheet. 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 fair market value.
13. SEGMENT INFORMATION
The Company's operations primarily involve a single industry segment--the
wholesale distribution of computer hardware and software products. The
geographic areas in which the Company operates on an ongoing basis are the
United States, and Canada, after taking into account the sale of the Company's
other foreign businesses during 1996. Net sales, operating income (before
interest, other non-operating expenses and income taxes) and identifiable
assets by geographical area were as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER
STATES CANADA INTERNATIONAL ELIMINATIONS CONSOLIDATED
---------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1994:
Net sales............. $3,413,614 $516,616 $1,088,457 $5,018,687
========== ======== ========== ==========
Operating income
(loss)............... $ 52,150 $ 9,871 $ (1,294) $ 60,727
========== ======== ========== ==========
Identifiable assets... $ 715,082 $147,483 $ 337,083 $ (7,778) $1,191,870
========== ======== ========== ======== ==========
1995:
Net sales:
Net sales............. $3,996,346 $572,569 $1,388,052 $5,956,967
========== ======== ========== ==========
Operating loss........ $ (37,825) $ (3,637) $ (12,760) $ (54,222)
========== ======== ========== ==========
Identifiable assets... $ 738,220 $135,482 $ 375,878 $(19,246) $1,230,334
========== ======== ========== ======== ==========
1996:
Net sales:
Net sales............. $3,818,923 $643,730 $1,060,171 $5,522,824
========== ======== ========== ==========
Operating income
(loss)............... $ (44,295) $ (5,406) $ 1,901 $ (47,800)
========== ======== ========== ==========
Identifiable assets... $ 623,707 $126,691 $ 0 $(19,359) $ 731,039
========== ======== ========== ======== ==========
</TABLE>
F-19
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods for the fiscal
years ended 1995 and 1996 is presented below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1995
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales.................... $1,454,894 $1,379,864 $1,544,018 $1,578,191
Gross profit................. 93,223 85,475 89,253 55,738
Net loss..................... (1,789) (4,613) (253) (77,256)
Net loss per share........... (0.06) (0.16) (0.01) (2.59)
<CAPTION>
1996
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales.................... $1,536,589 $1,442,668 $1,393,532 $1,150,035
Gross profit................. 87,223 79,587 57,193 65,251
Net (loss) income............ (13,508) (11,404) (117,138) 1,675
Net (loss) income per share (0.45) (0.38) (3.90) .06
</TABLE>
In the fourth quarter of 1995, the Company recorded certain items which
reduced operating income by approximately $89,400,000. These items included
impairment losses on long-lived assets totaling $51,400,000. The remaining
$38,000,000 represents adjustments to account balances, primarily in accounts
payable. Additional adjustments related to vendor account reconcilations and
customer disputes were taken, which amounted to $2,200,000 in each of the
first two quarters of 1996, and $23,000,000 in the third quarter of 1996.
Additionally, third quarter charges were also recognized for further
impairment of certain long lived assets for $40,000,000 and for the loss on
the sale of certain assets totaling $33,455,000. In the fourth quarter of
1996, net income includes a $2,033,000 charge to adjust Merisel FAB's assets
to their fair value based on the provisions of a definitive agreement to sell
such assets in the first quarter of 1997.
F-20
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 47,930 $ 44,678
Accounts receivable (net of allowances of $23,206 and
$23,684 for 1997 and 1996, respectively)............. 189,376 168,295
Inventories........................................... 358,208 392,557
Prepaid expenses and other current assets............. 17,371 16,925
Income taxes receivable............................... 1,404 2,183
Deferred income tax benefit........................... 482 482
-------- --------
Total current assets................................ 614,771 625,120
PROPERTY AND EQUIPMENT, NET........................... 58,763 61,430
COST IN EXCESS OF NET ASSETS ACQUIRED, NET............ 26,108 41,724
OTHER ASSETS.......................................... 6,378 2,765
-------- --------
TOTAL ASSETS........................................ $706,020 $731,039
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable...................................... $ 367,634 $ 383,548
Accrued liabilities................................... 34,241 37,544
Long-term debt--current............................... 14,984 9,084
Subordinated debt--current............................ 4,400 4,400
--------- ---------
Total current liabilities........................... 421,259 434,576
Long-term debt........................................ 260,147 268,079
Subordinated debt..................................... 8,800 13,200
Capitalized lease obligations......................... 187
--------- ---------
TOTAL LIABILITIES..................................... 690,206 716,042
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; 30,078,500
shares outstanding for 1997 and 1996, respectively... 301 301
Additional paid-in capital............................ 142,300 142,300
Retained earnings (deficit)........................... (120,034) (121,164)
Cumulative translation adjustment..................... (6,753) (6,440)
--------- ---------
Total stockholders' equity............................ 15,814 14,997
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 706,020 $ 731,039
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
NET SALES............................................... $1,113,100 $1,536,589
COST OF SALES........................................... 1,048,124 1,449,366
---------- ----------
GROSS PROFIT............................................ 64,976 87,223
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.............. 51,520 83,136
---------- ----------
OPERATING INCOME........................................ 13,456 4,087
INTEREST EXPENSE........................................ 8,623 9,877
OTHER EXPENSE........................................... 3,530 7,238
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....................... 1,303 (13,028)
INCOME TAX PROVISION.................................... 173 480
---------- ----------
NET INCOME (LOSS)....................................... $ 1,130 $ (13,508)
========== ==========
NET INCOME (LOSS) PER SHARE............................. $ 0.04 $ (0.45)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING........... 30,078 29,863
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ 1,130 $ (13,508)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization......................... 3,180 5,759
Provision for doubtful accounts....................... 4,797 4,733
Deferred income taxes................................. 2,862
Changes in assets and liabilities:
Accounts receivable................................... (32,384) (20,834)
Inventories........................................... 34,348 120,778
Prepaid expenses and other assets..................... (4,083) (3,869)
Income taxes receivable............................... 779 1,303
Accounts payable...................................... 6,626 (70,689)
Accrued liabilities................................... (3,816) (5,228)
--------- ---------
Net cash provided by operating activities............... 10,577 21,307
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (648) (3,438)
Payment of earn out obligation from Computerland
acquisition............................................ (13,409)
Cash proceeds from sale of Australian business.......... 8,515
--------- ---------
Net cash used for investing activities.................. (648) (8,332)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit............... 254,208 443,400
Repayments under revolving line of credit............... (255,118) (396,400)
Net (repayments) borrowings under foreign bank
facilities............................................. (514) (20,289)
Proceeds from issuance of promissory notes.............. (607) 11,261
Proceeds from sale of accounts receivable............... 23,721
Repayment under subordinated debt agreement............. (4,400) (4,400)
--------- ---------
Net cash provided by (used for) financing activities.... (6,432) 57,293
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................. (245) (1,858)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 3,252 68,410
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 44,678 1,378
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 47,930 $ 69,788
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<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
main operating subsidiary, Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries (the "Operating Company"), the Company markets products and
services throughout North America, and has achieved operational efficiencies
that have made it 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 months ended March 31, 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.
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 4--"Dispositions"). Management believes
that a substantial portion of operating losses incurred in 1996 relate to the
implementation of its 1996 Business Plan which focused upon the conservation
of cash, the sale of assets, and the improvement of business processes,
particularly in the area of accounts payable.
The Company has developed and is implementing a business strategy for 1997
(the "1997 Business Strategy") that focuses on profitable North American
revenue growth instead of managing for cash. Under the 1997 Business Strategy,
Merisel intends to concentrate on strengthening and building its sales
infrastructure, improving gross margins, and controlling operating expenses.
Other priorities include continuing efforts to achieve operational excellence,
addressing financial controls and policies by emphasizing margin improvements
and tight expense control, and implementing a strategy focused on the United
States and Canada.
In order to meet its debt obligations, Merisel is actively pursuing a
restructuring plan with the debtholders under its various financing
agreements. Effective April 14, 1997, the Company entered into an agreement
(the "Agreement") with holders of more than 75% of the outstanding principal
amount of its 12.5% Senior Notes ("12.5% Notes"). Pursuant to the terms of the
Agreement, upon the fulfillment of certain conditions, holders of the 12.5%
Notes would exchange (the "Exchange") their 12.5% Notes for common stock, par
value $.01 per share, of the Company (the "Common Stock"), which would equal
80% of the outstanding shares of Common Stock immediately after the Exchange.
Contemporaneously with the Exchange, the holders of Common Stock immediately
prior to the Exchange would receive warrants (the "Warrants") to purchase
Common Stock constituting 17.5% of the Common Stock outstanding immediately
after giving effect to the Exchange.
F-25
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Exchange is subject to certain conditions including (i) stockholder
approval of an amendment to the Certificate of Incorporation of the Company to
authorize the additional shares of Common Stock, and (ii) consents to
amendments of the $84,297,000 principal amount of the Revolving Credit
Agreement ("Revolving Credit Agreement") and the agreement governing the
$56,198,000 principal amount of the 11.5% Senior Note Purchase Agreement
("11.5% Notes") by 100% of the lenders under such agreements to extend the
maturity of such indebtedness to January 31, 1999 (the "Extension"), or a
refinancing of such indebtedness prior to October 31, 1997. The Company
intends to effectuate the Exchange by commencing a registered exchange offer
which would be conditioned on 100% of the holders of the 12.5% Notes tendering
such notes for Common Stock. If less than 100% of the holders of the 12.5%
Notes tender in the exchange offer, Merisel, Inc., the parent company, intends
to file a "prepackaged" plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Merisel Americas and Merisel Canada (the subsidiaries through
which the Company's distribution business is conducted) would not be a party
to any prepackaged plan which may be required. Any such prepackaged plan, if
filed, would affect Merisel, Inc. only, and as such would not affect the
continuing and timely payment in full of such subsidiaries' obligations to
suppliers, employees and other creditors. In addition, such a prepackaged plan
would be subject only to the approval of the holders of the 12.5% Notes, as no
other creditors of the Company or its operating subsidiaries would be impaired
by the plan as contemplated. The holders of the required percentage of the
outstanding principal amount of 12.5% Notes have agreed to vote in favor of
the prepackaged plan subject to fulfillment of the other conditions to the
Exchange.
In connection with the Extension, the Company has entered into waivers and
an agreement in principle with 100% of the holders of the outstanding
principal amount of the Revolving Credit Agreement and the 11.5% Notes,
pursuant to which such holders have agreed, subject to execution of definitive
documentation, to extend the respective maturities to January 31, 1999. In
consideration of such Extension, the Company has agreed to pay certain fees
related to the Extension and, commencing in 1998, additional fees payable
quarterly together with an increase in the interest rate of 0.5% per quarter
in 1998 and for each quarter that the debt remains outstanding. The Company
would have the right to prepay such debt at anytime without penalty. In the
event that the Extension does not become effective, the Company believes that,
assuming it achieves its 1997 Business Strategy, it will have reasonable
prospects for a refinancing of such indebtedness in the latter half of 1997,
particularly if the Exchange is consummated concurrently with such
refinancing.
Effective immediately, and throughout the period the Company is implementing
the Exchange and Extension, in excess of 75% of the holders of the 12.5% Notes
have agreed to waive any default arising from the nonpayment of interest due
in 1997 on the 12.5% Notes, and 100% of the holders of the Revolving Credit
Agreement, the 11.5% Notes, and the Subordinated Notes of Merisel Americas
have agreed to waive any cross-default resulting from such non-payment. In
consideration for such waivers, Merisel Americas has agreed to pay certain
fees to the holders of the Revolving Credit Agreement and the 11.5% Notes,
and, subject to the Extension becoming effective, to increase the interest
rate by 0.5% per quarter during 1998 on the Subordinated Notes while such debt
remains outstanding. Accordingly, the Company believes that it will be able to
satisfy all of its material debt obligations under such instruments in 1997
pending the consummation of the Exchange and the Extension. Interest will
continue to be due and payable on the outstanding 12.5% Notes that have not
consented to the waiver at the time such payments are due; however, such
holders will not be able to accelerate the payment of the principal of the
12.5% Notes under the terms of the Indenture governing the 12.5% Notes.
At March 31, 1997, the Company had cash and cash equivalents of
approximately $47,930,000. In the opinion of management, as a result of the
Agreement reached with the holders of the 12.5% Notes and the waivers received
from the holders of the Revolving Credit Agreement, the 11.5% Notes and the
Subordinated Notes, cash on hand, additional permitted sales of accounts
receivable under the securitization facilities, together with anticipated cash
flow in 1997 will be sufficient to meet the Company's liquidity requirements
for the next 12 months.
F-26
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1997, certain holders of the 12.5% Notes have threatened to sue the
Company regarding a purported breach of the Agreement. The Company does not
believe that the Noteholders' claims for breach are valid, and it intends to
defend itself vigorously should a suit be commenced. Due to the fact that no
suit has yet been filed and no discovery has taken place, it is premature to
predict the outcome with any certainty.
2. NEW ACCOUNTING PRONOUNCEMENT
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.
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 first quarter is the 13 week period
ending on the Saturday nearest to March 31. For simplicity of presentation,
the Company has described the interim periods and year-end period as of March
31, and December 31, respectively.
4. 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 $9,915,000 in the form of repayment of certain
intercompany debt obligations. The Company recognized a $1,915,000 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, payable in three installments of $3,000,000, $4,000,000, and
$4,000,000, of which only the final payment of $4,000,000 remained outstanding
as of March 31, 1997.
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 buyer assuming $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. The purchase price is subject to adjustments based upon
Merisel FAB's March 28, 1997 balance sheet. 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.
F-27
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
------------------ ------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Net Sales.......................... $881,565 $910,923
Gross Profit....................... 51,581 57,299
Net loss........................... (13,887) (1,024)
======== ========
Net loss per share................. $ (0.47) $ (0.03)
======== ========
Weighted Average Shares
Outstanding....................... 29,863 30,078
======== ========
</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.
5. DEBT
At March 31, 1997, the Company's subsidiaries, Merisel Americas and Merisel
Europe, Inc. ("Merisel Europe") had unsecured senior borrowings, which as
amended, consisted of $56,198,000 of 11.5% notes by Merisel Americas, and an
$84,297,000 Revolving Credit Agreement by Merisel Americas and Merisel Europe,
all of which were outstanding. Advances under the Revolving Credit Agreement
bear interest at specific rates based upon market reference rates plus a
specified percentage. The average interest rate for the Revolving Credit
Agreement at March 31, 1997 was approximately 10.8%. The outstanding balance
under the Company's privately placed subordinated notes was $13,200,000 and
provide for an interest rate of 11.78%. Additionally, At March 31, 1997,
Merisel, Inc. had outstanding $125,000,000 principal amount of the 12.5%
Notes. The 12.5% Notes provide for an interest rate of 12.5% payable
semiannually.
On April 14, 1997, the Company obtained a Limited Waiver and Voting
Agreement from the required number of holders of the 12.5% Notes. Under the
Limited Waiver and Voting Agreement, the holders have agreed to exchange the
12.5% Notes into approximately 80% of the Company's Common Stock. (See Note
1--"Liquidity").
At March 31, 1997, the Company had promissory notes outstanding with an
aggregate balance of $9,635,000. Such notes provide for interest at the rate
of approximately 7.7% per annum and are repayable in 48 and 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.
6. NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the related period,
including common stock options when dilutive.
F-28
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) in the quarter ended March 31 for interest and income
taxes was as follows:
<TABLE>
<CAPTION>
1997 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Interest................................................. $9,238 $18,111
Income taxes............................................. $ (593) $(3,547)
</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 4-- "Dispositions").
F-29
<PAGE>
MERISEL, INC.
IMPORTANT
No person has been authorized to give any information or to make any
representations, other than those contained in this Proxy
Statement/Prospectus. If given or made, such information or representation may
not be relied upon as having been authorized by the Company. The Company is
not aware of any jurisdiction in which the Solicitation of Acceptances of the
Prepackaged Plan is not in compliance with applicable law. If the Company
becomes aware of any jurisdiction in which the Solicitation of Acceptances of
the Prepackaged Plan would not be in compliance with applicable law, the
Company will make a good faith effort to comply with such law. If, after such
good faith effort, the Company cannot comply with any such law, the
Solicitation of Acceptances of the Prepackaged Plan will not be made to
Stockholders residing in such jurisdictions. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities hereunder shall
under any circumstances create any implications that the information contained
herein is correct as of any time subsequent to the date hereof or that there
has been no change in the information set forth herein or in the affairs of
the Company since the date hereof.
FOR INFORMATION REGARDING THE PROCEDURES TO BE FOLLOWED IS CONNECTION WITH
VOTING ON THE PROPOSALS AND VOTING ON THE PREPACKAGED PLAN, SEE "STOCKHOLDERS'
MEETING, VOTING RIGHTS AND PROXIES" HEREIN AND "VOTING AND CONFIRMATION OF THE
PLAN" IN THE DISCLOSURE STATEMENT, INCLUDED HEREIN AS PART B TO ANNEX IV.
The Voting Agent:
U.S. STOCK TRANSFER CORPORATION
By Hand Delivery or Overnight Courier, or by Registered or Certified Mail:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Telephone:
(818) 502-1404
The Information Agent:
LOGO
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
CALL TOLL FREE (800) 322-2885
ADDITIONAL COPIES
Requests for additional copies of this Proxy Statement/Prospectus, Proxies
or Ballots should be directed to the Information Agent. You may also contact
your broker, dealer, or trust company for assistance concerning the
Restructuring.
<PAGE>
MERISEL, INC.
IMPORTANT
No person has been authorized to give any information or to make any
representations, other than those contained in this Exchange Restructuring
Prospectus. If given or made, such information or representation may not be
relied upon as having been authorized by the Company. The Company is not aware
of any jurisdiction in which the making of the Exchange Offer or the
Solicitation of Acceptances of the Prepackaged Plan is not in compliance with
applicable law. If the Company becomes aware of any jurisdiction in which the
making of the Exchange Offer or the Solicitation of Acceptances of the
Prepackaged Plan would not be in compliance with applicable law, the Company
will make a good faith effort to comply with such law. If, after such good
faith effort, the Company cannot comply with any such law, the Exchange Offer
or the Solicitation of Acceptances of the Prepackaged Plan will not be made to
(nor will tenders or votes be accepted from or on behalf of) Noteholders
residing in such jurisdictions. Neither the delivery of this Exchange
Restructuring Prospectus nor any distribution of securities hereunder shall
under any circumstances create any implications that the information contained
herein is correct as of any time subsequent to the date hereof or that there
has been no change in the information set forth herein or in the affairs of
the Company since the date hereof.
FOR INFORMATION REGARDING THE PROCEDURES TO BE FOLLOWED IS CONNECTION WITH
TENDERING IN THE EXCHANGE OFFER AND VOTING ON THE PREPACKAGED PLAN, SEE
"TENDERING AND VOTING PROCEDURES" IN PART A AND "VOTING AND CONFIRMATION OF
THE PLAN" IN PART B (THE DISCLOSURE STATEMENT).
The Depositary and Voting Agent:
THE BANK OF NEW YORK
By Hand Delivery or Facsimile Transmissions: By Registered or
Overnight Delivery: (Eligible Institutions Only) Certified Mail:
The Bank of New York (212) 815-6339 The Bank of New York
101 Barclay Street 101 Barclay Street, 7E
Corporate Trust Services Confirm by Telephone New York, New York 10286
Window Or For Information Call: Attention: Reorganization
Ground Level Department
New York, New York 10286 (212) 815-4997
Attention: Reorganization
Department
The Information Agent:
[LOGO OF MACKENZIE PARTNERS, INC.]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
CALL TOLL FREE (800) 322-2885
ADDITIONAL COPIES
Requests for additional copies of this Exchange Restructuring Prospectus,
Letter of Transmittal or Ballots should be directed to the Information Agent.
You may also contact your broker, dealer, commercial bank or trust company for
assistance concerning the Restructuring.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Article VII of the Company's
Certificate of Incorporation provides that the Company may indemnify its
officers and directors to the fullest extent permitted by law. Section 145 of
the General Corporation Law of the State of Delaware ("DGCL") provides that a
Delaware corporation has the power to indemnify its officers and directors in
certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such
action, suit or proceeding provided that such director or officer acted in
good faith in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
conduct was unlawful.
Subsection (b) of the Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses actually and reasonably incurred
in connection with the defense or settlement of such action or suit provided
that such director or officer acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such director or officer shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action was brought shall determine that
despite the adjudication of liability such director or officer is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) or (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification provided for by Section 145 shall
not be deemed exclusive of any other rights to which the indemnified party may
be entitled and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.
Article VI of the Company's Certificate of Incorporation currently provides
that each director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper benefit.
The Company has entered into indemnity agreements with each of its
directors. The indemnity agreements generally indemnify such persons against
liabilities arising out of their service in their capacities as directors,
officers, employees or agents of the Company. The Company may from time to
time enter into indemnity agreements with additional individuals who become
officers and/or directors of the Company.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The exhibits to this registration statement are listed in the Exhibit Index
and are incorporated herein by reference.
(b) Financial Statement Schedules
The information required of the Company by Schedule II, Schedule of
Valuation and Qualifying Accounts for the three years ended December 28, 1996
is incorporated herein by reference to the Company's Annual Report on Form 10-
K filed with the Securities and Exchange Commission for the fiscal year ended
December 31, 1996.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
II-2
<PAGE>
(d) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF
CALIFORNIA, ON SEPTEMBER 9, 1997.
Merisel, Inc.
/s/ Dwight A. Steffensen
By: _________________________________
DWIGHT A. STEFFENSEN
CHAIRMAN OF THE BOARD OF
DIRECTORS,
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Dwight A. Steffensen Chairman of the
- ------------------------------------- Board of Directors, September 9,
DWIGHT A. STEFFENSEN and Chief Executive 1997
Officer (Principal
Executive Officer)
Senior Vice
/s/ James E. Illson(1) President-- September 9,
- ------------------------------------- Finance, Chief 1997
JAMES E. ILLSON Financial Officer,
and Secretary
(Principal
Financial and
Accounting Officer)
/s/ Lawrence J. Schoenberg(1) Director
- ------------------------------------- September 9,
LAWRENCE J. SCHOENBERG 1997
/s/ David L. House(1) Director
- ------------------------------------- September 9,
DAVID L. HOUSE 1997
/s/ Dr. Arnold Miller(1) Director
- ------------------------------------- September 9,
DR. ARNOLD MILLER 1997
/s/ Joseph Abrams(1) Director
- ------------------------------------- September 9,
JOSEPH ABRAMS 1997
- --------
(1) By Dwight A. Steffensen, attorney-in-fact.
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENTS NUMBER
------- ------------------------ ------
<C> <S> <C>
2.1 Purchase Agreement dated as of August 29, 1996.(21)
2.2 Amendment 1 to Purchase Agreement dated as of October 4,
1996.(21)
2.3 Amended and Restated Receivables Transfer Agreement dated as
of September 27, 1996 by and between Merisel Americas, Inc.
and Merisel Capital Funding, Inc.(21)
2.4 Amended and Restated Receivables and Servicing Agreement
dated as of September 27, 1996, by and between Merisel
Capital Funding, Inc., Redwood Receivables Corporation,
Merisel Americas, Inc. and General Electric Capital
Corporation.(21)
2.5 Amendment No. 1 and Waiver to Amended and Restated
Receivables Purchase and Servicing Agreement dated as of
November 7, 1996 among Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc.
Electric and General Capital Corporation.(25)
2.6 Amendment No. 1 and Waiver to Amended and Restated
Receivables Transfer Agreement dated as of November 7, 1996
by and between Merisel Americas, Inc. and Merisel Capital
Funding, Inc.(25)
2.7 Settlement Agreement and Release dated February 13, 1997 by
and among CHS Electronics, Inc., Merisel, Inc. and Merisel
Europe, Inc.(25)
2.8 Asset Purchase Agreement dated January 15, 1997 by and among
SYNNEX Information Technologies, Inc., SynFab, Inc. and
Merisel FAB, Inc.(25)
2.9 Amendment No. 1 to the Asset Purchase Agreement dated as of
March 6, 1997 by and among Merisel, Inc., Merisel FAB, Inc.,
SYNNEX Information Technologies, Inc. and ComputerLand
Corporation, successor-in-interest to SynFab, Inc.(25)
3.1 Restated Certificate of Incorporation of Registrant.(1)
3.2 Amendment to Certificate of Incorporation of Registrant
dated August 22, 1990.(6)
3.3 Bylaws, as amended, of Merisel, Inc.(8)
4 Indenture dated October 15, 1994 between the Company and
NationsBank of Texas, N.A., as Trustee, relating to the
Company's 12.5% Senior Notes Due 2004, including the form of
such Senior Notes attached as Exhibit A thereto.(14)
4.1 First Amendment to Amended and Restated Revolving Credit
Agreement dated as of June 30, 1996 by and among Merisel
Americas, Inc., Merisel Europe, Inc., Merisel, Inc. and the
lender parties thereto.(21)
4.2 Second Amendment and Waiver to Amended and Restated
Revolving Credit Agreement dated as of October 2, 1996 by
and among Merisel Americas, Inc., Merisel Europe, Inc.,
Merisel, Inc. and the lender parties thereto.(21)
4.3 Third Amendment to Amended and Restated Subordinated Note
Purchase Agreement dated as of June 30, 1996 by and among
Merisel Americas, Inc. and the Noteholders signatory
thereto.(21)
4.4 Fourth Amendment and Waiver to Amended and Restated
Subordinated Note Purchase Agreement dated as of October 2,
1996 by and among Merisel Americas, Inc. and the Noteholders
signatory thereto.(21)
4.5 Fourth Amendment to Amended and Restated Senior Note
Purchase Agreement dated as of June 30, 1996 by and among
Merisel Americas, Inc., Merisel, Inc. and the Noteholders
signatory thereto.(21)
4.6 Fifth Amendment and Waiver to Amended and Restated Senior
Note Purchase Agreement dated as of October 2, 1996 by and
among Merisel Americas, Inc., Merisel, Inc. and the
Noteholders signatory thereto.(21)
4.7 Third Amendment and Waiver to Amended and Restated Revolving
Credit Agreement dated as of February 27, 1997 by and among
Merisel Americas, Inc. and the Noteholders signatory
thereto.(25)
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4.8 Fifth Waiver to Amended and Restated Subordinated Note
Purchase Agreement dated as of February 27, 1997 by and
among Merisel Americas, Inc. and the signatory Noteholders
thereto.(25)
4.9 Sixth Amendment and Waiver to Amended and Restated Senior
Note Purchase Agreement dated February 27, 1997 by and among
Merisel Americas, Inc., Merisel, Inc. and the Noteholders
signatory thereto.(25)
4.10 Form of Limited Waiver and Voting Agreement, dated as of
April 11, 1997, by and among Merisel, Inc. and the holders
of the 12 1/2% Senior Notes due December 31, 2004.(25)
4.11 Form of Limited Waiver and Agreement to Amend dated as of
April 14, 1997 by and among Merisel, Inc., Merisel Europe,
Inc., and the holders of the Revolving Credit Agreement and
the Senior Note Purchase Agreement.(25)
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding legality of securities to be issued.(26)
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding tax matters.(26)
10.1 Microamerica Substitute Stock Option Plan of Registrant
together with related forms of Stock Option Agreements.(4)*
10.2 1983 Stock Option Plan of Softsel Computer Products, Inc.,
as amended, together with Form of Incentive Stock Option
Agreement and Form of Nonqualified Stock Option Agreement
under 1983 Employee Stock Option Plan.(7)*
10.3 1983 Employee Stock Option Plan of Softsel Computer
Products, Inc., as amended, together with Form of Incentive
Stock Option Agreement and Form of Nonqualified Stock Option
Agreement under the 1983 Employee Stock Option Plan.(7)*
10.4 1991 Employee Stock Option Plan of Merisel, Inc. together
with Form of Incentive Stock Option Agreement and Form of
Nonqualified Stock Option Agreement under the 1991 Employee
Stock Option Plan.(8)*
10.5 Merisel, Inc. 1992 Stock Option Plan for Nonemployee
Directors.(10)*
10.6 Incentive Stock Option Agreements between Registrant and
Michael D. Pickett dated as of October 1, 1986 and March 4,
1987.(1)*
10.7 Nonqualified Stock Option Agreement between Registrant and
Michael D. Pickett dated as of December 11, 1987.(1)*
10.8 Amendment to Stock Option Agreements together with Joint
Escrow Instructions between Michael D. Pickett and
Registrant dated as of August 11, 1988.(1)*
10.9 Softsel Computer Products, Inc. Executive Deferred
Compensation Plan. (9)*
10.10 Employment Agreement between Registrant and Michael D.
Pickett dated as of August 14, 1992.(11)*
10.11 Merisel, Inc. Amended and Restated 401(k) Retirement Savings
Plan.(15)*
10.12 Asset Transfer, Assignment and Assumption Agreement dated as
of December 23, 1993 by and between Registrant and Merisel
Americas, Inc.(13)
10.13 Asset Transfer, Assignment and Assumption Agreement dated as
of December 23, 1993 by and between Registrant and Merisel
Europe, Inc.(13)
10.14 Lease between Registrant and Pacifica Holding Company dated
April 6, 1989.(2)
10.15 Lease Agreement dated October 27, 1988 by and between
Rosewood Development Corporation and Microamerica, Inc. re:
property located in Marlborough, Massachusetts.(3)
10.16 Lease Agreement dated May 23, 1990 by and between Kilroy-
Freehold El Segundo Company and Softsel/Microamerica, Inc.,
re: property located in El Segundo, California.(5)
10.17 Lease Agreement dated October 1991 by and between Koll
Hayward Associates II and Merisel, Inc.(9)
10.18 Asset Purchase Agreement dated January 31, 1994 between
ComputerLand Corporation, Merisel FAB, Inc. and for purposes
of Section 2.2 thereof, the Registrant. Portions of this
agreement have been omitted pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.(12)
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10.19 Guaranty Agreement dated January 31, 1994 between
ComputerLand Corporation and the Registrant.(12)
10.20 Distribution and Services Agreement dated January 31, 1994
between ComputerLand Corporation and Merisel FAB, Inc.
("Services Agreement"). Portions of this agreement has been
omitted pursuant to Rule 24b-2 of the Securities Act of
1934, as amended.(12)
10.21 Amendment Number 13 to Services Agreement dated as of
January 31, 1996. Portions of this agreement have been
omitted pursuant to Rule 24b-2 of the Securities Act of
1934, as amended.(19)
10.22 Stock Purchase Agreement dated January 31, 1994 between the
Registrant and ComputerLand Corporation.(12)
10.23 Amended and Restated Senior Note Purchase Agreement by and
among each purchasers named therein and Merisel Americas,
Inc., dated as of December 23, 1993 ("Senior Note Purchase
Agreement").(13)
10.24 First Amendment, dated as of September 30, 1994 to Senior
Note Purchase Agreement, by and among the Noteholders named
therein and Merisel Americas, Inc.(16)
10.25 Form of Second Amendment dated as of June 23, 1995 to Senior
Note Purchase Agreement.(19)
10.26 Amended and Restated Subordinated Note Purchase Agreement by
and among each of the purchasers named therein and Merisel
Americas, Inc., dated as of December 23, 1993 ("Subordinated
Note Purchase Agreement").(13)
10.27 First Amendment, dated as of September 30, 1994, to
Subordinated Note Purchase Agreement, by and among the
Noteholders named therein and Merisel Americas, Inc.(16)
10.28 Revolving Credit Agreement dated as of December 23, 1993
among Merisel Americas, Inc., Merisel Europe, Inc., the
Registrant, the lender parties thereto, Citicorp USA, Inc.,
as agent, and Citibank, N.A., as designated issuer
("Revolving Credit Agreement").(13)
10.29 First Amendment, dated as of September 29, 1994, to
Revolving Credit Agreement, by and among Merisel Americas,
Inc., Merisel Europe, Inc., Merisel, Inc. and the financial
institutions named therein.(16)
10.30 Second Amendment, dated as of December 1, 1994, to Revolving
Credit Agreement, by and among Merisel, Americas, Inc.,
Merisel Europe, Inc., Merisel, Inc., and the financial
institutions named therein.(15)
10.31 Third Amendment, dated as of February 27, 1995, to Revolving
Credit Agreement, by and among Merisel Americas, Inc.,
Merisel Europe, Inc., Merisel, Inc., and the financial
institutions named therein.(15)
10.32 Receivable Transfer Agreement dated as of October 2, 1995 by
and between Merisel Americas, Inc. and Merisel Capital
Funding, Inc.(17)
10.33 Receivable Purchase and Servicing Agreement dated as of
October 2, 1995 by and among Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc. and
General Electric Capital Corporation.(17)
10.34 Annex X to Receivable Transfer Agreement and Receivables
Purchase and Servicing Agreement dated as of October 2,
1995.(17)
10.35 Form of Receivables Purchase Agreement between Merisel
Canada, Inc. and Canadi an Master Trust dated as of December
15, 1995.(19)
10.36 Form of Security Agreement between Merisel Properties, Inc.
and Heller Financial, Inc. dated December 29, 1995.(19)
10.37 Deed of Trust, Security Agreement, Assignment of Leases and
Rents and Fixture Filing between Merisel Properties, Inc.
and Heller Financial, Inc. dated December 29, 1995.(19)
10.38 Agreement for the Sale and Purchase of Debts between Deutche
Financial Services (UK) Limited and Merisel (UK) Limited
dated October 12, 1995.(19)
</TABLE>
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10.39 Form of Agreement between Merisel, Inc. and Michael D.
Pickett dated February 12, 1996.(19)*
10.40 Share Purchase Agreement between Merisel, Inc. and Merisel
Asia, Inc. and Tech Pacific Holdings Ltd. dated March 7,
1996.(19)
10.41 Form of Employment Agreement between Merisel, Inc. and the
following: James L. Brill, Paul Lemerise, John Thompson, Tom
Reeves and Marty Wolf.(17)*
10.42 Form of Retention Agreement between Merisel, Inc. and the
following: James L. Brill, Paul Lemerise, John Thompson, Tom
Reeves and Marty Wolf.(17)*
10.43 Third Amendment and Waiver to Amended and Restated Senior
Note Purchase Agreement by and among each of the purchasers
named therein and Merisel Americas, Inc., dated as of April
12, 1996.(21)
10.44 Revolving Credit Agreement among Merisel Americas, Inc.,
Merisel Europe, Inc., Merisel , Inc., the lender parties
thereto, Citicorp USA, Inc., as agent, and Citibank, N.A.,
as designated issuer, as amended and restated as of April
12, 1996.(21)
10.45 Amendment Number One and Waiver to Receivables Purchase and
Servicing Agreement among Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc., and
General Electric Capital Corporation, dated as of April 12,
1996.(21)
10.46 Form of Second Amendment and Waiver to Amended and Restated
Subordinated Note Purchase Agreement among the dated as of
April 12, 1996.(21)
10.47 Retention Agreement between Merisel, Inc. and Susan J.
Miller-Smith dated April 22, 1996.(18)*
10.48 Employment Agreement dated February 12, 1996 between Dwight
A. Steffensen and Merisel, Inc.(22)*
10.49 Employment Agreement dated May 2, 1996 between Ronald A.
Rittenmeyer and Merisel, Inc.(22)*
10.50 Employment Agreement dated as of May 15, 1996 between
Verilyn Smith and Merisel, Inc.(22)*
10.51 Employment Agreement between Merisel, Inc. and James Illson
dated August 19, 1996.(23)*
10.52 Severance Agreement between Merisel, Inc. and James Brill
dated August 27, 1996.(23)*
10.53 Employment Agreement, dated as of September 5, 1996, between
Merisel, Inc. and James D. Wittry.(24)*
10.54 Letter Agreement dated June 1, 1995 between Merisel
Americas, Inc. and Kristin M. Rogers.(24)*
10.55 Amendment to Letter Agreement dated April 9, 1996 between
Merisel Americas, Inc. and Kristin M. Rogers.(24)*
10.56 Amendment to Letter Agreement dated August 30, 1996 between
Merisel Americas, Inc. and Kristin M. Rogers.(24)*
10.57 Retention Agreement dated April 5, 1996 between Merisel,
Inc. and Kelly M. Martin.(24)*
10.58 Letter Agreement dated June 1, 1995 between Merisel
Americas, Inc. and Archie K. Miller.(24)*
10.59 Amendment to Letter Agreement dated August 28, 1996 between
Merisel Americas, Inc. and Archie K Miller.(24)*
10.60 Retention Agreement dated April 5, 1996 between Merisel,
Inc. and Bruce A. Zeedik.(24)*
10.61 Letter Agreement dated November 29, 1996 between Merisel,
Inc. and Timothy N. Jenson.(24)*
10.62 Amendment to Letter Agreement dated April 9, 1996 between
Merisel, Inc. and Timothy N. Jenson.(24)*
10.63 Amendment to Letter Agreement dated August 22, 1996 between
Merisel, Inc. and Timothy N. Jenson.(24)*
</TABLE>
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10.64 Amended and Restated Employment Agreement dated November 6,
1996 between Susan J. Miller-Smith and Merisel, Inc.(24)*
10.65 Employment Agreement between Robert McInerney and Merisel,
Inc. dated February 3, 1997.(25)*
10.66 Employment Agreement between Dwight A. Steffensen and
Merisel, Inc. dated February 12, 1997.(25)*
10.67 Amendment to the Company's 1991 Employee Stock Option Plan
(as Amended through January 16, 1997).(25)
10.68 Form of Retention Agreement between Merisel, Inc. and Karen
A. Tallman.(26)*
10.69 Form of Retention Agreement between Merisel, Inc. and
Timothy N. Jenson.(26)*
10.70 Form of First Amendment to Employment Agreement between
Merisel, Inc. and James E. Illson.(26)*
10.71 Form of First Amendment to Employment Agreement between
Merisel, Inc. and Robert J. McInerney.(26)*
10.72 Form of First Amendment to Retention Agreement between
Merisel, Inc. and Thomas P. Reeves.(26)*
10.73 Form of First Amendment to Employment Agreement between
Merisel, Inc. and James D. Wittry.(26)*
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in their opinions filed as Exhibits 5.1 and 8.1).(26)
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
24.1 Power of Attorney.(26)
99.1 Form of Proxy Card (included herein as Annex I to the
Supplement).
99.2 Form of Letter of Transmittal.(26)
99.3 Form of Master Ballot for 12.5% Notes.(26)
99.4 Form of Master Ballot for Old Common Stock.(26)
99.5 Form of Beneficial Owner Ballot for 12.5% Notes.(26)
99.6 Form of Beneficial Owner Ballot for Old Common Stock.(26)
99.7 Consent of James E. Illson.(26)
99.8 Press Release, dated September 4, 1997.(26)
99.9 Letter dated July 14, addressed to the Company from
Stonington.(27)
99.10 Letters dated August 8, 10, and 11, 1997 addressed to the
Company from Stonington.(28)
99.11 Letter dated August 29, 1997 addressed to the Company form
Stonington.(29)
</TABLE>
- --------
* Management contract or executive compensation plan or arrangement.
(1) Filed as an exhibit to the Form S-1 Registration Statement of Softsel
Computer Products, Inc., No. 33-23700, and incorporated herein by this
reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1989 of Softsel Computer Products, Inc., and
incorporated herein by this reference.
(3) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1990 of Softsel Computer Products, Inc., and incorporated
herein by this reference.
(4) Filed as an exhibit to the Form S-8 Registration Statement of Softsel
Computer Products, Inc., No. 33-34296, filed with the Securities and
Exchange Commission on April 12, 1990, and incorporated herein by this
reference.
(5) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990 of Softsel Computer Products, Inc., and incorporated
herein by this reference.
(6) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, and incorporated herein by this reference.
<PAGE>
(7) Filed as an exhibit to the Form S-8 Registration Statement of Softsel
Computer Products, Inc., No. 33-35648, filed with the Securities and
Exchange Commission on June 29, 1990, and incorporated herein by this
reference.
(8) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991, and incorporated herein by this reference.
(9) Filed as an exhibit to the Form S-3 Registration Statement of Merisel,
Inc., No. 33-45696, filed with the Securities and Exchange Commission on
February 14, 1992 and incorporated herein by this reference.
(10) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992, and incorporated herein by this reference.
(11) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992 of Merisel, Inc., and incorporated herein by
this reference.
(12) Filed as an exhibit to the Current Report on Form 8-K dated February 14,
1994, as amended on March 24, 1994 and October 4, 1994, and incorporated
herein by this reference.
(13) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1993, and incorporated herein by this reference.
(14) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994, and incorporated herein by this reference.
(15) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by this reference.
(16) Filed as an exhibit to the Form S-3 Registration Statement of the
Registrant, No. 33-55195, filed with the Securities and Exchange
Commission on August 23, 1994, and incorporated herein by this reference.
(17) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated herein by this reference.
(18) Filed as an exhibit to Amendment No. 1 to the Annual Report on Form 10-
K/A for the year ended December 31, 1995, and incorporated herein by this
reference.
(19) Filed as an exhibit to Amendment No. 2 to the Annual Report on Form 10-
K/A for the year ended December 31, 1995, and incorporated herein by this
reference.
(20) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, and incorporated herein by this reference.
(21) Filed as an exhibit to the Current Report on Form 8-K dated April 17,
1996, and incorporated herein by this reference.
(22) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and incorporated herein by this reference.
(23) Filed as an exhibit to the Current Report on Form 8-K dated October 18,
1996, and incorporated herein by this reference.
(24) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, and incorporated herein by this reference.
(25) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by this reference.
(26) Previously filed.
(27) Filed as an exhibit to the Current Report on Form 8-K dated July 15,
1997, and incorporated herein by this reference.
(28) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and incorporated herein by this reference.
(29) Filed as an exhibit to the Current Report on Form 8-K dated August 29,
1997, and incorporated herein by this reference.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Post-Effective Amendment No. 2 to
Registration Statement No. 333-27369 of Merisel, Inc. on Form S-4 of our
report dated April 14, 1997, incorporated by reference from the Annual Report
on Form 10-K of Merisel, Inc. for the Year Ended December 31, 1996, and to the
use of our report dated April 14, 1997 appearing in the Prospectus, which is
part of this Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Los Angeles, California
September 9, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
We hereby consent to the reference to DLJ under the caption "Recommendation
of the Board" in the Supplement to Offer to Exchange and Solicitation of
Acceptances of Prepackaged Plan of Reorganization and Supplement to Proxy
Statement/Prospectus and Solicitation of Prepackaged Plan Acceptances of
Merisel, Inc. which forms a part of this Registration Statement on Form S-4.
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under and we do not admit that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ J. Halisey Kennedy
-------------------------------------
Los Angeles, California J. Halisey Kennedy
September 8, 1997
