<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _______________ to ___________
Commission File Number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
- ---------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last year
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class August 13, 1998
Common Stock, $.01 par value 80,228,393 Shares
<PAGE>
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of 1-2
June 30, 1998 and December 31, 1997
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of 9-19
Financial Condition and Results of Operations
PART II OTHER INFORMATION 20-21
SIGNATURES 23
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors may
include, but are not limited to, the effect of (i) economic conditions
generally, (ii) industry growth, (iii) competition, (iv) liability and other
claims asserted against the Company, (v) the loss of significant customers or
vendors, (vi) operating margins, (vii) business disruptions, and (viii) other
risks detailed in this report. These factors are discussed in more detail
elsewhere in this report. Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
June 30, December 31,
1998 1997
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $168,448 $36,447
Accounts receivable (net of allowances
of $19,460 and $18,549 for 1998 and 1997,
respectively) 143,225 162,895
Inventories 431,013 462,752
Prepaid expenses and other current assets 24,184 12,352
Deferred income tax benefit 624 644
------------------- -------------------
Total current assets 767,494 675,090
PROPERTY AND EQUIPMENT, NET 49,113 40,142
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 24,863 25,381
OTHER ASSETS 3,309 6,498
------------------- -------------------
TOTAL ASSETS $844,779 $747,111
=================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $523,284 $437,211
Accrued liabilities 43,164 38,963
Long-term debt - current 1,788 1,762
-------------------- --------------------
Total current liabilities 568,236 477,936
Long-term debt 130,797 131,667
-------------------- --------------------
TOTAL LIABILITIES 699,033 609,603
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued or outstanding
Common stock, $.01 par value, authorized
150,000,000 shares; 80,225,368 and 80,078,500
shares outstanding for 1998 and 1997, respectively 802 801
Additional paid-in capital 282,285 281,701
Accumulated deficit (128,261) (137,005)
Cumulative translation adjustment (9,080) (7,989)
-------------------- --------------------
Total stockholders' equity 145,746 137,508
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $844,779 $747,111
==================== ====================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $1,096,439 $895,754 $2,198,109 $2,008,855
COST OF SALES 1,034,736 840,101 2,074,655 1,888,224
----------------- ----------------- ---------------- ----------------
GROSS PROFIT 61,703 55,653 123,454 120,631
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 47,959 43,299 97,052 94,820
----------------- ----------------- ---------------- ----------------
OPERATING INCOME 13,744 12,354 26,402 25,811
INTEREST EXPENSE 3,890 7,760 7,673 16,383
OTHER EXPENSE 4,531 2,389 9,621 5,919
----------------- ----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 5,323 2,205 9,108 3,509
INCOME TAX PROVISION 215 159 364 333
----------------- ----------------- ---------------- ----------------
NET INCOME $5,108 $2,046 $8,744 $3,176
================= ================= ================= =================
NET INCOME PER SHARE (BASIC AND DILUTED) $0.06 $0.07 $0.11 $0.11
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 80,216 30,078 80,184 30,078
DILUTED 81,531 30,078 80,557 30,078
================= ================= ================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
1998 1997
------------------ --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,744 $3,176
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,118 5,971
Provision for doubtful accounts 5,104 4,692
Loss (Gain) on Sale of Property and Equipment 3 (1,530)
Changes in assets and liabilities:
Accounts receivable (37,821) (24,715)
Inventories 31,739 45,826
Prepaid expenses and other assets (8,642) (9,050)
Accounts payable 86,073 (13,381)
Accrued liabilities 4,220 1,646
------------------ --------------------
Net cash provided by operating activities 94,538 12,635
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,827) (2,831)
Proceeds from sale of property 5,020
------------------ --------------------
Net cash (used for) provided by investing activities (13,827) 2,189
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 27,200 484,708
Repayments under revolving line of credit (27,200) (488,319)
Net repayments under other bank facilitie (844) (777)
Repayment of senior notes (2,407)
Proceeds from sale of accounts receivable 52,489
Repayment of subordinated debt (4,400)
Proceeds from issuance of Common Stock 585
------------------ --------------------
Net cash provided by (used for) financing activities 52,230 (11,195)
------------------ --------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (940) 256
------------------ --------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 132,001 3,885
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 36,447 44,678
------------------ --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $168,448 $48,563
================== ====================
See accompanying notes to consolidated financial statements.
</TABLE>
<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 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 operates the
Merisel Open Computing Alliance (MOCA(TM)), which primarily supports Sun
Microsystems' UNIX(R)-based product sales and installations.
The information for the three and six months ended June 30, 1998 and 1997 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. Certain amounts for 1997 have been reclassified to conform with 1998
presentation. 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, 1997.
2. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"), which requires disclosure of certain
information about operating segments, geographic areas in which the Company
operates, major customers, and products and services. The Company will evaluate
the effect that this new standard has on the Company's financial statement
presentation, and the required information will be reflected in the financial
statements for the year ended December 31, 1998.
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.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
4. Loan and Security Agreement
Merisel Americas entered into a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security Agreement") with BankAmerica Business Credit, Inc.
("BA"), acting as agent, which provides for borrowings on a revolving basis. The
Loan and Security Agreement permits borrowings of up to $100,000,000 outstanding
at any one time (including face amounts of letters of credit), subject to
meeting certain availability requirements under a borrowing base formula and
other limitations. Borrowings under the Loan and Security Agreement are
secured by a pledge of substantially all of the inventory held by Merisel
Americas. Borrowings bear interest at the rate of LIBOR plus a specified margin
or, at the Company's option, BA's prime rate. An annual fee of 0.375% is
payable with respect to the unused portion of the commitment. The Loan and
Security Agreement has a termination date of June 30, 2003.
The Revolving Credit Agreement and Convertible Promissory Note (the "BT Note")
entered into in January 1998 by the Company and Merisel Americas with Bankers
Trust Company expired in accordance with its terms on July 2, 1998. No amounts
were outstanding under the BT Note on the expiration date.
5. Dispositions
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") to a
wholly owned subsidiary of SYNNEX Information Technologies, Inc. ("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.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Following are summarized pro forma operating results for the six months ended
June 30, 1997 assuming that the Company had sold the assets of Merisel FAB as of
January 1, 1997 and summarized actual operating results for the six months ended
June 30, 1998.
(in thousands except per share data)
Actual Pro Forma
Six Months Ended Six Months Ended
June 30, June 30,
1998 1997
---------------- --------------------
Net Sales $ 2,198,109 $ 1,806,677
Gross Profit 123,454 112,952
Net Income (loss) 8,744 1,022
================ ====================
Net Income (loss) per
share $ 0.11 $ 0.03
================ ====================
Weighted Average
Shares
Outstanding
(Diluted) 80,557 30,078
================ ====================
6. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130, which the
Company adopted in the first quarter of 1998, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is computed as
follows:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 5,108 $ 2,046 $ 8,744 $ 3,176
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,209) 505 (1,091) 191
----------- ---------- ---------- -------------
Comprehensive income $ 3,899 $ 2,551 $ 7,653 $ 3,367
=========== ========== ========== =============
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
7. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Financial
Accounting Standard No. 128, "Earnings Per Share". Basic earnings per share is
calculated using the average number of common shares outstanding. Diluted
earnings per share is computed on the basis of the average number of common
shares outstanding plus the effect of outstanding stock options using the
"treasury stock" method. In the both the three-month period and six-month period
ended June 30, 1997, there is no material difference between the primary
earnings per share reported previously by the Company, and basic earnings per
share or diluted earnings per share methods adopted currently.
The following table is a reconciliation of the weighted average shares used in
the computation of basic and diluted EPS for the income statement periods
presented herein:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three-months Ended Six Months Ended
June 30, June 30,
Weighted average shares outstanding 1998 1997 1998 1997
- ----------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 80,216 30,078 80,184 30,078
Assumed exercises of stock options 1,315 373
------------ ------------ ------------- ------------
Diluted 81,531 30,078 80,557 30,078
============ ============ ============= ============
</TABLE>
8. Supplemental Disclosure of Cash Flow Information
Cash paid (received) in the three-month periods and six-month periods ended
June 30 for interest and income taxes was as follows:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 8,104 $ 5,007 $ 7,336 $ 14,245
Income taxes $ 133 $ (2,808) $ (116) $ (3,401)
</TABLE>
Effective March 28, 1997, the Company sold substantially all of the assets of
Merisel FAB. The recorded sale price was $31,992,000, consisting of the
assumption of $11,992,000 of trade payables and accrued liabilities and a
$20,000,000 extended payable due to a third party, in full consideration for the
assets (See Note 5 "Dispositions").
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware, networking equipment and software products. Through its main operating
subsidiary, Merisel Americas, Inc. ("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 operates the
Merisel Open Computing Alliance (MOCA(TM)), which primarily supports Sun
Microsystems' UNIX(R)-based product sales and installations.
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") to a
wholly owned subsidiary of SYNNEX Information Technologies, Inc. ("Synnex"). The
Company's operations are now focused exclusively on distribution in North
America. The Company's sales were $3.85 billion for 1997, excluding revenues
from operations sold in the first quarter of 1997. As the North American
Business (defined below) represents the ongoing business of the Company, the
following discussion and analysis will compare the components of operating
income for the six months ended June 30, 1998 and 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 the Merisel FAB
operations disposed of by Merisel in the first quarter of 1997.
On September 19, 1997, the Company and Merisel Americas entered into a
definitive Stock and Note Purchase Agreement with Phoenix Acquisition Company
II, L.L.C. ("Phoenix"), a Delaware limited liability company whose sole member
is Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and
Note Purchase Agreement, on September 19, 1997 Phoenix acquired a Convertible
Note for $137,100,000 (the "Convertible Note") and 4,901,316 shares (the
"Initial Shares") of the Company's common stock ("Common Stock") for
$14,900,000. The Convertible Note was an unsecured obligation of the Company and
Merisel Americas and provided that, upon the satisfaction of certain conditions,
including obtaining stockholder approval, the Convertible Note would
automatically convert into 45,098,684 shares of Common Stock (the "Conversion
Shares"). The Company used substantially all of the $152,000,000 in proceeds
from the issuance of the Initial Shares and the Convertible Note to repay
indebtedness of its operating subsidiaries (the "Operating Company Debt")
consisting of $80,697,000
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
principal amount outstanding under a revolving credit agreement, $53,798,000
principal amount of its 11.5% senior notes, and $13,200,000 principal amount of
subordinated notes. On October 10, 1997, Phoenix exercised its option to
convert, without any additional payment, $3,296,286 principal amount of the
Convertible Note into 1,084,305 shares of Common Stock, representing the maximum
amount that could be converted prior to obtaining stockholder approval. On
December 19, 1997, following receipt of stockholder approval, the remaining
portion of the Convertible Note was converted into Common Stock. The
$152,000,000 in proceeds from the issuance of the Initial Shares and the
Convertible Note was partially offset by professional fees and other direct
costs related thereto totaling approximately $12,099,000, which were recorded as
a reduction to additional paid in capital at the time of conversion. As of June
30, 1998, Phoenix owned 50,000,000 shares of Common Stock, or approximately
62.4% of the outstanding Common Stock.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 as Compared to the Three Months Ended June 30,
1997.
Net sales increased 22.4% from $ 895,754,000 in the quarter ended June 30, 1997
to $1,096,000 in the quarter ended June 30, 1998. The increase was the result of
a 23.6% increase in net sales for the U.S. and a 17.0% increase in Canada. All
of the Company's U.S. customer bases contributed to the growth rate in the U.S.,
with particularly strong growth in MOCA, commercial reseller/dealer and retail
sales. The growth rate in Canada in terms of Canadian dollar sales was 23.0%,
but the decline in the value of the Canadian dollar hampered the growth rate in
terms of U.S. dollars, as was also the case in the first quarter of 1998.
Hardware and accessories accounted for 78% of net sales and software accounted
for 22% of net sales in the second quarter of 1998, which is the same product
mix for the Company's net sales in the second quarter of 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Gross profit increased 10.9% or $6,049,000 from $55,654,000 in the second
quarter of 1997 to $61,703,000 in the same period in 1998. Gross profit as a
percentage of sales, or gross margin, decreased from 6.21% in 1997 to 5.63% in
1998. Without the effect of favorable resolutions of vendor reconciliation
issues in the amount of $3,290,000, however, the gross margin for the second
quarter of 1997 would have been 5.85%. Gross margins in the United States and
Canada were 5.61% and 5.71%, respectively, for the second quarter of 1998,
compared to 6.20% and 6.25%, respectively, for the second quarter of 1997, after
the effect of favorable resolutions of vendor reconciliation issues. The
decrease in margins as a percentage of sales is partially the result of changes
in customer and product mix, and is also significantly affected by intense
competitive pricing pressures. The Company has committed resources to reverse
the deterioration of margins by focusing attention on more profitable product
lines and improved controls over margin management related activities such as
sales execution, processes, vendor rebate programs and purchasing
discounts. However, the Company believes that it will continue to face intense
price competition.
Selling, general and administrative expenses for the Company increased by 10.8%
from $43,299,000 in the second quarter of 1997 to $47,960,000 in the second
quarter of 1998. However, selling, general and administrative expenses as a
percentage of sales decreased from 4.83% of sales in 1997 to 4.37% for the same
period in 1998. This decrease is primarily attributable to efforts to control
operating expenses while the Company experienced sales growth of 22.4% during
the period.
As a result of the above items, operating income for the Company improved by
$1,389,000 from $12,354,000 for the second quarter of 1997 to $13,743,000 for
the second quarter of 1998.
Six Months Ended June 30, 1998 as Compared to the Six Months Ended June 30,
1997.
The following table sets forth the unaudited results of operations for the North
American Business and for the Former Operations for the six months ended June
30, 1998 and June 30, 1997.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
(In Thousands) (Unaudited) (In Thousands) (Unaudited)
----------------------------------------------- --------------------------------------------
North North
American Former Consolidated American Former Consolidated
Business Operations Total Business Operations Total
-------------- ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 2,198,109 $ 2,198,109 $ 1,806,677 $ 202,178 $ 2,008,855
Cost of Sales 2,074,655 2,074,655 1,693,724 194,500 1,888,224
-------------- ------------ ------------- ------------- ------------ -------------
Gross Profit 123,454 123,454 112,953 7,678 120,631
SG&A Expenses 97,052 97,052 88,620 6,200 94,820
-------------- ------------ ------------- ------------- ------------ -------------
Operating $ 26,402 $ 26,402 $ 24,333 $ 1,478 $ 25,811
Income ============= =========== ============ ============ =========== ============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
For the six months ended June 30, 1998, net sales for the North American
Business increased by 21.7% from $1,806,677,000 for the six months ended June
30, 1997 to $2,198,109,000 for the six months ended June 30, 1998. The increase
resulted from a 24.0% increase in net sales for the U.S. and a 12.7% increase in
Canada. The growth rate in Canada in terms of Canadian dollars was 18.1%. The
growth rate reflects improved year over year performance in the second quarter,
due to the same factors summarized in the discussion of sales for the three
months ended June 30, 1998 and 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 first six months of
1998, as compared to 77% and 23% for the same categories, respectively, in the
first six months of 1997.
Gross profit for the North American Business increased 9.3% or $10,501,000 from
$112,953,000 for the first six months of 1997 to $123,454,000 for the first six
months of 1998. Gross profit as a percentage of sales, or gross margin,
decreased from 6.25% for the 1997 period to 5.62% for the 1998 period. Without
the effect of favorable resolutions of vendor reconciliation issues in the
amount of $3,290,000, however, the gross margin for the 1997 period would have
been 6.07%. The decrease is attributable to the same factors summarized in the
discussion of gross profit for the three months ended June 30, 1998 and 1997.
Gross margins in the United States and Canada were 5.58% and 5.75%,
respectively, for the first half of 1998, compared to 6.30% and 6.07%,
respectively, for the first half of 1997. The decrease in margin is attributable
to the same factors summarized in the discussion of gross profit for the three
months ended June 30, 1998 and 1997.
Selling, general and administrative expenses for the North American Business
increased by 9.5% from $88,621,000 in the six months ended June 30, 1997 to
$97,052,000 in the six months ended June 30, 1998. However, selling, general and
administrative expenses as a percentage of sales decreased from 4.91% of sales
in 1997 to 4.42% for the same period in 1998. This decrease is primarily
attributable to efforts to control operating expenses while the Company
experienced sales growth of 21.7% during the period.
As a result of the above items, operating income for the North American Business
improved by $2,070,000 from $24,332,000 for the first six months of 1997 to
$26,402,000 for the first six months of 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest Expense; Other Expense; and Income Tax Provision
Interest expense decreased 50.0% from $7,760,000 in the quarter ended June 30,
1997 to $3,890,000 in the quarter ended June 30, 1998. For the six months ended
June 30, 1998, interest expense for the Company, including Former Operations,
decreased 53.2% from $16,383,000 in the 1997 period to $7,673,000 in the 1998
period. The decrease in interest expense is primarily attributable to a
reduction of the Company's debt by approximately $150,984,000, from $283,569,000
on June 30, 1997 to $132,585,000 on June 30, 1998, largely from the use of
proceeds from the issuance of the Initial Shares and the Convertible Note to
repay substantially all of the Operating Company Debt.
Other expenses for the Company, including Former Operations, increased from
$2,389,000 and $5,919,000 for the three and six months ended June 30, 1997,
respectively, to $4,531,000 and $9,622,000 for the same period in 1998,
respectively. The increase for the quarter is due primarily to the recording of
a gain on the sale of property held in North Carolina for $1,530,000 in the
second quarter of 1997, which reduced other expenses for that period. The
increase is also attributable to a $323,000 increase in foreign currency losses.
For the six-month period, in addition to the effect of the gain on the sale of
the property and the increase in foreign currency losses, the increase was also
attributable to a $1,315,000 increase in asset securitization fees, which are
included in other expense, and the effect of other income in the 1997 period
related to the Former Operations. The increased securitization fees are due to
increased sales of accounts receivables in order to fund sales growth and daily
operations. The average proceeds drawn from the sale of accounts receivable at
month end under the Company's securitization facilities increased from
$250,441,000 for the six months ended June 30, 1997 to $272,868,000 for the same
period in 1998.
The income tax provision increased from an expense of $159,000 and $333,000 for
the three and six months ended June 30, 1997, respectively, to an expense of
$215,000 and $363,000 for the same periods in 1998. In both periods, 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 to offset federal income taxes in the
current period.
Consolidated Net Income
On a consolidated basis, net income for the Company, including Former
Operations, increased from $2,046,000 and $3,176,000 for the three and six
months ended June 30, 1997, respectively, to net income of $5,108,000 and
$8,744,000 for the three and six months ended June 30, 1998, respectively, due
to the factors described above. Net income per share decreased from $.07 per
share for the three months ended June 30, 1997 to net income of $.06 per share
for the three months ended June 30, 1998. Net income per share remained the same
at $.11 per share for the six months ended June 30, 1998 and June 30, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
SYSTEMS AND PROCESSES; YEAR 2000 ISSUES
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 U.S. operations to the SAP
client/server operating system. The Company plans to convert its U.S. operations
to the SAP system during the first half of 1999. The Company converted its
Canadian operations from a mainframe to the SAP client/server operating system
in August 1995. 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 new system is designed to provide greater
transaction functionality, automated controls, flexibility, and custom pricing
applications.
The Company believes that implementation of the SAP operating system will
address its major "year 2000 issues", which arise in cases where computer
systems or any equipment with computer chips use two-digit fields that recognize
dates using the assumption that the first two digits are "19". On January 1,
2000, any clock or date recording mechanism including date sensitive software
that uses only two digits to represent the year may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including among
other things a temporary inability to process transactions, send invoices or
engage in similar activities.
The Company is currently engaged in a review of its computer systems and
applications, including packaged software used by the Company, not addressed by
the SAP operating system. The Company expects to make any modifications required
to resolve year 2000 issues in a timely manner and to have the majority
completed by early 1999, leaving adequate time to assess and correct any
significant issues that may materialize. The Company is seeking assurances of
year 2000 compliance from its suppliers of software and other products and
services used internally that might raise year 2000 issues. The Company is also
expecting to initiate formal communications with selected vendors and customers
to determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own year 2000 issues.
The Company can give no guarantee that the systems of other companies on which
the Company's systems rely will be converted on time or that failure to convert
by another company or a conversion that is incompatible with the Company's
systems would not have a material adverse effect on the Company. The Company is
taking steps to reduce the likelihood that such failures could affect the
Company's systems through any electronic communications.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company does not expect that the review and modifications described above
(excluding the cost of implementing the SAP operating system in the U.S.)
will require material expenditures. If the Company is unable to successfully
implement the SAP operating system sufficiently in advance of the year 2000,
however, additional expenditures could be required and such expenditures could
be substantial. In addition, if the modifications required to address the
Company's year 2000 issues are not made, or are not timely, the year 2000 issues
could have a material impact on the operations and financial results and
condition of the Company. See "Liquidity and Capital Expenditures" below.
The design and implementation of these new systems are complex projects and
involve certain risks. The U.S. SAP implementation in particular, because of its
scope and complexity, involves risks that could have a material adverse impact
on operations and financial results.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the future. Management believes that the factors influencing quarterly
variability include: (i) the overall growth in the computer industry; (ii)
shifts in short-term demand for the Company's products resulting, in part, from
the introduction of new products or updates of existing products; and (iii) the
fact that virtually all sales in a given quarter result from orders booked in
that quarter. Due to the factors noted above, as well as the dynamic
characteristics of the computer product distribution industry, the Company's
revenues and earnings may be subject to material volatility, particularly on a
quarterly basis.
Additionally, in the U.S. and Canada, the Company's net sales in the fourth
quarter have been historically higher than in its other three quarters.
Management believes that the pattern of higher fourth quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday purchases. As a result of this pattern the Company's working capital
requirements in the fourth quarter have typically been greater than other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year, which is primarily due to buying patterns
of Canadian Government Agencies. See "Liquidity and Capital Resources" below.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash provided by operating activities during the six months ended June 30,
1998, was $94,538,000. The primary sources of cash from operating activities
include an increase in accounts payable of $86,073,000.The primary uses of cash
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
during the period include a $37,821,000 increase in accounts receivable.
The increase in accounts payable reflects the growth in the overall business as
well as the Company's efforts to increase vendor financing through increased
credit limits and more favorable payment terms. The increase in accounts
receivable is related primarily to increased sales volume.
Net cash used in investing activities was $13,827,000 consisting primarily
of leasehold improvements and equipment expenditures. The equipment expenditures
were primarily incurred in connection with the implementation of SAP in the U.S.
Capital expenditures were also made for the purchase of computer equipment for
internal use, for improvements of existing facilities and other expenditures
related to the U.S. SAP implementation.
Net cash provided by financing activities was $52,230,000 and was comprised
primarily of proceeds from the sale of accounts receivable under the Company's
asset securitization facilities.
Securitization Facilities
Funds generated by the sale of receivables in the U.S. are provided through
Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas. 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 $500,000,000 at
any point in time. The maximum commitment under the facility was increased from
$300,000,000 to $500,000,000 pursuant to an amendment entered into effective
July 30, 1998. 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. The agreement, as amended,
expires October 2003.
Funds are also provided to Merisel Canada, Inc. ("Merisel Canada") through a
receivables purchase agreement with a securitization company. In accordance with
this agreement, Merisel Canada sells receivables to the securitization company,
which yields proceeds of up to CND$150,000,000. 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,
1998, the total amount outstanding under these facilities was $363,048,000. Fees
incurred in connection with the sale of accounts receivable for the three and
six months ended June 30, 1998 were $4,023,000 and $8,665,000 compared to
$3,776,000 and $7,350,000 incurred for the three and six months ended June 30,
1997 and are recorded as other expense.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Debt Obligations, Financing Sources and Capital Expenditures
At June 30, 1998, Merisel, Inc. had outstanding $125,000,000 principal amount of
12-1/2% Senior Notes due 2004 (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 subsidiaries. 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,
asset sales or transfers, dividends and other payments, the creation of liens,
sale-leasebacks, transactions with affiliates and certain mergers.
At June 30, 1998, the Company had promissory notes outstanding with an aggregate
balance of $7,585,000. Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. The
notes are collateralized by certain of the Company's real property and
equipment.
Merisel Americas entered into a Loan and Security Agreement date as of June 30,
1998(the "Loan and Security Agreement") with BankAmerica Business Credit,
Inc.("BA"), acting as agent, which provides for borrowings on a revolving basis.
The Loan and Security Agreement permits borrowings of up to $100,000,000
outstanding at any one time (including face amounts of letters of credit),
subject to meeting certain availability requirements under a borrowing base
formula and other limitations. Borrowings under the Loan and Security
Agreement are secured by a pledge of substantially all of the inventory
held by Merisel Americas. Borrowings bear interest at the rate of LIBOR plus a
specified margin, or, at the Company's option, BA's prime rate. An annual fee
of 0.375% is payable with respect to the unused portion of the commitment.
The Loan and Security Agreement has a termination date of June 30, 2003.
The Revolving Credit Agreement and Convertible Promissory Note (the "BT Note")
entered into in January 1998 by the Company and Merisel Americas with Bankers
Trust Company expired on July 2, 1998 in accordance with its terms. No amounts
were outstanding under the BT Note on its expiration date.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be between $35,000,000
and $45,000,000 for 1998, primarily consisting of costs associated with
implementing the SAP operating system (which includes all external direct costs
of materials and services, purchased hardware and software, and payroll and
payroll-related costs of employees directly associated with the SAP
implementation), developing the Company's channel assembly capabilities,
enhancing electronic services, upgrading warehouse systems and other Company
facilities, and building the sales infrastructure. However, aggregate costs
could exceed these estimates, depending on the timing and scope of the SAP
implementation. The Company intends to fund its capital expenditures through
internally generated cash and long-term financing. The Company's capital
expenditures for 1998 will result in a significant increase in depreciation
expense in future periods.
At June 30, 1998, the Company had cash and cash equivalents of $168,448,000. The
Company does not intend to maintain this level of cash balances. In the opinion
of management, anticipated cash from operations in 1998, together with proceeds
under the Company's securitization and revolving credit facilities and trade
credit from vendors, will be sufficient to meet the Company's requirements for
the next 12 months. This assumes, however, that there are not material adverse
changes in the Company's relationships with its vendors, customers or lenders.
Any unforeseen event that adversely impacts the industry or the Company's
position in the industry could have a direct and material unfavorable effect on
the liquidity of the Company.
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. In recent months, however, certain computer systems manufacturers
that are among the Company's largest vendors have announced changes in price
protection and other terms and conditions which could adversely affect the
Company. The Company is working closely with these manufacturers and has
developed buying procedures and controls to manage inventory purchases to
minimize any adverse impact from these changes, although there is no assurance
that such efforts will be successful.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company purchases foreign exchange contracts to minimize foreign exchange
transaction gains and losses and intends to continue such practice.
The Company offers credit terms to qualifying customers and also sells on a
prepay, early pay, credit card and cash-on-delivery basis. The Company also
arranges a wide variety of programs through which third parties provide
financing to certain of its customers. These programs include floor plan
financing, hardware and software leasing, and escrow programs. 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
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, SYNNEX Information Technologies, Inc. and Tech Data Corporation, as
well as regional distributors and franchisers.
Merisel also competes with manufacturers that sell directly to computer
resellers, sometimes at prices below those charged by Merisel for similar
products. The Company believes its broad product offering, product availability,
prompt delivery and support services may offset a manufacturer's price
advantage. In addition, many manufacturers concentrate their direct sales on
large computer resellers because of the relatively high costs associated with
dealing with small-volume computer reseller customers.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1994, Merisel and certain of its officers and/or directors were named in
putative securities class actions filed in the United States District Court for
the Central District of California, consolidated as In re Merisel, Inc.
Securities Litigation. As of July 6, 1998, the parties agreed on a memorandum of
understanding ("MOU") which sets forth the basic terms of a settlement of this
action. The terms of the MOU will be incorporated in a Stipulation of
Settlement, which is subject to approval by the District Court. Under the
settlement, Merisel will not be required to make any material payment.
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 the Company's 12-1/2% Senior Notes due 2004 (the
"12.5% Note"). Pursuant to the terms of the Limited Waiver Agreement, upon the
fulfillment of certain conditions, holders of the 12.5% Notes would exchange
(the "Exchange") their 12.5% Notes for common stock of the Company (the "Common
Stock"), which would equal approximately 80% of the outstanding shares of Common
Stock immediately after the Exchange. The Limited Waiver Agreement also provided
that, immediately after the consummation of the Exchange, the Company would
issue certain warrants to the existing holders of Common Stock. The conditions
to the Exchange were not met and, on September 19, 1997, the Limited Waiver
Agreement terminated in accordance with its terms. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Prior to the
termination of the Limited Waiver Agreement on September 19, 1997, certain
disagreements arose between the Company and certain holders of the Company's
12.5% Notes ("Noteholders") over the interpretation of the Company's obligations
under the Limited Waiver Agreement, including that the Limited Waiver Agreement
did not require either the Board of Directors of the Company (the "Board") or
the Company to recommend to its stockholders proposals relating to the proposed
debt restructuring in which the Noteholders would have exchanged their 12.5%
Notes for Common Stock (the "Noteholder Restructuring") and that the Company was
not obligated to seek confirmation of a "prepackaged plan" of reorganization by
means of the "cramdown" provisions of the Bankruptcy Code. On September 4, 1997,
the Company filed suit in Delaware Chancery Court (the "Delaware Action")
seeking a declaratory judgment with respect to these issues. The Company intends
to vigorously prosecute its claim in the Delaware Action. There can be no
assurance, however, that the Company will ultimately be successful with respect
to its claims.
On September 11, 1997, certain Noteholders filed an answer to the Company's
complaint in the Delaware Action as well as a counterclaim against the Company
asserting claims for breach of the Limited Waiver Agreement, unjust enrichment
and a declaratory judgment (the "Noteholder Suit"). The Noteholder Suit also
asserts a claim for unjust enrichment against Dwight A. Steffensen, the
Company's Chief Executive Officer. The Noteholder Suit seeks damages in excess
of $100 million from the Company. The Company's alleged breaches include, among
other things, that the Board changed its recommendation with respect to
proposals relating to the Noteholder Restructuring. The Company and Mr.
Steffensen filed motions for judgment on the pleadings on October 7, 1997
seeking to have the Noteholder Suit dismissed. On January 5, 1998, the Court
denied both motions. The Company and Mr. Steffensen believe that they have
strong defenses to each of the claims asserted and intend to defend themselves
vigorously. There can be no assurance, however, as to the ultimate outcome of
these claims.
<PAGE>
In addition, on September 19, 1997, the Company received notice from
representatives of the lenders under the agreements relating to certain
operating company debt that, in connection with the Company's repayment of such
debt, such lenders believe that they are owed approximately $2.7 million in
fees. On October 31, 1997, the Company received a further letter demanding
payment of such fees. The Company has entered into a settlement agreement with
substantially all of such lenders which will not have a material adverse effect
on the Company or its financial condition.
On March 16, 1998, the Company received a summons and complaint, filed in the
Superior Court of California, County of Santa Clara, in a matter captioned
Official Unsecured Creditors Committee of Media Vision Technology, Inc. v.
Merisel, Inc. The plaintiffs allege that certain executive officers of Media
Vision Technology, Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision through, interalia, the improper recognition and
reporting of sales, revenue and income and the failure to properly recognize and
report product returns during 1993 and 1994, thereby overstating the financial
condition of Media Vision as reflected in its financial statements for 1993. The
plaintiffs further allege that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision executives. The plaintiffs
seek to recover compensatory damages, including interest thereon, exemplary and
punitive damages, and costs including attorneys' fees. On May 6, 1998, the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive damages prayer. The motion is set for hearing
on September 1, 1998. 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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Offer Of Employment Letter to Kristin M. Rogers dated April
30, 1998
10.2 Change of Control Agreement dated as of May 11, 1998 between
Kristin M. Rogers and Merisel Americas, Inc.
10.3 Offer Of Employment Letter to Ronald S. Smith dated June 2,
1998.
10.4 Waiver and Release Agreement between Robert J. McInerney and
Merisel, Inc. dated as of April 30, 1998.
10.5 Amendments to Securitization Agreements, dated as of July 31,
1998, among Merisel Americas, Inc., Merisel Capital Funding,
Inc., Redwood Receivables Corporation and General Electric
Capital Corporation.
27 Financial Data Schedule for the quarter ended June 30, 1998.
(b) The following Reports on Form 8-K were filed during the quarter
ended June 30, 1998.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 17, 1998
Merisel, Inc.
By /s/Timothy N. Jenson
-------------------------------
Timothy N. Jenson
Senior Vice President - Finance
Chief Financial Officer
April 30, 1998
Kristen Rogers
81 Lyon Plains Road
Weston, CT 06883
Dear Kris:
It is with great pleasure that I extend an offer to you for the position of
Senior Vice President/General Manger U.S. Distribution Business of Merisel
Americas, Inc. The compensation for this position consists of an annual salary
of $250,000 with annual performance and salary reviews. In addition, you are
eligible to participate in Merisel's 1998 Management Incentive Plan with a
target annual incentive of 50% of your base salary, or $125,000, to be paid in
accordance with the guidelines of Merisel's 1998 Management Incentive Plan. The
current split would be 25% based on the net income of Merisel, Inc. relative to
the Board-approved Operating Plan and 75% based on the performance of the U.S.
business relative to the Board-approved Operating Plan. A copy of Merisel's 1998
Management Incentive Plan is included with this letter. This offer is contingent
upon successful completion of Merisel's background check and drug screening. A
tentative start date is set for May 11, 1998. This offer expires on May 18,
1998.
I will also recommend to the Compensation Committee of the Board of Directors at
their next scheduled meeting that you participate in the Merisel 1997 Stock
Award and Incentive Plan with an initial grant of options for 150,000 shares of
common stock of Merisel, Inc. The exercise price of the options will be the
market price on the day that the Compensation Committee approves the option
grant. Under the current policy your options will vest over four years at the
rate of 25% each year. Further details will be set forth in the Stock Option
Agreement.
Merisel is also prepared to make a housing loan to you of $150,000, of which the
principle and interest will be forgiven based on the number of years you have
been employed from your start date in 1998 as follows:
Years Employed Percentage of Loan Forgiven
-------------- ---------------------------
1 0%
2 25%
3 25%
4 25%
5 25%
In addition, the principle and interest amount of the loan will be forgiven in
its entirety if your employment is terminated in circumstances following a
change of control or other events, as specifically set forth in a Change of
Control Agreement. The interest rate on the loan will be at 7.5% per annum
payable quarterly.
<PAGE>
Merisel is prepared to offer you the standard relocation package with the
following exceptions:
- Commissions for selling your house in Connecticut (up to 6%) will be
reimbursed separately. - Mortgage points for buying a house in California
(up to a maximum of 1 point) will be reimbursed separately. - Temporary
housing and travel expenses to be paid by Merisel for up to 120 days.
Trips for your husband and son are covered by the relocation policy.
The taxable amount of the relocation will be subject to a one-time gross up. The
relocation agreement will be forwarded to you under separate cover.
The company intents to enter into a Change of Control Agreement with you, a copy
of which is enclosed.
In addition to your salary, Merisel offers a comprehensive associate benefit
program. These benefits include medical, dental, life insurance, long term
disability and a 401(k) salary deferral program. Details of the benefit program
will be discussed with you at orientation on your first day of employment. Human
Resources is currently investigating opportunities to include in our benefits
program an executive disability program.
It is our policy to have all new associates sign an Employee Confidentiality
Agreement which will be provided for you on your first day of employment. Also,
in order to comply with the Immigration Reform and Control Act of 1986, you will
need to provide proof of citizenship or right to work in the United States on
your first day of employment. Please contact me if you need clarification on the
necessary documents.
Although we hope that the employment relationship will be mutually satisfactory,
it must be remembered that your employment with Merisel is at will. This means
that your employment is for no specific period of time for you or Merisel.
Accordingly, either you or Merisel can terminate the employment relationship at
any time, with or without cause, and with or without prior warning. By signing
this letter, you acknowledge that you understand and agree that no facts or
circumstances arising out of your employment, including length of employment or
any conduct by Merisel, including any express or implied agreements, can alter
the at will employment relationship unless specifically set forth in writing and
signed by you and the Chief Executive Officer of Merisel.
This letter sets forth, fully, all understandings and agreements between you and
Merisel regarding your employment. Please acknowledge your acceptance of our
offer by signing and dating this letter and returning it to me. A copy is
included for your records.
<PAGE>
Kris, we look forward to you joining the team. I believe you can greatly
contribute to the company and the continued growth of Merisel.
Congratulations on your new assignment!
Sincerely,
/s/ James E. Illson
- ------------------------------------------
James E. Illson
Executive Vice President - Operations and Finance
Merisel, Inc.
/s/ Kristen Rogers
- ------------------------------------------
Kristen Rogers
- ------------------------------------------
Date 5/1/98
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement is dated as of May 11, 1998 and is
between Merisel Americas, Inc. ("Americas"), a Delaware corporation, and
Kristin M. Rogers ("Executive").
Americas desires to employ Executive. Accordingly, Executive and
Americas desire to set forth the terms and conditions governing Executive's
employment by Americas following a Change of Control (as defined below) and in
certain other circumstances. Accordingly, Executive and Americas hereby agree as
follows:
1. Definitions. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
(a) "Base Salary" shall mean Executive's annual base salary as in
effect on the business day preceding a Covered Resignation (as defined below) or
a Change of Control or, in the case of a Change of Control, as the same may be
increased thereafter from time to time, exclusive of any bonus or incentive
compensation, benefits (whether standard or special), automobile allowances,
relocation or tax equalization payments, pension payments or reimbursements for
professional services.
(b) The "Company" shall mean Merisel, Inc., a Delaware corporation, and
each of its successor enterprises that result from any merger, consolidation,
reorganization, sale of assets or otherwise. As used herein, the term "Americas"
shall also include each successor enterprise of Merisel Americas, Inc. that
results from any merger, consolidation, reorganization, sale of assets or
otherwise.
(c) An "Americas Change of Control" shall have occurred if (i) any
person, corporation, partnership, trust, association, enterprise or group, other
than the Company, shall become the beneficial owner, directly or indirectly, of
outstanding capital stock of Americas possessing at least 50% of the voting
power (for the election of directors) of the outstanding capital stock of
Americas, or (ii) there shall be a sale of all or substantially all of Americas'
assets or Americas shall merge or consolidate with another corporation and the
stockholders of Americas immediately prior to such transaction do not own,
immediately after such transaction, stock of the purchasing or surviving
corporation in the transaction (or of the parent corporation of the purchasing
or surviving corporation) possessing more than 50% of the voting power (for the
election of directors) of the outstanding capital stock of that corporation,
which ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stock holders of Americas before
the transaction. A "Company Change of Control" shall have occurred if (i) any
person, corporation, partnership, trust, association, enterprise or group shall
become the beneficial owner, directly or indirectly, of outstanding capital
stock of the Company possessing at least 50% of the voting power (for the
election of directors) of the outstanding capital stock of the Company, or (ii)
there shall be a sale of all or substantially all of the Company's assets or the
Company shall merge or consolidate with another corporation and the stockholders
of the Company immediately prior to such transaction do not own, immediately
<PAGE>
after such transaction, stock of the purchasing or surviving corporation in the
transaction (or of the parent corporation of the purchasing or surviving
corporation) possessing more than 50% of the voting power (for the election of
directors) of the outstanding capital stock of that corporation, which ownership
shall be measured without regard to any stock of the purchasing, surviving or
parent corporation owned by the stock holders of the Company before the
transaction. It is expressly understood that, for purposes of this Section 1(c),
the holders of indebtedness of the Company or its subsidiaries shall not be
deemed to constitute a "group" solely by virtue of their roles as debtholders or
by exercising their rights with respect thereto. A "Change of Control" shall be
the first to occur of a Company Change of Control or an Americas Change of
Control.
(d) "Covered Resignation" shall mean a resignation by Executive that
occurs within six months after there has been a material reduction in
Executive's job responsibilities from those that existed immediately prior to
the reduction, it being understood that a mere change in title alone shall not
constitute a material reduction in Executive's job responsibilities.
(e) "Covered Termination" shall mean any cessation of the Executive's
employment by Americas that occurs after a Change of Control other than as a
result of (i) Termination for Cause, (ii) Executive's death or permanent
disability, or (iii) Executive's resignation without Good Reason (as hereinafter
defined).
(f) A resignation by Executive shall be with "Good Reason" if after a
Change of Control (i) there has been a material reduction in Executive's job
responsibilities from those that existed immediately prior to the Change of
Control, it being understood that a mere change in title alone shall not
constitute a material reduction in Executive's job responsibilities, (ii)
without Executive's prior written approval, Americas requires Executive to be
based anywhere other than the Executive's then current location, it being
understood that required travel on Americas' business to an extent consistent
with Executive's business travel obligation prior to the Change of Control does
not constitute "Good Reason," (iii) there is a reduction in Executive's Base
Salary, except that an across-the-board reduction in the salary level of all of
Americas' Executives in the same percentage amount as part of a general salary
level reduction shall not constitute "Good Reason," or (iv) a successor to all
or substantially all of the business and assets of Americas fails to furnish
Executive with the assumption agreement required by Section 8 hereof.
(g) "Termination for Cause" shall mean if Americas terminates
Executive's employment for any of the following reasons: Executive's misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another Executive by
Executive in violation of Americas' policies); excessive absenteeism; abuse of
sick time; or Executive's conviction for or a plea of nolo contendere by
Executive to a felony or any crime involving moral turpitude.
(h) "Expiration Date" shall mean May 31, 2000.
<PAGE>
2. At-Will Employee. Subject to the express provisions of this
Agreement, Americas shall have no obligation to retain or continue Executive as
an employee and Executive's employment status as an "at-will" employee of
Americas is not affected by this Agreement.
3. Consequences of Covered Termination or Covered Resignation. If (1) a
Change of Control shall occur on or before the Expiration Date and if a Covered
Termination shall occur within one year after the Change of Control or (2) a
Covered Resignation shall occur prior to the Expiration Date, then: (A) on the
effective date of such Covered Termination or Covered Resignation, Americas
shall make a lump sum payment to Executive equal to twelve months of Executive's
Base Salary; (B) Americas will reimburse Executive for the cost of Executive's
COBRA payments (at the level of coverage, including dependent care coverage, as
in effect immediately prior to such Covered Termination or Covered Resignation)
under Americas' health insurance plans for a twelve month period following the
date of the Covered Termination or Covered Resignation; and (C) on the effective
date of such Covered Termination or Covered Resignation, Americas will forgive
the outstanding principal amount of the $150,000 housing loan made to Executive
following the commencement of Executive's employment. The amount of the
reimbursement for COBRA payments will be grossed up so that Executive will
receive an amount equal to the COBRA payments, after taking into account all
applicable taxes. The payments to be made to Executive upon a Covered
Termination or Covered Resignation are in addition to the payments made to
employees by Americas upon termination in the ordinary course, such as
reimbursement for business expenses and vacation pay through the date of
termination.
4. Withholding. Americas shall deduct from all payments paid to
Executive under this Agreement any required amounts for social security, federal
and state income tax withholding, federal or state unemployment insurance
contributions, and state disability insurance or any other required taxes.
5. Benefit Reduction. In the event any payments are required to be made
pursuant to Section 3 hereof, the first dollar amount of such payments shall be
reduced to the extent necessary to assure that the payments that are received
pursuant to the terms and conditions of this Agreement which are "parachute
payments" under Internal Revenue Code Section 280G (or any successor section)
and the Department of Treasury regulations issued thereunder do not exceed the
maximum amount which may be paid hereunder without such amounts being treated as
an "excess parachute payment" under such section.
6. Mitigation. Executive shall have no obligation to mitigate the
amount of any payment provided for in this Agreement by seeking employment or
otherwise.
7. Executive's Obligations. In exchange for Americas providing the
above described benefits to Executive, Executive agrees that prior to receiving
any severance compensation from Americas in respect of such Covered Termination
or Covered Resignation, whether under this Agreement or otherwise, Executive
will execute and deliver to Americas a Release and a Confidentiality Agreement,
each substantially in the form provided to Executive with this Agreement.
<PAGE>
8. Assumption Agreement. Americas will require any successor (whether
direct or indirect, by purchase, merger consolidation or otherwise) to all or
substantially all of the business and assets of Americas, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that Americas would be required to perform it whether or not such succession had
taken place.
9. Arbitration. Any dispute that may arise between Executive and
Americas in connection with or relating to this Agreement, including any
monetary claim arising from or relating to this Agreement, will be submitted to
final and binding arbitration in Los Angeles, California, in accordance with the
rules of the American Arbitration Association ("AAA") then in effect. Such
arbitration shall proceed before a single arbitrator who shall be selected by
the mutual agreement of the parties. If the parties are unable to agree on the
selection of an arbitrator, such arbitrator shall be selected in accordance with
the Employment Dispute Resolution Rules and procedures of the AAA. The decision
of the arbitrator, including determination of the amount of any damages
suffered, shall be conclusive, final and binding on such arbitrating parties,
their respective heirs, legal representatives, successors, and assigns. Each
party to any such arbitration proceeding shall bear her or his own attorney's
fees and costs in connection with any such arbitration and each party shall pay
half of all costs associated with the arbitration including the arbitrator's
fees.
10. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of Americas and Executive; provided that Executive shall not assign
any of Executive's rights or duties under this Agreement without the express
prior written consent of Americas. This Agreement sets forth the parties' entire
agreement with regard to the subject matter hereof. No other agreements,
representations, or warranties have been made by either party to the other with
respect to the subject matter of this Agreement. This agreement may be amended
only by a written agreement signed by both parties. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as or be construed as a waiver of any subsequent
breach. If any legal action is necessary to enforce the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorneys' fees in addition
to any other relief to which that party may be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the day and year first written above.
MERISEL AMERICAS, INC.
/s/ Dwight A. Steffensen /s/ Kristin M. Rogers
By:__________________________ __________________________
Name: Dwight A. Steffensen Kristin M. Rogers
Title: Chief Executive Officer
June 2, 1998
Ronald S. Smith
34 McKay Crescent
Unionville, Ontario
L3R 3M6
Dear Ron:
It is with great pleasure that I extend an offer to you for the position of
President, Merisel Canada Inc. The compensation for this position consists of an
annual salary of CD$300,000, with annual performance and salary reviews. In
addition, you are eligible to participate in Merisel's 1998 Management Incentive
Plan with a target annual incentive of 50% of your base salary, or CD$150,000,
to be paid in accordance with the guidelines of Merisel's 1998 Management
Incentive Plan. The current split would be 25% based on the net income of
Merisel, Inc. relative to the Board-approved Operating Plan and 75% based on the
performance of the Merisel Canada business relative to the Board-approved
Operating Plan. Merisel will guarantee 50% of your target bonus for the
remainder of 1998. A copy of Merisel's 1998 Management Incentive Plan is
included with this letter.
In addition, you will be eligible for an annual car allowance of CD$18,000 and
reimbursement of up to CD$3,000 for club membership. A tentative start date is
set for June 22, 1998. This offer expires on June 3, 1998.
I will also recommend to the Compensation Committee of the Board of Directors at
their next scheduled meeting that you participate in the Merisel 1997 Stock
Award and Incentive Plan with an initial grant of options for 125,000 shares of
common stock of Merisel, Inc. The exercise price of the options will be the
market price on the day that the Compensation Committee approves the option
grant. Under the current policy your options will vest over four years at the
rate of 25% each year. Details of the Stock Option Plan will set forth in the
Stock Option Agreement. In the event of a change of control or termination not
for cause, any change in the plan provisions would need to considered by the
Compensation Committee of the Board of Directors at the time of the event.
<PAGE>
If your employment with Merisel is terminated without cause, you will be
eligible for severance of one years salary and bonus at the rate in effect at
the time of termination. If there is a material reduction in your
responsibilities from those that exist upon hire, and you resign your employment
with Merisel within (3) three months of the notice of the change in
responsibilities, you will be eligible for severance of one years salary and
bonus at the rate in effect at the time of the reduction.
The company intents to enter into a Change of Control Agreement with you, a copy
of which will be sent to you under separate cover.
In addition to your salary, Merisel offers a comprehensive associate benefit
program. These benefits include medical, dental, life insurance and long term
disability. Details of the benefit program will be discussed with you by the
Human Resources Department upon your employment.
It is our policy to have all new associates sign an Employee Confidentiality
Agreement which will be provided for you on your first day of employment.
This letter sets forth, fully, all understandings and agreements between you and
Merisel regarding your employment. Please acknowledge your acceptance of our
offer by signing and dating this letter and returning it to me. A copy is
included for your records.
Ron, we look forward to you joining the team. I believe you can greatly
contribute to the company and the continued growth of Merisel.
Congratulations on your new assignment!
Sincerely,
/s/ James E. Illson
- ------------------------------------------
James E. Illson
Executive Vice President - Operations and Finance
Merisel, Inc.
/s/ Ronald S. Smith
- ------------------------------------------
Ronald S. Smith
- ------------------------------------------
Date 6/3/98
WAIVER AND RELEASE AGREEMENT
This Release is given
By the Releasor(s): ROBERT J. MCINERNEY
Address:
hereinafter referred to as "I",
To the Releasee(s): MERISEL, INC. and its parent, subsidiary
and affiliated corporations(including
predecessors and successors) and their
officers,directors,employees and
representatives
sometimes hereinafter referred to as "You" or "Merisel".
1. Release. I hereby release and give up any and all actions, causes of action,
claims and rights (hereinafter "Claims") which I may have against You. This
releases all claims, including those of which I am not aware and those not
mentioned herein. This Waiver and Release Agreement ("Agreement") applies to
Claims resulting from anything that has happened prior to and through and
including the date of this Agreement. I specifically release any and all Claims
relating in any way to my employment relationship with you, or the termination
of the Employment Agreement entered into as of February 3, 1997 between myself
and Merisel, Inc. (the "Employment Agreement"), including, but not limited to,
any Claims arising under the Age Discrimination in Employment Act, the Older
Workers Benefit Protection Act of 1990, Title VII of the Civil Rights Act of
1964, the Equal Pay Act, the Employee Retirement Income Security Act, the Fair
Labor Standards Act, the Consolidated Omnibus Budget Reconciliation Act of 1986,
or any other federal, state or local laws or ordinances and any common law
claims under tort, contract, or any other theories now or hereafter recognized.
This Agreement specifically includes, but without limitation, all Claims arising
out of my employment relationship with You.
2. Waiver. I hereby acknowledge and assume all risks or chances that the
injuries claimed to have resulted from the above-stated matter may become
greater or more extensive than now known, anticipated or expected. I understand
that this instrument shall be effective as a full and final release of all
Claims. I acknowledge that I am familiar with, and have been provided with,
separate consideration for that portion of Section 1542 of the Civil Code of the
State of California which provides as follows:
<PAGE>
"A general release does not extend to claims which
the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if
known by him must have materially affected his
settlement with debtor."
I waive any right that I have under the above-mentioned Section 1542 to the
fullest extent that I may lawfully waive all such rights pertaining to the
subject matter of this Agreement. In connection with the above waiver, I am
aware that I may hereafter discover Claims or facts in addition to or different
from those I now know or believe to exist with respect to the subject matter of
this Agreement or You. However, I, on behalf of myself and my successors and
assigns, hereby settle and release all of the Claims which I may have against
You.
3. No Admissions. I agree and acknowledge that this Agreement is not to be
construed as an admission of any violation of any federal, state or local
statutes, ordinance or regulation or any duty allegedly owed by You to me. You
specifically disclaim any liability to me on any basis.
4. Time Periods. I have been given the opportunity to take a period of at least
twenty-one (21) days within which to consider this Agreement. If I choose to
sign this Agreement before that time period expires, I do so knowingly and
voluntarily. I also understand that I have the right to change my mind and
cancel this Agreement within seven (7) days following the date that I have
signed it. This Agreement will not be effective until the end of this seven (7)
day period.
5. Consideration. In exchange for consideration of and reliance on (1) my
resignation as President and Chief Operating Officer effective March 11, 1998
and as a full-time associate effective April 30, 1998, (2) my agreement to
resign as a Director of Merisel, Inc. prior to June 30, 1998, (3) my execution
of this Agreement, and (4) my agreement to be bound by Paragraphs 6 (Disclosure
of Information), 7 (Employee Covenants), 8 (Non-Compete and Non-Solicitation)
and 9 (Return of Work Product) of the Employment Agreement, You agree to (1)
employ me as an employee consultant from May 1, 1998 through February 3, 1999 or
until I am employed on a full time basis or working as a consultant on a more
than half-time basis, whichever occurs first, at $12,500.00 monthly payable in
bi-weekly installments (this equates to an annualized salary of $150,000.00),
(2) continue benefit coverage through February 3, 1999 or until I am employed
and eligible for coverage, whichever occurs first, (3) pay me an amount equal to
the bonus I would have been entitled to receive pursuant to the Employment
Agreement for the first quarter of 1998 based on the guidelines of the 1998
Incentive Plan in accordance with Merisel's normal bonus payment procedures, and
(4) reimburse me for business expenses that result from employee consulting
services provided by me to Merisel. I agree that I will not be eligible for
bonus payments and any vacation or sick time beyond the first quarter of 1998. I
also agree that I will not seek anything further, including any other payment
from You. I further agree, in return for receipt of the foregoing payments, to
abide by all of your rules, policies and procedures applicable to current and
former associates.
<PAGE>
6. Confidentiality. I agree that the terms and conditions of this Agreement
shall remain confidential and shall not be disclosed to any other person (other
than my family members, attorneys, and accountants who shall be informed of and
bound by the confidentiality provisions of this Agreement) other than as
required by court order, legal process or applicable law or as otherwise agreed
to by You and me. I also agree that as a Director, Officer and employee of
Merisel, I received confidential information, including, without limitation,
information which would be protected by the attorney-client privilege or
work-product doctrine, and I further agree not to disclose any such confidential
information to anyone unless compelled to do so by legal process. I understand
that this provision regarding confidentiality constitutes a substantial
inducement for You to enter into this Agreement.
7. Non-Compete. In return for the payments set forth in paragraph 5 hereinabove,
for the period from the date of this Agreement through February 3, 1999, I will
not directly or indirectly (a) own or control any debt, equity, or other
interest in (except as a passive investor of less than 5% of the capital stock
or publicly traded notes or debentures of a publicly held company); or (b) act
as a director, officer, manager, employee, participant or consultant to; or (c)
be obligated to, or connected in any advisory business enterprise or ownership
capacity with, any of Tech Data Corp., Ingram Micro, Inc., Micro Age, Inc.,
Inacom Corp., Compucom, Entex Information Services, Inc., SYNNEX Technologies,
Inc., Arrow Electronics, Inc., or Vanstar Corp. or with any subsidiary, division
or successor of any of them or with any entity that acquires, whether by
acquisition, merger or otherwise, any significant amount of the assets or
substantial part of any of the business of any of them or any other wholesale
distributor of micro computer products or otherwise engage or participate in any
such business.
8. Non-Solicitation. In return for the payments set forth in paragraph 5
hereinabove, for the period from the date of this Agreement through February 3,
1999, I will not directly or indirectly solicit any associate of Merisel on my
behalf or on behalf of a competitor or customer of Merisel. As used herein, the
word "indirectly" includes but is not limited to attempting to induce any
associate of Merisel or its affiliates to leave Merisel or such affiliates for
any purpose.
9. Further Assurances and Future Cooperation. You and I, without further
consideration, agree to cooperate fully and execute any and all documents, and
to take all additional actions that may be necessary, convenient or appropriate
to give full force and effect to the basic terms and intent of this Agreement.
In addition, I agree to cooperate in good faith with You and your counsel in
connection with any pending or subsequent administrative proceeding, mediation,
arbitration or litigation including, without limitation, litigation relating to,
or arising out of, the Limited Waiver and Voting Agreement entered into on April
14, 1997 between Merisel and certain holders of Merisel's 12 - 1/2% percent
Senior Notes due in 2004, including, without limitation, by providing
<PAGE>
information and/or documents, participating in informal interviews, and
appearing for depositions and/or trial testimony. I further agree to notify
Merisel immediately, telephonically and in writing, personally or through my
legal counsel, of any subpoena, interview, deposition, or other contact with any
third party with respect to my employment with You, or litigation involving the
Limited Waiver and Voting Agreement or any disputes relating thereto. You agree
that Merisel, Inc. remains bound under the Indemnity Agreement dated February 3,
1997 entered into between Merisel, Inc. and myself.
10. Who is Bound. You and I are bound by this Agreement. Anyone who succeeds to
my rights and responsibilities, such as my heirs or the executor of my estate,
and any or your successors or assigns, is also bound by and entitled to the
benefit of this Agreement.
11. No Inducements. I further warrant that no promise or inducement for this
Agreement has been made except as set forth herein, that this Agreement is
executed without reliance upon any statement or representation by any person or
parties released, or their officers, directors, employees, agents or
representatives, concerning any fact material to my act in releasing them, and
that I am legally competent to execute this Agreement and accept full
responsibility therefor.
12. Representations. I represent and acknowledge that I understand the contents,
implications, and consequences of this Agreement, and that I agree to the terms
of this Agreement and have executed it voluntarily. I have had an opportunity to
discuss the terms of this Agreement with individuals of my own choosing who are
not associated with You. I have been advised by You to consult with an attorney
of my own choosing.
13. Entire Agreement. This Agreement constitutes the entire agreement between
You and I concerning the subject matter hereof and supersedes all prior
agreements between You and I, except the Employment Agreement to the extent that
its provisions survive. This Agreement may not be modified orally.
14. Governing Law. This Agreement is made and entered into in the State of
California and shall in all respects be interpreted, enforced and governed under
the laws of said State. The language of all parts of this Agreement shall be
construed as a whole, according to its fair meaning, and not strictly for or
against You or I.
15. Invalidity. Should any provisions of this Agreement be determined by any
court to be illegal or invalid, the validity of the remaining parts, terms or
provisions shall not be affected thereby and said illegal or invalid part, term
or provision shall be deemed not to be a part of this Agreement.
16. Arbitration. All controversies, claims, disputes, and matters in question
arising out of or relating to this Agreement, or the breach thereof, shall be
decided by arbitration in accordance with the provisions of this paragraph. The
<PAGE>
arbitration proceedings shall be conducted under the applicable rules of the
American Arbitration Association, or its successor in effect, at the time a
demand for arbitration under the rules is made. The arbitration board will
consist of three arbitrators, one chosen by each of us and the third selected by
the two arbitrators so chosen. The decision of the majority of the arbitrators,
including determination of amount of any damages suffered, shall be conclusive,
final, and binding on each of us, and our respective heirs, legal
representatives, successors, and assigns. The arbitrators shall be bound to
follow California law and case precedent. Any decision of the arbitrators will
not be binding if the arbitrators fail to follow California law and case
precedent. The losing party shall pay to the successful party its expenses in
the arbitration for arbitration costs, including arbitrators' fees and
attorneys' fees, fees for expert testimony, and for other expenses of presenting
its case.
I ACKNOWLEDGE AND AGREE THAT I HAVE BEEN ADVISED TO CONSULT WITH AN ATTORNEY
PRIOR TO EXECUTING THIS AGREEMENT; THAT TO THE EXTENT I HAVE DESIRED, I HAVE
AVAILED MYSELF OF THAT RIGHT; THAT I HAVE CAREFULLY READ AND UNDERSTAND ALL OF
THE PROVISIONS OF THIS AGREEMENT; THAT I WAS INFORMED I HAD TWENTY-ONE (21) DAYS
IN WHICH TO CONSIDER THIS AGREEMENT AND HAVE VOLUNTARILY WAIVED SUCH TWENTY-ONE
(21) DAY CONSIDERATION PERIOD; THAT I MAY REVOKE THIS AGREEMENT WITHIN SEVEN (7)
DAYS AFTER I EXECUTED IT; AND THAT I AM VOLUNTARILY ENTERING INTO THIS
AGREEMENT.
Please sign both copies of this Agreement on the line below to acknowledge your
agreement, retain one for your files and return the other in the enclosed
self-addressed stamped envelope.
IN WITNESS WHEREOF, the undersigned has executed this
AGREEMENT as of the date written freely and voluntarily.
4/30/98
DATED AS OF: ____________ MERISEL, INC.
/s/ Dwight Steffensen
By:_________________________________
4/30/98
DATED AS OF: ______________ ACKNOWLEDGED AND AGREED:
/s/ Robert J. McInerney
_________________________________
AMENDMENTS TO SECURITIZATION AGREEMENTS
AMENDMENTS TO SECURITIZATION AGREEMENTS, dated as of
July 31, 1998, among MERISEL AMERICAS, INC ("Merisel Americas"),
MERISEL CAPITAL FUNDING, INC. ("Merisel Capital Funding"), REDWOOD
RECEIVABLES CORPORATION ("Redwood") and GENERAL ELECTRIC CAPITAL
CORPORATION ("GE Capital").
WHEREAS, Merisel Americas, as originator (in such
capacity, the "Originator"), and Merisel Capital Funding are parties to
an Amended and Restated Receivables Transfer Agreement, dated as of
September 27, 1996, as amended by Amendment No. 1, dated as of November
7, 1996, and Amendment No. 2, dated as of December 19, 1997 (the
"Transfer Agreement");
WHEREAS, Merisel Capital Funding, as seller (in such
capacity, the "Seller"), Redwood as purchaser (in such capacity, the
"Purchaser"), GE Capital, as operating agent (in such capacity, the
"Operating Agent") and collateral agent (in such capacity, the
"Collateral Agent") and Merisel Americas (in such capacity, the
"Servicer") are parties to an Amended and Restated Receivables Purchase
and Servicing Agreement, dated as of September 27, 1996, as amended by
Amendment No. 1, dated as of November 7, 1996, and Amendment No. 2,
dated as of December 19, 1997 (the "Purchase Agreement");
WHEREAS, Redwood and GE Capital, in its capacity as
Collateral Agent, Letter of Credit Provider (in such capacity, the "LOC
Provider") and Letter of Credit Agent (in such capacity, the "LOC
Agent") are parties to a Second Amended and Restated Letter of Credit
Reimbursement Agreement, dated as of June 29, 1995 (the "Reimbursement
Agreement"), and Redwood, the LOC Agent and the LOC Provider are
parties to a Reimbursement Agreement Supplement, dated as of October 2,
1995, as amended by Amendment No. 1 to RFC Supplement, dated as of
December 19, 1997 (the "RFC Supplement");
WHEREAS, Redwood and GE Capital, in its capacity as
Liquidity Agent, Operating Agent and Collateral Agent are parties to a
Liquidity Loan Agreement, dated as of October 2, 1995 (the "Liquidity
Agreement");
WHEREAS, definitions and interpretations of the
Transfer Agreement and Purchase Agreement are set forth in Annex X
thereto, dated as of September 27, 1996, as amended on December 19,
1997 ("Annex X," and, together with the Transfer Agreement, the
Purchase Agreement, the Reimbursement Agreement, the RFC Supplement,
and the Liquidity Agreement, the "Securitization Agreements"); and
<PAGE>
WHEREAS, the parties hereto desire to amend the
Securitization Agreements (such amendment collectively referred to
herein as the "Amendments").
FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND
ADEQUACY OF WHICH ARE HEREBY ACKNOWLEDGED, THE PARTIES HERETO,
INTENDING TO BE LEGALLY BOUND HEREBY, AGREE AS FOLLOWS:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. All capitalized terms used
herein, unless otherwise defined, are used as defined in the Purchase
Agreement.
ARTICLE II
AMENDMENT NO. 2 TO ANNEX X
Section 2.1 Amendment to Annex X. Annex X is hereby
amended as set forth in this Section 2.1. (a) The definition of
"Additional Amounts" is hereby amended by replacing the word "and" with
a comma and adding after the reference to "2.11" the phrase "and 2.13".
(b) The definition of "Adverse Claim is hereby
amended by adding the following after the term "Collateral Agent
Agreement":
"or under the Inventory Facility"
(c) The definition of "Affected Parties" is amended
by adding "the Insurer" as one of the parties named therein.
(d) The definition of "Availability" is hereby
amended by adding at the end of clause (a)(iii) of such definition the
following: "and the Dilution Reserve."
(e) The definition of "Final Purchase Date" is hereby
amended to be July 31, 2003.
(f) The definition of "Investment Base" is amended
and restated to read as follows:
"'Investment Base' means, for any
date of determination, the amount equal to
the Outstanding Balance of Receivables that
are Eligible Receivables minus the Reserves
with respect thereto plus, for purposes of
determining "Funding Base" under the
Collateral Agent Agreement, at any time
after the Facility Termination Date, so long
as the Insurance Policy has not been
terminated, the aggregate amount that would
be available for drawing under the Insurance
Policy if such date were the "Draw Date"
thereunder, in each case as disclosed in the
most recently submitted Investment Base
Certificate or as otherwise determined by
the Purchaser, the Operating Agent or the
<PAGE>
Collateral Agent based on Seller Collateral
information available to any of them,
including any information obtained from any
audit or from any other reports with respect
to the Seller Collateral, which
determination shall be final, binding and
conclusive on all parties to the Purchase
Agreement (absent manifest error)."
(g) The definition of "Maximum Purchase Limit" is
hereby amended by replacing the amount "$300,000,000" with the amount
"$500,000,000."
(h) The definition of "Purchase Discount Rate" in
Annex X is hereby amended by deleting the existing text and replacing
in lieu thereof the following:
"Purchase Discount Rate"
means a rate, on any date of determination,
equal to 100% minus the greater of (a)(i)
the sum of the Loss Reserve Ratio and the
Dilution Reserve Ratio minus (ii) 20%, or
(b) 15%.
(i) The definition of "Purchaser Secured Parties" is
hereby amended by adding "the Insurer" as a party named therein.
(j) The definition of "Receivable" is hereby amended
by inserting the following at the end of clause (b) thereof:
",provided that Returned Goods (as defined
in the Intercreditor Agreement) shall cease
to constitute a "Receivable" to the extent
the Receivables Interest (as defined in the
Intercreditor Agreement) therein ceases to
exist as provided in Section 2.1 of the
Intercreditor Agreement"
(k) The definition of "Related Documents" is hereby
amended by adding "the Insurance Agreement" and the "Intercreditor
Agreement" as documents named therein.
<PAGE>
(l) The following definitions are hereby added:
(i) "'Dilution Reserve' means, on
any date of determination, an amount
calculated in accordance with the following
formula:
The lesser of (a) 5% of Investment Base and
(b) Investment Base x [(GDR x
2.00) + .05 - (1.00 - MPR)]
where:
GDR = Gross Dilution Ratio as of such date
of determination
MPR = The Purchase Discount Rate
(expressed as a decimal) as of such
date of determination.
(ii) "'Insurance Agreement' means
that certain Insurance Agreement among the
Insurer, the Purchaser, the Collateral Agent
and the Operating Agent, dated as of July
31, 1998."
(iii) "'Insurance Draws' means draws
made or to be made under the Insurance
Policy"
(iv) "'Insurer' means Ambac
Assurance Corporation, a New York stock
insurance company, and its permitted
successors and assigns."
(v) "'Insurance Policy' means Excess
of Loss Insurance Policy of the Insurer
designated as Policy No. AB0182BE naming GE
Capital, in its capacity as Collateral Agent
on behalf of the Purchaser, as the Insured
Party"
(vi) "Intercreditor Agreement" means
that certain Intercreditor Agreement, dated
as of June 30, 1998, among the Operating
Agent, the Collateral Agent, the Seller, the
Servicer, the Originator, the Purchaser and
the Inventory Lenders' Agent.
(vii) "Inventory Lenders' Agent"
means BankAmerica Business Credit, Inc., as
agent for the lenders named in the Inventory
Facility.
<PAGE>
(viii) "Inventory Facility" means
the revolving loans evidenced by that
certain Loan and Security Agreement dated as
of June 30, 1998, among the Originator, the
Inventory Lenders' Agent and the lenders
named therein.
ARTICLE III
AMENDMENT NO. 3 TO TRANSFER AGREEMENT
Section 3.1 Amendment to Section 2.01(b). Section
2.01(b) is hereby amended by inserting the following in the first
sentence thereof after the word "thereafter":
"which is prior to receipt of an Enforcement
Action (as defined in the
Intercreditor Agreement) as provided in
Section 2.4(a) of the Intercreditor
Agreement"
Section 3.2. Amendment to Section 4.03(c).
Section 4.03(c) is hereby amended by
inserting the following at the beginning thereof:
"except as provided in Section 2.4(c) of the
Intercreditor Agreement"
Section 3.3 Amendment to Exhibit B. Exhibit B is
hereby amended by replacing existing Exhibit B with a new Exhibit B
attached hereto as Schedule 1.
ARTICLE IV
AMENDMENT NO. 3 TO PURCHASE AGREEMENT
Section 4.1 Amendment to Article II.
(a) Section 2.02(b) is hereby amended by deleting the
last sentence therein (which was added in Amendment No. 2 to the
Purchase Agreement) and substituting in lieu thereof the following:
"In the event that the Seller gives notice
that it intends to terminate the Maximum
Purchase Limit under this Section 2.02(b)
and such termination is to be effective on
or prior to December 31, 1999, a condition
precedent to such termination is the receipt
by the Purchaser of a prepayment fee in the
amount of $1,000,000."
<PAGE>
(b) Section 2.10(a) is hereby amended by (i)
inserting the phrase ", the
Insurance Agreement" after the first reference to "this Agreement; and
(ii) deleting the phrase "the Seller's Share of"; and
(c) Section 2.10(b) is hereby amended by
(i)adding the phrase ", the Insurance
Agreement of" after the phrase "the Liquidity Loans" each time it
appears therein, (ii) deleting the phrase "the Seller's Share of" and
(iii) Section 2.10(c) is hereby amended by adding the phrase ", the
Insurance Agreement, the Insurance Policy" after the phrase "the
Liquidity Loans".
Section 4.2 Amendment to Section 4.01(u). Section
4.01(u) is hereby amended by inserting the following after the phrase
"Transfer Agreement":
"or, subject to the terms of the
Intercreditor Agreement, in favor of the
Inventory Lenders' Agent"
Section 4.3 Amendment to Article VI. (a)
Section 6.03(c)(iv) is hereby
amended by deleting the phrase "account of the Seller,"and substituting
in lieu thereof, "account of the Purchaser."
(b) Sections 6.05(b) and 6.05(c) are hereby deleted in
their entirety and replaced with the following:
"(b) transfer all amounts in the Deferred Purchase Price
Sub-Account, in the following priority:
(i) if an Event of Servicer
Termination has occurred and a Successor Servicer has
been appointed, to the Successor Servicer in an
amount equal to its accrued and unpaid Successor
Servicing Fees and Expenses;
(ii) to the Collateral Account for
the account of the Purchaser, in an amount equal to,
on any such Business Day on which Capital Investment
is being maintained through the issuance of
Commercial Paper (to the extent such Capital
Investment exceeds Transaction Liquidity Loans then
outstanding), accrued and unpaid CP Interest through
and including the date of maturity of the Commercial
Paper maintaining such Capital Investment;
<PAGE>
(iii) to the Insurer, any unpaid
premiums then owing the Insurer under the Insurance
Agreement;
(iv) if Insurance Draws are then
outstanding, to the Insurer, an amount equal to
accrued and unpaid interest on the Insurance Draws to
the extent amounts on deposit in the Deferred
Purchase Price Sub-Account are allocated to this
subparagraph (iv) pursuant to the terms of the
Insurance Agreement;
(v) if there are Transaction
Liquidity Loans outstanding, to the Transaction
Liquidity Agent on behalf of the Transaction
Liquidity Providers, in an amount equal to accrued
and unpaid interest on the Transaction Liquidity
Loans;
(vi) to the Capital InvestmentSub-
Account:
(A) an amount equal to the
Dilution Funded Amount; and
(B) if there are
Transaction Liquidity Loans then
outstanding or Capital Investment exceeds the
Transaction Liquidity Loans then outstanding, all
amounts remaining in the Deferred Purchase Price
Sub-Account, if any;
(vii) to the Letter of Credit Agent,
if there are any outstanding LOC Draws in respect of
the Seller, in an amount equal to accrued and unpaid
interest on such outstanding LOC Draws;
(viii) to the Collateral Account, an
amount equal to (A) accrued and unpaid Daily Yield
minus (B) the sum of (1) amounts paid under Section
6.05(b)(ii), (2) amounts paid under Section
6.05(b)(iv), (3) amounts paid under 6.05(b)(v) and
(4) amounts paid under Section 6.05(b)(vii);
(ix) if an Event of Servicer
Termination has not occurred, to the Servicer in an
amount equal to its accrued and unpaid Servicing Fee;
(x) upon payment in full of all
amounts set forth in clauses (c)(i)-(c)(viii) below,
to an account previously designated by the Seller, in
partial payment of the Deferred Purchase Price, the
balance, if any; and
<PAGE>
(c) transfer all amounts in the Capital
Investment Sub-Account, in the following priority:
(i) to the Collateral Account for
the account of the Purchaser, in an amount equal to,
(A) on any such Business
Day on which Capital Investment is being
maintained through the issuance of
Commercial Paper (to the extent such Capital
Investment exceeds Transaction Liquidity
Loans then outstanding), accrued and unpaid
CP Interest through and including such date,
to the extent not paid pursuant to Sections
6.05(b)(ii) and 6.05(b)(viii); and
(B) on any such Business
Day on which Capital Investment is being
maintained through the issuance of
Commercial Paper (to the extent such Capital
Investment exceeds Transaction Liquidity
Loans then outstanding), the principal of
all Capital Investment in excess of such
Transaction Liquidity Loans;
(ii) to the Insurer, to the extent
amounts on deposit in the Capital Investment
Sub-Account are allocated to this subparagraph
(c)(ii) pursuant to the terms of the Insurance
Agreement, unpaid premiums of the Insurer under the
Insurance Agreement to the extent not paid under
Section 6.05(b)(iii);
(iii) if Insurance Draws are then
outstanding, to the Insurer, to the extent amounts on
deposit in the Capital Investment Sub-Account are
allocated to this subparagraph (c)(iii) pursuant to
the terms of the Insurance Agreement, an amount equal
to:
(A) accrued and unpaid
interest on the Insurance Draws to the
extent not paid under Section 6.05(b)(iv);
and
(B) the outstanding amount
of Insurance Draws; and
(C) any other amounts owing
to the Insurer pursuant the
Insurance Policy or the Insurance
Agreement, including, without
limitation, any fees and expenses of
the Insurer other than Additional
Amounts and Indemnified Amounts;
<PAGE>
(iv) if there are Transaction
Liquidity Loans outstanding, to the Transaction
Liquidity Agent on behalf of the Transaction
Liquidity Providers, in an amount equal to:
(A) accrued and unpaid
interest on the Transaction Liquidity Loans
to the extent not paid pursuant to Section
6.05(b)(v);
(B) the principal of
outstanding Transaction Liquidity Loans; and
(C) any other amounts
(other than Additional Amounts and
Indemnified Amounts), including any fees,
owing to the Transaction Liquidity Agent or
Transaction Liquidity Providers in
connection with the Transaction Liquidity
Loans to the extent not paid pursuant to
Section 6.05(b)(v);
(v) to the Collateral Account for
the account of the Purchaser, in an amount equal to:
(A) all Additional Amounts
incurred and payable to any Affected Party; and
(B) all Indemnified Amounts
incurred and payable to any Indemnified
Party;
(vi) to the Letter of Credit Agent,
if there are any outstanding LOC Draws in respect of
the Seller, in an amount equal to:
(A) accrued and unpaid
interest on such outstanding LOC Draws to
the extent not paid pursuant to Section
6.05(b)(vii);
(B) the principal of such
outstanding LOC Draws; and
(C) any other amounts,
including fees, owing to the Letter of
Credit Agent in connection with such
outstanding LOC Draws; and
(vii) to the Collateral Account, an
amount equal to (A) accrued and unpaid Daily Yield
minus (B) the aggregate amounts paid pursuant to
Sections 6.05(b)(ii), 6.05(b)(iv), 6.05(b)(v),
6.05(b)(vii), 6.05(b)(viii), 6.05(c)(i)(A),
6.05(c)(iii)(A), 6.05(c)(iv)(A) and 6.05(c)(vi)(A).
<PAGE>
(viii) if an Event of Servicer
Termination has not occurred, to the Servicer in an
amount equal to its accrued and unpaid Servicing Fee;
and
(ix) upon payment in full of all
amounts set forth in clauses (c)(i)-(c)(viii) above,
to an account previously designated by the Seller,
the balance, if any."
Section 4.4 Amendment to Article IX.
(a) Section 9.01(b) of the Purchase Agreement is
hereby amended by replacing "$1,000,000" with "$500,000" in clause (ii)
thereof and adding at the end thereof the following:
"or (iii) a default, or an event that with
the passage of time or the giving of notice
or both would result in an event of default,
has occurred and been continuing for a
period of more than 30 days in respect of
any Debt of the Originator or the Seller,
having a principal amount of $500,000 or
more and incurred on and after the date
hereof (including, without limitation, Debt
incurred to refinance Debt that is in
existence as of the date hereof and the
Inventory Facility).
(b) Section 9.01(v) is hereby amended and restated to
read as follows:
"or (v) a breach of the covenants contained
in Exhibit J has occurred."
(c) Section 9.01(w) is hereby amended and restated to
read as follows:
"(w) unless the Purchaser, the Operating
Agent and each Rating Agency otherwise
consent, (i) Insurance Policy shall for any
reason cease to be in full force and effect
other than as a result of any action or
inaction by the Purchaser or the Operating
Agent (including, without limitation,
termination pursuant to Section 7.7 of the
Insurance Agreement), (ii) the Insurer shall
deny all or any material portion of its
liability under the Insurance Policy, or
<PAGE>
(iii) the Insurer shall cease to have a
long-term debt rating of AA or better from
S&P, and, in each case, the Operating Agent
shall not have received a replacement
Insurance Policy within 90 days on
substantially the same terms and issued by
an insurance company or other financial
institution with a long-term debt rating of
AA or better from S&P and/or Aa2 or better
from Moody's and otherwise reasonably
acceptable to the Operating Agent (provided
no Termination Event shall be deemed to
exist under this clause (w) unless the
Operating Agent has utilized reasonable best
efforts to obtain such a replacement policy
within such 90 day period);
Section 4.5 Amendment to Section 14.03(a). Section
14.03(a) is hereby amended by adding ", the Insurer" after the phrase
"the Operating Agent" each time such phrase appears therein.
Section 4.6 Amendment to Schedule 1. Schedule 1 is
hereby deleted and replaced with the following:
<PAGE>
Schedule 1
CONCENTRATION LIMITS
I. Obligor Long-Term Concentration Limit
Debt Rating(1)(2) Percentage
AA/Aa2 or higher 15%
A/A3 8%
Less than A/A3 or not rated 4%
II. Obligor
Micro Warehouse, Inc. 5%
Office Depot, Inc. 6%(3)
Dell Computer Corporation 6%(4)
Section 4.7 Amendment to Exhibit H. Exhibit H of
----------------------
the Purchase Agreement is hereby amended by:
---------------------------
(1) An Obligor may have a deemed rating equivalent to the debt rating
of its parent corporation (provided that the parent is liable for the
debts of the Obligor) or an unconditional third party insurer or
guarantor under an insurance contract or a guarantee acceptable to the
Operating Agreement and the Collateral Agreement.
(2) Does not include Obligors listed below.
(3) Provided that the senior unsecured debt of such company is rated
Baa or better my Moody's and BBB by S&P.
(4) Provided that the senior unsecured debt of such company is rated
Baa1 by Moody's and BBB by S&P.
<PAGE>
(a) by adding the phrase "minus Capital Expenditures"
after the term "EBITDA" in the definition of "Fixed Charge Coverage
Ratio."
(b) deleting the chart as it appears in such Exhibit
and substituting in lieu thereof the following chart:
FINANCIAL COVENANTS
All covenants (i) shall be calculated on the basis of
the financial ratios and net worth percentages for the most recent four
consecutive fiscal quarters just completed, ending in each case with
one of the quarters specified in the tables below, and (ii) shall be
calculated on a quarterly basis. For the Fixed Charge Coverage Ratio
covenants and Interest Coverage Ratio covenants, with respect to any
period of four fiscal quarters that ends before the Fourth Quarter of
1998 are to be calculated on a pro-forma basis including without
limitation with respect to interest expense, principal payments and
Restructuring Costs, as if (a) the indebtedness that was refinanced or
retired in connection with the issuance of the Stonington Convertible
Note had been refinanced or retired by the Stonington Convertible Note
as of the last day preceding the four fiscal quarters in respect of
which such covenants are to be calculated and (b) the Stonington
Convertible Note was converted into common stock of the Parent as of
the last day preceding the four fiscal quarters in respect of which
such covenants are to be calculated; provided that the pro-forma
adjustments referred to in the foregoing clause (iii) shall be
reasonably satisfactory to the Operating Agent as evidenced by the
written approval of the Operating Agent; provided, further, that if the
adjustments are not reasonably satisfactory to the Operating Agent, the
parties to the Purchase Agreement shall negotiate in good faith to
resolve any differences. For purposes of determining the covenants set
forth in this Exhibit H, Funded Debt shall include any notes, bonds,
certificates or other interests issued in a securitization of assets of
the Originator or any of its Subsidiaries and principal payments on
Funded Debt shall include any payments in respect of principal of such
securities and Cash Interest Expense shall include any payments or
distributions in respect of interest on such securities.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Covenant Level
I. Parent Fixed Charge Coverage Ratio (minimum)
Fourth Quarter of 1997 1.00 to 1.00
First Quarter of 1998 1.00 to 1.00
Second Quarter of 1998 1.00 to 1.00
Third Quarter of 1998 0.85 to 1.00
Fourth Quarter of 1998 0.70 to 1.00
First Quarter of 1999 0.60 to 1.00
Second Quarter of 1999 0.60 to 1.00
Third Quarter of 1999 0.70 to 1.00
Fourth Quarter of 1999 0.90 to 1.00
First Quarter of 2000 1.0 to 1.0
Second Quarter of 2000 1.0 to 1.0
Third Quarter of 2000
and thereafter 1.1 to 1.0
Interest Coverage Ratio (minimum)
Fourth Quarter of 1997 1.10 to 1.00
First Quarter of 1998 1.10 to 1.00
Second Quarter of 1998 1.15 to 1.00
Third Quarter of 1998 1.25 to 1.00
Fourth Quarter of 1998
and each quarter thereafter 1.40 to 1.00
II. Seller Net Worth Percentage (minimum) 15%
III. Parent Tangible Net Worth (minimum) $105,000,000
(commencing
1/3/1998)
plus the
greater of
85% of Net
Income and
zero
</TABLE>
[END OF CHART]
<PAGE>
Section 4.8 Amendment to Section 12.01(a). Section
12.01(a) is hereby amended by adding ",the Insurer" after the phrase
"any Transaction Liquidity Lender" the first time such phrase appears.
(b) The definition of "Fixed Charges" is
hereby amended and restated to read:
"'Fixed Charges' means, with respect to any
Person for any period, the sum of
the following amounts payable during
such period by such Person and its
consolidated subsidiaries: (i) Cash
Interest Expense in respect of
Funded Debt, (ii) regularly
scheduled principal payments on
Funded Debt, and (iii) cash taxes."
(c) The definition of "Tangible Net Worth"
is hereby amended and restated to
read:
"'Tangible Net Worth' means, with respect to
any Person and its consolidated
subsidiaries, assets minus liabilities."
Section 4.9 Addition of Exhibit J. A new
Exhibit J is added to read as follows:
<PAGE>
Exhibit J
(i) As of the last day of any fiscal month, the Net Dilution
Ratio shall not exceed 8%, (ii) the Default Ratio shall not exceed
3.5% and (iii) as of the last day of any fiscal month neither the
Receivable Collection Turnover Ratio nor the Gross Dilution Ratio
shall exceed the levels set forth below for the corresponding range
of Sales Ratios:
Receivable
Collection Gross
Sales Ratio Turnover Dilution Ratio
----------- ---------- --------------
25% or less 44 days 12.0%
25.1% to 30% 45 days 12.5%
30.1% to 35% 46 days 13.0%
35.1% to 40% 47 days 13.5%
40.1% to 45% 48 days 14.0%
45.1% to 50% 49 days 14.5%
Greater than 50% 50 days 15.0%
"Sales Ratio" shall be the ratio (expressed as a percentage)
of (x) sales of merchandise in respect of (a) the "Merisel Open
Computing Alliance" plus (b) total retail sales, divided by (y) total
sales of merchandise.
[END OF EXHIBIT J]
<PAGE>
ARTICLE V
AMENDMENT NO. 2 TO RFC SUPPLEMENT.
Section 5.1 Amendment to the RFC Supplement.
-------------------------------
The RFC Supplement is hereby amended by (a) deleting "$300,000,000" as
the Maximum Purchase Limit and substituting in lieu thereof
"$500,000,000"; and
(b) amending and restating the LOC Draw Percentage to read as
follows:
"25%; provided, that, for purposes of
computing Aggregate LOC Draw
Availability in Section 6.07(ii) of
the Collateral Agent Agreement, if
25% results in LOC Draw Availability
in respect of Merisel Capital
Funding Inc. being less than
$80,000,000, the LOC Draw Percentage
shall be increased to a percentage
necessary to produce Aggregate LOC
Draw Availability in respect of
draws relating to Merisel Capital
Funding, Inc. of $80,000,000."
ARTICLE VI
AMENDMENT NO. 1 TO LIQUIDITY AGREEMENT.
Section 6.1 Amendment to Amount of
Liquidity Commitment. The definition of "Liquidity Commitment is
hereby amended by replacing the amount "$309,000,000" with the
amount "$515,000,000." The amount of $309,000,000 wherever it
appears in the Liquidity Agreement is hereby amended to $515,000,000.
Section 6.2 Conditions to Increase in
Liquidity Commitment (a) Commencing on [the date hereof], GE Capital
will hold 100% of the Liquidity Commitment. In connection with
the increased Liquidity Commitment as set forth in Section 5.1 herein
above, GE Capital hereby waives the requirement set forth in Section
5.04(a) that Redwood deliver a "Letter re Increase in Liquidity
Commitment." The undersigned "Authorized Officer" (as defined in the
Liquidity Agreement) of Redwood hereby certifies pursuant to
Section 5.04(d) of the Liquidity Agreement that all conditions
specified in Section 5.04 of the Liquidity Agreement relating to the
increase in Liquidity Commitment have been satisfied. The foregoing
certification is hereby deemed to be the "Company Certificate"
required by Section 5.04(d) of the Liquidity Agreement.
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1. Conditions Precedent.
The effectiveness of these Amendments is subject to the conditions
precedent that the Collateral Agent, the Operating Agent, the
Liquidity Agent, the LOC Agent and the Purchaser shall have received
each of the following, in form and substance satisfactory to each
such party:
(a) All consents required under the
Reimbursement Agreement and Liquidity Loan Agreement and confirmation
from each Rating Agency that the Rating Agency Condition has been
satisfied.
(b) A certificate of the Secretary of each
of the Seller and the Servicer, dated the date of these Amendments and
certifying (i) that attached thereto is a true and complete copy of
a resolution of the Board of Directors of the Seller or the
Servicer, as the case may be, authorizing the execution,
delivery and performance of these Amendments, and all other
documents required or necessary to be delivered hereunder and that
such resolution has not been modified, rescinded or amended and is in
full force and effect and (ii) as to the incumbency and specimen
signature of each Person's officers executing these Amendments, and all
other documents required or necessary to be delivered hereunder.
(c) A certificate of an officer of each of
the Seller and the Servicer, dated the date of these amendments,
certifying that each of the representations and warranties made by
the Seller and the Servicer in these Amendments is true and correct in
all material respects as of the date hereof.
(d) The opinion of Skadden, Arps, Slate,
Meagher & Flom LLP,in form and substance reasonably satisfactory to the
Purchaser, the LOC Agent, the Liquidity Agent, the Operating Agent
and the Collateral Agent, as to certain matters including, without
limitation, (i) the valid existence and good standing of the Seller
and Servicer, (ii) the power and authority of the Seller and Servicer
(or Originator, as the case may be) to execute (A) the Amendments in
respect of the Purchase Agreement and Transfer Agreement and (B) the
Intercreditor Agreement, (iii) the due authorization, execution and
delivery of (A) the Amendments in respect of the Purchase Agreement
and the Transfer Agreement and (B) the Intercreditor Agreement by the
<PAGE>
Seller and Servicer (or Originator, as the case may be), (iv) the
enforceability of the Amendments and the Intercreditor Agreement
against the Seller and Servicer (or Originator, as the case may be),
(v) that the execution and delivery of the Amendments in respect
of the Purchase Agreement and the Transfer Agreement and (B) the
Intercreditor Agreement (x) does not conflict with the organizational
documents of the Seller or Servicer and (y) does not violate or
constitute a default under any material financing agreements of the
Seller or Servicer, and (vi) that the Amendments provided for herein
do not adversely affect the validity or perfection of the security
interest of the Seller or the Purchaser in the Collateral.
(e) An Officer's Certificates in form and
substance satisfactory to the Operating Agent to the effect that
all of representations and Warranties in the Transfer Agreement
and Purchase Agreement are true and correct in all material respects
as of the date hereof.
(f) Execution and delivery by the Insurer,
the Collateral Agent and the Operating Agent of the Insurance
Agreement.
(g) Delivery by Insurer to the LOC Provider
of its Insurance Policy.
(h) Such other approvals, opinions or
documents as the Collateral Agent, the Liquidity Agent, the LOC Agent,
the Operating Agent or the Insurer may reasonably request.
(i) Execution and delivery of the
Intercreditor Agreement by each of the parties thereto.
ARTICLE VIII
SELLER'S AND SERVICER'S REPRESENTATIONS
AND WARRANTIES
SECTION 8.1 Seller's and Servicer's
Representations and Warranties. Each of the Seller and the Servicer
represents and warrants that:
(a) these Amendments have been duly
authorized, executed and delivered pursuant to its corporation power;
<PAGE>
(b) these Amendments constitute its legal,
valid and binding obligation; and
(c) after giving effect to the amendments
referred to herein, there does not exist any Termination Event.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Confirmation of Securitization
Agreements. Each of the Seller and the Servicer agree that, except
for the specific amendments set forth herein, nothing herein shall
be deemed to be a waiver or amendment of any covenant or agreement
contained in the Securitization Agreements and each of the other
documents executed in connection therewith are ratified and confirmed
in all respects and shall remain in full force and effect in
accordance with its terms. Each reference in the Purchase Agreement,
Annex X, the Reimbursement Agreement, the Liquidity Agreement and the
RFC Supplement to "this Agreement" and in each of the other documents
to be executed in connection therewith to the "Purchase Agreement,"
"Annex X," the "Reimbursement Agreement," the "Liquidity
Agreement," and the "RFC Supplement," as the case may be, shall
mean such respective agreement as amended by these Amendments and
as each such agreement may be hereinafter amended or restated.
Nothing herein shall obligate the Seller, the Servicer, the
Purchaser, Liquidity Agent, the LOC Agent, the Operating Agent or
the Collateral Agent to enter into any future amendment (whether
similar or dissimilar).
SECTION 9.2 Waiver by the Seller; Consent
to Inventory Facility and Intercreditor Agreement. (a) Except for
manifest errors on the part of the Operating Agent, each of the Seller
and the Servicer hereby waives any claim, defense, demand, action
or suit of any kind or nature whatsoever against the Purchaser, the
LOC Provider, the LOC Agent, the Operating Agent and the Collateral
Agent arising on or prior to the date hereof in connection with
the Purchase Agreement or the transactions contemplated thereunder.
(b) Each of the Servicer, the Seller, the
Purchaser, the Operating Agent and the Collateral Agent consents
to the execution, delivery and performance of the Inventory
Facility (as in effect as of the date of execution and delivery
thereof) and the Intercreditor Agreement (as amended) each in
accordance with the terms thereof.
<PAGE>
SECTION 9.3 Counterparts. Delivery of an
executed counterpart of a signature page to these Amendments by
facsimile shall be effective as delivery of a manually executed
counterpart of these Amendments. These Amendments may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be
an original and all of which taken together shall constitute one and
the same agreement.
SECTION 9.4 Governing Law. The amendments
to Annex X, the Transfer Agreement and the Purchase Agreement shall
be governed by, and construed in accordance with, California law.
The amendments to the Liquidity Agreement and the RFC Supplement
shall be governed by, and construed in accordance with New York law.
SECTION 9.5 Effective Date of Amendments.
Upon the execution and delivery of these Amendments by the parties
hereto and the satisfaction of the conditions precedent set forth
herein, the Securitization Agreements shall be amended by these
Amendments, effective as of the date hereof.
* * *
<PAGE>
IN WITNESS WHEREOF, the Seller, the
Servicer, the Originator, the Collateral Agent, the Operating Agent, the
Liquidity Agent, the LOC Agent, the LOC Provider and the Purchaser have caused
these Amendments to be duly executed by their respective authorized officers as
of the date and year first above written.
MERISEL CAPITAL FUNDING, INC.,
as Seller
/s/ Charles B. Freedman
By:___________________________
Title: Treasurer
Name: Charles B. Freedman
MERISEL AMERICAS, INC.,
as Originator and Servicer
/s/ James E. Illson
By:___________________________
Title: Executive Vice President
Name: James E. Illson
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
as Operating Agent and Collateral Agent
/s/ Janet K. Williams
By:___________________________
Title: Duly authorized signatory
Name: Janet K. Williams
GENERAL ELECTRIC CAPITAL CORPORATION,
as LOC Agent, Liquidity Agent and LOC
Provider
/s/ Joan B. Makara
By:__________________________
Title:
Name: Joan B. Makara
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
/s/ H. Darren Alcus
By:___________________________
Title: Assistant Secretary
Name: H. Darren Alcus
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 168,448
<SECURITIES> 0
<RECEIVABLES> 161,639
<ALLOWANCES> 18,414
<INVENTORY> 431,013
<CURRENT-ASSETS> 767,494
<PP&E> 111,898
<DEPRECIATION> 62,785
<TOTAL-ASSETS> 844,779
<CURRENT-LIABILITIES> 568,236
<BONDS> 0
0
0
<COMMON> 802
<OTHER-SE> 144,944
<TOTAL-LIABILITY-AND-EQUITY> 844,779
<SALES> 2,198,109
<TOTAL-REVENUES> 2,198,109
<CGS> 2,074,655
<TOTAL-COSTS> 97,052
<OTHER-EXPENSES> 9,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,673
<INCOME-PRETAX> 9,108
<INCOME-TAX> 364
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,744
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
