SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
incorporation or organization) Identification No.)
200 Continental Boulevard
El Segundo, California 90245-0948
(Address of principal executive offices) (Zip Code )
Registrant's telephone number, including area code: (310) 615-3080
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 30,1998, the aggregate market value of voting stock held by
non-affiliates of the Registrant based on the last sales price as reported by
the Nasdaq National Market System was $89,536,602 (29,845,534 shares at a
closing price of $3.00).
As of March 30, 1998, the Registrant had 80,212,918 shares of Common Stock
outstanding.
Documents Incorporated By Reference
Portions of the Registrant's definitive Proxy Statement for its 1998 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
PART I
<S> <C>
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 8
Item 3. Legal Proceedings............................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 11
Item 6. Selected Financial Data...................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 13
Item 8. Financial Statements and Supplementary Data.................................................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 45
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 46
Item 11. Executive Compensation....................................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 46
Item 13. Certain Relationships and Related Transactions............................................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 46
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K,
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 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, (viii) the ability to attract and
retain qualified personnel, and (ix) other risks detailed in this report. These
factors are discussed in more detail elsewhere in this report, including,
without limitation, under the captions "Business", "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". 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 I
Item 1. Business.
Overview
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 Company was
incorporated in 1980 as Softsel, Inc. and changed its name to Merisel, Inc. in
1990 in connection with the acquisition of Microamerica, Inc.
At December 31, 1997, Merisel stocked more than 25,000 products from more than
500 of the computer hardware and software industry's leading manufacturers,
including American Power Conversion, Apple, Compaq, Corel, Creative Labs,
Digital Equipment Corporation, Epson America, Hewlett-Packard, IBM/Lotus, Intel,
Iomega, Kingston Technology, Lexmark, Microsoft, NEC Technologies, Novell,
Okidata, Seagate, Sony, Sun Microsystems, Symantec, 3Com/U.S. Robotics, Toshiba,
ViewSonic and Western Digital. Merisel sells products to more than 45,000
computer resellers throughout North America, including VARs, large retail
chains, commercial resellers/dealers, computer superstores, mass merchants, Sun
Microsystems resellers, system integrators and original equipment manufacturers
("OEMs"). The breadth of Merisel's product line, together with its extensive
distribution network, enables the Company to provide its customers with a single
supply source and prompt product delivery.
During 1996, Merisel determined to sell substantially all of its assets and
operations outside of North America and pursued a business plan that was
developed to address liquidity and capital structure issues by controlling costs
and curtailing non-essential capital expenditures as well as disposing of
assets. In March 1996, effective as of January 1, 1996, Merisel sold its
Australian operations to Tech Pacific Holdings Ltd. ("Tech Pacific"). On October
4, 1996, Merisel completed the sale of substantially all of its European,
Mexican and Latin American businesses (such businesses are referred to herein as
"EML") to CHS Electronics, Inc. ("CHS"). In addition, as of March 28, 1997,
Merisel completed the sale of substantially all of the assets of its wholly
owned subsidiary, Merisel FAB, Inc. ("Merisel FAB"), which operated the
ComputerLand Franchise and Datago Aggregation Business, to SYNNEX Information
Technologies, Inc. ("Synnex"). On April 12, 1997, the Company sold its minority
interest in a corporation engaged in the distribution of computer hardware and
software products in the former Soviet Union. As a result of the foregoing
transactions, 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. Of these
sales, 80% were generated in the United States and 20% were generated in Canada.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In 1997, the Company pursued a business strategy (the "1997 Business Strategy")
focused on profitable North American revenue growth and improving its capital
structure. Under the 1997 Business Strategy, Merisel concentrated on
strengthening and building its sales infrastructure and controlling operating
expenses. Other priorities in 1997 included continuing efforts to achieve
operational excellence, addressing financial controls and policies by
emphasizing margin improvements and tight expense control, and implementing a
strategy focused on the United States and Canada. The Company's 1998 business
strategy calls for improving margins and profitably growing the business, and
incorporates a North American focus along with the following key initiatives:
implementing the SAP operating system in the U.S.; enhancing
configuration/channel assembly capabilities; and expanding electronic commerce
services.
Also during 1997, the Company pursued and completed a debt restructuring plan
that resulted in the repayment of substantially all of its operating company
indebtedness with the proceeds of a $152 million equity investment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<PAGE>
The Industry
The computer products distribution industry is growing rapidly throughout North
America, with the rise in demand for computer products and the increased use of
wholesale distribution by manufacturers for sales support of their products.
There are two types of businesses that assist manufacturers in getting their
products to market: those that sell directly to end users ("resellers") and
those that sell to resellers ("wholesale distributors").
Resellers sell directly to end users, such as large corporate accounts, small-
to medium-sized businesses and home users. Resellers fall into the following
channel segments: VAR, commercial reseller or dealer, and retailer. VARs, which
comprise one of the largest channel segments, typically add value by combining
proprietary software and/or services with off-the-shelf hardware or software.
OEMs and systems integrators fall under the VAR channel segment.
Wholesale distributors sell to resellers. Distributors generally purchase a wide
range of products in bulk directly from manufacturers and then ship products in
smaller quantities to many different types of resellers. With product
proliferation and increasingly complex technologies, resellers are becoming more
dependent on wholesale distributors to provide value-added services, which
simplify and/or increase profit potential for reseller businesses. As a result,
wholesale distributors are increasingly expanding their core competencies beyond
product distribution to include offerings such as configuration, channel
assembly, financial services, training, marketing services, telemarketing,
electronic services and technical support.
Business Strategy
Merisel offers leading products and services to resellers at competitive prices.
The Company provides cost-effective customer service to targeted customer groups
through its inside and field sales forces and specialized marketing programs. In
1997, the Company continued to actively pursue sales via "electronic commerce,"
which encompasses the Internet and other electronic interfaces to market
products, establish accounts and take orders at typically lower operating costs
than traditional sales methods.
Providing Leading Products and Services. The Company's objective is to offer a
broad range of leading brands in each of the product categories it carries. By
stocking a broad mix of products, the Company meets the needs of resellers who
prefer to deal with a single source for many of their product requirements. The
Company continually evaluates new products, the demand for current products, and
its overall product mix and seeks to develop distribution relationships with
suppliers of products that enhance the Company's product offerings. The Company
believes that the size of its reseller customer base, combined with the breadth
and quality of its marketing support programs, give Merisel a competitive
advantage over smaller, regional distributors in developing and maintaining
supplier relationships.
Customer Service and Satisfaction. Merisel believes that a high level of
customer satisfaction is important to achieve and maintain success in the very
competitive computer products distribution industry. The Company measures
customer satisfaction by such standards as accuracy and efficiency in product
delivery and the provision of comprehensive services and information. Merisel
strives on an ongoing basis to improve its operational processes in order to
achieve increasingly high levels of customer satisfaction.
Resellers can place their orders via SELline, Merisel's remote order-entry and
information service, accessible via the Internet from Merisel's corporate Web
site. For larger customers, the Company has also installed electronic data
interchange ("EDI") systems, which allow participating customers to directly
access Merisel's computer system for order processing and account information.
Targeting Customer Groups. Merisel serves a variety of reseller channels, which
have diverse product, financing and support requirements. Merisel was among the
first major wholesale distributors in the industry to offer its various customer
groups a channel-dedicated sales force as well as customized product offerings,
financing programs and marketing and technical support programs, all of which
are tailored to address the differing needs of these customer groups. The
Company intends to continue focusing on the profitability of the markets it
serves to identify customer opportunities and develop sales and marketing
programs that serve these groups more effectively.
<PAGE>
Products
Merisel distributes more than 25,000 hardware and software products for MS-DOS,
Windows, NT, OS/2, Macintosh and Sun Microsystems/UNIX(R) operating
environments. Hardware products include computer components such as servers,
printers, monitors, disk drives and other storage devices, modems and other
connectivity devices, routers, switching products, communication/networking
(local and wide area) products, plug-in boards, and accessories. The Company's
software mix includes business application software for spreadsheets, word
processing programs, desktop publishing and graphics packages, educational
software and games, as well as a broad offering of operating systems, including
local area networks, advanced language, and utility products.
In fiscal 1997, net sales of hardware and accessories for the Company's ongoing
U.S. and Canadian distribution businesses accounted for approximately 77% of
sales, while software product sales accounted for the remaining 23% of sales.
Manufacturers and Manufacturer Services
Merisel has established and developed long-term business relationships with many
of the leading manufacturers in the computer industry. The Company's suppliers
include American Power Conversion, Apple, Compaq, Corel, Creative Labs, Digital
Equipment Corporation, Epson America, Hewlett-Packard, IBM/Lotus, Intel, Iomega,
Kingston Technology, Lexmark, Microsoft, NEC Technologies, Novell, Okidata,
Sony, Sun Microsystems, Symantec, 3Com/U.S. Robotics, Toshiba, ViewSonic and
Western Digital. Merisel is one of only three distributors in the United States
authorized to sell Sun Microsystems products.
Merisel enters into written distribution agreements with the manufacturers of
the products it distributes. As is customary in the industry, these agreements
usually provide non-exclusive distribution rights and often contain territorial
restrictions that limit the countries in which Merisel is permitted to
distribute the products. The agreements generally provide Merisel with stock
balancing and price protection provisions which partially reduce Merisel's risk
of loss due to slow-moving inventory, supplier price reductions, product updates
or obsolescence. The Company's agreements, which generally have a term of at
least one year, may contain minimum purchase amounts and generally contain
provisions permitting earlier termination by either party upon written notice.
Although Merisel regularly stocks products and accessories supplied by more than
500 manufacturers, 69% of net sales for the North American Business in 1997 (as
compared to 60% in 1996 and 55% in 1995) was derived from products supplied by
Merisel's 10 largest vendors, with the sale of products manufactured by
Microsoft, Hewlett-Packard, Sun Microsystems and Compaq accounting for
approximately 15%, 12%, 12%, and 10%, respectively, of net sales in 1997 (as
compared to 14%, 9%, 10% and 10%, respectively, in 1996, and 18%, 6%, 7% and 8%,
respectively, in 1995). Because reseller customers often prefer to deal with a
single source for many of their product needs, the loss of the ability to
distribute a particularly popular product could result in losses of sales
unrelated to the product. The loss of a direct relationship between the Company
and any of its key suppliers could have an adverse impact on the Company's
business and financial results.
Merisel provides its manufacturers with access to one of the largest bases of
computer resellers in North America, as well as the means to reduce inventory,
credit, marketing, and overhead costs typically associated with maintaining
direct reseller relationships. Through its product marketing group, the Company
develops and implements promotional programs for specific manufacturers to
increase customer purchasing depth and breadth. Promotional programs include
bundle offers, growth goal incentives, and reseller training events as well as
channel communication vehicles such as target direct mail, fax and advertising.
In addition, the Company provides manufacturers with the opportunity to
participate in Merisel's Softeach computer products training forum. Each year,
more than 4,000 resellers and dozens of leading manufacturers gather for two
days of intensive, small group seminars in cities across the country.
Manufacturers can take advantage of this forum to train resellers on how to
market their products and increase sales.
<PAGE>
Customers and Customer Services
In 1997, Merisel sold products and services to more than 45,000 computer
resellers throughout North America. Merisel's smaller customers often do not
have the resources to establish a large number of direct purchasing
relationships or stock significant product inventories, nor can they meet
manufacturers' minimum purchase requirements or obtain acceptable credit.
Consequently, they tend to purchase a high percentage of their products from
distributors such as Merisel, which can meet their inventory needs quickly and
efficiently. Larger resellers often establish direct relationships with
manufacturers for their more popular products but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products which may
not be available on a timely basis from manufacturers. No single customer
accounted for more than 4% of Merisel's net sales in 1997, 1996 or 1995.
Single Source Provider. Merisel offers computer resellers a single source for
more than 25,000 competitively priced hardware and software products. By
purchasing from Merisel, the reseller only needs to comply with a single set of
ordering, billing and product return procedures and may also benefit from
attractive volume pricing and third-party financing programs. In addition,
resellers are generally allowed, within specified time limits and/or specified
volume limits, to return products for credit to be applied against future
purchases from Merisel.
Prompt Delivery. In the United States and Canada, orders received by 5:00 p.m.
local time are typically shipped the same day, provided the required inventory
is in stock. Merisel maintains sufficient inventory levels in the United States
to fill consistently in excess of 95% of all units ordered on the day of
receipt. As part of a continuing effort to improve accuracy, Merisel's
Information and Logistical Efficiency System ("MILES") was first installed in
the Company's Atlanta warehouse in early 1994. By 1996, installation of this
custom computerized warehouse management system was completed in all nine of
Merisel's North American warehouses. The successful implementation of MILES has
resulted in significant improvements in inventory and shipping accuracy rates.
The Company believes that its shipping accuracy rates are currently the highest
in the industry at 99.993%.
Merisel typically delivers products from its regional warehouses via Federal
Express, United Parcel Service, and other common carriers. Most customers in the
United States receive orders within one or two working days of shipment. Merisel
also provides customer-paid overnight air handling upon request. These services
allow resellers to minimize inventory investment and serve their customers
responsively. For larger customers in the United States, Merisel also provides a
fulfillment service to ship orders directly to resellers' customers which speeds
delivery and further minimizes reseller inventories.
Financing Programs. Merisel's credit policy for qualified resellers eliminates
the need for them to establish multiple credit relationships with a large number
of manufacturers. In addition, the Company arranges floor plan and lease
financing through a number of credit institutions and allows credit card
purchases by qualified customers. To allow certain resellers to purchase larger
orders in the United States, the Company can arrange alternative financing such
as escrow programs and special bid financing.
Information Services. Merisel provides its reseller customers with a series of
publications containing detailed information on products, pricing, promotions
and developments in the industry. Merisel also publishes the Merisel Product
Catalog, which lists Merisel's current product offerings. Merisel's corporate
Web site offers technical product information on thousands of products and links
to more than 400 of the industry's leading manufacturers. Resellers can obtain
current information on programs and services, daily product promotions,
strategic Merisel announcements and the Merisel Open Computing Alliance.
Customers can communicate with Merisel Customer Service via e-mail, download
return authorization and system return forms, and track product shipments with
links to Federal Express and UPS. Merisel's Web site also offers secure, 24-hour
access to SELline, Merisel's remote order-entry and information service, so
resellers can place their product orders through the Company's Web site at
www.merisel.com. SELline provides resellers with real-time access to pricing,
credit information, technical descriptions, product availability and promotional
information.
<PAGE>
Training and Technical Support. Through Merisel's Educational Services offering,
resellers and their customers can choose from a broad selection of training
solutions on UNIX(R), networking systems, the Internet, intranet, data
communications and mainstream software applications. Merisel also provides
training and product information to resellers through Softeach, a series of
manufacturer-hosted computer products training forums. Each year, more than
4,000 resellers and dozens of leading manufacturers gather for two days of
intensive, small group seminars in cities across the country. In addition,
Merisel's Tech Trax Technology Training Seminars are designed to provide Merisel
resellers with technology-focused training on how to sell and support
profitable, high-end solutions.
Merisel provides resellers with direct access to the Company's technical support
engineers through a dedicated hot line. Resellers can take advantage of
specialized technical support for virtually all product lines sold by Merisel.
In addition, Merisel's engineers provide regular product training for Merisel's
sales representatives to help them increase their product knowledge and their
ability to answer resellers' questions.
Sales and Marketing
During 1997, the Company's sales organization for its core distribution business
in the United States was organized into four sales divisions to serve the VAR,
retail, commercial reseller/dealer and Sun Microsystems reseller market
segments. The VAR division offers specialized services and technical products to
value-added resellers, system integrators and OEMs who offer service, support
and consulting to clients in addition to selling computer products. The
Company's MOCA(TM) division is dedicated primarily to selling and supporting Sun
Microsystems and Sun-complementary UNIX-based products through its own sales,
marketing, operations, and technical support departments. The retail division
primarily services mass merchants and computer chain stores, while the
commercial reseller/dealer division offers direct fulfillment services, EDI
transaction support and dedicated field and inside support to large-volume
national accounts.
The Company's sales department for its distribution business in Canada is also
structured to reflect the various customer segments. In February 1997, the
Company launched its MOCA(TM) division in Canada.
The Company's sales force is composed of field sales representatives who manage
relations with the larger accounts and inside sales representatives who solicit
and receive product orders and answer customer inquiries. When a customer calls
Merisel, screen synchronization technology automatically causes a sales profile
to appear on the sales representative's computer screen. Customer orders
generally are placed via a toll-free telephone call to Merisel's inside sales
representatives and, in the United States, are entered on Merisel's SalesNet for
Windows order-entry system, a proprietary local area network created by Merisel
to speed the process of taking and processing orders. Using the SalesNet for
Windows database, sales representatives can immediately enter customer orders,
obtain descriptive information regarding products, check inventory status,
determine customer credit availability and obtain special pricing and promotion
information.
In 1993, the Company introduced its Vantage Loyalty incentive program to provide
increased services, support and better pricing to larger volume customers. The
Vantage program was enhanced in late 1996 with the launch of the "Vantage Visa"
card as a frequent buyer program to reward resellers for more frequent and
higher volume purchases. The Vantage Visa program offers unique promotional and
bundling opportunities to resellers.
The Company is continuing to expand its participation in "electronic commerce",
which represents growing sales opportunities in the computer products
distribution industry. Electronic commerce is the overall term applied to the
development and maintenance of business-to-business relationships via such
electronic services as EDI, on-line systems, electronic mail, and Web sites.
Electronic commerce can simplify account set-up, ordering, shipping, and support
and thereby facilitate sales while it decreases both selling and purchasing
costs. Electronic commerce is becoming an increasingly significant factor as the
computer products distribution industry evolves.
<PAGE>
Merisel utilizes EDI systems to allow large-volume customers to communicate with
the Company's computer system directly for order processing and account data. In
addition, Merisel began to actively promote its electronic commerce offering
with the introduction of SELline in 1994. This system was the industry's first
graphical user interface ("GUI") application to allow customers to access
specific, customized information directly from various databases owned and
maintained by the Company. This information includes access to real-time
pricing, credit, product descriptions and availability information. SELline
usage increased with the 1996 introduction of the Company's World Wide Web site,
which allows customers Internet access to key technical information and
hyperlink access to more than 400 manufacturer Internet sites from one location.
In November 1996, the Web site enabled Merisel to introduce the distribution
industry's first national Web-based order-entry system that features a SELline
interface for 24-hour, secure order processing. Since its introduction in 1994,
SELline has had more than 36,000 customer enrollees in the U.S. and Canada.
Configuration and Channel Assembly
Configuration involves the assembly of computer products from multiple vendors
into a single unit or system, which conforms to the specific needs of an
individual end user. While at one time configuration was a very minor aspect of
a wholesale distributor's business, it has become a major initiative as
manufacturers outsource this segment of production to wholesale distributors.
Channel assembly involves the distributor at an earlier phase of the assembly
process, is conducted on a vendor-specific basis and entails high-volume,
standardized production.
Through 1996, Merisel outsourced its configuration business to two third-party
providers, the Cerplex Group, Inc. and Vanstar Corporation. In 1997, the Company
took these responsibilities in-house and currently performs system configuration
in its Hayward, California and Toronto, Canada warehouse facilities. The
Hayward, California facility handles all of Merisel's configuration requirements
for its resellers throughout North America.
Merisel intends to meet the evolving channel assembly and configuration needs of
its business partners as the demand for such services continues to grow. The
Company has dedicated resources assigned to these important initiatives and is
making ongoing investments in systems and facilities for such purposes.
Merisel's current strategy calls for the Company to continue to perform
high-end, custom configuration in its Hayward and Toronto facilities, and to
attain ISO9002 certification for all channel assembly and configuration
opportunities. The Company will continue to evaluate market trends and its
business partner needs and is planning on opening additional strategically
located facility as needed.
Operations, Distribution and Investment in Systems
Locations. At December 31, 1997, the Company operated nine distribution centers
throughout North America: seven in the United States and two in Canada. All of
these distribution centers are leased.
Systems. Merisel has made significant investments in 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 utilize the MILES computerized warehouse management system, which
uses infrared bar coding and advanced computer hardware and software to improve
shipping, receiving and picking accuracy rates. See "Customers and Customer
Services - Prompt Delivery" above.
<PAGE>
Merisel is in the process of converting its North American operations to the SAP
client/server operating system. SAP is an enterprise-wide system which
integrates all functional areas of the business including order entry, inventory
management and finance in a real-time environment. The Company began designing
the new system in 1993 and converted its Canadian operations from a mainframe to
the SAP client/server operating system in August 1995. The new system is
designed to provide greater transaction functionality, flexibility, and custom
pricing applications. In the early implementation stages, the Canadian SAP
system produced results and response times below the Company's expectations. The
response time and capacity limitations of the Canadian SAP system prompted a
delay in the U.S. implementation of SAP, and related operating results added to
Merisel's fourth quarter 1995 net operating loss. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-- Results of
Operations." This system is now fully implemented in Canada, is performing to
expectations and for more than two years has been operating with essentially no
unscheduled downtime.
The Company has resumed the conversion of its United States operations to the
SAP system. In the fourth quarter of 1997, the Company completed the first
planning phase of the U.S. SAP system implementation and is proceeding with a
plan to complete the implementation in late 1998 or early 1999. The design and
implementation of these new systems are complex projects and involve certain
risks. As a result, the United States system implementation could be delayed
beyond 1998. However, Merisel believes that the stability and availability of
its Canadian system will serve as an advantage by providing a working system on
which to test and fine-tune the Company's North American protocols. Until such
implementation, the Company will continue to modify its existing United States
systems and may experience difficulty in processing transactions, which could
adversely affect operating income and cash flows. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Competition
Competition in the computer products distribution industry is intense.
Competitive factors include price, brand selection, breadth and availability of
product offering, purchasing arrangements, financing options, shipping and
packaging accuracy, speed of delivery, level of training and technical support,
marketing services and programs, and ability to influence a buyer's decision.
Certain of Merisel's competitors have substantially greater financial resources
than Merisel. Merisel's principal competitors include large United States-based
distributors and aggregators such as Gates/Arrow, Inacom, Ingram Micro, MicroAge
and Tech Data, 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.
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 qualities
of the computer products distribution industry, the Company's revenues and
earnings may be subject to material volatility, particularly on a quarterly
basis.
Additionally, in the U.S. and Canada, the Company's net sales in the fourth
quarter have been historically higher than in its other three quarters.
Management believes that the pattern of higher fourth quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday purchases. As a result of this pattern, the Company's working capital
requirements in the fourth quarter have typically been greater than other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year, which is primarily due to buying patterns
of Canadian government agencies. See "Management's Discussion and Analysis
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
<PAGE>
Employees
As of December 31, 1997, Merisel had approximately 2,300 employees. Merisel
believes it has good relations with its employees.
Environmental Compliance
The Company believes that it is in substantial compliance with all environmental
laws applicable to it and its operations.
Item 2. Properties.
At December 31, 1997, the Company maintained distribution centers in seven
locations throughout the United States and in two locations in Canada. All of
the Company's distribution centers are leased. Additionally, the Company
maintains United States administrative and sales offices in El Segundo,
California; Marlborough, Massachusetts; and Cary, North Carolina, as well as
Canadian administrative and sales offices in Toronto, Ontario; Montreal, Quebec;
and Vancouver, British Columbia.
The Company's headquarters are located in El Segundo, California, where the
Company owns a 112,500 square-foot facility and leases another 50,700
square-foot facility. In addition, the Company owns 29 acres of undeveloped land
in Cary, North Carolina. The Company believes that its facilities provide
sufficient space for its present needs, and that additional suitable space will
be available on reasonable terms, if needed.
Item 3. Legal Proceedings.
In June 1994, Merisel and certain of its officers and/or directors were named in
putative securities class actions filed in the United States District Court for
the Central District of California, consolidated as In re Merisel, Inc.
Securities Litigation. Plaintiffs, who are seeking damages in an unspecified
amount, purport to represent a class of all persons who purchased Merisel common
stock between November 8, 1993 and June 7, 1994 (the "Class Period"). The
complaint, as amended and consolidated, alleges that the defendants inflated the
market price of Merisel's common stock with material misrepresentations and
omissions during the Class Period. Plaintiffs contend that such alleged
misrepresentations are actionable under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Following
the granting of defendant's first motion to dismiss on December 5, 1994,
plaintiffs filed a second consolidated and amended complaint December 22, 1994.
On April 3, 1995, Federal District Judge Real dismissed the complaint with
prejudice. On August 8, 1997 the Court of Appeals for the Ninth Circuit (the
"Court of Appeals") reversed the dismissal and remanded the case to the trial
court. On August 22, 1997, the Company filed a petition for rehearing and
suggestion of rehearing en banc (the "Petition") with the Court of Appeals. On
January 30, 1998, the Court of Appeals issued an order amending its prior
opinion and denying the Company's petitions for rehearing and rehearing en banc.
In light of this order, the Federal District Court has scheduled a hearing for
April 13, 1998. The Company intends to defend itself vigorously against this
claim.
In January 1997, the Company received notice that Tech Pacific had brought a
claim in the Supreme Court of New South Wales, Sydney Registry Commercial
Division, against Merisel; its subsidiary Merisel Asia, Inc. ("Merisel Asia");
Patrick T. Woods, former managing director of Merisel Australia; and Michael D.
Pickett, former CEO and Chairman of Merisel, in a proceeding captioned Tech
Pacific Holdings Limited, v. Merisel, Inc., et. al. In March 1996, Tech Pacific
purchased Merisel Pty, Ltd ("Merisel Australia"), Merisel's Australian
subsidiary, for a purchase price of $9,900,000 pursuant to the Share Purchase
Agreement dated as of March 7, 1996 between Merisel Asia and Tech Pacific. The
claim asserts various breaches of representations and warranties as well as
misleading and deceptive conduct under relevant provisions of Australian law
with respect to the financial position of Merisel Australia as represented by
oral and written disclosures. The plaintiffs seek to recover specified damages
exceeding AUS$8.3 million (or approximately US$5.6 million as of March 27, 1998)
as well as unspecified damages plus costs and expenses associated with the
claim. The Company intends to defend itself vigorously against this claim. The
Company does not believe that the outcome of the claim will have a material
adverse effect on the Company or its financial condition.
<PAGE>
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 exchanged
(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.
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 does not believe any such fees are owed and
has so notified the lenders. There can be no assurance, however, as to the
ultimate outcome of this claim.
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. 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 4. Submission of Matters to a Vote of Security Holders.
On December 19, 1997, the Company held a special meeting of stockholders (the
"Special Meeting") for the following purposes: (i) to approve an amendment of
the Company's certificate of incorporation to increase the number of authorized
shares of common stock from 50,000,000 to 150,000,000 (the "Charter Amendment");
(ii) to approve the issuance of up to 44,014,379 shares of common stock of the
Company to Phoenix Acquisition Company II, L.L.C. upon conversion of the
approximately $133.8 million outstanding principal amount of a convertible note
dated September 19, 1997 issued by the Company and Merisel Americas (the "Stock
Issuance"); and (iii) to approve the adoption of the Merisel, Inc. 1997 Stock
Award and Incentive Plan (the "1997 Plan"). With respect to such matters, the
Company's stockholders cast votes as follows: (i) to approve the Charter
Amendment - 22,391,523 for, 1,204,461 against, 105,756 abstentions, and 736,050
broker non-votes; (ii) to approve the Stock Issuance - 23,281,860 for, 314,742
against, 105,138 abstentions, and 736,050 broker non-votes; and (iii) to approve
the 1997 Plan - 22,380,381 for, 1,786,944 against, and 270,465 abstentions.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock is traded on the National Market tier of the Nasdaq
Stock Market under the symbol MSEL. The following table sets forth the quarterly
high and low sale prices for the Common Stock as reported by the National
Market.
<TABLE>
<CAPTION>
<S> <C> <C>
High Low
Fiscal Year 1996
First quarter.... 5 7/8 2 1/4
Second quarter... 5 1/16 2 1/4
Third quarter.... 3 13/16 1 13/16
Fourth quarter... 2 5/16 1 5/8
Fiscal Year 1997
First quarter.... 2 1/2 1 9/16
Second quarter... 2 7/16 1 1/32
Third quarter.... 4 7/8 1 7/8
Fourth quarter... 5 21/32 3 3/8
</TABLE>
On March 30, 1998, the closing sale price for the Company's Common Stock was
$3.00 per share. As of March 30, 1998, there were 1,131 record holders of the
Company's Common Stock.
Merisel has never declared or paid any dividends to stockholders. The indenture
relating to the Company's 12-1/2% Senior Notes due 2004 currently prohibits the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Information on the issuance of 50,000,000 shares of the Company's Common Stock
to Phoenix Acquisition Company II, L.L.C. ("Phoenix) is included in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview - Debt Restructuring." The issuances of Common Stock to
Phoenix were exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended, because the transaction constituted a private placement and
did not involve a public offering.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- --------- -------- --------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:(1)
Net sales..................................... $ 3,085,851 $ 5,018,687 $ 5,956,967 $ 5,522,824 $ 4,048,972
Cost of sales................................. 2,827,315 4,676,164 5,633,278 5,233,570 3,807,888
----------- ----------- ------------ ----------- -----------
Gross profit.................................. 258,536 342,523 323,689 289,254 241,084
Selling, general & administrative expenses.... 187,152 281,796 317,195 295,021 191,406
Impairment losses............................. 51,383 42,033 14,100
Restructuring charge.......................... 9,333
----------- ----------- ------------ ----------- -----------
Operating income (loss)....................... 71,384 60,727 (54,222) (47,800) 35,578
Interest expense.............................. 17,810 29,024 37,583 37,431 26,957
Loss on sale of European, Mexican, and
Latin American operations..................... 33,455
Debt Restructuring Costs...................... 5,230
Other expense................................. 2,722 11,752 13,885 20,150 14,992
----------- ----------- ------------ ----------- -----------
Income (loss) before income taxes............. 50,852 19,951 (105,690) (138,836) (11,601)
Provision (benefit) for income taxes.......... 20,413 8,341 (21,779) 1,539 496
----------- ----------- ------------ ----------- -----------
Net income (loss) Before Extraordinary Item... 30,439 11,610 (83,911) (140,375) (12,097)
Extraordinary Loss on Extinguishment of
Debt........................................ 3,744
Net Income (Loss)............................. $ 30,439 $ 11,610 $ (83,911) $ (140,375) $ (15,841)
Per Share Data:
Net income (loss) per diluted share........... $ 1.00 $ 0.38 $ (2.82) $ (4.68) $ (.48)
Weighted average number of diluted shares..... 30,454 30,389 29,806 30,001 33,216
Balance Sheet Data:
Working capital............................... $ 359,765 $ 399,848 $ 280,864 $ 190,544 $ 197,154
Total assets.................................. 936,283 1,191,870 1,230,334 731,039 747,111
Long-term and subordinated debt............... 208,500 357,685 356,271 294,763 133,429
Total debt.................................... 259,429 395,556 382,395 294,950 133,429
Stockholders' equity.......................... 223,857 236,164 154,466 14,997 137,508
</TABLE>
(1) Merisel's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. For clarity of presentation throughout this Annual
Report on Form 10-K, Merisel has described year-ends presented as if the
year ended on December 31. The 1997 fiscal year was 53 weeks in duration,
and all other fiscal years presented were 52 weeks in duration. The
selected financial data set forth above includes those balances and
activities related to the Company's Australian business until its disposal
effective January 1, 1996 and the Company's European, Mexican and Latin
American businesses until their disposal on October 4, 1996, effective as
of September 27, 1996. It also includes Merisel FAB results from the date
such business was acquired on January 31, 1994 through its disposal as of
March 28, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company was founded in 1980 as Softsel, Inc. and has grown through internal
growth and acquisitions of other computer products distributors. By 1989, the
Company had achieved annual revenues of $629,400,000 principally through
internal expansion. In April 1990, the Company acquired Microamerica, Inc.
("Microamerica"), another distributor of computer products with net sales of
approximately $526,000,000 for the year ended December 31, 1989. In connection
with this acquisition, the Company changed its name to Merisel, Inc. In the
years following the Microamerica acquisition, the Company's revenues increased
rapidly, reaching $5.0 billion in 1994 and $6.0 billion in 1995. This increase
partially reflected the substantial growth in both domestic and international
sales as the worldwide market for computer products expanded and manufacturers
increasingly turned to wholesale distributors for product distribution. The
growth also reflected the Company's acquisition of certain assets of the United
States Franchise and Distribution Division of Vanstar Corporation (formerly
ComputerLand Corporation), through its wholly owned subsidiary, Merisel FAB,
Inc. ("Merisel FAB"), which contributed additional revenues in excess of $1
billion during each of the three years ended 1994, 1995, and 1996.
Following substantial losses for the fiscal year ended December 31, 1995 (see
"Results of Operations" below), during 1996 the Company pursued a business plan
to address liquidity and capital structure issues by controlling costs and
curtailing non-essential capital expenditures as well as disposing of
substantially all of the Company's assets and operations outside of North
America.
Asset Dispositions
On March 7, 1996, Merisel sold its wholly owned Australian subsidiary, Merisel
Pty Ltd. ("Merisel Australia"), to Tech Pacific. The sale was effective as of
January 1, 1996. Under the terms of the sale agreement, the Company received
consideration of $9,900,000 in the form of repayment of certain intercompany
debt obligations for $8,500,000 and $1,400,000 in non-cash asset transfers. The
Company recognized a $1,900,000 charge as an impairment loss for the write down
of Merisel Australia's net assets to their net realizable value in the fourth
quarter of 1995. See "Item 3. Legal Proceedings."
On October 4, 1996, the Company completed the sale of substantially all of its
European, Mexican and Latin American businesses ("EML") to CHS Electronics, Inc.
("CHS"). The sale was effective as of September 17, 1996. A loss of
approximately $33,455,000, including $7,400,000 of direct selling costs, was
recorded in connection with the sale. The final sales price was $147,631,000
based on the combined closing balance sheet of EML, and consisted of (i)
$110,379,000 in cash, (ii) the assumption of Merisel's European asset
securitization agreement, against which $26,252,000 was outstanding at closing,
and (iii) a short term receivable of $11,000,000 due at various dates through
1997 . The initial cash payment of $110,379,000 was used to reduce the Company's
debt and improve its working capital.
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of Merisel FAB to a wholly owned subsidiary of SYNNEX Information
Technologies, Inc. ("Synnex"). The sales price, computed based upon the February
21, 1997 balance sheet of Merisel FAB, was $31,992,000 consisting of the
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, not to
exceed $2,000,000. In anticipation of this sale, the Company recorded an
impairment charge in the fourth quarter of 1996 for $2,033,000 to adjust Merisel
FAB's assets to their fair value.
<PAGE>
Debt Restructuring
Although the Company was profitable in the fourth quarter of 1996, the Company
did not believe that it could satisfy its debt obligations without a
restructuring of its $125,000,000 principal amount of 12 1/2% Senior Notes due
2004 (the "12.5% Notes") and/or the approximately $150,000,000 of outstanding
indebtedness of certain subsidiaries of the Company (the "Operating Company
Debt"), which required principal repayments of $40,000,000 if the Company made
the June 30, 1997 interest payment on the 12.5% Notes, and an additional
$30,000,000 if the Company made its December 31, 1997 interest payment on the
12.5% Notes.
Accordingly, Merisel commenced negotiations with an ad hoc committee of holders
of the 12.5% Notes and, effective April 14, 1997, entered into a Limited Waiver
and Voting Agreement (the "Limited Waiver Agreement") with holders of more that
75% of the outstanding principal amount of the 12.5% Notes (the "Consenting
Noteholders"). 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") that would equal approximately 80% of the shares of Common Stock
outstanding immediately after the Exchange. The Limited Waiver Agreement also
provided that, immediately after the consummation of the Exchange, the Company
would issue warrants (the "Warrants") to purchase up to 17.5% of the shares of
Common Stock outstanding immediately after the Exchange to existing holders of
Common Stock. The Warrants would be issued in two series and would have exercise
prices of $1.34 and $1.74 per share, respectively. While the Limited Waiver
Agreement was in effect, the Consenting Noteholders agreed to waive any default
arising from the nonpayment of interest due in 1997 on the 12.5% Notes. The
conditions to the Exchange were not met and, on September 19, 1997, the Limited
Waiver Agreement terminated in accordance with its terms and the Company paid
the interest due with respect to the 12.5% Notes. See "Item 3 - Legal
Proceedings".
On September 19, 1997, the Company and Merisel Americas entered into a
definitive Stock and Note Purchase Agreement with Phoenix Acquisition Company
II, L.L.C. ("Phoenix"), a Delaware limited liability company whose sole member
is Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and
Note Purchase Agreement, on September 19, 1997, Phoenix acquired a Convertible
Note for $137,100,000 (the "Convertible Note") and 4,901,316 shares of Common
Stock (the "Initial Shares") for $14,900,000. The Convertible Note 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 Conversion Shares and
Initial Shares would together represent 50,000,000 shares of Common Stock at a
purchase price of $3.04 per share, and approximately 62.4% of the Common Stock
outstanding immediately following the issuance of the Conversion Shares. The
Company used the proceeds from the issuance of the Initial Shares and the
Convertible Note to repay substantially all of the Operating Company Debt. 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. As of March 31, 1998, Phoenix
owned 50,000,000 shares of Common Stock, or approximately 62.4% of the
outstanding Common Stock. See "Notes to Consolidated Financial Statements - Note
7 - "Income Taxes" regarding the impact of the restructuring on the Company's
available net operating loss carryforwards.
Results of Operations
As a result of the asset dispositions described above, the Company's operations
are now focused exclusively in North America. The North American Business (as
defined below) produced approximately $3.8 billion and $3.4 billion in revenues
for 1997 and 1996, respectively. Former Operations (as defined below) produced
approximately $202 million and $2.1 billion in revenues for 1997 and 1996,
respectively. Because the North American Business now represents the ongoing
business of the Company, the following discussion and analysis will compare the
results of operations solely for the North American Business unless otherwise
indicated.
As used in this discussion and analysis, the term "North American Business"
refers to Merisel's United States and Canadian operations, and the term "Former
Operations" refers to those operations disposed of since the beginning of 1996,
namely EML, Merisel FAB and the Australian operations.
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the results of operations for the North American
Business and for the Former Operations for the fiscal years indicated.
(in thousands)
North American Business Former Operations Consolidated Total
/-------December 31,--------\ /-------December 31,--------\ /---------December 31,----------\
1995 1996 1997 1995 1996 1997 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $3,427,821 $3,441,343 $3,846,795 $2,529,146 $2,081,481 $ 202,177 $5,956,967 $5,522,824 $4,048,972
Cost of Sales 3,242,903 3,262,105 3,613,389 2,390,375 1,971,465 194,499 5,633,278 5,233,570 3,807,888
---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Gross Profit 184,918 179,238 233,406 138,771 110,016 7,678 323,689 289,254 241,084
SG&A 181,042 193,521 185,206 136,153 101,500 6,200 317,195 295,021 191,406
Impairment
loss 19,500 14,100 31,883 42,033 51,383 42,033 14,100
Restructuring
charge 5,228 4,105 9,333
---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Operating
(loss)Income $ (20,852) $ (14,283) $ 34,100 $ (33,370) $ (33,517) $ 1,478 $ (54,222) $ (47,800) $ 35,578
========== ========== ========== ========== =========== ========== ========== ========== ==========
</TABLE>
Comparison of Fiscal Years Ended December 31, 1997 and December 31, 1996
The Company's net sales for the North American Business increased 11.8% from
$3,441,343,000 in 1996 to $3,846,795,000 for the year ended December 31, 1997.
This increase resulted from increased sales of 18.2% in Canada and 10.3% in the
United States. The growth rate in Canada in terms of Canadian dollars was steady
throughout the year, but the decline in the value of the Canadian dollar
hampered the growth rate in terms of U.S. dollars, particularly in the fourth
quarter of the year. U.S. sales growth was lower in the first half of the year
(-1.1% and 5.2% for the first and second quarters, respectively) despite double
digit rates of growth in MOCA(TM) and VAR sales. This was partially related to
declines in Retail sales, which reflected the Company's decision to
substantially reduce its retail sales activities in early 1996, in part to
address liquidity issues and constraints. The Company recommitted significant
resources to rebuilding its retail customer base in early 1997, which
contributed to fourth quarter growth in retail sales of 28.2% on a
year-over-year basis. Growth rates in all other customer areas also increased
measurably during the second half of 1997 over 1996 levels, contributing to
combined U.S. growth rates of 16.6% and 20.6% in the third and fourth quarters
of 1997, respectively, on a year-over-year basis.
In the North American Business, hardware and accessories accounted for 77% of
net sales, and software accounted for 23% of net sales for the year ended
December 31, 1997 as compared to 76% and 24%, respectively, for such categories
for the year ended December 31, 1996.
Gross profit for the North American Business increased 30.2% from $179,238,000
in 1996 to $233,406,000 in 1997. Both years were affected by significant margin
adjustments. In 1996, the Company recorded $27,338,000 in charges primarily
related to customer disputes and vendor reconciliation issues. In 1997, through
the process of resolving these customer disputes and vendor reconciliation
issues, margins were favorably affected by adjustments totaling $7,245,000.
Excluding the effect of these margin adjustments, gross profit would have been
5.88% and 6.0% for 1997 and 1996, respectively. The decrease in adjusted gross
profit is attributed primarily to competitive pricing pressures and the impact
of liquidity constraints on the Company's ability to purchase on favorable
terms. The Company is addressing the margin issue by targeting specific areas
for margin improvement including sales execution, product mix, pricing and
customer mix. However, the Company continues to face intense competitive pricing
pressures, and the Company's efforts to improve its margins may not be
successful.
<PAGE>
Selling, general and administrative expenses for the North American Business
decreased by $8,315,000 or 4.3% from $193,521,000 for the year ended December
31, 1996 to $185,206,000 for the year ended December 31, 1997. Selling, general
and administrative expenses in 1996 include approximately $10,500,000 in costs
related to professional fees incurred as part of the 1996 business plan for
process improvements, professional fees related to lender negotiations, and
severance charges related to management changes. In 1997, selling, general and
administrative expenses included compensation charges of $1,950,000 incurred
pursuant to employment contracts of certain executive officers of the Company
and related to the debt restructuring completed during 1997. Excluding these
charges in both years, selling, general and administrative expenses did not
change significantly in total dollars, but decreased as a percentage of sales
from 5.3% in 1996 to 4.8% in 1997. This decrease is primarily attributable to
efforts to control operating expenses even though sales growth increased
throughout the year. Selling, general and administrative costs include
depreciation and amortization expense totaling $11,073,000 in 1997 and
$12,360,000 in 1996.
In the fourth quarter of 1997, the Company recorded a non-cash asset impairment
charge of $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996. Through implementation planning that resumed in the fourth
quarter 1997 and a recently completed evaluation of SAP in its upgraded form,
the Company identified costs that will not provide future value, and it is these
costs that are the basis of the impairment charge. See "Notes to Consolidated
Financial Statements - Note 2 - Impairment Losses."
As a result of the above items, the Company's North American Business had an
operating profit of $34,100,000 for the year ended December 31, 1997 compared to
an operating loss of $14,283,000 for the year ended December 31, 1996. Excluding
the margin adjustments taken in both years, the professional fees and severance
costs noted in 1996, the restructuring related compensation costs in 1997 and
the impairment charge taken in 1997, the Company's North American Business would
have had operating income of $42,905,000 in 1997 as compared to operating income
of $23,555,000 in 1996.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company, including Former Operations, decreased 28%
from $37,431,000 for the year ended December 31, 1996 to $26,957,000 for the
year ended December 31, 1997. This decrease was attributable to: (i) lower
average borrowings resulting from a $72,500,000 debt paydown in October 1996
using proceeds from the sale of EML; (ii) scheduled debt payments totaling
$13,090,000; and (iii) elimination of substantially all of the Operating Company
Debt on September 19, 1997, using substantially all of the $152,000,000 proceeds
from the issuance of the Initial Shares and the Convertible Note. These factors
were offset in part by an increase in interest rates under the Operating Company
Debt during 1997 prior to its elimination in September of 1997.
Other expense for the Company, including Former Operations, decreased from
$20,150,000 for the year ended December 31, 1996 to $14,992,000 for the year
ended December 31, 1997. This decrease is primarily attributable to one-time
financing charges paid in the first quarter of 1996 of approximately $3,125,000
related to amendments of financing agreements which have since been terminated.
Additionally, the Company recorded a gain of $1,530,000 in 1997 on the sale of
property held in North Carolina.
Also during 1997, the Company incurred $5,230,000 in expenses related to the
Company's efforts to effect a restructuring of its debt. These expenses
represent professional fees and other costs associated with the terminated
Limited Waiver Agreement with the holders of the 12.5% Notes, and costs incurred
as a result of the change in control that occurred as a result of the conversion
of the Convertible Note.
The income tax provision decreased from $1,539,000 for the year ended December
31, 1996 to $496,000 for 1997. In 1997, the income tax provision reflects only
the minimum statutory tax requirements in the various states and provinces in
which the Company conducts business, as the Company has sufficient net operating
loss provisions from prior year losses. The Company has not recognized a tax
provision benefit in either year, having fully utilized its ability to carryback
those losses and obtain refunds of taxes paid in prior years. In 1996, the
Company recognized additional tax provision expense that represented the
establishment of a valuation allowance against a previously recognized state
deferred tax asset. (See "Notes to Consolidated Financial Statements - Note 7 -
Income Taxes".)
<PAGE>
Consolidated Loss
The Company, including Former Operations, reported a net loss of $15,841,000, or
$0.48 per diluted share, in 1997 compared to a net loss of $140,375,000, or
$4.68 per diluted share, in 1996. Included in the 1997 net loss is an
extraordinary loss on the extinguishment of debt of $3,744,000, or $0.12 per
diluted share, related to the repayment of the Operating Company Debt.
Comparison of Fiscal Years Ended December 31, 1996 and December 31, 1995
The Company's net sales for the North American Business increased 0.4% from
$3,427,821,000 in 1995 to $3,441,343,000 for the year ended December 31, 1996.
This increase resulted from increased sales of 12.4% in Canada offset by a 2.0%
decrease in sales in the United States. In the third quarter of 1995, the North
American Business sold approximately $124,000,000 of Microsoft Windows '95
following its launch in August 1995. Excluding the effect of this additional
revenue in 1995, net sales in 1996 would have increased 2.0% in the United
States and 14.5% in Canada over 1995 levels. The Canadian sales increase is in
line with the growth in the industry for the markets in which that subsidiary
competes. In the United States, the Company did not keep pace with industry
growth rates, due to liquidity constraints, cost controls which Merisel
implemented to conserve cash outflow and competitive pressures.
In the North American Business, hardware and accessories accounted for 76% of
net sales, and software accounted for 24% of net sales for the year ended
December 31, 1996 as compared to 69% and 31% for the same categories
respectively, for the year ended December 31, 1995. Software sales were a larger
percentage of total sales in 1995 due to the sales generated from the Microsoft
Windows '95 launch in August 1995.
Gross profit for the North American Business decreased 3.1% from $184,918,000 in
1995 to $179,238,000 in 1996. Gross profit as a percentage of sales, or gross
margin, decreased from 5.4% in 1995 to 5.2% in 1996. Both years were affected by
large margin adjustments. In 1995, the Company recorded a $25,800,000 charge to
margin in the United States related to accounts payable reconciliation issues.
In 1996, the Company recorded charges of $17,750,000 related to customer
disputes, vendor reconciliations and other issues in the United States, and
$9,588,000 for similar issues in Canada. Excluding the effect of these margin
adjustments, gross profit would have been $174,079,000 or 6.1% of net sales and
$36,639,000 or 6.4% of net sales in the United States and Canada, respectively,
for the year ended December 31, 1995, as compared to $168,531,000 or 6.0% of net
sales and $38,045,000 or 5.9% of net sales in the United States and Canada,
respectively, for the year ended December 31, 1996. The decrease in adjusted
gross profit is primarily attributable to the impact of liquidity constraints on
the Company's ability to purchase on favorable terms and competitive pricing
pressures.
Selling, general and administrative expenses for the North American Business
increased by 6.9% from $181,042,000 for the year ended December 31, 1995 to
$193,521,000 for the year ended December 31, 1996. Selling, general
administrative expenses in 1995 included a fourth quarter charge of $8,200,000
to adjust the value of certain assets and liabilities. Excluding this fourth
quarter 1995 charge, selling, general and administrative expenses would have
increased approximately $20,679,000 in 1996 over 1995. Of this increase,
$10,500,000 related to professional fees incurred as part of the 1996 Business
Plan for process improvements and lender negotiations and severance charges
related to management changes. Selling, general and administrative expenses in
1996 excluding these charges were $183,021,000. The remaining increase in
expenses is primarily related to higher operating costs associated with the
installation of new computer systems. Selling, general and administrative costs
include depreciation and amortization expense totaling $11,756,000 in 1995 and
$12,360,000 in 1996.
In the fourth quarter of 1995, the North American business recorded an asset
impairment charge of $19,500,000 in order to adjust capitalized system
development costs related to the installation of new computer systems. Also in
1995, $5,228,000 in restructuring charges were recorded in the North American
Business as a result of the planned closure of a warehouse and other
restructuring activities. No such charges were deemed necessary in 1996.
<PAGE>
As a result of the above items, the operating loss for the North American
Business of $20,852,000 for the year ended December 31, 1995 improved to an
operating loss of $14,283,000 for the year ended December 31, 1996. Excluding
the margin adjustments taken in both years, the professional fees and severance
costs incurred in 1996, the fourth quarter charges to operating expense taken in
1995, the impairment charge in 1995, and the restructuring charge in 1995, all
of which are quantified above, the Company would have had operating income of
$37,876,000 in 1995 as compared to operating income of $23,555,000 in 1996.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company, including Former Operations, decreased 0.4%
from $37,583,000 for the year ended December 31, 1995 to $37,431,000 for the
year ended December 31, 1996. The decrease resulted from lower average
borrowings in the fourth quarter of 1996, largely offset by higher average
interest rates and higher average borrowings in the first three quarters of the
year.
Other expense for the Company, including Former Operations, increased from
$13,885,000 for the year ended December 31, 1995 to $20,150,000 for the year
ended December 31, 1996. The increase was primarily attributable to fees
incurred in connection with an increase in the Company's trade receivable
securitizations in 1996. The increase in securitization fees is primarily
attributable to an increase in the amount of net receivables sold.
The income tax provision increased from a benefit of $21,779,000 for the year
ended December 31, 1995 to an expense of $1,539,000 for the same period in 1996.
The Company has not recognized a tax provision benefit with respect to its
current losses, having fully utilized its ability to carryback those losses and
obtain refunds of taxes paid in prior years. Further, the Company has recognized
a tax provision expense that primarily represents the establishment of a
valuation allowance against a previously recognized state deferred tax asset.
See "Notes to Consolidated Financial Statements - Note 7 - Income Taxes."
Consolidated Loss
The Company, including Former Operations, reported an increase in net loss from
$83,911,000 in 1995 to $140,375,000 in 1996. The net loss per share increased
from $2.82 in 1995 to $4.68 in 1996.
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 no later than the first part of 1999. The Company converted
its Canadian operations from a mainframe to the 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.
<PAGE>
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.
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. See "Liquidity and Capital Expenditures" below.
The design and implementation of these new systems are complex projects and
involve certain risks. Until such implementation, the Company will continue to
modify its existing U.S. systems and may experience difficulty in processing
transactions, which could adversely affect operating income and cash flows. 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.
Variability of Quarterly Results and Seasonality
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the future. Management believes that the factors influencing quarterly
variability include: (i) the overall growth in the computer industry; (ii)
shifts in short-term demand for the Company's products resulting, in part, from
the introduction of new products or updates of existing products; and (iii) the
fact that virtually all sales in a given quarter result from orders booked in
that quarter. Due to the factors noted above, as well as the dynamic
characteristics of the computer product distribution industry, the Company's
revenues and earnings may be subject to material volatility, particularly on a
quarterly basis.
Additionally, in the U.S. and Canada, the Company's net sales in the fourth
quarter have been historically higher than in its other three quarters.
Management believes that the pattern of higher fourth quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday purchases. As a result of this pattern, the Company's working capital
requirements in the fourth quarter have typically been greater than other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year. This is primarily due to buying patterns
of Canadian government agencies. See "Liquidity and Capital Resources" below.
<PAGE>
Liquidity and Capital Resources
General Discussion of Liquidity over the Periods Presented
From the time the Company was founded in 1980 through the end of 1993, it
experienced accelerated growth that was fueled by a combination of industry
growth, industry consolidation and acquisitions. By the end of the first quarter
of 1994, the Company's internal growth and acquisitions had created a complex
organization with operations in more than eleven countries. The rapid growth put
a tremendous burden on the Company's management to effectively integrate the
diverse operations and implement several new initiatives including new warehouse
systems, a centralized European distribution center, and an integrated North
American operating system. At the same time, the industry continued to evolve
resulting in increasing competitive pressures on gross margins.
To fund the new initiatives, working capital growth and acquisitions, the
Company incurred significant debt which, combined with the decreasing gross
margins and increases in interest rates, resulted in declining profitability and
increased debt service requirements. Despite declining earnings and increasing
debt burden, the Company had sufficient cash reserves and available borrowing
capacity to meet its debt obligations and to fund continued growth during 1994
and throughout 1995, and considered the investments in new initiatives to be a
vital component of long-term growth and profitability.
During the fourth quarter of 1995, the Company recorded $89,400,000 in negative
adjustments to its operating earnings. These adjustments included (i) a charge
to trade accounts payable for $25,800,000 to address vendor reconciliation
issues, (ii) impairment losses of $30,000,000 on intangible assets associated
with the Company's ComputerLand franchise business, (iii) impairment losses of
$19,500,000 related to cost overruns on the implementation of system
installations, and (iv) other adjustments to asset and liability values. As a
result, the Company incurred substantial losses during the fourth quarter of
1995, and was required to negotiate with lenders under various financing
agreements to amend such agreements and waive certain defaults.
In order to comply with the requirements of its lenders, Merisel developed a
plan in April 1996 that sought to maximize cash flow by controlling costs and
curtailing non-essential capital expenditure investments during the remainder of
1996. However, while these amended agreements were considered by the Company to
be sufficient to allow it to operate without the need for additional sources of
financing in 1996, because a substantial amount of the Operating Company Debt
was due in mid-1997, the Company anticipated that it would need to dispose of
certain assets, and/or obtain new financing arrangements, in order to position
itself to meet this obligation. Accordingly, the Company began actively
exploring all of its strategic options with the assistance of Merrill Lynch &
Co. in early 1996, which included the sale of certain of its operating
subsidiaries. This effort led to the sale of EML in October 1996. From the
proceeds of this sale, the Company repaid $72,500,000 principal amount of the
Operating Company Debt and negotiated an extension of the due date on the
remaining principal outstanding to January 31, 1998. However, this extension
also stipulated that if the Company made its June 30, 1997 interest payment on
the 12.5% Notes, then the Company would have to make an aggregate principal
repayment of $40,000,000 on the Operating Company Debt. Further, if the Company
were to have made the December 31, 1997 interest payment on the 12.5% Notes,
then the Company would have been required to make an additional principal
repayment of $30,000,000.
The Company did not believe that it would be able to make the principal
repayments on such debt, as described above, and therefore began actively
pursuing a restructuring plan with the debtholders under its various financing
agreements. Additionally, beginning in the fourth quarter of 1996, Merisel
aggressively pursued a strategy of proactively working with vendors and other
creditors to negotiate more flexible trading terms and thereby improve cash
flow.
On September 19, 1997, the Company issued the Initial Shares and the Convertible
Note to Phoenix and used the proceeds therefrom to repay substantially all of
the outstanding Operating Company Debt. On December 19, 1997, the entire
outstanding Convertible Note was converted into Common Stock, which improves the
Company's liquidity position by substantially decreasing the Company's aggregate
outstanding indebtedness and, consequently, interest expense.
<PAGE>
Cash Flows Activity For The Year Ended December 31, 1997
Net cash used by operating activities during the year ended December 31, 1997
was $44,968,000. The primary uses of cash were an increase in accounts
receivable of $70,119,000 and an increase in inventory of $70,196,000. The
primary sources of cash were an increase in accounts payable of $76,203,000 and
$15,563,000 of cash generated from operations. The increase in accounts
receivable is primarily the result of increased sales of 18.8% in the fourth
quarter of 1997. The increase in inventory relates partially to investments
required to meet the demands of increased sales volume and to strategic volume
purchases that the Company took advantage of late in the fourth quarter of 1997.
The increase in inventories also contributed to the increase in accounts
payable.
Net cash used in investing activities in 1997 was $2,270,000 consisting of
capital expenditures of $7,290,000, which was partially offset by proceeds from
the sale of land held in North Carolina totaling $5,020,000. The expenditures
were primarily for the maintenance and improvement of existing facilities.
Net cash provided by financing in 1997 was $40,307,000. Sources of cash from
financing activities included $61,740,000 in proceeds received from the sale of
receivables under the Company's asset securitization facilities and $139,901,000
in net proceeds from the issuance of Initial Shares and the Convertible Note
(which consists of $152,000,000 in gross proceeds less $12,099,000 in investment
banking, legal, accounting and other direct costs). Uses of cash for financing
activities include scheduled debt payments of $13,634,000 and the extinguishment
of Operating Company Debt of $147,700,000.
As noted above, a portion of the Company's funds are also generated through the
sale of receivables by 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 $300,000,000 at any point in time. Merisel Capital Funding is a
separate corporate entity with separate creditors who, in the event of
liquidation, are entitled to be satisfied out of Merisel Capital Funding's
assets prior to any value in the subsidiary becoming available to the
subsidiary's equity holder. As a result of losses the Company incurred in fiscal
year 1996, Merisel Americas and Merisel Capital Funding were obliged and did
obtain amendments and waivers with respect to certain covenants under this
facility, which expires October 2000.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars. The facility expires December 12, 2000, but is
extendible by notice from the securitization company, subject to the Company's
approval.
Effective October 16, 1995, Merisel U.K. Ltd. ("Merisel U.K.") entered into a
receivables purchase agreement with a securitization company to provide funding
for Merisel U.K. This facility, including $26,300,000 outstanding thereunder,
was assumed by CHS in connection with the purchase of EML effective September
27, 1996.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of December
31, 1997, the total amount outstanding under these facilities was $310,560,000.
Fees incurred in connection with the sale of accounts receivable under these
facilities for the years ended December 31, 1997 and December 31, 1996 were
$16,030,000 and $16,029,000, respectively, and are recorded as other expense.
Cash Flows Activity for the Year Ended December 31, 1996
Net cash provided by operating activities during the year ended December 31,
1996 was $29,249,000. The primary sources of cash from operating activities were
decreases in accounts receivable, inventories, and income taxes receivable of
$132,480,000, $91,059,000 and $33,470,000, respectively. The primary use of cash
from operations during the period was a decrease in accounts payable of
$179,304,000. Lower inventory and accounts receivable levels resulted primarily
from improved management of inventories and collections. The decrease in
inventories also contributed to the decrease in accounts payable.
<PAGE>
Net cash provided from investing activities in 1996 was $101,041,000, consisting
of proceeds from the sale of EML and the Company's Australian business of
$110,379,000 and $8,515,000, respectively, partially offset by the Company's
earn-out obligation under the Merisel FAB acquisition of $13,409,000 and
property and equipment expenditures of $9,652,000, net of proceeds from the sale
of property and equipment of $5,975,000. Expenditures for property and equipment
were primarily attributed to the upgrading of the Company's computer systems,
expenditures for a new warehouse management system and the upgrading of existing
facilities and leasehold improvements.
Net cash used in financing activities in 1996 was $82,765,000, related primarily
to repayments of indebtedness of the Company's operating subsidiaries consisting
of $43,195,000 of repayments of 11.5% senior notes, $17,792,000 of net
repayments under a revolving credit agreement, the payment of a $4,400,000
installment of subordinated notes and payments of $17,742,000 under other bank
facilities.
Cash Flows Activity For The Year Ended December 31, 1995
Net cash used for operating activities in 1995 was $62,386,000. Sources of cash
from operating activities consisted of a $98,756,000 increase in accounts
payable and a $23,872,000 increase in accrued liabilities. The primary uses of
cash in 1995 were a net loss of $83,911,000 and increases in inventories and
accounts receivable of $43,524,000 and $103,553,000, respectively. The increases
in inventories and accounts receivable were primarily related to the Company's
higher sales volumes, especially in December 1995. The increase in accounts
payable was due to increased purchasing associated with higher sales volumes.
Net cash used for investing activities in 1995 was $49,082,000, consisting of
property and equipment expenditures. The expenditures for property and equipment
were primarily for the upgrading of the Company's computer systems, expenditures
for a new warehouse management system and the upgrading of existing facilities
and leasehold improvements.
Net cash provided by financing activities in 1995 was $108,346,000, comprised
principally of proceeds from the net sales of an interest in the Company's trade
accounts receivable of $125,320,000, partially offset by a net repayment under
domestic lines of credit of $7,685,000 and net repayments under local
subsidiaries' lines of credit of $9,980,000.
Debt Obligations, Financing Sources and Capital Expenditures
At December 31, 1997, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of 12.5%
payable semi-annually. By virtue of being an obligation of Merisel, Inc., the
12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's 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 imposes 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 December 31, 1997, the Company had promissory notes outstanding with an
aggregate balance of $8,429,000. 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.
<PAGE>
In January 1998, the Company and Merisel Americas entered into a Revolving
Credit Agreement and Convertible Promissory Note due July 2, 1998 (the "BT
Note") with Bankers Trust Company ("BT"), which permits borrowings thereunder by
Merisel Americas of up to $46,500,000 outstanding at any one time. In order to
induce BT to enter into the BT Note, Stonington Capital Appreciation 1994 Fund,
L.P. (the "Fund"), the sole owner of Phoenix Acquisition Company L.L.C.
("Phoenix"), which owns approximately 62.4% of the outstanding shares of common
stock of the Company, caused its wholly owned subsidiary Stonington Financing
Inc. ("SFI") to enter into a note put agreement (the "Note Put Agreement") with
BT. Pursuant to the Note Put Agreement, BT may require SFI to purchase the BT
Note in the event of a default by Merisel Americas, including failure to pay the
BT Note at maturity. In the event SFI purchases the BT Note pursuant to the Note
Put Agreement, the BT Note is convertible into shares of common stock of the
Company at the option of SFI at a conversion rate equal to the average closing
price of the Company's common stock on NASDAQ for the fifteen trading days
immediately preceding the conversion. SFI and Merisel Americas also entered into
an agreement wherein Merisel Americas covenants that, in the event BT gives
notice to SFI pursuant to the Note Put Agreement requiring SFI to purchase the
BT Note, it will use its best efforts to refinance the BT Note prior to its
final maturity date.
Merisel Americas may borrow under the BT Note through May 31, 1998, and all
outstanding borrowings mature on July 2, 1998. Borrowings bear interest at the
rate of LIBOR plus 3% or, at the Company's option, BT's prime rate plus 2%. A
commitment fee of 0.5% is payable with respect to the unused portion of the
commitment.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be between $30,000,000
and $40,000,000 for 1998, primarily consisting of costs associated with
implementing the SAP operating system, 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
primarily through internally generated cash and lease financing.
At December 31, 1997, the Company had cash and cash equivalents of $36,447,000.
In the opinion of management, anticipated cash from operations in 1998, together
with borrowings under the Company's securitization facilities and trade credit
from vendors, will be sufficient to meet the Company's requirements for the next
12 months, without the need for additional financing, assuming the BT Note is
refinanced or replaced with other sources of internal or external funding. 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.
Inflation. Due to the short-term nature of Merisel's contracts and agreements
with customers and vendors, the Company does not believe that inflation had a
material impact on its operations.
<PAGE>
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.
Historically, the Company has purchased foreign exchange contracts to minimize
foreign exchange transaction gains and losses. While such contracts were
temporarily not available to the Company in the latter part of 1996, they were
again being purchased as of early 1997. No material negative financial impact
was experienced during the time the contracts were not being used.
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. The Company also offers
financing for its sales to certain of its customers through various floor plan
financing companies. With respect to credit sales, the Company attempts to
control its bad debt exposure by monitoring customers' creditworthiness and,
where practicable, through participation in credit associations that provide
customer credit rating information for certain accounts. In addition, the
Company purchases credit insurance as it deems appropriate.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merisel, Inc. and subsidiaries at
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 23, 1998
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
-------------------------
1996 1997
------------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 44,678 $ 36,447
Accounts receivable (net of allowances of $23,684 and $18,549 at December
31, 1996 and 1997, respectively)............................................. 168,295 162,895
Inventories..................................................................... 392,557 462,752
Prepaid expenses and other current assets....................................... 16,925 12,352
Income taxes receivable......................................................... 2,183
Deferred income tax benefit..................................................... 482 644
----------- -----------
Total current assets....................................................... 625,120 675,090
PROPERTY AND EQUIPMENT, NET.......................................................... 61,430 40,142
COST IN EXCESS OF NET ASSETS ACQUIRED, NET........................................... 41,724 25,381
OTHER ASSETS......................................................................... 2,765 6,498
TOTAL ASSETS.................................................................... $ 731,039 $ 747,111
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 383,548 $ 437,211
Accrued liabilities............................................................. 37,544 37,268
Income taxes payable............................................................ 1,695
Long-term debt--current......................................................... 9,084 1,762
Subordinated debt--current...................................................... 4,400
----------- -----------
Total current liabilities.................................................. 434,576 477,936
LONG-TERM DEBT....................................................................... 268,079 131,667
SUBORDINATED DEBT.................................................................... 13,200
CAPITALIZED LEASE OBLIGATIONS........................................................ 187
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued or
outstanding
Common stock, $.01 par value; authorized 150,000,000 shares; outstanding
30,078,500 and 80,078,500 at December 31, 1996 and 1997, respectively........ 301 801
Additional paid-in capital...................................................... 142,300 281,701
Accumulated deficit............................................................. (121,164) (137,005)
Cumulative translation adjustment............................................... (6,440) (7,989)
----------- -----------
Total stockholders' equity................................................. 14,997 137,508
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 731,039 $ 747,111
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amount)
For the Years Ended December 31,
-------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
NET SALES.......................................................... $5,956,967 $5,522,824 $4,048,972
COST OF SALES...................................................... 5,633,278 5,233,570 3,807,888
GROSS PROFIT....................................................... 323,689 289,254 241,084
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 317,195 295,021 191,406
IMPAIRMENT LOSSES.................................................. 51,383 42,033 14,100
RESTRUCTURING CHARGE............................................... 9,333
----------- ------------ ------------
OPERATING (LOSS) INCOME............................................ (54,222) (47,800) 35,578
INTEREST EXPENSE................................................... 37,583 37,431 26,957
LOSS ON SALE OF EUROPEAN, MEXICAN AND
LATIN AMERICAN OPERATIONS....................................... 33,455
DEBT RESTRUCTURING COSTS........................................... 5,230
OTHER EXPENSE, NET................................................. 13,885 20,150 14,992
----------- ------------ ------------
LOSS BEFORE INCOME TAXES........................................... (105,690) (138,836) (11,601)
(BENEFIT) PROVISION FOR INCOME TAXES............................... (21,779) 1,539 496
----------- ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM................................. (83,911) (140,375) (12,097)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT...................... 3,744
----------- ------------ ------------
NET LOSS........................................................... $ (83,911) $ (140,375) $ (15,841)
=========== ============ ============
NET LOSS PER SHARE (BASIC AND DILUTED):
NET LOSS BEFORE EXTRAORDINARY ITEM................................. $ (2.82) $ (4.68) $ (.36)
EXTRAORDINARY LOSS................................................. (.12)
----------- ------------ ------------
NET LOSS........................................................... $ (2.82) $ (4.68) $ (.48)
=========== ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
(BASIC AND DILUTED)......................................... 29,806 30,001 33,216
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Retained
Additional Earnings Cumulative
Paid-in (Accumulated Translation
Common Stock Capital Deficit) Adjustment Total
------------------- ---------- ------------- -------------- -----------
Shares Amount
---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994............... 29,716,600 $ 297 $ 141,249 $ 103,122 $ (8,504) $ 236,164
Exercise of stock options and other..... 146,900 2 689 691
Cumulative translation adjustment....... 1,522 1,522
Net loss................................ (83,911) (83,911)
---------- -------- ---------- ------------- -------------- -----------
BALANCE AT DECEMBER 31, 1995............... 29,863,500 299 141,938 19,211 (6,982) 154,466
Exercise of stock options and other..... 215,000 2 362 364
Cumulative translation adjustment....... 542 542
Net loss................................ (140,375) (140,375)
---------- -------- ---------- ------------- -------------- -----------
BALANCE AT DECEMBER 31, 1996............... 30,078,500 301 142,300 (121,164) (6,440) 14,997
Sale of stock.......................... 4,901,316 49 14,851 14,900
Conversion of Note into Common Stock.... 45,098,684 451 124,550 125,001
Cumulative translation adjustment....... (1,549) (1,549)
Net loss................................ (15,841) (15,841)
---------- -------- ---------- ------------- -------------- -----------
BALANCE AT DECEMBER 31, 1997............... 80,078,500 $ 801 $ 281,701 $ (137,005) $ (7,989) $ 137,508
========== ======== ========== ============= ============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................$(83,911) $ (140,375) $ (15,841)
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization .......................................... 20,509 18,789 11,311
Provision for doubtful accounts ........................................ 16,335 17,421 7,361
Impairment losses....................................................... 51,383 42,033 14,100
Loss on Sale of European, Mexican and Latin American businesses......... 33,455
Deferred income taxes................................................... 5,471 6,175 162
Gain on sale of fixed assets............................................ (1,530)
Changes in assets and liabilities, net of the effects from acquisitions:
Accounts receivable.................................................(103,553) 132,480 (70,119)
Inventories......................................................... (43,524) 91,059 (70,196)
Prepaid expenses and other current assets........................... (8,186) (14,612) 654
Income taxes receivable............................................. (35,116) 33,470 2,021
Accounts payable.................................................... 98,756 (179,304) 76,203
Accrued liabilities................................................. 23,872 (11,342) (789)
Income taxes payable................................................ (4,422) 1,695
---------- ----------- -----------
Net cash (used for) provided by operating activities........... (62,386) 29,249 (44,968)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (49,082) (9,652) (7,290)
Proceeds from sale of property and equipment................................ 5,975 5,020
Payment of earn out obligation from ComputerLand acquisition................ (13,409)
Cash proceeds from sale of Australian business.............................. 8,515
Cash proceeds from sale of European, Mexican and Latin American businesses.. 110,379
Other investing activities.................................................. (767)
---------- ----------- -----------
Net cash (used for) provided by investing activities............ (49,082) 101,041 (2,270)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit................................... 937,275 1,448,358 726,308
Repayments under revolving line of credit...................................(944,960) (1,466,150) (811,516)
Repayments under senior notes............................................... (43,195) (56,805)
Repayments under subordinated debt agreement................................ (4,400) (17,600)
Repayments under other financing arrangements............................... (9,980) (17,742) (1,721)
Proceeds from sale of accounts receivable................................... 125,320 61,740
Net proceeds from the issuance of convertible notes...................... 125,001
Proceeds from issuance of common stock...................................... 691 364 14,900
---------- ----------- -----------
Net cash provided by (used for) financing activities............ 108,346 (82,765) 40,307
---------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... 967 (4,225) (1,300)
---------- ----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS............................. (2,155) 43,300 (8,231)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 3,533 1,378 44,678
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................$ 1,378 $ 44,678 $ 36,447
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid(received) during the year for:
Interest (net of interest capitalized of $3,281 for 1995)..................$ 27,118 $ 30,456 $ 33,385
Income taxes................................................................ 10,747 (36,068) (3,362)
Noncash activities:
Capital lease obligations entered into...................................... 5,708 187
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Effective March 28, 1997, the Company sold substantially all of the assets of
its wholly owned subsidiary, Merisel FAB, Inc.. The recorded sale price was
$31,992,000, consisting of the assumption of $11,992,000 of trade payables and
accrued liabilities and a $20,000,000 extended payable due to a third party, in
full consideration for the assets (see Note 4 - "Dispositions").
On October 10, 1997, Phoenix Acquisition Company II, L.L.C. ("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.
On December 19, 1997, following receipt of stockholder approval, approximately
$133.8 million outstanding principal amount of the convertible note held by
Phoenix was converted, without any additional payment, to 44,014,379 shares of
Common Stock. The proceeds from the issuance of the convertible note were offset
by professional fees and other direct costs of approximately $12,099,000 which
was recorded as a reduction to additional paid in capital at the time of
conversion.
See accompanying notes to consolidated financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. Summary of Significant Accounting Policies
General-- Merisel, Inc., a Delaware corporation and a holding company (together
with its subsidiaries, "Merisel" or the "Company"), is a leading distributor of
computer hardware, networking equipment and software products. Through its main
operating subsidiary, Merisel Americas, Inc. ("Merisel Americas"), and its
subsidiaries the 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-based product sales and installations.
Risks and Uncertainties --The Company believes that the diversity and breadth of
the Company's product and service offerings, customers, and the general
stability of the economies in the markets in which it operates significantly
mitigate the risk that a severe impact will occur in the near term as a result
of changes in its customer base, competition, or composition of its markets.
Although Merisel regularly stocks products and accessories supplied by more that
500 manufacturers, 69% of the Company's net sales for the North American
Business in 1997 (as compared to 60% in 1996 and 55% in 1995) were derived from
products supplied by Merisel's ten largest vendors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectibility of accounts receivable, inventory, deferred
income taxes, accounts payable, sales returns and recoverability of long-term
assets.
New Accounting Pronouncement--In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard No.
128, "Earnings per Share" ("SFAS 128"), which is effective for financial
statements issued for periods ending after December 15, 1997. SFAS 128
simplifies the previous standards for computing earnings per share ("EPS") and
requires the disclosure of basic and diluted earnings per share. The Company has
adopted SFAS 128 in presenting EPS disclosure for 1997 and the prior years
presented. Because of the anti-dilutive effect that the Company's equity
instruments have on EPS in the years presented, basic and diluted EPS are both
computed by dividing the net loss by the weighted average number of shares
outstanding.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130 requires a
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company is presently
developing a statement to comply with these requirements and, accordingly, will
include such statement beginning with the first quarter of 1998.
In addition, in June of 1997, the FASB 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.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition, Returns and Sales Incentives--The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds available
for cooperative promotion of product sales. Customers earn credit under such
programs based upon the volume of purchases. The cost of these programs is
partially subsidized by marketing allowances provided by the Company's
manufacturers. The allowances for sales returns and costs of customer incentive
programs are accrued concurrently with the recognition of revenue.
Cash and Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents. As of December 31, 1997, cash and cash equivalents included
$9,500,000 in restricted cash balances.
Inventories--Inventories are valued at the lower of cost or market; cost is
determined on the average cost method.
Property and Depreciation--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, generally three to ten years.
Leasehold improvements are amortized over the shorter of the life of the lease
or the improvement.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and warehouse
management systems. Such amounts include the costs of materials and other direct
construction costs, purchased computer hardware and software, outside
programming and consulting fees, direct employee salaries and interest.
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
resulted from the acquisition in January 1994 of Merisel FAB, Inc., which
operated the ComputerLand Franchise and Datago Aggregation Business ("Merisel
FAB"), and the acquisition in 1990 of Microamerica, Inc. Accumulated
amortization was $14,429,000 and $7,672,000 as of December 31, 1996 and 1997,
respectively. The cost in excess of net assets acquired from Microamerica, Inc.
is being amortized over a period of 40 years using the straight line method. The
cost in excess of net assets acquired from Merisel FAB was being amortized over
an aggregate period of 25 years. As of March 28, 1997, the Company completed the
sale of substantially all of the assets of Merisel FAB. In connection with such
sale, the cost in excess of net assets acquired related to Merisel FAB were
written off (see Note 4 - "Dispositions").
The Company reviews the recoverability of intangible assets and other long lived
assets to determine if there has been any permanent impairment. This assessment
is performed based on the estimated undiscounted future cash flows from
operating activities compared with the carrying value of intangible assets. If
the undiscounted future cash flows are less than the carrying value, an
impairment loss is recognized, measured by the difference between the carrying
value and fair value of the assets (see Note 2 - "Impairment Losses").
Income Taxes--Deferred income taxes represent the amounts which will be paid or
received in future periods based on the tax rates that are expected to be in
effect when the temporary differences are scheduled to reverse.
At December 31, 1995, the cumulative amount of undistributed earnings on which
the Company has not recognized United States income taxes was approximately
$7,000,000, representing primarily earnings in the Company's Canadian
subsidiary. No undistributed foreign earnings remained in the Company as of
December 31, 1997.
Concentration of Credit Risk--Financial instruments which subject the Company to
credit risk consist primarily of cash equivalents, trade accounts receivable,
and forward foreign currency exchange contracts. Concentration of credit risk
with respect to trade accounts receivable are generally diversified due to the
large number of entities comprising the Company's customer base and their
geographic dispersion. The Company performs ongoing credit evaluations of its
customers, maintains an allowance for potential credit losses and in certain
locations maintains credit insurance as the Company deems appropriate. The
Company actively evaluates the creditworthiness of the financial institutions
with which it conducts business.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Financial Instruments--The fair values of financial instruments,
other than long-term debt, closely approximate their carrying value because of
their short term nature. The estimated fair value of long-term debt including
current maturities, based on reference to quoted market prices, was greater than
its carrying value as of December 31, 1997 by $10,000,000, and was less than the
carrying value as of December 31, 1996 by approximately $60,776,000.
Foreign Currency Translation--Assets and liabilities of foreign subsidiaries are
translated into United States dollars at the exchange rate in effect at the
close of the period. Revenues and expenses of these subsidiaries are translated
at the average exchange rate during the period. The aggregate effect of
translating the financial statements of foreign subsidiaries at the above rates
is included in a separate component of stockholders' equity entitled Cumulative
Translation Adjustment. In addition, the Company advances funds in the normal
course of business to certain of its foreign subsidiaries which are not expected
to be repaid in the foreseeable future. Translation adjustments resulting from
these advances are also included in Cumulative Translation Adjustment.
Foreign Exchange Instruments--The Company's use of derivatives is limited to the
purchase of foreign exchange contracts in order to minimize foreign exchange
transaction gains and losses. The Company purchases forward dollar contracts to
hedge short-term advances to its foreign subsidiary and to hedge commitments to
acquire inventory for sale and does not use the contracts for trading purposes.
The Company's foreign exchange rate contracts minimize the Company's exposure to
exchange rate movement risk, as any gains or losses on these contracts are
offset by gains and losses on the transactions being hedged. There were no
outstanding foreign exchange contracts as of December 31, 1996. As of December
31, 1997, there were approximately $42,000,000 in outstanding foreign exchange
contracts. In 1995, there was a net foreign currency loss of $806,000, primarily
due to the devaluation of the Mexican Peso. In 1996, the Company recorded a net
foreign currency gain of $161,000 which was also primarily related to the
performance of the Mexican Peso against the United States dollar. In 1997, the
Company recorded a net foreign currency loss of $351,000. These amounts are
recorded as other expense.
Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending on
the Saturday nearest to December 31 and its fiscal quarters are the 13- or
14-week periods ending on the Saturday nearest to March 31, June 30, September
30 and December 31. For clarity of presentation, the Company has described
year-ends presented as if the years ended on December 31 and quarter-ends
presented as if the quarters ended on March 31, June 30, September 30 and
December 31. The 1995 and 1996 fiscal years were 52 weeks in duration. The 1997
fiscal year was 53 weeks in duration. All quarters presented for 1996 and the
first three quarters of 1997 were 13 weeks in duration. The fourth quarter of
1997 was 14 weeks in duration.
2. Impairment Losses
Impairment of long-lived assets is recognized when events or changes in
circumstances indicate that the carrying value of the asset, or related group of
assets, may not be recoverable.
In 1993, the Company undertook the process of converting its North American
Operations to SAP. Although this process was completed in Canada in 1995, the
Company delayed the implementation in the United States and recorded an
impairment charge of $19,500,000. In the fourth quarter of 1997, the Company
renewed its implementation efforts. As part of this process, the Company
reviewed previously capitalized costs and determined that a portion of these
costs no longer provided value to the Company primarily due to changes in the
SAP implementation strategy and the planned implementation of a different
version of SAP. As a result, a $14,100,000 impairment charge was recorded.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the quarter ended September 30, 1996, the Company determined that a portion
of the carrying value for certain of its identifiable intangible assets would
not be recovered from their use in future operations. Accordingly, these assets
were written down to their fair values as of September 30, 1996. An impairment
was recognized on the intangible assets of Merisel FAB, due to declining sales
growth, margins and earnings, and the resulting negative trend in projected cash
flows. The intangible assets of Merisel FAB were acquired in January 1994 and
had a net book value of $87,500,000 in 1995 prior to the impairment losses. In
the fourth quarter of 1995, the fair value of the intangible assets was measured
by discounting future expected cash flows, which resulted in a required write
down of $30,000,000. Another impairment charge of $40,000,000 was recognized
against these assets in the third quarter of 1996 on the same basis. In December
1996, the Company recorded an additional $2,033,000 charge to adjust Merisel FAB
assets to their fair value based on the provisions of a definitive agreement to
sell such assets in the first quarter of 1997. (See Note 4 "Dispositions.")
In March 1996, effective January 1, 1996, the Company sold its interest in its
wholly owned Australian subsidiary, Merisel Pty Ltd. ("Merisel Australia"), to
Tech Pacific Holdings Ltd. Under the terms of the agreement, the Company
received consideration of $9,900,000 in the form of repayment of certain
intercompany debt obligations for $8,500,000 and $1,400,000 in non-cash asset
transfers. The Company recognized a $1,900,000 charge as an impairment loss for
the write down of the Australian net assets to their net realizable value in the
fourth quarter of 1995.
3. Debt Restructuring and Equity Investment
On September 19, 1997, the Company and Merisel Americas entered into a
definitive Stock and Note Purchase Agreement with Phoenix Acquisition Company
II, L.L.C. ("Phoenix"), a Delaware limited liability company whose sole member
is Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and
Note Purchase Agreement, on September 19, 1997 Phoenix acquired a Convertible
Note for $137,100,000 (the "Convertible Note") and 4,901,316 shares of Common
Stock (the "Initial Shares") for $14,900,000. The Convertible Note 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 consisting of $80,697,000 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.
In connection with these repayments, the Company recorded an extraordinary loss
on the extinguishment of debt of $3,744,000. This amount consisted of a "make
whole" premium of $960,000 required to be paid with respect to the prepayment of
the subordinated notes, unamortized prepaid financing fees totaling
approximately $2,546,000 and other costs totaling $238,000. Additionally, the
Company incurred $5,230,000 in other expenses related to the Company's efforts
to effect a restructuring of its debt. These costs include $4,380,000 of
professional fees and other costs associated with the termination of a Limited
Waiver Agreement with the holders of its 12.5% Senior Notes due 2004 ("12.5%
Notes") and $850,000 in costs that were incurred as a result of the change in
control that occurred upon the conversion of the Convertible Note. Additionally,
selling, general and administrative expenses include compensation charges of
$1,950,000 incurred pursuant to employment contracts of certain executive
officers of the Company related to the debt restructuring.
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 December 31, 1997, Phoenix owned
50,000,000 shares of Common Stock, or approximately 62.4% of the outstanding
Common Stock.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Dispositions
On October 4, 1996, Merisel completed the sale of its European, Mexican and
Latin American subsidiaries ("EML") to CHS Electronics, Inc. ("CHS"). The sale
was effective as of September 27, 1996. A loss of $33,455,000, which includes
approximately $7,400,000 of direct costs related to the sale, was recorded on
such sale. The sale price, computed based on the combined closing balance sheet
of EML, was $147,631,000, consisting of (i) $110,379,000 in cash, (ii) the
assumption of Merisel's European asset securitization agreement against which
$26,252,000 was outstanding at closing and (iii) a receivable for $11,000,000
which has since been collected.
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 buyer assuming $11,992,000 of trade
payables and accrued liabilities and a $20,000,000 extended payable due to
Vanstar Corporation. As part of the sale, the Company agreed to extend rebates
to Synnex on future purchases, not to exceed $2,000,000. In connection with this
sale, the Company recorded an impairment charge in the fourth quarter of 1996
for $2,033,000 to adjust Merisel FAB's assets to their fair value.
In addition, effective January 1, 1996, the Company completed the sale of
Merisel Australia (see Note 2). Following is summarized pro forma operating
results assuming that the Company had sold EML, Merisel FAB, and Merisel
Australia as of January 1, 1996.
<TABLE>
<CAPTION>
(Unaudited)
(in thousands except per share data)
Twelve Months Ended December 31,
1996 1997
--------------- ---------------
<S> <C> <C>
Net Sales $ 3,441,343 $ 3,846,795
Gross Profit 179,238 233,406
Net loss (60,751) (17,994)
=============== ================
Net loss per basic &
diluted share $ (2.02) $ (0.54)
=============== ================
Weighted Average
basic & diluted
Shares Outstanding 30,001 33,216
=============== ================
</TABLE>
EML is not an incorporated entity for which historical financial statements were
prepared. The historical balances used in preparing the above pro forma balances
represent combined balances obtained from the separate unaudited financial
statements for the individual entities comprising EML. The pro forma results
include adjustments for general and administrative expenses that would not have
been eliminated due to the sale of EML. The pro forma adjustments also include
adjustments for amortization of intangible assets and for interest expense on
debt repaid with a portion of the proceeds from the sale, net of the effect of
an interest rate increase resulting from the renegotiation of certain debt
agreements as a result of the sale. Historical balances obtained from the
unaudited financial statements of Merisel FAB and Merisel Australia were also
used in preparing the pro forma balances above.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Sale of Accounts Receivable
The Company's wholly owned subsidiary, Merisel Americas, sells trade receivables
on an ongoing basis to its wholly owned subsidiary Merisel Capital Funding, Inc.
("Merisel Capital Funding"). Pursuant to an agreement with a securitization
company (the "Receivables Purchase and Servicing Agreement"), Merisel Capital
Funding, in turn, sells such receivables to the securitization company on an
ongoing basis, which yields proceeds of up to $300,000,000 at any point in time.
Merisel Capital Funding's sole business is the purchase of trade receivables
from Merisel Americas. Merisel Capital Funding is a separate corporate entity
with its own separate creditors, which in the event of its liquidation will be
entitled to be satisfied out of Merisel Capital Funding's assets prior to any
value in Merisel Capital Funding becoming available to Merisel Capital Funding's
equity holders. This facility expires in October 2000.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars. The facility expires December 12, 2000, but is
extendible by notice from the securitization company, subject to the Company's
approval.
Effective October 16, 1995, Merisel U.K. Ltd. ("Merisel U.K.") entered into a
receivables purchase agreement with a securitization Company to provide funding
for Merisel U.K. This facility, including $26,252,000 outstanding thereunder,
was assumed by CHS in connection with the purchase of EML effective September
27, 1996.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of December
31, 1997 the total amount outstanding under these facilities was $310,560,000.
Fees incurred in connection with the sale of accounts receivable for the years
ended December 31, 1995, 1996 and 1997 were $10,291,000, $16,029,000 and
$16,030,000, respectively, and are recorded as other expense.
6. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful
Life
(in Years)
December 31,
----------------
1996 1997
---------- ---------
<S> <C> <C>
Land ............................................. $ 5,818 $ 2,440
Building........................................... 20 3,880 3,880
Equipment.......................................... 3 to 10 65,628 66,455
Furniture and fixtures............................. 3 to 5 8,575 6,733
Leasehold improvements............................. 3 to 20 9,025 8,166
Construction in progress........................... 21,850 14,589
---------- ---------
Total.............................................. 114,776 102,263
Less accumulated depreciation and amortization..... (53,346) (62,121)
---------- ---------
Property and equipment, net........................ $ 61,430 $ 40,142
========== =========
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
The components of loss before income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
Domestic......................................... $ (71,884) $(100,139) $(18,442)
Foreign.......................................... (33,806) (38,697) 2,601
------------- -------------- -------------
Total............................................ $(105,690) $(138,836) $(15,841)
============= ============== =============
</TABLE>
The (benefit) provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
Current:
Federal..................... $(24,627) $ (1,706)
State....................... 130 360 $ 312
Foreign..................... (2,753) (3,290) 346
------------- -------------- -------------
Total Current............... (27,250) (4,636) 658
------------- -------------- -------------
Deferred:
Domestic.................... 7,120 4,659
Foreign..................... (1,649) 1,516 (162)
------------- -------------- -------------
Total deferred.............. 5,471 6,175 (162)
------------- -------------- -------------
Total provision (benefit)... $(21,779) $ 1,539 $ 496
============= ============== =============
</TABLE>
Deferred tax liabilities and assets were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss.......................... $26,328 $51,744
Expense accruals............................ 11,919 16,164
State taxes................................. (372) 109
Property and goodwill....................... 10,697 (4,361)
Other, net.................................. 2,033 2,314
------------ ------------
50,605 65,970
Valuation allowances........................ (50,123) (65,327)
------------ ------------
Total.................................. $ 482 $ 643
============ ============
Net deferred tax asset........................... $ 482 $ 643
============ ============
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The major elements contributing to the difference between the federal statutory
tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------------
1995 1996 1997
------------- -------------- ------------
<S> <C> <C> <C>
Statutory rate.............................................. (35.0)% (35.0)% (35.0)%
Increase in U.S. valuation allowance........................ 9.3 27.3 32.7
State income taxes, less effect of federal deduction........ 0.1 .2 1.3
Foreign income subject to tax at other than statutory rate.. 3.2
Goodwill amortization....................................... 0.4 .2 1.5
Foreign losses with benefits at less than statutory rate.... 0.1 7.2
Utilization of net operating losses of foreign subsidiary... (1.0) 1.2
Other....................................................... 1.3 2.2 1.5
------------- -------------- ------------
Effective tax rate.......................................... (20.6)% 1.1% 3.2%
============= ============== ============
</TABLE>
Upon the issuance of the Conversion Shares, the Company experienced an ownership
change for Federal income tax purposes, resulting in an annual limitation on the
Company's ability to utilize its net operating loss carryforwards to offset
future taxable income. The annual limitation was determined by multiplying the
value of the Company's equity before the change by the long-term tax exempt rate
as defined by the Internal Revenue Service. The Company has estimated that this
limitation could reduce available net operating loss carryforwards by
approximately $23,000,000 and has adjusted its deferred tax asset to reflect
such estimated limitation. At December 31, 1996 and 1997, the Company had
available net operating loss carryforwards of $77,643,000 and $125,378,000,
after adjusting for the estimated limitation, which expires at various dates
through December 31, 2012.
8. Debt
At December 31, 1997, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of 12.5%
payable semi-annually. By virtue of being an obligation of Merisel, Inc., the
12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's 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, sales or
transfers of assets, the making of dividends and other payments, the creation of
liens, sale-leaseback transactions with affiliates and certain mergers.
At December 31, 1997, the Company had promissory notes outstanding with an
aggregate balance of $8,429,000. 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. At December 31, 1996, the Company's only capital lease obligations
were $187,000 related to Merisel FAB's operations. These obligations were
assumed by Synnex as part of the sale of Merisel FAB in the first quarter of
1997.
9. Commitments and Contingencies
The Company leases certain of its facilities and equipment under noncancelable
operating leases. Future minimum rental payments, under leases that have initial
or remaining noncancelable lease terms in excess of one year are $8,717,000 in
1998, $7,089,000 in 1999, $5,043,000 in 2000, $4,315,000 in 2001, $3,011,000 in
2002 and $3,298,000 thereafter. Certain of the leases contain inflation
escalation clauses and requirements for the payment of property taxes,
insurance, and maintenance expenses. Rent expense for 1995, 1996 and 1997 was
$14,840,000, $16,284,000 and $10,487,000, respectively.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has arrangements with certain finance companies that provide
inventory and accounts receivable financing facilities for its customers. In
conjunction with these arrangements, the Company has inventory repurchase
agreements with the finance companies that would require it to repurchase
certain inventory if repossessed from the customers by the finance companies.
Such repurchases have been insignificant in the past.
In June 1994, Merisel and certain of its officers and/or directors were named in
putative securities class actions filed in the United States District Court for
the Central District of California, consolidated as In re Merisel, Inc.
Securities Litigation. Plaintiffs, who are seeking damages in an unspecified
amount, purport to represent a class of all persons who purchased Merisel common
stock between November 8, 1993 and June 7, 1994 (the "Class Period"). The
complaint, as amended and consolidated, alleges that the defendants inflated the
market price of Merisel's common stock with material misrepresentations and
omissions during the Class Period. Plaintiffs contend that such alleged
misrepresentations are actionable under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Following
the granting of defendant's first motion to dismiss on December 5, 1994,
plaintiffs filed a second consolidated and amended complaint December 22, 1994.
On April 3, 1995, Federal District Judge Real dismissed the complaint with
prejudice. On August 8, 1997 the Court of Appeals for the Ninth Circuit (the
"Court of Appeals") reversed the dismissal and remanded the case to the trial
court. On August 22, 1997, the Company filed a petition for rehearing and
suggestion of rehearing en banc (the "Petition") with the Court of Appeals. On
January 30, 1998, the Court of Appeals issued an order amending its prior
opinion and denying the Company's petitions for rehearing and rehearing en banc.
In light of this order, the Federal District Court has scheduled a hearing for
April 13, 1998. The Company intends to defend itself vigorously against this
claim.
In January 1997, the Company received notice that Tech Pacific had brought a
claim in the Supreme Court of New South Wales, Sydney Registry Commercial
Division, against Merisel; its subsidiary Merisel Asia, Inc. ("Merisel Asia");
Patrick T. Woods, former managing director of Merisel Australia; and Michael D.
Pickett, former CEO and Chairman of Merisel, in a proceeding captioned Tech
Pacific Holdings Limited, v. Merisel, Inc., et. al. In March 1996, Tech Pacific
purchased Merisel Pty, Ltd ("Merisel Australia"), Merisel's Australian
subsidiary, for a purchase price of $9,900,000 pursuant to the Share Purchase
Agreement dated as of March 7, 1996 between Merisel Asia and Tech Pacific. The
claim asserts various breaches of representations and warranties as well as
misleading and deceptive conduct under relevant provisions of Australian law
with respect to the financial position of Merisel Australia as represented by
oral and written disclosures. The plaintiffs seek to recover specified damages
exceeding AUS$8.3 million (or approximately US$5.6 million as of March 27, 1998)
as well as unspecified damages plus costs and expenses associated with the
claim. The Company intends to defend itself vigorously against this claim. The
Company does not believe that the outcome of the claim will have a material
adverse effect on the Company or its financial condition.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 exchanged
(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.
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 does not believe any such fees are owed and
has so notified the lenders. There can be no assurance, however, as to the
ultimate outcome of this claim.
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. 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>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Employee Stock Options and Benefit Plans
On December 19, 1997, the Company's stockholders approved the Merisel Inc. 1997
Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"). Under the
Stock Award and Incentive Plan, incentive stock options and nonqualified stock
options as well as other stock-based awards may be granted to employees,
directors, and consultants. The plan authorized the issuance of an aggregate of
8,000,000 shares of Common Stock less the number of shares of Common Stock that
remain subject to outstanding option grants under any of the Company's other
stock-based incentive plans for employees and are not either canceled in
exchange for options granted under the Stock Award and Incentive Plan or
forfeited. The optionees, option prices, vesting provisions, dates of grant and
number of shares granted under the plans are determined primarily by the Board
of Directors or the committee authorized by the Board of Directors to administer
such plans, although incentive stock options must be granted at prices which are
no less than the fair market value of the Company's Common Stock at the date of
grant. On December 22, 1998, the Company granted options under the Stock Award
and Incentive Plan in exchange for previously granted employee stock options
that were then outstanding and that had an exercise price greater than the then
market price of the Common Stock, subject to the agreement of each optionee to
cancel the outstanding options. As of December 31, 1997, 1,435,000 options
remain outstanding under the Company's other employee stock option plans,
however, no new options may be issued under these plans. In addition to the
shares issuable under the Stock Award and Incentive Plan, 50,000 shares are
reserved for issuance under the Company's 1992 Stock Option Plan for
Non-Employee Directors. The following summarizes the aggregate activity in all
of the Company's plans for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------------- --------------------------- -----------------------------
Wgtd Avg. Wgtd Avg. Wgtd Avg.
Shares Exer. Price Shares Exer. Price Shares Exer. Price
------------- ------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,902,625 9.03 3,191,289 7.30 1,368,345 7.48
Granted 1,680,241 5.91 354,500 2.45 6,146,323 3.86
Exercised (112,422) 2.99 (215,000) .67
Canceled (279,155) 12.43 (1,962,444) 7.04 (841,143) 6.41
------------ ------------- -------------
Outstanding at end
of year 3,191,289 7.30 1,368,345 7.48 6,673,525 4.10
------------ ------------- -------------
Option price range for
Exercised shares $2.20-$6.25 $0.01-$2.20 $0.00
----------- ------------- -----
Weighted average fair
value at date of grant,
of options granted
during the year $3.80 $1.61 $2.55
------------ ------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at 12/31/97 In Years Price at 12/31/97 Price
- ------------------------- --------------- ------------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.0000 to $ 3.0000 92,727 4 $ 3.0000 87,727 $ 3.0000
$ 11.3750 to $11.3750 43,250 5 $ 11.3750 43,250 $ 11.3750
$ 11.7500 to $11.8750 59,000 6 $ 11.8686 53,400 $ 11.8680
$ 4.3100 to $19.8750 4,776,623 7 $ 4.4314 980,050 $ 4.8051
$ 4.5790 to $ 6.3125 200,500 8 $ 5.7481 104,000 $ 5.7601
$ 1.8750 to $ 2.8125 703,875 9 $ 2.6915 568,500 $ 2.7622
$ 1.6250 to $ 2.3100 797,550 10 $ 2.0744 0 $ 0
--------------- -----------------
$ 1.6250 to $19.8750 6,673,525 1,836,927
=============== =================
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on their fair value at the grant date for options granted in
1995, 1996 and 1997 consistent with the provisions of SFAS No. 123, the
Corporation's net loss and loss per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Net Loss - As Reported $(83,911) $(140,375) $( 15,841)
Net Loss - Pro Forma $(84,480) $(140,994) $( 16,914)
Loss Per Share - As Reported $ (2.82) $ (4.68) $ (.48)
Loss Per Share - Pro Forma $ (2.83) $ (4.70) $ (.51)
</TABLE>
The fair value of each option granted during 1995, 1996 and 1997 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Expected life 5.0 5.0 5.0
Expected volatility 72.41% 72.69% 73.84%
Risk-free interest rate 6.27% 6.32% 5.76%
Dividend Yield 0.00% 0.00% 0.00%
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company offers a 401(k) savings plan under which all employees who are 21
years of age with at least one year of service are eligible to participate. The
plan permits eligible employees to make contributions up to certain limitations,
with the Company matching certain of those contributions. The Company's
contributions vest 25% per year. The Company contributed $125,000 and $506,000
to the plan during the years ended December 31, 1995 and 1997, respectively. The
Company did not make any matching contributions on behalf of its employees in
1996.
11. Segment Information
The Company's operations primarily involve a single industry segment--the
wholesale distribution of computer hardware and software products. The
geographic areas in which the Company operates on an ongoing basis are the
United States, and Canada, after taking into account the sale of the Company's
other foreign businesses during 1996. Net sales, operating income (before
interest, other non-operating expenses and income taxes) and identifiable assets
by geographical area were as follows (in thousands):
<TABLE>
<CAPTION>
United Other
States Canada International Eliminations Consolidated
------------- ---------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
1995:
Net sales....................... $ 3,996,346 $ 572,569 $ 1,388,052 $ 5,956,967
============= ================ ============== =============
Operating loss.................. $ (37,825) $ (3,637) $ (12,760) $ (54,222)
============= ================ ============== =============
Identifiable assets............. $ 738,220 $ 135,482 $ 375,878 $ (19,246) $ 1,230,334
============= ================ ============== ================ =============
1996:
Net sales....................... $ 3,818,923 $ 643,730 $ 1,060,171 $ 5,522,824
============= ================ ============== =============
Operating income (loss)......... $ (44,295) $ (5,406) $ 1,901 $ (47,800)
============= ================ ============== =============
Identifiable assets............. $ 623,707 $ 126,691 $ (19,359) $ 731,039
============= ================ ================ =============
1997:
Net sales....................... $ 3,288,241 $ 760,731 $ 4,048,972
============= ================ =============
Operating income ............ $ 27,667 $ 7,911 $ 35,578
============= ================ =============
Identifiable assets............. $ 603,414 $ 152,648 $ (8,951) $ 747,111
============= ================ ================ =============
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Quarterly Financial Data (Unaudited)
Selected financial information for the quarterly periods for the fiscal years
ended 1996 and 1997 is presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales...................... $1,536,589 $1,442,668 $1,393,532 $1,150,035
Gross profit................... 87,223 79,587 57,193 65,251
Net loss....................... (13,508) (11,404) (117,138) 1,675
Net loss per share............. (0.45) (0.38) (3.90) .06
1997
--------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ------------- --------------- -----------
Net sales...................... $1,113,100 $895,754 $965,238 $1,074,880
Gross profit................... 64,977 55,654 58,508 61,945
Net (loss) income before
extraordinary item........... 1,130 2,046 (5,333) (9,939)
Net (loss) income.............. 1,130 2,046 (9,077) (9,939)
Net (loss) income per basic
and diluted share before
extraordinary item............. .04 .07 (.17) (.24)
Net (loss) income per
basic and diluted share...... .04 .07 (.29) (.24)
</TABLE>
The Company recorded adjustments related to vendor account reconcilations and
customer disputes that amounted to $2,200,000 in each of the first two quarters
of 1996 and $23,000,000 in the third quarter of 1996. Additionally, charges in
the third quarter of 1996 were recognized for further impairment of certain long
lived assets for $40,000,000 and for the loss on the sale of certain assets
totaling $33,455,000. In the fourth quarter of 1996, net income includes a
$2,033,000 charge to adjust Merisel FAB's assets to their fair value based on
the provisions of a definitive agreement to sell such assets in the first
quarter of 1997. In the third quarter of 1997, the Company recorded $9,324,000
in expenses related to its debt restructuring efforts. These expenses included
$1,950,000 in compensation to executive officers of the Company in connection
with the successful restructuring, $3,630,000 related to the termination of the
Limited Waiver Agreement with certain holders of the Company's 12.5% Notes, and
$3,744,000 in extraordinary loss on the extinguishment of debt. In the fourth
quarter of 1997, the Company recorded additional charges of $1,600,000 related
to the conversion of the Convertible Note and the resulting change in control.
The Company also recognized an asset impairment charge in the fourth quarter of
1997 for $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996 and has since been resumed in the fourth quarter of 1997.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
MERISEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1995, 1996 AND 1997
Balance at Charged to Balance at
December 31, Costs and December 31,
1994 Expenses Deductions 1995
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Accounts receivable--Doubtful accounts..... $16,511,000 $16,335,000 $12,647,000 $20,199,000
Accounts receivable--Other (1)............. 9,048,000 23,100,000 27,561,000 4,587,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1995 Expenses Deductions 1996
-------------- ------------- ------------- --------------
Accounts receivable--Doubtful accounts..... $20,199,000 $17,421,000 $17,858,000 $19,762,000
Accounts receivable--Other (1)............. 4,587,000 14,355,000 15,020,000 3,922,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1996 Expenses Deductions 1997
-------------- ------------- ------------- --------------
Accounts receivable--Doubtful accounts..... $19,762,000 $7,361,000 $10,521,000 $16,602,000
Accounts receivable--Other (1)............. 3,922,000 16,232,000 18,207,000 1,947,000
</TABLE>
(1) Accounts receivable--Other includes allowances for net sales returns and
uncollectible cooperative advertising credits.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated herein by reference to
information contained in the Company's definitive proxy statement for its 1998
annual meeting of stockholders (the "1998 Proxy Statement") under the captions
"Election of Directors - Information Regarding Nominees and the Board of
Directors," "Election of Directors - Executive Officers" and "Election of
Directors - Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to the
information contained in the 1998 Proxy Statement under the captions "Election
of Directors - Executive Compensation - Summary Compensation Table; - Options in
1997; - Compensation Committee Interlocks and Insider Participation;" "Election
of Directors - Employment and Change-in-Control Arrangements" and "Election of
Directors - Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to the
information contained in the 1998 Proxy Statement under the caption "Election of
Directors - Ownership of Common Stock."
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference to the
information contained in the 1998 Proxy Statement under the caption "Election of
Directors - Cerain Relationships and Related Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this Report:
(1) Financial Statements included in Item 8:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1996 and 1997.
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997.
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules included in Item 8:
Schedule II--Valuation and Qualifying Accounts.
<PAGE>
Schedules other than that referred to above have been omitted
because they are not applicable or are not required under the
instructions contained in Regulation S-X or because the information
is included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
The exhibits listed on the accompanying Index of Exhibits are filed
as part of this Annual Report.
(b) The Following Reports on Form 8-K were filed during the quarter ended
December 31, 1997:
Current Report on Form 8-K, dated October 22, 1997; and Current
Report on Form 8-K, dated December 19, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 30, 1998
MERISEL, INC.
By /s/James E. Illson
------------------------------------------------
James E. Illson
Executive Vice President - Operations and Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
Signature
<S> <C> <C>
/s/Dwight A. Steffensen Chairman, Chief Executive Officer and President March 30,1998
Dwight A. Steffensen (Principal Executive Officer)
/s/James E. Illson Director, Executive Vice President - Operations March 30,1998
James E. Illson and Finance and Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/Albert J. Fitzgibbons III Director March 30,1998
Albert J. Fitzgibbons III
/s/Bradley J. Hoecker Director March 30,1998
Bradley J. Hoecker
/s/Robert J. McInerney Director March 30,1998
Robert J. McInerney
/s/Stephen M. McLean Director March 30,1998
Stephen M. McLean
/s/Dr. Arnold Miller Director March 30,1998
Dr. Arnold Miller
/s/Thomas P. Mullaney Director March 30,1998
Thomas P. Mullaney
/s/Lawrence J. Schoenberg Director March 30,1998
Lawrence J. Schoenberg
</TABLE>
<PAGE>
EXHIBIT INDEX
2.1 Purchase Agreement dated as of August 29, 1996 between CHS
Electronics, Inc., Merisel, Inc. and Merisel Europe, Inc. (15)
2.2 First Amendment to Purchase Agreement dated as of October 4, 1996
between CHS Electronics, Inc., Merisel, Inc. and Merisel Europe,
Inc. (15)
2.3 Settlement Agreement and Release dated February 13, 1997 by and among
CHS Electronics, Inc., Merisel, Inc. and Merisel Europe, Inc. (15)
2.4 Asset Purchase Agreement dated January 15, 1997 by and among SYNNEX
Information Technologis, Inc., SynFab, Inc. and Merisel FAB, Inc.
(19)
2.5 Amendment No. 1 to the Asset Purchase Agreement dated as of March 6,
1997 by and among Merisel, Inc., Merisel FAB, Inc., SYNNEX
Information Technologies, Inc. and ComputerLand Corporation,
successor-in-interest to SynFab, Inc. (19)
3.1 Restated Certificate of Incorporation of Merisel, Inc. (1)
3.2 Amendment to Certificate of Incorporation of Merisel, Inc. dated
August 22, 1990. (5)
3.3 Amendment to Certificate of Incorporation of Merisel, Inc. dated
December 19, 1997. (21)
3.4 Bylaws, as amended, of Merisel, Inc. (7)
4.1 Indenture dated October 15, 1994 between Merisel, Inc. and
NationsBank of Texas, N.A., as Trustee, relating to the Company's
12.5% Senior Notes Due 2004, including the form of such Senior Notes
attached as Exhibit A thereto. (11)
4.2 Form of Limited Waiver and Voting Agreement, dated as of April 11,
1997, by and among Merisel, Inc. and the holders of the 12 1/2%
Senior Notes due December 31, 2004. (19)
4.3 Form of Limited Waiver and Agreement to Amend dated as of April 14,
1997 by and among Merisel, Inc., Merisel Europe, Inc., and the
holders of the Revolving Credit Agreement and the Senior Note
Purchase Agreement. (19)
10.1 1983 Employee Stock Option Plan of Softsel Computer Products, Inc.,
as amended, together with Form of Incentive Stock Option Agreement
and Form of Nonqualified Stock Option Agreement under 1983 Employee
Stock Option Plan. (6)*
10.2 1991 Employee Stock Option Plan of Merisel, Inc. together with Form
of Incentive Stock Option Agreement and Form of Nonqualified Stock
Option Agreement under the 1991 Employee Stock Option Plan. (7)*
10.3 Amendment to the Company's 1991 Employee Stock Option Plan dated
January 16, 1997. (19)*
10.4 Merisel, Inc. 1992 Stock Option Plan for Nonemployee Directors. (9)*
10.5 Softsel Computer Products, Inc. Executive Deferred Compensation Plan.
(10)*
10.6 Merisel, Inc. 1997 Stock Award and Incentive Plan. (22)*
<PAGE>
10.7 Form of Nonqualified Stock Option Plan under the 1997 Stock Award and
Incentive Plan.
10.8 Merisel, Inc. Amended and Restated 401(k) Retirement Savings Plan.
(12)*
10.9 Lease between Registrant and Pacifica Holding Company dated April 6,
1989. (2)
10.10 Lease Agreement dated October 27, 1988 by and between Rosewood
Development Corporation and Microamerica, Inc. re: property located
in Marlborough, Massachusetts. (3)
10.11 Lease Agreement dated May 23, 1990 by and between Kilroy-Freehold El
Segundo Company and Softsel/Microamerica, Inc. re: property located
in El Segundo, California. (4)
10.12 Lease Agreement dated October 1991 by and between Koll Hayward
Associates II and Merisel, Inc. (8)
10.13 Annex X to Receivable Transfer Agreement and Receivables Purchase and
Servicing Agreement dated as of October 2, 1995. (13)
10.14 Form of Receivables Purchase Agreement between Merisel Canada, Inc.
and Canadian Master Trust dated as of December 15, 1995. (14)
10.15 Amended and Restated Receivables Transfer Agreement dated as of
September 27, 1996 by and between Merisel Americas, Inc. and Merisel
Capital Funding, Inc. (15)
10.16 Amended and Restated Receivables and Servicing Agreement dated as of
September 27, 1996, by and between Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc. and General
Electric Capital Corporation. (15)
10.17 Amendment No. 1 and Waiver to Amended and Restated Receivables
Purchase and Servicing Agreement dated as of November 7, 1996 among
Merisel Capital Funding, Inc., Redwood Receivables Corporation,
Merisel Americas, Inc. Electric and General Capital Corporation. (19)
10.18 Amendment No. 1 and Waiver to Amended and Restated Receivables
Transfer Agreement dated as of November 7, 1996 by and between
Merisel Americas, Inc. and Merisel Capital Funding, Inc. (19)
10.19 Amendments to Securitization Agreements, dated as of December 19,
1997, among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation.
10.20 Form of Security Agreement between Merisel Properties, Inc. and
Heller Financial, Inc. dated December 29, 1995. (14)
<PAGE>
10.21 Deed of Trust, Security Agreement, Assignment of Leases and Rents and
Fixture Filing between Merisel Properties, Inc. and Heller Financial,
Inc. dated December 29, 1995. (14)
10.22 Share Purchase Agreement between Merisel, Inc., Merisel Asia, Inc.
and Tech Pacific Holdings Ltd. dated March 7, 1996. (14)
10.23 Retention Agreement between Merisel, Inc. and Thomas P. Reeves dated
October 1, 1995. (13)*
10.24 Employment Agreement dated February 12, 1996 between Dwight A.
Steffensen and Merisel, Inc. (16)*
10.25 Employment Agreement between Dwight A. Steffensen and Merisel, Inc.
dated February 12, 1997. (19)*
10.26 First Amendment to Employment Agreement dated as of December 15, 1997
between Merisel, Inc. and Dwight A. Steffensen.*
10.27 Employment Agreement between Merisel, Inc. and James Illson dated
August 19, 1996. (17)*
10.28 First Amendment to Employment Agreement dated as of July 26, 1997
between Merisel, Inc., Merisel Americas, Inc., and James E. Illson.
(20)*
10.29 Employment Agreement, dated as of September 5, 1996, between Merisel,
Inc. and James D. Wittry. (18)*
10.30 Letter Agreement dated November 29, 1996 between Merisel, Inc. and
Timothy N. Jenson. (18)*
10.31 Amendment to Letter Agreement dated April 9, 1996 between Merisel,
Inc. and Timothy N. Jenson. (18)*
10.32 Amendment to Letter Agreement dated August 22, 1996 between Merisel,
Inc. and Timothy N. Jenson. (18)*
<PAGE>
10.33 Change of Control Agreement dated as of July 26, 1997 between
Merisel, Inc., Merisel Americas, Inc., and Timothy N. Jenson. (20)*
10.34 Employment Agreement between Robert McInerney and Merisel, Inc. dated
February 3, 1997. (19)*
10.35 First Amendment to Employment Agreement dated as of July 26, 1997
between Merisel, Inc., Merisel Americas, Inc., and Robert J.
McInerney. (20)*
10.36 Change of Control Agreement dated as of June 23, 1997 between
Merisel, Inc., Merisel Americas, Inc., and Karen A. Tallman. (20)*
10.37 Stock and Note Purchase Agreement, dated September 19, 1997, among
Phoenix Acquisition Company II, L.L.C, Merisel, Inc., Merisel
Americas, Inc., and incorporated herein by this reference. (23)
10.38 Convertible Promissory Note dated September 19, 1997 of Merisel, Inc.
and Merisel Americas, Inc.
10.39 Registration Rights Agreement, dated September 19, 1997, by and among
Merisel, Inc., Merisel Americas, Inc. and Phoenix Acquisition Company
II, L.L.C, and incorporated herein by this reference. (23)
10.40 Revolving Credit Agreement and Convertible Promissory Note due July
2, 1998, between Merisel, Inc., Merisel Americas, Inc. and Bankers
Trust Company dated January 26, 1998. (24)
10.41 Letter Agreement dated January 26, 1998, between Merisel Americas,
Inc. And Stonington Financing, Inc. (24)
21 Subsidiaries of the Registrant.
27 Financial Data Schedule for the years ended December 31, 1995, 1996
and 1997.
- --------
* Management contract or executive compensation plan or arrangement.
(1) Filed as an exhibit to the Form S-1 Registration Statement of Softsel
Computer Products, Inc. No. 33-23700, and incorporated herein by this
reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989 of Softsel Computer Products, Inc.,
and incorporated herein by this reference.
(3) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1990 of Softsel Computer Products, Inc., and
incorporated herein by this reference.
(4) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1990 of Softsel Computer Products, Inc., and
incorporated herein by this reference.
<PAGE>
(5) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990, and incorporated herein by this
reference.
(6) Filed as an exhibit to the Form S-8 Registration Statement of Softsel
Computer Products, Inc., No. 33-35648, filed with the Securities and
Exchange Commission on June 29, 1990, and incorporated herein by this
reference.
(7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991, and incorporated herein by this
reference.
(8) Filed as an exhibit to the Form S-3 Registration Statement of
Merisel, Inc., No. 33-45696, filed with the Securities and Exchange
Commission on February 14, 1992 and incorporated herein by this
reference.
(9) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992, and incorporated herein by this
reference.
(10) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992 of Merisel, Inc., and incorporated
herein by this reference.
(11) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, and incorporated herein by this
reference.
(12) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by this reference.
(13) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, and incorporated herein by this
reference.
(14) Filed as an exhibit to Amendment No. 2 to the Annual Report on Form
10-K/A for the year ended December 31, 1995, and incorporated herein
by this reference.
(15) Filed as an exhibit to the Current Report on Form 8-K dated April 17,
1996, and incorporated herein by this reference.
(16) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by this
reference.
(17) Filed as an exhibit to the Current Report on Form 8-K dated October
18, 1996, and incorporated herein by this reference.
(18) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarter September 30, 1996, and incorporated herein by this
reference.
<PAGE>
(19) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1996, and incorporated herein by this reference.
(20) Filed as an exhibit to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, and incorporated herein by this
reference.
(21) Filed as Annex I to Schedule 14A dated October 6, 1997, and
incorporated herein by this reference.
(22) Filed as Annex II to Schedule 14A dated October 6, 1997, and
incorporated herein by this reference.
(23) Filed as an exhibit to the Current Report on Form 8-K, dated
September 19, 1997, and incorporated herein by this reference.
(24) Filed as an exhibit to the Current Report on Form 8-K dated
January 26, 1998, and incorporated herein by this reference.
MERISEL, INC.
1997 Stock Award and Incentive Plan
Nonqualified Stock Option Agreement
This NONQUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is
entered into this 14th day of January, 1998 (the "Grant Date"), by and between
MERISEL, INC., a Delaware corporation (the "Company"), and FirstName LastName,
an employee of the Company (the "Optionee"). Any capitalized terms not defined
herein shall have the meaning set forth in the Plan (as defined below).
1. Grant of Option
Pursuant to the Merisel, Inc. 1997 Stock Award and Incentive
Plan (the "Plan"), the Committee has determined that the Optionee is to be
granted, on the terms and conditions set forth herein (and subject to the terms
and provisions of the Plan), a nonqualified stock option (an "Option") to
purchase shares of the Company's common stock, par value $.01 per share ("Common
Stock"), and hereby grants such Option. It is intended that the Option
constitute a "nonqualified stock option" and not an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. Number of Shares and Option Price
The Option entitles the Optionee to purchase Total shares of
Common Stock (the "Option Shares") at an exercise price (the "Option Price") of
$4.06 per share.
3. Term of Option and Agreement
Subject to Section 5 hereof, the Option, this Agreement and
all rights to acquire Common Stock hereunder shall expire when the first of the
following occurs:
(a) the expiration of ten years from the Grant
Date, provided, however, that if the Optionee is a 10 percent stockholder
of the Company as detailed in Section 422A(c)(8) of the Code, the expiration of
five years from the Grant Date;
(b) the date and time of the termination of
the Optionee's employment by, or status as an independent contractor of,
the Company or a Subsidiary, except that, with respect to any Option that is
vested and exercisable under Section 4(b) hereof upon the date of such
termination, this Agreement shall expire on the expiration of three months
from the date of such termination (unless by reason of death) or, if such
termination is by reason of Optionee's Disability (as defined below), the
expiration of one year from the date of such termination; and
(c) the expiration of one year from the date
of Optionee's death if such death occurs while Optionee is, or not later
than three months after Optionee has ceased to be, an employee or
independent contractor of the Company or any Subsidiary.
<PAGE>
"Disability" means the inability of the Optionee to perform
substantially his duties and responsibilities to the Company or a Subsidiary by
reason of a physical or mental disability or infirmity (i) for a continuous
period of six months or (ii) such earlier time as the Optionee submits medical
evidence satisfactory to the Company that he has a physical or mental disability
or infirmity which will likely prevent him from returning to the performance of
his work duties for six months or longer. The date of such Disability shall be
on the last day of such six-month period or the day on which the Optionee
submits such satisfactory medical evidence, as the case may be.
4. Exercise of Option
Subject to the restrictions on exercise set forth in Section
10, this Option may be exercised by the Optionee (or, after his or her death, by
the person designated in Section 6) in accordance with the following provisions:
(a) this Option may be exercised by the Optionee
upon delivery of the following to the Company at its principal executive
offices:
(i) a written notice of exercise, in
a form provided by or otherwise satisfactory to the Secretary of
the Company, which identifies this Agreement and states the
number (which may not be less than 100) of shares of Common Stock then
being purchased;
(ii) payment of the Option Price either (A)
in lawful money of the United States of America in an amount equal to
the Option Price in such form as is acceptable to the Company or (B)
by delivery of shares of Common Stock having a Fair Market Value (as of
the date of exercise) equal to the Option Price or (C) any combination
of (A) and (B) which equals the Option Price or (D) by transacting a
"same day sale" and thereby executing a "cashless" option exercise
provided such a transaction does not violate any applicable federal or
state laws or regulations; and
(iii) if requested by the Company either
before or after the Company's receipt of the notice of exercise,
payment in such form as is acceptable to the Company of the amount
of any taxes (other than stock issue or transfer taxes) that the
Company is obligated to collect or withhold by reason of the exercise
of this Option.
(b) Subject to the provisions of the Plan and this
Agreement, this Option shall become
vested and exercisable in the following installments:
Anniversary of Percentage of Option
Grant Date Shares Exercisable
First Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%
Second Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
Third Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%
Fourth Year . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%
<PAGE>
The installments shall be cumulative, such that this Option
may be exercised as to any or all of the Option Shares covered by an installment
at any time or times after the installment becomes vested and exercisable and
until this Option expires or terminates. Any other provision of the Plan or this
Agreement notwithstanding, no further exercise or vesting rights shall accrue
after Optionee ceases to be an employee or independent contractor of the Company
or a Subsidiary. If the Optionee takes a leave of absence from the Company or a
Subsidiary in excess of six months' duration, other than a sick leave or
disability leave (to be determined in the sole discretion of the Committee),
then the date when any installment of this Option would otherwise become vested
and exercisable under the foregoing schedule shall be delayed for a period equal
to the duration of such leave of absence.
(c) Notwithstanding any contrary provisions of this Agreement,
the Option may not be exercised unless the restrictions on exercise set forth in
Section 10 have been met.
(d) The Company retains the right to amend the schedule of
vesting, as set forth in Section 4(b) above, as follows:
(i) accelerate any unvested and
unexercisable portion of this Option to permit the Optionee to
exercise this Option with respect to that accelerated portion and
any previously vested and exercisable portion of the Option hereby
granted; or
(ii) accelerate the date by which any
unexercised portion of this Option terminates, requiring the
Optionee to exercise the vested and unexercised portion of the
Option or forfeit such Option; however, such date shall, in no event,
be less than two (2) weeks from the date the Optionee is informed in
writing of such acceleration.
(e) After receiving a proper notice of exercise, and timely
payment of the Option Price and any applicable tax withholding, the Company
shall cause to be issued a certificate or certificates for the Option Shares as
to which this Option has been exercised, registered in the name of the person
exercising this Option (or in the names of such person and his or her spouse as
community property or as joint tenants with right of survivorship) and bearing
any appropriate legends. The Company shall cause such certificate or
certificates to be delivered to or upon the order of the person exercising this
Option.
5. Termination of Employment
Notwithstanding any other provision of this Agreement, the
Company shall retain the right to terminate all unexercised Options, whether
vested or not, granted to an Optionee pursuant to the Plan if the employment of
such Optionee is terminated, except if such termination of employment is by
reason of death or Disability.
<PAGE>
6. Death of Optionee; No Assignment
The rights of the Optionee under this Agreement may not be
assigned or transferred except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order ("QDRO"). This
Option shall be exercisable during the Optionee's lifetime only by the Optionee
or his guardian or legal representative or as otherwise provided by a QDRO. Any
attempt to assign this Option in contravention of this Agreement shall be void
and shall have no effect. If the Optionee should die while he or she is, or not
later than three months after he or she has ceased to be, an employee or
independent contractor of the Company or a Subsidiary, his or her legal
representative, his or her legatee, or the person who acquired the right to
exercise this Option by reason of the death of such Optionee (this group shall
be collectively known as "Successors") succeeds to the Optionee's rights under
this Agreement. After the death of such Optionee, only his or her Successor may
exercise this Option.
7. No Employment or Service Contract
Nothing in this Agreement or the Plan shall confer upon the
Optionee any right to continue in the employment or service of the Company (or
any parent corporation of the Company or Subsidiary employing or retaining the
Optionee) for any period of time or interfere with or restrict in any way the
rights of the Company (or any parent corporation of the Company or Subsidiary
employing or retaining the Optionee) or the Optionee, which rights are hereby
expressly reserved by each, to terminate the employment of the Optionee at any
time for any reason whatsoever, with or without cause.
8. No Rights as Stockholders
The Optionee shall have no rights as a stockholder of any
Option Shares until the date of issuance of a stock certificate representing
such Shares.
9. Agreement Subject To Plan
This Agreement is made under the provisions of the Plan and
shall be interpreted in a manner consistent with it. Any provision in this
Agreement inconsistent with the Plan shall be superseded and governed by the
Plan. A copy of the Plan is available to the Optionee at the Company's principal
executive offices upon request and without charge. Optionee has carefully
reviewed the Plan and understands the restrictions on the Option Shares to be
purchased by Optionee pursuant to this Option.
10. Restrictions on Exercise
This Option may not be exercised until (a) the issuance to the
Optionee and the resale to the public of the Option Shares issuable upon
exercise have been registered under the Securities Act of 1933, as amended (the
"Act"), on a Form S-8 (or equivalent Form) and such issuance otherwise complies
with applicable federal and state securities laws or (b) the Company receives an
opinion of counsel to Optionee in form and substance satisfactory to the Company
that (i) the issuance of such Shares is exempt from registration under the Act
and otherwise complies with federal and state securities laws, and (ii) the
issuance of such Shares, when combined with the issuance of stock or other
securities of the Company issuable under any employee stock option or related
plan, will not result in a violation of federal or state securities laws. As a
condition of the exercise of this Option, the Company may require the Optionee
to make any representation and warranty to the Company as the Company may
request in order to comply with any applicable law or regulation.
<PAGE>
11. No Disclosure
Optionee acknowledges and agrees that neither the Company, its
stockholders nor its directors and officers has any duty or obligation to
disclose to the Optionee any material information regarding the business of the
Company or affecting the value of the Common Stock at any time, whether before,
at the time of or after termination of the Optionee as an employee or
independent contractor of the Company or a Subsidiary, including, without
limitation, any information concerning plans for the Company to make a public
offering of its securities, to acquire another entity or to be acquired by or
merged with or into another firm or entity.
12. Investment Representation
Upon the exercise of all or any part of this Option, the
Committee may require the Optionee to furnish to the Company an agreement (in
such form as the Committee may specify) in which the Optionee shall represent
that the Option Shares are to be acquired for the Optionee's own account and not
with a view to the sale or distribution thereof.
13. Authority of the Committee
The Committee shall have full authority to interpret and
construe the terms of the Plan and this Agreement. The determination of the
Committee as to any such of interpretation or construction shall be final,
binding and conclusive.
14. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to
principles of conflicts of laws.
<PAGE>
The Company and the Optionee have executed this Agreement as
of the date set forth in the first paragraph.
MERISEL, INC.
By: ___________________________
James E. Illson
Executive Vice President and
Chief Financial Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
--------------------------------
Optionee
--------------------------------
Address
--------------------------------
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City State Zip Code
AMENDMENTS TO SECURITIZATION AGREEMENTS
AMENDMENTS TO SECURITIZATION AGREEMENTS, dated as of December
19, 1997, among MERISEL AMERICAS, INC ("Merisel Americas"), MERISEL CAPITAL
FUNDING, INC. ("Merisel Capital Funding"), REDWOOD RECEIVABLES CORPORATION
("Redwood") and GENERAL ELECTRIC CAPITAL CORPORATION ("GECC").
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 (the "Transfer
Agreement");
WHEREAS, Merisel Funding, as seller (in such capacity, the
"Seller"), Redwood as purchaser (in such capacity, the "Purchaser"), GECC, 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 on November 7, 1996 (the "Purchase Agreement");
WHEREAS, Redwood and GECC, 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 (the "RFC Supplement," and, together with the Transfer
Agreement, the Purchase Agreement, the Reimbursement Agreement and the RFC
Supplement, the "Securitization Agreements"); and
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. 1 TO ANNEX X
Section 2.1 Amendment to Annex X. (a) The definition of
"Purchase Discount Rate" in Annex X is hereby amended by replacing the amount
set forth in clause (b) thereof with "20%".
(b) The following definitions are hereby added:
"Restructuring Costs" means the transaction charges
related to (i) the indebtedness that was refinanced or retired
in connection with the issuance of the Stonington Convertible
Note and (ii) the conversion of the Stonington Convertible
Note into common stock of the Parent, including, without
limitation, printing costs, fees and expenses for attorneys,
accountants and investment advisory services, unamortized debt
placement fees, up-front fees, contingent payments and
make-whole payments, which with respect to the third fiscal
quarter of 1997, were approximately $9,324,000 in the
aggregate.
"Stonington Convertible Note" means that certain
Convertible Promissory Note, dated September 19, 1997, issued
by the Parent and the Originator, as amended.
ARTICLE III
AMENDMENT NO. 2 TO PURCHASE AGREEMENT
Section 3.1 Amendment to Section 2.02(b).
(a) Section 2.02(b) is hereby amended by adding the following
sentence at the end thereof:
"In the event that the Purchaser 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
October 31, 1998, a condition precedent to such termination is
the receipt by the Purchaser of a prepayment fee in the amount
of $750,000."
Section 3.2 Amendment to Section 5.01(a). Section 5.01(a) of
the Purchase Agreement is hereby amended by adding the phrase "(including,
without limitation, the financial covenants set forth in Exhibit H)" after the
word "Agreement" the second time such word appears in Section 5.01(a).
Section 3.3 Amendment to Section 5.02. Section 5.02 of the
Purchase Agreement is hereby amended by adding the following paragraph (k) at
the end thereof:
<PAGE>
"(k) a report showing the computation of the
financial covenants contained in Exhibit H which report shall
accompany the financial statements and certifications to be
delivered pursuant to Section 5.02(c) and Section 5.02(e)."
Section 3.4 Amendment to Schedule 3. Schedule 3 of the
Purchase Agreement by
(i) deleting the definition of "Daily Margin" and substituting
therefor the following definition of "Daily Margin":
"'Daily Margin' as of any date, a percentage per
annum (the "Reference Percentage") divided by 360, which
Reference Percentage shall be determined by reference to the
Daily Margin Interest Coverage Ratio for the four fiscal
quarters of the Seller ended on or most recently prior to such
date as set forth below:
MARGIN LEVEL
Daily Margin
Interest Coverage Reference
Ratio Percentage
Level I
Less than or equal to
1.00 1.25%
Level II
Greater than 1.00, but
less than or equal to
1.40 1.00%
Level III
Greater than 1.40, but
less than or equal to
1.65 0.75%
Level IV
Greater than 1.65, but
less than or equal to
2.00 0.60%
Level V
Greater than 2.00 0.45%
<PAGE>
The Daily Margin shall be determined by reference to the Daily
Margin Interest Coverage Ratio in effect from time to time;
provided, that (A) no change in the Daily Margin shall be
effective until one Business Day after the date on which the
Operating Agent and the Purchaser receive financial statements
pursuant to Section 5.02(c) or Section 5.02(e) and a
certificate of the chief financial officer of the Seller
demonstrating the computation of the Daily Margin Interest
Coverage Ratio and (B) if the Operating Agent and Purchaser
have not received the information described in clause (A) of
this proviso within ten days of the day required under Section
5.02(c), or Section 5.02(e), as the case may be, or if a
Termination Event or Incipient Event has occurred and is
continuing, the Daily Margin shall be determined with
reference to Level I for so long as such information has not
been received by the Operating Agent and Purchaser or such
Termination Event or Incipient Event continues; provided that
the Daily Margin Interest Coverage Ratio with respect to any
period of four fiscal quarters that ends before the Fourth
Quarter of 1998 are to be adjusted on a pro-forma basis to
remove 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 ratio is 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
ratio is to be calculated; provided, further, that the
pro-forma adjustments referred to in foregoing proviso 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.
(ii) adding the following definition:
"Daily Margin Interest Coverage Ratio" means, with
respect to any Person and its consolidated subsidiaries for
any period, the ratio of (i) EBITDA to (ii) Cash Interest
Expense on all Funded Debt;
Section 3.5 Amendment to Exhibit H. Exhibit H of the
Purchase Agreement is amended by:
(a) deleting the chart as it appears in such Exhibit and
substituting in lieu thereof the following chart:
<PAGE>
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, (ii) shall be calculated on a quarterly basis and
(iii) 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.
Covenant Level Convenant
- --------- ----- ---------
I. Parent Fixed Charge Coverage Ratio (minimum)
Fourth Quarter of 1997 1.0 to 1.0
First Quarter of 1998 1.0 to 1.0
Second Quarter of 1998 1.0 to 1.0
Third Quarter of 1998 1.0 to 1.0
Fourth Quarter of 1998 1.1 to 1.0
and each quarter thereafter
Interest Coverage Ratio (minimum)
Fourth Quarter of 1997 1.1 to 1.0
First Quarter of 1998 1.1 to 1.0
Second Quarter of 1998 1.15 to 1.0
Third Quarter of 1998 1.25 to 1.0
Fourth Quarter of 1998 1.40 to 1.0
and each quarter thereafter
II. Seller Net Worth Percentage (minimum) 15%
<PAGE>
III. Parent Tangible Net Worth (minimum) $125,000,000
(commencing
1/3/1998)plus the
greater of 85% of
Net Income and zero
(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, (iii)
Capital Expenditures, and (iv) cash taxes.
(c) adding the following definitions immediately after the
definition of "Funded Debt";
"'Interest Coverage Ratio'" means, with
respect to any Person and its consolidated
subsidiaries for any period, the ratio of (i) EBITDA
to (ii) Cash Interest Expense on all Funded Debt.
"Net Income" means, for any Person with respect to
any period, the consolidated net income of such Person and its
consolidated subsidiaries.
<PAGE>
ARTICLE IV
AMENDMENT NO. 2 TO TRANSFER AGREEMENT
Section 4.1 Amendment to Section 6.04 of the Transfer
Agreement. Section 6.04 is hereby amended by adding the following phrase, which
phrase shall appear immediately after the word "indirectly":
",including, without limitation, by exercising any rights
under the Subordinated Note".
ARTICLE V
AMENDMENT NO. 1 TO RFC SUPPLEMENT.
Section 5.1 Amendment to the RFC Supplement. The RFC
Supplement is hereby amended by deleting "20%" as the LOC Draw Percentage and
substituting in lieu thereof "25%."
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1. 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 (A) 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, (B) 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 and (C) that each of the representations and warranties made by the
Seller and the Servicer in these Amendments is true and correct as of the date
hereof.
(c) the opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
in form and substance 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 to execute the Amendments in respect of the Purchase Agreement and
Transfer Agreement, (iii) the due authorization, execution and delivery of the
Amendments in respect of the Purchase Agreement and the Transfer Agreement by
the Seller and Servicer, (iv) the enforceability of the Amendments against the
Seller and Servicer and (v) that the execution and delivery of the Amendments in
respect of the Purchase Agreement and the Transfer Agreement (A) does not
conflict with the organizational documents of the Seller or Servicer and (B)
does not violate or constitute a default under any material agreements of the
Seller or Servicer.
<PAGE>
(d) evidence, in form reasonably satisfactory to the Operating
Agent, of the conversion of the Stonington Convertible Note.
(d) such other approvals, opinions or documents as the
Collateral Agent, the Liquidity Agent, the LOC Agent, or the Operating Agent may
reasonably request.
ARTICLE VII
SELLER'S AND SERVICER'S REPRESENTATIONS
AND WARRANTIES
SECTION 7.1 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;
(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 VIII
MISCELLANEOUS
SECTION 8.1 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 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," 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 Purchaser, Liquidity Agent, the LOC Agent, the Operating
Agent or the Collateral Agent to enter into any future amendment (whether
similar or dissimilar).
SECTION 8.2 Waiver by the Seller. 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.
<PAGE>
SECTION 8.3 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 8.4 Governing Law. These Amendments shall be governed
by, and construed in accordance with, California law.
SECTION 8.5 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
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
By:___________________________
Title:
Name:
MERISEL AMERICAS, INC.,
as Originator and Servicer
By:___________________________
Title:
Name:
GENERAL ELECTRIC CAPITAL CORPORATION,
as Operating Agent and Collateral Agent
By:___________________________
Title:
Name:
GENERAL ELECTRIC CAPITAL CORPORATION,
as LOC Agent and LOC Provider
By:__________________________
Title:
Name:
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
By:___________________________
Title:
Name:
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made as of December
_______, 1997 between Merisel, Inc., a Delaware corporation (the "Company") and
Dwight A. Steffensen ("Executive").
WHEREAS, the Company and Executive entered into an Employment Agreement
dated as of February 12, 1997 (the "Agreement") pursuant to which the terms and
conditions governing Executive's employment by the Company were set forth and
providing for Executive to serve as Chief Executive Officer; and
WHEREAS, the Company and Executive desire to modify the terms of the
Agreement as set forth herein;
NOW, THEREFORE, the Company and Executive hereby agree to amend the
Agreement as set forth below.
1. The following shall be added to the end of Section 9.2 of the Agreement:
"In the event of a Sale of the Company consisting of the Stonington
Conversion (as defined in the Company's Proxy Statement dated November
25, 1997), the three year period referenced in the first and third
sentences of this Section 9.2 shall commence upon termination of this
Agreement."
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this First Amendment to Employment Agreement, as of the day and year first
written above.
MERISEL, INC.
By:__________________________
James E. Illson
Senior Vice President and
Chief Financial Officer
DWIGHT A. STEFFENSEN
-----------------------------
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF
NAME INCORPORATION
- ------- ----------------
Merisel Canada, Inc..................................Canada
MIFINCO, Inc.........................................Delaware
Softsel Foreign Sales Corporation....................U.S. Virgin Islands
Merisel Americas, Inc................................Delaware
Merisel Europe, Inc..................................Delaware
Merisel FAB, Inc.....................................Delaware
Merisel Asia, Inc....................................Delaware
Merisel Properties...................................Delaware
Merisel Capital Funding, Inc.........................Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 36,447
<SECURITIES> 0
<RECEIVABLES> 181,444
<ALLOWANCES> 18,549
<INVENTORY> 462,752
<CURRENT-ASSETS> 675,090
<PP&E> 102,263
<DEPRECIATION> 62,121
<TOTAL-ASSETS> 747,111
<CURRENT-LIABILITIES> 477,936
<BONDS> 131,667
0
0
<COMMON> 801
<OTHER-SE> 281,701
<TOTAL-LIABILITY-AND-EQUITY> 747,111
<SALES> 4,048,972
<TOTAL-REVENUES> 4,048,972
<CGS> 3,807,888
<TOTAL-COSTS> 3,807,888
<OTHER-EXPENSES> 211,628
<LOSS-PROVISION> 14,100
<INTEREST-EXPENSE> 26,957
<INCOME-PRETAX> (11,601)
<INCOME-TAX> 496
<INCOME-CONTINUING> (12,097)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,744)
<CHANGES> 0
<NET-INCOME> (15,841)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
