SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _______________ to ___________
Commission File Number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
- ---------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last year
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class as of November 12, 1999
Common Stock, $.01 par value 80,278,809 Shares
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets as of 1-2
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-9
Management's Discussion and Analysis of 10-20
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 21
PART II OTHER INFORMATION 22-23
SIGNATURES 24
</TABLE>
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors may
include, but are not limited to, the effect of (i) economic conditions
generally, (ii) industry growth, (iii) competition, (iv) liability and other
claims asserted against the Company, (v) the loss of significant customers or
vendors, (vi) operating margins, (vii) business disruptions, (viii)
uncertainties associated with the potential Year 2000 impact on end user demand,
and (ix) other risks detailed in this report. These factors are discussed in
more detail elsewhere in this report. Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained or incorporated by reference herein to reflect future events or
developments.
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $9,264 $36,341
Accounts receivable (net of allowances
of $17,615 and $20,476 for 1999 and 1998, respectively) 230,002 202,128
Inventories 541,548 587,317
Prepaid expenses and other current assets 15,507 14,193
Deferred income taxes 897 865
------------------- -------------------
Total current assets 797,218 840,844
PROPERTY AND EQUIPMENT, NET 88,404 79,719
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 23,866 24,309
OTHER ASSETS 519 448
------------------- -------------------
TOTAL ASSETS $910,007 $945,320
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 1998
1999
------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $615,663 $623,673
Accrued liabilities 37,868 31,737
Long-term debt and capitalized lease obligations - current 2,784 3,692
------------------- --------------------
Total current liabilities 656,315 659,102
Long-term debt 131,505 129,360
Capitalized lease obligations 1,911 2,605
------------------- --------------------
TOTAL LIABILITIES 789,731 791,067
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued or outstanding
Common stock, $.01 par value, authorized
150,000,000 shares; 80,278,812 and 80,272,683 shares
outstanding for 1999 and 1998, respectively 803 803
Additional paid-in capital 282,392 282,380
Accumulated deficit (153,704) (118,495)
Accumulated other comprehensive income (9,215) (10,435)
------------------- --------------------
Total stockholders' equity 120,276 154,253
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $910,007 $945,320
=================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
NET SALES $1,358,495 $1,144,317 $3,880,314 $3,342,426
COST OF SALES 1,296,072 1,077,042 3,692,343 3,151,697
---------------- ---------------- ------------------ -----------------
GROSS PROFIT 62,423 67,275 187,971 190,729
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 62,475 49,792 178,876 146,844
LITIGATION-RELATED CHARGE 12,000
---------------- ---------------- ------------------ -----------------
OPERATING (LOSS) INCOME (52) 17,483 (2,905) 43,885
INTEREST EXPENSE 3,980 3,649 10,777 11,323
OTHER EXPENSE 7,537 5,786 20,929 15,407
---------------- ---------------- ------------------ -----------------
(LOSS) INCOME BEFORE INCOME TAXES (11,569) 8,048 (34,611) 17,155
INCOME TAX PROVISION 147 444 598 807
---------------- ---------------- ------------------ -----------------
NET (LOSS) INCOME $(11,716) $7,604 $(35,209) $16,348
================ ================ ================== =================
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED)
$(0.15) $0.09 $(0.44) $0.20
================ ================ ================== =================
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC 80,279 80,228 80,278 80,199
DILUTED 80,279 80,473 80,278 80,529
================ ================ ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
1999 1998
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(35,209) $16,348
Adjustments to reconcile net (loss) income to net
Cash (used in) provided by operating activities:
Depreciation and amortization 15,418 7,750
Provision for doubtful accounts 9,474 8,728
Changes in operating assets and liabilities:
Accounts receivable (35,420) (13,852)
Inventories 49,291 7,419
Prepaid expenses and other current assets (1,354) 3,864
Accounts payable (11,738) 124,867
Accrued liabilities 7,029 (1,549)
------------------ -------------------
Net cash (used in) provided by operating activities (2,509) 153,575
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (24,468) (22,684)
------------------ -------------------
Net cash used for investing activities (24,468) (22,684)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 298,700
Repayments under revolving line of credit (296,200)
Repayments under other financing arrangements (1,957) (1,278)
Proceeds from issuance of Common Stock 12 595
------------------ -------------------
Net cash provided by (used for) financing activities 555 (683)
------------------ -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (655) (2,490)
------------------ -------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (27,077) 127,718
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 36,341 36,447
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $9,264 $164,165
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. The Company operates three distinct business
segments: United States distribution, Canadian distribution and the Merisel Open
Computing Alliance ("MOCA(TM)"). The Company markets products and services
throughout the United States and Canada, 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, and
retailers. Through MOCA(TM), the Company supports Sun Microsystems'
UNIX(R)-based products and complementary third-party products.
The information for the three months and nine months ended September 30, 1999
and 1998 has not been audited by independent accountants, but includes all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of the results for such
periods.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities and
Exchange Commission, although the Company believes that the disclosures included
in these financial statements are adequate to make the information not
misleading. Certain amounts for 1998 have been reclassified to conform with the
1999 presentation. The consolidated financial statements as presented herein
should be read in conjunction with the consolidated financial statements and
notes thereto included in Merisel's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
2. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for
financial statements issued for periods beginning after June 15, 2000, as
amended. The Company will adopt SFAS 133 as required in January 2001. SFAS 133
requires all derivatives to be recorded on the balance sheet at fair value with
changes in fair value reflected in income or equity, depending on the nature of
the hedge. The Company is in the process of evaluating the effect that this new
standard will have on the Company's financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
3. Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The Company's third quarter is the 13-week period ending
on the Saturday nearest to September 30. For simplicity of presentation, the
Company has described the interim period-end and year-end as September 30 and
December 31, respectively.
4. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130, which the
Company adopted in the first quarter of 1998, establishes standards for
reporting and displaying comprehensive income and its components in general
purpose financial statements. Comprehensive income is computed as follows:
<TABLE>
<CAPTION>
(In thousands) (In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $(11,716) $7,604 $(35,209) $16,348
Other comprehensive income -
Foreign currency translation adjustments (311) (1,642) 1,220 (2,733)
---------------- ---------------- ------------- ---------------
Comprehensive income $(12,027) $5,962 $(33,989) $13,615
================ ================ ============= ===============
</TABLE>
5. Earnings Per Share ("EPS")
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings per
share is calculated using the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the weighted
average number of common shares outstanding plus the effect of outstanding stock
options, excluding those that would be anti-dilutive, using the "treasury stock"
method.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The following table is a reconciliation of the weighted average shares used in
the computation of basic and diluted EPS for the income statement periods
presented herein:
<TABLE>
<CAPTION>
(In thousands) (In thousands)
Three months Ended Nine Months Ended
September 30, September 30,
Weighted average shares outstanding 1999 1998 1999 1998
- ----------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 80,279 80,228 80,278 80,199
Assumed exercises of stock options 245 330
--------------- --------------- --------------- ---------------
Diluted 80,279 80,473 80,278 80,529
=============== =============== =============== ===============
</TABLE>
6. Supplemental Disclosure of Cash Flow Information
Cash paid in the three-month and nine-month periods ended September 30 for
interest and income taxes is as follows:
<TABLE>
<CAPTION>
(In thousands) (In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $593 $ 32 $7,441 $7,369
Income taxes $ 49 $ 463 $ 238 $ 348
</TABLE>
7. Segment Information
The Company provides certain information about operating segments, geographic
areas in which the Company operates, major customers, and products and services,
in accordance with Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company has determined it has three operating segments under SFAS
131: the United States distribution segment, the Canadian distribution segment,
and MOCA. Each of these segments has a dedicated management team and is managed
separately primarily because of geography (United States and Canada) and
differences in product categories, marketing strategies and customer base
(MOCA). All segment information is provided on the basis of these three segments
as identified. Sales, costs of sales and other direct expenses related to MOCA's
operations in Canada, which have historically been attributed to the Canadian
segment, have been reclassified to the MOCA segment for comparative purposes for
all periods presented.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The Company does not maintain separate stand-alone financial statements prepared
in accordance with generally accepted accounting principles for each of its
operating segments. In accordance with SFAS 131, the Company has prepared the
following tables which present information related to each operating segment
included in internal management reports.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
September 30, 1999
-------------------------------------------------------------------------------
United
States MOCA Canada Total
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net sales to external customers $894,710 $257,315 $206,470 $1,358,495
Segment profit contribution(A) 10,453(A) 10,453(A)
Segment operating (loss) profit(A) (12,837) 2,332 (10,505)
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
September 30, 1998
-------------------------------------------------------------------------------
United
States MOCA Canada Total
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales to external customers $803,389 $153,273 $187,655 $1,144,317
Segment profit contribution(A) 5,677 5,677
Segment operating profit(A) 9,757 2,049 11,806(A)
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30, 1999
-------------------------------------------------------------------------------
United
States MOCA Canada Total
--------- ------ ------- -------
<S> <C> <C> <C> <C>
Net sales to external customers $2,479,306 $730,003 $671,005 $3,880,314
Segment profit contribution(A) 29,084(A) 29,084(A)
Segment operating (loss) profit(A) (39,381) 7,392 (31,989)
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30, 1998
-------------------------------------------------------------------------------
United
States MOCA Canada Total
-------- ------ --------- -------
<S> <C> <C> <C> <C>
Net sales to external customers $2,310,309 $423,410 $608,706 $3,342,426
Segment profit contribution(A) 17,904(A) 17,904(A)
Segment operating profit(A) 22,284 3,696 25,980(A)
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
<TABLE>
<CAPTION>
Geographical Area Net Sales:
(In thousands) (In thousands)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $1,145,874 $ 954,605 $3,193,783 $2,726,173
Canada 212,621 189,712 686,531 616,253
----------------- ---------------- ----------------- -----------------
Total Net Sales $1,358,495 $1,144,317 $3,880,314 $3,342,426
================= ================ ================= =================
</TABLE>
<TABLE>
<CAPTION>
Hardware/Software Sales
(In thousands) (In thousands)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hardware $1,100,381 $ 904,010 $3,065,448 $2,607,092
Software 258,114 240,307 814,866 735,334
----------------- ---------------- ----------------- -----------------
Total Net Sales $1,358,495 $1,144,317 $3,880,314 $3,342,426
================= ================ ================= =================
</TABLE>
Note A: For each of its operating segments, the Company evaluates performance
based upon operating (loss) profit or profit contribution. However, the Company
has not historically allocated corporate overhead, depreciation and
amortization, or shared operating expenses to the MOCA operating segment. As a
result, the Company believes that the segment profit contribution for MOCA in
the tables above would be substantially lower than the amounts shown if such
costs were allocated. Corporate overhead, amortization and shared operating
expenses are allocated to Canada on a pro rata basis. Segment operating (loss)
profit for the United States business includes all corporate overhead,
amortization and shared operating expenses not allocated to Canada and MOCA, and
in 1999, segment operating loss includes the litigation-related charge and the
offsetting insurance recovery.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. The Company operates three distinct business
segments: United States distribution, Canadian distribution and the Merisel Open
Computing Alliance ("MOCA(TM)"). The Company markets products and services
throughout the United States and Canada, 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, and
retailers. Through MOCA(TM), the Company supports Sun Microsystems'
UNIX(R)-based products and complementary third-party products.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 as Compared to the Three Months Ended
September 30, 1998
Net sales increased 18.7% from $1,144,317,000 in the quarter ended September, 30
1998 to $1,358,495,000 in the quarter ended September 30, 1999. The increase
resulted from an 11.4% increase in net sales for U.S. distribution, a 67.9%
increase for MOCA and a 10.0% increase for the Canadian distribution business.
The U.S. growth rate resulted from increased sales of 18.1% for the commercial
customer group, 3.9% for the retail customer group, and 1.5% for the VAR
customer group. The Company expects that the growth rate in MOCA will decrease
in future periods. The growth rate in Canada in terms of Canadian dollars was
7.4%, which is lower than in recent quarters and reflects in part the effect
of general softness in the Canadian market.
Hardware and accessories accounted for 81% of net sales and software accounted
for 19% of net sales in the third quarter of 1999, as compared to 79% and 21%
for the same categories, respectively, for the third quarter of 1998.
Gross profit decreased 7.2% or $4,852,000 from $67,275,000 in the third quarter
of 1998 to $62,423,000 in the 1999 period. Gross profit as a percentage of
sales, or gross margin, decreased from 5.9% in the 1998 period to 4.6% in the
1999 period. The decline in margins was primarily related to the U.S.
distribution segment, which was significantly negatively affected by (i)
changing vendor terms and conditions, including a reduction in vendor rebates
and an increase in price protection exposure, (ii) competitive pricing
pressures, and (iii) increased systems sales, which have comparatively lower
margins than non-system products, as a result of a significant increase in sales
of Compaq product following the launch of Compaq's Distributor Alliance Program
under which the Company is one of four distributors and resellers able to source
product directly from Compaq. To address the issue of declining margins in the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
U.S., the Company is adjusting selling margins, particularly on product lines
that have been affected by vendor rebate reductions, leveraging SAP to implement
system controls for enhanced margin management and increasing the extent to
which sales compensation is tied to margin-goal achievement. The Company is also
accelerating customer recruitment efforts to expand its account base, focusing
attention on more profitable product lines, and enhancing customer support by
assigning dedicated sales teams according to customer specific business models
and geographical locations. There is no assurance that the Company's efforts to
improve margins will be successful. In addition, changing manufacturer terms and
conditions, particularly in price protection, have contributed to greater
inventory risk and necessitated changes in purchasing practices that in turn
have affected selling and pricing activities.
Selling, general and administrative expenses increased by 25.5% from $49,792,000
in the third quarter of 1998 to $62,475,000 in the third quarter of 1999,
increasing as a percentage of sales from 4.4% of sales in 1998 to 4.6% for the
same period in 1999. This reflects an increase in depreciation expenses for the
1999 quarter of approximately $4,000,000, which is primarily related to the SAP
R/3 operating system, other information systems expenditures and strategic
initiatives. Selling, general and administrative expenses for the 1999 period
also included approximately $1,430,000 of payroll and payroll related costs that
were capitalized in the 1998 period for employees directly associated with the
SAP implementation project. Such costs are expected to continue in future
periods. Additionally, the Company spent approximately $762,000 during the third
quarter of 1999 in Year 2000 compliance-related expenses. No other significant
future expenses related to Year 2000 compliance are expected to be incurred. See
"Year 2000 Issues" below. The remainder of the increase resulted principally
from increased variable costs associated with growth of the Company's
businesses.
As a result of the above items, operating income decreased by $17,535,000 from
$17,483,000 for the third quarter of 1998 to a loss of $52,000 for the third
quarter of 1999.
Interest expense for the Company increased $331,000 from $3,649,000 in the
quarter ended September 30, 1998 to $3,980,000 in the quarter ended September
30, 1999. The increase is due primarily to the utilization of the Company's
revolving line of credit to fund working capital requirements.
Other expenses for the Company increased from $5,786,000 for the quarter ended
September 30, 1998 to $7,537,000 for the same period in 1999. The increase is
due primarily to asset securitization fees which increased $2,891,000 for the
third quarter due to increased sales of accounts receivable and an increase in
the underlying rate associated with the fees that the Company pays on the sale
of receivables. The average proceeds resulting from the sale of accounts
receivable at month end under the Company's securitization facilities increased
from $293,728,000 for the third quarter of 1998 to $440,593,000 for the same
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
period in 1999. The increase in asset securitization fees was partially offset
by a $1,087,000 decrease in foreign currency losses as a result of more
favorable volatility in the Canadian dollar.
The income tax provision decreased from an expense of $444,000 for the third
quarter of 1998 to an expense of $147,000 for the same period in 1999 due to a
current quarter net loss position versus a net income position in the prior
period. In both periods, the income tax expense reflects primarily the minimum
statutory tax requirements in the provinces and states in which the Company
conducts business. The Company has sufficient net operating loss provisions to
offset federal income taxes in the current period.
On a consolidated basis, net income for the Company decreased from $7,604,000
for the third quarter of 1998 to a net loss of $11,716,000 for the third quarter
of 1999, due to the factors described above. Net income per share decreased from
$.09 per share for the third quarter of 1998 to a net loss of $.15 per share for
the third quarter of 1999.
Nine Months Ended September 30, 1999 as Compared to the Nine Months Ended
September 30, 1998
For the nine months ended September 30, 1999, net sales increased by 16.1% from
$3,342,426,000 for the nine months ended September 30, 1998 to $3,880,314,000
for the nine months ended September 30, 1999. The increase resulted from a 7.3%
increase in net sales in U.S. distribution, a 72.4% increase in MOCA and a 10.2%
increase in Canadian distribution. The growth rate in the U.S. reflects sales
growth of 27.5% for the retail customer group and 8.7% for the commercial
customer group, with essentially no growth for the VAR customer group over the
prior year period. The Company does not expect that growth rate to
continue. The increase in year-over-year performance in Canadian distribution is
due to substantially the same factors summarized in the discussion of sales for
the three months ended September 30, 1999 and 1998. The growth rate in Canada in
terms of Canadian dollars was 12.6%, but the decline in the value of the
Canadian dollar hampered the growth rate in terms of U.S. dollars.
Hardware and accessories accounted for 79% of net sales and software accounted
for 21% of net sales in the first nine months of 1999, as compared to 78% and
22% for the same categories, respectively, in the first nine months of 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Gross profit decreased 1.5% or $2,758,000 from $190,729,000 for the first nine
months of 1998 to $187,971,000 for the first nine months of 1999. Gross profit
as a percentage of sales decreased from 5.7% for the 1998 period to 4.8% for the
1999 period. The decline in margins was primarily related to the U.S.
distribution segment and is attributable to substantially the same factors
summarized in the discussion of gross profit for the three months ended
September 30, 1999 and 1998.
Selling, general and administrative expenses increased by 21.8% from
$146,844,000 in the nine months ended September 30, 1998 to $178,876,000 in the
nine months ended September 30, 1999. Selling, general and administrative
expenses as a percentage of sales increased from 4.4% of sales in 1998 to 4.6%
for the same period in 1999. Contributing to the increase for the year were
depreciation expenses related to the SAP R/3 operating system and other
strategic initiatives; post "go-live" costs for expenses associated with the SAP
implementation; payroll and payroll-related costs of employees directly
associated with the SAP project, which payroll costs for periods prior to
implementation had been capitalized and which will continue to be incurred in
future periods; expenses related to the Company's strategic initiatives; and
costs associated with Year 2000 compliance. The remainder of the increase
resulted largely from increased variable costs associated with growth of the
Company's business and other costs incurred to support growth.
Results for the nine months ended September 30, 1999 also reflected the
$21,000,000 charge recorded by the Company in the first quarter of 1999 relating
to the settlement of the litigation pending in Delaware Chancery Court between
the Company and certain holders and former holders of the Company's 12-1/2%
Senior Notes, offset in part by the $9,000,000 insurance recovery recorded by
the Company in the second quarter.
As a result of the above items, operating income decreased by $46,790,000 from
$43,885,000 for the nine months ended September 30, 1998 to a loss of $2,905,000
for the nine months ended September 30, 1999. Excluding the litigation-related
charge and related insurance recovery, the Company would have had operating
income of $9,095,000 for the nine months ended September 30, 1999.
Interest expense for the nine months ended September 30, 1999 decreased 4.8%
from $11,323,000 in the 1998 period to $10,777,000 in the 1999 period. The
decrease in interest expense is primarily attributable to the capitalization of
$1,230,000 in interest related to the SAP implementation in the first quarter of
1999. The decrease was offset in part by an increase in interest expense
resulting from higher average borrowings under the Company's revolving line of
credit to fund working capital requirements.
Other expenses for the Company increased from $15,407,000 for the nine months
ended September 30, 1998, to $20,929,000 for the nine months ended September
30,1999. The increase is due primarily to asset securitization fees, which
increased $6,518,000 over the prior year period. The increased securitization
fees are primarily due to increased sales of accounts
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
receivable and an increase in the underlying rate associated with the fees that
the Company pays on the sale of receivables. The average proceeds resulting
from the sale of accounts receivable at month end under the Company's
securitization facilities increased from $272,272,000 for the nine months ended
September 30, 1998 to $431,666,000 for the same period in 1999.
The income tax provision decreased from an expense of $807,000 for the nine
months ended September 30, 1998, to an expense of $598,000 for the same period
in 1999. In both periods, the income tax rate reflects primarily the minimum
statutory tax requirements in the provinces and states in which the Company
conducts business. The Company has sufficient net operating loss provisions to
offset federal income taxes in the current period.
On a consolidated basis, net income for the Company decreased from $16,348,000
for the nine months ended September 30, 1998, to a net loss of $35,209,000 for
the nine months ended September 30, 1999, due to the factors described above.
Net income per share decreased from $.20 per share for the nine months ended
September 30, 1998 to a net loss of $.44 per share for the nine months ended
September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash used by operating activities during the nine months ended September 30,
1999 was $2,509,000. The primary uses of cash during the period include an
increase in accounts receivable of $35,420,000 due to an increase in sales, a
$12,000,000 charge net of insurance recoveries paid in the first half of 1999
relating to the settlement of litigation between the Company and certain holders
and former holders of the Company's 12-1/2% Senior Notes, and a decrease in
current liabilities that resulted from industry-wide changes in vendor terms and
conditions and an increased used of vendor early-pay opportunities. The primary
source of cash from operating activities was a decrease in inventory of
$49,291,000 from the unusually high level of inventory at the end of 1998. The
Company believes that it needs to continue to decrease its inventory level in
order to offset inventory risks related to changing vendor terms and conditions
and to improve its working capital position.
Net cash used in investing activities during the nine months ended September 30,
1999 consisted of capital expenditures of $24,468,000.
Net cash provided by financing activities during the nine months ended September
30, 1999 was $555,000 and was comprised primarily of the difference between
borrowings and repayments of the revolving line of credit and other financing
arrangements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Securitization Facilities
Funds generated by the sale of receivables in the U.S. are provided through
Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas, Inc. ("Merisel Americas"), which in turn is a
wholly owned subsidiary of Merisel, Inc. Merisel Capital Funding's sole business
is the ongoing purchase of trade receivables from Merisel Americas. Merisel
Capital Funding sells these receivables, in turn, under an agreement with a
securitization company, whose purchases yield proceeds of up to $500,000,000 at
any point in time. Merisel Capital Funding is a separate corporate entity with
separate creditors who, upon its liquidation, are entitled to be satisfied out
of Merisel Capital Funding's assets prior to any value in the subsidiary
becoming available to the subsidiary's equity holder. This agreement expires in
October 2003.
Funds are also provided to Merisel Canada, Inc. ("Merisel Canada"), a wholly
owned subsidiary of Merisel Americas, through a receivables purchase
agreement with a securitization company. In accordance with this agreement,
Merisel Canada sells receivables to the securitization company, which yields
proceeds of up to $150,000,000 Canadian dollars at any point in time. The
facility expires December 13, 2000, but is extendible by notice from the
securitization company, subject to the Company's approval.
Under these securitization agreements, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of September
30, 1999, the total amount outstanding under these agreements was $435,202,000.
Fees incurred in connection with the sale of accounts receivable for the three
and nine months ended September 30, 1999 were $7,102,000 and $19,394,000
compared to $4,211,000 and $12,876,000 incurred for the three and nine months
ended September 30, 1998 and are recorded as other expense.
Debt Obligations, Financing Sources and Capital Expenditures
At September 30, 1999, Merisel, Inc. had outstanding $125,000,000 principal
amount of 12-1/2% Senior Notes due 2004 (the "12.5% Notes"). The 12.5% Notes
provide for an interest rate of 12.5% payable semi-annually. By virtue of being
an obligation of Merisel, Inc., the 12.5% Notes are effectively subordinated to
all liabilities of the Company's subsidiaries, including trade payables, and are
not guaranteed by any of the Company's subsidiaries. The indenture relating to
the 12.5% Notes contains certain covenants that, among other things, limit the
type and amount of additional indebtedness that may be incurred by the Company
or any of its subsidiaries and 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 September 30, 1999, the Company had promissory notes outstanding with an
aggregate balance of $5,329,000. 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,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
with balloon payments of $500,000 and $3,900,000 due on January 1, 2000 and
January 1, 2001, respectively. The notes are collateralized by certain of the
Company's real property and equipment.
Merisel Americas is party to a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security Agreement") with Bank of America NT&SA ("BA"),
acting as agent, that provides for borrowings on a revolving basis. The Loan and
Security Agreement permits borrowings of up to $100,000,000 outstanding at any
one time (including face amounts of letters of credit), subject to meeting
certain availability requirements under a borrowing base formula and other
limitations. Borrowings under the Loan and Security Agreement are secured by a
pledge of substantially all of the inventory held by Merisel Americas.
Borrowings bear interest at the rate of LIBOR plus a specified margin or, at the
Company's option, the agent's prime rate. An annual fee of 0.375% is payable
with respect to the unused portion of the commitment. The Loan and Security
Agreement has a termination date of June 30, 2003. As of September 30, 1999,
$2,500,000 was outstanding under the Loan and Security Agreement.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be less than
$35,000,000 for 1999, primarily consisting of costs associated with information
systems, including systems for enhancing electronic services and growing the
Company's infrastructure, developing and implementing the SAP operating system,
developing the Company's configuration and co-location capabilities, and
upgrading warehouse systems and other Company facilities. The Company intends to
fund its capital expenditures primarily through internally generated cash and
lease financing.
At September 30, 1999, the Company had cash and cash equivalents of $9,264,000.
In the opinion of management, anticipated cash from operations, together with
proceeds from the sale of receivables under the Company's securitization
agreements, trade credit from vendors and borrowings under the Company's
revolving credit facility, will be sufficient to meet the Company's requirements
for the next 12 months, without the need for additional financing. This assumes,
however, that there are not material adverse changes in the Company's
relationships with its vendors, customers or lenders. In addition, any
unforeseen event that adversely impacts the industry or the Company's position
in the industry could have a direct and material unfavorable effect on the
liquidity of the Company.
ASSET MANAGEMENT
Merisel attempts to manage its inventory position to maintain levels sufficient
to achieve high product availability and same-day order fill rates. Inventory
levels may vary from period to period, due to factors including increases or
decreases in sales levels, Merisel's practice of making large-volume purchases
when it deems such purchases to be attractive, and the addition of new
manufacturers and products. The Company has negotiated agreements with many of
its
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
manufacturers that contain stock balancing and price protection provisions
intended to reduce, in part, Merisel's risk of loss due to slow-moving or
obsolete inventory or manufacturer price reductions. The Company is not assured
that these agreements will succeed in reducing this risk. In the event of a
manufacturer price reduction, the Company generally receives a credit for
products in inventory. In addition, the Company has the right to return a
certain percentage of purchases, subject to certain limitations. Historically,
price protection and stock return privileges, as well as the Company's inventory
management procedures, have helped to reduce the risk of loss of carrying
inventory. In the past year, however, certain computer systems manufacturers
that are among the Company's largest vendors have announced changes in price
protection and other terms and conditions that have adversely affected U.S.
distribution margins during 1999. The Company is working closely with these
manufacturers and is developing buying procedures and controls to manage
inventory purchases to reduce the potential adverse impact from these changes
while balancing the need to maintain sufficient levels of inventory. There is no
assurance that such efforts will be successful in preventing a material adverse
effect on the Company in future periods.
The Company purchases foreign exchange contracts to minimize foreign exchange
transaction gains and losses. The Company intends to continue the practice of
purchasing foreign exchange contracts. However, the risk of foreign exchange
transaction losses cannot be completely eliminated.
The Company offers credit terms to qualifying customers and also sells on a
prepay, early pay, credit card and cash-on-delivery basis. In addition, the
Company has developed a number of customer financing alternatives, including
escrow programs and selected bid financing arrangements. The Company also
arranges a wide variety of programs through which third parties provide
financing to certain of its customers. These programs include floor plan
financing and hardware and software leasing. 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.
SYSTEMS AND PROCESSES
In April 1999, Merisel completed the conversion of its U.S. operations to the
SAP R/3 client/server operating system. The Company converted its Canadian
operations from a mainframe to the SAP client/server operating system in August
1995. With the U.S. implementation complete, the U.S. and Canadian operations
are each operating on a single platform. SAP is an enterprise-wide system which
integrates substantially all functional areas of the business in a real-time
environment. The new system is designed to provide greater transaction
functionality, real-time information access, automated controls, flexibility,
and custom pricing applications.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
YEAR 2000 ISSUES
Introduction
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date
sensitive calculations by computers and other equipment as the year 2000 is
approached and reached. These problems generally arise from the fact that
computers and equipment have historically used two-digit fields that recognize
dates using the assumption that the first two digits are "19." On January 1,
2000, systems using two-digit date fields could recognize a date using "00" as
the year 1900 rather than the year 2000.
Year 2000 Project and the Company's State of Readiness
The Company believes that implementation of the SAP operating system addresses
its major Year 2000 issues for its core information technology ("IT") systems.
See "Systems and Processes" above. The Company developed and executed a plan for
addressing the remainder of its Year 2000 issues which focused on the following
six areas: core IT systems; off-line IT subsystems; technical infrastructure
(e.g., networks, servers, desktop computers); vendor/customer interfaces
(consisting of electronic data interchange or "EDI"); facilities (including
security systems, elevators, and heating and cooling systems); and third-party
suppliers, vendors and customers ("External Parties"). For the first five areas,
the Company's Year 2000 plan consisted of the following phases: (1) conducting
an inventory of items with Year 2000 implications; (2) assessment of Year 2000
compliance; (3) remediation or replacement of material items that are determined
not to be Year 2000 compliant; (4) testing (including re-testing of material
items that were remediated or replaced); and (5) certification of Year 2000
compliancy. The Company has completed all six phases of its Year 2000 plan.
Costs
The Company has incurred aggregate costs of $2,667,000 through September 30,
1999 in connection with its Year 2000 project, which is substantially below the
Company's original budget estimate of $4.2 million. The Company does not expect
to incur any significant additional amounts. The aggregate costs exclude the
cost of implementing the SAP operating system in the U.S. and costs incurred
pursuant to the Company's technology upgrade strategy where the upgrades were
not accelerated due to the Year 2000 issues. The Company's aggregate cost does
not include costs that may be incurred by the Company as a result of the failure
of any third parties, including suppliers, to become Year 2000 ready or costs to
implement any contingency. The Year 2000 project costs are expensed by the
Company as incurred.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Risks
The Company believes that the completion of its Year 2000 project and the
implementation of the SAP operating system in the U.S. has resulted in the
Company being Year 2000 compliant. However, the failure to correct a material
Year 2000 problem could result in an interruption in, or a failure of, certain
normal business activities or operations, which could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
In addition, if third parties that provide goods or services that are critical
to the Company's business activities fail to adequately address their Year 2000
issues, there could be a similar material adverse effect on the Company. The
Company believes that its most reasonably likely worst case scenario is the
failure of such a third party. Such a failure could result in, for example, the
inability of the Company to ship product, a telecommunications failure at one or
more of the Company's call centers, a decrease in customer orders, delays in
product deliveries from vendors or power outages at one or more of the Company's
facilities. The Company believes that its Year 2000 project has significantly
reduced the uncertainty surrounding the Year 2000 issue, including uncertainity
related to External Parties. The Company believes that, with the completion of
its Year 2000 project, the possibility of significant interruptions of normal
operations has been reduced.
Contingency Plans
As part of the Company's Year 2000 project, Year 2000-specific contingency plans
have been developed. The Company expects that these plans will continue to be
modified throughout 1999 as the Company obtains additional information regarding
the status of the Year 2000 readiness of External Parties. In addition, as a
normal course of business, the Company maintains and deploys contingency plans
as part of its disaster recovery program that are designed to address various
other potential business interruptions. These plans may be applicable to address
the failure of External Parties to provide goods or services to the Company as a
result of their failure to be Year 2000 ready. During 1999, the Company is
expanding its disaster recovery program to cover substantially all systems for
which detailed contingency plans do not currently exist.
Readers are cautioned that forward-looking statements contained under "Year 2000
Issues" should be read in conjunction with the Company's disclosures under the
heading: "SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION" on page ii.
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; (iii) the
intensity of price
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
competition among the Company and its competitors as influenced by various
factors; and (iv) the fact that virtually all sales in a given quarter result
from orders booked in that quarter. In addition, quarterly variability could be
affected by the Year 2000 issue by shifting demand for computer products during
1999 and future years. 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, the Company's net sales in the fourth quarter have been
historically higher than in its other three quarters, although there is
uncertainty as to whether 1999 fourth quarter sales will be adversely affected
by Year 2000 issues. Management believes that the pattern of higher fourth
quarter sales is partially explained by customer buying patterns relating to
calendar year-end business and holiday purchases. As a result of this pattern,
the Company's working capital requirements in the fourth quarter have typically
been greater than other quarters. Net sales in the Canadian operations are also
historically strong in the first quarter of the fiscal year, which is primarily
due to buying patterns of Canadian government agencies. See "Liquidity and
Capital Resources" above.
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 for its businesses include large
distributors and aggregators such as Gates/Arrow, GE IT Distribution Group,
Inacom, Ingram Micro, Pinacor, Synnex Information Technologies, Inc. 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 resellers.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
No material changes have occurred in the quantitative and qualitative market
risk disclosure of the Company as presented in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 plaintiff alleges that certain executive officers of Media
Vision Technology, Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision through, inter alia, 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
plaintiff further alleges that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision executives. The plaintiff
seeks to recover compensatory damages, including interest thereon, exemplary and
punitive damages, and costs including attorneys' fees. On May 6, 1998, the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive damages prayer. In response to the motions,
the plaintiff filed a first amended complaint on August 31, 1998, adding a claim
for unfair business practices under California Business & Professions Code
ss.17200 and additional allegations. The plaintiff's filing of an amended
complaint mooted the Company's original motions. The Company filed a motion to
dismiss the amended complaint on various grounds and a motion to strike the
punitive damages prayer. In its opposition to the Company's motion to strike,
the plaintiff withdrew its prayer for punitive damages. On January 15, 1999, the
Court issued an Order staying prosecution of the action under the doctrine of
exclusive concurrent federal jurisdiction. Plaintiff filed a motion to seek
relief from the stay and in October 1999 such motion was granted. The Company
intends to file a renewed motion to dismiss and expects that its renewed motion
will be heard during December 1999, although it is uncertain when a decision
will be issued. The Company has defended itself vigorously against this claim
and will continue to do so.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 6 to Purchase Agreement and Waiver dated as of August
13, 1999 among Merisel Americas, Inc., Merisel Capital Funding,
Inc., Redwood Receivables Corporation and General Electric Capital
Corporation.
10.2 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and William Page.
10.3 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and Karen Tallman.
10.4 Amendment No. 2 dated as of September 30, 1999, among Merisel Americas,
Inc., Inc., the financial institutions listed on the signature pages
thereto and Bank of America, N.A.
(b) The following Reports on Form 8-K were filed during the quarter
ended September, 1999.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 15, 1999
Merisel, Inc.
By /s/ Timothy N. Jenson
---------------------------
Timothy N. Jenson
Chief Financial Officer and
Senior Vice President, Finance
AMENDMENT No. 6 TO PURCHASE AGREEMENT AND WAIVER
AMENDMENT No. 6 TO PURCHASE AGREEMENT AND WAIVER, dated as of
August 13, 1999, among MERISEL AMERICAS, INC. ("Merisel Americas"), MERISEL
CAPITAL FUNDING, INC. ("Merisel Capital Funding"), REDWOOD RECEIVABLES
CORPORATION ("Redwood") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital").
WHEREAS, Merisel Americas, as originator (in such capacity,
the "Originator") and Merisel Capital Funding are parties to an Amended and
Restated Receivables Transfer Agreement, dated as of September 27, 1996, as
amended by Amendment No. 1, dated as of November 7, 1996, Amendment No. 2, dated
as of December 19, 1997 and Amendment No. 3, dated as of July 31, 1998 (the
Transfer Agreement").
WHEREAS, Merisel Capital Funding, as seller (in such capacity,
the "Seller"), Redwood as purchaser (in such capacity, the "Purchaser"), GE
Capital, as operating agent (in such capacity, the "Operating Agent") and
collateral agent (in such capacity, the "Collateral Agent") and Merisel
Americas, as servicer (in such capacity, the "Servicer") are parties to an
Amended and Restated Receivables Purchase and Servicing Agreement, dated as of
September 27, 1996, as amended by Amendment No. 1, dated as of November 7, 1996,
Amendment No. 2, dated as of December 19, 1997, Amendment No. 3, dated as of
July 31, 1998, Amendment No. 4, dated as of February 22, 1999 and Amendment No.
5, dated as of May 12, 1999 (the "Purchase Agreement");
WHEREAS, the Seller and the Servicer have requested that the
Purchaser, the Operating Agent and the Collateral Agent waive and amend certain
financial covenants contained in the Purchase Agreement, subject to the terms
and conditions hereof.
WHEREAS, the parties hereto desire to amend the Purchase
Agreement (such amendments collectively referred to herein as these
"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:
ARTICLE I
DEFINITIONS
All capitalized terms used herein, unless otherwise defined,
are used as defined in the Purchase Agreement.
<PAGE>
ARTICLE II
AMENDMENT NO. 6 TO PURCHASE AGREEMENT
(a) Annex X of the Purchase Agreement is hereby amended by (i)
adding the following definition thereto:
"Investment Base Reserve" means an amount equal to
the product of 2.5% and Investment Base; and
(ii) amending and restating the definition of
"Availability" to read as follows:
"Availability" means, as of any date, the lesser of: (a) an
amount equal to: (i) Investment Base times (ii) Purchase Discount Rate minus
(iii) the Yield Discount Amount, the Dilution Reserve, and the Investment Base
Reserve and (b) the Maximum Purchase Limit then in effect.
(b) Section 5.02 of the Purchase Agreement is hereby amended
by moving the word "and" from the end of paragraph (i) to the end of paragraph
(j) and adding a new paragraph (k) to read as follows:
"(k) as soon as available after the end of each fiscal month,
a consolidated balance sheet of the Parent and its consolidated Subsidiaries as
of the end of such fiscal month and including the prior comparable period, and
consolidated statement of net income and retained earnings, and of cash flow, of
the Parent and its consolidated Subsidiaries for such fiscal month and for the
period commencing at the end of the previous fiscal year and ending with the end
of such fiscal month, (it being agreed that information shall be presented in
such form as Parent may utilize in the presentation of its monthly financial
reporting, as in effect from time to time.)
(c) Schedule 3 is hereby amended by:
(i) deleting the definition of "Daily Margin" and substituting therefor the
following definition of "Daily Margin":
"`Daily Margin'" means 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 Fixed Charge Coverage Ratio for the four fiscal
quarters of the Parent ended on or most recently prior to such
date as set forth below:
<PAGE>
MARGIN LEVEL
Daily Margin Reference
Fixed Charge Coverage Ratio Percentage
Level I 1.50%
Less than or equal to 0.40 x
Level II 1.25%
Greater than 0.40 x, but less than or equal to 0.50 x
Level III 1.00%
Greater than 0.50 x, but less than or equal to 0.75 x
Level IV 0.75%
Greater than 0.75 x, but less than or equal to 1.00 x
Level V 0.60%
Greater than 1.00 x
The Daily Margin shall be (i) calculated for the four
preceding fiscal quarter of the Parent (except for the fiscal
quarter ending on October 2, 1999 with respect to which such
calculation shall be made for the three most recent fiscal
quarters), and (ii) determined by reference to the Daily
Margin Fixed Charge 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 Parent
demonstrating the computation of the Daily Margin Fixed Charge
Coverage Ratio, (B) if the Operating Agent and the 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 by 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; and (C) until
December 15, 1999, the Daily Margin shall be determined by
reference to Level I; and
(ii) deleting the definition of Daily Margin
Interest Coverage Ratio and replacing it with the following definition of "Daily
Margin Fixed Charge Coverage Ratio" (all references in the Purchase Agreement to
"Daily Margin Interest Coverage Ratio" shall from and after the date hereof be
deemed to refer to "Daily Fixed Charge Coverage Ratio"):
<PAGE>
"Daily Margin Fixed Charge Coverage Ratio" means, with respect
to any Person and its consolidated subsidiaries for the
preceding four fiscal quarters (except for the fiscal quarter
ending October 2, 1999, with respect to which such calculation
shall be made for the three most recent quarters), the ratio
of (i) EBITDA to (ii) Fixed Charges (as defined in Exhibit H)
plus Capital Expenditures.
(d) Exhibit H of the Purchase Agreement is hereby amended and
restated in its entirety to read as follows by deleting the chart as it appears
in such Exhibit and substituting in lieu thereof the following:
FINANCIAL COVENANTS
(a) 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, except as provided in clause (b) below, and (ii)
shall be calculated on a quarterly basis. 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 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. The Fixed Charge Coverage Ratio, Minimum EBITDA and
Tangible Net Worth covenants with respect to any four fiscal quarters ending
before the Second Quarter of 2000 are to be calculated on a pro-forma basis
excluding the reserve of $21 million relating to the loss recorded by the Parent
in connection with the Turnberry Settlement (except to the extent of any net
insurance proceeds, if any, collected in connection with the Turnberry
Settlement).
(b) The Fixed Charge Coverage Ratio shall be calculated on the
basis of the following measurement periods
Period End Date Measurement Period
--------------- ------------------
April 3, 1999 First Quarter of 1999
July 3, 1999 First and Second Quarters of 1999
October 2, 1999 First, Second, and Third Quarters
of 1999
January 1, 2000 Most recent four quarters
and the last day of each fiscal quarter
thereafter
<PAGE>
Covenant Covenant Level
I. Parent Fixed Charge Coverage Ratio (minimum)
Fourth Quarter of 1997 1.00 to 1.00
First Quarter of 1998 1.00 to 1.00
Second Quarter of 1998 1.00 to 1.00
Third Quarter of 1998 0.85 to 1.00
Fourth Quarter of 1998 0.70 to 1.00
First Quarter of 1999 0.46 to 1.00
Second Quarter of 1999 0.60 to 1.00
Third Quarter of 1999 0.40 to 1.00
Fourth Quarter of 1999 0.45 to 1.00
First Quarter of 2000 0.45 to 1.00
Second Quarter of 2000 0.55 to 1.00
Third Quarter of 2000 and thereafter 1.00 to 1.00
II. Seller Net Worth Percentage (minimum 15%
III. Parent Tangible Net Worth (minimum) $120,000,000 plus 50% of
(commencing 10/3/1999)1 Net Income for fiscal
quarter then ended
IV. Parent Minimum EBITDA Covenant Level
Measurement Period
Third Quarter of 1999 36,000,000
Fourth Quarter of 1999 35,000,000
First Quarter of 2000 36,000,000
Second Quarter of 2000 45,000,000
Third Quarter of 2000 and each quarter
thereafter 55,000,000
[END OF CHART]
Capitalized terms used above and not otherwise defined below
shall have the meanings specified in Annex X to the Purchase Agreement.
- -----------------
1 Commencing with the fiscal quarter ending on October 3, 1999. Tangible Net
Worth on the last day of each fiscal quarter shall be not less than the minimum
Tangible Net Worth of the Parent required pursuant to this Covenant III for the
immediately preceding fiscal quarter, plus 50% of Net Income for the fiscal
quarter ended.
<PAGE>
"Capital Expenditures" means all payments for any fixed assets
or improvements or for replacements, substitutions, or additions thereto, which
are required to be capitalized in accordance with GAAP, including, without
limitation, any such expenditures financed by the proceeds received from the
sale of Receivables under the Transfer Agreement, but excluding expenditures
under (i) Capital Leases and (ii) financed by the incurrence of Debt (other than
pursuant to the Inventory Facility).
"Cash Interest Expense" means, with respect to any Person and
its consolidated subsidiaries for any period, (i) the sum of the amount of cash
interest payable on all Debt of such Person and its consolidated Subsidiaries
(other than interest expense eliminated in consolidation in accordance with
GAAP) and (ii) Redwood Yield, if any, for such Person.
"EBITDA" means, for any Person with respect to any period, (a)
consolidated net income of such Person and its consolidated subsidiaries for
such period, plus to the extent deducted in determining net income, (b) the sum
of (i) such Person's and its consolidated subsidiaries' depreciation and
amortization for such period, (ii) Cash Interest Expense for such period, (iii)
any provision for taxes based on income or profits that was deducted in
computing consolidated net income for such period, and (iv) any other non-cash
charges.
"Fixed Charges" means, with respect to any Person for any
period, the sum of the following amounts payable during such period by such
Person and its consolidated subsidiaries: (i) Cash Interest Expense in respect
of Funded Debt; (ii) regularly scheduled principal payments on Funded Debt; and
(iii) cash taxes.
"Fixed Charge Coverage Ratio" means with respect to any Person
and its consolidated subsidiaries, the ratio of (i) EBITDA to (ii) Fixed Charges
plus Capital Expenditures.
"Funded Debt" means, with respect to any Person and its
consolidated subsidiaries, all Debt of such Person and its consolidated
subsidiaries which by the terms of the agreement governing or instrument
evidencing such Debt matures more than one year from, or is directly or
indirectly renewable or extendable at the option of the debtor under a revolving
credit or similar agreement obligating the lender or lenders to extend credit
over a period of more than one year from, the date of creation thereof,
including current maturities of long-term debt, revolving credit, and short-term
debt extendable beyond one year at the option of such Person and its
consolidated subsidiaries.
"Net Income" means, for any Person with respect to any period,
the consolidated net income of such Person and its consolidated subsidiaries.
"Net Worth Percentage" means a fraction (expressed as a
percentage) (i) the numerator of which is the excess of assets over liabilities,
each determined in accordance with GAAP on a basis consistent with the last
audited financial statements and (ii) the denominator of which is the
Outstanding Balance of Transferred Receivables.
<PAGE>
"Tangible Net Worth" means, with respect to any Person and its
consolidated subsidiaries, assets minus liabilities.
(e) Exhibit J is amended and restated to read as follows:
(i) As of the last day of any fiscal month, the Net Dilution
Ratio shall not exceed 6.5%, (ii) the Default Ratio shall not exceed 2.5%, (iii)
the Delinquency Ratio shall not exceed 6.5%, and (iv) neither the Receivables
Collection Turnover nor the Gross Dilution Ratio shall exceed the levels set
forth below for the corresponding range of Sales Ratios:
Sales Ratio Receivables Collection Turnover Gross Dilution Ratio
25.0% or less 41 8.50%
25.1%-35.0% 42 8.75%
35.1%-45.0% 44 9.00%
Greater than 45.1% 46 9.50%
"Sales Ratio" shall mean the ratio (expressed as a percentage)
of (x) sales of merchandise in respect of (a) the "Merisel Open Computing
Alliance" plus(b) total retail sales, divided by (y) total sales of merchandise.
ARTICLE III
WAIVER OF DEFAULT UNDER
PURCHASE AGREEMENT
The Operating Agent, the Collateral Agent and the Purchaser
agree to waive any potential Termination Event resulting from the potential
breach of the Fixed Charge Coverage Ratio and the Interest Coverage Ratio
covenants contained in Exhibit H of the Purchase Agreement for the fiscal
quarter ended July 3, 1999.
ARTICLE IV
CONDITIONS PRECEDENT
The effectiveness of these Amendments and waiver is subject
to the conditions precedent that the Collateral Agent, the Operating Agent and
the Purchaser shall have received each of the following, in form and substance
satisfactory to each such party:
(a) A certificate of the Secretary of each of the Seller and
the Servicer, dated the date of these Amendments and certifying (i) that
attached thereto is a true and complete copy of a resolution of the Board of
Directors of the Seller or the Servicer, as the case may be, authorizing the
execution, delivery and performance of these Amendments, and all other documents
required or necessary to be delivered hereunder and that such resolution has not
been modified, rescinded or amended and is in full force and effect and (ii) as
to the incumbency and specimen signature of each Person's officers executing
these Amendments, and all other documents required or necessary to be delivered
hereunder.
<PAGE>
(b) A certificate of an officer of each of the Seller and the
Servicer, dated the date of these amendments, certifying that each of the
representations and warranties made by the Seller and the Servicer in these
Amendments is true and correct in all material respects as of the date hereof.
(c) The opinion of counsel to the Seller, in form and
substance reasonably satisfactory to the Purchaser, the Operating Agent and the
Collateral Agent, as to certain matters including, without limitation, (i) the
valid existence and good standing of the Seller and Servicer, (ii) the power and
authority of the Seller and Servicer (or Originator, as the case may be) to
execute the Amendments, (iii) the due authorization, execution and delivery of
the Amendments by the Seller and Servicer (or Originator, as the case may be),
(iv) the enforceability of the Amendments against the Seller and Servicer (or
Originator, as the case may be), and (v) that the execution and delivery of the
Amendments (x) does not conflict with the organizational documents of the Seller
or Servicer and (y) does not violate or constitute a default under any material
financing agreements of the Seller or Servicer.
(d) An Officer's Certificate in form and substance
satisfactory to the Operating Agent to the effect that all of the
representations and warranties in the Transfer Agreement and Purchase Agreement
are true and correct in all material respects as of the date hereof after giving
effect to this Amendment No. 6.
(e) The Seller shall pay the fees and expenses of the
Purchaser incurred in connection with preparing these Amendments (including,
without limitation, reasonable legal fees and expenses).
(f) Confirmation from the Rating Agencies that this Amendment
No. 6 will not result in the qualification, withdrawal or downgrade of the
ratings assigned to the Commercial Paper.
ARTICLE V
SELLER'S AND SERVICER'S REPRESENTATIONS
AND WARRANTIES
Each of the Seller and the Servicer represents and warrants
that:
(a) these Amendments have been duly authorized, executed and
delivered pursuant to its corporation power;
<PAGE>
(b) these Amendments constitute its legal, valid and binding
obligation subject to the effect of bankruptcy, insolvency, reorganization or
other similar laws affecting the enforcement of creditors' rights generally; and
(c) after giving effect to the amendments referred to herein,
there does not exist any Termination Event.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Confirmation of Purchase Agreement. Each of the
Seller and the Servicer agree that, except for the specific amendments and
waiver set forth herein, nothing herein shall be deemed to be a waiver or
amendment of any covenant or agreement contained in the Purchase Agreement 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 to "this
Agreement" and in each of the other documents to be executed in connection
therewith to the "Purchase Agreement," shall mean the Purchase Agreement as
amended by these Amendments and as each such agreement may be hereinafter
amended or restated. Nothing herein shall obligate the Seller, the Servicer, the
Purchaser, the Operating Agent or the Collateral Agent to enter into any future
amendment (whether similar or dissimilar).
SECTION 6.2 Waiver by the Seller and Servicer. Except for
manifest errors on the part of the Operating Agent, each of the Seller and the
Servicer hereby waives any claim, defense, demand, action or suit of any kind or
nature whatsoever against the Purchaser, the 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.
SECTION 6.3 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 6.4 Governing Law. These Amendments shall be
governed by, and construed in accordance with, California law.
SECTION 6.5 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 Purchase Agreement shall be
amended by these Amendments, effective as of the date hereof.
<PAGE>
IN WITNESS WHEREOF, the Seller, the Servicer, the Collateral
Agent, the Operating 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:
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
By:___________________________
Title:
Name:
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement is dated as of August 18, 1999 and is
between Merisel, Inc., a Delaware corporation (the "Company"), Merisel Americas,
Inc., a Delaware corporation ("Americas"), and William Page ("Associate").
The Company and Americas desire to retain Associate. Accordingly,
Associate, the Company and Americas desire to set forth the terms and conditions
governing Associate's employment by Americas following a Change of Control (as
defined below). Associate, the Company and Americas hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
(a) "Base Salary" shall mean Associate's annual base salary as
in effect on the business day preceding a Change of Control or as the same may
be increased thereafter from time to time, exclusive of any bonus or incentive
compensation, benefits (whether standard or special), automobile allowances,
relocation or tax equalization payments, pension payments or reimbursements for
professional services.
(b) The "Company" shall mean Merisel, Inc., a Delaware
corporation, and each of its successor enterprises that results from any merger,
consolidation, reorganization, sale of assets or otherwise. As used herein, the
term "Americas" shall also include each successor enterprise of Merisel
Americas, Inc. that results from any merger, consolidation, reorganization, sale
of assets or otherwise.
(c) An "Americas Change of Control" shall have occurred if (i)
any person, corporation, partnership, trust, association, enterprise or group,
other than the Company, shall become the beneficial owner, directly or
indirectly, of outstanding capital stock of Americas possessing at least 50% of
the voting power (for the election of directors) of the outstanding capital
stock of Americas, or (ii) there shall be a sale of all or substantially all of
Americas' assets or Americas shall merge or consolidate with another corporation
and the stockholders of Americas immediately prior to such transaction do not
own, immediately after such transaction, stock of the purchasing or surviving
corporation in the transaction (or of the parent corporation of the purchasing
or surviving corporation) possessing more than 50% of the voting power (for the
election of directors) of the outstanding capital stock of that corporation,
which ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stockholders of Americas before the
transaction. A "Company Change of Control" shall have occurred if (i) any
person, corporation, partnership, trust, association, enterprise or group shall
become the beneficial owner, directly or indirectly, of outstanding capital
stock of the Company possessing at least 50% of the voting power (for the
election of directors) of the outstanding capital stock of the Company, or (ii)
there shall be a sale of all or substantially all of the Company's assets or the
Company shall merge or consolidate with another corporation and the stockholders
of the Company immediately prior to such transaction do not own, immediately
<PAGE>
after such transaction, stock of the purchasing or surviving corporation in the
transaction (or of the parent corporation of the purchasing or surviving
corporation) possessing more than 50% of the voting power (for the election of
directors) of the outstanding capital stock of that corporation, which ownership
shall be measured without regard to any stock of the purchasing, surviving or
parent corporation owned by the stockholders of the Company before the
transaction. A "Change of Control" shall be the first to occur of a Company
Change of Control or an Americas Change of Control.
(d) "Covered Termination" shall mean any cessation of
Associate's employment by Americas that occurs after a Change of Control other
than as a result of (i) Termination for Cause, (ii) Associate's death or
permanent disability, or (iii) Associate's resignation without Good Reason (as
hereinafter defined).
(e) A resignation by Associate shall be with "Good Reason" if
after a Change of Control (i) there has been a material reduction in Associate's
job responsibilities from those that existed immediately prior to the Change of
Control, it being understood that a mere change in title alone shall not
constitute a material reduction in Associate's job responsibilities, (ii)
without Associate's prior written approval, Americas requires Associate to be
based anywhere other than Associate's then current location, it being understood
that required travel on Americas' business to an extent consistent with
Associate's business travel obligations prior to the Change of Control does not
constitute "Good Reason," (iii) there is a reduction in Associate's Base Salary,
except that an across-the-board reduction in the salary level of all of
Americas' associates and similarly situated employees of any purchasing or
surviving corporation in the same percentage amount as part of a general salary
level reduction shall not constitute "Good Reason," or (iv) a successor to all
or substantially all of the business and assets of the Company or Americas fails
to furnish Associate with the assumption agreement required by Section 8 hereof.
(f) "Termination for Cause" shall mean if Americas terminates
Associate's employment for any of the following reasons: Associate misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Associate in violation of Americas' policies); excessive absenteeism; abuse of
sick time; or Associate's conviction for or a plea of nolo contendere by
Associate to a felony or any crime involving moral turpitude.
(g) "Expiration Date" shall mean July 31, 2001.
2. At-Will Employee. Americas shall have no obligation to retain or
continue Associate as an employee and Associate's employment status as an
"at-will" employee of Americas is not affected by this Agreement.
3. Covered Termination Following Change of Control. If a Change of
Control shall occur on or before the Expiration Date and if a Covered
Termination shall occur within one year after the Change of Control, then: (A)
on the effective date of such Covered Termination, the Company or Americas shall
<PAGE>
make a lump sum payment to Associate equal to twelve (12) months of Associate's
Base Salary; and (B) the Company or Americas will reimburse Associate for the
cost of Associate's COBRA payments (at the level of coverage, including
dependent care coverage, as in effect immediately prior to such Covered
Termination) under the Company's health insurance plans for a twelve (12) month
period following the date of the Covered Termination. The payments to be made to
Associate upon a Covered Termination are in addition to the payments made to
employees by Americas upon termination in the ordinary course, such as
reimbursement for business expenses and vacation pay through the date of
termination. The obligations of the Company and Americas hereunder shall be
joint and several.
4. Withholding. The Company or Americas, as applicable, shall deduct
from all payments paid to Associate under this Agreement any required amounts
for social security, federal and state income tax withholding, federal or state
unemployment insurance contributions, and state disability insurance or any
other required taxes.
5. Benefit Reduction. In the event any payments are required to be made
pursuant to Section 3 hereof, the first dollar amount of such payments shall be
reduced to the extent necessary to assure that the payments that are received
pursuant to the terms and conditions of this Agreement which are "parachute
payments" under Internal Revenue Code Section 280G (or any successor section)
and the Department of Treasury regulations issued thereunder do not exceed the
maximum amount which may be paid hereunder without such amounts being treated as
subject to a loss of a federal income tax deduction under such section.
6. Mitigation. Associate shall have no obligation to mitigate the
amount of any payment provided for in this Agreement by seeking employment or
otherwise.
7. Associate's Obligations. In exchange for the Company or Americas
providing the above-described benefits to Associate, Associate agrees that prior
to receiving any severance compensation from the Company or Americas in respect
of such Covered Termination, whether under this Agreement or otherwise,
Associate will execute and deliver to the Company a Release and a
Confidentiality Agreement, each substantially in the form provided to Associate
with this Agreement.
8. Assumption Agreement. The Company and Americas will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and assets of the Company
or Americas, as the case may be, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company or Americas
would be required to perform it whether or not such succession had taken place.
9. Arbitration. Any dispute that may arise between Associate and the
Company and/or Americas in connection with or relating to this Agreement,
including any monetary claim arising from or relating to this Agreement, will be
submitted to final and binding arbitration in Los Angeles, California, in
accordance with the rules of the American Arbitration Association ("AAA") then
<PAGE>
in effect. Such arbitration shall proceed before a single arbitrator who shall
be selected by the mutual agreement of the parties. If the parties are unable to
agree on the selection of an arbitrator, such arbitrator shall be selected in
accordance with the Employment Dispute Resolution Rules and procedures of the
AAA. The decision of the arbitrator, including determination of the amount of
any damages suffered, shall be conclusive, final and binding on such arbitrating
parties, their respective heirs, legal representatives, successors, and assigns.
Each party to any such arbitration proceeding shall bear her or his own
attorney's fees and costs in connection with any such arbitration and each party
shall pay half of all costs associated with the arbitration including the
arbitrator's fees.
10. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of Company, Americas and Associate; provided that Associate shall
not assign any of Associate's rights or duties under this Agreement without the
express prior written consent of the Company and Americas. This Agreement
together with the Merisel Employment Agreement signed by Associate sets forth
the parties' entire agreement with regard to the subject matter hereof. No other
agreements, representations, or warranties have been made by either party to the
other with respect to the subject matter of this Agreement. This Agreement may
be amended only by a written agreement signed by the parties hereto. This
Agreement shall be governed by and construed in accordance with the laws of the
State of California. Any waiver by either party of any breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach. If any legal action is necessary to enforce the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees
in addition to any other relief to which that party may be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the day and year first written above.
MERISEL, INC. William Page
By:______________________________ ____________________________
Name: Dwight A. Steffensen
Title: Chief Executive Officer
MERISEL AMERICAS, INC.
By:_______________________________
Name: Dwight A. Steffensen
Title: Chief Executive Officer
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement is dated as of August 18, 1999 and is
between Merisel, Inc., a Delaware corporation (the "Company"), Merisel Americas,
Inc., a Delaware corporation ("Americas"), and Karen Tallman ("Associate").
The Company and Americas desire to retain Associate. Accordingly,
Associate, the Company and Americas desire to set forth the terms and conditions
governing Associate's employment by Americas following a Change of Control (as
defined below). Associate, the Company and Americas hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
(a) "Base Salary" shall mean Associate's annual base salary as
in effect on the business day preceding a Change of Control or as the same may
be increased thereafter from time to time, exclusive of any bonus or incentive
compensation, benefits (whether standard or special), automobile allowances,
relocation or tax equalization payments, pension payments or reimbursements for
professional services.
(b) The "Company" shall mean Merisel, Inc., a Delaware
corporation, and each of its successor enterprises that results from any merger,
consolidation, reorganization, sale of assets or otherwise. As used herein, the
term "Americas" shall also include each successor enterprise of Merisel
Americas, Inc. that results from any merger, consolidation, reorganization, sale
of assets or otherwise.
(c) An "Americas Change of Control" shall have occurred if (i)
any person, corporation, partnership, trust, association, enterprise or group,
other than the Company, shall become the beneficial owner, directly or
indirectly, of outstanding capital stock of Americas possessing at least 50% of
the voting power (for the election of directors) of the outstanding capital
stock of Americas, or (ii) there shall be a sale of all or substantially all of
Americas' assets or Americas shall merge or consolidate with another corporation
and the stockholders of Americas immediately prior to such transaction do not
own, immediately after such transaction, stock of the purchasing or surviving
corporation in the transaction (or of the parent corporation of the purchasing
or surviving corporation) possessing more than 50% of the voting power (for the
election of directors) of the outstanding capital stock of that corporation,
which ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stockholders of Americas before the
transaction. A "Company Change of Control" shall have occurred if (i) any
person, corporation, partnership, trust, association, enterprise or group shall
become the beneficial owner, directly or indirectly, of outstanding capital
stock of the Company possessing at least 50% of the voting power (for the
election of directors) of the outstanding capital stock of the Company, or (ii)
there shall be a sale of all or substantially all of the Company's assets or the
Company shall merge or consolidate with another corporation and the stockholders
of the Company immediately prior to such transaction do not own, immediately
<PAGE>
after such transaction, stock of the purchasing or surviving corporation in the
transaction (or of the parent corporation of the purchasing or surviving
corporation) possessing more than 50% of the voting power (for the election of
directors) of the outstanding capital stock of that corporation, which ownership
shall be measured without regard to any stock of the purchasing, surviving or
parent corporation owned by the stockholders of the Company before the
transaction. A "Change of Control" shall be the first to occur of a Company
Change of Control or an Americas Change of Control.
(d) "Covered Termination" shall mean any cessation of
Associate's employment by Americas that occurs after a Change of Control other
than as a result of (i) Termination for Cause, (ii) Associate's death or
permanent disability, or (iii) Associate's resignation without Good Reason (as
hereinafter defined).
(e) A resignation by Associate shall be with "Good Reason" if
after a Change of Control (i) there has been a material reduction in Associate's
job responsibilities from those that existed immediately prior to the Change of
Control, it being understood that a mere change in title alone shall not
constitute a material reduction in Associate's job responsibilities, (ii)
without Associate's prior written approval, Americas requires Associate to be
based anywhere other than Associate's then current location, it being understood
that required travel on Americas' business to an extent consistent with
Associate's business travel obligations prior to the Change of Control does not
constitute "Good Reason," (iii) there is a reduction in Associate's Base Salary,
except that an across-the-board reduction in the salary level of all of
Americas' associates and similarly situated employees of any purchasing or
surviving corporation in the same percentage amount as part of a general salary
level reduction shall not constitute "Good Reason," or (iv) a successor to all
or substantially all of the business and assets of the Company or Americas fails
to furnish Associate with the assumption agreement required by Section 8 hereof.
(f) "Termination for Cause" shall mean if Americas terminates
Associate's employment for any of the following reasons: Associate misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Associate in violation of Americas' policies); excessive absenteeism; abuse of
sick time; or Associate's conviction for or a plea of nolo contendere by
Associate to a felony or any crime involving moral turpitude.
(g) "Expiration Date" shall mean July 31, 2001.
2. At-Will Employee. Americas shall have no obligation to retain or
continue Associate as an employee and Associate's employment status as an
"at-will" employee of Americas is not affected by this Agreement.
3. Covered Termination Following Change of Control. If a Change of
Control shall occur on or before the Expiration Date and if a Covered
Termination shall occur within one year after the Change of Control, then: (A)
<PAGE>
on the effective date of such Covered Termination, the Company or Americas shall
make a lump sum payment to Associate equal to twelve (12) months of Associate's
Base Salary; and (B) the Company or Americas will reimburse Associate for the
cost of Associate's COBRA payments (at the level of coverage, including
dependent care coverage, as in effect immediately prior to such Covered
Termination) under the Company's health insurance plans for a twelve (12) month
period following the date of the Covered Termination. The payments to be made to
Associate upon a Covered Termination are in addition to the payments made to
employees by Americas upon termination in the ordinary course, such as
reimbursement for business expenses and vacation pay through the date of
termination. The obligations of the Company and Americas hereunder shall be
joint and several.
4. Withholding. The Company or Americas, as applicable, shall deduct
from all payments paid to Associate under this Agreement any required amounts
for social security, federal and state income tax withholding, federal or state
unemployment insurance contributions, and state disability insurance or any
other required taxes.
5. Benefit Reduction. In the event any payments are required to be made
pursuant to Section 3 hereof, the first dollar amount of such payments shall be
reduced to the extent necessary to assure that the payments that are received
pursuant to the terms and conditions of this Agreement which are "parachute
payments" under Internal Revenue Code Section 280G (or any successor section)
and the Department of Treasury regulations issued thereunder do not exceed the
maximum amount which may be paid hereunder without such amounts being treated as
subject to a loss of a federal income tax deduction under such section.
6. Mitigation. Associate shall have no obligation to mitigate the
amount of any payment provided for in this Agreement by seeking employment or
otherwise.
7. Associate's Obligations. In exchange for the Company or Americas
providing the above-described benefits to Associate, Associate agrees that prior
to receiving any severance compensation from the Company or Americas in respect
of such Covered Termination, whether under this Agreement or otherwise,
Associate will execute and deliver to the Company a Release and a
Confidentiality Agreement, each substantially in the form provided to Associate
with this Agreement.
8. Assumption Agreement. The Company and Americas will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and assets of the Company
or Americas, as the case may be, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company or Americas
would be required to perform it whether or not such succession had taken place.
9. Arbitration. Any dispute that may arise between Associate and the
Company and/or Americas in connection with or relating to this Agreement,
including any monetary claim arising from or relating to this Agreement, will be
submitted to final and binding arbitration in Los Angeles, California, in
accordance with the rules of the American Arbitration Association ("AAA") then
<PAGE>
in effect. Such arbitration shall proceed before a single arbitrator who shall
be selected by the mutual agreement of the parties. If the parties are unable to
agree on the selection of an arbitrator, such arbitrator shall be selected in
accordance with the Employment Dispute Resolution Rules and procedures of the
AAA. The decision of the arbitrator, including determination of the amount of
any damages suffered, shall be conclusive, final and binding on such arbitrating
parties, their respective heirs, legal representatives, successors, and assigns.
Each party to any such arbitration proceeding shall bear her or his own
attorney's fees and costs in connection with any such arbitration and each party
shall pay half of all costs associated with the arbitration including the
arbitrator's fees.
10. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of Company, Americas and Associate; provided that Associate shall
not assign any of Associate's rights or duties under this Agreement without the
express prior written consent of the Company and Americas. This Agreement
together with the Merisel Employment Agreement signed by Associate sets forth
the parties' entire agreement with regard to the subject matter hereof. No other
agreements, representations, or warranties have been made by either party to the
other with respect to the subject matter of this Agreement. This Agreement may
be amended only by a written agreement signed by the parties hereto. This
Agreement shall be governed by and construed in accordance with the laws of the
State of California. Any waiver by either party of any breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach. If any legal action is necessary to enforce the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees
in addition to any other relief to which that party may be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the day and year first written above.
MERISEL, INC. Karen Tallman
By:_______________________________ _____________________________
Name: Dwight A. Steffensen
Title: Chief Executive Officer
MERISEL AMERICAS, INC.
By:________________________________
Name: Dwight A. Steffensen
Title: Chief Executive Officer
AMENDMENT NO. 2
TO
LOAN AGREEMENT
AMENDMENT NO. 2 dated as of September 30, 1999, among MERISEL AMERICAS,
INC. ("Borrower"), the financial institutions listed on the signature pages
hereof (each a "Lender" and collectively, the "Lenders") and BANK OF AMERICA,
N.A., as agent (the "Agent").
WHEREAS, the Borrower, the Agent and the Lenders are parties to a
certain Loan and Security Agreement, dated as of June 30, 1998 (the "Loan
Agreement"), pursuant to which the Lenders have agreed, subject to the terms and
conditions therein set forth, to provide certain financial accommodations to the
Borrower; and
WHEREAS, the Borrower desires that the Lenders amend certain provisions
of the Loan Agreement, and the Lenders are willing, subject to the terms and
conditions hereinafter set forth, to do so;
NOW, THEREFORE, the Borrowers and the Lenders hereby agree as follows:
SECTION 1. CAPITALIZED TERMS. Capitalized terms used but not
defined herein shall have the respective meanings set forth in the Loan
Agreement.
SECTION 2. AMENDMENTS
(a) The definition of "Applicable Margin" set forth in
Section 1.1 of the Loan Agreement is hereby amended by:
(i) deleting the amount of "0%" set forth in clause (i) thereof and
substituting therefor the amount of ".75%"; and
(ii) deleting the amount of "2.25%" set forth in
the table contained in such definition and
substituting therefor the amount of "3.00%."
(b) Sections 9.22 and 9.23 of the Loan Agreement are
hereby amended to read in their entirety as follows:
"9.22 Minimum Adjusted Net Earnings from Operations. The
Parent will maintain Adjusted Net Earnings from Operations,
determined as of the last day of each Fiscal Year, of not less
than ($35,000,000) for 1999, ($11,500,000) for 2000 and
$3,000,000 for each Fiscal year thereafter.
<PAGE>
9.23 Interest Coverage Ratio. For the fiscal periods set forth
below, the Parent will maintain an Interest Coverage Ratio in
the amount set forth opposite such fiscal period:
Fiscal Period Ratio
Four quarters ending September 30, 1999 .72 to 1.00
Four quarters ending December 31, 1999 .15 to 1.00
Quarter ending March 31, 2000 .90 to 1.00
Quarter ending June 30, 2000 .90 to 1.00
Quarter ending September 30, 2000 1.00 to 1.00
Quarter ending December 31, 2000 1.10 to 1.00
Each quarter ending thereafter 1.10 to 1.00"
SECTION 3. EFFECTIVENESS. The amendment made herein shall become
effective as of September 30, 1999, when (i) the Lenders shall have duly
executed and delivered this Agreement and counterparts hereof shall have been
duly executed and delivered to the Agent by the Borrower and (ii) Borrower shall
have paid Agent on behalf of Lenders an amendment fee of $75,000.
SECTION 4. COUNTERPARTS AND GOVERNING LAW. This Agreement may be
executed in counterparts, each of which shall be an original, and all of which,
taken together, shall constitute a single instrument. This Agreement shall be
governed by, and construed in accordance with the law of the State of
California.
SECTION 5. REFERENCES TO LOAN AGREEMENT. From and after the
effectiveness of this Agreement and the waivers and agreements contemplated
hereby, all references in the Loan Agreement to "this Agreement", "hereof",
"herein", and similar terms shall mean and refer to the Loan Agreement as
certain provisions thereof are amended or supplemented by this Agreement, and
all references in other documents to the Loan Agreement shall mean such
agreement as certain provisions thereof are amended or supplemented by this
Agreement.
SECTION 6. INVALIDITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation, it
shall be deemed modified to conform to the minimum requirements of such law or
regulation, or if for any reason it is not deemed so modified, it shall be
ineffective and valid only to the extent of such prohibition or invalidity
without the remainder thereof or any of the remaining provisions of this
Agreement being prohibited or invalid.
SECTION 7. RATIFICATION AND CONFIRMATION. The Loan Agreement
is hereby ratified and confirmed and, except as herein otherwise agreed, remains
unmodified and in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
MERISEL AMERICAS, INC.
By:___________________________
Title:________________________
BANK OF AMERICA, N.A.
Individually and as Agent
By:___________________________
Title:________________________
CONGRESS FINANCIAL CORPORATION
By:___________________________
Title:________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATMENTS
</LEGEND>
<CIK> 0000724941
<NAME> MERISEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 9,264
<SECURITIES> 0
<RECEIVABLES> 247,617
<ALLOWANCES> 17,615
<INVENTORY> 541,548
<CURRENT-ASSETS> 797,218
<PP&E> 169,819
<DEPRECIATION> 81,416
<TOTAL-ASSETS> 910,007
<CURRENT-LIABILITIES> 656,315
<BONDS> 0
0
0
<COMMON> 803
<OTHER-SE> 119,473
<TOTAL-LIABILITY-AND-EQUITY> 910,007
<SALES> 3,880,314
<TOTAL-REVENUES> 3,880,314
<CGS> 3,692,343
<TOTAL-COSTS> 190,876
<OTHER-EXPENSES> 20,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,777
<INCOME-PRETAX> (34,611)
<INCOME-TAX> 598
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,209)
<EPS-BASIC> (.44)
<EPS-DILUTED> (.44)
</TABLE>
