SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 12, 1999
Common Stock, $.01 par value 80,278,829 Shares
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets as of 1-2
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 20
PART II OTHER INFORMATION 21-22
SIGNATURES 23
</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, and (viii) other
risks detailed in this report. These factors are discussed in more detail
elsewhere in this report. Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
June 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $21,079 $36,341
Accounts receivable (net of allowances
of $17,078 and $20,476 for 1999 and 1998, respectively) 225,467 202,128
Inventories 493,167 587,317
Prepaid expenses and other current assets 14,966 14,193
Deferred income taxes 905 865
------------------- -------------------
Total current assets 755,584 840,844
PROPERTY AND EQUIPMENT, NET 89,885 79,719
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 24,095 24,309
OTHER ASSETS 520 448
------------------- -------------------
TOTAL ASSETS $870,084 $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
June 30, December 31,
1999 1998
------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $570,424 $623,673
Accrued liabilities 32,859 31,737
Long-term debt and capitalized lease obligations - current 3,062 3,692
------------------- --------------------
Total current liabilities 606,345 659,102
Long-term debt 129,160 129,360
Capitalized lease obligations 2,276 2,605
------------------- --------------------
TOTAL LIABILITIES 737,781 791,067
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; 80,278,833 and 80,272,683 shares
outstanding for 1999 and 1998, respectively 803 803
Additional paid-in capital 282,392 282,380
Accumulated deficit (141,988) (118,495)
Accumulated other comprehensive income (8,904) (10,435)
------------------- --------------------
Total stockholders' equity 132,303 154,253
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $870,084 $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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
NET SALES $1,266,622 $1,096,439 $2,521,819 $2,198,109
COST OF SALES 1,206,202 1,034,736 2,396,271 2,074,655
---------------- ---------------- ------------------ -----------------
GROSS PROFIT 60,420 61,703 125,548 123,454
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 61,279 47,959 116,401 97,052
LITIGATION-RELATED
(RECOVERY)/CHARGE (9,000) 12,000
---------------- ---------------- ------------------ -----------------
OPERATING INCOME (LOSS) 8,141 13,744 (2,853) 26,402
INTEREST EXPENSE 3,979 3,890 6,796 7,673
OTHER EXPENSE 6,766 4,531 13,393 9,621
---------------- ---------------- ------------------ -----------------
(LOSS) INCOME BEFORE INCOME TAXES (2,604) 5,323 (23,042) 9,108
INCOME TAX PROVISION 380 215 451 364
---------------- ---------------- ------------------ -----------------
NET (LOSS) INCOME $(2,984) $5,108 $(23,493) $8,744
================ ================ ================== =================
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED)
$(0.04) $0.06 $(0.29) $0.11
================ ================ ================== =================
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC 80,279 80,216 80,278 80,184
DILUTED 80,279 81,531 80,278 80,557
================ ================ ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
1999 1998
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(23,493) $8,744
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 8,800 5,118
Provision for doubtful accounts 7,547 5,104
Changes in operating assets and liabilities:
Accounts receivable (31,087) 14,668
Inventories 94,150 31,739
Prepaid expenses and other current assets (845) (8,642)
Accounts payable (53,248) 86,073
Accrued liabilities 1,415 4,223
------------------ -------------------
Net cash provided by operating activities 3,239 147,027
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (18,708) (13,827)
------------------ -------------------
Net cash used for investing activities (18,708) (13,827)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 172,150 27,200
Repayments under revolving line of credit (172,150) (27,200)
Repayments under other financing arrangements (1,159) (844)
Proceeds from issuance of Common Stock 12 585
------------------ -------------------
Net cash used for financing activities (1,147) (259)
------------------ -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,354 (940)
------------------ -------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (15,262) 132,001
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 36,341 36,447
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $21,079 $168,448
================== ===================
</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. Through its main operating subsidiary, Merisel
Americas, Inc. ("Merisel Americas"), and its subsidiaries the Company operates
three distinct business units: 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 six months ended June 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 Standard 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 second quarter is the 13-week period
ending on the Saturday nearest to June 30. For simplicity of presentation, the
Company has described the interim periods and year-end period as of June 30 and
December 31, respectively.
4. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130, which the
Company adopted in the first quarter of 1998, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is computed as
follows:
<TABLE>
<CAPTION>
(In thousands) (In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $(2,984) $5,108 $(23,493) $8,744
Other comprehensive income -
Foreign currency translation adjustments 783 (1,208) 1,531 (1,091)
---------------- ---------------- ------------- ---------------
Comprehensive income $(2,201) $3,900 $(21,962) $7,653
================ ================ ============= ===============
</TABLE>
5. Earnings Per Share ("EPS")
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings Per Share." Basic earnings per
share is calculated using the average number of common shares outstanding.
Diluted earnings per share is computed on the basis of the average number of
common shares outstanding plus the effect of outstanding stock options,
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 Six Months Ended
June 30, June 30,
Weighted average shares outstanding 1999 1998 1999 1998
- ----------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 80,279 80,216 80,278 80,184
Assumed exercises of stock options 1,315 373
--------------- --------------- --------------- ---------------
Diluted 80,279 81,531 80,278 80,557
=============== =============== =============== ===============
</TABLE>
6. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Cash paid (received) in the three-month and six-month periods ended June 30 for interest and income taxes was as
follows:
(In thousands) (In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $7,706 $8,104 $6,848 $7,336
Income taxes $(284) $133 $189 $(116)
</TABLE>
7. Segment Information
During 1998, the Company provided 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 Standard 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).
<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
June 30, 1999
-------------------------------------------------------------------------------
United
States MOCA Canada Total
----------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Net sales to external customers $794,916 $261,510 $210,196 $1,266,622
Segment profit contribution(A) 10,909(A) 10,909 (A)
Segment operating (loss) profit(A) (4,545) 1,777 (2,768)(A)
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
June 30, 1998
-------------------------------------------------------------------------------
United
States MOCA Canada Total
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net sales to external customers $756,883 $148,387 $191,169 $1,096,439
Segment profit contribution(A) 5,376(A) 5,376(A)
Segment operating profit(A) 9,324 (956) 8,368(A)
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30, 1999
-------------------------------------------------------------------------------
United
States MOCA Canada Total
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net sales to external customers $1,584,597 $463,312 $473,910 $2,521,819
Segment profit contribution(A) 18,420(A) 18,420 (A)
Segment operating (loss) profit(A) (26,565) 5,292 (21,273)(A)
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30, 1998
-------------------------------------------------------------------------------
United
States MOCA Canada Total
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Net sales to external customers $1,506,920 $264,648 $426,541 $2,198,109
Segment profit contribution(A) 11,927(A) 11,927(A)
Segment operating profit(A) 12,616 1,859 14,475(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 Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $1,056,426 $905,270 $2,047,909 $1,771,568
Canada 210,196 191,169 473,910 426,541
----------------- ---------------- ----------------- -----------------
Total Net Sales $1,266,622 $1,096,439 $2,521,819 $2,198,109
================= ================ ================= =================
</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 in 1999,
segment operating loss includes the litigation-related charge and the 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. Through its main operating subsidiary, Merisel
Americas, Inc. ("Merisel Americas"), and its subsidiaries the Company operates
three distinct business units: 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 June 30, 1999 as Compared to the Three Months Ended June 30,
1998.
Net sales increased 16% from $1,096,439,000 in the quarter ended June, 30 1998
to $1,266,622,000 in the quarter ended June 30, 1999. The increase resulted from
a 17% increase in net sales for the U.S. and a 10% increase in Canada. The U.S.
growth rate resulted from increased sales of 76% in the MOCA business segment,
36% for the retail customer group, and 4% for the commercial customer group,
offset in part by a decline in sales of 1% for the VAR customer group. The
growth rate in the MOCA business segment reflected in substantial part the
acquisition by the Company of several new large Sun Microsystems reseller
accounts during 1998, and the Company does not expect that growth rate to
continue. Without the addition of such new accounts, the growth rate in the MOCA
business segment would have been approximately 45%. The growth rate in Canada in
terms of Canadian dollars was 11%.
Hardware and accessories accounted for 79% of net sales and software accounted
for 21% of net sales in the second quarter of 1999, as compared to 78% and 22%
for the same categories, respectively, for the second quarter of 1998.
Gross profit decreased 2.1% or $1,283,000 from $61,703,000 in the second quarter
of 1998 to $60,420,000 in the 1999 period. Gross profit as a percentage of
sales, or gross margin, decreased from 5.6% in the 1998 period to 4.8% in the
1999 period. Gross margins in the United States and Canada were 4.5% and 6.1%,
respectively, for the second quarter of 1999, compared to 5.6% and 5.7%,
respectively, for the second quarter of 1998. Margins in the U.S. were
significantly negatively affected by changing vendor terms and conditions,
including the reduction of vendor rebates and changes in price protection. Gross
margins were also negatively affected by the launch of Microsoft Office 2000 and
continued intense price competition. In Canada, the increase in margins as a
percentage of sales was achieved through a concerted effort focused on customer
mix and new-account recruitment as well as the more effective usage of system
tools to
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
manage pricing. The Company has committed resources to address the issue of
declining margins in the U.S. by focusing attention on more profitable product
lines, expanding the Company's customer base and intensifying recruitment of
higher margin customers, using new sales tools, and enhancing customer support
by segmenting customers by business model and geographical location and
assigning those customers to dedicated sales teams. The Company is also
continuing efforts to improve the controls and management supervision over
margin management related activities such as sales execution and processes and
is adjusting selling prices to offset reduced vendor rebate opportunities. 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.
Selling, general and administrative expenses increased by 27.8% from $47,959,000
in the second quarter of 1998 to $61,279,000 in the second quarter of 1999,
increasing as a percentage of sales from 4.4% of sales in 1998 to 4.8% for the
same period in 1999. Contributing to the increase in the 1999 quarter were
depreciation expenses of approximately $3.5 million related to the SAP R/3
operating system and other strategic initiatives; post "go-live" costs of
approximately $1.0 million for expenses associated with the SAP implementation;
approximately $1.0 million of 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; approximately $1.4 million in expenses related to the Company's
strategic initiatives; and costs of approximately $1.3 million associated with
Year 2000 compliance. The Company expects to incur approximately the same amount
in the third quarter of 1999 in connection 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.
In the second quarter of 1999, the Company recorded a $9,000,000 insurance
recovery representing insurance reimbursement of a portion of the $21,000,000
charge recorded 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. See Part II -
Item 1. "Legal Proceedings."
As a result of the above items, operating income decreased by $5,603,000 from
$13,744,000 for the second quarter of 1998 to income of $8,141,000 for the
second quarter of 1999. Excluding the $9,000,000 insurance recovery, the Company
would have had an operating loss of $859,000 for the second quarter of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Six Months Ended June 30, 1999 as Compared to the Six Months Ended June 30,
1998.
For the six months ended June 30, 1999, net sales increased by 15% from
$2,198,109,000 for the six months ended June 30, 1998 to $2,521,819,000 for the
six months ended June 30, 1999. The increase resulted from a 16% increase in net
sales for the U.S. and an 11% increase in Canada. The growth rate reflects
improved year-over-year performance due to substantially the same factors
summarized in the discussion of sales for the three months ended June 30, 1999
and 1998. The growth rate in Canada in terms of Canadian dollars was 15%, 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 six months of 1999, as compared to 77% and 23%
for the same categories, respectively, in the first six months of 1998.
Gross profit increased 1.7% or $2,094,000 from $123,454,000 for the first six
months of 1998 to $125,548,000 for the first six months of 1999. Gross profit as
a percentage of sales, or gross margin, decreased from 5.6% for the 1998 period
to 5.0% for the 1999 period. Gross margins in the United States and Canada were
4.8% and 5.8%, respectively, for the first six months of 1999, compared to 5.6%
and 5.8%, respectively, for the first six months of 1998. The decrease in margin
in the U.S. is attributable to substantially the same factors summarized in the
discussion of gross profit for the three months ended June 30, 1999 and 1998.
Selling, general and administrative expenses increased by 19.9% from $97,052,000
in the six months ended June 30, 1998 to $116,401,000 in the six months ended
June 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.
The increase resulted in large part from the increased expenses in the second
quarter of 1999 described above as well as the SAP training of 1,400 associates
over an eight-week period during the first quarter.
Results for the six months ended June 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 $29,255,000 from
$26,402,000 for the year ended 1998 to a loss of $2,853,000 for the year ended
1999. Excluding the litigation-related charge and related insurance recovery,
the Company would have had operating income of $9,147,000 for the year ended
1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest Expense; Other Expense; and Income Tax Provision
Interest expense for the Company increased 2.3% from $3,890,000 in the quarter
ended June 30, 1998 to $3,979,000 in the quarter ended June 30, 1999. For the
six months ended June 30, 1999, interest expense for the Company decreased 11.4%
from $7,673,000 in the 1998 period to $6,796,000 in the 1999 period. The
decrease in interest expense is primarily attributable to the capitalization of
interest related to the SAP implementation in the first quarter of 1999.
Other expenses for the Company increased from $4,531,000 and $9,621,000 for the
three and six months ended June 30, 1998, respectively, to $6,766,000 and
$13,393,000 for the same periods in 1999, respectively. The increase is due
primarily to asset securitization fees which increased $1,893,000 and $3,627,000
for the three and six month periods, respectively. The increased securitization
fees are due to increased sales of accounts receivable in order to fund sales
growth and daily operations, to meet greater working capital needs resulting
from changing vendor terms and conditions, and to take advantage of vendor
early-pay opportunities. The average proceeds resulting from the sale of
accounts receivable at month end under the Company's securitization facilities
increased from $276,442,000 for the six months ended June 30, 1998 to
$348,718,000 for the same period in 1999.
The income tax provision increased from an expense of $215,000 and $364,000 for
the three and six months ended June 30, 1998, respectively, to an expense of
$380,000 and $451,000 for the same periods in 1999. In both periods, the income
tax rate reflects primarily the minimal statutory tax requirements in the
various states and provinces in which the Company conducts business, as the
Company has sufficient net operating loss provisions to offset federal income
taxes in the current period.
Consolidated Net Income
On a consolidated basis, net income for the Company decreased from $5,108,000
and $8,744,000 for the three and six months ended June 30, 1998, respectively,
to net losses of $2,984,000 and $23,493,000 for the three and six months ended
June 30, 1999, respectively, due to the factors described above. Net income per
share decreased from $.06 per share for the three months ended June 30, 1998 to
a net loss of $.04 per share for the three months ended June 30, 1999. Net
income per share decreased from $.11 per share for the six months ended June 30,
1998 to a net loss of $.29 per share for the six months ended June 30, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
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 will
address its major Year 2000 issues for its core information technology ("IT")
systems. See "Systems and Processes" above. The Company has developed and is
executing a plan for addressing the remainder of its Year 2000 issues which
focuses 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 consists 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 the inventory and assessment phases with respect to
all areas. The remediation and testing phases are substantially completed and,
along with the certification phase, are on schedule to be completed during the
third quarter of 1999. In addition, during July
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
1999 the Company successfully completed integration testing of its core systems
and uncovered no material issues. The Company currently plans to complete the
five phases of its Year 2000 plan outlined above by the beginning of the fourth
quarter of 1999.
Costs
The Company currently estimates that the aggregate cost of its Year 2000 project
will be approximately $3.2 million, which is substantially below the Company's
original budget estimate of $4.2 million, although the total amount could be
greater than the current estimate. Approximately $1.9 million had been spent
through the first half of 1999. The aggregate cost estimate excludes 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 Year 2000 issues. In addition, a portion of the estimated
total costs of the Year 2000 project will be funded by reallocation of existing
resources rather than incurring incremental costs. This reallocation of
resources is not expected to have a significant impact of the day-to-day
operations of the Company, including any material effect on the implementation
of any IT project. The Company's aggregate cost estimate 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.
Risks
The Company believes that the completion of its Year 2000 project and the
implementation of the SAP operating system in the U.S. will result in the
Company being Year 2000 compliant in a timely manner. 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's Year 2000
project is expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000 compliance
and readiness of material External Parties. The Company believes that, with the
completion of its Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Contingency Plans
As part of the Company's Year 2000 project, Year 2000-specific contingency plans
are being developed and will be substantially completed by the end of the third
quarter. 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 intends
to expand its disaster recovery program to cover 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 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. Management believes that
the pattern of higher fourth quarter sales is partially explained by customer
buying patterns relating to calendar year-end business and holiday purchases. As
a result of this pattern, the Company's working capital requirements in the
fourth quarter have typically been greater than other quarters. Net sales in the
Canadian operations are also historically strong in the first quarter of the
fiscal year, which is primarily due to buying patterns of Canadian government
agencies. See "Liquidity and Capital Resources" below.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash provided by operating activities during the six months ended June 30,
1999 was $3,239,000. The primary source of cash from operating activities was a
decrease in inventory of $94,150,000 from the unusually high level of inventory
at the end of 1998. The primary uses of cash during the period include an
increase in accounts receivable of $31,087,000 and a $53,248,000 decrease in
accounts payable that resulted in part from industry-wide changes in vendor
terms and conditions and an increased use of vendor early-pay opportunities.
Net cash used in investing activities consisted of capital expenditures of
$18,708,000.
Net cash used for financing activities was $1,147,000 and was comprised
primarily of repayments under capitalized lease obligations and bank debt.
Securitization Facilities
Funds generated by the sale of receivables in the U.S. are provided through
Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas. Merisel Capital Funding's sole business is the
ongoing purchase of trade receivables from Merisel Americas. Merisel Capital
Funding sells these receivables, in turn, under an agreement with a
securitization company, whose purchases yield proceeds of up to $500,000,000 at
any point in time. 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") through a
receivables purchase agreement with a securitization company. In accordance with
this agreement, Merisel Canada sells receivables to the securitization company,
which yields proceeds of up to CND$150,000,000 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 June 30,
1999, the total amount outstanding under these agreements was $467,445,000. Fees
incurred in connection with the sale of accounts receivable for the three and
six months ended June 30, 1999 were $5,916,000 and $12,292,000 compared to
$4,023,000 and $8,665,000 incurred for the three and six months ended June 30,
1998 and are recorded as other expense.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Debt Obligations, Financing Sources and Capital Expenditures
At June 30, 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 June 30, 1999, the Company had promissory notes outstanding with an aggregate
balance of $5,797,000. Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments 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. No amounts were outstanding
under the Loan and Security Agreement as of June 30, 1999.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be between $35,000,000
and $45,000,000 for 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
At June 30, 1999, the Company had cash and cash equivalents of $21,079,000. In
the opinion of management, anticipated cash from operations in 1999, 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. Any unforeseen event that
adversely impacts the industry or the Company's position in the industry could
have a direct and material unfavorable effect on the liquidity of the Company.
ASSET MANAGEMENT
Merisel attempts to manage its inventory position to maintain levels sufficient
to achieve high product availability and same-day order fill rates. Inventory
levels may vary from period to period, due to factors including increases or
decreases in sales levels, Merisel's practice of making large-volume purchases
when it deems such purchases to be attractive, and the addition of new
manufacturers and products. The Company has negotiated agreements with many of
its manufacturers 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 could adversely affect the
Company. The Company is working closely with these manufacturers and has
developed buying procedures and controls to manage inventory purchases to 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.
The Company purchases 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
to control its bad debt exposure by monitoring customers' creditworthiness and,
where practicable, through participation in credit associations that provide
customer credit rating information for certain accounts. In addition, the
Company purchases credit insurance as it deems appropriate.
COMPETITION
Competition in the computer products distribution industry is intense.
Competitive factors include price, brand selection, breadth and availability of
product offering, 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 U.S. and Canadian
distribution businesses include large United States-based 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.
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 September 4, 1997, the Company filed suit in Delaware Chancery Court (the
"Delaware Action") seeking a declaratory judgment with respect to certain issues
that arose between the Company and certain holders of the Company's 12.5% Notes
("Noteholders") pursuant to the Limited Waiver and Voting Agreement (the
"Limited Waiver Agreement"). On September 11, 1997, certain Noteholders filed an
answer to the Company's complaint in the Delaware Action as well as a
counterclaim against the Company asserting claims for breach of the Limited
Waiver Agreement, unjust enrichment and a declaratory judgment (the "Noteholder
Suit"). The Noteholder Suit also asserted a claim for unjust enrichment against
Dwight A. Steffensen, the Company's Chief Executive Officer. The Noteholder Suit
sought damages in excess of $100 million from the Company. On May 10, 1999, the
Company and Mr. Steffensen entered into a settlement agreement (the "Agreement")
with the Noteholders that provides for all of the parties to dismiss their
claims against each other with prejudice. The Agreement also provided for the
dismissal of an action brought by the Noteholders against Stonington Partners,
Inc. alleging tortious interference. On June 4, 1999, the Delaware Chancery
Court entered an order dismissing the Delaware Action and the Noteholder Suit
with prejudice. As a result of the settlement, the Company recorded a charge in
the first quarter of 1999 of $21 million, which represented amounts payable
pursuant to the settlement as well as certain costs related to the settlement
and the litigation. Under an agreement with its insurers, the Company will
recover $9 million of the litigation and settlement costs.
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 has advised the Company
that intends to file a motion to seek relief from the stay. A hearing on such
motion is expected to take place in October 1999. The Company has defended
itself vigorously against this claim and will continue to do so.
<PAGE>
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1 to Loan and Security Agreement dated
as of May 11, 1999 by and among Merisel Americas,
Inc., Bank of America National Trust and Savings
Association, as Agent and a Lender.
10.2 Amendment No. 5 to Purchase Agreement and Waiver dated as of May 12,
1999 among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation.
10.3 Severance Agreement dated as of March 3, 1999 between Merisel, Inc. and
James E. Illson.
10.4 Severance Agreement dated as of March 3, 1999 between Merisel, Inc. and
Timothy N. Jenson.
10.5 Promissory Note dated March 17, 1999 between Timothy N. Jenson and
Merisel, Inc.
10.6 Promissory Note dated June 17, 1999 between Kristin M. Rogers and
Merisel Americas, Inc.
(b) The following Reports on Form 8-K were filed during the quarter
ended June 30, 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: August 13, 1999
Merisel, Inc.
By /s/ Timothy N. Jenson
--------------------------------
Timothy N. Jenson
Chief Financial Officer and
Senior Vice President, Finance
AMENDMENT NO. 1 TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 1 to Loan and Security Agreement is made as
of May 11, 1999 by and among each of the undersigned and amends that certain
Loan and Security Agreement, dated as of June 30, 1998 (the "Loan Agreement"),
among the financial institutions listed on the signature pages thereof as
lenders (such financial institutions, together with their respective successors
and assigns, are referred to hereinafter each individually as a "Lender" and
collectively as the "Lenders"), Bank of America National Trust and Savings
Association (formerly known as BankAmerica Business Credit, Inc.), a Delaware
corporation, as agent for the Lenders (in its capacity as agent, the "Agent"),
and Merisel Americas, Inc., a Delaware corporation (the "Borrower"). Capitalized
terms used herein without definition have the meanings assigned thereto in the
Loan Agreement.
RECITALS
A. The Borrower has requested that certain provisions of the Loan
Agreement be amended as more fully described below.
B. On the terms and subject to the conditions set forth in this
Amendment, the Borrower and the Agent, on behalf of the Lenders, have agreed to
the amendments and waivers to the Loan Agreement as set forth below.
AGREEMENT
In consideration of the foregoing, and for good and valuable
consideration, the receipt of which is hereby acknowledged, the undersigned
hereby agree as follows:
ARTICLE 1
AMENDMENTS AND WAIVERS TO LOAN AND SECURITY AGREEMENT
1.1 Amendment to the Definition of "Adjusted Net Earnings from
Operations". The definition of "Adjusted Net Earnings from Operations" set forth
in Section 1.1 of the Loan Agreement is hereby amended by changing the period at
the end of such definition to a semicolon and adding a new clause (h) to the
definition as follows:
"and (h) any gains or losses related in any way to the settlement
(which shall not exceed $21,000,000) of the action filed in the
Delaware Chancery Court captioned Merisel v. Turnberry Capital
Management, L.P., et al."
1.2 Amendment to the Definition of "Interest Coverage Ratio". The
definition of "Interest Coverage Ratio" set forth in Section 1.1 of the Loan
Agreement is hereby amended by adding the following sentence to the end of the
definition:
<PAGE>
"Notwithstanding the foregoing, the Interest Coverage Ratio as used in
the definition of "Applicable Margin" herein, and only in such
definition, shall mean, for any period, the ratio of (a) Adjusted Net
Earnings from Operations (calculated without regard to clause (h) of
such definition) for such period plus the sum of the following to the
extent deducted in computing Adjusted Net Earnings from Operations: (i)
tax expense or provision for taxes, (ii) total interest expense net of
interest income, (iii) total amortization expense, (iv) total
depreciation expense, and (v) other non-cash expenses deducted in
computing Adjusted Net Earnings from Operations, over (b) total
interest expense during such period (net of interest income)."
1.3 Amendment to the Transaction with Affiliates Covenant. Section
9.15(a) of the Loan Agreement is hereby amended by adding a new clause (vii) to
the end of such section as follows:
"and (vii) the Borrower and its Subsidiaries may pay cash dividends or
make other advances or distributions to the Parent (in an aggregate
amount not to exceed $21,000,000) for purposes of paying obligations or
costs arising from the Parent's settlement of the action filed in the
Delaware Chancery Court captioned Merisel v. Turnberry Capital
Management, L.P., et al."
1.4 Waiver to Covenants and Representations. Agent, on behalf of
Lenders, hereby waives any Event of Default existing under the Loan Agreement as
a result of the Borrower's breach of any representation, warranty or covenant
contained in Article 8 or Article 9 on account of the settlement of the action
filed in the Delaware Chancery Court captioned Merisel v. Turnberry Capital
Management, L.P., et al., so long as the aggregate amount paid by Borrower in
connection with such settlement does not exceed $21,000,000.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
The Borrower warrants and represents to the Agent and the Lenders that:
2.1 Representations and Warranties True and Correct. The
representations and warranties contained in the Loan Agreement and the other
Loan Documents are correct in all material respects on and as of the date hereof
after giving effect to this Amendment (except representations and warranties
which are made as of a specified date shall only be required to be true and
correct in all material respects as of such specified date).
2.2 No Default or Event of Default. No event has occurred and is
continuing which constitutes a Default or an Event of Default after giving
effect to this Amendment.
<PAGE>
ARTICLE 3
MISCELLANEOUS
3.1 Effective Date. This Amendment shall be effective as of the date
when the Agent has received (i) a duly executed counterpart of this Amendment
from the Borrower and (ii) the duly executed Amendment to Fee Letter from
Borrower to Agent, solely on Agent's own behalf, dated as of the date hereof.
3.2 No Other Waiver. Except as expressly waived hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
3.3 Governing Law. This Amendment shall be interpreted and the rights
and liabilities of the parties hereto determined in accordance with the internal
laws (as opposed to the conflict of laws provisions) of the State of California.
3.4 Counterparts. This Amendment may be executed in any number of
counterparts, and by the Agent and the Borrower in separate counterparts, each
of which shall be an original, but all of which shall together constitute one
and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this
Amendment on the date first above written.
"BORROWER"
Merisel Americas, Inc., a Delaware corporation
By:__/s/__________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: 200 Continental Boulevard
El Segundo, CA 90245
Telecopy No.: (310) 615-1234
"AGENT"
Bank of America National Trust and Savings Association,
as the Agent
By:_/s/___________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: 40 East 52nd Street
New York, New York 10022
Telecopy No.: (212) 836-5167
<PAGE>
"LENDERS"
Bank of America National Trust and Savings Association,
as a Lender
By:_/s/___________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: 40 East 52nd Street
New York, New York 10022
Telecopy No.: (212) 836-5167
AMENDMENT No. 5 TO PURCHASE AGREEMENT AND WAIVER
AMENDMENT No. 5 TO PURCHASE AGREEMENT AND WAIVER, dated as of
May 12, 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 and Amendment No. 2,
dated as of December 19, 1997 (the Transfer Agreement").
WHEREAS, Merisel Capital Funding, as seller (in such capacity,
the "Seller"), Redwood as purchaser (in such capacity, the "Purchaser"), GE
Capital, as operating agent (in such capacity, the "Operating Agent") and
collateral agent (in such capacity, the "Collateral Agent") and Merisel
Americas, 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 and Amendment No. 4, dated as of February 22, 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. 5 TO PURCHASE AGREEMENT
(a) Annex X of the Purchase Agreement is hereby amended by
adding the following definitions thereto:
"Turnberry Litigation" means the litigation between Parent and
Turnberry Capital Management, L.P., et al, filed in the Court of Chancery of the
State of Delaware in and for New Castle County.
"Turnberry Settlement" means the settlement of the Turnberry
Litigation set forth in the Turnberry Settlement Agreement.
"Turnberry Settlement Agreement" means that certain Settlement
Agreement, dated as of May 10, 1999, by and among Parent, Dwight A. Steffenson,
Stonington Partners, Inc., Turnberry Capital Management, L.P., Monarch
Management Group Ltd., Robert Fleming Inc., Value Partners, Ltd., Dayton Special
Situations Fund, L.P., Daystar L.L.C., CoMac Partners, L.P., CoMac
International, N.V. and Tribeca Investments, L.L.C., evidencing the Turnberry
Settlement.
(b) Paragraph (a) under the heading "FINANCIAL COVENANTS" in
Exhibit H of the Purchase Agreement is hereby amended by inserting "(w)" after
the term "Exhibit H" the first time such term appears in the last sentence under
such heading and adding the following language at the end of such sentence:
"; and (x) for any period of four fiscal quarters that ends
before the Second Fiscal Quarter of 2000, $21 million relating to the loss
reserve to be recorded by the Parent in connection with the Turnberry Settlement
will be excluded (except to the extent of any net insurance proceeds collected
in connection with the Turnberry Settlement) and (y) for the calculation of
Tangible Net Worth at any time, an amount equal to $21 million minus the net
insurance proceeds, if any, collected in connection with the Turnberry
Settlement will be added to Tangible Net Worth."
ARTICLE III
WAIVER OF DEFAULT UNDER
TRANSFER AGREEMENT
The Operating Agent, the Collateral Agent and the Purchaser
agree to waive any default resulting from a breach of the representation set
forth in Section 4.01(a)(vii) of the Transfer Agreement; provided, that such
waiver shall apply solely to defaults (i) resulting from the Turnberry
Settlement period.
<PAGE>
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.
(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 representations
and warranties in the Transfer Agreement and Purchase Agreement are true and
correct in all material respects as of the date hereof.
(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).
<PAGE>
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;
(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.
<PAGE>
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.
* * *
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:__/s/_________________________
Title:
Name:
MERISEL AMERICAS, INC.,
as Originator and Servicer
By:_/s/__________________________
Title:
Name:
GENERAL ELECTRIC CAPITAL CORPORATION,
as Operating Agent and Collateral Agent
By:__/s/_________________________
Title:
Name:
<PAGE>
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
By:__/s/_________________________
Title:
Name:
3
SEVERANCE AGREEMENT
This Severance Agreement is dated as of March 3, 1999 and is between
Merisel, Inc., a Delaware corporation, and James E. Illson ("Executive").
The Company and Executive hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
(a) "Base Salary" shall mean Executive's annual base salary as in
effect on the date hereof or as the same may be increased from time to time and
without giving effect to any reduction referenced by clause (d)(iii) below that
is not part of an across-the-board reduction, 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) "Employment Agreement" shall mean that certain Employment
Agreement dated as of August 19, 1996 between Executive and the Company.
(c) The "Company" shall mean Merisel, Inc., a Delaware corporation, and
each of its successor enterprises that result from any merger, consolidation,
reorganization, sale of assets or otherwise.
(d) A resignation by Executive shall be with "Good Reason" if (i) there
has been a material reduction in Executive's job responsibilities from those
that existed immediately prior to such reduction, it being understood that a
mere change in title alone shall not constitute a material reduction in
Executive's job responsibilities, (ii) without Executive's prior written
approval, the Company requires Executive to be based anywhere other than the
Executive's then current location, it being understood that required travel on
the Company's business to an extent consistent with Executive's normal and
customary business travel obligations does not constitute "Good Reason," or
(iii) there is a reduction in Executive's Base Salary, except that an
across-the-board reduction in the salary level of all of the Company's
executives in the same percentage amount as part of a general salary level
reduction shall not constitute "Good Reason."
(e) "Termination for Cause" shall mean if the Company terminates
Executive's employment for any of the following reasons: Executive's misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Executive in violation of the Company' policies); excessive absenteeism; abuse
of sick time; or Executive's conviction for or a plea of nolo contendere by
Executive to a felony or any crime involving moral turpitude.
<PAGE>
2. At-Will Employee. The Company shall have no obligation to retain or
continue Executive as an employee and Executive's employment status as an
"at-will" employee of the Company is not affected by this Agreement.
3. Termination. If Executive's employment by the Company terminates for
any reason other than as a result of a Termination for Cause, death or permanent
disability, or Executive's resignation without Good Reason, then: (A) the
Company shall pay Executive as severance compensation (the "Severance Payment")
an amount equal to one and one-half times Executive's Base Salary, which shall
be paid to Executive bi-weekly in equal amounts over a period of 78 weeks
("Payment Period") in accordance with the Company's standard payroll practices,
and (B) the Company shall reimburse Executive for the cost of Executive's COBRA
payments (at the level of coverage, including dependent care coverage, as in
effect immediately prior to such termination) under the Company's health
insurance plans for an eighteen-month period following the date of such
termination; provided, however, that (i) the amount payable under clause (A)
above shall be reduced by any lump sum payment made to Executive under the
Employment Agreement and (ii) Executive shall not be entitled to payments under
clause (B) above to the extent they are made to Executive pursuant to the
Employment Agreement. The payments to be made to Executive upon a termination
contemplated by this paragraph 3 are in addition to the payments made to
employees by the Company upon termination in the ordinary course, such as
reimbursement for business expenses and vacation pay through the date of
termination.
4. Withholding. The Company shall deduct from all payments paid to
Executive under this Agreement any required amounts for social security, federal
and state income tax withholding, federal or state unemployment insurance
contributions, and state disability insurance or any other required taxes.
5. Mitigation. Executive shall have no obligation to mitigate the
amount of any payment provided for in this Agreement by seeking employment or
otherwise.
6. Executive's Obligations. (a) In exchange for the Company agreeing to
provide the above-described benefits to Executive, Executive agrees that prior
to receiving any severance compensation from the Company in respect of such
termination, whether under this Agreement or otherwise, Executive will execute
and deliver to the Company a Release and a Confidentiality Agreement, each in
the form provided to Executive with this Agreement.
(b) During the Payment Period, Executive will not, on behalf of any
business enterprise other than the Company and its subsidiaries, solicit the
employment of or hire any person that is or was employed by the Company or any
of its subsidiaries at any time on or after March 3, 1999. If Executive breaches
this provision, the Company will have no further obligation to pay any unpaid
portion of the Severance Payment or amounts payable pursuant to paragraph 3 (B)
above.
7. Assumption Agreement. The Company 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 expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it whether or not such
succession had taken place.
<PAGE>
8. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of the Company and Executive; provided that Executive shall not assign
any of Executive's rights or duties under this Agreement without the express
prior written consent of the Company. This Agreement together with the
Employment Agreement sets forth the parties' entire agreement with regard to the
subject matter hereof. Neither party has made any other agreements,
representations, or warranties to the other with respect to the subject matter
of this Agreement. This Agreement may be amended only by a written agreement
signed by both parties. This Agreement shall be governed by and construed in
accordance with the laws of the State of California. Any waiver by either party
of any breach of any provision of this Agreement shall not operate as or be
construed as a waiver of any subsequent breach. If any legal action is necessary
to enforce the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees in addition to any other relief to which that
party may be entitled.
9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument, which shall be effective upon the
execution hereof by all of the parties hereto. A complete set of counterparts
shall be made available to each party hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the day and year first written above.
MERISEL, INC.
By: /s/Dwight A. Steffensen
------------------------------
Its: CEO
------------------------------
JAMES E. ILLSON
/s/James E. Illson
- -----------------------------------
SEVERANCE AGREEMENT
This Severance Agreement is dated as of March 3, 1999 and is between
Merisel, Inc., a Delaware corporation, and Timothy N. Jenson ("Executive").
The Company and Executive hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
(a) "Base Salary" shall mean Executive's annual base salary as in
effect on the date hereof or as the same may be increased from time to time and
without giving effect to any reduction referenced by clause (d)(iii) below that
is not part of an across-the-board reduction, 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) "Change of Control Agreement" shall mean that certain Change of
Control Agreement dated as of July 26, 1997 between Executive and the Company.
(c) The "Company" shall mean Merisel, Inc., a Delaware corporation, and
each of its successor enterprises that result from any merger, consolidation,
reorganization, sale of assets or otherwise.
(d) A resignation by Executive shall be with "Good Reason" if (i) there
has been a material reduction in Executive's job responsibilities from those
that existed immediately prior to such reduction, it being understood that a
mere change in title alone shall not constitute a material reduction in
Executive's job responsibilities, (ii) without Executive's prior written
approval, the Company requires Executive to be based anywhere other than the
Executive's then current location, it being understood that required travel on
the Company's business to an extent consistent with Executive's normal and
customary business travel obligations does not constitute "Good Reason," or
(iii) there is a reduction in Executive's Base Salary, except that an
across-the-board reduction in the salary level of all of the Company's
executives in the same percentage amount as part of a general salary level
reduction shall not constitute "Good Reason."
(e) "Termination for Cause" shall mean if the Company terminates
Executive's employment for any of the following reasons: Executive's misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Executive in violation of the Company' policies); excessive absenteeism; abuse
of sick time; or Executive's conviction for or a plea of nolo contendere by
Executive to a felony or any crime involving moral turpitude.
<PAGE>
2. At-Will Employee. The Company shall have no obligation to retain or
continue Executive as an employee and Executive's employment status as an
"at-will" employee of the Company is not affected by this Agreement.
3. Termination. If Executive's employment by the Company terminates for
any reason other than as a result of a Termination for Cause, death or permanent
disability, or Executive's resignation without Good Reason, then: (A) the
Company shall pay Executive as severance compensation (the "Severance Payment")
an amount equal to one times Executive's Base Salary, which shall be paid to
Executive bi-weekly in equal amounts over a period of 52 weeks ("Payment
Period") in accordance with the Company's standard payroll practices, and (B)
the Company shall reimburse Executive for the cost of Executive's COBRA payments
(at the level of coverage, including dependent care coverage, as in effect
immediately prior to such termination) under the Company's health insurance
plans for a twelve-month period following the date of such termination;
provided, however, that (i) the amount payable under clause (A) above shall be
reduced by any lump sum payment made to Executive under the Change of Control
Agreement and (ii) Executive shall not be entitled to payments under clause (B)
above to the extent they are made to Executive pursuant to the Change of Control
Agreement. The payments to be made to Executive upon a termination contemplated
by this paragraph 3 are in addition to the payments made to employees by the
Company upon termination in the ordinary course, such as reimbursement for
business expenses and vacation pay through the date of termination.
4. Withholding. The Company shall deduct from all payments paid to
Executive under this Agreement any required amounts for social security, federal
and state income tax withholding, federal or state unemployment insurance
contributions, and state disability insurance or any other required taxes.
5. Mitigation. Executive shall have no obligation to mitigate the
amount of any payment provided for in this Agreement by seeking employment or
otherwise.
6. Executive's Obligations. (a) In exchange for the Company agreeing to
provide the above-described benefits to Executive, Executive agrees that prior
to receiving any severance compensation from the Company in respect of such
termination, whether under this Agreement or otherwise, Executive will execute
and deliver to the Company a Release and a Confidentiality Agreement, each in
the form provided to Executive with this Agreement.
(b) During the Payment Period, Executive will not, on behalf of any
business enterprise other than the Company and its subsidiaries, solicit the
employment of or hire any person that is or was employed by the Company or any
of its subsidiaries at any time on or after March 3, 1999. If Executive breaches
this provision, the Company will have no further obligation to pay any unpaid
portion of the Severance Payment or amounts payable pursuant to paragraph 3(B)
above.
<PAGE>
7. Assumption Agreement. The Company 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 expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it whether or not such
succession had taken place.
8. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of the Company and Executive; provided that Executive shall not assign
any of Executive's rights or duties under this Agreement without the express
prior written consent of the Company. This Agreement together with the Change of
Control Agreement sets forth the parties' entire agreement with regard to the
subject matter hereof. Neither party has made any other agreements,
representations, or warranties to the other with respect to the subject matter
of this Agreement. This Agreement may be amended only by a written agreement
signed by both parties. This Agreement shall be governed by and construed in
accordance with the laws of the State of California. Any waiver by either party
of any breach of any provision of this Agreement shall not operate as or be
construed as a waiver of any subsequent breach. If any legal action is necessary
to enforce the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees in addition to any other relief to which that
party may be entitled.
9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument, which shall be effective upon the
execution hereof by all of the parties hereto. A complete set of counterparts
shall be made available to each party hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the day and year first written above.
MERISEL, INC.
By: /s/Dwight A. Steffensen
----------------------------
Its: CEO
----------------------------
TIMOTHY N. JENSON
/s/Timothy N. Jenson
- ----------------------------------
PROMISSORY NOTE
Los Angeles, California
$65,000.00 March 17, 1999
1. Promise to Pay. For Value Received, Timothy N. Jenson ("Borrower")
hereby unconditionally promises to pay to the order of Merisel, Inc., a Delaware
corporation (the "Company"), or order, the sum of sixty-five thousand dollars
($65,000.00).
2. Interest. No interest will be payable by Borrower on this Note.
3. Forgiveness of Principal.
(a) The entire principal amount of this Note shall be forgiven
on the earlier of (i) the date the Company releases its earnings for fiscal year
1999, provided that the Company's consolidated pre-tax net income for 1999
equals at least 80% of the amount therefor set forth in the 1999 Operating Plan
approved by the Company's Board of Directors on December 16, 1998, and (ii)
March 2, 2001.
(b) The entire principal amount of this Note shall be forgiven
upon termination of the Borrower's employment by the Company other than as a
result of Termination for Cause (as defined below) or Borrower's resignation
without Good Reason (as defined below).
4. Mandatory Payment. The outstanding principal balance of this Note
shall be due and payable ninety (90) days after termination of Borrower's
employment with the Company due to Termination for Cause or Borrower's
resignation without Good Reason.
5. Definitions.
(a) A resignation by Borrower shall be with "Good Reason" if
(i) there has been a material reduction in Borrower's job responsibilities from
those that existed immediately prior to such reduction, it being understood that
a mere change in title alone shall not constitute a material reduction in
Borrower's job responsibilities, (ii) without Borrower's prior written approval,
the Company requires Borrower to be based anywhere other than Borrower's then
current location, it being understood that required travel on the Company'
business to an extent consistent with Borrower's normal and customary business
travel obligations does not constitute "Good Reason," or (iii) there is a
reduction in Borrower's base salary, except that an across-the-board reduction
in the salary level of all of the Company's executives in the same percentage
amount as part of a general salary level reduction shall not constitute "Good
Reason."
<PAGE>
(b) "Termination for Cause" shall mean if the Company
terminates Borrower's employment for any of the following reasons: Borrower's
misconduct (misconduct includes physical assault, insubordination, falsification
or misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of Company property or assets, or harassment of another associate by
Borrower in violation of the Company' policies); excessive absenteeism; abuse of
sick time; or Borrower's conviction for or a plea of nolo contendere by Borrower
to a felony or any crime involving moral turpitude.
6. Form of Payments. Any payment due hereunder shall be payable in
lawful money of the United States of America, which shall be legal tender in
payment of all debts and dues, public and private, at the time of payment. All
payments of principal are payable at the Company's offices at 200 Continental
Boulevard, El Segundo, California 90245 or at such other place of which the
Company shall notify Borrower in writing as hereinafter provided.
7. Costs of Collection. In the event this Note is turned over to an
attorney at law for collection after default, in addition to the principal
payable hereunder, the Company shall be entitled to collect all costs of
collection, including but not limited to attorneys' fees, incurred in connection
with protection of or realization of collateral or in connection with any of the
Company's collection efforts, whether or not suit on this Note or any
foreclosure proceeding is filed, and all such costs and expenses shall be
payable on demand.
8. No Waiver. No failure on the part of the Company or any other holder
hereof to exercise any right or remedy hereunder, whether before or after the
happening of a default, shall constitute a waiver thereof, and no waiver of any
past default shall constitute a waiver of any future default or of any other
default. No indulgence granted from time to time shall be construed to be a
waiver of the right to insist upon prompt payment thereafter, or shall be deemed
to be a novation of this Note or a reinstatement of the debt evidenced hereby,
or be construed so as to preclude the exercise of any right which the Company
may have, whether by the laws of the state governing this Note, by agreement or
otherwise; and Borrower hereby expressly waives the benefit of any statute or
rule of law or equity which would produce a result contrary to or in conflict
with the foregoing. This Note may not be changed orally, but only by an
agreement in writing signed by the party against whom such agreement is sought
to be enforced.
9. Borrower's Waivers. Borrower, for itself and it successors and
assigns, hereby waives presentment, protest, demand, diligence, notice of
dishonor and of nonpayment, and waives and renounces all rights to the benefits
of any statute of limitations and any moratorium, appraisement, exemption and
homestead now provided or which may hereafter be provided by any federal or
state statute, including, but not limited to, exemptions provided by or allowed
under the Bankruptcy Reform Act of 1984, both as to itself personally and as to
all of its property, whether real or personal, against the enforcement and
collection of the obligations evidenced by this Note and any and all extensions,
renewals and modifications hereof.
<PAGE>
10. Applicable Law. This Note shall be governed by and construed under
the laws of the State of California, without giving effect to its conflicts of
law principles. Borrower hereby submits to personal jurisdiction in the State of
California for the enforcement of Borrower's obligations hereunder and waives
any and all personal rights under the law of any other state to object to
jurisdiction within such state for the purposes of any action to enforce such
obligations of Borrower. In the event such action is commenced, Borrower agrees
that service of process may be made and personal jurisdiction may be obtained by
service of a copy of the summons, complaint, and other pleadings required to
commence such action upon Borrower at the address provided in section 11.
11. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed given
when delivered personally or by facsimile transmission, delivered by courier
service or by other messenger or ten days after being mailed by registered or
certified mail (return receipt requested), postage prepaid, to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice; provided that notices of a change of address shall be
effective only upon receipt thereof):
If to Borrower, to:
Timothy N. Jenson
11491 Harrisburg Road
Los Alamitos, CA 90720
Tel: 562-799-0458
If to the Company, to:
Merisel, Inc.
200 Continental Boulevard
El Segundo, California 90245
Tel: 310-615-1235
Fax: 310-615-6819
Attention: Karen A. Tallman
12. Captions. The captions of the sections of this Note are solely for
convenience and are not intended to be a part of this Note and shall not be
deemed to modify, explain, enlarge or restrict any of the provisions hereof.
13. Waiver of Jury Trial. Borrower hereby knowingly, voluntarily and
intentionally waives the right to a trial by jury in respect of any action based
on or arising out of, under or in connection with this Note, or any course of
conduct, course of dealings, statements (whether oral or written) or actions of
either party, this waiver being a material inducement for the Company to accept
this Note.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date
first above written.
WITNESS/ATTEST TIMOTHY N. JENSON
/s/ /s/Timothy N. Jenson
By:______________________________ ___________________________
Name:____________________________
Title:___________________________
PROMISSORY NOTE
Los Angeles, California
$150,000.00 June 7, 1999
1. Promise to Pay. For Value Received, Kristin M. Rogers ("Borrower")
hereby unconditionally promises to pay to the order of Merisel Americas, Inc., a
Delaware corporation ("Americas"), or order, the sum of one hundred-fifty
thousand dollars ($150,000.00).
2. Interest. Interest shall accrue on the outstanding principal amount
hereof from the date hereof until paid in full or forgiven at a rate of 7.5% per
annum.
3. Forgiveness of Principal and Interest.
(a) The principal amount of this Note shall be forgiven in
increments on the following dates and in the following amounts: (1) May 11, 2000
- - $37,500; (2) May 11, 2001 - $37,500; (3) May 11, 2002 - $37,500; and (4) May
11, 2003 - $37,500. All accrued interest on any principal amount forgiven shall
be forgiven on the date such principal amount is forgiven. Notwithstanding the
foregoing, no such amount shall be forgiven unless Borrower is an employee of
Americas on the date the amount is to be forgiven.
(b) The entire principal amount of this Note and all accrued
interest shall be forgiven upon a Covered Termination (as defined below) or upon
a Covered Resignation (as defined below).
4. Mandatory Payment. The outstanding principal balance of this Note,
together with accrued and unpaid interest, shall be due and payable one hundred
eighty (180) days after termination of Borrower's employment by Americas due to
a Termination for Cause (as defined below) or Borrower's resignation without
Good Reason (as defined below).
5. Definitions.
(a) An "Americas Change of Control" shall have occurred if (i)
any person, corporation, partnership, trust, association, enterprise or group,
other than the Company, shall become the beneficial owner, directly or
indirectly, of outstanding capital stock of Americas possessing at least 50% of
the voting power (for the election of directors) of the outstanding capital
stock of Americas, or (ii) there shall be a sale of all or substantially all of
Americas' assets or Americas shall merge or consolidate with another corporation
and the stockholders of Americas immediately prior to such transaction do not
own, immediately after such transaction, stock of the purchasing or surviving
corporation in the transaction (or of the parent corporation of the purchasing
or surviving corporation) possessing more than 50% of the voting power (for the
election of directors) of the outstanding capital stock of that corporation,
which ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the 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
<PAGE>
election of directors) of the outstanding capital stock of the Company, or (ii)
there shall be a sale of all or substantially all of the Company's assets or the
Company shall merge or consolidate with another corporation and the stockholders
of the Company immediately prior to such transaction do not own, immediately
after such transaction, stock of the purchasing or surviving corporation in the
transaction (or of the parent corporation of the purchasing or surviving
corporation) possessing more than 50% of the voting power (for the election of
directors) of the outstanding capital stock of that corporation, which ownership
shall be measured without regard to any stock of the purchasing, surviving or
parent corporation owned by the stockholders of the Company before the
transaction.
(b) "Company" shall mean Merisel, Inc., a Delaware
corporation, and each of its successor enterprises that result from any merger,
consolidation, reorganization, sale of assets or otherwise.
(c) "Covered Resignation" shall mean a resignation by Borrower
that occurs within six months after there has been a material reduction in
Borrower's job responsibilities from those that existed immediately prior to the
reduction, it being understood that a mere change in title alone shall not
constitute a material reduction in Borrower's job responsibilities.
(d) "Covered Termination" shall mean any cessation of
Borrower's employment by Americas that occurs after a Change of Control other
than as a result of (i) Termination for Cause, (ii) Borrower's death or
permanent disability, or (iii) Borrower's resignation without Good Reason (as
hereinafter defined).
(e) A resignation by Borrower shall be with "Good Reason" if
after a Change of Control (i) there has been a material reduction in Borrower'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 Borrower's job responsibilities, (ii) without
Borrower's prior written approval, Americas requires Borrower to be based
anywhere other than Borrower's then current location, it being understood that
required travel on Americas' business to an extent consistent with Borrower's
business travel obligation prior to the Change of Control does not constitute
"Good Reason," or (iii) there is a reduction in Borrower's Base Salary, except
that an across-the-board reduction in the salary level of all of Americas'
executives in the same percentage amount as part of a general salary level
reduction shall not constitute "Good Reason."
(f) "Termination for Cause" shall mean if Americas terminates
Borrower's employment for any of the following reasons: Borrower's misconduct
(misconduct includes physical assault, insubordination, falsification or
misrepresentation of facts on company records, fraud, dishonesty, willful
destruction of company property or assets, or harassment of another associate by
Borrower in violation of Americas' policies); excessive absenteeism; abuse of
sick time; or Borrower's conviction for or a plea of nolo contendere by Borrower
to a felony or any crime involving moral turpitude.
6. Form of Payments. Any payment due hereunder shall be payable in
lawful money of the United States of America, which shall be legal tender in
payment of all debts and dues, public and private, at the time of payment. All
payments of principal are payable at Americas' offices at 200 Continental
Boulevard, El Segundo, California 90245 or at such other place of which Americas
shall notify Borrower in writing as hereinafter provided.
<PAGE>
7. Costs of Collection. In the event this Note is turned over to an
attorney at law for collection after default, in addition to the principal
payable hereunder, Americas shall be entitled to collect all costs of
collection, including but not limited to attorneys' fees, incurred in connection
with protection of or realization of collateral or in connection with any of
Americas' collection efforts, whether or not suit on this Note or any
foreclosure proceeding is filed, and all such costs and expenses shall be
payable on demand.
8. No Waiver. No failure on the part of Americas or any other holder
hereof to exercise any right or remedy hereunder, whether before or after the
happening of a default, shall constitute a waiver thereof, and no waiver of any
past default shall constitute a waiver of any future default or of any other
default. No indulgence granted from time to time shall be construed to be a
waiver of the right to insist upon prompt payment thereafter, or shall be deemed
to be a novation of this Note or a reinstatement of the debt evidenced hereby,
or be construed so as to preclude the exercise of any right which Americas may
have, whether by the laws of the state governing this Note, by agreement or
otherwise; and Borrower hereby expressly waives the benefit of any statute or
rule of law or equity which would produce a result contrary to or in conflict
with the foregoing. This Note may not be changed orally, but only by an
agreement in writing signed by the party against whom such agreement is sought
to be enforced.
9. Borrower's Waivers. Borrower, for itself and it successors and
assigns, hereby waives presentment, protest, demand, diligence, notice of
dishonor and of nonpayment, and waives and renounces all rights to the benefits
of any statute of limitations and any moratorium, appraisement, exemption and
homestead now provided or which may hereafter be provided by any federal or
state statute, including, but not limited to, exemptions provided by or allowed
under the Bankruptcy Reform Act of 1984, both as to itself personally and as to
all of its property, whether real or personal, against the enforcement and
collection of the obligations evidenced by this Note and any and all extensions,
renewals and modifications hereof.
10. Applicable Law. This Note shall be governed by and construed under
the laws of the State of California, without giving effect to its conflicts of
law principles. Borrower hereby submits to personal jurisdiction in the State of
California for the enforcement of Borrower's obligations hereunder and waives
any and all personal rights under the law of any other state to object to
jurisdiction within such state for the purposes of any action to enforce such
obligations of Borrower. In the event such action is commenced, Borrower agrees
that service of process may be made and personal jurisdiction may be obtained by
service of a copy of the summons, complaint, and other pleadings required to
commence such action upon Borrower at the address provided in section 11.
11. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed given
when delivered personally or by facsimile transmission, telexed or delivered by
courier service or by other messenger or ten days after being mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided that notices of a change of address
shall be effective only upon receipt thereof):
<PAGE>
If to Borrower, to:
Kristin M. Rogers
Hillcrest Manor Drive
Rolling Hills Estates, CA
If to Americas, to:
Merisel Americas, Inc.
200 Continental Boulevard
El Segundo, CA 90245
Tel: 310-615-1235
Fax: 310-615-6819
Attention: Karen A. Tallman
12. Captions. The captions of the sections of this Note are solely for
convenience and are not intended to be a part of this Note and shall not be
deemed to modify, explain, enlarge or restrict any of the provisions hereof.
13. Waiver of Jury Trial. Borrower hereby knowingly, voluntarily and
intentionally waives the right to a trial by jury in respect of any action based
on or arising out of, under or in connection with this Note, or any course of
conduct, course of dealings, statements (whether oral or written) or actions of
either party, this waiver being a material inducement for Americas to accept
this Note.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date
first above written.
WITNESS/ATTEST KRISTIN M. ROGERS
/s/ /s/Kristin M. Rogers
By:_______________________________ _________________________
Name:_____________________________
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 JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000724941
<NAME> MERISEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.0000
<CASH> 21,079
<SECURITIES> 0
<RECEIVABLES> 242,545
<ALLOWANCES> 17,078
<INVENTORY> 493,167
<CURRENT-ASSETS> 755,584
<PP&E> 165,069
<DEPRECIATION> 75,184
<TOTAL-ASSETS> 870,084
<CURRENT-LIABILITIES> 606,345
<BONDS> 0
0
0
<COMMON> 803
<OTHER-SE> 131,500
<TOTAL-LIABILITY-AND-EQUITY> 870,084
<SALES> 2,521,819
<TOTAL-REVENUES> 2,521,819
<CGS> 2,396,271
<TOTAL-COSTS> 128,401
<OTHER-EXPENSES> 13,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,796
<INCOME-PRETAX> (23,042)
<INCOME-TAX> 451
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,493)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
