SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
200 Continental Boulevard
El Segundo, California 90245-0948
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 615-3080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 28, 2000, the aggregate market value of voting stock held by
non-affiliates of the Registrant based on the last sales price as reported by
the Nasdaq National Market System was $48,350,397 (29,662,820 shares at a
closing price of $1.63).
As of March 28, 2000, the Registrant had 80,309,046 shares of Common Stock
outstanding.
Documents Incorporated By Reference
Portions of the Registrant's definitive Proxy Statement for its 2000 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
PART I
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Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 9
Item 3. Legal Proceedings.............................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............................................ 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 10
Item 6. Selected Financial Data........................................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 7A. Quantitative and Qualitative Market Risk Disclosure............................................ 21
Item 8. Financial Statements and Supplementary Data.................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 43
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 44
Item 11. Executive Compensation......................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 44
Item 13. Certain Relationships and Related Transactions................................................. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 44
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the effect of (i) economic conditions generally, (ii)
industry growth, (iii) competition, (iv) liability and other claims asserted
against the Company, (v) the loss of significant customers or vendors, (vi)
operating margins, (vii) business disruptions, (viii) the ability to attract and
retain qualified personnel, and (ix) other risks detailed in this report. For a
detailed discussion of certain of these factors, see "Business - Certain
Business Factors." These factors are also discussed elsewhere in this report,
including, without limitation, under the captions "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
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PART I
Item 1. Business.
Overview
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. Merisel 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. In
addition, the Company supports the growth of its partners with business
development and educational services, expert technical support, flexible
financing options, certified configuration services, and progressive e-business
solutions. The Company distributes more than 35,000 products from the industry's
leading hardware and software manufacturers. These manufacturers include
American Power Conversion, Apple, Compaq, Hewlett-Packard, IBM/Lotus, Intel,
Microsoft, 3Com, Sun Microsystems, Symantec, Toshiba and ViewSonic. The breadth
of Merisel's product line, together with its extensive distribution network,
enables the Company to provide its customers with a single supply source and
prompt product delivery.
For a discussion of certain business and other factors that may have an adverse
effect on the Company, see "Certain Business Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company was incorporated in 1980 as Softsel Computer Products, Inc. and
changed its name to Merisel, Inc. in 1990 in connection with the acquisition of
Microamerica, Inc. ("Microamerica"). In the years following the Microamerica
acquisition, the Company's revenues increased rapidly through both internal
growth and acquisition. This increase reflected the substantial growth in both
domestic and international sales as the worldwide market for computer products
expanded and manufacturers increasingly turned to wholesale distributors for
product distribution. From 1996 through the first quarter of 1997, the Company
engaged in the process of divesting of its operations outside of the United
States and Canada and its non-distribution operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview." As a result, the Company's operations are now focused exclusively in
the United States and Canada.
From March 1997 through late 1999 the Company, through its main operating
subsidiary Merisel Americas, Inc. ("Merisel Americas") and its subsidiaries,
operated three distinct business units: United States distribution, Canadian
distribution and the Merisel Open Computing Alliance(R) (MOCA(TM)). At the end
of 1999, Merisel announced plans to restructure and combine its U.S. and
Canadian distribution businesses. The Company accomplished this reorganization
in early 2000 and began operating two distinct North American business units:
North American distribution and MOCA. Merisel's North American distribution
business offers a full line of products and services to a broad range of
reseller customers, including value-added resellers ("VARs"), commercial
resellers, Internet resellers and retailers. MOCA provides enterprise-class
solutions for Sun Microsystems servers and the Solaris operating system to Sun
Microsystems-authorized resellers and consultants. Effective April 3, 2000, the
operations of MOCA will be conducted by Merisel Open Computing Alliance, Inc. as
a wholly owned subsidiary of Merisel, Inc.
The Company's sales were approximately $5.2 billion for 1999. Of these sales,
81.6% were generated by North American Distribution, and 18.4% were generated by
MOCA. On a geographical basis, 81.7% of these sales were generated in the United
States and 18.3% were generated in Canada. See "Notes to Consolidated Financial
Statements - Note 13 - Segment Information."
The Industry
The primary participants in the computer products distribution industry are
manufacturers, wholesale distributors and resellers. The supply chain was
traditionally based on a model through which manufacturers would sell directly
to wholesalers, resellers and end users; wholesale distributors would sell to
resellers; and resellers would sell to other resellers and directly to end
users. As the industry continues to mature, the roles of channel players are
becoming less clearly defined. Generally, full-line wholesale distributors, like
Merisel, purchase a wide range of products in bulk directly from manufacturers
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and then ship products in smaller quantities to many different types of
resellers. Types of resellers include corporate resellers, value-added resellers
or "VARs," system integrators, original equipment manufacturers or "OEMs,"
direct marketers, independent dealers, mass merchants and computer chain stores,
and resellers conducting business via the Internet ("E-tailers"). In addition,
resellers are often defined and distinguished by the types of value-added
services they provide and by the end-user markets they serve, such as large
corporate accounts, small to medium-sized businesses, and home users.
Resellers rely on wholesale distributors like Merisel for their broad product
offerings, product availability, flexible financing alternatives, technical
support, and prompt and efficient delivery. In addition, as resellers intensify
their focus on sales and customer service, they are increasingly relying on
distributors for "back-office" support services, such as product procurement,
configuration, fulfillment, logistics and end-user financing. Manufacturers
benefit from using wholesale distribution as an alternative to direct sales to
resellers by not having to maintain large sales forces, warehouse facilities and
distribution networks. Manufacturers also rely on wholesale distributors to
provide marketing and support services as well as credit for reseller customers.
The computer products distribution industry continues to experience double-digit
growth throughout North America. Recent trends in wholesale distribution include
custom configuration of products by distributors, various supply chain
management strategies to eliminate time and cost, and accelerated development of
electronic commerce and information systems. Additional industry dynamics
include the rapid emergence of Internet and other "virtual" businesses that
operate with minimal infrastructure, changing terms and conditions from major
systems manufacturers, aggressive pricing practices and continued industry
consolidation.
In order to compete more effectively and lower their costs, major computer
systems manufacturers that rely on the two-tier distribution model have begun to
take steps to reduce their own inventories and the inventories of their
distributors and resellers. One such strategy is "co-location," which involves
the distributor occupying space in the manufacturer's facility, and taking
possession of and shipping the manufacturer's product. Configuration services
may also be performed at the co-location facilities. Electronic business, or
eBusiness, refers to the use of electronic systems and applications to exchange
information and transact business. These systems and applications include
electronic data interchange, or "EDI," and Internet-based order-entry and
information systems. Electronic business can simplify account set-up, ordering,
shipping and support, and thereby facilitate sales while decreasing both selling
and purchasing costs. Electronic business continues to increase in significance
in the computer products distribution industry.
Business Strategy
Merisel is a full-line wholesale distributor offering leading products and
services to resellers at competitive prices. The Company provides dedicated
sales support and customized programs and services to targeted customer groups.
Merisel believes that a high level of customer satisfaction is important to
achieve and maintain success in the very competitive computer products
distribution industry. The Company measures customer satisfaction by such
standards as accuracy and efficiency in the delivery of products, services and
information. Merisel strives on an ongoing basis to improve its operational
processes and achieve optimum levels of customer satisfaction.
Leading Products and Services. The Company's objective is to offer a broad range
of leading brands of systems, peripherals, networking products and software. By
stocking a broad mix of products, the Company meets the needs of resellers who
prefer to deal with a single source for their product requirements. The Company
continually evaluates new products, the demand for current products, and its
overall product mix, and seeks to develop distribution relationships with
suppliers of products that enhance the Company's product offering. The Company
believes that the size of its reseller customer base, combined with the breadth
and quality of its marketing support programs, gives Merisel a competitive
advantage over smaller, regional distributors in developing and maintaining
supplier relationships, although the Company's larger competitors may have
advantages over the Company due to their size.
Customer Groups. Merisel serves a variety of reseller channels, which have
diverse product, financing and support requirements. Merisel was among the first
major wholesale distributors in the industry to offer its various customer
groups a customer-segmented sales force as well as a customized product
offering, financing programs, and
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marketing and technical support programs, all of which are tailored to address
the differing needs of these customer groups. The Company intends to continue
focusing on the profitability of the markets it serves in order to identify
customer opportunities and develop sales and marketing programs that serve these
groups most effectively.
2000 Initiatives. To capitalize on its strengths and differentiate Merisel from
its competitors in 2000, the Company is focused on key initiatives aimed at
generating new ways to support its customers, increase sales and gross margins,
and enhance stockholder returns. The Company is focused on expanding its reach
to specific customer groups that offer significant revenue and margin
opportunities, such as VARs, Internet and other "virtual" businesses, and
high-end resellers that offer enterprise-computing solutions. Merisel is
leveraging its North American strategy to increase operating efficiencies while
uniquely providing seamless, cross-border service to its customers. In addition,
the Company is working with its manufacturer partners to improve efficiencies
and eliminate costs within the computer products supply chain. Lastly, because
Merisel views electronic business as a key competitive area, the Company is
leveraging its state-of-the-art SAP(TM) R/3(R) operating system to accelerate
development of its eBusiness initiatives.
Products and Suppliers
Merisel has established and developed long-term business relationships with many
of the leading manufacturers in the computer products industry. The Company's
suppliers number approximately 500 and include Adobe Systems, American Power
Conversion, Apple, Compaq, Computer Associates, Corel, Epson America,
Hewlett-Packard, IBM/Lotus, Intel, Intuit, Iomega, Kingston Technology, Lexmark,
Microsoft, NEC Technologies, Network Associates, Novell, Okidata, Sony, Sun
Microsystems, Symantec, 3Com, Toshiba, ViewSonic and Western Digital. Merisel is
one of only three distributors in North America authorized to sell Sun
Microsystems products.
Merisel enters into written distribution agreements with the manufacturers of
the products it distributes. As is customary in the industry, these agreements
usually provide non-exclusive distribution rights and often contain territorial
restrictions that limit the countries in which Merisel is permitted to
distribute the products. The Company's suppliers generally warrant the products
distributed by the Company and allow the Company to return defective products,
including those that have been returned to the Company by its customers, as well
as products discontinued by the supplier. The agreements generally provide
Merisel with stock-balancing and price-protection provisions that partially
reduce Merisel's risk of loss due to slow-moving inventory, supplier price
reductions, product updates or obsolescence. Stock balancing provisions
typically give the distributor the right to return for credit or exchange for
other products a portion of the inventory items purchased, within a designated
period of time, but are not generally provided by the major PC systems
manufacturers. Under price-protection provisions, suppliers will credit the
distributor for declines in inventory value resulting from the supplier's price
reductions if the distributor complies with certain conditions. In the past two
years, however, certain major PC manufacturers that are among the Company's
largest vendors have reduced the availability of price protection for
distributors by shortening the time periods during which distributors may
receive rebates or credit for decreases in manufacturer prices on unsold
inventory and have changed other terms and conditions. Through buying procedures
and controls to manage inventory purchases, the Company seeks to reduce future
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 the future in preventing a material adverse effect on the Company.
The Company's agreements with its suppliers, which generally have a term of at
least one year, may contain minimum purchase amounts and generally contain
provisions permitting early termination by either party upon written notice.
Current manufacturer programs toward which Merisel is devoting resources include
co-location and configuration. Co-location involves establishing distribution
operations jointly with a systems manufacturer within their facility in order to
take steps, time and costs out of the distribution process. The distributor
takes possession of the manufacturer's product on-site at the manufacturer's
facility and ships it directly to the customer. Since October 1998, Merisel has
operated a co-location operation with IBM in IBM's Raleigh, North Carolina,
facility. Configuration involves the assembly of computer products from multiple
vendors into a single unit or system that conforms to the specific needs of an
individual end user. While at one time configuration was a very minor aspect of
a wholesale distributor's business, it has become a major initiative as
manufacturers outsource this segment of production to wholesale distributors.
Through 1996, Merisel outsourced its configuration business to two third-party
providers. In 1997, the Company took these responsibilities in-house and
currently performs system configuration in its Hayward, California, Toronto,
Canada, and Raleigh, North Carolina facilities. For each of these
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facilities, Merisel has obtained ISO 9002 certification, which is required by
certain systems manufacturers. The Company will continue to evaluate market
trends and adapt its strategy to meet the evolving needs of its business
partners.
Although Merisel distributes more than 35,000 products and accessories supplied
by approximately 500 manufacturers, 75% of net sales in 1999 (as compared to 73%
in 1998 and 69% in 1997) were derived from products supplied by Merisel's 10
largest vendors. The sale of products manufactured by Sun Microsystems, Compaq,
Hewlett-Packard and Microsoft accounted for approximately 18%, 15%, 14%, and
10%, respectively, of net sales in 1999 (as compared to 13%, 12%, 13% and 13%,
respectively, in 1998, and 12%, 10%, 12% and 15%, respectively, in 1997).
Because reseller customers often prefer to deal with a single source for many of
their product needs, the loss of the ability to distribute a particularly
popular product could result in losses of sales unrelated to the product. The
loss of a direct relationship between the Company and any of its key suppliers
could have an adverse impact on the Company's business and financial results.
Merisel provides its manufacturers with access to one of the largest bases of
computer resellers in North America, as well as the means to reduce inventory,
credit, marketing and overhead costs typically associated with maintaining
direct reseller relationships. Through its product-marketing group, the Company
develops and implements promotional programs for specific manufacturers to
increase customer purchasing depth and breadth. Promotional programs include
bundled offers, growth-goal incentives, and reseller training events as well as
channel communication vehicles such as targeted direct mail, fax and
advertising.
Customers and Customer Services
In 1999, Merisel sold products and services to approximately 30,000 computer
resellers throughout North America. Merisel's smaller customers often do not
have the resources to establish a large number of direct purchasing
relationships or stock significant product inventories, nor can they meet
manufacturers' minimum purchase requirements or obtain acceptable credit.
Consequently, they tend to purchase a high percentage of their products from
distributors such as Merisel, which can meet their inventory needs quickly and
efficiently. Larger resellers often establish direct relationships with
manufacturers for their more popular products but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products that may
not be available on a timely basis from manufacturers. The Company has limited
contracts with some of its reseller customers, which contracts generally have a
short term or are terminable at will and have no minimum purchase requirements.
No single customer accounted for more than 5% of Merisel's net sales in 1999,
1998 or 1997.
Single-Source Provider. Merisel offers computer resellers a single source for
more than 35,000 competitively priced hardware and software products. By
purchasing from Merisel, resellers need only comply with a single set of
ordering, billing and product-return procedures. Resellers may also benefit from
attractive volume pricing and financing programs. In addition, within specified
time limits and/or specified volume limits, resellers are generally allowed to
return products for credit to be applied against future purchases from Merisel.
Customers and Sales Organizations. The sales organization supporting the
Company's North American distribution business is structured to serve the
varying requirements of the different customer groups in the industry. The
Company's North American distribution business is organized into three primary
sales divisions to serve VARs, national/major accounts, and retail/Internet
customers. The VAR division offers specialized services and technical products
to value-added resellers, system integrators and OEMs who offer service, support
and consulting to clients in addition to selling computer products. Other key
elements of Merisel's VAR strategy include its Value Added Services team,
providing a range of programs and services for resellers' use or sales, and its
Electronic and Technology Support Services (eTSS) team, providing technical
support. The national/major accounts division offers direct-fulfillment
services, EDI transaction support, and dedicated field and inside sales support
to large-volume national accounts, while the retail/Internet division primarily
services mass merchants, computer chain stores and Internet resellers. Because
of the specialized nature of servicing the needs of customers who sell products
directly to the federal, state and local governments and to educational
institutions, the Company has also created a dedicated Government and Education
sales team.
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The Company's sales force is comprised of dedicated field and inside sales
representatives. Merisel's account managers in the field determine resellers'
business needs and execute specific account plans to mutually grow business. The
Company's inside sales and technical specialists are trained for efficiency and
responsiveness. This efficiency is augmented by Merisel's screen-synchronization
technology, which automatically displays a customer profile on the sales
representative's computer screen when a customer calls Merisel. The Company's
systems allow its sales representatives to enter customer orders, obtain
descriptive information regarding products, check inventory status, determine
customer credit availability, and obtain special pricing and promotion
information. In addition, customers may access SELline II, Merisel's electronic
business and information service, which offers ordering options and access to
the above information 24 hours a day, seven days a week.
Customers of MOCA are authorized by Sun Microsystems to purchase from only one
of its three North American distributors, and may generally change the
distributor with whom they deal only once per year. MOCA provides customer
support through dedicated sales account executives, business development
managers, technical support systems engineers, financial services
representatives, and marketing and reseller services teams. This unique coverage
model has created an unparalleled business proposition for resellers selling
enterprise solutions. In addition, MOCA is focused on providing innovative new
service solutions to serve its business partners in an evolving industry. In
March 2000, the Company announced an exclusive outsourcing and
product-fulfillment agreement between MOCA and Stonebridge Technologies. The
two-year agreement is the first of its kind in the Sun channel and involves the
outsourcing of a number of services to MOCA, including product procurement,
configuration, fulfillment, logistics and financial services. MOCA will pursue
similar customer opportunities in the future.
Prompt Delivery. In the United States and Canada, orders received by 5:00 p.m.
local time are typically shipped the same day, provided the required inventory
is in stock. As part of a continuing effort to improve accuracy, Merisel's
Information and Logistics Efficiency System ("MILES") was first installed in the
Company's Atlanta distribution center in early 1994. By 1996, installation of
this custom, computerized warehouse-management system was completed in all nine
of Merisel's North American distribution centers. Merisel has also established
MILES environments as part of its co-location strategy in IBM's Raleigh, North
Carolina, facility. The successful implementation of MILES has resulted in high
rates of inventory and shipping accuracy. The Company believes that its shipping
accuracy rates are the highest in the industry at 99.993%.
Merisel typically delivers products from its regional distribution centers via
United Parcel Service, Federal Express, Purolator Courier and other common
carriers in North America. Most customers receive orders within one or two
working days of shipment. Merisel also provides customer-paid overnight air
handling upon request. These services allow resellers to minimize inventory
investment and serve their customers responsively. To expedite delivery and
further minimize reseller inventories, Merisel also provides fulfillment
services, through which the Company ships orders directly to resellers'
customers.
Financing Programs. Merisel's credit policy for qualified resellers eliminates
the need for them to establish multiple credit relationships with a large number
of manufacturers. In addition, the Company arranges floor-plan and lease
financing through a number of credit institutions and allows credit card
purchases by qualified customers. Merisel's Direct Ship program provides for
direct shipment to and billing of the reseller's customer. To allow certain
resellers to purchase larger orders in the United States, the Company can also
arrange alternative financing through its escrow programs as well as selected
bid-financing arrangements.
Information Services. Merisel provides its reseller customers with detailed
information on products, pricing, promotions and developments in the industry.
Merisel's corporate Web site and SELline II offer technical product information
on thousands of products and links to more than 350 of the industry's leading
manufacturers. In addition, resellers can obtain current information on programs
and services, daily product promotions, and strategic Merisel announcements.
They can also download return-authorization and system-return forms, and track
product shipments with links to UPS and Federal Express. Merisel's Web site also
offers secure, 24-hour access to SELline II, Merisel's electronic business and
information service, so resellers can place their product orders through the
site. SELline II provides resellers with real-time access to pricing
information, credit information, technical descriptions, product availability
and promotional information. Currently SELline II has approximately 40,000
enrollees in the
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U.S. and Canada. Merisel also utilizes EDI systems to allow large-volume
customers to communicate with the Company's computer system directly for order
processing and account data. The Company also offers API business-to-business
connections, which allow resellers and vendors to directly connect their systems
to Merisel's SAP system, enabling supply-chain integration and synchronization.
Training and Technical Support. Through Merisel's Value Added Services,
resellers and their customers can choose from a broad selection of services to
augment their offerings to their end-user customers or directly benefit their
businesses. The Company's Technical Training Group offers technical and software
training in partnership with leading educational institutions throughout North
America. In addition, Services Sales Advocates are available to assist resellers
with services that go beyond those covered under normal warranty provisions for
IBM, 3Com, HP, Compaq and Philips Magnavox products. Merisel's
manufacturer-dedicated product specialists also represent 29 vendors and are
available to assist the Company's sales force in closing sales. Merisel also
offers installation, data-retrieval and help-desk services.
Merisel's VAR Business Builder program, launched in October 1998 across Canada,
rewards VARs for sales growth, and helps them reduce expenses and maximize new
profit opportunities in cutting-edge markets. Through the program, Merisel
resellers earn points that can be redeemed for business tools, marketing
services and promotional items. Participants are also invited to attend Business
Builder seminars at no cost. In 2000, Merisel is augmenting the program by
dedicating resources to determine new vertical-market opportunities and assess
needs in these areas. The information will be used in future seminar topics and
help Merisel sales teams assist resellers with business development.
Merisel provides resellers with direct access to the Company's technical support
engineers through a dedicated hotline, offering specialized pre-sale and
post-sale technical support for product lines sold by Merisel. In addition,
Merisel's technical engineers provide regular product training for Merisel's
sales representatives to help them increase their product knowledge and their
ability to answer resellers' questions.
Operations, Distribution and Systems
Locations. At December 31, 1999, the Company operated nine distribution centers
throughout North America: seven in the United States and two in Canada. The
Company also operates a specialized distribution center as part of its
co-location strategy at IBM's Raleigh, North Carolina, facility.
Systems. Merisel has made significant investments in advanced computer and
warehouse management systems for its North American operations to support sales
growth and improve service levels. All of Merisel's nine North American
distribution centers and its Raleigh, North Carolina, co-location facility
utilize the MILES computerized warehouse management system, which uses infrared
bar coding and advanced computer hardware and software to improve shipping,
receiving and picking accuracy rates. See "Customers and Customer Services --
Prompt Delivery" above.
In 1993, the Company began designing an SAP R/3 enterprise-wide information
system that would integrate all functional areas of the business, including
sales and distribution, inventory management, financial services, and marketing,
in a real-time environment. Merisel converted its Canadian operations from a
mainframe system to the new SAP system in August 1995, and successfully
completed the conversion of its North American operations in April 1999.
Providing a common platform for Merisel's North American distribution and MOCA
businesses, the new system is designed to support business growth by providing
greater transaction functionality, increased flexibility, enhanced reporting
capabilities, and custom-pricing applications.
Since April 1999, system performance, stability and availability have improved
significantly. SAP performs with sub-second, on-line response time and has an
average systems-availability rate of 99.999 percent. Availability for all of
Merisel's core systems has averaged 99.9 percent or above since April 1999. SAP
also enforces a high degree of data integrity, which better supports Merisel's
reporting needs both through SAP and Merisel's data warehouse system.
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In addition, SAP has provided a solid base for application development, allowing
Merisel to expedite the development cycle for functionality improvements in the
system. SAP has enabled new systems capabilities benefiting government resellers
and numerous advancements in Merisel's electronic commerce offering, including
enhancements to SELline II, the Company's electronic business and information
service. Since April 1999, electronic order placement via SELline II has
increased by more than 400 percent, and Web/SELline traffic has increased by 83
percent to 12.7 million "hits" per month. In 1999, over 55 percent of all orders
received by Merisel were processed electronically.
Competition
Competition in the computer products distribution industry is intense.
Competitive factors include price, breadth and availability of products and
services, credit availability and financing options, shipping accuracy, speed of
delivery, availability of technical support and product information, 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 North American
distribution business include large United States-based distributors such as
Ingram Micro, Pinacor and Tech Data, as well as regional distributors and
franchisers. MOCA's competitors are GE Access, which is owned by GE Capital, and
Ingram Micro.
Merisel also competes with manufacturers that sell directly to computer
resellers and end users, sometimes at prices below those charged by Merisel for
similar products, and larger resellers and E-tailers that sell to resellers. 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.
See "Certain Business Factors - Size of Competitors; - Direct Sales by
Manufacturers" below.
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 to existing products; (iii)
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. Due to the factors
noted above, as well as the dynamic qualities of the computer products
distribution industry, the Company's revenues and earnings may be subject to
material volatility, particularly on a quarterly basis, and the results for any
quarterly period may not be indicative of results for a full fiscal year.
Additionally, in the U.S. and Canada, the Company's net sales in the fourth
quarter have been historically higher than in its other three quarters.
Management believes that the pattern of higher fourth-quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday purchases. As a result of this pattern, the Company's working capital
requirements in the fourth quarter have typically been greater than other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year, which is primarily due to buying patterns
of Canadian government agencies. See "Management's Discussion and Analysis
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Employees
As of January 31, 2000, Merisel had approximately 2,400 employees. Merisel
continually seeks to enhance employee morale and strengthen its relations with
employees.
Environmental Compliance
The Company believes that it is in substantial compliance with all environmental
laws applicable to it and its operations.
Certain Business Factors
In addition to the other information in this report, readers are cautioned to
carefully consider the following business factors that may affect the future
operations and performance of the Company.
Decline in Gross Margins. Over the past few years, the computer distribution
industry in general and the Company in particular have experienced a significant
decline in gross margins. Competitive pricing pressures escalated during the
fourth quarter of 1998 and continued in 1999. In addition, the Company's gross
margins have been significantly affected over the last several quarters by a
reduction in manufacturer rebates and changes by manufacturers in terms and
conditions, which have resulted in a shift of costs to distributors. While the
Company has taken actions in recent years intended to improve margin
performance, gross margins have continued to decline primarily due to these
factors. In the fourth quarter of 1999 and the first quarter of 2000, the
Company has addressed the gross margin issue by implementing a series of pricing
actions to adjust for these factors. If the Company's efforts to increase gross
margins are not successful or if an increase in gross margins results in a
significant decline in sales volumes without a corresponding decrease in
operating expenses, the Company may not be able to achieve satisfactory levels
of profitability.
Vendor Terms and Conditions. Like other wholesale distributors, the Company's
business is subject to the risk that the value of its inventory will be affected
adversely by vendor price reductions or by product obsolescence resulting from
technological changes or product updates. It is the policy of most manufacturers
of microcomputer products to protect distributors who purchase directly from
them from the loss in value of inventory due to product obsolescence or the
manufacturer's price reductions. Over the last two years, certain major PC
manufacturers that are among the Company's largest vendors have reduced the
availability of price protection for distributors and changed other terms and
conditions. Through buying procedures and controls to manage inventory
purchases, the Company seeks to reduce potential future adverse impact from
these changes while balancing the need to maintain sufficient levels of
inventory. Notwithstanding these efforts, the Company's results during the past
few quarters have been adversely affected by the reduced availability of price
protection. There is no assurance that such efforts will be successful in the
future in preventing a material adverse effect on the Company. Unforeseen
changes in current price protection policies or other changes in terms and
conditions of any of the Company's major vendors could have a material adverse
effect on the Company.
Dependence on Key Vendors. In 1999, 75% of the Company's net sales were derived
from products supplied by the Company's 10 largest vendors, as compared to 73%
in 1998 and 69% in 1997. The Company's large vendors generally provide incentive
funds for marketing that are based on sales levels of their products. These
incentive funds contribute substantially to the Company's profitability. As is
customary in the industry, the Company's agreements with these vendors provide
non-exclusive distribution rights and may generally be terminated by the vendor
on short notice. The termination of the Company's distribution agreement with
one of its key vendors, or a material change in the terms of the distribution
agreement, including a decrease in incentive funds, could have a material
adverse effect on the Company. In the past two years, many vendors have reduced
the incentive funds they pay to distributors or increased the sales volumes
required to receive various levels of incentive funds, which has negatively
affected the Company's profitability. Over the last year, several large
manufacturers have elected to reduce their number of direct distribution
relationships, and the Company expects that this trend is likely to continue.
Although the Company has not been terminated as a distributor for these
manufacturers, future decisions by manufacturers to reduce their number of
distribution partners could result in the Company's loss of vendors, which could
have a material adverse effect on the Company.
Size of Competitors. The Company's competitors include distributors that are
substantially larger than the Company, partially as a result of the trend toward
consolidation in the industry. Because of their size, these firms can achieve
greater economies of scale than the Company and may be able to form stronger
relationships with manufacturers. The Company does not believe that it can
achieve operating expense levels as a percentage of sales as low as those that
can be achieved by its much larger competitors. A continuation of industry
consolidation not involving the Company may exacerbate this disadvantage. See
"Competition" above.
Direct Sales by Manufacturers. Several computer product manufacturers have
expanded their direct selling efforts to resellers and end users. Although the
Company does not believe that its business has been significantly affected by
these developments, continued efforts by manufacturers to change their
businesses to compete with the direct
<PAGE>
sales model may adversely the Company. The Company believes that the direct
sales business will grow faster than sales through the distribution channel and
that consolidation of resellers, who are the customers of distributors, may
contribute to such differential. An increase in sales of computer products
outside the traditional distribution channel may have a material adverse effect
on the Company.
Item 2. Properties.
At December 31, 1999, the Company maintained distribution centers in seven
locations throughout the United States and in two locations in Canada.
Additionally, the Company maintains United States administrative and sales
offices in El Segundo, California; Marlborough, Massachusetts; and Cary, North
Carolina, as well as Canadian administrative and sales offices in Toronto,
Ontario; Montreal, Quebec; and Vancouver, British Columbia.
The Company's headquarters are located in El Segundo, California, where the
Company owns an 112,500 square-foot facility, leases another 50,700 square-foot
facility and leases 23,000 square feet in a third building. In addition, the
Company owns a 61,000 square-foot facility and 29 acres of undeveloped land in
Cary, North Carolina. All of the Company's other facilities are leased. The
Company believes that its facilities provide sufficient space for its present
needs, and that additional suitable space will be available on reasonable terms,
if needed.
Item 3. Legal Proceedings.
On March 16, 1998, the Company received a summons and complaint, filed in the
Superior Court of California, County of Santa Clara, in a matter captioned
Official Unsecured Creditors Committee of Media Vision Technology, Inc. v.
Merisel, Inc. The plaintiff alleges that certain executive officers of Media
Vision Technology, Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision through, inter alia, the improper recognition and
reporting of sales, revenue and income and the failure to properly recognize and
report product returns during 1993 and 1994, thereby overstating the financial
condition of Media Vision as reflected in its financial statements for 1993. The
plaintiff further alleges that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision executives. The plaintiff
seeks to recover compensatory damages, including interest thereon, exemplary and
punitive damages, and costs including attorneys' fees. On May 6, 1998, the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive damages prayer. In response to the motions,
the plaintiff filed a first amended complaint on August 31, 1998, adding a claim
for unfair business practices under California Business & Professions Code
ss.17200 and additional allegations. The plaintiff's filing of an amended
complaint mooted the Company's original motions. The Company filed a motion to
dismiss the amended complaint on various grounds and a motion to strike the
punitive damages prayer. In its opposition to the Company's motion to strike,
the plaintiff withdrew its prayer for punitive damages. On January 15, 1999, the
Court issued an Order staying prosecution of the action under the doctrine of
exclusive concurrent federal jurisdiction. Plaintiff filed a motion to seek
relief from the stay and in October 1999 such motion was granted. The Company
renewed its motion to dismiss and on January 28, 2000 the judge entered an order
granting the Company's motion to dismiss, and granting the plaintiff leave to
amend its complaint with respect only to the unfair business practices claim.
The Company has defended itself vigorously against this claim and will continue
to do so.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock is traded on the National Market tier of the Nasdaq
Stock Market under the symbol MSEL. The following table sets forth the quarterly
high and low sale prices for the Common Stock as reported by the National
Market.
High Low
Fiscal Year 1998
First quarter.... 4 1/2 2 3/4
Second quarter... 3 1/2 2 3/4
Third quarter.... 3 1/2 2 1/8
Fourth quarter... 3 1/4 2
Fiscal Year 1999
First quarter.... 2 7/8 1 1/4
Second quarter... 3 3/16 1 5/32
Third quarter.... 2 7/16 1 1/2
Fourth quarter... 1 25/32 1 5/32
As of March 28, 2000, there were 958 record holders of the Company's Common
Stock.
Merisel has never declared or paid any dividends to stockholders. The indenture
relating to the Company's 12-1/2% Senior Notes due 2004 currently prohibits the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
Year Ended December 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
------- ----- ----- ----- -----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:(1 & 2)
Net sales..................................... $ 5,955,765 $ 5,521,475 $ 4,047,621 $ 4,550,977 $5,188,679
Cost of sales................................. 5,633,278 5,233,570 3,807,888 4,298,553 4,947,626
----------- ----------- ----------- ---------- ----------
Gross profit.................................. 322,487 287,905 239,733 252,424 241,053
Selling, general & administrative expenses.... 314,523 292,023 188,404 195,468 235,471
Litigation related charge..................... 12,000
Restructuring charge.......................... 9,333 3,200
Impairment losses............................. 51,383 42,033 14,100 3,800
----------- ----------- ----------- ---------- ----------
Operating (loss) income....................... (52,752) (46,151) 37,229 56,956 (13,418)
Interest expense.............................. 39,053 39,080 28,608 17,125 17,849
Loss on sale of European, Mexican, and
Latin American operations..................... 33,455
Debt Restructuring Costs...................... 5,230
Other expense, net............................ 13,885 20,150 14,992 20,904 28,962
----------- ----------- ----------- ---------- ----------
(Loss) income before income taxes............. (105,690) (138,836) (11,601) 18,927 (60,229)
(Benefit) provision for income taxes.......... (21,779) 1,539 496 417 939
----------- ----------- ----------- ---------- ----------
Net (loss) income Before Extraordinary Item... (83,911) (140,375) (12,097) 18,510 (61,168)
Extraordinary Loss on Extinguishment of
Debt....................................... 3,744
----------- ----------- ----------- ---------- ----------
Net (loss) income............................. $(83,911) $(140,375) $(15,841) $18,510 $(61,168)
============ =========== =========== ========== ==========
Per Share Data:
Net (loss) income per diluted share........... $ (2.82) $ (4.68) $ (.48) $ .23 $ (.76)
Weighted average number of diluted shares. 29,806 30,001 33,216 80,485 80,279
Balance Sheet Data:
Working capital............................... $ 280,864 $ 190,544 $ 197,154 $ 181,742 $ 116,616
Total assets.................................. 1,230,334 731,039 747,111 945,320 805,795
Long-term and subordinated debt............... 356,271 294,763 133,429 131,856 130,264
Total debt.................................... 382,395 294,950 133,429 135,657 133,170
Stockholders' equity.......................... 154,466 14,997 137,508 154,253 95,173
</TABLE>
(1) Merisel's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. For clarity of presentation throughout this Annual
Report on Form 10-K, Merisel has described fiscal years presented as if the
year ended on December 31. Except for 1997, all fiscal years presented were
52 weeks in duration. The selected financial data set forth above includes
those balances and activities related to the Company's Australian business
until its disposal effective January 1, 1996 and the Company's European,
Mexican and Latin American businesses until their disposal on October 4,
1996, effective as of September 27, 1996. It also includes results of
Merisel FAB (as defined below) from the date such business was acquired on
January 31, 1994 through its disposal as of March 28, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) The Company has reclassified certain items in its 1995, 1996, 1997 and 1998
financial statements to conform to the 1999 presentation. These
reclassifications principally consist of costs associated with the
Company's flooring arrangements. The impact to the 1995, 1996, 1997 and
1998 financial statements is to reduce general and administrative expenses
by $2,672,000, $2,998,000, $3,002,000 and $4,461,000, respectively, to
decrease net sales by $1,202,000, $1,349,000, $1,351,000 and $2,007,000,
respectively, and to increase interest expense by $1,470,000, $1,649,000,
$1,651,000, and $2,454,000, respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company was founded in 1980 as Softsel Computer Products, Inc. and changed
its name to Merisel, Inc. in 1990 in connection with the acquisition of
Microamerica, Inc. ("Microamerica"). The Company has experienced rapid growth
through domestic and international acquisitions, and internal growth, reaching
nearly $6.0 billion in revenues in 1995. In 1996, the Company divested of its
operations outside of North America. Today Merisel operates in the United States
and Canada and is focused exclusively on the North American market through its
North American distribution and MOCA business units.
Asset Dispositions
In two separate transactions in 1996, Merisel completed the sale of its wholly
owned Australian subsidiary, Merisel Pty Ltd., and substantially all of its
European, Mexican and Latin American businesses.
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB"). The
sales price, computed based upon the February 21, 1997 balance sheet of Merisel
FAB, was $31,992,000.
Debt Restructuring and Equity Investment
On September 19, 1997, the Company and its main operating subsidiary, Merisel
Americas Inc. ("Merisel Americas"), entered into a definitive Stock and Note
Purchase Agreement with Phoenix Acquisition Company II, L.L.C. ("Phoenix"), a
Delaware limited liability company whose sole member is Stonington Capital
Appreciation 1994 Fund, L.P. Pursuant to the Stock and Note Purchase Agreement,
on September 19, 1997, Phoenix acquired a Convertible Note for $137,100,000 (the
"Convertible Note") and 4,901,316 shares of Common Stock (the "Initial Shares")
for $14,900,000. The Convertible Note was an unsecured obligation of the Company
and Merisel Americas and provided that, upon the satisfaction of certain
conditions, including obtaining stockholder approval, the Convertible Note would
automatically convert into 45,098,684 shares of Common Stock (the "Conversion
Shares"). The Conversion Shares and Initial Shares would together represent
50,000,000 shares of Common Stock at a purchase price of $3.04 per share, and
approximately 62.4% of the Common Stock outstanding immediately following the
issuance of the Conversion Shares. The Company used the proceeds from the
issuance of the Initial Shares and the Convertible Note to repay indebtedness of
its operating subsidiaries (the "Operating Company Debt") consisting of
$80,697,000 principal amount outstanding under a revolving credit agreement,
$53,798,000 of its 11.5% Senior Notes, and $13,200,000 principal amount of
subordinated notes. On October 10, 1997, Phoenix exercised its option to
convert, without any additional payment, $3,296,286 principal amount of the
Convertible Note into 1,084,305 shares of Common Stock, representing the maximum
amount that could be converted prior to obtaining stockholder approval. On
December 19, 1997, following receipt of stockholder approval, the remaining
portion of the Convertible Note was converted into Common Stock. As of March 30,
2000, Phoenix owned 50,000,000 shares of Common Stock, or approximately 62.3% of
the outstanding Common Stock. See "Notes to Consolidated Financial Statements -
Note 9 - Income Taxes" regarding the impact of the restructuring on the
Company's available net operating loss carryforwards.
Results of Operations
During most of 1997, 1998 and 1999, the Company operated three distinct business
units: United States distribution, Canadian distribution and the Merisel Open
Computing Alliance ("MOCA"). Although the Company continued to experience
positive sales growth in all of its business units during 1999, pricing
pressure, changing vendor terms and conditions, and industry turbulence caused a
continued erosion in gross margins. While the Company believes it has slowed
this erosion with corrective actions taken throughout the year, the erosion has
exceeded the Company's ability to reduce operating expenses as a percentage of
sales, and has negatively impacted operating income as a result. In December
1999, the Company announced plans to restructure and combine its U.S. and
Canadian distribution business units to form one North American distribution
business. As a result, the Company now operates North American distribution and
MOCA as its only two business units.
<PAGE>
Comparison of Fiscal Years Ended December 31, 1999 and December 31, 1998
The Company's net sales increased 14.0% from $4,550,977,000 in 1998 to
$5,188,679,000 for the year ended December 31, 1999. This increase resulted from
sales growth of 56.2% and 7.5% for the MOCA and North American distribution
businesses, respectively. MOCA growth was strong due to increased sales to
existing customers and, to a lesser extent, to the acquisition by MOCA of
several new Sun Microsystems reseller accounts during the latter part of 1998.
MOCA sales growth on a year-over-year basis ranged from 68% to 75% in the first
three quarters of 1999 and was 19.8% for the fourth quarter. The slower growth
in the fourth quarter relates to a general slowdown in the industry related in
part to Year 2000 issues and also reflects a reduced impact from new accounts.
The Company expects MOCA sales growth for 2000 to decrease overall from 1999
growth levels. North American distribution sales growth resulted primarily from
growth in the retail customer and national/major customer groups.
On a consolidated basis, hardware and accessories accounted for 80% of net sales
and software accounted for 20% of net sales for the year ended December 31, 1999
as compared to 78% and 22%, respectively, for such categories for the year ended
December 31, 1998.
Gross profit decreased 4.5% from $252,424,000 in 1998 to $241,053,000 in 1999.
Gross profit as a percentage of sales, or gross margin, decreased from 5.55% in
1998 to 4.65% in 1999. The decline in margins was primarily related to the U.S.
portion of the North American distribution business, which was significantly
negatively affected by (i) changing vendor terms and conditions, including a
reduction in vendor rebates and an increase in price protection exposure, (ii)
competitive pricing pressures, and (iii) sales of comparatively lower margin
systems product increasing at a greater rate than higher margin product as a
result of a significant increase in sales of Compaq product following the launch
of Compaq's Distributor Alliance Program under which the Company is one of four
distributors and resellers able to source product directly from Compaq. Gross
profit for 1999 was further negatively affected by an $8.1 million charge taken
in the fourth quarter of 1999 reflecting higher than historical
inventory-related provisions. That charge is in addition to the obsolescence
reserves that are accrued in the normal course of business throughout the year,
and was taken to address the increased exposure related to inventory on hand at
December 31, 1999 due in part to the factors noted above.
Excluding this charge, gross margins would have been 4.80%.
Over the past year, the Company has taken various actions to address the issue
of declining margins, including accelerating customer recruitment efforts to
expand the company's account base, focusing attention on more profitable product
lines, enhancing customer support by assigning dedicated sales teams according
to customer specific business models and geographic locations, and increasing
the extent to which sales compensation is tied to margin goal achievement.
During the first quarter of 2000, the Company took more direct measures to
improve margins by implementing price increases across a broad range of product
offerings. There is no assurance that the Company's efforts to increase margins
will be successful or that an increase in margins will not result in a
significant decline in sales volume, offsetting any potential improvement to net
income. While the Company has seen some positive margin trends through the last
half of the first quarter of 2000, for the first 12 weeks of fiscal year 2000,
North American distribution sales were approximately 13% below sales levels for
the same period in fiscal year 1999. MOCA sales were up 28% over the same prior
year period, resulting in consolidated sales being down 7% over the same period.
The Company believes that, during the first half of the quarter, this decline
resulted primarily from the focus on restructuring activities and that sales
have been negatively impacted by price increases during the second half of the
quarter.
Selling, general and administrative expenses increased by $40,003,000 or 20.5%
from $195,468,000 for the year ended December 31, 1998 to $235,471,000 for the
year ended December 31, 1999. Selling, general and administrative expenses as a
percentage of sales increased from 4.3% of sales in 1998 to 4.5% for the same
period in 1999. Contributing to the increase for the year were depreciation
expenses related to the SAP R/3 operating system and other strategic
initiatives, which were part of an overall increase in depreciation expense of
$11,368,000, or an increase from $10,201,000 in 1998 to $21,569,000 for 1999.
Additionally, the Company incurred $1,821,000 in post "go-live" costs for
expenses associated with the SAP implementation; and payroll and payroll-related
costs of
<PAGE>
employees directly associated with the SAP project, which had been capitalized
in periods prior to implementation. Costs associated with Year 2000 compliance
of approximately $2,179,000 were also incurred during 1999. The remaining
increase in selling, general and administrative expenses relates primarily to
increased variable costs in support of sales growth.
Results for the year 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 due 2004 (the
"12.5% Notes"), offset in part by the $9,000,000 insurance recovery recorded by
the Company in the second quarter.
In connection with the Company's announced plan to combine its U.S. and Canadian
distribution businesses, the Company evaluated the fixed asset investments that
were made to support the former business units. As a result, in the fourth
quarter of 1999 the Company recorded a $3,800,000 non-cash asset impairment
charge related to redundant assets resulting from the combination.
In the fourth quarter of 1999, the Company announced that, in connection with
the combination of its U.S. and Canadian distribution businesses, it would
reduce its workforce by approximately 400 full-time positions. The planned
reduction, which was effective in January 2000, was accomplished through the
elimination of duplicative positions in marketing, product and inventory
management, and sales under the newly formed North American distribution
business unit, and by the realignment of finance and administrative functions.
This workforce reduction included the elimination of approximately 85 full-time
positions through the sale of the Company's Marlborough call center during the
first quarter of 2000 and the anticipated reduction of another 125 positions
through not filling attrition-related vacancies. As a result, the Company has
recorded a restructuring charge of $3,200,000 in the fourth quarter of 1999 that
primarily consists of termination benefits including severance pay and
outplacement services that are being provided to the approximately 190 employees
that were involuntarily affected by the reduction in workforce. The Company
believes that these actions have enabled the Company to simplify its business
and reduce projected operating expenses by approximately $25,000,000 on an
annualized basis.
As a result of the above items, the Company had an operating loss of $13,418,000
for the year ended December 31, 1999 compared to operating income of $56,956,000
for the year ended December 31, 1998. Excluding the restructuring-related
charge, the asset impairment charge and the litigation-related charge, net of
related recovery, taken in 1999, the Company would have had operating income of
$5,582,000 in 1999.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company increased 4.2% from $17,125,000 for the year
ended December 31, 1998 to $17,849,000 for the year ended December 31, 1999.
This increase was primarily attributable to increases in average borrowings
outstanding under the Company's revolving line of credit. The Company uses the
revolver to fund short-term working capital needs and to finance strategic
inventory purchases. At the end of 1998 and 1999, there were no outstanding
borrowings under this facility.
Other expense for the Company increased from $20,904,000 for the year ended
December 31, 1998 to $28,962,000 for the year ended December 31, 1999. The
increase is attributable to a $9,217,000 increase in asset securitization fees
offset by a decrease in foreign currency loss of $1,621,000. The increased
securitization fees are primarily due to increased sales of accounts receivable
and an increase in the underlying rate associated with the fees that the Company
pays on the sale of receivables. The average proceeds resulting from the sale of
accounts receivable under the Company's securitization facilities increased from
$282,336,000 for the year ended December 31, 1998 to $414,902,000 for 1999.
The income tax provision increased from $417,000 for the year ended December 31,
1998 to $939,000 for 1999. In both years the income tax provision provides for
only the minimum statutory tax requirements in the various states and provinces
in which the Company conducts business, as the Company had sufficient net
operating losses from prior years to offset U.S. federal income taxes. The
Company has not recognized a tax provision benefit in either year, having fully
utilized its ability to carryback those losses and obtain refunds of taxes paid
in prior years. The provision for 1999 also includes approximately $400,000 in
reserves against tax exposures related to outstanding tax issues under review by
tax agencies. See "Notes to Consolidated Financial Statements - Note 9 Income
Taxes".
<PAGE>
Consolidated Net Income
The Company reported net income of $18,510,000, or $.23 per diluted share, in
1998 compared to a net loss of $61,168,000, or $0.76 per share, in 1999.
Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997
Results for the year ended December 31, 1997 include the results of operations
of Merisel FAB until the disposition of the Merisel FAB business as of March 28,
1997 as described above. The Company's consolidated results of operations for
1997 include results of operations of Merisel FAB consisting of sales of
$202,177,000, gross profit of $7,678,000, and selling, general and
administrative expenses of $6,200,000. Excluding the results of Merisel FAB, the
Company's 1997 results would have included sales of $3,845,444,000, gross profit
of $232,055,000, and selling, general and administrative expenses of
$182,204,000. The following discussion refers to the Company's 1997 results of
operations excluding the results of Merisel FAB, except for the discussion below
under "Interest Expense; Other Expense; Income Tax Provision" and "Consolidated
Net Income."
The Company's net sales increased 18.3% from $3,845,444,000 in 1997 to
$4,550,977,000 for the year ended December 31, 1998. This increase resulted from
increased sales of 12.2% in Canada and 19.9% in the United States. For the year,
while MOCA and retail sales continued to show substantial growth at 36% and 55%,
respectively, neither VAR nor commercial performance was as robust, resulting in
U.S. growth slowing considerably, particularly in the fourth quarter. During
1998, VAR sales grew 9% and commercial sales increased 19%. The growth rate in
Canada in terms of Canadian dollars was 20.3%, but the decline in the value of
the Canadian dollar hampered the growth rate in terms of U.S. dollars,
particularly in the second half of the year.
Hardware and accessories accounted for 78% of net sales and software accounted
for 22% of net sales for the year ended December 31, 1998 as compared to 77% and
23%, respectively, for such categories for the year ended December 31, 1997.
Gross profit increased 8.8% from $232,055,000 in 1997 to $252,424,000 in 1998.
Gross profit as a percentage of sales, or gross margin, decreased from 6.0% in
1997 to 5.5% in 1998. Gross margins in the United States and Canada were 5.43%
and 6.07%, respectively, for 1998, compared to 5.97% and 6.31%, respectively,
for 1997. The decrease in margins as a percentage of sales has resulted in large
part from intense competitive pricing pressures, as well as changes in vendor
terms and conditions. The margin decrease is also partially the result of
changes in customer concentration and mix and product mix.
Selling, general and administrative expenses increased by $13,264,000 or 7.3%
from $182,204,000 for the year ended December 31, 1997 to $195,468,000 for the
year ended December 31, 1998. Selling, general and administrative expenses in
1997 included compensation charges of $1,950,000 incurred pursuant to employment
contracts of certain executive officers of the Company and related to the debt
restructuring completed during 1997. Excluding this charge, selling, general and
administrative expenses increased $15,214,000, but decreased as a percentage of
sales from 4.7% in 1997 to 4.3% in 1998. This decrease is primarily attributable
to efforts to control operating expenses while the Company experienced sales
growth of 18.4% for the year. Selling, general and administrative costs include
depreciation and amortization expense totaling $10,980,000 in 1998 and
$11,073,000 in 1997.
In the fourth quarter of 1997, the Company recorded a non-cash asset impairment
charge of $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996. Through implementation planning that resumed in the fourth
quarter of 1997 and an evaluation of SAP in its upgraded form, the Company
identified costs that would not provide future value, and it is these costs that
are the basis of the impairment charge. See "Notes to Consolidated Financial
Statements - Note 4 - Impairment Losses."
As a result of the above items, the Company had operating income of $56,956,000
for the year ended December 31, 1998 compared to operating income of $35,751,000
for the year ended December 31, 1997. Excluding the restructuring related
compensation costs incurred and the impairment charge taken in 1997, the Company
would have had operating income of $51,801,000 in 1997.
<PAGE>
Interest Expense; Other Expense; Income Tax Provision
Interest expense decreased 40.1% from $28,608,000 for the year ended December
31, 1997 to $17,125,000 for the year ended December 31, 1998. This decrease was
primarily attributable to the debt restructuring, which resulted in the
elimination of substantially all of the Operating Company Debt on September 19,
1997 using proceeds from the issuance of the Initial Shares and the Convertible
Note.
Other expense increased from $14,992,000 for the year ended December 31, 1997 to
$20,904,000 for the year ended December 31, 1998. This increase is attributable
in part to the recording of a gain on the sale of property held in North
Carolina for $1,530,000 in 1997, which reduced other expenses. The increase is
also attributable to a $1,534,000 increase in foreign currency losses and a
$1,534,000 increase in asset securitization fees. The increased securitization
fees are due to increased sales of accounts receivables in order to fund sales
growth, daily operations and, in the fourth quarter, increased levels of
inventory in anticipation of higher sales volumes that did not materialize.
Also during 1997, the Company incurred $5,230,000 in expenses related to the
Company's efforts to effect a restructuring of its debt. These expenses
represent professional fees and other costs associated with the terminated
Limited Waiver and Voting Agreement (the "Limited Waiver Agreement") entered
into with certain holders of the Company's 12.5 % Notes, and costs incurred as a
result of the change in control that occurred as a result of the conversion of
the Convertible Note.
The income tax provision decreased from $496,000 for the year ended December 31,
1997 to $417,000 for 1998. In both years the income tax provision reflects only
the minimum statutory tax requirements in the various states and provinces in
which the Company conducts business, as the Company had sufficient net operating
losses from prior years. The Company has not recognized a tax provision benefit
in either year, having fully utilized its ability to carryback those losses and
obtain refunds of taxes paid in prior years. See "Notes to Consolidated
Financial Statements - Note 9 - Income Taxes".
Consolidated Net Income
The Company, reported net income of $18,510,000, or $.23 per diluted share, in
1998 compared to a net loss of $15,841,000, or $0.48 per diluted share, in 1997.
Included in the 1997 net loss is an extraordinary loss on the extinguishment of
debt of $3,744,000, or $0.12 per diluted share, related to the repayment of the
Operating Company Debt.
Year 2000 Issues
As of the date of this report, the Company is not aware of any adverse effects
of Year 2000 issues on the Company, including its systems and operations. The
Company's Year 2000 project focused on its core IT systems, off-line IT
subsystems, technical infrastructure, vendor/customer interfaces, and
facilities. The Company's efforts included conducting an inventory of items with
Year 2000 implications, assessing Year 2000 compliance, remediating or replacing
material items that were determined not to be Year 2000 compliant, testing and
certifying Year 2000 compliancy. The Company also communicated with a
significant portion of its third-party suppliers, vendors and customers to
determine the extent to which the Company may have been vulnerable to those
third parties' failure to remediate their own Year 2000 issues. This process of
addressing Year 2000 issues was essentially completed by mid-November 1999. The
Company incurred aggregate costs of approximately $2.6 million in connection
with its Year 2000 project. The aggregate costs exclude the cost of implementing
the SAP operating system in the U.S. and costs incurred pursuant to the
Company's technology upgrade strategy where the upgrades were not accelerated
due to Year 2000 issues. The Year 2000 project costs were expensed by the
Company as incurred.
The Company believes that its procedures were effective to identify and manage
the risks associated with Year 2000 compliance, however, there can be no
assurance that its remediation process has been fully effective. The failure of
the Company to identify and remediate the Company's systems, or the failure of
key third parties who do business
<PAGE>
with the Company to remediate their systems, could have a material adverse
effect on the Company's results of operations and financial condition. Although
the Company is not aware of any Year 2000 readiness issues affecting it at this
time, there can be no assurances that issues not yet apparent to it will not
arise during 2000 and beyond.
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 to existing products; (iii)
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. Due to the factors
noted above, as well as the dynamic qualities of the computer products
distribution industry, the Company's revenues and earnings may be subject to
material volatility, particularly on a quarterly basis, and the results for any
quarterly period may not be indicative of results for a full fiscal year.
Additionally, in the U.S. and Canada, the Company's net sales in the fourth
quarter have been historically higher than in its other three quarters.
Management believes that the pattern of higher fourth-quarter sales is partially
explained by customer buying patterns relating to calendar year-end business and
holiday purchases. As a result of this pattern, the Company's working capital
requirements in the fourth quarter have typically been greater than other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year, which is primarily due to buying patterns
of Canadian government agencies. See "Management's Discussion and Analysis
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Liquidity and Capital Resources
Cash Flows Activity For The Year Ended December 31, 1999
Net cash provided by operating activities during the year ended December 31,
1999 was $52,764,000. The primary sources of cash include a decrease in
inventory of $147,609,000, a decrease in accounts receivable of $7,100,000 and a
decrease in other prepaid and tax assets. The inventory decrease resulted in
part from stricter enforcement of payment terms by some of the Company's
larger vendors, which impacted credit lines. The Company also took actions to
reduce inventory in order to counter inventory risk associated with changing
vendor terms and conditions, particularly related to price protection policies.
The decrease in receivables is related primarily to decreased marketing and
cooperative advertising and other vendor receivables resulting from changes in
vendor programs and a decreased volume of pass-through programs. The primary
uses of cash were a $91,141,000 reduction in accounts payable and the net loss
for the year, excluding the non-cash charges for depreciation and bad debt
provisions. Accounts payable have declined due to the decrease in inventory
noted above and to the stricter enforcement of terms by major manufacturers to
more closely match payables with inventory levels.
Net cash used in investing activities in 1999 consisted of capital expenditures
of $29,255,000. The expenditures were primarily related to 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.
Net cash used by financing in 1999 was $3,145,000 and was comprised
primarily of scheduled repayments against promissory notes
outstanding.
Cash Flows Activity For The Year Ended December 31, 1998
Net cash provided by operating activities during the year ended December 31,
1998 was $53,068,000. The primary sources of cash include an increase in
accounts payable of $186,462,000. The primary uses of cash were an increase
<PAGE>
in accounts receivable of $51,406,000 and an increase in inventory of
$124,565,000. The increase in accounts receivable is primarily the result of
increased sales during 1998. The increase in inventory can be attributed to
large purchases near the end of the fourth quarter made with the expectation of
a higher sales volume that did not materialize. The increase in inventories also
contributed to the increase in accounts payable.
Net cash used in investing activities in 1998 consisted of capital expenditures
of $50,067,000. The expenditures were primarily related to costs associated with
development of SAP and with other information systems as well as the purchase by
the Company of its call center facility in Cary, North Carolina.
Net cash used by financing in 1998 was $891,000 and was comprised of scheduled
debt payments of $1,572,000, offset by proceeds received from the issuance of
common stock.
Cash Flows Activity for the Year Ended December 31, 1997
Net cash provided by operating activities during the year ended December 31,
1997 was $16,772,000. The primary sources of cash were an increase in accounts
payable of $76,203,000 and $15,563,000 of cash generated from operations. The
primary uses of cash were an increase in accounts receivable of $8,379,000 and
an increase in inventory of $70,196,000. The increase in accounts receivable is
primarily the result of increased sales in the fourth quarter of 1997. The
increase in inventory relates partially to investments required to meet the
demands of increased sales volume and to strategic volume purchases that the
Company took advantage of late in the fourth quarter of 1997. The increase in
inventories also contributed to the increase in accounts payable.
Net cash used in investing activities in 1997 was $2,270,000 consisting of
capital expenditures of $7,290,000, which was partially offset by proceeds from
the sale of land held in North Carolina totaling $5,020,000. The expenditures
were primarily for the maintenance and improvement of existing facilities.
Net cash used by financing in 1997 was $21,433,000. Uses of cash for financing
activities include scheduled debt payments of $13,634,000 and the extinguishment
of Operating Company Debt of $147,700,000. The primary source of cash from
financing activities was $139,901,000 in net proceeds from the issuance of
Initial Shares and the Convertible Note (which consists of $152,000,000 in gross
proceeds less $12,099,000 in investment banking, legal, accounting and other
direct costs).
Debt Obligations, Financing Sources and Capital Expenditures
At December 31, 1999, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of 12.5%
payable semi-annually. By virtue of being an obligation of Merisel, Inc., the
12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's subsidiaries. The indenture relating to the 12.5% Notes contains
certain covenants that, among other things, limit the type and amount of
additional indebtedness that may be incurred by the Company or any of its
subsidiaries and imposes limitations on investments, loans, advances, asset
sales or transfers, dividends and other payments, the creation of liens,
sale-leasebacks, transactions with affiliates and certain mergers.
At December 31, 1999, the Company had promissory notes outstanding with an
aggregate balance of $5,011,000. Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. The
notes are collateralized by certain of the Company's real property and
equipment.
Merisel Americas 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. The amount available for borrowing under the Loan and Security
Agreement at
<PAGE>
any time may be further reduced under the indenture relating to the 12.5% Notes.
As a result of the availability requirements and indenture limitations, based on
current trends there is no assurance that there will be amounts available for
future borrowings under the Loan and Security Agreement. The Loan and Security
Agreement also contains certain financial covenants that require, among other
things, minimum levels of cash flow and interest coverage. With respect to the
quarter ended December 31, 1999, the Company was required to obtain, and did
obtain, amendments and waivers with respect to certain covenants under the Loan
and Security Agreement. Borrowings under the Loan and Security Agreement are
secured by a pledge of a majority 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.
A portion of the Company's funds are generated through the sale of receivables
by Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas. Merisel Capital Funding's sole business is the
ongoing purchase of trade receivables from Merisel Americas and, upon the
commencement of MOCA's operations as a separate subsidiary, Merisel Open
Computing Alliance, Inc. Pursuant to an agreement with a securitization company
(the "Receivables Purchase and Servicing Agreement"), Merisel Capital Funding,
in turn, sells these receivables to the securitization company on an ongoing
basis, which yields proceeds of up to $500,000,000 at any point in time. Merisel
Capital Funding is a separate corporate entity with separate creditors who, in
the event of liquidation, are entitled to be satisfied out of Merisel Capital
Funding's assets prior to any value in the subsidiary becoming available to the
subsidiary's equity holder. This agreement expires in October 2003. The
Receivables Purcahse and Servicing Agreement contains certain financial
covenants that require, among other things, minimum levels of net worth and cash
flow. With respect to the quarter ended December 31, 1999, the Company was
required to obtain, and did obtain, amendments and waivers with respect to
certain covenants under the Receivables Purchase and Servicing Agreement.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. The agreement expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under the securitization agreements, the receivables are sold at face value with
payment of a portion of the purchase price being deferred. As of December 31,
1999, the total amount outstanding under these agreements was $419,929,000. Fees
incurred in connection with the sale of accounts receivable under these
agreements for the years ended December 31, 1999, December 31, 1998 and December
31, 1997 were $26,781,000, $17,564,000, and $16,030,000, respectively, and are
recorded as other expense.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be less than
$25,000,000 for 2000. Capital expenditures are expected to primarily consist of
costs associated with information systems, including investments made to enhance
and expand the Company's electronic commerce capabilities and to grow and
enhance the Company's infrastructure and upgrade warehouse systems and other
Company facilities. The Company intends to fund its capital expenditures
primarily through internally generated cash and lease financing.
Certain actions taken by the Company's vendors and by the Company could have a
negative impact on the Company's working capital and cash position. These
include significant changes in payment terms that have been introduced by
several of the Company's major vendors that have resulted in shorter payment
terms and/or reduced vendor financing. Additionally, if the pricing actions
taken by the Company in the first quarter of 2000 further reduce sales volume
significantly, the Company's cash flow may be negatively affected, particularly
if the Company's receivables decline faster than inventory levels. The Company
is responding to these factors by reducing investments in inventory, increasing
the use of flooring programs for both customers and vendors, and shortening
credit terms of its customers.
In the opinion of management, anticipated cash from operations in 2000, together
with proceeds from the sale of receivables under the Company's securitization
agreements, trade credit from vendors, and borrowings under the Company's
revolving credit facility will be sufficient to meet the Company's requirements
for the next 12 months, without the need for additional financing. This assumes,
however, that there are not material adverse changes in the Company's
relationships with its vendors, customers or lenders. In addition, if in future
periods the Company were to incur losses of a magnitude that resulted in
violations of covenants under the Company's financing agreements, there can be
no assurance that the Company would be able to renegotiate such agreements. Any
unforeseen event that adversely impacts the industry or the Company's position
in the industry, or future losses that result in convenant violations under the
Company's financing agreements, could have a direct and material unfavorable
effect on the liquidity of the Company.
<PAGE>
Inflation
Due to the short-term nature of Merisel's contracts and agreements with
customers and vendors, the Company does not believe that inflation had a
material impact on its operations.
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, special term large-volume purchases, and the addition
of new manufacturers and products. The distribution agreements entered into
between the Company and its vendors generally provide Merisel with
stock-balancing and price-protection provisions that partially reduce Merisel's
risk of loss due to slow-moving inventory, supplier price reductions, product
updates or obsolescence. Stock balancing provisions typically give the
distributor the right to return for credit or exchange for other products a
portion of the inventory items purchased, within a designated period of time,
but are not generally provided by the major PC systems manufacturers. Under
price-protection provisions, suppliers will credit the distributor for declines
in inventory value resulting from the supplier's price reductions if the
distributor complies with certain conditions. In the past two years, however,
certain major PC manufacturers that are among the Company's largest vendors have
reduced the availability of price protection for distributors by shortening the
time periods during which distributors may receive rebates or credit for
decreases in manufacturer prices on unsold inventory and changed other terms and
conditions. These changes have increased the Company's exposure to inventory
valuation risks and have adversely affected the Company's gross margins for the
last several quarters. Through buying procedures and controls to manage
inventory purchases, the Company seeks to reduce future 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 the
future in preventing a material adverse effect on the Company.
The Company purchases exchange contracts to reduce foreign exchange transaction
gains and losses. The Company intends to continue the practice of purchasing
foreign exchange contracts, however, the risk of foreign exchange transaction
losses cannot be completely eliminated.
The Company offers credit terms to qualifying customers and also sells on a
prepay, early pay, credit card and cash-on-delivery basis. In addition, the
Company has developed a number of customer financing alternatives, including
escrow programs and selected bid financing arrangements. The Company also
arranges a wide variety of programs through which third parties provide
financing to certain of its customers. These programs include floor plan
financing and hardware and software leasing. With respect to credit sales, the
Company attempts to control its bad debt exposure by monitoring customers'
creditworthiness and, where practicable, through participation in credit
associations that provide customer credit rating information for certain
accounts. In addition, the Company purchases credit insurance as it deems
appropriate. Historically, the Company has not experienced credit losses
materially in excess of established credit loss reserves. However, if the
Company's receivables experience a substantial deterioration in their
collectibility or if the Company cannot obtain credit insurance at reasonable
rates, the Company's financial condition and results of operations may be
adversely impacted.
<PAGE>
Item 7A. Quantitative and Qualitative Market Risk Disclosure
Investments
At December 31, 1999, the Company had no investments, with the exception of
$44,809,000 held in overnight, interest-bearing accounts invested through
high-quality credit financial institutions.
Foreign Currency Risk
The Company purchases forward dollar contracts to hedge short-term advances to
its Canadian subsidiary and to hedge commitments to acquire inventory for sale.
The Company does not use the contracts for speculative or trading purposes. At
December 31, 1999, the Company had 26 short-term Canadian forward contracts with
a face value of approximately $65,380,000 outstanding. The size of the contracts
ranged from $474,000 to $24,104,000 with a weighted average contract value of
approximately $3,600,000. Forward rates on the contracts ranged from 1.451 to
1.479 with the weighted average forward rate approximating 1.4710. The contracts
matured at various dates in January and February 2000.
Long-term Debt
Since the Company has a significant amount of debt, it is subject to risk
related to fluctuations in market interest rates. The table below provides
information concerning fixed rate long-term debt outstanding at December 31,
1999, including principal amounts maturing each year, average interest rate and
fair value.
<TABLE>
<CAPTION>
Total
2000 2001 2002 2003 2004 Total Fair Value
---- ---- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
12.5% Senior Notes 0 0 0 0 $125,000,000 $125,000,000 $77,500,000
Average Interest Rate 12.5% 12.5% 12.5% 12.5% 12.5%
Fixed rate promissory notes $1,111,000 $3,900,000 0 0 0 $5,011,000 $5,011,000
Average Interest Rate 7.70% 7.71%
</TABLE>
Asset Securitization
Fees incurred in connection with the sale of trade accounts receivable under the
Company's asset securitization agreements typically are based upon commercial
paper rates. As of December 31, 1999, the total amount outstanding under these
agreements was $419,929,000 and the average cost of securitization was
approximately 7.17%. During 1999, the total amount outstanding under these
agreements averaged $414,902,000, and the weighted average cost of
securitization was 6.45%.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed at Item 14. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merisel, Inc. and subsidiaries at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 16, 2000
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1998 1999
----- -----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 36,341 $ 57,557
Accounts receivable (net of allowances of $20,476 and $15,186 at December
31, 1998 and 1999, respectively)............................................. 202,128 182,352
Inventories.................................................................... 587,317 445,663
Prepaid expenses and other current assets....................................... 14,193 10,488
Deferred income taxes........................................................... 865 914
----------- ----------
Total current assets....................................................... 840,844 696,974
PROPERTY AND EQUIPMENT, NET.......................................................... 79,719 84,609
COST IN EXCESS OF NET ASSETS ACQUIRED, NET........................................... 24,309 23,755
OTHER ASSETS 448 457
----------- ----------
TOTAL ASSETS.................................................................... $ 945,320 $ 805,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 623,673 $ 540,843
Accrued liabilities............................................................. 31,737 36,609
Long-term debt and capitalized lease obligations--current........................ 3,692 2,906
----------- ----------
Total current liabilities.................................................. 659,102 580,358
LONG-TERM DEBT....................................................................... 129,360 128,900
CAPITALIZED LEASE OBLIGATIONS........................................................ 2,605 1,364
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued or
outstanding
Common stock, $.01 par value; authorized 150,000,000 shares; outstanding
80,272,683 and 80,278,808 shares at December 31, 1998 and 1999,
respectively................................................................. 803 803
Additional paid-in capital...................................................... 282,380 282,492
Accumulated deficit............................................................. (118,495) (179,663)
Accumulated other comprehensive loss............................................ (10,435) (8,459)
----------- ----------
Total stockholders' equity................................................. 154,253 95,173
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 945,320 $ 805,795
============ ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Years Ended December 31,
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
NET SALES.......................................................... $ 4,047,621 $ 4,550,977 $ 5,188,679
COST OF SALES...................................................... 3,807,888 4,298,553 4,947,626
------------ ------------ -----------
GROSS PROFIT....................................................... 239,733 252,424 241,053
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 188,404 195,468 235,471
LITIGATION-RELATED CHARGE.......................................... 12,000
RESTRUCTURING CHARGE............................................... 3,200
IMPAIRMENT LOSSES.................................................. 14,100 3,800
------------ ------------ -----------
OPERATING INCOME (LOSS)............................................ 37,229 56,956 (13,418)
INTEREST EXPENSE................................................... 28,608 17,125 17,849
DEBT RESTRUCTURING COSTS........................................... 5,230
OTHER EXPENSE, NET................................................. 14,992 20,904 28,962
------------ ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES.................................. (11,601) 18,927 (60,229)
PROVISION FOR INCOME TAXES......................................... 496 417 939
------------ ------------ -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM............................ (12,097) 18,510 (61,168)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT 3,744
------------ ------------ -----------
NET (LOSS) INCOME.................................................. $ (15,841) $ 18,510 $ (61,168)
============= ============ =============
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED):
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM........................ $ (.36) $ .23 $ (.76)
EXTRAORDINARY LOSS................................................. (.12)
------------ ------------ -----------
NET (LOSS) INCOME.................................................. $ (.48) $ .23 $ (.76)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC........................................................... 33,216 80,210 80,279
DILUTED......................................................... 33,216 80,485 80,279
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Additional other
Paid-in Accumulated Comprehensive Comprehensive
Common Stock Capital Deficit Loss Total Income
Shares Amount
------- ------- --------- ------------ ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.. 30,078,500 $301 $142,300 $(121,164) $(6,440) $14,997
Sale of common stock...... 4,901,316 49 14,851 14,900
Conversion of Note into
Common Stock............. 45,098,684 451 124,550 125,001
Comprehensive Income:
Translation adjustment... (1,549) (1,549) $ (1,549)
Net loss................. (15,841) (15,841) (15,841)
--------
Total Comprehensive Loss...... $(17,390)
========
---------- ----- ------ ---------- -------- -------
Balance at December 31, 1997.. 80,078,500 801 281,701 (137,005) (7,989) 137,508
Exercise of stock options
and other.................. 194,183 2 679 681
Comprehensive Income:
Translation adjustment.... (2,446) (2,446) $ (2,446)
Net income............... 18,510 18,510 18,510
------
Total Comprehensive Income.... $ 16,064
======
---------- ----- ------ ---------- -------- -------
Balance at December 31, 1998.. 80,272,683 803 282,380 (118,495) (10,435) 154,253
Exercise of stock options
and other.................. 6,125 112 112
Comprehensive Income:
Translation adjustment... 1,976 1,976 $ 1,976
Net loss................. (61,168) (61,168) (61,168)
--------
Total Comprehensive Loss...... $(59,192)
========
---------- ----- ------- --------- ------- -------
Balance at December 31, 1999.. 80,278,808 $803 $282,492 $(179,663) $(8,459) $95,173
========== ===== ======== ========== ======== =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1997 1998 1999
------ ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ (15,841) $ 18,510 $ (61,168)
Adjustments to reconcile net (loss) income to net cash provided by
operating
activities:
Depreciation and amortization........................................... 11,311 10,980 22,349
Provision for doubtful accounts......................................... 7,361 12,553 15,774
Impairment losses....................................................... 14,100 3,800
Deferred income taxes................................................... 162 (221) 2
Gain on sale of property and equipment.................................. (1,530) (65)
Restricted stock units compensation expense............................. 100
Changes in assets and liabilities
Accounts receivable................................................. (8,379) (51,406) 7,100
Inventories......................................................... (70,196) (124,565) 147,609
Prepaid expenses and other current assets........................... 654 6,786 3,744
Income taxes payable................................................ 2,021 1,095
Accounts payable.................................................... 76,203 186,462 (91,141)
Accrued liabilities................................................. 906 (6,031) 3,565
------- --------- -------
Net cash provided by operating activities....................... 16,772 53,068 52,764
------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (7,290) (50,067) (29,255)
Proceeds from sale of property and equipment................................ 5,020
------- --------- -------
Net cash used for investing activities........................... (2,270) (50,067) (29,255)
------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit................................... 726,308 75,401 464,701
Repayments under revolving line of credit................................... (811,516) (75,401) (464,701)
Repayments under senior notes............................................... (56,805)
Repayments under subordinated debt agreement................................ (17,600)
Repayments under other financing arrangements............................... (1,721) (1,572) (3,157)
Net proceeds from the issuance of convertible notes......................... 125,001
Proceeds from issuance of common stock...................................... 14,900 681 12
------- --------- -------
Net cash used for financing activities.......................... (21,433) (891) (3,145)
------- --------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (1,300) (2,216) 852
------- --------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (8,231) (106) 21,216
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 44,678 36,447 36,341
------- --------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD YEAR................................... $ 36,447 $ 36,341 $ 57,557
======= ======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid(received) during the year for:
Interest ................................................................ $ 33,385 $ 14,698 $ 18,571
Income taxes .............................................................. ( 3,362) 655 309
Noncash activities:
Capital lease obligations entered into...................................... 4,480 670
See accompanying notes to consolidatedfinancial statements.
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Effective March 28, 1997, the Company sold substantially all of the assets of
its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB"). The recorded sale
price was $31,992,000, consisting of the assumption of $11,992,000 of trade
payables and accrued liabilities and a $20,000,000 extended payable due to a
third party, in full consideration for the assets (see Note 6 "Dispositions").
On October 10, 1997, Phoenix Acquisition Company II, L.L.C. ("Phoenix")
exercised its option to convert, without any additional payment, $3,296,286
principal amount of a convertible note into 1,084,305 shares of common stock. On
December 19, 1997, following receipt of stockholder approval, approximately
$133.8 million outstanding principal amount of the convertible note was
converted, without any additional payment, into 44,014,379 shares of common
stock. The proceeds from the issuance of the convertible note were offset by
professional fees and other direct costs of approximately $12,099,000, which
were recorded as a reduction to additional paid-in capital at the time of
conversion.
See accompanying notes to consolidated financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 and 1999
1. Summary of Significant Accounting Policies
General--Merisel, Inc., a Delaware corporation and a holding company (together
with its subsidiaries, "Merisel" or the "Company"), is a leading distributor of
computer hardware and software products. From March 1997 through 1999 through
its main operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and
its subsidiaries, the Company operated three distinct business units: United
States distribution, Canadian distribution and the Merisel Open Computing
Alliance (MOCA(TM)). In December 1999, Merisel announced plans to restructure
and combine its U.S. and Canadian distribution businesses. The Company
accomplished this reorganization in early 2000 and began operating two distinct
North American business units: North American distribution ("North American
Distribution") and MOCA. Merisel's North American Distribution business offers a
full line of products and services to a broad range of reseller customers,
including value-added resellers ("VARs"), commercial resellers, Internet
resellers and retailers. MOCA provides enterprise-class solutions for Sun
Microsystems servers and the Solaris operating system to Sun
Microsystems-authorized resellers and consultants. Effective April 3, 2000, the
operations of MOCA will be conducted by Merisel Open Computing Alliance, Inc. as
a wholly owned subsidiary of Merisel, Inc.
Liquidity--In 1999, the Company incurred a net loss of $61,168,000, increasing
its accumulated deficit to $179,663,000 at December 31, 1999. This loss was
primarily the result of a continued decline in gross margins, the recognition of
a litigation-related charge of $12,000,000, an impairment loss of $3,800,000 and
a restructuring charge of $3,200,000. In its efforts to return to profitability,
effective December 1999, the Company announced a restructuring plan, which would
combine its United States and Canadian distribution businesses and would reduce
its planned workforce by approximately 400 full-time positions. The Company's
plan, if achieved, would reduce operating expenses by approximately $25,000,000
annually. In connection with the restructuring, the Company has developed a
business plan, which, if successfully implemented, will provide sufficient cash
flow to support its operations throughout 2000 and ultimately return to
profitability. The business plan focuses upon improving gross margins and
working capital management, and significantly reducing operating expenses.
Risks and Uncertainties--The Company believes that the diversity and breadth of
its products, services and customers, along with the general stability of the
economies in the markets in which it operates, significantly mitigate the risk
that a material adverse impact will occur in the near term as a result of
changes in its customer base, competition, or composition of its markets.
However, continued pricing pressures, or the loss of a major vendor, or other
unanticipated occurrences could result in a materially adverse impact to the
business. Although Merisel regularly stocks products and accessories supplied by
more than 500 manufacturers, 75% of the Company's net sales for its North
American Distribution and MOCA businesses in 1999 (as compared to 73% in 1998
and 69% in 1997) were derived from products supplied by Merisel's ten largest
vendors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectibility of accounts receivable, inventory, deferred
income taxes, accounts payable, sales returns and recoverability of long-term
assets.
New Accounting Pronouncements--In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." As amended
by SFAS No. 137, SFAS 133 is effective for financial statements issued for all
fiscal quarters of all fiscal years beginning after June 15, 2000. 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. The Company is in
the process of evaluating the effect that this new standard will have on its
financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition, Returns and Sales Incentives--The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs that, among other things, include funds
available for cooperative promotion of product sales. Customers earn credit
under such programs based upon the volume of purchases. The cost of these
programs is partially subsidized by marketing allowances provided by the
Company's manufacturers. The allowances for sales returns and costs of customer
incentive programs are accrued concurrently with the recognition of revenue.
Cash and Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
Inventories--Inventories are valued at the lower of cost or market; cost is
determined using the average cost method.
Property and Depreciation--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to ten
years. Leasehold improvements are amortized over the shorter of the life of the
lease or the improvement.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and warehouse
management systems. Such amounts include the costs of materials and other direct
construction costs, purchased computer hardware and software, outside
programming and consulting fees, direct employee salaries and interest.
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
resulted from the acquisition in 1990 of Microamerica, Inc. Accumulated
amortization was $8,477,000 and $9,494,000 as of December 31, 1998 and 1999,
respectively. The cost in excess of net assets acquired is being amortized over
a period of 40 years using the straight-line method.
Impairment of Long-Lived Assets--The Company reviews the recoverability of
intangible assets, including cost in excess of net assets acquired, and other
long-lived assets to determine if there has been any impairment. This assessment
is performed based on the estimated undiscounted future cash flows from
operating activities compared with the carrying value of the related asset. If
the undiscounted future cash flows are less than the carrying value, an
impairment loss is recognized, measured by the difference between the carrying
value and the estimated fair value of the assets (see Note 4 - "Impairment
Losses").
Income Taxes--Deferred income taxes represent the amounts that will be paid or
received in future periods based on the tax rates that are expected to be in
effect when the temporary differences are scheduled to reverse.
Concentration of Credit Risk--Financial instruments that subject the Company to
credit risk consist primarily of cash equivalents, trade accounts receivable,
and forward foreign currency exchange contracts. The Company invests its excess
cash with high-quality credit financial institutions. Credit risk with respect
to trade accounts receivable is generally not concentrated due to the large
number of entities comprising the Company's customer base and their geographic
dispersion. The Company performs ongoing credit evaluations of its customers,
maintains an allowance for potential credit losses and maintains credit
insurance. The Company actively evaluates the creditworthiness of the financial
institutions with which it conducts business.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Financial Instruments--The fair values of financial instruments,
other than long-term debt, closely approximate their carrying value because of
their short-term nature. The estimated fair value of long-term debt including
current maturities, based on reference to quoted market prices, was less than
its carrying value by approximately $47,500,000 as of December 31, 1999 and
greater than its carrying value by approximately $3,750,000 as of December 31,
1998.
Foreign Currency Translation--Assets and liabilities of the Company's Canadian
subsidiary are translated into United States dollars at the exchange rate in
effect at the close of the period. Revenues and expenses are translated at the
average exchange rate during the period. The aggregate effect of translating the
financial statements at the above rates is included in a separate component of
stockholders' equity entitled Accumulated Other Comprehensive Loss. In addition,
the Company advances funds to its Canadian subsidiary in the normal course of
business that are not expected to be repaid in the foreseeable future.
Translation adjustments resulting from these advances are also included in
Accumulated Other Comprehensive Loss.
Foreign Exchange Instruments--The Company's use of derivatives is limited to the
purchase of spot and forward foreign currency exchange contracts in order to
minimize foreign exchange transaction gains and losses. The Company purchases
forward dollar contracts to hedge short-term advances to its Canadian subsidiary
and to hedge commitments to acquire inventory for sale and does not use the
contracts for trading purposes. The Company's foreign exchange rate contracts
reduce the Company's exposure to exchange rate movement risk, as any gains or
losses on these contracts are offset by gains and losses on the transactions
being hedged. As of December 31, 1998, there were approximately $80,268,000 in
outstanding foreign exchange contracts and $65,380,000 outstanding as of
December 31, 1999. In 1997, 1998, and 1999, the Company recorded net foreign
currency transaction losses of $351,000, $1,885,000 and $264,000, respectively.
These amounts are included in other expense.
Reclassifications--Certain reclassifications were made to prior year statements
to conform to the current year presentation.
Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending on
the Saturday nearest to December 31 and its fiscal quarters are the 13- or
14-week periods ending on the Saturday nearest to March 31, June 30, September
30 and December 31. For clarity of presentation, the Company has described
fiscal years presented as if the years ended on December 31 and fiscal quarters
presented as if the quarters ended on March 31, June 30, September 30 and
December 31. The 1998 and 1999 fiscal years were 52 weeks in duration. The 1997
fiscal year was 53 weeks in duration. All quarters presented for 1998, 1999 and
the first three quarters of 1997 were 13 weeks in duration. The fourth quarter
of 1997 was 14 weeks in duration.
2. Litigation Related Charge
During fiscal year 1999, a $21,000,000 charge was recorded by the Company
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 due 2004 (the "12.5% Notes") which was offset in part by a
$9,000,000 insurance recovery received by the Company.
3. Restructuring Charge
During the fourth quarter of 1999, the Company announced that, in connection
with the combination of its U.S. and Canadian distribution businesses, it would
reduce its workforce by approximately 400 full-time positions. The planned
reduction, which was effective in January 2000, was accomplished through the
elimination of duplicative positions in marketing, product and inventory
management, and sales under the newly formed North American
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distribution business unit, and by the realignment of finance and administrative
functions. As a result, the Company has recorded a restructuring charge of
$3,200,000 in the fourth quarter of 1999 that primarily consists of termination
benefits including severance pay and outplacement services to be provided to
those employees that were involuntarily affected by the reduction in workforce.
These benefits had not been paid as of December 31, 1999, and the entire amount
remains in accrued liabilities.
4. Impairment Losses
In 1993, the Company undertook the process of converting its North American
Operations to the SAP information system ("SAP"). Although this process was
completed in Canada in 1995, the Company delayed the implementation in the
United States and recorded an impairment charge of $19,500,000 during 1996. In
the fourth quarter of 1997, the Company renewed its implementation efforts. As
part of this process, the Company reviewed previously capitalized costs and
determined that a portion of these costs no longer provided value to the Company
primarily due to changes in the SAP implementation strategy and the planned
implementation of a different version of SAP. As a result, a $14,100,000
impairment charge was recorded. In the fourth quarter of 1999, the Company
announced a restructuring plan that would combine the U.S. and Canadian
distribution business units into one business unit. In conjunction with the
restructuring, the Company has evaluated the fixed asset investments that have
been made to support the former business units. As a result, in the fourth
quarter of 1999 a $3,800,000 impairment charge related to redundant assets
determined to have no value to the Company was recorded.
5. Debt Restructuring and Equity Investment
On September 19, 1997, the Company and Merisel Americas entered into a
definitive Stock and Note Purchase Agreement with Phoenix Acquisition Company
II, L.L.C. ("Phoenix"), a Delaware limited liability company whose sole member
is Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and
Note Purchase Agreement, on September 19, 1997 Phoenix acquired a Convertible
Note for $137,100,000 (the "Convertible Note") and 4,901,316 shares of Common
Stock (the "Initial Shares") for $14,900,000. The Convertible Note was an
unsecured obligation of the Company and Merisel Americas and provided that, upon
the satisfaction of certain conditions, including obtaining stockholder
approval, the Convertible Note would automatically convert into 45,098,684
shares of Common Stock (the "Conversion Shares").
The Company used substantially all of the $152,000,000 in proceeds from the
issuance of the Initial Shares and the Convertible Note to repay indebtedness of
its operating subsidiaries consisting of $80,697,000 principal amount
outstanding under a revolving credit agreement, $53,798,000 principal amount of
its 11.5% senior notes, and $13,200,000 principal amount of subordinated notes.
In connection with these repayments, the Company recorded an extraordinary loss
on the extinguishment of debt of $3,744,000. This amount consisted of a "make
whole" premium of $960,000 required to be paid with respect to the prepayment of
the subordinated notes, unamortized prepaid financing fees totaling
approximately $2,546,000 and other costs totaling $238,000. Additionally, the
Company incurred $5,230,000 in other expenses in 1997 related to the Company's
efforts to effect a restructuring of its debt. These costs include $4,380,000 of
professional fees and other costs associated with the termination of a Limited
Waiver Agreement with the holders of its 12.5% Notes and $850,000 in costs that
were incurred as a result of the change in control that occurred upon the
conversion of the Convertible Note. Additionally, selling, general and
administrative expenses in 1997 include compensation charges of $1,950,000
incurred pursuant to employment contracts of certain executive officers of the
Company related to the debt restructuring.
On October 10, 1997, Phoenix exercised its option to convert, without any
additional payment, $3,296,286 principal amount of the Convertible Note into
1,084,305 shares of Common Stock, representing the maximum amount that could be
converted prior to obtaining stockholder approval. On December 19, 1997,
following receipt of
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stockholder approval, the remaining portion of the Convertible Note was
converted into Common Stock. The $152,000,000 in proceeds from the issuance of
the Initial Shares and the Convertible Note was partially offset by professional
fees and other direct costs related thereto totaling approximately $12,099,000,
which were recorded as a reduction to additional paid-in capital at the time of
conversion. As of December 31, 1999, Phoenix owned 50,000,000 shares of Common
Stock, or approximately 62.3% of the outstanding Common Stock.
6. Dispositions
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of Merisel FAB to a wholly owned subsidiary of SYNNEX Information
Technologies, Inc. ("Synnex"). The sale price, computed based upon the February
21, 1997 balance sheet of Merisel FAB, was $31,992,000 consisting of the buyer
assuming $11,992,000 of trade payables and accrued liabilities and a $20,000,000
extended payable due to Vanstar Corporation. In connection with this sale, the
Company recorded an impairment charge in the fourth quarter of 1996 for
$2,033,000 to adjust Merisel FAB's assets to their fair value. If the Company
had sold Merisel FAB as of January 1, 1997 for the year ended December 31, 1997,
revenues and gross profit would have been reduced by $202,000,000 and
$8,000,000, respectively, and net loss and loss per share would have increased
$2,000,000 and $.06, respectively.
7. Sale of Accounts Receivable
The Company's wholly owned subsidiary, Merisel Americas, sells trade receivables
on an ongoing basis to its wholly owned subsidiary Merisel Capital Funding, Inc.
("Merisel Capital Funding"). Pursuant to an agreement with a securitization
company (the "Receivables Purchase and Servicing Agreement"), Merisel Capital
Funding, in turn, sells such receivables to the securitization company on an
ongoing basis, which yields proceeds of up to $500,000,000 at any point in time.
Merisel Capital Funding's sole business is the purchase of trade receivables
from Merisel Americas and, upon the commencement of MOCA's operations as a
separate subsidiary, Merisel Open Computing Alliance, Inc. Merisel Capital
Funding is a separate corporate entity with its own separate creditors, which in
the event of its liquidation will be entitled to be satisfied out of Merisel
Capital Funding's assets prior to any value in Merisel Capital Funding becoming
available to Merisel Capital Funding's equity holders. This facility expires in
October 2003. The Receivables Purchase and Servicing Agreement contains certain
financial covenants that require, among other things, minimum levels of net
worth and cash flow. With respect to the quarter ended December 31, 1999, the
Company was required to obtain, and did obtain, amendments and waivers with
respect to certain covenants under the Receivables Purchase and Servicing
Agreement.
Effective December 15, 1995, Merisel Canada Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. The facility expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of December
31, 1999, the total amount outstanding under these facilities was $419,929,000.
Fees incurred in connection with the sale of accounts receivable for the years
ended December 31, 1997, 1998 and 1999 were $16,030,000, $17,564,000 and
$26,781,000, respectively, and are recorded as other expense.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Property and Equipment
Property and equipment consisted of the following (in thousands):
Estimated
Useful
Life December 31,
(in Years)
----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Land............................................... $ 3,324 $ 3,324
Building........................................... 20 8,883 9,011
Equipment and computer hardware and software....... 3 to 7 71,225 129,709
Furniture and fixtures............................. 3 to 5 9,177 9,500
Leasehold improvements............................. 3 to 20 8,941 11,078
Construction in progress........................... 45,811 2,953
------------ -------------
Total.............................................. 147,361 165,575
Less accumulated depreciation and amortization..... (67,642) (80,966)
------------ -------------
Property and equipment, net........................ $ 79,719 $ 84,609
============ =============
</TABLE>
During 1999, the Company capitalized approximately $1,300,000 of interest costs
as property and equipment.
9. Income Taxes
The components of (loss) income before income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1998 1999
------------ ---------- ------------
<S> <C> <C> <C>
Domestic............................... $ (14,202) $ 19,661 $ (61,085)
Foreign................................ 2,601 (734) 856
------------ ---------- ------------
Total.................................. $ (11,601) $ 18,927 $ (60,229)
============ ========== ============
</TABLE>
The (benefit) provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1998 1999
------------- ---------- -----------
<S> <C> <C> <C>
Current:
State.................................. $ 312 $ 360 $ 457
Foreign................................ 346 278 531
------------- ---------- -----------
Total Current.......................... 658 638 988
------------- ---------- -----------
Deferred:
Foreign................................ (162) (221) (49)
------------- ---------- -----------
Total deferred......................... (162) (221) (49)
------------- ---------- -----------
Total provision........................ $ 496 $ 417 $ 939
============ ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income tax liabilities and assets were comprised of the following (in
thousands):
December 31,
1998 1999
------------ -----------
<S> <C> <C>
Net operating loss.......................... $ 48,400 $ 72,614
Expense accruals............................ 17,184 14,552
State taxes................................. (27) 43
Property and goodwill....................... (11,665) (13,283)
-------- ---------
53,892 73,926
Valuation allowances........................ (53,027) (73,012)
-------- ---------
Total.................................. $ 865 $ 914
======== =========
Net deferred tax asset........................... $ 865 $ 914
======== =========
</TABLE>
The major elements contributing to the difference between the federal statutory
tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Statutory rate.............................................. (35.0)% 35.0% (35.0)%
Change in valuation allowance............................... 32.7 (36.7) 35.8
State income taxes, less effect of federal deduction........ 1.3 1.2 .4
Goodwill amortization....................................... 1.5 .6 .4
Foreign losses with benefits at less than statutory rate.... 1.4 .1
Utilization of net operating losses of foreign subsidiary... 1.2 .3 (.6)
Other....................................................... 1.5 .4 .5
------------ ------------- -----------
Effective tax rate.......................................... 3.2% 2.2% 1.6%
============ ============= ===========
</TABLE>
Upon the issuance of the Conversion Shares, the Company experienced an ownership
change for Federal income tax purposes, resulting in an annual limitation on the
Company's ability to utilize its net operating loss carryforwards to offset
future taxable income. The annual limitation was determined by multiplying the
value of the Company's equity before the change by the long-term tax exempt rate
as defined by the Internal Revenue Service. The Company has adjusted its
deferred tax asset to reflect the estimated limitation. At December 31, 1998 and
1999, the Company had available U.S. Federal net operating loss carryforwards of
$126,892,000 and $181,795,000, after adjusting for the estimated limitation,
which expire at various dates beginning December 31, 2010. As of December 31,
1999, $112,138,000 of the net operating loss carryforwards is restricted as a
result of the ownership change and $69,657,000 is not. The restricted net
operating loss is limited to $7,476,000 per year.
10. Debt
At December 31, 1999, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes, which mature on December 31, 2004,
provide for an interest rate of 12.5% payable semi-annually. The 12.5% Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after December 31, 1999, initially at 106.25% of principal amount and at
redemption prices declining to 100% of principal amount for redemptions on or
after December 31, 2002. By virtue of being an obligation of Merisel, Inc.,
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the 12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's subsidiaries. The indenture relating to the 12.5% Notes contains
certain covenants that, among other things, limit the type and amount of
additional indebtedness that may be incurred by the Company or any of its
subsidiaries and impose limitations on investments, loans, advances, sales or
transfers of assets, the making of dividends and other payments, the creation of
liens, sale-leaseback transactions with affiliates and certain mergers.
At December 31, 1999, the Company had promissory notes outstanding with an
aggregate balance of $5,011,000. Such notes provide for interest at a rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. Payments
due under these notes are $1,111,000 in 2000, and $3,900,000 in 2001. 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. The amount available for borrowing under the Loan and Security
Agreement at any time may be further limited by restrictions under the indenture
relating to the 12.5% Notes. The Loan and Security Agreement also contains
certain financial covenants that require, among other things, minimum levels of
cash flow and interest coverage. With respect to the quarter ended December 31,
1999, the Company was required to obtain, and did obtain, amendments and waivers
with respect to certain covenants under the Loan and Security Agreement.
Borrowings under the Loan and Security Agreement are secured by a pledge of
substantially all of the inventories held by Merisel Americas. Borrowings bear
interest at 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 December 31, 1999.
11. Commitments and Contingencies
The Company leases certain of its facilities and equipment under noncancelable
operating leases. Future minimum rental payments under leases that have initial
or remaining noncancelable lease terms in excess of one year are $5,317,000 in
2001, $3,725,000 in 2002, $2,357,000 in 2003, $1,362,000 in 2004, and $392,000
thereafter. Certain of the leases contain inflation escalation clauses and
requirements for the payment of property taxes, insurance, and maintenance
expenses. Rent expense for 1997, 1998 and 1999 was $8,726,000, $9,131,000 and
$10,177,000 respectively.
The Company also leases certain computer equipment under capitalized leases and
has the option to purchase the equipment for a nominal cost at the termination
of the lease.
Property and equipment includes the following amounts for leases that
have been capitalized:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- ------------
<S> <C> <C>
Computer equipment............................................ $4,489,000 $5,445,000
Less accumulated depreciation................................. 567,000 2,370,000
================== ===================
Total....................................................... $3,922,000 $3,075,000
================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments for capitalized leases were as follows at
December 31, 1999.
<S> <C>
2000.......................................................... $1,983,000
2001.......................................................... 1,396,000
2002.......................................................... 22,000
--------------------
Total minimum lease payments.................................. 3,401,000
Less amount representing interest............................. 242,000
--------------------
Present value of net minimum lease payments................... 3,159,000
Less current maturities....................................... 1,795,000
--------------------
Long-term obligation...................................... $1,364,000
====================
</TABLE>
The Company has arrangements with certain finance companies that provide
inventory and accounts receivable financing facilities for its customers. In
conjunction with these arrangements, the Company has inventory repurchase
agreements with the finance companies that would require it to repurchase
certain inventory if repossessed from the customers by the finance companies.
Such repurchases have been insignificant in the past.
On March 16, 1998, the Company received a summons and complaint, filed in the
Superior Court of California, County of Santa Clara, in a matter captioned
Official Unsecured Creditors Committee of Media Vision Technology, Inc. v.
Merisel, Inc. The plaintiff alleges that certain executive officers of Media
Vision Technology, Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision through, inter alia, the improper recognition and
reporting of sales, revenue and income and the failure to properly recognize and
report product returns during 1993 and 1994, thereby overstating the financial
condition of Media Vision as reflected in its financial statements for 1993. The
plaintiff further alleges that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision executives. The plaintiff
seeks to recover compensatory damages, including interest thereon, exemplary and
punitive damages, and costs including attorneys' fees. On May 6, 1998, the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive damages prayer. In response to the motions,
the plaintiff filed a first amended complaint on August 31, 1998, adding a claim
for unfair business practices under California Business & Professions Code
ss.17200 and additional allegations. The plaintiff's filing of an amended
complaint mooted the Company's original motions. The Company filed a motion to
dismiss the amended complaint on various grounds and a motion to strike the
punitive damages prayer. In its opposition to the Company's motion to strike,
the plaintiff withdrew its prayer for punitive damages. On January 15, 1999, the
Court issued an Order staying prosecution of the action under the doctrine of
exclusive concurrent federal jurisdiction. Plaintiff filed a motion to seek
relief from the stay and in October 1999 such motion was granted. The Company
renewed its motion to dismiss and on January 28, 2000 the judge entered an order
granting the Company's motion to dismiss, and granting the plaintiff leave to
amend its complaint with respect only to the unfair business practices claim.
The Company has defended itself vigorously against this claim and will continue
to do so.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material impact
on the financial condition or business of Merisel.
12. Employee Stock Options and Benefit Plans
On December 19, 1997, the Company's stockholders approved the Merisel Inc. 1997
Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"). Under the
Stock Award and Incentive Plan, incentive stock options
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and nonqualified stock options as well as other stock-based awards may be
granted to employees, directors, and consultants. The plan authorized the
issuance of an aggregate of 8,000,000 shares of Common Stock less the number of
shares of Common Stock that remain subject to outstanding option grants under
any of the Company's other stock-based incentive plans for employees after
December 19, 1997 and are not either canceled in exchange for options granted
under the Stock Award and Incentive Plan or forfeited. At December 31, 1999,
2,430,583 shares were available for grant under the Stock Award and Incentive
Plan. The grantees, terms of the grant (including option prices and vesting
provisions), dates of grant and number of shares granted under the plans are
determined primarily by the Board of Directors or the committee authorized by
the Board of Directors to administer such plans, although incentive stock
options are granted at prices which are no less than the fair market value of
the Company's Common Stock at the date of grant. On December 22, 1997, the
Company granted options under the Stock Award and Incentive Plan in exchange for
previously granted employee stock options that were then outstanding and that
had an exercise price greater than the then market price of the Common Stock,
subject to the agreement of each optionee to cancel the outstanding options. As
of December 31, 1999, 634,756 options remain outstanding under the Company's
other employee stock option plans, however, no new options may be issued under
these plans. In addition to the shares issuable under the Stock Award and
Incentive Plan, 50,000 shares are reserved for issuance under the Company's 1992
Stock Option Plan for Non-Employee Directors. During August 1999, the Company
issued 515,000 restricted stock units to certain employees under the Stock Award
and Incentive Plan. Each restricted stock unit represents the right to receive
one share of common stock of the Company at no cost to the employee. The
restricted stock units cliff vest after three years with provisions for
accelerated vesting in the event certain operating performance targets are met.
Compensation expense, measured by the fair value at the grant date of the
Company's common stock issuable in respect of the units, totaled $869,000 and is
being amortized over the related three-year vesting period. Upon the attainment
of the performance criteria specified, the remaining compensation expense for
the units will be recognized by the Company in full. During 1999, the Company
recorded approximately $100,000 of compensation expense related to the
restricted stock units outstanding. The following summarizes the aggregate
activity in all of the Company's plans for the three years ended December 31,
1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exer. Price Shares Exer. Price Shares Exer. Price
----------- ------------ --------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of year 1,368,345 7.48 6,673,525 4.10 5,947,150 3.79
Granted 6,146,323 3.86 583,400 3.29 691,250 .52
Exercised (77,750) 2.16 (6,150) 2.01
Canceled (841,143) 6.41 (1,232,025) 5.32 (1,138,150) 3.50
------------- ----------- -----------
Outstanding at end
of year 6,673,525 4.10 5,947,150 3.79 5,494,100 3.44
------------- ----------- -----------
Option price range for
Exercised shares $0.00 $1.63-$2.63 $2.00-$2.31
----- ----------- -----------
Weighted average fair
value at date of grant
of options granted
during the year
$2.55 $2.13 $1.61
------------- ------------ -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at 12/31/99 In Years Price at 12/31/99 Price
------------------ ----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$3.0000 to $3.0000 32,156 2 $3.0000 32,156 $3.0000
$0.0000 to $11.3750 517,000 3 $0.0440 2,000 $11.3750
$11.7500 to $11.7500 2,000 4 $11.7500 2,000 $11.7500
$15.0000 to $15.0000 2,000 5 $15.0000 2,000 $15.0000
$5.8750 to $6.3125 26,500 6 $6.2795 24,050 $6.2761
$1.8750 to $2.6250 162,500 7 $2.3598 122,375 $2.3578
$1.6250 to $4.3100 4,241,444 8 $3.9166 2,817,857 $3.7909
$2.6875 to $4.0600 394,250 9 $3.3681 129,319 $3.3274
$2.0000 to $2.1875 116,250 10 $2.0565 0 $0
----------- ------------
$0.0000 to $15.0000 5,494,100 3,131,757
=========== ============
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on their fair value at the
grant date for options granted in 1997, 1998 and 1999 consistent with the
provisions of SFAS No. 123, the Company's net (loss) income and (loss) income
per share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1997 1998 1999
---------- ------------- ----------
<S> <C> <C> <C>
Net (Loss) Income - As Reported $(15,841) $18,510 $(61,168)
Net (Loss) Income - Pro Forma $(16,914) $17,348 $(62,412)
Net (Loss) Income Per Share (Basic & Diluted)
As Reported $ ( .48) $ 0.23 $(.76)
Pro Forma $ ( .51) $ 0.22 $(.78)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option granted during 1997, 1998 and 1999 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Expected life 5.0 5.0 5.0
Expected volatility 73.84% 76.97% 76.78%
Risk-free interest rate 5.76% 5.35% 5.81%
Dividend Yield 0.00% 0.00% 0.00%
</TABLE>
The Company offers a 401(k) savings plan under which all employees who are 21
years of age with at least 30 days of service are eligible to participate. The
plan permits eligible employees to make contributions up to certain limitations,
with the Company matching certain of those contributions. The Company's
contributions vest 25% per year. The Company contributed $506,000, $892,000 and
$1,250,000 to the plan during the years ended December 31, 1997, 1998 and 1999,
respectively. The contributions to the 401(k) plan were in the form of newly
issued shares of the Company's common stock for 1997 and cash, which was used to
purchase shares of the Company's common stock on the open market, for 1998 and
1999.
13. Segment Information
As of January 1, 1998, the Company implemented SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires disclosure of certain information about operating segments, geographic
areas in which the Company operates, major customers, and products and services.
In accordance with SFAS 131, the Company had determined it had three operating
segments: the United States distribution segment, the Canadian distribution
segment, and MOCA. Prior to December 1999, each of these segments had a
dedicated management team and was managed separately primarily because of
geography (United States and Canada) and differences in product categories,
marketing strategies and customer base (MOCA). In December 1999, the Company
announced a restructuring plan that would combine the U.S. and Canadian
distribution segments into one operating segment, the North American
distribution segment.
Historically, the Company has not maintained separate stand-alone financial
statements prepared in accordance with generally accepted accounting principles
for each of its operating segments. During 1999, the Company began to evaluate
the MOCA segment as a combination of United States and Canadian MOCA. The 1997
and 1998 segment disclosures have been restated to conform to the 1999
presentation. The impact of these restatements on the 1997 and 1998 disclosures
is to increase net sales of the MOCA segment by $12,431,000 and $9,698,000,
respectively. Additionally, during 1999, the Company developed methods to
allocate corporate overhead, depreciation and amortization, shared operating
expenses, and shared assets, including asset securitizations, to the MOCA
operating segment. The impact of these restatements on the 1997 and 1998
disclosures is to increase MOCA depreciation and amortization by $155,000 in
each year, to reduce MOCA segment operating profit by $10,869,000 and
$10,992,000, respectively, to increase MOCA long-lived assets by $325,000 and
$170,000, respectively, and to decrease total segment assets by $58,494,000 and
$80,814,000, respectively.
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. The United States and Canadian segments have been combined
to show how they would look as the North American distribution segment, which is
how internal management reports will be presented on a go-forward basis.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999
(in thousands)
------------------------------------------------------------------------------------------------
US Canada Eliminations NAM MOCA Other Total
-- ------ ------------ --- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers 3,305,026 926,370 4,231,396 957,283 5,188,679
Depreciation and
amortization 20,497 1,751 22,248 101 22,349
Operating (loss)profit (A) (34,180) 9,099 (25,081) 23,663 (12,000) (13,418)
Long-lived assets 80,120 3,988 84,108 501 84,609
Total segment assets 1,066,330 185,956 (554,933) 697,353 108,442 805,795
Capital expenditures 27,720 1,103 28,823 432 29,255
</TABLE>
<TABLE>
<CAPTION>
1998
(in thousands)
------------------------------------------------------------------------------------------------
US Canada Eliminations NAM MOCA Other Total
-- ------ ------------ --- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers 3,098,261 839,668 3,937,929 613,048 4,550,977
Depreciation and
amortization 8,915 1,910 10,825 155 10,980
Operating profit 34,098 8,007 42,105 14,851 56,956
Long-lived assets 74,378 5,171 79,549 170 79,719
Total segment assets 1,268,199 180,234 (657,242) 791,191 154,129 945,320
Capital expenditures 44,505 5,562 50,067 50,067
</TABLE>
<TABLE>
<CAPTION>
1997
(in thousands)
------------------------------------------------------------------------------------------------
US Canada Eliminations NAM MOCA Other Total
-- ------ ------------ --- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers(B) 2,637,979 750,900 3,388,879 456,565 202,177 4,047,621
Depreciation and
amortization(B) 8,807 2,111 10,918 155 278 11,351
Operating profit (B) 12,147 7,563 19,710 16,041 1,478 37,229
Long-lived assets 35,545 4,272 39,817 325 40,142
Total segment assets 1,091,683 151,662 (567,919) 675,426 71,685 747,111
Capital expenditures 5,864 1,426 7,290 7,290
Note A: Other amount represents a $12,000,000 litigation-related charge, net of
recovery, which was not allocated to any segment.
Note B: Other amount represents the results of FAB operations which had been
included in the U.S. segment in 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographical Area Net Sales:
1997 1998 1999
------------------ --------------- -----------------
<S> <C> <C> <C>
United States $3,286,890 $3,697,660 $4,239,285
Canada 760,731 853,317 949,394
------------------ --------------- -----------------
Total Net Sales $4,047,621 $4,550,977 $5,188,679
================== =============== =================
</TABLE>
14. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with SFAS No.
128, "Earnings Per Share". Basic earnings per share is calculated using the
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the average number of common shares outstanding plus
the effect of outstanding stock options using the "treasury stock" method.
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)
For the Years Ended
December 31,
Weighted average shares outstanding 1997 1998 1999
- ----------------------------------- ---- ---- ----
<S> <C> <C> <C>
Basic 33,216 80,210 80,279
Assumed exercises of stock options 275
------ ------ ------
Diluted 33,216 80,485 80,279
====== ====== ======
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Quarterly Financial Data (Unaudited)
Selected financial information for the quarterly periods for the fiscal years
1998 and 1999 is presented below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
March 31 June 30 September 30 December 31
------------ -------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales...................... $1,101,235 $1,095,936 $1,143,848 $1,209,958
Gross profit................... 61,316 61,200 66,806 63,102
Net income..................... 3,636 5,108 7,604 2,162
Net income per
Basic and diluted share..... .05 .06 .09 .03
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
March 31 June 30 September 30 December 31
------------ -------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales...................... $1,254,717 $1,266,164 $1,357,826 $1,309,972
Gross profit................... 64,648 59,962 61,754 54,689
Net income..................... (20,509) (2,984) (11,716) (25,959)
Net income per
Basic and diluted share..... (.26) (.04) (.15) (.32)
</TABLE>
In the first quarter of 1999, a $21,000,000 charge was recorded by the Company
relating to the settlement of the litigation pending in Delaware Chancery Court
between the Company and certain holders and former holders of the 12.5% Notes.
In the second quarter of 1999, the Company recorded an $9,000,000 offset to the
litigation charge due to the negotiation and receipt of an insurance recovery.
In the fourth quarter of 1999 the value of certain investments in software
development and facilities were determined to be of diminished or no value in
connection with the combination of the U.S. and Canadian distribution
businesses. As a result, the Company recorded a $3,800,000 non-cash asset
impairment charge. The Company also recorded a restructuring charge in the
fourth quarter of 1999 for $3,200,000 relating to severance costs associated
with such combination.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
MERISEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1998 AND 1999
Balance at Charged to Balance at
December 31, Costs and December 31,
1996 Expenses Deductions 1997
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Accounts receivable--Doubtful accounts..... $19,762,000 $7,361,000 $10,521,000 $16,602,000
Accounts receivable--Other (1)............. 3,922,000 16,232,000 18,207,000 1,947,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1997 Expenses Deductions 1998
-------------- ------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $16,602,000 $12,553,000 $10,358,000 $18,797,000
Accounts receivable--Other (1)............. 1,947,000 13,104,000 13,372,000 1,679,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1998 Expenses Deductions 1999
-------------- ------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $18,797,000 $15,271,000 $23,526,000 $10,542,000
Accounts receivable--Other (1)............. 1,679,000 15,492,000 12,527,000 4,644,000
</TABLE>
(1) Accounts receivable--Other includes allowances for net sales returns,
uncollectible cooperative advertising credits and notes receivable.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated herein by reference to
information contained in the Company's definitive proxy statement for its 2000
annual meeting of stockholders (the "2000 Proxy Statement") under the captions
"Election of Directors Information Regarding Nominees and the Board of
Directors," "Election of Directors - Executive Officers" and "Election of
Directors Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to the
information contained in the 2000 Proxy Statement under the captions "Election
of Directors - Executive Compensation - Summary Compensation Table; - Options in
1999; - Compensation Committee Interlocks and Insider Participation," "Election
of Directors - Employment and Change-in-Control Arrangements" and "Election of
Directors - Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to the
information contained in the 2000 Proxy Statement under the caption "Election of
Directors - Ownership of Common Stock."
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference to the
information contained in the 2000 Proxy Statement under the caption "Election of
Directors - Certain Relationships and Related Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List of documents filed as part of this Report:
(1) Financial Statements included in Item 8:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1998 and 1999.
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1999.
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1999.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules included in Item 8:
Schedule II - Valuation and Qualifying Accounts.
<PAGE>
Schedules other than that referred to above have been omitted
because they are not applicable or are not required under the
instructions contained in Regulation S-X or because the
information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits:
The exhibits listed on the accompanying Index of Exhibits are filed as
part of this Annual Report.
(b) The Following Reports on Form 8-K were filed during the quarter ended
December 31, 1999:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 29, 2000
MERISEL, INC.
By:/s/Timothy N. Jenson
Timothy N. Jenson
Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------ -------------- ----------
<S> <C> <C>
/s/Dwight A. Steffensen Chairman of the Board of Directors and Chief Executive March 29, 2000
- ------------------------------------ Officer (Principal Executive Officer)
Dwight A. Steffensen
/s/Timothy N. Jenson Chief Financial Officer and Executive Vice President March 29, 2000
- ------------------------------------ (Principal Financial and Accounting Officer)
Timothy N. Jenson
/s/Albert J. Fitzgibbons III Director March 29, 2000
- ------------------------------------
Albert J. Fitzgibbons III
/s/Bradley J. Hoecker Director March 29, 2000
- ------------------------------------
Bradley J. Hoecker
/s/Dr. Arnold Miller Director March 29, 2000
- ------------------------------------
Dr. Arnold Miller
/s/Thomas P. Mullaney Director March 29, 2000
- ------------------------------------
Thomas P. Mullaney
/s/Lawrence J. Schoenberg Director March 29, 2000
- ------------------------------------
Lawrence J. Schoenberg
</TABLE>
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Merisel, Inc., filed as
an exhibit to the Form S-1 Registration Statement of
Softsel Computer Products, Inc., No. 33-23700.**
3.2 Amendment to Certificate of Incorporation of Merisel, Inc. dated
August 22, 1990, filed as exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990.**
3.3 Amendment to Certificate of Incorporation of Merisel, Inc. dated
December 19, 1997, filed as Annex I to the Company's Schedule 14A
dated October 6, 1997.**
3.4 Bylaws, as amended, of Merisel, Inc, filed as exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.**
4.1 Indenture dated October 15, 1994 between Merisel, Inc. and NationsBank
of Texas, N.A., as Trustee, relating to the Company's 12.5% Senior
Notes Due 2004, including the form of such Senior Notes attached as
Exhibit A thereto, filed as exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.**
*10.1 1983 Employee Stock Option Plan of Softsel Computer Products, Inc., as
amended, together with Form of Incentive Stock Option Agreement and
Form of Nonqualified Stock Option Agreement under 1983 Employee Stock
Option Plan, filed as exhibits 4.4, 4.5 and 4.6, respectively to the
Form S-8 Registration Statement of Softsel Computer Products, Inc., No.
33-35648, filed with the Securities and Exchange Commission on June 29,
1990.**
*10.2 1991 Employee Stock Option Plan of Merisel, Inc. together with Form of
Incentive Stock Option Agreement and Form of Nonqualified Stock Option
Agreement under the 1991 Employee Stock Option Plan, filed as exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991.**
*10.3 Amendment to the 1991 Employee Stock Option Plan of Merisel, Inc.
dated January 16, 1997, filed as exhibit 10.67 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.**
*10.4 Merisel, Inc. 1992 Stock Option Plan for Nonemployee Directors,
filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.**
*10.5 Softsel Computer Products, Inc. Executive Deferred Compensation Plan,
filed as exhibit 10.35 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991.**
*10.6 Merisel, Inc. 1997 Stock Award and Incentive Plan, filed as Annex II to
the Company's Schedule 14A dated October 6, 1997.**
*10.7 Form of Nonqualified Stock Option Agreement under the Merisel, Inc.
1997 Stock Award and Incentive Plan, filed as exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.**
*10.8 Form of Restricted Stock Unit Agreement under the Merisel, Inc. 1997
Stock Award and Incentive Plan.
10.9 Amended and Restated Receivables Transfer Agreement dated as of
September 27, 1996 by and between Merisel Americas, Inc. and Merisel
Capital Funding, Inc., filed as exhibit 10.53 to the Company's Current
Report on Form 8-K, dated April 17, 1996.**
10.10 Amended and Restated Receivables Purchase and Servicing Agreement dated
as of September 27, 1996, by and between Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc. and General
Electric Capital Corporation, filed as exhibit 10.54 to the Company's
Current Report on Form 8-K, dated April 17, 1996.**
<PAGE>
10.11 Annex X to Receivables Transfer Agreement and Receivables Purchase and
Servicing Agreement dated as of October 2, 1995, filed as exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.**
10.12 Amendment No. 1 and Waiver to Amended and Restated Receivables Purchase
and Servicing Agreement dated as of November 7, 1996 among Merisel
Capital Funding, Inc., Redwood Receivables Corporation, Merisel
Americas, Inc. and General Electric Capital Corporation, filed as
exhibit 2.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.**
10.13 Amendment No. 1 and Waiver to Amended and Restated Receivables Transfer
Agreement dated as of November 7, 1996 by and between Merisel Americas,
Inc. and Merisel Capital Funding, Inc., filed as exhibit 2.6 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.**
10.14 Amendments to Securitization Agreements, dated as of December 19, 1997,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation, filed
as exhibit 10.19 to the Company's Annual Report on Form 10-K for year
ended December 31, 1997.**
10.15 Amendments to Securitization Agreements, dated as of July 31, 1998,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation, filed
as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.**
10.16 Amendment No. 4 and Waiver to Purchase Agreement, dated of as February
22, 1999, among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation, filed as exhibit 10.15 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.**
10.17 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, filed as exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.**
10.18 Amendment No. 6 to Purchase Agreement and Waiver dated as of August 13,
1999 among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation, filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 3, 1999.**
10.19 Amendments to Securitization Agreements and Waiver dated as of March
10, 2000, among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Corporation.
10.20 Receivables Transfer Agreement dated as of March 10, 2000, between
Merisel Capital Funding, Inc. and Merisel Open Computing Alliance,Inc.
10.21 Loan and Security Agreement, dated as of June 30, 1998, among the
financial institutions listed on the signature pages thereof,
BankAmerica Business Credit, Inc. and Merisel Americas, Inc., filed as
exhibit 10.6 to Amendment No. 1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.**
10.22 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, filed as exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.**
<PAGE>
10.23 Amendment No. 2 to Loan Agreement dated as of September 30, 1999, among
Merisel Americas, Inc., the financial institutions listed on signature
pages thereto and Bank of America, N.A. filed as exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.**
10.24 Amendment No. 3 to Loan and Security Agreement dated as of March 10,
2000, among Merisel Americas, Inc., Bank of America National
Association and Congress Financial Corporation.
10.25 Form of Security Agreement between Merisel Properties, Inc. and
Heller Financial, Inc. dated December 29, 1995, filed as
exhibit 10.36 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.**
10.26 Deed of Trust, Security Agreement, Assignment of Leases and Rents
and Fixture Filing between Merisel Properties, Inc. and Heller
Financial, Inc. dated December 29, 1995, filed as exhibit 10.37 to
the Company's Annual Report and Form 10-K for the year ended December
31, 1995.**
10.27 Severance Agreement dated as of March 3, 1999 between Merisel, Inc.
and James E. Illson, filed as exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 30, 1999.**
*10.28 Severance Agreement dated as of March 3, 1999 between Merisel, Inc.
and Timothy N. Jenson, filed as exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended March 30, 1999.**
*10.29 Promissory Note dated March 17, 1999 between Timothy N. Jenson and
Merisel, Inc., filed as exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q for the period ended March 30, 1999.**
*10.30 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and William Page, filed as
exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.**
*10.31 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and Karen A. Tallman, filed
as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.**
*10.32 Change of Control Agreement dated as of May 11, 1998 between Kristin M.
Rogers and Merisel Americas, Inc., filed as exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.**
*10.33 Promissory Note dated June 17, 1999 between Kristin M. Rogers and
Merisel Americas, Inc., filed as exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1999.**
*10.34 Offer of Employment Letter to Ronald S. Smith dated June 2, 1998,
filed as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.**
10.35 Registration Rights Agreement, dated September 19, 1997, by and among
Merisel, Inc., Merisel Americas, Inc. and Phoenix Acquisition Company
II, L.L.C, filed as exhibit 99.4 to the Company's Current Report on
Form 8-K, dated September 19, 1997.**
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP, Independent Accountants.
27 Financial Data Schedule for the year ended December 31, 1999.
- --------
*Management contract or executive compensation plan or arrangement.
**Incorporated by reference.
RESTRICTED STOCK UNIT AGREEMENT
This RESTRICTED STOCK UNIT AGREEMENT (the "Agreement") is entered into
as of this ____ day of _______________, 1999, by and between MERISEL, INC., a
Delaware corporation (the "Company"), and FirstName LastName, an
employee of the Company or one of its subsidiaries (the "Grantee"). Any
capitalized terms not defined herein shall have the meaning set forth in the
Plan (as defined below).
Pursuant to the Merisel, Inc. 1997 Stock Award and Incentive Plan (the
"Plan") and in consideration of Grantee's services, which has been determined by
the Board of Directors of the Company to be sufficient consideration hereunder,
the Committee has determined that the Grantee is to be granted, on the terms and
conditions set forth herein (and subject to the terms and provisions of the
Plan), restricted stock units ("Restricted Stock Units"), and hereby awards such
Restricted Stock Units. Each Restricted Stock Unit represents the right to
receive one share of the Company's common stock ("Stock"), par value $.01 per
share, subject to the conditions and restrictions set forth herein.
1. Number of Restricted Stock Units and Date of Grant. The Grantee is
entitled to Grants Restricted Stock Units pursuant to the terms and
conditions of this Agreement and the provisions of the Plan.
2. Restrictions; Vesting Period; Issuance of Stock.
a. Restrictions. The rights of the Grantee under this
Agreement and the Restricted Stock Units granted hereunder may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of and shall
be subject to a risk of forfeiture as described in Paragraph 4 below until the
termination of the Vesting Period (as defined below).
b. Vesting Period. Unless the Vesting Period is previously
terminated pursuant to Subparagraph 2.c. of this Agreement, the Grantee shall be
entitled to receive one share of Stock for each Restricted Stock Unit at the end
of the period ending on August 17, 2002 (the "Vesting Period").
c. Early Termination of Vesting Period. The Vesting Period
shall terminate as to all or a portion of the Restricted Stock Units, and the
Grantee shall be entitled to receive shares of Stock for such Restricted Stock
Units, if the Company's consolidated pre-tax net income for any four consecutive
fiscal quarters, as a percentage of total net sales for such four consecutive
fiscal quarters, equals or exceeds any of the percentages set forth below:
Pre-tax Net Income as a Restricted Stock Units for which
Percentage of Total Net Sales Vesting Period Terminates
1.25% 100%
1.00% 75%
0.75% 50%
0.50% 25%
<PAGE>
2
In determining the number of Restricted Stock Units as to which the Vesting
Period terminates, the applicable percentage shall be applied to the number of
Restricted Stock Units granted pursuant to Section 1 above, provided that
Grantee shall not be entitled hereunder to more than the number of Restricted
Stock Units granted. The determination as to whether the Vesting Period has
terminated with respect to all or a portion of the Restricted Stock Units at the
end of any fiscal quarter shall be made, and the Vesting Period shall terminate
if at all, on the day that the Company publicly releases its earnings for such
fiscal quarter. At the sole and absolute discretion of the Committee, pre-tax
net income shall be calculated to exclude any extraordinary gains or losses or
other non-recurring items.
In addition, the Committee, in its sole and absolute discretion, may
terminate the Vesting Period at any time with respect to all or a portion of the
Restricted Stock Units.
d. Issuance of Shares of Stock. Upon termination of the
Vesting Period with respect to all or a portion of the Restricted Stock Units
and upon satisfaction of any applicable tax withholding requirements, the
Company shall cause to be issued a certificate or certificates for the shares of
Stock to which the Grantee is entitled, registered in the name of the Grantee.
The Company shall cause such certificate or certificates to be delivered to or
upon the order of the Grantee.
3. Rights of a Stockholder. The Grantee shall have no rights as a
stockholder of the Company with respect to the shares of Stock issuable in
respect of Restricted Stock Units until the date of issuance of a stock
certificate representing such shares.
4. Forfeiture Upon Termination of Employment. In the event that Grantee
ceases to be employed by the Company for any reason, then the Restricted Stock
Units as to which the Vesting Period has not terminated shall be forfeited to
the Company without payment of any consideration therefor, and neither the
Grantee nor any of his successors, heirs, assigns, or personal representatives
shall thereafter have any further rights or interests in such Restricted Stock
Units or any right to receive shares of Stock in respect of such Restricted
Stock Units.
5. Withholding Taxes. Any federal, state or local taxes arising by
virtue of this Agreement and assessed against or based on the value of the
Restricted Stock Units awarded to the Grantee, or the shares of Stock issued to
the Grantee in respect of such Restricted Stock Units, shall be the sole
responsibility of the Grantee; provided that the Company shall have the right to
withhold any amounts required to be so withheld for federal, state or local
income tax purposes. All such taxes and withholding must be paid or provided for
according to law and in a manner satisfactory to the Company before any Stock,
or certificates therefor, can be delivered to the Grantee.
6. Notices. Any notice required or permitted under this Agreement shall
be deemed given when delivered personally, or when deposited with a postal
service, postage prepaid, addressed, as appropriate, to the Grantee either at
his address set forth below or such other address as he or she may designate in
writing to the Company, or to the Company: Attention: General Counsel at the
Company's offices located at 200 Continental Boulevard, El Segundo, CA 90245 or
such other address as the Company may designate in writing to the Grantee.
7. Failure to Enforce Not a Waiver. The failure of the Company to
enforce at any time any provision of this Agreement shall in no way be construed
to be a waiver of such provision or of any other provision hereof.
8. Governing Law. This Agreement shall be governed by and construed
according to the laws of the State of Delaware without regard to its principles
of conflict of laws.
9. Incorporation of Plan. The Plan is hereby incorporated by reference
and made a part hereof, and both the grant hereunder and this Agreement are
subject to all of the terms and conditions of the Plan.
10. Amendments. This Agreement may be amended or modified at any time
by an instrument in writing signed by the parties hereto.
11. Agreement Not a Contract of Employment. Neither the Plan, the
granting of Restricted Stock Units, this Restricted Stock Unit Agreement, nor
any other action taken pursuant to the Plan shall constitute or be evidence of
any agreement or understanding, express or implied, that the Grantee has a right
to continue as an employee of the Company or any Subsidiary or affiliate for any
period of time or at any specific rate of compensation.
12. Authority of the Committee. The Committee shall have full authority
to interpret and construe the terms of the Plan and this Restricted Stock Unit
Agreement. The determination of the Committee as to any such matter of
interpretation or construction shall be final, binding and conclusive.
13. Termination of this Agreement. Upon termination of this Agreement,
all rights of the Grantee hereunder shall cease.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
MERISEL, INC.
By:
Dwight A. Steffensen
Chief Executive Officer
The undersigned hereby accepts and agrees to all the terms and provisions of the
foregoing Agreement and to all the terms and provisions of the Plan, which are
controlling and which are herein incorporated by reference.
Grantee (please sign here)
Address
AMENDMENTS TO SECURITIZATION AGREEMENTS AND WAIVER
AMENDMENTS TO SECURITIZATION AGREEMENTS AND WAIVER, dated as
of March 10, 2000 (these "Amendments") 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 and Merisel Capital
Funding are parties to an Amended and Restated Receivables Transfer Agreement,
dated as of September 27, 1996, as amended by Amendment No. 1, dated as of
November 7, 1996, Amendment No. 2, dated as of December 19, 1997 and Amendment
No. 3, dated as of July 31, 1998 (the "MAI Transfer Agreement");
WHEREAS, Merisel Capital Funding, as seller (in such capacity,
the "Seller"), Redwood as purchaser (in such capacity, the "Purchaser"), GE
Capital, as operating agent (in such capacity, the "Operating Agent") and
collateral agent (in such capacity, the "Collateral Agent") and Merisel
Americas, as servicer (in such capacity, the "Servicer") are parties to an
Amended and Restated Receivables Purchase and Servicing Agreement, dated as of
September 27, 1996, as amended by Amendment No. 1, dated as of November 7, 1996,
Amendment No. 2, dated as of December 19, 1997, Amendment No. 3, dated as of
July 31, 1998, Amendment No. 4, dated as of February 22, 1999, Amendment No. 5,
dated as of May 12, 1999 and Amendment No. 6, dated as of August 13, 1999 (the
"Purchase Agreement");
WHEREAS, Redwood and GE Capital, as liquidity agent (in such
capacity, the "Liquidity Agent"), Operating Agent and Collateral Agent are
parties to a Liquidity Loan Agreement, dated as of October 2, 1995, as amended
by Amendment No. 1, dated as of July 31, 1998 (the "Liquidity Loan Agreement");
WHEREAS, definitions and interpretations of the Purchase
Agreement and the Transfer Agreement are set forth in Annex X thereto, dated as
of September 27, 1996, as amended ("Annex X," and, together with the Purchase
Agreement, the MAI Transfer Agreement and the Liquidity Loan Agreement, the
"Securitization Agreements"); and
WHEREAS, the parties hereto desire to amend the Securitization
Agreements (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:
<PAGE>
ARTICLE I : DEFINITIONS
SECTION 1.1 All capitalized terms used herein, unless otherwise defined, are
used as defined in the Purchase Agreement.
ARTICLE II : AMENDMENT NO. 7 TO PURCHASE AGREEMENT
SECTION 2.1 The Purchase Agreement is hereby amended by adding Exhibit K
to read as set forth in Annex 1 to this Amendment.
SECTION 2.2 Recital E of the Purchase Agreement is hereby amended by:
(i) adding the symbol "(i)" between the second set of
the words "to" and "the" which appear in the
second line therein;
(ii)inserting the acronym "MAI" before the word
"Transfer" which appears in the third line
therein;
(iii) deleting the words "the Originator" and
substituting therefor the words "Merisel
Americas, Inc."; and
(iv)adding the phrase "(ii) the Receivable Transfer
Agreement, dated as of March 10, 2000, between
MOCA and MCF, as amended or amended and restated
from time to time (the "MOCA Transfer
Agreement"), and (iii) such other receivables
transfer agreement between the Purchaser and a
Subsidiary of Merisel, Inc., as may be entered
into from time to time and approved by the
Operating Agent and Collateral Agent (the
"Additional Transfer Agreement," and together
with the MAI Transfer Agreement and the MOCA
Transfer Agreement, the "Transfer Agreement")"
after the word "Seller" which appears in the
final line therein.
SECTION 2.3 Recital I of the Purchase Agreement is hereby amended by deleting
the words "the Originator" and substituting therefor the words "Merisel
Americas, Inc.".
SECTION 2.4 Section 2.03(a) of the Purchase Agreement is hereby amended
by:
(i) deleting the word "the" which appears in the
fourth line therein and substituting therefor the
word "each"; and
(ii)deleting the word "the" which appears in the
thirteenth line therein after the word "under"
and substituting therefor the word "each".
<PAGE>
SECTION 2.5 Section 2.04(d) of the Purchase Agreement is hereby amended by (i)
replacing the word "the" before the word "Originator" in the first line thereof
and substituting therefor the word "either" and (ii) replacing the word "the"
before the word "Transfer" in the second line thereof and substituting therefor
the word "either".
SECTION 2.6 Section 2.08 of the Purchase Agreement is hereby amended by
changing the reference to 3:00 p.m.to 1:00 p.m.
SECTION 2.7 Section 4.01(q) of the Purchase Agreement is hereby amended
by:
(i)adding the phrase "only with respect to" after
the word "and" and before the word "those";
(ii)deleting the words "the Originator" and
substituting therefor the words "Merisel
Americas, Inc."; and
(iii) inserting the acronym "MAI" before the word
"Transfer" which appears in the fifth line
therein.
SECTION 2.8 Section 4.01(u) of the Purchase Agreement is amended by changing the
word "the" that appears before the word "Transfer" in the eleventh line of such
definition to the word "any".
SECTION 2.9 Section 4.01(v) of the Purchase Agreement is amended by changing the
word "the" that appears before the word "Transfer" in the second line of such
definition to the word "any".
SECTION 2.10 Section 4.01(bb) of the Purchase Agreement is hereby amended by
deleting each occurrence of the words "the Originator" and substituting therefor
the words "Merisel Americas, Inc."
SECTION 2.11 Section 5.02 of the Purchase Agreement is hereby amended by:
(i) deleting the word "and" after subclause (j);
(ii)striking the period after subclause (k) and
adding a semi-colon and the word "and"; and
(ii)adding subclause (l) to read as follows:
"as soon as available, a Weekly Availability Report
in the Form of Exhibit K.
<PAGE>
SECTION 2.12 Section 5.02(a) of the Purchase Agreement is amended and
restated to read as follows:
(a)an Investment Base Certificate in the form of
Exhibit C weekly, as soon as available, and in
any event within three Business Days after the
end of each week, no later than 11:00 a.m. New
York time on the day required.
SECTION 2.13 Section 5.03(h)(i) of the Purchase Agreement is hereby amended by
(i) replacing the word "the" before the word "Originator" in the second line
thereof and substituting therefor the word "either", (ii) replacing the word
"the" before the word "Transfer" in the third line thereof and substituting
therefor the word "either" and (iii) replacing the word "the" before the word
"Subordinated" in the third line thereof and substituting therefor the word
"either".
SECTION 2.14 Section 6.02(a) of the Purchase Agreement is amended by
changing the reference to 10:00 a.m.to 1:00 p.m.
SECTION 2.15 Section 6.02(a)(vi) of the Purchase Agreement is hereby amended by
(i) replacing the word "the Originator" before the word "made" in the first line
thereof and substituting therefor the words "Merisel Americas, Inc.", (ii)
inserting the acronym "MAI" before the word "Transfer" in the third line thereof
and (iii) replacing the words "the Originator" before the word "for" in the
fourth line thereof and substituting therefor the words "Merisel Americas,
Inc.".
SECTION 2.16 Section 6.03 of the Purchase Agreement is amended to changing
the reference to 12:00 p.m. to 1:00 p.m.
SECTION 2.17 Section 7.04 of the Purchase Agreement is hereby amended by
deleting the words "the Originator" after the word "is" and before the word "or"
and substituting therefor the words "Merisel Americas, Inc.".
SECTION 2.18 Section 7.06(f) of the Purchase Agreement is hereby amended by
inserting the acronym "MAI before the word "Transfer" in the third line thereof.
SECTION 2.19 Section 8.01(b) of the Purchase Agreement is hereby amended by
deleting the word "the" which appears in the first line therein and substituting
therefor the words "each".
SECTION 2.20 Section 9.01 of the Purchase Agreement is hereby amended by:
(i)adding the word "or" after subclause (w); and
(ii)adding subclause (x) to read as follows:
<PAGE>
"if the non-consolidation opinion of special counsel
to Merisel Americas between Merisel Americas, Inc. and the
Seller, in form and substance satisfactory to the Operating
Agent and its counsel is not received by the Operating Agent
within 60 days of the effective date of the Amendments to
Securitization Agreements and Waiver, dated as of March 10,
2000, among Merisel Americas, Inc., the Seller, the Purchaser,
the Collateral Agent and the Operating Agent.
SECTION 2.21 Section 14.03(a) of the Purchase Agreement is hereby amended by
deleting the phrase "after a termination event".
SECTION 2.22 Schedule 3 of the Purchase Agreement is hereby amended by:
(i) deleting the definition of "Daily Margin" and
substituting therefor the following definition of
"Daily Margin":
"`Daily Margin'" means as of any date, a percentage
per annum (the "Reference Percentage") divided by 360, which
Reference Percentage shall be determined by reference to the
Daily Margin Fixed Charge Coverage Ratio for the most recent
four fiscal quarters of the Parent for which financial results
are required to be delivered pursuant to Section 5.02(c) or
(e), as the case may be, of this Agreement ended on or most
recently prior to such date as set forth below:
MARGIN LEVEL
Daily Margin Reference
Fixed Charge Coverage Ratio Percentage
Level I 3.00%
Less than or equal to 0.40 x
Level II 2.25%
Greater than 0.40 x, but less than or equal to
0.70 x
Level III 1.75%
Greater than 0.70 x, but less than or equal to
1.00 x
Level IV 1.00%
Greater than 1.00 x
The Daily Margin shall be (i) calculated for the four
preceding fiscal quarters of the Parent for which financial
results are required to be delivered pursuant to Section 5.02
<PAGE>
(c) or (e), as the case may be, of this Agreement and (ii)
determined by reference to the Daily Margin Fixed Charge
Coverage Ratio in effect from time to time; provided, that (A)
no change in the Daily Margin shall be effective until three
Business Days after the date on which the Operating Agent and
the Purchaser receive financial statements pursuant to Section
5.02(c) or Section 5.02(e) and a certificate of the chief
financial officer of the Parent demonstrating the computation
of the Daily Margin Fixed Charge Coverage Ratio, (B) if the
Operating Agent and the Purchaser have not received the
information described in clause (A) of this proviso within ten
days of the day required under Section 5.02(c), or Section
5.02(e), as the case may be, or if a Termination Event or
Incipient Event has occurred and is continuing, the Daily
Margin shall be determined by reference to Level I for so long
as such information has not been received by the Operating
Agent and Purchaser or such Termination Event or Incipient
Event continues; and (C) until May 15, 2000, the Daily Margin
shall be determined by reference to Level II; and
(ii)amending and restating the definition of "Daily
Margin Fixed Charge Coverage Ratio" to read as
follows:
"Daily Margin Fixed Charge Coverage Ratio" means the
Fixed Charge Coverage Ratio then in effect in accordance with
Exhibit H.
SECTION 2.23 Schedule 7 of the Purchase Agreement is hereby amended by
adding subclause 7 to read as follows:
"Receivables Transfer Agreement
Dated as of March 10, 2000
Merisel Capital Funding, Inc. as Buyer
MOCA, as Seller".
SECTION 2.24 Exhibit H of the Purchase Agreement is hereby amended and restated
in its entirety to read as follows:
(a) All covenants (i) shall be calculated on the
basis of the financial ratios and net worth percentages for
the most recent four consecutive fiscal quarters just
completed for which financial results are required to be
delivered pursuant to Section 5.02(c) or (e), as the case may
be, of this Agreement, and (ii) shall be calculated on a
quarterly basis. For purposes of determining the covenants set
forth in this Exhibit H, Funded Debt shall include any notes,
bonds, certificates or other interests issued in
securitization of assets of the Parent or any of its
Subsidiaries and principal of such securities and Cash
Interest Expense shall include any payments or distributions
in respect of interest on such securities. The Fixed Charge
Coverage Ratio, Minimum EBITDA and Tangible Net Worth
covenants with respect to any four fiscal quarters (i) ending
before the Second Quarter of 2000 are to be calculated on a
pro-forma basis excluding the reserve of $21 million relating
to the loss recorded by the Parent in connection with the
<PAGE>
Turnberry Settlement (except to the extent of any net
insurance proceeds, if any, collected in connection with the
Turnberry Settlement) and (ii) ending before the First Quarter
of 2001 are to be calculated on a pro forma basis excluding
$10 million relating to the restructuring plan announced by
the Parent in the Fourth Quarter of 1999.
Covenant Covenant Level
I. Parent Fixed Charge Coverage Ratio (minimum)
Fourth Quarter of 1997 1.00 to 1.00
First Quarter of 1998 1.00 to 1.00
Second Quarter of 1998 1.00 to 1.00
Third Quarter of 1998 0.85 to 1.00
Fourth Quarter of 1998 0.70 to 1.00
First Quarter of 1999 0.46 to 1.00
Second Quarter of 1999 0.60 to 1.00
Third Quarter of 1999 0.40 to 1.00
Fourth Quarter of 1999 0.45 to 1.00
First Quarter of 2000 0.35 to 1.00
Second Quarter of 2000 0.45 to 1.00
Third Quarter of 2000 0.70 to 1.00
Fourth Quarter of 2000 1.00 to 1.00
Each Quarter Thereafter 1.10 to 1.00
II. Seller Net Worth Percentage (minimum) 15%
III. Parent Tangible Net Worth Covenant Level
Measurement Period
First Quarter of 2000 $80,000,000
Second Quarter of 2000 75,000,000
1 Commencing with the First Quarter of 2001, Tangible Net Worth on the last day
of each fiscal quarter shall be not less than the minimum Tangible Net Worth of
the Parent required pursuant to this Covenant III for the immediately prceding
fiscal quarter, plus 50% of Net Income for the fiscal quarter then ended.
<PAGE>
Third Quarter of 2000 80,000,000
Fourth Quarter of 2000 90,000,000
Each Quarter Thereafter 90,000,000 plus 50% of
(commencing First Quarter Net Income for fiscal
of 2001)1 quarter then ended
IV. Parent Minimum EBITDA Covenant Level
Measurement Period
Third Quarter of 1999 36,000,000
Fourth Quarter of 1999 35,000,000
First Quarter of 2000 30,000,000
Second Quarter of 2000 35,000,000
Third Quarter of 2000 50,000,000
Fourth Quarter of 2000 65,000,000
Each Quarter Thereafter 85,000,000
[END OF CHART]
Capitalized terms used above and not otherwise defined below
shall have the meanings specified in Annex X to the Purchase Agreement.
"Capital Expenditures" means all payments for any
fixed assets or improvements or for replacements, substitutions, or
additions thereto, which are required to be capitalized in accordance
with GAAP, including, without limitation, any such expenditures
financed by the proceeds received from the sale of Receivables under
the Transfer Agreement, but excluding expenditures under (i) Capital
Leases and (ii) financed by the incurrence of Debt (other than pursuant
to the Inventory Facility).
"Cash Interest Expense" means, with respect to the
Parent and its consolidated subsidiaries for any period, (i) the sum of the
amount of cash interest payable on all Debt of the Parent and its consolidated
Subsidiaries (other than interest expense eliminated in consolidation in
accordance with GAAP) and (ii) Redwood Yield, if any, for such Person.
<PAGE>
"EBITDA" means, for any Person with respect to any
period, (a) consolidated net income of the Parent and its consolidated
subsidiaries for such period, plus to the extent deducted in determining net
income, (b) the sum of (i) the Parent's and its consolidated subsidiaries'
depreciation and amortization for such period, (ii) Cash Interest Expense for
such period, (iii) any provision for taxes based on income or profits that was
deducted in computing consolidated net income for such period, and (iv) any
other non-cash charges.
"Fixed Charges" means, with respect to the Parent's
for any period, the sum of the following amounts payable during such period by
the Parent's and its consolidated subsidiaries: (i) Cash Interest Expense in
respect of Debt; (ii) regularly scheduled principal payments on Funded Debt; and
(iii) cash taxes.
"Fixed Charge Coverage Ratio" means with respect to
the Parent and its consolidated subsidiaries, the ratio of (i) EBTDA to (ii)
Fixed Charges plus Capital Expenditures.
"Funded Debt" means, with respect to any Person and
its consolidated subsidiaries, all Debt of such Person and its consolidated
subsidiaries which by the terms of the agreement governing or instrument
evidencing such Debt matures more than one year from or is directly or
indirectly renewable or extendable at the option of the debtor under a revolving
credit or similar agreement obligating the lender or lenders to extend credit
over a period of more than one year from, the date of creation thereof,
including current maturities of long-term debt, revolving credit, and short-term
debt extendable beyond one year at the option of such Person and its
consolidated subsidiaries.
"Net Income" means, for the Parent with respect to
any period, the consolidated net income of the Parent and its consolidated
subsidiaries.
"Net Worth Percentage" means a fraction (expressed
as a percentage) (i) the numerator of which is the excess of assets over
liabilities, each determined in accordance with GAAP on a basis consistent with
the last audited financial statements and (ii) the denominator of which is the
Outstanding Balance of Transferred Receivables.
"Tangible Net Worth" means, with respect to the
Parent and its consolidated subsidiaries, assets minus liabilities.
ARTICLE III : AMENDMENT NO. 3 TO ANNEX X
SECTION 3.1 Annex X is hereby amended by:
(i) adding the following definitions:
"MAI Secured Obligations" means all obligations of
every nature of the Originator now or hereafter existing,
under the MAI Transfer Agreement and any promissory note or
other document or instrument delivered pursuant to such
<PAGE>
documents, and all amendments, extensions or renewals thereof,
whether for principal, interest, fees, expenses or otherwise,
whether now existing or hereafter arising, voluntary or
involuntary, whether or not jointly owed with others, direct
or indirect, absolute or contingent, liquidated or
unliquidated, and whether or not from time to time decreased
or extinguished and later increased, created or incurred and
all or any portion of such obligations that are paid, to the
extent all or any part of such payment is avoided or recovered
directly or indirectly from MCF as a preference, fraudulent
transfer to otherwise.
"MAI Subordinated Note" has the meaning specified in
Section 2.01(c) of the MAI Transfer Agreement.
"MAI Transfer Agreement" means the Amended and
Restated Receivables Transfer Agreement, dated as of
September 27, 1996 as amended by Amendment No. 1, Amendment
No. 2 and Amendment No. 3, as amended or amended and restated
from time to time, between Merisel Americas, Inc. and MCF.
"MOCA" means Merisel Open Computing Alliance, Inc. a
Delaware corporation.
"MOCA Effective Date" means the effective date of the
MOCA Transfer Agreement.
"MOCA Secured Obligations" means all obligations of
every nature of the Originator now or hereafter existing,
under the MOCA Transfer Agreement and any promissory note or
other document or instrument delivered pursuant to such
documents, and all amendments, extensions or renewals thereof,
whether for principal, interest, fees, expenses or otherwise,
whether now existing or hereafter arising, voluntary or
involuntary, whether or not jointly owed with others, direct
or indirect, absolute or contingent, liquidated or
unliquidated, and whether or not from time to time decreased
or extinguished and later increased, created or incurred and
all or any portion of such obligations that are paid, to the
extent all or any part of such payment is avoided or recovered
directly or indirectly from MCF as a preference, fraudulent
transfer or otherwise.
"MOCA Subordinated Note" has the meaning specified in
Section 2.01(c) of the MOCA Transfer Agreement.
"MOCA Transfer Agreement" means the Receivables
Transfer Agreement, dated as of March 10, 2000, as amended or
amended and restated from time to time, between MOCA and MCF.
"Net Worth Percentage" means a fraction (expressed as
a percentage) (i) the numerator of which is the excess of
assets over liabilities, each determined in accordance with
<PAGE>
GAAP on a basis consistent with the last audited financial
statements and (ii) the denominator of which is the
Outstanding Balance of Transferred Receivables.
(ii) adding the following text to the cover of Annex X after the date "September
27, 1996":
"AND
RECEIVABLES TRANSFER AGREEMENT
Dated as of
March 10, 2000".
<PAGE>
(iii) amending the definition of "Adjusted Generated Receivables" by deleting
the word "the" before the word "Originator" and substituting therefor the word
"each".
(iv) the definition of "Contract" is hereby amended (i) deleting the words "an
Obligor" in the second line hereof and replacing such words with the words "a
Person" and (ii) deleting the words "such Obligor" in the second line thereof
and replacing such words with the words "such Person".
(v) amending the definition of "Contributed Receivable" by inserting the acronym
"MAI" before the word "Transfer" and after the word "the".
(vi) amending the definition of "Credit and Collection Policies" by deleting the
word "the" before the word "Originator" and substituting therefor the word
"each".
(vii) amending the definition of "Effective Date" by adding the phrase "(i) in
the case of MAI," after the word "means" and the phrase "and (ii) in the case of
MOCA, the date of the MOCA Transfer Agreement" after the word "Agreement".
(viii) amending the definition of "Eligible Receivable" by (a) adding the word
"applicable" before the word "Transfer" after the word "the" in subclause (e)
and (b) amending and restating subclause (f) to read as follows: "(f) which
complies with such other criteria and requirements as the Operating Agent may
from time to time specify to the Seller or the Originator upon prior written
notice and in its reasonable credit discretion.
(ix) amending the definition of "MCF" by deleting the phrase "as a purchaser and
transferee of Transferred Receivables under the Transfer Agreement and the
Seller under the Purchase Agreement" and substituting therefor the phrase ", a
Delaware corporation".
(x) amending the definition of "Obligor" by (i) deleting the words "this Section
1" and substituting therefor the words" Annex X" and (ii) inserting at the end
thereof the following sentence.
"Unless otherwise stated, the term "Obligor"
of any Receivable refers to both the Original Obligor that
owes such Receivable and, if applicable, the Floor Plan
Obligor that finances, or may finance, such Receivable."
<PAGE>
(xi) amending the definition of "Orders" by deleting the word "the" before the
word "Transfer" and substituting therefor the word "each".
(xii) amending the definition of "Original Obligor" by deleting the words "this
Section 1" and substituting therefor the words" Annex X".
(xiii) amending the definition of "Proceeds" by adding the following at the end
thereof: "Provided that returned goods, for all purposes other than Section 2.02
of each Transfer Agreement and Section 8.01 of the Purchase Agreement or
inventory shall not constitute Proceeds to the extent the Billed Amount thereof
less all collections thereof have been paid to MCF in accordance with Section
4.04 of either Transfer Agreement."
(xiv) amending the definition of "Originator" by deleting the word "initially",
adding the phrase "(ii) Merisel Open Computing Alliance, Inc., a Delaware
corporation," after the word "and" and before the symbol "(ii)", and deleting
the symbol "(ii)" and substituting therefor the symbol "(iii)".
(xv) amending the definition of "Purchase Agreement" by adding the phrase "as
the same may be amended from time to time" after the word "Servicer".
(xvi) amending and restating the definition of "Receivable" to read as
follows:
"Receivable" means
(a) indebtedness of a Person (whether
constituting an account, chattel paper, instrument or general
intangible) arising from the sale by an Originator of goods,
merchandise or inventory to such Person or the provision by an
Originator of services, related to the processing of payments
for a Person, including the right to payment of any interest
or finance charges and other obligations of such Person with
respect thereto including, without limitation, (i) the
indebtedness of any Person under an agreement (including an
invoice), pursuant to which such Person is obligated to pay an
Originator from time to time, arising from a sale of
merchandise by an Originator to such Person, including without
limitation any such indebtedness which may be financed by any
other Person, and (ii) the indebtedness of any Person arising
from the sale by the Originator of any indebtedness referred
to in clause (i) above to such Person under the agreement or
arrangement of the type described in clause (c) hereof
relating to such indebtedness.
(b) all security interests or liens and
property subject thereto from time to time securing or
purporting to secure payment by such Person; provided that,
except for the purposes of Section 2.02 of each Transfer
Agreement and Section 8.01 of the Purchase Agreement, (i)
Returned Goods (as defined in the Intercreditor Agreement)
therein ceases to exist and (ii) returned goods or inventory
related to an Originator shall not constitute a "Receivable"
<PAGE>
to the extent the Billed Amount of the Receivable created in
connection with the sale of such goods or inventory less all
Collections thereon have been paid to MCF in accordance with
Section 4.04 of the relevant Transfer Agreement.
(c) all rights under any floor plan repurchase
agreements, repurchase agreements, inventory financing
agreements, and other floor plan agreements, and all
guarantees, indemnities and warranties and proceeds thereof,
proceeds of insurance policies, financing statements and other
agreements or arrangement of whatever character, in each case
from time to time supporting or securing payment of such
Receivable whether pursuant to the contract related to such
Receivable or otherwise.
(d) all Collections with respect to any of the
foregoing.
(e) all Records with respect to any of the foregoing;
and
(f) all Proceeds of any of the foregoing."
Notwithstanding anything to the contrary expressed or implied by the foregoing,
indebtedness or other obligations of a vendor or seller of merchandise, goods or
inventory relating to credits, discounts, rebates, refunds and incentive
payments shall be excluded from this definition of "Receivable".
(xvii) amending the definition of "Related Documents" by deleting the word "the"
before the word "Transfer" and substituting therefor the word "each".
(xviii) amending and restating the definition of "Reserves" to read as
follows:
"Reserves" means, for any day, the sum of the Concentration
Discount Amount, the Defective Goods Reserve, the Refused
Shipment Reserve, the Price Protection Reserve and such other
reserves as the Operating Agent may establish from time to
time in its reasonable credit discretion.
(xix) amending the definition of "Servicer" by deleting the word the
"Originator" and substituting therefor the words "Merisel Americas, Inc.".
(xx) amending the definition of "Sold Receivable" by adding the word
"applicable" before the word "Transfer".
(xxi) amending and restating the term "Subordinated Note" to read as follows:
"Subordinated Note" means, as applicable, the MAI Subordinated
Note, the MOCA Subordinated Note, or a subordinated note
between MCF and an additional originator as may be approved by
the Operating Agent in its sole discretion.
<PAGE>
(xxii) amending and restating the definition of "Transfer Agreement" it in its
entirety to read as follows:
"means individually or collectively, as the case may be, or
the context may require (i) the MAI Transfer Agreement, (ii)
the MOCA Transfer Agreement, and (iii) such other receivables
transfer agreement between an Originator and MCF, as shall be
approved by the Operating Agent and as may be amended or
amended and restated from time to time".
(xxiii) amending the definition of "Transferred Receivable" by adding
the word "applicable" before the word "Transfer".
ARTICLE IV : AMENDMENT NO. 4 TO MAI TRANSFER AGREEMENT
SECTION 4.1 Article I of the MAI Transfer Agreement is hereby amended by
adding Section 1.03 to read as follows:
"Definition of Receivables, Transferred Receivable and
Contract. Whenever the terms "Receivables", "Transferred
Receivable" or "Contract" are used herein, such terms shall
mean only those Receivables, Transferred Receivables or
Contract (as such terms are defined in Annex X) originated by
Merisel Americas, Inc., and no other Subsidiary of Merisel,
Inc."
SECTION 4.2 Section 2.01(b) is amended by deleting the word "opening"
immediately preceding the words "of business" and replacing such word with the
word "close".
SECTION 4.3 Section 2.01(c) of The MAI Transfer Agreement is hereby
amended by:
(i) amending and restating the phrase "Subordinated Note" to
read "MAI Subordinated Note" each time such term is used
in the MAI Transfer Agreement.
(ii) adding the phrase ", and provided further that, in any
event, the indebtedness under the MAI Subordinated Note
shall not be increased on any day if such increase would
interfere with the transfer of receivables by MOCA to MCF"
after the number "15%".
SECTION 4.4 Section 2.02 is amended and restated in its entirety to read:
"(a) It is the intention of the parties
hereto that each transfer of Receivables to be made hereunder
shall constitute a purchase and sale, and not a loan. In the
event, however, that a court of competent jurisdiction were to
hold that any transaction provided for hereby constitutes a
<PAGE>
loan and not a purchase and sale or for any reason such
purchase and sale is not effective, it is the intention of the
parties hereto that this Agreement shall constitute a security
agreement under applicable law and that the Originator shall
be deemed to have granted to MCF and the Originator hereby
grants to MCF for such purpose a first priority security
interest in all of the Originator's right, title and interest
in, to and under the Receivables transferred hereunder (or any
other Receivables which would have been transferred hereunder
if the transactions contemplated hereunder were deemed to be a
purchase or sale and not a loan), all payments of principal,
interest, fees, charges and indemnities on or under such
Receivables and all Proceeds of any such Receivables as
security for the prompt payment or performance when due,
whether at stated maturity, by acceleration or otherwise of
all MAI Secured Obligations.
(b) To the extent a Receivable relates to a returned
good or inventory, the security interest granted under this
Agreement with respect thereto shall terminate and MCF shall
automatically release such security interest immediately upon
the payment to MCF of the Billed Amount of the Receivable
relating to such returned good or inventory less all
Collections thereon in accordance with Section 4.04 of this
Agreement and MCF shall, at the request of the Originator,
provide such additional documentation requested by the
Originator to evidence such release of the security interest."
<PAGE>
SECTION 4.5 Section 4.01(a)(ii) is hereby amended by inserting the text "to
which it is a party" immediately following the words "Related Documents".
SECTION 4.6 Sections 4.01(a)(ii) through 4.01(a)(v) and Sections 4.01(a)(viii),
4.01(a)(xiv) and 4.01(b)(xv) are each hereby amended by inserting the words "to
which it is a party" immediately following each occurrence of the words "Related
Documents".
SECTION 4.7 Section 4.01(a)(xxiii) is hereby amended by deleting the text "G"
immediately following the word "Regulations" and replacing such text with the
text "T".
SECTION 4.8 Section 4.02(d)(i) is hereby amended by inserting the words "to
which it is a party" immediately following the words "Related Documents".
SECTION 4.9 Section 4.02(d)(ii) is hereby amended by replacing the words
"the Seller" with the text "MCF".
SECTION 4.10 Section 4.02(k)(iii) is hereby amended by inserting the words
"Merisel Open Computing Alliance, Inc. and" immediately following the words
"Receivables from the Originator and".
SECTION 4.11 Section 4.02(n) is hereby amended by inserting the words "to which
the Originator is a party" immediately following each occurrence of the words
"Related Documents".
SECTION 4.12 Section 4.04 is hereby amended by inserting the text "(and MCF
shall transfer such Receivable to the Originator)" immediately following the
words "under the Subordinated Note or both".
SECTION 4.13 Section 5.01 is hereby amended by deleting each occurrence of the
text "wilful" and replacing such text with the text "willful" in each instance.
SECTION 4.14 Section 6.03 is hereby amended by deleting the text "pursuant to
Sections 4.01, 4.02 and 4.03" and replacing such text with the text "pursuant to
Sections 4.01(b), 4.02(b) and (c) and 4.03 (a), (b) and (c)".
ARTICLE V : AMENDMENT NO. 2 TO LIQUIDITY LOAN AGREEMENT
SECTION 5.1 Section 1.01 of the Liquidity Loan Agreement is hereby amended by
adding the following definitions:
"MAI Transfer Agreement" means the Amended and
Restated Receivables Transfer Agreement, dated as of September
27, 1996, as amended by Amendment No. 1, Amendment No. 2 and
<PAGE>
Amendment No. 3, as amended or amended and restated from time
to time, between Merisel Americas, Inc. and MCF.
"MOCA" means Merisel Open Computing Alliance, Inc., a
Delaware corporation.
"MOCA Transfer Agreement" means the Receivables
Transfer Agreement, dated as of March 10, 2000, as amended or
amended and restated from time to time, between MOCA and MCF.
"Transfer Agreement" means collectively, the MAI
Transfer Agreement and the MOCA Transfer Agreement.
ARTICLE VI : WAIVER OF DEFAULT UNDER PURCHASE AGREEMENT
SECTION 6.1 The Operating Agent, the Collateral Agent and the Purchaser agree to
waive compliance with the financial covenants in Exhibit H of the Purchase
Agreement for the fiscal quarter ended December 31, 1999 and any Incipient Event
or potential Termination Event resulting from the potential breach of the
Financial Covenants contained in Exhibit H of the Purchase Agreement for the
fiscal quarter ended December 31, 1999.
ARTICLE VI : CONDITIONS PRECEDENT
SECTION 7.1 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
<PAGE>
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), (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 and (v) "true
sale" opinions covering the transfers from Merisel Americas to Merisel
Capital Funding and MOCA to Merisel Capital Funding.
(d) An Officer's Certificate in form and substance satisfactory to the
Operating Agent to the effect that all of the representations and
warranties in the Transfer Agreement and Purchase Agreement are true
and correct in all material respects as of the date hereof after giving
effect to this Amendment No. 7.
(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 and all amounts due and
owing under the Amendment No. 7 Fee Letter).
(f) The Operating Agent shall have received written confirmation from the
Rating Agencies that these Amendments will not result in a withdrawal,
downgrade or qualification of the ratings assigned to the Commercial
Paper.
ARTICLE VIII : SELLER'S AND SERVICER'S REPRESENTATIONS AND WARRANTIES
SECTION 8.1 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 IX: MISCELLANEOUS
SECTION 9.1 Confirmation of Securitization Agreements. Each of the Seller and
the Servicer agree that, except for the specific amendments and waiver set forth
<PAGE>
herein, nothing herein shall be deemed to be a waiver or amendment of any
covenant or agreement contained in the Securitization Agreements and each of the
other documents executed in connection therewith are ratified and confirmed in
all respects and shall remain in full force and effect in accordance with its
terms. Each reference in the Transfer Agreement to "this Agreement" and in each
of the other documents to be executed in connection therewith to the "Transfer
Agreement," shall mean the Transfer Agreement as amended by these Amendments and
as each such agreement may be hereinafter amended or restated. 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 9.2 Waiver by the Seller and Servicer. Except for manifest errors on the
part of the Operating Agent, each of the Seller and the Servicer hereby waives
any claim, defense, demand, action or suit of any kind or nature whatsoever
against the Purchaser, the Operating Agent and the Collateral Agent arising on
or prior to the date hereof in connection with the Purchase Agreement or the
transactions contemplated thereunder.
SECTION 9.3 Counterparts. Delivery of an executed counterpart of a signature
page to these Amendments by facsimile shall be effective as delivery of a
manually executed counterpart of these Amendments. These Amendments may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 9.4 Governing Law. These Amendments shall be governed by, and construed
in accordance with, California law.
SECTION 9.5 Effective Date of Amendments. Upon the execution and delivery of
these Amendments by the parties hereto and the satisfaction of the conditions
precedent set forth herein, the Purchase Agreement shall be amended by these
Amendments, effective as of the date of hereof.
* * *
<PAGE>
IN WITNESS WHEREOF, the Seller, the Servicer, the Collateral
Agent, the Operating Agent and the Purchaser have caused these Amendments to be
duly executed by their respective authorized officers as of the date and year
first above written.
MERISEL CAPITAL FUNDING, INC.,
as Seller
By:___________________________
Title:
Name:
MERISEL AMERICAS, INC.,
as Originator and Servicer
By:___________________________
Title:
Name:
GENERAL ELECTRIC CAPITAL CORPORATION,
as Operating Agent and Collateral Agent
By:___________________________
Title:
Name:
GENERAL ELECTRIC CAPITAL CORPORATION,
as Liquidity Agent
By:___________________________
Title:
Name:
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
By:___________________________
Title:
Name:
RECEIVABLES TRANSFER AGREEMENT
Dated as of March 10, 2000
by and between
MERISEL OPEN COMPUTING ALLIANCE, INC.
and
MERISEL CAPITAL FUNDING, INC.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
Article I DEFINITIONS AND INTERPRETATION.......................................................1
SECTION 1.01 Definitions............................................................1
SECTION 1.02 Other Terms and Interpretation.........................................1
Article II TRANSFERS OF RECEIVABLES.............................................................2
SECTION 2.01 Agreement to Transfer..................................................2
SECTION 2.02 Grant of Security Interest.............................................3
Article III CONDITIONS OF SALE...................................................................4
SECTION 3.01 Conditions Precedent to the Initial Sale...............................4
SECTION 3.02 Conditions Precedent to All Sales......................................6
Article IV REPRESENTATIONS, WARRANTIES AND COVENANTS............................................7
SECTION 4.01 Representations and Warranties of the Originator.......................7
SECTION 4.02 Covenants of the Originator...........................................15
SECTION 4.03 Negative Covenants of the Originator..................................20
SECTION 4.04 Breach of Representations, Warranties or Covenants....................22
Article V INDEMNIFICATION.....................................................................23
SECTION 5.01 Indemnification.......................................................23
SECTION 5.02 Assignment of Indemnities.............................................25
Article VI MISCELLANEOUS.......................................................................25
SECTION 6.01 Notices, Etc..........................................................25
SECTION 6.02 No Waiver; Remedies...................................................25
SECTION 6.03 Binding Effect; Assignability.........................................25
SECTION 6.04 No Proceedings........................................................25
SECTION 6.05 Amendments; Consents and Waivers......................................26
SECTION 6.06 GOVERNING LAW; CONSENT TO JURISDICTION; ................................
WAIVER OF JURY TRIAL..................................................26
SECTION 6.07 Execution in Counterparts; Severability...............................27
SECTION 6.08 Descriptive Headings..................................................27
SECTION 6.09 No Setoff.............................................................27
SECTION 6.10 Further Assurances....................................................27
SECTION 6.11 Confidentiality.......................................................27
SECTION 6.12 Assignment of Agreement...............................................28
</TABLE>
Receivables Transfer Agreement, dated as of March 10, 2000
(this "Agreement"), between Merisel Open Computing Alliance, Inc., a Delaware
corporation (the "Originator") and MERISEL CAPITAL FUNDING, INC., a Delaware
corporation ("MCF").
R E C I T A L S
A. The Originator and MCF desire to enter into this
Agreement pursuant to the terms and conditions set forth herein.
B. The Originator presently is a wholly owned direct
subsidiary of Merisel Americas, Inc.
C. The capital stock of the originator will be distributed by
Merisel Americas, Inc. to the parent, Merisel, Inc. causing the Originator to
become a wholly-owned direct subsidiary of Merisel, Inc.
D. MCF is a wholly owned subsidiary of Merisel Americas, Inc.
E. MCF has been formed for the sole purpose of purchasing or
otherwise acquiring certain trade receivables originated by Merisel, Inc. and/or
its subsidiaries.
F. The Originator intends to sell, and MCF intends to
purchase, certain trade receivables originated by the Originator, from time to
time, as described herein.
The parties agree as follows:
Article I
DEFINITIONS AND INTERPRETATION
SECTION 1.01 Definitions. Except as otherwise expressly provided herein or
unless the context otherwise requires, capitalized terms not otherwise defined
herein shall have the meanings assigned to such terms in Annex X hereto, which
is incorporated by reference herein. All other capitalized terms used herein
shall have the meanings specified herein.
SECTION 1.02 Other Terms and Interpretation. All other terms and the
interpretation of this Agreement shall be as set out in Annex X hereto.
SECTION 1.03 Definition of Receivables, Transferred Receivables and Contract.
When the terms "Receivables," "Transferred Receivables" and "Contracts" are used
herein, such term shall mean only those Receivables, Transferred Receivables and
Contracts (as such terms are defined in Annex X) originated by, or in respect
of, the Originator, and no other Subsidiary of Merisel, Inc.
<PAGE>
Article II
TRANSFERS OF RECEIVABLES
SECTION 2.01 Agreement to Transfer. (a) On and after the date of this Agreement,
the Originator agrees to sell to MCF all Receivables originated by the
Originator. On or before the MOCA Effective Date, the Originator and MCF shall
enter into a separate Certificate of Assignment substantially in the form of
Exhibit A hereto (the "Assignment").
(b) The Originator shall, on the date hereof and on each date thereafter (or if
such date is not a Business Day, the following Business Day, each such date, a
"Transfer Date"), transfer to MCF all outstanding Receivables originated and
owned by the Originator through such date. On each Transfer Date, the Originator
shall identify all outstanding Receivables originated through such date which
are owned by the Originator on such date, and which are to be purchased by MCF
and sold by the Originator (the "Sold Receivables"). Each such identification
shall be made as of the close of business of the Originator on each Transfer
Date. The Originator may deliver to MCF a Request Notice making the
identification of such Receivables, provided that the Originator shall keep such
records necessary to promptly deliver a Request Notice in respect of each prior
Transfer Date if requested by MCF or the Operating Agent. To the extent not
identified by the Originator as being sold, the transfer of such Receivables to
MCF shall be deemed to have been a purchase by MCF and sale by the Originator on
such Transfer Date.
(c) The price paid for the Sold Receivables shall be the Sale Price. Such Sale
Price shall be paid by means of (i) an immediate cash payment to the Originator
or, (ii) upon the agreement of the Originator and MCF, indebtedness owed by MCF
to the Originator evidenced by, and payable with interest pursuant to a note in
the form of Exhibit B (the "MOCA Subordinated Note") or both, provided that the
indebtedness under the MOCA Subordinated Note shall not be increased on any day
if, after giving effect thereto and to the effect of any increase in any other
subordinated note issued by MCF to an Originator, MCF's Net Worth Percentage
would be less than 15%. On each Transfer Date the Sold Receivables shall be
assigned, and on such Transfer Date MCF shall pay the Sale Price for such Sold
Receivables. The portion of the Sale Price payable in cash shall be payable by
wire transfer on the Transfer Date to an account designated by the Originator
(and approved by the Operating Agent).
(d) On and after each Transfer Date hereunder, MCF shall own the Transferred
Receivables (assuming payment by MCF in accordance with Section 2.01(c) hereof)
and the Originator shall not take any action inconsistent with such ownership,
nor shall the Originator claim any ownership interest in any such Transferred
Receivables.
(e) Until the occurrence of an Event of Servicer Termination or a resignation of
the Servicer pursuant to the Purchase Agreement, (i) the Servicer, shall conduct
the servicing, administration and collection of such Transferred Receivables and
shall take, or cause to be taken, all such actions as may be necessary or
<PAGE>
advisable to service, administer and collect such Transferred Receivables, from
time to time, all in accordance with (A) the terms of the Purchase Agreement,
(B) customary and prudent servicing procedures for trade receivables of a
similar type and (C) all applicable laws, rules and regulations, and (ii)
documents relating to Transferred Receivables shall be held in trust by the
Servicer, for the benefit of MCF and its assignees as the owners thereof, and
possession of any incident relating to the Transferred Receivables and Contracts
so retained is for the sole purpose of facilitating the servicing of the
Transferred Receivables. Such retention and possession thereof is at the will of
MCF and its assignees and in a custodial capacity for their benefit only. Each
sale by the Originator to MCF is made without recourse to the Originator, except
as set forth in Section 4.04 hereof
SECTION 2.02 Grant of Security Interest. (a) It is the intention of the parties
hereto that each transfer of Receivables transferred hereunder shall constitute
a purchase and sale, and not a loan. In the event, however, that a court of
competent jurisdiction were to hold that any transaction provided for hereby
constitutes a loan and not a purchase and sale or for any reason such purchase
and sale is not effective, it is the intention of the parties hereto that this
Agreement shall constitute a security agreement under applicable law and that
the Originator shall be deemed to have granted to MCF and the Originator hereby
grants to MCF for such purpose a first priority security interest in all of the
Originator's right, title and interest in, to and under the Receivables
transferred hereunder (or any other Receivables which would have been
transferred hereunder if the transactions contemplated hereunder were deemed to
be a purchase or sale and not a loan), all payments of principal, interest,
fees, charges and indemnities on or under such Receivables and all Proceeds of
any such Receivables as security for the prompt payment or performance when due,
whether at stated maturity, by acceleration or otherwise of all MOCA Secured
Obligations.
SECTION 2.03 (b) To the extent a Receivable relates to a returned good or
inventory, the security interest granted under this Agreement with respect
thereto shall terminate and MCF shall automatically release such security
interest immediately upon the payment to MCF of the Billed Amount of the
Receivable relating to such returned good or inventory less all Collections
thereon in accordance with Section 4.04 of this Agreement and MCF shall, at the
request of the Originator, provide such additional documentation requested by
the Originator to evidence such release of the security interest.
SECTION 2.04 Termination of Obligations. (a) At any time the Originator
may terminate its obligations hereunder if:
--------------------------
(i) the Originator shall have given MCF and its assigns not less than 60
days' prior written notice of its intention to terminate,
(ii) an Authorized Officer of the Originator shall have certified that the
termination by the Originator of its obligations hereunder will not
have a material adverse effect on the business, financial condition or
operations of MCF, and
<PAGE>
(iii) both immediately before and after giving effect to the termination by
the Originator, no Termination Event shall have occurred and be
continuing or shall reasonably be expected to occur as a result of such
termination.
The termination by the Originator shall become effective on
the first Business Day that follows the day on which the requirements of clauses
(a)(i) through (iii) shall have been satisfied (or such later date specified in
the notice or certificate referred to in the clauses). The termination by the
Originator shall terminate its rights and obligations hereunder; provided,
however, that the termination shall not relieve the Originator of obligations
which relate to Transferred Receivables originated by or obligations of the
Originator prior to the effective date of the termination.
(b) The Originator's right and obligation to sell its Receivables to MCF shall
terminate immediately if the Originator ceases to be a Subsidiary or Affiliate
of the Parent; provided, however, that the termination shall not relieve the
Originator of obligations which relate to Transferred Receivables originated by
or obligations of the Originator prior to the effective date of the termination.
Article III
CONDITIONS OF SALE
SECTION 3.01 Conditions Precedent to the Initial Sale. The initial Sale
hereunder is subject to the conditions precedent that MCF shall have received on
or before the MOCA Effective Date, each dated such date (unless otherwise
indicated), in form and substance satisfactory to MCF:
(i) an Assignment executed by the Originator;
(ii) a copy of resolutions duly adopted by the Board of Directors of the
Originator approving this Agreement, the Assignment and the other
documents to be delivered by it hereunder and the transactions and
matters contemplated hereby, certified by its Secretary or Assistant
Secretary;
(iii) the charter, as amended, of the Originator, certified by the Secretary
of State of the Originator's state of incorporation, dated not earlier
than 10 days prior to the Effective Date;
(iv) a good standing certificate for the Originator issued by the Secretary
of State of the Originator's state of incorporation, dated not earlier
than 10 days prior to the Effective Date;
(v) a copy of the Originator's by-laws, as amended, certified by
the Originator's Secretary or Assistant Secretary;
<PAGE>
(vi) a certificate of the Secretary or Assistant Secretary of the Originator
certifying the names and true signatures of the officers authorized on
behalf of the Originator to sign this Agreement, the Assignment, and
the other documents to be delivered by the Originator hereunder (on
which certificate MCF may conclusively rely until such time as MCF
shall receive from the Originator a revised certificate meeting the
requirements of this Subsection (vi)) and certifying that (A) the
charter of the Originator has not changed since the date of the
certificate referred to in Section 3.01(iii), (B) the Originator is
still in good standing in all jurisdictions where it is qualified to do
business, including, without limitation, that referred to in Section
3.01(iv), (C) all representations and warranties made by the Originator
in this Agreement are true and correct in all material respects (except
with respect to Section 4.01(b) and those already so qualified which
are true and correct in all respects) and (D) no financing statements
or other similar instruments relating to the Receivables have been
filed in any jurisdiction, other than those financing statements, other
similar instruments and documents shown on the certified copies of the
requests for information or copies (Form UCC-1)(or a similar search
report certified by a party acceptable to the Operating Agent) provided
pursuant to clause (ix);
(vii) copies of proper financing statements (Form UCC-1), dated on or prior
to the MOCA Effective Date, naming the Originator as the assignor of
the Transferred Receivables and MCF as assignee, or other similar
instruments or documents, in form and substance sufficient for filing
under the UCC or any comparable law of any and all jurisdictions as may
be necessary or, in the reasonable opinion of the Operating Agent
desirable to perfect MCF's ownership interest in all Transferred
Receivables, in each case in which an interest may be assigned
hereunder;
(viii) copies of properly executed termination statements or statements of
release (Forms UCC-2 or UCC-3) or other similar instruments or
documents, if any, in form and substance satisfactory for filing under
the UCC or any comparable law of any and all jurisdictions as may be
necessary or, in the reasonable opinion of the Operating Agent,
desirable to release all security interests and similar rights of any
Person in the Transferred Receivables previously granted by the
Originator;
(ix) certified copies of requests for information or copies (Form UCC-11)
(or a similar search report certified by a party acceptable to the
Operating Agent), dated a date reasonably near and prior to the
Effective Date, listing all effective financing statements and other
similar instruments and documents, which name the Originator (under its
present name and any previous name) as debtor and which are filed in
the jurisdictions in which filings are to be made pursuant to such
Subsections (vii) and (viii) above, together with copies of such
financing statements, none of which shall cover any Transferred
Receivables unless termination statements or statements of release are
provided with respect thereto pursuant to Subsection (viii) above;
<PAGE>
(x) any necessary third party consents to the closing of the transactions
contemplated hereby, in the form and substance reasonably satisfactory
to the Operating Agent;
(xi) the Lockbox Agreements in respect of each Lockbox Account, in each case
duly executed by the parties thereto and acknowledged and agreed to by
the applicable Lockbox Bank; and
(xii) such legal opinions as may be requested by the Operating Agent,
including, without limitation, (i) a "true sale" opinion (which shall
cover the transfer between MOCA and MCF and Merisel Americas, Inc. and
MCF, (ii) a backup security interest opinion, and (iii) a customary
corporate and enforceability opinion, each in form and substance
satisfactory to the Operating Agent.
SECTION 3.02 Conditions Precedent to All Sales. The obligation of MCF to pay for
each Sold Receivable on each Transfer Date (including the initial Transfer Date)
shall be subject to the further conditions precedent that on such Transfer Date:
(a) The following statements shall be true (and delivery by the Originator of a
Request Notice and the acceptance by the Originator of the Sale Price for any
Receivables on any Transfer Date shall constitute a representation and warranty
by the Originator that on such Transfer Date such statements are true):
(i) the representations and warranties of the Originator contained in
Section 4.01 shall be correct on and as of such Transfer Date in all
material respects (except with respect to Section 4.01(b) and those
already so qualified which are true and correct in all respects),
before and after giving effect to the Sale of Receivables on such
Transfer Date and to the application of proceeds therefrom, as though
made on and as of such date; and
(ii) the Originator is in compliance with each of its covenants and other
agreements set forth herein.
(b) The Originator shall have taken such other action, including delivery of
approvals, consents, opinions, documents and instruments as MCF may reasonably
request.
Article IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 4.01 Representations and Warranties of the Originator. The Originator
represents and warrants to MCF as of each Transfer Date, that:
<PAGE>
(a) With respect to the Originator:
(i) the Originator is a corporation duly organized, validly existing and in
good standing under the laws of its respective jurisdiction of
incorporation and is duly qualified to do business and is in good
standing in every jurisdiction in which the nature of its business
requires it to be so qualified except where the failure to be so
qualified would not materially and adversely affect (1) the performance
of MCF or the Originator of its obligations under this Agreement or any
of the Related Documents, (2) the validity or enforceability of this
Agreement or any of the Related Documents, (3) the Transferred
Receivables, the Contracts or the interests of MCF or its assigns
therein, or (4) the business, operations, financial condition or
prospects of MCF or the Originator;
(ii) the Originator has the corporate power and authority to own, pledge,
mortgage, operate and convey all of its properties and assets, to
execute and deliver this Agreement and the Related Documents to which
it is a party and to perform the transactions contemplated hereby and
thereby;
(iii) the execution, delivery and performance by the Originator of this
Agreement and the Related Documents to which it is a party and the
transactions contemplated hereby and thereby (A) have been duly
authorized by all necessary corporate or other action on the part of
the Originator, (B) do not contravene or cause the Originator to be in
default under (1) the Originator's certificate or articles of
incorporation or by-laws, (2) any contractual restriction with respect
to any Debt of the Originator or contained in any material indenture,
loan or credit agreement, lease, mortgage, security agreement, bond,
note, or other material agreement or instrument binding on or affecting
the Originator, its affiliates or their or its respective property or
(3) any law, rule, regulation, order, writ, judgment, award, injunction
or decree applicable to, binding on or affecting the Originator, or its
property and (C) do not result in or require the creation of any
Adverse Claim upon or with respect to any of its properties (other than
in favor of MCF with respect to this Agreement and Redwood and the
Collateral Agent under the Purchase Agreement);
(iv) this Agreement and the Related Documents to which it is a party have each
been duly executed and delivered by the Originator;
(v) no approval or consent of, notice to, filing with or licenses, permits,
qualifications or other action by any Governmental Authority or any
other party, is required or necessary for the conduct of the
Originator's business as currently conducted and for the due
execution, delivery and performance by the Originator of this
Agreement or any of the Related Documents to which it is a
party or for the perfection of or the exercise by MCF, Redwood, the
Operating Agent or the Collateral Agent of any of their rights or
remedies thereunder or hereunder, except (A) approvals, consents,
notices, filings and other actions which have been obtained or made and
complete copies of which have been provided to Redwood, the
<PAGE>
Operating Agent and the Collateral Agent (other than
confirmation statements in respect of any such filings) and (B)
where the failure to obtain such approval, consent, license, permit or
qualification, make or present such notice or filing, or take such
other action would not materially and adversely affect (1) the
performance of MCF or the Originator of its obligations under this
Agreement or any of the Related Documents to which it is a party, (2)
the validity or enforceability of this Agreement or any of the
Related Documents to which it is a party, (3) the Transferred
Receivables, the Contracts or the interests of MCF or its assigns
therein, or (4) the business, operations, financial condition or
prospects of MCF or the Originator;
(vi) this Agreement and the other Related Documents delivered by the
Originator are the legal, valid and binding obligations of the
Originator enforceable against the Originator in accordance with their
respective terms subject to (A) any applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to or affecting the enforceability of creditors' rights
generally and (B) general equitable principles, whether applied in a
proceeding at law or in equity;
(vii) there is no pending or, to the knowledge of the Originator, threatened,
nor, to the knowledge of the Originator, any reasonable basis for,
any action, suit or proceeding against or affecting the Originator, its
officers or directors, or the property of the Originator, in any
court or tribunal, or before any arbitrator of any kind or before or
by any Governmental Authority (A) asserting the invalidity of this
Agreement or any of the Related Documents, (B) seeking to prevent
the transfer, sale or pledge of any Receivable or the
consummation of any of the transactions contemplated hereby or
thereby, (C)seeking any determination or ruling that might
materially and adversely affect (1) the performance by MCF or the
Originator of its obligations under this Agreement or any of the
Related Documents, (2) the validity or enforceability of this
Agreement or any of the Related Documents, or (3) the
Transferred Receivables, the Contracts or the interests of MCF or its
assigns therein, or (D) reasonably likely to result in damages or
penalties in an uninsured amount in excess of $1,000,000;
(viii) no injunction, writ, restraining order or other order (collectively,
"Orders") of any nature adverse to the Originator or the conduct of
its business or which is inconsistent with the due
consummation of the transactions contemplated by this Agreement or the
Purchase Agreement or any of the other Related Documents to which it
is a party has been issued by a Governmental Authority nor been
sought by any Person except such Orders that would not materially and
adversely affect (1) the performance of MCF or the Originator of its
obligations under this Agreement or any of the Related Documents to
which it is a party, (2) the validity or enforceability of this
Agreement or any of the Related Documents to which it is a party,
(3) the Transferred Receivables or the Contracts or the interests of
MCF or its assigns therein, or the business, operations, financial
condition or prospects of MCF or the Originator;
<PAGE>
(ix) the principal place of business, the chief executive office and all
other places of business of the Originator are located at the addresses
of the Originator referred to in Schedule 1 and there are now no, and
during the past four months there have not been any, other locations
where the Originator is located (as that term is used in the UCC of the
jurisdiction where such principal place of business is located) or
keeps Records;
(x) the legal name of the Originator is as set forth at the beginning of
this Agreement and the Originator has not changed its name in the last
six years, and during such period the Originator did not use, nor does
the Originator now use, any trade names, fictitious names, assumed
names or "doing business as" names other than as set forth in Schedule
1;
(xi) the Originator is solvent and will not become insolvent after giving
effect to the transactions contemplated by this Agreement and the
Related Documents; the Originator is paying its Debts as they mature;
the Originator has not incurred Debts beyond its ability to pay as they
mature; and the Originator, after giving effect to the transactions
contemplated by this Agreement and the Related Documents, will have an
adequate amount of capital to conduct its business in the foreseeable
future;
(xii) for federal income tax, reporting and accounting purposes (except in
any consolidated financial statements and consolidated tax returns),
the Originator will treat the sale of each Sold Receivable sold or
assigned pursuant to this Agreement as a sale of, or absolute
assignment of, its full right, title and ownership interest in such
Receivable to MCF, and the Originator has not in any other respect
accounted for or treated the transactions contemplated by this
Agreement or the Related Documents.
(xiii) the Originator has complied in all material respects with all
applicable laws, rules, regulations, and orders with respect to it, its
business and properties and all Transferred Receivables and related
Contracts (including without limitation, all applicable environmental,
health and safety requirements) and all restrictions contained in any
indenture, loan or credit agreement, mortgage, security agreement,
bond, note or other agreement or instrument binding on or affecting the
Originator or its property;
(xiv) without limiting the generality of the prior representation, no
condition exists or event has occurred which, in itself or with the
giving of notice or lapse of time or both, would result in the
suspension, revocation, impairment, forfeiture or non-renewal of any
Governmental Consent applicable to the Originator or any Subsidiary
except where such conditions or events would not, separately or in the
aggregate, have a material adverse effect on (A) the performance by MCF
or the Originator of its obligations under this Agreement or any of the
Related Documents to which it is a party, (B) the validity or
enforceability of this Agreement or any of the Related Documents to
which it is a party, or (C) the Transferred Receivables or the
Contracts or the interests of MCF or Redwood therein;
<PAGE>
(xv) the Originator has filed on a timely basis all tax returns, tax reports
and statements (federal, state and local) required to be filed and has
paid or made adequate provisions for the payment of all taxes, fees,
assessments and other governmental charges due from the Originator
(other than taxes, fees, amendments or governmental charges which the
Originator is contesting in good faith with such taxing authority and
in respect of which no final unappealable order has been made against
the Originator), no tax lien or similar Adverse Claim has been
filed, and no claim is being asserted, with respect to any such
tax, fee, assessment, or other governmental charge. Any taxes, fees,
assessments and other governmental charges payable by the Originator
in connection with the execution and delivery of this Agreement
and the Related Documents and the transactions contemplated hereby
or thereby have been paid or shall have been paid when due, at or
prior to such Transfer Date;
(xvi) the Originator is licensed or otherwise has the lawful right to use all
patents, trademarks, servicemarks, tradenames, copyrights, technology,
know-how and processes used in or necessary for the conduct of its
business as currently conducted which are material to its financial
condition, business, operations, assets and prospects, individually or
taken as a whole;
(xvii) as of the date of each Request Notice delivered by the Originator, such
Request Notice contains an accurate list of the aggregate amount of all
Transferred Receivables sold by the Originator to MCF as of the
relevant Transfer Date;
(xviii) each Obligor of a Transferred Receivable has been directed, and is
required to, remit all payments with respect to such Receivable for
deposit in a Lockbox Account or a Lockbox;
(xix) the Originator is in compliance with ERISA and has not incurred and
does not expect to incur any liabilities (except for premium payments
arising in the ordinary course of business) payable to the PBGC (or any
successor thereof) under ERISA or the Internal Revenue Code;
(xx) each pension plan or profit sharing plan to which the Originator or any
Affiliate is a party has been administered and fully funded in
accordance with the obligations the Originator under law and as set
forth in such plan, and the Originator has complied with the applicable
provisions of ERISA or the Internal Revenue Code in effect as of such
Transfer Date;
(xxi) the Originator has not agreed to pay any fee or commission to any
agent, broker, finder or other person for or on account of services
rendered as a broker or finder in connection with this Agreement or the
Related Documents or the transactions contemplated hereby or thereby
which would give rise to any valid claim against MCF for any brokerage
commission or finder's fee or like payment;
<PAGE>
(xxii) all information heretofore or hereafter furnished with respect to the
Originator to MCF in connection with any transaction contemplated by
this Agreement or the Related Documents is and will be true and
complete in all material respects and does not and will not omit to
state a material fact necessary to make the statements contained herein
or therein not misleading, provided that any projections, pro forma or
preliminary financial information furnished are based on good faith
estimates and assumptions believed by the Originator to be reasonable
at the time made and MCF acknowledges that such projections as to
future events are not to be viewed as facts and that actual results for
such period may differ from the projected results;
(xxiii) no part of the proceeds received by the Originator or any Affiliate
from the Sale Price will be used directly or indirectly for the purpose
of purchasing or carrying, or for payment in full or in part of, Debt
that was incurred for the purposes of purchasing or carrying any
"margin stock," as such term is defined in Regulations T and U of the
Board of Governors of the Federal Reserve System;
(xxiv) there are not now, nor will there be at any time in the future, any
agreement or understanding between the Originator and MCF (other than
as expressly set forth herein) providing for the allocation or sharing
of obligations to make payments or otherwise in respect of any taxes,
fees, assessments or other governmental charges;
(xxv) no transaction contemplated by this Agreement or any of the Related
Documents requires compliance with any bulk sales act or similar law;
(xxvi) the Request Notice with respect to such Transfer Date is accurate in all
material respects;
(xxvii) each purchase of Receivables under this Agreement will constitute (A) a
"current transaction" within the meaning of Section 3(a)(3) of the
Securities Act of 1933, as amended, and (B) a purchase or other
acquisition of notes, drafts, acceptances, open accounts receivables or
other obligations representing part or all of the sales price of
merchandise, insurance or services within the meaning of Section
3(c)(5) of the Investment Company Act of 1940, as amended;
(xxviii) (A) the Originator is not a party to any indenture, loan or credit
agreement or any lease or other agreement or instrument or subject to
any charter or corporation restriction that is reasonably likely to
have, and no provision of applicable law or governmental regulation is
reasonably likely to have, a material adverse effect on the ability of
the Originator to carry out its obligations under this Agreement and
<PAGE>
the other Related Documents to which the Originator is a party and (B)
the Originator is not in default under or with respect to any contract,
agreement, lease or other instrument to which the Originator is a party
and which is material to the Originator's ability to perform its
obligations hereunder or to the quality or collectibility of the
receivables, and the Originator has not delivered or received any
notice of default thereunder;
(xxix) the Originator is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of
1940, as amended. The purchase or acquisition of the Transferred
Receivables by MCF, the application of the proceeds and the
consummation of the transactions contemplated by this Agreement and the
other Related Documents to which the Originator is a party will not
violate any provision of such Act or any rule, regulation or order
issued by the Securities and Exchange Commission thereunder;
(xxx) the bylaws or the articles of incorporation of the Originator require
it to maintain (A) books and records of account, and (B) minutes of the
meetings and other proceedings of its shareholders and board of
directors;
(xxxi) the Lockboxes and the Lockbox Accounts are the only lockboxes and
accounts maintained by the Originator into which Collections of any
Transferred Receivables are deposited; and
(xxxii) each of the representations and warranties of the Originator contained
in the Related Documents (other than this Agreement) is true and
correct in all material respects and the Originator hereby makes each
such representation and warranty to, and for the benefit of, the
Collateral Agent, the Operating Agent and Redwood as if the same were
set forth in full herein.
(b) On each Transfer Date and as of the date of each Investment Base Certificate
delivered under the Purchase Agreement with respect to each Transferred
Receivable designated as an Eligible Receivable:
(i) such Receivable is an Eligible Receivable and is a receivable created
through the provision of merchandise, goods or services by the
Originator in the ordinary course of its business;
(ii) such Receivable was created in accordance with and satisfies in all
material respects all applicable requirements of the Credit and
Collection Policies;
(iii) such Receivable represents the genuine, legal, valid and binding
obligation in writing of the Obligor enforceable by the holder thereof
in accordance with its terms, subject to (A) any applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting the enforceability of
<PAGE>
creditors' rights generally and (B) general equitable principles,
whether applied in a proceeding at law or in equity and neither such
Receivable nor its related Contract has been satisfied, subordinated,
rescinded or amended in any manner which would impair the
collectibility of such Receivable, adjust the value of such Receivable,
or modify the payment terms of such Receivable after its creation;
(iv) such Receivable is not and will not be subject to any exercise of any
right of rescission, set-off, recoupment, counterclaim or defense;
(v) prior to its sale to MCF such Receivable was owned by the Originator
free and clear of any Adverse Claim, and the Originator had the right
to sell, assign and transfer the same and interests therein as
contemplated under this Agreement, upon such sale, MCF will have
acquired good and marketable title to and the sole record and
beneficial ownership interest in such Receivable, free and clear of any
Adverse Claim and, after such sale, such Receivable did not become
subject to any Adverse Claim as a result of any action or inaction of
the Originator;
(vi) this Agreement and the Assignment constitute a valid sale, transfer,
assignment, setover and conveyance to MCF of all right, title and
interest of the Originator in and to such Receivable;
(vii) such Receivable allows the holder thereof to bring suit or otherwise
enforce its remedies against an Obligor through judicial process, is
entitled to be paid pursuant to the terms of the related Contract, has
not been paid in full or been compromised, adjusted, extended,
satisfied, subordinated, rescinded or modified, and is not subject to
compromise, adjustment, extension, satisfaction, subordination,
rescission, or modification by the Originator except in accordance with
any applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to or effecting
the enforceability of creditors' rights generally;
(viii) the Originator has submitted all necessary documentation for payment of
such Receivable to the Obligor and has fulfilled all its other
obligations in respect thereof;
(ix) the stated term of such Receivable, if any, is not greater than 90 days;
(x) such Receivable is an "account" within the meaning of the UCC of the
jurisdiction where the Originator's chief executive office is located;
(xi) neither such Receivable nor its related Contract contravenes in any
material respect any laws, rules or regulations applicable thereto
(including, without limitation, laws, rules and regulations relating to
usury, consumer protection, truth in lending, fair credit billing, fair
<PAGE>
credit reporting, equal credit opportunity, fair debt collection
practices and privacy) and no party to such related Contract is in
violation of any such law, rule or regulation in any material respect;
(xii) such Receivable does not represent "billed but not yet shipped" goods
or merchandise, unperformed services, consigned goods or "sale or
return" goods; nor does such Receivable arise from a transaction for
which any additional performance by MCF or acceptance or other act of
the Obligor remains to be performed as a condition to any payments on
such Receivable;
(xiii) there are no proceedings or investigations pending or to the
Originator's knowledge threatened before any Governmental Authority (A)
asserting the invalidity of such Receivable or such Contract, (B)
asserting the bankruptcy or insolvency of the related Obligor, (C)
seeking the payment of such Receivable or payment and performance of
such Contract, or (D) seeking any determination or ruling that might
materially and adversely affect the validity or enforceability of such
Receivable or such Contract;
(xiv) as of the relevant Transfer Date hereunder, no Obligor on such
Receivable is bankrupt or insolvent, is unable to make payment of its
obligations when due, is the debtor in a voluntary or involuntary
bankruptcy proceeding, or is the subject of a comparable receivership
or insolvency proceeding, other than Obligors under the protection of a
bankruptcy court or receivership which has approved payment by any such
Obligor of such Receivable; and
(xv) the Originator has no knowledge of any fact (including any defaults by
the Obligor on any other accounts) which leads it or should have led it
to expect that any payments on such Receivable will not be paid in full
when due or to expect any other material adverse effect on (A) the
performance by MCF or the Originator of its obligations under this
Agreement or any of the Related Documents, (B) the validity or
enforceability of this Agreement or any of the Related Documents to
which it is a party, or (C) the Transferred Receivables or the
Contracts or the interests of MCF or Redwood therein.
It is understood and agreed that the representations and warranties described in
this Section 4.01 shall survive the sale of the Transferred Receivables to MCF,
any subsequent assignment of the Transferred Receivables by MCF, and the
termination of this Agreement and the Purchase Agreement and shall continue so
long as any Transferred Receivable shall remain outstanding.
SECTION 4.02 Covenants of the Originator.
(a) Offices and Records. The Originator shall keep its chief place of business
and chief executive offices and the office where it keeps its Records at the
respective locations specified in Schedule I hereto or, upon at least 30 days
<PAGE>
prior written notice to MCF and the Collateral Agent, at such other location in
a jurisdiction where all action required by Section 4.02(d) shall have been
taken with respect to the Transferred Receivables. The Originator shall, for not
less than three years or for such longer period as may be required by law, from
the date on which any Transferred Receivable arose, maintain adequate Records
with respect to each Transferred Receivable, including records of all payments
received, credits granted and merchandise returned. Upon prior notice to the
Originator, except after the occurrence of any Termination Event, the Originator
will permit representatives of MCF, the Servicer, the Operating Agent or the
Collateral Agent at any time and from time to time during normal business hours,
and at such times outside of normal business hours as MCF, the Servicer, the
Operating Agent or the Collateral Agent shall reasonably request, (i) to inspect
and make copies of and abstracts from such records, (ii) to visit the properties
of the Originator utilized in connection with the collection, processing or
servicing of the Transferred Receivables for the purpose of examining such
Records, and (iii) to discuss matters relating to the Transferred Receivables or
the Originator's performance under this Agreement or the affairs, finances and
accounts of the Originator with any of its officers, directors, employees,
representatives or agents and with its independent certified accountants. The
Originator will advise its independent certified accountants that MCF, the
Operating Agent, the Servicer and the Collateral Agent have been authorized to
review and discuss with such accountants any and all financial statements and
other information of any kind that they may have with respect to the Originator
and deliver a letter (the "Accountants' Letter") addressed to such accountants
instructing them to make available to MCF, the Operating Agent, the Servicer and
the Collateral Agent such information and records as MCF, the Operating Agent,
the Servicer and the Collateral Agent may reasonably request and to otherwise
comply with the provisions of this Section 4.02(a). The Originator shall be
given prior notice of any discussions with its accountants and the opportunity
to participate; provided that the Originator's failure or inability to
participate shall not prevent any of MCF, the Operating Agent, the Servicer and
the Collateral Agent from engaging in such discussions. After the Effective
Date, if the Originator engages the services of accountants other than Deloitte
& Touche, it shall deliver a letter addressed to such accountants containing the
same terms and provisions as the Accountants' Letter. In connection with the
foregoing, in the event any of the Originator, the Operating Agent or the
Collateral Agent determines that a deterioration has or is reasonably likely to
occur in the quality of servicing of the Transferred Receivables, any of them,
individually or collectively, may institute procedures to permit it to confirm
the Obligor's outstanding balances in respect of any Transferred Receivables.
The Originator agrees to render to MCF, the Operating Agent and the Collateral
Agent, at the Originator's own cost and expense, such clerical and other
assistance as may be reasonably requested with regard to the foregoing. If a
Termination Event under the Purchase Agreement shall have occurred and be
continuing, promptly upon request therefor, the Originator shall assist MCF in
delivering to the Operating Agent records reflecting activity through the close
of business on the immediately preceding Business Day.
(b) Compliance With Credit and Collection Policies. The Originator shall comply
in all material respects with the Credit and Collection Policies with regard to
<PAGE>
each Transferred Receivable and the related Contracts, and with the terms of
such Receivables and Contracts.
(c) Notice of Adverse Claim. The Originator shall advise MCF and any assignees,
promptly, in reasonable detail, (i) of any Adverse Claim known to it made or
asserted against any of the Transferred Receivables, (ii) of any determination
that a Sold Receivable, or any other Receivable designated as an Eligible
Receivable in a Request Notice or otherwise, was not an Eligible Receivable at
such time and (iii) of the occurrence of any event which would have a material
adverse effect on the aggregate value of the Transferred Receivables or on the
validity of the transfers in this Agreement.
(d) Further Assurances: Financing Statements.
(i) The Originator agrees that at any time and from time to time, at its
expense, upon the request of MCF or MCF's assignees it shall
promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or, in the
reasonable opinion of MCF or any assignee, desirable or that MCF or
any assignee may reasonably request to perfect, preserve,
continue and maintain fully and protect the transfers made and the
right, title and interests (including any security interests) granted
to MCF by this Agreement or to enable MCF or any assignee to exercise
and enforce its rights and remedies under this Agreement or any of the
Related Documents to which it is a party with respect to any
Transferred Receivables. Without limiting the generality of the
foregoing, the Originator shall execute and file such financing or
continuation statements, or amendments thereto, and such other
instruments or notices as may be necessary or in the reasonable
opinion of MCF or any assignee desirable or that MCF or any assignee
may reasonably request to protect and preserve and perfect the
transfers and security interests granted by this Agreement, free and
clear of all Adverse Claims.
(ii) The Originator hereby authorizes MCF and the Collateral Agent to file
one or more financing or continuation statements, and amendments
thereto, relating to all or any part of the Transferred Receivables
without the signature of the Originator where permitted by law. A
carbon, photographic or other reproduction of this Agreement or any
notice or financing statement covering the Transferred Receivables or
any part thereof shall be sufficient as a notice or financing statement
where permitted by law. MCF will promptly send to the Originator any
financing or continuation statements thereto which it files without the
signature of the Originator except, in the case of filings of copies of
this Agreement as financing statements, MCF will promptly send the
Originator the filing or recordation information with respect thereto.
(e) Assignment. The Originator acknowledges and agrees that, to the extent
permitted under the Purchase Agreement, MCF may assign all of its right, title
and interest in, to and under the Transferred Receivables and its right, title
and interest under this Agreement, including its right to exercise the remedies
<PAGE>
created by Section 4.04. The Originator agrees that, upon such assignment, the
assignee under the Purchase Agreement may enforce directly, without joinder of
MCF, the repurchase obligations of the Originator set forth in Section 4.04 with
respect to breaches of the representations and warranties or covenants set forth
in Section 4.01(b) and 4.02(b) and (c).
(f) Compliance With Agreements and Applicable Laws. The Originator shall perform
each of its obligations under this Agreement and the Related Documents and
comply with all material requirements of any law, rule or regulation applicable
to it, provided that the Originator shall be deemed to have complied with any
such requirements for as long as the Originator contests in good faith the
application of such requirement, a stay has been granted with respect to any
penalty imposed on the Originator in respect of such requirement and no final
unappealable order in respect of such requirement has been made against the
Originator (notwithstanding the foregoing, this proviso shall not be effective
unless the Originator gives prior written notice of any such notice to MCF and
its assignees and such non-compliance does not adversely affect their rights in
respect of the Transferred Receivables or impair their ability to exercise any
of their rights or remedies hereunder) except for any noncompliance with laws
which would not have a material adverse effect on (1) the performance of MCF or
the Originator of its obligations under this Agreement or any of the Related
Documents, (2) the validity or enforceability of this Agreement or any of the
Related Documents, (3) the Transferred Receivables or the Contracts or the
interests of MCF or its assigns therein, or the business, operations, financial
condition or prospects of MCF or the Originator.
(g) Corporate Existence. Subject to Section 4.03(d), the Originator shall
maintain its corporate existence and shall at all times continue to be duly
organized under the laws of the state of its incorporation and duly qualified
and duly authorized (as described in Section 4.01) and shall conduct its
business in accordance with the terms of its certificate of incorporation and
bylaws.
(h) Notice of Material Event. The Originator shall promptly inform MCF and any
assignee (except in respect of clause (i), in which event the Originator shall
immediately inform MCF and any assignee) in writing of the occurrence of any of
the following:
(i) the submission of any claim or the initiation of any legal process,
litigation or administrative or judicial investigation against the
Originator or with respect to or in connection with all or any portion
of the Transferred Receivables, in excess of $1,000,000 or which, if
adversely determined, would be reasonably likely to have a material
adverse effect on the Originator or its ability to perform its
obligations hereunder;
(ii) any change in the location of the Originator's principal office or any
change in the location of the Originator's books and records;
(iii) the commencement or threat of any rule making or disciplinary
proceedings or any proceedings instituted by or against the Originator
<PAGE>
in any federal, state or local court or before any governmental body or
agency, or before any arbitration board, or the promulgation of any
proceeding or any proposed or final rule which, if adversely
determined, would have a material adverse effect with respect to the
Originator or its ability to perform its obligations hereunder;
(iv) the commencement of any proceedings, or written threat to commence any
proceedings, by or against the Originator under any applicable
bankruptcy, reorganization, liquidation, rehabilitation, insolvency or
other similar law now or hereafter in effect or of any proceeding in
which a receiver, liquidator, conservator, trustee or similar official
shall have been, or may be, appointed or requested for the Originator
or any of its assets;
(v) the receipt of notice that (A) the Originator is being placed under
regulatory supervision, (B) any license, permit, charter, registration
or approval necessary for the conduct of the Originator's business is
to be, or may be, suspended or revoked, or (C) the Originator is to
cease and desist any practice, procedure or policy employed by the
Originator in the conduct of its business, and such cessation may have
a material adverse effect with respect to the Originator or its ability
to perform its obligations hereunder; or
(vi) any other event, circumstance or condition that has had, or has a
material possibility of having, a material adverse effect in respect of
the Originator or its ability to perform its obligations hereunder.
(i) Maintenance of Licenses. The Originator shall maintain all licenses,
permits, charters and registrations which are material to the conduct of its
business.
(j) Use of Proceeds. The Originator shall apply its funds towards general
corporate purposes (including the retirement or repayment of third party debt)
and towards the other sums payable by the Originator under this Agreement and
the Related Documents in connection with the transactions contemplated hereby
and by the Related Documents and for no other purpose.
(k) Separate Identity.
(i) The Originator shall maintain corporate records and books of account
separate from those of MCF.
(ii) The financial statements of the Parent and its consolidated
Subsidiaries shall (i) disclose the effects of the Originator's
transactions in accordance with GAAP and (ii) either (a) disclose that
the assets of MCF are not available to pay creditors of the Originator
or any other Affiliate of the Originator or (b) contain the language
set forth in Section 4.02(k)(iii)(b).
(iii) The annual financial statements of the Parent and its consolidated
subsidiaries (including MCF) will contain footnotes or other
<PAGE>
information to the effect that with respect to MCF: (a) MCF's business
consists of the purchase of the Receivables from the Originator and
Merisel Americas, Inc. and (b) MCF is a separate corporate entity with
its own separate creditors, which upon its liquidation will be entitled
to be satisfied out of MCF's assets prior to any value in MCF becoming
available to MCF's equityholders.
(iv) The resolutions and other instruments underlying the transactions
described in this Agreement shall be continuously maintained by the
Originator as official records.
(v) The Originator shall use its best efforts to maintain an arm's-length
relationship with MCF and will not hold itself out as being liable for
the debts of MCF.
(vi) The Originator shall use its best efforts to keep its assets (except
with respect to any Records necessary for the servicing of the
Transferred Receivables) and its liabilities wholly separate from those
of MCF.
(vii) The Originator will conduct its business solely in its own name
(including any trade or fictitious name) through its duly authorized
officers or agents so as not to mislead others as to the identity of
the Originator.
(viii) The Originator will use its best efforts to avoid the appearance of
conducting business on behalf of MCF or that the assets of the
Originator are available to pay the creditors of MCF.
(l) ERISA. The Originator shall give the Operating Agent prompt notice of each
of the following events (but in no event more than 30 days after the occurrence
of the event): (i) an Accumulated Funding Deficiency, (ii) the failure to make a
material required contribution to a Plan or Multiemployer Plan (but in no event
will a contribution failure sufficient to give rise to a lien under ss.302(f) of
ERISA be considered immaterial), (iii) a Reportable Event, (iv) any action by a
Commonly Controlled Entity to terminate any Plan or withdraw from any
Multiemployer Plan, (v) any action by the PBGC to terminate or appoint a trustee
to administer a Plan, (vi) the reorganization or insolvency of any Multiemployer
Plan and (vii) an aggregate Underfunding for all Underfunded Plans in excess of
$100,000.
(m) Cooperation With Requests for Information or Documents. The Originator will
cooperate fully with all reasonable requests of MCF or any assignee regarding
the provision of any information or documents, necessary, including the
provision of such information or documents in electronic or machine-readable
format, or desirable to allow MCF and each assignee to carry out its
responsibilities under the Related Documents.
(n) Payment, Performance and Discharge of Obligations. The Originator will pay,
perform and discharge all of its obligations and liabilities, including, without
<PAGE>
limitation, all taxes, assessments and governmental charges upon its income and
properties when due the non-payment, performance or discharge of which would
materially and adversely affect (1) the performance of MCF or the Originator of
its obligations under this Agreement or any of the Related Documents to which
the Originator is a party, (2) the validity or enforceability of this Agreement
or any of the Related Documents to which the Originator is a party, (3) the
Transferred Receivables or the Contracts or the interests of MCF or its assigns
therein, or (4) the business, operations, financial condition or prospects of
MCF or the Originator, unless and to the extent only that such obligations,
liabilities, taxes, assessments and governmental charges shall be contested in
good faith and by appropriate proceedings and that, to the extent required by
GAAP, proper and adequate book reserves relating thereto are established by the
Originator and then only to the extent that a bond is filed in cases where the
filing of a bond is necessary to avoid the creation of an Adverse Claim against
any of its properties.
SECTION 4.03 Negative Covenants of the Originator. The Originator shall not,
without the written consent of MCF and each assignee of MCF's rights:
(a) sell, assign (by operation of law or otherwise) or otherwise dispose of, or
create or suffer to exist any Adverse Claim upon or with respect to, or assign
any right to receive income in respect of any Transferred Receivable or related
Contract with respect thereto, or upon or with respect to any Lockbox or any
Lockbox Account;
(b) extend, amend, forgive, discharge, compromise, cancel or otherwise modify
the terms of any Transferred Receivable, or amend, modify or waive any term or
condition of any Contract related thereto (except as to the Originator in its
capacity as the Sub-Servicer under the Sub-Servicing Agreement and in the case
of any such Contracts, any amendments or modifications to any provision thereof
other than payment terms or any term adversely affecting the payment of such
Receivable), provided that the foregoing shall not prohibit the Servicer or
Sub-Servicer from offering early pay discounts to the extent permitted by the
Credit and Collection Policy;
(c) make any change in its instructions to Obligors regarding payments to be
made to MCF or payments to be deposited to a Lockbox or a Lockbox Account other
than (i) changes of a purely administrative nature which do not alter any
directions to Obligors regarding the method, timing or place of payment, or (ii)
changes to the method or timing of payments which are in accordance with the
Credit and Collections Policy, or (iii) changes redirecting payments from one
Lockbox or Lockbox Account to another Lockbox Account in respect of which all
actions required under Section 6.01 of the Purchase Agreement have been taken;
(d) merge with or into, consolidate with or into, convey, transfer, lease or
otherwise dispose of all or substantially all of its assets (whether now owned
or hereafter acquired) to, or acquire all or substantially all of the assets or
capital stock or other ownership interest of, any Person (whether in one
transaction or in a series of transactions) except where such action would not
have a material adverse effect on the business of the Originator or the ability
<PAGE>
of the Originator to perform its obligations under this Agreement and the Rating
Agency Condition is satisfied;
(e) make statements or disclosures or prepare any financial statements which
shall account for the transactions contemplated by this Agreement in any manner
other than as a sale or absolute assignment of the Transferred Receivables to
MCF, or in any other respect account for or treat the transactions contemplated
hereby (including but not limited to, for accounting, tax and reporting
purposes) in any manner other than as a sale or absolute assignment of the
Transferred Receivables;
(f) (i) take any action, or fail to take any action, with respect to the
Transferred Receivables, if such action or failure to take action may interfere
with the enforcement of any rights under this Agreement or the Related Documents
that are material to the rights, benefits or obligations of MCF or any assignee
(however, nothing herein shall be construed to constitute a guarantee of
collectibility by the Originator); (ii) take any action, with respect to the
Transferred Receivables, or fail to take any action, if such action or failure
to take action may materially interfere with the enforcement of any rights with
respect to the Transferred Receivables; or (iii) fail to pay any tax,
assessment, charge, fee or other obligation of the Originator with respect to
the Transferred Receivables, or fail to defend any action, if such failure to
pay or defend may adversely affect the priority or enforceability of the first
priority perfected interest of MCF in the Transferred Receivables or the
Originator's right, title or interest in the Transferred Receivables;
(g) neither the Originator nor any Commonly Controlled Entity will:
(i) terminate any Plan so as to incur any material liability to the PBGC;
(ii) knowingly participate in any "prohibited transaction" (as defined in
ERISA) involving any Plan or Multiemployer Plan or any trust created
thereunder which would subject any of them to a material tax or penalty
on prohibited transactions imposed under Section 4975 of the Internal
Revenue Code or ERISA;
(iii) fail to pay to any Plan or Multiemployer Plan any contribution which it
is obligated to pay under the terms of such Plan or Multiemployer Plan,
if such failure would cause such plan to have any material Accumulated
Funding Deficiency, whether or not waived; or
(iv) allow or suffer to exist any occurrence of a Reportable Event, or any
other event or condition, which presents a material risk of termination
by the PBGC on any Plan or Multiemployer Plan, to the extent that the
occurrence or nonoccurrence of such Reportable Event or other event or
condition is within the control of it or any Commonly Controlled
Entity;
<PAGE>
(h) make any material change to the Credit and Collection Policies without the
prior written consent of MCF and each assignee; or
(i) take or permit (other than with respect to actions taken or to be taken
solely by a Government Authority) to be taken any action which would have the
effect directly or indirectly of subjecting interest on any of the Purchases or
the Commercial Paper to withholding taxation in the hands of, respectively, MCF,
Redwood or holders of the Commercial Paper generally who are residents of the
United States and will perform all of the Originator's obligations under this
Agreement and the Related Documents to prevent or cure any default by the
Originator which would have the effect, directly or indirectly, of subjecting
interest on any of the Purchases or the Commercial Paper to withholding
taxation.
(j) permit, cause, or suffer the creation, incurrence or assumption of any Debt
secured by a lien (other than capital leases and Debt owing to vendors of the
Originator in connection with the provision of goods) without first having
entered into an intercreditor agreement, in form and substance satisfactory to
MCF and each assignee of MCF's rights hereunder.
SECTION 4.04 Breach of Representations, Warranties or Covenants. Upon discovery
by the Originator, MCF, or any assignee of MCF's rights hereunder, that any of
the representations, warranties or covenants described in Sections 4.01(b),
4.02(b) or (c) or 4.03(a), (b) or (c) have been breached such that they are or
were untrue or incorrect in any respect, which breach is reasonably likely to
have a material adverse effect on the value of a Transferred Receivable or the
interests of MCF or any assignee therein, the party discovering the same shall
give prompt written notice to the other parties. Thereafter, if requested by
notice from MCF or any assignee, or if the Originator so desires, the Originator
shall, on the next succeeding Business Day, either (i) repurchase such
Transferred Receivable from MCF in consideration of cash or a reduction of the
outstanding indebtedness under the Subordinated Note or both (and MCF shall
transfer such Receivable to the Originator), or (ii) transfer ownership of a new
Eligible Receivable or new Eligible Receivables on such Business Day, in the
case of clauses (i) and (ii) in an amount equal to the Billed Amount of such
Transferred Receivable less Collections received in respect thereof.
Notwithstanding the foregoing, if any Receivable is not paid in full on account
of any Dilution Factors, the Originator's repurchase obligation under this
Section 4.04 shall be reduced by the amount of any such Dilution Factors taken
into account in the Sale Price.
Article V
INDEMNIFICATION
SECTION 5.01 Indemnification. (a) Without limiting any other rights that MCF,
any of its shareholders, officers or agents, or any assignee of MCF's rights
hereunder or such assignee's shareholders, officers, employees or agents (each,
an "Indemnified Party") may have hereunder or under applicable law, the
<PAGE>
Originator hereby agrees to indemnify each Indemnified Party from and against
any and all claims, losses, liabilities, obligations, damages, penalties,
actions, judgments, suits, and costs and expenses of any nature whatsoever
related thereto, including reasonable attorneys fees and disbursements (all of
the foregoing being collectively referred to as "Indemnified Amounts") which may
be imposed on, incurred by or asserted against an Indemnified Party in any way
arising out of or resulting from this Agreement or the use by the Originator of
proceeds of any purchase or assignment hereunder or in respect of any
Transferred Receivable or any Contract, excluding, however, (A) Indemnified
Amounts to the extent resulting from gross negligence or willful misconduct on
the part of such Indemnified Party, (B) recourse for uncollectible or
uncollected Transferred Receivables or (C) consequential, indirect, punitive or
exemplary damages; provided, however, that if a court of competent jurisdiction
in a final non-appealable order determines that such Indemnified Amounts arose
in part from such Indemnified Party's gross negligence or willful misconduct,
the Originator shall reimburse such Indemnified Party for the portion of such
Claim not resulting from such Indemnified Party's gross negligence or willful
misconduct. To the extent such a determination of gross negligence or willful
misconduct is made, after payment of any Indemnified Amounts related thereto,
the Originator shall be repaid any amounts reimbursed under the preceding clause
that due to such determination it should not have paid. Without limiting or
being limited by the foregoing, the Originator shall pay on demand to each
Indemnified Party any and all Indemnified Amounts necessary to indemnify such
Indemnified Party from and against any and all Indemnified Amounts relating to
or resulting from:
(i) reliance on any representation or warranty made or deemed made by the
Originator (or any of its officers) under or in connection with this
Agreement or any Related Document, any report or any other information
delivered by the Originator pursuant hereto, which shall have been
incorrect in any material respect when made or deemed made or
delivered;
(ii) the failure by the Originator to comply with any term, provision or
covenant contained in this Agreement, any Related Document or any
agreement executed in connection with this Agreement, with any
applicable law, rule or regulation with respect to any Transferred
Receivable or the related Contract, or the nonconformity of any
Transferred Receivable or the related Contract with any such applicable
law, rule or regulation; or
(iii) the failure to vest and maintain vested in MCF, or to transfer to MCF,
legal and equitable title to and ownership of the Receivables which
are, or are purported to be, Transferred Receivables, together with all
Collections and Proceeds in respect thereof, free and clear of any
Adverse Claim (except as permitted hereunder) whether existing at the
time of the proposed sale of such Receivable or at any time thereafter;
excluding, however, (A) Indemnified Amounts to the extent resulting from gross
negligence or willful misconduct on the part of such Indemnified Party or (B)
recourse for uncollectible or uncollected Transferred Receivables or (C)
<PAGE>
consequential, indirect, punitive or exemplary damages; provided, however, that
if a court of competent jurisdiction in a final non-appealable order determines
that such Indemnified Amounts arose in part from such Indemnified Party's gross
negligence or willful misconduct, the Originator shall reimburse such
Indemnified Party for the portion of such Claim not resulting from such
Indemnified Party's gross negligence or willful misconduct. To the extent such a
determination of gross negligence or willful misconduct is made, after payment
of any Indemnified Amounts related thereto, the Originator shall be repaid any
amounts reimbursed under the preceding clause that due to such determination it
should not have paid.
(b) If indemnification is to be sought hereunder by an Indemnified Party, then
such Indemnified Party shall promptly notify the Originator of the commencement
of any litigation, proceeding or other action in respect thereof; provided,
however, that the failure to notify the Originator shall not relieve the
Originator from any liability or obligation that it may have hereunder or
otherwise to such Indemnified Party, except to the extent the Originator is
actually prejudiced thereby. Each Indemnified Party shall have the right to
control its own defense, but shall consult from time to time with the Originator
and in no event shall the Originator, in connection with any one action or
proceeding or separate but substantially similar or related actions or
proceedings arising out of the same general allegations or circumstances, be
liable for the fees and expense of more than one firm of attorneys (together
with any appropriate local counsel) at any time acting for GE Capital, GE
Capital Markets Group Inc. or their employees, directors or officers
(collectively "GE Persons"), unless any such GE Person has been advised by legal
counsel that (a) the representation of such GE Person by legal counsel acting
for other GE Persons would be inappropriate due to actual or potential conflicts
of interest or (b) there may be legal defenses available to such GE Person that
are different from or additional to those available to any other GE Person
represented by such legal counsel; provided, that any Indemnified Party other
than any GE Person shall not be restricted from hiring separate legal counsel
the fees and expenses for which the Originator shall be liable as provided
herein. Notwithstanding anything to the contrary contained herein, the
Originator shall not have any obligation to hold harmless or indemnify any
Indemnified Party for the amount of any cash settlement if any Indemnified Party
enters into any such cash settlement of a claim without the prior written
consent of the Originator, which consent will not be unreasonably withheld or
delayed and in the event the Originator shall not consent to any proposed
settlement, then the Originator shall notify such Indemnified Party in writing
of the amount which the Originator is willing to pay (and if no such written
notification is provided, the Originator will be deemed to consent to the entire
cash settlement); provided that the Originator shall in any event continue to be
obligated to hold harmless and indemnify such Indemnified Party for legal costs
in relation to such Indemnified Amount as provided herein. If, for any reason,
no settlement is made, all indemnity obligations under this Article V shall
continue.
SECTION 5.02 Assignment of Indemnities. The Originator acknowledges that, to the
extent permitted under the Purchase Agreement, MCF may assign its rights of
indemnity granted hereunder and upon such assignment, such assignee shall have
<PAGE>
all rights of MCF hereunder and may in turn assign such rights. The Originator
agrees that, upon such assignment, such assignee may enforce directly, without
joinder of MCF, the indemnities set forth in this Article V.
Article VI
MISCELLANEOUS
SECTION 6.01 Notices, Etc. All notices and other communications provided for
hereunder shall, unless otherwise stated herein, be in writing (including
facsimile, telex and express mail) and mailed or telecommunicated, or delivered
as to each party hereto, at its address set forth under its name on the
signature page hereof or at such other address as shall be designated by such
party in a written notice to the other parties hereto. All such notices and
communications shall not be effective until received by the party to whom such
notice or communication is addressed.
SECTION 6.02 No Waiver; Remedies. No failure on the part of an Originator or MCF
or any assignee of MCF to exercise, and no delay in exercising, any right
hereunder or under any Assignment shall operate as a waiver thereof; nor shall
any single or partial exercise of any right hereunder preclude any other or
further exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any other remedies provided by law.
SECTION 6.03 Binding Effect; Assignability. This Agreement shall be binding upon
and inure to the benefit of the Originator and MCF, and their respective
successors and permitted assigns. Except as contemplated herein, none of the
parties may assign any of its rights and obligations hereunder or any interest
herein without the prior written consent of the other parties. This Agreement
shall create and constitute the continuing obligations of the parties hereto in
accordance with its terms, and shall remain in full force and effect until its
termination; provided, that the rights and remedies pursuant to Section 4.04
with respect to any breach of any representation, warranty or covenants made by
the Originator pursuant to Sections 4.01(b), 4.02(b) and (c) and 4.03(a), (b)
and (c) and the indemnification and payment provisions of Article V shall be
continuing and shall survive any termination of this Agreement.
SECTION 6.04 No Proceedings. The Originator hereby agrees that it will not,
directly or indirectly, including, without limitation, by exercising any rights
under the Subordinated Note, institute, or cause to be instituted, against MCF
any proceeding of the type referred to in Section 9.01(c) of the Purchase
Agreement so long as there shall not have elapsed one year plus one day since
the latest maturing commercial paper issued by Redwood and allocated to MCF has
been paid in full in cash.
SECTION 6.05 Amendments; Consents and Waivers. No modification, amendment or
waiver of, or with respect to, any provision of this Agreement, the Purchase
Agreement and any exhibits or schedules hereto or thereto, nor consent to any
departure by the Originator or MCF from any of the terms or conditions hereof,
<PAGE>
shall be effective unless it shall be in writing and signed by each of the
parties hereto, and prior written consent is given by Redwood and the Collateral
Agent. Any waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No consent or demand in any case shall, in
itself, entitle any party to any other consent or further notice or demand in
similar or other circumstances. This Agreement and the documents referred to
herein embody the entire agreement of the Originator and MCF with respect to the
Transferred Receivables and supersede all prior agreements and understandings
relating to the subject hereof.
SECTION 6.06 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. (a)
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF
CALIFORNIA.
(b) THE ORIGINATOR AND MCF HEREBY SUBMIT TO THE JURISDICTION OF THE COURTS OF
THE STATE OF CALIFORNIA, AND EACH WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS
UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED MAIL
DIRECTED TO THE ADDRESS SET FORTH ON THE SIGNATURE PAGE HEREOF AND SERVICE SO
MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER THE SAME SHALL HAVE BEEN
DEPOSITED IN THE U.S. MAILS, POSTAGE PREPAID. THE ORIGINATOR AND MCF HEREBY
WAIVE ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF
ANY ACTION INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. NOTHING IN THIS SECTION
SHALL AFFECT THE RIGHT OF THE ORIGINATOR OR MCF TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW.
(c) THE ORIGINATOR AND MCF HEREBY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE ARISING
OUT OF, CONNECTED WITH, RELATED TO, OR IN CONNECTION WITH THIS AGREEMENT.
INSTEAD, ANY DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT
A JURY.
SECTION 6.07 Execution in Counterparts; Severability. This Agreement may be
executed by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and both of which when taken together
shall constitute one and the same agreement. In case any provision in or
obligation under this Agreement shall be invalid, illegal or unenforceable in
any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations in any jurisdiction, or of such provision or
obligation in any jurisdiction, shall not in any way be affected or impaired
thereby.
<PAGE>
SECTION 6.08 Descriptive Headings. The descriptive headings of the various
sections of this Agreement are inserted for convenience of reference only and
shall not be deemed to affect the meaning or construction of any of the
provisions hereof.
SECTION 6.09 No Setoff. The Originator's obligations under this Agreement shall
not be affected by any right of setoff, counterclaim, recoupment, defense or
other right the Originator might have against MCF, Redwood, the Operating Agent,
the Collateral Agent or any assignee, all of which rights are hereby waived by
the Originator.
SECTION 6.10 Further Assurances. The Originator agrees to do such further acts
and things and to execute and deliver to MCF, Redwood, the Operating Agent or
any assignee such additional assignments, agreements, powers and instruments as
MCF, Redwood, the Operating Agent or any assignee may require or deem advisable
to carry into effect the purposes of this Agreement or to better assure and
confirm unto any such party its respective rights, powers and remedies
hereunder.
SECTION 6.11 Confidentiality. (a) The Originator and MCF agree to maintain the
confidentiality of this Agreement (and all drafts of this agreement and
documents ancillary to this Agreement) in their communications with third
parties other than any Affected Party or any Indemnified Party and otherwise and
not to disclose, deliver or otherwise make available to any third party (other
than its directors, officers, employees, accountants or counsel) the original or
any copy of all or any part of this Agreement (or any draft of this Agreement
and documents ancillary to this Agreement) except to an Affected Party or an
Indemnified Party.
(b) Notwithstanding Section 6.11(a), (i) the general terms of the transactions
contemplated by this Agreement and the Related Documents may be disclosed to any
existing lender to or potential investor in the Parent that has agreed in
writing not to disclose such terms, and (ii) this Agreement and the Related
Documents may be disclosed (A) if required to be filed publicly with the
Securities and Exchange Commission, (B) to the certified public accountants of
the Parent to the extent necessary, (C) to the extent otherwise required by
applicable law, rule or regulation, (D) to the extent required under a valid and
appropriately limited subpoena or equivalent legal process or (E) if the
Affected Party otherwise consents in writing.
(c) The Originator agrees that it shall not (and shall not permit any of its
Subsidiaries to) issue any news release or make any public announcement
pertaining to the transactions contemplated by this Agreement and the Related
Documents without the prior written consent of MCF and its assignees (which
consent shall not be unreasonably withheld) unless such news release or public
announcement is required by law, in which case the Originator shall consult with
MCF and its assignees prior to the issuance of such news release or public
announcement.
SECTION 6.12 Assignment of Agreement. The Originator acknowledges that, to the
extent permitted under the Purchase Agreement, MCF may assign its rights granted
<PAGE>
hereunder, including any rights in the Collateral granted under Article II, and
upon such assignment, such assignee shall have all rights of MCF hereunder and,
to the extent permitted under the Purchase Agreement, may in turn assign such
rights. The Originator agrees that, upon such assignment, such assignee may
enforce directly, without joinder of MCF, the rights set forth in this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Receivables Transfer
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
MERISEL OPEN COMPUTING ALLIANCE, INC.
By:
Name: Charles Freedman
Title: Treasurer
Address: 200 Continental Boulevard
El Segundo, CA 90245
Attention: Charles Freedman, Treasurer
MERISEL CAPITAL FUNDING, INC.
By:
Name: Charles Freedman
Title: Treasurer
Address: 200 Continental Boulevard
El Segundo, CA 90245
Attention: Charles Freedman
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 3 to Loan and Security Agreement is made as
of March 10, 2000 by and among each of the undersigned and amends that certain
Loan and Security Agreement dated as of June 30, 1998, as previously amended by
Amendment No. 1 to Loan and Security Agreement dated as of May 11, 1999, and
Amendment No. 2 to Loan Agreement dated as of September 30, 1999 (the "Loan
Agreement"), by and 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
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 the Loan Agreement be amended and
modified as provided herein, and certain proposed actions by the Borrower be
consented to by the Agent and the Lenders, all as more fully described below.
B. On the terms and subject to the conditions set forth in this
Amendment, the Borrower, the Agent and 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 "Applicable Margin". The definition
of "Applicable Margin" set forth in Section 1.1 of the Loan Agreement is hereby
amended by deleting such definition in its entirety, and inserting in its place
the following:
"`Applicable Margin' means (i) with respect to Base Rate Revolving
Loans, .75%; and (ii) with respect to LIBOR Revolving Loans, 3.00%."
1.2 Capital Expenditures Definition. A new definition of "Capital
Expenditures" is added to Section 1.1 of the Loan
Agreement as follows:
<PAGE>
"`Capital Expenditures' means expenditures of the Borrower to acquire
fixed assets and improvements which should be capitalized in accordance
with GAAP, excluding (i) such expenditures used to replace or repair
assets that are financed with insurance proceeds, settlement proceeds
or condemnation proceeds, (ii) assets purchased with the trade in of
existing assets to the extent of the trade-in credit, and (iii)
expenditures to replace certain assets sold, transferred or otherwise
disposed of to the extent of the proceeds realized from such sale,
transfer or disposition of such asset."
1.3 Cash Flow Definition. A new definition of "Cash Flow" is
added to Section 1.1 of the Loan Agreement as follows:
"`Cash Flow' means, for any period, the total of (a) Consolidated Net
Earnings for such period plus the sum of the following to the extent
deducted in computing Consolidated Net Earnings for such period: (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 Consolidated Net Earnings, minus (b) total interest expense
of the Borrower paid to Persons that are not Affiliates of the Borrower
net of interest income of the Borrower in such period, minus (c) 80% of
interest paid under the Indenture during such period, and minus (d)
total Capital Expenditures in such period."
1.4 Consolidated Net Earnings Definition. A new definition of
"Consolidated Net Earnings" is added to Section 1.1 of
the Loan Agreement as follows:
"`Consolidated Net Earnings' means, with respect to any fiscal period
of the Borrower, the Borrower's and its Subsidiaries' consolidated net
income after provision for income taxes for such fiscal period, as
determined in accordance with GAAP and reported on the Financial
Statements for such period, excluding (without duplication) any and all
of the following included in such net income: (a) gain (net of any
taxes paid or accrued for in accordance with GAAP) or loss arising from
the sale of any capital assets; (b) gain (net of any deferred taxes
liability accrued for in accordance with GAAP) arising from any
write-up in the book value of any asset or loss arising from any write
down of any asset (other than Inventory, Accounts or accounts payable);
(c) earnings (net of any taxes paid or accrued for in accordance with
GAAP) or losses of any corporation, substantially all the assets of
which have been acquired by the Borrower in any pooling of interests
transaction, to the extent realized by such other corporation prior to
the date of acquisition; (d) earnings of any nonconsolidated business
entity in which the Borrower has an ownership interest unless (and only
to the extent) such earnings shall actually have been received by the
Borrower in the form of cash distributions (net of any taxes paid or
accrued for in accordance with GAAP); (e) earnings (net of any taxes
paid or accrued for in accordance with GAAP) of any Person to which a
substantial part of the assets of the Borrower shall have been sold,
<PAGE>
transferred or disposed of, or into which the Borrower shall have been
merged, or which has been a party with the Borrower to any
consolidation or other form of reorganization, prior to the date of
such transaction; (f) gain (net of any taxes paid or accrued for in
accordance with GAAP) or loss arising from the acquisition of debt or
equity securities of the Borrower or from cancellation or forgiveness
of debt; and (g) any other extraordinary non-recurring gains (net of
any taxes paid or accrued for in accordance with GAAP) or losses (other
than losses arising from any write down of Inventory, Accounts or
accounts payable)."
1.5 Amendment to the Definition of "Excluded Assets". The definition of
"Excluded Assets" set forth in Section 1.1 of the Loan Agreement is hereby
amended by deleting subpart (iv) of such definition in its entirety, and
inserting in its place the following:
"(iv) inventory which after the date of this Agreement becomes subject
to agreements with vendors or floor plan creditors that prohibit the
granting of an Agent's Lien on inventory sold by such vendor or
financed by such floor plan creditor, provided that upon the Agent's
receiving written notice from Borrower (by overnight mail or confirmed
facsimile) of the entering into of any such agreement, the Agent's Lien
in such inventory shall be released on the eleventh day following the
Agent's receipt of such notice; provided that such release (and the
exclusion from Inventory described in the preceding clause (iii) and
this clause (iv)) shall only be for the period any such prohibition is
in effect."
1.6 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 deleting such definition in its entirety, and
inserting in its place the following:
"`Interest Coverage Ratio' means, for any period, the ratio of (a)
Consolidated Net Earnings for such period plus the sum of the following
to the extent deducted in computing Consolidated Net Earnings: (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 Consolidated Net Earnings, over (b) total interest expense of
the Borrower paid to Persons that are not Affiliates of the Borrower
during such period (net of interest income) and 80% of interest paid
under the Indenture during such period."
1.7 Amendment to the Definition of "Inventory Mix Reserve Percentage".
The definition of "Inventory Mix Reserve Percentage" set forth in Section 1.1 of
the Loan Agreement is hereby amended by deleting such definition in its
entirety, and inserting in its place the following:
<PAGE>
"`Inventory Mix Reserve Percentage' means the quotient, expressed as a
percentage, of the following:
1 - 80% *(OLV);
50
where OLV means the amount determined by the Agent as the realizable
value of Eligible Inventory (expressed as a percentage of cost)
calculated based on the methodology of the Dovetech, Inc. appraisal
most recently submitted to Agent pursuant to Section 6.5; provided,
however, that (i) the Inventory Mix Reserve Percentage shall be
re-determined if, when the Borrowing Base Certificate for the prior
fiscal month-end is delivered, the ratio of (x) the value of the
Inventory described in clauses (iii) and (iv) of the definition of
Excluded Assets to (y) the value of Eligible Inventory, first exceeds
10% of the value of Eligible Inventory and thereafter, when such ratio
is (a) greater than or equal to the next highest integral multiple of
5% in excess of such ratio for the immediately preceding fiscal month
and (b) less than or equal to the highest integral multiple of 5% that
is less than such ratio for the immediately preceding fiscal month;
(ii) as of the Closing Date, the Inventory Mix Reserve Percentage shall
be 9.90%; and (iii) at no time shall the Inventory Mix Reserve
Percentage be less than zero."
1.8 Amendment to the Definition of "Permitted Liens". The definition of
"Permitted Liens" set forth in Section 1.1 of the Loan Agreement is hereby
amended by deleting subparagraph (g) of such definition in its entirety, and
inserting in its place the following:
"(g) Liens constituting vendor or floor plan creditor liens existing on
the Closing Date (the Agent's Lien shall be junior to such Liens,
provided that the applicable agreement between Borrower and the vendor
or floor plan creditor thereof does not prohibit the granting of junior
liens) and Liens created after the Closing Date on any inventory
(including, without limitation, Inventory) in favor of such vendor
thereof or floor plan creditor relating to such inventory securing the
unpaid purchase price and amounts relating to such Inventory (including
interest and fees) owing to such vendor or floor plan creditor;
provided, however, that the Vendor Obligations and amounts of Inventory
that at any relevant time are subject to the Liens described in this
clause (g), shall be reflected on applicable Borrowing Base
Certificates and that the Impaired Inventory Percentage shall not
exceed 50%;"
1.9 Property Definition. A new definition of "Property" is added
to Section 1.1 of the Loan Agreement as follows:
<PAGE>
"`Property' means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible."
1.10 Amendment to Letter of Credit Fee Section. Section 3.6 of the Loan
Agreement is hereby amended by deleting such section in its entirety, and
inserting in its place the following:
"3.6 Letter of Credit Fee. The Borrower agrees to pay to the Agent, for
the ratable account of the Lenders, for each Letter of Credit, a fee
(the "Letter of Credit Fee") equal to 3.00% per annum of the undrawn
face amount of each Letter of Credit issued for the Borrower's account
at the Borrower's request, plus all reasonable out-of-pocket costs,
fees and expenses incurred by the Agent in connection with the
application for, issuance of, or amendment to any Letter of Credit, as
such fees are determined according to Schedule 3.6. The Letter of
Credit Fee shall be payable monthly in arrears on the first day of each
month following any month in which a Letter of Credit was issued and/or
in which a Letter of Credit remains outstanding. The Letter of Credit
Fee shall be computed on the basis of a 360-day year for the actual
number of days elapsed. If any Event of Default occurs and is
continuing and the Majority Lenders in their discretion so elect, then,
while any Event of Default is outstanding, the Letter of Credit Fee
shall be increased to the Default Rate."
1.11 Amendment to Provision Regarding Appraisals. Section 6.5 of the
Loan Agreement is hereby amended by deleting such section in its entirety, and
inserting in its place the following:
"6.5 Appraisals. Whenever a Default or Event of Default exists, and at
such other times not more frequently than twice a year as the Agent
requests (and, upon the Agent's request, at any one time after the
Impaired Inventory Percentage exceeds (i) 25%; (ii) 35%; and (iii)
45%), the Borrower shall, at its expense and upon the Agent's request,
provide the Agent with appraisals or updates thereof of any or all of
the Collateral from an appraiser, and prepared on a basis, reasonably
satisfactory to the Agent."
1.12 Amendment to Collateral Reporting Requirements. Section 6.7 of the
Loan Agreement is hereby amended by deleting such section in its entirety, and
inserting in its place the following:
"6.7 Collateral Reporting. The Borrower shall provide the Agent with
the following documents at the following times in form reasonably
satisfactory to the Agent: (a) on a weekly basis no later than the
third Business Day of the following week, a Borrowing Base Certificate,
a summary report listing on hand Inventory balances by vendor and
accounts payable owing to any vendor or supplier who has a Lien on any
Inventory, a summary report with such information as is included in the
Borrower's currently produced report titled "Top Fifty Manufacturers
<PAGE>
Summary of Accounts Payable Owed" (such summary report shall
specifically include all amounts owed and accounts payable to Compaq),
summary Inventory reports by category (and, if requested by the Agent,
additional detail thereof); (b) on a quarterly basis no later than the
45th day following the end of each fiscal quarter, a statement of the
balance of each of the Intercompany Accounts; (c) upon the occurrence
and during the continuance of an Event of Default, (i) as frequently as
requested by the Agent, Borrowing Base certificates, and (ii) on a
monthly basis (or more frequently if requested by the Agent), an aging
of accounts payable which is aged by due date, an aging of Accounts
reconciled against the previous month's aging and the Borrower's
general ledger and copies of invoices and purchase orders as requested
by the Agent; and (d) such other reports as to the Collateral of the
Borrower as the Agent shall reasonably request from time to time. If
any of the Borrower's records or reports of the Collateral are prepared
by an accounting service or other agent, the Borrower hereby authorizes
such service or agent to deliver such records, reports, and related
documents to the Agent, for distribution to the Lenders. For the
purposes of this Section 6.7, the word "month" shall mean "fiscal
month.""
1.13 Amendment to Financial Reporting Requirement. Section 7.2 of the
Loan Agreement is hereby amended by adding a new subparagraph (k) to read as
follows:
"(k) On a quarterly basis no later than the 45th day following the end
of each fiscal quarter, beginning with the fiscal quarter ended June
30, 2000, a quarterly consolidating financial report in a form
acceptable to the Agent, setting forth certain unaudited financial
information of the Parent and its Subsidiaries (with such changes to
such exhibit as the Parent may adopt from time to time)."
1.14 Amendment to Financial Reporting Requirement. Section 7.2 of the
Loan Agreement is hereby amended by deleting subparagraph (b) in its entirety,
and inserting in its place the following:
"(b) As soon as available after the end of each fiscal month, a monthly
financial report in substantially the form of Exhibit F (and, in any
case, including the "key monthly business driver data"), setting forth
certain unaudited financial information of the Parent and its
Subsidiaries (with such changes to such Exhibit F as Parent may adopt
from time to time)"
1.15 Subsidiaries and Affiliates. Section 8.5 of the Loan Agreement is
hereby amended by inserting the following at the end
of such section:
"The Borrower shall supplement Schedule 8.5 from time to time as new
Subsidiaries of the Parent are created so long as such new Subsidiaries
are otherwise permitted by the terms of this Agreement."
<PAGE>
1.16 Transactions with Affiliates. Section 9.15 of the Loan Agreement
is hereby amended by (i) adding the following to clause (a) thereof: "and (vii)
Guarantees permitted under Section 9.13(g) and (h)" and (ii) inserting a new
clause (d) at the end of such section to read as follows:
"(d) so long as such transactions are related to the ongoing businesses
and activities of Merisel Open Computing Alliance, Inc. or the Borrower
and its Subsidiaries, the Borrower and its Subsidiaries may in the
ordinary course of business (i) sell Inventory and inventory to the
extent permitted under Section 1.23 of the Third Amendment to this
Agreement, (ii) make loans or advances to, or receive loans or advances
from, Merisel Open Computing Alliance, Inc. on a day to day basis so
long as such transactions are done solely to meet such entities'
short-term cash flow needs; and (iii) provide services, facilities or
equipment to, or receive services, facilities or equipment from,
Merisel Open Computing Alliance, Inc. (and may receive fees and pay
fees corresponding to such services, facilities or equipment), which
services may include, without limitation, provision of personnel."
1.17 Addition of Cash Flow Covenant. Section 9.20 of the Loan Agreement
(which was Intentionally Omitted) is hereby amended by deleting such section in
its entirety, and inserting in its place the following:
"9.20 Cash Flow. The Borrower will maintain Cash Flow, determined as of
the last day of the fiscal quarter, of not less than (i) ($15,000,000)
for the quarter ending March 31, 2000 and (ii) ($20,500,000) for the
period of two consecutive fiscal quarters ending June 30, 2000."
1.18 Amendment to Certain Financial Covenants. Sections 9.22 and 9.23
of the Loan Agreement are hereby amended, effective as of December 31, 1999, by
deleting such sections in their entirety, and inserting in their place the
following:
"9.22 Capital Expenditures. Neither the Parent nor the Borrower, nor
any of their Subsidiaries, shall, commencing with Fiscal Year 2000,
make or incur any Capital Expenditure if, after giving effect thereto,
the aggregate amount of all Capital Expenditures (net of proceeds from
sales of fixed assets) by such parties on a consolidated basis would
exceed (i) $25,000,000 for any Fiscal Year or (ii) $7,500,000 for any
fiscal quarter.
"9.23 Interest Coverage Ratio. For the fiscal periods set forth
below, the Borrower will maintain an Interest Coverage
Ratio in the amount set forth opposite such fiscal period:
Fiscal Period Ratio
Quarter ending September 30, 2000 1.00 to 1.00
Quarter ending December 31, 2000 1.10 to 1.00
Each quarter ending thereafter 1.10 to 1.00"
<PAGE>
1.19 Amendment to Schedule 8.5. The Agent and the Borrower hereby
agree that Schedule 8.5 to the Loan Agreement is hereby
supplemented by adding the following:
"The Borrower owns all of the outstanding equity interests of Merisel
Open Computing Alliance, Inc.; provided that such equity interest may,
at the Borrower's discretion, be distributed to the Parent."
1.20 Waiver of Defaults. The Agent and the Lenders hereby waive,
effective as of the end of the Borrower's 1999 Fiscal Year and as of the end of
the Borrower's 1999 fiscal fourth quarter, the potential Defaults or Events of
Default existing under the Loan Agreement by reason of the failure of the
Borrower to be in compliance with the requirements of Sections 9.22 and 9.23 of
the Loan Agreement as of such dates (as such sections were in effect at the end
of the Borrower's 1999 Fiscal Year and without giving effect to the
modifications to such sections in this Amendment). Nothing contained herein
shall constitute a waiver of any other Event of Default, whether or not the same
are known to the Agent or any of the Lenders at the date hereof, or constitute
any agreement to waive the same or other Events of Default at any other time in
the future.
1.21 Waiver to Covenants and Representations. The Agent and the Lenders
hereby waive compliance with any representation, warranty, or covenant under
Articles 6, 7, 8 or 9 of the Loan Agreement and any Default or Event of Default
under Article 11 of the Loan Agreement, to the extent the Borrower would breach
such representation, warranty or covenant or create a Default or Event of
Default in consummating or effectuating the Borrower's proposal to split its
"Merisel Open Computing Alliance" division into a new wholly owned subsidiary,
as such transaction is described in the written summary attached hereto as
Exhibit A (the "MOCA Transaction").
1.22 Consent to MOCA Transaction. The Agent and the Lenders hereby
approve of and consent to the MOCA Transaction and the transfer by the Borrower
of that portion of its Inventory which relates solely to the products of Sun
Microsystems (the "Transferred Inventory") to Merisel Open Computing Alliance,
Inc. ("MOCA"). The Agent and the Lenders hereby agree to release, and to execute
and deliver such instruments or agreements as may be necessary to effect such
release, the Lenders' security interest in the Transferred Inventory, provided
that such release of the Transferred Inventory will not, under the Loan
Agreement, cause the Aggregate Revolver Outstanding to exceed the Availability
(with the Availability for purposes of this sentence calculated as if (i) the
Aggregate Revolver Outstanding were zero and (ii) the Transferred Inventory were
excluded from the Borrowing Base).
1.23 Consent to Periodic Transfer of Inventory to MOCA. The Agent and
the Lenders hereby approve of and consent to sales by the Borrower to MOCA, from
time to time, of Inventory and inventory which is to be sold by MOCA in its
ordinary course of business; provided that the terms of such sales provide for
<PAGE>
amounts due to be paid within 30 days from the time such Inventory and inventory
is sold (unless: (i) MOCA is in default under any agreement with General
Electric Capital Corporation relating to the securitization of its assets or
(ii) such sale of any such Inventory or inventory will cause the Availability
(calculated without regard to the Maximum Revolver Amount) to be less than
$50,000,000.00, in which case such sales must be on a cash basis). Upon any such
sales, the Agent's and the Lenders' Liens on such sold Inventory shall be
released.
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.
2.3 Corporate Authority; No Breach. The execution, delivery and
performance by the Borrower of this Amendment have been duly authorized by all
necessary corporate and other action and do not and will not (i) require any
registration with, consent or approval of, notice to or action by, any Person
(including any Governmental Authority) in order to be effective and enforceable,
(ii) contravene the terms of the Borrower's Certificate of Incorporation or
bylaws, or (iii) conflict with, or result in any breach or contravention of, any
other document to which the Borrower is a party or any order, injunction, writ
or decree of any Governmental Authority to which the Borrower or its property is
subject. The Loan Agreement as amended by this Amendment constitutes a legal,
valid and binding obligation of the Borrower, enforceable against the Borrower
in accordance with its respective terms, without defense, counterclaim or
offset, except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in equity or at law).
<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, (ii) a duly executed guaranty by the Parent in a form
acceptable to the Agent in its sole discretion (the "Parent Guaranty"), (iii) a
duly executed guaranty by MOCA in a form acceptable to the Agent in its sole
discretion (the "MOCA Guaranty"), and (iv) a duly executed "Second Amendment to
Fee Letter" (in a form acceptable to the Agent in its sole discretion) from the
Borrower to the Agent dated as of the date hereof.
3.2 Covenant Regarding Landlord Waiver. The Borrower covenants and
agrees to use its reasonable best efforts to obtain and deliver to the Agent, no
later than the 30th day following the execution of this Amendment, a duly
executed landlord waiver in a form acceptable to the Agent in its sole
discretion covering the property that the Borrower leases in Richmond, Virginia.
The Borrower acknowledges and agrees that if such landlord waiver is not
delivered to the Agent before the end of such 30-day period, then the Agent may
at its discretion, pursuant to the provisions of the Loan Agreement, establish a
reserve from Availability.
3.3 No Other Waiver. The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Agent or the Lenders under the Loan Documents,
nor constitute a waiver of any provisions of the Loan Documents.
3.4 Governing Law. This Amendment is to be construed in accordance with
and governed by the internal laws of the State of California (as permitted by
Section 1646.5 of the California Civil Code or any similar successor provision)
without giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the internal laws of the State of
California to the rights and duties of the parties.
3.5 Binding Effect. This Amendment shall be binding upon and shall
inure to the benefit of the parties hereto and each of their respective
successors and assigns.
3.6 Entire Agreement. This Amendment, together with the Loan Agreement
and the other Loan Documents, contains the entire and exclusive agreement of the
parties hereto with reference to the matters discussed herein and therein, and
cannot be amended, modified or supplemented except by an instrument in writing
executed by each party hereto. This Amendment supersedes all prior drafts and
communications between the parties with respect to the subject matter addressed
herein.
<PAGE>
3.7 Severability. If any term or provision of this Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision shall
be invalidated without affecting the remaining provisions of this Amendment or
the Loan Agreement, respectively.
3.8 Costs and Expenses; Further Assurances. Without limiting any
provisions of any of the Loan Documents: (i) the Borrower agrees to pay on
demand all costs and expenses of the Agent and the Lenders (including the
reasonable costs (estimated at approximately $38,900) of that certain Collateral
appraisal being conducted concurrently with the preparation of this Amendment)
in connection with the preparation, execution, delivery and enforcement of this
Amendment, including, without limitation, the reasonable fees and expenses of
counsel for the Agent with respect thereto and with respect to advising Agent as
to its rights and responsibilities hereunder; and (ii) the Borrower, the Agent
and the Lenders agree to execute and deliver such instruments and documents and
take such other action as shall be reasonably necessary or advisable in order to
carry out the intent of this Amendment.
3.9 References to Loan Agreement and Loan Documents. From and after the
effectiveness of this Amendment, all references in the Loan Agreement to "this
Agreement", "hereof", "herein", and similar terms shall mean and refer to the
Loan Agreement as certain provisions thereof are amended or supplemented by this
Amendment, and all references in other documents to the Loan Agreement shall
mean such agreement as certain provisions thereof are amended or supplemented by
this Amendment. From and after the effectiveness of this Amendment, the term
"Loan Documents" (as defined in the Loan Agreement) shall include the Parent
Guaranty and the MOCA Guaranty. The Loan Agreement and the other Loan Documents
are hereby ratified and confirmed and, except as herein otherwise agreed, remain
unmodified and in full force and effect.
3.10 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:_______________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: 200 Continental Boulevard
El Segundo, CA 90245
Telecopy No.: (310) 615-1234
"AGENT"
Bank of America, National Association, as the Agent
By:_______________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: 40 East 52nd Street
New York, New York 10022
Telecopy No.: (212) 836-5167
<PAGE>
"LENDERS"
Bank of America, National Association, as a Lender
By:_______________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: 40 East 52nd Street
New York, New York 10022
Telecopy No.: (212) 836-5167
Congress Financial Corporation, as a Lender
By:_______________________________________________________
Name:_____________________________________________________
Title:____________________________________________________
Address: ________________
Telecopy No.: (___) ___________
<PAGE>
Subsidiaries of the Registrant
NAME JURISDICTION OF INCORPORATION
- ----- ------------------------------
Channel Financial Services, Inc. Delaware
Merisel Americas, Inc. Delaware
Merisel Asia, Inc. Delaware
Merisel Canada Inc. Canada
Merisel Capital Funding, Inc. Delaware
Merisel CCR, Inc. California
Merisel Open Computing Alliance, Inc. Delaware
Merisel Properties, Inc. Delaware
Softsel Foreign Sales Corporation U.S. Virgin Islands
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-29616, No. 33-61592, No. 333-44595, No. 333-44605, and No. 33-63021 of
Merisel, Inc. on Form S-8 of our report dated March 16, 2000, appearing in this
Annual Report on Form 10-K of Merisel, Inc. for the year ended December 31,
1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
consolidated financial statements for Merisel, Inc. and is qualified in its
entirety by reference to such financial statements
</LEGEND>
<CIK> 0000724941
<NAME> MERISEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.0000
<CASH> 57,557
<SECURITIES> 0
<RECEIVABLES> 197,538
<ALLOWANCES> 15,186
<INVENTORY> 445,663
<CURRENT-ASSETS> 696,673
<PP&E> 165,879
<DEPRECIATION> 81,270
<TOTAL-ASSETS> 805,795
<CURRENT-LIABILITIES> 580,358
<BONDS> 128,900
0
0
<COMMON> 803
<OTHER-SE> 94,369
<TOTAL-LIABILITY-AND-EQUITY> 805,795
<SALES> 5,188,679
<TOTAL-REVENUES> 5,188,679
<CGS> 4,947,626
<TOTAL-COSTS> 247,468
<OTHER-EXPENSES> 28,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,849
<INCOME-PRETAX> (60,229)
<INCOME-TAX> 939
<INCOME-CONTINUING> (61,168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,168)
<EPS-BASIC> (.76)
<EPS-DILUTED> (.76)
</TABLE>
