<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24667
MERKERT AMERICAN CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3411833
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
490 Turnpike Street, Canton, Massachusetts 02021
(781) 828-4800
(Address, including zip code and telephone number, including area code of
Registrant's principal executive office)
-------------------------
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 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 [_]
The number of shares of the Registrant's Common Stock and Restricted Common
Stock outstanding as of May 14, 1999 was 7,172,300 and 335,700, respectively.
1
<PAGE>
MERKERT AMERICAN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1998 and March 31, 1999 (unaudited)........................ 3
Condensed Consolidated Statement of Operations
Quarter ended March 31, 1999 (unaudited)............................... 4
Condensed Consolidated Statement of Cash Flows
Quarter ended March 31, 1999 (unaudited)............................... 5
Notes to Condensed Consolidated Financial Statements (unaudited).......... 6
Predecessor Company-Merkert Enterprises, Inc. and Subsidiary
Consolidated Statement of Operations
Quarter ended March 31, 1998 (unaudited)............................... 8
Predecessor Company-Merkert Enterprises, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Quarter ended March 31, 1998 (unaudited)............................... 9
Predecessor Company-Rogers American Company, Inc. and Subsidiary
Consolidated Statement of Operations
Quarter ended March 31, 1998 (unaudited)............................... 10
Predecessor Company-Rogers American Company, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Quarter ended March 31, 1998 (unaudited)............................... 11
Predecessor Company-Notes to Consolidated Financial
Statements (unaudited)................................................. 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 18
Item 2. Changes in Securities and Use of Proceeds................................. 18
Item 3. Defaults Upon Senior Securities........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................... 18
Item 5. Other Information......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
Signatures................................................................ 19
</TABLE>
2
<PAGE>
MERKERT AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................... $ 1,185 $ 1,362
Restricted cash ................................ 9,981 8,281
Accounts receivable, less allowance for
doubtful accounts of $1,374 at December 31,
1998 and March 31, 1999 ...................... 22,334 23,971
Income taxes receivable ........................ 2,647 2,441
Inventories .................................... 1,623 1,423
Prepaid expenses and other ..................... 1,018 1,158
-------- --------
Total current assets ........................ 38,788 38,636
-------- --------
Property, plant and equipment, net ................ 17,417 17,202
Noncompete agreements, net ........................ 1,986 1,885
Goodwill, net ..................................... 124,475 129,164
Other assets ...................................... 5,744 5,897
-------- --------
Total assets ................................ $188,410 $192,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
notes payable ................................ $ 10,523 $ 14,246
Accounts payable ............................... 9,293 5,480
Accrued expenses ............................... 21,080 19,032
-------- --------
Total current liabilities ................... 40,896 38,758
-------- --------
Long-term debt, net of current portion ............ 74,673 74,443
-------- --------
Other liabilities ................................. 246 1,110
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized 54,000,000 shares
Issued and outstanding 7,218,000
and 7,508,000, respectively .................. 72 75
Additional paid in capital ..................... 75,489 79,532
Note for sale of common stock .................. (1,500) (1,500)
Accumulated earnings (deficit) ................. (1,466) 366
-------- --------
Total stockholders' equity .................. 72,595 78,473
-------- --------
Total liabilities and stockholders' equity... $188,410 $192,784
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
MERKERT AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1999
(unaudited and amounts in thousands, except share and per share amounts)
<TABLE>
<S> <C>
Commission income ....................................... $ 43,876
Sales ................................................... 12,749
----------
Revenues ............................................. 56,625
Cost of sales ........................................... 11,304
Selling expenses ........................................ 27,377
General and administrative expenses ..................... 11,332
Depreciation and amortization ........................... 1,457
----------
Operating income ..................................... 5,155
Interest expense, net ................................... 1,824
----------
Income before provision for income taxes ............. 3,331
Provision for income taxes .............................. 1,499
----------
Net income ........................................... $ 1,832
==========
Net income per share basic ............................. $0.25
==========
Shares used in computing net income per share basic .... 7,447,000
==========
Net income per share diluted ........................... $0.25
==========
Shares used in computing net income per share diluted .. 7,447,000
==========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
MERKERT AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1999
(unaudited and amounts in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income ............................................... $ 1,832
Adjustments to reconcile net income to cash used
in operating activities:
Depreciation and amortization ......................... 1,457
Deferred income taxes ................................. 1,499
Changes in assets and liabilities, exclusive of
acquisitions -
(Increase) decrease in -
Restricted cash ..................................... 135
Accounts receivable ................................. (683)
Income tax receivable ............................... 206
Inventories ......................................... 200
Prepaid expenses and other .......................... 55
Increase (decrease) in
Accounts payable .................................... (3,965)
Accrued expenses .................................... (2,342)
-------
Net cash used in operating activities ............. (1,606)
-------
Cash flows from investing activities:
Acquisitions, net of cash acquired .................... (2,687)
Purchase of property, plant and equipment ............. (99)
Increase in cash surrender value of life insurance .... (8)
-------
Net cash used in investing activities ............. (2,794)
-------
Cash flows from financing activities:
Borrowings under revolving credit facility ............ 3,000
Repayments of long term debt .......................... (4,154)
Issuance of common stock, net of expenses ............. 4,046
Restricted cash ....................................... 1,685
-------
Net cash provided by financing activities ......... 4,577
-------
Net increase in cash .............................. 177
Cash at beginning of period .............................. 1,185
-------
Cash at end of period .................................... $ 1,362
=======
Supplemental disclosures of:
Cash flow information -
Cash payments for -
Interest .......................................... $ 2,051
=======
Income taxes ...................................... $ -
=======
Non-cash flow information-
Purchase price financed with debt ................. $ 3,767
=======
Assets acquired ................................... $ 781
=======
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
MERKERT AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited and amounts in thousands, except share and per share amounts)
1. Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. This financial information should be read in
conjunction with the consolidated financial statements and notes thereto for the
period ended December 31, 1998, included in the Annual Report on Form 10-K of
Merkert American Corporation and Subsidiaries (the "Company"), for the period
ended December 31, 1998. The results of operations for the interim periods are
not necessarily indicative of the operating results for the year.
2. Operations and Acquisitions
Merkert American Corporation was incorporated on March 4, 1998. The
Company's only operations for the period between March 4, 1998 and March 31,
1998 related to the public offering of the Company's stock and the acquisition
of Merkert Enterprises, Inc. and Rogers-American Company, Inc. The acquisitions
of Merkert Enterprises and Rogers-American were consummated on December 18, 1998
and have been accounted for using the purchase method of accounting.
Accordingly, the results of operations of both Merkert Enterprises and Rogers-
American have been included in the Company's Consolidated Statement of
Operations since the date of acquisition. Due to the significance of the
operations of the Company's predecessors (Merkert Enterprises and Rogers-
American), the Company has included the statements of operations and cash flows
for the three months ended March 31, 1998 for Merkert Enterprises and Rogers-
American in this Form 10-Q.
In January 1999, the Company completed the acquisition of Sell, Inc.
("Sell"), a full service brokerage firm in the Midwest region of the United
States, for an aggregate purchase price of approximately $3 million in cash and
$3.8 million in notes. The acquisition was accounted for using the purchase
method of accounting. Goodwill resulting from the acquisition is being amortized
over its estimated useful life. The operating results of Sell are included in
the operating results of the Company since the acquisition date.
In April 1999, the Company completed the acquisition of United Brokerage
Company ("UBC"), for an aggregate purchase price of approximately $3.2 million
in notes in addition to debt assumed. The acquisition will be accounted for
using the purchase method of accounting. Goodwill resulting from the acquisition
will be amortized over its estimated useful life. UBC has operated in the
Midwest region of the United States under an alliance known as "The Sell Group"
since 1998.
In April 1999, the Company signed a definitive merger agreement with Dallas,
Texas-based Richmont Marketing Specialists Inc. ("Marketing Specialists"). Under
the terms of the transaction, the stockholders of Marketing Specialists will
receive 6,705,551 shares of the Company's common stock. In addition, the Company
will grant to certain stockholders and employees of Marketing Specialists
options to purchase an additional 800,000 shares (subject to increase up to
1,000,000 shares) of the Company's stock at a per share price equal to the
greater of fair market value upon grant or $13.50. The Company will assume all
of Marketing Specialists' outstanding debt, which net of cash on hand at
December 31, 1998 totaled approximately $150 million. The transaction is subject
to customary conditions and approvals, including regulatory and Company
shareholder approval, and is expected to close in the third quarter of 1999.
6
<PAGE>
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share for the period ended March 31, 1999:
<TABLE>
<S> <C>
Numerator:
Net income $ 1,832
==========
Denominator:
Weighted average shares basic 7,447,000
Dilutive stock options -
----------
Weighted average shares assuming dilution 7,447,000
==========
Number of options excluded as they
would be antidilutive 245,000
==========
Net income per common share:
Basic and diluted $ 0.25
==========
</TABLE>
4. Segment Information
The Company operates in two principal segments: Food Brokerage and Private
Label principally in the United States. The Company provides outsourced sales
and marketing services to manufacturers of branded food and non-food products in
the Food Brokerage segment. Private Label includes the Company's private label
division, which procures private label products on behalf of certain retailers
as well as the distribution of price marking equipment and other ancillary
products to retailers.
Information on the Company's business segments was as follows:
For the period ended March 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Food Brokerage $ 43,876
Private Label 12,749
--------
$ 56,625
========
Operating Profit:
Food Brokerage 7,828
Private Label 1,445
General corporate expenses (4,118)
--------
Operating profit $ 5,155
========
At March 31, 1999:
Identifiable Assets:
Food Brokerage $ 19,805
Private Label 5,589
General corporate assets 167,390
--------
$192,784
========
</TABLE>
7
<PAGE>
PREDECESSOR COMPANY
MERKERT ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
(unaudited and amounts in thousands)
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Commissions ............................... $24,168
Sales ..................................... 12,424
-------
36,592
Operating expenses:
Selling expenses .......................... 16,144
Cost of sales ............................. 11,420
General and administrative ................ 8,174
Depreciation and amortization ............. 1,137
-------
Operating loss ........................ (283)
-------
Other income (expense):
Interest expense .......................... (1,129)
Other income (expense) .................... (103)
-------
Total other income (expense) .......... (1,232)
-------
Loss before provision for income taxes ........ (1,515)
Provision for income taxes .................... 100
-------
Net loss .............................. (1,615)
Preferred stock dividends ..................... 100
-------
Net loss applicable to common shareholders .... $(1,715)
=======
</TABLE>
See notes to consolidated financial statements
8
<PAGE>
PREDECESSOR COMPANY
MERKERT ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1998
(unaudited and amounts in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss .............................................. $(1,615)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities
Depreciation and amortization ...................... 1,137
Gain on disposal of fixed assets ................... (224)
Changes in assets and liabilities, exclusive of
acquisitions ......................................
(Increase) decrease in
Accounts receivable, net ........................ 2,419
Inventories, prepaid expenses and advances ...... (1,537)
Other assets .................................... (131)
Accounts payable ................................ (5,130)
Accrued expenses ................................ 2,345
-------
Net cash used in operating activities ........... (2,736)
-------
Cash flows from investing activities:
Additions to property, plant and equipment ......... (410)
Net proceeds from sale of property, plant and
Equipment ......................................... 512
Increase in cash surrender value, net of
increase in policy loans .......................... (3)
-------
Net cash provided by investing activities ....... 99
-------
Cash flows from financing activities:
Borrowings under revolving line of credit .......... 40
Issuance of long term debt ......................... 3,170
Repayment of notes payable ......................... (761)
-------
Net cash provided by financing activities ....... 2,449
-------
Net decrease in cash ............................ (188)
Cash at beginning of year .......................... 1,161
-------
Cash at end of period .............................. $ 973
=======
</TABLE>
See notes to consolidated financial statements
9
<PAGE>
PREDECESSOR COMPANY
ROGERS AMERICAN COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
(unaudited and amounts in thousands)
<TABLE>
<S> <C>
Revenues:
Commissions ............................ $20,831
Operating expenses:
Selling expenses ....................... 15,785
General and administrative ............. 3,221
Depreciation and amortization .......... 635
-------
Operating income .................... 1,190
Interest expense .......................... (650)
-------
Income before provision for income taxes .. 540
Provision for income taxes ................ 308
-------
Net income .......................... $ 232
=======
</TABLE>
See notes to consolidated financial statements
10
<PAGE>
PREDECESSOR COMPANY
ROGERS AMERICAN COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1998
(unaudited and amounts in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income ............................................ $ 232
Adjustments to reconcile net loss to cash provided
by (used in) operating activities
Depreciation and amortization ...................... 635
Changes in assets and liabilities, exclusive of
acquisitions
(Increase) decrease in:
Restricted cash ................................. (177)
Accounts receivable, net ........................ (1,229)
Prepaid expenses and advances ................... (22)
Accounts payable ................................ (302)
Accrued expenses ................................ (231)
-------
Net cash used in operating activities ........... (1,094)
-------
Cash flows from investing activities:
Additions to property, plant and equipment ......... (66)
Acquisition of business, net of cash acquired ...... 159
-------
Net cash provided by investing activities ....... 93
-------
Cash flows from financing activities:
Borrowings under revolving line of credit .......... 9,560
Principal payments on line of credit ............... (8,369)
Repayment of notes payable ......................... (252)
-------
Net cash provided by financing activities ....... 939
-------
Net decrease in unrestricted cash ............... (62)
Cash at beginning of year .......................... 556
-------
Cash at end of period .............................. $ 494
=======
Supplemental disclosures of cash flow information:
Cash payments for -
Interest ........................................ $ 569
=======
Income taxes .................................... $ 582
=======
</TABLE>
See notes to consolidated financial statements
11
<PAGE>
PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Presentation
The Merkert Enterprises and Rogers-American consolidated financial statements
are presented as predecessors of Merkert American Corporation and have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. This financial information should be read in conjunction with the
consolidated financial statements and notes thereto for the period ended
December 31, 1998, included in the Annual Report on Form 10-K of Merkert
American Corporation and Subsidiaries (the "Company"), for the period ended
December 31, 1998. The results of operations for the interim periods are not
necessarily indicative of the operating results for the year.
12
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report on Form 10-Q contains 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. The words
"believe," "expect," "anticipate," "intend," "estimate," "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do no relate solely to historical matters identify forward-
looking statements. Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors,
which are in some cases beyond the control of the Company and may cause the
actual results, performance or achievements of the Company to differ materially
from the anticipated future results, performance or achievements expressed or
implied by such forward-looking statements.
Overview
The Company was organized in March 1998 to create a leading food brokerage
firm providing outsourced sales, merchandising and marketing services to
manufacturers, suppliers and producers of food products and consumer goods
("Manufacturers"). The Company acts as an independent sales and marketing
representative, selling grocery and consumer products on behalf of Manufacturers
and coordinating the execution of Manufacturers' marketing programs with
retailers and wholesalers ("Retailers"). The Company's principal source of
revenue is commissions it receives from Manufacturers. The Company's other
activities include managing private label programs on behalf of selected
Retailers.
On December 18, 1998, the Company sold 4.4 million shares of its Common
Stock at a price of $15.00 per share (the "Offering"). Simultaneously with the
Offering, the Company purchased in separate transactions (collectively the
"Combination") all of the issued and outstanding capital stock of Merkert
Enterprises, Inc., a Massachusetts corporation ("Merkert"), and Rogers-American
Company, Inc., a North Carolina corporation ("Rogers"). As a result, each of
Merkert and Rogers became a wholly-owned subsidiary of the Company. In January
1999, the Company issued 290,000 shares of its Common Stock in connection with
the exercise of a portion of the over-allotment option by the Underwriters of
the Offering, raising net proceeds of approximately $4.1 million.
Prior to December 18, 1998, the Company conducted operations only in
connection with the Combination and the Offering. Therefore, the Company's
operations for the period ended March 31, 1998 related only to the Combination
and the Offering. Prior to the Combination, including during the three months
ended March 31, 1998, Merkert and Rogers operated as independently owned
entities. For financial reporting purposes, the Company is presented as
acquiring Merkert and Rogers.
In January 1999, the Company acquired Sell, Inc. ("Sell"), a full service
brokerage firm in the Midwest region of the United States. The operating results
of Sell are included in the operating results of the Company from the date of
acquisition.
In April 1999, the Company completed the acquisition of United Brokerage
Company ("UBC"). UBC has operated in the Midwest region of the United States
under an alliance known as "The Sell Group" since 1998.
In April 1999, the Company signed a definitive merger agreement with Dallas,
Texas-based Richmont Marketing Specialists Inc. The transaction is subject to
customary conditions and approvals, including regulatory and Company shareholder
approval, and is expected to close in the third quarter of 1999. There can be no
assurance that the transaction will be consummated.
Effective March 31, 1999, the Company merged its several operating
subsidiaries and now operates with one wholly-owned subsidiary, Merkert American
Co., Inc. (formerly Merkert Enterprises, Inc.)
13
<PAGE>
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the accompanying condensed
consolidated financial statements and the notes thereto and the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
Results of Operations
The following defined terms are used in conjunction with the Company's
discussion of operating results.
Revenues. Revenues are derived mainly from commissions earned from
Manufacturers based on the Manufacturers' invoices to Retailers for products
sold. Commissions are usually expressed as a percentage of the invoice as agreed
by contract between the Manufacturer and broker. Commission rates typically
range from 3% for full brokerage services to 1% for retail-only services. The
Company also derives revenues, referred to as "Sales" from the sale of products
including private label packaging materials and frozen products, such as fruits
and vegetables, to certain Retailers, and other products for certain
Manufacturers.
Cost of sales. Cost of sales are primarily the direct cost of private
label products sold by the Company, such as the cost of packaging and frozen
vegetables purchased from suppliers.
Selling, general and administrative expenses. Selling expenses are
predominately comprised of salaries, fringe benefits and incentives for
personnel directly involved in providing services to Manufacturers and
Retailers. Other selling expenses include, among other things, automobiles
utilized by the sales personnel, promotional expenses, and travel and
entertainment. General and administrative expenses consist primarily of salaries
and fringe benefits for administrative and corporate personnel, occupancy and
other office expenses, information technology, communications and insurance.
Depreciation and amortization. Depreciation and amortization expenses
relate to property, plant and equipment and intangible assets, including
goodwill and noncompete agreements.
The following table sets forth the results of operations of the Company for
the three months ended March 31, 1999. The 1998 amounts represent the combined,
historical results of Merkert and Rogers and do not reflect the effect of any
pro forma adjustments (dollars in thousands).
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
-------- -------
<S> <C> <C> <C> <C>
Commissions......................... $44,999 $43,876
Sales .............................. 12,424 12,749
------- -------
Revenues ....................... 57,423 100.0% 56,625 100.0%
Selling expenses ................... 31,929 55.6 27,377 48.3
Cost of sales ...................... 11,420 19.9 11,304 20.0
General and administrative ......... 11,395 19.8 11,332 20.0
Depreciation and amortization ...... 1,772 3.1 1,457 2.6
------- ----- ------- -----
Operating income ................... 907 1.6 5,155 9.1
Interest expense, net .............. 1,779 3.1 1,824 3.2
Other expenses, net ................ 103 0.2 - -
------- ----- ------- -----
Income (loss) before income taxes .. (975) (1.7) 3,331 5.9
Provision for income taxes ......... 408 0.7 1,499 2.7
------- ----- ------- -----
Net income (loss) .................. (1,383) (2.4) 1,832 3.2
======= ===== ======= =====
</TABLE>
14
<PAGE>
Commissions. Commissions decreased by $1.1 million, or 2.5%, from
$45.0 million for the three months ended March 31, 1998 to $43.9 million for the
three months ended March 31, 1999. The decrease in commissions is primarily
attributable to approximately $1.4 million in lost business arising from the
resolution of Manufacturer conflicts resulting from the Combination and $1.5
million of other Manufacturer conflicts, offset by approximately $1.8 million of
increased revenue as a result of the acquisition of Sell.
Sales. Sales increased by $0.3 million, or 2.6%, from $12.4 million for the
three months ended March 31, 1998 to $12.7 million for the three months ended
March 31, 1999, due primarily to increases in private label sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $4.6 million, or 10.7%, from $43.3 million
for the three months ended March 31, 1998 to $38.7 million for the three months
ended March 31, 1999. The decrease is primarily due to reductions in personnel
relating to the integration of Merkert and Rogers operations.
As a percentage of revenues, selling, general and administrative expenses
decreased from 75.4% for the three months ended March 31, 1998 to 68.3% for the
three months ended March 31, 1999.
Depreciation and amortization. Depreciation and amortization expenses
decreased by $0.3 million, or 17.8%, from $1.8 million for the three months
ended March 31, 1998 to $1.5 million for the three months ended March 31, 1999.
The decrease is primarily attributable to amortizing goodwill over 40 years in
1999 as compared to the use of various lives ranging from 5 to 20 years during
the same period in 1998.
Interest expense. Interest expense remained substantially unchanged for the
three months ended March 31, 1999 as compared to the comparable period in 1998
Provision for income taxes. Provision for income taxes is based on the
statutory tax rates after considering non-deductible amortization.
Liquidity and Capital Resources
In January 1999, the Company issued 290,000 shares of its Common Stock in
connection with the exercise of a portion of the over-allotment option by the
Underwriters of the Offering, raising net proceeds of approximately
$4.1 million.
In connection with the Offering and Combination, the Company obtained a
$75 million Credit Facility from First Union National Bank and First Union
Capital Markets. The Credit Facility consists of a five-year, secured, fully
amortizing $50 million term loan (the "Term Loan") and a three-year, secured
$25 million revolving line of credit (the "Revolving Credit"). The balance
outstanding under the Credit Facility was $51.4 million at March 31, 1999.
At March 31, 1999, the working capital deficit of the Company was
approximately $0.1 million. The Company anticipates that its cash flow from
operations, cash on hand and anticipated borrowings available under the
Revolving Credit will provide cash sufficient to satisfy the Company's working
capital needs, debt service requirements and planned capital expenditures for at
least the next 12 months.
The Company intends to pursue acquisition opportunities and expects to fund
future acquisitions through the issuance of additional Common Stock, borrowings
available under the Revolving Credit, debt or equity financing and cash flows
from operations.
15
<PAGE>
Net cash used in operating activities for the three months ended March 31,
1999 was $1.6 million. The use of cash for operations in 1999 resulted primarily
from a decrease in accounts payable and accrued expenses. Net cash used in
investing activities for the three months ended March 31, 1999 was $2.8 million,
primarily as a result of the acquisition of Sell. Net cash provided by financing
activities for the three months ended March 31, 1999 was $4.6 million, primarily
as a result of the issuance of additional shares of Common Stock and borrowings
under the Revolving Credit, offset by term loan repayments.
Seasonality
The Company expects to experience fluctuations in quarterly revenues and
operating results as a result of seasonal patterns. Results of operations for
any particular quarter therefore are not necessarily indicative of the results
for any future period. Future seasonal and quarterly fluctuations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Certain Factors Affecting Future Operating Results
This report on Form 10-Q contains 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. Actual results
or developments could differ materially from those projected in such statements
as a result of certain factors set forth in this section and elsewhere in this
report.
Some of the factors that might cause these differences include, but are not
limited to, the following: the degree to which the Company is leveraged may
effect its ability to obtain additional financing for future working capital,
capital expenditures and acquisitions as well as limit its flexibility to adjust
to changing market conditions: the Company's inability to resolve or deal with
Manufacturer representation conflicts: the Company's inability to successfully
identify and integrate acquisition candidates.
Year 2000 Compliance
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900 or not at
all. The inability to recognize or properly respond to the Year 2000 issue may
cause systems to incorrectly process financial and operational information.
The Company has developed and begun the implementation of a plan to
evaluate, remediate and, where necessary, replace its information technology
infrastructure, software, hardware and communications systems (the "IT systems")
in light of the Year 2000 issue. The Company has substantially completed the
evaluation of its IT and non-IT systems (such as climate control, copying
machines and security systems) for potential exposure to problems associated
with Year 2000 compliance. The Company's assessment and evaluation efforts have
included the testing of systems, inquiries of third parties and other research.
Primarily as a result of the implementation of significant systems upgrades,
the Company believes that it has substantially reduced its potential exposure to
Year 2000 problems. These upgrades have included the replacement of Merkert's
order processing system (including the electronic data interchange ("EDI")) with
new hardware and software. The Company has tested the application of this order
processing system at Merkert and such tests have yielded satisfactory results.
As a result, the Company believes that this order processing system is Year 2000
compliant. Additionally, during the second quarter of 1999, the Company intends
to convert Rogers' mid-Atlantic operations to the order processing system
currently in use by Merkert and by Rogers in regions other than the mid-
Atlantic, which the Company believes is Year 2000 compliant. The estimated cost
of this conversion is approximately $0.1 million.
The Company has determined that Merkert's financial reporting system is not
Year 2000 compliant and intends to replace it with Rogers' existing system,
which has been recently upgraded and which the Company believes is Year 2000
compliant. This replacement is expected to be completed by July 1999 and is
estimated to cost approximately $0.2 million.
16
<PAGE>
Substantially all of the costs incurred by the Company relating to the
improvement of its IT systems were incurred in connection with planned upgrading
activities rather than in response to the results of the Company's Year 2000
compliance evaluation. The Company does not anticipate any significant
additional costs in connection with its Year 2000 compliance activities.
However, if the Company's Year 2000 compliance efforts are not completed as
scheduled, or if the cost of achieving Year 2000 compliance exceeds the
Company's current estimates, the Year 2000 issue could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company intends to replace several PBX (telephone) systems at Rogers
because they are not Year 2000 compliant. The estimated cost of the new
telephone systems is $0.1 million. In addition, approximately $0.2 million of
personal computers, which cannot be upgraded, will be replaced in the second
quarter of 1999.
The Company also is vulnerable to the failure by Manufacturers, Retailers or
other third-party vendors or customers to identify and remedy their own
Year 2000 issues. Although the Company has initiated efforts to communicate with
such parties regarding their Year 2000 compliance efforts, the Company is unable
to estimate the nature or extent of any potential impact resulting from the
failure of these third parties to achieve Year 2000 compliance. There can be no
assurance that any one or more of such third parties will not experience Year
2000 problems or that such problems will not have a material adverse effect on
the Company.
The Company has developed a contingency plan to transmit data that is
ordinarily transmitted on the EDI system to third parties that are not Year 2000
compliant. Other than with respect to the transmission of such data, the Company
has not developed a contingency plan in the event that it has not achieved Year
2000 compliance on or prior to December 31, 1999. The results of the Company's
assessment and evaluation efforts to date have not yet identified a need for
such contingency planning. The Company intends to continue to assess its
Year 2000 compliance, to implement its Year 2000 compliance plans and to
communicate with material third parties regarding their Year 2000 compliance
efforts. In the event that the Company develops information indicating that
contingency planning would be prudent, the Company intends to undertake such
planning and to implement appropriate measures accordingly.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk related to its Credit. The interest on
the Credit Facility is subject to fluctuations in the market. The Company has
entered into an interest rate swap agreement with a financial institution to
hedge a portion of this risk. The Company does not believe the remaining market
risk is material to the Company's condensed consolidated financial statements.
17
<PAGE>
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
(i) Current Report on Form 8-K, dated January 20, 1999, relating to the
acquisition of Sell, Inc., filed with the Securities and Exchange
Commission on February 4, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Merkert American Corporation
-----------------------------
(Registrant)
/s/ Joseph Casey
-----------------------------
Joseph Casey
Chief Financial Officer
/s/ Duane Church
-----------------------------
Duane Church
Corporate Controller
19
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