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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
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)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4172359
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
200 CONTINENTAL BOULEVARD
EL SEGUNDO, 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 the Form 10-K. [_]
As of March 21, 1994 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 was $505,927,874 (23,531,529 shares at a closing price
of $21.50).
As of March 21, 1994 the Registrant had 29,661,880 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the fiscal year
ended December 31, 1993 are incorporated by reference into Part III.
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INDEX TO FORM 10-K/A
MERISEL, INC.
PAGE REFERENCE
PART I
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Item 1. Business............................................................ 1
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PART II
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation...................................................... 12
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Merisel, Inc. (together with its subsidiaries, "Merisel" or the "Company") is
the largest worldwide publicly-held wholesale distributor of microcomputer
hardware and software products. Through its full-line, channel-specialized
distribution business, Merisel combines the comprehensive product selection and
operational efficiency of a full-line distributor with the customer support of
a specialty distributor offering dedicated sales organizations to each of its
customer groups. On January 31, 1994, the Company completed the acquisition
(the "ComputerLand Acquisition") of certain assets of ComputerLand
Corporation's United States franchise and aggregator business ("the
ComputerLand Business"). The ComputerLand Business is a leading aggregator, or
master reseller, of computer systems and related products from major
microcomputer manufacturers, including Apple, Compaq, Hewlett-Packard and IBM,
to a network of approximately 750 independently-owned computer product
resellers in the United States. With the acquisition of the ComputerLand
Business, the Company has become the industry's only "Master Distributor,"
combining the strengths of a full-line, channel specialized distributor with
those of a master reseller. As a Master Distributor, the Company believes it is
uniquely positioned to offer a wider selection of microcomputer products to
more categories of customers than any of its competitors.
At December 31, 1993, Merisel stocked over 25,000 products from more than 900
of the microcomputer hardware and software industry's leading manufacturers
including Apple, AST, Borland, Colorado Memory Systems, Compaq, Creative Labs,
Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard, IBM, Intel,
Lotus, Microsoft, NEC, Novell, Okidata, Sun Microsystems, Symantec, Texas
Instruments, 3Com, Toshiba, WordPerfect and Wyse. Merisel sells products to
over 65,000 computer resellers worldwide, including value-added resellers,
large retail chains and franchisees, computer superstores, mass merchants,
Macintosh and Unix resellers, system integrators and original equipment
manufacturers. The Company currently maintains 20 distribution centers that
serve North America, Europe, Latin America, Australia and other international
markets. For the fiscal year ended December 31, 1993, the Company's net sales
by geographic region were generated as follows: United States, 63%; Canada,
13%; Europe, 17%; and other international markets, 7%.
THE INDUSTRY
The microcomputer products distribution industry is large and growing,
reflecting both increasing demand worldwide for computer products and the
increasing use of wholesale distribution channels by manufacturers for the
distribution of their products. The industry moves product from manufacturer to
end-user through a complex combination of distribution agreements between
manufacturers, wholesale distributors, aggregators and resellers. Historically,
there have been two types of companies within the industry: those that sell
directly to the end-user ("resellers") and those that sell to resellers
("wholesale distributors" and "aggregators", which are also called "master
resellers").
Resellers sell directly to end-users, including large corporate accounts,
small- and medium-sized businesses and home users. The major reseller channels
are dealers and corporate resellers, value-added sellers ("VARs"), mail-order
firms and retailers (computer superstores, office supply chains and mass
merchants). VARs, which account for one of the largest segments of the overall
reseller channel, typically add value by combining proprietary software and/or
services with off-the-shelf hardware and software.
Wholesale distributors generally purchase a wide range of products in bulk
directly from manufacturers and then ship products in smaller quantities to
many different types of resellers, who typically include dealers, VARs, system
integrators, mail order resellers, computer products superstores and mass
merchants. Aggregators, or master resellers, are functionally similar to
wholesale distributors, but they focus on selling relatively few product lines,
typically high-volume, brand name computer systems, to a captive network of
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franchised dealers and affiliates. The larger computer manufacturers, such as
Apple, Compaq, Hewlett-Packard and IBM, have historically required resellers to
purchase their products from an affiliated aggregator, such as the ComputerLand
Business. Wholesale distributors have not been authorized to sell these
manufacturers' key microcomputer components, except on a limited basis. These
restrictions have been eased recently, and may continue to ease and eventually
be eliminated, with the result that the distinction between wholesale
distributors and master resellers may blur. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisition of
ComputerLand Business."
With the acquisition of the ComputerLand Business, the Company has become the
industry's only Master Distributor, combining the strengths of a full-line,
channel-specialized distributor with those of a master reseller.
BUSINESS STRATEGY
Merisel has achieved its leading position by pursuing a strategy of offering
the industry's leading products and services to its customers at competitive
prices, providing superior cost-effective service through operational
excellence, expanding the Company's international business and targeting its
various customer groups using dedicated sales forces and marketing programs.
Providing Leading Products and Services. The Company's objective is to offer
the broadest range of leading product brands in each of the product categories
it carries. By stocking the leading brands, the Company generates sales of both
those product brands as well as other products, as reseller customers often
prefer to deal with a single source for many of their product needs. The
Company continuously evaluates new products, the demand for its current
products and its overall product mix and seeks to develop distribution
relationships with suppliers of products that enhance the Company's product
offerings. The Company believes that the size of its reseller customer base,
its international distribution capability and the breadth and quality of its
marketing support programs give it a competitive advantage over smaller,
regional distributors in developing supplier relationships.
As a result of the ComputerLand Acquisition, the Company, through the
ComputerLand Business, is now able to offer to the ComputerLand Business'
franchisees and affiliates a broad range of microcomputer systems and other
products from Apple, Compaq, Hewlett-Packard and IBM. Although the Company
distributes certain products of these leading manufacturers through its
wholesale distribution arrangements, neither the Company nor its direct
wholesale distribution competitors have been authorized to sell these
manufacturers' key microcomputer systems in the United States, except on a
limited basis. Instead, these manufacturers historically have distributed their
products directly to resellers and through aggregators such as ComputerLand
Corporation. See "--The Industry."
The Company believes that an opportunity exists to generate additional,
higher-margin revenues by offering fee-based services and information to
manufacturers and resellers. In 1993, the Company formed the Channel Services
Group to provide a variety of these services, including telemarketing,
merchandising and electronic software services.
Achieving Operational Excellence. The Company believes that high levels of
customer service and operating efficiency, or "operational excellence," are
important factors in achieving and maintaining success in the highly
competitive microcomputer products distribution industry. The Company measures
operational excellence by such standards as "ease of doing business," accuracy
and efficiency in delivering products and expediting the delivery of services
and information. Merisel constantly strives to improve itsoperational
processes. In furtherance of this strategy, the Company is in the process of
upgrading and improving its computer operating systems as well as its warehouse
management systems. See "--Operations and Distribution." In addition, the
Company is reorganizing its European operations, adding new management
personnel and centralizing certain functions to achieve economies of scale.
Merisel will seek to continue to refine the operational systems at its foreign
sales offices and distribution centers in order to
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increase the uniformity and efficiency of the Company's worldwide operations.
See "--International Operations." These changes are intended to enhance the
Company's ability to offer faster, more efficient and accurate service to its
customers.
Expanding Internationally. Merisel believes that it generates the largest
volume of international sales of any U.S.-based distributor, and is the largest
wholesale distributor of computer products in Canada and a leading distributor
in Europe, Mexico, Australia and Latin America. See "--International
Operations." The Company believes that many international markets will continue
to offer growth and profit opportunities, due to the immature and fragmented
nature of the microcomputer distribution industry in these markets. Merisel
believes it is well positioned to capitalize on the opportunities presented in
a number of these markets because of the current scope of its international
operations and its ability to offer a broader range of products and specialized
services than many of its competitors. The Company's strategy is to expand its
international operations through internal growth and the possible acquisition
of existing distributors or the establishment of new operations in other
countries.
Targeting Customer Groups. Merisel serves a variety of different reseller
channels, which have diverse product, financing and support needs. Merisel was
the first full-line distributor in the industry to offer its various customer
groups a channel-dedicated sales force as well as customized product offerings,
financing programs and marketing and technical support programs, all of which
are tailored to address the differing needs of these customer groups. The
Company intends to continue to monitor the markets it serves to identify
customer opportunities and develop sales and marketing programs that serve
these groups more effectively. In furtherance of this strategy, on January 31,
1994 the Company completed the ComputerLand Acquisition.
PRODUCTS AND MANUFACTURER SERVICES
Merisel provides its manufacturers with access to one of the largest bases of
computer resellers worldwide while offering these manufacturers the means to
reduce the inventory, credit, marketing and overhead costs associated with
establishing a direct relationship with these resellers. This factor, along
with Merisel's access to financial resources and its economies of scale, has
allowed the Company to establish and develop long-term business relationships
with many of the leading manufacturers in the microcomputer industry. Merisel
distributes over 25,000 hardware and software products, including products for
the MS-DOS, OS/2, Macintosh, Apple and Unix operating environments. For the
fiscal year ended December 31, 1993, net worldwide sales of hardware and
accessories accounted for approximately 60% of the Company's sales, and sales
of software products accounted for the remaining 40% of net sales.
Merisel's suppliers include many of the leading microcomputer software and
hardware manufacturers, such as Apple, AST, Borland, Colorado Memory Systems,
Compaq, Creative Labs, Digital Equipment Corporation, Epson, Hayes, Hewlett-
Packard, IBM, Intel, Lotus, Microsoft, NEC, Novell, Okidata, Sun Microsystems,
Symantec, Texas Instruments, 3Com, Toshiba, WordPerfect and Wyse. In October
1993, Merisel was selected as one of two distributors in the U.S. of Sun
Microsystem's products. Software products include business applications such as
spreadsheets, word processing programs and desktop publishing and graphics
packages, as well as a broad offering of operating systems, including local
area network operating systems, advanced language and utility products.
Hardware products offered by the Company include computer systems, printers,
monitors, disk drives and other storage devices, modems and other connectivity
products, plug-in boards and accessories. The ComputerLand Acquisition
increased the Company's ability, through the ComputerLand Business, to
distribute the product offerings of Apple, Compaq, Hewlett-Packard and IBM to
the ComputerLand Business' franchisees and affiliates. See "--The Industry."
In addition to providing manufacturers access to one of the largest bases of
computer resellers worldwide, the Company also offers manufacturers the
opportunity to efficiently offer a number of special promotions, training
programs and marketing services targeted to the needs of specific reseller
groups. Merisel runs a variety of special promotions for manufacturers'
products, ranging from price discounts and bundled purchase discounts to
specialized computer reseller marketing programs, including the Vantage and
Frequent Buyer Programs. These promotional programs are designed to encourage
computer resellers to increase their
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volume of purchases, motivate resellers to purchase within a limited time
period and highlight specific manufacturers' products or promotion
opportunities. Additionally, Merisel provides marketing consultation services
for manufacturers' strategic marketing campaigns, as well as the opportunity to
be included in Merisel-sponsored trade advertisements. Merisel employs
marketing program specialists to work with designated manufacturers to develop
and carry out marketing programs such as dealer commission programs, sales
contests and other promotions. Merisel can also provide dedicated marketing
support and targeted customer information from its database to enhance
manufacturers' product promotions.
The Company also offers two exclusive training programs: Softeach, a two-day
worldwide seminar series whereby manufacturers train resellers about their
products, and Selteach, a training seminar series that gives manufacturers an
opportunity to provide product information to Merisel's United States sales
force. In 1993, Merisel offered Softeach seminars in 26 cities and 11
countries. Merisel, through third-party consultants, also conducts training
classes regarding certain Novell, 3Com, The Santa Cruz Operation, Digital
Equipment Corporation, Sun Microsystems, Microsoft and Lotus products for its
reseller customers.
Merisel generally 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 which limit the countries in which Merisel is
permitted to distribute the products. The agreements generally provide Merisel
with stock balancing and price protection provisions which reduce in part
Merisel's risk of loss due to slow-moving inventory, supplier price reductions,
product updates or obsolescence. The Company's agreements generally have a term
of at least one year, but often contain provisions permitting earlier
termination by either party upon written notice. Some of these agreements
contain minimum purchase amounts. Failure to purchase at such minimum levels
could result in the termination of the agreement.
Although Merisel regularly stocks products and accessories supplied by more
than 900 manufacturers, 45% of the Company's net sales in 1993 (as compared to
46% in 1992 and 47% in 1991) were derived from products supplied by Merisel's
ten largest manufacturers, with the sale of products manufactured by Microsoft
accounting for approximately 16% of net sales in 1993 (as compared to 17% in
1992 and 15% in 1991). The loss of the ability to distribute a particularly
popular product could result in losses of sales unrelated to that 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.
CUSTOMERS AND CUSTOMER SERVICES
Merisel sells to more than 65,000 computer resellers worldwide. Merisel's
customers include VARs, large hardware and software retail chains and
franchisees, computer superstores, mass merchants, Macintosh, Unix and other
corporate resellers, systems integrators, and original equipment manufacturers
as well as independently owned retail outlets and consultants. Merisel's
smaller customers often do not have the resources to establish a large number
of direct purchasing relationships or stock significant product inventories.
Consequently, they tend to purchase a high percentage of their products from
distributors. Larger resellers often establish direct relationships with
manufacturers for their more popular products, but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products which may
not be available on a timely basis from manufacturers. No single customer
accounted for more than 2.0% of Merisel's net sales in 1991, 1992 or 1993.
In Merisel's wholesale distribution business, the Company offers its
customers a single source of supply, prompt delivery, financing programs and
customer support.
Single Source Provider. Merisel offers computer resellers a single source for
over 25,000 competitively priced hardware and software products. By purchasing
from Merisel, the reseller only needs to comply with a single set of ordering,
billing and product return procedures and may also benefit from attractive
volume pricing. In addition, resellers are allowed, within specified time
limits, to return slow-moving products from one manufacturer in exchange for
more popular products from other manufacturers. Merisel's policy is to
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not grant cash refunds. Merisel has recently initiated a program that provides
incentives to ComputerLand franchisees and Datago affiliates to make all their
product purchases from Merisel and the ComputerLand Business.
Prompt Delivery. In most areas of the world serviced by the Company, orders
received by 5:00 p.m. local time are typically shipped the same day, provided
the required inventory is in stock. Merisel maintains sufficient inventory
levels in the United States to fill consistently in excess of 95% of all units
ordered on the day of receipt. Merisel typically delivers products from its
regional warehouses via United Parcel Service and other common carriers, with
customers in most areas in the United States receiving orders within one to two
working days of shipment. Merisel also will provide overnight air handling if
requested and paid for by the customer. These services allow computer resellers
to minimize inventory investment and provide responsive service to their
customers. For larger customers in the United States, Merisel also provides a
fulfillment service so that orders are shipped directly to the computer
resellers' customer, thereby reducing the need for computer resellers to
maintain inventories of certain products. The Company's foreign subsidiaries
may have lower fill rates and longer delivery times due to differing market
requirements and the smaller size of their operations.
Financing Programs. Merisel's credit policy for qualified resellers
eliminates the need 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 offers a program that
permits credit card purchases by qualified customers. To allow certain
resellers to purchase larger orders in the United States, the Company offers a
"financing desk" which seeks to arrange alternative financing such as escrow
programs and special bid financing from financial institutions.
Customer Support. Merisel offers a number of customer loyalty programs,
including the Vantage and Frequent Buyer Programs, which provide incentives to
resellers to aggregate their purchases through Merisel. The Vantage Programs
offer Merisel's top-volume customers within the VAR and value-added dealer
channels increased levels of service and pricing advantages. Merisel's Frequent
Buyer Program awards resellers with credits based on the dollar amount of their
purchases from Merisel, which credits are redeemable for travel, education,
merchandise and for revenue-generating activities such as product promotions
and advertisements. The cost of the Frequent Buyer Program is funded by
cooperative marketing dollars paid by Merisel's suppliers.
Merisel furnishes its computer resellers with a series of publications
containing detailed information on products, pricing, promotions and
developments in the industry. Merisel publishes a Confidential Reseller Price
Book, which lists Merisel's current product offerings. Merisel also publishes
the Hot List, which ranks Merisel's current best-selling hardware and software
products in four different reseller channels. In addition, Merisel's On-Line
Literature Library offers over 20,000 data sheets of product information
literature on a fax-back system and on CD-ROM.
Merisel provides training and product information to its reseller customers
through its well-respected Softeach program, a worldwide series of training
forums whereby manufacturers conduct seminars on how to sell their products.
Softeach is held periodically in major cities throughout the United States,
Canada, Australia and Europe. In 1993, the Company believes that over 15,000
computer resellers attended Softeach seminars held in 11 countries worldwide.
Merisel also provides computer resellers with a technical support "hotline," as
well as specialized technical support for virtually all product lines sold by
Merisel. In addition, Merisel's Technical Support department provides regular
product training seminars to Merisel's sales representatives to help them
become more product-knowledgeable.
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SALES AND MARKETING
To reach diverse customer segments, the Company has organized its Sales
department for its wholesale distribution business in the United States into
three channel segments.
DEALER CHANNEL. This channel is composed of the following specialized sales
divisions:
. The RETAILER division serves franchisees, independent retail chains and
storefronts, corporate resellers and direct-mail marketers.
. The RESELLER FULFILLMENT division serves the needs of direct marketers
such as Dell, IBM and Zenith through the fulfillment of orders for
third-party hardware and software products.
. The MAJOR ACCOUNTS division serves Merisel's large franchisee accounts,
computer superstores and computer retail chains through a specialized
staff that offers enhanced services, volume purchase agreements,
corporate office coordination, marketing programs and sales report
data.
. The MACINTOSH division provides expertise in sale and support of third-
party Macintosh products worldwide through its own separate marketing,
sales, products and technical support and purchasing departments.
VAR CHANNEL. This channel is composed of the following specialized sales
divisions:
. The VAR division provides value-added resellers with highly
knowledgeable sales representatives, a comprehensive line of computer
systems, Unix and connectivity products, education, financial services
and technical support.
. The ADVANCED PRODUCTS division (formerly the UNIX division) is
primarily dedicated to selling and supporting Sun Microsystems and Sun-
complimentary products through its own sales, marketing, operations and
technical support departments.
. The OEM division supports Merisel's customers who integrate and/or
manufacture microprocessor-based systems and solutions utilizing OEM
versions of Merisel's hardware and software products.
. The recently created SYSTEM INTEGRATOR division supports large system
and network integrators who require specialized programs and services.
CONSUMER CHANNEL.
. The CONSUMER PRODUCTS division targets mass merchants such as Circuit
City, Montgomery Ward and Office Depot by providing inventory selection
and control services, specialized marketing programs and other support
services tailored to the needs of mass-market merchandisers.
For each of the Company's international subsidiaries, the number and type of
specialized sales divisions vary based on market requirements, the size of the
subsidiary's sales force and the products carried by the subsidiary.
The Company's sales force is comprised of field sales representatives who
manage relations with the larger accounts and inside telemarketing sales
representatives who receive product orders and answer customer inquiries. When
a customer calls Merisel, screen synchronization technology causes a sales
profile to appear on the sales representative's computer screen before
greetings are exchanged. Customer orders generally are placed via a toll-free
telephone call to Merisel's inside sales representatives and are entered on
Merisel's SalesNet order entry system, a proprietary local area network created
by Merisel to speed the process of taking and processing orders. Using the
SalesNet database, sales representatives can immediately enter customer orders,
obtain descriptive information regarding products, check inventory status,
determine customer credit availability and obtain special pricing and promotion
information. Merisel also offers Dial-Up SalesNet, a system that allows a
customer, through the use of its own personal computer and a modem, to access
Merisel's database to examine pricing, credit information, product description
and availability and promotional information and to place orders directly into
Merisel's order processing system. For certain of its larger customers, the
Company has installed electronic data interchange (EDI) systems which allow
participating customers to directly access the Company's mainframe computer
system for order processing and account information.
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OPERATIONS AND DISTRIBUTION
The Company operates 20 distribution centers around the world, including
eight in the United States, two in Canada, five in Europe, four serving Latin
America and one in Australia. All of these distribution centers are leased,
except for one facility in Mexico, which is owned by the Company.
The Company's United States, Canadian and United Kingdom operations, other
than the ComputerLand Business, are conducted using a mainframe-based computer
system, originally implemented in the early 1980s, that operates on hardware
owned and operated by a third-party service provider. In recent years, the
Company has experienced a significant increase in both its sales volume and in
the number and type of transactions processed by the computer system. The
Company believes that the ability of its existing computer system in North
America to process the increased sales volumes contemplated for 1994 and the
first three quarters of 1995 is limited without certain modifications to the
system. The Company is in the process of implementing such modifications and
believes such modifications will be successful. If, however, there is a delay
in implementing the modifications, or if the system, as modified, performs
below anticipated service levels, the existing system may not be able to
accommodate anticipated increases in sales volumes and transaction requirements
in the fourth quarter of 1994. As a result, the Company is making a significant
investment in new advanced computer and warehouse management systems for its
North American operations.
These new systems are designed to accommodate sales volumes of up to twice
current volumes as well as provide greater transaction accuracy and operating
efficiency and more flexibility to accommodate a variety of transaction types.
The Company began designing the new computer system in early 1993 and currently
anticipates that it will convert to the new system in late 1994 and the first
half of 1995. The Company presently estimates that its aggregate investment in
the new computer systems, including costs of system design, hardware, software,
installation and training, will be approximately $20 million. The Company
installed its first new warehouse management system, which includes infrared
bar coding equipment and advanced computer hardware and software systems, in
one warehouse in 1993 and anticipates installation in its remaining North
American warehouses during 1994 and 1995.
The design and implementation of these new systems are complex projects and
involve risks that unanticipated problems may delay implementation of the new
systems or cause them to perform below anticipated service levels. The Company
therefore is making a substantial investment (see above) in the design and
installation of these systems and is dedicating a significant number of its
personnel on a full-time basis (82 employees and independent contractors) to
these projects. In the event the Company experiences delays in implementation
of these new systems or such systems fail to perform at anticipated service
levels, the Company may not be able to accommodate anticipated increases in
sales volumes and transaction processing requirements after the third quarter
of 1995.
INTERNATIONAL OPERATIONS
The Company distributes microcomputer products throughout the world. Merisel
formed its first international subsidiary in 1982 and now operates in Canada,
the United Kingdom, France, Germany, Australia, Switzerland, Austria and
Mexico. Merisel also has a subsidiary based in Miami, Florida, which primarily
sells products to customers in Latin America and in other parts of the world
where Merisel does not have a physical presence. In June 1990, the Company
began limited distribution of products in Russia as part of a joint venture.
Management believes that its international microcomputer distribution
operations are larger than the operations of any other U.S.-based microcomputer
distributor. The Company also believes that certain of the markets for
microcomputer products outside the United States are less mature and therefore
present opportunities for further growth. Accordingly, the Company will seek to
further expand its international operations through internal growth and the
possible acquisition of existing distributors or establishment of new
operations in other countries.
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The products and services offered by Merisel's international subsidiaries are
generally similar to those offered in the United States, although the breadth
of the subsidiaries' product lines and the range of manufacturers' and
customers' services offered by the subsidiaries are usually smaller due to the
smaller size of the subsidiaries and differing market requirements. Certain
subsidiaries provide products or services not offered in the United States due
to differing manufacturer relationships and market requirements. Operationally,
the management and distribution systems at the Company's international
subsidiaries vary depending on the size of the subsidiary, its length of
operation and local market requirements. As each subsidiary expands, the
Company seeks to implement systems and procedures that are more similar to
those used in the United States.
In Europe, the Company is revising its distribution strategy in response to
the reduction in cross-border shipment barriers instituted by the European
Economic Community in 1993. With the reduction of cross-border shipping
barriers, the Company believes it can more efficiently ship to a large number
of countries from a centralized master warehouse or warehouses, supplemented by
smaller warehouses in various locations across Europe. At present, the Company
maintains a full warehouse in each of the countries in which it has operations,
with the exception of Austria. The Company is currently undertaking
preparations for development of a master warehouse in Northern Europe for use
beginning in mid-to-late 1995.
The Company's European operations are managed through a European
headquarters, which operates with a staff of pan-European managers to oversee
the Company's various European subsidiaries and operations. Merisel currently
is increasing its European management team and planning the computer system
revisions and other operational changes required to implement its centralized
distribution strategy.
Because the Company conducts business in a number of countries, that portion
of operating results and cash flows that is non-U.S. dollar denominated is
subject to certain currency fluctuations. The Company generally employs forward
exchange contracts to limit the impact of fluctuations in the relative values
of some of the currencies in which it does business.
In addition, international operations may also be subject to risks such as
the imposition of governmental controls, export license requirements,
restrictions on the export of certain technology, political instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
international operations and collecting accounts receivable and the impact of
local economic conditions and practices. As the Company continues to expand its
international operations, its success will be dependent, in part, on its
ability to anticipate and deal with these and other risks. There can be no
assurance that these or other factors will not have an adverse effect on the
Company's international operations.
For segment information regarding Merisel's United States and international
operations, see Note 11 of Notes to Consolidated Financial Statements.
COMPUTERLAND BUSINESS
On January 31, 1994, the Company, through its wholly-owned subsidiary,
Merisel FAB, Inc. ("Merisel FAB"), completed the ComputerLand Acquisition. As a
result of the ComputerLand Acquisition, Merisel, through the ComputerLand
Business, will now operate as a master reseller of computer systems and related
products from the major microcomputer manufacturers to a network of
approximately 750 independently-owned product resellers composed of two
customer groups: ComputerLand franchisees, with whom Merisel acts as franchisor
by licensing the ComputerLand name and providing both product supply and
various support services, and resellers purchasing under the ComputerLand
Business' Datago Program, which are independent dealers and value-added
resellers that purchase products from the ComputerLand Business on a cost-plus
basis, but do not license the ComputerLand name. For its fiscal year ended
September 30, 1993, the ComputerLand Business generated net revenues of
approximately $1.1 billion and income from operations of $16.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of ComputerLand Business."
8
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In connection with its purchase of the ComputerLand Business, Merisel
purchased the ComputerLand Business' franchise and third-party reseller
agreements as well as the rights in the United States to ComputerLand
Corporation's trademarks, trade names, service marks, copyrights, patents and
logos. Merisel paid approximately $80 million in cash at the closing of the
ComputerLand Acquisition for the acquired assets. In addition, Merisel has
agreed to make an additional payment in 1996 of up to $30 million, the amount
of which will be determined based upon the growth in Merisel FAB's and the
Company's sales of products of designated manufacturers to specified customers
over the two-year period ending January 31, 1996. Sixty-five of the
ComputerLand Business' 66 employees became employees of Merisel FAB in
connection with the ComputerLand Acquisition. Merisel did not purchase the
order fulfillment systems, warehouses or inventory used by the ComputerLand
Business. Instead, the Company eventually intends to integrate these functions
into its facilities and systems. As an interim strategy Merisel and
ComputerLand Corporation have entered into the Services Agreement pursuant to
which ComputerLand Corporation will continue to provide products and
distribution and other support services to the ComputerLand Business for two
years following the ComputerLand Acquisition.
Following its sale of the ComputerLand Business, ComputerLand Corporation
continues to operate as a reseller of computer products and services through
its company-owned locations throughout the United States and also retains its
international operations. ComputerLand Corporation recently changed its name to
Vanstar, Inc., but may continue to use the ComputerLand name in connection with
operation of its existing company-owned locations in the United States until
August 1994. Merisel FAB can sell franchises throughout the United States,
except that Merisel FAB may not sell franchises in areas with such ComputerLand
Corporation company-owned locations until August 1994.
The ComputerLand Business' franchisees operate locations under the
ComputerLand name. The ComputerLand Business currently sells products to
franchisees at cost and receives a royalty based upon gross sales of the
franchisee, irrespective of whether the products sold were purchased from the
ComputerLand Business. During 1994, the ComputerLand Business may offer
franchisees the opportunity to revise such franchisees' pricing structure by
selling products to franchisees at cost plus a mark-up and reducing or
eliminating the royalty on overall franchisee sales provided the franchisee
achieves minimum purchase targets. Franchisees typically enter into a ten-year
exclusive contract, renewable at the option of the franchisee. In addition to
the use of the ComputerLand name, the ComputerLand Business provides
franchisees a range of services including sales and marketing materials,
management and sales support services and a proprietary-dealer management
software system. At February 1, 1994, the ComputerLand Business had agreements
with franchisee groups operating 198 locations, located primarily in secondary
metropolitan markets in the United States.
The ComputerLand Business' Datago resellers are independent dealers and
value-added resellers. These resellers generally enter into non-exclusive one-
year renewable contracts cancelable at the option of either party on short
notice. These contracts typically entitle Datago resellers to purchase the full
range of the ComputerLand Business' products at cost plus a mark-up, depending
on the dollar volume of products purchased. At February 1, 1994, the
ComputerLand Business had approximately 549 active Datago resellers. During its
fiscal year ended September 30, 1993, no individual franchisee or Datago
reseller accounted for more than 10% of the ComputerLand Business revenues.
Following the ComputerLand Acquisition, the Company has undertaken an effort
to add additional resellers as customers of the ComputerLand Business under its
Datago program. Later in 1994, the Company intends to begin adding new
ComputerLand franchisees, focusing in particular on locations where no reseller
is using the ComputerLand name. In adding new Datago resellers and ComputerLand
franchisees, the Company will seek to offer programs that permit customers to
leverage their purchases from both the ComputerLand Business and Merisel's
existing wholesale distribution business.
9
<PAGE>
The ComputerLand Business offers its franchisees and Datago resellers a
selection of major microcomputer equipment and peripherals provided by
approximately 70 suppliers. For its fiscal year ended September 30, 1993,
approximately 76% of the ComputerLand Business revenues were generated by sales
of Apple, Compaq, Hewlett-Packard and IBM products. The loss of any one of
these four manufacturers, or a change in the way any of these manufacturers
markets, prices or distributes its products, could have a material adverse
effect on the ComputerLand Business' operations and financial results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of ComputerLand Business." In addition to the products
supplied directly by the ComputerLand Business, franchisees and Datago
resellers may purchase other products offered by the Company's wholesale
distribution business pursuant to separate agreements negotiated on their
behalf by Merisel FAB.
Under the two-year Services Agreement, ComputerLand Corporation will continue
to purchase and warehouse manufacturers' products and fulfill reseller orders
for substantially all of the products offered by Merisel FAB. Merisel FAB will
purchase such products from ComputerLand Corporation, rather than directly from
the supplier, and will pay ComputerLand Corporation a service fee for
performing these distribution functions. Resellers will continue to place
product orders with Merisel FAB through the order placement system operated by
ComputerLand Corporation. ComputerLand Corporation will typically ship products
to a customer within two days of receipt of an order. During the term of the
Services Agreement, Merisel FAB will be dependent upon ComputerLand Corporation
to purchase and maintain inventories of products sufficient to meet resellers'
requirements and to receive and fulfill orders at acceptable service levels.
Merisel FAB and ComputerLand Corporation will jointly maintain supplier
relationships. In the event that ComputerLand Corporation becomes unable to
perform its obligations under the Services Agreement, there may be an adverse
effect on the operations and financial results of the ComputerLand Business.
The Services Agreement contains provisions for monetary penalties in the event
that ComputerLand Corporation fails to achieve agreed-upon service levels, as
well as provisions permitting Merisel FAB to take over a portion of
ComputerLand Corporation's operations to fulfill such obligations under certain
circumstances.
Over 76% of the ComputerLand Business' sales to its customers currently are
financed on behalf of such customers by floor plan financing companies, and the
ComputerLand Business typically receives payment from these financing companies
within three business days from the date of sale. Such floor plan financing is
typically subsidized for the ComputerLand Business' customers by its suppliers.
Any material change in the availability or the terms of financing offered by
such financing companies or the subsidies provided by suppliers could require
Merisel FAB to provide such financing to its customers, thereby substantially
increasing the working capital necessary to operate its business.
The Company does not have experience in operating a master reseller business
such as the ComputerLand Business, with its different merchandising strategy
and customer base. While the Company believes that the personnel hired as part
of the ComputerLand Acquisition, together with the Company's senior management,
will successfully manage the ComputerLand Business, no assurances can be given
as to the future performance levels or operating results of the ComputerLand
Business.
COMPETITION
Competition in the microcomputer products distribution industry is intense
and is based primarily on price, brand selection, breadth and availability of
product offering, speed of delivery, level of training and technical support,
marketing services and programs and ability to influence a buyer's decision.
Certain of Merisel's competitors have substantially greater financial
resources than Merisel. Merisel's principal competitors include large United
States-based international distributors such as Ingram Micro and Tech Data
Corporation, non-U.S. based international distributors such as Computer 2000,
national distributors such as Gates/FA Distributing, Inc. and Robec, Inc. and
regional distributors and franchisors. The Company competes internationally
with a variety of national and regional distributors on a country-by-country
basis.
10
<PAGE>
Merisel also competes with manufacturers that sell directly to computer
resellers, sometimes at prices below those charged by Merisel for similar
products. The Company believes its broad product offering, product
availability, prompt delivery and support services may offset a manufacturer's
price advantage. In addition, many manufacturers focus their direct sales to
large computer resellers because of the high costs associated with dealing with
a large number of small-volume computer reseller customers.
The ComputerLand Business is subject to competition from other franchisors
and aggregators in obtaining and retaining franchisees and third-party
resellers, as well as competition from wholesale distributors with respect to
sales of products to customers in the ComputerLand Business' network. See "--
The Industry." The Company believes that the ComputerLand Business' pricing,
brand selection, product availability and service levels are competitive in the
industry. With respect to brand selection, the Company believes that an
important factor in the ComputerLand Business' ability to attract customers is
the fact that it is able to offer computer systems and other hardware products
from Apple, Compaq, Hewlett-Packard and IBM. These manufacturers historically
have sold their products directly to resellers and through a limited number of
master resellers such as the ComputerLand Business. The loss of any of these
manufacturers, or any change in the way any such manufacturers' markets, prices
or distributes its products, could have a material adverse effect on the
ComputerLand Business' operations and financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of ComputerLand Business." The ComputerLand Business' principal
competitors are Intelligent Electronics, MicroAge and InaCom, all of which
maintain networks of franchisees and third-party dealers and which carry
products of one or more of the Company's major manufacturers. Certain of the
ComputerLand Business' competitors have greater financial resources than the
Company.
EMPLOYEES
As of December 31, 1993 Merisel had 2,502 employees. Merisel considers its
relations with its employees to be excellent.
11
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
The Company was founded in 1980 and has grown both through internal growth
and through acquisitions of other computer products distributors. By 1989, the
Company had achieved annual revenues of $629.4 million, principally through
internal expansion. In April 1990, the Company acquired Microamerica, Inc.
("Microamerica"), another worldwide distributor of microcomputer products, with
net sales of approximately $526 million for the year ended December 31, 1989.
In the years following the Microamerica acquisition, the Company's revenues
increased from $1.6 billion in 1991 to $2.2 billion in 1992 and to $3.1 billion
in 1993, reflecting substantial growth in both domestic and international sales
as the worldwide market for computer products expanded and manufacturers
increasingly turned to wholesale distributors for distribution of their
products. The Company's net income as a percentage of sales, or net margin,
improved over this period, largely as a result of management's success in
reducing selling, general and administrative expenses and interest expense,
expressed as a percentage of sales, to more than offset declines in the
Company's gross margin to more than offset lower gross margins.
On January 31, 1994, the Company completed the acquisition of certain assets
of the ComputerLand Business from ComputerLand Corporation. See "Business--
ComputerLand Business." For its fiscal year ended September 30, 1993, the
ComputerLand Business generated net revenues of approximately $1.1 billion,
gross profit of $54.7 million and income from operations of $16.6 million. See
"--Acquisition of ComputerLand Business."
The Company anticipates that it will continue to experience downward pressure
on gross margins due to industry price competition. In addition, the Company's
recently acquired ComputerLand Business generates lower gross margins than the
Company's existing wholesale distribution business. However, the ComputerLand
Business has lower selling, general and administrative expenses as a percentage
of sales than the Company's existing wholesale distribution business. See "--
Acquisition of ComputerLand Business." Although Merisel expects that it will be
able to continue to reduce selling, general and administrative expenses as a
percentage of sales, through (among other things) the implementation of new
computer operating systems and warehouse management systems that will enable
the Company to utilize its existing assets more productively, no assurance can
be given as to whether such reductions will, in fact, occur or as to the actual
amount of any such reductions. See "Business--Operations and Distribution." To
the extent gross margins continue to decline and the Company is not successful
in reducing selling, general and administrative expenses as a percentage of
sales, the Company will experience a negative impact on its operating income.
12
<PAGE>
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth selected items from
the Company's Consolidated Statements of Income, expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Cost of sales........................................ 90.0 91.0 91.6
------- ------- -------
Gross profit......................................... 10.0 9.0 8.4
Selling, general and administrative expenses......... 7.5 6.7 6.1
------- ------- -------
Operating income..................................... 2.5 2.3 2.3
Interest expense..................................... 1.0 0.7 0.6
Other expense........................................ 0.1 0.1 0.1
------- ------- -------
Income before income taxes........................... 1.4 1.5 1.6
Provision for income taxes........................... 0.7 0.6 0.6
------- ------- -------
Net income........................................... 0.7% 0.9% 1.0%
======= ======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
The Company's net sales increased 37.8% to $3.1 billion in 1993 from $2.2
billion in 1992, reflecting significant growth in both domestic and
international sales. The Company believes this increase is due principally to
the establishment of new relationships with manufacturers in various markets
around the world, the introduction of new products by existing manufacturers,
increased customer demand for computer products and increased use of wholesale
distribution by manufacturers in their distribution channels. The Company's
1992 fiscal year included 53 weeks due to the timing of the fiscal year end,
while the 1993 fiscal year contained 52 weeks. See Note 1 of Notes to
Consolidated Financial Statements.
Geographically, the Company's 1993 net sales were generated as follows:
United States, $1.95 billion, or 63%; Canada, $395 million, or 13%; Europe,
$532 million, or 17%; and other international markets, $207 million, or 7%.
From 1992 to 1993, these geographic regions experienced sales growth rates of
32.3%, 30.7%, 64.1% and 51.4%, respectively. The Company's higher sales growth
rate in Europe has resulted in part from the addition of new manufacturer
relationships in various European markets. In the United States, the Company's
sales increase is due in part to new product offerings from computer systems
and other hardware manufacturers. In the United States, hardware and
accessories accounted for 60.5% of net sales, and software accounted for 39.5%
of net sales in 1993, as compared to 55.9% and 44.1%, respectively, in 1992.
For additional information on the Company's operating results by geographic
region, see Note 11 of Notes to Consolidated Financial Statements.
Gross profit increased 27.7% to $258.5 million in 1993 from $202.4 million in
1992, reflecting the higher 1993 net sales. Gross margin declined to 8.4% in
1993 from 9.0% in 1992, principally as a result of continuing competitive
pricing pressures worldwide.
Selling, general and administrative ("SG&A") expenses increased 24.0% to
$187.2 million in 1993 from $150.9 million in 1992, primarily as a result of
increased expenses associated with the Company's 37.8% increase in net sales.
SG&A expenses as a percentage of sales declined to 6.1% in 1993 from 6.7% in
1992, reflecting economies of scale resulting from higher sales volumes as well
as improved operating efficiencies. The Company's number of full-time
equivalent employees increased from 1,939 at December 31, 1992 to 2,502 at
December 31, 1993.
13
<PAGE>
Operating income increased 38.6% to $71.4 million in 1993 from $51.5 million
in 1992, despite small operating losses at the Company's Swiss, Austrian and
French operations. Operating income as a percentage of sales was 2.3% in both
1993 and 1992, as the decline in gross margin of 0.6% in 1993 was offset by a
corresponding decline in SG&A as a percentage of sales.
Interest expense increased 13.1% to $17.8 million in 1993 from $15.7 million
in 1992, but declined as a percentage of sales to 0.6% in 1993 from 0.7% in
1992. The increase in interest expense reflects higher average borrowings,
principally to finance the Company's higher sales levels, offset in part by
lower average interest rates in 1993.
Other expense increased to $2.7 million in 1993 from $1.3 million in 1992,
but other expense as a percentage of sales remained at 0.1% in both 1992 and
1993. Other expense in 1993 includes the fees paid by the Company in connection
with the sale of an interest in its trade accounts receivables pursuant to an
accounts receivable securitization program instituted in the third quarter of
1993. See "--Liquidity and Capital Resources." The Company intends to continue
this program in future periods, and other expense is therefore anticipated to
increase as additional fees are incurred.
Provision for income taxes increased 37.8% to $20.4 million in 1993,
reflecting the Company's 47.5% increase in income before income taxes. The
Company's effective tax rate decreased to 40.1% in 1993 from 43.0% in 1992,
primarily as a result of a $1.7 million income tax benefit related to the
restructuring of the Company's Swiss operations in 1993. In addition, net
losses of certain of the Company's subsidiaries that derive no tax benefit from
such losses under local tax laws decreased in 1993.
Net income increased 54.8% to $30.4 million in 1993 from $19.7 million in
1992, while net income per share increased to $1.00 from $0.67. The Company's
weighted average number of shares outstanding increased from 29,274,000 shares
in 1992 to 30,454,000 shares in 1993, reflecting the issuance of 4,600,000
shares in a public offering of the Company's Common Stock in March 1992 and the
exercise of employee stock options.
YEAR ENDED DECEMBER 31, 1992 COMPARED TO YEAR ENDED DECEMBER 31, 1991
Net sales increased 41.2% to $2.2 billion in 1992 from $1.6 billion in 1991.
The Company believes that this increase in net sales was due primarily to an
increase in market share, customer demand, sales of new products from existing
manufacturers and the establishment of new relationships with manufacturers and
customers. In addition, the Company's 1992 fiscal year included 53 weeks due to
the timing of the fiscal year end. See Note 1 of Notes to Consolidated
Financial Statements.
Hardware and accessories sales accounted for 56.6% of United States net sales
in 1992, with software sales accounting for the remaining 43.4%. In 1991,
hardware and accessories sales accounted for 57.6% of United States net sales,
with software sales accounting for the remaining 42.4%.
Geographically, the Company's 1992 net sales were generated as follows:
United States, $1.48 billion, or 66%; Canada, $303 million, or 14%; Europe,
$324 million, or 14%; and other international markets, $137 million, or 6%. The
increase in net sales achieved by the European operations was primarily the
result of sales growth by the Company's United Kingdom and German subsidiaries.
This increase was offset in part by lower than expected sales levels in
Switzerland and France. For additional information on the Company's operating
results by geographic region, see Note 11 of Notes to Consolidated Financial
Statements.
Gross profit increased 28.2% to $202.4 million in 1992 from $158.0 million in
1991, reflecting the increase in net sales in 1992. Gross margin decreased to
9.0% in 1992 from 10.0% in 1991, reflecting continued competitive pressures on
pricing.
14
<PAGE>
SG&A expenses increased 26.1% to $150.9 million in 1992 from $119.7 million
in 1991, but declined as a percentage of net sales to 6.7% in 1992 from 7.5% in
1991. The absolute dollar increase in SG&A expenses was primarily due to costs
associated with the Company's 41.2% increase in net sales. The decrease in SG&A
expenses as a percentage of net sales was the result of economies of scale
resulting from higher sales volume as well as improved operating efficiencies.
The Company's number of full-time equivalent employees increased to 1,939 at
December 31, 1992 from 1,450 at December 31, 1991.
Operating income increased 34.6% to $51.5 million in 1992 from $38.3 million
in 1991, despite continuing operating losses in the Company's Swiss and
Austrian subsidiaries and an operating loss at the Company's French subsidiary.
Operating income as a percent of sales decreased to 2.3% in 1992 from 2.5% in
1991. The 0.2% decrease in operating income as a percent of net sales reflects
the fact that the decrease in gross margin of 1.0% more than offset the
decrease SG&A expenses as a percentage of net sales of 0.8%.
Interest expense decreased 1.4% to $15.7 million in 1992 from $16.0 million
in 1991 and decreased as a percentage of net sales to 0.7% in 1992 from 1.0% in
1991. The decrease in interest expense is attributable to both the Company's
lower average borrowings in 1992 and a reduction in average funding cost. The
Company's average borrowings under all lines of available credit decreased 2.5%
to $151.2 million in 1992 from $155.0 million in 1991. The decrease in average
borrowings is a result of a public offering of 4,600,000 shares of the
Company's common stock in March 1992, providing net proceeds of $55.7 million,
partially offset by an increase in working capital requirements related to the
Company's growth and an increase in the Company's investing activities,
principally property and equipment expenditures. See "--Liquidity and Capital
Resources."
The Company's provision for income taxes increased by 39.1% to $14.8 million
in 1992 from $10.7 million in 1991, reflecting the Company's increased income
before income taxes. The Company's effective tax rate declined to 43.0% in 1992
from 49.6% in 1991. The lower effective tax rate reflects the fact that,
although certain of the Company's foreign subsidiaries incurred losses with no
corresponding tax benefit, such losses comprised a smaller percentage of the
Company's consolidated income before taxes in 1992 as compared to 1991.
Net income increased 81.6% to $19.7 million in 1992 from $10.8 million in
1991. Net income per share increased to $0.67 in 1992 from $0.43 in 1991. The
Company's weighted average number of shares increased to 29,274,000 shares in
1992 from 24,896,600 shares in 1991, primarily as a result of a public offering
of 4,600,000 shares of the Company's common stock in March 1992.
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 microcomputer industry; (ii)
shifts in short-term demand for the Company's products resulting, in part, from
the introduction of new products or updates of existing products; and (iii) the
fact that virtually all sales in a given quarter result from orders booked in
that quarter. Due to the factors noted above, as well as the fact that the
Company participates in a highly dynamic industry, the Company's revenues and
earnings may be subject to material volatility, particularly on a quarterly
basis.
Additionally, the Company's net sales in the fourth quarter have been 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 purchases and holiday period purchases.
For a tabular presentation of certain quarterly financial data with respect to
1992 and 1993, see Note 12 of Notes to Consolidated Financial Statements.
15
<PAGE>
ACQUISITION OF COMPUTERLAND BUSINESS
Through the ComputerLand Acquisition, Merisel now operates the ComputerLand
Business, a leading master reseller of computer systems and related products
from the major microcomputer manufacturers to a network of approximately 750
independently-owned computer products resellers, including ComputerLand
franchisees and affiliated resellers purchasing through the Datago program. See
"Business--ComputerLand Business."
For its fiscal year ended September 30, 1993, the ComputerLand Business
generated net revenues of$1.1 billion, gross profit of $54.7 million and income
from operations of $16.6 million. Gross margin and SG&A expenses as a
percentage of net revenues for this period were 5.1% and 3.6%, respectively,
reflecting the lower margins and lower SG&A expenses incurred in the master
reseller, or aggregator, business as compared to the Company's existing
wholesale distribution business. The ComputerLand Business' operating margin as
a percentage of net revenues for this period was 1.5%.
As a master reseller, the ComputerLand Business supplies a significantly
smaller number of products to a significantly smaller number of customers than
the Company's existing distribution business. See "Business--The Industry,"
"Business--Products and Manufacturer Services" and "Business--Customers and
Customer Services." Master resellers focus on supplying computer systems and
other higher-volume products to their customers while the Company's existing
business supplies a wide range of products to many different types of
customers. Certain of the larger computer manufacturers, such as Apple, Compaq,
Hewlett-Packard and IBM, have historically required resellers to purchase their
products from an affiliated aggregator, such as the ComputerLand Business.
Wholesale distributors have not been authorized to sell these manufacturers'
key microcomputer components, except on a limited basis.
For the fiscal year ended September 30, 1993, approximately 76% of the
ComputerLand Business' revenues were generated from the sale of products from
four manufacturers: Apple, Compaq, Hewlett-Packard and IBM. The loss of any one
of these four manufacturers, or a change in the way any of these manufacturers
markets, prices or distributes its products, could have a material adverse
effect on the ComputerLand Business' operating and financial results.
Specifically, to the extent that one of the leading four manufacturers changes
its current system of limiting authorization to sell its products to master
resellers, the ComputerLand Business' sales levels would be adversely affected.
The Company believes, however, that its existing wholesale distribution
business may benefit from such changes.
All of the ComputerLand Business' franchisees are electronically linked for
the purposes of order placement and other communications, reducing the need for
sales representatives and support personnel in comparison to the Company's
existing business. In addition, over 95% of the ComputerLand Business'
customers currently finance their orders through "floor plan" financing
companies or pay on a C.O.D. basis, reducing the need for credit and collection
personnel and reducing financing costs because of improved cash flow.
As a result of the foregoing as well as other factors, master resellers such
as the ComputerLand Business tend to generate both lower gross margins and
lower operating expenses as a percentage of sales than those generated by the
Company in its existing distribution business.
Competition among master resellers is intense (see "Business--Competition"),
and the ComputerLand Business may experience downward pressures on its gross
margins due to competitive pricing decisions. Under the Services Agreement,
ComputerLand Corporation will perform a significant portion of the ComputerLand
Business' distribution functions for a contractually agreed-upon fee for a two-
year period. As a result of this outsourcing arrangement, the ComputerLand
Business does not directly control the costs of those distribution functions,
and therefore will be limited in its ability to lower its costs in response to
a lower gross margin environment during the two-year term of the Services
Agreement. Due to this limitation, the Services Agreement provides that the
service fee, as a percentage of sales volume, decreases if the ComputerLand
Business' sales volume increases over a specified amount. Further, in the event
sales volume
16
<PAGE>
does not increase over a specified amount, and the ComputerLand Business' gross
margin declines, the Service Agreement provides for a limited reduction in the
service fee to offset partially the decline in gross margin. Notwithstanding
these contractual provisions, a material decline in the ComputerLand Business'
gross margins could have a material adverse effect on the Company's results of
operations.
Over 76% of the ComputerLand Business' sales to its customers currently are
financed on behalf of such customers by floor plan financing companies. The
ComputerLand Business typically receives payment from these financing companies
within three business days from the date of sale, resulting in reduced cash
requirements for the ComputerLand Business as compared to the Company's
existing wholesale distribution business. This floor plan financing is
typically subsidized for the ComputerLand Business' customers by its
manufacturers. Any material change in the availability or the terms of
financing offered by such financing companies or in the subsidies provided by
manufacturers could require the ComputerLand Business to provide such financing
to its customers, thereby substantially increasing the working capital
necessary to operate its business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs primarily through
borrowings, income from operations, the public and private sales of its
securities and securitizations of its accounts receivable.
Net cash used for operating activities in 1993 was $125.4 million, as
compared to net cash used for operating activities in 1992 of $58.6 million.
The primary uses of cash in 1993 were increases in accounts receivables of
$194.2 million, reflecting the Company's higher sales volumes, especially in
December 1993, and greater sales to customers with extended credit terms, and
inventories of $142.9 million, reflecting the Company's higher sales volumes.
Sources of cash from operating activities included net income, after adjustment
for non-cash items, of $55.9 million and an increase in accounts payable of
$166.3 million.
Net cash used for investing activities in 1993 was $25.1 million, principally
reflecting investments in new computer systems, new warehouse management
systems and new distribution facilities and equipment. The Company presently
anticipates that its capital expenditures for 1994 will be approximately $25
million, principally for development and implementation of new computer systems
in North America, new warehouse management systems, new computer systems for
the Company's European operations and a new distribution center in Europe. See
"Business--Operations and Distribution" and "Business--International
Operations."
Net cash provided by financing activities in 1993 was $156.8 million,
comprised principally of net borrowings under domestic revolving lines of
credit of $70.1 million, net borrowings under foreign bank facilities of $10.2
million and proceeds from the sale of an interest in the Company's trade
accounts receivables of $75.0 million pursuant to a receivables securitization
program.
To provide capital for the Company's operating and investing activities, the
Company and its subsidiaries, including Merisel Americas, Merisel Europe and
Merisel FAB, maintain a number of credit facilities. Merisel Americas and
Merisel Europe are co-borrowers under a $150 million unsecured revolving bank
credit facility expiring on May 31, 1997. At March 18, 1994, $140.9 million was
outstanding under this facility, comprised of $135.9 million in direct
borrowings and $5 million in outstanding letters of credit. A portion of the
net proceeds of the Offering will be used to reduce the balance due under this
facility. See "Use of Proceeds." To provide for its anticipated working capital
needs, on December 23, 1993, Merisel FAB entered into a $10 million unsecured
revolving credit agreement. This agreement expires on January 29, 1995. At
March 18, 1994, no amount was outstanding under this agreement. The Company and
its subsidiaries also maintain various local lines of credit, primarily to
facilitate overnight and other short-term borrowings. The total amount of
outstanding borrowings under these lines as of December 31, 1993 was $50.9
million.
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Merisel Americas has also entered into a $75 million trade accounts
receivable securitization agreement pursuant to which it sells on an ongoing
basis an undivided interest of up to $75 million in designated trade
receivables to a syndicate of purchasers. The receivables are sold at face
value and fees paid in connection with such sales are recorded by the Company
as other expense. This facility expires in September 1994. Merisel Americas
currently is negotiating an amendment to this facility to increase its amount
to $150 million and to extend its expiration date to November 1994. The net
proceeds from the increase in this facility will be used to reduce the amount
of outstanding borrowings under Merisel Americas' and Merisel Europe's $150
million revolving bank credit facility.
To finance the ComputerLand Acquisition, the Company borrowed $65 million
under an unsecured credit agreement with a bank lender. This agreement expires
on January 29, 1995, but is subject to mandatory prepayment upon any debt or
equity issuance by the Company. Merisel FAB also borrowed $16 million, the
balance of the ComputerLand Acquisition purchase price, under a separate credit
agreement, which was repaid in full on February 15, 1994.
Merisel Americas also has outstanding $100 million of 8.58% senior notes due
June 30, 1997, and $22 million of 11.28% subordinated notes due in five equal
annual principal installments, beginning in March 1996. See Notes 5 and 6 of
Notes to Consolidated Financial Statements.
In connection with the ComputerLand Acquisition, Merisel FAB and ComputerLand
Corporation entered into the Services Agreement pursuant to which ComputerLand
will provide significant distribution and other support services to Merisel FAB
for up to two years. See "Business--ComputerLand Business." Under the Services
Agreement, Merisel FAB has been granted $20 million in extended credit terms on
its product purchases from ComputerLand Corporation. ComputerLand Corporation
has agreed to use this $20 million account receivable from Merisel FAB to
purchase 1,103,144 shares of the Company's Common Stock at a per share price of
$18.13, if and when a registration statement covering the resale of such shares
is declared effective by the Securities and Exchange Commission. It is
presently anticipated that the Company will file such a registration statement
in March 1994.
Merisel believes that its existing cash balances, together with the proceeds
of an offering of 5 million shares of the Company's Common Stock anticipated to
occur in the second quarter of 1994, income from operations, proceeds of
receivables securitizations and borrowings under lines of credit will be
sufficient to meet its working capital and capital investment needs through at
least the next twelve months.
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 in part to increases or
decreases in sales levels, Merisel's practice of making large-volume purchases
when it deems the terms of such purchases to be attractive and the addition of
new manufacturers and products. The Company has negotiated agreements with many
of its manufacturers which contain stock balancing and price protection
provisions intended to reduce, in part, Merisel's risk of loss due to slow
moving or obsolete inventory or manufacturer price reductions. In the event of
a manufacturer price reduction, the Company generally receives a credit for
products in inventory. In addition, the Company has the right to return a
certain percentage of purchases, subject to certain limitations. Historically,
price protection and stock return privileges as well as the Company's inventory
management procedures have helped to reduce the risk of loss of carrying
inventory.
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. With respect to credit sales,
the Company attempts to control its bad debt exposure through monitoring of
customers' creditworthiness and, where practicable, through participation in
credit associations that provide credit rating information about its customers.
In certain foreign markets, the Company may elect to purchase credit insurance
for certain accounts.
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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: MAY 3, 1994
Merisel, Inc.
/s/ James L. Brill
By___________________________________
James L. Brill
Senior Vice President, Finance,
Chief Financial Officer and
Secretary
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