<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994.
--------------
OR
[ ] 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
0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Continental Boulevard
El Segundo, CA 90245-0984
(Address and zip code of principal executive offices)
(310) 615-3080
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class August 10,1994
----- --------------
Common Stock, $.01 par value 29,685,449
<PAGE>
MERISEL, INC.
-------------
INDEX
-----
<TABLE>
<CAPTION>
Page Reference
--------------
PART I FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993 1-2
Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1994 and 1993 3
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1994 and 1993 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
PART II OTHER INFORMATION 17
SIGNATURES 18
</TABLE>
ii
<PAGE>
PART I FINANCIAL INFORMATION
-----------------------------
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
CURRENT ASSETS: $212 $14
Cash and cash equivalents
Accounts receivable (net of allowance
for doubtful accounts of $15,332
and $16,543 for 1994 and 1993,
respectively) 357,275 393,252
Inventories 497,003 442,392
Prepaid expenses and other current assets 9,668 15,443
Deferred income tax benefit 8,917 8,942
---------- --------
Total current assets 873,075 860,043
PROPERTY AND EQUIPMENT - NET 50,026 39,858
COST IN EXCESS OF NET ASSETS
ACQUIRED - NET 113,701 32,832
OTHER ASSETS 5,468 3,550
---------- --------
TOTAL ASSETS $1,042,270 $936,283
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $467,361 $414,841
Accrued liabilities 45,766 26,811
Short-term bank debt 94,631 50,929
Income taxes payable 3,200 7,697
---------- -----------
Total current liabilities 610,958 500,278
Deferred income tax liability 1,618 1,787
Long-term debt 168,400 186,500
Subordinated debt 22,000 22,000
---------- -----------
TOTAL LIABILITIES 802,976 710,565
---------- -----------
MINORITY INTEREST 839 1,861
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized
1,000,000 shares; none issued or outstanding
Common stock, $.01 par value, authorized
50,000,000 shares; outstanding 29,681,200
and 29,604,300 for 1994 and 1993, respectively 297 296
Additional paid-in capital 141,143 140,775
Retained earnings 102,826 91,512
Cumulative translation adjustment (5,811) (8,726)
---------- -----------
Total stockholders' equity 238,455 223,857
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,042,270 $936,283
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $1,210,498 $713,422 $2,365,120 $1,405,880
COST OF SALES 1,128,734 654,290 2,201,050 1,287,325
---------- -------- ---------- ----------
GROSS PROFIT 81,764 59,132 164,070 118,555
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 67,441 44,425 128,656 87,779
---------- -------- ---------- ----------
OPERATING INCOME 14,323 14,707 35,414 30,776
INTEREST EXPENSE 6,354 4,127 12,559 8,916
OTHER EXPENSES 3,589 358 4,913 577
---------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,380 10,222 17,942 21,283
PROVISION FOR INCOME TAXES 1,662 4,150 6,628 8,858
---------- -------- ---------- ----------
NET INCOME $2,718 $ 6,072 $ 11,314 $ 12,425
========== ======== ========== ==========
NET INCOME PER SHARE $0.09 $0.20 $0.37 $0.41
========== ======== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 30,638 30,312 30,764 30,308
========== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1994 1993
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,314 $ 12,425
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 7,540 4,979
Provision for bad debts 8,130 7,373
Deferred income taxes (143) (1,234)
Changes in assets and liabilities:
Accounts receivable (47,398) (22,924)
Inventories (54,612) (16,550)
Prepaid expenses and other assets 5,168 (10,870)
Accounts payable 52,520 (7,384)
Accrued liabilities 15,275 (1,425)
Income taxes payable (4,497) (3,644)
----------- ---------
Net cash used for operating activities (6,703) (39,254)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (14,561) (9,927)
Acquisition of ComputerLand Business (82,686)
----------- ---------
Net cash used for investing activities (97,247) (9,927)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 912,830 437,400
Repayments under revolving line of credit (945,930) (396,100)
Borrowings(repayments) under bank facilities (6,298) 10,549
Borrowings in connection with acquisition 65,000
Proceeds from sale of accounts receivable 75,000
Proceeds from issuance of common stock 369 730
----------- ---------
Net cash provided by financing activities 100,971 52,579
----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,177 (3,448)
----------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 198 (50)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 14 133
----------- ---------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 212 $ 83
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
Merisel, Inc. ("Merisel" or the "Company") is a worldwide wholesale distributor
of microcomputer hardware and software products. In addition, as a result of its
acquisition of the ComputerLand Business, the Company is a leading aggregator,
or master reseller, of computer systems and related products from major
microcomputer manufacturers to ComputerLand franchises and Datago affiliates.
The consolidated financial statements include the accounts of Merisel and its
consolidated subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The information for the three and six month periods ended June 30, 1994 and 1993
has not been audited by independent accountants, but includes all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for such periods.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities and
Exchange Commission, although the Company believes that the disclosures included
in these financial statements are adequate to make the information not
misleading. The consolidated financial statements as presented herein should be
read in conjunction with the consolidated financial statements and notes thereto
included in Merisel's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993. Operating results for the three and six months ended June
30, 1994 may not be indicative of the results which will be achieved in the
future.
2. Acquisitions
On January 31, 1994, the Company, through its wholly-owned subsidiary, Merisel
FAB, Inc. ("Merisel FAB"), acquired certain assets of the United States
Franchise and Distribution Division (the "F&D Division") of Vanstar Corporation
(formerly ComputerLand Corporation) (the "ComputerLand Acquisition"). The
Company paid $80.2 million in cash at closing for the acquired assets and $2.5
million of direct acquisition costs. In addition, the Company has agreed to make
an additional payment in 1996 of up to $30 million. The amount of such payment
will be based upon the growth of the Company's and Merisel FAB's sales of
products of designated vendors to specified customers over the two-year period
ending January 31, 1996. The acquisition has been accounted for as a purchase.
Under the purchase method of accounting, an allocation of the purchase price to
the Merisel FAB assets and liabilities is required to reflect fair values.
Based on a preliminary allocation, $82 million of the purchase price has been
allocated to intangible assets with an estimated aggregate life of 25 years. A
final allocation of the purchase price has not yet been performed.
5
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Merisel FAB has also entered into a Distribution and Services Agreement (the
"Agreement") with Vanstar Corporation whereby Vanstar will provide products and
distribution and other support services to Merisel FAB for two years following
the ComputerLand Acquisition. Under the Agreement, Merisel has been granted
$20 million in extended credit terms on its product purchases from Vanstar
Corporation (the "Vanstar Payable"). The Vanstar Payable currently accrues
interest at prime less 2%, per annum (5.25% at June 30, 1994), payable monthly,
with the principal balance due on February 1, 1996.
Following is summarized pro forma operating results assuming that the Company
had acquired the F&D Division on January 1, 1993.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1994 1993 1993
---------- ---------- ------------------
<S> <C> <C> <C>
(in thousands)
Net Sales $2,466,852 $1,929,638 $996,636
Income before taxes 18,436 24,567 12,195
Net income 11,610 14,396 7,256
Net income per share 0.38 0.47 0.24
Weighted average shares
outstanding 30,764 30,308 30,312
</TABLE>
Prior to its acquisition, the ComputerLand Business was not an incorporated
entity and separate historical financial statements were not prepared;
accordingly, no such financial statements were readily available. The summarized
pro forma operating results are based, in part, on historical income statement
information obtained from the F&D Division's statement of revenues and operating
expenses for the month ended January 31, 1994 and the three months and six
months ended June 30, 1993. Such historical statements present the revenues,
direct expenses and general and administrative expenses allocated from Vanstar.
The pro forma information for 1994 includes the actual operating results for the
period from February 1, 1994 to June 30, 1994. In addition, the summarized pro
forma information for the F&D Division, prior to its acquisition by the Company,
includes adjustments to reflect the allocation of general and administrative
expenses, such as, the costs of the distribution centers and general corporate
functions and administrative personnel. Such expenses have been allocated based
upon such factors as the ratio of shipments by the F&D Division to total
shipments by Vanstar Corporation and Vanstar's management's estimate of the time
spent by shared employees of Vanstar Corporation. The pro forma results also
include adjustments for interest expense on debt incurred in connection with the
acquisition, amortization of intangible assets and provision for income taxes
assuming a 40% effective tax rate. The summarized pro forma information may not
be indicative of the results that would have occurred if the acquisition had
been consummated on January 1, 1994 or 1993 or which may be achieved in the
future.
6
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
3. Sale of Accounts Receivable
Pursuant to a trade accounts receivable securitization agreement with a
securitization company, as amended in March 1994, the securitization company may
purchase on an ongoing basis up to $150 million of an undivided interest in
designated accounts receivable. The receivables are sold at face value and fees
paid in connection with such sales are recorded as other expense. This facility
expires in November 1994. At June 30, 1994, $150 million of net accounts
receivable were sold under this agreement.
4. Net Income Per Share
Net income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the related period,
including common stock options when dilutive.
5. Fiscal Year
The Company's fiscal year is the 52 or 53 week period ending on the Saturday
nearest to December 31. The three month and six month periods ended June 30,
1994 and 1993 were 13 and 26 week periods, respectively. For simplicity of
presentation, the Company has described the interim periods and year-end period
as of June 30, and December 31, respectively.
6. Debt
The Company and its subsidiaries maintain a number of credit facilities,
including a $150 million unsecured revolving bank credit facility, which expires
on May 31, 1997. At June 30, 1994, $68.4 million was outstanding under this
facility, as well as $5 million in outstanding letters of credit. The Company's
subsidiaries, Merisel Americas, Inc. ("Merisel Americas") and Merisel Europe,
Inc. are the borrowers under this revolving bank credit facility, which is also
guaranteed by the Company. The Company and its subsidiaries also maintain
various local lines of credit. The total amount of outstanding borrowings under
these lines as of June 30, 1994 was $29.6 million.
To finance the ComputerLand Acquisition, the Company borrowed $65 million under
an unsecured credit agreement with a bank. The loan agreement provides for
periodic interest payments prior to maturity, starting at the prime rate, with
quarterly increases of 0.5% until maturity. This agreement expires on January
29, 1995, but is subject to mandatory prepayment upon any debt or equity
issuance by the Company.
7
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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.
8. Litigation
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to represent a class of all persons who purchased
Merisel common stock between February 1, 1994 and June 7, 1994 (the "Class
Period"). The complaints allege that the defendants inflated the market price of
Merisel's common stock with material misrepresentations and omissions during the
Class Period. Plaintiffs contend that such alleged misrepresentations are
actionable under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Plaintiffs will file a consolidated
amended complaint on August 15, 1994. Merisel believes that it has meritorious
defenses to this lawsuit and intends to defend the action vigorously. Management
believes that the outcome of this matter will not have a material adverse effect
on the consolidated financial position or results of operations of the Company,
and accordingly, no provision for loss has been made in the accompanying
financial statements.
9. Supplemental Disclosure of Cash Flow Information
Cash paid for interest and income taxes for the six month periods ended June 30,
1994 and 1993 was as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
(in thousands)
<S> <C> <C>
Interest $13,325 $12,409
Income Taxes $ 7,486 $13,026
</TABLE>
During the six month periods ended June 30, 1994 and 1993, the Company accrued
$2,000,000 and $1,000,000, respectively, to reflect the acquisition of an
additional 20% and 10% interest in a Mexican distributor. Pro forma income
statement information for this acquisition has not been provided as the
financial statement impact is not significant.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
- - -------
Merisel, Inc. ("Merisel" or the "Company") is a worldwide wholesale distributor
of microcomputer hardware and software products. In addition, as a result of its
acquisition of certain assets of the United States Franchise and Distribution
Division (the "ComputerLand Business") of Vanstar Corporation (formerly
ComputerLand Corporation) (the "ComputerLand Acquisition") the Company is a
leading aggregator, or master reseller, of computer systems and related products
from major microcomputer manufacturers to ComputerLand franchises and Datago
affiliates.
On January 31, 1994, the Company acquired, through its wholly-owned subsidiary
Merisel FAB, Inc. ("Merisel FAB"), the Computer Land Business. The operating
results for the quarter and six months ended June 30, 1994 include the results
of operations for Merisel FAB since its acquisition on January 31, 1994.
Operating results for the three and six months ended June 30, 1994 may not be
indicative of the results which will be achieved in the future.
The following table sets forth the percentage relationship that certain income
and expense items bear to net sales and is derived from the consolidated
statements of income for the Company for the three and six month periods ended
June 30, 1994 and 1993:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1994 1993 1994 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.2 91.7 93.1 91.6
----- ----- ----- -----
Gross profit 6.8 8.3 6.9 8.4
Selling, gen'l & admin. expenses 5.6 6.2 5.4 6.2
----- ----- ----- -----
Operating income 1.2 2.1 1.5 2.2
Interest expense 0.5 0.6 0.5 0.6
Other expenses 0.3 0.1 0.2 0.1
----- ----- ----- -----
Income before income taxes 0.4 1.4 0.8 1.5
Provision for income taxes 0.2 0.6 0.3 0.6
----- ----- ----- -----
Net income 0.2% 0.8% 0.5% 0.9%
===== ===== ===== =====
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
RESULTS OF OPERATIONS
- - ---------------------
Three Months Ended June 30, 1994 as Compared to the Three Months Ended June 30,
- - -------------------------------------------------------------------------------
1993
- - ----
Net sales increased 70% from $713.4 million in 1993 to $1,210.5 million in
1994. The increase in net sales was due to the impact of the ComputerLand
Acquisition, as well as an increase in the number of vendors and products the
Company is authorized to sell in various geographic markets. The Company also
increased its market share of certain vendor products in various geographic
markets. Net sales for Merisel FAB were $286.6 million or 23.7% of consolidated
net sales for the quarter ended June 30, 1994.
Geographically, the Company's net sales for the quarter ended June 30, 1994 were
generated as follows: United States, $843.9 million, or 69.7%; Canada, $116.7
million, or 9.6%; Europe, $171.5 million, or 14.2%; and other international
markets, $78.3 million, or 6.5%. From 1993 to 1994, these geographic regions
experienced sales growth rates as follows: United States, 86.2% (23.0%
excluding Merisel FAB), Canada, 51.3%, Europe, 33.3% and other international
markets, 44.3%. The Company's higher sales growth rates were due to the same
factors described in the preceding paragraph.
In the United States, including Merisel FAB, hardware and accessories accounted
for 75% of net sales, and software accounted for 25% of net sales in 1994, as
compared to 57% and 43% respectively, in 1993. The increase in hardware
sales is due to the fact that the Company has obtained additional rights to
distribute hardware products throughout the world from various vendors and to
the fact that Merisel FAB's revenues are predominantly hardware related.
Gross profit increased 38.3% from $59.1 million in 1993 to $81.8 million in
1994. Gross profit as a percentage of sales, or gross margin, decreased from
8.3% in 1993 to 6.8% in 1994. The decrease in gross margin is principally
attributable to competitive pressures on pricing worldwide and the effect of the
ComputerLand Acquisition. Merisel FAB has lower gross margins than those of the
Company's wholesale distribution business. However, Merisel FAB's operating
expenses as a percentage of sales are generally lower than the Company's
wholesale distribution business, which helps offset the lower gross margins.
The Company anticipates that it will continue to experience downward pressure on
gross margin due to industry price competition.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
Selling, general and administrative expenses ("SG&A") increased 51.8% from $44.4
million in 1993 to $67.4 million in 1994. SG&A decreased as a percentage of net
sales from 6.2% in 1993 to 5.6% in 1994. The absolute dollar increase in SG&A
is primarily due to costs associated with the Company's 70% increase in net
sales, while the decrease in SG&A as a percentage of sales is due to Merisel
FAB's lower operating expenses as a percentage of sales compared to Merisel's
wholesale distribution business.
Operating income decreased 2.6% from $14.7 million in 1993 to $14.3 million in
1994. Operating income as a percentage of net sales was 2.1% in 1993 and 1.2% in
1994. Operating income for the Company's U.S. distribution business declined as
a result of lower margins and higher operating expenses. In addition, the
Company's European operations continued to experience net operating losses as a
result of continued competitive pressure on margins as well as an increase in
operating costs in Europe as the result of the Company implementing its long-
term strategy to centralize and integrate its European operations.
Interest expense increased 54% from $4.1 million in 1993 to $6.4 million in
1994, but decreased from 0.6% to 0.5% as a percentage of net sales in 1993
compared to 1994. The increase in interest expense is primarily attributable to
the Company's higher average borrowings in 1994. The Company's average month-end
bank borrowings increased 51.1% from $213.3 million in 1993 to $322.2 million in
1994. The increase in average borrowings in 1994 reflected the need to finance
the ComputerLand Acquisition and to finance higher levels of working capital to
support increased sales.
Other expenses increased from $0.4 million in 1993 to $3.6 million in 1994,
primarily due to fees of $1.9 million incurred in connection with accounts
receivable securitizations, write-off of offering costs of $0.5 million incurred
in connection with the Company withdrawing its common stock offering in May 1994
and an increase in foreign currency transaction losses of $0.5 million
experienced by the Company's Mexican subsidiary.
The Company's provision for income taxes decreased 60% from $4.2 million in
1993 to $1.7 million in 1994, reflecting the Company's decreased income before
income taxes. The Company's effective tax rate declined from 40.6% in 1993 to
38% in 1994. The lower effective tax rate reflects the increased utilization of
tax loss carry forwards by certain of the Company's foreign subsidiaries in
1994.
Net income decreased 55.2% from $6.1 million in 1993 to $2.7 million in 1994.
Net income per share decreased from $0.20 in 1993 to $0.09 in 1994. The
Company's weighted average number of shares increased from 30,312,000 shares in
1993 to 30,638,000 shares in 1994.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
RESULTS OF OPERATIONS
- - ---------------------
Six Months Ended June 30, 1994 as Compared to the Six Months Ended June 30, 1993
- - --------------------------------------------------------------------------------
Net sales increased 68.2% from $1,405.9 million in 1993 to $2,365.1 million in
1994. The increase in net sales was due to the same factors summarized in the
discussion of net sales for the Three Months Ended June 30, 1994 and 1993. Net
sales for Merisel FAB were $472.5 million or 20% of consolidated net sales for
the six months ended June 30, 1994.
Geographically, the Company's net sales for the six months ended June 30, 1994
were generated as follows: United States, $1,595.8 million, or 67.5%; Canada,
$259.4 million, or 11%; Europe, $366.4 million, or 15.5%; and other
international markets, $143.5 million, or 6%. From 1993 to 1994, these
geographic regions experienced sales growth rates as follows: United States,
82.9% (28.7% excluding Merisel FAB), Canada, 45.3%, Europe, 44.4% and other
international markets, 38.2%.
In the United States, including Merisel FAB, hardware and accessories accounted
for 74% of net sales, and software accounted for 26% of net sales in 1994,
as compared to 56% and 44% respectively, in 1993. The increase in hardware
sales was due to the same factors summarized in the discussion of hardware and
accessories and software sales for the Three Months Ended June 30, 1994 and
1993.
Gross profit increased 38.4% from $118.6 million in 1993 to $164.1 million in
1994. Gross profit as a percentage of sales, or gross margin, decreased from
8.4% in 1993 to 6.9% in 1994. The decrease in gross margin is due to the
same factors summarized in the discussion of gross profit for the Three Months
Ended June 30, 1994 and 1993.
SG&A increased 46.6% from $87.8 million in 1993 to $128.7 million in 1994. SG&A
decreased as a percentage of net sales from 6.2% in 1993 to 5.4% in 1994. The
absolute dollar increase in SG&A is primarily due to costs associated with the
Company's 68.2% increase in net sales. The decrease in SG&A as a percentage of
sales is due to the same factors summarized in the discussion of SG&A for the
Three Months Ended June 30, 1994 and 1993.
Operating income increased 15.1% from $30.8 million in 1993 to $35.4 million in
1994. Operating income as a percentage of net sales was 2.2% in 1993 and 1.5% in
1994. The decrease in operating income as a percentage of net sales reflects
competitive pressure on pricing worldwide.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
Interest expense increased 40.9% from $8.9 million in 1993 to $12.6 million in
1994, but decreased from 0.6% to 0.5% as a percentage of net sales in 1993
compared to 1994. The increase in interest expense and the reduction in
interest as a percentage of net sales was due primarily to the same factors
summarized in the discussion of interest expense for the Three Months Ended June
30, 1994 and 1993.
Other expenses increased from $0.6 million in 1993 to $4.9 million in 1994,
primarily due to fees of $2.7 million incurred in connection with accounts
receivable securitizations, write-off of offering costs of $0.5 million incurred
in connection with the Company withdrawing its common stock offering in May 1994
and an increase in foreign currency transaction losses of $0.6 million
experienced by the Company's Mexican subsidiary.
The Company's provision for income taxes decreased 25.1% from $8.9 million in
1993 to $6.6 million in 1994, reflecting the Company's decreased income before
income taxes. The Company's effective tax rate declined from 41.6% in 1993 to
36.9% in 1994. The lower effective tax rate is due to the same factors
summarized in the discussion of provision for income taxes for the Three Months
Ended June 30, 1994 and 1993.
Net income decreased 9% from $12.4 million in 1993 to $11.3 million in 1994.
Net income per share decreased from $0.41 in 1993 to $0.37 in 1994. The
Company's weighted average number of shares increased from 30,308,000 shares in
1993 to 30,764,000 shares in 1994.
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) changes in the rate of 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 traditionally 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 purchases.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company has historically financed its growth and cash needs primarily
through borrowings, income from operations, public and private sales of its
securities and securitization of its accounts receivable.
Net cash used in operating activities during the six months ended June 30, 1994
was $6.7 million. Sources of cash from operating activities include net income
and adjustments for non-cash charges of $26.8 and an increase in accounts
payable and accrued liabilities of $67.8 million. The primary uses of cash
during the period were a $47.4 million increase in accounts receivable and a
$54.6 million increase in inventories. The increase in accounts receivable was
due primarily to the increase in sales volume and the increase in inventory was
due to the current and anticipated sales growth as well as the addition of new
product lines.
Net cash used for investing activities during the six months ended June 30, 1994
was $97.2 million, reflecting the ComputerLand Acquisition and property and
equipment expenditures. The expenditures for property and equipment were
primarily for the upgrading of existing facilities, leasehold improvements and
the upgrading of the Company's computer systems.
Net cash provided by financing activities was $101 million, comprised of
borrowings of $65 million in connection with the ComputerLand Acquisition, and
proceeds from the sale of an interest in the Company's trade accounts receivable
of $75 million pursuant to a receivables securitization program. Net cash used
for financing activities was $39.4 million representing net repayments under
domestic revolving lines of credit and various local lines of credit maintained
by the Company and its subsidiaries.
To provide capital for the Company's operating and investing activities, the
Company and its subsidiaries maintain a number of credit facilities including a
$150 million unsecured revolving bank credit facility expiring on May 31, 1997.
The Company's subsidiaries, Merisel Americas, Inc. ("Merisel Americas") and
Merisel Europe, Inc. are the borrowers under this revolving bank credit
facility, which is also guaranteed by the Company. At June 30, 1994, $68.4
million was outstanding under this facility as well as $5 million in outstanding
letters of credit. 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
June 30, 1994 was $29.6 million.
The Company has also entered into a $150 million trade accounts receivable
securitization agreement pursuant to which it may sell on an ongoing basis an
undivided interest of up to $150 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 as other expense. This facility
expires in November 1994. At June 30, 1994, $150 million of net accounts
receivable were sold under this agreement.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
To finance the ComputerLand Acquisition, the Company borrowed $65 million under
an unsecured credit agreement with a bank. The loan agreement provides for
periodic interest payments prior to maturity, starting at the prime rate, with
quarterly increases of 0.5% until maturity. This agreement expires on January
29, 1995, but is subject to mandatory prepayment upon any debt or equity
issuance by the Company. Merisel, Inc. is considering issuing senior notes in
an aggregate principal amount of up to $150 million at a market interest rate
for high yield debt securities. A portion of the proceeds of such issuance
would be used to repay this acquisition indebtedness in full.
Merisel Americas also has outstanding $100 million of 8.58% senior notes, due
June 30, 1997 and $22 million of 11.28% senior subordinated notes repayable in
five equal annual installments beginning in March 1996.
In connection with the ComputerLand Acquisition, Merisel FAB and Vanstar
Corporation entered into a Distribution and Service Agreement (the "Agreement")
pursuant to which Vanstar Corporation will provide significant distribution and
other support services to Merisel FAB for up to two years. Under the Agreement,
Merisel FAB has been granted $20 million in extended credit terms on its product
purchases from Vanstar Corporation. The Vanstar Payable currently accrues
interest at prime, less 2% per annum (5.25% at June 30, 1994), with the
principal balance due on February 1, 1996.
Merisel continues to monitor its working capital requirements and to negotiate
with lenders for additional debt. The Company believes that its existing cash
balances, cash generated from operations, proceeds from receivable
securitization, borrowings under existing lines of credit and its ability to
obtain additional credit will be sufficient to meet its working capital needs
through 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 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. The Company is not assured
that these agreements will succeed in reducing this risk. In the event of a
manufacturer price reduction, the Company generally receives a credit for
products in inventory. In addition, the Company has the right to return a
certain percentage of purchases, subject to certain limitations. Historically,
price protection and stock return privileges as well as the Company's inventory
management procedures have helped to reduce the risk of loss of carrying
inventory.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
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.
# # #
16
<PAGE>
PART II - OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
-----------------
In June 1994, the Company and certain of its officers and/or directors
were named in putative securities class actions filed in the United
States District Court for the Central District of California,
consolidated as In re Merisel, Inc. Securities Litigation. Plaintiffs,
who are seeking damages in an unspecified amount, purport to represent
a class of all persons who purchased Merisel common stock between
February 1, 1994 and June 7, 1994 (the "Class Period"). The complaints
allege that the defendants inflated the market price of Merisel's
common stock with material misrepresentations and omissions during the
Class Period. Plaintiffs contend that such alleged misrepresentations
are actionable under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs
will file a consolidated amended complaint on August 15, 1994. Merisel
believes that it has meritorious defenses to this lawsuit and intends
to defend the action vigorously. Management believes that the outcome
of this matter will not have a material adverse effect on the
consolidated financial position or results of operations of the
Company, and accordingly, no provision for loss has been made in the
accompanying financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1994 Annual Meeting of Stockholders held on June 7, 1994, the
stockholders approved a proposal to elect three Class I directors to
the Board of Directors for terms expiring in 1997 to replace those
directors whose terms expire in 1994. All nominees were duly elected.
The following sets forth the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as
to each nominee:
<TABLE>
<CAPTION>
Against Abstentions and
Nominee For or Withheld Broker Non-Votes
------- ---------- ----------- ----------------
<S> <C> <C> <C>
James L. Brill 21,984,063 197,233 0
Lawrence J. Schoenberg 22,145,284 36,012 0
David S. Wagman 22,146,229 35,067 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
Report on Form 8-K, filed June 16, 1994, concerning the
Company's press release discussing the reasons for lower than
expected earnings for the second quarter ended June 30, 1994.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 1994
Merisel, Inc.
By /s/ James L. Brill
------------------------------------
James L. Brill
Senior Vice President, Finance,
(Duly Authorized Officer and
Chief Financial Officer)
18
