<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, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from _______________ to ___________
Commission File Number
0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
(Address 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 8, 1995
Common Stock, $.01 par value 29,856,496 Shares
<PAGE>
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of 1-2
June 30, 1995 and December 31, 1994
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1995
and 1994 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-18
PART II OTHER INFORMATION 19-20
SIGNATURES 21
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<CAPTION>
ASSETS
June 30, December 31,
1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $321 $3,533
Accounts receivable (net of
allowance for doubtful accounts
of $24,227 and $21,815 for 1995
1994, respectively) 394,085 451,246
Inventories 501,186 517,706
Prepaid expenses and other current
assets 11,818 13,256
Income taxes receivable 5,570
Deferred income tax benefit 10,587 12,128
---------- ---------
Total current assets 923,567 997,869
PROPERTY AND EQUIPMENT - NET 91,407 69,511
COST IN EXCESS OF NET ASSETS
ACQUIRED - NET 111,379 113,115
OTHER ASSETS 12,253 11,375
---------- ----------
TOTAL ASSETS $1,138,606 $1,191,870
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<page
<TABLE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $517,601 $509,226
Accrued liabilities 56,735 46,502
Subordinated debt - current 4,400
Short-term bank debt 43,446 37,871
Income taxes payable 4,422
--------- ---------
Total current liabilities 622,182 598,021
Long-term debt 265,000 335,685
Subordinated debt 17,600 22,000
Deferred income tax liability 1,069
--------- ---------
TOTAL LIABILITIES 905,851 955,706
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 29,819,700 and
29,716,600 for 1995 and 1994,
respectively 298 297
Additional paid-in capital 141,554 141,249
Retained earnings 96,720 103,122
Cumulative translation adjustment (5,817) (8,504)
-------- --------
Total stockholders' equity 232,755 236,164
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,138,606 $1,191,870
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
NET SALES $1,379,864 $1,210,498 $2,834,758 $2,365,120
COST OF SALES 1,294,389 1,128,734 2,656,060 2,201,050
--------- --------- --------- ---------
GROSS PROFIT 85,475 81,764 178,698 164,070
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 74,628 67,441 151,109 128,656
RESTRUCTURING CHARGE 4,271 9,333
------- ------- ------- -------
OPERATING INCOME 6,576 14,323 18,256 35,414
INTEREST EXPENSE 9,274 6,354 19,733 12,559
OTHER EXPENSE 3,438 3,589 6,821 4,913
------- ------- ------- -------
(LOSS) INCOME BEFORE
INCOME TAXES (6,136) 4,380 (8,298) 17,942
INCOME TAX(BENEFIT)
PROVISION (1,523) 1,662 (1,896) 6,628
------- ------- ------- -------
NET (LOSS) INCOME ($4,613) $2,718 ($6,402) $11,314
------- ------- ------- -------
NET (LOSS) INCOME PER
SHARE ($0.16) $0.09 ($0.22) $0.37
------- ------- ------ ------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 29,734 30,638 29,724 30,764
------- ------- ------- -------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income ($6,402) $11,314
Adjustments to reconcile net (loss)
income to net cash provided by (used for)
operating activities:
Depreciation and amortization 9,858 7,540
Provision for bad debts 9,068 8,130
Deferred income taxes 2,610 (143)
Changes in operating assets and
liabilities:
Accounts receivable 47,722 (47,398)
Inventories 16,520 (54,612)
Prepaid expenses and other assets 116 5,168
Income taxes receivable (5,570)
Accounts payable 8,375 52,520
Accrued liabilities 10,233 15,275
Income taxes payable (4,422) (4,497)
------- -------
Net cash provided by (used for)
operating activities 88,108 (6,703)
------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment (28,220) (14,561)
Acquisition of ComputerLand Business (82,686)
Other investing activities (326)
------- -------
Net cash used for investing
activities (28,546) (97,247)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under revolving line of
credit 467,721 912,830
Repayments under revolving line of
credit (538,406) (945,930)
Borrowings(repayments) of local
borrowings 5,575 (6,298)
Borrowings in connection with
acquisition 65,000
Proceeds from sale of accounts
receivable 75,000
Proceeds from issuance of common
stock 306 369
------- -------
Net cash (used for) provided by
financing activities (64,804) 100,971
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,030 3,177
------- -------
NET (DECREASE) INCREASE IN CASH &
CASH EQUIVALENTS (3,212) 198
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 3,533 14
------- -------
CASH & CASH EQUIVALENTS, END OF PERIOD $321 $212
------- -------
See accompanying notes to consolidated financial statements.
</TABLE>
<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. The Company, through its wholly-owned subsidiary,
Merisel FAB, Inc. ("Merisel FAB"), is a leading aggregator, or
master reseller, of computer systems and related products from
major microcomputer manufacturers to ComputerLand franchisees and
Datago resellers. The consolidated financial statements include
the accounts of Merisel and its consolidated subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. Operating results for the three and
six months ended June 30, 1995 may not be indicative of the
results of operations expected for the fiscal year ended December
31, 1995.
The information for the three and six months ended June 30, 1995
and 1994 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
reclassifications have been made to the 1994 amounts to conform
with 1995 presentations.
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, 1994.
2. Fiscal Year
The Company's fiscal year is the 52 or 53 week period ending on
the Saturday nearest to December 31. The Company's three and six
month periods ended June 30, 1995 and 1994 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.
3. Restructuring Charge
In the second quarter of 1995, the Company's restructuring plan
resulted in a charge of $4,271,000. This amount consists of
$1,578,000 of severance charges for the involuntary termination
of approximately 150 employees, $2,196,000 for warehouse closures
in North America and $497,000 for consolidation of certain other
warehouses in Europe. In the six months ended June 30, 1995 the
Company recorded total restructuring charges of $9,333,000. This
amount consists of $4,578,000 of severance charges for the
involuntary termination of approximately 240 employees,
$2,830,000 for warehouse closures in North America and $1,925,000
for the consolidation of certain other warehouses in Europe. As
of June 30, 1995, $7,031,000 of this amount remained in accrued
liabilities.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
4. 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 $2.1 million of direct acquisition costs. In
addition, the Company has agreed to make an additional payment in
1996 of up to $30 million (the "Earn Out"), 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 an independent valuation prepared for the Company, $82
million of the purchase price has been allocated to intangible
assets with an estimated aggregate life of 25 years.
Merisel FAB has also entered into a Distribution and Services
Agreement (the "Services Agreement") with Vanstar whereby Vanstar
will provide products and distribution and other support services
to Merisel FAB until January 31, 1996. Under the Services
Agreement, Merisel has been granted $20 million in extended
credit terms on its product purchases from Vanstar (the "Vanstar
Payable"). The Vanstar Payable accrues interest at prime less
2%, per annum (7.0% at June 30, 1995), payable monthly, with the
principal balance due on February 1, 1996.
On July 12, 1995 Merisel entered into a non-binding letter of
intent with Vanstar to extend the Services Agreement until
January 31, 1997. Upon negotiation and execution of definitive
documentation amending the Services Agreement, Merisel and
Vanstar have agreed that the Earn Out will be approximately $13.9
million and will be paid according to a payment schedule with the
final payment being due on February 1, 1997. If such definitive
documentation is not executed by the Company and Vanstar, then
the Earn Out and the Services Agreement will remain as originally
agreed.
Following is summarized pro forma operating results assuming that
the Company had acquired the F&D Division on January 1, 1994.
Six Months Ended
June 30, 1994
----------------
(in thousands)
Net sales $2,466,852
Income before taxes 18,436
Net income 11,610
Net income per share $0.38
Weighted average share outstanding 30,764
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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. Such historical statement presents
the revenues, direct expenses and general and administrative
expenses allocated from Vanstar. The pro forma information for
1994 includes actual operating results for the period from
February 1, 1994 to June 30, 1994 already incorporated in the
Company's Consolidated Results of Operations. 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.
5. Sale of Accounts Receivable
The Company's wholly-owned subsidiary Merisel Americas, Inc.
("Merisel Americas") on an ongoing basis, sells its trade
receivables to its wholly-owned subsidiary, Merisel Capital
Funding, Inc. ("Merisel Capital Funding"). Pursuant to a trade
receivables purchase and sale agreement with a securitization
company, as amended and restated in November, 1994, Merisel
Capital Funding, in turn, sells to a syndicate of purchasers on
an ongoing basis up to $150 million of an undivided interest in
such trade receivables. The receivables are sold at face value
and fees paid in connection with such sales are recorded as other
expense. This facility expires in October 1995. At June 30,
1995, $150 million of net accounts receivable were sold to the
securitization company. Fees incurred in connection with the
sale of accounts receivable for the three months and six months
ended June 30, 1995 were $2,525,000 and $5,095,000, respectively,
compared to $1,858,000 and $2,696,000 incurred for the three and
six months ended June 30, 1994, respectively.
6. Debt
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. At June 30, 1995, $40
million was outstanding under this facility. 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, 1995 was $43.4 million.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The Company and its subsidiaries also have outstanding $125
million of 12 1/2% senior notes due December 31, 2004, $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.
7. 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.
8. Supplemental Disclosure of Cash Flow Information
Cash paid for interest and income taxes for the six month periods
ended June 30, 1995 and 1994 was as follows:
1995 1994
(in thousands)
Interest $22,615 $13,325
Income Taxes $2,714 $7,486
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 Vanstar
Corporation's (formerly ComputerLand Corporation) United States
Franchise and Distribution Division (the "ComputerLand Franchise
and Aggregation Business"). The ComputerLand Franchise and
Aggregation 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.
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 months ended June 30, 1995 and 1994:
PERCENTAGE OF NET SALES
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.8 93.2 93.7 93.1
------- ------- ------- -------
Gross profit 6.2 6.8 6.3 6.9
Selling, gen'l. and
admin. expenses 5.4 5.6 5.4 5.4
Restructuring charges 0.3 0.3
------- ------- ------- -------
Operating income 0.5 1.2 0.6 1.5
Interest expense 0.7 0.5 0.7 0.5
Other expense 0.2 0.3 0.2 0.2
------- ------- ------- -------
(Loss)income before
income taxes (0.4) 0.4 (0.3) 0.8
Income tax (benefit)
provision (0.1) 0.2 (0.1) 0.3
------- ------- ------- -------
Net (loss) income (0.3)% 0.2% (0.2)% 0.5%
------- ------- ------- -------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995 as Compared to the Three Months
Ended June 30, 1994
Net sales increased 14.0% from $1,210.5 million in 1994 to
$1,379.9 million in 1995. The increase in net sales was due to
sales growth in existing distribution operations in the United
States, Canada and Europe resulting from the growth of the
overall market for hardware products and an increase in the
number of products certain vendors are selling through
distribution. The Company also increased its market share of
certain vendor products in various geographic markets. The
growth in hardware sales was partially offset by a decrease in
software sales in the United States distribution business. This
decrease was primarily attributable to the reduction in unit
prices on software products. Net sales for the ComputerLand
Franchise and Aggregation Business were $286.6 million or 23.7%
of consolidated net sales for the quarter ended June 30, 1994
compared to $294.8 million or 21.4% in 1995.
Geographically, the Company's net sales for the quarter ended
June 30, 1995, were as follows: United States, $923.7 million,
or 67%; Canada, $128.6 million, or 9.3%; Europe, $247.8 million
or 18%; and other international markets, $79.8 million, or 5.7%.
From 1994 to 1995, these geographic regions experienced sales
growth rates of 9.5% (12.8% without the ComputerLand Franchise
and Aggregation Business), 10.2%, 44.5%, and 1.9%, respectively.
The Company's higher sales growth rate in Europe was partially
the result of the strengthening of the European currencies
against the dollar in 1995 compared to 1994. In periods when the
U.S. dollar is weakening, the effect of the translation of the
financial statements of the consolidated foreign subsidiaries
into U.S. dollars is that of higher sales, costs and net income.
The effect of a weaker U.S. dollar when compared to European
currencies represented 16.5% of the sales growth rate in European
sales. The fluctuation of the U.S. dollar when compared to other
world currencies did not have a material impact upon sales.
In the United States, including Merisel FAB, hardware and
accessories accounted for 78% of net sales, and software
accounted for 22% of net sales in 1994, as compared to 81% and
19%, respectively, in 1995. The increase in hardware sales was
primarily due to general industry growth. The decrease in
software sales resulted from the reduction in unit prices on
software products.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Gross profit increased 4.5% from $81.8 million in 1994 to $85.5
million in 1995. Gross profit as a percentage of sales, or gross
margin, decreased from 6.8% in 1994 to 6.2% in 1995. In 1994,
gross margin as a percentage of sales for the ComputerLand
Franchise and Aggregation Business and the Company's core
distribution business was 4.7% and 7.4%, respectively, compared
to 4.3% and 6.7%, respectively, in 1995. The Company's core
distribution business continued to experience competitive
pressures on pricing worldwide. The decrease in the ComputerLand
Franchise and Aggregation Business gross margin was the result of
intense price competition and the effect of a revised pricing
structure offered to new and existing franchisees to deal with
this competition. The Company anticipates that it will continue
to experience downward pressure on gross margin due to industry
price competition.
Selling, general and administrative expenses ("SG&A") increased
10.6% from $67.4 million in 1994 to $74.6 million in 1995. SG&A
as a percentage of net sales decreased from 5.6% in 1994 to 5.4%
in 1995. SG&A as a percentage of sales for the ComputerLand
Franchise and Aggregation Business and the Company's core
distribution business was 3.3% and 6.3%, respectively in 1994,
compared to 3.5% and 5.9%, respectively, in 1995. The absolute
dollar increase in SG&A is primarily due to the costs associated
with the Company's 14.0% increase in net sales. The increase in
SG&A as a percentage of sales for the ComputerLand Franchise and
Aggregation Business was the result of a 17% increase in
headcount resulting in higher salary and salary related expenses.
In the first quarter of 1995, the Company announced its intent to
adopt a restructuring plan to assess its current cost structure
in response to pricing and gross margin pressures and anticipated
recording a total restructuring charge of approximately $10
million. For the three months ending June 30, 1995, the Company
adopted elements of this plan resulting in a restructuring charge
of $4.3 million. The restructuring charge as a percentage of net
sales was 0.3%. The restructuring charge represents costs
incurred associated with reductions in personnel and the closure
and consolidation of warehouses. See Note 3 of Notes to
Consolidated Financial Statements.
Operating income decreased 54.1% from $14.3 million in 1994 to
$6.6 million in 1995. Operating income as a percentage of net
sales was 1.2% in 1994 and 0.5% in 1995. In 1994, operating
income as a percentage of sales for the ComputerLand Franchise
and Aggregation Business and the Company's core distribution
business was 1.3% and 1.1%, respectively, compared to 0.5% and
0.4%, respectively, in 1995. The decrease in operating income
was the result of lower gross margins in both the ComputerLand
Franchise and Aggregation Business and the core distribution
business, an increase in operating expense as a percentage of
sales in the ComputerLand Franchise and Aggregation Business and
the restructuring charges.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest expense increased 46.0% from $6.4 million in 1994 to
$9.3 million in 1995, and increased from 0.5% to 0.7% as a
percentage of net sales in 1994 compared to 1995. The increase
in interest expense was attributable to both the Company's higher
average borrowings and an increase in interest rates in 1995.
The Company's average month-end bank borrowings increased 16%
from $322 million in 1994 to $372 million in 1995. The increase
in average borrowings in 1995 reflected the need to finance
higher levels of working capital to support increased sales and
property and equipment expenditures. In addition, the Company
experienced an increase in interest rates, primarily resulting
from the issuance of $125 million principal amount of 12 1/2%
senior notes in October 1994, the proceeds of which were used to
repay indebtedness under outstanding credit lines having an
average interest rate of approximately 6.25% at June 30, 1994.
Other expenses decreased from $3.6 million in 1994 to $3.4
million in 1995. The change resulted primarily from $0.7 million
of increased fees incurred in connection with trade receivables
securitizations in 1995, offset by a decrease of $0.4 million in
foreign currency transaction losses in 1995 and a $0.5 million
write-off of offering costs incurred in connection with the
Company withdrawing its common stock offering in May 1994.
Higher amounts of net receivables sold and securitization yield
contributed to the increased securitization fees of $1.9 million
in 1994 compared to $2.6 million in 1995. The weighted average
amount of accounts receivable sold to the securitization company
increased from $140 million in 1994 to $150 million in 1995 while
the securitization yield increased from 5.4% to 6.8% at June 30,
1994 and June 30, 1995, respectively.
The Company's effective tax rate was a benefit of 24.8% for the
period ended June 30, 1995. This rate was effected by certain
foreign subsidiaries deriving no tax benefit for losses under
local tax laws. The losses reported by the Company's domestic
subsidiaries were partially the result of the $4.3 million
restructuring charge recognized in 1995. The Company's effective
tax rate for the period ended June 30, 1994 was 37.9%.
Net income decreased from $2.7 million in 1994 to a loss of $4.6
million in 1995. Net income per share decreased from $0.09 in
1994 to a loss of $0.16 in 1995.
Six Months Ended June 30, 1995 as Compared to the Six Months
Ended June 30, 1994
Net sales increased 19.9% from $2,365.1 million in 1994 to
$2,834.8 million in 1995. The increase in net sales was due to
sales growth in existing distribution operations in all
geographic regions resulting from the growth of the overall
market for hardware and software products and an increase in the
number of products certain vendors are selling through
distribution. The Company also increased its market share of
certain vendor products in various geographic markets and
experienced the impact of an additional month of revenue from the
ComputerLand Franchise and Aggregation Business. Net sales for
Merisel FAB were $578.2 million or 20.4% of consolidated net
sales for the six months ended June 30, 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Geographically, the Company's net sales for the six months ended
June 30, 1995 were generated as follows: United Sates, $1,861.2
million, or 65.7%; Canada, $296.6 million, or 10.4%; Europe,
$520.8 million, or 18.4%; and other international markets, $156.2
million, or 5.5%. From 1994 to 1995, these geographic regions
experienced sales growth rates as follows: United States, 16.6%
(14.2% excluding Merisel FAB), Canada, 14.3%, Europe, 42.1% and
other international markets, 8.8%. The Company's higher sales
growth rate in Europe was partially the result of the
strengthening of the European currencies against the dollar in
1995 compared to 1994. In periods when the U.S. dollar is
weakening, the effect of the translation of the financial
statements of the consolidated foreign subsidiaries into U. S.
dollars is that of higher sales, costs and net income. The effect
of a weaker U.S. dollar when compared to European currencies
represented 16.7% of the sales growth rate in European sales.
The fluctuation of the U.S. dollar when compared to other world
currencies did not have a material impact upon sales.
In the United States, including Merisel FAB, hardware and
accessories accounted for 79% of net sales, and software
accounted for 21% of net sales in 1995, as compared to 74% and
26% respectively, in 1994. The increase in hardware sales was
due to general industry growth and the impact of an additional
month of revenue from the ComputerLand Franchise and Aggregation
Business, which is predominantly hardware related.
Gross profit increased 8.9% from $164.1 million in 1994 to $178.7
million in 1995. Gross profit as a percentage of sales or gross
margin, decreased from 6.9% in 1994 to 6.3% in 1995. In 1994,
the gross margin as a percentage of sales for the ComputerLand
Franchise and Aggregation business and the Company's core
distribution business was 4.9% and 7.5%, respectively, compared
to 4.2% and 6.9%, respectively in 1995. The decrease in gross
margin was due to the same factors summarized in the discussion
of gross profit for the Three Months Ended June 30, 1995 and 1994
and the impact of an additional month of revenue from the
ComputerLand Franchise and Aggregation Business, which operates
at lower gross margins that those of the Company's core
distribution business.
SG&A increased 17.4% from $128.7 million in 1994 to $151.1
million in 1995. SG&A remained constant at 5.4% in both 1994 and
1995. The absolute dollar increase in SG&A was primarily due to
costs associated with the Company's 19.9% increase in net sales.
In 1994, SG&A as a percentage of sales for the ComputerLand
Franchise and Aggregation Business and the Company's core
distribution was 3.5% and 5.9%, respectively, compared to 3.6%
and 5.8%, respectively, in 1995. The absolute dollar increase in
SG&A was primarily due to the costs associated with the Company's
19.9% increase in sales and the impact of an additional month of
SG&A from the ComputerLand Franchise and Aggregation Business.
In the first quarter of 1995, the Company announced its intent to
adopt a restructuring plan to assess its current cost structure
in response to pricing and gross margin pressures and the
anticipated recording of a total restructuring charge of
approximately $10 million. As of June 30, 1995, this plan
resulted in a restructuring charge of $9.3 million. The
restructuring charge as a percentage of net sales was 0.3%. The
restructuring charge represents costs incurred associated with
reductions in personnel and the closure and consolidation of
warehouses. See Note 3 to Notes to Consolidated Financial
Statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating income decreased 48.5% from $35.4 million in 1994 to
$18.3 million in 1995. Operating income as a percentage of net
sales was 1.5% in 1994 and 0.6% in 1995. In 1994, operating
income as a percentage of sales for the ComputerLand Franchise
and Aggregation Business and the Company's core distribution
business was 1.4% and 1.5%, respectively, compared to 0.6% and
0.7%, respectively, in 1995. The decrease in operating income as
a percentage of net sales reflected competitive pressure on
pricing worldwide and the restructuring charges.
Interest expense increased 57.1% from $12.6 million in 1994 to
$19.7 million in 1995 and increased from 0.5% to 0.7% as a
percentage of net sales in 1994 compared to 1995. The increase
in interest expense and 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, 1995 and 1994.
Other expenses increased 38.8% from $4.9 million in 1994 to $6.8
million in 1995, primarily due to an increase in fees of $2.4
million incurred in connection with accounts receivable
securitizations in 1995, offset by a write-off of offering costs
of $0.5 million incurred in connection with the Company
withdrawing its common stock offering in May 1994.
The Company's effective tax rate was a benefit of 22.8%. This
rate was effected by certain foreign subsidiaries deriving no tax
benefit for losses under local tax laws and income from certain
foreign subsidiaries having a higher effective tax rate than
those experienced at the Company's domestic subsidiaries that
experienced losses. The losses reported by the Company's
domestic subsidiaries were primarily the result of the $9.3
million restructuring charge recognized in 1995. The Company's
effective tax rate for the period ended June 30, 1994 was 36.9%.
Net income decreased from $11.3 million in 1994 to a loss of $6.4
million in 1995. Net income per share decreased from $0.37 in
1994 to a loss of $0.22 in 1995.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The commercial release of Microsoft Corporation's Windows'95
operating system on August 24, 1995 is expected to have a
significant impact on the microcomputer industry. If the
Windows'95 introduction is not as successful in the end-user
market as Merisel's reseller customers anticipate, Merisel may
suffer significant negative effects both as a result of higher
than normal return levels and as a result of the reduction in
anticipated demand for compatible hardware and software products.
Additionally, the Company's net sales in the fourth quarter have
been historically higher than in its other three quarters.
Management believes that the pattern of higher fourth quarter
sales is partially explained by customer buying patterns relating
to calendar year-end business purchases and holiday purchases.
OPERATING SYSTEMS
In addition to continuing the design and implementation of a new
computer operating system, the Company has completed
modifications to its existing computer system designed to process
the increased sales volumes anticipated for the fourth quarter of
1995. 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 1995, which in
turn could have a negative effect on the Company's business and
financial results.
In the third quarter of 1995, the Company began the installation
of a new computer operating system in its Canadian subsidiary.
If this system does not perform as anticipated, the Canadian
subsidiary may not be able to accommodate the sales volume and
transaction requirements anticipated for the fourth quarter of
1995. The conversion to new operating systems and the
installation of new warehouse management systems will continue
into 1996. 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. 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 1996, which in turn could have a negative
effect on the Company's business and financial results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth and cash needs
primarily through borrowings, income from operations, the public
and private sales of its securities and securitizations of its
trade receivables.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net cash provided by operating activities during the six months
ended June 30, 1995 was $88.1 million. Sources of cash from
operating activities consisted of adjustments for non-cash items
of $21.5 million, and decrease in accounts receivable, inventory,
accounts payable and accrued liabilities of $47.7 million, $16.5
million, $8.4 million and $10.2 million, respectively. The
primary uses of cash during the period were a net loss of $6.4
million, a $5.6 million increase in income taxes receivable and a
$4.4 million decrease in income taxes payable. The decrease in
accounts receivable was primarily due to improved collections, as
days sales outstanding from the Company's core distribution
business pre asset securitization decreased from 50 days to 44
days for the quarter ended June 30, 1994 and 1995, respectively.
The decrease in inventory was the result of improved inventory
management, as inventory turns increased from 9.1 times to 10.3
times for the quarter ended June 30, 1994 and 1995, respectively.
Net cash used for investing activities in 1995 was $28.5 million,
reflecting property and equipment expenditures. The expenditures
for property and equipment were primarily for the upgrading of
the Company's computer systems, expenditures for a new warehouse
management system, the upgrading of existing facilities and
leasehold improvements.
Net cash used for financing activities was $64.8 million,
comprised of net repayments under domestic revolving lines of
credit of $70.7 million, partially offset by net borrowings under
various local bank facilities of 5.6 million.
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. At August 4,
1995, $98.8 million was outstanding under this facility. 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, 1995 was $43.4 million.
The Company's wholly-owned subsidiary Merisel Americas, Inc.
("Merisel Americas") on an ongoing basis, sells its trade
receivables to its wholly-owned subsidiary, Merisel Capital
Funding, Inc. ("Merisel Capital Funding"). Pursuant to a trade
receivables purchase and sale agreement with a securitization
company, as amended and restated in November, 1994, Merisel
Capital Funding, in turn, sells to a syndicate of purchasers on
an ongoing basis up to $150 million of an undivided interest in
such trade receivables. The receivables are sold at face value
and fees paid in connection with such sales are recorded as other
expense. This facility expires in October 1995.
The Company and its subsidiaries also have outstanding $125
million of 12 1/2% Senior Notes due December 31, 2004, $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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In connection with the ComputerLand Acquisition, Merisel FAB and
Vanstar entered into the Services Agreement pursuant to which
Vanstar will provide significant distribution and other support
services until January 31, 1996 to the ComputerLand Franchise and
Aggregation Business for a contractually agreed upon fee. Under
the Services Agreement, the ComputerLand Franchise and
Aggregation Business has been granted $20 million in extended
credit terms on its product purchases from Vanstar. The Vanstar
payable currently accrues interest at the prime rate, less 2% per
annum (7% at June 30, 1995), with the principal balance due on
February 1, 1996. In addition, the Company has agreed to make an
additional payment in 1996 of up to $30 million (the "Earn Out"),
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.
On July 12, 1995 Merisel entered into a non-binding letter of
intent with Vanstar to extend the Services Agreement until
January 31, 1997. Upon negotiation and execution of definitive
documentation amending the Services Agreement, Merisel and
Vanstar have agreed that the Earn Out will be approximately $13.9
million and will be paid according to a payment schedule with the
final payment being due on February 1, 1997. If such definitive
documentation is not executed by the Company and Vanstar, then
the Earn Out and the Services Agreement will remain as originally
agreed.
Merisel continues to monitor its working capital requirements.
Assuming the Company can obtain a renewal or replacement of its
accounts receivable securitization facility at an increased
level, the Company believes that its existing cash balances, its
ability to borrow under existing lines of credit and obtain
additional financing will be sufficient to meet its working
capital and capital investment needs through the next twelve
months. However, no assurances can be given that the required
renewal or replacement of the accounts receivable securitization
facility or such other financings can be obtained.
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.
<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. The
Company also offers financing for its sales to certain of its
customers through various floor plan financing companies. 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1994, Merisel, Inc. 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 November 8, 1993 and June 7, 1994
(the "Class Period"). The complaint, as amended and
consolidated, alleges 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 Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. Following the granting of
defendant's first motion to dismiss on December 5, 1994,
plaintiffs filed a second consolidated and amended complaint on
December 22, 1994. On April 3, 1995, Federal District Judge Real
dismissed the complaint with prejudice. Plaintiffs filed a
Notice of Appeal on April 26, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
At the 1995 Annual Meeting of Stockholders held on May 16, 1995,
the stockholders approved a proposal to elect three Class I
directors to the Board of Directors for terms expiring in 1998 to
replace those directors whose terms expire in 1995. 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:
Against Abstentions
Nominee For or Withheld Broker Non-Votes
Joseph Abrams 27,141,604 217,000 N/A
Dr. Arnold Miller 27,134,655 223,949 N/A
Michael D. Pickett 26,812,379 546,225 N/A
In addition, the stockholders approved a proposal to (a)
reapprove the Company's 1991 Employee Stock Option Plan, as
amended (the "Plan"), and (b) approve amendments to the Plan to
increase the number of shares of Common Stock reserved for
issuance thereunder from 500,000 shares to 2,000,000 shares and
to establish a per employee maximum grant of option shares under
the Plan. The proposition was duly approved. The following sets
forth the number of votes cast for, against or withheld, as well
as the number of abstentions and broker non-votes for the
proposition:
Against
or Broker
For Withheld Abstentions Non-Votes
12,296,784 5,011,559 402,944 9,647,317
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- None
(b) Reports on Form 8-K
- There were nor reports on Form 8-K filed by
by the Company during this quarter ended June 30, 1995
<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 11, 1995
Merisel, Inc.
By: /s/James L. Brill
---------------------
James L. Brill
Senior Vice President, Finance,
(Duly Authorized Officer and
Chief Financial Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements for Merisel, Inc. for the quarterly period ended June 30,
1995.
</LEGEND>
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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