<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996.
--------------
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 of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
--------------
_______________________________________________________________________________
Former name, former address, and former fiscal year, if changed since last year
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 9 , 1996
----- ----------------------------
Common Stock, $.01 par value 30,013,495 Shares
<PAGE>
MERISEL, INC.
-------------
INDEX
-----
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of 1-2
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1996
and 1995 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5-9
Management's Discussion and Analysis of 10-20
Financial Condition and Results of Operations
PART II OTHER INFORMATION 21
SIGNATURES 22
</TABLE>
ii
<PAGE>
PART 1. FINANCIAL INFORMATION
------------------------------
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $35,959 $1,378
Accounts receivable (net of allowances
of $24,180 and $24,786 for 1996 and 1995,
respectively) 363,151 413,057
Inventories 399,474 561,230
Prepaid expenses and other current assets 14,118 17,919
Income taxes receivable 13,043 35,116
Deferred income tax benefit 6,657
---------- ----------
Total current assets 825,745 1,035,357
PROPERTY AND EQUIPMENT, NET 85,465 90,381
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 91,009 93,287
OTHER ASSETS 12,067 11,309
---------- ----------
TOTAL ASSETS $1,014,286 $1,230,334
========== ==========
</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,
1996 1995
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $424,922 $621,990
Accrued liabilities 70,786 71,483
Short-term debt 231,524 21,620
Long-term debt - current 4,296 35,000
Subordinated debt - current 4,400 4,400
Deferred income taxes 396
---------- ----------
Total current liabilities 736,324 754,493
Long-term debt 134,373 299,271
Subordinated debt 13,200 17,600
Capitalized lease obligations 4,765 4,504
---------- ----------
TOTAL LIABILITIES 888,662 1,075,868
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, 30,013,500 and
29,863,500 shares for 1996 and 1995, respectively 300 299
Additional paid-in capital 142,154 141,938
Retained earnings (5,701) 19,211
Cumulative translation adjustment (11,129) (6,982)
---------- ----------
Total stockholders' equity 125,624 154,466
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,014,286 $1,230,334
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $1,442,668 $1,379,864 $2,979,257 $2,834,758
COST OF SALES 1,363,081 1,294,389 2,812,447 2,656,060
---------- ---------- ---------- ----------
GROSS PROFIT 79,587 85,475 166,810 178,698
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 78,422 74,628 161,558 151,109
RESTRUCTURING CHARGE 0 4,271 0 9,333
---------- ---------- ---------- ----------
OPERATING INCOME 1,165 6,576 5,252 18,256
INTEREST EXPENSE 9,595 9,274 19,472 19,733
OTHER EXPENSE 3,528 3,438 10,766 6,821
---------- ---------- ---------- ----------
LOSS BEFORE
INCOME TAXES (11,958) (6,136) (24,986) (8,298)
INCOME TAX BENEFIT 554 1,523 74 1,896
---------- ---------- ---------- ----------
NET LOSS $(11,404) $(4,613) $(24,912) $(6,402)
========== ========== ========== ==========
NET LOSS PER SHARE $(0.38) $(0.16) $(0.83) $(0.22)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 29,878 29,734 29,871 29,724
========== ========== ========== ==========
</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,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,912) $(6,402)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 11,171 9,858
Provision for doubtful accounts 8,006 9,068
Deferred income taxes 396 2,610
Changes in assets and liabilities:
Accounts receivable 66,641 47,722
Inventories 161,757 16,520
Prepaid expenses and other assets (6,968) 116
Income taxes receivable 28,804 (5,570)
Accounts payable (183,659) 8,375
Accrued liabilities (510) 10,233
Income taxes payable (4,422)
-------- --------
Net cash provided by operating activities 60,726 88,108
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,817) (28,220)
Payment of earn out obligation from ComputerLand (13,409)
acquisition
Cash proceeds from sale of Australian business 8,515
Other investing activities 1,721 (326)
-------- --------
Net cash used for investing activities (7,990) (28,546)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 785,850 467,721
Repayments under revolving line of credit (750,850) (538,406)
Net (repayments) borrowings under foreign bank facilities (21,487) 5,575
Proceeds from issuance of promissory notes 8,790
Repayment of senior notes (8,000)
Proceeds from sale of accounts receivable (24,540)
Repayment under subordinated debt agreement (4,400) 306
Proceeds from issuance of common stock 217
-------- --------
Net cash used in financing activities (14,420) (64,804)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,735) 2,030
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 34,581 (3,212)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 1,378 3,533
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $35,959 $321
======== ========
</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 leader in the
distribution of computer hardware and software products. In addition, the
Company, through its wholly owned subsidiary, Merisel FAB, Inc. ("Merisel FAB"),
is an 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. Results of operations for
the three and six month periods ended June 30, 1996 may not be indicative of the
results of operations expected for the fiscal year ended December 31, 1996.
The information for the three and six months ended June 30, 1996 and 1995 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, 1995.
2. New Accounting Standard
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosure of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
3. Fiscal Periods
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 nearest
June 30, 1996 and 1995 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.
5
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
4. Restructuring Charge
During the first and second quarters of 1995, the Company recorded charges of
$5,061,000 and $4,272,000, respectively, associated with resizing and
restructuring several of the Company's operations. The aggregate charge of
$9,333,000 consisted of $4,578,000 of severance charges for the involuntary
termination of approximately 240 employees, $2,830,000 for anticipated warehouse
closures in North America and $1,925,000 for the anticipated consolidation of
certain warehouses in Europe. As of June 30, 1996, $4,367,000 of this amount
remained in accrued liabilities.
5. Acquisitions
On January 31, 1994, the Company, through its wholly owned subsidiary, Merisel
FAB, acquired certain assets of the ComputerLand franchise and Datago
aggregation businesses of Vanstar Corporation (formerly ComputerLand
Corporation) (the "ComputerLand Acquisition"). The Company paid $80,200,000 in
cash at closing for the acquired assets and $2,100,000 of direct acquisition
costs. In addition, on February 2, 1996 the Company paid Vanstar $13,409,000,
which consisted of a negotiated settlement of the Company's earn out obligation
under the original purchase agreement related to the ComputerLand Acquisition of
$14,594,000, net of rebates of $1,185,000. 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,
$82,300,000 of the purchase price and $14,000,000 of the additional payment were
allocated to intangible assets with an estimated aggregate life of 25 years. A
total of $35,400,000 was allocated to Datago and $60,900,000 to ComputerLand.
The ComputerLand portion of these intangible assets was subsequently written
down by $30,000,000 in recognition of an impairment loss in the fourth quarter
of 1995.
In connection with the ComputerLand Acquisition, Merisel FAB entered into a
Distribution and Services Agreement (the "Services Agreement") with Vanstar
whereby Vanstar provides significant distribution and other support services to
the Franchise and Aggregation Business for a contractually agreed upon fee.
Effective July 12, 1995, this agreement was extended until April 30, 1997. Under
the terms of the Services Agreement extension, Merisel and Vanstar agreed that
(i) the extended credit terms under the Services Agreement would be increased to
$31,400,000; and, (ii) the terms of the distribution fee would be adjusted. The
amount of the extended credit will be reduced by a scheduled amount of $844,000
monthly through October 31, 1996. A final balance of $23,500,000 will be payable
in four scheduled payments between May 15, 1997 and July 31, 1997. If an
inventory reduction plan is agreed upon between the two parties, then the
$23,500,000 may decrease on an accelerated basis.
6. Sale of Accounts Receivable
The Company's wholly owned subsidiary Merisel Americas, Inc. ("Merisel
Americas") on an ongoing basis, sells trade receivables to its wholly owned
subsidiary, Merisel Capital Funding, Inc. ("Merisel Capital Funding"). Pursuant
to an agreement with a securitization company (the
6
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
"Receivables Purchase and Servicing Agreement"), Merisel Capital Funding, in
turn, sells such receivables to this company on an ongoing basis, which yields
proceeds of up to $300,000,000 at any point in time. Merisel Capital Funding's
sole business is the purchase of trade receivables from Merisel Americas.
Merisel Capital Funding is a separate corporate entity with its own separate
creditors, which upon its liquidation will be entitled to be satisfied out of
Merisel Capital Funding's assets prior to any value in Merisel Capital Funding
becoming available to Merisel Capital Funding's equity holders. This facility
expires in October 2000.
Effective October 16, 1995, Merisel U.K. Ltd. ("Merisel U.K.") entered into a
receivables purchase agreement with a securitization company to provide funding
for Merisel's U.K. subsidiary. In accordance with this agreement, Merisel U.K.
sells receivables to the securitization company on an ongoing basis, which
yields proceeds of up to 25,000,000 pounds sterling. The facility has no fixed
expiration date but will expire no earlier than 18 months from the effective
date following three to six months' prior written notice from the securitization
company. Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada")
entered into a receivables purchase agreement with a securitization company to
provide funding for Merisel's Canadian subsidiary. In accordance with this
agreement, Merisel Canada sells receivables to the securitization company, which
yields proceeds of up to $150,000,000 Canadian dollars. The facility expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of June 30,
1996 the total amount outstanding under these facilities was $250,782,000. Fees
incurred in connection with the sale of accounts receivable for the three months
and six months ended June 30, 1996 were $3,931,000 and $8,526,000, respectively,
compared to $2,525,000 and $5,095,000 incurred for the three and six months
ended June 30, 1995 and are recorded as other expense.
7. Debt
At June 30, 1996, the Company's subsidiaries, Merisel Americas and Merisel
Europe, Inc. ("Merisel Europe") had unsecured senior borrowing commitments,
which, as amended, consisted of $92,000,000 of 9.58% senior notes (the "Senior
Notes") by Merisel Americas, and a $138,000,000 revolving credit agreement (the
"Revolving Credit Agreement") by Merisel Americas and Merisel Europe, all of
which was outstanding. The Senior Notes and the Revolving Credit Agreement are
due on May 31, 1997. Advances under the Revolving Credit Agreement bear interest
at specific rates based upon market reference rates plus a specified percentage.
The combined average interest rate for the Revolving Credit Agreement at June
30, 1996 was approximately 8%. The Revolving Credit Agreement and the Senior
Notes require that the Company pay a total of $10,000,000 on April 15, 1996, and
$5,000,000 on each of May 5, 1996, June 5, 1996, July 5, 1996, August 5, 1996
and September 5, 1996, and a total of $65,000,000 on January 15, 1997. As of
August 9, 1996 the Company was current with these required payments. The
payments will be shared ratably by the banks under the Revolving Credit
Agreement and the holders of the Senior Notes, although to the extent that the
Company has not
7
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
borrowed the full amount available under the Revolving Credit Agreement, the
banks' collective commitments under the Revolving Credit Agreement will be
reduced by the ratable amounts without any payment by the Company. The Company
is also required to pay a commitment fee on the unused available funds on the
Revolving Credit Agreement. The Revolving Credit Agreement and the Senior Notes
each contain various covenants, including those which prohibit the payment of
cash dividends, require a minimum amount of tangible net worth, and place
limitations on the acquisition of assets. The agreements also require the
Company or certain of its subsidiaries to maintain certain specified financial
ratios, including interest coverage, minimum adjusted tangible net worth, total
debt equivalents to adjusted tangible net worth, inventory turnover, minimum
accounts payable and minimum accounts payable to inventory.
At June 30, 1996, the Company had outstanding $125,000,000 principal amount of
senior notes (the "Notes") due December 31, 2004. The Notes provide for an
interest rate of 12.5% payable semiannually. The Notes are effectively
subordinated to all liabilities of the Company's subsidiaries, including trade
payables. The Indenture relating to the Notes contains certain covenants that,
among other things, limit the type and amount of additional indebtedness that
may be incurred by the Company or any of its subsidiaries and impose limitations
on investment, loans, advances, sales or transfers of assets, the making of
dividends and other payments, the creation of liens, sale-leaseback transactions
with affiliates and certain mergers. In addition, the restriction on dividend
payments contained in the Senior Notes and the Revolving Credit Agreement could
limit the ability of the Company to repay principal and interest on the Notes
if, and to the extent that, such limitations prevent cash or other dividends
from being paid to the holding Company. Further, in the event of a default under
the Senior Notes and the Revolving Credit Agreement, payments of principal and
interest on the Notes are prohibited.
At June 30, 1996 Merisel Americas had outstanding an aggregate of $17,600,000 of
privately placed subordinated notes (the "Subordinated Notes"). The Subordinated
Notes, as amended, provide for interest at the rate of 11.78% per annum and are
repayable in four remaining equal annual installments with the next installment
due January 1997. Commencing on September 10, 1996, accrued interest on the
Subordinated Notes will be required to be paid quarterly, rather than semi-
annually. The Subordinated Notes contain certain restrictive covenants,
including those that limit the Company's ability to incur debt, acquire the
stock of or merge with other corporations, or sell certain assets and prohibits
the payment of dividends. The Subordinated Notes also incorporate the financial
covenants contained in the Senior Notes and the Revolving Credit Agreement.
In connection with the preparation and reporting of the second quarter of 1996
results, the Company determined that a balance sheet convenant would need to be
amended, which amendment was obtained.
At June 30, 1996 the Company had promissory notes outstanding with an aggregate
balance of $15,061,000. The notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
commencing February 1, 1996, with balloon
8
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
payments due at maturity. The notes are collateralized by certain of the
Company's real property and equipment. In addition, the Company and its
subsidiaries have various unsecured lines of credit denominated in their local
currencies. The Company had borrowings outstanding under such lines of credit of
$132,000 and $43,446,000 at June 30, 1996 and 1995, respectively.
8. Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the related period,
including common stock options when dilutive.
9. Supplemental Disclosure of Cash Flow Information
Cash paid (received) for interest and income taxes for the six month periods
ended June 30, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
Interest $ 21,452 $22,615
Income taxes $(28,066) $ 2,714
</TABLE>
9
<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 a
worldwide leader in the distribution of computer 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. In
addition, through its wholly owned subsidiary, Merisel FAB, Inc. ("Merisel FAB"
or the "Franchise and Aggregation Business"), the Company is an 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 730 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 operations for the Company for the three and six months ended June
30, 1996 and 1995:
<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 94.5 93.8 94.4 93.7
------ ------ ------ ------
Gross profit 5.5 6.2 5.6 6.3
Selling, general and administrative
expenses 5.4 5.4 5.4 5.4
Restructuring charges 0.0 0.3 0.0 0.3
------ ------ ------ ------
Operating income 0.1 0.5 0.2 0.6
Interest expense 0.7 0.7 0.7 0.7
Other expense 0.3 0.2 0.3 0.2
------ ------ ------ ------
Loss before income taxes (0.9) (0.4) (0.8) (0.3)
Income tax benefit 0.1 0.1 0.1
------ ------ ------ ------
Net loss (0.8)% (0.3)% (0.8)% (0.2)%
====== ====== ====== ======
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
- -------------------------------------------------------------------------------
1995
- ----
Net sales increased 4.6% from $1,379,864,000 in 1995 to $1,442,668,000 in 1996.
Excluding the Company's Australian operations, which were sold effective January
1, 1996, the Company experienced a 6.9% increase in net sales. 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. Net sales for the Franchise and Aggregation
Business were $273,118,000 or 19% of consolidated net sales for the quarter
ended June 30, 1996 compared to $294,758,000 or 21.4% for the same period in
1995.
Geographically, the Company's net sales for the quarter ended June 30, 1996,
were as follows: United States, $969,210,000, or 67.2%; Canada, $132,862,000 or
9.2%; Europe, $264,283,000 or 18.3%; and other international markets,
$76,313,000 or 5.3%. From 1995 to 1996, these geographic regions experienced
sales growth rates of 4.9% (10.7% without the Franchise and Aggregation
Business), 3.4%, 6.7% and (4.4)%, respectively. The negative growth rate in
other international markets is due to the sale of the Company's Australian
operations in the first quarter of 1996, with an effective date of January 1,
1996. Excluding the Australian business, the sales growth rate for other
international markets was 53.3%. The Company's lower sales growth rate in Europe
was partially the result of the weakening of the European currencies against the
dollar in 1996 compared to 1995. In periods when the U.S. dollar is
strengthening, the effect of the translation of the financial statements of the
consolidated foreign subsidiaries into U.S. dollars is that of lower sales,
costs and net income. After accounting for the effects of a stronger U.S. dollar
when compared to the European currencies, the sales growth rate in European
sales would have been 15.2%. 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 81% of net sales, and software accounted for 19% of net sales in the second
quarter of 1995, which remained constant in 1996.
Gross profit decreased 6.9% from $85,475,000 in 1995 to $79,587,000 in 1996.
Gross profit as a percentage of sales, or gross margin, decreased from 6.2% in
1995 to 5.5% in 1996. In 1995, the gross margin as a percentage of sales for the
Franchise and Aggregation Business and the Company's core distribution business
was 4.3% and 6.7%, respectively, compared to 4.1% and 5.9% respectively, in
1996. The Company's core distribution business continued to experience worldwide
competitive pricing pressures. The decrease in the Franchise and Aggregation
Business' gross margin is 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 intense price competition.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
In the fourth quarter of 1995, the Company recorded several large adjustments
which reduced operating income, including a significant charge which resulted
from adjustments to trade accounts payable balances. In the course of its
business, Merisel reconciles its accounts payable balances to statements
provided by its vendors. The accounts payable charge taken in the fourth quarter
was related to adjustments for price protection, returns to vendors by Merisel
and inventory receipt related issues, such as short-shipments, identified
through the reconciliation process. An additional charge to gross profit of
$2,200,000 was taken in the second quarter of 1996 related to these same issues.
In February 1996 Merisel began implementing processes and procedures to address
current system deficiencies and has engaged the assistance of outside
consultants to assist in this process. In addition, management has committed
additional resources to assist in collecting a part of the charge that may be
determined to be recoverable.
Selling, general and administrative expenses ("SG&A") increased 5.0% from
$74,628,000 in 1995 to $78,422,000 in 1996. SG&A as a percentage of net sales
remained level at 5.4% in 1996. In 1995, SG&A as a percentage of sales for the
Franchise and Aggregation Business and the Company's core distribution business
was 3.5% and 5.9%, respectively, compared to 3.2% and 5.9%, respectively, in
1996. The absolute dollar increase in SG&A is due in part to the costs
associated with the Company's 4.6% increase in net sales. In addition, in 1996
the Company incurred significant costs to prepare and implement the Company's
1996 business plan and to begin improving certain business processes, including
the supplier account reconciliation process.
In response to pricing and gross margin pressures, the Company adopted a
restructuring plan and recorded a total restructuring charge of $9,333,000 in
the first half of 1995. Of this total, $4,271,000 was recorded in the quarter
ended June 30, 1995, which represented 0.3% of net sales. The restructuring
charge represented anticipated costs to be incurred associated with reductions
in personnel and the closure and consolidation of warehouses. See Note 4 of
Notes to Consolidated Financial Statements.
Operating income decreased 82.3% from $6,576,000 in 1995 to $1,165,000 in 1996.
Operating income as a percentage of net sales was 0.48% in 1995 and 0.08% in
1996. In 1995, operating income (loss) as a percentage of sales for the
Franchise and Aggregation Business and the Company's core distribution business
was 0.74% and 0.41%, respectively, compared to 0.86% and (0.09)% respectively,
in 1996. The decrease in consolidated operating income is the result of lower
gross margins in both the Franchise and Aggregation Business and the core
distribution business and the additional accounts payable charge of $2,200,000
taken in the second quarter of 1996.
Interest expense increased 3.5% from $9,274,000 in 1995 to $9,595,000 in 1996,
and remained level at 0.7% of net sales. Interest expense remained level since
the Company is financing an increased part of its business through asset sales
pursuant to accounts receivable asset securitizations in various subsidiaries.
The Company's average month-end bank borrowings increased 4% from $372,000,000
in 1995 to $398,335,000 in 1996. The increase in average
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
borrowings in 1996 reflected primarily the need to finance higher levels of
working capital to support increased sales and the higher cash balance
maintained by the Company.
Other expenses increased from $3,438,000 in 1995 to $3,528,000 in 1996. The
increase was primarily attributable to fees incurred in connection with an
increase in the Company's trade receivable securitizations in 1996. The increase
in securitization fees is primarily attributable to an increase in the amount of
net receivables sold. The average month end proceeds from accounts receivable
sales under all of the Company's various facilities increased from $150,000,000
in 1995 to $268,895,000 in 1996.
The Company's tax benefit decreased from $1,523,000 in 1995 to $554,000 in 1996.
The decrease reflects the limitation on tax benefits due to Net Operating Losses
in excess of taxable income in the carryback periods. The Company's effective
tax rate for the period ended June 30, 1995 was a benefit of 24.8%.
Net loss increased from $4,613,000 in 1995 to $11,404,000 in 1996. Net loss per
share increased from $0.16 in 1995 to $0.38 in 1996.
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30, 1995
- --------------------------------------------------------------------------------
Net sales increased 5.1% from $2,834,758,000 in 1995 to $2,979,257,000 in 1996.
Excluding the Company's Australian operations, which were sold effective January
1, the Company experienced a 7% increase in net sales. 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. Net sales for the Franchise and Aggregation
Business were $531,056,000 or 18% of consolidated net sales for the six months
ended June 30, 1996 compared to $578,195,000 for the same period in 1995.
Geographically, the Company's net sales for the six months ended June 30, 1996
were generated as follows: United States, $1,931,021,000, or 64.8%; Canada,
$310,553,000, or 10.4%; Europe, $588,162,000, or 19.8%; and other international
markets, $149,521,000, or 5.0%. From 1995 to 1996, these geographic regions
experienced sales growth rates as follows: United States, 3.8% (9.1% excluding
Merisel FAB), Canada, 4.7%, Europe, 12.9% and other international markets,
(4.3)%. The negative growth rate in other international markets is due to the
sale of the Company's Australian operations in the first quarter of 1996, with
an effective date of January 1, 1996. Excluding the Australian business, the
sales growth rate for other international markets was 45.7%. The Company's lower
sales growth rate in Europe was partially the result of the weakening of the
European currencies against the dollar in 1996 compared to 1995. In periods
when the U.S. dollar is strengthening, the effect of the translation of the
financial statements of the consolidated foreign subsidiaries into U.S. dollars
is that of lower sales, costs and net income. After accounting for the effects
of a stronger U.S. dollar when compared to the European currencies, the sales
growth rate in European sales would have been 18.5%. The fluctuation of the
U.S. dollar when compared to other world currencies did not have a material
impact upon sales.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
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 the first
half of 1995, as compared to 81% and 19%, respectively, in 1996.
Gross profit decreased 6.7% from $178,698,000 in 1995 to $166,810,000 in
1996. Gross profit as a percentage of sales or gross margin, decreased from 6.3%
in 1995 to 5.6% in 1996. In 1995, the gross margin as a percentage of sales for
the ComputerLand Franchise and Aggregation business and the Company's core
distribution business was 4.2% and 6.9%, respectively, compared to 3.7% and
6.0%, respectively in 1996. 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, 1996 and 1995.
SG&A increased 6.9% from $151,109,000 in 1995 to $161,558,000 in 1996. SG&A as a
percentage of net sales remained at 5.4% in 1996. The absolute dollar increase
in SG&A was primarily due to costs associated with the Company's 5.1% increase
in net sales. SG&A as a percentage of sales for the ComputerLand Franchise and
Aggregation Business decreased from 3.6% in 1995 to 3.5% in 1996. SG&A for
Merisel's distribution business remained level at 5.8% in 1996.
In the first half of 1995, the Company adopted a restructuring plan to assess
its cost structure in response to pricing and gross margin pressures and
recorded a total restructuring charge of $9,333,000. The restructuring charge as
a percentage of net sales was 0.3%. The restructuring charge represented costs
incurred associated with reductions in personnel and the closure and
consolidation of warehouses. See Note 4 to Notes to Consolidated Financial
Statements.
Operating income decreased 71.2% from $18,256,000 in 1995 to $5,252,000 in
1996. Operating income as a percentage of net sales was 0.6% in 1995 and 0.2% in
1996. In 1995, operating income as a percentage of sales for the ComputerLand
Franchise and Aggregation Business and the Company's core distribution business
was 0.6% and 0.7%, respectively, compared to 0.1% and 0.2%, respectively, in
1996. The decrease in operating income as a percentage of net sales was due to
the same factors summarized in the discussion of operating income for the Three
Months Ended June 30, 1996.
Interest expense decreased 1.3% from $19,733,000 in 1995 to $19,472,000 in 1996
and decreased from 0.70% to 0.65% as a percentage of net sales in 1995 compared
to 1996. The decrease in interest expense is attributable to the Company
financing an increased part of its business through asset sales pursuant to
account receivable asset securitizations in various subsidiaries.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
Other expenses increased 57.8% from $6,821,000 in 1995 to $10,766,000 in 1996,
primarily due to an increase in fees of $3,431,000 incurred in connection with
accounts receivable securitizations in 1996 and the same factors summarized in
the discussion of interest expense for the Three Months Ended June 30, 1996 and
1995.
The Company's tax benefit decreased from $1,896,000 in 1995 to $74,000 in 1996.
The decrease reflects the limitation on tax benefits due to Net Operating Losses
in excess of taxable income in the carryback periods. The Company's effective
tax rate for the period ended June 30, 1995 was a benefit of 22.8%.
Net loss increased from $6,402,000 in 1995 to $24,912,000 in 1996. Net loss per
share increased from $0.22 in 1995 to a loss of $0.83 in 1996.
1996 BUSINESS PLAN
- ------------------
In April 1996, due to the substantial losses incurred for the fourth quarter and
fiscal year ended December 31, 1995, Merisel was required to negotiate with the
lenders under various of its financing agreements to amend such agreements and
to waive certain defaults, which amendments and waivers were obtained. In
connection with the negotiations with its lenders, Merisel developed a business
plan for the remainder of fiscal 1996 that called for curtailing non-essential
capital expenditures during 1996 in order to maximize cash flow.
Concurrently with the implementation of its business plan for 1996, Merisel has
been actively exploring all of its strategic options with the assistance of
Merrill Lynch & Co. These options have included, and continue to include, a sale
of significant assets in geographic regions around the world, including Merisel
FAB, which would enable Merisel to fund its remaining operations out of existing
cash flow or restructured borrowings. The Company's future results of operations
will depend, in part, on the results of those efforts.
The Company's 1996 business plan assumes that the Company will not experience
any significant changes in payment terms to, or product availability from, its
key vendors, however, there can be no assurance that significant changes will
not occur. Any such deterioration, in the absence of the development of
alternate financing sources or asset sales, could adversely impact the Company's
cash flow and its future results of operations.
The preceding information constitutes forward looking information and actual
results could differ materially from current expectations. Among the factors
that could impact actual results are the following: additional adjustments
related to the Company's ongoing supplier account reconciliation process;
significant changes in payment terms to, or product availability from, the
Company's key vendors; any further unanticipated charges associated with the
Company's computer and operating systems; any asset dispositions or potential
restructurings; and, any reduction in customer demand or deterioration of
margins.
SYSTEMS AND PROCESSES
- ---------------------
The Company is in the process of converting its North American operations to new
computer operating systems. The Company began designing the systems in early
1993 and converted its Canadian operations to the new system in August 1995. In
the early implementation stages the Canadian conversion produced results below
the Company's expectations. In late February 1996 Merisel Canada's operating
systems had begun to show results closer to the Company's original projection.
However, this required substantial additional development efforts and costs in
the post-implementation period. Accumulated expenditures incurred to develop
these systems have
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
been significantly in excess of the amounts originally expected. In addition,
the Company has delayed installation of these systems in the United States
beyond 1996.
The Company is also reviewing certain of its existing accounting systems,
including shipping and billing processes, which may result in adjustments to
accounts receivable and/or inventory balances.
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
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. As a result of this pattern the Company's cash requirements in the
fourth quarter have typically been greater. See "--Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has financed its growth and cash needs primarily through borrowings,
securitizations of its trade receivables and the public and private sales of its
securities.
Net cash provided by operating activities during the six months ended June 30,
1996 was $60,726,000. The primary sources of cash from operating activities
were decreases in inventories, accounts receivables and income taxes receivable
of $161,757,000, $66,641,000 and $28,804,000, respectively. The primary uses
of cash during the period were a net loss of $24,912,000 and a decrease in
accounts payable of $183,659,000. Decreased inventory and accounts receivable
levels resulted primarily from improved management of inventories and
collections. The decrease in inventories also contributed to the decrease in
accounts payable.
Net cash used for investing activities in 1996 was $7,990,000, consisting of
payment of the Company's earn out obligation under the ComputerLand Acquisition
of $13,409,000 and property and equipment expenditures of $4,817,000, partly
offset by proceeds received of $8,515,000 from the sale of the Company's
Australian operations. The expenditures for property and equipment were
primarily for the upgrading of the Company's computer systems, expenditures for
a new warehouse management system and the upgrading of existing facilities and
leasehold improvements. The Company presently anticipates that its capital
expenditures for
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
1996 will be approximately $12,885,000 consisting of costs of upgrading and
modifying the new computer system and the new warehouse management systems in
North America, development of new computer systems for the Company's European
operations, and purchase of warehouse and other equipment in North America,
Europe and Latin America. In addition, the Company has deferred non-essential
capital expenditures to maximize its cash flow in 1996. See "--1996 Business
Plan." The Company intends to finance its anticipated capital expenditures with
funds from existing operations.
Net cash used in financing activities was $14,420,000, comprised of net
borrowings under domestic revolving lines of credit of $35,000,000 and proceeds
from the issuance of promissory notes of $8,790,000, partially offset by net
repayments under foreign bank facilities of $21,487,000, the payment of the
first installment of $4,400,000 of the Subordinated Notes (as defined below),
and decrease in sale of trade accounts receivable of $24,538,000.
The Company's wholly owned subsidiary Merisel Americas, Inc. 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 (the "Receivables Purchase and Servicing
Agreement"), Merisel Capital Funding, in turn, sells such receivables to a
securitization company, which yields proceeds of up to $300,000,000. The
receivables are sold at face value with a portion of the purchase price being
deferred and fees paid in connection with such sales are recorded as other
expense. Merisel Capital Funding is a separate corporate entity with its own
separate creditors, which upon its liquidation will be entitled to be satisfied
out of Merisel Capital Funding's assets prior to any value in Merisel Capital
Funding becoming available to Merisel Capital Funding's equity holders. This
facility expires in October 2000.
In addition, on October 16, 1995, Merisel U.K. Ltd. entered into a receivables
purchase agreement with a securitization company to provide funding for
Merisel's U.K. subsidiary. In accordance with this agreement, Merisel U.K. sells
receivables to the securitization company on an ongoing basis, which yields
proceeds of up to 25,000,000 pounds sterling. The facility has no fixed
expiration date but will expire no earlier than 18 months from the effective
date following three to six months' prior written notice from the securitization
company. Effective December 15, 1995, Merisel Canada Inc. entered into a
receivables purchase agreement with a securitization company to provide funding
for Merisel's Canadian subsidiary. In accordance with this agreement, Merisel
Canada sells receivables to the securitization company, which yields proceeds of
up to $150,000,000 Canadian dollars. The facility expires December 12, 2000, but
is extendible by notice from the securitization company, subject to the
Company's approval.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of June 30,
1996 the total amount outstanding under these facilities was $250,782,000. Fees
incurred in connection with the sale of accounts receivable for the quarter
ended June 30, 1995 and 1996 were $2,525,000 and $3,931,000, respectively, and
are recorded as other expense. As of June 30, 1996, the total proceeds from
asset sales for the United States, United Kingdom, and Canadian securitization
facilities were
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
$176,000,000, $23,084,000, and $51,698,000, respectively, which were near the
maximum amounts that could be sold under such facilities at that time, based on
the Company's eligible receivables, as defined in the various agreements.
However, at June 30, 1996 the Company had cash and cash equivalents on hand of
$35,959,000.
To provide capital for the Company's operating and investing activities, the
Company and its subsidiaries maintain a number of credit facilities including
the amended $138,000,000 unsecured revolving bank credit facility expiring on
May 31, 1997 (the "Revolving Credit Agreement"). See Note 7 to Consolidated
Financial Statements. At August 9, 1996, $132,000,000 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, 1996 was
$132,000.
At June 30, 1996 the Company and its subsidiaries also had outstanding
$125,000,000 of 12.5% Senior Notes due December 31, 2004, $92,000,000 of 9.58%
senior notes due May 31, 1997 (the "Senior Notes") and $17,600,000 of 11.78%
senior subordinated notes (the "Subordinated Notes") repayable in four
remaining equal annual installments, with the next installment due January 1997.
As a result of the substantial losses incurred by the Company for the fourth
quarter and fiscal year ended December 31, 1995, Merisel was required to obtain
amendments with respect to certain covenants under the Revolving Credit
Agreement, the purchase agreement related to the Senior Notes, the purchase
agreement related to the Subordinated Notes, and the Receivables Purchase and
Servicing Agreement, which amendments were obtained. In addition, in connection
with the preparation and reporting of second quarter results, the Company
determined that a balance sheet covenant would need to be amended, which
amendment was obtained.
As a result of certain of these amendments, in April 1996, the rates on the
Senior Notes and Subordinated Notes were increased to their current levels from
8.58% and 11.28%, respectively. See Note 7 to Consolidated Financial
Statements. The Company's amended debt agreements with the lenders under the
Revolving Credit Agreement, Senior Notes and Subordinated Notes also require
principal payments of approximately $5,000,000 in the remainder of 1996 and
$219,400,000 in 1997, based on the amounts outstanding at August 9, 1996.
In light of the significant principal payments required in 1997, as well as
other obligations described herein the Company will not be able to finance its
operations or amortize its debt in 1997 without engaging in significant asset
sales, and either refinancing or restructuring its borrowings or obtaining new
sources of financing, or some combination thereof, and there can be no assurance
that it will be able to both accomplish such asset sales and restructure its
debit. In addition, if the Company's 1996 business plan is not successfully
implemented, the Company may need to obtain additional waivers from its lenders,
or other sources of capital through asset sales, and there can be no assurance
that such waivers or alternate sources of capital can be obtained.
18
<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 a Distribution and Services Agreement (the "Services Agreement") pursuant
to which Vanstar provides significant distribution and other support services to
the Franchise and Aggregation Business for a contractually agreed upon fee.
Effective July 12, 1995, this agreement was extended until April 30, 1997. Under
the terms of the Services Agreement extension, Merisel and Vanstar agreed that
(i) the extended credit terms under the Services Agreement would be increased to
$31,400,000; and (ii) the terms of the distribution fee would be adjusted. The
amount of the extended credit will be reduced by a scheduled amount of $844,000
monthly through October 31, 1996. As of June 30, 1996, the Vanstar payable is
$27,719,000. A final balance of $23,500,000 will be payable in four scheduled
payments between May 15, 1997 and July 31, 1997. If an inventory reduction plan
is agreed upon between the two parties, then the $23,500,000 may decrease on an
accelerated basis. In addition, on February 2, 1996 the Company paid Vanstar
$13,409,000 which consisted of a negotiated settlement of the Company's earn out
obligation under the original purchase agreement related to the ComputerLand
acquisition of $14,594,000, net of rebates of $1,185,000. See Note 5 to
Consolidated Financial Statements.
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 and Merisel's practice of making large purchases when it deems the
terms of such purchases to be attractive. Further contributing to inventory
level changes is 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.
Historically the Company purchases foreign exchange contracts to minimize
foreign exchange transaction gains and losses. To the extent such contracts are
no longer made available to the Company, the Company cannot predict the
resulting impact on its results of operations or financial condition.
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 markets, the
Company may elect to purchase credit insurance for certain accounts.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
COMPETITION
- -----------
Competition in the microcomputer products distribution industry is intense and
is based primarily on price, brand selection, breadth and availability of
product offering, financing options, 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, MicroAge and Tech Data
Corporation; non-United States based international distributors such as Computer
2000; national distributors such as Gates/Arrow and regional distributors and
franchisers. The Company competes internationally with a variety of national and
regional distributors on a country-by-country basis. Merisel also competes with
manufacturers that sell directly to computer resellers, sometimes at prices
below those charged by Merisel for similar products.
The Franchise and Aggregation Business is subject to competition from other
franchisers 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 Franchise and Aggregation Business
network. With respect to brand selection, the Company believes that an important
factor in the Franchise and Aggregation 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 Franchise and Aggregation
Business. The loss of any of these manufacturers, or any change in the way any
such manufacturer markets, prices or distributes its products, could have a
material adverse effect on the Franchise and Aggregation Business' operations
and financial results. The Franchise and Aggregation 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
Franchise and Aggregation Business' competitors have greater financial resources
than the Company.
20
<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. The plaintiffs have appealed the dismissal. The
parties' appellate briefing to the Ninth Circuit was completed on November 6,
1995. On June 4, 1996, the Ninth Circuit heard oral argument regarding the
appeal.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.50 Employment Agreement dated as of May 15, 1996 between Verilyn
Smith and Merisel, Inc.
27 Financial Data Schedule
21
<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, 1996
Merisel, Inc.
By: /s/ James L. Brill
-------------------------------
James L. Brill
Senior Vice President, Finance,
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
22
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is dated as of May 15, 1996 and is between Merisel,
Inc. (the "Company"), a Delaware corporation, and the undersigned executive
officer of the Company ("Executive").
Executive and the Company desire to set forth certain of the terms and
conditions governing Executive's employment by the Company.
Accordingly, Executive and the Company hereby agree as follows:
SECTION 1 DEFINITIONS. For purposes of this Agreement, the following terms
-----------
shall have the meanings set forth below:
(a) "Annual Base Salary" shall mean Executive's annual base salary set
forth in Section 3(a), exclusive of any bonus or incentive compensation,
benefits (whether standard or special), relocation or tax equalization
payments, automobile allowances, pension payments or reimbursements for
professional services.
(b) "Company" shall mean Merisel, Inc., a Delaware corporation, and each
of its successor enterprises that result from any merger, consolidation,
reorganization, sale of assets or otherwise.
(c) "Termination for Cause" shall mean if the Company terminates
Executive's employment for any of the following reasons: Executive
misconduct (misconduct is limited to, physical assault, insubordination,
falsification or misrepresentation of facts on company records, fraud,
dishonesty, willful destruction of company property or assets, or sexual
harassment of another Associate by Executive); or Executive conviction for
or a plea of nolo contendere by Executive to a felony or any crime
involving moral turpitude.
(d) "Benefit Period" shall mean a period of one year beginning July 1,
1996.
(e) "Expiration Date" shall mean August 31, 1996 or a later date as agreed
to by both parties.
(f) "Payment Event" shall mean July 1, 1996, unless a Termination for
Cause shall have occurred prior to such date.
SECTION 2 "AT-WILL" EMPLOYMENT. Subject to the express provisions of this
-------------------
Agreement, the Company shall have no obligation to retain or continue Executive
as an employee and Executive's employment status as an "at-will" employee of
Company is not affected by this Agreement.
SECTION 3 TERMS OF EMPLOYMENT. Executive's compensation and benefits during
-------------------
employment with the Company through the Expiration Date shall include:
(a) Effective as of June 1, 1995 through June 30, 1996, an Annual Base
Salary of $215,000.00; thereafter, Executive's Base Salary shall be
$35,833.33 per month.
<PAGE>
(b) Effective June 1, 1996 in lieu of a superannuation payment to
Executive, Company will instead immediately cancel the $30,000.00 loan,
together with all accrued but unpaid interest, from Company to Executive.
(c) Effective as of June 1, 1995, Executive shall be eligible for a $40,000
annual bonus payable quarterly to a maximum of $10,000.00 per quarter based
on achievement of the Board approved plan for ComputerLand.
(d) Company has leased a car for Executive's use and will continue to do
so during her employment with the Company and for a period of two months
following the Expiration Date. Company will continue to pay all expenses
incurred in connection with the lease of the car including lease payments,
maintenance, insurance and gasoline, not to exceed $26,000.00 per calendar
year. If Company pays less than $26,000.00/year in either 1995 or 1996 on
an annualized basis, for expenses incurred in connection with the lease and
provision of the car to Executive, then Company shall pay Executive the
difference between the annualized expenses paid by Company and $26,000.00.
(e) Company will continue to pay all housing and related costs for housing
for Executive in the San Francisco Bay Area through the period of
Executive's employment by the Company and for a period of one month
thereafter.
(f) Company will pay Executive within 10 business days' receipt of each
invoice by the Company, for twelve months of medical/health insurance in
Australia with payments to begin at least 3 months prior to the Payment
Event or Expiration Date, whichever is sooner.
(g) Executive is not to bear the burden of any United States Federal or
state taxes for: (i) payments made by the Company, or reimbursed or paid to
Executive under Sections 3 (e) or (f) ; or (ii) payments made by Company or
reimbursed or paid to Executive for Executive's costs and expenses for
relocation to Pleasanton, California. Consequently, Company will either:
(i) gross up the amount of such payment or reimbursement to Executive so
that Executive will receive an amount equal to the payment or
reimbursement, after taking into account all applicable taxes; or (ii) pay
Executive the amount of any such tax prior to the date that the tax must be
paid by Executive.
SECTION 4 PAYMENT EVENTS.
--------------
(a) The Company shall pay Executive on the date of the Payment Event
$215,000.00. In the event that Executive dies before such payment is
made, Company agrees that it shall immediately pay any payments remaining
unpaid under this Section 4(a) as a death benefit to Executive's estate on
------------
the same terms;
(b) On the Expiration Date, the Company shall pay Executive all
compensation and benefits, including unused vacation pay, earned by her
through such date;
2
<PAGE>
(c) Following the Expiration Date, Company shall pay Executive within ten
(10) business days receipt of each invoice, all costs and expenses
associated with Executive's relocation to Australia including removal of
all personal goods, chattels and effects including packaging, comprehensive
insurance, storage, cleaning (laundry and dry cleaning after unpacking) and
air freight of a reasonable amount of personal goods;
(d) Company shall pay Executive a lump sum payment of $15,000.00 to
Executive to cover repurchase by Executive of electrical appliances on the
date of the Payment Event.
(e) Company will reimburse Executive within ten(10) business days receipt
of each invoice for the cost of Executive's COBRA payments under Company's
health insurance plans until Executive qualifies for coverage under
Australian medical/health insurance, but no more than three months.
Company will continue to pay for Executive's medical/health insurance in
Australia pursuant to Section 3(f); and
(f) Company has amended Executive's stock options to provide that options
to purchase 6,250 shares at $4.579 per share, previously scheduled to vest
on May 27, 1997 shall vest on July 1, 1996.
Executive is not to bear any burden for United States federal or state taxes
consequences for payments made by the Company or reimbursed or paid to Executive
under Section 4(c) and (e). Consequently, Company will either: (i) gross up the
amount of such payment or reimbursement to Executive so that Executive will
receive an amount equal to the payment or reimbursement, after taking in to
account all applicable taxes; or (ii) pay Executive the amount of any such tax
prior to the date that the tax must be paid by Executive.
SECTION 5 WITHHOLDING. Company shall deduct from all payments paid to
-----------
Executive under this Agreement any amounts required under the laws of the United
States or any State within the United States for social security, federal and
state income tax withholding, federal or state unemployment insurance
contributions, and state disability insurance or any other required taxes.
SECTION 6 EXECUTIVE'S OBLIGATIONS. In exchange for Company providing the above
-----------------------
described benefits to Executive, Executive agrees to the following:
(a) Executive agrees to continue to observe and comply with all company
policies during Executive's employment by Company;
(b) Executive agrees that during the Benefit Period, Executive will not
directly or indirectly (a) engage in; (b) own or control any debt equity,
or other interest in (except as a passive investor of less that 5% of the
capital stock or publicly traded notes or debentures of a publicly held
company); or (c) (1) act as director, officer, manager, employee,
participant or consultant to or (2) be obligated to or connected in any
advisory business enterprise or ownership capacity with,
3
<PAGE>
any of Tech Data Corp., Ingram Micro, Inc., Computer 2000 AG (C2000),
Intelligent Electronics, Inc., MicroAge, Inc., Inacom Corp., Compucom,
Entex Information Services, Inc. or Vanstar Corporation or with any
subsidiary, division or successor of any of them or with any entity that
acquires, whether by acquisition, merger or otherwise, any significant
amount of the assets or substantial part of any of the business of any of
them;
(c) During the term of this Agreement, or if longer, the Benefit Period,
Executive will not, on behalf of any business enterprise other than the
Company and its subsidiaries, solicit the employment of or hire any person
that is or was employed by the Company or any of its subsidiaries at any
time on or after January 1, 1995;
(d) Prior to receiving any compensation from Company under Section 4,
Executive will execute and deliver to Company a Release and a
Confidentiality Agreement, each substantially in the form satisfactory to
Company, with such changes as Company might request;
(e) In the event of any breach by Executive of the restrictions contained
in this Agreement, Company shall have no further obligation to compensate
Executive hereunder and Executive acknowledges that the harm to Company
cannot be reasonably or adequately compensated in damages in any action at
law. Accordingly, Executive agrees that, upon any violation of such
restrictions, Company shall be entitled to preliminary and permanent
injunctive relief in addition to any other remedy, without the necessity of
proving actual damages;
(f) Executive shall cooperate in making appliances purchased by Executive
for her relocation to Pleasanton, California and paid for by the Company,
available to the Company; and
(g) Executive shall assist Company, as requested, in its search for a
President of the ComputerLand business.
SECTION 7 ASSUMPTION AGREEMENT. The Company will require any successor
--------------------
(whether direct or indirect, by purchase, merger consolidation or otherwise) to
all or substantially all of the business and assets of the Company, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it whether or not such
succession had taken place.
SECTION 8 MISCELLANEOUS. This Agreement shall be binding upon and inure to
-------------
the benefit of Company and Executive; provided that Executive shall not assign
any of Executive's rights or duties under this Agreement without the express
prior written consent of Company. This Agreement sets forth the parties' entire
agreement with regard to the subject matter hereof. No other agreements,
representations, or warranties have been made by either party to the other with
respect to the subject matter of this Agreement. This agreement may be amended
only by a written agreement signed by both parties. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as or be construed as a waiver of any subsequent
breach. If any legal action is necessary to enforce the terms of
4
<PAGE>
this Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees in addition to any other relief to which that party may be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the
day and year first written above.
MERISEL, INC.
By:_______________________
Its:_______________________
"EXECUTIVE"
__________________________
VERILYN SMITH
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 35,959
<SECURITIES> 0
<RECEIVABLES> 387,331
<ALLOWANCES> 24,180
<INVENTORY> 399,474
<CURRENT-ASSETS> 825,745
<PP&E> 145,726
<DEPRECIATION> 60,261
<TOTAL-ASSETS> 1,014,286
<CURRENT-LIABILITIES> 736,324
<BONDS> 0
0
0
<COMMON> 300
<OTHER-SE> 125,324
<TOTAL-LIABILITY-AND-EQUITY> 125,624
<SALES> 2,979,257
<TOTAL-REVENUES> 2,979,257
<CGS> 2,812,447
<TOTAL-COSTS> 2,812,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,612
<INTEREST-EXPENSE> 19,472
<INCOME-PRETAX> (24,986)
<INCOME-TAX> 74
<INCOME-CONTINUING> (24,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,912)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
