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 September 30, 1998.
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 November 12, 1998
Common Stock, $.01 par value 80,237,934 Shares
<PAGE>
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of 1-2
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of 9-20
Financial Condition and Results of Operations
PART II OTHER INFORMATION 21-23
SIGNATURES 24
i
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors may
include, but are not limited to, the effect of (i) economic conditions
generally, (ii) industry growth, (iii) competition, (iv) liability and other
claims asserted against the Company, (v) the loss of significant customers or
vendors, (vi) operating margins, (vii) business disruptions, and (viii) other
risks detailed in this report. These factors are discussed in more detail
elsewhere in this report. Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
ii
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $164,165 $ 36,447
Accounts receivable (net of allowances
of $21,220 and $18,549 for 1998 and 1997,
respectively) 168,423 162,895
Inventories 455,333 462,752
Prepaid expenses and other current assets 14,541 12,352
Deferred income tax benefit 594 644
-------- --------
Total current assets 803,056 675,090
PROPERTY AND EQUIPMENT, NET 55,341 40,142
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 24,467 25,381
OTHER ASSETS 445 6,498
-------- --------
TOTAL ASSETS $883,309 $747,111
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 562,078 $ 437,211
Accrued liabilities 37,362 38,963
Long-term debt - current 1,822 1,762
--------- ---------
Total current liabilities 601,262 477,936
Long-term debt 130,329 131,667
--------- ---------
TOTAL LIABILITIES 731,591 609,603
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued or outstanding
Common stock, $.01 par value, authorized
150,000,000 shares; 80,231,434 and 80,078,500
shares outstanding for 1998 and 1997, respectively 802 801
Additional paid-in capital 282,295 281,701
Accumulated deficit (120,657) (137,005)
Cumulative translation adjustment (10,722) (7,989)
--------- ---------
Total stockholders' equity 151,718 137,508
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 883,309 $ 747,111
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,144,317 $ 965,238 $ 3,342,426 $ 2,974,093
COST OF SALES 1,077,042 906,730 3,151,697 2,794,954
----------- ----------- ----------- -----------
GROSS PROFIT 67,275 58,508 190,729 179,139
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 49,792 48,697 146,844 143,518
----------- ----------- ----------- -----------
OPERATING INCOME 17,483 9,811 43,885 35,621
INTEREST EXPENSE 3,649 7,029 11,323 23,412
OTHER EXPENSE 5,786 4,329 15,407 10,248
DEBT RESTRUCTURING COSTS 3,630 3,630
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 8,048 (5,177) 17,155 (1,669)
INCOME TAX PROVISION 444 156 807 488
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE $ 7,604 $ (5,333) $ 16,348 $ (2,157)
EXTRAORDINARY ITEM
EXTRAORDINARY LOSS ON
EXTINGUISHMENT OF DEBT 3,744 3,744
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 7,604 $ (9,077) $ 16,348 $ (5,901)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE (BASIC AND DILUTED)
LOSS BEFORE EXTRAORDINARY ITEM $ (0.17) $ (0.07)
EXTRAORDINARY ITEM (0.12) (0.12)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE (BASIC AND
DILUTED) $ 0.09 $ (0.29) $ 0.20 $ (0.19)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 80,228 30,895 80,199 30,351
DILUTED 80,473 30,895 80,529 30,351
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,348 $ (5,901)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 7,750 8,655
Provision for doubtful accounts 8,728 11,255
Loss (Gain) on Sale of Property and Equipment 3 (1,530)
Changes in assets and liabilities:
Accounts receivable (48,654) (60,262)
Inventories 7,419 16,894
Prepaid expenses and other assets 3,864 (3,903)
Accounts payable 124,867 55,267
Accrued liabilities (1,552) 9,761
--------- --------
Net cash provided by operating activities 118,773 30,236
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,684) (4,439)
Proceeds from sale of property 5,020
--------- --------
Net cash (used for) provided by investing activities (22,684) 581
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 726,308
Repayments under revolving line of credit (811,516)
Proceeds from Convertible Notes 137,100
Net repayments under other bank facilities (1,278) (1,176)
Repayment of senior notes (56,805)
Proceeds from sale of accounts receivable 34,802
Repayment of subordinated debt (17,600)
Proceeds from issuance of Common Stock 595 14,900
--------- --------
Net cash provided by (used for) financing activities 34,119 (8,789)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,490) (381)
--------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 127,718 21,647
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 36,447 44,678
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 164,165 $ 66,325
========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware, networking equipment and software products. Through its main operating
subsidiary, Merisel Americas, Inc. ("Merisel Americas"), and its subsidiaries
the Company markets products and services throughout North America and has
achieved operational efficiencies that have made it a valued partner to a broad
range of computer resellers, including value-added resellers ("VARs"),
commercial resellers/dealers, and retailers. The Company also operates the
Merisel Open Computing Alliance (MOCA(TM)), which primarily supports Sun
Microsystems' UNIX(R)-based product sales and installations.
The information for the three and nine months ended September 30, 1998 and 1997
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. Certain amounts for 1997 have been reclassified to conform with 1998
presentation. 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, 1997.
2. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"), which requires disclosure of certain
information about operating segments, geographic areas in which the Company
operates, major customers, and products and services. The Company will evaluate
the effect that this new standard has on the Company's financial statement
presentation, and the required information will be reflected in the financial
statements for the year ended December 31, 1998.
3. 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 third quarter is the 13-week period ending
on the Saturday nearest to September 30. For simplicity of presentation, the
Company has described the interim periods and year-end period as of September 30
and December 31, respectively.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
4. Loan and Security Agreement
Merisel Americas entered into a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security Agreement") with BankAmerica Business Credit, Inc.
("BA"), acting as agent, which provides for borrowings on a revolving basis. The
Loan and Security Agreement permits borrowings of up to $100,000,000 outstanding
at any one time (including face amounts of letters of credit), subject to
meeting certain availability requirements under a borrowing base formula and
other limitations. Borrowings under the Loan and Security Agreement are secured
by a pledge of substantially all of the inventory held by Merisel Americas.
Borrowings bear interest at the rate of LIBOR plus a specified margin or, at the
Company's option, BA's prime rate. An annual fee of 0.375% is payable with
respect to the unused portion of the commitment. The Loan and Security Agreement
has a termination date of June 30, 2003. No amounts were outstanding under the
Loan and Security Agreement as of September 30, 1998.
The Revolving Credit Agreement and Convertible Promissory Note (the "BT Note")
entered into in January 1998 by the Company and Merisel Americas with Bankers
Trust Company expired in accordance with its terms on July 2, 1998. No amounts
were outstanding under the BT Note on the expiration date.
5. Dispositions
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB") to a
wholly owned subsidiary of SYNNEX Information Technologies, Inc. ("Synnex").
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Following are summarized pro forma operating results for the nine months ended
September 30, 1997 assuming that the Company had sold the assets of Merisel FAB
as of January 1, 1997 and summarized actual operating results for the nine
months ended September 30, 1998.
(in thousands except per share data)
Actual Pro Forma
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
---------------- --------------------
Net Sales $ 3,342,426 $ 2,771,915
Gross Profit 190,729 171,461
Net Income (loss) 16,348 (8,055)
================ ====================
Net Income (loss) per
share $ .20 $ (0.27)
================ ====================
Weighted Average Shares
Outstanding
(Diluted) 80,529 30,351
================ ====================
6. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130, which the
Company adopted in the first quarter of 1998, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is computed as
follows:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income 7,604 (9,077) 16,348 (5,901)
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,642) (665) (2,733) (474)
---------- ---------- --------- ---------
Comprehensive income 5,962 (9,742) 13,615 (6,375)
========== ========== ========= =========
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
7. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Financial
Accounting Standard No. 128, "Earnings Per Share". Basic earnings per share is
calculated using the average number of common shares outstanding. Diluted
earnings per share is computed on the basis of the average number of common
shares outstanding plus the effect of outstanding stock options using the
"treasury stock" method. In both the three-month period and nine-month period
ended September 30, 1997, there is no material difference between the primary
earnings per share reported previously by the Company, and basic earnings per
share or diluted earnings per share methods adopted currently.
The following table is a reconciliation of the weighted average shares used in
the computation of basic and diluted EPS for the income statement periods
presented herein:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
Weighted average shares outstanding 1998 1997 1998 1997
- ----------------------------------- ---- ---- ---- ----
Basic 80,228 30,895 80,199 30,351
Assumed exercises of stock options 245 330
-------- -------- ------- -------
Diluted 80,473 30,895 80,529 30,351
======== ======== ======== =======
</TABLE>
8. Supplemental Disclosure of Cash Flow Information
Cash paid (received) in the three-month periods and nine-month periods ended
September 30 for interest and income taxes was as follows:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 32 $ 4,167 $ 7,369 $ 18,412
Income taxes $ 463 $ (3,285) $ 348 $ (6,687)
</TABLE>
Effective March 28, 1997, the Company sold substantially all of the assets of
Merisel FAB. The recorded sale price was $31,992,000, consisting of the
assumption of $11,992,000 of trade payables and accrued liabilities and a
$20,000,000 extended payable due to a third party, in full consideration for the
assets.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware, networking equipment and software products. Through its main operating
subsidiary, Merisel Americas, Inc. ("Merisel Americas"), and its subsidiaries
the Company markets products and services throughout North America and has
achieved operational efficiencies that have made it a valued partner to a broad
range of computer resellers, including value-added resellers ("VARs"),
commercial resellers/dealers, and retailers. The Company also operates the
Merisel Open Computing Alliance (MOCA(TM)), which primarily supports Sun
Microsystems' UNIX(R)-based product sales and installations.
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB") to a
wholly owned subsidiary of SYNNEX Information Technologies, Inc. The Company's
operations are now focused exclusively on distribution in North America. The
Company's sales were $3.85 billion for 1997, excluding revenues from operations
sold in the first quarter of 1997. As the North American Business (defined
below) represents the ongoing business of the Company, the following discussion
and analysis will compare the components of operating income for the nine months
ended September 30, 1998 and September 30, 1997 for the North American Business
only. As used in this discussion and analysis, the term "North American
Business" refers to Merisel's United States and Canadian distribution
businesses, and the term "Former Operations" refers to the Merisel FAB
operations disposed of by Merisel in the first quarter of 1997.
On September 19, 1997, the Company and Merisel Americas entered into a
definitive Stock and Note Purchase Agreement with Phoenix Acquisition Company
II, L.L.C. ("Phoenix"), a Delaware limited liability company whose sole member
is Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and
Note Purchase Agreement, on September 19, 1997 Phoenix acquired a Convertible
Note for $137,100,000 (the "Convertible Note") and 4,901,316 shares (the
"Initial Shares") of the Company's common stock ("Common Stock") for
$14,900,000. The Convertible Note was an unsecured obligation of the Company and
Merisel Americas and provided that, upon the satisfaction of certain conditions,
including obtaining stockholder approval, the Convertible Note would
automatically convert into 45,098,684 shares of Common Stock (the "Conversion
Shares"). The Company used substantially all of the $152,000,000 in proceeds
from the issuance of the Initial Shares and the Convertible Note to repay
indebtedness of its operating subsidiaries (the "Operating Company Debt")
consisting of $80,697,000 principal amount outstanding under a revolving credit
agreement, $53,798,000 principal amount of its 11.5% senior notes, and
$13,200,000 principal amount of subordinated notes. On October 10, 1997, Phoenix
exercised its option to convert, without any additional payment, $3,296,286
principal amount of the Convertible Note into 1,084,305 shares of Common Stock,
representing the maximum amount that could be converted prior to obtaining
stockholder approval. On December 19, 1997, following receipt of stockholder
approval, the remaining portion of the Convertible Note was converted into
Common Stock. The $152,000,000 in proceeds from the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
issuance of the Initial Shares and the Convertible Note was partially offset by
professional fees and other direct costs related thereto totaling approximately
$12,099,000, which were recorded as a reduction to additional paid in capital at
the time of conversion. As of September 30, 1998, Phoenix owned 50,000,000
shares of Common Stock, or approximately 62.3% of the outstanding Common Stock.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 as Compared to the Three Months Ended
September 30, 1997.
Net sales increased 18.6% from $965,238,000 in the quarter ended September 30,
1997 to $1,144,317,000 in the quarter ended September 30, 1998. The increase was
the result of a 20.1% increase in net sales for the U.S. and a 11.1% increase in
Canada. All of the Company's U.S. customer bases contributed to the growth rate
in the U.S., with particularly strong growth in MOCA and retail sales. The
growth rate in Canada in terms of Canadian dollar sales was 23.3%, but the
decline in the value of the Canadian dollar hampered the growth rate in terms of
U.S.
dollars, as was also the case in the first two quarters of 1998.
Hardware and accessories accounted for 79% of net sales and software accounted
for 21% of net sales in the third quarter of 1998, as compared to 78% and 22%
for the same categories, respectively, in the third quarter of 1997.
Gross profit increased 15.0% or $8,767,000 from $58,508,000 in the third quarter
of 1997 to $67,275,000 in the same period in 1998. Gross profit as a percentage
of sales, or gross margin, decreased from 6.06% in 1997 to 5.88% in 1998. Gross
margins in the United States and Canada were 5.81% and 6.25%, respectively, for
the third quarter of 1998, compared to 6.01% and 6.30%, respectively, for the
third quarter of 1997. The decrease in margins as a percentage of sales is
partially the result of changes in customer and product mix, and is also
significantly affected by intense competitive pricing pressures. The Company has
committed resources to reverse the deterioration of margins by focusing
attention on more profitable product lines, expanding the Company's customer
base and improving controls over margin management related activities such as
sales execution, processes, vendor rebate programs and purchasing discounts.
However, the Company believes that it will continue to face intense price
competition.
Selling, general and administrative expenses for the Company increased by 2.2%
from $48,697,000 in the third quarter of 1997 to $49,792,000 in the third
quarter of 1998. However, selling, general and administrative expenses as a
percentage of sales decreased from 5.05% of sales in 1997 to 4.35% for the same
period in 1998. This decrease is primarily attributable to efforts to control
operating expenses while the Company experienced sales growth of 18.6% during
the period. In addition, expenses for the third quarter of 1997 include
compensation charges of $1,950,000 related to the debt restructuring without
which selling, general and administrative expenses as a percentage of sales
would have been 4.84%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As a result of the above items, operating income for the Company improved by
$7,672,000 from $9,811,000 for the third quarter of 1997 to $17,483,000 for the
third quarter of 1998.
Nine Months Ended September 30, 1998 as Compared to the Nine Months Ended
September 30, 1997.
The following table sets forth the unaudited results of operations for the North
American Business and for the Former Operations for the nine months ended
September 30, 1998 and September 30, 1997.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
(In Thousands) (Unaudited) (In Thousands) (Unaudited)
-------------------------------------------------- -----------------------------------------------
North North
American Former Consolidated American Former Consolidated
Business Operations Total Business Operations Total
--------------- ------------ -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 3,342,426 $ 3,342,426 $ 2,771,915 $ 202,178 $ 2,974,093
Cost of Sales 3,151,697 3,151,697 2,600,454 194,500 2,794,954
--------------- ------------ -------------- ------------- ------------ -------------
Gross Profit 190,729 190,729 171,461 7,678 179,139
SG&A Expenses 146,844 146,844 137,318 6,200 143,518
--------------- ------------ -------------- ------------- ------------ -------------
Operating
Income $ 43,885 $ 43,885 $ 34,143 $ 1,478 $ 35,621
============== ============ ============== ============= =========== =============
</TABLE>
For the nine months ended September 30, 1998, net sales for the North American
Business increased by 20.6% from $2,771,915,000 for the nine months ended
September 30, 1997 to $3,342,426,000 for the nine months ended September 30,
1998. The increase resulted from a 22.7% increase in net sales for the U.S. and
a 12.2% increase in Canada. The growth rate in Canada in terms of Canadian
dollars was 19.7%. The growth rate reflects improved year over year performance
due to the same factors summarized in the discussion of sales for the three
months ended September 30, 1998 and 1997 as well as, for the first two quarters
of 1998, strong growth in commercial reseller/dealer sales.
In the North American Business, hardware and accessories accounted for 78% of
net sales and software accounted for 22% of net sales in the first nine months
of 1998, as compared to 77% and 23% for the same categories, respectively, in
the first nine months of 1997.
Gross profit for the North American Business increased 11.2% or $19,268,000 from
$171,461,000 for the first nine months of 1997 to $190,729,000 for the first
nine months of 1998. Gross profit as a percentage of sales, or gross margin,
decreased from 6.19% for the 1997 period to 5.71% for the 1998 period. The
decrease is attributable to the same factors summarized in the discussion of
gross profit for the three months ended September 30, 1998 and 1997. Gross
margins in the United States and Canada were 5.66% and 5.90%, respectively, for
the first nine
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
months of 1998, compared to 6.20% and 6.14%, respectively, for the first nine
months of 1997. The decrease in margin is attributable to the same factors
summarized in the discussion of gross profit for the three months ended
September 30, 1998 and 1997.
Selling, general and administrative expenses for the North American Business
increased by 6.9% from $137,318,000 in the nine months ended September 30, 1997
to $146,844,000 in the nine months ended September 30, 1998. However, selling,
general and administrative expenses as a percentage of sales decreased from
4.95% of sales in 1997 to 4.39% for the same period in 1998. This decrease is
primarily attributable to efforts to control operating expenses while the
Company experienced sales growth of 20.6% during the period. In addition,
without the debt restructuring-related compensation charges referenced in the
discussion for the three months ended September 30, 1998, selling, general and
administrative expenses as a percentage of sales for the nine months ended
September 30, 1997 would have been 4.88%.
As a result of the above items, operating income for the North American Business
improved by $9,742,000 from $34,143,000 for the first nine months of 1997 to
$43,885,000 for the first nine months of 1998.
Interest Expense; Other Expense; and Income Tax Provision
Interest expense for the Company decreased 48.1% from $7,029,000 in the quarter
ended September 30, 1997 to $3,649,000 in the quarter ended September 30, 1998.
For the nine months ended September 30, 1998, interest expense for the Company
decreased 51.6% from $23,412,000 in the 1997 period to $11,323,000 in the 1998
period. The decrease in interest expense is primarily attributable to a
reduction of the Company's debt largely from the use of proceeds from the
issuance of the Initial Shares and the Convertible Note to repay substantially
all of the Operating Company Debt in September 1997.
Other expenses for the Company increased from $4,329,000 and $10,248,000 for the
three and nine months ended September 30, 1997, respectively, to $5,786,000 and
$15,407,000 for the same periods in 1998, respectively. The increase for the
quarter is due primarily to a $1,042,000 increase in foreign currency losses.
For the nine month period, the increase is attributable in part to the recording
of a gain on the sale of property held in North Carolina for $1,530,000 in the
second quarter of 1997, which reduced other expenses for that period. The
increase is also attributable to a $1,277,000 increase in foreign currency
losses and a $1,460,000 increase in asset securitization fees. The increased
securitization fees are due to increased sales of accounts receivables in order
to fund sales growth and daily operations. The average proceeds resulting from
the sale of accounts receivable at month end under the Company's securitization
facilities increased from $255,578,000 for the nine months ended September 30,
1997 to $272,272,000 for the same period in 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The income tax provision increased from an expense of $156,000 and $488,000 for
the three and nine months ended September 30, 1997, respectively, to an expense
of $444,000 and $807,000 for the same periods in 1998. In both periods, the
income tax rate reflects only the minimal statutory tax requirements in the
various states and provinces in which the Company conducts business, as the
Company has sufficient net operating loss provisions to offset federal income
taxes in the current period.
Debt Restructuring Costs; Extraordinary Item
During the three months ended September 30, 1997, the Company recognized as
expenses $3,630,000 of transaction costs relating to professional fees and other
costs associated with the termination of a Limited Waiver and Voting Agreement
entered into with certain holders of the Company's 12-1/2% Senior Notes due
2004. Also for that period, in connection with the repayments of the Operating
Company Debt in September 1997, the Company recorded an extraordinary loss on
the extinguishment of debt of $3,744,000.
Consolidated Net Income
On a consolidated basis, net income for the Company increased from a loss of
$9,077,000 and $5,901,000 for the three and nine months ended September 30,
1997, respectively, to a net income of $7,604,000 and $16,348,000 for the three
and nine months ended September 30, 1998, respectively, due to the factors
described above. Net income per share increased from a loss of $.29 per share
for the three months ended September 30, 1997 to net income of $.09 per share
for the three months ended September 30, 1998. Net income per share increased
from a loss of $.19 per share for the nine months ended September 30, 1997 to
net income of $.20 per share for the nine months ended September 30, 1998.
SYSTEMS AND PROCESSES
Merisel has made significant investments in new, advanced computer and warehouse
management systems for its North American operations to support sales growth and
improve service levels. All of Merisel's nine North American warehouses now
utilize Merisel's Information and Logistical Efficiency System ("MILES"), a
computerized warehouse management system, which uses infrared bar coding and
advanced computer hardware and software to maintain high picking, receiving and
shipping accuracy rates.
Merisel is in the process of converting its U.S. operations to the SAP
client/server operating system. The Company plans to convert its U.S. operations
to the SAP system during the first half of 1999. The Company converted its
Canadian operations from a mainframe to the SAP client/server operating system
in August 1995. SAP is an enterprise-wide system which integrates all functional
areas of the business including order entry, inventory management and finance in
a real-time environment. The new system is designed to provide greater
transaction functionality, automated controls, flexibility, and custom pricing
applications.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The design and implementation of these new systems are complex projects and
involve certain risks. The U.S. SAP implementation in particular, because of its
scope and complexity, involves risks that could have a material adverse impact
on operations and financial results.
YEAR 2000 ISSUES
Introduction
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date
sensitive calculations by computers and other equipment as the year 2000 is
approached and reached. These problems generally arise from the fact that
computers and equipment have historically used two-digit fields that recognize
dates using the assumption that the first two digits are "19". On January 1,
2000, systems using two-digit date fields could recognize a date using "00" as
the year 1900 rather than the year 2000.
Year 2000 Project
The Company believes that implementation of the SAP operating system in the U.S.
will address its major Year 2000 issues for its core information technology
("IT") systems. See "Systems and Processes" above. The Company has developed a
plan for addressing the remainder of its Year 2000 issues which focuses on the
following six areas: core IT systems; off-line IT subsystems; technical
infrastructure (e.g., networks, servers, desktop computers); vendor/customer
interfaces (consisting of electronic data interchange or "EDI"); facilities
(including security systems, elevators, and heating and cooling systems); and
third-party suppliers, vendors and customers ("External Parties"). For the first
five areas, the Company's Year 2000 plan consists of the following phases: (1)
conducting an inventory of items with Year 2000 implications; (2) assessment of
Year 2000 compliance; (3) remediation or replacement of material items that are
determined not to be Year 2000 compliant; (4) testing (including re-testing of
material items that were remediated or replaced); and (5) certification of Year
2000 compliancy.
The Company has substantially completed the inventory phase with respect to all
areas. The assessment phase is in process and is scheduled to be completed
during the first quarter of 1999, the remediation phase during the second
quarter of 1999 and the testing phase by the early part of the third quarter of
1999. In addition, the Company intends to conduct integration testing during the
early part of the third quarter of 1999. The Company currently plans to complete
the Year 2000 project by the beginning of the fourth quarter of 1999.
With respect to External Parties that provide critical goods and services to the
Company, including utility companies, telecommunication service companies,
shipping companies and other service providers outside of the Company's control,
the Company is seeking assurances,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
either through formal communications or otherwise, that such parties will be
Year 2000 ready. As a general matter, the Company is vulnerable to the inability
of material External Parties to remedy their own year 2000 issues. See "Risks"
below.
Costs
The Company currently estimates that the aggregate cost of its Year 2000 project
will be approximately $4.2 million, of which less than $200,000 had been spent
through October 31, 1998, although the total amount could be greater. This
amount excludes the cost of implementing the SAP operating system in the U.S.
and costs incurred pursuant to the Company's technology upgrade strategy where
the upgrades were not accelerated due to Year 2000 issues. In addition, a
portion of the estimated total costs of the Year 2000 project will be funded by
reallocating existing resources rather than incurring incremental costs. This
reallocation of resources is not expected to have a significant impact on the
day-to-day operations of the Company, including any material effect on the
implementation of any IT project. The Company's aggregate cost estimate does not
include costs that may be incurred by the Company as a result of the failure of
any third parties, including suppliers, to become Year 2000 ready or costs to
implement any contingency. The Year 2000 project costs will be expensed by the
Company as incurred.
Risks
The Company believes that the completion of its Year 2000 project and the
implementation of the SAP operating system in the U.S. as planned will result in
the Company being Year 2000 compliant in a timely manner. However, the failure
to correct a material Year 2000 problem could result in an interruption in, or a
failure of, certain normal business activities or operations, which could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. In addition, if third parties that provide goods or
services that are critical to the Company's business activities fail to
adequately address their Year 2000 issues, there could be a similar material
adverse effect on the Company. The Company believes that its most reasonably
likely worst case scenario is the failure of such a third party. Such a failure
could result in, for example, the inability of the Company to ship product, a
telecommunications failure at one or more of the Company's call centers, a
decrease in customer orders, delays in product deliveries from vendors or power
outages at one or more of the Company's facilities. The Company's Year 2000
project is expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000 compliance
and readiness of material External Parties. The Company believes that, with the
completion of its Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Contingency Plans
As part of the Company's Year 2000 project, Year 2000-specific contingency plans
will be developed. The Company expects that these plans will be substantially
completed by the end of February 1999, but that the plans will continue to be
modified as the Company obtains additional information regarding the Company's
internal systems and equipment during the remediation and testing phases of its
Year 2000 program and regarding the status of the Year 2000 readiness of
External Parties. In addition, as a normal course of business, the Company
maintains and deploys contingency plans designed to address various other
potential business interruptions. These plans may be applicable to address the
failure of External Parties to provide goods or services to the Company as a
result of their failure to be Year 2000 ready.
Readers are cautioned that forward-looking statements contained under "Year 2000
Issues" should be read in conjunction with the Company's disclosures under the
heading: "SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION" on page ii.
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 computer 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 dynamic
characteristics of the computer product distribution industry, the Company's
revenues and earnings may be subject to material volatility, particularly on a
quarterly basis.
Additionally, in the U.S. and Canada, 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 and
holiday purchases. As a result of this pattern the Company's working capital
requirements in the fourth quarter have typically been greater than in other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year, which is primarily due to buying patterns
of Canadian Government Agencies. See "Liquidity and Capital Resources" below.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash provided by operating activities during the nine months ended September
30, 1998 was $118,773,000. The primary sources of cash from operating activities
include an increase in accounts payable of $124,867,000. The primary uses of
cash during the period include a $48,654,000 increase in accounts receivable.
The increase in accounts payable primarily reflects the growth in the overall
business as well as the Company's efforts to increase vendor financing through
increased credit limits and more favorable payment terms. The increase also
reflects a higher level of inventory of one of the Company's large vendors
resulting from purchases made to offset the expected effect of that vendor's
suspension of inventory shipments during a subsequent system conversion. The
increase in accounts receivable is related primarily to increased sales volume.
Net cash used in investing activities was $22,684,000 consisting primarily of
capital expenditures incurred in connection with the implementation of SAP in
the U.S. Capital expenditures were also made for the purchase of computer
equipment for internal use and for improvements of existing facilities.
Net cash provided by financing activities was $34,119,000 and was comprised
primarily of proceeds from the sale of accounts receivable under the Company's
asset securitization facilities.
Securitization Facilities
Funds generated by the sale of receivables in the U.S. are provided through
Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas. Merisel Capital Funding's sole business is the
ongoing purchase of trade receivables from Merisel Americas. Merisel Capital
Funding sells these receivables, in turn, under an agreement with a
securitization company, whose purchases yield proceeds of up to $500,000,000 at
any point in time. The maximum commitment under the facility was increased from
$300,000,000 to $500,000,000 pursuant to an amendment entered into effective
July 30, 1998. Merisel Capital Funding is a separate corporate entity with
separate creditors who, upon its liquidation, are entitled to be satisfied out
of Merisel Capital Funding's assets prior to any value in the subsidiary
becoming available to the subsidiary's equity holder. The agreement, as amended,
expires October 2003.
Funds are also provided to Merisel Canada, Inc. ("Merisel Canada") through a
receivables purchase agreement with a securitization company. In accordance with
this agreement, Merisel Canada sells receivables to the securitization company,
which yields proceeds of up to CND$150,000,000. The facility expires December
12, 2000, but is extendible by notice from the securitization company, subject
to the Company's approval.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of September
30, 1998, the total amount outstanding under these facilities was $345,363,000.
Subsequent to September 30, 1998, a substantial portion of the Company's cash
and cash equivalents was used to reduce the amount outstanding under the
securitization facilities. Fees incurred in connection with the sale of accounts
receivable for the three and nine months ended September 30, 1998 were
$4,211,000 and $12,876,000 compared to $4,066,000 and $11,416,000 incurred for
the three and nine months ended September 30, 1997 and are recorded as other
expense.
Debt Obligations, Financing Sources and Capital Expenditures
At September 30, 1998, Merisel, Inc. had outstanding $125,000,000 principal
amount of 12-1/2% Senior Notes due 2004 (the "12.5% Notes"). The 12.5% Notes
provide for an interest rate of 12.5% payable semi-annually. By virtue of being
an obligation of Merisel, Inc., the 12.5% Notes are effectively subordinated to
all liabilities of the Company's subsidiaries, including trade payables, and are
not guaranteed by any of the Company's subsidiaries. The indenture relating to
the 12.5% 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 investments, loans,
advances, asset sales or transfers, dividends and other payments, the creation
of liens, sale-leasebacks, transactions with affiliates and certain mergers.
At September 30, 1998, the Company had promissory notes outstanding with an
aggregate balance of $7,151,000. Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. The
notes are collateralized by certain of the Company's real property and
equipment.
Merisel Americas entered into a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security Agreement") with BankAmerica Business Credit, Inc.
("BA"), acting as agent, which provides for borrowings on a revolving basis. The
Loan and Security Agreement permits borrowings of up to $100,000,000 outstanding
at any one time (including face amounts of letters of credit), subject to
meeting certain availability requirements under a borrowing base formula and
other limitations. Borrowings under the Loan and Security Agreement are secured
by a pledge of substantially all of the inventory held by Merisel Americas.
Borrowings bear interest at the rate of LIBOR plus a specified margin, or, at
the Company's option, BA's prime rate. An annual fee of 0.375% is payable with
respect to the unused portion of the commitment. The Loan and Security Agreement
has a termination date of June 30, 2003. No amounts were outstanding under the
Loan and Security Agreement as of September 30, 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be between $35,000,000
and $45,000,000 for 1998, primarily consisting of costs associated with
implementing the SAP operating system (which includes all external direct costs
of materials and services, purchased hardware and software, and payroll and
payroll-related costs of employees directly associated with the SAP
implementation), developing the Company's co-location and configuration
capabilities, enhancing electronic services, upgrading warehouse systems and
other Company facilities, and building the Company's infrastructure to support
growth. The Company intends to fund its capital expenditures through internally
generated cash and long-term financing. The Company's capital expenditures for
1998 will result in a significant increase in depreciation expense in future
periods.
At September 30, 1998, the Company had cash and cash equivalents of
$164,165,000. A substantial portion of the cash and cash equivalents balance,
which is significantly larger than the Company's average cash balances during
the quarter, was used to reduce the amount outstanding under the Company's
securitization facilities subsequent to September 30, 1998. The Company does not
intend to maintain this level of cash balances. In the opinion of management,
anticipated cash from operations in 1998, together with proceeds under the
Company's securitization and revolving credit facilities and trade credit from
vendors, will be sufficient to meet the Company's requirements for the next 12
months. This assumes, however, that there are not material adverse changes in
the Company's relationships with its vendors, customers or lenders. Any
unforeseen event that adversely impacts the industry or the Company's position
in the industry could have a direct and material unfavorable effect on the
liquidity of the Company.
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 to factors including increases or
decreases in sales levels, Merisel's practice of making large-volume purchases
when it deems 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. In recent months, however, certain computer systems manufacturers
that are among the Company's largest vendors have announced changes in price
protection and other terms and conditions which could adversely affect the
Company. The Company is working closely with these manufacturers and has
developed buying procedures and controls to manage
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
inventory purchases to minimize any adverse impact from these changes, although
there is no assurance that such efforts will be successful.
The Company purchases foreign exchange contracts to minimize foreign exchange
transaction gains and losses. The Company intends to continue the practice of
purchasing foreign exchange contracts and is currently considering adjustments
to its hedging strategy to further minimize foreign exchange risks. However, the
risk of foreign exchange transaction losses cannot be completely eliminated.
The Company offers credit terms to qualifying customers and also sells on a
prepay, early pay, credit card and cash-on-delivery basis. The Company also
arranges a wide variety of programs through which third parties provide
financing to certain of its customers. These programs include floor plan
financing, hardware and software leasing, and escrow programs. With respect to
credit sales, the Company attempts to control its bad debt exposure by
monitoring customers' creditworthiness and, where practicable, through
participation in credit associations that provide customer credit rating
information for certain accounts. In addition, the Company purchases credit
insurance as it deems appropriate.
COMPETITION
Competition in the computer products distribution industry is intense.
Competitive factors include price, brand selection, breadth and availability of
product offering, financing options, shipping and packaging accuracy, 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
distributors and aggregators such as Gates/Arrow, Inacom, Ingram Micro, Pinacor,
SYNNEX Information Technologies, Inc. and Tech Data Corporation, as well as
regional distributors and franchisers.
Merisel also competes with manufacturers that sell directly to computer
resellers, sometimes at prices below those charged by Merisel for similar
products. The Company believes its broad product offering, product availability,
prompt delivery and support services may offset a manufacturer's price
advantage. In addition, many manufacturers concentrate their direct sales on
large computer resellers because of the relatively high costs associated with
dealing with small-volume computer reseller customers.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1994, Merisel 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. The parties executed a Stipulation of Settlement,
which is subject to approval by the district court. Under the settlement,
Merisel was not required to make any material payment.
Effective April 14, 1997, the Company entered into a Limited Waiver and
Voting Agreement (the "Limited Waiver Agreement") with holders of more than 75%
of the outstanding principal amount of the Company's 12-1/2% Senior Notes due
2004 (the "12.5% Notes"). Pursuant to the terms of the Limited Waiver Agreement,
upon the fulfillment of certain conditions, holders of the 12.5% Notes would
exchange (the "Exchange") their 12.5% Notes for common stock of the Company (the
"Common Stock"), which would equal approximately 80% of the outstanding shares
of Common Stock immediately after the Exchange. The Limited Waiver Agreement
also provided that, immediately after the consummation of the Exchange, the
Company would issue certain warrants to the existing holders of Common Stock.
The conditions to the Exchange were not met and, on September 19, 1997, the
Limited Waiver Agreement terminated in accordance with its terms. Prior to the
termination of the Limited Waiver Agreement on September 19, 1997, certain
disagreements arose between the Company and certain holders of the Company's
12.5% Notes ("Noteholders") over the interpretation of the Company's obligations
under the Limited Waiver Agreement, including that the Limited Waiver Agreement
did not require either the Board of Directors of the Company (the "Board") or
the Company to recommend to its stockholders proposals relating to the proposed
debt restructuring in which the Noteholders would have exchanged their 12.5%
Notes for Common Stock (the "Noteholder Restructuring") and that the Company was
not obligated to seek confirmation of a "prepackaged plan" of reorganization by
means of the "cramdown" provisions of the Bankruptcy Code. On September 4, 1997,
the Company filed suit in Delaware Chancery Court (the "Delaware Action")
seeking a declaratory judgment with respect to these issues. The Company intends
to vigorously prosecute its claim in the Delaware Action. There can be no
assurance, however, that the Company will ultimately be successful with respect
to its claims.
On September 11, 1997, certain Noteholders filed an answer to the
Company's complaint in the Delaware Action as well as a counterclaim against the
Company asserting claims for breach of the Limited Waiver Agreement, unjust
enrichment and a declaratory judgment (the "Noteholder Suit"). The Noteholder
Suit also asserts a claim for unjust enrichment against Dwight A. Steffensen,
the Company's Chief Executive Officer. The Noteholder Suit seeks damages in
excess of $100 million from the Company. The Company's alleged breaches include,
among other things, that the Board changed its recommendation with respect to
proposals relating to the Noteholder Restructuring. The Company and Mr.
Steffensen filed motions for judgment on the pleadings on October 7, 1997
seeking to have the Noteholder Suit dismissed. On January 5, 1998, the Delaware
Chancery Court (the "Court") denied both motions. Under the current schedule set
by the Court, in February 1999 the Court will consider any summary judgment
motions filed by the parties. It is Merisel's current intention to file such a
motion although there can be no certainty that the Court will resolve the case
by means of such a motion. If the Court denies any such motion, in whole or in
part, or if the parties do not elect to file any such motion, trial will
commence on March 15, 1999 or as soon thereafter as is convenient for the Court.
<PAGE>
The Company and Mr. Steffensen believe that they have strong defenses to each of
the claims asserted and intend to defend themselves vigorously. There can be no
assurance, however, as to the ultimate outcome of these claims.
On March 16, 1998, the Company received a summons and complaint, filed
in the Superior Court of California, County of Santa Clara, in a matter
captioned Official Unsecured Creditors Committee of Media Vision Technology,
Inc. v. Merisel, Inc. The plaintiff alleges that certain executive officers of
Media Vision Technology, Inc. ("Media Vision") committed fraud and breached
fiduciary duties owed to Media Vision through, inter alia, the improper
recognition and reporting of sales, revenue and income and the failure to
properly recognize and report product returns during 1993 and 1994, thereby
overstating the financial condition of Media Vision as reflected in its
financial statements for 1993. The plaintiff further alleges that the Company
aided, abetted, conspired and/or made possible such acts and omissions of the
Media Vision executives. The plaintiff seeks to recover compensatory damages,
including interest thereon, exemplary and punitive damages, and costs including
attorneys' fees. On May 6, 1998, the Company filed a motion to dismiss the
complaint on various legal grounds as well as a motion to strike the punitive
damages prayer. In response to the motions, the plaintiff filed a first amended
complaint on August 31, 1998, adding a claim for unfair business practices under
California Business & Professions Code ss. 17200 and additional allegations. The
plaintiff's filing of an amended complaint mooted the Company's original
motions. The Company has filed a motion to dismiss the amended complaint on
various grounds and a motion to strike the punitive damages prayer. These
motions are set for hearing on January 14, 1999. The Company intends to defend
itself vigorously against this claim.
The Company is involved in certain other legal proceedings arising in
the ordinary course of business, none of which is expected to have a material
impact on the financial condition or business of Merisel.
<PAGE>
Item 5. Other Information
The Securities and Exchange Commission (the "Commission") recently
amended certain rules under the Securities Exchange Act of 1934 regarding the
use of a company's discretionary proxy voting authority with respect to
shareholder proposals submitted to the Company for consideration at the
Company's next annual meeting.
Shareholder proposals submitted to the Company outside the processes of
Rule 14a-8 (i.e., the procedures for placing a shareholder's proposal in the
Company's proxy materials) with respect to the Company's 1999 annual meeting of
shareholders will be considered untimely if received by the Company after
February 24, 1999. Accordingly, the proxy with respect to the Company's 1999
annual meeting of shareholders will confer discretionary authority to vote on
any shareholder proposals received by the Company after February 24, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the quarter ended September 30, 1998
(b) The following Reports on Form 8-K were filed during the quarter
ended September 30, 1998.
None.
<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: November 16, 1998
Merisel, Inc.
By /s/Timothy N. Jenson
-----------------------------
Timothy N. Jenson
Senior Vice President - Finance
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000724941
<NAME> MERISEL, INC.
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