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 March 31, 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 May 13, 1998
Common Stock, $.01 par value 80,214,568 Shares
<PAGE>
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of 1-2
March 31, 1998 and December 31, 1997
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of 9-18
Financial Condition and Results of Operations
PART II OTHER INFORMATION 19-21
SIGNATURES 23
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
March 31, December 31,
1998 1997
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $109,701 $36,447
Accounts receivable (net of allowances
of $ 18,128 and $18,549 for 1998 and 1997, respectively) 167,502 162,895
Inventories 467,546 462,752
Prepaid expenses and other current assets 14,441 12,352
Deferred income tax benefit 646 644
------------------- -------------------
Total current assets 759,836 675,090
PROPERTY AND EQUIPMENT, NET 42,902 40,142
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 25,199 25,381
OTHER ASSETS 5,589 6,498
------------------- -------------------
TOTAL ASSETS $833,526 $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
March 31, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $519,360 $437,211
Accrued liabilities 37,314 37,268
Income taxes payable 2,024 1,695
Long-term debt - current 2,081 1,762
-------------------- -------------------
Total current liabilities 560,779 477,936
Long-term debt 130,929 131,667
-------------------- -------------------
TOTAL LIABILITIES 691,708 609,603
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; 80,212,918 and 80,078,500
shares outstanding for 1998 and 1997, respectively 802 801
Additional paid-in capital 282,257 281,701
Accumulated deficit (133,369) (137,005)
Cumulative translation adjustment (7,872) (7,989)
-------------------- --------------------
Total stockholders' equity 141,818 137,508
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $833,526 $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
March 31,
1998 1997
---------------- -----------------
<S> <C> <C>
NET SALES $ 1,101,670 $ 1,113,100
COST OF SALES 1,039,919 1,048,124
---------------- -----------------
GROSS PROFIT 61,751 64,976
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 49,093 51,520
---------------- -----------------
OPERATING INCOME 12,658 13,456
INTEREST EXPENSE 3,783 8,623
OTHER EXPENSE 5,090 3,530
----------------- ------------------
INCOME BEFORE INCOME TAXES 3,785 1,303
INCOME TAX PROVISION 149 173
------------------ ------------------
NET INCOME $ 3,636 $ 1,130
================== ==================
NET INCOME PER SHARE (BASIC AND DILUTED) $ 0.05 $ 0.04
================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 80,152 30,078
DILUTED 80,389 30,078
================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
1998 1997
------------------ --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,636 $ 1,130
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,509 3,180
Provision for doubtful accounts 1,844 4,797
Changes in assets and liabilities:
Accounts receivable (41,201) (32,384)
Inventories (4,794) 34,348
Prepaid expenses and other assets (1,180) (4,083)
Income taxes receivable/payable 327 779
Accounts payable 82,149 6,626
Accrued liabilities 45 (3,816)
------------------ --------------------
Net cash provided by operating activities 43,335 10,577
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,062) (648)
------------------ --------------------
Net cash used for investing activities (5,062) (648)
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 33,200 254,207
Repayments under revolving line of credit (33,200) (255,118)
Proceeds from issuance of promissory notes (607)
Net repayments under other bank facilities (514)
Repayments under other financing arrangements (418)
Proceeds from sale of accounts receivable 34,737
Repayment of subordinated debt (4,400)
Proceeds from issuance of Common Stock 557
------------------ --------------------
Net cash provided by financing activities 34,876 (6,432)
------------------ --------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 105 (245)
------------------ --------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 73,254 3,252
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 36,447 44,678
------------------ --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 109,701 $ 47,930
================== ====================
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 months ended March 31, 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. 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 first quarter is the 13-week period ending
on the Saturday nearest to March 31. For simplicity of presentation, the Company
has described the interim periods and year-end period as of March 31 and
December 31, respectively.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
4. Debt
In January 1998, the Company and Merisel Americas entered into a Revolving
Credit Agreement and Convertible Promissory Note due July 2, 1998 (the "BT
Note") with Bankers Trust Company ("BT"), which permits borrowings thereunder by
Merisel Americas of up to $46,500,000 outstanding at any one time. In order to
induce BT to enter into the BT Note, Stonington Capital Appreciation 1994 Fund,
L.P. (the "Fund"), the sole owner of Phoenix Acquisition Company L.L.C.
("Phoenix"), which owns approximately 62.4% of the outstanding shares of common
stock of the Company, caused its wholly owned subsidiary Stonington Financing
Inc. ("SFI") to enter into a note put agreement (the "Note Put Agreement") with
BT. Pursuant to the Note Put Agreement, BT may require SFI to purchase the BT
Note in the event of a default by Merisel Americas, including failure to pay the
BT Note at maturity. In the event SFI purchases the BT Note pursuant to the Note
Put Agreement, the BT Note is convertible into shares of common stock of the
Company at the option of SFI at a conversion rate equal to the average closing
price of the Company's common stock on NASDAQ for the fifteen trading days
immediately preceding the conversion. SFI and Merisel Americas also entered into
an agreement wherein Merisel Americas covenants that, in the event BT gives
notice to SFI pursuant to the Note Put Agreement requiring SFI to purchase the
BT Note, it will use its best efforts to refinance the BT Note prior to its
final maturity date.
Merisel Americas may borrow under the BT Note through May 31, 1998, and all
outstanding borrowings mature on July 2, 1998. Borrowings bear interest at the
rate of LIBOR plus 3% or, at the Company's option, BT's prime rate plus 2%. A
commitment fee of 0.5% is payable with respect to the unused portion of the
commitment.
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"). The
sale price, computed based upon the February 21, 1997 balance sheet of Merisel
FAB, was $31,992,000 consisting of the assumption by the buyer of $11,992,000 of
trade payables and accrued liabilities and a $20,000,000 extended payable due to
Vanstar Corporation. As part of the sale, the Company agreed to extend rebates
to Synnex on future purchases at a defined rate per dollar of purchases, not to
exceed $2,000,000 in aggregate rebates.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Following are summarized pro forma operating results for the three months ended
March 31, 1997 assuming that the Company had sold the assets of Merisel FAB as
of January 1, 1997 and summarized actual operating results for the three months
ended March 31, 1998.
(in thousands except per share data)
Actual Pro Forma
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
---------------- -----------------
Net Sales $ 1,101,670 $ 910,923
Gross Profit 61,751 57,299
Net Income (loss) 3,636 (1,024)
================ =================
Net Income (loss) per
shares $ 0.05 $ (0.03)
================ =================
Weighted Average
Shares Outstanding 80,152 30,078
================ =================
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:
(in thousands)
Three Months Ended
March 31,
1998 1997
---- ----
Net Income $ 3,636 $ 1,130
------------- -------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 117 (313)
------------- -------------
Comprehensive income $ 3,753 $ 817
============= =============
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
7. Earnings Per Share
The Company calculates earnings per share 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 the quarter ended March 31, 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.
8. Supplemental Disclosure of Cash Flow Information
Cash paid (received) in the three month periods ended March 31 for interest and
income taxes was as follows:
1998 1997
------ -------
(in thousands)
Interest $ (768) $ 9,238
Income taxes $ (248) $ (593)
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 (See Note 5 "Dispositions").
<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. ("Synnex"). 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 three months ended March 31, 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 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 March
31, 1998, Phoenix owned 50,000,000 shares of Common Stock, or approximately
62.4% of the outstanding Common Stock.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 as Compared to the Three Months Ended March
31, 1997.
The following table sets forth the unaudited results of operations for the three
months ended March 31, 1998 and for the North American Business and Former
Operations for the three months ended March 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 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 $1,101,670 $1,101,670 $ 910,923 $ 202,177 $1,113,100
Cost of Sales 1,039,919 1,039,919 853,624 194,500 1,048,124
------------- ------------- -------------- ------------- -------------- ---------------
Gross Profit 61,751 61,751 57,299 7,677 64,976
SG&A Expenses 49,093 49,093 45,321 6,199 51,520
------------- ------------- -------------- ------------- -------------- ---------------
Operating
Income $ 12,658 $ $ 12,658 $ 11,978 $ 1,478 $ 13,456
============= ============= ============== ============= ============== ===============
</TABLE>
Net sales for the North American Business increased 20.9% from $910,923,000 in
the quarter ended March, 31 1997 to $1,101,670,000 in the quarter ended March
31, 1998. The increase resulted from a 24.5% increase in net sales for the U.S.
and a 9.4% 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 from
MOCA, Commercial and Retail. The growth rate in Canada in terms of Canadian
dollars was 14.4%, 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 fourth
quarter of 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Hardware and accessories accounted for 78% of net sales and software accounted
for 22% of net sales in the first quarter of 1998, as compared to 75% and 25%
for the same categories, respectively, for the North American Business in the
first quarter of 1997.
Gross profit for the North American Business increased 7.8% or $4,452,000 from
$57,299,000 in the first quarter of 1997 to $61,751,000 in the 1998 period.
Gross profit as a percentage of sales, or gross margin, decreased from 6.3% in
1997 to 5.6% in 1998. Gross margins in the United States and Canada were 5.6%
and 5.8%, respectively, for the first quarter of 1998, compared to 6.4% and
5.9%, respectively, for the first 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 and improved
controls over margin management related activities such as sales execution,
improved 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 North American Business
increased by 8.3% from $45,321,000 in the first quarter of 1997 to $49,093,000
in the first quarter of 1998. However, selling, general and administrative
expenses as a percentage of sales decreased from 5.0% of sales in 1997 to 4.5%
for the same period in 1998. This decrease is primarily attributable to efforts
to control operating expenses while the Company experienced sales growth of
20.9% during the period.
As a result of the above items, operating income for the North American Business
improved by $680,000 from $11,978,000 for the first quarter of 1997 to $
12,658,000 for the first quarter of 1998.
Interest Expense; Other Expense; and Income Tax Provision
Interest expense for the Company, including Former Operations, decreased 56.1%
from $8,623,000 in 1997 to $3,783,000 in 1998. The decrease in interest expense
is primarily attributable to a reduction of the Company's debt by approximately
$154,902,000, from $288,331,000 on March 31, 1997 to $133,429,000 by December
31, 1997, 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.
Other expenses for the Company, including Former Operations, increased from
$3,530,000 for the three months ended March 31, 1997 to $5,090,000 for the same
period in 1998. This increase is due primarily to a $1,069,000 increase in asset
securitization fees which are included in other expense. The increased
securitization fees are due to increased sales of accounts receivables in the
North American Business in order to fund sales growth and daily operations. The
average proceeds drawn from the sale of accounts receivable at month end under
the Company's
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
securitization facilities increased from $251,294,000 for the three months ended
March 31, 1997 to $291,846,000 for the same period in 1998.
The income tax provision decreased from an expense of $173,000 for the three
months ended March 31, 1997 to an expense of $148,000 for the same period 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.
Consolidated Loss
On a consolidated basis, net income for the Company, including Former
Operations, increased from $1,130,000 for the three months ended March 31, 1997
to income of $3,636,000 for the three months ended March 31, 1998 due to the
factors described above. Net income per share increased from $0.04 per share for
the three months ended March 31, 1997 to net income of $0.05 per share for the
same period of 1998.
SYSTEMS AND PROCESSES; YEAR 2000 ISSUES
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 no later than the first part of 1999. The Company converted
its Canadian operations from a mainframe to the 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.
The Company believes that implementation of the SAP operating system will
address its major "year 2000 issues", which arise in cases where computer
systems or any equipment with computer chips use two-digit fields that recognize
dates using the assumption that the first two digits are "19". On January 1,
2000, any clock or date recording mechanism including date sensitive software
that uses only two digits to represent the year may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including among
other things a temporary inability to process transactions, send invoices or
engage in similar activities.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company is currently engaged in a review of its computer systems and
applications, including packaged software used by the Company, not addressed by
the SAP operating system. The Company expects to make any modifications required
to resolve year 2000 issues in a timely manner and to have the majority
completed by early 1999, leaving adequate time to assess and correct any
significant issues that may materialize. The Company is seeking assurances of
year 2000 compliance from its suppliers of software and other products and
services used internally that might raise year 2000 issues. The Company is also
expecting to initiate formal communications with selected vendors and customers
to determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own year 2000 issues. The Company can give
no guarantee that the systems of other companies on which the Company's systems
rely will be converted on time or that failure to convert by another company or
a conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company. The Company is taking steps to reduce
the likelihood that such failures could affect the Company's systems through any
electronic communications.
The Company does not expect that the review and modifications described above
(excluding the cost of implementing the SAP operating system in the U.S.) will
require material expenditures. If the Company is unable to successfully
implement the SAP operating system sufficiently in advance of the year 2000,
however, additional expenditures could be required and such expenditures could
be substantial. See "Liquidity and Capital Expenditures" below.
The design and implementation of these new systems are complex projects and
involve certain risks. Until such implementation, the Company will continue to
maintain its existing U.S. systems and may experience difficulty in processing
transactions, which could adversely affect operating income and cash flows. In
addition, if the modifications required to address the Company's year 2000
issues are not made, or are not timely, the year 2000 issues could have a
material impact on the operations and financial results and condition of the
Company.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 and holiday purchases. As
a result of this pattern the Company's working capital requirements in the
fourth quarter have typically been greater than 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash provided by operating activities during the three months ended March
31, 1998, was $43,335,000. The primary sources of cash from operating activities
include an increase in accounts payable of $82,149,000. The primary uses of cash
during the period include a $41,201,000 increase in accounts receivable. The
increase in accounts payable reflects the Company's efforts to increase vendor
financing through increased credit limits and more favorable payment terms. The
increase in accounts receivable is related primarily to increased sales volume.
Net cash used in investing activities was $5,062,000 consisting entirely of
leasehold improvements and equipment expenditures. The equipment expenditures
were primarily incurred in connection with 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 $34,876,000 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 $300,000,000 at
any point in time. 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 2000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of March 31,
1998, the total amount outstanding under these facilities was $345,297,000. Fees
incurred in connection with the sale of accounts receivable for the three months
ended March 31, 1998 were $4,642,000 compared to $3,573,000 incurred for the
three months ended March 31, 1997 and are recorded as other expense.
Debt Obligations, Financing Sources and Capital Expenditures
At March 31, 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 March 31, 1998, the Company had promissory notes outstanding with an
aggregate balance of $8,010,000. 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.
In January 1998, the Company and Merisel Americas entered into a Revolving
Credit Agreement and Convertible Promissory Note due July 2, 1998 (the "BT
Note") with Bankers Trust Company ("BT"), which permits borrowings thereunder by
Merisel Americas of up to $46,500,000 outstanding at any one time. In order to
induce BT to enter into the BT Note, Stonington Capital Appreciation 1994 Fund,
L.P. (the "Fund"), the sole owner of Phoenix, which owns approximately 62.4% of
the outstanding Common Stock, caused its wholly owned subsidiary Stonington
Financing Inc. ("SFI") to enter into a note put agreement (the "Note Put
Agreement") with BT. Pursuant to the Note Put Agreement, BT may require SFI to
purchase the BT Note in the event of a default by Merisel Americas, including
failure to pay the BT Note at
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
maturity. In the event SFI purchases the BT Note pursuant to the Note Put
Agreement, the BT Note is convertible into shares of Common Stock at the option
of SFI at a conversion rate equal to the average closing price of the Common
Stock on NASDAQ for the fifteen trading days immediately preceding the
conversion. SFI and Merisel Americas also entered into an agreement wherein
Merisel Americas covenants that, in the event BT gives notice to SFI pursuant to
the Note Put Agreement requiring SFI to purchase the BT Note, it will use its
best efforts to refinance the BT Note prior to its final maturity date.
Merisel Americas may borrow under the BT Note through May 31, 1998, and all
outstanding borrowings mature on July 2, 1998. Borrowings bear interest at the
rate of LIBOR plus 3% or, at the Company's option, BT's prime rate plus 2%. A
commitment fee of 0.5% is payable with respect to the unused portion of the
commitment. The Company is currently in negotiations with respect to a
replacement facility, however, no assurances can be given that such negotiations
will be successful.
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, developing the Company's channel assembly
capabilities, enhancing electronic services, upgrading warehouse systems and
other Company facilities, and building the sales infrastructure. However,
aggregate costs could exceed these estimates, depending on the timing and scope
of the SAP implementation. The Company intends to fund its capital expenditures
primarily through internally generated cash and lease financing.
At March 31, 1998, the Company had cash and cash equivalents of $109,701,000. In
the opinion of management, anticipated cash from operations in 1998, together
with borrowings under the Company's securitization facilities and trade credit
from vendors, will be sufficient to meet the Company's requirements for the next
12 months, without the need for additional financing, assuming the BT Note is
refinanced or replaced with other sources of internal or external funding. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Historically, the Company has purchased foreign exchange contracts to minimize
foreign exchange transaction gains and losses. While such contracts were
temporarily not available to the Company in the latter part of 1996, they were
again being purchased as of early 1997. No material negative financial impact
was experienced during the time the contracts were not being used. The Company
plans to continue to use foreign exchange contracts in the future, to the extent
they are available and necessary.
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 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, MicroAge
and Tech Data Corporation, as well as regional distributors and franchisers.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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. 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 December 22, 1994.
On April 3, 1995, Federal District Judge Real dismissed the complaint with
prejudice. On August 8, 1997 the Court of Appeals for the Ninth Circuit (the
"Court of Appeals") reversed the dismissal and remanded the case to the trial
court. On August 22, 1997, the Company filed a petition for rehearing and
suggestion of rehearing en banc (the "Petition") with the Court of Appeals. On
January 30, 1998, the Court of Appeals issued an order amending its prior
opinion and denying the Company's petitions for rehearing and rehearing en banc.
In light of this order, the Federal District Court held a hearing on April 13,
1998 at which Judge Real set a trial date of September 8, 1998. The Company
intends to defend itself vigorously against this claim.
In January 1997, the Company received notice that Tech Pacific Holdings Limited
("Tech Pacific") had brought a claim in the Supreme Court of New South Wales,
Sydney Registry Commercial Division, against Merisel; its subsidiary Merisel
Asia, Inc. ("Merisel Asia"); Patrick T. Woods, former managing director of
Merisel Australia; and Michael D. Pickett, former CEO and Chairman of Merisel,
in a proceeding captioned Tech Pacific Holdings Limited, v. Merisel, Inc., et.
al. In March 1996, Tech Pacific purchased Merisel Pty, Ltd ("Merisel
Australia"), Merisel's Australian subsidiary, for a purchase price of $9,900,000
pursuant to the Share Purchase Agreement dated as of March 7, 1996 between
Merisel Asia and Tech Pacific. The claim asserted various breaches of
representations and warranties as well as misleading and deceptive conduct under
relevant provisions of Australian law with respect to the financial position of
Merisel Australia as represented by oral and written disclosures. The plaintiffs
sought to recover specified damages exceeding AUS$8.3 million (or approximately
US$5.6 million as of March 27, 1998) as well as unspecified damages plus costs
and expenses associated with the claim. In April 1998 the Company entered into a
settlement agreement with Tech Pacific which did not and will not have a
material adverse effect on the Company or its financial condition.
<PAGE>
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% Note"). 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." 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 Court
denied both motions. 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.
In addition, on September 19, 1997, the Company received notice from
representatives of the lenders under the agreements relating to certain
operating company debt that, in connection with the Company's repayment of such
debt, such lenders believe that they are owed approximately $2.7 million in
fees. On October 31, 1997, the Company received a further letter demanding
payment of such fees. The Company does not believe any such fees are owed and
has so notified the lenders. There can be no assurance, however, as to the
ultimate outcome of this claim.
<PAGE>
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 plaintiffs allege that certain executive officers of Media
Vision Technology, Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision through, interalia, 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
plaintiffs further allege that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision executives. The plaintiffs
seek 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. The motion is set for hearing
on July 14, 1998. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) The following Reports on Form 8-K were filed during the quarter
ended March 31, 1998.
Current Report on Form 8-K, dated January 26, 1998, which
reports that the Company and its wholly owned subsidiary
Merisel Americas, Inc. entered into a Revolving Credit
Agreement and Convertible Promissory Note due July 2, 1998
with Bankers Trust Company.
<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: May 15, 1998
Merisel, Inc.
By: /s/James E. Illson
-------------------------------------
James E. Illson
Executive Vice President - Operations
and Finance and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 109,701
<SECURITIES> 0
<RECEIVABLES> 184,003
<ALLOWANCES> 16,501
<INVENTORY> 467,546
<CURRENT-ASSETS> 759,837
<PP&E> 106,978
<DEPRECIATION> 64,076
<TOTAL-ASSETS> 833,526
<CURRENT-LIABILITIES> 560,779
<BONDS> 0
0
0
<COMMON> 802
<OTHER-SE> 141,016
<TOTAL-LIABILITY-AND-EQUITY> 833,526
<SALES> 1,101,670
<TOTAL-REVENUES> 1,101,670
<CGS> 1,039,919
<TOTAL-COSTS> 49,093
<OTHER-EXPENSES> 5,090
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<INTEREST-EXPENSE> 3,783
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<INCOME-TAX> 149
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<NET-INCOME> 3,636
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