SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
200 Continental Boulevard
El Segundo, California 90245-0948
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 615-3080
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 29,1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant based on the last sales price as reported by
the Nasdaq National Market System was $44,479,061 (29,652,707 shares at a
closing price of $1.50).
As of March 29, 1999, the Registrant had 80,278,682 shares of Common
Stock outstanding.
Documents Incorporated By Reference
Portions of the Registrant's definitive Proxy Statement for its 1999 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
PART I
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Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 8
Item 3. Legal Proceedings........................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......................................... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 10
Item 6. Selected Financial Data..................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 12
Item 7A. Quantitative and Qualitative Market Risk Disclosure.......................................... 22
Item 8. Financial Statements and Supplementary Data................................................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 44
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 45
Item 11. Executive Compensation...................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 45
Item 13. Certain Relationships and Related Transactions.............................................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 45
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K,
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 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, (viii) the ability to attract and
retain qualified personnel, and (ix) other risks detailed in this report. For a
detailed discussion of certain of these factors, see "Business - Certain
Business Factors." These factors are also discussed elsewhere in this report,
including, without limitation, under the captions "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." 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.
<PAGE>
PART I
Item 1. Business.
Overview
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. The Company operates three distinct business
units: United States distribution, Canadian distribution and the Merisel Open
Computing Alliance (MOCA(TM)). The Company markets products and services
throughout the United States and Canada, 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, and
retailers. Through MOCATM, the Company supports Sun Microsystems' UNIX(R)-based
products and complementary third-party products.
Merisel distributes more than 25,000 products from the industry's leading
hardware and software manufacturers. These manufacturers include American Power
Conversion, Apple, Compaq, Hewlett-Packard, IBM/Lotus, Intel, Microsoft,
3Com/U.S. Robotics, Sun Microsystems, Toshiba and Viewsonic. The breadth of
Merisel's product line, together with its extensive distribution network,
enables the Company to provide its customers with a single supply source and
prompt product delivery.
The Company was incorporated in 1980 as Softsel Computer Products, Inc. and
changed its name to Merisel, Inc. in 1990 in connection with the acquisition of
Microamerica, Inc. ("Microamerica"). In the years following the Microamerica
acquisition, the Company's revenues increased rapidly through both internal
growth and acquisition. This increase reflected the substantial growth in both
domestic and international sales as the worldwide market for computer products
expanded and manufacturers increasingly turned to wholesale distributors for
product distribution. In 1996, the Company began the process of divesting of its
operations outside of the United States and Canada and its non-distribution
operations, which it completed in the first quarter of 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview." As a result, the Company's operations are now focused exclusively on
the United States and Canada.
The Company's sales were approximately $4.6 billion for 1998. Of these sales,
81% were generated in the United States and 19% were generated in Canada.
The Industry
The primary participants in the computer products distribution industry are
manufacturers, wholesale distributors and resellers. Manufacturers sell directly
to wholesalers, resellers and end users; wholesale distributors sell to
resellers; and resellers sell to other resellers and directly to end users.
Full-line wholesale distributors, like Merisel, generally purchase a wide range
of products in bulk directly from manufacturers and then ship products in
smaller quantities to many different types of resellers. Types of resellers
include corporate resellers, value-added resellers or "VARs," system
integrators, original equipment manufacturers or "OEMs," direct marketers,
independent dealers, and mass merchants and computer chain stores. In addition,
resellers are often defined and distinguished by the types of value-added
services they provide and by the end-user markets they serve, such as large
corporate accounts, small to medium-sized businesses, and home users. Resellers
rely on wholesale distributors like Merisel for their broad product offerings,
product availability, flexible financing alternatives, technical support, and
prompt and efficient delivery. Manufacturers benefit from using wholesale
distribution as an alternative to direct sales to resellers by not having to
maintain large sales forces, warehouse facilities and distribution networks.
Manufacturers also rely on wholesale distributors to provide marketing and
support services as well as credit for reseller customers.
The computer products distribution industry continues to experience double-digit
growth throughout North America. Recent trends in wholesale distribution include
custom configuration of products by distributors, various supply chain
management strategies to eliminate time and cost, and continued development of
electronic commerce and information systems. Additional industry dynamics
include the rapid emergence of Internet and other "virtual" businesses that
operate with minimal infrastructure, changing terms and conditions from major
systems manufacturers, increasingly aggressive pricing practices and continued
industry consolidation. In order to compete more effectively and lower their
costs, major computer systems manufacturers that rely on the two-tier
distribution model have begun to take steps to reduce their own inventories and
the inventories of their distributors and resellers. One such strategy is
"co-location," which involves the distributor occupying space in the
manufacturer's facility where it takes possession of and ships the
manufacturer's product. Additionally, configuration services may be performed at
these co-location facilities. Electronic commerce refers to the use of
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electronic systems and applications to exchange information and transact
business. These systems and applications include electronic data interchange, or
"EDI," and Internet-based order-entry and information systems. Electronic
commerce can simplify account set-up, ordering, shipping and support, and
thereby facilitate sales while decreasing both selling and purchasing costs.
Electronic commerce is becoming an increasingly significant factor in the
computer products distribution industry.
Business Strategy
Merisel is a full-line wholesale distributor offering leading products and
services to resellers at competitive prices. The Company provides dedicated
sales support and customized programs and services to targeted customer groups.
Leading Products and Services. The Company's objective is to offer a broad range
of leading brands of systems, peripherals, networking products and software. By
stocking a broad mix of products, the Company meets the needs of resellers who
prefer to deal with a single source for many of their product requirements. The
Company continually evaluates new products, the demand for current products, and
its overall product mix, and seeks to develop distribution relationships with
suppliers of products that enhance the Company's product offerings. The Company
believes that the size of its reseller customer base, combined with the breadth
and quality of its marketing support programs, gives Merisel a competitive
advantage over smaller, regional distributors in developing and maintaining
supplier relationships.
Customer Service and Satisfaction. Merisel believes that a high level of
customer satisfaction is important to achieve and maintain success in the very
competitive computer products distribution industry. The Company measures
customer satisfaction by such standards as accuracy and efficiency in product
delivery and the provision of comprehensive services and information. Merisel
strives on an ongoing basis to improve its operational processes in order to
achieve increasingly high levels of customer satisfaction.
Customer Groups. Merisel serves a variety of reseller channels, which have
diverse product, financing and support requirements. Merisel was among the first
major wholesale distributors in the industry to offer its various customer
groups a channel-dedicated sales force as well as customized product offerings,
financing programs, and marketing and technical support programs, all of which
are tailored to address the differing needs of these customer groups. The
Company intends to continue focusing on the profitability of the markets it
serves to identify customer opportunities and develop sales and marketing
programs that serve these groups most effectively.
1999 Initiatives and Investments. To capitalize on its strengths and
differentiate Merisel from its competitors in 1999, the Company is focused on
key initiatives aimed at generating new ways to support its customers and
increase sales and gross margins. The Company is focused on expanding its reach
to specific customer groups that offer significant revenue and margin
opportunities, such as VARs, Internet and other "virtual" businesses, and
high-end resellers that offer enterprise computing solutions. To support its
customers, expand service offerings, and increase productivity and efficiency,
the Company has also identified three key areas for further investment:
electronic commerce, enhanced information systems and improved supply chain
management.
Manufacturers and Manufacturer Programs and Services
Merisel has established and developed long-term business relationships with many
of the leading manufacturers in the computer products industry. The Company's
suppliers number more than 500 and include Adobe Systems, American Power
Conversion, Apple, Compaq, Computer Associates, Corel, Epson America,
Hewlett-Packard, IBM/Lotus, Informix, Intel, Intuit, Iomega, Kingston
Technology, Lexmark, Microsoft, NEC Technologies, Network Associates, Novell,
Okidata, Seagate, Sony, Sun Microsystems, Symantec, 3Com/U.S. Robotics, Toshiba,
ViewSonic and Western Digital. Merisel is one of only three distributors in
North America authorized to sell Sun Microsystems products.
Merisel enters into written distribution agreements with the manufacturers of
the products it distributes. As is customary in the industry, these agreements
usually provide non-exclusive distribution rights and often contain territorial
restrictions that limit the countries in which Merisel is permitted to
distribute the products. The agreements generally provide Merisel with stock
balancing and price protection provisions that partially reduce Merisel's risk
of loss due to slow-moving inventory, supplier price reductions, product updates
or obsolescence. In the past year, however, certain computer systems
manufacturers that are among the Company's largest vendors have announced
changes in price protection and other terms and conditions that could adversely
affect the Company. The Company is working closely with these manufacturers and
has developed buying procedures and controls to manage inventory purchases to
reduce the potential adverse impact from these changes while balancing the need
to maintain sufficient levels of inventory. There is no assurance that such
efforts will be successful in preventing a material adverse effect on the
Company. The Company's agreements, which generally have a term of at least one
year, may contain minimum purchase amounts and generally contain provisions
permitting earlier termination by either party upon written notice.
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Additional manufacturer programs toward which Merisel is devoting substantial
resources include configuration and co-location. Configuration involves the
assembly of computer products from multiple vendors into a single unit or system
that conforms to the specific needs of an individual end user. While at one time
configuration was a very minor aspect of a wholesale distributor's business, it
has become a major initiative as manufacturers outsource this segment of
production to wholesale distributors. Through 1996, Merisel outsourced its
configuration business to two third-party providers. In 1997, the Company took
these responsibilities in-house and currently performs system configuration in
its Hayward, California, and Toronto, Canada, warehouse facilities. Merisel is
in the process of expanding its configuration capabilities and has attained ISO
9002 certification for both of these facilities, which is required by certain
systems manufacturers.
Co-location involves establishing operations jointly with systems manufacturers
in their facilities to take steps, time, and costs out of the distribution
process, while offering improved levels of service. In a co-location facility,
the distributor takes possession of the manufacturer's product and ships it
directly to the customer, without sending the product to the distributor's
distribution center first. Merisel established its first co-location operation
with IBM in IBM's Raleigh, North Carolina, facility in October, 1998, and
recently announced a similar agreement with Compaq their Houston, Texas,
facility. Merisel's current strategy calls for the Company to perform high-end,
custom configuration at these facilities. The Company will continue to evaluate
market trends and adapt its strategy to meet the evolving needs of its business
partners.
Although Merisel distributes more than 25,000 products and accessories supplied
by more than 500 manufacturers, 73% of net sales for the North American Business
in 1998 (as compared to 69% in 1997 and 60% in 1996) was derived from products
supplied by Merisel's 10 largest vendors, with the sale of products manufactured
by Hewlett-Packard, Microsoft, Sun Microsystems and Compaq accounting for
approximately 13%, 13%, 13%, and 12%, respectively, of net sales in 1998 (as
compared to 12%, 15%, 12% and 10%, respectively, in 1997, and 9%, 14%, 10% and
10%, respectively, in 1996). Because reseller customers often prefer to deal
with a single source for many of their product needs, the loss of the ability to
distribute a particularly popular product could result in losses of sales
unrelated to the product. The loss of a direct relationship between the Company
and any of its key suppliers could have an adverse impact on the Company's
business and financial results.
Merisel provides its manufacturers with access to one of the largest bases of
computer resellers in North America, as well as the means to reduce inventory,
credit, marketing, and overhead costs typically associated with maintaining
direct reseller relationships. Through its product marketing group, the Company
develops and implements promotional programs for specific manufacturers to
increase customer purchasing depth and breadth. Promotional programs include
bundle offers, growth-goal incentives, and reseller training events as well as
channel communication vehicles such as targeted direct mail, fax and
advertising.
In addition, the Company provides manufacturers with the opportunity to
participate in Merisel's Softeach computer products training forum. Each year,
more than 4,000 resellers and dozens of leading manufacturers gather for two
days of intensive, small-group seminars in cities across the country.
Manufacturers can take advantage of this forum to train resellers on how to
market their products and increase sales.
Customers and Customer Services
In 1998, Merisel sold products and services to more than 35,000 computer
resellers throughout North America. Merisel's smaller customers often do not
have the resources to establish a large number of direct purchasing
relationships or stock significant product inventories, nor can they meet
manufacturers' minimum purchase requirements or obtain acceptable credit.
Consequently, they tend to purchase a high percentage of their products from
distributors such as Merisel, which can meet their inventory needs quickly and
efficiently. Larger resellers often establish direct relationships with
manufacturers for their more popular products but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products that may
not be available on a timely basis from manufacturers. No single customer
accounted for more than 4% of Merisel's net sales in 1998, 1997 or 1996.
Single Source Provider. Merisel offers computer resellers a single source for
more than 25,000 competitively priced hardware and software products. By
purchasing from Merisel, the reseller only needs to comply with a single set of
ordering, billing and product return procedures and may also benefit from
attractive volume pricing and financing programs. In addition, resellers are
generally allowed, within specified time limits and/or specified volume limits,
to return products for credit to be applied against future purchases from
Merisel. Customers of TM are authorized by Sun Microsystems to purchase from
only one of its three North American distributors, and may generally change the
distributor with whom they deal only once per year.
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Sales Organization. The sales departments for the Company's U.S. and Canadian
distribution businesses are organized to serve the varying requirements of the
different customer groups in the industry. The Company's United States
distribution business is organized into three sales divisions to serve VAR,
commercial, and retail customer groups. The VAR division offers specialized
services and technical products to value-added resellers, system integrators and
OEMs who offer service, support and consulting to clients in addition to selling
computer products. Because of the specialized nature of servicing the needs of
customers who sell products directly to the federal, state and local
governments, and to educational institutions, the Company has also created a
dedicated Government and Education sales team. The commercial division offers
direct fulfillment services, EDI transaction support, and dedicated field and
inside sales support to large-volume national accounts, while the retail
division primarily services mass merchants, computer chain stores and Internet
resellers.
The Company's sales force is composed of field sales representatives who manage
relationships with larger accounts and inside sales representatives who solicit
and receive product orders and answer customer inquiries. When a customer calls
Merisel, screen synchronization technology automatically causes a sales profile
to appear on the sales representative's computer screen. The Company's systems
allow the sales representative to enter customer orders, obtain descriptive
information regarding products, check inventory status, determine customer
credit availability, and obtain special pricing and promotion information.
Prompt Delivery. In the United States and Canada, orders received by 5:00 p.m.
local time are typically shipped the same day, provided the required inventory
is in stock. Merisel maintains sufficient inventory levels in the United States
to fill consistently approximately 92% of all units ordered on the day of
receipt. As part of a continuing effort to improve accuracy, Merisel's
Information and Logistics Efficiency System ("MILES") was first installed in the
Company's Atlanta distribution center in early 1994. By 1996, installation of
this custom computerized warehouse management system was completed in all nine
of Merisel's North American distribution centers. Merisel has also established
MILES environments as part of its co-location strategy in IBM's Raleigh, North
Carolina, facility and Compaq's Houston, Texas, facility. The successful
implementation of MILES has resulted in significant improvements in inventory
and shipping accuracy rates. The Company believes that its shipping accuracy
rates are currently the highest in the industry at 99.99%.
Merisel typically delivers products from its regional distribution centers via
Federal Express, United Parcel Service, and other common carriers. Most
customers in the United States receive orders within one or two working days of
shipment. Merisel also provides customer-paid overnight air handling upon
request. These services allow resellers to minimize inventory investment and
serve their customers responsively. For larger customers in the United States,
Merisel also provides a fulfillment service to ship orders directly to
resellers' customers, which speeds delivery and further minimizes reseller
inventories.
Financing Programs. Merisel's credit policy for qualified resellers eliminates
the need for them to establish multiple credit relationships with a large number
of manufacturers. In addition, the Company arranges floor plan and lease
financing through a number of credit institutions and allows credit card
purchases by qualified customers. Another program provides for direct shipment
to and billing of the reseller's customer. To allow certain resellers to
purchase larger orders in the United States, the Company can also arrange
alternative financing such as escrow programs and selected bid financing
arrangements.
Information Services. Merisel provides its reseller customers with a series of
publications containing detailed information on products, pricing, promotions
and developments in the industry. Merisel also publishes the Merisel Product
Catalog, which lists Merisel's current product offerings. Merisel's corporate
Web site offers technical product information on thousands of products and links
to more than 350 of the industry's leading manufacturers. Resellers can obtain
current information on programs and services, daily product promotions,
strategic Merisel announcements and MOCA. Customers can communicate with Merisel
Customer Service via e-mail, download return authorization and system return
forms, and track product shipments with links to Federal Express and UPS.
Merisel's Web site also offers secure, 24-hour access to SELline II, Merisel's
remote order-entry and information service, so resellers can place their product
orders through the Company's Web site at www.merisel.com. SELline II provides
resellers with real-time access to pricing information, credit information,
technical descriptions, product availability and promotional information. Since
its inception, SELline has had approximately 26,000 enrollees in the U.S. and
Canada. Merisel also utilizes EDI systems to allow large-volume customers to
communicate with the Company's computer system directly for order processing and
account data.
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Training and Technical Support. Through Merisel's Educational Services offering,
resellers and their customers can choose from a broad selection of training
solutions on UNIX(R), networking systems, the Internet, intranet, data
communications and mainstream software applications. Merisel also provides
training and product information to resellers through Softeach, a series of
manufacturer-hosted computer products training forums. Each year, more than
4,000 resellers and dozens of leading manufacturers gather for two days of
intensive, small group seminars in cities across the country. In addition,
Merisel's Tech Trax Technology Training Seminars are designed to provide Merisel
resellers with technology-focused training on how to sell and support
profitable, high-end solutions.
Merisel provides resellers with direct access to the Company's technical support
engineers through a dedicated hot line. Resellers can take advantage of
specialized pre-sale and post-sale technical support for product lines sold by
Merisel. In addition, Merisel's technical engineers provide regular product
training for Merisel's sales representatives to help them increase their product
knowledge and their ability to answer resellers' questions.
Operations, Distribution and Systems
Locations. At December 31, 1998, the Company operated nine distribution centers
throughout North America: seven in the United States and two in Canada. The
Company also operates specialized distribution centers as part of its
co-location strategy at IBM's Raleigh, North Carolina, facility and Compaq's
Houston, Texas, facility.
Systems. Merisel has made significant investments in 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
distribution centers, and the co-location facilities at IBM's Raleigh, North
Carolina, facility and Compaq's Houston, Texas, facility, utilize the MILES
computerized warehouse management system, which uses infrared bar coding and
advanced computer hardware and software to improve shipping, receiving and
picking accuracy rates. See "Customers and Customer Services - Prompt Delivery"
above.
Merisel is in the process of converting its North American operations to the SAP
enterprise-wide information system. SAP integrates all functional areas of the
business including order entry, inventory management and finance in a real-time
environment. The Company began designing the new system in 1993 and converted
its Canadian operations from a mainframe to the SAP enterprise-wide information
system in August 1995. The new system is designed to provide greater transaction
functionality, flexibility, and custom pricing applications. In the early
implementation stages, the Canadian SAP system produced results and response
times below the Company's expectations, which prompted a delay in the U.S.
implementation of SAP. This system is now fully implemented in Canada, is
performing to expectations and for more than two years has been operating with
essentially no unscheduled downtime.
The Company resumed the conversion of its United States operations to the SAP
system in the fourth quarter of 1997. The Company expects to go live on the SAP
system in the United States during the second quarter of 1999. The design and
implementation of these new systems are complex projects and involve certain
risks. The conversion to the new system may result in delays and other
unanticipated interruptions. However, Merisel believes that the stability and
availability of its Canadian system has served as an advantage by providing a
working system on which to test and fine-tune the Company's North American
protocols. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Systems and Processes."
Competition
Competition in the computer products distribution industry is intense.
Competitive factors include price, brand selection, breadth and availability of
product offering, purchasing arrangements, 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 for its U.S. and Canadian
distribution businesses include large United States-based distributors such as
Inacom, Ingram Micro, Pinacor and Tech Data, as well as regional distributors
and franchisers. MOCA's competitors are Access Graphics, which is owned by GE
Capital, and Ingram Micro.
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 resellers.
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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 to existing products; (iii)
intensity of price competition among the Company and its competitors as
influenced by various factors; and (iv) the fact that virtually all sales in a
given quarter result from orders booked in that quarter. In addition, quarterly
variability could be affected by the year 2000 issue by shifting demand for
computer products during 1999 and future years. Due to the factors noted above,
as well as the dynamic qualities of the computer products 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 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 "Management's Discussion and Analysis
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Employees
As of December 31, 1998, Merisel had approximately 2,700 employees. Merisel
believes it has good relations with its employees.
Environmental Compliance
The Company believes that it is in substantial compliance with all environmental
laws applicable to it and its operations.
Certain Business Factors
In addition to the other information in this report, readers are cautioned to
carefully consider the following business factors that may affect the future
operations and performance of the Company.
Decline in Gross Margins. Over the past few years, the computer industry in
general and the Company in particular have experienced a significant decrease in
gross margins. While the Company has taken actions over the last several
quarters intended to improve margin performance, gross margins have continued to
decline primarily due to intense competitive pricing. These pricing pressures
escalated during the fourth quarter of 1998 and are continuing in 1999. If the
Company's efforts to increase gross margins are not successful, the Company may
not be able to achieve satisfactory levels of profitability.
Vendor Terms and Conditions. Like other wholesale distributors, the Company's
business is subject to the risk that the value of its inventory will be affected
adversely by vendor price reductions or by product obsolescence that results
from technological changes or product updates. It is the policy of most
manufacturers of microcomputer products to protect distributors who purchase
directly from them from the loss in value of inventory due to product
obsolescence or the manufacturer's price reductions. Over the last year certain
major PC manufacturers that are among the Company's largest vendors have
announced changes to price protection and other terms and conditions, including
product return rights, that could adversely affect the Company. The Company is
working closely with these manufacturers and has developed buying procedures and
controls to manage inventory purchases to reduce the potential adverse impact
from these changes while balancing the need to maintain sufficient levels of
inventory. There is no assurance that such efforts will be successful in
preventing a material adverse effect on the Company. Unforeseen changes in
current price protection policies or other changes in terms and conditions of
any of the Company's major vendors could have a material adverse effect on the
Company.
Dependence on Key Vendors. In 1998, 73% of the Company's net sales was derived
from products supplied by the Company's 10 largest vendors, as compared to 69%
in 1997 and 60% in 1996. The Company's large vendors generally provide incentive
funds for marketing and based on sales levels of their products. These incentive
funds contribute substantially to the Company's gross profit margin. As is
customary in the industry, the Company's agreements with these vendors provide
non-exclusive distribution rights and may generally be terminated by the vendor
on short notice. The termination of the Company's distribution agreement with
one of its key vendors, or a material change in the terms of the distribution
agreement, including a decrease in incentive funds, could have a material
adverse effect on the Company. In addition, in the past year some vendors have
reduced the incentive funds they pay to distributors or increased the sales
volumes required to receive various levels of incentive funds.
<PAGE>
Size of Competitors. The Company's competitors include distributors that are
substantially larger than the Company, partially as a result of the trend toward
consolidation in the industry. Because of their size, these firms can achieve
greater economies of scale than the Company and may be able to form stronger
relationships with manufacturers. The Company does not believe that it can
achieve operating expense levels as a percentage of sales as low as those that
can be achieved by its much larger competitors. A continuation of industry
consolidation not involving the Company may exacerbate this disadvantage.
Direct Sales by Manufacturers. Several computer product manufacturers have
expanded their direct selling efforts to resellers and end users. Although the
Company does not believe that its business has been significantly affected by
these developments, continued efforts by manufacturers to change their
businesses to compete with the direct sales model may adversely the Company. The
Company believes that the direct sales business will grow faster than sales
through the distribution channel and that consolidation of resellers, who are
the customers of distributors, may contribute to such differential. An increase
in sales of computer products outside the traditional distribution channel may
have a material adverse effect on the Company.
<PAGE>
Item 2. Properties.
At December 31, 1998, the Company maintained distribution centers in seven
locations throughout the United States and in two locations in Canada.
Additionally, the Company maintains United States administrative and sales
offices in El Segundo, California; Marlborough, Massachusetts; and Cary, North
Carolina, as well as Canadian administrative and sales offices in Toronto,
Ontario; Montreal, Quebec; and Vancouver, British Columbia.
The Company's headquarters are located in El Segundo, California, where the
Company owns an 112,500 square-foot facility, leases another 50,700 square-foot
facility and leases 23,000 square feet in a third building. In addition, the
Company owns a 61,000 square-foot facility and 29 acres of undeveloped land in
Cary, North Carolina. All of the Company's other facilities are leased. The
Company believes that its facilities provide sufficient space for its present
needs, and that additional suitable space will be available on reasonable terms,
if needed.
Item 3. 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
was approved by the district court judge on December 21, 1998. The judge entered
a judgment to dismiss the case with prejudice and such judgment was final on
January 20, 1999. 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. In January 1999 the Company
and Mr. Steffensen filed motions for summary judgment. If the Court denies the
motion, in whole or in part, as currently scheduled, trial will commence on June
1, 1999. 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
<PAGE>
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 filed a motion to dismiss the
amended complaint on various grounds and a motion to strike the punitive damages
prayer. In its opposition to the Company's motion to strike, the plaintiff
withdrew its prayer for punitive damages. On January 15, 1999, the Court issued
an Order staying prosecution of the action under the doctrine of exclusive
concurrent federal jurisdiction. It is unknown whether the plaintiff will
proceed further with its action in any forum. The Company has defended itself
vigorously against this claim and will continue to do so.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock is traded on the National Market tier of the Nasdaq
Stock Market under the symbol MSEL. The following table sets forth the quarterly
high and low sale prices for the Common Stock as reported by the National
Market.
High Low
Fiscal Year 1997
First quarter.... 2 1/2 1 9/16
Second quarter... 2 7/16 1 1/32
Third quarter.... 4 7/8 1 7/8
Fourth quarter... 5 21/32 3 3/8
Fiscal Year 1998
First quarter.... 4 1/2 2 3/4
Second quarter... 3 1/2 2 3/4
Third quarter.... 3 1/2 2 1/8
Fourth quarter... 3 1/4 2
As of March 29, 1999, there were 1,074 record holders of the Company's Common
Stock.
Merisel has never declared or paid any dividends to stockholders. The indenture
relating to the Company's 12-1/2% Senior Notes due 2004 currently prohibits the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
Year Ended December 31,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:(1)
Net sales ................................................. $ 5,018,687 $ 5,956,967 $ 5,522,824 $ 4,048,972 $ 4,552,984
Cost of sales ............................................. 4,676,164 5,633,278 5,233,570 3,807,888 4,298,553
------------ ------------ ------------ ------------ -----------
Gross profit .............................................. 342,523 323,689 289,254 241,084 254,431
Selling, general & administrative expenses ................ 281,796 317,195 295,021 191,406 199,929
Impairment losses ......................................... 51,383 42,033 14,100
Restructuring charge ...................................... 9,333
------------ ------------ ------------ ------------ -----------
Operating income (loss) ................................... 60,727 (54,222) (47,800) 35,578 54,502
Interest expense .......................................... 29,024 37,583 37,431 26,957 14,671
Loss on sale of European, Mexican, and
Latin American operations ................................. 33,455
Debt Restructuring Costs .................................. 5,230
Other expense ............................................. 11,752 13,885 20,150 14,992 20,904
------------ ------------ ------------ ------------ -----------
Income (loss) before income taxes ......................... 19,951 (105,690) (138,836) (11,601) 18,927
Provision (benefit) for income taxes ...................... 8,341 (21,779) 1,539 496 417
------------ ------------ ------------ ------------ -----------
Net income (loss) Before Extraordinary Item ............... 11,610 (83,911) (140,375) (12,097) 18,510
Extraordinary Loss on Extinguishment of
Debt .................................................. 3,744
------------ ------------ ------------ ------------ -----------
Net Income (Loss) ......................................... $ 11,610 $ (83,911) $ (140,375) $ (15,841) $ 18,510
============ ============ ============ ============ ===========
Per Share Data:
Net income (loss) per diluted share ....................... $ 0.38 $ (2.82) $ (4.68) $ (.48) $ .23
Weighted average number of diluted shares ................. 30,389 29,806 30,001 33,216 80,485
Balance Sheet Data:
Working capital ........................................... $ 399,848 $ 280,864 $ 190,544 $ 197,154 $ 181,742
Total assets .............................................. 1,191,870 1,230,334 731,039 747,111 945,320
Long-term and subordinated debt ........................... 357,685 356,271 294,763 133,429 131,856
Total debt ................................................ 395,556 382,395 294,950 133,429 135,657
Stockholders' equity ...................................... 236,164 154,466 14,997 137,508 154,253
</TABLE>
(1) Merisel's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. For clarity of presentation throughout this Annual
Report on Form 10-K, Merisel has described fiscal years presented as if the
year ended on December 31. Except for 1997, all fiscal years presented were
52 weeks in duration. The selected financial data set forth above includes
those balances and activities related to the Company's Australian business
until its disposal effective January 1, 1996 and the Company's European,
Mexican and Latin American businesses until their disposal on October 4,
1996, effective as of September 27, 1996. It also includes results Merisel
FAB (as defined below) from the date such business was acquired on January
31, 1994 through its disposal as of March 28, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company was founded in 1980 as Softsel Computer Products, Inc. and changed
its name to Merisel, Inc. in 1990 in connection with the acquisition of
Microamerica, Inc. ("Microamerica"). In the years following the Microamerica
acquisition, the Company's revenues increased rapidly through both internal
growth and acquisition, reaching $5.0 billion in 1994 and nearly $6.0 billion in
1995. This increase partially reflected the substantial growth in both domestic
and international sales as the worldwide market for computer products expanded
and manufacturers increasingly turned to wholesale distributors for product
distribution. In 1996, the Company began the process of divesting of its
operations outside of North America and its non-distribution operations.
Asset Dispositions
On March 7, 1996, Merisel sold its wholly owned Australian subsidiary, Merisel
Pty Ltd. ("Merisel Australia"), to Tech Pacific. The sale was effective as of
January 1, 1996.
On October 4, 1996, the Company completed the sale of substantially all of its
European, Mexican and Latin American businesses ("EML") to CHS Electronics, Inc.
("CHS"). The sale was effective as of September 17, 1996. A loss of
approximately $33,455,000, including $7,400,000 of direct selling costs, was
recorded in connection with the sale. The final sales price was $147,631,000
based on the combined closing balance sheet of EML, and consisted of (i)
$110,379,000 in cash, (ii) the assumption of Merisel's European asset
securitization agreement, against which $26,252,000 was outstanding at closing,
and (iii) a short term receivable of $11,000,000 due at various dates through
1997.
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"), which
had been acquired by the Company from the United States Franchise and
Distribution Division of Vanstar Corporation (formerly ComputerLand
Corporation), to a wholly owned subsidiary of SYNNEX Information Technologies,
Inc. ("Synnex"). The sales 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. In anticipation of this
sale, the Company recorded an impairment charge in the fourth quarter of 1996
for $2,033,000 to adjust Merisel FAB's assets to their fair value.
Debt Restructuring and Equity Investment
On September 19, 1997, the Company and its main operating subsidiary, Merisel
Americas Inc. ("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 of Common Stock (the "Initial Shares")
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 Conversion Shares and Initial Shares would together represent
50,000,000 shares of Common Stock at a purchase price of $3.04 per share, and
approximately 62.4% of the Common Stock outstanding immediately following the
issuance of the Conversion Shares. The Company used the 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 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. As of March 31,
1999, Phoenix owned 50,000,000 shares of Common Stock, or approximately 62.3% of
the outstanding Common Stock. See "Notes to Consolidated Financial Statements -
Note 7 - Income Taxes" regarding the impact of the restructuring on the
Company's available net operating loss carryforwards.
<PAGE>
Results of Operations
As a result of the asset dispositions described above, the Company's operations
are now focused exclusively on North America. The North American Business (as
defined below) produced approximately $4.6 billion, $3.8 billion, and $3.4
billion in revenues for 1998, 1997 and 1996, respectively. Former Operations (as
defined below) produced approximately $202 million and $2.1 billion in revenues
for 1997 and 1996, respectively. Because the North American Business now
represents the ongoing business of the Company, the following discussion and
analysis will compare the results of operations solely for the North American
Business unless otherwise indicated.
As used in this discussion and analysis, the term "North American Business"
refers to Merisel's United States and Canadian operations, and the term "Former
Operations" refers to those operations disposed of since the beginning of 1996,
namely EML and Merisel FAB.
The following table sets forth the results of operations for the North American
Business and for the Former Operations for the fiscal years indicated.
<TABLE>
<CAPTION>
(in thousands)
North American Business Former Operations Consolidated Total
/---------December31,-----------\ /----------December31,-----------\ /--------------December31,------------\
1996 1997 1998 1996 1997 1998 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 3,441,343 $3,846,795 $4,552,984 $2,081,481 $202,177 $5,522,824 $4,048,972 $4,552,984
Cost of Sales 3,262,105 3,613,389 4,298,553 1,971,465 194,499 5,233,570 3,807,888 4,298,553
----------- ---------- ---------- ---------- -------- --------- ---------- ---------- -----------
Gross Profit 179,238 233,406 254,431 110,016 7,678 289,254 241,084 254,431
SG&A 193,521 185,206 199,929 101,500 6,200 295,021 191,406 199,929
Impairment
loss 14,100 42,033 42,033 14,100
----------- ---------- ---------- ---------- -------- --------- ---------- ---------- -----------
Operating
(loss)Income $ (14,283) $ 34,100 $ 54,502 $ (33,517) $ 1,478 $ (47,800) $ 35,578 $ 54,502
=========== ========== ========== ========== ======== ========= ========== ========== ============
</TABLE>
Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997
The Company's net sales for the North American Business increased 18.4% from
$3,846,795,000 in 1997 to $4,552,984,000 for the year ended December 31, 1998.
This increase resulted from increased sales of 12.2% in Canada and 19.9% in the
United States. For the year, while MOCA and retail sales continued to show
substantial growth at 36% and 55%, respectively, neither VAR nor commercial
performance was as robust, resulting in U.S. growth slowing considerably,
particularly in the fourth quarter. During 1998, VAR sales grew 9% and
commercial sales increased 19%. The growth rate in Canada in terms of Canadian
dollars was 20.3%, but the decline in the value of the Canadian dollar hampered
the growth rate in terms of U.S. dollars, particularly in the second half of the
year.
In the North American Business, hardware and accessories accounted for 78% of
net sales and software accounted for 22% of net sales for the year ended
December 31, 1998 as compared to 77% and 23%, respectively, for such categories
for the year ended December 31, 1997.
Gross profit for the North American Business increased 9.0% from $233,406,000 in
1997 to $254,431,000 in 1998. Gross profit as a percentage of sales, or gross
margin, decreased from 6.07% in 1997 to 5.59% in 1998. Gross margins in the
United States and Canada were 5.48% and 6.07%, respectively, for 1998, compared
to 6.01% and 6.31%, respectively, for 1997. The decrease in margins as a
percentage of sales has resulted in large part from intense competitive pricing
pressures, as well as changes in vendor terms and conditions. The margin
decrease is also partially the result of changes in customer concentration and
mix and product mix. The Company has committed resources to address the issue of
declining margins by focusing attention on more profitable product lines,
expanding the Company's customer base, and enhancing customer support by
segmenting customers by business model and geographical location and assigning
those customers to dedicated sales teams. The Company is also continuing efforts
to improve the controls and management supervision over margin management
related activities such as sales execution and processes. However, the Company
continues to face intense competitive pricing pressures, which escalated during
the fourth quarter of 1998 and continue to persist. In addition, changing
manufacturer terms and conditions, particularly in price protection, have
contributed to greater inventory risk and necessitated changes in purchasing
practices that in turn have affected selling, pricing, and vendor rebates.
<PAGE>
Selling, general and administrative expenses for the North American Business
increased by $14,723,000 or 7.9% from $185,206,000 for the year ended December
31, 1997 to $199,929,000 for the year ended December 31, 1998. Selling, general
and administrative expenses in 1997 included compensation charges of $1,950,000
incurred pursuant to employment contracts of certain executive officers of the
Company and related to the debt restructuring completed during 1997. Excluding
this charge, selling, general and administrative expenses increased $16,673,000,
but decreased as a percentage of sales from 4.8% in 1997 to 4.4% in 1998. This
decrease is primarily attributable to efforts to control operating expenses
while the Company experienced sales growth of 18.4% for the year. Selling,
general and administrative costs include depreciation and amortization expense
totaling $10,980,000 in 1998 and $11,073,000 in 1997. The Company's capital
expenditures of $50,067,000 in 1998 and similarly planned amounts in 1999 will
result in a significant increase in depreciation expense in future periods. (See
"Liquidity and Capital Resources - Debt Obligations, Financing Sources and
Capital Expenditures" below.) In addition to increased depreciation expense in
1999, the Company expects to incur operating expenses to fund its strategic
initiatives (See "Item 1. Business - Business Strategy"), Year 2000 compliance
expenses, and expenses related to implementation and stabilization of the new
SAP operating system for the U.S.
In the fourth quarter of 1997, the Company recorded a non-cash asset impairment
charge of $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996. Through implementation planning that resumed in the fourth
quarter of 1997 and a recently completed evaluation of SAP in its upgraded form,
the Company identified costs that would not provide future value, and it is
these costs that are the basis of the impairment charge. See "Notes to
Consolidated Financial Statements - Note 2 - Impairment Losses."
As a result of the above items, the Company's North American Business had
operating income of $54,502,000 for the year ended December 31, 1998 compared to
operating income of $34,100,000 for the year ended December 31, 1997. Excluding
the restructuring related compensation costs incurred and the impairment charge
taken in 1997, the Company's North American Business would have had operating
income of $50,150,000 in 1997.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company, including Former Operations, decreased 45.6%
from $26,957,000 for the year ended December 31, 1997 to $14,671,000 for the
year ended December 31, 1998. This decrease was primarily attributable to the
debt restructuring, which resulted in the elimination of substantially all of
the Operating Company Debt on September 19, 1997 using proceeds from the
issuance of the Initial Shares and the Convertible Note.
Other expense for the Company, including Former Operations, increased from
$14,992,000 for the year ended December 31, 1997 to $20,904,000 for the year
ended December 31, 1998. This 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 1997,
which reduced other expenses. The increase is also attributable to a $1,534,000
increase in foreign currency losses and a $1,534,000 increase in asset
securitization fees. The increased securitization fees are due to increased
sales of accounts receivables in order to fund sales growth, daily operations
and, in the fourth quarter, increased levels of inventory in anticipation of
higher sales volumes that did not materialize.
Also during 1997, the Company incurred $5,230,000 in expenses related to the
Company's efforts to effect a restructuring of its debt. These expenses
represent professional fees and other costs associated with the terminated
Limited Waiver and Voting Agreement (the "Limited Waiver Agreement") entered
into with certain holders of the Company's 12-1/2% Senior Notes due 2004 (the
"12.5% Notes"), and costs incurred as a result of the change in control that
occurred as a result of the conversion of the Convertible Note. See "Item 3.
Legal Proceedings."
The income tax provision decreased from $496,000 for the year ended December 31,
1997 to $417,000 for 1998. In both years the income tax provision reflects only
the minimum statutory tax requirements in the various states and provinces in
which the Company conducts business, as the Company had sufficient net operating
losses from prior years. The Company has not recognized a tax provision benefit
in either year, having fully utilized its ability to carryback those losses and
obtain refunds of taxes paid in prior years. See "Notes to Consolidated
Financial Statements - Note 7 - Income Taxes".
Consolidated Net Income
The Company, including Former Operations, reported net income of $18,510,000, or
$.23 per diluted share, in 1998 compared to a net loss of $15,841,000, or $0.48
per diluted share, in 1997. Included in the 1997 net loss is an extraordinary
loss on the extinguishment of debt of $3,744,000, or $0.12 per diluted share,
related to the repayment of the Operating Company Debt.
<PAGE>
Comparison of Fiscal Years Ended December 31, 1997 and December 31, 1996
The Company's net sales for the North American Business increased 11.8% from
$3,441,343,000 in 1996 to $3,846,795,000 for the year ended December 31, 1997.
This increase resulted from increased sales of 18.2% in Canada and 10.3% in the
United States. The growth rate in Canada in terms of Canadian dollars was steady
throughout the year, but the decline in the value of the Canadian dollar
hampered the growth rate in terms of U.S. dollars, particularly in the fourth
quarter of the year. U.S. sales growth was lower in the first half of the year
(-1.1% and 5.2% for the first and second quarters, respectively) despite double
digit rates of growth in MOCA(TM) and VAR sales. This was partially related to
declines in retail sales, which reflected the Company's decision to
substantially reduce its retail sales activities in early 1996, in part to
address liquidity issues and constraints. The Company recommitted significant
resources to rebuilding its retail customer base in early 1997, which
contributed to fourth quarter growth in retail sales of 28.2% on a
year-over-year basis. Growth rates in all other customer areas also increased
measurably during the second half of 1997 over 1996 levels, contributing to
combined U.S. growth rates of 16.6% and 20.6% in the third and fourth quarters
of 1997, respectively, on a year-over-year basis.
In the North American Business, hardware and accessories accounted for 77% of
net sales and software accounted for 23% of net sales for the year ended
December 31, 1997 as compared to 76% and 24%, respectively, for such categories
for the year ended December 31, 1996.
Gross profit for the North American Business increased 30.2% from $179,238,000
in 1996 to $233,406,000 in 1997. Both years were affected by significant margin
adjustments. In 1996, the Company recorded $27,338,000 in charges primarily
related to customer disputes and vendor reconciliation issues. In 1997, through
the process of resolving these customer disputes and vendor reconciliation
issues, margins were favorably affected by adjustments totaling $7,245,000.
Excluding the effect of these margin adjustments, gross profit would have been
5.88% and 6.0% for 1997 and 1996, respectively. The decrease in adjusted gross
profit is attributed primarily to competitive pricing pressures and the impact
of liquidity constraints on the Company's ability to purchase on favorable
terms.
Selling, general and administrative expenses for the North American Business
decreased by $8,315,000 or 4.3% from $193,521,000 for the year ended December
31, 1996 to $185,206,000 for the year ended December 31, 1997. Selling, general
and administrative expenses in 1996 include approximately $10,500,000 in costs
related to professional fees incurred as part of the 1996 business plan for
process improvements, professional fees related to lender negotiations, and
severance charges related to management changes. In 1997, selling, general and
administrative expenses included compensation charges of $1,950,000 incurred
pursuant to employment contracts of certain executive officers of the Company
and related to the debt restructuring completed during 1997. Excluding these
charges in both years, selling, general and administrative expenses did not
change significantly in total dollars, but decreased as a percentage of sales
from 5.3% in 1996 to 4.8% in 1997. This decrease is primarily attributable to
efforts to control operating expenses even though sales increased throughout the
year. Selling, general and administrative costs include depreciation and
amortization expense totaling $11,073,000 in 1997 and $12,360,000 in 1996.
In the fourth quarter of 1997, the Company recorded a non-cash asset impairment
charge of $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996. Through implementation planning that resumed in the fourth
quarter of 1997 and an evaluation of SAP in its upgraded form, the Company
identified costs that would not provide future value, which costs are the basis
of the impairment charge. See "Notes to Consolidated Financial Statements - Note
2 - Impairment Losses."
As a result of the above items, the Company's North American Business had an
operating profit of $34,100,000 for the year ended December 31, 1997 compared to
an operating loss of $14,283,000 for the year ended December 31, 1996. Excluding
the margin adjustments taken in both years, the professional fees and severance
costs noted in 1996, the restructuring related compensation costs in 1997 and
the impairment charge taken in 1997, the Company's North American Business would
have had operating income of $42,905,000 in 1997 as compared to operating income
of $23,555,000 in 1996.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company, including Former Operations, decreased 28%
from $37,431,000 for the year ended December 31, 1996 to $26,957,000 for the
year ended December 31, 1997. This decrease was attributable to: (i) lower
average borrowings resulting from a $72,500,000 debt paydown in October 1996
using proceeds from the sale of EML; (ii) scheduled debt payments totaling
$13,090,000; and (iii) elimination of substantially all of the Operating Company
Debt on September 19, 1997, using substantially all of the $152,000,000 in
proceeds from the issuance of the Initial Shares and the Convertible Note. These
factors were offset in part by an increase in interest rates under the Operating
Company Debt during 1997 prior to its elimination in September of 1997.
<PAGE>
Other expense for the Company, including Former Operations, decreased from
$20,150,000 for the year ended December 31, 1996 to $14,992,000 for the year
ended December 31, 1997. This decrease is primarily attributable to one-time
financing charges paid in the first quarter of 1996 of approximately $3,125,000
related to amendments of financing agreements that have since been terminated.
Additionally, the Company recorded a gain of $1,530,000 in 1997 on the sale of
property held in North Carolina.
Also during 1997, the Company incurred $5,230,000 in expenses related to the
Company's efforts to effect a restructuring of its debt. These expenses
represent professional fees and other costs associated with the Limited Waiver
Agreement, and costs incurred as a result of the change in control that occurred
as a result of the conversion of the Convertible Note.
The income tax provision decreased from $1,539,000 for the year ended December
31, 1996 to $496,000 for 1997. In 1997, the income tax provision reflects only
the minimum statutory tax requirements in the various states and provinces in
which the Company conducts business, as the Company had sufficient net operating
loss provisions from prior year losses. The Company has not recognized a tax
provision benefit in either year, having fully utilized its ability to carryback
those losses and obtain refunds of taxes paid in prior years. In 1996, the
Company recognized additional tax provision expense that represented the
establishment of a valuation allowance against a previously recognized state
deferred tax asset. See "Notes to Consolidated Financial Statements - Note 7 -
Income Taxes".
Consolidated Loss
The Company, including Former Operations, reported a net loss of $15,841,000, or
$0.48 per diluted share, in 1997 compared to a net loss of $140,375,000, or
$4.68 per diluted share, in 1996. Included in the 1997 net loss is an
extraordinary loss on the extinguishment of debt of $3,744,000, or $0.12 per
diluted share, related to the repayment of the Operating Company Debt.
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 second quarter 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.
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, particularly during the quarter in which
the implementation occurs. Among other things, the implementation of the SAP
system in the U.S. may result in delays and other unanticipated interruptions
that could adversely affect the Company's business.
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 and the Company's State of Readiness
The Company believes that implementation of the SAP operating system 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
<PAGE>
(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 completed the inventory phase with respect to all areas. The
assessment phase is substantially completed and the remediation and testing
phases are in process and are scheduled to be substantially completed during the
second quarter of 1999, with a limited amount of remediation completed during
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.
Costs
The Company currently estimates that the aggregate cost of its Year 2000 project
will be approximately $4.2 million, although the total amount could be greater.
Less than $500,000 had been spent through the end of 1998. The aggregate cost
estimate 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
reallocation of existing resources rather than incurring incremental costs. This
reallocation of resources is not expected to have a significant impact of 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.
Contingency Plans
As part of the Company's Year 2000 project, Year 2000-specific contingency plans
are being developed. The Company expects that these 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. The Company expects these plans to be finalized by the date of
completion of all other areas of the Year 2000 project. In addition, as a normal
course of business, the Company maintains and deploys contingency plans as part
of its disaster recovery program that are 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. During 1999, the Company intends
to expand its disaster recovery program to cover systems for which detailed
contingency plans do not currently exist.
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)
<PAGE>
shifts in short-term demand for the Company's products resulting, in part, from
the introduction of new products or updates of existing products; (iii) the
intensity of price competition among the Company and its competitors as
influenced by various factors; and (iv) the fact that virtually all sales in a
given quarter result from orders booked in that quarter. In addition, quarterly
variability could be affected by the Year 2000 issue by shifting demand for
computer products during 1999 and future years. 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 other
quarters. Net sales in the Canadian operations are also historically strong in
the first quarter of the fiscal year. This is primarily due to buying patterns
of Canadian government agencies. See "Liquidity and Capital Resources" below.
Liquidity and Capital Resources
Cash Flows Activity For The Year Ended December 31, 1998
Net cash used by operating activities during the year ended December 31, 1998
was $52,493,000. The primary uses of cash were an increase in accounts
receivable of $156,967,000 and an increase in inventory of $124,565,000. The
primary sources of cash include an increase in accounts payable of $186,462,000.
The increase in accounts receivable is primarily the result of increased sales
during 1998. The increase in inventory can be attributed to large purchases near
the end of the fourth quarter made with the expectation of a higher sales volume
that did not materialize. The increase in inventories also contributed to the
increase in accounts payable.
Net cash used in investing activities in 1998 consisted of capital expenditures
of $50,067,000. The expenditures were primarily related to costs associated with
development of SAP and with other information systems as well as the purchase by
the Company of its call center facility in Cary, North Carolina.
Net cash provided by financing in 1998 was $104,670,000 and was comprised
primarily of proceeds received from the sale of receivables under the Company's
asset securitization agreements. Uses of cash for financing activities include
scheduled debt payments of $1,572,000. As noted above, a portion of the
Company's funds are also generated through the sale of receivables by 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. Merisel Capital Funding is a separate corporate entity with separate
creditors who, in the event of 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. This agreement expires in October
2003.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. The agreement expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under the securitization agreements, the receivables are sold at face value with
payment of a portion of the purchase price being deferred. As of December 31,
1998, the total amount outstanding under these agreements was $416,121,000. Fees
incurred in connection with the sale of accounts receivable under these
agreements for the years ended December 31, 1998, December 31, 1997 and December
31, 1996 were $17,564,000, $16,030,000, and $16,029,000, respectively, and are
recorded as other expense.
Cash Flows Activity for the Year Ended December 31, 1997
Net cash used by operating activities during the year ended December 31, 1997
was $44,968,000. The primary uses of cash were an increase in accounts
receivable of $70,119,000 and an increase in inventory of $70,196,000. The
primary sources of cash were an increase in accounts payable of $76,203,000 and
$15,563,000 of cash generated from operations. The increase in accounts
receivable is primarily the result of increased sales of 18.8% in the fourth
quarter of 1997. The increase in inventory relates partially to investments
required to meet the demands of increased sales volume and to strategic volume
purchases that the Company took advantage of late in the fourth quarter of 1997.
The increase in inventories also contributed to the increase in accounts
payable.
<PAGE>
Net cash used in investing activities in 1997 was $2,270,000 consisting of
capital expenditures of $7,290,000, which was partially offset by proceeds from
the sale of land held in North Carolina totaling $5,020,000. The expenditures
were primarily for the maintenance and improvement of existing facilities.
Net cash provided by financing in 1997 was $40,307,000. Sources of cash from
financing activities included $61,740,000 in proceeds received from the sale of
receivables under the Company's asset securitization facilities and $139,901,000
in net proceeds from the issuance of Initial Shares and the Convertible Note
(which consists of $152,000,000 in gross proceeds less $12,099,000 in investment
banking, legal, accounting and other direct costs). Uses of cash for financing
activities include scheduled debt payments of $13,634,000 and the extinguishment
of Operating Company Debt of $147,700,000.
Cash Flows Activity For The Year Ended December 31, 1996
Cash flows activity for the year ended December 31, 1996 was significantly
affected by the plan developed in 1996, following substantial losses in 1995,
that sought to maximize cash flow by controlling costs and curtailing
non-essential capital investments during the remainder of 1996 and disposing of
assets. See "Overview - Asset Dispositions" above.
Net cash provided by operating activities during the year ended December 31,
1996 was $29,249,000. The primary sources of cash from operating activities were
decreases in accounts receivable, inventories, and income taxes receivable of
$132,480,000, $91,059,000 and $33,470,000, respectively. The primary use of cash
from operations during the period was a decrease in accounts payable of
$179,304,000. Lower inventory and accounts receivable levels resulted primarily
from improved management of inventories and collections. The decrease in
inventories also contributed to the decrease in accounts payable.
Net cash provided from investing activities in 1996 was $101,041,000, consisting
of proceeds from the sale of EML and the Company's Australian business of
$110,379,000 and $8,515,000, respectively, partially offset by the Company's
earn-out obligation under the Merisel FAB acquisition of $13,409,000 and
property and equipment expenditures of $9,652,000, net of proceeds from the sale
of property and equipment of $5,975,000. Expenditures for property and equipment
were primarily attributed to the upgrading of the Company's computer systems,
expenditures for a new warehouse management system and the upgrading of existing
facilities and leasehold improvements.
Net cash used in financing activities in 1996 was $82,765,000, related primarily
to repayments of indebtedness of the Company's operating subsidiaries consisting
of $43,195,000 of repayments of 11.5% senior notes, $17,792,000 of net
repayments under a revolving credit agreement, the payment of a $4,400,000
installment of subordinated notes and payments of $17,742,000 under other bank
facilities.
Debt Obligations, Financing Sources and Capital Expenditures
At December 31, 1998, Merisel, Inc. had outstanding $125,000,000 principal
amount of 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 imposes 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 December 31, 1998, the Company had promissory notes outstanding with an
aggregate balance of $6,857,000. 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 a subsidiary of Bank of America
NT&SA ("BA"), acting as agent, that provides for borrowings on a revolving
basis. Effective April 1, 1999, the obligations of BA under the Loan and
Security Agreement will be assumed by Bank of America NT&SA. 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
<PAGE>
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, the agent'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 December 31, 1998.
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 1999, primarily consisting of costs associated with
information systems, including systems for enhancing electronic services and
growing the Company's infrastructure, implementing the SAP operating system,
developing the Company's configuration and co-location capabilities, and
upgrading warehouse systems and other Company facilities. The Company intends to
fund its capital expenditures primarily through internally generated cash and
lease financing.
At December 31, 1998, the Company had cash and cash equivalents of $36,341,000.
In the opinion of management, anticipated cash from operations in 1999, together
with proceeds from the sale of receivables under the Company's securitization
agreements 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. 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.
Inflation
Due to the short-term nature of Merisel's contracts and agreements with
customers and vendors, the Company does not believe that inflation had a
material impact on its operations.
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 that 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 the past year, however, certain computer systems manufacturers
that are among the Company's largest vendors have announced changes in price
protection and other terms and conditions that could adversely affect the
Company. The Company is working closely with these manufacturers and has
developed buying procedures and controls to manage inventory purchases to reduce
the potential adverse impact from these changes while balancing the need to
maintain sufficient levels of inventory. There is no assurance that such efforts
will be successful in preventing a material adverse effect on the Company.
The Company purchases 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 in an attempt to reduce foreign exchange risks. However,
the risk of foreign exchange transaction losses cannot be completely eliminated.
<PAGE>
The Company offers credit terms to qualifying customers and also sells on a
prepay, early pay, credit card and cash-on-delivery basis. In addition, the
Company has developed a number of customer financing alternatives, including
escrow programs and selected bid financing arrangements. 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 and hardware and software leasing. 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.
Item 7A. Quantitative and Qualitative Market Risk Disclosure
Investments
At December 31, 1998, the Company had no investments, with the exception of
$36,341,000 held in overnight, interest-bearing accounts.
Foreign Currency Risk
The Company purchases forward dollar contracts to hedge short-term advances to
its Canadian subsidiary and to hedge commitments to acquire inventory for sale.
The Company does not use the contracts for speculative or trading purposes. At
December 31, 1998, the Company had 26 short-term Canadian forward contracts with
a face value of approximately $80,268,000 outstanding. The size of the contracts
ranged from $474,000 to $19,295,000 with a weighted average contract value of
approximately $3,100,000. Forward rates on the contracts ranged from 1.516 to
1.553 with the weighted average forward rate approximating 1.550. The contracts
matured at various dates in January and February 1999.
Long-term Debt
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. The table below provides information concerning long-term debt
outstanding at December 31, 1998, including principal amounts maturing each
year, average interest rate and fair value.
<TABLE>
<CAPTION>
Total
1999 2000 2001 2002 2003 2004 Total Fair Value
---- ---- ---- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12.5% Senior Notes 0 0 0 0 0 $125,000,000 $125,000,000 $128,750,000
Average Interest Rate 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
Fixed rate promissory notes $2,496,000 $461,000 $3,900,000 $6,857,000 $ 7,009,000
Average Interest Rate 8.84% 7.20% 7.56%
</TABLE>
Asset Securitization
Fees incurred in connection with the sale of trade accounts receivable under the
Company's asset securitization agreements typically are based upon commercial
paper rate. As of December 31, 1998, the total amount outstanding under these
agreements was $416,121,000 and the average cost of securitization was
approximately 5.83%. During 1998, the total amount outstanding under these
agreements averaged $303,300,000, and the weighted average cost of
securitization was 5.79%.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merisel, Inc. and subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 23, 1999
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1997 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 36,447 $ 36,341
Accounts receivable (net of allowances of $18,549 and $20,476 at December
31, 1997 and 1998, respectively) ........................................ 162,895 202,128
Inventories ................................................................ 462,752 587,317
Prepaid expenses and other current assets .................................. 12,352 14,193
Deferred income taxes ...................................................... 644 865
------------ -------------
Total current assets .................................................. 675,090 840,844
PROPERTY AND EQUIPMENT, NET ..................................................... 40,142 79,719
COST IN EXCESS OF NET ASSETS ACQUIRED, NET ...................................... 25,381 24,309
OTHER ASSETS .................................................................... 6,498 448
------------ -------------
TOTAL ASSETS ............................................................... $ 747,111 $ 945,320
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 437,211 $ 623,673
Accrued liabilities ........................................................ 38,963 31,737
Long-term debt and capitalized lease obligations--current .................. 1,762 3,692
------------ -------------
Total current liabilities ............................................. 477,936 659,102
LONG-TERM DEBT .................................................................. 131,667 129,360
CAPITALIZED LEASE OBLIGATIONS ................................................... 2,605
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued or
Outstanding
Common stock, $.01 par value; authorized 150,000,000 shares; outstanding
80,078,500 and 80,272,683 shares at December 31, 1997 and 1998,
respectively ........................................................ 801 803
Additional paid-in capital ................................................. 281,701 282,380
Accumulated deficit ........................................................ (137,005) (118,495)
Accumulated other comprehensive income ..................................... (7,989) (10,435)
------------ -------------
Total stockholders' equity ............................................ 137,508 154,253
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 747,111 $ 945,320
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amount)
For the Years Ended December 31,
1996 1997 1998
----------- -------------- ------------
<S> <C> <C> <C>
NET SALES ...................................... $ 5,522,824 $ 4,048,972 $4,552,984
COST OF SALES .................................. 5,233,570 3,807,888 4,298,553
----------- -------------- ------------
GROSS PROFIT ................................... 289,254 241,084 254,431
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ... 295,021 191,406 199,929
IMPAIRMENT LOSSES .............................. 42,033 14,100
----------- -------------- ------------
OPERATING (LOSS) INCOME ........................ (47,800) 35,578 54,502
INTEREST EXPENSE ............................... 37,431 26,957 14,671
LOSS ON SALE OF EUROPEAN, MEXICAN AND
LATIN AMERICAN OPERATIONS ................... 33,455
DEBT RESTRUCTURING COSTS ....................... 5,230
OTHER EXPENSE, NET ............................. 20,150 14,992 20,904
----------- -------------- ------------
(LOSS) INCOME BEFORE INCOME TAXES .............. (138,836) (11,601) 18,927
PROVISION FOR INCOME TAXES ..................... 1,539 496 417
----------- -------------- ------------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM .... (140,375) (12,097) 18,510
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT .. 3,744
----------- -------------- ------------
NET (LOSS) INCOME .............................. $ (140,375) $ (15,841) $ 18,510
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED):
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM .... $ (4.68) $ (.36) $ .23
EXTRAORDINARY LOSS ............................. (.12)
----------- -------------- ------------
NET (LOSS) INCOME .............................. $ (4.68) $ (.48) $ .23
=========== ============== ============
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC ................................... 30,001 33,216 80,210
DILUTED ................................. 30,001 33,216 80,485
=========== ============== ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Retained Accumulated
Additional Earnings Other
Paid-in (Accumulated Comprehensive Comprehensive
Common Stock Capital Deficit) Income Total Income
----------------------- ----------- ------------- ---------------- ----------- --------------
Shares Amount
------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....29,863,500 $299 $141,938 $19,211 $(6,982) $154,466
Exercise of stock options .. 215,000 2 362 364
Comprehensive Income:
Translation Adjustment . 542 542 $ 542
Net loss ............... (140,375) (140,375) (140,375)
-------------
Total Comprehensive Loss ... $(139,833)
------------- --------- ------------ ------------- ----------------- ------------ =============
Balance at December 31, 1996....30,078,500 301 142,300 (121,164) (6,440) 14,997
Sale of common stock ...... 4,901,316 49 14,851 14,900
Conversion of Note into
Common Stock ...........45,098,684 451 124,550 125,001
Comprehensive Income:
Translation adjustment. (1,549) (1,549) $ (1,549)
Net loss ............... (15,841) (15,841) (15,841)
-------------
Total Comprehensive Loss ....... $ (17,390)
------------- --------- ------------ ------------- ----------------- ------------ =============
Balance at December 31, 1997....80,078,500 801 281,701 (137,005) (7,989) 137,508
Exercise of stock options
and other.................. 194,183 2 679 681
Comprehensive Income:
Translation adjustment . (2,446) (2,446) $ (2,446)
Net income ............. 18,510 18,510 18,510
-------------
Total Comprehensive Income...... $ 16,064
------------- --------- ------------ ------------- ----------------- ------------ =============
Balance at December 31, 1998....80,272,683 $803 $282,380 $(118,495) $(10,435) $154,253
============= ========= ============ ============= ================= ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1996 1997 1998
-------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income .......................................................... $ (140,375) $ (15,841) $ 18,510
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 18,789 11,311 10,980
Provision for doubtful accounts ........................................ 17,421 7,361 12,553
Impairment losses ...................................................... 42,033 14,100
Loss on Sale of European, Mexican and Latin American businesses . 33,455
Deferred income taxes .................................................. 6,175 162 (221)
Gain on sale of property and equipment .......................... (1,530)
Changes in assets and liabilities, net of the effects from acquisitions:
Accounts receivable ................................................ 132,480 (8,379) (51,406)
Inventories ........................................................ 91,059 (70,196) (124,565)
Prepaid expenses and other current assets .......................... (14,612) 654 6,786
Income taxes receivable ............................................ 33,470 2,021
Accounts payable ................................................... (179,304) 76,203 186,462
Accrued liabilities ................................................ (11,342) 906 (6,031)
-------------- ------------- ---------------
Net cash provided by operating activities ...................... 29,249 16,772 53,068
-------------- ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ......................................... (9,652) (7,290) (50,067)
Proceeds from sale of property and equipment ............................... 5,975 5,020
Payment of earn out obligation from ComputerLand acquisition ........... (13,409)
Cash proceeds from sale of Australian business ......................... 8,515
Cash proceeds from sale of European, Mexican and Latin American
businesses ...................................................... 110,379
Other investing activities ............................................. (767)
-------------- ------------- ---------------
Net cash provided by (used for) investing activities .......... 101,041 (2,270) (50,067)
-------------- ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit .................................. 1,448,358 726,308
Repayments under revolving line of credit .................................. (1,466,150) (811,516)
Repayments under senior notes .............................................. (43,195) (56,805)
Repayments under subordinated debt agreement ........................... (4,400) (17,600)
Repayments under other financing arrangements .............................. (17,742) (1,721) (1,572)
Net proceeds from the issuance of convertible notes .................... 125,001
Proceeds from issuance of common stock ..................................... 364 14,900 681
-------------- ------------- ---------------
Net cash (used for) provided by financing activities ........... (82,765) (21,433) (891)
-------------- ------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................ (4,225) (1,300) (2,216)
-------------- ------------- ---------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS ............................ 43,300 (8,231) (106)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................... 1,378 44,678 36,447
-------------- ------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD YEAR .................................. $ 44,678 $ 36,447 $ 36,341
============== ============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid(received) during the year for:
Interest ................................................................... $ 30,456 $ 33,385 $ 14,698
Income taxes ............................................................... (36,068) (3,362) 655
Noncash activities:
Capital lease obligations entered into ..................................... 187 4,480
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Effective March 28, 1997, the Company sold substantially all of the assets of
its wholly owned subsidiary Merisel FAB, Inc. ("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 4 "Dispositions").
On October 10, 1997, Phoenix Acquisition Company II, L.L.C. ("Phoenix")
exercised its option to convert, without any additional payment, $3,296,286
principal amount of a convertible note into 1,084,305 shares of common stock. On
December 19, 1997, following receipt of stockholder approval, approximately
$133.8 million outstanding principal amount of the convertible note was
converted, without any additional payment, into 44,014,379 shares of common
stock. The proceeds from the issuance of the convertible note were offset by
professional fees and other direct costs of approximately $12,099,000, which
were recorded as a reduction to additional paid in capital at the time of
conversion.
See accompanying notes to consolidated financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 and 1998
1. Summary of Significant Accounting Policies
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 and software products. Through its main operating subsidiary,
Merisel Americas, Inc. ("Merisel Americas"), and subsidiaries the Company
operates three distinct business units: United States distribution, Canadian
distribution and the Merisel Open Computing Alliance (MOCA(TM)). The Company
markets products and services throughout the United States and Canada, 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, and retailers. Through MOCA(TM), the Company supports Sun
Microsystems' UNIX(R)-based products and complementary third-party products.
Risks and Uncertainties --The Company believes that the diversity and breadth of
the Company's product and service offerings, customers, and the general
stability of the economies in the markets in which it operates significantly
mitigate the risk that a material adverse impact will occur in the near term as
a result of changes in its customer base, competition, or composition of its
markets. However, continued pricing pressures, or the loss of a major vendor, or
other unanticipated occurrences could result in a materially adverse impact to
the business. Although Merisel regularly stocks products and accessories
supplied by more than 500 manufacturers, 73% of the Company's net sales for the
North American Business in 1998 (as compared to 69% in 1997 and 60% in 1996)
were derived from products supplied by Merisel's ten largest vendors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectibility of accounts receivable, inventory, deferred
income taxes, accounts payable, sales returns and recoverability of long-term
assets.
New Accounting Pronouncements--In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is effective for financial statements issued for periods beginning after
June 15, 1999. The Company will adopt SFAS 133 as required in January 2000. SFAS
133 requires all derivatives to be recorded on the balance sheet at fair value.
The Company is in the process of evaluating the effect that this new standard
will have on the Company's financial statements.
Revenue Recognition, Returns and Sales Incentives--The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs that, among other things, include funds
available for cooperative promotion of product sales. Customers earn credit
under such programs based upon the volume of purchases. The cost of these
programs is partially subsidized by marketing allowances provided by the
Company's manufacturers. The allowances for sales returns and costs of customer
incentive programs are accrued concurrently with the recognition of revenue.
Cash and Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
Inventories--Inventories are valued at the lower of cost or market; cost is
determined using the average cost method.
Property and Depreciation--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to ten
years. Leasehold improvements are amortized over the shorter of the life of the
lease or the improvement.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and warehouse
management systems. Such amounts include the costs of materials and
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
other direct construction costs, purchased computer hardware and software,
outside programming and consulting fees, direct employee salaries and interest.
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
resulted from the acquisition in 1990 of Microamerica, Inc. Accumulated
amortization was $7,672,000 and $8,477,000 as of December 31, 1997 and 1998,
respectively. The cost in excess of net assets acquired is being amortized over
a period of 40 years using the straight line method.
Impairment of Long-Lived Assets--The Company reviews the recoverability of
intangible assets and other long lived assets to determine if there has been any
permanent impairment. This assessment is performed based on the estimated
undiscounted future cash flows from operating activities compared with the
carrying value of the related asset. If the undiscounted future cash flows are
less than the carrying value, an impairment loss is recognized, measured by the
difference between the carrying value and estimated fair value of the assets
(see Note 2 - "Impairment Losses").
Income Taxes--Deferred income taxes represent the amounts which will be paid or
received in future periods based on the tax rates that are expected to be in
effect when the temporary differences are scheduled to reverse.
Concentration of Credit Risk--Financial instruments that subject the Company to
credit risk consist primarily of cash equivalents, trade accounts receivable,
and forward foreign currency exchange contracts. Credit risk with respect to
trade accounts receivable is generally not concentrated due to the large number
of entities comprising the Company's customer base and their geographic
dispersion. The Company performs ongoing credit evaluations of its customers,
maintains an allowance for potential credit losses and maintains credit
insurance. The Company actively evaluates the creditworthiness of the financial
institutions with which it conducts business.
Fair Values of Financial Instruments--The fair values of financial instruments,
other than long-term debt, closely approximate their carrying value because of
their short-term nature. The estimated fair value of long-term debt including
current maturities, based on reference to quoted market prices, was greater than
its carrying value by approximately $3,750,000 and $10,000,000 as of December
31, 1998 and 1997, respectively.
Foreign Currency Translation--Assets and liabilities of the Company's Canadian
subsidiary are translated into United States dollars at the exchange rate in
effect at the close of the period. Revenues and expenses are translated at the
average exchange rate during the period. The aggregate effect of translating the
financial statements at the above rates is included in a separate component of
stockholders' equity entitled Accumulated Other Comprehensive Income. In
addition, the Company advances funds to its Canadian subsidiary in the normal
course of business that are not expected to be repaid in the foreseeable future.
Translation adjustments resulting from these advances are also included in
Accumulated Other Comprehensive Income.
Foreign Exchange Instruments--The Company's use of derivatives is limited to the
purchase of foreign exchange contracts in order to minimize foreign exchange
transaction gains and losses. The Company purchases forward dollar contracts to
hedge short-term advances to its Canadian subsidiary and to hedge commitments to
acquire inventory for sale and does not use the contracts for trading purposes.
The Company's foreign exchange rate contracts minimize the Company's exposure to
exchange rate movement risk, as any gains or losses on these contracts are
offset by gains and losses on the transactions being hedged. As of December 31,
1997, there were approximately $42,000,000 in outstanding foreign exchange
contracts and $80,268,000 outstanding as of December 31, 1998. In 1996, 1997,
and 1998, the Company recorded net foreign currency transaction gains (losses)
of $161,000, ($351,000) and ($1,885,000), respectively. These amounts are
included in other expense.
Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending on
the Saturday nearest to December 31 and its fiscal quarters are the 13- or
14-week periods ending on the Saturday nearest to March 31, June 30, September
30 and December 31. For clarity of presentation, the Company has described
fiscal years presented as
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
if the years ended on December 31 and fiscal quarters presented as if the
quarters ended on March 31, June 30,September 30 and December 31. The 1996 and
1998 fiscal years were 52 weeks in duration. The 1997 fiscal year was 53 weeks
in duration. All quarters presented for 1996, 1998 and the first three quarters
of 1997 were 13 weeks in duration. The fourth quarter of 1997 was 14 weeks in
duration.
2. Impairment Losses
In 1993, the Company undertook the process of converting its North American
Operations to SAP. Although this process was completed in Canada in 1995, the
Company delayed the implementation in the United States and recorded an
impairment charge of $19,500,000. In the fourth quarter of 1997, the Company
renewed its implementation efforts. As part of this process, the Company
reviewed previously capitalized costs and determined that a portion of these
costs no longer provided value to the Company primarily due to changes in the
SAP implementation strategy and the planned implementation of a different
version of SAP. As a result, a $14,100,000 impairment charge was recorded.
In the quarter ended September 30, 1996, the Company determined that a portion
of the carrying value for certain of its identifiable intangible assets would
not be recovered from their use in future operations. Accordingly, these assets
were written down to their fair values as of September 30, 1996. An impairment
was recognized on the intangible assets of Merisel FAB, due to declining sales
growth, margins and earnings, and the resulting negative trend in projected cash
flows. The intangible assets of Merisel FAB were acquired in January 1994 and
had a net book value of $87,500,000 in 1995 prior to the impairment losses. In
the fourth quarter of 1995, the fair value of the intangible assets was measured
by discounting future expected cash flows, which resulted in a required write
down of $30,000,000. Another impairment charge of $40,000,000 was recognized
against these assets in the third quarter of 1996 on the same basis. In December
1996, the Company recorded an additional $2,033,000 charge to adjust Merisel FAB
assets to their fair value based on the provisions of a definitive agreement to
sell such assets in the first quarter of 1997. (See Note 4 "Dispositions.")
3. Debt Restructuring and Equity Investment
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 of Common
Stock (the "Initial Shares") 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 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.
In connection with these repayments, the Company recorded an extraordinary loss
on the extinguishment of debt of $3,744,000. This amount consisted of a "make
whole" premium of $960,000 required to be paid with respect to the prepayment of
the subordinated notes, unamortized prepaid financing fees totaling
approximately $2,546,000 and other costs totaling $238,000. Additionally, the
Company incurred $5,230,000 in other expenses in 1997 related to the Company's
efforts to effect a restructuring of its debt. These costs include $4,380,000 of
professional fees and other costs associated with the termination of a Limited
Waiver Agreement with the holders of its 12-1/2% Senior Notes due 2004 ("12.5%
Notes") and $850,000 in costs that were incurred as a result of the change in
control that occurred upon the conversion of the Convertible Note. Additionally,
selling, general and administrative expenses in 1997 include compensation
charges of $1,950,000 incurred pursuant to employment contracts of $1,950,000
incurred pursuant to employment contracts of certain executive officers of the
Company related to the debt restructuring.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1998, Phoenix owned
50,000,000 shares of Common Stock, or approximately 62.3% of the outstanding
Common Stock.
4. Dispositions
On October 4, 1996, Merisel completed the sale of its European, Mexican and
Latin American subsidiaries ("EML") to CHS Electronics, Inc. ("CHS"). The sale
was effective as of September 27, 1996. A loss of $33,455,000, which includes
approximately $7,400,000 of direct costs related to the sale, was recorded on
such sale. The sale price, computed based on the combined closing balance sheet
of EML, was $147,631,000, consisting of (i) $110,379,000 in cash, (ii) the
assumption of Merisel's European asset securitization agreement against which
$26,252,000 was outstanding at closing and (iii) a receivable for $11,000,000,
which has since been collected.
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of 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 buyer
assuming $11,992,000 of trade payables and accrued liabilities and a $20,000,000
extended payable due to Vanstar Corporation. In connection with this sale, the
Company recorded an impairment charge in the fourth quarter of 1996 for
$2,033,000 to adjust Merisel FAB's assets to their fair value.
Following are summarized pro forma operating results assuming that the Company
had sold EML and Merisel FAB as of January 1, 1996.
(Unaudited)
(in thousands except per share data)
For the Years Ended December 31,
1996 1997
------------- ---------------
Net Sales $ 3,441,343 $ 3,846,795
Gross Profit 179,238 233,406
Net income (loss) (60,751) (17,994)
============= ===============
Net income (loss) per
basic & diluted share $ (2.02) $ (0.54)
============= ===============
Weighted Average
Shares Outstanding
Basic 30,001 33,216
Diluted 30,001 33,216
============= ===============
EML is not an incorporated entity for which historical financial statements were
prepared. The historical balances used in preparing the above pro forma balances
represent combined balances obtained from the separate unaudited financial
statements for the individual entities comprising EML. The pro forma results
include adjustments for general and administrative expenses that would not have
been eliminated due to the sale of EML. The pro forma adjustments also include
adjustments for amortization of intangible assets and for interest expense on
debt repaid with a portion of the proceeds from the sale, net of the effect of
an interest rate increase resulting from the
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
renegotiation of certain debt agreements as a result of the sale. Historical
balances obtained from the unaudited financial statements of Merisel FAB were
also used in preparing the pro forma balances above.
5. Sale of Accounts Receivable
The Company's wholly owned subsidiary, Merisel Americas, sells trade receivables
on an ongoing basis to its wholly owned subsidiary Merisel Capital Funding, Inc.
("Merisel Capital Funding"). Pursuant to an agreement with a securitization
company (the "Receivables Purchase and Servicing Agreement"), Merisel Capital
Funding, in turn, sells such receivables to the securitization company on an
ongoing basis, which yields proceeds of up to $500,000,000 at any point in time.
Merisel Capital Funding's sole business is the purchase of trade receivables
from Merisel Americas. Merisel Capital Funding is a separate corporate entity
with its own separate creditors, which in the event of its liquidation will be
entitled to be satisfied out of Merisel Capital Funding's assets prior to any
value in Merisel Capital Funding becoming available to Merisel Capital Funding's
equity holders. This facility expires in October 2003.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. 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 December
31, 1998 the total amount outstanding under these facilities was $416,121,000.
Fees incurred in connection with the sale of accounts receivable for the years
ended December 31, 1996, 1997 and 1998 were $16,029,000, $16,030,000 and
$17,564,000, respectively, and are recorded as other expense.
6. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful
Life
(in Years) December 31,
1997 1998
<S> <C> <C> <C>
Land............................................... $ 2,440 $ 3,324
Building........................................... 20 3,880 8,883
Equipment.......................................... 3 to 7 66,455 71,225
Furniture and fixtures............................. 3 to 5 6,733 9,177
Leasehold improvements............................. 3 to 20 8,166 8,941
Construction in progress........................... 14,589 45,811
-------- ---------
Total.............................................. 102,263 147,361
Less accumulated depreciation and amortization..... (62,121) (67,642)
-------- ---------
Property and equipment, net........................ $ 40,142 $ 79,719
======== =========
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
The components of (loss) income before income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Domestic............................... $(100,139) $(14,202) $ 19,661
Foreign................................ (38,697) 2,601 (734)
----------- ---------- ----------
Total.................................. $(138,836) $(11,601) $ 18,927
=========== ========== ==========
</TABLE>
The (benefit) provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................ $ (1,706)
State.................................. 360 $ 312 $ 360
Foreign................................ (3,290) 346 278
----------- ---------- ----------
Total Current.......................... (4,636) 658 638
----------- ---------- ----------
Deferred:
Domestic............................... 4,659
Foreign................................ 1,516 (162) (221)
----------- ---------- ----------
Total deferred......................... 6,175 (162) (221)
----------- ---------- ----------
Total provision........................ $ 1,539 496 $ 417
=========== ========== ==========
</TABLE>
Deferred income tax liabilities and assets were comprised of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1998
------------ -------------
<S> <C> <C>
Net operating loss.......................... $ 51,744 $ 48,400
Expense accruals............................ 16,164 17,184
State taxes................................. 109 (27)
Property and goodwill....................... (4,361) (11,665)
Other, net.................................. 2,315
------------ -------------
65,971 53,892
Valuation allowances........................ (65,327) (53,027)
------------ -------------
Total.................................. $ 644 $ 865
============ =============
Net deferred tax asset........................... $ 644 $ 865
============ =============
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The major elements contributing to the difference between the federal statutory
tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------------
1996 1997 1998
---------- ------------- -----------
<S> <C> <C> <C>
Statutory rate.............................................. (35.0)% (35.0)% 35.0%
Change in valuation allowance............................... 27.3 32.7 (36.7)
State income taxes, less effect of federal deduction........ .2 1.3 1.2
Goodwill amortization....................................... .2 1.5 .6
Foreign losses with benefits at less than statutory rate.... 7.2 1.4
Utilization of net operating losses of foreign subsidiary... (1.0) 1.2 .3
Other....................................................... 2.2 1.5 .4
---------- ------------- -----------
Effective tax rate.......................................... 1.1% 3.2% 2.2%
========== ============= ===========
</TABLE>
Upon the issuance of the Conversion Shares, the Company experienced an ownership
change for Federal income tax purposes, resulting in an annual limitation on the
Company's ability to utilize its net operating loss carryforwards to offset
future taxable income. The annual limitation was determined by multiplying the
value of the Company's equity before the change by the long-term tax exempt rate
as defined by the Internal Revenue Service. The Company has adjusted its
deferred tax asset to reflect the estimated limitation. At December 31, 1997 and
1998, the Company had available net operating loss carryforwards of $125,378,000
and $126,892,000, after adjusting for the estimated limitation, which expire at
various dates beginning December 31, 2010. As of December 31, 1998, $106,055,000
of the net operating loss carryforwards is restricted as a result of the
ownership change and $20,837,000 is not. The restricted net operating loss is
limited to $7,070,000 per year.
8. Debt
At December 31, 1998, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes, which mature on December 31, 2004,
provide for an interest rate of 12.5% payable semi-annually. The 12.5% Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after December 31, 1999, initially at 106.25% of principal amount and at
redemption prices declining to 100% of principal amount for redemptions on or
after December 31, 2002. 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, sales or
transfers of assets, the making of dividends and other payments, the creation of
liens, sale-leaseback transactions with affiliates and certain mergers.
At December 31, 1998, the Company had promissory notes outstanding with an
aggregate balance of $6,857,000. Such notes provide for interest at a 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. Payments
due under these notes are $1,846,000 in 1999, $1,111,000 in 2000, and $3,900,000
in 2001. 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 a subsidiary of Bank of America
NT&SA ("BA"), acting as agent, that provides for borrowings on a revolving
basis. Effective April 1, 1999, the obligations of BA under the Loan and
Security Agreement will be assumed by Bank of America NT&SA. 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 inventories held by Merisel Americas.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Borrowings bear interest at the rate of LIBOR plus a specified margin, or, at
the Company's option, the agent'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 December 31, 1998.
9. Commitments and Contingencies
The Company leases certain of its facilities and equipment under noncancelable
operating leases. Future minimum rental payments under leases that have initial
or remaining noncancelable lease terms in excess of one year are $8,046,000 in
1999, $6,041,000 in 2000, $4,831,000 in 2001, $2,742,000 in 2002, $1,250,000 in
2003, and $421,000 thereafter. Certain of the leases contain inflation
escalation clauses and requirements for the payment of property taxes,
insurance, and maintenance expenses. Rent expense for 1996, 1997 and 1998 was
$16,284,000, $10,487,000 and $10,947,000, respectively.
The Company also leases certain computer equipment under capitalized leases and
has the option to purchase the equipment for a nominal cost at the termination
of the lease.
Property and equipment includes the following amounts for leases that
have been capitalized:
<TABLE>
<CAPTION>
December 31,
1998
--------
<S> <C>
Computer equipment............................................ $4,489,000
Less accumulated depreciation................................. 567,000
--------------------
Total..................................................... $3,922,000
Future minimum payments for capitalized leases were as follows at December 31, 1998.
1999.......................................................... $1,409,000
2000.......................................................... 1,666,000
2001.......................................................... 1,174,000
--------------------
Total minimum lease payments.................................. 4,249,000
Less amount representing interest............................. 448,000
--------------------
Present value of net minimum lease payments................... 3,801,000
Less current maturities....................................... 1,196,000
--------------------
Long-term obligation..................................... $2,605,000
====================
</TABLE>
The Company has arrangements with certain finance companies that provide
inventory and accounts receivable financing facilities for its customers. In
conjunction with these arrangements, the Company has inventory repurchase
agreements with the finance companies that would require it to repurchase
certain inventory if repossessed from the customers by the finance companies.
Such repurchases have been insignificant in the past.
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
was approved by the district court judge on December 21, 1998. The judge entered
a judgment to dismiss the case with prejudice and such judgment was final on
January 20, 1999. Under the settlement, Merisel was not required to make any
material payment.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 12.5% 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. In January 1999 the Company
and Mr. Steffensen filed motions for summary judgment. If the Court denies the
motion, in whole or in part, as currently scheduled, trial will commence on June
1, 1999. 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 its opposition to the
Company's motion to strike, the plaintiff withdrew its prayer for punitive
damages. 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 filed a motion to dismiss the amended complaint on various
grounds and a motion to strike the punitive damages prayer. On January 15, 1999,
the Court issued an Order staying prosecution of the action under the doctrine
of exclusive concurrent federal jurisdiction. It is unknown whether the
plaintiff will proceed further with its action in any forum. The Company has
defended itself vigorously against this claim and will continue to do so.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
10. Employee Stock Options and Benefit Plans
On December 19, 1997, the Company's stockholders approved the Merisel Inc. 1997
Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"). Under the
Stock Award and Incentive Plan, incentive stock options and nonqualified stock
options as well as other stock-based awards may be granted to employees,
directors, and consultants. The plan authorized the issuance of an aggregate of
8,000,000 shares of Common Stock less the number of shares of Common Stock that
remain subject to outstanding option grants under any of the Company's other
stock-based incentive plans for employees after December 19, 1997 and are not
either canceled in exchange for options granted under the Stock Award and
Incentive Plan or forfeited. At December 31, 1998, 1,983,683 options were
available for grant under the Stock Award and Incentive Plan. The optionees,
option prices, vesting provisions, dates of grant and number of shares granted
under the plans are determined primarily by the Board of Directors or the
committee authorized by the Board of Directors to administer such plans,
although incentive stock options must be granted at prices which are no less
than the fair market value of the Company's Common Stock at the date of grant.
On December 22, 1997, the Company granted options under the Stock Award and
Incentive Plan in exchange for previously granted employee stock options that
were then outstanding and that had an exercise price greater than the then
market price of the Common Stock, subject to the agreement of each optionee to
cancel the outstanding options. As of December 31, 1998, 1,025,106 options
remain outstanding under the Company's other employee stock option plans,
however, no new options may be issued under these plans. In addition to the
shares issuable under the Stock Award and Incentive Plan, 50,000 shares are
reserved for issuance under the Company's 1992 Stock Option Plan for
Non-Employee Directors. The following summarizes the aggregate activity in all
of the Company's plans for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- --------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exer. Price Shares Exer. Price Shares Exer. Price
------------- -------------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of year 3,191,289 7.30 1,368,345 7.48 6,673,525 4.10
Granted 354,500 2.45 6,146,323 3.86 583,400 3.29
Exercised (215,000) .67 (77,750) 2.16
Canceled (1,962,444) 7.04 (841,143) 6.41 (1,232,025) 5.32
----------- ----------- -------------
Outstanding at end
of year 1,368,345 7.48 6,673,525 4.10 5,947,150 3.79
----------- ----------- -------------
Option price range for
Exercised shares $0.01-$2.20 $0.00 $1.63-$2.63
----------- -------- -----------
Weighted average fair
value at date of grant,
of options granted
during the year $1.61 $2.55 $2.13
------------ --------- ------------
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at 12/31/98 In Years Price at 12/31/98 Price
<S> <C> <C> <C> <C> <C>
$3.0000 to $3.0000 32,156 3 $3.0000 27,156 $3.0000
$11.3750 to $11.3750 2,000 4 $11.3750 2,000 $11.3750
$11.7500 to $11.7500 2,000 5 $11.7500 2,000 $11.7500
$15.0000 to $15.0000 2,000 6 $15.0000 2,000 $15.0000
$5.8750 to $6.3125 26,500 7 $6.2795 20,375 $6.2696
$1.8750 to $2.6250 172,500 8 $2.3752 87,250 $2.3694
$1.6250 to $4.3100 5,136,244 9 $3.8761 2,559,788 $3.6214
$2.6875 to $4.0600 573,750 10 $3.2771 0 $0
------------- ------------
$1.6250 to $15.0000 5,947,150 2,700,569
============= ============
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on their fair value at the grant date for options granted in
1996, 1997 and 1998 consistent with the provisions of SFAS No. 123, the
Company's net (loss) income and (loss) income per share would have been adjusted
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Net (Loss) Income - As Reported $(140,375) $( 15,841) $18,510
Net (Loss) Income - Pro Forma $(140,994) $( 16,914) $17,348
Net (Loss) Income Per Share (Basic & Diluted)
As Reported $ (4.68) $ (.48) $ 0.23
Pro Forma $ (4.70) $ (.51) $ 0.22
</TABLE>
The fair value of each option granted during 1996, 1997 and 1998 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1996 1997 1998
--------- ---------- ----------
Expected life 5.0 5.0 5.0
Expected volatility 72.69% 73.84% 76.97%
Risk-free interest rate 6.32% 5.76% 5.35%
Dividend Yield 0.00% 0.00% 0.00%
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company offers a 401(k) savings plan under which all employees who are 21
years of age with at least 30 days of service are eligible to participate. The
plan permits eligible employees to make contributions up to certain limitations,
with the Company matching certain of those contributions. The Company's
contributions vest 25% per year. The Company contributed $506,000 and $892,000
to the plan during the years ended December 31, 1997 and 1998, respectively. The
contributions to the 401(k) plan were in the form of newly issued shares of the
Company's common stock for 1997, and cash which was used to purchase shares of
the Company's common stock on the open market, for 1998. The Company did not
make any matching contributions on behalf of its employees in 1996.
11. Segment Information
In 1998, the Company implemented Statement of Financial Accounting Standard No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires disclosure of certain information about operating
segments, geographic areas in which the Company operates, major customers, and
products and services. In accordance with SFAS 131, the Company has determined
it has three operating segments: the United States distribution segment, the
Canadian distribution segment, and MOCA. Each of these segments has a dedicated
management team and is managed separately primarily because of geography (United
States and Canada) and differences in product categories, marketing strategies
and customer base (MOCA).
The Company does not maintain separate stand-alone financial statements prepared
in accordance with generally accepted accounting principles for each of its
operating segments. In accordance with SFAS 131, the Company has prepared the
following tables which present information related to each operating segment
included in internal management reports.
<TABLE>
<CAPTION>
1998
(in thousands)
-------------------------------------------------------------------------------------
United Other
States MOCA Canada International Eliminations Total
--------- ------ ------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales to external customers $ 3,096,317 $ 603,350 $ 853,317 $ 4,552,984
Depreciation and amortization 7,870 3,110 10,980
Segment profit contribution (A) 25,843 (A) 25,843 (A)
Segment operating profit (A) 20,237 (A) 8,422 (A) 28,659
Long-lived assets 74,548 5,171 79,719
Total segment assets (B) 1,186,944 235,384 180,234 $ (657,242) 945,320
Capital expenditures 44,505 5,562 50,067
</TABLE>
<TABLE>
<CAPTION>
1997
(in thousands)
-------------------------------------------------------------------------------------
United Other
States MOCA Canada International Eliminations Total
--------- ------ ------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales to external customers $ 2,844,107 $ 444,134 $ 760,731 $4,048,972
Depreciation and amortization 9,200 2,111 11,311
Segment profit contribution (A) 26,910(A) 26,910(A)
Segment operating profit (A) 757 (A) 7,911 (A) 8,668
Long-lived assets 35,870 4,272 40,142
Total segment assets (B) 1,032,701 130,666 151,662 $ (567,919) 747,110
Capital expenditures 5,864 1,426 7,290
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1996
(in thousands)
-------------------------------------------------------------------------------------
United Other
States MOCA Canada International Eliminations Total
--------- ------- -------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales to external customers $ 3,473,833 $ 345,090 $ 643,730 $ 1,060,171 $ 5,522,824
Depreciation and amortization 12,788 2,787 3,214 18,789
Segment profit contribution (A) 24,047(A) 24,047(A)
Segment operating profit (A) (71,851) (A) (5,406) (A) 5,410 (71,847)
Long-lived assets 56,438 4,992 61,430
Total segment assets (B) 1,246,056 139,789 $(654,806) 731,039
Capital expenditures 4,814 1,136 3,702 9,652
</TABLE>
Geographical Area Net Sales:
1996 1997 1998
------------------ --------------- -----------------
United States $ 3,818,923 $3,288,241 $ 3,699,667
Canada 643,730 760,731 853,317
Other International 1,060,171
================== =============== =================
Total Net Sales $ 5,522,824 $4,048,972 $ 4,552,984
================== =============== =================
Note A: For each of its operating segments, the Company evaluates performance
based upon operating profit or profit contribution. However, the Company does
not allocate corporate overhead, depreciation and amortization, or shared
operating expenses to the MOCA operating segment. As a result, the Company
believes that the segment profit contribution for MOCA in the tables above would
be substantially lower than the amounts shown if such costs were allocated.
Corporate overhead, amortization and shared operating expenses are allocated to
Canada. Segment profit for the United States business includes all corporate
overhead and amortization not allocated to Canada.
Note B: The Company only identifies direct assets associated with the MOCA
operating segment, primarily trade accounts receivable and inventory. No other
assets are allocated to MOCA. In 1996, the Company did not identify assets for
the MOCA operating segment for purposes of internal reporting.
12. 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 the year ended December 31, 1998, 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.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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)
For the Years Ended
December 31,
Weighted average shares outstanding 1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Basic 30,001 33,216 80,210
Assumed exercises of stock options 275
------------ ----------- -----------
Diluted 30,001 33,216 80,485
============ =========== ===========
</TABLE>
13. Quarterly Financial Data (Unaudited)
Selected financial information for the quarterly periods for the fiscal years
ended 1997 and 1998 is presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales...................... $1,113,100 $895,754 $965,238 $1,074,880
Gross profit................... 64,977 55,654 58,508 61,945
Net income (loss) before
extraordinary item....... 1,130 2,046 (5,333) (9,939)
Net income (loss).............. 1,130 2,046 (9,077) (9,939)
Net income (loss) per basic
and diluted share before
extraordinary item.......... .04 .07 (.17) (.24)
Net income (loss) per
basic and diluted share... .04 .07 (.29) (.24)
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales...................... $1,101,670 $1,096,439 $1,144,317 $1,210,558
Gross profit................... 61,751 61,703 67,275 63,702
Net income..................... 3,636 5,108 7,604 2,162
Net income per
Basic and diluted share... .05 .06 .09 .03
</TABLE>
In the third quarter of 1997, the Company recorded $9,324,000 in expenses
related to its debt restructuring efforts. These expenses included $1,950,000 in
compensation to executive officers of the Company in connection with the
successful restructuring, $3,630,000 related to the termination of the Limited
Waiver Agreement with certain holders of the Company's 12.5% Notes, and
$3,744,000 in extraordinary loss on the extinguishment of debt. In the fourth
quarter of 1997, the Company recorded additional charges of $1,600,000 related
to the conversion of the Convertible Note and the resulting change of control.
The Company also recognized an asset impairment charge in the fourth quarter of
1997 for $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996 and resumed in the fourth quarter of 1997.
<PAGE>
SCHEDULE II
MERISEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Balance at Charged to Balance at
December 31, Costs and December 31,
1995 Expenses Deductions 1996
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Accounts receivable--Doubtful accounts..... $20,199,000 $17,421,000 $17,858,000 $19,762,000
Accounts receivable--Other (1)............. 4,587,000 14,355,000 15,020,000 3,922,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1996 Expenses Deductions 1997
-------------- ------------- ------------ --------------
Accounts receivable--Doubtful accounts..... $19,762,000 $7,361,000 $10,521,000 $16,602,000
Accounts receivable--Other (1)............. 3,922,000 16,232,000 18,207,000 1,947,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1997 Expenses Deductions 1998
-------------- ------------- ------------ --------------
Accounts receivable--Doubtful accounts..... $16,602,000 $12,553,000 $10,358,000 $ 18,797,000
Accounts receivable--Other (1)............. 1,947,000 13,104,000 13,372,000 1,679,000
</TABLE>
(1) Accounts receivable--Other includes allowances for net sales returns and
uncollectible cooperative advertising credits.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated herein by reference to
information contained in the Company's definitive proxy statement for its 1999
annual meeting of stockholders (the "1999 Proxy Statement") under the captions
"Election of Directors Information Regarding Nominees and the Board of
Directors," "Election of Directors - Executive Officers" and "Election of
Directors Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to the
information contained in the 1999 Proxy Statement under the captions "Election
of Directors - Executive Compensation - Summary Compensation Table; - Options in
1998; - Compensation Committee Interlocks and Insider Participation," "Election
of Directors - Employment and Change-in-Control Arrangements" and "Election of
Directors - Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to the
information contained in the 1999 Proxy Statement under the caption "Election of
Directors - Ownership of Common Stock."
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference to the
information contained in the 1999 Proxy Statement under the caption "Election of
Directors - Certain Relationships and Related Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this Report:
(1) Financial Statements included in Item 8:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1997 and 1998.
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998.
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules included in Item 8:
Schedule II--Valuation and Qualifying Accounts.
<PAGE>
Schedules other than that referred to above have been omitted
because they are not applicable or are not required under the
instructions contained in Regulation S-X or because the information
is included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3) Exhibits
The exhibits listed on the accompanying Index of Exhibits are filed
as part of this Annual Report.
(b) The Following Reports on Form 8-K were filed during the quarter ended
December 31, 1998:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 30, 1999
MERISEL, INC.
By /s/Timothy N. Jenson
-----------------------
Timothy N. Jenson
Chief Financial Officer and
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Dwight A. Steffensen Chairman of the Board of Directors and Chief Executive March 30,1999
- ----------------------------------- Officer (Principal Executive Officer)
Dwight A. Steffensen
/s/James E. Illson Director, President and Chief Operating Officer March 30,1999
- -----------------------------------
James E. Illson
/s/Timothy N. Jenson Chief Financial Officer and Senior Vice President, March 30,1999
- ----------------------------------- Finance (Principal Financial and Accounting Officer)
Timothy N. Jenson
/s/Albert J. Fitzgibbons III Director March 30,1999
- -----------------------------------
Albert J. Fitzgibbons III
/s/Bradley J. Hoecker Director March 30,1999
- -----------------------------------
Bradley J. Hoecker
/s/Dr. Arnold Miller Director March 30,1999
- -----------------------------------
Dr. Arnold Miller
/s/Thomas P. Mullaney Director March 30,1999
- -----------------------------------
Thomas P. Mullaney
/s/Lawrence J. Schoenberg Director March 30,1999
- -----------------------------------
Lawrence J. Schoenberg
</TABLE>
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Merisel, Inc., filed as an
exhibit to the Form S-1 Registration Statement of Softsel Computer
Products, Inc., No. 33-23700.**
3.2 Amendment to Certificate of Incorporation of Merisel, Inc. dated
August 22, 1990, filed as exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990.**
3.3 Amendment to Certificate of Incorporation of Merisel, Inc. dated
December 19, 1997, filed as Annex I to the Company's Schedule 14A
dated October 6, 1997.**
3.4 Bylaws, as amended, of Merisel, Inc, filed as exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991.**
4.1 Indenture dated October 15, 1994 between Merisel, Inc. and
NationsBank of Texas, N.A., as Trustee, relating to the Company's
12.5% Senior Notes Due 2004, including the form of such Senior Notes
attached as Exhibit A thereto, filed as exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.**
4.2 Form of Limited Waiver and Voting Agreement, dated as of April 11,
1997, by and among Merisel, Inc. and the holders of the 12 1/2%
Senior Notes due December 31, 2004, filed as exhibit 4.10 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.**
4.3 Form of Limited Waiver and Agreement to Amend dated as of April 14,
1997 by and among Merisel, Inc., Merisel Europe, Inc., and the
holders of the Revolving Credit Agreement and the Senior Note
Purchase Agreement, filed as exhibit 4.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.**
*10.1 1983 Employee Stock Option Plan of Softsel Computer Products, Inc.,
as amended, together with Form of Incentive Stock Option Agreement
and Form of Nonqualified Stock Option Agreement under 1983 Employee
Stock Option Plan, filed as exhibits 4.4, 4.5 and 4.6, respectively
to the Form S-8 Registration Statement of Softsel Computer Products,
Inc., No. 33-35648, filed with the Securities and Exchange Commission
on June 29, 1990.**
*10.2 1991 Employee Stock Option Plan of Merisel, Inc. together with Form
of Incentive Stock Option Agreement and Form of Nonqualified Stock
Option Agreement under the 1991 Employee Stock Option Plan, filed as
exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991.**
*10.3 Amendment to the 1991 Employee Stock Option Plan of Merisel, Inc.
dated January 16, 1997, filed as exhibit 10.67 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.**
*10.4 Merisel, Inc. 1992 Stock Option Plan for Nonemployee Directors,
filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.**
*10.5 Softsel Computer Products, Inc. Executive Deferred Compensation
Plan, filed as exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.**
*10.6 Merisel, Inc. 1997 Stock Award and Incentive Plan, filed as Annex II
to the Company's Schedule 14A dated October 6, 1997.**
*10.7 Form of Nonqualified Stock Option Agreement under the Merisel, Inc.
1997 Stock Award and Incentive Plan, filed as exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.**
10.8 Amended and Restated Receivables Transfer Agreement dated as of
September 27, 1996 by and between Merisel Americas, Inc. and Merisel
Capital Funding, Inc., filed as exhibit 10.53 to the Company's
Current Report on Form 8-K, dated April 17, 1996.**
10.9 Amended and Restated Receivables Purchase and Servicing Agreement
dated as of September 27, 1996, by and between Merisel Capital
Funding, Inc., Redwood Receivables Corporation, Merisel Americas,
Inc. and General Electric Capital Corporation, filed as exhibit 10.54
to the Company's Current Report on Form 8-K, dated April 17, 1996.**
10.10 Annex X to Receivables Transfer Agreement and Receivables Purchase
and Servicing Agreement dated as of October 2, 1995, filed as exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995.**
<PAGE>
10.11 Amendment No. 1 and Waiver to Amended and Restated Receivables
Purchase and Servicing Agreement dated as of November 7, 1996 among
Merisel Capital Funding, Inc., Redwood Receivables Corporation,
Merisel Americas, Inc. and General Electric Capital Corporation,
filed as exhibit 2.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.**
10.12 Amendment No. 1 and Waiver to Amended and Restated Receivables
Transfer Agreement dated as of November 7, 1996 by and between
Merisel Americas, Inc. and Merisel Capital Funding, Inc., filed as
exhibit 2.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.**
10.13 Amendments to Securitization Agreements, dated as of December 19,
1997, among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation, filed as exhibit 10.19 to the Company's Annual Report on
Form 10-K for year ended December 31,1997.**
10.14 Amendments to Securitization Agreements, dated as of July 31, 1998,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation,
filed as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.**
10.15 Amendment No. 4 and Waiver to Purchase Agreement, dated of as
February 22, 1999, among Merisel Americas, Inc., Merisel
Capital Funding, Inc., Redwood Receivables Corporation and General
Electric Capital Corporation.
10.16 Loan and Security Agreement, dated as of June 30, 1998, among the
financial institutions listed on the signature pages thereof,
BankAmerica Business Credit, Inc. and Merisel Americas, Inc., filed
as exhibit 10.6 to Amendment No. 1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.**
10.17 Form of Security Agreement between Merisel Properties, Inc. and
Heller Financial, Inc. dated December 29, 1995, filed as exhibit
10.36 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.**
10.18 Deed of Trust, Security Agreement, Assignment of Leases and Rents
and Fixture Filing between Merisel Properties, Inc. and Heller
Financial, Inc. dated December 29, 1995, filed as exhibit 10.37 to
the Company's Annual Report and Form 10-K for the year ended
December 31, 1995.**
*10.19 Employment Agreement between Dwight A. Steffensen and Merisel, Inc.
dated February 12, 1997, filed as exhibit 10.66 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.**
*10.20 First Amendment to Employment Agreement dated as of December 15,
1997 between Merisel, Inc. and Dwight A. Steffensen, filed as
exhibit 10.26 to the Company's Annual Report on Form 10-K for year
ended December 31, 1997.**
*10.21 Employment Agreement between Merisel, Inc. and James Illson dated
August 19, 1996, filed as exhibit 10.61 to the Company's
Current Report on Form 8-K, dated October 18, 1996.**
*10.22 First Amendment to Employment Agreement dated as of July 26, 1997
between Merisel, Inc., Merisel Americas, Inc., and James E. Illson,
filed as exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.**
*10.23 Change of Control Agreement dated as of July 26, 1997 between
Merisel, Inc., Merisel Americas, Inc. and Timothy N. Jenson,
filed as exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.**
*10.24 Change of Control Agreement dated as of June 23, 1997 between
Merisel, Inc., Merisel Americas, Inc. and Karen A. Tallman,
filed as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.**
*10.25 Offer of Employment Letter to Kristin M. Rogers dated April 13,
1998, filed as exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.**
*10.26 Change of Control Agreement dated as of May 11, 1998 between Kristin
M. Rogers and Merisel Americas, Inc., filed as exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.**
*10.27 Offer of Employment Letter to Ronald S. Smith dated June 2, 1998,
filed as exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.**
<PAGE>
*10.28 Waiver and Release Agreement between Robert J. McInerney and
Merisel, Inc. dated as of April 30, 1998, filed as exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.**
10.29 Stock and Note Purchase Agreement, dated September 19, 1997, among
Phoenix Acquisition Company II, L.L.C, Merisel, Inc. and Merisel
Americas, Inc., filed as exhibit 99.2 to the Company's Current Report
on Form 8-K, dated September 19, 1997.**
10.30 Convertible Promissory Note dated September 19, 1997 of Merisel,
Inc. and Merisel Americas, Inc., filed as exhibit 99.3 to
the Company's Current Report on Form 8-K, dated September 19, 1997.**
10.31 Registration Rights Agreement, dated September 19, 1997, by and among
Merisel, Inc., Merisel Americas, Inc. and Phoenix Acquisition Company
II, L.L.C, filed as exhibit 99.4 to the Company's Current Report on
Form 8-K, dated September 19, 1997.**
10.32 Revolving Credit Agreement and Convertible Promissory Note due July
2, 1998, between Merisel, Inc., Merisel Americas, Inc. and Bankers
Trust Company dated January 26, 1998, filed as exhibit 99.1 to the
Company's Current Report on Form 8-K, dated January 26, 1998.**
10.33 Letter Agreement dated January 26, 1998, between Merisel Americas,
Inc. and Stonington Financing, Inc., filed as exhibit 99.2 to the
Company's Current Report on Form 8-K, dated January 26, 1998.**
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche, Independent Accountants.
27 Financial Data Schedule for the year ended December 31, 1998.
- --------
*Management contract or executive compensation plan or arrangement.
**Incorporated by reference.
AMENDMENT No. 4 AND WAIVER TO PURCHASE AGREEMENT
AMENDMENT No. 4 AND WAIVER TO PURCHASE AGREEMENT, dated as of February 22, 1999,
among MERISEL AMERICAS, INC ("Merisel Americas"), MERISEL CAPITAL FUNDING, INC.
("Merisel Capital Funding"), REDWOOD RECEIVABLES CORPORATION ("Redwood") and
GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital").
WHEREAS, Merisel Capital Funding, as seller (in such capacity,
the "Seller"), Redwood as purchaser (in such capacity, the "Purchaser"), GE
Capital, as operating agent (in such capacity, the "Operating Agent") and
collateral agent (in such capacity, the "Collateral Agent") and Merisel Americas
(in such capacity, the "Servicer") are parties to an Amended and Restated
Receivables Purchase and Servicing Agreement, dated as of September 27, 1996, as
amended by Amendment No. 1, dated as of November 7, 1996, Amendment No. 2, dated
as of December 19, 1997 and Amendment No. 3, dated as of July 31, 1998 (the
"Purchase Agreement");
WHEREAS, the Seller and the Servicer have requested that the
Purchaser, the Operating Agent and the Collateral Agent waive and amend certain
financial covenants contained in the Purchase Agreement, subject to the terms
and conditions hereof.
WHEREAS, the parties hereto desire to amend the Purchase
Agreement (such amendments collectively referred to herein as the "Amendments").
FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND ADEQUACY OF WHICH ARE
HEREBY ACKNOWLEDGED, THE PARTIES HERETO, INTENDING TO BE LEGALLY BOUND HEREBY,
AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
<PAGE>
All capitalized terms used herein, unless otherwise defined,
are used as defined in the Purchase Agreement.
ARTICLE II
AMENDMENT NO. 4 TO PURCHASE AGREEMENT
(a) Section 2.02(b) of the Purchase Agreement is hereby
amended by changing "December 31, 1999" to "December 31, 2001."
(b) Section 14.02 is hereby amended by adding ", GE Capital
sponsored conduit," after the phrase "Affiliate of GE Capital" each time such
phrase appears.
(c) Schedule 3 is hereby amended by:
(i) deleting the definition of "Daily Margin" and
substituting therefor the following definition of "Daily Margin":
"'Daily Margin' means as of any date, a percentage
per annum (the "Reference Percentage") divided by 360, which
Reference Percentage shall be determined by reference to the
Daily Margin Interest Coverage Ratio for the four fiscal
quarters of the Parent ended on or most recently prior to such
date as set forth below:
MARGIN LEVEL
Daily Margin
Interest Coverage Reference
Ratio Percentage
Level I
Less than or equal to
1.00 1.25%
Level II
Greater than 1.00, but
less than or equal to
1.40 1.00%
Level III
Greater than 1.40, but
less than or equal to
1.65 0.75%
Level IV
Greater than 1.65, but
less than or equal to
2.00 0.60%
Level V
Greater than 2.00 0.45%
Notwithstanding the foregoing, Daily Margin shall mean 0.75% until May 15, 1999,
and thereafter Daily Margin shall be computed for the fiscal quarters ending
April 3, 1999, July 3, 1999, October 2, 1999 and January 1, 2000 by reference to
the Fixed Charge Coverage Ratio of the Parent as set forth below:
<PAGE>
For the Fiscal Quarter ending April 3, 1999:
Fixed Charge Coverage Ratio Reference %
Level A Less than 0.62 0.75
Level B Greater than or equal to 0.62 Refer to Daily Margin Interest
Coverage Ratio
For the Fiscal Quarter ending July 3, 1999:
Fixed Charge Coverage Ratio Reference %
Level A Less than 0.68 0.75
Level B Greater than or equal to 0.68 Refer to Daily
Margin Interest
Coverage Ratio
For the Fiscal Quarter ending October 2, 1999:
Fixed Charge Coverage Ratio Reference %
Level A Less than 0.77 0.75
Level B Greater than or equal to 0.77 Refer to Daily
Margin Interest
Coverage Ratio
For the Fiscal Quarter ending January 1, 2000:
Fixed Charge Coverage Ratio Reference %
Level A Less than 0.90 0.75%
Level B Greater than or equal to 0.90 Refer to Daily
Margin Interest
Coverage Ratio
<PAGE>
The Daily Margin shall be determined by reference to the
Daily Margin Interest Coverage Ratio or the Fixed Charge
Coverage Ratio, as applicable, in effect from time to
time; provided, that (A) no change in the Daily Margin
shall be effective until one Business Day after the date
on which the Operating Agent and the Purchaser receive
financial statements pursuant to Section 5.02(c) or
Section 5.02(e) and a certificate of the chief financial
officer of the Parent demonstrating the computation of the
Daily Margin Interest Coverage Ratio or the Fixed Charge
Coverage Ratio, as applicable, and (B) if the Operating
Agent and Purchaser have not received the information
described in clause (A) of this proviso within ten days of
the day required under Section 5.02(c), or Section
5.02(e), as the case may be, or if a Termination Event or
Incipient Event has occurred and is continuing, the Daily
Margin shall be determined with reference to Level I for
so long as such information has not been received by the
Operating Agent and Purchaser or such Termination Event or
Incipient Event continues; provided that the Daily Margin
Interest Coverage Ratio with respect to any period of four
fiscal quarters that ends before the Fourth Quarter of
1998 are to be adjusted on a pro-forma basis to remove
Restructuring Costs as if (a) the indebtedness that was
refinanced or retired in connection with the issuance of
the Stonington Convertible Note had been refinanced or
retired by the Stonington Convertible Note as of the last
day preceding the four fiscal quarters in respect of which
such ratio is to be calculated and (b) the Stonington
Convertible Note was converted into common stock of the
Parent as of the last day preceding the four fiscal
quarters in respect of which such ratio is to be
calculated; provided, further, that the pro-forma
adjustments referred to in foregoing proviso shall be
reasonably satisfactory to the Operating Agent as
evidenced by the written approval of the Operating Agent;
provided, further, that if the adjustments are not
reasonably satisfactory to the Operating Agent, the
parties to the Purchase Agreement shall negotiate in good
faith to resolve any differences; and
(ii) amending and restating the definition of Daily Margin
Interest Coverage Ratio to read as follows:
"Daily Margin Interest Coverage
Ratio" means, with respect to any Person and its
consolidated subsidiaries for any period for the preceding
four fiscal quarters, the ratio of (i) EBITDA to (ii) Cash
Interest Expense on all Funded Debt;
(d) Exhibit H of the Purchase Agreement is hereby amended
by deleting the chart as it appears in such Exhibit
and substituting in lieu thereof the following:
FINANCIAL COVENANTS
(a) Except as provided in (b) below, all covenants
(i) shall be calculated on the basis of the financial ratios and net worth
percentages for the most recent four consecutive fiscal quarters just completed,
ending in each case with one of the quarters specified in the tables below, and
(ii) shall be calculated on a quarterly basis. For the Fixed Charge Coverage
Ratio covenants and Interest Coverage Ratio covenants, with respect to any
period of four fiscal quarters that ends before the Fourth Quarter of 1998, such
covenants are to be calculated on a pro-forma basis including without limitation
with respect to interest expense, principal payments and Restructuring Costs, as
if (A) the indebtedness that was refinanced or retired in connection with the
issuance of the Stonington Convertible Note had been refinanced or retired by
the Stonington Convertible Note as of the last day preceding the four fiscal
quarters in respect of which such covenants are to be calculated and (B) the
Stonington Convertible Note was converted into common stock of the Parent as of
the last day preceding the four fiscal quarters in respect of which such
covenants are to be calculated; provided that the pro-forma adjustments referred
to in this sentence shall be reasonably satisfactory to the Operating Agent as
evidenced by the written approval of the Operating Agent; provided, further,
that if the adjustments are not reasonably satisfactory to the Operating Agent,
the parties to the Purchase Agreement shall negotiate in good faith to resolve
any differences. For purposes of determining the covenants set forth in this
Exhibit H, Funded Debt shall include any notes, bonds, certificates or other
interests issued in a securitization of assets of the Originator or any of its
Subsidiaries and principal payments on Funded Debt shall include any payments in
respect of principal of such securities and Cash Interest Expense shall include
any payments or distributions in respect of interest on such securities. (b) The
Fixed Charge Coverage Ratio shall be calculated on
the basis of the following measurement periods
<PAGE>
Period End Date Measurement Period
April 3, 1999 First Quarter of 1999
July 3, 1999 First and Second Quarters of 1999
October 2, 1999 First, Second, and Third
Quarters of 1999
January 1, 2000 Most recent four quarters
and the last day of each
fiscal quarter thereafter
Covenant Covenant Level
I. Parent Fixed Charge Coverage Ratio (minimum)
Fourth Quarter of 1997 1.00 to 1.00
First Quarter of 1998 1.00 to 1.00
Second Quarter of 1998 1.00 to 1.00
Third Quarter of 1998 0.85 to 1.00
Fourth Quarter of 1998 0.70 to 1.00
First Quarter of 1999 0.46 to 1.00
Second Quarter of 1999 0.60 to 1.00
Third Quarter of 1999 0.41 to 1.00
Fourth Quarter of 1999 0.73 to 1.00
First Quarter of 2000 1.00 to 1.00
Second Quarter of 2000 1.00 to 1.00
Third Quarter of 2000
and thereafter 1.10 to 1.00
Interest Coverage Ratio (minimum)
Fourth Quarter of 1997 1.10 to 1.00
First Quarter of 1998 1.10 to 1.00
Second Quarter of 1998 1.15 to 1.00
Third Quarter of 1998 1.25 to 1.00
Fourth Quarter of 1998
and each quarter thereafter 1.40 to 1.00
II. Seller Net Worth Percentage (minimum) 15%
III. Parent Tangible Net Worth (minimum) $125,000,000
(commencing
1/3/1998) plus
the greater of
85% of Net Income
and zero
[END OF CHART]
(c) The definition of "Fixed Charge Coverage Ratio" is hereby amended by (a)
adding the phrase "except as provided in paragraph (b) under the heading
"Financial Covenants" in this Exhibit H" after the word "and" in the fourth line
thereof and (b) adding the following language at the end thereof:
"provided, however, that for purposes of determining compliance with
the Fixed Charge Coverage Ratio covenant for the fiscal quarters ended
April 3, 1999 and July 3, 1999, "Fixed Charge Coverage Ratio" means
with respect to any Person and its consolidated subsidiaries, the ratio
of (i) EBITDA to (ii) Fixed Charges plus Capital Expenditures."
<PAGE>
ARTICLE III
WAIVER OF DEFAULT UNDER
PURCHASE AGREEMENT
The Operating Agent, the Collateral Agent and the Purchaser
agree to waive any potential Termination Event resulting from any breach of the
Fixed Charge Coverage Ratio covenant contained in Exhibit H of the Purchase
Agreement as applicable to the Parent that may occur for the fiscal quarter
ended December 31, 1998.
ARTICLE IV
CONDITIONS PRECEDENT
The effectiveness of these Amendments is subject to the
conditions precedent that the Collateral Agent, the Operating Agent, the
Liquidity Agent, the LOC Agent and the Purchaser shall have received each of the
following, in form and substance satisfactory to each such party:
(a) All consents required under the Reimbursement Agreement,
Liquidity Loan Agreement and Insurance Agreement and confirmation from each
Rating Agency that the Rating Agency Condition has been satisfied.
(b) A certificate of the Secretary of each of the Seller and
the Servicer, dated the date of these Amendments and certifying (i) that
attached thereto is a true and complete copy of a resolution of the Board of
Directors of the Seller or the Servicer, as the case may be, authorizing the
execution, delivery and performance of these Amendments, and all other documents
required or necessary to be delivered hereunder and that such resolution has not
been modified, rescinded or amended and is in full force and effect and (ii) as
to the incumbency and specimen signature of each Person's officers executing
these Amendments, and all other documents required or necessary to be delivered
hereunder.
(c) A certificate of an officer of each of the Seller and the
Servicer, dated the date of these amendments, certifying that each of the
representations and warranties made by the Seller and the Servicer in these
Amendments is true and correct in all material respects as of the date hereof.
(d) The opinion of counsel to the Seller, in form and
substance reasonably satisfactory to the Purchaser, the LOC Agent, the Liquidity
Agent, the Operating Agent and the Collateral Agent, as to certain matters
including, without limitation, (i) the valid existence and good standing of the
Seller and Servicer, (ii) the power and authority of the Seller and Servicer (or
Originator, as the case may be) to execute the Amendments, (iii) the due
authorization, execution and delivery of the Amendments by the Seller and
Servicer (or Originator, as the case may be), (iv) the enforceability of the
Amendments against the Seller and Servicer (or Originator, as the case may be),
and (v) that the execution and delivery of the Amendments (x) does not conflict
with the organizational documents of the Seller or Servicer and (y) does not
violate or constitute a default under any material financing agreements of the
Seller or Servicer.
(e) An Officer's Certificate in form and substance
satisfactory to the Operating Agent to the effect that all of representations
and Warranties in the Transfer Agreement and Purchase Agreement are true and
correct in all material respects as of the date hereof.
(f) The Seller shall pay the fees and expenses of the
Purchaser as set forth in the letter agreement between the Seller and Purchaser
dated the date hereof (including, without limitation, reasonable legal fees and
expenses).
ARTICLE V
SELLER'S AND SERVICER'S REPRESENTATIONS
AND WARRANTIES
Each of the Seller and the Servicer represents and warrants
that:
(a) these Amendments have been duly authorized, executed and
delivered pursuant to its corporation power;
(b) these Amendments constitute its legal, valid and binding
obligation subject to the effect of bankruptcy, insolvency, reorganization or
other similar laws affecting the enforcement of creditors' rights generally; and
(c) after giving effect to the amendments referred to herein,
there does not exist any Termination Event.
<PAGE>
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Confirmation of Purchase Agreement. Each of the
Seller and the Servicer agree that, except for the specific amendments and
waiver set forth herein, nothing herein shall be deemed to be a waiver or
amendment of any covenant or agreement contained in the Purchase Agreement and
each of the other documents executed in connection therewith are ratified and
confirmed in all respects and shall remain in full force and effect in
accordance with its terms. Each reference in the Purchase Agreement to "this
Agreement" and in each of the other documents to be executed in connection
therewith to the "Purchase Agreement," shall mean the Purchase Agreement as
amended by these Amendments and as each such agreement may be hereinafter
amended or restated. Nothing herein shall obligate the Seller, the Servicer, the
Purchaser, Liquidity Agent, the LOC Agent, the Operating Agent or the Collateral
Agent to enter into any future amendment (whether similar or dissimilar).
SECTION 6.2 Waiver by the Seller. Except for manifest errors
on the part of the Operating Agent, each of the Seller and the Servicer hereby
waives any claim, defense, demand, action or suit of any kind or nature
whatsoever against the Purchaser, the LOC Provider, the LOC Agent, the Operating
Agent and the Collateral Agent arising on or prior to the date hereof in
connection with the Purchase Agreement or the transactions contemplated
thereunder.
SECTION 6.3 Counterparts. Delivery of an executed counterpart
of a signature page to these Amendments by facsimile shall be effective as
delivery of a manually executed counterpart of these Amendments. These
Amendments may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
SECTION 6.4 Governing Law. These Amendments shall be
governed by, and construed in accordance with, California law.
SECTION 6.5 Effective Date of Amendments. Upon the execution
and delivery of these Amendments by the parties hereto and the satisfaction of
the conditions precedent set forth herein, the Purchase Agreement shall be
amended by these Amendments, effective as of the date hereof.
* * *
<PAGE>
IN WITNESS WHEREOF, the Seller, the Servicer, the Collateral
Agent, the Operating Agent, the Liquidity Agent, the LOC Agent, the LOC Provider
and the Purchaser have caused these Amendments to be duly executed by their
respective authorized officers as of the date and year first above written.
MERISEL CAPITAL FUNDING, INC.,
as Seller
By:/s/Charles B. Freedman
---------------------------------
Title: Vice President and Treasurer
Name: Charles B. Freedman
MERISEL AMERICAS, INC.,
as Servicer
By:/s/Charles B. Freedman
---------------------------------
Title: Vice President and Treasurer
Name: Charles B. Freedman
GENERAL ELECTRIC CAPITAL CORPORATION,
as Operating Agent and Collateral Agent
By:/s/Dennis M. Creeden
---------------------------------
Title: Vice President
Name: Dennis M. Creeden
GENERAL ELECTRIC CAPITAL CORPORATION,
as LOC Agent, Liquidity Agent and LOC Provider
By:/s/Dennis M. Creeden
---------------------------------
Title: Vice President
Name: Dennis M. Creeden
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
By:/s/Joseph Wiles
---------------------------------
Title: Assistant Secretary
Name: Joseph Wiles
SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION OF
INCORPORATION
Channel Financial Services, Inc. Delaware
Merisel Americas, Inc. Delaware
Merisel Asia, Inc. Delaware
Merisel Canada Inc. Canada
Merisel Capital Funding, Inc. Delaware
Merisel Properties, Inc. Delaware
Softsel Foreign Sales Corporation U. S. Virgin Islands
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-29616, No. 33-61592, No. 333-44595, No. 333-44605 and No. 33-63021 of
Merisel, Inc. on Form S-8 of our report dated February 23, 1999, appearing in
this Annual Report on Form 10-K of Merisel, Inc. for the year ended December 31,
1998.
Deloitte & Touche, LLP
Los Angeles, California
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000724941
<NAME> MERISEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.0000
<CASH> 36,341
<SECURITIES> 0
<RECEIVABLES> 222,604
<ALLOWANCES> 20,476
<INVENTORY> 587,317
<CURRENT-ASSETS> 840,844
<PP&E> 146,774
<DEPRECIATION> 67,055
<TOTAL-ASSETS> 945,320
<CURRENT-LIABILITIES> 659,102
<BONDS> 129,360
0
0
<COMMON> 803
<OTHER-SE> 153,450
<TOTAL-LIABILITY-AND-EQUITY> 945,320
<SALES> 4,552,984
<TOTAL-REVENUES> 4,552,984
<CGS> 4,298,553
<TOTAL-COSTS> 199,929
<OTHER-EXPENSES> 20,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,671
<INCOME-PRETAX> 18,927
<INCOME-TAX> 417
<INCOME-CONTINUING> 18,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,510
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
