SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _______________ to ___________
Commission File Number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
- ---------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last year
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class May 14, 1999
Common Stock, $.01 par value 80,278,682 Shares
<PAGE>
9
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets as of 1-2
March 31, 1999 and December 31, 1998
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of 9-18
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 18
PART II OTHER INFORMATION 19-21
SIGNATURES 22
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors may
include, but are not limited to, the effect of (i) economic conditions
generally, (ii) industry growth, (iii) competition, (iv) liability and other
claims asserted against the Company, (v) the loss of significant customers or
vendors, (vi) operating margins, (vii) business disruptions, and (viii) other
risks detailed in this report. These factors are discussed in more detail
elsewhere in this report. Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
March 31, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $24,780 $36,341
Accounts receivable (net of allowances
of $15,122 and $20,476 for 1999 and 1998, respectively) 178,796 202,128
Inventories 472,680 587,317
Prepaid expenses and other current assets 17,229 14,193
Deferred income taxes 885 865
------------------- -------------------
Total current assets 694,370 840,844
PROPERTY AND EQUIPMENT, NET 88,178 79,719
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 24,202 24,309
OTHER ASSETS 494 448
------------------- -------------------
TOTAL ASSETS $807,244 $945,320
=================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1999 December 31, 1998
------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $489,626 $623,673
Accrued liabilities 48,302 31,737
Long-term debt and capitalized lease obligations - current 3,179 3,692
------------------- --------------------
Total current liabilities 541,107 659,102
Long-term debt 129,313 129,360
Capitalized lease obligations 2,320 2,605
------------------- --------------------
TOTAL LIABILITIES 672,740 791,067
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued or outstanding
Common stock, $.01 par value, authorized
150,000,000 shares; 80,278,683 and 80,272,683 shares
outstanding for 1999 and 1998, respectively 803 803
Additional paid-in capital 282,392 282,380
Accumulated deficit (139,004) (118,495)
Accumulated other comprehensive income (9,687) (10,435)
------------------- --------------------
Total stockholders' equity 134,504 154,253
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $807,244 $945,320
=================== ====================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1999 1998
------------------------- -------------------------
<S> <C> <C>
NET SALES $ 1,255,197 $1,101,670
COST OF SALES 1,190,069 1,039,919
------------------------- -------------------------
GROSS PROFIT 65,128 61,751
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 55,122 49,093
LITIGATION-RELATED CHARGE 21,000
------------------------- -------------------------
OPERATING (LOSS) INCOME (10,994) 12,658
INTEREST EXPENSE 2,818 3,783
OTHER EXPENSE 6,626 5,090
------------------------- -------------------------
(LOSS) INCOME BEFORE INCOME TAXES (20,438) 3,785
INCOME TAX PROVISION 71 149
------------------------- -------------------------
NET (LOSS) INCOME $ (20,509) $ 3,636
========================= =========================
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED)
$ (0.26) $ 0.05
========================= =========================
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 80,278 80,152
DILUTED 80,278 80,389
========================= =========================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
1999 1998
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(20,509) $3,636
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 2,963 2,509
Provision for doubtful accounts 4,227 1,844
Changes in operating assets and liabilities:
Accounts receivable 18,997 (6,464)
Inventories 114,637 (4,794)
Prepaid expenses and other current assets (3,082) (1,180)
Accounts payable (134,046) 82,149
Accrued liabilities 16,545 372
------------------ -------------------
Net cash (used for) provided by operating activities (268) 78,072
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,111) (5,062)
------------------ -------------------
Net cash used for investing activities (11,111) (5,062)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 33,200
Repayments under revolving line of credit (33,200)
Repayments under other financing arrangements (846) (418)
Proceeds from issuance of Common Stock 12 557
------------------ -------------------
------------------ -------------------
Net cash (used for) provided by financing activities (834) 139
------------------ -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 652 105
------------------ -------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (11,561) 73,254
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 36,341 36,447
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $24,780 $109,701
================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. Through its main operating subsidiary, Merisel
Americas, Inc. ("Merisel Americas"), and its 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.
The information for the three months ended March 31, 1999 and 1998 has not been
audited by independent accountants, but includes all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the results for such periods.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities and
Exchange Commission, although the Company believes that the disclosures included
in these financial statements are adequate to make the information not
misleading. Certain amounts for 1998 have been reclassified to conform with the
1999 presentation. The consolidated financial statements as presented herein
should be read in conjunction with the consolidated financial statements and
notes thereto included in Merisel's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
2. 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 with changes in fair value
reflected in income or equity, depending on the nature of the hedge. The Company
is in the process of evaluating the effect that this new standard will have on
the Company's financial statements.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
3. Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The Company's first quarter is the 13-week period ending
on the Saturday nearest to March 31. For simplicity of presentation, the Company
has described the interim periods and year-end period as of March 31 and
December 31, respectively.
4. Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130, which the
Company adopted in the first quarter of 1998, establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is computed as
follows:
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net (Loss) Income $(20,509) $3,636
Other comprehensive income:
Foreign currency translation adjustments 748 117
-------------------- ------------------
Comprehensive income $(19,761) $3,753
==================== ==================
</TABLE>
5. Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
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.
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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)
Three Months Ended
March 31,
Weighted average shares outstanding 1999 1998
- ----------------------------------- ---- ----
<S> <C> <C>
Basic 80,278 80,152
Assumed exercises of stock options 237
--------------------- ---------------------
Diluted 80,278 80,389
===================== =====================
</TABLE>
6. Supplemental Disclosure of Cash Flow Information
Cash received in the three-month periods ended March 31 for interest and income
taxes was as follows:
(in thousands)
1999 1998
---- ----
Interest $858 $768
Income taxes $473 $248
7. 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).
<PAGE>
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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>
Three Months Ended
March 31, 1999
(in thousands)
-------------------------------------------------------------------------------
United
States MOCA Canada Total
<S> <C> <C> <C> <C>
Net sales to external customers $789,682 $201,801 $263,714 $1,255,197
Segment profit contribution(A) 7,460(A) 7,460(A)
Segment operating (loss) profit(A) (21,969) 3,515 (18,454) (A)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
(in thousands)
-------------------------------------------------------------------------------
United
States MOCA Canada Total
<S> <C> <C> <C> <C>
Net sales to external customers $749,899 $116,399 $235,372 $1,101,670
Segment profit contribution(A) 7,026(A) 7,026(A)
Segment operating profit(A) 2,818 2,814 5,632(A)
</TABLE>
Geographical Area Net Sales:
Three months ended
March 31,
1999 1998
------------------- -------------------
United States $ 991,483 $ 866,298
Canada 263,714 235,372
------------------- -------------------
Total Net Sales $1,255,197 $1,101,670
=================== ===================
Note A: For each of its operating segments, the Company evaluates performance
based upon operating (loss) 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 operating (loss) profit for the United States business includes
all corporate overhead and amortization not allocated to Canada, and in 1999,
segment operating loss includes the litigation-related charge.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. Through its main operating subsidiary, Merisel
Americas, Inc. ("Merisel Americas"), and its 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 as Compared to the Three Months Ended March
31, 1998.
Net sales increased 13.9% from $1,101,670,000 in the quarter ended March, 31
1998 to $1,255,197,000 in the quarter ended March 31, 1999. The increase
resulted from a 14.5% increase in net sales for the U.S. and a 12.0% increase in
Canada. The U.S. growth rate resulted from increased sales of 73% in the MOCA
business segment and 46% for the retail customer group, combined with sales
growth of 1% and 2% for the VAR and commercial customer groups, respectively.
The growth rate in the MOCA business segment reflected in substantial part the
acquisition by the Company of several new large Sun Microsystems reseller
accounts during 1998, and the Company does not expect that growth rate to
continue. The growth rate in Canada in terms of Canadian dollars was 17.8%, but
the decline in the value of the Canadian dollar hampered the growth rate in
terms of U.S. dollars.
Hardware and accessories accounted for 79% of net sales and software accounted
for 21% of net sales in the first quarter of 1999, as compared to 78% and 22%
for the same categories, respectively, for the first quarter of 1998.
Gross profit increased 5.5% or $3,377,000 from $61,751,000 in the first quarter
of 1998 to $65,128,000 in the 1999 period. Gross profit as a percentage of
sales, or gross margin, decreased from 5.6% in the 1998 period to 5.2% in the
1999 period. Gross margins in the United States and Canada were 5.1% and 5.6%,
respectively, for the first quarter of 1999, compared to 5.6% and 5.8%,
respectively, for the first quarter of 1998. Gross margins were positively
affected by the favorable resolution of customer dispute issues that resulted in
a reduction of accounts receivable allowances. The decrease in margins as a
percentage of sales has resulted in large part from intense pricing pressures,
as well as changes in vendor terms and conditions, particularly in price
protection. The margin decrease is also partially the result of changes in
customer concentration and mix and product mix. Gross margins were also
negatively affected by lower vendor rebates as a result of lower than
anticipated sales. The Company has committed resources to address the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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. There is no assurance
that the Company's efforts to improve margins will be successful. 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 and pricing.
Selling, general and administrative expenses increased by 12.3% from $49,093,000
in the first quarter of 1998 to $55,122,000 in the first quarter of 1999.
However, selling, general and administrative expenses as a percentage of sales
decreased slightly from 4.5% of sales in 1998 to 4.4% for the same period in
1999. Selling, general and administrative expenses in the 1999 quarter were
negatively affected by the U.S. implementation of SAP, which required the
training of 1,400 associates over an eight-week period during the quarter.
The depreciation of the approximately $50 million in capital expenditures
associated with the implementation of the SAP operating system in the U.S. in
April 1999 is expected to result in additional depreciation and amortization
expense in future periods of more than $2 million per quarter. The Company also
expects to incur approximately $1 million in expenses in the second quarter of
1999 for post "go-live" SAP costs and approximately $3.3 million in the second
and third quarters of 1999 for expenses associated with Year 2000 compliance. In
addition, the payroll and payroll-related costs of employees directly associated
with the SAP project, which were capitalized prior to the implementation, will
be expensed in future periods as these employees will be integrated back into
the operations of the business.
The Company also expects that, notwithstanding that it considered the SAP
implementation to be a success, particularly given its scope and complexity,
sales and profitability in the second quarter of 1999 will be negatively
affected by issues that arise in transitioning to a new operating system such as
SAP.
In the first quarter of 1999, the Company recorded a charge of $21,000,000
relating to the settlement of the litigation pending in Delaware Chancery Court
between the Company and certain holders and former holders of the Company's
12-1/2% Senior Notes. The charge represents amounts payable pursuant to the
settlement agreement as well as certain costs related to the settlement and the
litigation. The Company is currently in negotiations with its insurers seeking
to recover a substantial portion of the litigation and settlement costs,
although there is no assurance that the Company will be successful in obtaining
any significant reimbursement. See Part II Item 1. "Legal Proceedings."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As a result of the above items, operating income decreased by $23,652,000 from
$12,658,000 for the first quarter of 1998 to a loss of $10,994,000 for the first
quarter of 1999. Excluding the charge related to the noteholder litigation, the
Company would have had operating income of $10,006,000 for the first quarter of
1999.
Interest Expense; Other Expense; and Income Tax Provision
Interest expense for the Company decreased 25.5% from $3,783,000 in 1998 to
$2,818,000 in 1999. The decrease in interest expense is primarily attributable
to the capitalization of interest related to the SAP implementation in the first
quarter of 1999.
Other expenses for the Company increased from $5,090,000 for the three months
ended March 31, 1998 to $6,626,000 for the same period in 1999. This increase is
due primarily to a $1,734,000 increase in asset securitization fees which are
included in other expense. The increased securitization fees are due in large
part to increased sales of accounts receivable in order to fund sales growth and
daily operations. The average proceeds drawn from the sale of accounts
receivable at month end under the Company's securitization facilities increased
from $291,846,000 for the three months ended March 31, 1998 to $438,223,000 for
the same period in 1999.
The income tax provision decreased from an expense of $149,000 for the three
months ended March 31, 1998 to an expense of $71,000 for the same period in
1999. In both periods, the income tax rate reflects only the minimal statutory
tax requirements in the various states and provinces in which the Company
conducts business, as the Company has sufficient net operating loss provisions
to offset federal income taxes.
Consolidated Net Loss
On a consolidated basis, net income for the Company decreased from income of
$3,636,000 for the three months ended March 31, 1998 to a loss of $20,509,000
for the three months ended March 31, 1999 due to the factors described above.
Net income per share decreased from $0.05 per share for the three months ended
March 31, 1998 to a net loss of $0.26 per share for the same period of 1999.
SYSTEMS AND PROCESSES
In April 1999, Merisel completed the conversion of its U.S. operations to the
SAP client/server operating system. The Company converted its Canadian
operations from a mainframe to the SAP client/server operating system in August
1995. With the U.S. implementation complete, the U.S. and Canadian operations
are each operating on a single platform. SAP is an enterprise-wide system which
integrates substantially all functional areas of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
the business in a real-time environment. The new system is designed to provide
greater transaction functionality, real-time information access, automated
controls, flexibility, and custom pricing applications.
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 in the
U.S., which was completed in April 1999, will address its major Year 2000 issues
for its core information technology ("IT") systems. See "Systems and Processes"
above. The Company has developed a plan for addressing the remainder of its Year
2000 issues which focuses on the following six areas: core IT systems; off-line
IT subsystems; technical infrastructure (e.g., networks, servers, desktop
computers); vendor/customer interfaces (consisting of electronic data
interchange or "EDI"); facilities (including security systems, elevators, and
heating and cooling systems); and third-party suppliers, vendors and customers
("External Parties"). For the first five areas, the Company's Year 2000 plan
consists of the following phases: (1) conducting an inventory of items with Year
2000 implications; (2) assessment of Year 2000 compliance; (3) remediation or
replacement of material items that are determined not to be Year 2000 compliant;
(4) testing (including re-testing of material items that were remediated or
replaced); and (5) certification of Year 2000 compliancy.
The Company has 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 for the
core IT systems during the second quarter of 1999, with the remaining areas to
be 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Costs
The Company currently estimates that the aggregate cost of its Year 2000 project
will be approximately $4.0 million, although the total amount could be greater.
Approximately $700,000 had been spent through the first quarter of 1999. 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 are 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. 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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)
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, the Company's net sales in the fourth quarter have been
historically higher than in its other three quarters. Management believes that
the pattern of higher fourth quarter sales is partially explained by customer
buying patterns relating to calendar year-end business and holiday purchases. As
a result of this pattern, the Company's working capital requirements in the
fourth quarter have typically been greater than other quarters. Net sales in the
Canadian operations are also historically strong in the first quarter of the
fiscal year, which is primarily due to buying patterns of Canadian government
agencies. See "Liquidity and Capital Resources" below.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash used by operating activities during the three months ended March 31,
1999 was $268,000. The primary sources of cash from operating activities include
a decrease in accounts receivable of $18,997,000, and a decrease in inventory of
$114,637,000 from the unusually high level of inventory at the end of 1998. The
primary use of cash during the period includes a $134,046,000 decrease in
accounts payable, which resulted in part from industry-wide changes in vendor
terms and conditions.
Net cash used in investing activities consisted of capital expenditures of
$11,111,000. The expenditures were primarily related to costs associated with
development and implementation of SAP and with other information systems.
Net cash used for financing activities was $834,000 and was comprised primarily
of repayments under capitalized lease obligations and bank debt.
Securitization Facilities
Funds generated by the sale of receivables in the U.S. are provided through
Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas. Merisel Capital Funding's sole business is the
ongoing purchase of trade receivables from Merisel Americas. Merisel Capital
Funding sells these receivables, in turn, under an agreement with a
securitization company, whose purchases yield proceeds of up to $500,000,000 at
any point in time. Merisel Capital Funding is a separate corporate entity with
separate creditors who, upon its liquidation, are entitled to be satisfied out
of Merisel Capital Funding's assets prior to any value in the subsidiary
becoming available to the subsidiary's equity holder. This agreement expires in
October 2003.
Funds are also provided to Merisel Canada, Inc. ("Merisel Canada") through a
receivables purchase agreement with a securitization company. In accordance with
this agreement, Merisel Canada sells receivables to the securitization company,
which yields proceeds of up to CND$150,000,000 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 agreements, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of March 31,
1999, the total amount outstanding under these agreements was $404,812,000. Fees
incurred in connection with the sale of accounts receivable for the three months
ended March 31, 1999 were $6,376,000 compared to $4,642,000 incurred for the
three months ended March 31, 1998 and are recorded as other expense.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Debt Obligations, Financing Sources and Capital Expenditures
At March 31, 1999, Merisel, Inc. had outstanding $125,000,000 principal amount
of 12-1/2% Senior Notes due 2004 (the "12.5% Notes"). The 12.5% Notes provide
for an interest rate of 12.5% payable semi-annually. By virtue of being an
obligation of Merisel, Inc., the 12.5% Notes are effectively subordinated to all
liabilities of the Company's subsidiaries, including trade payables, and are not
guaranteed by any of the Company's subsidiaries. The indenture relating to the
12.5% Notes contains certain covenants that, among other things, limit the type
and amount of additional indebtedness that may be incurred by the Company or any
of its subsidiaries and 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 March 31, 1999, the Company had promissory notes outstanding with an
aggregate balance of $6,257,000. 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 were 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 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 March 31, 1999.
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, developing and 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
At March 31, 1999, the Company had cash and cash equivalents of $24,780,000. 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, trade credit from vendors and borrowings under the Company's
revolving credit facility, 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.
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.
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
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 and
aggregators such as Gates/Arrow, Inacom, Ingram Micro, Pinacor, Synnex
Information Technologies, Inc. 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.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
No material changes have occurred in the quantitative and qualitative market
risk disclosure of the Company as presented in the Company's Annual Report on
Form 10-K for the period ended December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
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
asserted a claim for unjust enrichment against Dwight A. Steffensen, the
Company's Chief Executive Officer. The Noteholder Suit sought damages in excess
of $100 million from the Company. The Company's alleged breaches included, 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. While waiting for the
Court to rule on its motion for summary judgment, the Company entered into
settlement negotiations with the Noteholders. On May 10, 1999, the Company and
Mr. Steffensen entered into a settlement agreement (the "Agreement") with the
Noteholders that provides for all of the parties to dismiss their claims against
each other with prejudice. As a result of the settlement, the
<PAGE>
Company recorded a charge in the first quarter of 1999 of $21 million, which
represents amounts payable pursuant to the settlement as well as certain costs
related to the settlement and the litigation. The Company is currently in
negotiations with its insurers seeking to recover a substantial portion of the
litigation and settlement costs, although there is no assurance that the Company
will be successful in obtaining any significant reimbursement. The Agreement
also provided for the dismissal of an action brought by the Noteholders against
Stonington Partners, Inc. alleging tortious interference.
On March 16, 1998, the Company received a summons and complaint, filed in the
Superior Court of California, County of Santa Clara, in a matter captioned
Official Unsecured Creditors Committee of Media Vision Technology, Inc. v.
Merisel, Inc. The plaintiff alleges that certain executive officers of Media
Vision Technology, Inc. ("Media Vision") committed fraud and breached fiduciary
duties owed to Media Vision through, inter alia, the improper recognition and
reporting of sales, revenue and income and the failure to properly recognize and
report product returns during 1993 and 1994, thereby overstating the financial
condition of Media Vision as reflected in its financial statements for 1993. The
plaintiff further alleges that the Company aided, abetted, conspired and/or made
possible such acts and omissions of the Media Vision executives. The plaintiff
seeks to recover compensatory damages, including interest thereon, exemplary and
punitive damages, and costs including attorneys' fees. On May 6, 1998, the
Company filed a motion to dismiss the complaint on various legal grounds as well
as a motion to strike the punitive damages prayer. In response to the motions,
the plaintiff filed a first amended complaint on August 31, 1998, adding a claim
for unfair business practices under California Business & Professions Code ss.
17200 and additional allegations. The plaintiff's filing of an amended complaint
mooted the Company's original motions. The Company 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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) The following Reports on Form 8-K were filed during the quarter
ended March 31, 1999.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 1999
Merisel, Inc.
By /s/ Timothy N. Jenson
Timothy N. Jenson
Chief Financial Officer and
Senior Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR MERISEL, INC. FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> MERISEL, INC.
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