SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
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 as of November 16, 2000
Common Stock, $.01 par value 80,309,046 Shares
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MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION
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Consolidated Balance Sheets as of 1-2
September 30, 2000 and December 31, 1999
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5-11
Management's Discussion and Analysis of 12-22
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 22
PART II OTHER INFORMATION 23
SIGNATURES 24
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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 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. These
factors are discussed elsewhere in this report, including, without limitation,
under the captions "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.
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
September 30, December 31,
2000 1999
------------------- ------------------
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CURRENT ASSETS:
Cash and cash equivalents $ 31,958 $ 57,557
Accounts receivable (net of allowances
of $16,208 and $12,734 for 2000 and 1999, respectively) 50,841 152,631
Inventories 65,584 364,438
Prepaid expenses and other current assets 3,187 9,433
Deferred income taxes 878 914
Net assets of discontinued operations 95,177 43,136
------------------- ------------------
Total current assets 247,625 628,109
PROPERTY AND EQUIPMENT, NET 50,618 83,885
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 3,692 23,755
OTHER ASSETS 440 457
------------------- ------------------
TOTAL ASSETS $ 302,375 $ 736,206
=================== ==================
See accompanying notes to consolidated financial statements.
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PART 1. FINANCIAL INFORMATION
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 1999
2000
------------------- --------------------
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CURRENT LIABILITIES:
Accounts payable $ 157,498 $ 474,859
Accrued liabilities 40,672 33,004
Long-term debt and capitalized lease obligations - current 1,718 2,906
------------------- --------------------
Total current liabilities 199,888 510,769
Long-term debt 67,395 128,900
Capitalized lease obligations 61 1,364
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.01 par value, authorized 1,000,000
shares; 153,500 issued and outstanding 2
Common stock, $.01 par value, authorized
150,000,000 shares; 80,309,046 and 80,278,808
shares outstanding for 2000 and 1999, respectively 803 803
Additional paid-in capital 297,985 282,492
Accumulated deficit (254,090) (179,663)
Accumulated other comprehensive loss (9,669) (8,459)
------------------- --------------------
Total stockholders' equity 35,031 95,173
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 302,375 $ 736,206
=================== ====================
See accompanying notes to consolidated financial statements.
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MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------- ----------------- ------------------ -----------------
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NET SALES $399,480 $1,100,712 $1,932,328 $3,149,187
COST OF SALES 399,061 1,053,564 1,867,142 3,003,807
----------------- ----------------- ------------------ -----------------
GROSS PROFIT 419 47,148 65,186 145,380
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 40,360 54,349 137,037 156,248
IMPAIRMENT LOSSES 9,859 29,346
RESTRUCTURING CHARGE 10,964 10,964
LITIGATION-RELATED CHARGE 12,000
----------------- ----------------- ------------------ -----------------
OPERATING LOSS (60,764) (7,201) (112,161) (22,868)
INTEREST EXPENSE 1,523 4,798 10,097 12,742
OTHER (INCOME) EXPENSE, NET (4,960) 5,491 3,659 15,660
----------------- ----------------- ------------------ -----------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (57,327) (17,490) (125,917) (51,270)
INCOME TAX PROVISION 147 147 460 598
----------------- ----------------- ------------------ -----------------
LOSS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM (57,474) (17,637) (126,377) (51,868)
DISCONTINUED OPERATIONS:
INCOME FROM DISCONTINUED OPERATIONS 3,228 5,921 20,130 16,659
----------------- ----------------- ------------------ -----------------
LOSS BEFORE EXTRAORDINARY ITEM (54,246) (11,716) (106,247) (35,209)
EXTRAORDINARY GAIN ON DEBT
EXTINGUISHMENT, NET 10,514 32,170
----------------- ----------------- ------------------ -----------------
NET LOSS $(43,732) $(11,716) $(74,077) $(35,209)
================= ================= ================== =================
NET LOSS PER SHARE
(BASIC AND DILUTED):
LOSS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEMS $(0.72) $(0.22) $(1.57) $(0.65)
INCOME FROM DISCONTINUED OPERATIONS 0.04 0.07 0.25 0.21
EXTRAORDINARY GAIN 0.13 0.40
================= ================= ================== =================
NET LOSS $(0.54) $(0.15) $(0.92) $(0.44)
================= ================= ================== =================
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC AND DILUTED 80,330 80,279 80,316 80,278
================= ================= ================== =================
See accompanying notes to consolidated financial statements.
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MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2000 1999
------------------ -------------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (74,077) $ (35,209)
Less: income from discontinued operations, net 20,130 16,659
Loss from continuing operations (94,207) (51,868)
Adjustments to reconcile net loss from continuing operations to net cash used by
operating activities:
Depreciation and amortization 16,053 15,243
Provision for doubtful accounts 13,775 7,188
Impairment losses 29,346
Gain on sale of property and equipment (10,455)
Extraordinary gain on extinguishment of debt (32,170)
Changes in operating assets and liabilities:
Accounts receivable 87,735 (27,107)
Inventories 296,453 48,800
Prepaid expenses and other current assets 3,622 (1,208)
Accounts payable (312,041) 1,880
Accrued liabilities 10,960 5,908
------------------ -------------------
Net cash provided by (used for) operating activities of continuing operations 9,071 (1,164)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,853) (24,289)
Proceeds from sale of property and equipment, net disposal cost 15,888
------------------ -------------------
Net cash provided by (used for) investing activities of continuing operations 14,035 (24,289)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 40,000 298,700
Repayments under revolving line of credit (40,000) (296,200)
Proceeds from issuance of convertible preferred stock 15,000
Purchase of bonds (22,814)
Repayments under other financing arrangements (6,391) (1,957)
Proceeds from issuance of Common Stock 12
------------------ -------------------
Net cash (used for) provided by financing activities of continuing operations (14,205) 555
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,588) (655)
------------------ -------------------
NET CASH USED IN DISCONTINUED OPERATIONS (31,912) (1,524)
NET DECREASE IN CASH AND
CASH EQUIVALENTS OF CONTINUING OPERATIONS (25,599) (27,077)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 57,557 36,341
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,958 $ 9,264
================== ===================
Supplemental disclosure of cash flow information:
(in thousands)
Cash paid (received) during the period for: 2000 1999
------------------ --------------------
Interest $ 10,870 $ 11,447
Income taxes (1,653) 238
Non cash activities:
Capital lease obligations entered into 120 --
Sell of property for note receivable 1,000
See accompanying notes to consolidated financial statements.
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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 distributor of computer hardware
and software products and a provider of logistics services. On November 10, 2000
the Company completed the acquisition of substantially all the assets of Value
America, Inc., including its electronic fulfillment business assets, to
complement its existing back-end logistics and distribution capability and allow
the Company to operate an e-services and logistics business. See Note 12 -
"Subsequent Events." Through its main operating subsidiary Merisel Americas,
Inc. ("Merisel Americas") and its subsidiaries, in recent years the Company has
operated three distinct business units: United States distribution, Canadian
distribution and, until October 27, 2000, the Merisel Open Computing Alliance
(MOCA(TM)). Merisel's U.S. and Canadian distribution businesses offer products
and services to a broad range of reseller customers, including value-added
resellers ("VARs"), commercial resellers, internet resellers and retailers.
Merisel completed the sale of its MOCA business to Arrow Electronics, Inc.
effective as of October 27, 2000. MOCA provides enterprise-class solutions for
Sun Microsystems servers and the Solaris operating system to Sun
Microsystems-authorized resellers and consultants.
The information for the three and nine months ended September 30, 2000 and 1999
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 in the United States of America have been omitted pursuant to the
requirements of the Securities and Exchange Commission ("SEC"), although the
Company believes that the disclosures included in these financial statements are
adequate to make the information not misleading. Certain amounts for 1999 have
been reclassified to conform with the 2000 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, 1999.
2. Liquidity
At September 30, 2000, the Company had cash and cash equivalents of $31,958,000,
which subsequent of September 30, 2000 increased substantially as a result of
the sale of the MOCA business to Arrow effective as of October 27, 2000. In the
opinion of management, the Company will have sufficient liquidity for its U.S.
and Canadian distribution businesses only if it receives adequate vendor credit
support and is able to obtain new financing for such businesses to replace
terminating asset securitization facilities. The Company believes that if the
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MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
U.S. and Canadian distribution business plans for 2001 are successfully
implemented, it will have sufficient liquidity to meet the requirements of its
e-services and logistics business for the next 12 months.
3. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recorded on the balance sheet at fair value. SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, is effective for financial statements issued for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
will adopt SFAS No. 133 as required in January 2001. The Company is in the
process of evaluating the effect that this new standard will have on its
financial statements.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
which provides the staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. In March 2000, the SEC
released SAB No. 101A, which delayed for one quarter the implementation date of
SAB No. 101 for registrants with fiscal years beginning between December 16,
1999 and March 15, 2000. In June 2000, the SEC released SAB No. 101B, which
delayed the implementation date of SAB No. 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company is
evaluating what impact, if any, SAB No. 101 may have on its consolidated
financial statements.
4. Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The Company's third quarter is the 13-week period ending
on the Saturday nearest to September 30. For simplicity of presentation, the
Company has described the interim periods and year-end period as of September 30
and December 31, respectively.
5. Discontinued Operations
Effective as of October 27, 2000, the Company completed the sale of its MOCA
business to Arrow Electronics, Inc. ("Arrow"). The stock sale agreement pursuant
to which the sale was made provided for a purchase price of $110 million,
subject to adjustments based on changes in working capital reflected on the
closing balance sheet of Merisel Open Computing Alliance, Inc., plus an
additional amount up to $37.5 million payable by the end of March 2001 based
upon MOCA's ability to retain existing and gain additional business. The
preliminary purchase price was approximately $191.2 million of which $18.5
million will be paid by Arrow on a deferred basis, subject to the collection of
specified customer accounts receivable and the return of certain
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MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
inventory, and approximately $57.5 million was for amounts outstanding under the
Merisel asset securitization facility. Based on the preliminary purchase price,
the Company expects to realize a gain of approximately $27.4 million from the
sale of the MOCA business, without including the potential additional $37.5
million. The preliminary purchase price is subject to adjustments for actual
working capital amounts as of the closing date determined within 60 days of
closing, which are not expected to be material.
The Company has reclassified its consolidated financial statements to reflect
the sale of the MOCA business and to segregate the revenues, direct costs and
expenses (excluding allocated costs), assets and liabilities, and cash flows of
the MOCA business. The net operating results, net assets and net cash flows of
this business have been reported as "Discontinued Operations" in the
accompanying consolidated financial statements.
Summarized financial information for the discontinued operations is as follows:
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(In thousands) (In thousands)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
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Net Sales $181,539 $257,114 $740,299 $729,520
Income from Discontinued
Operations 3,228 5,921 20,130 16,659
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At September 30, 2000 At December 31, 1999
<S> <C> <C>
Current Assets $123,901 $112,001
Total Assets 124,453 112,725
Current Liabilities 29,276 69,589
Total Liabilities 29,276 69,589
Net assets of discontinued operations 95,177 43,136
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MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
6. Extraordinary Gain on Debt Extinguishment
In July 2000, the Company purchased $20,105,000 aggregate principal amount of
its outstanding 12-1/2% Senior Notes due 2004 (the "12.5% Notes"). The aggregate
cost to purchase the notes was $7,742,000 and, as a result, the Company
recognized an extraordinary gain, net of unamortized debt issuance costs, of
approximately $10,514,000 for the three months ended September 30, 2000. As a
result of this purchase and purchases of 12.5% Notes made in June 2000, the
Company has recognized extraordinary gains of approximately $32,170,000 for the
nine months ended September 30, 2000.
7. Restructuring Charge
During the third quarter of 2000, the Company announced plans that it would
reduce its workforce by approximately 1,000 full-time positions. As a result,
the Company has recorded a restructuring charge of $10,964,000 in the third
quarter of 2000. Approximately $7,098,000 of the charge consists of termination
benefits including severance pay and outplacement services to be provided to
those employees that were involuntarily affected by the reduction in workforce.
The charge also reflects approximately $3,866,000 of lease termination fees
related to the planned closure of certain warehouses and offices. A significant
portion of these benefits and fees had not been paid as of September 30, 2000,
and the amounts related thereto are included in accrued liabilities.
8. Impairment Losses
As the result of its continuing losses and conditions in its business and the
industry in which it operated at June 30, 2000, the Company reviewed the
recoverability of its long-lived assets, including identifiable intangible
assets, to determine if there had been any permanent impairment. The review of
the Company's intangible assets indicated that the excess of cost over net
assets acquired related to the U.S. distribution business was impaired.
Accordingly, the Company recorded an impairment loss totaling $19,487,000,
representing the unamortized goodwill attributable to the U.S. distribution
business, in the second quarter of 2000. In the third quarter of 2000, the
Company announced a restructuring plan that would significantly reduce its
facilities and workforce. In relation to this, the Company has evaluated the
fixed asset investments that supported these former facilities and personnel. As
a result, in the third quarter of 2000 a $9,859,000 impairment charge related to
redundant and non-used assets determined to have no value to the Company was
recorded.
9. Comprehensive Income
The Company calculates comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 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:
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MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
(In thousands) (In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
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Net loss $(43,732) $(11,716) $(74,077) $(35,209)
Other comprehensive income -
Foreign currency translation adjustments (369) (311) (1,210) 1,220
---------------- ---------------- ------------- ---------------
Comprehensive loss $(44,101) $(12,027) $(75,287) $(33,989)
================ ================ ============= ===============
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10. Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share is computed on the basis of the
weighted average number of common shares outstanding. Diluted earnings per share
is computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding potential common shares including
stock options, convertible preferred stock and restricted stock units using the
"treasury stock" method. There was no difference between basic and diluted
weighted average shares outstanding for each of the September 30, 2000 and 1999
periods as the impact of stock options, convertible preferred stock and
restricted stock units would be anti-dilutive in both periods.
11. Segment Information
The Company reports segment information in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
131 requires disclosure of certain information about operating segments,
geographic areas in which the Company operates, major customers, and products
and services. As described in Note 5, effective as of October 27, 2000, the
Company completed the sale of its MOCA business, which has historically been
treated as a separate segment under SFAS 131. MOCA has been treated as a
discontinued operation in the accompanying financial statements. The segment
data included below has been restated to exclude amounts related to the MOCA
business unit.
Excluding the MOCA business unit, during the periods presented the Company
operated two distinct business units: United States distribution and Canadian
distribution.
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MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
In accordance with SFAS No. 131, the Company has prepared the following tables
which present information related to each operating segment included in internal
management reports.
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Three Months Ended
September 30, 2000
(in thousands)
------------------------------------------------------------
United
States Canada Other Total
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Net sales to external
Customers $269,808 $129,672 $399,480
Segment operating loss $(51,540) $(9,206) $(60,764)
Total segment assets $137,260 $64,993 $4,945 $207,198
Three Months Ended
September 30, 1999
(in thousands)
------------------------------------------------------------
United
States Canada Other Total
Net sales to external
Customers $894,246 $206,466 $1,100,712
Segment operating
(loss) profit $(9,533) $2,332 $(7,201)
Nine Months Ended
September 30, 2000
(in thousands)
------------------------------------------------------------
United
States Canada Other Total
Net sales to external
customers $1,410,508 $521,820 $1,932,328
Segment operating loss $ (98,707) $(10,611) $(2,843) $(112,161)
Nine Months Ended
September 30, 1999
(in thousands)
------------------------------------------------------------
United
States Canada Other Total
Net sales to external
Customers $2,478,169 $671,018 $3,149,187
Segment operating
(loss) profit $(18,260) $7,392 $(12,000) $(22,868)
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MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
12. Subsequent Events
On November 10, 2000, the Company completed a transaction in which it purchased
substantially all of the assets and assumed certain liabilities of
Charlottesville, Virginia-based Value America, Inc. for approximately
$2,375,000. The Company expects to account for the acquisition under the
purchase method of accounting.
<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 distributor of computer hardware
and software products and a provider of logistics services. Through its main
operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries, the Company operates a United States distribution business and a
Canadian distribution business. These distribution businesses offer products and
services to a broad range of reseller customers, including value-added resellers
("VARs"), commercial resellers, internet resellers and retailers. In addition,
through a newly formed subsidiary, the Company operates a logistics business
which, through the acquisition of certain electronic fulfillment business assets
from Value America, the Company intends to expand to include a full range of
electronic services and logistics capabilities to offer to customers in a broad
range of industries ("e-Services and Logistics"). See "Business Strategy"
below.
Discontinued Operations
Effective as of October 27, 2000, the Company completed the sale of its Merisel
Open Computing Alliance ("MOCA") business unit, which provides enterprise-class
solutions for Sun Microsystems servers and the Solaris operating system to
authorized resellers, to Arrow Electronics, Inc. ("Arrow"). The stock sale
agreement pursuant to which the sale was made provided for a purchase price of
$110 million, subject to adjustments based on changes in working capital
reflected on the closing balance sheet of Merisel Open Computing Alliance, Inc.,
plus an additional amount up to $37.5 million payable by the end of March 2001
based upon MOCA's ability to retain existing and gain additional business. The
preliminary purchase price was approximately $191.2 million of which $18.5
million will be paid by Arrow on a deferred basis, subject to the collection of
specified customer accounts receivable and the return of certain inventory, and
approximately $57.5 million was for amounts outstanding under the Merisel asset
securitization facility. The preliminary purchase price is subject to
adjustments for actual working capital amounts as of the closing date determined
within 60 days of closing, which are not expected to be material.
The Company has reclassified its consolidated financial statements to reflect
the sale of the MOCA business and to segregate the revenues, direct costs and
expenses (excluding any allocated costs), assets and liabilities, and cash flows
of the MOCA business. The net operating results, net assets and net cash flows
of this business have been reported as "Discontinued Operations" in the
accompanying consolidated financial statements.
Revenues from MOCA decreased $75,575,000, or 29.4%, in the quarter ended
September 30, 2000 compared with the same quarter in 1999 and increased
$10,779,000, or 1.5%, in the nine months ended September 30, 2000 compared with
the same period in 1999. The loss of major customers in the February recruiting
cycle and a decrease in vendor support resulting in inconsistent availability of
certain key products are the primary causes for the third quarter decrease in
sales.
<PAGE>
Business Strategy
With respect to the U.S. distribution business, the Company has determined that,
primarily as a result of a significant contraction in sales and continuing
substantial operating losses, it must operate the business at a significantly
lower cost structure than it has historically. As a result of this, the Company
announced a plan to restructure and substantially decrease the size and scope of
the U.S. distribution business in the third quarter of 2000. As part of these
efforts, during the quarter ended September 30, 2000 the Company discontinued
its relationships with over 100 suppliers in order to streamline its business.
In addition, some vendors (including the three largest vendors) have terminated
their relationships with the U.S. distribution business and the scope of the
relationship with other vendors has been significantly reduced. The U.S.
distribution business is also eliminating four of its seven warehouse to further
reduce expenses. Management believes that by focusing on fewer vendors, reducing
operating expenses, and capitalizing on its 99.9%-plus shipping accuracy and
strong relationships with certain customers, the business has the potential to
be returned to a successful business model albeit on a much smaller scale. With
respect to its Canadian distribution business, the Company is also undertaking a
major restructuring in order to reduce operating costs to bring them into
alignment with projected sales levels and return the business to profitability.
While management believes this restructuring plan has the potential to return
the U.S. and Canadian distribution businesses to profitability, there are still
considerable risks involved, including risks related to vendor support and
financing. See "Liquidity and Capital Resources."
With the significant contraction of the U.S. distribution business, the Company
has been exploring possibilities for leveraging its distribution and logistics
capabilities to generate services revenue utilizing the Company's core
competencies. Following the sale of the MOCA business, on November 10, 2000 the
Company acquired substantially all the assets of Charlottesville, Virginia-based
Value America, Inc. for a purchase price of $2,375,000. Through a newly formed
subsidiary, the Company intends to conduct its e-Services and Logistics
business, offering a complete turnkey e-commerce solution to manufacturers and
retailers who sell their products through traditional channels and are looking
to move into the e-commerce arena. The e-Services and Logistics business will
provide a front-end Web-based customer interface and other e-service offerings,
including marketing and advertising services, web development and design, and
interactive call center management and customer service, that will complement
Merisel's existing back-end logistics and distribution capability. The Company
expects to complete the development of the front-end interface and required
systems integration within a six-month period. The Company has already begun
recruitment of customers that it may be able to service solely with the existing
back-end logistics and distribution capability prior to completion of the
front-end interface. In connection with the sale of the MOCA business to Arrow,
the Company entered into a transition services agreement with Arrow pursuant to
which the Company is providing fee-based distribution and logistics services for
the MOCA business, with an initial term of six months.
<PAGE>
RESULTS OF OPERATIONS
Including discontinued operations, the Company reported a net loss of
$43,732,000, or $0.55 loss per share, for the quarter ended September 30, 2000.
This compares with a net loss of $11,716,000, or $0.15 loss per share, for the
comparable prior year period. The net loss of $43,732,000 includes net income of
$3,228,000 from discontinued operations. The discussion and analysis below is
limited to the Company's continuing operations.
Three Months Ended September 30, 2000 as Compared to the Three Months Ended
September 30, 1999.
The Company's net sales decreased 63.7% from $1,100,712,000 in the quarter ended
September 30, 1999 to $399,480,000 in the quarter ended September 30, 2000. The
decrease resulted from a 69.8% decline in net sales in the U.S. distribution
business and a 37.2% decline in net sales in the Canadian distribution business.
The decrease in net sales for these businesses, which the Company also
experienced for the quarters ended March 31, 2000 and June 30, 2000, has
resulted from a number of factors. The decrease primarily resulted from
restructuring activities during the first half of the first quarter and from
decreased customer orders in reaction to Merisel's price changes implemented in
the latter half of the first quarter. The decline in sales contributed to excess
inventory positions resulting in a delay in some vendor payments while inventory
levels were reduced to be in line with the lower sales levels. These
circumstances, combined with vendor concern caused by the bankruptcy filings of
three major distributors during the first half of 2000, contributed to a
significant loss of vendor credit support. This loss of credit support has
affected the Company's ability to obtain sufficient inventory in the U.S.
distribution business, which has significantly reduced product availability and
caused further declines in sales for the U.S. distribution business.
Hardware and accessories accounted for 70% of net sales and software accounted
for 30% of net sales in the third quarter of 2000, as compared to 77% and 23%
for the same categories, respectively, in the third quarter of 1999.
Gross profit decreased 99.1% or $46,729,000 from $47,148,000 in the third
quarter of 1999 to $419,000 in the 2000 period, which primarily reflects the
decline in sales in the 2000 period and adjustments to inventory, accounts
receivable and accounts payable reserves to reflect current realizable value.
These adjustments are primarily related to the Company's rapid decline in sales
which has increased inventory obsolescence and to the wind-down of certain
vendor relationships. Gross profit as a percentage of sales, or gross margin,
decreased from 4.28% in the third quarter of 1999 to .10% in the third quarter
of 2000. Gross margins in the U.S. and Canadian distribution businesses were
(1.41%) and 3.27%, respectively, for the third quarter of 2000, compared to
3.84% and 6.19%, respectively, for the third quarter of 1999. Excluding the
adjustments, U.S. distribution would have had gross profit of $6,110,000, or
gross margin of 2.3%. and Canadian distribution would have had gross profit of
$8,122,000, or gross margin of 6.26%. Such decline in gross margin for the U.S.
distribution business resulted primarily from a decrease in vendor rebates,
which are generally based on sales volume.
<PAGE>
Selling, general and administrative expenses decreased by 25.7% from $54,349,000
in the third quarter of 1999 to $40,360,000 in the third quarter of 2000. This
reduction resulted primarily from a decrease in variable expenses due to lower
sales volumes and also from cost savings associated with the December 1999
restructuring plan. Selling, general and administrative expenses as a percentage
of sales increased from 4.94% for the third quarter of 1999 to 10.10% for the
same period in 2000, due primarily to reduced sales volumes in relation to fixed
costs.
During the third quarter of 2000, the Company announced that it would reduce its
workforce by approximately 700 full-time positions. Subsequent to that
announcement, the Company made the decision to close its Cary, North Carolina
facility, eliminating an additional 100 positions. Approximately 200 additional
positions were eliminated by not filling attrition-related vacancies. As a
result, the Company has recorded a restructuring charge of $10,964,000 in the
third quarter of 2000. Approximately $7,098,000 of the charge consists of
termination benefits including severance pay and outplacement services to be
provided to those employees that were involuntarily affected by the reduction in
workforce. The charge also reflects approximately $3,866,000 of lease
termination fees related to the planned closure of certain warehouses and
offices.
In connection with the Company's announced restructuring plan, which would
significantly reduce its facilities and workforce, the Company has recorded an
impairment charge of $9,859,000 related to redundant and non-used assets in the
third quarter of 2000.
As a result of the above items, the Company incurred an operating loss of
$60,764,000 for the three-month period ended September 30, 2000 compared to an
operating loss of $7,201,000 for the three-month period ended September 30,
1999. Excluding the impairment charges totaling $9,859,000 and the $10,964,000
restructuring charge, the Company would have had an operating loss of
$39,941,000 for the three-month period ended September 30, 2000.
In July 2000, the Company purchased $20,105,000 aggregate principal amount of
its outstanding 12-1/2% Senior Notes due 2004 (the "12.5% Notes") for an
aggregate cost of $7,742,000. As a result, the Company recognized an
extraordinary gain, net of unamortized debt issuance costs, of approximately
$10,514,000 for the three months ended September 30, 2000. See "Liquidity and
Capital Resources - Debt Obligations, Financing Sources and Capital
Expenditures."
Nine Months Ended September 30, 2000 as Compared to the Nine Months Ended
September 30, 1999.
For the nine months ended September 30, 2000, net sales decreased by 38.6% from
$3,149,187,000 for the nine months ended September 30, 1999 to $1,932,328,000
for the nine months ended September 30, 2000. The decrease resulted from a 43.1%
decrease in net sales for the U.S. distribution business to $1,410,508,000 from
$2,478,169,000 and a 22.2% decrease in net sales for the Canadian distribution
business to $521,820,000 from $671,018,000.
Gross profit decreased 55.2% or $80,194,000 from $145,380,000 for the first nine
months of 1999 to $65,186,000 for the first nine months of 2000. Gross profit as
a percentage of sales, or gross margin, decreased from 4.62% for the 1999 period
to 3.37% for the 2000 period. Gross
<PAGE>
margins in the U.S. and Canadian distribution businesses were 2.90% and 5.34%,
respectively, for the first nine months of 2000, compared to 4.25% and 5.95%,
respectively, for the first nine months of 1999. The decreases in margin in the
U.S. and Canada are attributable to substantially the same factors summarized in
the discussion of gross margin for the three months ended September 30, 2000.
Selling, general and administrative expenses decreased by 12.3% from
$156,248,000 in the nine months ended September 30, 1999 to $137,037,000 in the
nine months ended September 30, 2000. Selling, general and administrative
expenses as a percentage of sales increased from 4.96% of sales in 1999 to 7.09%
for the same period in 2000, primarily as a result of decreased sales volumes.
During the third quarter of 2000, the Company announced a restructuring plan
that would significantly reduce its facilities and workforce. As a result, the
Company has recorded a restructuring charge of $10,964,000 in the third quarter
of 2000.
As the result of its continuing losses and conditions in its business and the
industry in which it operated at June 30, 2000, the Company reviewed the
recoverability of its long-lived assets, including identifiable intangible
assets, to determine if there had been any permanent impairment. The review of
the Company's intangible assets indicated that the excess of cost over net
assets acquired related to the U.S. distribution business was impaired.
Accordingly, the Company recorded an impairment loss totaling $19,487,000,
representing the unamortized goodwill attributable to the U.S. distribution
business, in the second quarter of 2000. In connection with the Company's
announced restructuring plan, the Company has recorded an impairment charge of
$9,859,000 related to redundant and non-used assets in the third quarter of
2000.
Results for the nine months ended September 30, 1999 also reflected the
$21,000,000 charge recorded by the Company in the first quarter of 1999 relating
to the settlement of the litigation pending in Delaware Chancery Court between
the Company and certain holders and former holders of the 12.5% Notes, offset in
part by the $9,000,000 insurance recovery recorded by the Company in the second
quarter of 1999.
As a result of the above items, the Company incurred an operating loss of
$112,160,000 for the nine-month period ended September 30, 2000 compared to an
operating loss of $22,868,000 for the nine-month period ended September 30,
1999.
In June 2000, the Company purchased $37,500,000 aggregate principal amount of
the 12.5% Notes for an aggregate cost of $15,000,000. In July 2000, the Company
purchased $20,105,000 aggregate principal amount of its outstanding 12.5% Notes
for an aggregate cost of $7,742,000. As a result, the Company recognized an
extraordinary gain, net of unamortized debt issuance costs, of approximately
$32,170,000 for the nine months ended September 30, 2000. See "Liquidity and
Capital Resources - Debt Obligations, Financing Sources and Capital
Expenditures."
<PAGE>
Interest Expense; Other Expense; and Income Tax Provision
Interest expense for the Company decreased 68.3% from $4,798,000 in the third
quarter of 1999 to $1,523,000 in the 2000 period. For the nine months ended
September 30, 2000, interest expense for the Company decreased 20.8% from
$12,742,000 in the 1999 period to $10,097,000 in the 2000 period. These
decreases are primarily related to the purchases of the 12.5% Notes made in June
and July of 2000 and a reduction in outstanding borrowings under the Company's
revolving credit facility.
Other expense for the Company decreased from $5,491,000 in the three months
ended September 30, 1999 to income of $4,960,000 for the three months ended
September 30, 2000, and decreased from $15,660,000 in the nine months ended
September 30, 1999 to $3,659,000 for the nine months ended September 30, 2000.
The decrease is primarily related to a $8,917,000 gain recorded on the sale in
September 2000 of the building in El Segundo, California owned by the Company
and, for the nine-month period, a $1,538,000 gain recorded on the sale of the
Company's Marlborough, Massachusetts call center in January 2000. The average
proceeds drawn from the sale of accounts receivable under the Company's
securitization facilities as of the end of each month decreased from
$337,344,000 for the nine months ended September 30, 1999 to $178,012,000 for
the same period in 2000. The Company's securitization fees decreased $3,764,000
from $14,125,000 for the nine months ended 1999 to $10,361,000 in the same
period for 2000.
The income tax provision was $147,000 and $598,000 for the three and nine months
ended September 30, 1999, respectively, and $147,000 and $460,000 for the same
periods in 2000. In both periods, the income tax rate reflects primarily the
minimal statutory tax requirements in the various states and provinces in which
the Company conducts business, as the Company has sufficient net operating loss
provisions to offset federal income taxes in the current period.
Loss from Continuing Operations Before Extraordinary Item
Net loss from continuing operations before extraordinary item for the Company
increased from $17,637,000 and $51,868,000 for the three and nine months ended
September 30, 1999, respectively, to a net loss of $57,474,000 for the three
months ended September 30, 2000 and $126,377,000 for the nine months ended
September 30, 2000 due to the factors described above. Net loss per share before
extraordinary item increased from $0.22 per share for the three months ended
September 30, 1999 to a net loss of $0.72 per share for the three months ended
September 30, 2000. Net loss per share before extraordinary item increased from
$0.65 per share for the nine months ended September 30, 1999 to a net loss of
$1.57 per share for the nine months ended September 30, 2000.
Results for the nine months ended September 30, 2000 also reflect an
extraordinary gain of $32,170,000 related to the purchase of $57,605,000
aggregate principal amount of the 12.5% Notes.
<PAGE>
SYSTEMS AND PROCESSES
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 five North American distribution
centers 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.
In 1993, the Company began designing an SAP R/3 enterprise-wide information
system that would integrate all functional areas of the business, including
sales and distribution, inventory management, financial services, and marketing,
in a real-time environment. Merisel converted its Canadian operations from a
mainframe system to the new SAP system in August 1995, and successfully
completed the conversion of its North American operations in April 1999.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis. 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. 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, and the
results for any quarterly period may not be indicative of results for a full
fiscal year.
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 "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash provided by operating activities during the nine months ended September
30, 2000 was $9,071,000. The primary sources of cash from operating activities
include decreases in inventory and accounts receivable balances of $296,453,000
and $87,735,000, respectively. These are partially offset by a decrease in
accounts payable of $312,041,000.
<PAGE>
Net cash provided by investing activities related to cash proceeds of
$14,123,000 from the sale of the Company's El Segundo building in September 2000
and cash proceeds of $1,765,000 from the sale of the Marlborough, Massachusetts
call center in January 2000. These were partially offset by capital expenditures
of $1,853,000 which were primarily related to various information systems
projects.
Net cash used for financing activities was $14,205,000 and was comprised
primarily of repayments under capitalized lease obligations and promissory
notes, including $4,057,000 related to the building sold in September 2000. In
addition, $22,814,000 of cash was used to purchase $57,605,000 aggregate
principal of the 12.5% Notes, which was offset by $15,000,000 of proceeds from
the issuance of convertible preferred stock.
Securitization Facilities
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 equal to percentage of the receivables that
have been sold and remain outstanding at any point in time. Merisel Capital
Funding's sole business is the purchase of trade receivables from Merisel
Americas and, upon the commencement of MOCA's operations as a separate
subsidiary on April 3, 2000, Merisel Open Computing Alliance, Inc. 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. In connection
with the sale of the MOCA business to Arrow, the Receivables Purchase and
Service Agreement was amended to permit the repurchase of accounts receivable
generated by MOCA and to terminate MOCA's participation in the facility upon
completion of the sale to Arrow. The amendment also reduced the maximum proceeds
available under the facility to $60 million through November 15, 2000 and to
declining amounts thereafter until the termination of the facility on January
31, 2001.
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. Due to the Company's recent performance, the
securitization company has indicated that it will not likely extend the
facility. If the facility is not extended, the Company believes that it will be
able to secure alternative financing for its Canadian operations, but there are
no assurances it will be successful. The Company is currently in negotiations to
obtain such financing.
Under these securitization agreements, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of September
30, 2000, the total amount outstanding under these agreements was $92,723,000.
Fees incurred in connection with the sale of accounts receivable for the three
and nine months ended September 30, 2000 were $2,380,000
<PAGE>
and $10,361,000 compared to $5,056,000 and $14,125,000 incurred for the three
and nine months ended September 30, 1999, and are recorded as other expense.
Debt Obligations, Financing Sources and Capital Expenditures
In June 2000, the Company purchased $37,500,000 aggregate principal amount of
the 12.5% Notes for an aggregate cost of $15,000,000, which was funded by
proceeds from the issuance of convertible preferred stock. In July 2000, the
Company purchased an additional $20,105,000 aggregate principal amount of the
12.5% Notes for an aggregate cost of $7,742,000. As a result, the Company
recognized an extraordinary gain, net of unamortized debt issuance costs, of
approximately $32,170,000 in the nine-month period ended September 30, 2000.
At September 30, 2000, Merisel, Inc. had outstanding $67,395,000 principal
amount of the 12.5% Notes. In October and November 2000, the Company purchased
an additional $34,437,000 of the 12.5% Notes, reducing the outstanding balance
to $32,958,000 as of November 17, 2000. The 12.5% Notes 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.
In June 2000, an affiliate of Stonington Partners, Inc., which owns
approximately 62 percent of the Company's common stock, purchased convertible
preferred stock of the Company for an aggregate purchase price of $15 million
(the "Convertible Preferred"). The Convertible Preferred provides for an 8%
dividend payable in additional shares of Convertible Preferred. The Convertible
Preferred is convertible into the Company's common stock at a per share
conversion price of $1.75. At the option of the Company, the Convertible
Preferred will be converted into common stock when the average closing price of
the common stock for any 20 consecutive trading days is at least $3.75. The
Convertible Preferred is not convertible during the first six months after
issuance and is not redeemable during the first three years after issuance,
except in the event of certain extraordinary corporate events, including a
change of control.
Merisel Americas was party to a Loan and Security Agreement dated as of June 30,
1998 with Bank of America NT&SA, acting as agent, that provided for borrowings
on a revolving basis. In October 2000, the Company cancelled the facility.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures, excluding the costs related
to the acquisition of Value America's assets, will be less than $5,000,000 for
2000. Capital expenditures are expected to consist primarily of costs associated
with maintaining the Company's infrastructure (including information systems,
warehouse systems and other Company facilities) as is required to support the
Company's continuing operations.
<PAGE>
At September 30, 2000, the Company had cash and cash equivalents of $31,958,000,
which have increased substantially as a result of the sale of the MOCA business
to Arrow effective as of October 27, 2000. In the opinion of management, the
Company will have sufficient liquidity for its U.S. and Canadian distribution
businesses only if it receives adequate vendor credit support and is able to
obtain new financing for such businesses to replace its terminated
securitization facilities. However, if the Canadian distribution business is
unable to obtain appropriate financing, the Company would be required to either
significantly decrease the size of or wind down the Canadian distribution
business. The Company believes that if the U.S. and Canadian distribution
business plans for 2001 are successfully implemented, it will have sufficient
liquidity during the next 12 months to meet the requirements of its e-Services
and Logistics business, which the Company does not expect to be profitable
during that period.
ASSET MANAGEMENT
Merisel attempts to manage its inventory position to maintain levels sufficient
to achieve high product availability and same-day order fill rates. Due to
insufficient vendor credit support, the Company recently has not been able to
achieve this for its U.S. distribution business. Inventory levels may vary from
period to period, due to factors including increases or decreases in sales
levels, special term large-volume purchases, and the addition of new
manufacturers and products. The distribution agreements entered into between the
Company and its vendors 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.
Stock balancing provisions typically give the distributor the right to return
for credit or exchange for other products a portion of the inventory items
purchased, within a designated period of time, but are not generally provided by
the major PC systems manufacturers. Under price-protection provisions, suppliers
will credit the distributor for declines in inventory value resulting from the
supplier's price reductions if the distributor complies with certain conditions.
In the past two years, however, certain major PC manufacturers that are among
the Company's largest vendors have reduced the availability of price protection
for distributors by shortening the time periods during which distributors may
receive rebates or credit for decreases in manufacturer prices on unsold
inventory and changed other terms and conditions. These changes have increased
the Company's exposure to inventory valuation risks and have adversely affected
the Company's gross margins for the last several quarters.
The Company purchases exchange contracts to reduce foreign exchange transaction
gains and losses. The Company intends to continue the practice of purchasing
foreign exchange contracts, 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 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
<PAGE>
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. Historically, the Company
has not experienced credit losses materially in excess of established credit
loss reserves. However, if the Company's receivables experience a substantial
deterioration in their collectibility or if the Company cannot obtain credit
insurance at reasonable rates, the Company's financial condition and results of
operations may be adversely impacted.
COMPETITION
Competition in the computer products distribution industry is intense.
Competitive factors include price, breadth and availability of products and
services, credit availability and financing options, shipping accuracy, speed of
delivery, availability of technical support and product information, 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 North American distribution business
include large United States-based distributors such as Ingram Micro and Tech
Data, as well as regional distributors and franchisers.
Merisel also competes with manufacturers that sell directly to computer
resellers and end users, sometimes at prices below those charged by Merisel for
similar products, and larger resellers and E-tailers that sell to 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, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendments to Securitization Agreements and Waiver, dated as of
August 18, 2000, between Merisel Americas, Inc., Merisel
Capital Funding, Inc., Redwood Receivables Corporation and General
Electric Capital Corporation
10.2 Amendments to Securitization Agreements and Waiver, dated as of
October 16, 2000, between Merisel Americas, Inc., Merisel
Capital Funding, Inc., Redwood Receivables Corporation and General
Electric Capital Corporation
10.3 Bonus Agreement, dated as of August 10, 2000, between Merisel Americas,
Inc. and Timothy N. Jenson
10.4 Retention Agreement, dated as of August 10, 2000, between Merisel
Americas, Inc. and Karen A. Tallman
(b) The following Report on Form 8-K was filed during the quarter ended
September 30, 2000.
Current report on Form 8-K, dated September 15, 2000, which reported
that the Company had entered into a Stock Sale Agreement, dated as of
September 15, 2000, between Merisel, Inc., Merisel Americas, Inc.
("Americas"), and Arrow Electronics, Inc. ("Arrow"), pursuant to which
Americas had agreed to sell the outstanding capital stock of Merisel Open
Computing Alliance, Inc. to Arrow.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 17, 2000
Merisel, Inc.
By:/s/ Timothy N. Jenson
------------------------------
Timothy N. Jenson
Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer)
