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, 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 May 11, 2000
Common Stock, $.01 par value 80,309,046 Shares
<PAGE>
MERISEL, INC.
INDEX
PART I FINANCIAL INFORMATION Page Reference
Consolidated Balance Sheets as of 1-2
March 31, 2000 and December 31, 1999
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statement 5-7
Management's Discussion and Analysis of 8-16
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 16
PART II OTHER INFORMATION 17-18
SIGNATURES 19
<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 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.
<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,
2000 1999
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,096 $ 57,557
Accounts receivable (net of allowances
of $14,814 and $15,186 for 2000 and 1999,
respectively) 228,195 182,352
Inventories 297,464 445,663
Prepaid expenses and other current assets 10,379 10,488
Deferred income taxes 911 914
------------------- -------------------
Total current assets 559,045 696,974
PROPERTY AND EQUIPMENT, NET 80,804 84,609
COST IN EXCESS OF NET ASSETS
ACQUIRED, NET 23,548 23,755
OTHER ASSETS 326 457
------------------- -------------------
TOTAL ASSETS $ 663,723 $ 805,795
=================== ===================
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2000 December 31, 1999
------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 410,040 $ 540,843
Accrued liabilities 39,718 36,609
Long-term debt and capitalized lease obligations - current 6,205 2,906
------------------- --------------------
Total current liabilities 455,963 580,358
Long-term debt 125,000 128,900
Capitalized lease obligations 1,032 1,364
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; 80,309,046 and 80,278,808 shares
outstanding for 2000 and 1999, respectively 803 803
Additional paid-in capital 282,609 282,492
Accumulated deficit (193,110) (179,663)
Accumulated other comprehensive loss (8,574) (8,459)
------------------- --------------------
Total stockholders' equity 81,728 95,173
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 663,723 $ 805,795
=================== ====================
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2000 1999
------------------------- -------------------------
<S> <C> <C>
NET SALES $ 1,166,764 $ 1,254,717
COST OF SALES 1,112,201 1,190,069
------------------------- -------------------------
GROSS PROFIT 54,563 64,648
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 57,245 54,055
LITIGATION-RELATED CHARGE 21,000
------------------------- -------------------------
OPERATING LOSS (2,682) (10,407)
INTEREST EXPENSE 4,545 3,405
OTHER EXPENSE, NET 6,068 6,626
------------------------- -------------------------
LOSS BEFORE INCOME TAXES (13,295) (20,438)
PROVISION FOR INCOME TAXES 152 71
------------------------- -------------------------
NET LOSS $ (13,447) $ (20,509)
========================= =========================
NET LOSS PER SHARE (BASIC AND DILUTED) $ (0.17) $ (0.26)
========================= =========================
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 80,289 80,278
DILUTED 80,289 80,278
========================= =========================
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
2000 1999
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (13,447) $ (20,509)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 5,479 2,963
Provision for doubtful accounts 3,854 4,227
Gain on sale of property and equipment (1,539)
Changes in operating assets and liabilities
Accounts receivable (49,851) 18,997
Inventories 147,917 114,637
Prepaid expenses and other current assets 238 (3,082)
Accounts payable (130,402) (134,046)
Accrued liabilities 3,116 16,545
------------------ -------------------
Net cash used for operating activities (34,635) (268)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,846) (11,111)
Proceeds from sale of property and equipment, net disposal cost 1,765
------------------ -------------------
Net cash used for investing activities (81) (11,111)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 40,000 45,500
Repayments under revolving line of credit (40,000) (45,500)
Repayments under other financing arrangements (1,053) (846)
Proceeds from issuance of Common Stock 112 12
------------------ -------------------
Net cash used for by financing activities (941) (834)
------------------ -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 196 652
------------------ -------------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (35,461) (11,561)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 57,557 36,341
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,096 $ 24,780
================== ===================
</TABLE>
<TABLE>
<CAPTION>
Supplemental disclosure of cash flow information: Cash paid (received) during
the period for:
(in thousands)
2000 1999
------------------ --------------------
<S> <C> <C>
Interest $ 653 $ (858)
Income taxes 140 473
Non cash activities:
Captial lease obligations entered into 120
</TABLE>
See accompanying notes to consolidated
financial statements.
<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. From March 1997 through 1999, through its main
operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries, the Company operated three distinct business units: United States
distribution, Canadian distribution and the Merisel Open Computing Alliance
(MOCA(TM)). In December 1999, Merisel announced plans to restructure and combine
its U.S. and Canadian distribution businesses. The Company accomplished this
reorganization in early 2000 and began operating two distinct North American
business units: North American distribution and MOCA. Merisel's North American
distribution business offers a full line of products and services to a broad
range of reseller customers, including value-added resellers ("VARs"),
commercial resellers, internet resellers and retailers. MOCA provides
enterprise-class solutions for Sun Microsystems servers and the Solaris
operating system to Sun Microsystems-authorized resellers and consultants.
Effective April 3, 2000, the operations of MOCA are conducted by Merisel Open
Computing Alliance, Inc. as a separate subsidiary.
The information for the three months ended March 31, 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 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 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. 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". As amended by SFAS No. 137, SFAS No. 133 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. SFAS No. 133 requires all derivatives to be recorded
on the balance sheet at fair value. The Company is in the process of evaluating
the effect that this new standard will have on its 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
The Company calculates comprehensive income in accordance with SFAS No. 130,
"Reporting for 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:
<TABLE>
(in thousands)
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net loss $(13,447) $(20,509)
Other comprehensive (loss) income:
Foreign currency translation adjustment (115) 748
-------------------- ------------------
Comprehensive loss $(13,562) $(19,761)
==================== ==================
</TABLE>
5. 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 stock options using the "treasury
stock" method. There was no difference between basic and diluted weighted
average shares outstanding for each of the March 31, 2000 and 1999 periods as
the impact of stock options would be anti-dilutive in both periods.
6. 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. From March 1997 through late 1999, the Company operated three
distinct business units: United States distribution, Canadian distribution and
MOCA. Prior to December 1999, each of these segments had a dedicated management
team and was managed separately primarily because of geography (United States
and Canada) and differences in product categories, marketing strategies and
customer base (MOCA). In December 1999, the Company announced a
restructuringplan that would combine the U.S. and Canadian distribution segments
into one operating segment, the North American distribution segment. Effective
April 3, 2000, the operations of MOCA are conducted by Merisel Open Computing
Alliance, Inc. as a separate subsidiary.
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. For 1999, the United States and Canadian segments have been
combined to show how they would look as the North American distribution segment,
which is how internal management reports are now prepared.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000
(in thousands)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
United Elim-
States Canada Inations NAM MOCA Other Total
------ ------ -------- --- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers $670,893 $233,672 $904,565 $262,199 $1,166,764
Segment operating
(loss) profit $(5,822) $(726) $(6,548) $6,709 $(2,843) $(2,682)
Total segment assets $391,409 $144,802 $127,512 $663,723
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
(in thousands)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
United Elim-
States Canada inations NAM MOCA Other Total
------ ------ -------- --- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to external
customers $789,345 $259,940 $1,049,285 $205,432 $1,254,717
Segment operating
Profit (loss) $3,922 $3,461 $7,383 $3,210 $(21,000) $(10,407)
</TABLE>
Geographical Area Net Sales:
(in thousands)
Three months ended
March 31,
2000 1999
------------------- -------------------
United States $ 923,960 $ 991,003
Canada 242,804 263,714
------------------- -------------------
Total net sales $1,166,764 $1,254,717
=================== ===================
<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. From March 1997 through 1999, through its main
operating subsidiary Merisel Americas, Inc. ("Merisel Americas") and its
subsidiaries, the Company operated three distinct business units: United States
distribution, Canadian distribution and the Merisel Open Computing Alliance
(MOCA(TM)). In December 1999, Merisel announced plans to restructure and combine
its U.S. and Canadian distribution businesses. The Company accomplished this
reorganization in early 2000 and began operating two distinct North American
business units: North American distribution and MOCA. Merisel's North American
distribution business offers a full line of products and services to a broad
range of reseller customers, including value-added resellers ("VARs"),
commercial resellers, internet resellers and retailers. MOCA provides
enterprise-class solutions for Sun Microsystems servers and the Solaris
operating system to Sun Microsystems-authorized resellers and consultants.
Effective April 3, 2000, the operations of MOCA are conducted by Merisel Open
Computing Alliance, Inc. as a separate subsidiary.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 as Compared to the Three Months Ended March
31, 1999.
The Company's net sales decreased 7.0% from $1,254,717,000 in the quarter ended
March 31, 1999 to $1,166,764,000 in the quarter ended March 31, 2000. The
decrease resulted from a 13.8% decline in net sales for the North America
distribution business to $904,565,000 from $1,049,285,000, offset in part by an
increase in net sales for MOCA of 27.6% to $262,199,000 from $205,432,000. The
decrease in net sales for North American distribution resulted primarily from
the focus on restructuring activities during the first half of the quarter, and
from decreased customer orders in reaction to Merisel's price increases during
the second half of the quarter. MOCA sales growth was primarily the result of
strong demand for Sun-related computer products and services. The Company does
not expect MOCA sales growth to continue at the same rate throughout 2000 due to
the recent loss of certain customers that will impact future sales.
Hardware and accessories accounted for 83% of net sales and software accounted
for 17% of net sales in the first quarter of 2000, as compared to 79% and 21%
for the same categories, respectively, in the first quarter of 1999.
Gross profit decreased 15.6% or $10,085,000 from $64,648,000 in the first
quarter of 1999 to $54,563,000 in the 2000 period, which reflects in part the
decline in sales in the 2000 period. Gross profit as a percentage of sales, or
gross margin, decreased from 5.15% in the first quarter of 1999 to 4.68% in the
first quarter of 2000. Gross margins in the North American distribution business
and MOCA were 4.36% and 5.77%, respectively, for the first quarter of 2000,
compared to 5.07% and 5.58%, respectively, for the first quarter of 1999. The
decrease in North American
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
distribution business gross margins has resulted in large part from changes in
vendor terms and conditions, including a reduction in vendor rebates and an
increase in price protection-related losses.
Over the past year, the Company has taken various actions to address the issue
of declining margins, including accelerating customer recruitment efforts to
expand the Company's account base, focusing attention on more profitable product
lines, enhancing customer support by assigning dedicated sales teams according
to customer specific business models and geographic locations, and increasing
the extent to which sales compensation is tied to margin goal achievement.
During the first quarter of 2000, the Company took more direct measures to
improve margins by implementing sales price increases across a broad range of
product offerings. As a result of these price increases, front-end selling
margins related to the U.S. portion of the North American distribution business
for March 2000 increased more than 40 basis points over February 2000, and more
than 80 basis points over December 1999. Although the Company has maintained
such higher front-end selling margins during the first half of the second
quarter of 2000, sales have continued to be negatively impacted. For April 2000,
North American distribution sales declined by nearly 24% over sales for April
1999 and by approximately 29% over sales for January 2000.
Selling, general and administrative expenses increased by 5.9% from $54,055,000
in the first quarter of 1999 to $57,245,000 in the first quarter of 2000. The
increase resulted primarily from an increase of $2,843,000 in litigation-related
reserves in the first quarter of 2000, as well as an increase in depreciation
and amortization expense of $2,516,000. The increase in depreciation and
amortization expense is primarily related to the SAP operating system
implemented in the U.S. in April 1999. The increases were offset in part by
reductions in expenses resulting from the combination of the Company's U.S. and
Canadian distribution businesses announced in December 1999. Selling, general
and administrative expenses as a percentage of sales increased from 4.31% for
the first quarter of 1999 to 4.91% for the same period in 2000. The increase in
selling, general and administrative expenses as a percentage of sales reflects
in part the 7.0% decline in sales for the first quarter of 2000 over the first
quarter of 1999.
Additionally, 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.
As a result of the above items, operating loss decreased by $7,725,000 from a
loss of $10,407,000 for the first quarter of 1999 to a loss of $2,682,000 for
the first quarter of 2000. Excluding the charge related to the noteholder
litigation, the Company would have had operating income of $10,593,000 for the
first quarter of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest Expense; Other Expense; and Income Tax Provision
Interest expense for the Company increased 33.5% from $3,405,000 in the first
quarter of 1999 to $4,545,000 in the 2000 period. This increase is primarily
related to the capitalization of $1,227,000 of interest related to the SAP
implementation in the first quarter of 1999. As SAP was implemented in the U.S.
in April 1999, there was no capitalization of interest required in the first
quarter of 2000.
Other expenses for the Company decreased from $6,626,000 for the three
months ended March 31, 1999 to $6,068,000 for the same period in 2000. This
decrease is due primarily to a $1,539,000 gain recorded on the sale of the
Company's Marlborough, Massachusetts call center in January 2000. The
decrease was partially offset by a $135,000 increase in asset
securitization fees, a $362,000 increase in other bank-related fees, and a
$480,000 increase in foreign exchange losses. 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 $418,092,000 for the
three months ended March 31, 1999 to $344,001,000 for the same period in
2000, however, securitization fees increased due to higher rates
experienced in the first quarter of 2000.
The income tax provision increased from $71,000 for the three months ended March
31, 1999 to $152,000 for the same period in 2000. 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 loss for the Company decreased from a loss of
$20,509,000 for the three months ended March 31, 1999 to a loss of $13,447,000
for the three months ended March 31, 2000 due to the factors described above.
Net loss per share decreased from a net loss of $0.26 per share for the three
months ended March 31, 1999 to a net loss of $0.17 per share for the same period
of 2000.
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 nine North American distribution
centers and its Raleigh, North Carolina, co-location facility utilize the MILES
computerized warehouse management system, which uses infrared bar coding and
advanced computer hardware and software to improve shipping, receiving and
picking accuracy rates.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Providing a common platform for Merisel's North American distribution and MOCA
businesses, the new system is designed to support business growth by providing
greater transaction functionality, increased flexibility, enhanced reporting
capabilities, and custom-pricing applications.
Since April 1999, system performance, stability and availability have improved
significantly. SAP performs with sub-second, on-line response time and has an
average systems-availability rate of 99.999 percent. Availability for all of
Merisel's core systems has averaged 99.9 percent or above since April 1999. SAP
also enforces a high degree of data integrity, which better supports Merisel's
reporting needs both through SAP and Merisel's data warehouse system.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the future. Management believes that the factors influencing quarterly
variability include: (i) the overall growth in the computer industry; (ii)
shifts in short-term demand for the Company's products resulting, in part, from
the introduction of new products or updates to existing products; (iii)
intensity of price competition among the Company and its competitors as
influenced by various factors; and (iv) the fact that virtually all sales in a
given quarter result from orders booked in that quarter. 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 "Management's Discussion and Analysis
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
<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,
2000 was $34,635,000. The primary uses of cash from operating activities include
an increase in accounts receivable of $49,851,000 and a decrease in accounts
payable of $130,402,000 which was offset by a decrease in inventory of
$147,917,000. The decrease in accounts payable and inventory are related in part
to the actions that the Company has taken to align North American distribution
inventory levels to changes in vendor terms and conditions across the industry.
Additionally, the lower sales volume associated with the restructuring and
increased prices implemented during the first quarter of 2000 contributed to
excess inventory positions during the quarter, resulting in a delay in some
vendor payments while inventory levels were reduced to be in line with the lower
sales levels. The Company believes that overall inventory levels are now
appropriate in relation to projected sales volumes. However, further sales
declines could result in similar conditions in the future. The increase in
accounts receivable is primarily due to a larger percentage of the Company's
receivables being ineligible under the Company's securitization facilities as a
result of concentration limitations.
Net cash used in investing activities related to $1,765,000 in cash proceeds
from the sale of the Marlborough, Massachusetts call center in January 2000.
This was largely offset by capital expenditures of $1,846,000, which were
primarily related to various information systems projects.
Net cash used for financing activities was $941,000 and was comprised primarily
of repayments under capitalized lease obligations and promissory notes.
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 of up to $500,000,000 at any point in time.
Merisel Capital Funding's sole business is the purchase of trade receivables
from Merisel Americas 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.
This facility expires in October 2003. The Receivables Purchase and Servicing
Agreement contains certain financial covenants that require, among other things,
minimum levels of net worth and cash flow.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Effective December 15, 1995, Merisel Canada Inc. ("Merisel Canada") entered into
a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. The facility expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of March 31,
2000, the total amount outstanding under these facilities was $285,068,000. Fees
incurred in connection with the sale of accounts receivable for the three months
ended March 31, 2000 were $6,514,000 compared to $6,376,000 incurred for the
three months ended March 31, 1999 and are recorded as other expense.
Debt Obligations, Financing Sources and Capital Expenditures
At March 31, 2000, 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. The 12.5% Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after December 31, 1999, initially at 106.25% of principal amount and at
redemption prices declining to 100% of principal amount for redemptions on or
after December 31, 2002. By virtue of being an obligation of Merisel, Inc., the
12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's subsidiaries. The indenture relating to the 12.5% Notes contains
certain covenants that, among other things, limit the type and amount of
additional indebtedness that may be incurred by the Company or any of its
subsidiaries and impose limitations on investments, loans, advances, sales or
transfers of assets, the making of dividends and other payments, the creation of
liens, sale-leaseback transactions with affiliates and certain mergers.
At March 31, 2000, the Company had a promissory note outstanding with an
aggregate balance of $4,363,000. This note provides for interest at a rate of
7.7% per annum. Remaining payments due under this note are $463,000 in 2000 and
$3,900,000 in 2001. The note is collateralized by certain of the Company's real
property and equipment.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In May 2000, an affiliate of Stonington Partners, Inc., which owns approximately
62 percent of the Company's common stock, agreed to purchase convertible
preferred stock of the Company for an aggregate purchase price of $15 million
(the "Convertible Preferred"). The purchase is expected to be made by June 15,
2000. The Convertible Preferred will provide for an 8% dividend payable in
additional shares of Convertible Preferred. The Convertible Preferred will be
convertible into the Company's common stock at a rate equal to the greater of
$1.75 or 115 % of the average closing price of the common stock for the 10
trading days immediately prior to the date of issuance of the Convertible
Preferred, not to exceed $2.25. 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 will not be convertible during the first six months after
issuance and will not be redeemable during the first three years after issuance,
except in the event of certain extraordinary corporate events, including a
change of control.
Merisel Americas is party to a Loan and Security Agreement dated as of June 30,
1998 (the "Loan and Security Agreement") with Bank of America NT&SA ("BA"),
acting as agent, that provides for borrowings on a revolving basis. Borrowings
under the Loan and Security Agreement are secured by a pledge of a majority of
the inventories held by Merisel Americas, and are subject to meeting certain
availability requirements under a borrowing-base formula and other limitations.
The amount available for borrowing under the Loan and Security Agreement at any
time may be further limited by restrictions under the indenture relating to the
12.5% Notes. Because the decline in inventory pledged under the Loan and
Security Agreement had essentially eliminated borrowing availability, in May
2000 the Loan and Security Agreement was amended to reduce the commitment from
$100 million to $35 million and to change the borrowing-base formula to increase
availability. The Loan and Security Agreement also contains covenants that
require minimum levels of gross profit and limit capital expenditures.
Borrowings bear interest at 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, 2000.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be less than
$20,000,000 for 2000. Capital expenditures are expected to primarily consist of
costs associated with information systems, including investments made to enhance
and expand the Company's electronic commerce capabilities and to grow and
enhance the Company's infrastructure and upgrade 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, 2000, the Company had cash and cash equivalents of $22,096,000. In
the opinion of management, anticipated cash from operations in 2000, together
with proceeds from the sale of receivables under the Company's securitization
agreements, trade credit from vendors, borrowings under the Company's revolving
credit facility, and the $15 million in proceeds from the Convertible Preferred
to be issued in June 2000, 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, 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. Through buying procedures and controls to manage
inventory purchases, the Company seeks to reduce future 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 the
future in preventing a material adverse effect on the Company.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company offers credit terms to qualifying customers and also sells on a
prepay, early pay, credit card and cash-on-delivery basis. In addition, the
Company has developed a number of customer financing alternatives, including
escrow programs and selected bid financing arrangements. The Company also
arranges a wide variety of programs through which third parties provide
financing to certain of its customers. These programs include floor plan
financing and hardware and software leasing. With respect to credit sales, the
Company attempts to control its bad debt exposure by monitoring customers'
creditworthiness and, where practicable, through participation in credit
associations that provide customer credit rating information for certain
accounts. In addition, the Company purchases credit insurance as it deems
appropriate. 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.
MOCA's competitors are GE Access, which is owned by GE Capital, and Ingram
Micro.
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. 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, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. Plaintiff filed a motion to seek
relief from the stay and in October 1999 such motion was granted. The Company
renewed its motion to dismiss and on January 28, 2000 the judge entered an order
granting the Company's motion to dismiss, and granting the plaintiff leave to
amend its complaint with respect only to the unfair business practices claim.
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, 2000.
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, 2000
Merisel, Inc.
By:/s/Timothy N. Jenson
Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements for Merisel, Inc. for the quarterly period ended March 31,
2000 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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