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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
200 Continental Boulevard
El Segundo, California 90245-0948
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 615-3080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 28, 2000, the aggregate market value of voting stock held by
non-affiliates of the Registrant based on the last sales price as reported by
the Nasdaq National Market System was $48,350,397 (29,662,820 shares at a
closing price of $1.63).
As of March 28, 2000, the Registrant had 80,309,046 shares of Common Stock
outstanding.
Documents Incorporated By Reference
Portions of the Registrant's definitive Proxy Statement for its 2000 annual
meeting of stockholders are incorporated by reference into Part III.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 9
Item 3. Legal Proceedings.............................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............................................ 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 10
Item 6. Selected Financial Data........................................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 7A. Quantitative and Qualitative Market Risk Disclosure............................................ 21
Item 8. Financial Statements and Supplementary Data.................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 43
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 44
Item 11. Executive Compensation......................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 44
Item 13. Certain Relationships and Related Transactions................................................. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 44
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the effect of (i) economic conditions generally, (ii)
industry growth, (iii) competition, (iv) liability and other claims asserted
against the Company, (v) the loss of significant customers or vendors, (vi)
operating margins, (vii) business disruptions, (viii) the ability to attract and
retain qualified personnel, and (ix) other risks detailed in this report. For a
detailed discussion of certain of these factors, see "Business - Certain
Business Factors." These factors are also discussed elsewhere in this report,
including, without limitation, under the captions "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
PART I
Item 1. Business.
Overview
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a leading distributor of computer
hardware and software products. Merisel markets products and services throughout
the United States and Canada, and has achieved operational efficiencies that
have made it a valued partner to a broad range of computer resellers. In
addition, the Company supports the growth of its partners with business
development and educational services, expert technical support, flexible
financing options, certified configuration services, and progressive e-business
solutions. The Company distributes more than 35,000 products from the industry's
leading hardware and software manufacturers. These manufacturers include
American Power Conversion, Apple, Compaq, Hewlett-Packard, IBM/Lotus, Intel,
Microsoft, 3Com, Sun Microsystems, Symantec, Toshiba and ViewSonic. The breadth
of Merisel's product line, together with its extensive distribution network,
enables the Company to provide its customers with a single supply source and
prompt product delivery.
For a discussion of certain business and other factors that may have an adverse
effect on the Company, see "Certain Business Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company was incorporated in 1980 as Softsel Computer Products, Inc. and
changed its name to Merisel, Inc. in 1990 in connection with the acquisition of
Microamerica, Inc. ("Microamerica"). In the years following the Microamerica
acquisition, the Company's revenues increased rapidly through both internal
growth and acquisition. This increase reflected the substantial growth in both
domestic and international sales as the worldwide market for computer products
expanded and manufacturers increasingly turned to wholesale distributors for
product distribution. From 1996 through the first quarter of 1997, the Company
engaged in the process of divesting of its operations outside of the United
States and Canada and its non-distribution operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview." As a result, the Company's operations are now focused exclusively in
the United States and Canada.
From March 1997 through late 1999 the Company, through its main operating
subsidiary Merisel Americas, Inc. ("Merisel Americas") and its subsidiaries,
operated three distinct business units: United States distribution, Canadian
distribution and the Merisel Open Computing Alliance(R) (MOCA(TM)). At the end
of 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 will be conducted by Merisel Open Computing Alliance, Inc. as
a wholly owned subsidiary of Merisel, Inc.
The Company's sales were approximately $5.2 billion for 1999. Of these sales,
81.6% were generated by North American Distribution, and 18.4% were generated by
MOCA. On a geographical basis, 81.7% of these sales were generated in the United
States and 18.3% were generated in Canada. See "Notes to Consolidated Financial
Statements - Note 13 - Segment Information."
The Industry
The primary participants in the computer products distribution industry are
manufacturers, wholesale distributors and resellers. The supply chain was
traditionally based on a model through which manufacturers would sell directly
to wholesalers, resellers and end users; wholesale distributors would sell to
resellers; and resellers would sell to other resellers and directly to end
users. As the industry continues to mature, the roles of channel players are
becoming less clearly defined. Generally, full-line wholesale distributors, like
Merisel, purchase a wide range of products in bulk directly from manufacturers
and then ship products in smaller quantities to many different types of
resellers. Types of resellers include corporate resellers, value-added resellers
or "VARs," system integrators, original equipment manufacturers or "OEMs,"
direct marketers, independent dealers, mass merchants and computer chain stores,
and resellers conducting business via the Internet ("E-tailers"). In addition,
resellers are often defined and distinguished by the types of value-added
services they provide and by the end-user markets they serve, such as large
corporate accounts, small to medium-sized businesses, and home users.
Resellers rely on wholesale distributors like Merisel for their broad product
offerings, product availability, flexible financing alternatives, technical
support, and prompt and efficient delivery. In addition, as resellers intensify
their focus on sales and customer service, they are increasingly relying on
distributors for "back-office" support services, such as product procurement,
configuration, fulfillment, logistics and end-user financing. Manufacturers
benefit from using wholesale distribution as an alternative to direct sales to
resellers by not having to maintain large sales forces, warehouse facilities and
distribution networks. Manufacturers also rely on wholesale distributors to
provide marketing and support services as well as credit for reseller customers.
The computer products distribution industry continues to experience double-digit
growth throughout North America. Recent trends in wholesale distribution include
custom configuration of products by distributors, various supply chain
management strategies to eliminate time and cost, and accelerated development of
electronic commerce and information systems. Additional industry dynamics
include the rapid emergence of Internet and other "virtual" businesses that
operate with minimal infrastructure, changing terms and conditions from major
systems manufacturers, aggressive pricing practices and continued industry
consolidation.
In order to compete more effectively and lower their costs, major computer
systems manufacturers that rely on the two-tier distribution model have begun to
take steps to reduce their own inventories and the inventories of their
distributors and resellers. One such strategy is "co-location," which involves
the distributor occupying space in the manufacturer's facility, and taking
possession of and shipping the manufacturer's product. Configuration services
may also be performed at the co-location facilities. Electronic business, or
eBusiness, refers to the use of electronic systems and applications to exchange
information and transact business. These systems and applications include
electronic data interchange, or "EDI," and Internet-based order-entry and
information systems. Electronic business can simplify account set-up, ordering,
shipping and support, and thereby facilitate sales while decreasing both selling
and purchasing costs. Electronic business continues to increase in significance
in the computer products distribution industry.
Business Strategy
Merisel is a full-line wholesale distributor offering leading products and
services to resellers at competitive prices. The Company provides dedicated
sales support and customized programs and services to targeted customer groups.
Merisel believes that a high level of customer satisfaction is important to
achieve and maintain success in the very competitive computer products
distribution industry. The Company measures customer satisfaction by such
standards as accuracy and efficiency in the delivery of products, services and
information. Merisel strives on an ongoing basis to improve its operational
processes and achieve optimum levels of customer satisfaction.
Leading Products and Services. The Company's objective is to offer a broad range
of leading brands of systems, peripherals, networking products and software. By
stocking a broad mix of products, the Company meets the needs of resellers who
prefer to deal with a single source for their product requirements. The Company
continually evaluates new products, the demand for current products, and its
overall product mix, and seeks to develop distribution relationships with
suppliers of products that enhance the Company's product offering. The Company
believes that the size of its reseller customer base, combined with the breadth
and quality of its marketing support programs, gives Merisel a competitive
advantage over smaller, regional distributors in developing and maintaining
supplier relationships, although the Company's larger competitors may have
advantages over the Company due to their size.
Customer Groups. Merisel serves a variety of reseller channels, which have
diverse product, financing and support requirements. Merisel was among the first
major wholesale distributors in the industry to offer its various customer
groups a customer-segmented sales force as well as a customized product
offering, financing programs, and
marketing and technical support programs, all of which are tailored to address
the differing needs of these customer groups. The Company intends to continue
focusing on the profitability of the markets it serves in order to identify
customer opportunities and develop sales and marketing programs that serve these
groups most effectively.
2000 Initiatives. To capitalize on its strengths and differentiate Merisel from
its competitors in 2000, the Company is focused on key initiatives aimed at
generating new ways to support its customers, increase sales and gross margins,
and enhance stockholder returns. The Company is focused on expanding its reach
to specific customer groups that offer significant revenue and margin
opportunities, such as VARs, Internet and other "virtual" businesses, and
high-end resellers that offer enterprise-computing solutions. Merisel is
leveraging its North American strategy to increase operating efficiencies while
uniquely providing seamless, cross-border service to its customers. In addition,
the Company is working with its manufacturer partners to improve efficiencies
and eliminate costs within the computer products supply chain. Lastly, because
Merisel views electronic business as a key competitive area, the Company is
leveraging its state-of-the-art SAP(TM) R/3(R) operating system to accelerate
development of its eBusiness initiatives.
Products and Suppliers
Merisel has established and developed long-term business relationships with many
of the leading manufacturers in the computer products industry. The Company's
suppliers number approximately 500 and include Adobe Systems, American Power
Conversion, Apple, Compaq, Computer Associates, Corel, Epson America,
Hewlett-Packard, IBM/Lotus, Intel, Intuit, Iomega, Kingston Technology, Lexmark,
Microsoft, NEC Technologies, Network Associates, Novell, Okidata, Sony, Sun
Microsystems, Symantec, 3Com, Toshiba, ViewSonic and Western Digital. Merisel is
one of only three distributors in North America authorized to sell Sun
Microsystems products.
Merisel enters into written distribution agreements with the manufacturers of
the products it distributes. As is customary in the industry, these agreements
usually provide non-exclusive distribution rights and often contain territorial
restrictions that limit the countries in which Merisel is permitted to
distribute the products. The Company's suppliers generally warrant the products
distributed by the Company and allow the Company to return defective products,
including those that have been returned to the Company by its customers, as well
as products discontinued by the supplier. The agreements generally provide
Merisel with stock-balancing and price-protection provisions that partially
reduce Merisel's risk of loss due to slow-moving inventory, supplier price
reductions, product updates or obsolescence. 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 have changed other terms and conditions. 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's agreements with its suppliers, which generally have a term of at
least one year, may contain minimum purchase amounts and generally contain
provisions permitting early termination by either party upon written notice.
Current manufacturer programs toward which Merisel is devoting resources include
co-location and configuration. Co-location involves establishing distribution
operations jointly with a systems manufacturer within their facility in order to
take steps, time and costs out of the distribution process. The distributor
takes possession of the manufacturer's product on-site at the manufacturer's
facility and ships it directly to the customer. Since October 1998, Merisel has
operated a co-location operation with IBM in IBM's Raleigh, North Carolina,
facility. Configuration involves the assembly of computer products from multiple
vendors into a single unit or system that conforms to the specific needs of an
individual end user. While at one time configuration was a very minor aspect of
a wholesale distributor's business, it has become a major initiative as
manufacturers outsource this segment of production to wholesale distributors.
Through 1996, Merisel outsourced its configuration business to two third-party
providers. In 1997, the Company took these responsibilities in-house and
currently performs system configuration in its Hayward, California, Toronto,
Canada, and Raleigh, North Carolina facilities. For each of these
facilities, Merisel has obtained ISO 9002 certification, which is required by
certain systems manufacturers. The Company will continue to evaluate market
trends and adapt its strategy to meet the evolving needs of its business
partners.
Although Merisel distributes more than 35,000 products and accessories supplied
by approximately 500 manufacturers, 75% of net sales in 1999 (as compared to 73%
in 1998 and 69% in 1997) were derived from products supplied by Merisel's 10
largest vendors. The sale of products manufactured by Sun Microsystems, Compaq,
Hewlett-Packard and Microsoft accounted for approximately 18%, 15%, 14%, and
10%, respectively, of net sales in 1999 (as compared to 13%, 12%, 13% and 13%,
respectively, in 1998, and 12%, 10%, 12% and 15%, respectively, in 1997).
Because reseller customers often prefer to deal with a single source for many of
their product needs, the loss of the ability to distribute a particularly
popular product could result in losses of sales unrelated to the product. The
loss of a direct relationship between the Company and any of its key suppliers
could have an adverse impact on the Company's business and financial results.
Merisel provides its manufacturers with access to one of the largest bases of
computer resellers in North America, as well as the means to reduce inventory,
credit, marketing and overhead costs typically associated with maintaining
direct reseller relationships. Through its product-marketing group, the Company
develops and implements promotional programs for specific manufacturers to
increase customer purchasing depth and breadth. Promotional programs include
bundled offers, growth-goal incentives, and reseller training events as well as
channel communication vehicles such as targeted direct mail, fax and
advertising.
Customers and Customer Services
In 1999, Merisel sold products and services to approximately 30,000 computer
resellers throughout North America. Merisel's smaller customers often do not
have the resources to establish a large number of direct purchasing
relationships or stock significant product inventories, nor can they meet
manufacturers' minimum purchase requirements or obtain acceptable credit.
Consequently, they tend to purchase a high percentage of their products from
distributors such as Merisel, which can meet their inventory needs quickly and
efficiently. Larger resellers often establish direct relationships with
manufacturers for their more popular products but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products that may
not be available on a timely basis from manufacturers. The Company has limited
contracts with some of its reseller customers, which contracts generally have a
short term or are terminable at will and have no minimum purchase requirements.
No single customer accounted for more than 5% of Merisel's net sales in 1999,
1998 or 1997.
Single-Source Provider. Merisel offers computer resellers a single source for
more than 35,000 competitively priced hardware and software products. By
purchasing from Merisel, resellers need only comply with a single set of
ordering, billing and product-return procedures. Resellers may also benefit from
attractive volume pricing and financing programs. In addition, within specified
time limits and/or specified volume limits, resellers are generally allowed to
return products for credit to be applied against future purchases from Merisel.
Customers and Sales Organizations. The sales organization supporting the
Company's North American distribution business is structured to serve the
varying requirements of the different customer groups in the industry. The
Company's North American distribution business is organized into three primary
sales divisions to serve VARs, national/major accounts, and retail/Internet
customers. The VAR division offers specialized services and technical products
to value-added resellers, system integrators and OEMs who offer service, support
and consulting to clients in addition to selling computer products. Other key
elements of Merisel's VAR strategy include its Value Added Services team,
providing a range of programs and services for resellers' use or sales, and its
Electronic and Technology Support Services (eTSS) team, providing technical
support. The national/major accounts division offers direct-fulfillment
services, EDI transaction support, and dedicated field and inside sales support
to large-volume national accounts, while the retail/Internet division primarily
services mass merchants, computer chain stores and Internet resellers. Because
of the specialized nature of servicing the needs of customers who sell products
directly to the federal, state and local governments and to educational
institutions, the Company has also created a dedicated Government and Education
sales team.
The Company's sales force is comprised of dedicated field and inside sales
representatives. Merisel's account managers in the field determine resellers'
business needs and execute specific account plans to mutually grow business. The
Company's inside sales and technical specialists are trained for efficiency and
responsiveness. This efficiency is augmented by Merisel's screen-synchronization
technology, which automatically displays a customer profile on the sales
representative's computer screen when a customer calls Merisel. The Company's
systems allow its sales representatives to enter customer orders, obtain
descriptive information regarding products, check inventory status, determine
customer credit availability, and obtain special pricing and promotion
information. In addition, customers may access SELline II, Merisel's electronic
business and information service, which offers ordering options and access to
the above information 24 hours a day, seven days a week.
Customers of MOCA are authorized by Sun Microsystems to purchase from only one
of its three North American distributors, and may generally change the
distributor with whom they deal only once per year. MOCA provides customer
support through dedicated sales account executives, business development
managers, technical support systems engineers, financial services
representatives, and marketing and reseller services teams. This unique coverage
model has created an unparalleled business proposition for resellers selling
enterprise solutions. In addition, MOCA is focused on providing innovative new
service solutions to serve its business partners in an evolving industry. In
March 2000, the Company announced an exclusive outsourcing and
product-fulfillment agreement between MOCA and Stonebridge Technologies. The
two-year agreement is the first of its kind in the Sun channel and involves the
outsourcing of a number of services to MOCA, including product procurement,
configuration, fulfillment, logistics and financial services. MOCA will pursue
similar customer opportunities in the future.
Prompt Delivery. In the United States and Canada, orders received by 5:00 p.m.
local time are typically shipped the same day, provided the required inventory
is in stock. As part of a continuing effort to improve accuracy, Merisel's
Information and Logistics Efficiency System ("MILES") was first installed in the
Company's Atlanta distribution center in early 1994. By 1996, installation of
this custom, computerized warehouse-management system was completed in all nine
of Merisel's North American distribution centers. Merisel has also established
MILES environments as part of its co-location strategy in IBM's Raleigh, North
Carolina, facility. The successful implementation of MILES has resulted in high
rates of inventory and shipping accuracy. The Company believes that its shipping
accuracy rates are the highest in the industry at 99.993%.
Merisel typically delivers products from its regional distribution centers via
United Parcel Service, Federal Express, Purolator Courier and other common
carriers in North America. Most customers receive orders within one or two
working days of shipment. Merisel also provides customer-paid overnight air
handling upon request. These services allow resellers to minimize inventory
investment and serve their customers responsively. To expedite delivery and
further minimize reseller inventories, Merisel also provides fulfillment
services, through which the Company ships orders directly to resellers'
customers.
Financing Programs. Merisel's credit policy for qualified resellers eliminates
the need for them to establish multiple credit relationships with a large number
of manufacturers. In addition, the Company arranges floor-plan and lease
financing through a number of credit institutions and allows credit card
purchases by qualified customers. Merisel's Direct Ship program provides for
direct shipment to and billing of the reseller's customer. To allow certain
resellers to purchase larger orders in the United States, the Company can also
arrange alternative financing through its escrow programs as well as selected
bid-financing arrangements.
Information Services. Merisel provides its reseller customers with detailed
information on products, pricing, promotions and developments in the industry.
Merisel's corporate Web site and SELline II offer technical product information
on thousands of products and links to more than 350 of the industry's leading
manufacturers. In addition, resellers can obtain current information on programs
and services, daily product promotions, and strategic Merisel announcements.
They can also download return-authorization and system-return forms, and track
product shipments with links to UPS and Federal Express. Merisel's Web site also
offers secure, 24-hour access to SELline II, Merisel's electronic business and
information service, so resellers can place their product orders through the
site. SELline II provides resellers with real-time access to pricing
information, credit information, technical descriptions, product availability
and promotional information. Currently SELline II has approximately 40,000
enrollees in the
U.S. and Canada. Merisel also utilizes EDI systems to allow large-volume
customers to communicate with the Company's computer system directly for order
processing and account data. The Company also offers API business-to-business
connections, which allow resellers and vendors to directly connect their systems
to Merisel's SAP system, enabling supply-chain integration and synchronization.
Training and Technical Support. Through Merisel's Value Added Services,
resellers and their customers can choose from a broad selection of services to
augment their offerings to their end-user customers or directly benefit their
businesses. The Company's Technical Training Group offers technical and software
training in partnership with leading educational institutions throughout North
America. In addition, Services Sales Advocates are available to assist resellers
with services that go beyond those covered under normal warranty provisions for
IBM, 3Com, HP, Compaq and Philips Magnavox products. Merisel's
manufacturer-dedicated product specialists also represent 29 vendors and are
available to assist the Company's sales force in closing sales. Merisel also
offers installation, data-retrieval and help-desk services.
Merisel's VAR Business Builder program, launched in October 1998 across Canada,
rewards VARs for sales growth, and helps them reduce expenses and maximize new
profit opportunities in cutting-edge markets. Through the program, Merisel
resellers earn points that can be redeemed for business tools, marketing
services and promotional items. Participants are also invited to attend Business
Builder seminars at no cost. In 2000, Merisel is augmenting the program by
dedicating resources to determine new vertical-market opportunities and assess
needs in these areas. The information will be used in future seminar topics and
help Merisel sales teams assist resellers with business development.
Merisel provides resellers with direct access to the Company's technical support
engineers through a dedicated hotline, offering specialized pre-sale and
post-sale technical support for product lines sold by Merisel. In addition,
Merisel's technical engineers provide regular product training for Merisel's
sales representatives to help them increase their product knowledge and their
ability to answer resellers' questions.
Operations, Distribution and Systems
Locations. At December 31, 1999, the Company operated nine distribution centers
throughout North America: seven in the United States and two in Canada. The
Company also operates a specialized distribution center as part of its
co-location strategy at IBM's Raleigh, North Carolina, facility.
Systems. Merisel has made significant investments in advanced computer and
warehouse management systems for its North American operations to support sales
growth and improve service levels. All of Merisel's nine North American
distribution centers and 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. See "Customers and Customer Services --
Prompt Delivery" above.
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.
In addition, SAP has provided a solid base for application development, allowing
Merisel to expedite the development cycle for functionality improvements in the
system. SAP has enabled new systems capabilities benefiting government resellers
and numerous advancements in Merisel's electronic commerce offering, including
enhancements to SELline II, the Company's electronic business and information
service. Since April 1999, electronic order placement via SELline II has
increased by more than 400 percent, and Web/SELline traffic has increased by 83
percent to 12.7 million "hits" per month. In 1999, over 55 percent of all orders
received by Merisel were processed electronically.
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, Pinacor 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.
See "Certain Business Factors - Size of Competitors; - Direct Sales by
Manufacturers" below.
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."
Employees
As of January 31, 2000, Merisel had approximately 2,400 employees. Merisel
continually seeks to enhance employee morale and strengthen its relations with
employees.
Environmental Compliance
The Company believes that it is in substantial compliance with all environmental
laws applicable to it and its operations.
Certain Business Factors
In addition to the other information in this report, readers are cautioned to
carefully consider the following business factors that may affect the future
operations and performance of the Company.
Decline in Gross Margins. Over the past few years, the computer distribution
industry in general and the Company in particular have experienced a significant
decline in gross margins. Competitive pricing pressures escalated during the
fourth quarter of 1998 and continued in 1999. In addition, the Company's gross
margins have been significantly affected over the last several quarters by a
reduction in manufacturer rebates and changes by manufacturers in terms and
conditions, which have resulted in a shift of costs to distributors. While the
Company has taken actions in recent years intended to improve margin
performance, gross margins have continued to decline primarily due to these
factors. In the fourth quarter of 1999 and the first quarter of 2000, the
Company has addressed the gross margin issue by implementing a series of pricing
actions to adjust for these factors. If the Company's efforts to increase gross
margins are not successful or if an increase in gross margins results in a
significant decline in sales volumes without a corresponding decrease in
operating expenses, the Company may not be able to achieve satisfactory levels
of profitability.
Vendor Terms and Conditions. Like other wholesale distributors, the Company's
business is subject to the risk that the value of its inventory will be affected
adversely by vendor price reductions or by product obsolescence resulting from
technological changes or product updates. It is the policy of most manufacturers
of microcomputer products to protect distributors who purchase directly from
them from the loss in value of inventory due to product obsolescence or the
manufacturer's price reductions. Over the last two years, certain major PC
manufacturers that are among the Company's largest vendors have reduced the
availability of price protection for distributors and changed other terms and
conditions. Through buying procedures and controls to manage inventory
purchases, the Company seeks to reduce potential future adverse impact from
these changes while balancing the need to maintain sufficient levels of
inventory. Notwithstanding these efforts, the Company's results during the past
few quarters have been adversely affected by the reduced availability of price
protection. There is no assurance that such efforts will be successful in the
future in preventing a material adverse effect on the Company. Unforeseen
changes in current price protection policies or other changes in terms and
conditions of any of the Company's major vendors could have a material adverse
effect on the Company.
Dependence on Key Vendors. In 1999, 75% of the Company's net sales were derived
from products supplied by the Company's 10 largest vendors, as compared to 73%
in 1998 and 69% in 1997. The Company's large vendors generally provide incentive
funds for marketing that are based on sales levels of their products. These
incentive funds contribute substantially to the Company's profitability. As is
customary in the industry, the Company's agreements with these vendors provide
non-exclusive distribution rights and may generally be terminated by the vendor
on short notice. The termination of the Company's distribution agreement with
one of its key vendors, or a material change in the terms of the distribution
agreement, including a decrease in incentive funds, could have a material
adverse effect on the Company. In the past two years, many vendors have reduced
the incentive funds they pay to distributors or increased the sales volumes
required to receive various levels of incentive funds, which has negatively
affected the Company's profitability. Over the last year, several large
manufacturers have elected to reduce their number of direct distribution
relationships, and the Company expects that this trend is likely to continue.
Although the Company has not been terminated as a distributor for these
manufacturers, future decisions by manufacturers to reduce their number of
distribution partners could result in the Company's loss of vendors, which could
have a material adverse effect on the Company.
Size of Competitors. The Company's competitors include distributors that are
substantially larger than the Company, partially as a result of the trend toward
consolidation in the industry. Because of their size, these firms can achieve
greater economies of scale than the Company and may be able to form stronger
relationships with manufacturers. The Company does not believe that it can
achieve operating expense levels as a percentage of sales as low as those that
can be achieved by its much larger competitors. A continuation of industry
consolidation not involving the Company may exacerbate this disadvantage. See
"Competition" above.
Direct Sales by Manufacturers. Several computer product manufacturers have
expanded their direct selling efforts to resellers and end users. Although the
Company does not believe that its business has been significantly affected by
these developments, continued efforts by manufacturers to change their
businesses to compete with the direct
sales model may adversely the Company. The Company believes that the direct
sales business will grow faster than sales through the distribution channel and
that consolidation of resellers, who are the customers of distributors, may
contribute to such differential. An increase in sales of computer products
outside the traditional distribution channel may have a material adverse effect
on the Company.
Item 2. Properties.
At December 31, 1999, the Company maintained distribution centers in seven
locations throughout the United States and in two locations in Canada.
Additionally, the Company maintains United States administrative and sales
offices in El Segundo, California; Marlborough, Massachusetts; and Cary, North
Carolina, as well as Canadian administrative and sales offices in Toronto,
Ontario; Montreal, Quebec; and Vancouver, British Columbia.
The Company's headquarters are located in El Segundo, California, where the
Company owns an 112,500 square-foot facility, leases another 50,700 square-foot
facility and leases 23,000 square feet in a third building. In addition, the
Company owns a 61,000 square-foot facility and 29 acres of undeveloped land in
Cary, North Carolina. All of the Company's other facilities are leased. The
Company believes that its facilities provide sufficient space for its present
needs, and that additional suitable space will be available on reasonable terms,
if needed.
Item 3. Legal Proceedings.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock is traded on the National Market tier of the Nasdaq
Stock Market under the symbol MSEL. The following table sets forth the quarterly
high and low sale prices for the Common Stock as reported by the National
Market.
High Low
Fiscal Year 1998
First quarter.... 4 1/2 2 3/4
Second quarter... 3 1/2 2 3/4
Third quarter.... 3 1/2 2 1/8
Fourth quarter... 3 1/4 2
Fiscal Year 1999
First quarter.... 2 7/8 1 1/4
Second quarter... 3 3/16 1 5/32
Third quarter.... 2 7/16 1 1/2
Fourth quarter... 1 25/32 1 5/32
As of March 28, 2000, there were 958 record holders of the Company's Common
Stock.
Merisel has never declared or paid any dividends to stockholders. The indenture
relating to the Company's 12-1/2% Senior Notes due 2004 currently prohibits the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Item 6. Selected Financial Data.
Year Ended December 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
------- ----- ----- ----- -----
(In thousands, except per share amounts)
Income Statement Data:(1 & 2)
Net sales..................................... $ 5,955,765 $ 5,521,475 $ 4,047,621 $ 4,550,977 $5,188,679
Cost of sales................................. 5,633,278 5,233,570 3,807,888 4,298,553 4,947,626
----------- ----------- ----------- ---------- ----------
Gross profit.................................. 322,487 287,905 239,733 252,424 241,053
Selling, general & administrative expenses.... 314,523 292,023 188,404 195,468 235,471
Litigation related charge..................... 12,000
Restructuring charge.......................... 9,333 3,200
Impairment losses............................. 51,383 42,033 14,100 3,800
----------- ----------- ----------- ---------- ----------
Operating (loss) income....................... (52,752) (46,151) 37,229 56,956 (13,418)
Interest expense.............................. 39,053 39,080 28,608 17,125 17,849
Loss on sale of European, Mexican, and
Latin American operations..................... 33,455
Debt Restructuring Costs...................... 5,230
Other expense, net............................ 13,885 20,150 14,992 20,904 28,962
----------- ----------- ----------- ---------- ----------
(Loss) income before income taxes............. (105,690) (138,836) (11,601) 18,927 (60,229)
(Benefit) provision for income taxes.......... (21,779) 1,539 496 417 939
----------- ----------- ----------- ---------- ----------
Net (loss) income Before Extraordinary Item... (83,911) (140,375) (12,097) 18,510 (61,168)
Extraordinary Loss on Extinguishment of
Debt....................................... 3,744
----------- ----------- ----------- ---------- ----------
Net (loss) income............................. $(83,911) $(140,375) $(15,841) $18,510 $(61,168)
============ =========== =========== ========== ==========
Per Share Data:
Net (loss) income per diluted share........... $ (2.82) $ (4.68) $ (.48) $ .23 $ (.76)
Weighted average number of diluted shares. 29,806 30,001 33,216 80,485 80,279
Balance Sheet Data:
Working capital............................... $ 280,864 $ 190,544 $ 197,154 $ 181,742 $ 116,616
Total assets.................................. 1,230,334 731,039 747,111 945,320 805,795
Long-term and subordinated debt............... 356,271 294,763 133,429 131,856 130,264
Total debt.................................... 382,395 294,950 133,429 135,657 133,170
Stockholders' equity.......................... 154,466 14,997 137,508 154,253 95,173
(1) Merisel's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. For clarity of presentation throughout this Annual
Report on Form 10-K, Merisel has described fiscal years presented as if the
year ended on December 31. Except for 1997, all fiscal years presented were
52 weeks in duration. The selected financial data set forth above includes
those balances and activities related to the Company's Australian business
until its disposal effective January 1, 1996 and the Company's European,
Mexican and Latin American businesses until their disposal on October 4,
1996, effective as of September 27, 1996. It also includes results of
Merisel FAB (as defined below) from the date such business was acquired on
January 31, 1994 through its disposal as of March 28, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) The Company has reclassified certain items in its 1995, 1996, 1997 and 1998
financial statements to conform to the 1999 presentation. These
reclassifications principally consist of costs associated with the
Company's flooring arrangements. The impact to the 1995, 1996, 1997 and
1998 financial statements is to reduce general and administrative expenses
by $2,672,000, $2,998,000, $3,002,000 and $4,461,000, respectively, to
decrease net sales by $1,202,000, $1,349,000, $1,351,000 and $2,007,000,
respectively, and to increase interest expense by $1,470,000, $1,649,000,
$1,651,000, and $2,454,000, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company was founded in 1980 as Softsel Computer Products, Inc. and changed
its name to Merisel, Inc. in 1990 in connection with the acquisition of
Microamerica, Inc. ("Microamerica"). The Company has experienced rapid growth
through domestic and international acquisitions, and internal growth, reaching
nearly $6.0 billion in revenues in 1995. In 1996, the Company divested of its
operations outside of North America. Today Merisel operates in the United States
and Canada and is focused exclusively on the North American market through its
North American distribution and MOCA business units.
Asset Dispositions
In two separate transactions in 1996, Merisel completed the sale of its wholly
owned Australian subsidiary, Merisel Pty Ltd., and substantially all of its
European, Mexican and Latin American businesses.
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB"). The
sales price, computed based upon the February 21, 1997 balance sheet of Merisel
FAB, was $31,992,000.
Debt Restructuring and Equity Investment
On September 19, 1997, the Company and its main operating subsidiary, Merisel
Americas Inc. ("Merisel Americas"), entered into a definitive Stock and Note
Purchase Agreement with Phoenix Acquisition Company II, L.L.C. ("Phoenix"), a
Delaware limited liability company whose sole member is Stonington Capital
Appreciation 1994 Fund, L.P. Pursuant to the Stock and Note Purchase Agreement,
on September 19, 1997, Phoenix acquired a Convertible Note for $137,100,000 (the
"Convertible Note") and 4,901,316 shares of Common Stock (the "Initial Shares")
for $14,900,000. The Convertible Note was an unsecured obligation of the Company
and Merisel Americas and provided that, upon the satisfaction of certain
conditions, including obtaining stockholder approval, the Convertible Note would
automatically convert into 45,098,684 shares of Common Stock (the "Conversion
Shares"). The Conversion Shares and Initial Shares would together represent
50,000,000 shares of Common Stock at a purchase price of $3.04 per share, and
approximately 62.4% of the Common Stock outstanding immediately following the
issuance of the Conversion Shares. The Company used the proceeds from the
issuance of the Initial Shares and the Convertible Note to repay indebtedness of
its operating subsidiaries (the "Operating Company Debt") consisting of
$80,697,000 principal amount outstanding under a revolving credit agreement,
$53,798,000 of its 11.5% Senior Notes, and $13,200,000 principal amount of
subordinated notes. On October 10, 1997, Phoenix exercised its option to
convert, without any additional payment, $3,296,286 principal amount of the
Convertible Note into 1,084,305 shares of Common Stock, representing the maximum
amount that could be converted prior to obtaining stockholder approval. On
December 19, 1997, following receipt of stockholder approval, the remaining
portion of the Convertible Note was converted into Common Stock. As of March 30,
2000, Phoenix owned 50,000,000 shares of Common Stock, or approximately 62.3% of
the outstanding Common Stock. See "Notes to Consolidated Financial Statements -
Note 9 - Income Taxes" regarding the impact of the restructuring on the
Company's available net operating loss carryforwards.
Results of Operations
During most of 1997, 1998 and 1999, the Company operated three distinct business
units: United States distribution, Canadian distribution and the Merisel Open
Computing Alliance ("MOCA"). Although the Company continued to experience
positive sales growth in all of its business units during 1999, pricing
pressure, changing vendor terms and conditions, and industry turbulence caused a
continued erosion in gross margins. While the Company believes it has slowed
this erosion with corrective actions taken throughout the year, the erosion has
exceeded the Company's ability to reduce operating expenses as a percentage of
sales, and has negatively impacted operating income as a result. In December
1999, the Company announced plans to restructure and combine its U.S. and
Canadian distribution business units to form one North American distribution
business. As a result, the Company now operates North American distribution and
MOCA as its only two business units.
Comparison of Fiscal Years Ended December 31, 1999 and December 31, 1998
The Company's net sales increased 14.0% from $4,550,977,000 in 1998 to
$5,188,679,000 for the year ended December 31, 1999. This increase resulted from
sales growth of 56.2% and 7.5% for the MOCA and North American distribution
businesses, respectively. MOCA growth was strong due to increased sales to
existing customers and, to a lesser extent, to the acquisition by MOCA of
several new Sun Microsystems reseller accounts during the latter part of 1998.
MOCA sales growth on a year-over-year basis ranged from 68% to 75% in the first
three quarters of 1999 and was 19.8% for the fourth quarter. The slower growth
in the fourth quarter relates to a general slowdown in the industry related in
part to Year 2000 issues and also reflects a reduced impact from new accounts.
The Company expects MOCA sales growth for 2000 to decrease overall from 1999
growth levels. North American distribution sales growth resulted primarily from
growth in the retail customer and national/major customer groups.
On a consolidated basis, hardware and accessories accounted for 80% of net sales
and software accounted for 20% of net sales for the year ended December 31, 1999
as compared to 78% and 22%, respectively, for such categories for the year ended
December 31, 1998.
Gross profit decreased 4.5% from $252,424,000 in 1998 to $241,053,000 in 1999.
Gross profit as a percentage of sales, or gross margin, decreased from 5.55% in
1998 to 4.65% in 1999. The decline in margins was primarily related to the U.S.
portion of the North American distribution business, which was significantly
negatively affected by (i) changing vendor terms and conditions, including a
reduction in vendor rebates and an increase in price protection exposure, (ii)
competitive pricing pressures, and (iii) sales of comparatively lower margin
systems product increasing at a greater rate than higher margin product as a
result of a significant increase in sales of Compaq product following the launch
of Compaq's Distributor Alliance Program under which the Company is one of four
distributors and resellers able to source product directly from Compaq. Gross
profit for 1999 was further negatively affected by an $8.1 million charge taken
in the fourth quarter of 1999 reflecting higher than historical
inventory-related provisions. That charge is in addition to the obsolescence
reserves that are accrued in the normal course of business throughout the year,
and was taken to address the increased exposure related to inventory on hand at
December 31, 1999 due in part to the factors noted above.
Excluding this charge, gross margins would have been 4.80%.
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 price increases across a broad range of product
offerings. There is no assurance that the Company's efforts to increase margins
will be successful or that an increase in margins will not result in a
significant decline in sales volume, offsetting any potential improvement to net
income. While the Company has seen some positive margin trends through the last
half of the first quarter of 2000, for the first 12 weeks of fiscal year 2000,
North American distribution sales were approximately 13% below sales levels for
the same period in fiscal year 1999. MOCA sales were up 28% over the same prior
year period, resulting in consolidated sales being down 7% over the same period.
The Company believes that, during the first half of the quarter, this decline
resulted primarily from the focus on restructuring activities and that sales
have been negatively impacted by price increases during the second half of the
quarter.
Selling, general and administrative expenses increased by $40,003,000 or 20.5%
from $195,468,000 for the year ended December 31, 1998 to $235,471,000 for the
year ended December 31, 1999. Selling, general and administrative expenses as a
percentage of sales increased from 4.3% of sales in 1998 to 4.5% for the same
period in 1999. Contributing to the increase for the year were depreciation
expenses related to the SAP R/3 operating system and other strategic
initiatives, which were part of an overall increase in depreciation expense of
$11,368,000, or an increase from $10,201,000 in 1998 to $21,569,000 for 1999.
Additionally, the Company incurred $1,821,000 in post "go-live" costs for
expenses associated with the SAP implementation; and payroll and payroll-related
costs of
employees directly associated with the SAP project, which had been capitalized
in periods prior to implementation. Costs associated with Year 2000 compliance
of approximately $2,179,000 were also incurred during 1999. The remaining
increase in selling, general and administrative expenses relates primarily to
increased variable costs in support of sales growth.
Results for the year 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 Company's 12-1/2% Senior Notes due 2004 (the
"12.5% Notes"), offset in part by the $9,000,000 insurance recovery recorded by
the Company in the second quarter.
In connection with the Company's announced plan to combine its U.S. and Canadian
distribution businesses, the Company evaluated the fixed asset investments that
were made to support the former business units. As a result, in the fourth
quarter of 1999 the Company recorded a $3,800,000 non-cash asset impairment
charge related to redundant assets resulting from the combination.
In the fourth quarter of 1999, the Company announced that, in connection with
the combination of its U.S. and Canadian distribution businesses, it would
reduce its workforce by approximately 400 full-time positions. The planned
reduction, which was effective in January 2000, was accomplished through the
elimination of duplicative positions in marketing, product and inventory
management, and sales under the newly formed North American distribution
business unit, and by the realignment of finance and administrative functions.
This workforce reduction included the elimination of approximately 85 full-time
positions through the sale of the Company's Marlborough call center during the
first quarter of 2000 and the anticipated reduction of another 125 positions
through not filling attrition-related vacancies. As a result, the Company has
recorded a restructuring charge of $3,200,000 in the fourth quarter of 1999 that
primarily consists of termination benefits including severance pay and
outplacement services that are being provided to the approximately 190 employees
that were involuntarily affected by the reduction in workforce. The Company
believes that these actions have enabled the Company to simplify its business
and reduce projected operating expenses by approximately $25,000,000 on an
annualized basis.
As a result of the above items, the Company had an operating loss of $13,418,000
for the year ended December 31, 1999 compared to operating income of $56,956,000
for the year ended December 31, 1998. Excluding the restructuring-related
charge, the asset impairment charge and the litigation-related charge, net of
related recovery, taken in 1999, the Company would have had operating income of
$5,582,000 in 1999.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company increased 4.2% from $17,125,000 for the year
ended December 31, 1998 to $17,849,000 for the year ended December 31, 1999.
This increase was primarily attributable to increases in average borrowings
outstanding under the Company's revolving line of credit. The Company uses the
revolver to fund short-term working capital needs and to finance strategic
inventory purchases. At the end of 1998 and 1999, there were no outstanding
borrowings under this facility.
Other expense for the Company increased from $20,904,000 for the year ended
December 31, 1998 to $28,962,000 for the year ended December 31, 1999. The
increase is attributable to a $9,217,000 increase in asset securitization fees
offset by a decrease in foreign currency loss of $1,621,000. The increased
securitization fees are primarily due to increased sales of accounts receivable
and an increase in the underlying rate associated with the fees that the Company
pays on the sale of receivables. The average proceeds resulting from the sale of
accounts receivable under the Company's securitization facilities increased from
$282,336,000 for the year ended December 31, 1998 to $414,902,000 for 1999.
The income tax provision increased from $417,000 for the year ended December 31,
1998 to $939,000 for 1999. In both years the income tax provision provides for
only the minimum statutory tax requirements in the various states and provinces
in which the Company conducts business, as the Company had sufficient net
operating losses from prior years to offset U.S. federal income taxes. The
Company has not recognized a tax provision benefit in either year, having fully
utilized its ability to carryback those losses and obtain refunds of taxes paid
in prior years. The provision for 1999 also includes approximately $400,000 in
reserves against tax exposures related to outstanding tax issues under review by
tax agencies. See "Notes to Consolidated Financial Statements - Note 9 Income
Taxes".
Consolidated Net Income
The Company reported net income of $18,510,000, or $.23 per diluted share, in
1998 compared to a net loss of $61,168,000, or $0.76 per share, in 1999.
Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997
Results for the year ended December 31, 1997 include the results of operations
of Merisel FAB until the disposition of the Merisel FAB business as of March 28,
1997 as described above. The Company's consolidated results of operations for
1997 include results of operations of Merisel FAB consisting of sales of
$202,177,000, gross profit of $7,678,000, and selling, general and
administrative expenses of $6,200,000. Excluding the results of Merisel FAB, the
Company's 1997 results would have included sales of $3,845,444,000, gross profit
of $232,055,000, and selling, general and administrative expenses of
$182,204,000. The following discussion refers to the Company's 1997 results of
operations excluding the results of Merisel FAB, except for the discussion below
under "Interest Expense; Other Expense; Income Tax Provision" and "Consolidated
Net Income."
The Company's net sales increased 18.3% from $3,845,444,000 in 1997 to
$4,550,977,000 for the year ended December 31, 1998. This increase resulted from
increased sales of 12.2% in Canada and 19.9% in the United States. For the year,
while MOCA and retail sales continued to show substantial growth at 36% and 55%,
respectively, neither VAR nor commercial performance was as robust, resulting in
U.S. growth slowing considerably, particularly in the fourth quarter. During
1998, VAR sales grew 9% and commercial sales increased 19%. The growth rate in
Canada in terms of Canadian dollars was 20.3%, but the decline in the value of
the Canadian dollar hampered the growth rate in terms of U.S. dollars,
particularly in the second half of the year.
Hardware and accessories accounted for 78% of net sales and software accounted
for 22% of net sales for the year ended December 31, 1998 as compared to 77% and
23%, respectively, for such categories for the year ended December 31, 1997.
Gross profit increased 8.8% from $232,055,000 in 1997 to $252,424,000 in 1998.
Gross profit as a percentage of sales, or gross margin, decreased from 6.0% in
1997 to 5.5% in 1998. Gross margins in the United States and Canada were 5.43%
and 6.07%, respectively, for 1998, compared to 5.97% and 6.31%, respectively,
for 1997. The decrease in margins as a percentage of sales has resulted in large
part from intense competitive pricing pressures, as well as changes in vendor
terms and conditions. The margin decrease is also partially the result of
changes in customer concentration and mix and product mix.
Selling, general and administrative expenses increased by $13,264,000 or 7.3%
from $182,204,000 for the year ended December 31, 1997 to $195,468,000 for the
year ended December 31, 1998. Selling, general and administrative expenses in
1997 included compensation charges of $1,950,000 incurred pursuant to employment
contracts of certain executive officers of the Company and related to the debt
restructuring completed during 1997. Excluding this charge, selling, general and
administrative expenses increased $15,214,000, but decreased as a percentage of
sales from 4.7% in 1997 to 4.3% in 1998. This decrease is primarily attributable
to efforts to control operating expenses while the Company experienced sales
growth of 18.4% for the year. Selling, general and administrative costs include
depreciation and amortization expense totaling $10,980,000 in 1998 and
$11,073,000 in 1997.
In the fourth quarter of 1997, the Company recorded a non-cash asset impairment
charge of $14,100,000 against capitalized costs associated with the previously
scheduled implementation of the SAP information system in the U.S., which was
delayed in 1996. Through implementation planning that resumed in the fourth
quarter of 1997 and an evaluation of SAP in its upgraded form, the Company
identified costs that would not provide future value, and it is these costs that
are the basis of the impairment charge. See "Notes to Consolidated Financial
Statements - Note 4 - Impairment Losses."
As a result of the above items, the Company had operating income of $56,956,000
for the year ended December 31, 1998 compared to operating income of $35,751,000
for the year ended December 31, 1997. Excluding the restructuring related
compensation costs incurred and the impairment charge taken in 1997, the Company
would have had operating income of $51,801,000 in 1997.
Interest Expense; Other Expense; Income Tax Provision
Interest expense decreased 40.1% from $28,608,000 for the year ended December
31, 1997 to $17,125,000 for the year ended December 31, 1998. This decrease was
primarily attributable to the debt restructuring, which resulted in the
elimination of substantially all of the Operating Company Debt on September 19,
1997 using proceeds from the issuance of the Initial Shares and the Convertible
Note.
Other expense increased from $14,992,000 for the year ended December 31, 1997 to
$20,904,000 for the year ended December 31, 1998. This increase is attributable
in part to the recording of a gain on the sale of property held in North
Carolina for $1,530,000 in 1997, which reduced other expenses. The increase is
also attributable to a $1,534,000 increase in foreign currency losses and a
$1,534,000 increase in asset securitization fees. The increased securitization
fees are due to increased sales of accounts receivables in order to fund sales
growth, daily operations and, in the fourth quarter, increased levels of
inventory in anticipation of higher sales volumes that did not materialize.
Also during 1997, the Company incurred $5,230,000 in expenses related to the
Company's efforts to effect a restructuring of its debt. These expenses
represent professional fees and other costs associated with the terminated
Limited Waiver and Voting Agreement (the "Limited Waiver Agreement") entered
into with certain holders of the Company's 12.5 % Notes, and costs incurred as a
result of the change in control that occurred as a result of the conversion of
the Convertible Note.
The income tax provision decreased from $496,000 for the year ended December 31,
1997 to $417,000 for 1998. In both years the income tax provision reflects only
the minimum statutory tax requirements in the various states and provinces in
which the Company conducts business, as the Company had sufficient net operating
losses from prior years. The Company has not recognized a tax provision benefit
in either year, having fully utilized its ability to carryback those losses and
obtain refunds of taxes paid in prior years. See "Notes to Consolidated
Financial Statements - Note 9 - Income Taxes".
Consolidated Net Income
The Company, reported net income of $18,510,000, or $.23 per diluted share, in
1998 compared to a net loss of $15,841,000, or $0.48 per diluted share, in 1997.
Included in the 1997 net loss is an extraordinary loss on the extinguishment of
debt of $3,744,000, or $0.12 per diluted share, related to the repayment of the
Operating Company Debt.
Year 2000 Issues
As of the date of this report, the Company is not aware of any adverse effects
of Year 2000 issues on the Company, including its systems and operations. The
Company's Year 2000 project focused on its core IT systems, off-line IT
subsystems, technical infrastructure, vendor/customer interfaces, and
facilities. The Company's efforts included conducting an inventory of items with
Year 2000 implications, assessing Year 2000 compliance, remediating or replacing
material items that were determined not to be Year 2000 compliant, testing and
certifying Year 2000 compliancy. The Company also communicated with a
significant portion of its third-party suppliers, vendors and customers to
determine the extent to which the Company may have been vulnerable to those
third parties' failure to remediate their own Year 2000 issues. This process of
addressing Year 2000 issues was essentially completed by mid-November 1999. The
Company incurred aggregate costs of approximately $2.6 million in connection
with its Year 2000 project. The aggregate costs exclude the cost of implementing
the SAP operating system in the U.S. and costs incurred pursuant to the
Company's technology upgrade strategy where the upgrades were not accelerated
due to Year 2000 issues. The Year 2000 project costs were expensed by the
Company as incurred.
The Company believes that its procedures were effective to identify and manage
the risks associated with Year 2000 compliance, however, there can be no
assurance that its remediation process has been fully effective. The failure of
the Company to identify and remediate the Company's systems, or the failure of
key third parties who do business
with the Company to remediate their systems, could have a material adverse
effect on the Company's results of operations and financial condition. Although
the Company is not aware of any Year 2000 readiness issues affecting it at this
time, there can be no assurances that issues not yet apparent to it will not
arise during 2000 and beyond.
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."
Liquidity and Capital Resources
Cash Flows Activity For The Year Ended December 31, 1999
Net cash provided by operating activities during the year ended December 31,
1999 was $52,764,000. The primary sources of cash include a decrease in
inventory of $147,609,000, a decrease in accounts receivable of $7,100,000 and a
decrease in other prepaid and tax assets. The inventory decrease resulted in
part from stricter enforcement of payment terms by some of the Company's
larger vendors, which impacted credit lines. The Company also took actions to
reduce inventory in order to counter inventory risk associated with changing
vendor terms and conditions, particularly related to price protection policies.
The decrease in receivables is related primarily to decreased marketing and
cooperative advertising and other vendor receivables resulting from changes in
vendor programs and a decreased volume of pass-through programs. The primary
uses of cash were a $91,141,000 reduction in accounts payable and the net loss
for the year, excluding the non-cash charges for depreciation and bad debt
provisions. Accounts payable have declined due to the decrease in inventory
noted above and to the stricter enforcement of terms by major manufacturers to
more closely match payables with inventory levels.
Net cash used in investing activities in 1999 consisted of capital expenditures
of $29,255,000. The expenditures were primarily related to costs associated with
information systems, including systems for enhancing electronic services and
growing the Company's infrastructure, developing and implementing the SAP
operating system, developing the Company's configuration and co-location
capabilities, and upgrading warehouse systems and other Company facilities.
Net cash used by financing in 1999 was $3,145,000 and was comprised
primarily of scheduled repayments against promissory notes
outstanding.
Cash Flows Activity For The Year Ended December 31, 1998
Net cash provided by operating activities during the year ended December 31,
1998 was $53,068,000. The primary sources of cash include an increase in
accounts payable of $186,462,000. The primary uses of cash were an increase
in accounts receivable of $51,406,000 and an increase in inventory of
$124,565,000. The increase in accounts receivable is primarily the result of
increased sales during 1998. The increase in inventory can be attributed to
large purchases near the end of the fourth quarter made with the expectation of
a higher sales volume that did not materialize. The increase in inventories also
contributed to the increase in accounts payable.
Net cash used in investing activities in 1998 consisted of capital expenditures
of $50,067,000. The expenditures were primarily related to costs associated with
development of SAP and with other information systems as well as the purchase by
the Company of its call center facility in Cary, North Carolina.
Net cash used by financing in 1998 was $891,000 and was comprised of scheduled
debt payments of $1,572,000, offset by proceeds received from the issuance of
common stock.
Cash Flows Activity for the Year Ended December 31, 1997
Net cash provided by operating activities during the year ended December 31,
1997 was $16,772,000. The primary sources of cash were an increase in accounts
payable of $76,203,000 and $15,563,000 of cash generated from operations. The
primary uses of cash were an increase in accounts receivable of $8,379,000 and
an increase in inventory of $70,196,000. The increase in accounts receivable is
primarily the result of increased sales in the fourth quarter of 1997. The
increase in inventory relates partially to investments required to meet the
demands of increased sales volume and to strategic volume purchases that the
Company took advantage of late in the fourth quarter of 1997. The increase in
inventories also contributed to the increase in accounts payable.
Net cash used in investing activities in 1997 was $2,270,000 consisting of
capital expenditures of $7,290,000, which was partially offset by proceeds from
the sale of land held in North Carolina totaling $5,020,000. The expenditures
were primarily for the maintenance and improvement of existing facilities.
Net cash used by financing in 1997 was $21,433,000. Uses of cash for financing
activities include scheduled debt payments of $13,634,000 and the extinguishment
of Operating Company Debt of $147,700,000. The primary source of cash from
financing activities was $139,901,000 in net proceeds from the issuance of
Initial Shares and the Convertible Note (which consists of $152,000,000 in gross
proceeds less $12,099,000 in investment banking, legal, accounting and other
direct costs).
Debt Obligations, Financing Sources and Capital Expenditures
At December 31, 1999, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes provide for an interest rate of 12.5%
payable semi-annually. By virtue of being an obligation of Merisel, Inc., the
12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's subsidiaries. The indenture relating to the 12.5% Notes contains
certain covenants that, among other things, limit the type and amount of
additional indebtedness that may be incurred by the Company or any of its
subsidiaries and imposes limitations on investments, loans, advances, asset
sales or transfers, dividends and other payments, the creation of liens,
sale-leasebacks, transactions with affiliates and certain mergers.
At December 31, 1999, the Company had promissory notes outstanding with an
aggregate balance of $5,011,000. Such notes provide for interest at the rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. The
notes are collateralized by certain of the Company's real property and
equipment.
Merisel Americas 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. The Loan and
Security Agreement permits borrowings of up to $100,000,000 outstanding at any
one time (including face amounts of letters of credit), subject to meeting
certain availability requirements under a borrowing base formula and other
limitations. The amount available for borrowing under the Loan and Security
Agreement at
any time may be further reduced under the indenture relating to the 12.5% Notes.
As a result of the availability requirements and indenture limitations, based on
current trends there is no assurance that there will be amounts available for
future borrowings under the Loan and Security Agreement. The Loan and Security
Agreement also contains certain financial covenants that require, among other
things, minimum levels of cash flow and interest coverage. With respect to the
quarter ended December 31, 1999, the Company was required to obtain, and did
obtain, amendments and waivers with respect to certain covenants under the Loan
and Security Agreement. Borrowings under the Loan and Security Agreement are
secured by a pledge of a majority of the inventory held by Merisel Americas,
Borrowings bear interest at the rate of LIBOR plus a specified margin, or, at
the Company's option, the agent's prime rate. An annual fee of 0.375% is payable
with respect to the unused portion of the commitment. The Loan and Security
Agreement has a termination date of June 30, 2003.
A portion of the Company's funds are generated through the sale of receivables
by Merisel Capital Funding, Inc. ("Merisel Capital Funding"), a wholly owned
subsidiary of Merisel Americas. Merisel Capital Funding's sole business is the
ongoing purchase of trade receivables from Merisel Americas and, upon the
commencement of MOCA's operations as a separate subsidiary, Merisel Open
Computing Alliance, Inc. Pursuant to an agreement with a securitization company
(the "Receivables Purchase and Servicing Agreement"), Merisel Capital Funding,
in turn, sells these 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 is a separate corporate entity with separate creditors who, in
the event of liquidation, are entitled to be satisfied out of Merisel Capital
Funding's assets prior to any value in the subsidiary becoming available to the
subsidiary's equity holder. This agreement expires in October 2003. The
Receivables Purcahse and Servicing Agreement contains certain financial
covenants that require, among other things, minimum levels of net worth and cash
flow. With respect to the quarter ended December 31, 1999, the Company was
required to obtain, and did obtain, amendments and waivers with respect to
certain covenants under the Receivables Purchase and Servicing Agreement.
Effective December 15, 1995, Merisel Canada, Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. The agreement expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under the securitization agreements, the receivables are sold at face value with
payment of a portion of the purchase price being deferred. As of December 31,
1999, the total amount outstanding under these agreements was $419,929,000. Fees
incurred in connection with the sale of accounts receivable under these
agreements for the years ended December 31, 1999, December 31, 1998 and December
31, 1997 were $26,781,000, $17,564,000, and $16,030,000, respectively, and are
recorded as other expense.
In addition to its requirements for working capital for operations, the Company
presently anticipates that its capital expenditures will be less than
$25,000,000 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.
Certain actions taken by the Company's vendors and by the Company could have a
negative impact on the Company's working capital and cash position. These
include significant changes in payment terms that have been introduced by
several of the Company's major vendors that have resulted in shorter payment
terms and/or reduced vendor financing. Additionally, if the pricing actions
taken by the Company in the first quarter of 2000 further reduce sales volume
significantly, the Company's cash flow may be negatively affected, particularly
if the Company's receivables decline faster than inventory levels. The Company
is responding to these factors by reducing investments in inventory, increasing
the use of flooring programs for both customers and vendors, and shortening
credit terms of its customers.
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, and borrowings under the Company's
revolving credit facility will be sufficient to meet the Company's requirements
for the next 12 months, without the need for additional financing. This assumes,
however, that there are not material adverse changes in the Company's
relationships with its vendors, customers or lenders. In addition, if in future
periods the Company were to incur losses of a magnitude that resulted in
violations of covenants under the Company's financing agreements, there can be
no assurance that the Company would be able to renegotiate such agreements. Any
unforeseen event that adversely impacts the industry or the Company's position
in the industry, or future losses that result in convenant violations under the
Company's financing agreements, could have a direct and material unfavorable
effect on the liquidity of the Company.
Inflation
Due to the short-term nature of Merisel's contracts and agreements with
customers and vendors, the Company does not believe that inflation had a
material impact on its operations.
Asset Management
Merisel attempts to manage its inventory position to maintain levels sufficient
to achieve high product availability and same-day order fill rates. Inventory
levels may vary from period to period, due to factors including increases or
decreases in sales levels, 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.
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.
Item 7A. Quantitative and Qualitative Market Risk Disclosure
Investments
At December 31, 1999, the Company had no investments, with the exception of
$44,809,000 held in overnight, interest-bearing accounts invested through
high-quality credit financial institutions.
Foreign Currency Risk
The Company purchases forward dollar contracts to hedge short-term advances to
its Canadian subsidiary and to hedge commitments to acquire inventory for sale.
The Company does not use the contracts for speculative or trading purposes. At
December 31, 1999, the Company had 26 short-term Canadian forward contracts with
a face value of approximately $65,380,000 outstanding. The size of the contracts
ranged from $474,000 to $24,104,000 with a weighted average contract value of
approximately $3,600,000. Forward rates on the contracts ranged from 1.451 to
1.479 with the weighted average forward rate approximating 1.4710. The contracts
matured at various dates in January and February 2000.
Long-term Debt
Since the Company has a significant amount of debt, it is subject to risk
related to fluctuations in market interest rates. The table below provides
information concerning fixed rate long-term debt outstanding at December 31,
1999, including principal amounts maturing each year, average interest rate and
fair value.
Total
2000 2001 2002 2003 2004 Total Fair Value
---- ---- ---- ---- ---- ----- ----------
12.5% Senior Notes 0 0 0 0 $125,000,000 $125,000,000 $77,500,000
Average Interest Rate 12.5% 12.5% 12.5% 12.5% 12.5%
Fixed rate promissory notes $1,111,000 $3,900,000 0 0 0 $5,011,000 $5,011,000
Average Interest Rate 7.70% 7.71%
Asset Securitization
Fees incurred in connection with the sale of trade accounts receivable under the
Company's asset securitization agreements typically are based upon commercial
paper rates. As of December 31, 1999, the total amount outstanding under these
agreements was $419,929,000 and the average cost of securitization was
approximately 7.17%. During 1999, the total amount outstanding under these
agreements averaged $414,902,000, and the weighted average cost of
securitization was 6.45%.
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed at Item 14. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merisel, Inc. and subsidiaries at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 16, 2000
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1998 1999
----- -----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 36,341 $ 57,557
Accounts receivable (net of allowances of $20,476 and $15,186 at December
31, 1998 and 1999, respectively)............................................. 202,128 182,352
Inventories.................................................................... 587,317 445,663
Prepaid expenses and other current assets....................................... 14,193 10,488
Deferred income taxes........................................................... 865 914
----------- ----------
Total current assets....................................................... 840,844 696,974
PROPERTY AND EQUIPMENT, NET.......................................................... 79,719 84,609
COST IN EXCESS OF NET ASSETS ACQUIRED, NET........................................... 24,309 23,755
OTHER ASSETS 448 457
----------- ----------
TOTAL ASSETS.................................................................... $ 945,320 $ 805,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 623,673 $ 540,843
Accrued liabilities............................................................. 31,737 36,609
Long-term debt and capitalized lease obligations--current........................ 3,692 2,906
----------- ----------
Total current liabilities.................................................. 659,102 580,358
LONG-TERM DEBT....................................................................... 129,360 128,900
CAPITALIZED LEASE OBLIGATIONS........................................................ 2,605 1,364
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued or
outstanding
Common stock, $.01 par value; authorized 150,000,000 shares; outstanding
80,272,683 and 80,278,808 shares at December 31, 1998 and 1999,
respectively................................................................. 803 803
Additional paid-in capital...................................................... 282,380 282,492
Accumulated deficit............................................................. (118,495) (179,663)
Accumulated other comprehensive loss............................................ (10,435) (8,459)
----------- ----------
Total stockholders' equity................................................. 154,253 95,173
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 945,320 $ 805,795
============ ==========
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Years Ended December 31,
1997 1998 1999
------------ ------------ -----------
NET SALES.......................................................... $ 4,047,621 $ 4,550,977 $ 5,188,679
COST OF SALES...................................................... 3,807,888 4,298,553 4,947,626
------------ ------------ -----------
GROSS PROFIT....................................................... 239,733 252,424 241,053
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 188,404 195,468 235,471
LITIGATION-RELATED CHARGE.......................................... 12,000
RESTRUCTURING CHARGE............................................... 3,200
IMPAIRMENT LOSSES.................................................. 14,100 3,800
------------ ------------ -----------
OPERATING INCOME (LOSS)............................................ 37,229 56,956 (13,418)
INTEREST EXPENSE................................................... 28,608 17,125 17,849
DEBT RESTRUCTURING COSTS........................................... 5,230
OTHER EXPENSE, NET................................................. 14,992 20,904 28,962
------------ ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES.................................. (11,601) 18,927 (60,229)
PROVISION FOR INCOME TAXES......................................... 496 417 939
------------ ------------ -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM............................ (12,097) 18,510 (61,168)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT 3,744
------------ ------------ -----------
NET (LOSS) INCOME.................................................. $ (15,841) $ 18,510 $ (61,168)
============= ============ =============
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED):
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM........................ $ (.36) $ .23 $ (.76)
EXTRAORDINARY LOSS................................................. (.12)
------------ ------------ -----------
NET (LOSS) INCOME.................................................. $ (.48) $ .23 $ (.76)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
BASIC........................................................... 33,216 80,210 80,279
DILUTED......................................................... 33,216 80,485 80,279
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Additional other
Paid-in Accumulated Comprehensive Comprehensive
Common Stock Capital Deficit Loss Total Income
Shares Amount
------- ------- --------- ------------ ------------ ------- -------------
Balance at December 31, 1996.. 30,078,500 $301 $142,300 $(121,164) $(6,440) $14,997
Sale of common stock...... 4,901,316 49 14,851 14,900
Conversion of Note into
Common Stock............. 45,098,684 451 124,550 125,001
Comprehensive Income:
Translation adjustment... (1,549) (1,549) $ (1,549)
Net loss................. (15,841) (15,841) (15,841)
--------
Total Comprehensive Loss...... $(17,390)
========
---------- ----- ------ ---------- -------- -------
Balance at December 31, 1997.. 80,078,500 801 281,701 (137,005) (7,989) 137,508
Exercise of stock options
and other.................. 194,183 2 679 681
Comprehensive Income:
Translation adjustment.... (2,446) (2,446) $ (2,446)
Net income............... 18,510 18,510 18,510
------
Total Comprehensive Income.... $ 16,064
======
---------- ----- ------ ---------- -------- -------
Balance at December 31, 1998.. 80,272,683 803 282,380 (118,495) (10,435) 154,253
Exercise of stock options
and other.................. 6,125 112 112
Comprehensive Income:
Translation adjustment... 1,976 1,976 $ 1,976
Net loss................. (61,168) (61,168) (61,168)
--------
Total Comprehensive Loss...... $(59,192)
========
---------- ----- ------- --------- ------- -------
Balance at December 31, 1999.. 80,278,808 $803 $282,492 $(179,663) $(8,459) $95,173
========== ===== ======== ========== ======== =======
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1997 1998 1999
------ ----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ (15,841) $ 18,510 $ (61,168)
Adjustments to reconcile net (loss) income to net cash provided by
operating
activities:
Depreciation and amortization........................................... 11,311 10,980 22,349
Provision for doubtful accounts......................................... 7,361 12,553 15,774
Impairment losses....................................................... 14,100 3,800
Deferred income taxes................................................... 162 (221) 2
Gain on sale of property and equipment.................................. (1,530) (65)
Restricted stock units compensation expense............................. 100
Changes in assets and liabilities
Accounts receivable................................................. (8,379) (51,406) 7,100
Inventories......................................................... (70,196) (124,565) 147,609
Prepaid expenses and other current assets........................... 654 6,786 3,744
Income taxes payable................................................ 2,021 1,095
Accounts payable.................................................... 76,203 186,462 (91,141)
Accrued liabilities................................................. 906 (6,031) 3,565
------- --------- -------
Net cash provided by operating activities....................... 16,772 53,068 52,764
------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (7,290) (50,067) (29,255)
Proceeds from sale of property and equipment................................ 5,020
------- --------- -------
Net cash used for investing activities........................... (2,270) (50,067) (29,255)
------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit................................... 726,308 75,401 464,701
Repayments under revolving line of credit................................... (811,516) (75,401) (464,701)
Repayments under senior notes............................................... (56,805)
Repayments under subordinated debt agreement................................ (17,600)
Repayments under other financing arrangements............................... (1,721) (1,572) (3,157)
Net proceeds from the issuance of convertible notes......................... 125,001
Proceeds from issuance of common stock...................................... 14,900 681 12
------- --------- -------
Net cash used for financing activities.......................... (21,433) (891) (3,145)
------- --------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (1,300) (2,216) 852
------- --------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (8,231) (106) 21,216
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 44,678 36,447 36,341
------- --------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD YEAR................................... $ 36,447 $ 36,341 $ 57,557
======= ======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid(received) during the year for:
Interest ................................................................ $ 33,385 $ 14,698 $ 18,571
Income taxes .............................................................. ( 3,362) 655 309
Noncash activities:
Capital lease obligations entered into...................................... 4,480 670
See accompanying notes to consolidatedfinancial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Effective March 28, 1997, the Company sold substantially all of the assets of
its wholly owned subsidiary Merisel FAB, Inc. ("Merisel FAB"). The recorded sale
price was $31,992,000, consisting of the assumption of $11,992,000 of trade
payables and accrued liabilities and a $20,000,000 extended payable due to a
third party, in full consideration for the assets (see Note 6 "Dispositions").
On October 10, 1997, Phoenix Acquisition Company II, L.L.C. ("Phoenix")
exercised its option to convert, without any additional payment, $3,296,286
principal amount of a convertible note into 1,084,305 shares of common stock. On
December 19, 1997, following receipt of stockholder approval, approximately
$133.8 million outstanding principal amount of the convertible note was
converted, without any additional payment, into 44,014,379 shares of common
stock. The proceeds from the issuance of the convertible note were offset by
professional fees and other direct costs of approximately $12,099,000, which
were recorded as a reduction to additional paid-in capital at the time of
conversion.
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 and 1999
1. Summary of Significant Accounting Policies
General--Merisel, Inc., a Delaware corporation and a holding company (together
with its subsidiaries, "Merisel" or the "Company"), is a leading distributor of
computer hardware and software products. 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 ("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 will be conducted by Merisel Open Computing Alliance, Inc. as
a wholly owned subsidiary of Merisel, Inc.
Liquidity--In 1999, the Company incurred a net loss of $61,168,000, increasing
its accumulated deficit to $179,663,000 at December 31, 1999. This loss was
primarily the result of a continued decline in gross margins, the recognition of
a litigation-related charge of $12,000,000, an impairment loss of $3,800,000 and
a restructuring charge of $3,200,000. In its efforts to return to profitability,
effective December 1999, the Company announced a restructuring plan, which would
combine its United States and Canadian distribution businesses and would reduce
its planned workforce by approximately 400 full-time positions. The Company's
plan, if achieved, would reduce operating expenses by approximately $25,000,000
annually. In connection with the restructuring, the Company has developed a
business plan, which, if successfully implemented, will provide sufficient cash
flow to support its operations throughout 2000 and ultimately return to
profitability. The business plan focuses upon improving gross margins and
working capital management, and significantly reducing operating expenses.
Risks and Uncertainties--The Company believes that the diversity and breadth of
its products, services and customers, along with the general stability of the
economies in the markets in which it operates, significantly mitigate the risk
that a material adverse impact will occur in the near term as a result of
changes in its customer base, competition, or composition of its markets.
However, continued pricing pressures, or the loss of a major vendor, or other
unanticipated occurrences could result in a materially adverse impact to the
business. Although Merisel regularly stocks products and accessories supplied by
more than 500 manufacturers, 75% of the Company's net sales for its North
American Distribution and MOCA businesses in 1999 (as compared to 73% in 1998
and 69% in 1997) were derived from products supplied by Merisel's ten largest
vendors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectibility of accounts receivable, inventory, deferred
income taxes, accounts payable, sales returns and recoverability of long-term
assets.
New Accounting Pronouncements--In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." As amended
by SFAS No. 137, SFAS 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 133 as required in January 2001. SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value. The Company is in
the process of evaluating the effect that this new standard will have on its
financial statements.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition, Returns and Sales Incentives--The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs that, among other things, include funds
available for cooperative promotion of product sales. Customers earn credit
under such programs based upon the volume of purchases. The cost of these
programs is partially subsidized by marketing allowances provided by the
Company's manufacturers. The allowances for sales returns and costs of customer
incentive programs are accrued concurrently with the recognition of revenue.
Cash and Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
Inventories--Inventories are valued at the lower of cost or market; cost is
determined using the average cost method.
Property and Depreciation--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to ten
years. Leasehold improvements are amortized over the shorter of the life of the
lease or the improvement.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and warehouse
management systems. Such amounts include the costs of materials and other direct
construction costs, purchased computer hardware and software, outside
programming and consulting fees, direct employee salaries and interest.
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
resulted from the acquisition in 1990 of Microamerica, Inc. Accumulated
amortization was $8,477,000 and $9,494,000 as of December 31, 1998 and 1999,
respectively. The cost in excess of net assets acquired is being amortized over
a period of 40 years using the straight-line method.
Impairment of Long-Lived Assets--The Company reviews the recoverability of
intangible assets, including cost in excess of net assets acquired, and other
long-lived assets to determine if there has been any impairment. This assessment
is performed based on the estimated undiscounted future cash flows from
operating activities compared with the carrying value of the related asset. If
the undiscounted future cash flows are less than the carrying value, an
impairment loss is recognized, measured by the difference between the carrying
value and the estimated fair value of the assets (see Note 4 - "Impairment
Losses").
Income Taxes--Deferred income taxes represent the amounts that will be paid or
received in future periods based on the tax rates that are expected to be in
effect when the temporary differences are scheduled to reverse.
Concentration of Credit Risk--Financial instruments that subject the Company to
credit risk consist primarily of cash equivalents, trade accounts receivable,
and forward foreign currency exchange contracts. The Company invests its excess
cash with high-quality credit financial institutions. Credit risk with respect
to trade accounts receivable is generally not concentrated due to the large
number of entities comprising the Company's customer base and their geographic
dispersion. The Company performs ongoing credit evaluations of its customers,
maintains an allowance for potential credit losses and maintains credit
insurance. The Company actively evaluates the creditworthiness of the financial
institutions with which it conducts business.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Financial Instruments--The fair values of financial instruments,
other than long-term debt, closely approximate their carrying value because of
their short-term nature. The estimated fair value of long-term debt including
current maturities, based on reference to quoted market prices, was less than
its carrying value by approximately $47,500,000 as of December 31, 1999 and
greater than its carrying value by approximately $3,750,000 as of December 31,
1998.
Foreign Currency Translation--Assets and liabilities of the Company's Canadian
subsidiary are translated into United States dollars at the exchange rate in
effect at the close of the period. Revenues and expenses are translated at the
average exchange rate during the period. The aggregate effect of translating the
financial statements at the above rates is included in a separate component of
stockholders' equity entitled Accumulated Other Comprehensive Loss. In addition,
the Company advances funds to its Canadian subsidiary in the normal course of
business that are not expected to be repaid in the foreseeable future.
Translation adjustments resulting from these advances are also included in
Accumulated Other Comprehensive Loss.
Foreign Exchange Instruments--The Company's use of derivatives is limited to the
purchase of spot and forward foreign currency exchange contracts in order to
minimize foreign exchange transaction gains and losses. The Company purchases
forward dollar contracts to hedge short-term advances to its Canadian subsidiary
and to hedge commitments to acquire inventory for sale and does not use the
contracts for trading purposes. The Company's foreign exchange rate contracts
reduce the Company's exposure to exchange rate movement risk, as any gains or
losses on these contracts are offset by gains and losses on the transactions
being hedged. As of December 31, 1998, there were approximately $80,268,000 in
outstanding foreign exchange contracts and $65,380,000 outstanding as of
December 31, 1999. In 1997, 1998, and 1999, the Company recorded net foreign
currency transaction losses of $351,000, $1,885,000 and $264,000, respectively.
These amounts are included in other expense.
Reclassifications--Certain reclassifications were made to prior year statements
to conform to the current year presentation.
Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending on
the Saturday nearest to December 31 and its fiscal quarters are the 13- or
14-week periods ending on the Saturday nearest to March 31, June 30, September
30 and December 31. For clarity of presentation, the Company has described
fiscal years presented as if the years ended on December 31 and fiscal quarters
presented as if the quarters ended on March 31, June 30, September 30 and
December 31. The 1998 and 1999 fiscal years were 52 weeks in duration. The 1997
fiscal year was 53 weeks in duration. All quarters presented for 1998, 1999 and
the first three quarters of 1997 were 13 weeks in duration. The fourth quarter
of 1997 was 14 weeks in duration.
2. Litigation Related Charge
During fiscal year 1999, a $21,000,000 charge was recorded by the Company
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 due 2004 (the "12.5% Notes") which was offset in part by a
$9,000,000 insurance recovery received by the Company.
3. Restructuring Charge
During the fourth quarter of 1999, the Company announced that, in connection
with the combination of its U.S. and Canadian distribution businesses, it would
reduce its workforce by approximately 400 full-time positions. The planned
reduction, which was effective in January 2000, was accomplished through the
elimination of duplicative positions in marketing, product and inventory
management, and sales under the newly formed North American
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distribution business unit, and by the realignment of finance and administrative
functions. As a result, the Company has recorded a restructuring charge of
$3,200,000 in the fourth quarter of 1999 that primarily 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.
These benefits had not been paid as of December 31, 1999, and the entire amount
remains in accrued liabilities.
4. Impairment Losses
In 1993, the Company undertook the process of converting its North American
Operations to the SAP information system ("SAP"). Although this process was
completed in Canada in 1995, the Company delayed the implementation in the
United States and recorded an impairment charge of $19,500,000 during 1996. In
the fourth quarter of 1997, the Company renewed its implementation efforts. As
part of this process, the Company reviewed previously capitalized costs and
determined that a portion of these costs no longer provided value to the Company
primarily due to changes in the SAP implementation strategy and the planned
implementation of a different version of SAP. As a result, a $14,100,000
impairment charge was recorded. In the fourth quarter of 1999, the Company
announced a restructuring plan that would combine the U.S. and Canadian
distribution business units into one business unit. In conjunction with the
restructuring, the Company has evaluated the fixed asset investments that have
been made to support the former business units. As a result, in the fourth
quarter of 1999 a $3,800,000 impairment charge related to redundant assets
determined to have no value to the Company was recorded.
5. Debt Restructuring and Equity Investment
On September 19, 1997, the Company and Merisel Americas entered into a
definitive Stock and Note Purchase Agreement with Phoenix Acquisition Company
II, L.L.C. ("Phoenix"), a Delaware limited liability company whose sole member
is Stonington Capital Appreciation 1994 Fund, L.P. Pursuant to the Stock and
Note Purchase Agreement, on September 19, 1997 Phoenix acquired a Convertible
Note for $137,100,000 (the "Convertible Note") and 4,901,316 shares of Common
Stock (the "Initial Shares") for $14,900,000. The Convertible Note was an
unsecured obligation of the Company and Merisel Americas and provided that, upon
the satisfaction of certain conditions, including obtaining stockholder
approval, the Convertible Note would automatically convert into 45,098,684
shares of Common Stock (the "Conversion Shares").
The Company used substantially all of the $152,000,000 in proceeds from the
issuance of the Initial Shares and the Convertible Note to repay indebtedness of
its operating subsidiaries consisting of $80,697,000 principal amount
outstanding under a revolving credit agreement, $53,798,000 principal amount of
its 11.5% senior notes, and $13,200,000 principal amount of subordinated notes.
In connection with these repayments, the Company recorded an extraordinary loss
on the extinguishment of debt of $3,744,000. This amount consisted of a "make
whole" premium of $960,000 required to be paid with respect to the prepayment of
the subordinated notes, unamortized prepaid financing fees totaling
approximately $2,546,000 and other costs totaling $238,000. Additionally, the
Company incurred $5,230,000 in other expenses in 1997 related to the Company's
efforts to effect a restructuring of its debt. These costs include $4,380,000 of
professional fees and other costs associated with the termination of a Limited
Waiver Agreement with the holders of its 12.5% Notes and $850,000 in costs that
were incurred as a result of the change in control that occurred upon the
conversion of the Convertible Note. Additionally, selling, general and
administrative expenses in 1997 include compensation charges of $1,950,000
incurred pursuant to employment contracts of certain executive officers of the
Company related to the debt restructuring.
On October 10, 1997, Phoenix exercised its option to convert, without any
additional payment, $3,296,286 principal amount of the Convertible Note into
1,084,305 shares of Common Stock, representing the maximum amount that could be
converted prior to obtaining stockholder approval. On December 19, 1997,
following receipt of
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stockholder approval, the remaining portion of the Convertible Note was
converted into Common Stock. The $152,000,000 in proceeds from the issuance of
the Initial Shares and the Convertible Note was partially offset by professional
fees and other direct costs related thereto totaling approximately $12,099,000,
which were recorded as a reduction to additional paid-in capital at the time of
conversion. As of December 31, 1999, Phoenix owned 50,000,000 shares of Common
Stock, or approximately 62.3% of the outstanding Common Stock.
6. Dispositions
As of March 28, 1997, the Company completed the sale of substantially all of the
assets of Merisel FAB to a wholly owned subsidiary of SYNNEX Information
Technologies, Inc. ("Synnex"). The sale price, computed based upon the February
21, 1997 balance sheet of Merisel FAB, was $31,992,000 consisting of the buyer
assuming $11,992,000 of trade payables and accrued liabilities and a $20,000,000
extended payable due to Vanstar Corporation. In connection with this sale, the
Company recorded an impairment charge in the fourth quarter of 1996 for
$2,033,000 to adjust Merisel FAB's assets to their fair value. If the Company
had sold Merisel FAB as of January 1, 1997 for the year ended December 31, 1997,
revenues and gross profit would have been reduced by $202,000,000 and
$8,000,000, respectively, and net loss and loss per share would have increased
$2,000,000 and $.06, respectively.
7. Sale of Accounts Receivable
The Company's wholly owned subsidiary, Merisel Americas, sells trade receivables
on an ongoing basis to its wholly owned subsidiary Merisel Capital Funding, Inc.
("Merisel Capital Funding"). Pursuant to an agreement with a securitization
company (the "Receivables Purchase and Servicing Agreement"), Merisel Capital
Funding, in turn, sells such receivables to the securitization company on an
ongoing basis, which yields proceeds of up to $500,000,000 at any point in time.
Merisel Capital Funding's sole business is the purchase of trade receivables
from Merisel Americas and, upon the commencement of MOCA's operations as a
separate subsidiary, 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. With respect to the quarter ended December 31, 1999, the
Company was required to obtain, and did obtain, amendments and waivers with
respect to certain covenants under the Receivables Purchase and Servicing
Agreement.
Effective December 15, 1995, Merisel Canada Inc. ("Merisel Canada") entered
into a receivables purchase agreement with a securitization company to provide
funding for Merisel Canada. In accordance with this agreement, Merisel Canada
sells receivables to the securitization company, which yields proceeds of up to
$150,000,000 Canadian dollars at any point in time. The facility expires
December 12, 2000, but is extendible by notice from the securitization company,
subject to the Company's approval.
Under these securitization facilities, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of December
31, 1999, the total amount outstanding under these facilities was $419,929,000.
Fees incurred in connection with the sale of accounts receivable for the years
ended December 31, 1997, 1998 and 1999 were $16,030,000, $17,564,000 and
$26,781,000, respectively, and are recorded as other expense.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Property and Equipment
Property and equipment consisted of the following (in thousands):
Estimated
Useful
Life December 31,
(in Years)
----------------------------
1998 1999
------------ -------------
Land............................................... $ 3,324 $ 3,324
Building........................................... 20 8,883 9,011
Equipment and computer hardware and software....... 3 to 7 71,225 129,709
Furniture and fixtures............................. 3 to 5 9,177 9,500
Leasehold improvements............................. 3 to 20 8,941 11,078
Construction in progress........................... 45,811 2,953
------------ -------------
Total.............................................. 147,361 165,575
Less accumulated depreciation and amortization..... (67,642) (80,966)
------------ -------------
Property and equipment, net........................ $ 79,719 $ 84,609
============ =============
During 1999, the Company capitalized approximately $1,300,000 of interest costs
as property and equipment.
9. Income Taxes
The components of (loss) income before income taxes consisted of the following
(in thousands):
For the Years Ended December 31,
1997 1998 1999
------------ ---------- ------------
Domestic............................... $ (14,202) $ 19,661 $ (61,085)
Foreign................................ 2,601 (734) 856
------------ ---------- ------------
Total.................................. $ (11,601) $ 18,927 $ (60,229)
============ ========== ============
The (benefit) provision for income taxes consisted of the following (in
thousands):
For the Years Ended December 31,
1997 1998 1999
------------- ---------- -----------
Current:
State.................................. $ 312 $ 360 $ 457
Foreign................................ 346 278 531
------------- ---------- -----------
Total Current.......................... 658 638 988
------------- ---------- -----------
Deferred:
Foreign................................ (162) (221) (49)
------------- ---------- -----------
Total deferred......................... (162) (221) (49)
------------- ---------- -----------
Total provision........................ $ 496 $ 417 $ 939
============ ========== ===========
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income tax liabilities and assets were comprised of the following (in
thousands):
December 31,
1998 1999
------------ -----------
Net operating loss.......................... $ 48,400 $ 72,614
Expense accruals............................ 17,184 14,552
State taxes................................. (27) 43
Property and goodwill....................... (11,665) (13,283)
-------- ---------
53,892 73,926
Valuation allowances........................ (53,027) (73,012)
-------- ---------
Total.................................. $ 865 $ 914
======== =========
Net deferred tax asset........................... $ 865 $ 914
======== =========
The major elements contributing to the difference between the federal statutory
tax rate and the effective tax rate are as follows:
For the Years Ended
December 31,
---------------------------------------------
1997 1998 1999
Statutory rate.............................................. (35.0)% 35.0% (35.0)%
Change in valuation allowance............................... 32.7 (36.7) 35.8
State income taxes, less effect of federal deduction........ 1.3 1.2 .4
Goodwill amortization....................................... 1.5 .6 .4
Foreign losses with benefits at less than statutory rate.... 1.4 .1
Utilization of net operating losses of foreign subsidiary... 1.2 .3 (.6)
Other....................................................... 1.5 .4 .5
------------ ------------- -----------
Effective tax rate.......................................... 3.2% 2.2% 1.6%
============ ============= ===========
Upon the issuance of the Conversion Shares, the Company experienced an ownership
change for Federal income tax purposes, resulting in an annual limitation on the
Company's ability to utilize its net operating loss carryforwards to offset
future taxable income. The annual limitation was determined by multiplying the
value of the Company's equity before the change by the long-term tax exempt rate
as defined by the Internal Revenue Service. The Company has adjusted its
deferred tax asset to reflect the estimated limitation. At December 31, 1998 and
1999, the Company had available U.S. Federal net operating loss carryforwards of
$126,892,000 and $181,795,000, after adjusting for the estimated limitation,
which expire at various dates beginning December 31, 2010. As of December 31,
1999, $112,138,000 of the net operating loss carryforwards is restricted as a
result of the ownership change and $69,657,000 is not. The restricted net
operating loss is limited to $7,476,000 per year.
10. Debt
At December 31, 1999, Merisel, Inc. had outstanding $125,000,000 principal
amount of the 12.5% Notes. The 12.5% Notes, which mature on December 31, 2004,
provide for an interest rate of 12.5% payable semi-annually. The 12.5% Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after December 31, 1999, initially at 106.25% of principal amount and at
redemption prices declining to 100% of principal amount for redemptions on or
after December 31, 2002. By virtue of being an obligation of Merisel, Inc.,
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the 12.5% Notes are effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables, and are not guaranteed by any of the
Company's subsidiaries. The indenture relating to the 12.5% Notes contains
certain covenants that, among other things, limit the type and amount of
additional indebtedness that may be incurred by the Company or any of its
subsidiaries and impose limitations on investments, loans, advances, sales or
transfers of assets, the making of dividends and other payments, the creation of
liens, sale-leaseback transactions with affiliates and certain mergers.
At December 31, 1999, the Company had promissory notes outstanding with an
aggregate balance of $5,011,000. Such notes provide for interest at a rate of
approximately 7.7% per annum and are repayable in 48 and 60 monthly installments
that commenced February 1, 1996, with balloon payments due at maturity. Payments
due under these notes are $1,111,000 in 2000, and $3,900,000 in 2001. The notes
are collateralized by certain of the Company's real property and equipment.
Merisel Americas 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. The Loan and
Security Agreement permits borrowings of up to $100,000,000 outstanding at any
one time (including face amounts of letters of credit), subject to meeting
certain availability requirements under a borrowing base formula and other
limitations. 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. The Loan and Security Agreement also contains
certain financial covenants that require, among other things, minimum levels of
cash flow and interest coverage. With respect to the quarter ended December 31,
1999, the Company was required to obtain, and did obtain, amendments and waivers
with respect to certain covenants under the Loan and Security Agreement.
Borrowings under the Loan and Security Agreement are secured by a pledge of
substantially all of the inventories held by Merisel Americas. 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 December 31, 1999.
11. Commitments and Contingencies
The Company leases certain of its facilities and equipment under noncancelable
operating leases. Future minimum rental payments under leases that have initial
or remaining noncancelable lease terms in excess of one year are $5,317,000 in
2001, $3,725,000 in 2002, $2,357,000 in 2003, $1,362,000 in 2004, and $392,000
thereafter. Certain of the leases contain inflation escalation clauses and
requirements for the payment of property taxes, insurance, and maintenance
expenses. Rent expense for 1997, 1998 and 1999 was $8,726,000, $9,131,000 and
$10,177,000 respectively.
The Company also leases certain computer equipment under capitalized leases and
has the option to purchase the equipment for a nominal cost at the termination
of the lease.
Property and equipment includes the following amounts for leases that
have been capitalized:
December 31, December 31,
1998 1999
----------- ------------
Computer equipment............................................ $4,489,000 $5,445,000
Less accumulated depreciation................................. 567,000 2,370,000
================== ===================
Total....................................................... $3,922,000 $3,075,000
================== ===================
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments for capitalized leases were as follows at
December 31, 1999.
2000.......................................................... $1,983,000
2001.......................................................... 1,396,000
2002.......................................................... 22,000
--------------------
Total minimum lease payments.................................. 3,401,000
Less amount representing interest............................. 242,000
--------------------
Present value of net minimum lease payments................... 3,159,000
Less current maturities....................................... 1,795,000
--------------------
Long-term obligation...................................... $1,364,000
====================
The Company has arrangements with certain finance companies that provide
inventory and accounts receivable financing facilities for its customers. In
conjunction with these arrangements, the Company has inventory repurchase
agreements with the finance companies that would require it to repurchase
certain inventory if repossessed from the customers by the finance companies.
Such repurchases have been insignificant in the past.
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.
12. Employee Stock Options and Benefit Plans
On December 19, 1997, the Company's stockholders approved the Merisel Inc. 1997
Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"). Under the
Stock Award and Incentive Plan, incentive stock options
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and nonqualified stock options as well as other stock-based awards may be
granted to employees, directors, and consultants. The plan authorized the
issuance of an aggregate of 8,000,000 shares of Common Stock less the number of
shares of Common Stock that remain subject to outstanding option grants under
any of the Company's other stock-based incentive plans for employees after
December 19, 1997 and are not either canceled in exchange for options granted
under the Stock Award and Incentive Plan or forfeited. At December 31, 1999,
2,430,583 shares were available for grant under the Stock Award and Incentive
Plan. The grantees, terms of the grant (including option prices and vesting
provisions), dates of grant and number of shares granted under the plans are
determined primarily by the Board of Directors or the committee authorized by
the Board of Directors to administer such plans, although incentive stock
options are granted at prices which are no less than the fair market value of
the Company's Common Stock at the date of grant. On December 22, 1997, the
Company granted options under the Stock Award and Incentive Plan in exchange for
previously granted employee stock options that were then outstanding and that
had an exercise price greater than the then market price of the Common Stock,
subject to the agreement of each optionee to cancel the outstanding options. As
of December 31, 1999, 634,756 options remain outstanding under the Company's
other employee stock option plans, however, no new options may be issued under
these plans. In addition to the shares issuable under the Stock Award and
Incentive Plan, 50,000 shares are reserved for issuance under the Company's 1992
Stock Option Plan for Non-Employee Directors. During August 1999, the Company
issued 515,000 restricted stock units to certain employees under the Stock Award
and Incentive Plan. Each restricted stock unit represents the right to receive
one share of common stock of the Company at no cost to the employee. The
restricted stock units cliff vest after three years with provisions for
accelerated vesting in the event certain operating performance targets are met.
Compensation expense, measured by the fair value at the grant date of the
Company's common stock issuable in respect of the units, totaled $869,000 and is
being amortized over the related three-year vesting period. Upon the attainment
of the performance criteria specified, the remaining compensation expense for
the units will be recognized by the Company in full. During 1999, the Company
recorded approximately $100,000 of compensation expense related to the
restricted stock units outstanding. The following summarizes the aggregate
activity in all of the Company's plans for the three years ended December 31,
1999:
1997 1998 1999
---------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exer. Price Shares Exer. Price Shares Exer. Price
----------- ------------ --------- ------------ ------------- ---------------
Outstanding at
Beginning of year 1,368,345 7.48 6,673,525 4.10 5,947,150 3.79
Granted 6,146,323 3.86 583,400 3.29 691,250 .52
Exercised (77,750) 2.16 (6,150) 2.01
Canceled (841,143) 6.41 (1,232,025) 5.32 (1,138,150) 3.50
------------- ----------- -----------
Outstanding at end
of year 6,673,525 4.10 5,947,150 3.79 5,494,100 3.44
------------- ----------- -----------
Option price range for
Exercised shares $0.00 $1.63-$2.63 $2.00-$2.31
----- ----------- -----------
Weighted average fair
value at date of grant
of options granted
during the year
$2.55 $2.13 $1.61
------------- ------------ -------------
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at 12/31/99 In Years Price at 12/31/99 Price
------------------ ----------- ---------- ---------- ------------ ----------
$3.0000 to $3.0000 32,156 2 $3.0000 32,156 $3.0000
$0.0000 to $11.3750 517,000 3 $0.0440 2,000 $11.3750
$11.7500 to $11.7500 2,000 4 $11.7500 2,000 $11.7500
$15.0000 to $15.0000 2,000 5 $15.0000 2,000 $15.0000
$5.8750 to $6.3125 26,500 6 $6.2795 24,050 $6.2761
$1.8750 to $2.6250 162,500 7 $2.3598 122,375 $2.3578
$1.6250 to $4.3100 4,241,444 8 $3.9166 2,817,857 $3.7909
$2.6875 to $4.0600 394,250 9 $3.3681 129,319 $3.3274
$2.0000 to $2.1875 116,250 10 $2.0565 0 $0
----------- ------------
$0.0000 to $15.0000 5,494,100 3,131,757
=========== ============
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on their fair value at the
grant date for options granted in 1997, 1998 and 1999 consistent with the
provisions of SFAS No. 123, the Company's net (loss) income and (loss) income
per share would have been adjusted to the pro forma amounts indicated below:
(In thousands, except per share amounts)
1997 1998 1999
---------- ------------- ----------
Net (Loss) Income - As Reported $(15,841) $18,510 $(61,168)
Net (Loss) Income - Pro Forma $(16,914) $17,348 $(62,412)
Net (Loss) Income Per Share (Basic & Diluted)
As Reported $ ( .48) $ 0.23 $(.76)
Pro Forma $ ( .51) $ 0.22 $(.78)
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option granted during 1997, 1998 and 1999 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1997 1998 1999
----- ----- -----
Expected life 5.0 5.0 5.0
Expected volatility 73.84% 76.97% 76.78%
Risk-free interest rate 5.76% 5.35% 5.81%
Dividend Yield 0.00% 0.00% 0.00%
The Company offers a 401(k) savings plan under which all employees who are 21
years of age with at least 30 days of service are eligible to participate. The
plan permits eligible employees to make contributions up to certain limitations,
with the Company matching certain of those contributions. The Company's
contributions vest 25% per year. The Company contributed $506,000, $892,000 and
$1,250,000 to the plan during the years ended December 31, 1997, 1998 and 1999,
respectively. The contributions to the 401(k) plan were in the form of newly
issued shares of the Company's common stock for 1997 and cash, which was used to
purchase shares of the Company's common stock on the open market, for 1998 and
1999.
13. Segment Information
As of January 1, 1998, the Company implemented SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires disclosure of certain information about operating segments, geographic
areas in which the Company operates, major customers, and products and services.
In accordance with SFAS 131, the Company had determined it had three operating
segments: the United States distribution segment, the Canadian distribution
segment, 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 restructuring plan that would combine the U.S. and Canadian
distribution segments into one operating segment, the North American
distribution segment.
Historically, the Company has not maintained separate stand-alone financial
statements prepared in accordance with generally accepted accounting principles
for each of its operating segments. During 1999, the Company began to evaluate
the MOCA segment as a combination of United States and Canadian MOCA. The 1997
and 1998 segment disclosures have been restated to conform to the 1999
presentation. The impact of these restatements on the 1997 and 1998 disclosures
is to increase net sales of the MOCA segment by $12,431,000 and $9,698,000,
respectively. Additionally, during 1999, the Company developed methods to
allocate corporate overhead, depreciation and amortization, shared operating
expenses, and shared assets, including asset securitizations, to the MOCA
operating segment. The impact of these restatements on the 1997 and 1998
disclosures is to increase MOCA depreciation and amortization by $155,000 in
each year, to reduce MOCA segment operating profit by $10,869,000 and
$10,992,000, respectively, to increase MOCA long-lived assets by $325,000 and
$170,000, respectively, and to decrease total segment assets by $58,494,000 and
$80,814,000, respectively.
In accordance with SFAS 131, the Company has prepared the following tables which
present information related to each operating segment included in internal
management reports. 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 will be presented on a go-forward basis.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999
(in thousands)
------------------------------------------------------------------------------------------------
US Canada Eliminations NAM MOCA Other Total
-- ------ ------------ --- ---- ----- -----
Net sales to external
customers 3,305,026 926,370 4,231,396 957,283 5,188,679
Depreciation and
amortization 20,497 1,751 22,248 101 22,349
Operating (loss)profit (A) (34,180) 9,099 (25,081) 23,663 (12,000) (13,418)
Long-lived assets 80,120 3,988 84,108 501 84,609
Total segment assets 1,066,330 185,956 (554,933) 697,353 108,442 805,795
Capital expenditures 27,720 1,103 28,823 432 29,255
1998
(in thousands)
------------------------------------------------------------------------------------------------
US Canada Eliminations NAM MOCA Other Total
-- ------ ------------ --- ---- ----- -----
Net sales to external
customers 3,098,261 839,668 3,937,929 613,048 4,550,977
Depreciation and
amortization 8,915 1,910 10,825 155 10,980
Operating profit 34,098 8,007 42,105 14,851 56,956
Long-lived assets 74,378 5,171 79,549 170 79,719
Total segment assets 1,268,199 180,234 (657,242) 791,191 154,129 945,320
Capital expenditures 44,505 5,562 50,067 50,067
1997
(in thousands)
------------------------------------------------------------------------------------------------
US Canada Eliminations NAM MOCA Other Total
-- ------ ------------ --- ---- ----- -----
Net sales to external
customers(B) 2,637,979 750,900 3,388,879 456,565 202,177 4,047,621
Depreciation and
amortization(B) 8,807 2,111 10,918 155 278 11,351
Operating profit (B) 12,147 7,563 19,710 16,041 1,478 37,229
Long-lived assets 35,545 4,272 39,817 325 40,142
Total segment assets 1,091,683 151,662 (567,919) 675,426 71,685 747,111
Capital expenditures 5,864 1,426 7,290 7,290
Note A: Other amount represents a $12,000,000 litigation-related charge, net of
recovery, which was not allocated to any segment.
Note B: Other amount represents the results of FAB operations which had been
included in the U.S. segment in 1997.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographical Area Net Sales:
1997 1998 1999
------------------ --------------- -----------------
United States $3,286,890 $3,697,660 $4,239,285
Canada 760,731 853,317 949,394
------------------ --------------- -----------------
Total Net Sales $4,047,621 $4,550,977 $5,188,679
================== =============== =================
14. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with SFAS No.
128, "Earnings Per Share". Basic earnings per share is calculated using the
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the average number of common shares outstanding plus
the effect of outstanding stock options using the "treasury stock" method.
The following table is a reconciliation of the weighted average shares used in
the computation of basic and diluted EPS for the income statement periods
presented herein:
(in thousands)
For the Years Ended
December 31,
Weighted average shares outstanding 1997 1998 1999
- ----------------------------------- ---- ---- ----
Basic 33,216 80,210 80,279
Assumed exercises of stock options 275
------ ------ ------
Diluted 33,216 80,485 80,279
====== ====== ======
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Quarterly Financial Data (Unaudited)
Selected financial information for the quarterly periods for the fiscal years
1998 and 1999 is presented below (in thousands,
except per share amounts):
1998
-------------------------------------------------------
March 31 June 30 September 30 December 31
------------ -------- -------------- -------------
Net sales...................... $1,101,235 $1,095,936 $1,143,848 $1,209,958
Gross profit................... 61,316 61,200 66,806 63,102
Net income..................... 3,636 5,108 7,604 2,162
Net income per
Basic and diluted share..... .05 .06 .09 .03
1999
-------------------------------------------------------
March 31 June 30 September 30 December 31
------------ -------- -------------- -------------
Net sales...................... $1,254,717 $1,266,164 $1,357,826 $1,309,972
Gross profit................... 64,648 59,962 61,754 54,689
Net income..................... (20,509) (2,984) (11,716) (25,959)
Net income per
Basic and diluted share..... (.26) (.04) (.15) (.32)
In the first quarter of 1999, a $21,000,000 charge was recorded by the Company
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.
In the second quarter of 1999, the Company recorded an $9,000,000 offset to the
litigation charge due to the negotiation and receipt of an insurance recovery.
In the fourth quarter of 1999 the value of certain investments in software
development and facilities were determined to be of diminished or no value in
connection with the combination of the U.S. and Canadian distribution
businesses. As a result, the Company recorded a $3,800,000 non-cash asset
impairment charge. The Company also recorded a restructuring charge in the
fourth quarter of 1999 for $3,200,000 relating to severance costs associated
with such combination.
SCHEDULE II
MERISEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1998 AND 1999
Balance at Charged to Balance at
December 31, Costs and December 31,
1996 Expenses Deductions 1997
-------------- ------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $19,762,000 $7,361,000 $10,521,000 $16,602,000
Accounts receivable--Other (1)............. 3,922,000 16,232,000 18,207,000 1,947,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1997 Expenses Deductions 1998
-------------- ------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $16,602,000 $12,553,000 $10,358,000 $18,797,000
Accounts receivable--Other (1)............. 1,947,000 13,104,000 13,372,000 1,679,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1998 Expenses Deductions 1999
-------------- ------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $18,797,000 $15,271,000 $23,526,000 $10,542,000
Accounts receivable--Other (1)............. 1,679,000 15,492,000 12,527,000 4,644,000
(1) Accounts receivable--Other includes allowances for net sales returns,
uncollectible cooperative advertising credits and notes receivable.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated herein by reference to
information contained in the Company's definitive proxy statement for its 2000
annual meeting of stockholders (the "2000 Proxy Statement") under the captions
"Election of Directors Information Regarding Nominees and the Board of
Directors," "Election of Directors - Executive Officers" and "Election of
Directors Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to the
information contained in the 2000 Proxy Statement under the captions "Election
of Directors - Executive Compensation - Summary Compensation Table; - Options in
1999; - Compensation Committee Interlocks and Insider Participation," "Election
of Directors - Employment and Change-in-Control Arrangements" and "Election of
Directors - Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference to the
information contained in the 2000 Proxy Statement under the caption "Election of
Directors - Ownership of Common Stock."
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference to the
information contained in the 2000 Proxy Statement under the caption "Election of
Directors - Certain Relationships and Related Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List of documents filed as part of this Report:
(1) Financial Statements included in Item 8:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1998 and 1999.
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1999.
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1999.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules included in Item 8:
Schedule II - Valuation and Qualifying Accounts.
Schedules other than that referred to above have been omitted
because they are not applicable or are not required under the
instructions contained in Regulation S-X or because the
information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits:
The exhibits listed on the accompanying Index of Exhibits are filed as
part of this Annual Report.
(b) The Following Reports on Form 8-K were filed during the quarter ended
December 31, 1999:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 29, 2000
MERISEL, INC.
By:/s/Timothy N. Jenson
Timothy N. Jenson
Chief Financial Officer and
Executive Vice President
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
------------ -------------- ----------
/s/Dwight A. Steffensen Chairman of the Board of Directors and Chief Executive March 29, 2000
- ------------------------------------ Officer (Principal Executive Officer)
Dwight A. Steffensen
/s/Timothy N. Jenson Chief Financial Officer and Executive Vice President March 29, 2000
- ------------------------------------ (Principal Financial and Accounting Officer)
Timothy N. Jenson
/s/Albert J. Fitzgibbons III Director March 29, 2000
- ------------------------------------
Albert J. Fitzgibbons III
/s/Bradley J. Hoecker Director March 29, 2000
- ------------------------------------
Bradley J. Hoecker
/s/Dr. Arnold Miller Director March 29, 2000
- ------------------------------------
Dr. Arnold Miller
/s/Thomas P. Mullaney Director March 29, 2000
- ------------------------------------
Thomas P. Mullaney
/s/Lawrence J. Schoenberg Director March 29, 2000
- ------------------------------------
Lawrence J. Schoenberg
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of Merisel, Inc., filed as
an exhibit to the Form S-1 Registration Statement of
Softsel Computer Products, Inc., No. 33-23700.**
3.2 Amendment to Certificate of Incorporation of Merisel, Inc. dated
August 22, 1990, filed as exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990.**
3.3 Amendment to Certificate of Incorporation of Merisel, Inc. dated
December 19, 1997, filed as Annex I to the Company's Schedule 14A
dated October 6, 1997.**
3.4 Bylaws, as amended, of Merisel, Inc, filed as exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.**
4.1 Indenture dated October 15, 1994 between Merisel, Inc. and NationsBank
of Texas, N.A., as Trustee, relating to the Company's 12.5% Senior
Notes Due 2004, including the form of such Senior Notes attached as
Exhibit A thereto, filed as exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.**
*10.1 1983 Employee Stock Option Plan of Softsel Computer Products, Inc., as
amended, together with Form of Incentive Stock Option Agreement and
Form of Nonqualified Stock Option Agreement under 1983 Employee Stock
Option Plan, filed as exhibits 4.4, 4.5 and 4.6, respectively to the
Form S-8 Registration Statement of Softsel Computer Products, Inc., No.
33-35648, filed with the Securities and Exchange Commission on June 29,
1990.**
*10.2 1991 Employee Stock Option Plan of Merisel, Inc. together with Form of
Incentive Stock Option Agreement and Form of Nonqualified Stock Option
Agreement under the 1991 Employee Stock Option Plan, filed as exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991.**
*10.3 Amendment to the 1991 Employee Stock Option Plan of Merisel, Inc.
dated January 16, 1997, filed as exhibit 10.67 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.**
*10.4 Merisel, Inc. 1992 Stock Option Plan for Nonemployee Directors,
filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.**
*10.5 Softsel Computer Products, Inc. Executive Deferred Compensation Plan,
filed as exhibit 10.35 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991.**
*10.6 Merisel, Inc. 1997 Stock Award and Incentive Plan, filed as Annex II to
the Company's Schedule 14A dated October 6, 1997.**
*10.7 Form of Nonqualified Stock Option Agreement under the Merisel, Inc.
1997 Stock Award and Incentive Plan, filed as exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.**
*10.8 Form of Restricted Stock Unit Agreement under the Merisel, Inc. 1997
Stock Award and Incentive Plan.
10.9 Amended and Restated Receivables Transfer Agreement dated as of
September 27, 1996 by and between Merisel Americas, Inc. and Merisel
Capital Funding, Inc., filed as exhibit 10.53 to the Company's Current
Report on Form 8-K, dated April 17, 1996.**
10.10 Amended and Restated Receivables Purchase and Servicing Agreement dated
as of September 27, 1996, by and between Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc. and General
Electric Capital Corporation, filed as exhibit 10.54 to the Company's
Current Report on Form 8-K, dated April 17, 1996.**
10.11 Annex X to Receivables Transfer Agreement and Receivables Purchase and
Servicing Agreement dated as of October 2, 1995, filed as exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.**
10.12 Amendment No. 1 and Waiver to Amended and Restated Receivables Purchase
and Servicing Agreement dated as of November 7, 1996 among Merisel
Capital Funding, Inc., Redwood Receivables Corporation, Merisel
Americas, Inc. and General Electric Capital Corporation, filed as
exhibit 2.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.**
10.13 Amendment No. 1 and Waiver to Amended and Restated Receivables Transfer
Agreement dated as of November 7, 1996 by and between Merisel Americas,
Inc. and Merisel Capital Funding, Inc., filed as exhibit 2.6 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.**
10.14 Amendments to Securitization Agreements, dated as of December 19, 1997,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation, filed
as exhibit 10.19 to the Company's Annual Report on Form 10-K for year
ended December 31, 1997.**
10.15 Amendments to Securitization Agreements, dated as of July 31, 1998,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation, filed
as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.**
10.16 Amendment No. 4 and Waiver to Purchase Agreement, dated of as February
22, 1999, among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation, filed as exhibit 10.15 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.**
10.17 Amendment No. 5 to Purchase Agreement and Waiver dated as of May 12,
1999 among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation, filed as exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.**
10.18 Amendment No. 6 to Purchase Agreement and Waiver dated as of August 13,
1999 among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Capital
Corporation, filed as exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 3, 1999.**
10.19 Amendments to Securitization Agreements and Waiver dated as of March
10, 2000, among Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Redwood Receivables Corporation and General Electric Corporation.
10.20 Receivables Transfer Agreement dated as of March 10, 2000, between
Merisel Capital Funding, Inc. and Merisel Open Computing Alliance,Inc.
10.21 Loan and Security Agreement, dated as of June 30, 1998, among the
financial institutions listed on the signature pages thereof,
BankAmerica Business Credit, Inc. and Merisel Americas, Inc., filed as
exhibit 10.6 to Amendment No. 1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.**
10.22 Amendment No. 1 to Loan and Security Agreement dated as of May 11, 1999
by and among Merisel Americas, Inc., Bank of America National Trust and
Savings Association, as Agent and a Lender, filed as exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.**
10.23 Amendment No. 2 to Loan Agreement dated as of September 30, 1999, among
Merisel Americas, Inc., the financial institutions listed on signature
pages thereto and Bank of America, N.A. filed as exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.**
10.24 Amendment No. 3 to Loan and Security Agreement dated as of March 10,
2000, among Merisel Americas, Inc., Bank of America National
Association and Congress Financial Corporation.
10.25 Form of Security Agreement between Merisel Properties, Inc. and
Heller Financial, Inc. dated December 29, 1995, filed as
exhibit 10.36 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.**
10.26 Deed of Trust, Security Agreement, Assignment of Leases and Rents
and Fixture Filing between Merisel Properties, Inc. and Heller
Financial, Inc. dated December 29, 1995, filed as exhibit 10.37 to
the Company's Annual Report and Form 10-K for the year ended December
31, 1995.**
10.27 Severance Agreement dated as of March 3, 1999 between Merisel, Inc.
and James E. Illson, filed as exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 30, 1999.**
*10.28 Severance Agreement dated as of March 3, 1999 between Merisel, Inc.
and Timothy N. Jenson, filed as exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended March 30, 1999.**
*10.29 Promissory Note dated March 17, 1999 between Timothy N. Jenson and
Merisel, Inc., filed as exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q for the period ended March 30, 1999.**
*10.30 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and William Page, filed as
exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.**
*10.31 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and Karen A. Tallman, filed
as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.**
*10.32 Change of Control Agreement dated as of May 11, 1998 between Kristin M.
Rogers and Merisel Americas, Inc., filed as exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.**
*10.33 Promissory Note dated June 17, 1999 between Kristin M. Rogers and
Merisel Americas, Inc., filed as exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1999.**
*10.34 Offer of Employment Letter to Ronald S. Smith dated June 2, 1998,
filed as exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.**
10.35 Registration Rights Agreement, dated September 19, 1997, by and among
Merisel, Inc., Merisel Americas, Inc. and Phoenix Acquisition Company
II, L.L.C, filed as exhibit 99.4 to the Company's Current Report on
Form 8-K, dated September 19, 1997.**
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP, Independent Accountants.
27 Financial Data Schedule for the year ended December 31, 1999.
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*Management contract or executive compensation plan or arrangement.
**Incorporated by reference.