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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 December 31, 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 of (I.R.S. Employer Identification No.)
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
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Securities registered pursuant to Section 12(b) of the Act: None
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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 April 11, 2001, 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 $3,644,512 (2,892,470 shares at a closing
price of $1.26).
As of April 11, 2001, the Registrant had 8,030,882 shares of Common Stock
outstanding.
Documents Incorporated By Reference
None.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................ 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 11
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 14
Item 7A. Quantitative and Qualitative Market Risk Disclosure............................................ 21
Item 8. Financial Statements and Supplementary Data.................................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 44
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 45
Item 11. Executive Compensation......................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 45
Item 13. Certain Relationships and Related Transactions................................................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 45
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 distributor of computer hardware
and software products and a provider of logistics and electronic services.
Through its main operating subsidiary Merisel Americas, Inc. ("Merisel
Americas") and its subsidiaries, the Company operates a Canadian distribution
business and a U.S. software licensing business. In addition, through a newly
formed subsidiary, Optisel, Inc. ("Optisel"), the Company operates a logistics
business which, combined with certain electronic-fulfillment-business assets
acquired from Value America, the Company intends to expand to include a full
range of logistics and electronic-services capabilities to offer to
manufacturers, retailers, and e-tailers in a broad range of industries.
The Company's Canadian distribution business ("Merisel Canada") offers products
and services to a broad range of reseller customers, including value-added
resellers ("VARs"), commercial resellers, retailers and Internet resellers.
Merisel supports the growth of its partners in Canada with business development
and educational services, expert technical support, flexible financing options,
certified configuration services, and progressive e-business solutions. Merisel
Canada distributes more than 37,000 products (as measured by distinct part
numbers assigned by manufacturers and other suppliers) from the industry's
leading hardware and software manufacturers. These manufacturers include 3Com,
Compaq, Hewlett-Packard, IBM/Lotus, Microsoft, NEC, Palm, Symantec, Toshiba and
ViewSonic. The breadth of Merisel Canada's product line, together with its
distribution network, enables the Company to provide its Canadian customers with
a single supply source and prompt product delivery.
Merisel's software licensing business provides U.S. resellers with more than
12,000 licensing products from 10 leading manufacturers, including Computer
Associates, Corel, Network Associates, Symantec, and Veritas. The software
licensing business involves the distribution of multiple-end user licenses for
software products and requires minimal distribution of boxed product. The
business was started in 1997 and, by 1999, had earned the reputation as a leader
in operational efficiency and customer service. Today, Merisel's software
licensing business is focused on leveraging its positive reputation in the
marketplace and growing revenues in key vertical markets in support of
manufacturer strategies.
Optisel offers end-to-end e-services and logistics capabilities to
manufacturers, retailers, e-tailers, distributors and others. Leveraging
Merisel's world-class systems and logistics expertise, Optisel is currently
offering highly efficient logistics and distribution services. In addition,
Optisel will provide future clients with a front-end, Web-based customer
interface and other e-service offerings, including marketing and advertising
services, Web development and design, and interactive call center management and
customer service, that will complement the existing back-end logistics and
distribution capabilities. With this wide-ranging, end-to-end service offering,
Optisel will compete against service providers in both the logistics and
e-services industries.
The Company's sales were approximately $2.1 billion for 2000, excluding
approximately $796 million in sales generated by the Company's Merisel Open
Computing Alliance business, which was sold by the Company in the fourth quarter
of 2000. Of these sales, 68% were generated by U.S. distribution (of which 14%
were generated by software licensing) and 32% were generated by Canadian
distribution. See "Notes to Consolidated Financial Statements - Note 15 -
Segment Information."
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."
Background and Business Strategy
General. 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, which resulted in the
Company's operations being focused exclusively in the United States and Canada
and consisting of three distinct business units: United States distribution,
Canadian distribution and the Merisel Open Computing Alliance ("MOCA"). MOCA
provides enterprise-class solutions for Sun Microsystems servers and the Solaris
operating system to Sun Microsystems-authorized resellers and consultants.
Effective as of October 27, 2000, the Company completed the sale of its MOCA
business unit to Arrow Electronics, Inc. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."
In December 2000 the Company determined that, primarily as a result of a
significant contraction in sales and continuing substantial operating losses,
the U.S. distribution business would focus solely on software licensing and that
the balance of the U.S. distribution business would be wound down. Although the
wind-down was substantially completed by the end of the first quarter of 2001,
the Company has substantial remaining obligations related to the U.S.
distribution business, primarily with respect to leases, vendors and employee
severance. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." As part of the
wind-down, total headcount for the U.S. distribution business combined with the
Company's information technology, finance and corporate functions, which support
all of the Company's businesses, was reduced from 559 to 104. In addition, as
part of the wind-down the U.S. distribution business eliminated all of its
warehouses except for Chicago, Illinois and Hayward, California (which will be
utilized by Optisel), sold all of its inventory and discontinued all of its
non-software licensing manufacturer relationships.
Canadian Distribution. Revenues for the Canadian distribution business in 2000
were 29% lower than 1999 revenues, declining from approximately $926 million to
$660 million. Management believes that Merisel Canada's declining revenues for
2000 primarily resulted from management's need to focus on the problems in
Merisel's U.S. distribution business and from credit issues related to the U.S.
business. In June 2000, the Canadian distribution business began to experience
cash flow problems due to diminishing manufacturer credit support, which was due
primarily to heightened manufacturer concerns regarding the U.S. business. As a
result of the diminished manufacturer support and related product availability
challenges and management focus on the U.S. business, Merisel Canada began to
lose customers and revenues declined. In the third quarter of 2000, the Canadian
management team, which had assumed the leadership of a consolidated North
American distribution business in December 1999, returned to Canada to focus on
the Canadian business. By the end of that quarter, Merisel Canada had completed
a major restructuring that cut costs and reduced headcount from approximately
620 employees to approximately 425. As a part of the restructuring, Merisel
Canada's product offering was refocused on the most profitable suppliers while
less profitable supplier relationships were discontinued. Over the past several
months, Merisel Canada has reduced its number of manufacturer relationships from
more than 250 to approximately 110. By February 2001, Merisel Canada's overall
restructuring efforts had earned back significant manufacturer credit support.
With the current cost structure, management believes this level of business
should be sufficient to return Merisel Canada to profitability and to a positive
cash flow position for the first quarter of 2001 and for 2001. The Company is
focused on continuing to improve the performance of the business. At the same
time, the Company is considering strategic options with respect to Merisel
Canada, including the potential sale of that business.
Software Licensing. During 2000, the Company's software licensing business was
adversely affected by the contraction of the U.S. distribution business and the
termination of many vendor relationships, including Microsoft. Revenues for the
U.S. software licensing business were approximately $68 million, $68 million and
$56 million for the first, second and third quarters of 2000, respectively, and
declined to $3.2 million for the fourth quarter of 2000. For the first quarter
of 2001, revenues for the software licensing business increased 54% over the
prior quarter to approximately $5 million and the Company expects substantial
further increases quarter-over-quarter during 2001. Although many of these
distribution arrangements were terminated during 2000, management of Merisel's
software licensing business has maintained positive relationships with many key
software manufacturers beyond the 10 manufacturers whose products it currently
distributes. Management believes that by focusing on its software licensing
business, reducing operating expenses, and capitalizing on its strong
relationships with certain customers, the business has the potential to be
returned to a successful business model, albeit on a much smaller scale.
Optisel. On November 10, 2000 the Company acquired substantially all the
e-services assets of Charlottesville, Virginia-based Value America, Inc. for a
purchase price of $2,375,000. Through its newly formed subsidiary Optisel, the
Company will operate an e-services and logistics business, or commerce service
provider ("CSP"), leveraging its distribution and logistics capabilities to
generate services revenue and providing a front-end Web-based customer interface
and other e-service offerings, including marketing and advertising services, Web
development and design, and interactive call center management and customer
service. The Company expects to complete the development of the front-end
interface and required systems integration to enable Optisel's e-services
offering by the end of the third quarter of 2001. Through Optisel, the Company
plans to offer a complete turnkey e-commerce solution to manufacturers and
retailers who sell their products through traditional channels and are looking
to move into the e-commerce arena or that have not been successful with their
own e-commerce efforts.
With the logistics aspect of the business fully operational, Optisel currently
offers traditional product-fulfillment services to companies that seek logistics
expertise while continuing to recruit e-services customers to bring on board
once its front-end interface is available. In connection with the MOCA sale, the
Company entered into a services agreement under which MOCA outsourced the
operation of its information technology ("IT") systems and distribution and
logistics functions. Under that agreement, Optisel is currently providing MOCA
with distribution and logistics services to support more than a half billion
dollars in annual sales volume. The agreement, which provided for a minimum
six-month term, has been extended through the end of July and may be extended at
Arrow's option through the end of October 2001 and beyond with mutual agreement
of the parties. Optisel recently signed an agreement with an established
European conglomerate to provide logistics-only services that augment the
customer's third-party distribution efforts in the U.S. marketplace. The initial
assignment under the agreement is short-term but there is potential for
additional opportunities with that customer. Optisel will not generate any
additional revenues until at least mid-2001, and is not expected to achieve
break-even results until 2002 or later. Revenues for the Optisel business for
2000 were $1,587,000, all of which were generated by the MOCA services
agreement. In addition, the Company is considering strategic options with
respect to its Optisel business, including narrowing the scope of services it
offers as well as potential business combinations or joint ventures.
The Computer Products Distribution Industry
The Company's Canadian distribution and U.S. software licensing businesses
compete in the computer products distribution 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 the Company's Canadian
distribution business, purchase a wide range of products in bulk directly from
manufacturers and then ship products in smaller quantities to many different
types of resellers. Niche distributors like the Company's software licensing
business operate similarly but with a narrower product offering. Types of
resellers include corporate resellers, value-added resellers or "VARs," system
integrators, direct marketers, independent dealers, mass merchants and computer
chain stores, and resellers conducting business via the Internet ("e-tailers").
Resellers are often further 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 for product availability, flexible
financing alternatives, technical support, prompt and efficient delivery and,
with respect to full-line distributors like Merisel Canada, their broad product
offering. 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 has historically experienced
double-digit growth throughout North America. However, growth rates in the
latter part of 2000 and going into 2001 have been substantially lower and may be
negative in the short-term. 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 changing
terms and conditions from major systems manufacturers, aggressive pricing
practices, industry consolidation, and the emergence of Internet and other
"virtual" businesses that operate with minimal infrastructure.
In order to compete more effectively and lower their costs, major computer
systems manufacturers that rely on the two-tier distribution model have in
recent years taken steps to reduce their own inventories and the inventories of
their distributors and resellers. One such strategy has been to increase the use
of "eBusiness" solutions. Electronic business, or eBusiness, refers to the use
of electronic systems and applications to exchange information and transact
business. 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.
The Logistics Industry
Through the provision of warehousing and product fulfillment services, the
Company's Optisel business competes within the well-established third party
logistics industry. This industry has experienced significant growth within
recent years as an increasing number of companies have chosen to focus on their
core competencies and to outsource warehousing and delivery
to logistics experts. The emergence of e-businesses that maintain minimal
physical infrastructure have contributed to this trend. Also contributing to
this trend is the need for businesses to service a more highly dispersed
customer base as the tasks of picking and packing small quantities and shipping
to a vast number of addresses make the fulfillment process more of a challenge.
It is anticipated that the demand for reliable, cost-effective and scalable
business-to-business and business-to-customer logistics services will continue
to grow.
The e-Services Industry
The Company's Optisel business also competes within the Internet-driven,
e-services industry as a commerce service provider ("CSP"). The Internet has
emerged as a significant global communications medium, enabling millions of
people to share information and conduct business electronically. A number of
factors have contributed to the growth of the Internet and its commercial use,
including: (i) the large and growing installed base of personal computers in
homes and businesses; (ii) improvements in network infrastructure and bandwidth;
(iii) easier and cheaper access to the Internet; (iv) increased awareness of the
Internet among consumer and business users; and (v) the rapidly expanding
availability of online content and commerce that increases the value of the
Internet to users.
The increasing functionality, accessibility and overall usage of the Internet
have made it an attractive commercial medium. Via the Internet, businesses can
interact directly with end users, both businesses and consumers, and can
frequently adjust their featured selections, shopping interfaces and pricing.
The ability to reach and serve a large and global group of end users
electronically from a central location and the potential for personalized
low-cost customer interaction provide additional economic benefits. Traditional
brick-and-mortar businesses are increasingly augmenting their sales and
marketing strategies with online initiatives. In addition, many manufacturers
are realizing that they need to utilize the Internet in their sales and channel
strategies. As a result, an increasingly broad base of products is being sold
successfully online, including computers, travel services, brokerage services,
automobiles and music, as well as software products.
There are a number of advantages to outsourcing electronic commerce, including:
(i) avoiding the large, upfront investment required to purchase and implement
software applications and computer hardware; (ii) a shorter time to market with
an electronic commerce solution; (iii) the opportunity to shift the ongoing
financial and technology risk to a proven service provider; and (iv) allowing
businesses to focus on their specific core competency. Because of these
advantages, Merisel believes that an increasing number of businesses will
outsource their electronic commerce needs. As a result, the Company believes
that the market for e-services will continue to grow rapidly. Accordingly, the
Company believes that a substantial market opportunity exists for comprehensive,
cost-effective e-services that are integrated with a physical logistics delivery
infrastructure for retailers, e-tailers, manufacturers and distributors.
Canadian Distribution and U.S. Software Licensing Businesses
Products and Suppliers. Merisel has established and developed long-term business
relationships with many of the leading manufacturers in the computer products
industry. Merisel Canada offers more than 37,000 products (as measured by
distinct part numbers assigned by manufacturers and other suppliers), including
software licensing products, from approximately 110 suppliers, including 3Com,
Compaq, Hewlett-Packard, IBM/Lotus, Intuit, Lexmark, Microsoft, NEC, Palm,
Symantec, Toshiba and ViewSonic.
The Company's U.S. software licensing business offers its reseller customers
over 12,000 products from 10 leading manufacturers, including Computer
Associates, Corel, Network Associates, Symantec and Veritas. The software
licensing business involves the distribution of multiple-end user licenses for
software products, generally for installation on multiple systems, and requires
minimal distribution of boxed software product. Prior to the contraction of the
Company's U.S. distribution business, Merisel's U.S. software licensing business
offered products from 21 manufacturers and ranked number one in software
licensing sales for key manufacturers such as Microsoft and Novell. Although
many of these distribution arrangements were terminated during 2000, management
of Merisel's software licensing business have maintained positive relationships
with many key software manufacturers beyond the 10 manufacturers whose products
it currently distributes. The Company is currently engaged in activities aimed
at reestablishing these key relationships and rebuilding its product offering.
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. 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 few years, certain major PC manufacturers have reduced the
availability of price protection for distributors. 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.
Although Merisel Canada distributes more than 37,000 products supplied by
approximately 110 manufacturers, 57.8% of net sales in 2000 (as compared to
67.1% in 1999 and 69.9% in 1998) were derived from products supplied by Merisel
Canada's 10 largest vendors. The sale of products manufactured by Compaq and
Hewlett-Packard accounted for approximately 14.3% and 15.0%, respectively, of
net sales in 2000 (as compared to 16.8% and 15.8%, respectively, in 1999, and
19.6% and 14.3%, respectively, in 1998). No other manufacturer accounted for
more than 10 percent of Merisel Canada's sales in any of those years. 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 Merisel Canada and any of its key suppliers could
have an adverse impact on the Company's business and financial results.
Merisel Canada and, on a smaller scale, Merisel's software licensing business
provide manufacturers with access to a large base of computer resellers, as well
as the means to reduce inventory, credit, marketing and overhead costs typically
associated with maintaining direct reseller relationships. Merisel 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 2000, Merisel sold products and services to
approximately 8,000 Canadian resellers through Merisel Canada, but experienced a
decline in active customers during the course of the year as its revenues fell
off. During the first quarter of 2001, Merisel Canada had an active customer
base of approximately 4,000 resellers. In the U.S. in 2000, the Company's
software licensing business sold products and services to more than 3,000 U.S.
resellers. With the dramatic decline in revenues of the software licensing
business as the U.S. distribution business contracted in 2000, the number of
active customers declined to a fraction of prior levels. The software licensing
business is focused on reestablishing customer relationships and broadening its
customer base through proactive marketing to prospective new customers.
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, 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. Merisel generally does
not have contracts with its reseller customers. Merisel Canada's top 20
customers accounted for approximately 34.1% of Merisel Canada's total sales in
2000. One customer accounted for 7.8%, 9.6% and 7.6% of Merisel Canada's net
sales in 2000, 1999 and 1998, respectively, one customer accounted for 6.1% of
sales in 1998, and no other customers accounted for more than 5% of sales for
any of those years.
Single-Source Provider. As a full-line distributor, Merisel Canada offers
computer resellers a single source for more than 37,000 competitively priced
hardware and software products. By purchasing from Merisel Canada, 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 Canada.
Customers and Sales Organizations. Merisel supports resellers who offer product,
and often value-added services, to corporate or individual end-user clients.
Merisel Canada's sales organization is organized into three primary divisions to
serve the varying requirements of different customer groups in the industry as
follows: VARs and education resellers; large system integrators; and
retail/Internet customers. The VAR division provides specialized services and
technical products to value-added resellers and system integrators who offer
support, service and consulting to clients. Small and medium-sized resellers
rely very heavily on distribution for financial credit, next-day delivery (they
do not stock the product themselves), and manufacturer and product information.
Merisel Canada services this market largely through inside sales efforts with
support
from its marketing and financial services departments. The sales division
dedicated to large system integrators focuses on large dealers catering to
Fortune 500 companies as well as on companies such as Dell Computer to whom
Merisel Canada offers direct customer-fulfillment services. The Company provides
EDI transaction support, and dedicated field and inside sales support to
large-volume national accounts. The retail/Internet division services resellers
and retailers who are focused on the consumer market. Customers include large
retailers such as mass merchants and national computer chain stores; Internet
resellers; and independent retailers. Customers served by this division often
require unique services and support, such as demand projections, customized
marketing programs and product stocking support.
Merisel Canada'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 most of the above information 24 hours a day, seven days a week.
Merisel Canada also provides resellers with direct access to 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.
Merisel's software licensing business caters specifically to resellers who serve
the software needs of corporate, institutional and government clients. This
business serves its customers through a team of highly trained sales
representatives that receive cross-training on all of the products sold through
the business. This cross training is unique in the industry and leads to
enhanced customer service with every sales representative trained to assist
customers with every software product. Customer service (particularly with
respect to the complexities of manufacturers' licensing processes), quick
response to bid requests, and electronic ordering capabilities are critically
important to software licensing customers. Merisel has had a long-standing
reputation as a leader in these areas and is currently leveraging this positive
reputation in the marketplace to rebuild and grow its software licensing
business.
Prompt Delivery. By 1996, Merisel's Information and Logistics Efficiency System
("MILES") had been installed in all of the Company's distribution centers in the
U.S. and Canada. 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%. For shipment of boxed
products through Merisel Canada, orders received by 6:00 p.m. local time are
typically shipped the same day, provided the required inventory is in stock.
Merisel delivers products from its distribution centers via Purolator Courier,
UPS and other carriers by customer request. 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.
Information Services. Merisel provides its reseller customers with detailed
information on products, pricing, promotions and developments in the industry.
The Company's corporate and Merisel Canada Web sites and SELline II offer
technical product information on thousands of products and links to many 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 Purolator, 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. 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 manufacturers to directly connect their systems to Merisel's SAP system,
enabling supply-chain integration and synchronization.
Optisel
Customers and Customer Services. Optisel is actively recruiting customers that
it can service solely with its existing back-end logistics and distribution
capability prior to completion of the front-end interface. Optisel recently
signed an agreement with an established European conglomerate to provide
logistics-only services that augment the client's third-party distribution
efforts into the U.S. marketplace. The initial assignment under the agreement is
short-term but there is potential for additional opportunities with that
customer. In addition, in connection with the MOCA sale, the Company entered
into a services agreement under which MOCA outsourced the operation of its IT
systems and distribution and logistics functions, which are being provided by
Optisel. This agreement, which provided for a minimum six-month term, has been
extended through the end of July and may be extended at Arrow's option through
the end of October 2000 and beyond with mutual agreement of the parties. While
Optisel offers traditional product-fulfillment services to any company that
seeks logistics expertise, Optisel will ultimately offer a full suite of
logistics and e-services to e-tailers and to manufacturers and retailers who
sell their products through traditional channels and are looking to move into
the e-commerce business.
Warehousing and Fulfillment. By utilizing Merisel state-of-the-art distribution
centers and leveraging the Company's advanced Merisel Information and Logistics
Efficiency System ("MILES"), Optisel offers its clients inventory and shipping
accuracy rates that the Company believes are among the highest available in the
world today at 99.993%. Orders received by 6:00 p.m. local time are typically
shipped the same day, provided the required inventory is in stock. Optisel ships
product primarily via UPS and FedEx, and via other carriers by client request.
Most orders are received within one or two working days of shipment. Optisel
also offers overnight air handling upon request.
Operations, Distribution and Systems
Locations. At March 31, 2001, the Company operated four distribution centers in
North America: two in the United States and two in Canada.
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 distribution centers utilize
the MILES computerized warehouse management system, which uses infrared bar
coding and advanced computer hardware and software to improve shipping,
receiving and picking accuracy rates. 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 U.S. operations in April 1999. The system is
designed to support business growth by providing greater transaction
functionality, increased flexibility, enhanced reporting capabilities, and
custom-pricing applications. Prior to implementing SAP R/3 for its U.S.
operations, Merisel implemented a new version of SELline. This Web-based
application was built on a Microsoft platform and provides enhanced procurement
and inquiry functions to Merisel's resellers as well as real-time interfaces to
SAP R/3.
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.
In support of the Optisel business, Merisel's core systems are being expanded.
Enhancements have been made to SAP R/3 to add functionality needed for the
logistics model. This functionality includes new interfaces to SAP for automated
purchase order and SKU set-up, as well as capability to carry zero-priced
products in the system and charge fees for services. Additionally, the SAP R/3
system has been upgraded to the latest version of SAP (4.6D). This version of
SAP provides broader capability for interfacing directly to SAP and for
accessing real-time information. Further development is currently underway to
provide support for the e-services aspect of Optisel's business. This
development includes the set-up and
configuration of Siebel 2000, as well as corresponding changes to SAP R/3 needed
to support the Siebel environment. Siebel 2000 is expected to provide the
Company with functionality that includes Web-based order entry and inquiry, call
center support, content management, marketing management, and reporting. Siebel
2000 will have real-time connections to SAP for seamless order fulfillment.
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 Canadian distribution and
software licensing businesses include large United States-based distributors
such as Ingram Micro and Tech Data, as well as regional distributors and
franchisers. Merisel also competes with manufacturers that sell directly to
computer resellers and end users, sometimes at prices below those charged by
Merisel for similar products, and larger resellers and e-tailers that sell to
resellers. 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.
Because Optisel will offer services ranging from Internet-based transaction
functionality and electronic services to warehousing and product fulfillment,
this business will compete in both the e-services and logistics industries, both
of which are intensely competitively. Within the e-services industry, Optisel
will compete with several small e-services companies, such as Aqueduct (formerly
BuyNow.com), Digital River, and Escalate, many of which began operating in the
1998/1999 timeframe and which cater to manufacturers and retailers. In addition,
it is anticipated that there may be new entries into the marketplace by
independent software vendors (ISVs) that offer ASP services or large data
centers/hosting companies, such as EDS. Within the logistics industry, Optisel
competes with (i) traditional third-party logistics providers, such as Excel
Logistics and GATX Logistics; (ii) the logistics arms of well-known carriers,
such as FedEx, UPS, and Purolator Courier; and (iii) a variety of traditional
distributors, such as Ingram Micro, Tech Data, and Fingerhut, that are newly
leveraging their core competencies to compete in the fee-based logistics arena.
Some traditional distributors, such as Ingram Micro and Tech Data, are also
establishing e-services capabilities to augment their logistics services
offerings.
Management believes that the principal competitive factors in the e-services
industry are speed to market, cost and system scalability and that the principal
competitive factors in the logistics industry are accuracy, cost and systems
capabilities. Management believes Optisel's full spectrum of services will
assist it in competing against companies with service offerings that are limited
to either e-services or logistics. Many of Optisel's current and potential
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than Optisel. In addition, larger, well-established and well-financed
entities may acquire, invest in or form joint ventures with smaller competitors.
Optisel may be unable to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
Optisel's business.
Variability of Quarterly Results and Seasonality
Historically, the industry in which the Company operates has experienced
variability in its net sales and operating margins on a quarterly basis and
expects these patterns to continue in the future with respect to its Canadian
distribution and U.S. software licensing businesses. 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 Canada, the Company's net sales in the first and fourth
quarters have been historically higher than in its other two quarters.
Management believes that the pattern of higher first and fourth quarter sales is
partially explained by buying patterns of Canadian government agencies in the
first quarter and customer buying patterns relating to calendar year-end
business and holiday purchases in the fourth quarter. As a result of this
pattern, the Company's working capital requirements
in the fourth quarter have typically been greater than other quarters. The
Company expects that it would also experience this type of seasonality in its
Optisel business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Employees
As of March 31, 2001, Merisel had approximately 570 employees, of which 404 were
employees of Merisel Canada. 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.
Gross Margin Pressure. Historically, the computer distribution industry in
general and the Company in particular have experienced declines in gross
margins. The decline has resulted in part from a reduction in manufacturer
rebates and changes by manufacturers in terms and conditions, which have
resulted in a shift of costs to distributors, and economies of scale achieved by
growing distributors that decreased their costs. Merisel Canada attempts to
address the gross margin issue through pricing and other actions. If these
efforts to increase or maintain 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, Merisel Canada may not
be able to achieve satisfactory levels of profitability.
Vendor Terms and Conditions. Like other wholesale distributors, Merisel Canada'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 past few years, certain major PC
manufacturers that are among Merisel Canada'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, Merisel Canada seeks to reduce potential future 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. Unforeseen
changes in current price protection policies or other changes in terms and
conditions of any of Merisel Canada's major vendors could have a material
adverse effect on the Company.
Dependence on Key Vendors. In 2000, 57.8% of Merisel Canada's net sales were
derived from products supplied by its 10 largest vendors, as compared to 67.1%
in 1999 and 69.9% in 1998. 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
rebates, could have a material adverse effect on the Company. Over the last
couple of years, several large manufacturers have elected to reduce their number
of distribution relationships, and the Company expects that this trend is likely
to continue. Future decisions by manufacturers to reduce their number of
distribution partners could result in Merisel Canada's loss of vendors, which
could have a material adverse effect on the Company.
Size of Competitors. The Company's competitors in its Canadian distribution and
U.S. software licensing businesses include distributors with businesses that are
substantially larger than the Company's. Because of their size and the fact that
many of these larger competitors operate world-wide businesses, 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. Many
of Optisel's competitors for both e-services and logistics services are larger
and have substantially greater resources than Optisel, which may permit them to
offer more competitively priced-services. 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 by increasing sales of
computer products outside the traditional distribution channel may have a
material adverse effect on the Company.
Customer Credit Exposure. Through its Canadian distribution and U.S. software
licensing businesses, the Company sells products to a large customer base of
value-added resellers, commercial resellers, retailers and Internet resellers. A
significant portion of such sales is financed by the Company. As a result, the
Company's business could be adversely affected in the event of the deterioration
of the financial condition of its customers, resulting in the customers'
inability to repay the Company. This risk would be increased in the event of a
general economic downturn affecting a large number of the Company's customers.
Size of Software Licensing and Optisel Businesses. The Company's U.S. software
licensing and Optisel businesses are not currently profitable and are not
generating sufficient revenue to cover required fixed expenses to operate these
businesses. Because these are the only businesses comprising the Company's U.S.
operations, which have significant fixed operating and overhead costs, these
businesses may not be viable if they do not grow substantially or if their
revenues were to decrease.
Item 2. Properties.
At March 31, 2001, the Company maintained distribution centers in two locations
in the United States and two locations in Canada. Additionally, the Company
maintains United States administrative and sales offices in El Segundo,
California; offices for Optisel in Charlottesville, Virginia; and 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 leases a 50,700 square-foot facility.
The Company owns a 61,000 square-foot facility and 29 acres of undeveloped land
in Cary, North Carolina, which the Company is seeking to sell. All of the
Company's other facilities are leased. The Company believes that its facilities
provide sufficient space for its present needs.
In connection with the Company's wind-down of its U.S. distribution business,
the Company closed four U.S. distribution facilities during the third quarter of
2000 and one U.S. distribution facility during the fourth quarter of 2000.
Item 3. Legal Proceedings.
The Company is involved in certain legal proceedings arising in the ordinary
course of business, none of which is expected to have a material impact on the
financial condition or business of Merisel.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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. All stock prices are closing prices per The Nasdaq Stock Market, as
adjusted by a one-for-ten reverse stock split that was effective February 14,
2001.
High Low
Fiscal Year 1999
First quarter.... 28 3/4 12 1/2
Second quarter... 31 7/8 11 9/16
Third quarter.... 24 3/8 15
Fourth quarter... 17 13/16 11 9/16
Fiscal Year 2000
First quarter.... 31 1/4 11 1/4
Second quarter... 17 3/16 7 3/16
Third quarter.... 12 3/16 5 5/8
Fourth quarter... 6 7/8 1 9/16
As of March 31, 2001, there were 909 record holders of the Company's Common
Stock.
Merisel has never declared or paid any dividends on its Common Stock.
Information on the sale of 150,000 shares of convertible preferred stock
("Convertible Preferred") to an affiliate of Stonington Partners, Inc. is
included in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations-Debt Obligations, Financing Sources and
Capital Expenditures." The issuance of the Convertible Preferred was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
because the transaction constituted a private placement and did not involve a
public offering.
Item 6. Selected Financial Data.
Year Ended December 31,
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
(In thousands, except per share amounts)
Income Statement Data:(1, 2 and 3)
Net sales..................................... $ 5,176,475 $ 3,591,056 $ 3,937,930 $4,231,396 $2,093,529
Cost of sales................................. 4,923,070 3,385,585 3,721,651 4,046,094 2,020,111
----------- ----------- ----------- ----------- -----------
Gross profit.................................. 253,405 205,471 216,279 185,302 73,418
Selling, general & administrative expenses.... 282,780 176,173 180,090 211,990 176,752
Restructuring charge.......................... 3,200 17,636
Impairment losses............................. 42,033 14,100 3,800 52,833
Litigation related charge..................... 12,000
----------- ----------- ----------- ----------- -----------
Operating (loss) income....................... (71,408) 15,198 36,189 (45,688) (173,803)
Interest expense.............................. 39,080 28,608 17,125 17,849 10,920
Loss on sale of European, Mexican, and
Latin American operations..................... 33,455
Debt restructuring costs...................... 5,230
Other expense, net............................ 17,508 11,495 17,096 21,926 5,382
----------- ----------- ----------- ----------- -----------
(Loss) income before income taxes............. (161,451) (30,315) 1,968 (85,463) (190,105)
(Benefit) provision for income taxes.......... 1,539 496 417 939 620
----------- ----------- ----------- ----------- -----------
Net (loss) income from continuing operations
before extraordinary item..................... (162,990) (30,631) 1,551 (86,402) (190,725)
Discontinued operations:
Income from discontinued operations 22,615 18,534 16,959 25,234 20,757
Gain on sale of discontinued operations 25,178
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary item....... (140,375) (12,097) 18,510 (61,168) (144,790)
Extraordinary (loss) gain on extinguishment of
debt, net..................................... (3,744) 49,003
----------- ----------- ----------- ----------- -----------
Net (loss) income............................. $(140,375) $(15,841) $18,510 $(61,168) $(95,787)
=========== ============ =========== =========== ===========
Share Data (4):
Net (loss) income per diluted share........... $ (46.79) $ (4.77) $ 2.30 $ (7.62) $ (12.01)
Weighted average number of diluted
Shares..................................... 3,000 3,322 8,049 8,028 8,031
Balance Sheet Data: (2)
Working capital............................... $ 159,627 $ 169,164 $ 132,616 $ 117,340 $ 6,166
Total assets.................................. 681,129 696,104 834,458 736,206 178,281
Long-term and subordinated debt............... 294,763 133,429 131,856 130,264 23,803
Total debt.................................... 294,950 133,429 135,657 133,170 25,166
Stockholders' equity.......................... 14,997 137,508 154,253 95,173 13,418
(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 the
Company's wholly owned subsidiary Merisel FAB, Inc. through its disposal as
of March 28, 1997.
(2) The Company has reclassified certain items in its 1996, 1997 and 1998
financial statements to conform to the 1999 and 2000 presentations. These
reclassifications principally consist of costs associated with the
Company's flooring arrangements. The impact to the 1996, 1997 and 1998
financial statements is to reduce general and administrative expenses by
$2,998,000, $3,002,000 and $4,461,000, respectively, to decrease net sales
by $1,349,000, $1,351,000 and $2,007,000, respectively, and to increase
interest expense by $1,649,000, $1,651,000, and $2,454,000, respectively.
(3) The Company has reclassified its consolidated financial statements to
exclude results related to the MOCA business unit, which are included in
discontinued operations.
(4) Per share amounts and weighted average common shares outstanding
calculations reflect the impact of a one-for-ten reverse stock split that
was effective February 14, 2001.
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"). 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, which
resulted in the Company's operations being focused exclusively in the United
States and Canada and consisting of three distinct business units: United States
distribution, Canadian distribution and the Merisel Open Computing Alliance
("MOCA"). Effective as of October 27, 2000, the Company completed the sale of
its MOCA business unit to Arrow. Additionally, on December 14, 2000, the Company
announced that the U.S. distribution business would focus solely on software
licensing and that the balance of the U.S. distribution business would be wound
down. On November 10, 2000, the Company acquired substantially all the
e-services assets of Value America, Inc. through the Company's newly formed
subsidiary Optisel, which will leverage the Company's distribution and logistics
capabilities to operate an e-services and logistics business. As a result,
Merisel today operates a Canadian distribution business, a U.S. software
licensing business and Optisel.
Discontinued Operations
Effective as of October 27, 2000, the Company completed the sale to Arrow of its
MOCA business unit, which provides enterprise-class solutions for Sun
Microsystems servers and the Solaris operating system to authorized resellers.
The stock sale agreement pursuant to which the sale was made provided for a
purchase price of $110 million, subject to adjustments based on changes in
working capital reflected on the closing balance sheet of Merisel Open Computing
Alliance, Inc., plus an additional amount up to $37.5 million payable by the end
of March 2001 based upon MOCA's ability to retain existing and gain additional
business (the "Additional Payment"). The actual purchase price (excluding the
Additional Payment but including amounts received as deferred purchase price
payments) was approximately $179.8 million of which approximately $57.5 million
was for amounts outstanding under the Merisel asset securitization facility.
Based on the purchase price the Company realized a gain, net of costs associated
with the sale, of approximately $25.2 million. In March 2001 the Company
received an Additional Payment of $37.5 million which, after deducting certain
obligations relating to the payment, netted $36.25 million, which will be
recorded in the quarter ended March 31, 2001.
The Company has reclassified its consolidated financial statements to reflect
the sale of the MOCA business and to segregate the revenues, direct costs and
expenses (excluding any allocated costs), assets and liabilities, and cash flows
of the MOCA business. The net operating results, net assets and net cash flows
of this business have been reported as "Discontinued Operations" in the
accompanying consolidated financial statements.
Contraction of U.S. Distribution Business
With respect to the U.S. distribution business, in December 2000 the Company
determined that, primarily as a result of a significant contraction in sales and
continuing substantial operating losses, such business would focus solely on
software licensing and the balance of the U.S. distribution business would be
wound down. Although the wind-down was substantially completed by the end of the
first quarter of 2001, the Company has substantial remaining obligations related
to the U.S. distribution business, primarily with respect to leases, vendors and
employee severance. See "Liquidity and Capital Resources" below.
Optisel Business
With the significant contraction of the U.S. distribution business, the Company
began exploring possibilities for leveraging its distribution and logistics
capabilities to generate services revenue utilizing the Company's core
competencies. Following the sale of MOCA, on November 10, 2000 the Company
acquired substantially all the assets of Charlottesville, Virginia-based Value
America, Inc. for a purchase price of $2,375,000. Through the Company's newly
formed subsidiary Optisel, the Company will conduct its logistics and electronic
services business, offering a complete turnkey e-commerce solution to
manufacturers and retailers who sell their products through traditional channels
and are looking to move into the e-commerce arena. Optisel will provide future
clients with a front-end Web-based customer interface and other e-service
offerings, including marketing and advertising services, web development and
design, and interactive call center management and customer service, that will
complement Merisel's existing back-end logistics and distribution capability.
The Company expects to complete the development of the front-end interface and
required systems integration by the end of the third quarter of 2001. Optisel is
recruiting customers for its existing back-end logistics and distribution
capability prior to completion of the front-end interface. In connection with
the sale of the MOCA business to Arrow, the Company entered into a transition
services agreement with Arrow pursuant to which Optisel is providing fee-based
distribution and logistics services and IT services for MOCA. The agreement,
which provided for a minimum six-month term, has been extended through the end
of July and may be extended at Arrow's option through the end of October 2001
and beyond with mutual agreement of the parties. Optisel will not generate any
additional revenues until at least mid-2001, and is not expected to achieve
break-even results until 2002 or later. Optisel currently employs 61 associates,
excluding IT resources shared with the Canadian distribution and software
licensing businesses, and is expected to have direct operating expenses for 2001
of between $5,000,000 and $8,000,000.
Results of Operations
Including discontinued operations, the Company reported a net loss of
$95,787,000, or $12.01 loss per share, for 2000, compared to a net loss of
$61,168,000, or $7.62 loss per share, for 1999 and net income of $18,510,000, or
$2.30 per diluted share, for 1998. These results include net income from
discontinued operations of $20,757,000, $25,234,000 and $16,959,000 for 2000,
1999 and 1998, respectively. The discussion and analysis below is limited to the
Company's continuing operations and includes the U.S. distribution business.
Comparison of Fiscal Years Ended December 31, 2000 and December 31, 1999
The Company's net sales decreased 50.5% from $4,231,396,000 in 1999 to
$2,093,529,000 for the year ended December 31, 2000. Net sales for 2000 include
$660,216,000 generated by the Canadian distribution business. This decrease
resulted from sales declines of 56.7% and 28.7% for the U.S. and Canadian
distribution businesses, respectively. The decrease in net sales for these
businesses was due to a number of factors. The decrease experienced in the first
part of 2000 primarily resulted from restructuring activities during the first
half of the first quarter and from decreased customer orders in reaction to
Merisel's price changes implemented in the latter half of the first quarter. The
decline in sales contributed to excess inventory positions resulting in a delay
in some vendor payments while inventory levels were reduced to be in line with
the lower sales levels. These circumstances, combined with vendor concern caused
by the bankruptcy filings of three major distributors during the first half of
2000, contributed to a significant loss of vendor credit support. This loss of
credit support affected the Company's ability to obtain sufficient inventory in
the U.S. distribution business, which significantly reduced product availability
and caused further declines in sales for the U.S. distribution business, leading
to the ultimate decision to wind down the U.S. distribution business. Management
believes that the sales decline experienced by the Canadian distribution
business resulted primarily from management's need to focus on problems in the
U.S. distribution business and diminished vendor credit support, due primarily
to heightened vendor concerns regarding the U.S. business, and related product
availability challenges. Revenues for the Optisel business for 2000 were
$1,587,000, all of which were generated by the MOCA transition services
agreement.
In the Canadian distribution business, hardware and accessories accounted for
78% of net sales and software accounted for 22% of net sales for the year ended
December 31, 2000 as compared to 81% and 19%, respectively, for such categories
for the year ended December 31, 1999. The U.S. distribution business will focus
solely on software licensing in the future.
Gross profit decreased 60% from $185,302,000 in 1999 to $73,418,000 in 2000,
which primarily reflects the decline in sales in the 2000 period and adjustments
to inventory, accounts receivable and vendor related reserves to reflect current
realizable value. Gross profit as a percentage of sales, or gross margin,
decreased from 4.38% in 1999 to 3.51% in 2000. Gross margins in the U.S. and
Canadian distribution businesses were 2.53% and 5.51%, respectively, for 2000,
compared to 3.90% and 6.10%, respectively, for 1999. Additional factors that
contributed to lower margins were the sale of products by the U.S. distribution
business at cost during the wind-down period, a shift in product mix toward
lower margin products, and lower back-end rebates.
Selling, general and administrative expenses decreased by $35,238,000 or 16.6%
from $211,990,000 for the year ended December 31, 1999 to $176,752,000 for the
year ended December 31, 2000. Selling, general and administrative expenses as a
percentage of sales increased from 5.0% of sales in 1999 to 8.4% for the same
period in 2000, due primarily to reduced sales volumes in relation to fixed
costs.
During the third quarter of 2000, the Company announced a restructuring plan
that would significantly reduce its facilities and workforce. As a result, the
Company recorded a restructuring charge of $10,964,000 in the third quarter of
2000. In December 2000 the Company determined that, primarily as a result of a
significant contraction in sales and continuing substantial operating losses,
the U.S. distribution business would focus solely on software licensing and that
the balance of the U.S. distribution business would be wound down. As a result,
the Company recorded a restructuring charge of $6,672,000 in the fourth quarter
of 2000.
During 2000, the Company recorded aggregate impairment losses of $52,833,000
consisting of a second quarter charge of $19,487,000 related to the impairment
of goodwill attributable to the U.S. distribution business, a $20,808,000 fourth
quarter charge to adjust the carrying value of the Company's SAP operating
system to its fair value, and third and fourth quarter charges totaling
$12,538,000 for impairment of redundant and non-used assets primarily resulting
from the restructuring and wind-down of the U.S. distribution business.
As a result of the above items, the Company had an operating loss from
continuing operations of $173,803,000 for the year ended December 31, 2000
compared to an operating loss of $45,688,000 for the year ended December 31,
1999. Excluding the restructuring-related charges and the asset impairment
charges, the Company would have had an operating loss of $103,334,000 in 2000.
Interest Expense; Other Expense; Income Tax Provision
Interest expense for the Company decreased 38.8% from $17,849,000 for the year
ended December 31, 1999 to $10,920,000 for the year ended December 31, 2000,
which was primarily a result of purchases by the Company of outstanding debt
securities. See "Extraordinary Gain" below.
Other expense for the Company decreased from $21,926,000 for the year ended
December 31, 1999 to $5,382,000 for the year ended December 31, 2000. The
decrease is primarily related an $8,917,000 gain recorded on the sale in
September 2000 of the building in El Segundo, California owned by the Company, a
$1,538,000 gain recorded on the sale of the Company's Marlborough, Massachusetts
call center in January 2000 and a $7,810,000 reduction in asset securitization
fees related to lower balances outstanding during the year as a result of lower
sales.
The income tax provision decreased from $939,000 for the year ended December 31,
1999 to $620,000 for 2000. 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. A valuation allowance has been fully established against
available net operating loss carry forwards. See "Notes to Consolidated
Financial Statements - Note 11 - Income Taxes".
Extraordinary Gain
During 2000, the Company purchased $101,197,000 aggregate principal amount of
its outstanding 12-1/2% Senior Notes due 2005 (the "12.5% Notes") for an
aggregate cost of $50,982,000. As a result, the Company recognized an
extraordinary gain, net of unamortized debt issuance costs, of approximately
$49,003,000 in 2000.
Consolidated Net Loss
The Company reported a net loss of $61,168,000, or $7.62 loss per share, in 1999
compared to a net loss of $95,787,000, or $12.01 loss per share, in 2000.
Comparison of Fiscal Years Ended December 31, 1999 and December 31, 1998
The Company's net sales increased 7.5% from $3,937,930,000 in 1998 to
$4,231,396,000 for the year ended December 31, 1999. This increase resulted from
sales growth of 6.7% and 10.3% for the U.S. and Canadian distribution
businesses, respectively. Sales growth resulted primarily from growth in the
retail customer and national/major customer groups.
In the Canadian distribution business, hardware and accessories accounted for
81% of net sales and software accounted for 19% of net sales for the year ended
December 31, 1999 as compared to 82% and 18%, respectively, for such categories
for the year ended December 31, 1999.
Gross profit decreased 14.3% from $216,279,000 in 1998 to $185,302,000 in 1999.
Gross profit as a percentage of sales, or gross margin, decreased from 5.49% in
1998 to 4.38% in 1999. Gross margins in the U.S. and Canadian distribution
businesses were 3.90% and 6.10%, respectively, for 1999, compared to 5.33% and
6.08%, respectively, for 1998. Margins for the U.S. distribution business were
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 was 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 4.57%.
Selling, general and administrative expenses increased by $31,900,000 or 17.7%
from $180,090,000 for the year ended December 31, 1998 to $211,990,000 for the
year ended December 31, 1999. Selling, general and administrative expenses as a
percentage of sales increased from 4.6% of sales in 1998 to 5.0% 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
$11,289,000, or an increase from $10,046,000 in 1998 to $21,335,000 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 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 plan to combine its U.S. and Canadian
distribution businesses announced in December 1999, the Company evaluated the
fixed asset investments that were made to support those 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
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 the approximately 190 employees that
were involuntarily affected by the reduction in workforce.
As a result of the above items, the Company had an operating loss of $45,688,000
for the year ended December 31, 1999 compared to operating income of $36,189,000
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 an operating loss of
$26,688,000 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.
Other expense for the Company increased from $17,096,000 for the year ended
December 31, 1998 to $21,926,000 for the year ended December 31, 1999. The
increase is primarily attributable to an increase in asset securitization fees
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 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 did not recognize 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 exposure related to outstanding tax issues under review by
tax agencies. See "Notes to Consolidated Financial Statements - Note 11 - Income
Taxes."
Consolidated Net Income
The Company reported net income of $18,510,000, or $2.30 per diluted share, in
1998 compared to a net loss of $61,168,000, or $7.62 loss per share, in 1999.
Variability of Quarterly Results and Seasonality
Historically, the industry in which the Company operates has experienced
variability in its net sales and operating margins on a quarterly basis and
expects these patterns to continue in the future with respect to its Canadian
distribution and U.S. software licensing businesses. 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 Canada, the Company's net sales in the first and fourth
quarters have been historically higher than in its other two quarters.
Management believes that the pattern of higher first and fourth quarter sales is
partially explained by buying patterns of Canadian government agencies in the
first quarter and customer buying patterns relating to calendar year-end
business and holiday purchases in the fourth quarter. As a result of this
pattern, the Company's working capital requirements in the fourth quarter have
typically been greater than other quarters. The Company expects that it would
also experience this type of seasonality in its Optisel business.
See "Liquidity and Capital Resources."
Liquidity and Capital Resources
Cash Flows Activity for the Year Ended December 31, 2000
Net cash used by operating activities of continuing operations during the year
ended December 31, 2000 was $70,764,000. The primary use of cash is a decrease
in accounts payable of $371,382,000 and the net loss for the year, excluding the
non-cash charges for depreciation and bad debt provisions. The accounts payable
decrease was primarily the result of the
termination of vendor relationships of the U.S. distribution business. The
decrease was offset by declines in inventory of $300,157,000 and in accounts
receivable of $77,613,000, both of which were also primarily related to the
wind-down of the U.S. distribution business excluding software licensing.
Net cash provided by investing activities in 2000 was $132,353,000 and related
to cash proceeds of $14,123,000 from the sale of the Company's El Segundo
building in September 2000, cash proceeds of $1,765,000 from the sale of the
Marlborough, Massachusetts call center in January 2000 and cash proceeds of
$120,593,000 from the sale of MOCA in October 2000.
Net cash used for financing activities in 2000 was $42,730,000 and consisted
primarily of $50,982,000 used to purchase $101,197,000 aggregate principal of
the 12.5% Notes, which was offset by $15,000,000 of proceeds from the issuance
of Convertible Preferred. In addition, $6,807,000 was used to make repayments
under capitalized lease obligations and promissory notes, including $4,057,000
related to the El Segundo building sold in September 2000.
Cash Flows Activity for the Year Ended December 31, 1999
Net cash provided by operating activities of continuing operations during the
year ended December 31, 1999 was $20,553,000. The primary sources of cash
include a decrease in inventory of $99,344,000, a decrease in accounts
receivable of $8,571,000 and a decrease in other prepaid and tax assets. The
inventory decrease resulted in part from a 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 $48,316,000 reduction in accounts
payable and the net loss for the year, excluding the non-cash charges for
depreciation and bad debt provisions. Accounts payable 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 $29,013,000. 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 of continuing operations during the
year ended December 31, 1998 was $53,066,000. The primary sources of cash
include an increase in accounts payable of $126,734,000. The primary uses of
cash were an increase in accounts receivable of $44,269,000 and an increase in
inventory of $52,806,000. The increase in accounts receivable is primarily the
result of increased sales during 1998. The increase in inventory is primarily
attributable 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 in part by proceeds received from the
issuance of common stock.
Debt Obligations, Financing Sources and Capital Expenditures
During 2000, the Company purchased $101,197,000 aggregate principal amount of
its 12.5% Notes for an aggregate cost of $50,982,000. As a result, the Company
recognized an extraordinary gain, net of unamortized debt issuance costs, of
approximately $49,003,000 in 2000. At December 31, 2000, Merisel, Inc. had
outstanding $23,803,000 principal amount of the 12.5% Notes. In January 2001,
the Company purchased an additional $20,175,000 of the 12.5% Notes, reducing the
outstanding balance of the 12.5% Notes to $3,628,000, which were redeemed in
February 2001. As a result, none of the 12.5% Notes remain outstanding and the
Company's obligations under the indenture relating to the 12.5% Notes have been
discharged.
Merisel Americas was party to a Loan and Security Agreement dated as of June 30,
1998 with Bank of America NT&SA, acting as agent, that provided for borrowings
on a revolving basis. In October 2000, the Company cancelled the facility.
The Company has historically obtained a large portion of its working capital
financing under receivables securitization facilities. Under its U.S.
securitization facility, the Company would sell its trade receivables on an
ongoing basis to its wholly owned subsidiary Merisel Capital Funding, Inc.,
which in turn would sell such receivables to a securitization company, yielding
proceeds equal to a percentage of the receivables that had been sold and
remained outstanding at any point in time. In connection with the sale of the
MOCA business to Arrow, the U.S. securitization facility was amended to
terminate MOCA's participation in the facility upon completion of the sale to
Arrow. The amendment also reduced the maximum proceeds available under the
facility to $60 million through November 15, 2000 and to declining amounts
thereafter until the termination of the facility on January 31, 2001. The
Company terminated the facility on November 3, 2000.
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
sold receivables to the securitization company, yielding proceeds of up to
$150,000,000 Canadian dollars at any point in time. The agreement expired on
January 12, 2001, at which date Merisel Canada entered into an agreement
providing for a new financing facility described below.
Under the securitization facilities, the receivables are sold at face value with
payment of a portion of the purchase price being deferred. As of December 31,
2000, the total amount outstanding under the Merisel Canada agreement was
$46,941,000. Fees incurred in connection with the sale of accounts receivable
under all agreements for the years ended December 31, 2000, December 31, 1999
and December 31, 1998 were $11,948,000, $19,744,000, and $17,096,000,
respectively, and are recorded as other expense.
Merisel Canada is party to a Loan Agreement dated as of January 12, 2001 (the
"Loan Agreement") with Congress Financial Corporation (Canada), acting as agent
(the "Agent"), that provides for borrowings on a revolving basis. The Loan
Agreement permits borrowings of up to CDN$100,000,000 outstanding at any one
time (including face amounts of letters of credit), subject to meeting certain
availability requirements under a borrowing base formula and other limitations.
Borrowings under the Loan Agreement are secured by a pledge of substantially all
of Merisel Canada's assets, including inventory and accounts receivable.
Borrowings bear interest at the prime rate of a Canadian bank designated by the
Agent plus 0.75%, for Canadian dollar-denominated loans, at the prime rate of a
U.S. bank designated by the Agent plus 0.25%, for U.S. dollar-denominated loans,
or at LIBOR plus 2% for Eurodollar loans. A fee of 0.25% per annum is payable
with respect to the unused portion of the commitment. The Loan Agreement has a
termination date of January 12, 2004. As of March 30, 2001, CDN$85,583,000 was
outstanding under the Loan Agreement. The Loan Agreement contains various
covenants that provide for, among other things, the maintenance of certain
financial ratios and certain other restrictions.
In June 2000, an affiliate of Stonington Partners, Inc., which owns
approximately 62.4% of the Company's outstanding common stock, purchased 150,000
shares of Convertible Preferred issued by the Company for an aggregate purchase
price of $15 million. The Convertible Preferred provides for an 8% annual
dividend payable in additional shares of Convertible Preferred. Dividends are
cumulative and will accrue from the original issue date whether or not declared
by the Board of Directors. At December 31, 2000, $677,000 of accrued dividends
was recorded.
At December 31, 2000, the Company had $46.9 million in cash and cash
equivalents. At March 30, 2001, the Company had $40.9 million in cash and cash
equivalents, which reflects the receipt of a net $36.25 million additional
payment from Arrow in connection with the sale of MOCA. See "Overview -
Discontinued Operations" above.
With respect to the Company's Canadian distribution business, in the opinion of
management, anticipated cash from operations in 2001, together with trade credit
from vendors and borrowings under Merisel Canada's revolving credit facility,
will be sufficient to meet Merisel Canada's requirements for the next 12 months,
without the need for additional financing or cash contributions from Merisel
Americas. Those requirements include anticipated capital expenditures of less
than CDN$2,000,000 during 2001. This assumes, however, that there are not
material adverse changes in Merisel Canada's relationships with its vendors,
customers or lenders. Any unforeseen event that adversely impacts the industry
or Merisel Canada's position in the industry could have a direct and material
unfavorable effect on the liquidity of Merisel Canada.
With respect to the Company's U.S. operations, the Company has obligations
relating to the wind-down of the U.S. distribution business in addition to
working capital and capital expenditure requirements related to its software
licensing and Optisel businesses. The Company expects that expenditures related
to the wind-down will consume a substantial amount of the Company's cash balance
at March 31, 2001 and believes the aggregate amount could be as high as $15
million to $20 million. A large portion of those expenditures will be made in
2001. The Company presently anticipates that capital expenditures for its
Optisel and software licensing businesses will be between $4.0 million and $7.0
million for 2001. Management believes that, with its current cash, expected
revenues and cash flow from U.S. operations, and its ability to reduce operating
expenses, it has sufficient liquidity for the next 12 months.
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's Canadian distribution business 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 few years, certain major PC manufacturers have reduced the availability of
price protection for distributors. 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 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 program. 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. 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, 2000, the Company had cash investments of $45,131,000 held in
overnight, interest-bearing accounts invested through high-credit quality
financial institutions.
Foreign Currency Risk
The Company purchases forward dollar contracts to hedge commitments to acquire
inventory for sale and to hedge short-term advances to its Canadian subsidiary.
The Company does not use the contracts for speculative or trading purposes. At
December 31, 2000, the Company had seven short-term U.S. dollar forward
contracts with a face value of approximately $22,000,000 outstanding. The size
of the contracts ranged from $500,000 to $10,726,000 with a weighted average
contract value of approximately $3,100,000. Forward rates on the contracts
ranged from 1.520 to 1.549 with the weighted average forward rate approximating
1.542. The contracts matured at various dates in January 2001.
Long-term Debt
With respect to its outstanding debt, the Company 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, 2000, including
principal amounts maturing each year, average interest rate and fair value. All
of such debt was redeemed during the quarter ended March 31, 2001.
Total
2001 2002 2003 2004 Total Fair Value
---- ---- ---- ---- ----- ----------
12.5% Senior Notes 23,803,000 0 0 0 23,803,000 20,930,557
Average Interest Rate 12.5% 12.5% 12.5% 12.5% 12.5%
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, 2000, the total amount outstanding under the
Canadian asset securitization agreement was $46,941,000 and the average cost of
securitization was approximately 5.02%. During 2000, the total amount
outstanding under this agreement averaged $63,806,000, and the weighted average
cost of securitization was 6.46%.
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, 1999 and 2000, 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, 2000. 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 and the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
financial position of Merisel, Inc. and subsidiaries at December 31, 1999 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1, during the year ended December 31, 2000 the Company
decided to cease activities associated with virtually all of its United States
distribution business excluding software licensing. Additionally, as discussed
in Note 5, the Company sold its MOCA business unit effective October 27, 2000.
The gain on the sale and results of operations of MOCA prior to the sale are
included in discontinued operations in the accompanying consolidated statements
of operations.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 12, 2001
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1999 2000
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 57,557 $ 46,865
Accounts receivable (net of allowances of $12,974 and $25,218 at December 152,631 34,364
31, 1999 and 2000, respectively).............................................
Inventories.................................................................... 364,438 60,859
Prepaid expenses and other current assets....................................... 9,433 4,258
Deferred income taxes........................................................... 914 880
Net assets of discontinued operations........................................... 43,136
---------- ---------
Total current assets....................................................... 628,109 147,226
Property and equipment, net.......................................................... 83,885 27,054
Cost in excess of net assets acquired, net........................................... 23,755 3,666
Other assets 457 335
---------- ---------
Total assets.................................................................... $ 736,206 $ 178,281
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 474,859 $ 99,057
Accrued liabilities............................................................. 33,004 40,640
Long-term debt and capitalized lease obligations--current....................... 2,906 1,363
---------- ---------
Total current liabilities.................................................. 510,769 141,060
Long-term debt....................................................................... 128,900 23,803
Capitalized lease obligations........................................................ 1,364
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value; authorized 1,000,000 shares;
150,000 shares issued and outstanding........................................ 15,677
Common stock, $.01 par value; authorized 15,000,000 shares; issued and
outstanding 8,027,881 and 8,030,905 shares at December 31, 1999 and
2000,
respectively................................................................. 803 803
Additional paid-in capital...................................................... 282,492 281,896
Accumulated deficit............................................................. (179,663) (275,450)
Accumulated other comprehensive loss............................................ (8,459) (9,508)
---------- ---------
Total stockholders' equity................................................. 95,173 13,418
---------- ---------
Total liabilities and stockholders' equity...................................... $ 736,206 $ 178,281
========== =========
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,
1998 1999 2000
Net sales.......................................................... $ 3,937,930 $ 4,231,396 $ 2,093,529
Cost of sales...................................................... 3,721,651 4,046,094 2,020,111
------------ ------------ ------------
Gross profit....................................................... 216,279 185,302 73,418
Selling, general and administrative expenses....................... 180,090 211,990 176,752
Restructuring charge............................................... 3,200 17,636
Impairment losses.................................................. 3,800 52,833
Litigation-related charge.......................................... 12,000
------------ ------------ ------------
Operating income (loss)............................................ 36,189 (45,688) (173,803)
Interest expense, net.............................................. 17,125 17,849 10,920
Other expense, net................................................. 17,096 21,926 5,382
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and extraordinary item......................... 1,968 (85,463) (190,105)
Income tax provision............................................... 417 939 620
Income (loss) from continuing operations
before extraordinary item.......................................... 1,551 (86,402) (190,725)
Discontinued operations:
Income from discontinued operations............................. 16,959 25,234 20,757
Gain on sale of discontinued operations......................... 25,178
------------ ------------ ------------
Income (loss) before extraordinary item 18,510 (61,168) (144,790)
Extraordinary gain on extinguishment of debt 49,003
------------ ------------ ------------
Net income (loss).................................................. $ 18,510 $ (61,168) $ (95,787)
============ ============ ===========
Net income (loss) per share (basic and diluted):
Income (loss) from continuing operations before extraordinary items
available to common stockholders................................ $ .19 $ (10.76) $ (23.83)
Discontinued operations:
Income from operations.......................................... 2.11 3.14 2.58
Gain on sale.................................................... 3.14
Extraordinary gain................................................. 6.10
------------ ------------ ------------
Net income (loss)available to common stockholders.................. $ 2.30 $ (7.62) $ (12.01)
============ ============ ===========
Weighted average number of shares:
basic........................................................... 8,021 8,028 8,031
diluted......................................................... 8,049 8,028 8,031
============ ============ ===========
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
Preferred Stock Common Stock Paid-in Accumulated Comprehensive Comprehensive
Shares Amount Shares Amount Capital Deficit Loss Total Income
-------- -------- -------- ------ -------- --------- ----------- ------ -------------
Balance at December 31, 1997 8,007,850 $ 801 $ 281,701 $ (137,005) $ (7,989) $137,508
Exercise of stock options
and other................ 19,418 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 8,027,268 803 282,380 (118,495) (10,435) 154,253
Exercise of stock options
and other................ 613 112 112
Comprehensive Income:
Translation adjustment.. 1,976 1,976 $ 1,976
Net income........... (61,168) (61,168) (61,168)
-----------
Total Comprehensive Loss $ (59,192)
-------- -------- -------- ------ -------- --------- ----------- -------- =========
Balance at December 31, 1999 8,027,881 803 282,492 (179,663) (8,459) 95,173
Sale of convertible
preferred stock........ 150,000 $15,000 15,000
Accrual of convertible
preferred stock
dividend............. 677 (677)
Exercise of stock options
and other............ 3,024 81 81
Comprehensive Income:
Translation adjustment (1,049) (1,049) $ (1,049)
Net loss............. (95,787) (95,787) (95,787)
--------
Total Comprehensive Loss.. $(96,836)
-------- -------- -------- ------ -------- --------- ----------- -------- =========
Balance at December 31,
2000 150,000 $15,677 8,030,905 $803 $281,896 $(275,450) $(9,508) $13,418
======== ======== ======== ======= ======== ========= =========== ========
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1998 1999 2000
-------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 18,510 $ (61,168)$ (95,787)
Less: income from discontinued operations, net.............................. 16,959 25,234 20,757
Income (loss) from continuing operations.................................... 1,551 (86,402) (116,544)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization........................................... 10,825 22,115 19,290
Provision for doubtful accounts......................................... 12,585 14,442 38,991
Impairment losses....................................................... 3,800 52,833
Deferred income taxes................................................... (221) 2 34
Gain on sale of property and equipment.................................. (65) (10,575)
Gain on sale of MOCA.................................................... (25,178)
Restricted stock units compensation expense............................. 100 22
Extraordinary gain on extinguishment of debt............................ (49,003)
Changes in assets and liabilities
Accounts receivable................................................. (44,269) 8,571 77,613
Inventories......................................................... (52,806) 99,344 300,157
Prepaid expenses and other current assets........................... 4,825 3,854 5,244
Accounts payable.................................................... 126,734 (47,221) (371,382)
Accrued liabilities................................................. (6,158) 2,012 7,734
------------ --------- -----------
Net cash provided by (used for) operating activities............ 53,066 20,552 (70,764)
------------ --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (50,067) (29,013) (4,628)
Proceeds from sale of MOCA.................................................. 120,593
Proceeds from sale of property and equipment................................ 16,388
------------ --------- -----------
Net cash (used for) provided by investing activities............. (50,067) (29,013) 132,353
------------ --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit................................... 75,401 464,701 40,000
Repayments under revolving line of credit................................... (75,401) (464,701) (40,000)
Proceeds from issuance of convertible preferred stock....................... 15,000
Purchase of bonds........................................................... (50,982)
Repayments under other financing arrangements............................... (1,572) (3,157) (6,807)
Net proceeds from the issuance of convertible notes.........................
Proceeds from issuance of common stock...................................... 681 12 59
------------ --------- -----------
Net cash used for financing activities.......................... (891) (3,145) (42,730)
------------ --------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (2,216) 852 641
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
OF CONTINUING OPERATIONS........................................................ (106) 21,216 (10,692)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 36,447 36,341 57,557
------------ --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD YEAR.................................. $ 36,341 $ 57,557 $ 46,865
============ ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid(received) during the year for:
Interest..................................................................... $ 14,698 $ 18,571 $ 15,064
Income taxes................................................................ 655 309 (1,751)
Noncash activities:
Capital lease obligations entered into...................................... 4,480 670
Sale of property for note receivable........................................ 500
Preferred dividend accrued.................................................. 677
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 and 2000
1. Summary of Significant Accounting Policies
General-- 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"). 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, which
resulted in the Company's operations being focused exclusively in the United
States and Canada and consisting of three distinct business units: United States
distribution, Canadian distribution and the Merisel Open Computing Alliance
("MOCA"). Effective as of October 27, 2000, the Company completed the sale of
its MOCA business unit to Arrow Electronics, Inc. ("Arrow"). Additionally, on
December 14, 2000, the Company announced that the U.S. distribution business
would focus solely on software licensing and that the balance of the U.S.
distribution business would be wound down. On November 10, 2000, the Company
acquired substantially all the e-services assets of Value America, Inc. ("Value
America") through the Company's newly formed subsidiary Optisel, which will
leverage the Company's distribution and logistics capabilities to operate an
e-services and logistics business. As a result, Merisel today operates a
Canadian distribution business, a U.S. software licensing business and Optisel.
The consolidated financial statements retroactively reflect the effect of the
one-for-ten reverse stock split, which was effective February 14, 2001.
Accordingly, all disclosures involving the number of shares of Merisel common
stock outstanding, issued or to be issued, and all per share amounts,
retroactively reflect the impact of the reverse stock split.
Management's Plan--As stated previously, on December 14, 2000, the Company
announced its decision to wind down virtually all of its U.S. distribution
business, excluding software licensing. As a result of that decision and the
previous sale of MOCA, the Company's current operations consist primarily of its
Canadian distribution business, a new logistics and e-services business
operating as Optisel which includes the fulfillment of fee-based services
provided to MOCA under a transition services agreement that currently expires in
July 2001, but is extendible through October 2001, and a software licensing
distribution business. Primarily as a result of the Company's decision to wind
down its U.S. distribution business as well as the poor operating performance
experienced by the Canadian distribution business and the United States
distribution business prior to the decision to wind down its operations, the
Company incurred a net loss of $95,787,000 in 2000 which increased its
accumulated deficit to $275,450,000 at December 31, 2000.
The Company has developed an operating plan for 2001 that focuses upon returning
its Canadian distribution business to profitability, maximizing cash in winding
down its U.S. distribution business, and prudently investing in the further
development of Optisel and its software licensing business. At December 31,
2000, the Company had approximately $46,865,000 of cash and cash equivalents on
hand. Further, on January 12, 2001, the Company entered into a new
CDN$100,000,000 Loan Agreement with Congress Financial Corporation to support
the financing and operating needs of its Canadian distribution business. On
March 19, 2001, the Company received an additional $36,250,000 of cash in
connection with the sale of MOCA. Management believes that, with its cash on
hand, anticipated cash from operations, trade credit from vendors, borrowings
under Merisel Canada's revolving credit facility and, primarily with respect to
its U.S. operations, its ability to reduce operating expenses, it will have
sufficient cash flow and working capital to meet the Company's future operating
needs and cash requirements through December 31, 2001.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the wind-down of the U.S. distribution business, the Company has
made certain estimates as to the carrying value of assets and liabilities. The
most significant estimates relate to the collection of accounts receivable and
the recoverability of inventory and vendor-related receivables. At December 31,
2000, the Company has recorded accounts receivable, inventory and vendor-related
reserves associated with its U.S. distribution business of $11,466,000,
$8,034,000 and $28,719,000. In the opinion of management, these reserves
appropriately adjust these assets to their net realizable values.
Risks and Uncertainties--The Company believes that the diversity and breadth of
its products, services and customers in its Canadian distribution business
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 that business. Although Merisel Canada regularly stocks
products and accessories supplied by approximately 110 manufacturers, 58% of the
Company's net sales for its Canadian businesses in 2000 were derived from
products supplied by its ten largest vendors.
Use of Estimates--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,
accounts payable, sales returns and recoverability of long-term assets.
New Accounting Pronouncements--Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, will be required to be recorded on the balance
sheet at fair value. If the derivative is designated in a fair-value hedge,
changes in the fair value of the derivative and the hedged value will be
recognized currently in earnings. If the derivative is designated in a cash-flow
hedge, changes in the fair value of the derivative will be recorded in other
comprehensive income ("OCI") and then recognized in the income statement when
the hedged item affects earnings. SFAS 133 defines new requirements for
designation and documentation of hedging relationships as well as ongoing
effectiveness assessments in order to use hedge accounting. For a derivative
that does not qualify as a hedge, changes in fair value will be recognized
currently in earnings. The Company expects that at January 1, 2001, it will
record approximately $700,000 as a cumulative transition adjustment relating to
the adoption of SFAS 133.
In 2000, the Company adopted the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," SAB 101 summarized certain of the SEC's views on the application of
generally accepted accounting principles to revenue recognition. There was no
material impact upon the consolidated financial statements as a result of this
adoption.
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 vendors. The allowances for sales returns and costs of customer
incentive programs are accrued concurrently with the recognition of revenue.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents. The Company invests excess cash in interest bearing accounts.
Interest expense for 2000, 1999 and 1998 is net of interest income of
$3,400,000, $1,804,000 and $1,743,000, respectively.
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 Compuserve, a Canadian division of
Microamerica, Inc. Accumulated amortization was $1,874,000 and $1,910,000 as of
December 31, 1999 and 2000, 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 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.
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 $2,872,000 as of December 31, 2000 and less
than its carrying value by approximately $47,500,000 as of December 31, 1999.
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.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Canadian and U.S. 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. As of December 31, 1999 and
2000, there were approximately $65,380,000 and $22,000,000, respectively in
outstanding foreign exchange contracts. In 1998, 1999, and 2000, the Company
recorded net foreign currency transaction losses of $1,885,000, $264,000 and
$946,000, 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-week period ending on the
Saturday nearest to December 31 and its fiscal quarters are the 13-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.
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 Charges
During the third quarter of 2000, the Company announced plans that it would
reduce its workforce by approximately 1,000 full-time positions. As a result,
the Company recorded a restructuring charge of $10,964,000. Approximately
$7,098,000 of the charge consists of termination benefits including severance
pay and outplacement services to be provided to those employees that were
involuntarily affected by the reduction in workforce. The charge also reflects
approximately $3,866,000 of lease termination fees related to the planned
closure of certain warehouses and offices.
On December 14, 2000, the Company announced its plan to wind down virtually all
of its U.S. distribution business. Pursuant to this plan, the Company recorded a
restructuring charge of $6,672,000. Approximately $921,000 of the charge
consists of termination benefits and $5,751,000 relates to lease termination,
facility closures, and other costs for all but two of the Company's United
States locations.
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 distribution
business unit, and by the realignment of finance and administrative functions.
As a result, the Company recorded a restructuring charge of $3,200,000 in the
fourth quarter of 1999 that primarily consisted of termination benefits
including severance pay and outplacement services to be provided to those
employees that were involuntarily affected by the reduction in workforce.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2000, $13,743,000 of total restructuring costs had not been
paid and were included in accrued liabilities on the balance sheet. The
following table displays the activity and balances of the restructuring reserve
account from December 31, 1999 to December 31, 2000:
December 31, 3rd Quarter 4th Quarter December 31, 2000
1999 Restructuring Restructuring Payments Balance
Balance Charges Charges
Type of cost:
Severance and related costs 2,740 7,098 921 (5,545) 5,214
Facility, lease and other 460 3,866 5,751 (1,548) 8,529
----------------- ------------------- ------------------ ----------------- -------------------
Total 3,200 10,964 6,672 (7,093) 13,743
================= =================== ================== ================= ===================
4. Impairment Losses
As a result of the Company's decision to wind down its U.S. distribution
business and the previous sale of MOCA, the Company's Canadian distribution and
software licensing businesses represent the only significant on-going businesses
utilizing the Company's SAP operating system. The carrying value of SAP was
greater than the estimated undiscounted operating cash flows expected to result
from these ongoing businesses over the remaining expected life of SAP. As such,
in 2000 the Company recorded an impairment charge of $20,808,000 to adjust SAP
to its estimated fair market value using a discounted cash flow model.
Also in 2000, as a result of continuing losses, the Company reviewed the
recoverability of certain identifiable intangible assets to determine if there
had been any impairment. The review of the Company's intangible assets indicated
that the excess of cost over net assets acquired related to the U.S.
distribution business was impaired. Accordingly, the Company recorded an
impairment loss totaling $19,487,000, representing the unamortized goodwill
attributable to the U.S. distribution business.
In both the quarter ended September 30, 2000 and the quarter ended December 31,
2000, the Company announced restructuring plans that significantly reduced its
facilities and workforce. In relation to this, the Company evaluated the fixed
asset investments that supported these former facilities and personnel and
recorded a $12,538,000 impairment charge related to redundant and no longer used
assets. A $3,800,000 impairment charge was also recorded in 1999 related to
redundant and no longer used assets pursuant to a restructuring plan announced
in the fourth quarter of 1999.
5. Discontinued Operations
Effective as of October 27, 2000, the Company completed the sale to Arrow of its
MOCA business unit, which provides enterprise-class solutions for Sun
Microsystems servers and the Solaris operating system to authorized resellers.
The stock sale agreement pursuant to which the sale was made provided for a
purchase price of $110 million, subject to adjustments based on changes in
working capital reflected on the closing balance sheet of Merisel Open Computing
Alliance, Inc., plus an additional amount up to $37,500,000 payable by the end
of March 2001 based upon MOCA's ability to retain existing and gain additional
business (the "Additional Payment"). The actual purchase price (excluding the
Additional Payment but including amounts received as deferred purchase price
payments) was approximately $179.8 million of which approximately $57.5 million
was for amounts outstanding under the Merisel asset securitization facility.
Based on the purchase price the Company realized a gain, net of costs associated
with the sale, of approximately $25.2 million. In March 2001 the Company
received an Additional Payment of $37,500,000 which, after deducting certain
obligations relating to the payment, netted $36,250,000, which will be recorded
in the quarter ended March 31, 2001.
In connection with the sale, Merisel and Arrow entered into a fee-based
transition services agreement pursuant to which Merisel provides logistics
management, order processing, configuration and information technology services.
The agreement had an initial term of six months but has been extended through
July 27, 2001, and is extendible at Arrow's option through October 31, 2001 and
beyond with mutual agreement of the parties.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has reclassified its consolidated financial statements to reflect
the sale of the MOCA business and to segregate the revenues, direct costs and
expenses (excluding allocated costs), assets and liabilities, and cash flows of
the MOCA business. The net operating results, net assets and net cash flows of
this business have been reported as "Discontinued Operations" in the
accompanying consolidated financial statements.
Summarized financial information for the discontinued operations is as follows:
1998 1999 2000 (1)
--------------- -------------- -------------
Net Sales $613,047 $957,283 $796,184
Cost of Sales 576,902 901,532 744,017
--------------- -------------- -------------
Gross Profit 36,145 55,751 52,167
Selling, General & Administrative Expenses 15,378 23,481 24,084
--------------- -------------- -------------
Operating Income 20,767 32,270 28,083
Other Expense 3,808 7,036 7,326
--------------- -------------- -------------
Net Income $16,959 $25,234 $20,757
=============== ============== =============
(1) Year 2000 data is for January through October 2000.
At December 31,
1999
---
Current Assets $112,001
Total Assets 112,725
Current Liabilities 69,589
Total Liabilities 69,589
Net assets of discontinued operations 43,136
6. Extraordinary Gain on Debt Extinguishment
In thirteen separate transactions in 2000, the Company purchased $101,197,000
aggregate principal amount of its outstanding 12-1/2% Senior Notes due 2005 (the
"12.5% Notes"). The aggregate cost to purchase the 12.5% Notes was $50,982,000
and, as a result, the Company recognized an extraordinary gain, net of
unamortized debt issuance costs, of $49,003,000 in the year ended December 31,
2000.
In the first quarter of 2001, the Company purchased or redeemed the remaining
$23,803,000 principal amount of 12.5% Notes outstanding at an aggregate purchase
price of $20,931,000, resulting in an extraordinary gain of $2,872,000.
7. Preferred Stock
In June 2000, an affiliate of Stonington Partners, Inc., which owns
approximately 62.4% of the Company's outstanding common stock, purchased 150,000
shares of convertible preferred stock (the "Convertible Preferred") issued by
the Company for an aggregate purchase price of $15 million. The Convertible
Preferred provides for an 8% annual dividend payable in
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
additional shares of Convertible Preferred. Dividends are cumulative and will
accrue from the original issue date whether or not declared by the Board of
Directors. At December 31, 2000, $677,000 of accrued dividends was recorded.
At the option of the holder, the Convertible Preferred is convertible into the
Company's common stock at a per share conversion price of $17.50. At the option
of the Company, the Convertible Preferred can be converted into Common Stock
when the average closing price of the Common Stock for any 20 consecutive
trading days is at least $37.50. At the Company's option, on or after June 30,
2003, the Company may redeem outstanding shares of the Convertible Preferred
initially at $105 per share and declining to $100 on or after June 30, 2008,
plus accrued and unpaid dividends. In the event of a defined change of control,
holders of the Convertible Preferred have the right to require the redemption of
the Convertible Preferred at $101 per share plus accrued and unpaid dividends.
8. Acquisitions
On November 10, 2000, the Company acquired substantially all of the e-services
assets and assumed certain liabilities of Value America for $2,375,000. The
Company accounted for the acquisition as a purchase and the purchase price has
been allocated to the acquired assets and liabilities. Pro forma income
statement information for this acquisition has not been provided as the
financial statement impact is not significant.
9. Sale of Accounts Receivable
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
sold receivables to the securitization company, yielding proceeds of up to
$150,000,000 Canadian dollars at any point in time. The agreement expired on
January 12, 2001, at which date Merisel Canada entered into an agreement
providing for a new financing facility with Congress Financial Corporation. (see
Note 12 ).
Under an agreement that was fully terminated on November 3, 2000, the Company's
wholly owned subsidiary Merisel Americas sold 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, sold such receivables to the securitization company on an ongoing basis.
Merisel Capital Funding's sole business was the purchase of trade receivables
from Merisel Americas and Merisel Open Computing Alliance, Inc., upon the
commencement of MOCA's operations as a separate subsidiary on April 3, 2000.
Under the securitization facilities, the receivables were sold at face value
with payment of a portion of the purchase price being deferred. As of December
31, 2000 and 1999, the total amount outstanding under these agreements was
$46,941,000 and $370,059,000, respectively. Fees incurred in connection with the
sale of accounts receivable under these agreements for the years ended December
31, 2000, 1999 and 1998 were $11,948,000, $19,744,000, and $17,096,000,
respectively, and are recorded as other expense.
10. Property and Equipment
Property and equipment consisted of the following (in thousands):
Estimated
Useful
Life December 31,
(in Years)
----------------------------
1999 2000
------------ -------------
Land............................................... $ 3,324 $ 883
Buildings.......................................... 20 9,011 3,331
Equipment and computer hardware and software....... 3 to 7 128,084 79,476
Furniture and fixtures............................. 3 to 5 8,917 6,993
Leasehold improvements............................. 3 to 20 11,078 5,088
Construction in progress........................... 2,953 253
------------ -------------
Total.............................................. 163,367 96,024
Less accumulated depreciation and amortization..... (79,482) (68,970)
------------ -------------
Property and equipment, net........................ $ 83,885 $ 27,054
============ =============
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
The components of income (loss) from continuing operations before income taxes
consisted of the following (in thousands):
For the Years Ended December 31,
1998 1999 2000
----------- ------------ -----------
Domestic............................... $ 2,702 $ (86,499) $ (170,238)
Foreign................................ (734) 856 (19,867)
----------- ------------ -----------
Total.................................. $ 1,968 $ (85,643) $ (190,105)
=========== ============ ===========
The (benefit) provision for income taxes consisted of the following (in
thousands):
For the Years Ended December 31,
1998 1999 2000
----------- ------------ -----------
Current:
State.................................. $ 360 $ 457 $ 302
Foreign................................ 278 531 284
----------- ------------ -----------
Total Current.......................... 638 988 586
----------- ------------ -----------
Deferred:
Foreign................................ (221) (49) 34
----------- ------------ -----------
Total deferred......................... (221) (49) 34
----------- ------------ -----------
Total provision........................ $ 417 $ 939 $ 620
=========== ============ ===========
Deferred income tax liabilities and assets were comprised of the following (in
thousands):
December 31,
1999 2000
----------- -----------
Net operating loss.......................... $ 72,614 $ 91,724
Expense accruals............................ 14,552 45,556
State taxes................................. 43 904
Property and goodwill....................... (13,283) (12,208)
----------- -----------
73,926 125,976
Valuation allowances........................ (73,012) (125,096)
----------- -----------
Total.................................. $ 914 $ 880
=========== ===========
Net deferred tax asset........................... $ 914 $ 880
=========== ===========
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The major elements contributing to the difference between the federal statutory
tax rate and the effective tax rate on income from continuing operations are as
follows:
For the Years Ended
December 31,
---------------------------------------------
1998 1999 2000
Statutory rate.............................................. 35.0% (35.0)% (35.0)%
Change in valuation allowance............................... (51) 35.8 34.5
State income taxes, less effect of federal deduction........ 11.3 .4 .6
Goodwill amortization....................................... 5.6 .4 .3
Foreign losses with benefits at less than statutory rate.... 13.4 .1
Utilization of net operating losses of foreign subsidiary... 2.9 (.6)
Other....................................................... 4.0 (.1)
------------ ------------- -----------
Effective tax rate.......................................... 21.2% 1.1% .3%
============ ============= ===========
In 1997 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, 1999 and 2000, the Company had available
U.S. Federal net operating loss carryforwards of $181,795,000 and $216,616,000,
after adjusting for the estimated limitation, which expire at various dates
beginning December 31, 2012. As of December 31, 2000, $89,408,000 of the net
operating loss carryforwards is restricted as a result of the ownership change
and $127,208,000 is not. The restricted net operating loss is limited to
$7,476,000 per year.
12. Debt
At December 31, 2000, Merisel, Inc. had outstanding $23,803,000 principal amount
of the 12.5% Notes. In January 2001, the Company purchased an additional
$20,175,000 principal amount of the 12.5% Notes, reducing the outstanding
balance of the 12.5% Notes to $3,628,000, which were redeemed in February 2001.
As a result, none of the 12.5% Notes remain outstanding and the Company's
obligations under the indenture relating to the 12.5% Notes have been
discharged.
In January 2001, Merisel Canada entered into an agreement for a new revolving
credit facility. (see "Subsequents Events - Note 17")
13. 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 $4,556,000 in
2001, $3,965,000 in 2002, $2,617,000 in 2003, $1,473,000 in 2004, $112,000 in
2005 and $479,000 thereafter. Certain of the leases contain inflation escalation
clauses and requirements for the payment of property taxes, insurance, and
maintenance expenses. Rent expense for 1998, 1999 and 2000 was $9,131,000,
$10,177,000 and $9,373,318, respectively.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
1999 2000
---- ----
Computer equipment...................................... $5,445,000 $5,560,000
Less accumulated depreciation........................... 2,370,000 4,266,000
------------------ -------------------
Total................................................. $3,075,000 $1,294,000
================== ===================
Future minimum payments for capitalized leases were as follows at
December 31, 2000.
2001.......................................................... $1,424,000
Less amount representing interest............................. 61,000
--------------------
Present value of net minimum lease payments................... $1,363,000
====================
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.
The Company is involved in certain legal proceedings arising in the ordinary
course of business, none of which is expected to have a material impact on the
financial condition or results of operations of Merisel.
14. Employee Stock Options and Benefit Plans
On December 19, 1997, the Company's stockholders approved the Merisel Inc. 1997
Stock Award and Incentive Plan (the"Stock Award and Incentive Plan"). Under the
Stock Award and Incentive Plan, incentive stock options and nonqualified stock
options as well as other stock-based awards may be granted to employees,
directors, and consultants. The plan authorized the issuance of an aggregate of
800,000 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, 2000, 426,261 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, 2000, 33,507 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, 5,000 shares are
reserved for issuance under the Company's 1992 Stock Option Plan for
Non-Employee Directors. During 1999, the Company issued 51,500 restricted stock
units to certain employees under the Stock Award and Incentive Plan. As of
December 31, 2000, there were 16,000 restricted stock units outstanding. 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
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock issuable in respect of the units, totaled $245,000 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 and 2000, the Company
recorded approximately $100,000 and $22,000 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,
2000:
1998 1999 2000
---------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exer. Price Shares Exer. Price Shares Exer. Price
------------ -------------- -------- ------------- ---------- --------------
Outstanding at
Beginning of year 667,353 41.00 594,715 37.90 549,410 34.40
Granted 58,340 32.90 69,125 5.20 170,350 21.32
Exercised (7,775) 21.60 (615) 20.10 (3,025) 19.83
Canceled (123,203) 53.20 (113,815) 35.00 (353,552) 30.75
Outstanding at end
of year 594,715 37.90 549,410 34.40 363,183 31.87
------------- ---------- ------------
Weighted average fair
value at date of grant
of options granted
during the year
$21.30 $16.10 $11.73
------------- ---------- ------------
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at 12/31/00 In Years Price at 12/31/00 Price
------------------- ------------- ----------- ----------- -------------- ------------
$30.0000 to $30.0000 2,615 1 $3.0000 2,615 $30.0000
$0.0000 to $113.7500 16,200 2 $1.4043 200 $113.7500
$117.5000 to $117.5000 200 3 $117.5000 200 $117.5000
$150.0000 to $150.0000 200 4 $150.0000 200 $150.0000
$58.7500 to $63.1250 1,950 5 $62.6763 1,950 $62.6763
$18.7500 to $26.2500 4,175 6 $21.8151 4,175 $21.8151
$16.2500 to $43.1000 239,675 7 $37.6178 237,180 $37.8291
$26.8750 to $40.6000 9,995 8 $38.4723 7,075 $39.0352
$20.0000 to $21.8750 1,673 9 $20.2802 1,004 $20.1177
$17.5000 to $22.1880 86,500 10 $20.4989 30,000 $17.5000
------------ -------------
$0.0000 to $150.0000 363,183 284,599
============ =============
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 1998, 1999 and 2000 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and income (loss)
per share would have been adjusted to the pro forma amounts indicated below:
(In thousands, except per share amounts)
1998 1999 2000
--------- --------- --------
Net Income (Loss) - As Reported $18,510 $(61,168) $(95,787)
Net Income (Loss) - Pro Forma $18,204 $(61,249) $(95,894)
Net Income (Loss) Per Share (Basic & Diluted)
As Reported $ 2.30 $(7.62) $(12.01)
Pro Forma $ 2.26 $(7.63) $(12.02)
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option granted during 1998, 1999 and 2000 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1998 1999 2000
----------- ------------ ---------
Expected life 5.0 5.0 5.0
Expected volatility 76.97% 76.78% 89.18%
Risk-free interest rate 5.35% 5.81% 6.34%
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 $892,000, $1,250,000
and $840,070 to the plan during the years ended December 31, 1998, 1999 and
2000, respectively. The contributions to the 401(k) plan were in the form of
cash, which was used to purchase shares of the Company's common stock on the
open market.
15. Segment Information
The Company implemented SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), which 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. As
described in Note 5, effective October 27, 2000, the Company completed the sale
of its MOCA business segment. MOCA has been treated as a discontinued operation
in the accompanying financial statements. The segment data included below has
been restated to exclude amounts related to the MOCA business unit. As described
in Note 8, on November 10, 2000, the Company, through its wholly owned
subsidiary Optisel, Inc., acquired substantially all of the e-services assets of
Value America. Optisel has a separate management team and strategy and has been
determined to be an operating segment under SFAS 131.
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.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000
(in thousands)
---------------------------------------------------------------------
US Canada Optisel (1) Eliminations Total
Net sales to external customers1,431,726 660,216 1,587 2,093,529
Depreciation and amortization 17,588 1,502 200 19,290
Operating loss (158,235) (13,950) (1,618) (173,803)
Long-lived Assets 7,968 20,512 2,575 31,055
Total segment assets 67,199 108,454 2,628 178,281
Capital expenditures 1,701 152 2,775 4,628
1999
(in thousands)
---------------------------------------------------------------------
US Canada Optisel Eliminations Total
Net sales to external customers3,305,026 926,370 4,231,396
Depreciation and amortization 20,364 1,751 22,115
Operating profit (54,787) 9,099 (45,688)
Long-lived Assets 100,443 7,654 108,097
Total segment assets 1,105,180 185,959 (554,933) 736,206
Capital expenditures 27,910 1,103 29,013
1998
(in thousands)
---------------------------------------------------------------------
US Canada Optisel Eliminations Total
Net sales to external customers3,098,261 839,668 3,937,929
Depreciation and amortization 8,915 1,910 10,825
Operating profit 28,182 8,007 36,189
Long-lived Assets 95,639 8,837 104,476
Total segment assets 1,311,466 180,234 (657,242) 834,458
Capital expenditures 44,505 5,562 50,067
(1) Optisel's assets are located in the United States.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. 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 tables reconcile the weighted average shares used in the
computation of basic and diluted EPS and income available to common stockholders
for the income statement periods presented herein:
(in thousands)
For the Years Ended
December 31,
Weighted average shares outstanding 1998 1999 2000
- ----------------------------------- ---- ---- ----
Basic 8,021 8,028 8,031
Assumed exercises of stock options 28
Diluted 8,049 8,028 8,031
========== ========= =========
1998 1999 2000
--------------- --------------- ---------------
Income(Loss) from continuing operations $1,551 ($86,402) $(190,725)
Preferred stock dividends (677)
--------------- --------------- ---------------
Loss available to common stockholders 1,551 (86,402) (191,402)
Income from discontinued operations 16,959 25,234 20,757
Gain on sale of discontinued operations 25,178
Extraordinary gain on extinguishment of debt 49,003
--------------- --------------- ---------------
Net Income (Loss) available to common stockholders $18,510 ($61,168) $(96,464)
=============== =============== ===============
17. Subsequent Events
Merisel Canada is party to a Loan Agreement dated as of January 12, 2001 (the
"Loan Agreement") with Congress Financial Corporation (Canada), acting as agent
(the "Agent"), that provides for borrowings on a revolving basis. The Loan
Agreement permits borrowings of up to CDN$100,000,000 outstanding at any one
time (including face amounts of letters of credit), subject to meeting certain
availability requirements under a borrowing base formula and other limitations.
Borrowings under the Loan Agreement are secured by a pledge of substantially all
of Merisel Canada's assets, including inventory and accounts receivable.
Borrowings bear interest at the prime rate of a Canadian bank designated by the
Agent plus 0.75%, for Canadian dollar-denominated loans, at the prime rate of a
U.S. bank designated by the Agent plus 0.25%, for U.S. dollar-denominated loans,
or at LIBOR plus 2% for Eurodollar loans. A fee of 0.25% per annum is payable
with respect to the unused portion of the commitment. The Loan Agreement has a
termination date of January 12, 2004. As of March 30, 2001, CDN$85,583,000 was
outstanding under the Loan Agreement. The Loan Agreement contains various
covenants that provide for, among other things, the maintenance of certain
financial ratios and certain other restrictions.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Quarterly Financial Data (Unaudited)
Selected financial information for the quarterly periods for the fiscal years
1999 and 2000 is presented below (in thousands, except per share amounts):
1999
---------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ------------- ------------- -------------
Net sales $1,049,284 $999,191 $1,100,712 $1,082,209
Gross profit 53,176 45,056 47,148 39,922
Net loss from continuing operations (24,474) (9,757) (17,637) (34,534)
Income from discontinued operations 3,965 6,773 5,921 8,575
Net loss (20,509) (2,984) (11,716) (25,959)
Net income (loss) per share (basic and diluted):
Net loss from continuing operations (3.05) (1.22) (2.20) (4.30)
Income from discontinued operations 0.49 0.84 0.74 1.07
Net loss (2.55) (.37) (1.46) (3.23)
2000
---------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ------------- ------------- -------------
Net sales $904,565 $628,283 $399,480 $161,201
Gross profit 39,423 25,344 419 8,232
Net loss from continuing operations (21,166) (47,737) (57,474) (64,348)
Discontinued operations before extraordinary item:
Income from discontinued operations 7,719 9,183 3,228 627
Gain on sale of discontinued operations 25,178
Loss before extraordinary item (13,447) (38,554) (54,246) (38,543)
Extraordinary gain on extinguishment of debt 21,656 10,514 16,833
Net loss (13,447) (16,898) (43,732) (21,710)
Net income (loss) per share (basic and diluted):
Net loss from continuing operations (2.64) (5.94) (7.15) (8.10)
Discontinued operations:
Income from discontinued operations 0.96 1.14 0.40 0.08
Gain on sale of discontinued operations 3.14
Extraordinary gain 2.70 1.31 2.10
Net loss (1.67) (2.10) (5.44) (2.79)
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 a $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 was 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. In the second quarter of 2000, the Company recorded a
$19,487,000 impairment charge related to goodwill. In the third quarter of 2000,
the Company recorded an asset impairment charge of $9,859,000 and a
restructuring charge of $10,964,000 related to the restructuring of its
operations. In the fourth quarter or 2000, the Company recorded an asset
impairment charge of $23,487,000 and a restructuring charge of $6,672,000
related to the wind-down of its U.S. distribution business.
SCHEDULE II
MERISEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998, 1999 AND 2000
Balance at Charged to Balance at
December 31, Costs and December 31,
1997 Expenses Deductions 1998
-------------- --------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $13,318,000 $12,585,000 $10,091,000 $15,812,000
Accounts receivable--Other (1)............. 1,784,000 13,104,000 13,328,000 1,560,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1998 Expenses Deductions 1999
-------------- --------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $15,812,000 $14,442,000 $21,740,000 $8,514,000
Accounts receivable--Other (1)............. 1,560,000 15,427,000 12,527,000 4,460,000
Balance at Charged to Balance at
December 31, Costs and December 31,
1999 Expenses Deductions 2000
-------------- --------------- -------------- ---------------
Accounts receivable--Doubtful accounts..... $8,514,000 $38,991,000 $25,512,000 $21,993,000
Accounts receivable--Other (1)............. 4,460,000 4,725,000 5,960,000 3,225,000
(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 will be filed by amendment to this Form
10-K with the Securities and Exchange Commission on or before April 30, 2001.
Item 11. Executive Compensation.
The information required by this item will be filed by amendment to this Form
10-K with the Securities and Exchange Commission on or before April 30, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will be filed by amendment to this Form
10-K with the Securities and Exchange Commission on or before April 30, 2001.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will be filed by amendment to this Form
10-K with the Securities and Exchange Commission on or before April 30, 2001.
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, 1999 and 2000.
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2000.
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 2000.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2000.
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, 2000:
Current Report on Form 8-K, dated November 13, 2000 which reports the
completion of the sale by Merisel Americas, Inc. of the outstanding
capital stock of Merisel Open Computing Alliance, Inc. to Arrow
Electronics, Inc.
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: April 13, 2001 MERISEL, INC.
By:/s/Timothy N. Jenson
------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and
Chief Financial Officer
(Principal Executive and Financial 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/Allyson Vanderford Vice President-Finance April 13, 2001
- ------------------------------------ (Principal Accounting Officer)
Allyson Vanderford
/s/Albert J. Fitzgibbons III Director April 13, 2001
- ------------------------------------
Albert J. Fitzgibbons III
/s/Bradley J. Hoecker Director April 13, 2001
- ------------------------------------
Bradley J. Hoecker
/s/Timothy N. Jenson Director April 13, 2001
- ------------------------------------
Timothy N. Jenson
/s/Dr. Arnold Miller Director April 13, 2001
- ------------------------------------
Dr. Arnold Miller
/s/David G. Sadler Director April 13, 2001
- ------------------------------------
David G. Sadler
/s/Lawrence J. Schoenberg Director April 13, 2001
- ------------------------------------
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 Certificate of Designation of Convertible Preferred Stock of Merisel,
Inc., filed as exhibit 99.2 to the Company's Current Report on Form 8-K
dated June 9, 2000.**
*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 Merisel, Inc. 1997 Stock Award and Incentive Plan, filed as Annex II
to the Company's Schedule 14A dated October 6, 1997.**
*10.6 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.**
*10.7 Form of Restricted Stock Unit Agreement under the Merisel, Inc. 1997
Stock Award and Incentive Plan, filed as exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended January 1, 2000.
10.8 Amended and Restated Receivables Transfer Agreement dated as of
September 27, 1996 by and between Merisel Americas, Inc. and
Merisel Capital Funding, Inc., filed as exhibit 10.53 to the
Company's Current Report on Form 8-K, dated April 17, 1996.**
10.9 Amended and Restated Receivables Purchase and Servicing Agreement dated
as of September 27, 1996, by and between Merisel Capital Funding, Inc.,
Redwood Receivables Corporation, Merisel Americas, Inc. and General
Electric Capital Corporation, filed as exhibit 10.54 to the Company's
Current Report on Form 8-K, dated April 17, 1996.**
10.10 Annex X to Receivables Transfer Agreement and Receivables Purchase and
Servicing Agreement dated as of October 2, 1995, filed as exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.**
10.11 Amendment No. 1 and Waiver to Amended and Restated Receivables
Purchase and Servicing Agreement dated as of November 7, 1996 among
Merisel Capital Funding, Inc., Redwood Receivables Corporation,
Merisel Americas, Inc. and General Electric Capital Corporation,
filed as exhibit 2.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.**
10.12 Amendment No. 1 and Waiver to Amended and Restated Receivables
Transfer Agreement dated as of November 7, 1996 by and between
Merisel Americas, Inc. and Merisel Capital Funding, Inc., filed as
exhibit 2.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.**
10.13 Amendments to Securitization Agreements, dated as of December 19, 1997,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation, filed
as exhibit 10.19 to the Company's Annual Report on Form 10-K for year
ended December 31, 1997.**
10.14 Amendments to Securitization Agreements, dated as of July 31, 1998,
among Merisel Americas, Inc., Merisel Capital Funding, Inc., Redwood
Receivables Corporation and General Electric Capital Corporation, filed
as exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.**
10.15 Amendment No. 4 and Waiver to Purchase Agreement, dated of as
February 22, 1999, among Merisel Americas, Inc., Merisel Capital
Funding, Inc., Redwood Receivables Corporation and General
Electric Capital Corporation, filed as exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998.**
10.16 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.**
10.17 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.**
10.18 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, filed
as exhibit 10.19 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.**
10.19 Amendment No. 8 to Purchase Agreement dated as of May 19, 2000 among
Merisel Americas, Inc., Merisel Capital Funding, Inc., Rosewood
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 June 30, 2000.**
10.20 Amendments to Securitization Agreements and Waiver, dated as of August
18, 2000 between Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Rosewood 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 30, 2000.**
10.21 Amendments to Securitization Agreements and Waiver, dated as of October
16, 2000 between Merisel Americas, Inc., Merisel Capital Funding, Inc.,
Rosewood 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 September 30, 2000.**
10.22 Loan Agreement between Congress Financial Corporation (Canada),
the financial institutions listed therein and Merisel Canada Inc.
dated January 12, 2001.
*10.23 Retention Agreement dated as of April 4, 2001 between Merisel
Americas, and Jeffrey Hansen.
*10.24 Retention Agreement dated as of April 1, 2001 between Merisel, Inc.,
Merisel Americas, Inc. and Timothy N. Jenson.
*10.25 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.**
*10.26 Bonus Agreement dated as of August 10, 2000 between Merisel Americas,
Inc. and Timothy N. Jenson, filed as exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000.**
*10.27 Change of Control Agreement dated as of February 1, 2001 between
Merisel Canada Inc. and Mitchell Martin.
*10.28 Change of Control Agreement dated as of August 18, 1999 between
Merisel, Inc., Merisel Americas, Inc. and James Stephens.
*10.29 Retention Agreement dated August 10, 2000 between Merisel Americas,
Inc. and James Stephens.
*10.30 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.**
*10.31 Retention Agreement dated August 10, 2000 between Merisel Americas,
Inc. and Karen Tallman, filed as exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000.**
*10.32 Change of Control Agreement dated as of April 27, 2000 between Merisel,
Inc., Merisel Americas, Inc. and Allyson Vanderford.
*10.33 Severance Agreement dated as of December 21, 2000 between Merisel
Americas, Inc. and Allyson Vanderford.
*10.34 Waiver and Release Agreement dated November 8, 2000 between Merisel,
Inc. and Dwight A. Steffensen.
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.
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*Management contract or executive compensation plan or arrangement.
**Incorporated by reference.