SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _______________ to ___________
Commission File Number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
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- ---------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last year
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Number of Shares Outstanding
Class as of August 9, 2002
- ------------------------------------- --------------------
Common Stock, $.01 par value 7,755,593 Shares
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION (UNAUDITED)
Consolidated Balance Sheets as of 1
June 30, 2002 and December 31, 2001
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of 14
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 20
PART II OTHER INFORMATION 21
SIGNATURES 22
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Merisel, Inc. (the "Company"), or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the effect of (i) economic conditions generally, (ii)
industry growth, (iii) competition, (iv) liability and other claims asserted
against the Company, (v) the loss of significant customers or vendors, (vi)
operating margins, (vii) business disruptions, (viii) the ability to attract and
retain qualified personnel, and (ix) other risks detailed in this report. These
factors are discussed elsewhere in this report, including, without limitation,
under the captions "Legal Proceedings" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained or incorporated by reference herein to reflect future
events or developments.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
June 30, December 31,
2002 2001
------------------- -------------------
Current assets:
Cash and cash equivalents $50,173 $55,578
Accounts receivable (net of allowances of $1,023 and $703 for 2002 13,365 8,831
and 2001, respectively)
Inventories 42 117
Prepaid expenses and other current assets 759 920
------------------- -------------------
Total current assets 64,339 65,446
Property and equipment, net 893 3,418
Other assets 2,805 91
------------------- -------------------
Total assets $68,037 $68,955
=================== ===================
See accompanying notes to consolidated financial statements.
PART 1. FINANCIAL INFORMATION
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
2002 December 31, 2001
------------------- --------------------
Current liabilities:
Accounts payable $15,646 $11,763
Accrued liabilities 16,535 21,797
------------------- --------------------
Total current liabilities 32,181 33,560
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized
1,000,000 shares; 150,000 shares issued and outstanding 17,653 16,969
Common stock, $.01 par value, authorized 150,000,000
shares; 8,025,375 and 8,030,844 shares issued for 2002
and 2001, respectively; 7,760,995 and 7,842,644 shares
outstanding for 2002 and 2001, respectively 78 78
Additional paid-in capital 280,540 281,343
Accumulated deficit (261,804) (262,669)
Accumulated other comprehensive loss (82)
Treasury stock (529) (326)
------------------- --------------------
Total stockholders' equity 35,856 35,395
------------------- --------------------
Total liabilities and stockholders' equity $68,037 $68,955
=================== ====================
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------- ---------------- ------------------ -----------------
Net sales $17,845 $116,684 $33,618 $279,347
Cost of sales 16,260 100,107 30,798 253,606
--------------- ---------------- ------------------ -----------------
Gross profit 1,585 16,577 2,820 25,741
Selling, general & administrative expenses 1,620 8,936 3,590 25,365
Restructuring charge (34) 245
Impairment charge 29,416 29,416
--------------- ---------------- ------------------ -----------------
Operating loss (1) (21,775) (1,015) (29,040)
Interest (income) expense, net (476) (105) (810) 805
Other (income) expense, net (2) 180 (84) 971
--------------- ---------------- ------------------ -----------------
Income (loss) from operations before income
taxes, discontinued operations and extraordinary 477 (21,850) (121) (30,816)
item
Income tax provision (benefit) 40 (83) 80 647
--------------- ---------------- ------------------ -----------------
Income (loss) from operations before
discontinued operations and extraordinary item 437 (21,767) (201) (31,463)
Discontinued operations:
Income (loss) from discontinued operations (2,148) 1,066 (5,243)
Gain on sale of discontinued operations 36,250
--------------- ---------------- ------------------ -----------------
Income (loss) before extraordinary item 437 (23,915) 865 (456)
Extraordinary gain on extinguishment of debt, net 2,872
--------------- ---------------- ------------------ -----------------
Net income (loss) $437 $(23,915) $865 $2,416
=============== ================ ================== =================
Preferred stock dividends 346 320 686 633
--------------- ---------------- ------------------ -----------------
Net income (loss) available to common
Stockholders $91 $(24,235) $179 $1,783
=============== ================ ================== =================
Net income (loss) per share (basic and diluted):
Income (loss) from operations before
discontinued operations and extraordinary
item less preferred dividends $ .01 $ (2.75) $ (.12) $(4.00)
Income (loss) from discontinued operations (.27) .14 (.65)
Gain on sale of discontinued operations 4.51
Extraordinary gain on extinguishment of debt, net .36
--------------- ---------------- ------------------ -----------------
Net income (loss) available to common
stockholders $ .01 $ (3.02) $ .02 $ .22
=============== ================ ================== =================
Weighted average number of shares
Basic and diluted 7,781 8,031 7,807 8,031
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $865 $2,416
Less: Gain on sale of MOCA 36,250
Less: Extraordinary gain on extinguishment of debt 2,872
Less: income (loss) from discontinued operations, net 1,066 (5,243)
------------------ -------------------
Loss from continuing operations (201) (31,463)
Adjustments to reconcile net loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 18 3,250
Provision for doubtful accounts 123 (3,269)
Restricted stock units compensation expense (119)
Deferred compensation (82)
Gain on sale of property and equipment (82)
Changes in operating assets and liabilities:
Accounts receivable (4,657) (28,312)
Inventories 75 16,396
Prepaid expenses and other current assets (86) 5,987
Accounts payable 3,883 (25,821)
Accrued liabilities (5,180) (14,248)
------------------ -------------------
Net cash used for operating activities (6,307) (48,064)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (114)
Proceeds from sale of MOCA 36,250
Purchase of securities (637)
Transaction costs on sale of property (234)
Proceeds from sale of property and equipment 109 740
------------------ -------------------
Net cash (used for) provided by investing activities (762) 36,876
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing facility 20,988
Repayments under other financing (1,254)
Purchase of bonds (20,931)
Purchase of treasury stock (203)
------------------ -------------------
Net cash used for financing activities (203) (1,197)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 77
------------------ -------------------
NET CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS 1,868 (4,978)
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,405) (17,440)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 55,578 46,865
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $50,173 $29,425
================== ===================
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
Merisel, Inc., a Delaware corporation and a holding company (together with its
subsidiaries, "Merisel" or the "Company"), is a distributor of software
licensing products. Prior to July 28, 2001, the Company also operated a Canadian
computer hardware and software distribution business ("Merisel Canada").
Effective as of July 28, 2001, the Company completed the sale of Merisel Canada
to Synnex Information Technologies, Inc. ("Synnex"). In addition, prior to 2001
the Company operated a full-line U.S. computer products distribution business
which, excluding software licensing, the Company determined to wind down in
December 2000. Effective as of October 27, 2000, the Company completed the sale
to Arrow Electronics, Inc. ("Arrow") of its Merisel Open Computing Alliance
("MOCA") business unit, a distributor of Sun Microsystems products. During the
fourth quarter of 2001, the Company decided to discontinue operation of its
Optisel business, a provider of logistics and electronic services, because of
economic conditions generally and with respect to Internet-related businesses
specifically and Optisel's lack of success in generating business. As a
consequence of the foregoing events, Merisel's only on-going business is its
software licensing business. The Company is, however, actively seeking and
exploring acquisition and other investment opportunities.
The information for the three and six months ended June 30, 2002 and 2001 has
not been audited by independent accountants, but includes all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for such periods.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to the
requirements of the Securities and Exchange Commission ("SEC"), although the
Company believes that the disclosures included in these financial statements are
adequate to make the information not misleading. Certain amounts for 2001 have
been reclassified to conform to the 2002 presentation. The consolidated
financial statements as presented herein should be read in conjunction with the
consolidated financial statements and notes thereto included in Merisel's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
2. Liquidity
At June 30, 2002, the Company had cash and cash equivalents of approximately $50
million. The Company has developed an operating plan for 2002 that focuses upon
growing its software licensing distribution business and achieving profitability
for that business, maximizing cash in winding down its U.S. distribution
business, and seeking acquisition opportunities. Management believes that, with
its cash balances and anticipated cash balances after wind-down related
expenditures, which cash balances are substantial in relation to the Company's
working capital needs, as well as expected revenues and cash flow from
operations, it has sufficient liquidity for the foreseeable future. All
anticipated wind-down related expenditures are currently recorded as accrued
liabilities and/or accounts payable on the Company's balance sheet. If the
Company were to use a significant amount of cash to fund one or more
acquisitions, the Company would
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
have less liquidity to meet its working capital needs.
3. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles
Assets." SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment method-only approach. The Company
adopted SFAS No. 142 effective January 1, 2002. The adoption of SFAS Nos. 141
and 142 did not have a significant impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 144 retained substantially all of the requirements of
SFAS No. 121 while resolving certain implementation issues. The Company adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not
have a material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. A
principal effect will be the prospective characterization of gains and losses
from debt extinguishments used as part of an entity's risk management strategy.
Under SFAS No. 4, all gains and losses from early extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. Under SFAS No. 145, gains and losses from
extinguishment of debt will not be classified as extraordinary items unless they
meet much more narrow criteria in APB Opinion No. 30. SFAS No. 145 may be
adopted early, but is otherwise effective for fiscal years beginning after May
15, 2002, and must be adopted with retroactive effect. The Company believes that
the adoption of SFAS No. 145 will result in the reclassification of the amount
related to early extinguishment of debt previously recorded as an extraordinary
item to a component of operating loss.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that costs associated
with an exit or disposal activity be recognized when incurred as opposed to an
entity's commitment to an exit plan as previously allowed. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
4. Revenue Recognition
The Company recognizes revenue from software licensing sales when the rights and
risks of ownership are substantially passed to the customer as licenses are
issued and/or products are shipped. All sales are final and the product or
license becomes the responsibility of the customer at the time of shipment or
issuance and is not subject to any further obligation or performance by the
Company.
Beginning in 2002, the Company began selling product updates and customer
support services as new sources of revenue. Revenue for providing certain
product update and customer support services is deferred and recognized over the
term of the arrangement. Training and consulting revenue is recognized according
to the terms of the service arrangement.
The price for all products, licenses and services sold is fixed at the time of
the sale prior to the issuing of the license, shipment of the product or
performance of services. The Company frequently monitors its customers'
financial condition and credit worthiness and only sells products, licenses or
services to customers where, at the time of the sale, collection is reasonably
assured. The Company, subject to certain limitations including approval of its
manufacturers/suppliers, may permit its customers to return products and to
exchange products or receive credits against future purchases. Additionally, 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. A provision for estimated product returns and
costs of customer incentive programs is recorded concurrently as a component of
net sales with the recognition of revenue.
5. Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The Company's second quarter is the 13-week period
ending on the Saturday nearest to June 30. For simplicity of presentation, the
Company has described the interim periods and year-end period as of June 30 and
December 31, respectively.
6. Discontinued Operations
Effective as of October 27, 2000, the Company completed the sale to Arrow of its
MOCA business unit. 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 MOCA, 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"). In March 2001 the Company received an
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Additional Payment of $37.5 million which, after deducting certain obligations
relating to the payment, netted $36.3 million, which was recorded in the quarter
ended March 31, 2001 and resulted in a gain of $36.3 million.
Through its subsidiary Optisel, Inc. ("Optisel"), in November 2000 the Company
acquired substantially all the e-services assets of Value America, Inc. with the
intention of leveraging the Company's distribution and logistics capabilities to
operate a logistics and electronic services business. 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 provided fee-based
distribution and logistics services and information technology services for MOCA
through February 1, 2002. In connection with the sale of Merisel Canada to
Synnex, Merisel and Synnex entered into a fee-based transition services
agreement pursuant to which Optisel provided information technology services to
Merisel Canada through September 10, 2001. Optisel has not generated any
significant revenue except under these two transition services agreements. As a
result of economic conditions generally and with respect to Internet-related
businesses specifically and Optisel's lack of success in generating business,
the Company decided to discontinue operation of the Optisel business during the
fourth quarter of 2001.
The Company has reclassified its consolidated financial statements to reflect
the discontinuance of Optisel's operations and to segregate the revenues, direct
costs and expenses, assets and liabilities, and cash flows of this business. The
net operating results and net cash flows of this business have been reported as
"Discontinued Operations" in the accompanying consolidated financial statements.
The Company's financial statements also reflect the gain realized on the sale of
the MOCA business in the first quarter of 2001.
Summarized financial information for the discontinued operations is as follows
(in thousands):
For the Three Months Ended For the Six Months Ended June
June 30, 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $0 $2,445 $1,105 $4,465
Income (loss) from Discontinued Operations 0 (2,148) 1,066 (5,243)
7. Restructuring Charges and Wind Down Related Liabilities
During the first quarter of 2002, the Company made the decision to reduce its
workforce by approximately 17 full-time positions, which has resulted in the
Company having approximately 47 employees. As a result, a restructuring charge
of $485,000 related to severance and employee benefits was recorded in the first
quarter of 2002. A reduction to previously recorded charges related to employee
benefits of $220,000 was also recorded in the first quarter of 2002.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Additional adjustments of $14,000 to increase and $34,000 to decrease the
reserve were recorded related to lease and contract commitments in the first and
second quarters of 2002, respectively.
As of June 30, 2002, $3,779,000 of total restructuring costs had not been paid
and was included in accrued liabilities on the balance sheet. The following
tables set forth the activity and balances of the restructuring reserve account
from December 31, 2001 to June 30, 2002 and the expected timing of payments (in
thousands):
December 31, June 30,
2001 2002
Balance Charges Adjustments Payments Balance
-------------------- --------------- ---------------- ---------------- --------------
Severance and related costs $ 1,176 $ 485 $ (220) $ 853 $ 588
Facility, lease and other 4,184 (20) 973 3,191
-------------------- --------------- ---------------- ---------------- --------------
Total $ 5,360 $ 485 $ (240) $ 1,826 $ 3,779
==================== =============== ================ ================ ==============
Three months ended
------------------------------------------------------------
Expected timing of September 30, December 31, March 31, June 30,
payouts 2002 2002 2003 2003 Thereafter Total
---------------- ---------------- -------------- ------------ --------------- --------------
Severance and related
costs $ 216 $170 $ 124 $ 78 $588
Facility, lease and
other 440 441 362 281 1,667 3,191
---------------- ---------------- -------------- ------------ --------------- --------------
Total $ 656 $ 611 $ 486 $ 359 $ 1,667 $ 3,779
================ ================ ============== ============ =============== ==============
In addition to the restructuring amount of $3,779,000 which is recorded in
accrued liabilities, as of June 30, 2002, the Company has recorded $9,939,000 of
other accrued liabilities and $5,082,000 of accounts payable related to the
portion of its U.S. distribution business being wound down.
8. Disposition of Assets
Effective as of July 28, 2001, the Company completed the sale to Synnex of
Merisel Canada. The purchase price was CDN$30.0 million, of which CDN$1.0
million was deposited in an escrow account pending resolution of indemnification
claims made during the 12 months after closing. As of the expiration of the
escrow period, which occurred during the third quarter of 2002, Synnex had not
made any indemnification claims, and the remaining CDN$1.0 million was remitted
to the Company.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The following table discloses the unaudited Pro Forma Condensed Consolidated
Statements of Operations for the six-month period ended June 30, 2001 assuming
that the disposition occurred on the first date of the period (in thousands).
Pro Forma Adjustments
------------------------------------
Historical Merisel
6/30/01 Canada (a) Other Pro Forma
--------------- -------------- --------------- ---------------
Net sales $ 279,347 $ 264,780 $ 14,567
Cost of sales 253,606 249,485 4,121
--------------- -------------- --------------- ---------------
Gross profit 25,741 15,295 10,446
Selling, general & administrative
expenses 25,366 13,345 $ 2,127 (b) 14,148
Restructuring charge (229) 229
Impairment charge 29,416 29,416
--------------- -------------- --------------- ---------------
Operating loss (29,040) (27,237) (2,127) (3,931)
Interest expense, net 805 1,639 834 (c)
Other expense, net 971 330 641
--------------- -------------- --------------- ---------------
Loss from continuing operations before
income taxes and extraordinary item (30,816) (29,206) (2,961) (4,572)
Income tax provision (benefit) 647 (4) 651
--------------- -------------- --------------- ---------------
Loss from continuing operations
before extraordinary item $ (31,463) $ (29,202) $ (2,961) $ (5,223)
=============== ============== =============== ===============
Net loss per share from continuing
operations before extraordinary item
less preferred dividends $ (4.00) $ (.73)
=============== ============== =============== ===============
Weighted Average Number of
Shares Outstanding 8,031 8,031
=============== ============== =============== ===============
(a) Merisel Canada - Represents the historical unaudited balances of
Merisel Canada for the six months ended June 30, 2001, which are
eliminated to reflect the sale of Merisel Canada to Synnex.
(b) Selling, General and Administrative Expenses - Consists of corporate
costs allocated by the Company to Merisel Canada (corporate overhead,
administrative expenses, etc.) that would not have been eliminated due
to the sale of Merisel Canada.
(c) Interest Expense - Consists of interest expense allocated by the
Company to Merisel Canada (related to the Company's 12.5% Senior Notes)
that would not have been eliminated due to the sale of Merisel Canada.
Pro Forma operating results, reflecting similar adjustments in the above table,
for the three month period ended June 30, 2001 for net sales, operating income
and income form continuing operations before extraordinary item were $8,427,000
$5,203,000 $4,308,000 respectively.
In May 2002 the Company completed the sale of an office building in Cary, North
Carolina. The $3,000,000 purchase price was paid $25,000 in cash and the
remainder in a promissory note due May 20, 2004 or earlier in certain
circumstances. The note bears interest at the prime rate plus 2.25% payable
monthly and is secured by the property. The prime rate was 4.75% at June 30,
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
2002. The Company recorded the promissory note at a discounted amount of
$2,714,000 which approximates the carrying value of the property. The Company
recognized no gain or loss on the sale of the property, net of actual disposal
costs. In connection with the sale, the Company agreed to lend the purchaser up
to an additional $1,000,000, at terms similar to the note described above, to
fund improvements to the property after the purchaser has funded $1,000,000 in
initial improvements.
9. Extraordinary Gain on Debt Extinguishment
In January 2001, the Company purchased $20,175,000 of its outstanding 12-1/2%
Senior Notes due 2004 (the "12.5% Notes") for an aggregate cost of $17,149,000,
reducing the outstanding balance of the 12.5% Notes to $3,628,000, which were
redeemed at a total cost of $3,782,000 in February 2001. As a result, the
Company recognized an extraordinary gain of approximately $2,872,000 for the six
months ended June 30, 2001. As a result of such purchases and redemption, 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.
10. Comprehensive Income
The Company calculates comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is computed as
follows (in thousands):
Three Months Ended June Six Months Ended June 30,
30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $437 $(23,915) $865 $2,416
Other comprehensive loss - unrealized loss on
available for sale securities (82) (82)
Other comprehensive loss - foreign currency
translation adjustments 1,397 (104)
------------ ------------- ------------ -------------
Comprehensive income (loss) $355 $(22,518) $783 $2,312
============ ============= ============ =============
11. Earnings Per Share and Stockholders' Equity
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share is computed on the basis of the
weighted average number of common shares outstanding. Diluted earnings per share
is computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding potential common shares including
stock options, convertible preferred stock and restricted stock units using the
"treasury stock" method.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
(In thousands)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---------------- -------------- --------------- --------------
Income (loss) from operations before
discontinued operations and extraordinary item $437 $(21,767) $(201) $(31,463)
Preferred stock dividends (346) (320) (686) (633)
---------------- -------------- --------------- --------------
Income (loss) available to common stockholders 91 (22,087) (887) (32,096)
Income (loss) from discontinued operations (2,148) 1,066 (5,243)
Gain on sale of discontinued operations 36,250
Extraordinary gain on extinguishment of debt 2,872
---------------- -------------- --- --------------- --------------
Net income (loss) available to common
stockholders $91 $(24,235) $179 $1,783
================ ============== =============== ==============
On July 3, 2001 the Company announced that its Board of Directors had authorized
the expenditure of up to $1,000,000 to repurchase shares of its common stock
from time to time in the open market or otherwise. On March 25, 2002 the Company
announced that its Board of Directors had authorized the expenditure of up to
$1,000,000 during the remainder of 2002 for repurchases of its common stock. As
of June 30, 2002, the Company had cumulatively repurchased approximately 263,000
shares under these authorizations for an aggregate cost of $529,000, which
shares have been reflected as treasury stock in the accompanying consolidated
balance sheet.
12. Segment Information
The Company implemented SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," 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
No. 131, the Company had determined it had three operating segments: the United
States distribution segment, the Canadian distribution segment, and Optisel.
Effective in the fourth quarter of 2001, the Company discontinued its Optisel
business segment. Optisel has been treated as discontinued operations in the
accompanying financial statements. The segment data included below has been
restated to exclude amounts related to the Optisel business unit.
In accordance with SFAS No. 131, the Company has prepared the following tables
which present information related to each operating segment included in internal
management reports.
Three months ended June 30, 2002
(In thousands)
U.S.
Distribution Canada Total
---------------- ------------ -------------
Net sales to external customers $17,845 $17,845
Gross profit 1,585 1,585
Operating loss (1) (1)
Total segment assets 68,037 68,037
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Three months ended June 30, 2001
(In thousands)
U.S.
Distribution Canada Total
---------------- ------------ -------------
Net sales to external customers $8,426 $108,258 $116,684
Gross profit 10,225 6,352 16,577
Operating (loss) income (22,364) 589 (21,775)
Total segment assets 96,672 108,218 204,890
Six months ended June 30, 2002
(In thousands)
U.S.
Distribution Canada Total
---------------- ------------ -------------
Net sales to external customers $33,618 $33,618
Gross profit 2,820 2,820
Operating loss (1,015) (1,015)
Six months ended June 30, 2001
(In thousands)
U.S.
Distribution Canada Total
---------------- ------------ -------------
Net sales to external customers $14,567 $264,780 $279,347
Gross profit 10,446 15,295 25,741
Operating loss (3,931) (27,237) (29,040)
13. Prepaid Expenses and Other Current Assets
At June 30, 2002, prepaid expenses and other current assets include
approximately $555,000 of investment securities classified as available for
sale. Such amounts were invested in connection with a deferred compensation
agreement with the Company's chief executive officer. An offsetting obligation
is included in accrued liabilities. Payment of the deferred compensation is due
as provided for in the agreement. As of June 30, 2002, there were unrealized
holding losses of approximately $82,000. This unrealized loss has been recorded
as a reduction of selling, general and administrative expenses and as a
component of other comprehensive loss for the three and six months ended June
30, 2002.
14. Commitments and Contingencies
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. In addition, over the
last several years the Company has disposed of a number of businesses, including
all of its operations outside the United States, many of which had obligations
that had been guaranteed by the Company. In connection with those dispositions,
the Company sought either to have any guarantees released or to be indemnified
against any liabilities under guarantees. The Company may not have identified
all guarantees to be released and, in at least one instance, the indemnification
provided to the Company is no longer of any value. The Company believes that,
largely because of the passage of time, its exposure to liability under these
guarantees is remote.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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"), a distributor of Sun Microsystems products. 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. Effective as of July 28, 2001, the Company completed the sale of its
Canadian distribution business, a full-line distributor of computer hardware and
software products ("Merisel Canada"), to Synnex Information Technologies, Inc.
("Synnex"). 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 with the intention of leveraging the Company's distribution
and logistics capabilities to operate a logistics and electronic services
business. As a result of economic conditions generally and with respect to
Internet-related businesses specifically and Optisel's lack of success in
generating business, the Company decided to discontinue operation of the Optisel
business during the fourth quarter of 2001. As a consequence of the foregoing
events, Merisel's on-going business today consists solely of its software
licensing business. The Company is, however, actively seeking and exploring
acquisition and other investment opportunities.
Discontinued Operations
Effective as of October 27, 2000, the Company completed the sale to Arrow of its
MOCA business unit. 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 MOCA , 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"). In March 2001 the Company received an Additional Payment
of $37.5 million which, after deducting certain obligations relating to the
payment, netted $36.3 million, which was recorded in the quarter ended March 31,
2001 and resulted in a gain of $36.3 million.
Through Optisel, in November 2000 the Company acquired substantially all the
e-services assets of Value America, Inc. with the intention of leveraging the
Company's distribution and logistics capabilities to operate a logistics and
electronic services business. 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 provided fee-based distribution and logistics services
and information technology services for MOCA through February 1, 2002. In
connection with the sale of Merisel Canada to Synnex, Merisel and Synnex entered
into a fee-based transition
services agreement pursuant to which Optisel provided information technology
services to Merisel Canada through September 10, 2001. Optisel has not generated
any significant revenue except under these two transition services agreements.
As a result of economic conditions generally and with respect to
Internet-related businesses specifically and Optisel's lack of success in
generating business, the Company decided to discontinue operation of the Optisel
business during the fourth quarter of 2001.
The Company has reclassified its consolidated financial statements to reflect
the discontinuance of Optisel's operations and to segregate the revenues, direct
costs and expenses (excluding any allocated costs), assets and liabilities, and
cash flows of the Optisel 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.
Wind-Down 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 complete 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.
Sale of Merisel Canada
Effective as of July 28, 2001, the Company completed the sale to Synnex of
Merisel Canada. The purchase price was CDN$30.0 million, of which CDN$1.0
million was deposited in an escrow account pending resolution of indemnification
claims made during the 12 months after closing. In connection with this
transaction, in the quarter ended June 30, 2001 the Company recorded an
impairment charge of approximately $29.4 million with respect to Merisel Canada
related to the excess book value over expected cash consideration less
transaction fees. During the fourth quarter of 2001 the closing balance sheet of
Merisel Canada was finalized and agreed to by the Company and Synnex. This
resulted in a payment of CDN$2.0 million to the Company, which is recorded as a
$1.3 million adjustment to the impairment charge previously recorded in the
second quarter of 2001. As of the expiration of the escrow period, which
occurred during the third quarter of 2002, Synnex had not made any
indemnification claims, and the remaining CDN$1.0 million was remitted to the
Company.
RESULTS OF OPERATIONS
The Company reported net income available to common stockholders of $91,000, or
$.01 per share, for the three months ended June 30, 2002, compared to a net loss
available to common stockholders of $24,235,000, or $3.02 per share, for the
2001 period. The results for the three months ended June 30, 2001 include a loss
from discontinued operations of $2,148,000. The Company reported net income
available to common stockholders of $179,000, or $.02 per share, for the six
months ended June 30, 2002, compared to net income available to common
stockholders of $1,783,000, or $.22 per share, for the 2001 period. The results
include a gain
from discontinued operations of $1,066,000 for the six months ended June 30,
2002 and, for the six months ended June 30, 2001, a loss from discontinued
operations of $5,243,000 and a gain on sale of discontinued operations of
$36,250,000. The discussion and analysis below does not reflect discontinued
operations, but does include the Company's U.S. distribution business and, for
the 2001 period, its Canadian distribution business.
Three Months Ended June 30, 2002 as Compared to the Three Months Ended June 30,
2001.
The Company's net sales decreased 85% from $116,684,000 in the quarter ended
June 30, 2001 to $17,845,000 in the quarter ended June 30, 2002. The decrease
resulted from the sale of the Canadian distribution business effective July 28,
2001. Net sales for the software licensing business were $8.3 million in the
2001 period. The increase in net sales for the U.S. distribution business
resulted from the focus the Company has on growing its software licensing
business. In August 2002 the Company was advised by one of its largest vendors
that it is terminating its relationship with the Company effective August 31,
2002. For the three months and six months ended June 30, 2002 and the year ended
December 31, 2001, that vendor accounted for 21.3%, 24.8% and 23.4%,
respectively, of software licensing sales. The Company expects that such
termination will have an adverse effect on the Company's sales for a number of
quarters. In addition, it will increase the Company's dependence on its largest
vendor, which for the three months and six months ended June 30, 2002 and the
year ended December 31, 2001 accounted for 74.8%, 71.4% and 71.2%, respectively,
of software licensing sales.
Gross profit decreased $14,992,000 from $16,577,000 in the second quarter of
2001 to $1,585,000 in the second quarter of 2002. Gross profit as a percentage
of sales, or gross margin, was 14.2% for the three months ended June 30, 2001
compared to 8.9% for the three months ended June 30, 2002. The 2001 and 2002
periods reflect reductions in cost of sales of approximately $9,646,000 and
$810,000, respectively, relating primarily to the settlement of certain
discontinued vendor accounts associated with the wind-down of the U.S.
distribution business. Excluding these adjustments, gross margin would have been
5.9% and 4.3% in the 2001 and 2002 periods, respectively. Excluding the results
of the Canadian distribution business and the adjustments, gross profit would
have been $579,000 or 7.0% of sales in the second quarter of 2001. The decrease
in gross margin is related to a combination of pricing pressure experienced in
the software licensing business and reductions in vendor rebates as a result of
changes in vendor terms.
Selling, general and administrative expenses decreased by 82.0% from $8,936,000
in the second quarter of 2001 to $1,620,000 in the second quarter of 2002. This
reduction reflects primarily the sale of the Canadian distribution business
effective July 28, 2001 and the substantial reduction of costs associated with
the portion of the U.S. distribution business that was being wound down during
the second quarter of 2001. The Company had approximately $3,857,000 and
$508,000 of favorable adjustments related to the wind-down of the U.S.
distribution business in the second quarters of 2001 and 2002, respectively,
which caused a reduction of selling, general and administrative expenses for
those periods. Excluding these adjustments, selling, general and administrative
expenses as a percentage of sales would have been 11.0% in the three months
ended June 30, 2001 compared to 11.9% in the 2002 period. Excluding the results
of the Canadian distribution business and the adjustments, selling, general and
administrative expenses, which included substantial amounts related to the
wind-down of the U.S. distribution business, would have been $6,801,000 or 80.7%
of net sales in the second quarter of 2001.
As a result of the above items, the Company had an operating loss of $1,000 for
the three-month period ended June 30, 2002 compared to an operating loss of
$21,775,000 for the three-month period ended June 30, 2001.
Six Months Ended June 30, 2002 as Compared to the Six Months June 30, 2001.
The Company's net sales decreased 90% from $279,347,000 in the six months ended
June 30, 2001 to $33,618,000 in the six months ended June 30, 2002. The decrease
resulted from the sale of the Canadian distribution business effective July 28,
2001. Net sales for the 2001 period excluding sales from the Canadian
distribution business were $14.6 million, of which $13.4 million was generated
by the software licensing business. The increase in net sales for the U.S.
distribution business resulted from the focus the Company has on growing its
software licensing business.
Gross profit decreased $22,921,000 from $25,741,000 in the first half of 2001 to
$2,820,000 in the first half of 2002. Gross profit as a percentage of sales, or
gross margin, was 9.2% for the six months ended June 30, 2001 compared to 8.4%
for the six months ended 2002. The 2001 and 2002 periods reflect reductions in
cost of sales of approximately $9,405,000 and $1,302,000, respectively,
primarily relating to the settlement of certain discontinued vendor accounts
associated with the wind-down of the U.S. distribution business. Excluding these
adjustments, gross margin would have been 5.8% and 4.5% in the 2001 and 2002
periods, respectively. Excluding results of the Canadian distribution business
and the adjustments, gross profit would have been $938,000 or 7.1% of net sales
in the first half of 2001. The decrease in gross margin is primarily related to
pricing pressures experienced in the software licensing business and lower
vendor rebates due to changes in vendor terms.
Selling, general and administrative expenses decreased by 86% from $25,365,000
in the first six months of 2001 to $3,590,000 in the 2002 period. This reduction
reflects primarily the sale of the Canadian distribution business effective July
28, 2001 and the substantial reduction of costs associated with the portion of
the U.S. distribution business that was being wound down during the second
quarter of 2001. The Company had approximately $4,370,000 and $508,000 of
favorable adjustments related to the wind-down of the U.S. distribution business
in the first six months of 2001 and 2002, respectively, which caused a reduction
of selling, general and administrative expenses for those periods. Excluding
these adjustments, selling, general and administrative expenses as a percentage
of sales would have been 10.6% in the six months ended June 30, 2001 compared to
12.2% in the 2002 period, the increase primarily a result of decreased sales
volumes in relation to fixed costs. Excluding results of the Canadian
distribution business and the adjustments, selling, general and administrative
expenses, which included substantial amounts related to the wind down of the
U.S. distribution business, would have been $16,391,000 or 113% of net sales in
the first half of 2001.
During the first quarter of 2002, the Company made the decision to reduce its
workforce by approximately 17 full-time positions, which has resulted in the
Company having approximately 47 employees. As a result, a restructuring charge
of $485,000 related to severance and employee benefits was recorded in the first
quarter of 2002. A reduction to previously recorded charges related to employee
benefits of $220,000 was also recorded in the first quarter of 2002. An
additional restructuring charge of $14,000 was recorded related to lease and
contract commitments in the first quarter of 2002.
As a result of the above items, the Company had an operating loss of $1,015,000
for the six-month period ended June 30, 2002 compared to an operating loss of
$29,040,000 for the six-month period ended June 30, 2001.
Interest Expense; Other Expense; and Income Tax Provision
Interest income increased from $105,000 in the second quarter of 2001 to
$476,000 in the second quarter of 2002 and increased from expense of $805,000 in
the six months ended June 30, 2001 to income of $810,000 in the six months ended
June 30, 2002. The change primarily reflects the fact that the Company had no
indebtedness during the 2002 periods as a result of the sale of Merisel Canada
in July 2001, which eliminated the interest associated with its revolving credit
facility, as well as interest income earned on invested cash balances and early
pay discounts taken in the 2002 period.
Other expense for the Company decreased from $971,000 in the six months ended
June 30, 2001 to income of $84,000 in the six months ended June 30, 2002. Other
income in the 2002 period reflects a gain recognized on the sale of property,
plant and equipment that had been fully depreciated. Other expense for the 2001
period primarily reflects fees related to Merisel Canada's asset securitization
facility, which was terminated in the first quarter of 2001.
The income tax provision decreased from a benefit of $83,000 and expense of
$647,000 in the three and six months ended June 30, 2001, respectively to
$40,000 and $80,000 for the three and six months ended June 30, 2002,
respectively. The decrease for the six-month period is largely attributable to
the sale of Merisel Canada. The change for the three-month period occurred due
to the adjustment of previously recorded provisions made in the second quarter
of 2001, which resulted in the recording of a tax benefit. In all periods, the
income tax rate reflects primarily the minimum statutory tax requirements in the
various states and provinces in which the Company conducts business, as the
Company has sufficient net operating loss carry forwards to offset federal
income taxes in the current period.
Loss from Continuing Operations Before Extraordinary Item
As a result of the above items, the Company had income from continuing
operations before extraordinary item of $437,000 for the three months ended June
30, 2002 compared to a loss of $21,767,000 for the 2001 period. The Company
reported a loss from continuing operations before extraordinary item of $201,000
for the six months ended June 30, 2002 compared to a loss of $31,463,000 for the
six months ended June 30, 2001.
Extraordinary Gain; Gain on Sale of MOCA
In the first half of 2001, the Company purchased and redeemed $23,803,000
aggregate principal amount of 12.5% Notes for an aggregate cost of $20,931,000.
As a result, the Company recognized an extraordinary gain, net of unamortized
debt issuance costs, of approximately $2,872,000 for the six months ended June
30, 2001. See "Liquidity and Capital Resources - Debt Obligations, Financing
Sources and Capital Expenditures."
Additionally, for the six months ended June 30, 2001 the Company had a gain of
$36,250,000 in connection with the sale of MOCA.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the future with respect to its software licensing business. 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
relating to its software licensing business 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.
In the U.S., the Company's net sales in the fourth quarter have been
historically higher than in the first three quarters. Management believes that
the pattern of higher fourth quarter sales is partially explained by customer
buying patterns relating to calendar year-end business and holiday purchases. As
a result of this pattern, the Company's working capital requirements in the
fourth quarter have typically been greater than other quarters.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash used by operating activities during the six months ended June 30, 2002
was $6,308,000. The primary use of cash was a decrease in accrued expenses of
$5,180,000, which was primarily related to the wind-down of the U.S.
distribution business.
Net cash used for investing activities was $762,000 and consisted of $109,000 of
proceeds from the sale of property and equipment and $637,000 used for the
purchase of securities in connection with an employee deferred compensation
agreement.
Debt Obligations, Financing Sources and Capital Expenditures
In January 2001, the Company purchased $20,175,000 of the 12.5% Notes, and the
remaining outstanding balance of $3,628,000 which was redeemed in February 2001,
for a combined discounted amount of $20,931,000. As a result, the Company
recognized an extraordinary gain of approximately $2,872,000 in the first
quarter of 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.
Because the software licensing business requires the maintenance of minimal
levels of inventory and the Company anticipates making minimal capital
expenditures related to that business during the foreseeable future, the
Company's working capital requirements are much less than the Company's
historical needs for its distribution business and it is able to meet its
working capital needs without the need for any financing facility, in large part
because of its substantial cash
balances. As revenues of the software licensing business grow, the Company may
seek to establish a working capital financing facility to provide additional
funding for that business and for acquisitions.
Management believes that, with its cash balances and anticipated cash balances
after wind-down related expenditures, which balances are substantial in relation
to the Company's working capital needs, as well as expected revenues and cash
flow from operations, it has sufficient liquidity for the foreseeable future. If
the Company were to use a significant amount of cash to fund one or more
acquisitions, the Company could have less liquidity to meet its working capital
needs.
ASSET MANAGEMENT
The Company offers credit terms to qualifying customers and also sells on a
prepay, early-pay, credit card and cash-on-delivery basis. 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. Substantially all of the Company's software
licensing sales are 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 one or more of its customers, particularly one of the Company's
larger customers, resulting in the customer's inability to pay amounts owed to
the Company. This risk would be increased in the event of a general economic
downturn affecting a large number of the Company's customers. At June 30, 2002,
the Company's two largest customers represented 33%, or $4,567,000, of the
Company's total trade receivables. Net sales to these customers represented
$5,065,000, or 29%, and $13,062,000, or 35%, of the Company total net sales for
the three and six months ended June 30, 2002, respectively. The Company believes
it has established an adequate reserve against the June 30, 2002 accounts
receivable balance.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
At June 30, 2002, the Company had cash investments of $48,209,000 held in
overnight, interest-bearing accounts invested through high-credit quality
financial institutions. Additionally, the Company had cash balances of
$1,964,000 maintained in various checking accounts at June 30, 2002. As a result
of the sale of Merisel Canada effective July 28, 2001, the Company has no
outstanding long-term debt and no significant foreign currency risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain legal proceedings arising in the ordinary
course of business, none of which is expected to have a material impact on the
financial condition or business of Merisel.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1-Real Property Purchase and Sale Agreement dated
as of December 10, 2001 by and between HD Acquisitions, LLC
and Merisel Properties, Inc.
Exhibit 10.2-Tenth Amendment to Real Property Purchase and
Sale Agreement dated as of May 10, 2002 between DCF I, LLC,
the successor in interest to HD Acquisitions, LLC, and Merisel
Properties, Inc.
Exhibit 10.3-Consent to Assignment of Land Purchase
Agreement dated May 10, 2002 between Merisel Properties
Inc., HD Acquisitions, LLC and DCF I, LLC.
Exhibit 10.4-Purchase Money Note dated May 20, 2002 issued by
DCF I, LLC to Merisel Properties, Inc.
Exhibit 10.5-Purchase Money Deed of Trust dated May 20, 2002
between DCF I, LLC, as Grantor, Karen Tallman, as Trustee, and
Merisel Properties, Inc., as Beneficiary.
Exhibit 10.6-Construction Promissory Note dated May 20, 2002
issued by DCF I , LLC to Merisel Properties, Inc.
Exhibit 10.7-Deed of Trust and Security Agreement dated as of
May 20, 2002 between DCF I, LLC, as Grantor, Karen Tallman, as
Trustee, and Merisel Properties, Inc., as Beneficiary.
Exhibit 10.8-Construction Loan Agreement dated May 20, 2002
between DCF I, LLC, Anthony Dilweg and Merisel Properties,
Inc.
Exhibit 99.1-Certification of CEO and CFO pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The following Reports on Form 8-K were filed during the quarter
ended June 30, 2002.
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 2002
Merisel, Inc.
By:/S/Timothy N. Jenson
---------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and Chief
Financial Officer
(Principal Executive and Financial Officer)