SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _______________ to ___________
Commission File Number 0-17156
MERISEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4172359
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Continental Boulevard
El Segundo, CA 90245-0984
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 615-3080
--------------
- ---------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last year
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the Registrant is an accelerated
filer (as defined by Rule 12b-2 of the Exchange Act). [NOTE: required if public
float of $75 mil]
Yes No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Number of Shares Outstanding
Common Stock, $.01 par value as of November 11, 2002
7,619,095 Shares
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION (UNAUDITED)
Consolidated Balance Sheets as of 1
September 30, 2002 and December 31, 2001
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 21
Disclosure Controls and Procedures 21
PART II OTHER INFORMATION 22
SIGNATURES 23
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
September 30, December 31,
2002 2001
------------------- -------------------
Current assets:
Cash and cash equivalents $48,373 $55,578
Accounts receivable (net of allowances of $1,724 and $703 for 2002 13,420 8,831
and 2001, respectively)
Inventories 13 117
Prepaid expenses and other current assets 634 920
------------------- -------------------
Total current assets 62,440 65,446
Property and equipment, net 884 3,418
Other assets 2,805 91
------------------- -------------------
Total assets $66,129 $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
September 30,
2002 December 31, 2001
------------------- --------------------
Current liabilities:
Accounts payable $12,697 $11,763
Accrued liabilities 16,720 21,797
------------------- --------------------
Total current liabilities 29,417 33,560
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized
1,000,000 shares; 150,000 shares issued and outstanding 18,007 16,969
Common stock, $.01 par value, authorized 150,000,000
shares; 8,026,375 and 8,030,844 shares issued for 2002
and 2001, respectively; 7,619,095 and 7,842,644 shares
outstanding for 2002 and 2001, respectively 76 78
Additional paid-in capital 280,189 281,343
Accumulated deficit (260,568) (262,669)
Accumulated other comprehensive loss (152)
Treasury stock (840) (326)
------------------- --------------------
Total stockholders' equity 36,712 35,395
------------------- --------------------
Total liabilities and stockholders' equity $66,129 $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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- ---------------- ------------------ -----------------
Net sales $20,714 $42,199 $54,332 $321,545
Cost of sales 18,057 37,862 48,856 291,467
--------------- ---------------- ------------------ -----------------
Gross profit 2,657 4,337 5,476 30,078
Selling, general & administrative expenses 2,443 3,809 6,032 29,174
Restructuring charge (135) 245 2,190
Impairment charge 29,416
--------------- ---------------- ------------------ -----------------
Operating income (loss) 214 663 (801) (30,702)
Interest (income) expense, net (582) (521) (1,392) 284
Other (income) expense, net (53) (26) (137) 945
--------------- ---------------- ------------------ -----------------
Income (loss) from operations before income
taxes, discontinued operations and extraordinary 849 1,210 728 (31,931)
item
Income tax provision (benefit) (338) 299 (258) 946
--------------- ---------------- ------------------ -----------------
Income (loss) from operations before
discontinued operations and extraordinary item 1,187 911 986 (32,877)
Discontinued operations:
Income (loss) from discontinued operations 49 371 1,115 (2,547)
Gain on sale of discontinued operations 36,250
--------------- ---------------- ------------------ -----------------
Income before extraordinary item 1,236 1,282 2,101 826
Extraordinary gain on extinguishment of debt, net 2,872
--------------- ---------------- ------------------ -----------------
Net income $1,236 $1,282 $2,101 $3,698
=============== ================ ================== =================
Preferred stock dividends 353 326 1,039 959
--------------- ---------------- ------------------ -----------------
Net income available to common stockholders $883 $956 $1,062 $2,739
=============== ================ ================== =================
Net income (loss) per share (basic and diluted):
Income (loss) from operations before
discontinued operations and extraordinary
item less preferred dividends $ .11 $ .07 $ (.01) $ (4.22)
Income (loss) from discontinued operations .05 .14 (.32)
Gain on sale of discontinued operations 4.52
Extraordinary gain on extinguishment of debt, .36
net
--------------- ---------------- ------------------ -----------------
Net income available to common stockholders $ .11 $ .12 $ .13 $ .34
=============== ================ ================== =================
Weighted average number of shares
Basic 7,707 8,014 7,773 8,025
Diluted 7,707 8,019 7,773 8,025
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2002 2001
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,101 $3,698
Less: Gain on sale of MOCA (36,250)
Less: Extraordinary gain on extinguishment of debt (2,872)
Less: (income) loss from discontinued operations, net (1,115) 2,547
------------------ -------------------
Income (loss) from continuing operations 986 (32,877)
Adjustments to reconcile net income (loss) from continuing operations
to net cash used by operating activities:
Depreciation and amortization 28 4,438
Provision for doubtful accounts 757 (3,769)
Impairment losses 29,416
Restricted stock units compensation expense (119)
Deferred compensation (152)
Gain on sale of property and equipment (135)
Changes in operating assets and liabilities:
Accounts receivable (5,346) (26,856)
Inventories 104 17,500
Prepaid expenses and other current assets (30) 5,737
Accounts payable 934 (29,203)
Accrued liabilities (5,595) (18,001)
------------------ -------------------
Net cash used for operating activities (8,568) (53,615)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (114)
Proceeds from sale of MOCA 36,250
Proceeds from sale of Canada 670 14,686
Purchase of securities (637)
Transaction costs on sale of property (234)
Proceeds from sale of property and equipment 162 740
------------------ -------------------
Net cash (used for) provided by investing activities (39) 51,562
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing facility 35,963
Repayments under other financing (1,333)
Purchase of bonds (20,931)
Purchase of treasury stock (515) (98)
------------------ -------------------
Net cash used for financing activities (515) 13,601
EFFECT OF EXCHANGE RATE CHANGES ON CASH (75)
NET CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS 1,917 (785)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,205) 10,688
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 55,578 46,865
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $48,373 $57,553
================== ===================
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 software licensing solution
provider. 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 nine months ended September 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 consolidated 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 September 30, 2002, the Company had cash and cash equivalents of
approximately $48 million. The Company has developed an operating plan for 2002
that focuses upon growing its software licensing 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 after wind-down related expenditures, 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 consolidated balance sheet. If the Company were to use
a significant amount of cash to fund one or more acquisitions, the Company would
have less liquidity to meet its working capital needs.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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.
4. Revenue Recognition
The Company derives revenues from software licensing, product updates and
customer support services and training and consulting services purchased
directly from third party vendors. The Company records revenue from software
licensing when there is persuasive evidence of an arrangement, the fee is fixed
and determinable, collection is reasonably assured and delivery of the product
has occurred (as prescribed by Statement of Position ("SOP") 97-2, "Software
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
Revenue Recognition"). In arrangements that include software licenses and
professional services and/or product updates ("multiple elements"), the Company
allocates revenue based on vendor specific objective evidence ("VSOE") of fair
value of all elements, defers revenue for the undelivered items and recognizes
as revenue the fair value of the delivered items based on VSOE of each element
determined by the price for which the element is sold separately.
The Company recognizes product updates and customer support services revenue
ratably over the term of the arrangement. Revenue from training and consulting
services is recognized when the services are completed.
The Company recognizes revenue on a gross basis as (a) the Company has sole
discretion in determining the price for which it sells software licenses and
services, (b) its suppliers impose no control or limitations on the Company's
pricing, (c) the Company assumes all credit risk associated with its customers,
(d) the Company often actively assists the customer in the selection of its
products and services and (e) the Company has the discretion to purchase the
products and services it offers from a variety of different suppliers and
distributors.
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. 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. Risks and Uncertainties
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 nine months ended September 30, 2002 and the year ended
December 31, 2001, that vendor's products accounted for 13.0%, 20.0% 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 nine months ended September 30, 2002 and
the year ended December 31, 2001 accounted for 75.0%, 72.2% and 71.2%,
respectively, of software licensing sales.
6. Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The Company's third quarter is the 13-week period ending
on the Saturday
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
nearest to September 30. For simplicity of presentation, the Company has
described the interim periods and year-end period as of September 30 and
December 31, respectively.
7. 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 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 consolidated 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $0 $2,814 $1,105 $7,279
Income (loss) from Discontinued Operations 49 371 1,115 (2,547)
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
8. 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.
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 September 30, 2002, $3,181,000 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 September 30, 2002 and the expected timing of payments
(in thousands):
December 31, September 30,
2001 2002
Balance Charges Adjustments Payments Balance
-------------------- --------------- ---------------- --------------- ----------------
Severance and related costs $ 1,176 $ 485 $ (220) $ 1,028 $ 413
Facility, lease and other 4,184 (20) 1,396 2,768
-------------------- --------------- ---------------- --------------- ----------------
Total $ 5,360 $ 485 $ (240) $ 2,424 $ 3,181
==================== =============== ================ =============== ================
Three months ended
------------------------------------------------------------------
Expected timing of December 31, March 31, June 30, September 30,
payouts 2002 2003 2003 2003 Thereafter Total
---------------- ---------------- ------------- ------------------ ------------ ------------
Severance and related
costs $175 $ 159 $ 79 $413
Facility, lease and
other 459 362 361 349 1,237 2,768
---------------- ---------------- ------------- ------------------ ------------ ------------
Total $ 634 $ 521 $ 440 $ 349 $ 1,237 $ 3,181
================ ================ ============= ================== ============ ============
In addition to the restructuring amount of $3,181,000 which is recorded in
accrued liabilities, as of September 30, 2002, the Company has recorded
$10,489,000 of other accrued liabilities and $3,833,000 of accounts payable
related to the portion of its U.S. distribution business being wound down.
9. 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 nine-month period ended September 30, 2001
assuming that the disposition occurred on the first date of the period (in
thousands).
Pro Forma Adjustments
------------------------------------
Historical Merisel
9/30/01 Canada (a) Other Pro Forma
--------------- -------------- --------------- ---------------
Net sales $ 321,545 $ 295,682 $ 25,863
Cost of sales 291,467 278,679 12,788
--------------- -------------- --------------- ---------------
Gross profit 30,078 17,003 13,075
Selling, general & administrative
Expenses 29,174 15,041 2,127 (b) 16,260
Restructuring charge 2,190 (229) 2,419
Impairment charge 29,416 29,416
--------------- -------------- --------------- ---------------
Operating loss (30,702) (27,225) (2,127) (5,604)
Interest expense, net 284 1,799 834 (c)
Other expense, net 945 334 611
--------------- -------------- --------------- ---------------
Loss from continuing operations before
income taxes and extraordinary item (31,931) (29,358) (2,961) (6,215)
Income tax provision 946 297 651
--------------- -------------- --------------- ---------------
Loss from continuing operations
before extraordinary item $ (32,877) $ (29,655) $ (2,961) $ (6,866)
=============== ============== =============== ===============
Net loss per share from continuing
operations before extraordinary item
less preferred dividends $ (4.22) $ (.98)
=============== ============== =============== ===============
Weighted Average Number of
Shares Outstanding 8,025 8,025
=============== ============== =============== ===============
(a) Merisel Canada - Represents the historical unaudited balances of
Merisel Canada for the nine months ended September 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 September 30, 2001 for net sales, operating
income and income from continuing operations before extraordinary item were
$11,297,000, $651,000, and $1,364,000 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 September
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
30, 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.
10. 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
nine months ended September 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.
11. 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $1,236 $1,282 $2,101 $3,698
Other comprehensive loss - unrealized loss on
available for sale securities (70) (152)
------------ ------------- ------------ -------------
Comprehensive income $1,166 $1,282 $1,949 $3,698
============ ============= ============ =============
12. 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. Basic and diluted earnings per share are equal for the
three and nine months ended September 30, 2002 because potential common shares
equivalents are anti-dilutive.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---------------- -------------- --------------- --------------
Income (loss) from operations before
discontinued operations and extraordinary item $1,187 $911 $986 $(32,877)
Preferred stock dividends (353) (326) (1,039) (959)
---------------- -------------- --------------- --------------
Income (loss) available to common stockholders 834 585 (53) (33,836)
Income (loss) from discontinued operations 49 371 1,115 (2,547)
Gain on sale of discontinued operations 36,250
Extraordinary gain on extinguishment of debt 2,872
---------------- -------------- --- --------------- --------------
Net income available to common stockholders $883 $956 $1,062 $2,739
================ ============== =============== ==============
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 September 30, 2002, the Company had cumulatively repurchased approximately
407,000 shares under these authorizations for an aggregate cost of $846,000
(including approximately $6,000 in brokerage commissions), which shares have
been reflected as treasury stock in the accompanying consolidated balance sheet.
13. 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.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
In accordance with SFAS No. 131, the Company has prepared the following tables
which present information related to each operating segment included in internal
management reports.
Three months ended September 30, 2002
(In thousands)
U.S.
Distribution Canada Total
Net sales to external customers $20,714 $20,714
Gross profit 2,657 2,657
Operating income 214 214
Total segment assets 66,129 66,129
Three months ended September 30, 2001
(In thousands)
U.S.
Distribution Canada Total
Net sales to external customers $11,297 $30,902 $42,199
Gross profit 2,629 1,708 4,337
Operating income 651 12 663
Total segment assets 69,518 69,518
Nine months ended September 30, 2002
(In thousands)
U.S.
Distribution Canada Total
Net sales to external customers $54,332 $54,332
Gross profit 5,476 5,476
Operating loss (801) (801)
Nine months ended September 30, 2001
(In thousands)
U.S.
Distribution Canada Total
Net sales to external customers $25,863 $295,682 $321,545
Gross profit 13,075 17,003 30,078
Operating loss (3,477) (27,225) (30,702)
14. Prepaid Expenses and Other Current Assets
At September 30, 2002, prepaid expenses and other current assets include
approximately $485,000 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 September 30, 2002, there were
unrealized holding losses of approximately $152,000. This unrealized loss has
been recorded as a component of other comprehensive loss.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
15. 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 its software
licensing business 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
being a software licensing solution provider 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 $883,000, or
$.11 per share, for the three months ended September 30, 2002, compared to net
income available to common stockholders of $956,000, or $.12 per share, for the
2001 period. The results include income from discontinued operations of $49,000
and $371,000 for the three months ended September 30, 2002 and 2001,
respectively. The Company reported net income available to common stockholders
of $1,062,000, or $.13 per share, for the nine months ended September 30, 2002,
compared to net income available to common stockholders of $2,739,000, or $.34
per share, for the 2001 period. The results include a gain from discontinued
operations of $1,115,000 for the nine months ended September 30, 2002 and, for
the nine months ended
September 30, 2001, a loss from discontinued operations of $2,547,000, a gain on
sale of discontinued operations of $36,250,000, and a gain of $2,872,000 on
extinguishment of debt. 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 September 30, 2002 as Compared to the Three Months Ended
September 30, 2001.
The Company's net sales decreased 51% from $42,199,000 in the quarter ended
September 30, 2001 to $20,714,000 in the quarter ended September 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 $11.3 million
in the 2001 period. 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 nine months ended September 30, 2002
and the year ended December 31, 2001, that vendor's products accounted for
13.0%, 20.0% 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 nine months ended
September 30, 2002 and the year ended December 31, 2001 accounted for 75.0%,
72.2% and 71.2%, respectively, of software licensing sales.
Gross profit decreased $1,680,000 from $4,337,000 in the third quarter of 2001
to $2,657,000 in the third quarter of 2002. Gross profit as a percentage of
sales, or gross margin, was 10.3% for the three months ended September 30, 2001
compared to 12.8% for the three months ended September 30, 2002. The 2001 and
2002 periods reflect reductions in cost of sales of approximately $1,956,000 and
$1,982,000, 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
5.6% and 3.3% in the 2001 and 2002 periods, respectively. Excluding the results
of the Canadian distribution business and the adjustments discussed above, gross
profit would have been $673,000 or 6.0% of sales in the third quarter of 2001.
The decrease in adjusted 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 35.9% from $3,809,000
in the third quarter of 2001 to $2,443,000 in the third 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 early part of 2001. The Company had approximately $200,000 and $32,000 of
favorable adjustments related to the wind-down of the U.S. distribution business
in the third 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 9.5% in the three months ended September 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 $2,113,000 or 18.7% of net sales in
the third quarter of 2001.
As a result of the above items, the Company had operating income of $214,000 for
the three-month period ended September 30, 2002 compared to operating income of
$663,000 for the three-month period ended September 30, 2001.
Nine Months Ended September 30, 2002 as Compared to the Nine Months Ended
September 30, 2001.
The Company's net sales decreased 83.1% from $321,545,000 in the nine months
ended September 30, 2001 to $54,332,000 in the nine months ended September 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 $25.9 million, of which $24.7 million was
generated by the software licensing business. The increase in net sales for the
U.S. distribution business resulted from the Company's focus on growing its
software licensing business.
Gross profit decreased $24,602,000 from $30,078,000 in the first three quarters
of 2001 to $5,476,000 in the first three quarters of 2002. Gross profit as a
percentage of sales, or gross margin, was 9.4% for the nine months ended
September 30, 2001 compared to 10.1% for the nine months ended 2002. The 2001
and 2002 periods reflect reductions in cost of sales of approximately
$11,360,000 and $3,284,000, 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 4.0% in the 2001 and 2002 periods, respectively. Excluding results
of the Canadian distribution business and the adjustments discussed above, gross
profit would have been $1,715,000 or 6.6% of net sales in the first three
quarters of 2001. The decrease in adjusted gross margin is primarily related to
pricing pressures experienced in the software solution provider business and
lower vendor rebates due to changes in vendor terms.
Selling, general and administrative expenses decreased by 79.3% from $29,174,000
in the first nine months of 2001 to $6,032,000 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 early part of 2001. The Company had approximately $4,700,000 and $134,000 of
favorable adjustments related to the wind-down of the U.S. distribution business
in the first nine 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 10.5% in the nine months ended September 30,
2001 compared to 11.3% 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 discussed above, selling,
general and administrative expenses, which included substantial amounts related
to the wind down of the U.S. distribution business, would have been $18,833,000
or 72.8% of net sales in the first three quarters of 2001.
During the first quarter of 2002, the Company made the decision to reduce its
workforce by approximately 17 full-time positions, which resulted in the Company
having approximately 47 remaining 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.
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 a result of the above items, the Company had an operating loss of $801,000
for the nine-month period ended September 30, 2002 compared to an operating loss
of $30,702,000 for the nine-month period ended September 30, 2001.
Interest Expense; Other Expense; and Income Tax Provision
Interest income increased from $521,000 in the third quarter of 2001 to $582,000
in the third quarter of 2002 and increased from expense of $284,000 in the nine
months ended September 30, 2001 to income of $1,392,000 in the nine months ended
September 30, 2002. The year-to-date 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, and interest income earned on invested cash balances
and early pay discounts taken in the 2002 period.
Other expense for the Company decreased from $945,000 in the nine months ended
September 30, 2001 to income of $137,000 in the nine months ended September 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 $299,000 and $946,000 in the three and
nine months ended September 30, 2001, respectively to benefits of $338,000 and
$258,000 for the three and nine months ended September 30, 2002, respectively.
The decrease is largely attributable to the sale of Merisel Canada and the
settlement of certain state income tax matters during the quarter ended
September 30, 2002. 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 Discontinued Operations and Extraordinary
Item
As a result of the above items, the Company had income from continuing
operations before extraordinary item of $1,187,000 for the three months ended
September 30, 2002 compared to $911,000 for the 2001 period. The Company
reported income from continuing operations before extraordinary item of $986,000
for the nine months ended September 30, 2002 compared to a loss of $32,877,000
for the nine months ended September 30, 2001.
Extraordinary Gain; Gain on Sale of MOCA
In the first three months 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 nine months
ended September 30, 2001. See "Liquidity and Capital Resources - Debt
Obligations, Financing Sources and Capital Expenditures."
Additionally, for the nine months ended September 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 solution provider 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 solution provider 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 nine months ended September 30,
2002 was $8,568,000. The primary use of cash was a decrease in accrued expenses
of $5,595,000, which was primarily related to the wind-down of the U.S.
distribution business.
Net cash used for investing activities was $39,000 and consisted of $162,000 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, offset by $670,000 received related to the sale of Merisel Canada.
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 solution provider 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 after wind-down related
expenditures, 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 September 30,
2002, the Company's two largest customers represented 26%, or $3,776,000, of the
Company's total trade receivables. Net sales to these customers represented
$5,001,000, or 24%, and $17,635,000, or 31%, of the Company total net sales for
the three and nine months ended September 30, 2002, respectively. The Company
believes it has established an adequate reserve against the September 30, 2002
accounts receivable balance.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
At September 30, 2002, the Company had cash investments of $46,909,000 held in
overnight, interest-bearing accounts invested through high-credit quality
financial institutions. Additionally, the Company had cash balances of
$1,464,000 maintained in various checking accounts at September 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.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company completed an
evaluation, under the supervision and with the participation of the Company's
chief executive officer and chief financial officer of the effectiveness of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Exchange Act. Based on this evaluation, the Company's chief executive officer
and chief financial officer concluded that the Company's disclosure controls and
procedures were effective with respect to timely communicating to them all
material information required to be disclosed in this report as it related to
the Company and its subsidiaries.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed this evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Amended and Restated Registration Rights
Agreement dated June 9, 2000 (executed November 7, 2002)
between Merisel, Inc. and Phoenix Acquisition.
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) Reports on Form 8-K
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: November 11, 2002
Merisel, Inc.
By:/s/Timothy N. Jenson
---------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and Chief
Financial Officer
(Principal Executive and Financial Officer)
CERTIFICATIONS
I, Timothy N. Jenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merisel, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/Timothy N. Jenson
Date: November 11, 2002 ------------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and
Chief Financial Officer
CERTIFICATIONS
I, Timothy N. Jenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merisel, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
c. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
d. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
e. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/Timothy N. Jenson
Date: November 11, 2002 ----------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and
Chief Financial Officer