SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
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).
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:
Number of Shares Outstanding
Class as of May 13, 2003
Common Stock, $.01 par value 7,616,380 Shares
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION (Unaudited)
Consolidated Balance Sheets as of 1-2
March 31, 2003 and December 31, 2002
Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5-13
Management's Discussion and Analysis of 14-18
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 18
Disclosure Controls and Procedures 18
PART II OTHER INFORMATION 19
SIGNATURES 20
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 and the
Company's other public filings. These factors are discussed elsewhere in this
report, including, without limitation, in the footnotes to the attached
financial statements and under the caption "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
March 31, December 31,
2003 2002
------------------- -------------------
Current assets:
Cash and cash equivalents $48,180 $46,795
Accounts receivable (net of allowances of $1,045 and $1,185 for 13,150 21,664
2003 and 2002, respectively)
Prepaid expenses and other current assets 72 168
------------------- -------------------
Total current assets 61,402 68,627
Property and equipment, net 883 883
Other assets 3,364 3,334
------------------- -------------------
Total assets $65,649 $72,844
=================== ===================
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
March 31, December 31, 2002
2003
------------------- --------------------
Current liabilities:
Accounts payable $12,828 $18,157
Accrued liabilities 9,601 12,408
------------------- --------------------
Total current liabilities 22,429 30,565
Long term liabilities 559 529
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized
1,000,000 shares; 150,000 shares issued and outstanding 18,734 18,368
Common stock, $.01 par value, authorized 150,000,000
shares; 8,026,364 and 8,026,375 shares issued for 2003
and 2002, respectively; 7,616,384 and 7,619,095 shares
outstanding for 2003 and 2002, respectively 76 76
Additional paid-in capital 279,448 279,814
Accumulated deficit (254,609) (255,559)
Accumulated other comprehensive loss (141) (109)
Treasury stock (847) (840)
------------------- --------------------
Total stockholders' equity 42,661 41,750
------------------- --------------------
Total liabilities and stockholders' equity $65,649 $72,844
=================== ====================
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
March 31,
2003 2002
------------------- ----------------------
Net sales $18,463 $15,773
Cost of sales 17,438 14,538
------------------- ----------------------
Gross profit 1,025 1,235
Selling, general and administrative expenses 660 1,970
Restructuring charge 256 279
------------------- ----------------------
Operating income (loss) 109 (1,014)
Interest income, net 644 334
Other income, net 1 82
------------------- ----------------------
Income (loss) from operations before income tax and discontinued 754 (598)
operations
Income tax (benefit) provision (196) 40
------------------- ----------------------
Income (loss) from operations before discontinued operations 950 (638)
Discontinued operations:
Income from discontinued operations 1,066
------------------- ----------------------
Net income $950 $428
=================== ======================
Preferred dividends 366 339
------------------- ----------------------
Net income available to common stockholders $584 $89
=================== ======================
Net income (loss) per share (basic and diluted):
Income (loss) from continuing operations less preferred dividends $.08 $(.13)
Income from discontinued operations .14
------------------- ----------------------
Net income available to common stockholders $.08 $.01
=================== ======================
Weighted average number of shares
Basic and diluted 7,619 7,834
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
2003 2002
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $950 $428
Less: income from discontinued operations, net 1,066
------------------ -------------------
Income (loss) from continuing operations 950 (638)
Adjustments to reconcile net loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 10
Provision for doubtful accounts 102 (11)
Gain on sale of property and equipment (82)
Unrealized loss on deferred compensation asset (32)
Changes in operating assets and liabilities:
Accounts receivable 8,412 (1,165)
Prepaid expenses and other current assets 96 (119)
Accounts payable (5,329) 2,439
Accrued and long term liabilities (2,745) (2,856)
------------------ -------------------
Net cash provided by (used for) operating activities of continuing 1,454 (2,422)
operations
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (62) (637)
Proceeds from sale of property and equipment, net disposal cost 82
------------------ -------------------
Net cash used for investing activities of continuing operations (62) (555)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (7) (27)
------------------ -------------------
Net cash used for financing activities of continuing operations (7) (27)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 1,861
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,385 (1,143)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,795 55,578
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $48,180 $54,435
================== ===================
Supplemental disclosure of cash flow information:
(in thousands)
Cash paid (received) during the period for: 2003 2002
------------------ --------------------
Income taxes (152) 119
Preferred dividends accrued 366 339
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. 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
business today is its software licensing business. The Company is, however,
actively seeking and exploring acquisition and other investment opportunities.
The information for the three months ended March 31, 2003 and 2002 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. 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, 2002.
2. Liquidity
At March 31, 2003, the Company had cash and cash equivalents of approximately
$48 million. The Company has developed an operating plan for 2003 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 are not 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 elected to
adopt the provisions of SFAS No. 145 early, but the adoption had no impact on
the accompanying consolidated statements of operations.
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)
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
issued or modified subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002. The Company has historically issued guarantees only on a limited basis and
does not anticipate FIN 45 will have a material effect on its financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. This statement also amends APB Opinion No. 28, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
statements. SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company has elected not to change to the
fair value based method of accounting for stock-based compensation at this time.
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
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
that they provide 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.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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 was
terminating its relationship with the Company effective August 31, 2002. For the
three months ended March 31, 2002 and the year ended December 31, 2002, that
vendor's products accounted for 28.7% and 13.8%, 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 ended March 31, 2002, the three months ended March 31, 2003 and the year
ended December 31, 2002 accounted for 67.6%, 93.9% and 79.8%, respectively, of
software licensing sales. The termination of the Company's distribution
agreement with its remaining key vendor, or a material change in the terms of
the distribution agreement, including a decrease in rebates, could have a
material adverse effect on the Company.
For the three months ended March 31, 2002, 10 customers accounted for
approximately 77.5% of the Company's U.S. software licensing net sales, with the
top two customers accounting for approximately 24.6% and 18% of net sales,
respectively. For the three months ended March 31, 2003, 10 customers accounted
for approximately 72.2% of the Company's U.S. software licensing net sales, with
the top two customers accounting for approximately 21.9% and 16.8% of net sales,
respectively.
6. Fiscal Year
Effective December 31, 2002, the Company's fiscal year ends on December 31 and
its first fiscal quarter ends on March 31. Prior to December 31, 2002, the
Company's fiscal year was the 52-week period ending on the Saturday nearest to
December 31 and its first fiscal quarter was the 13-week period ending on the
Saturday nearest to March 31. For clarity of presentation of the prior first
quarter, the Company has described the first fiscal quarter presented as if the
period ended on March 31.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
7. Discontinued Operations
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 did not generate 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 the 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.
Summarized financial information for the discontinued operations is as follows:
(In thousands)
For the Three Months Ended
March 31, 2003 March 31, 2002
Net Sales $1,105
Income from Discontinued Operations 1,066
8. Restructuring Charges and Wind Down Related Liabilities
During the first quarter of 2003, the Company made the decision to reduce its
workforce by approximately 10 full-time positions. As a result, a restructuring
charge of $256,000 related to severance and employee benefits was recorded in
the first quarter of 2003.
During the first quarter of 2002, the Company made the decision to reduce its
workforce by approximately 17 full-time positions. As a result, a restructuring
charge of $265,000 related to severance and employee benefits was 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.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
As of March 31, 2003, $2,703,000 of total restructuring costs had not been paid
and was included in accrued liabilities on the balance sheet. The following
table sets forth the activity and balances of the restructuring reserve from
December 31, 2002 to March 31, 2003:
(In thousands)
December 31, 2002 March 31, 2003
Balance Net Charges Payments Balance
Type of cost:
Severance and related costs $ 283 $ 256 $ 154 $ 385
Facility, lease and other 2,599 281 2,318
------------------------- ----------------- ---------------- ----------------------
Total $ 2,882 $ 256 $ 435 $ 2,703
========================= ================= ================ ======================
Three months ended
------------------------------------------------------------------
Expected timing of June 30, September 30, December 31, March 31,
payouts 2003 2003 2003 2004 Thereafter Total
---------------- ----------------- --------------- --------------- ------------ ------------
Severance and related
costs $150 $ 150 $ 85 $385
Facility, lease and
other 314 297 297 320 1,090 2,318
---------------- ----------------- --------------- --------------- ------------ ------------
Total $ 464 $ 447 $ 382 $ 320 $ 1,090 $ 2,703
================ ================= =============== =============== ============ ============
9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in
thousands):
March 31, 2003 December 31, 2002
--------------- ------------------
Accounts payable:
Trade payables $ 9,919 $ 15,037
Wind-down payables related to discontinued vendors 2,909 3,120
--------------- ------------------
Total accounts payable $ 12,828 $ 18,157
=============== ==================
Accrued liabilities:
Restructuring accruals $ 2,703 $2,882
Compensation and other benefit accruals 1,100 1,819
State and local sales taxes and other taxes 1,719 1,724
Miscellaneous open credits 139 1,467
Software license and IT-related accruals 332 478
Optisel accruals 288 418
Other 3,320 3,620
--------------- ------------------
Total accrued liabilities $ 9,601 $ 12,408
=============== ==================
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
10. Disposition of Assets
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 4.25% at March 31,
2003. 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. As of March 31, 2003 no additional amounts have been
loaned. Subsequent to March 31, 2003, the purchaser informed the Company that
the purchaser's plans for developing the property securing the note may not be
economically feasible; and therefore the purchaser was likely to default on the
note and stop making any further payments. The Company is analyzing the
appropriate actions to maximize the underlying value of this note, including
potentially foreclosing on the property.
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 March 31,
2003 2002
---- ----
Net income $950 $428
Other comprehensive loss - unrealized loss on available for sale
securities (32)
--------------- -----------------
Comprehensive income $918 $428
=============== =================
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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.
(In thousands)
Three months ended March 31,
2003 2002
------------------ -----------------
Income (loss) from continuing operations $950 $(638)
Preferred stock dividends (366) (339)
------------------ -----------------
Income (loss) available to common stockholders 584 (977)
Income from discontinued operations 1,066
------------------ -----------------
Net income available to common stockholders $584 $89
================== =================
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. On
January 15, 2003, the Company announced that its Board of Directors had
authorized the expenditure of up to an additional $1,000,000 for repurchases of
its common stock at a maximum share price to be determined by the Board of
Directors from time to time. As of March 31, 2003, the Company had repurchased
approximately 410,000 shares under these authorizations for an aggregate cost of
$854,000 (including approximately $7,000 in brokerage commissions), which shares
have been reflected as treasury stock in the accompanying consolidated balance
sheets. There is approximately $993,000 remaining to be used for stock
repurchases under the current authorization.
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 Company has determined that it currently
has only one operating segment, the software licensing solution provider
segment. During 2002 and 2003, the Company had software licensing as the only
operating segment.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
14. Other Assets
At March 31, 2003, other assets include approximately $559,000 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 long term
liabilities. Payment of the deferred compensation is due as provided for in the
agreement. As of March 31, 2003, there were unrealized holding losses of
approximately $141,000. This unrealized loss has been recorded as a component of
other comprehensive loss.
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 not significant.
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, a
distributor of Sun Microsystems products ("MOCA"). Effective as of October 27,
2000, the Company completed the sale of its MOCA business unit to Arrow
Electronics, Inc. ("Arrow"). Additionally, on December 14, 2000, the Company
announced that the U.S. distribution business would focus solely on software
licensing and that the balance of the U.S. distribution business would be wound
down. 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 only business today is its software licensing business. The
Company is, however, actively seeking and exploring acquisition and other
investment opportunities.
Discontinued Operations
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 did not generate 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 discontinued the 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 significant remaining obligations related
to the U.S. distribution business, primarily with respect to leases, vendors and
employee severance. See "Liquidity and Capital Resources" below.
Risks and Uncertainties
In August 2002 the Company was advised by one of its largest vendors that it was
terminating its relationship with the Company effective August 31, 2002. For the
three months ended March 31, 2002 and the year ended December 31, 2002, that
vendor's products accounted for 28.7% and 13.8%, 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 ended March 31, 2002, the three months ended March 31, 2003 and the year
ended December 31, 2002 accounted for 67.6%, 93.9% and 79.8%, respectively, of
software licensing sales. The termination of the Company's distribution
agreement with its remaining key vendor, or a material change in the terms of
the distribution agreement, including a decrease in rebates, could have a
material adverse effect on the Company.
For the three months ended March 31, 2002, 10 customers accounted for
approximately 77.5% of the Company's U.S. software licensing net sales, with the
top two customers accounting for approximately 24.6% and 18% of net sales,
respectively. For the three months ended March 31, 2003, 10 customers accounted
for approximately 72.2% of the Company's U.S. software licensing net sales, with
the top two customers accounting for approximately 21.9% and 16.8% of net sales,
respectively.
RESULTS OF OPERATIONS
The Company reported net income available to common stockholders of $584,000, or
$0.08 per share, for the three months ended March 31, 2003, compared to net
income available to common stockholders of $89,000, or $0.01 per share, for the
2002 period. The results for the three months ended March 31, 2002 include
income from discontinued operations of $1,066,000. The discussion and analysis
below does not reflect discontinued operations, but does include the Company's
U.S. distribution business.
Three Months Ended March 31, 2003 as Compared to the Three Months March 31,
2002.
The Company's net sales increased 17.1% from $15,773,000 in the quarter ended
March 31, 2002 to $18,463,000 in the quarter ended March 31, 2003. The increase
in net sales resulted from the focus the Company has on growing its software
licensing business.
Gross profit decreased $210,000 from $1,235,000 in the first quarter of 2002 to
$1,025,000 in the first quarter of 2003. Gross profit as a percentage of sales,
or gross margin, was 7.8% for the three months ended March 31, 2002 compared to
5.6% for the three months ended 2003. The 2002 and 2003 periods reflect
reductions in cost of sales of approximately $492,000 and $486,000,
respectively, relating to the settlement of certain discontinued vendor
accounts, primarily related to the wind-down of the U.S. distribution business.
Excluding these adjustments, gross margin would have been 4.7% and 2.9% in the
2002 and 2003 periods, respectively. The decrease in gross margins in the
software licensing business are related to competitive pricing pressures and
declining backend rebates offered by manufacturers.
Selling, general and administrative expenses decreased by 66.5% from $1,970,000
in the first quarter of 2002 to $660,000 in the first quarter of 2003. Selling,
general and administrative expenses as a percentage of sales were 3.6% in the
first quarter of 2003 compared to 12.5% in the 2002 period. The 2003 period
reflects approximately $1,357,000 of favorable adjustments related to the
wind-down of the U.S. distribution business, partially offset by $287,000 of
certain transaction costs related to the Company's ongoing acquisition
activities. Excluding these adjustments, selling, general and administrative
expenses as a percentage of sales would have been 9.4% in the first quarter of
2003. The decline in selling, general and administrative expenses, both in
dollars and as a percentage of sales is related to cost reductions that the
Company has made over the past year and efficiencies that have been gained.
During the first quarter of 2003, the Company made the decision to reduce its
workforce by approximately 10 full-time positions. As a result, a restructuring
charge of $256,000 related to severance and employee benefits was recorded in
the first quarter of 2003.
During the first quarter of 2002, the Company made the decision to reduce its
workforce by approximately 17 full-time positions. As a result, a restructuring
charge of $265,000 related to severance and employee benefits was 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 operating income of $109,000 for
the three-month period ended March 31, 2003 compared to an operating loss of
$1,014,000 for the three-month period ended March 31, 2002.
Interest Expense; Other Expense; and Income Tax Provision
Interest income increased from $334,000 in the first quarter of 2002 to $644,000
in the first quarter of 2003. The change primarily reflects an increased amount
of vendor early pay discounts.
Other income for the Company decreased from $82,000 in the three months ended
March 31, 2002 to $1,000 in the three months ended March 31, 2003. Other income
in both periods reflects a gain recognized on the sale of property, plant and
equipment that had been fully depreciated.
The income tax provision decreased from $40,000 in the three months ended March
31, 2002 to a benefit of $196,000 for the three months ended March 31, 2003. In
both 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. In the 2003 period, the tax
provision is offset by refunds related to previously paid federal income tax
amounts.
Income (Loss) from Operations
As a result of the above items, the Company had income from operations of
$950,000 for the three months ended March 31, 2003 compared to a loss from
continuing operations of $638,000 or the three months ended March 31, 2002.
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 provided by operating activities during the three months ended March
31, 2003 was $1,454,000. The primary source of cash was a decrease in accounts
receivable of $8,412,000, which was offset by decreases in accounts payable and
accrued expenses of $5,329,000 and $2,745,000, respectively.
Net cash used for investing activities was $62,000 for the purchase of
securities in connection with an employee deferred compensation agreement.
Financing Sources and Capital Expenditures
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.
At March 31, 2003, the Company had cash and cash equivalents of approximately
$48 million. The Company has developed an operating plan for 2003 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 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 March 31, 2003,
the Company's two largest customers represented 43%, or $6,080,000, of the
Company's total trade receivables. The Company believes it has established an
adequate reserve against the March 31, 2003 accounts receivable balance.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
At March 31, 2003, the Company had cash investments of $45,443,000 held in
overnight, interest-bearing accounts invested through high-credit quality
financial institutions. Additionally, the Company had cash balances of
$2,737,000 maintained in various checking accounts at March 31, 2003. 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
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 of the business of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 March 31, 2003.
Current report on Form 8-K dated January 21, 2003 which
reported that the Company had received notification from
Nasdaq indicating that the Company had not maintained the
Nasdaq listing requirements.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 2003
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.
Date: May 15, 2003 /s/Timothy N. Jenson
---------------------------------------
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.
Date: May 15, 2003 /s/Timothy N. Jenson
---------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and
Chief Financial Officer