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, 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 November 12, 2003
Common Stock, $.01 par value 7,616,373 Shares
MERISEL, INC.
INDEX
Page Reference
PART I FINANCIAL INFORMATION (Unaudited)
Consolidated Balance Sheets as of 1-2
September 30, 2003 and December 31, 2002
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5-14
Management's Discussion and Analysis of 15-21
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 22
Disclosure Controls and Procedures 22
PART II OTHER INFORMATION 23
SIGNATURES 24
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
September 30, December 31,
2003 2002
------------------- -------------------
Current assets:
Cash and cash equivalents $44,479 $46,795
Accounts receivable (net of allowances of $1,186 and $1,185 for 18,077 21,664
2003 and 2002, respectively)
Prepaid expenses and other current assets 29 168
------------------- -------------------
Total current assets 62,585 68,627
Property and equipment, net 883 883
Other assets 1,628 3,334
------------------- -------------------
Total assets $65,096 $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
September 30, December 31, 2002
2003
------------------- --------------------
Current liabilities:
Accounts payable $11,949 $18,157
Accrued liabilities 8,223 12,408
------------------- --------------------
Total current liabilities 20,172 30,565
Long term liabilities 661 529
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized
1,000,000 shares; 150,000 shares issued and outstanding 19,488 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 278,694 279,814
Accumulated deficit (253,110) (255,559)
Treasury stock (847) (840)
Accumulated other comprehensive loss (38) (109)
------------------- --------------------
Total stockholders' equity 44,263 41,750
------------------- --------------------
Total liabilities and stockholders' equity $65,096 $72,844
=================== ====================
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------- ---------------- ------------------ ------------------
Net sales $25,370 $20,714 $68,498 $54,332
Cost of sales 24,524 18,057 65,776 48,856
--------------- ---------------- ------------------ ------------------
Gross profit 846 2,657 2,722 5,476
Selling, general & administrative expenses 1,251 2,443 2,924 6,032
Restructuring charge 214 422 245
Impairment loss on note receivable 1,800 1,800
--------------- ---------------- ------------------ ------------------
Operating income (loss) (2,419) 214 (2,424) (801)
Interest income, net 719 582 1,815 1,392
Other income, net 2,449 53 2,467 137
--------------- ---------------- ------------------ ------------------
Income from operations before income taxes and
discontinued operations 749 849 1,858 728
Income tax benefit 315 338 591 258
--------------- ---------------- ------------------ ------------------
Income from operations before discontinued
operations 1,064 1,187 2,449 986
Discontinued operations:
Income from discontinued operations 49 1,115
--------------- ---------------- ------------------ ------------------
Net income $1,064 1,236 $2,449 $2,101
=============== ================ ================== ==================
Preferred stock dividends 381 353 1,120 1,039
--------------- ---------------- ------------------ ------------------
Net income available to common stockholders $683 $883 $1,329 $1,062
=============== ================ ================== ==================
Net income (loss) per share (basic and diluted):
Income (loss) from operations before
discontinued operations less preferred
dividends $ .09 $.11 $ .17 $ (.01)
Income from discontinued operations .14
--------------- ---------------- ------------------ ------------------
Net income available to common stockholders $ .09 $.11 $ .17 $ .13
=============== ================ ================== ==================
Weighted average number of shares
Basic and diluted 7,616 7,707 7,617 7,773
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2003 2002
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,449 $2,101
Less: income from discontinued operations, net 1,115
------------------ -------------------
Net income from operations 2,449 986
Adjustments to reconcile net income from operations
to net cash used by operating activities:
Depreciation and amortization 28
Provision for doubtful accounts 264 757
Impairment loss on note receivable 1,800
Restricted stock units compensation expense (119)
Gain on sale of property and equipment (18) (135)
Non-cash deferred compensation 132 (152)
Changes in operating assets and liabilities:
Accounts receivable 3,323 (5,346)
Prepaid expenses and other assets 176 74
Accounts payable (6,208) 934
Accrued liabilities (4,184) (5,595)
------------------ -------------------
Net cash used for operating activities (2,266) (8,568)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (62) (637)
Proceeds from sale of Canada 670
Transaction costs on sale of property (234)
Proceeds from sale of property and equipment, net of disposal cost 18 162
------------------ -------------------
Net cash used for investing activities (44) (39)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (7) (515)
------------------ -------------------
Net cash used for financing activities (7) (515)
------------------ -------------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 1,917
------------------ -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,317) (7,205)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,795 55,578
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $44,479 $48,373
================== ===================
Supplemental disclosure of cash flow information:
(in thousands)
Cash paid (received) during the period for: 2003 2002
------------------ --------------------
Income taxes (507) (234)
Non-cash investing and financing activities:
Unrealized (gain) loss on securities (71) 152
Preferred stock dividends accrued 1,120 1,038
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 and nine months ended September 30, 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 September 30, 2003, the Company had cash and cash equivalents of
approximately $44.5 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 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. The Company has
complied with the provisions of SFAS No. 146.
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 consolidated
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.
Had compensation cost for the Company's stock option plans been determined based
on their fair value consistent with the provisions of SFAS No. 123, the effect
on the Company's net income and net income per share for the three and nine
months ended September 30, 2003 and 2002 would not be material.
FASB Interpretation ("FIN") No. 46 "Consolidation of Variable Interest Entities;
an Interpretation of ARB No. 51" was issued January 2003, as amended, to clarify
the application of Accounting Research Bulletin ("ARB") No. 51, "Consolidated
Financial Statements" for certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. This
Interpretation applies to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not anticipate that the adoption of FIN 46 will have a material
impact on its consolidated financial position or results of
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts. SFAS No. 149 will be
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The provisions of SFAS No.
149 are to be applied prospectively and the Company does not anticipate that
SFAS No. 149 will have a material impact on its consolidated financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" which is
effective for financial instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
Company's adoption of SFAS No. 150 on July 1, 2003 had no impact on its
consolidated financial position or results of operations.
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
01-9, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." This new guidance provides that
consideration from a vendor to a reseller is generally presumed to be a
reduction of the selling prices of the vendor's products, and, therefore, should
be characterized as a reduction of revenue when recognized in the vendor's
income statement. The Company recognizes consideration given to a customer in
conformity with EITF No. 01-9.
EITF Issue No. 02-16 "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" was issued January 2003 regarding
the circumstances under which cash consideration received from a vendor by a
reseller should be considered (a) an adjustment of the prices of the vendor's
products or services and, therefore, characterized as a reduction of cost of
sales when recognized in the reseller's income statement, (b) an adjustment to a
cost incurred by the reseller and, therefore, characterized as a reduction of
that cost when recognized in the reseller's income statement, or (c) a payment
for assets or services delivered to the vendor and, therefore, characterized as
revenue when recognized in the reseller's income statement. The Company
recognizes consideration received from vendors in conformity with EITF No.
02-16.
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
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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.
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
nine months ended September 30, 2002 and the year ended December 31, 2002, that
vendor's products accounted for 20.3% and 13.8%, respectively, of the Company's
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 remaining largest vendor, which
for the nine months ended September 30, 2002, the nine months ended September
30, 2003 and the year ended December 31, 2002 accounted for 71.7%, 94.0% and
79.4%, respectively, of the Company's 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, would have a material adverse effect on the Company.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The top 10 customers accounted for approximately 73.1% and 60.4% of net sales
for the three months ended September 30, 2003 and 2002, respectively. The top
two customers accounted for approximately 20.9% and 14.1% of net sales for the
three months ended September 30, 2003. In the same period of the prior year, the
top two customers accounted for approximately 16.1% and 10.5% of net sales. At
September 30, 2003, the Company's two largest customers combined represented
37.3%, or $7,105,000 of the Company's total trade receivables. For the nine
months ended September 30, 2003, the top 10 customers accounted for
approximately 72.2% of the Company's net sales, with the top two customers
accounting for approximately 25.5% and 16.2% of net sales, respectively. For the
same period of 2002, the top 10 customers accounted for approximately 61.8% of
the Company's net sales, with the top two customers accounting for approximately
20.2% and 10.7% of net sales, respectively.
6. Fiscal Year
Effective December 31, 2002, the Company's fiscal year ends on December 31 and
its third fiscal quarter ends on September 30. 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 third fiscal quarter was the 13-week period ending on the
Saturday nearest to September 30. For clarity of presentation of the prior third
quarter, the Company has described the third fiscal quarter presented as if the
period ended on September 30.
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.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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
2003 2002 2003 2002
---- ---- ---- ----
Net Sales - - - $1,105
Income from Discontinued Operations - 49 - 1,115
8. Restructuring Charges
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 second quarter of 2003, the Company
recorded an adjustment of $48,000 to reduce the previously recorded charge to
reflect updated estimates of severance and employee benefit liabilities. During
the third quarter of 2003, the Company recorded an adjustment of $214,000 to
increase the previous estimate of certain lease related costs recognized as a
restructuring charge in fiscal 2002.
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. Additional adjustments of $14,000 to increase and
$34,000 to decrease the restructuring reserve were recorded related to lease and
contract commitments in the first and second quarters of 2002, respectively.
As of September 30, 2003, $1,965,000 of total restructuring costs had not been
paid and was included in accrued liabilities in the accompanying consolidated
balance sheet. The following table sets forth the activity and balances of the
restructuring reserve from December 31, 2002 to September 30, 2003:
(In thousands)
December 31, 2002 September 30, 2003
Balance Net Charges Payments Balance
Type of cost:
Severance and related costs $ 283 $ 208 $ 491 $ 0
Facility, lease and other 2,599 214 848 1,965
------------------------- ----------------- ---------------- ----------------------
Total $ 2,882 $ 422 $ 1,339 $ 1,965
========================= ================= ================ ======================
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
The following represents the estimated timing of payouts related to the
remaining facility, lease and other reserve (in thousands):
Quarter Ending
December 31, 2003 $292
March 31, 2004 275
June 30, 2004 407
September 30, 2004 265
Thereafter 726
-----
Total $1,965
======
9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in
thousands):
September 30, 2003 December 31, 2002
-------------------- -------------------
Accounts payable:
Trade payables $ 9,119 $ 15,037
Wind-down payables related to discontinued vendors 2,830 3,120
-------------------- -------------------
Total accounts payable $ 11,949 $ 18,157
==================== ===================
Accrued liabilities:
Restructuring accruals $ 1,965 $2,882
Compensation and other benefit accruals 1,069 1,819
State and local sales taxes and other taxes 1,547 2,011
Software license and IT-related accruals 1,005 1,140
Accrued legal expense and reserves 966 1,143
Accruals related to Optisel and foreign operations 938 1,071
Other 733 2,342
-------------------- -------------------
Total accrued liabilities $ 8,223 $ 12,408
==================== ===================
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"). The Note bears interest at the prime rate plus 2.25%
payable monthly and is secured by the property. The prime rate was 4.00% at
September 30, 2003. The Company recorded the Note at a discounted amount of
$2,714,000 which approximated the carrying value of the property and is included
in other assets in the accompanying consolidated balance sheets. 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
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
in initial improvements. As of September 30, 2003 no additional amounts have
been loaned.
In April 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 discontinued recognizing interest income on the
loan and considered appropriate actions to maximize the underlying value of this
Note, including potentially foreclosing on the property. In the third quarter of
2003, management obtained a real property market valuation of the property
securing the Note and determined that the Note was impaired due to the
continuing default of the holder and the underlying value of the collateral
securing the Note. The Company recorded an impairment loss of $1,800,000 to
reduce the book value of the Note to the estimated fair value of 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income $1,064 $1,236 $2,449 $2,101
Other comprehensive loss - unrealized gain (loss) on
available for sale securities 2 (70) 71 (152)
------------ ------------- ----------- ------------
Comprehensive income $1,066 $1,166 $2,520 $1,949
============ ============= =========== ============
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. Stock options outstanding, representing total potential
common stock equivalents, were approximately 179,000 and 200,000 as of September
30, 2003 and 2002, respectively. As of September 30, 2003 and 2002, there are no
dilutive common stock equivalents.
(In thousands)
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
-------------- ------------ ----------- ---------------
Income (loss) from operations $1,064 $1,187 $2,449 $986
Preferred stock dividends (381) (353) (1,120) (1,039)
-------------- ------------ ----------- ---------------
Income (loss) available to common stockholders 683 834 1,329 (53)
Income from discontinued operations 49 1,115
-------------- ------------ ----------- ---------------
Net income available to common stockholders $683 $883 $1,329 $1,062
============== ============ =========== ===============
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 September 30, 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 as of July 28, 2001, the Company sold its Canadian distribution
segment. 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
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
provider segment. During 2002 and 2003, the Company had software licensing as
the only operating segment.
14. Other Assets
At September 30, 2003 and December 31, 2002, other assets include approximately
$661,000 and $529,000, respectively, of investment equity 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 September 30, 2003,
there were unrealized holding losses of approximately $38,000. 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. The Company made
estimates of its potential exposures and has established reserves for potential
losses related to such proceedings. There can be no assurance that the Company's
reserves will fully cover any possible exposure. 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 the 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. These
guarantees can only be drawn on in the event that the underlying obligation was
not paid in full by the obligor. The Company believes that most of these
exposures have been paid or otherwise no longer exist. These guarantees had no
expiration date or financial limitation, therefore the maximum potential
exposure cannot be estimated. The Company believes that, largely because of the
passage of time, its exposure to liability under these guarantees is not
significant.
During the third quarter of 2003, the Company was informed that it would be
receiving payment of between $2,400,000 and $4,800,000 in settlement of a
bankruptcy claim the Company had filed in July 2000 related to certain
indemnifications and guarantees obtained from the purchaser of certain of the
Company's subsidiaries in 1997. The Company received an interim distribution of
$2,448,000 in July 2003. A final distribution, if one is made, cannot be
estimated and may be significantly less than the initial payment. The Company
does not believe that there are any significant exposures related to the
guarantees and indemnifications. The Company recorded the amount received as a
component of other income in the accompanying consolidated statements of
operations for the three and nine months ended September 30, 2003.
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
nine months ended September 30, 2002 and the year ended December 31, 2002, that
vendor's products accounted for 20.3% 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 remaining largest vendor, which for the
nine months ended September 30, 2002, the nine months ended September 30, 2003
and the year ended December 31, 2002 accounted for 71.7%, 94.0% and 79.4%,
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, would
have a material adverse effect on the Company.
The top 10 customers accounted for approximately 73.1% and 60.4% of net sales
for the three months ended September 30, 2003 and 2002, respectively. The top
two customers accounted for approximately 20.9% and 14.1% of net sales for the
three months ended September 30, 2003. In the same period of the prior year, the
top two customers accounted for approximately 16.1% and 10.5% of net sales. At
September 30, 2003, the Company's two largest customers combined represented
37.3%, or $7,105,000 of the Company's total trade receivables. For the nine
months ended September 30, 2003, the top 10 customers accounted for
approximately 72.2% of the Company's net sales, with the top two customers
accounting for approximately 25.5% and 16.2% of net sales, respectively. For the
same period of 2002, the top 10 customers accounted for approximately 61.8% of
the Company's net sales, with the top two customers accounting for approximately
20.2% and 10.7% of net sales, respectively.
RESULTS OF OPERATIONS
The Company reported net income available to common stockholders of $683,000, or
$0.09 per share, for the three months ended September 30, 2003, compared to net
income available to common stockholders of $883,000, or $0.11 per share, for the
comparable 2002 period.
Three Months Ended September 30, 2003 as Compared to the Three Months ended
September 30, 2002.
Net Sales - The Company's net sales increased 22.5% from $20,714,000 in the
quarter ended September 30, 2002 to $25,370,000 in the quarter ended September
30, 2003. The increase in net sales resulted from the focus the Company has on
growing its software licensing business
through a combination of increasing the number of customers sold to and
increasing sales to existing customers.
Gross Profit - Gross profit decreased $1,811,000 from $2,657,000 in the third
quarter of 2002 to $846,000 in the third quarter of 2003. Gross profit as a
percentage of sales, or gross margin, was 12.8% for the three months ended
September 30, 2002 compared to 3.3% for the comparable 2003 period. The 2002 and
2003 periods reflect reductions in cost of sales of approximately $1,982,000 and
$182,000, 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 3.3% and
2.6% in the 2002 and 2003 periods, respectively. The decrease in gross margins
in the software licensing business is related to competitive pricing pressures
and declining backend rebates offered by manufacturers.
Selling, General and Administrative - Selling, general and administrative
expenses decreased by 48.8% from $2,443,000 in the third quarter of 2002 to
$1,251,000 in the third quarter of 2003. The Company had approximately $32,000
and $278,000 of favorable adjustments related to the wind-down of the U.S.
distribution business in the third quarters of 2002 and 2003, respectively,
which caused a reduction of selling, general and administrative expenses for
those periods. The $278,000 of cost reductions in the third quarter of 2003 is
comprised of $1,167,000 of cash collections from discontinued customers which
was partially offset by an $889,000 charge taken in relation to certain
estimated state sales tax liabilities. Excluding these adjustments, selling,
general and administrative expenses as a percentage of sales would have been
11.9% in the three months ended September 30, 2002 compared to 6.0% in the
comparable 2003 period. 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 as a result of changes in organizational processes and systems
resulting in fewer required employees.
Restructuring Charge - During the third quarter of 2003, the Company recorded a
$214,000 increase to the previously recorded charge to reflect updated estimates
of certain lease liabilities recorded as a component of the restructuring charge
during fiscal 2002.
Impairment Loss - During the third quarter of 2003, management determined that
the note receivable related to the sale of a building in Cary, North Carolina
had been impaired due to the continuing default of the purchaser under the terms
of the agreement and the uncertainty related to the Company's ability to recover
the full amount of the note receivable. As a result, the Company recorded an
impairment loss of $1,800,000 to reduce the book value of the note receivable to
the property's estimated fair market value, based on a real property market
valuation, which collateralizes the note receivable.
Operating (Loss) Income - As a result of the above items, the Company had an
operating loss of $2,419,000 for the three-month period ended September 30, 2003
compared to operating income of $214,000 for the three-month period ended
September 30, 2002.
Interest Income, net - Interest income increased from $582,000 in the third
quarter of 2002 to $719,000 in the third quarter of 2003. The change primarily
reflects increased amounts of early pay discounts taken in the 2003 period.
Other Income, net - Other income for the Company increased from $53,000 in the
three months ended September 30, 2002 to $2,449,000 in the three months ended
September 30, 2002. Other income in the 2002 period reflects gains recognized on
the sale of property, plant and equipment that had been fully depreciated. Other
income in the 2003 period primarily reflects a $2,448,000 receipt related to
cash received from the settlement of a bankruptcy claim related to certain
indemnifications and guarantees obtained from the purchaser of certain of the
Company's subsidiaries.
Nine Months Ended September 30, 2003 as Compared to the Nine Months September
30, 2002.
Net Sales - The Company's net sales increased 26.1% from $54,332,000 in the nine
months ended September 30, 2002 to $68,498,000 in the nine months ended
September 30, 2003. The increase in net sales resulted from the focus the
Company has on growing its software licensing business through a combination of
increasing the number of customers sold to and increasing sales to existing
customers.
Gross Profit - Gross profit decreased $2,754,000 from $5,476,000 in the first
nine months of 2002 to $2,722,000 in the comparable 2003 period. Gross profit as
a percentage of sales, or gross margin, was 10.1% for the nine months ended
September 30, 2002 compared to 4.0% for the 2003 period. The 2002 and 2003
periods reflect reductions in cost of sales of approximately $3,284,000 and
$758,000, 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 4.0% and
2.9% in the 2002 and 2003 periods, respectively. The decrease in gross margins
in the software licensing business is related to competitive pricing pressures
and declining backend rebates offered by manufacturers.
Selling, General & Administrative - Selling, general and administrative expenses
decreased by 51.5% from $6,032,000 in the first nine months of 2002 to
$2,924,000 in the first nine months of 2003. Selling, general and administrative
expenses as a percentage of sales were 11.1% in the first nine months of 2002
compared to 4.3% in the 2003 period. The 2002 and 2003 periods reflect
approximately $134,000 and $1,442,000 of favorable adjustments related to the
wind-down of the U.S. distribution business, respectively. The $1,442,000 of
cost reductions in the 2003 period is comprised of $2,494,000 of collections and
releases of reserves related to discontinued customers, offset by an $889,000
charge taken in relation to certain estimated state sales tax liabilities and a
$164,000 charge related to other non-software licensing business activities.
Excluding these adjustments, selling, general and administrative expenses as a
percentage of sales would have been 11.3% in the first nine months of 2002
compared to 6.4% in the first nine months 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 as a result of changes in organizational
processes and systems resulting in fewer required employees.
Restructuring Charge - 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 second quarter of
2003, the Company recorded a $48,000 reduction of the previously recorded charge
to reflect updated estimates of severance and employee benefit liabilities.
During the third quarter of 2003, the Company recorded an adjustment of $214,000
to increase the previous estimate of certain lease related costs recorded as a
component of the restructuring charge during fiscal 2002.
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.
Impairment Loss - During the third quarter of 2003, management determined that
the note receivable related to the sale of a building in Cary, North Carolina
had been impaired due to the continuing default of the purchaser under the terms
of the agreement and the uncertainty related to the Company's ability to recover
the full amount of the note receivable. As a result, the Company recorded an
impairment loss of $1,800,000 to reduce the book value of the note receivable to
the property's estimated fair market value, based on a real property market
valulation, which collateralizes the note receivable.
Operating (Loss) Income - As a result of the above items, the Company had an
operating loss of $2,424,000 for the nine-month period ended September 30, 2003
compared to $801,000 for the nine-month period ended September 30, 2002.
Interest Income, net - Interest income increased from $1,392,000 in the nine
months ended September 30, 2002 to $1,815,000 in the nine months ended September
30, 2003. The change primarily reflects increased amounts of early pay discounts
taken in the 2003 period.
Other Income, net - Other income for the Company increased from $137,000 in the
first nine months of 2002 to $2,467,000 in the first nine months of 2003. Other
income in the 2002 period reflects gains recognized on the sale of property,
plant and equipment that had been fully depreciated. Other income in the 2003
period primarily reflects a $2,448,000 receipt related to cash received from the
settlement of a bankruptcy claim related to certain indemnifications and
guarantees obtained from the purchaser of certain of the Company's subsidiaries.
Income Taxes - The income tax benefit decreased from $338,000 to $315,000 in the
three months ended September 30, 2003 and increased from $258,000 to $591,000 in
the nine months ended September 30, 2003. In all periods, federal and state
current income taxes are offset by net operating loss carry forwards. The
resulting income tax benefit in all periods represents refunds received from
various states.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the future with respect to its software licensing business. Management believes
that the factors influencing quarterly variability include: (i) the overall
growth in the computer industry; (ii) shifts in short-term demand for the
Company's products resulting, in part, from the introduction of new products or
updates to existing products; (iii) intensity of price competition among the
Company and its competitors as influenced by various factors; and (iv) the fact
that virtually all sales in a given quarter result
from orders booked in that quarter. Due to the factors noted above, as well as
the dynamic qualities of the computer products distribution industry, the
Company's revenues and earnings relating to its software licensing business may
be subject to material volatility, particularly on a quarterly basis, and the
results for any quarterly period may not be indicative of results for a full
fiscal year.
In the U.S., the Company's net sales in the fourth quarter have been
historically higher than in the first three quarters. Management believes that
the pattern of higher fourth quarter sales is partially explained by customer
buying patterns relating to calendar year-end business and holiday purchases. As
a result of this pattern, the Company's working capital requirements in the
fourth quarter have typically been greater than other quarters.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Activity
Net cash used by operating activities during the nine months ended September 30,
2003 was $2,266,000. The primary uses of cash were decreases in accounts payable
of $6,208,000 and accrued expenses of $4,184,000, which was primarily offset by
a decrease in accounts receivable of $3,323,000. Accounts payable and accounts
receivable decreased primarily due to the timing of sales during the respective
quarters. Accounts payable was also lower due to an increase in the amount of
early pay discounts. Accrued expenses continue to decline as the wind down
related restructuring charges and other accruals are paid or resolved.
Net cash used for investing activities was $44,000, primarily related to the
purchase of securities of $62,000 in connection with an employee deferred
compensation agreement, offset by $18,000 of proceeds from the sale of property
and equipment.
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 September 30, 2003, the Company had cash and cash equivalents of
approximately $44.5 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.
In June 2000, an affiliate of Stonington Partners, Inc., which owns
approximately 65.6% of the Company's outstanding common stock, purchased 150,000
shares of Convertible Preferred issued by the Company for an aggregate purchase
price of $15 million. The Convertible Preferred provides for an 8% annual
dividend payable in additional shares of Convertible Preferred. Dividends are
cumulative and will accrue from the original issue date whether or not declared
by the Board of Directors. Cumulative accrued dividends of $3,367,000 and
$4,488,000 were recorded at December 31, 2002 and September 30, 2003,
respectively.
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,
2003, the Company's two largest customers combined represented 37.3%, or
$7,105,000, of the Company's total trade receivables. The Company believes it
has established an adequate reserve against the September 30, 2003 accounts
receivable balance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the appropriate application of certain accounting
policies, many of which require the Company to make estimates and assumptions
about future events and their impact on amounts reported in the Company's
consolidated financial statements and related notes. Since future events and
their impact cannot be determined with certainty, the actual results will
inevitably differ from the Company's estimates. Such differences could be
material to the consolidated financial statements.
The Company believes the application of its accounting policies, and the
estimates inherently required therein, are reasonable. These accounting policies
and estimates are constantly reevaluated, and adjustments are made when facts
and circumstances dictate a change.
The Company's critical accounting policies and estimates are described in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
At September 30, 2003, the Company had cash investments of $44,479,000 held in
overnight, interest-bearing accounts invested through high-credit quality
financial institutions. The Company has no outstanding long-term debt and no
significant foreign currency risk.
Item 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
concluded, based on an evaluation of the Company's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)), 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 as of the end of the period covered by this report. No change in
the Company's internal control over financial reporting occurred during the
period covered by this report that have materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and
Chief Financial Offer 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 September 30, 2003.
Current report on Form 8-K dated July 31, 2003 which reported
the Company's second quarter earnings.
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 13, 2003
Merisel, Inc.
By: /s/Timothy N. Jenson
---------------------------------------
Timothy N. Jenson
Chief Executive Officer, President and Chief Financial Officer
(Principal Executive and Financial Officer)