UNITED STATES
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, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE 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, 2004
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
March 31, 2004 and December 31, 2003
Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2003 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 4
Notes to Consolidated Financial Statements 5-10
Management's Discussion and Analysis of 11-16
Financial Condition and Results of Operations
Quantitative and Qualitative Market Risk Disclosure 16
Disclosure Controls and Procedures 17
PART II OTHER INFORMATION 18
SIGNATURES 19
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,
2004 2003
------------------- -------------------
Current assets:
Cash and cash equivalents $48,984 $44,948
Accounts receivable (net of allowances of $1,768 and $1,286 for 9,261 19,585
2004 and 2003, respectively)
Inventories 20 13
Prepaid expenses and other current assets 527 65
------------------- -------------------
Total current assets 58,792 64,611
Property and equipment, net 936 883
Other assets 1,727 1,718
------------------- -------------------
Total assets $61,455 $67,212
=================== ===================
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, 2003
2004
------------------- --------------------
Current liabilities:
Accounts payable $8,396 $13,883
Accrued liabilities 6,559 7,915
------------------- --------------------
Total current liabilities 14,955 21,798
Long term liabilities 761 751
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized
1,000,000 shares; 150,000 shares issued and outstanding 20,284 19,882
Common stock, $.01 par value, authorized 150,000,000
shares; 8,026,353 issued and 7,616,373 outstanding AT March 31,
2004 and December 31, 2003. 76 76
Additional paid-in capital 277,898 278,300
Accumulated deficit (251,733) (252,799)
Accumulated other comprehensive gain 60 50
Treasury stock (846) (846)
------------------- --------------------
Total stockholders' equity 45,739 44,663
------------------- --------------------
Total liabilities and stockholders' equity $61,455 $67,212
=================== ====================
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,
2004 2003
------------------- ----------------------
Net sales $14,968 $18,463
Cost of sales 13,107 17,247
------------------- ----------------------
Gross profit 1,861 1,216
Selling, general and administrative expenses 1,279 495
Restructuring charge (356) 256
------------------- ----------------------
Operating income 938 465
Interest income, net 127 288
Other income, net 1 1
------------------- ----------------------
Income from operations before income tax 1,066 754
Income tax benefit 196
------------------- ----------------------
Net income $1,066 $950
=================== ======================
Preferred dividends 402 366
------------------- ----------------------
Net income available to common stockholders $664 $584
=================== ======================
Net income per share (basic and diluted):
------------------- ----------------------
Net income available to common stockholders $.09 $.08
=================== ======================
Weighted average number of share
Basic and diluted 7,616 7,619
See accompanying notes to consolidated financial statements.
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
2004 2003
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,066 $950
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for doubtful accounts 409 102
Gain on sale of property and equipment (1)
Noncash deferred compensation 10 (32)
Changes in operating assets and liabilities:
Accounts receivable 9,915 8,412
Inventories (7) (1)
Prepaid expenses, other current assets and other assets (461) 97
Accounts payable (5,487) (5,329)
Accrued and long term liabilities (1,356) (2,745)
------------------ -------------------
Net cash provided by operating activities 4,088 1,454
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (62)
Purchase of property and equipment (53)
Proceeds from sale of property and equipment, net disposal cost 1
------------------ -------------------
Net cash used for investing activities (52) (62)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (7)
------------------ -------------------
Net cash used for financing activities (7)
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,036 1,385
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 44,948 46,795
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $48,984 $48,180
================== ===================
Supplemental disclosure of cash flow information:
(in thousands)
Cash paid (received) during the period for: 2004 2003
------------------ --------------------
Income taxes $47 $(152)
Noncash investing and financing activities:
Preferred dividends accrued $402 $366
Unrealized (gain) loss on securities $(10) $32
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. In addition to the operation of the software licensing business, the
Company is actively seeking and exploring acquisition and other investment
opportunities, primarily outside the computer products distribution industry.
The information for the three months ended March 31, 2004 and 2003 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 year ended December 31, 2003.
2. Liquidity
At March 31, 2004, the Company had cash and cash equivalents of approximately
$49 million. The Company has developed an operating plan for 2004 that focuses
upon growing its software licensing 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 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.
3. 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
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
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.
4. Risks and Uncertainties
For the three months ended March 31, 2003 and 2004, one vendor's products
accounted for 93.9% and 84.1%, respectively, of the Company's software licensing
sales. The termination of the Company's distribution agreement with its 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.
Merisel generally does not have contracts with its customers. Merisel's largest
customers include Comp-E-Ware, Expert Networks, Future Com, PC Connection,
Softchoice, Software House International and Software Spectrum. For the three
months ended March 31, 2003, 10 customers combined accounted for approximately
72.2% of the Company's net sales, with the top three customers individually
accounting for approximately 21.9%, 16.8% and 7.4% of net sales. For the three
months ended March 31, 2004, 10 customers combined accounted for approximately
69.1% of the Company's net sales, with the top three customers individually
accounting for approximately 20.4%, 16.0% and 12.9% of net sales.
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
On March 15, 2004, the Company was notified by one customer, with an outstanding
accounts receivable balance of approximately $746,000, that it does not have
sufficient liquidity to repay the amount it owes the Company and has requested
an extended repayment plan. The Company is continuing to negotiate terms of a
potential repayment plan; however, no agreement has been reached with the
customer. There is no assurance that the customer's restructured business plan
will be successful or that the amounts owed will be collected. The Company
believes, based on historical write-offs and identified credit risks, it has
established an adequate reserve against the March 31, 2004 accounts receivable
balance.
5. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts and certain
amounts related to restructuring and wind-down activities recorded in accounts
payable and accrued liabilities.
6. Restructuring Charges and Wind Down Related Liabilities
During the first quarter ended March 31, 2004, the Company negotiated
settlements with certain of its lease commitment vendors. As a result of these
settlements, the Company recorded a favorable adjustment of $356,000 to
previously recorded estimated restructuring charges.
During the first quarter ended March 31, 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.
As of March 31, 2004, $1,242,000 of total restructuring costs had not been paid
and was included in accrued liabilities on the accompanying consolidated balance
sheet. The following table sets forth the activity and balances of the
restructuring reserve from December 31, 2003 to March 31, 2004:
(In thousands)
December 31, 2003 Net Charges March 31, 2004
Balance (Reductions) Payments Balance
Type of cost:
Facility, lease and other $1,929 $(356) $331 $1,242
========================= ================== =============== ======================
Three months ended
---------------------------------------------------------------
Expected timing of payouts June 30, September 30, December 31, March 31,
2004 2004 2004 2005 Thereafter Total
------------- ----------------- --------------- --------------- ------------ ------------
Facility, lease and other $273 $257 $502 $6 $204 $1,242
============= ================= =============== =============== ============ ============
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in
thousands):
March 31, 2004 December 31, 2003
--------------- ------------------
Accounts payable:
Trade payables $ 7,002 $ 11,379
Wind-down payables related to discontinued vendors 1,394 2,504
--------------- ------------------
Total accounts payable $ 8,396 $ 13,883
=============== ==================
Accrued liabilities:
Restructuring accruals $ 1,242 $1,929
Compensation and other benefit accruals 633 962
State and local sales taxes and other taxes 1,444 1,454
Legal reserves 846 846
Other 2,394 2,724
--------------- ------------------
Total accrued liabilities $ 6,559 $ 7,915
=============== ==================
8. Note Receivable
The Company has a secured note receivable of $2,975,000 (the "Note") recorded in
other assets in the accompanying consolidated balance sheets at March 31, 2004
and 2003. The Note relates to the sale of an office building in 2002 located in
Cary, North Carolina, which serves as collateral securing the Note. The
purchaser of the property continues to be in default under the terms of the
Note. During 2003, the Company recognized an impairment charge of $1,800,000 to
reduce the value of the Note to the estimated fair value of the property. At
December 31, 2003 and March 31, 2004, the net carrying value of the Note is
$914,000. The Company continues to evaluate possible alternatives to maximize
the value of the Note, including possible foreclosure, joint venture or
concessions with the existing purchaser.
9. 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,
2004 2003
---- ----
Net income $1,066 $950
Other comprehensive loss - unrealized gain (loss) on available for sale
securities 10 (32)
--------------- -----------------
Comprehensive income $1,076 $918
=============== =================
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
10. 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 and restricted stock units using the "treasury stock" method and
convertible preferred stock using the "if-converted" method. As of March 31,
2004 and 2003, there were no dilutive common stock equivalents. For the quarters
ended March 31, 2004 and 2003, there was no stock-based compensation cost to
record and the fair value impact of outstanding stock options was not material.
(In thousands)
Three months ended March 31,
2004 2003
------------------ ------------------
Net Income $1,066 $950
Preferred stock dividends (402) (366)
------------------ ------------------
Net income available to common stockholders $664 $584
Weighted average number of shares - basic and diluted 7,616 7,619
Net income per share to common stockholders $0.09 $0.08
The Company has announced various Board of Directors authorizations to
repurchase shares of the Company's common stock from time-to-time in the open
market or otherwise. Under all prior authorizations, the Company has repurchased
approximately 410,000 shares 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. As
of March 31, 2004, no unexpired share repurchase authorizations are in effect.
11. 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 has determined that during 2003 and 2004 it currently
operated only one operating segment.
12. Other Assets
At March 31, 2004, other assets include approximately $760,000 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 and for the quarter ended March 31, 2004, there was an
unrealized holding gain of approximately $60,000 and $10,000, respectively.
Unrealized gains and losses on
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
available for sale securities is recorded as a component of other comprehensive
income in the accompanying consolidated balance sheets.
13. Commitments and Contingencies
The Company is involved in certain legal proceedings arising in the ordinary
course of business, and in connection with discontinued vendors related to the
Company's wound down 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.
In February 2004, the Company was served with a summons and a complaint in an
adversary proceeding captioned Bridge Information Systems, Inc. et al, Debtor,
Scott P. Peltz, Chapter 11 Plan Administrator v. Merisel Americas, Inc. and MOCA
(the "Complaint"). The Complaint alleges that Debtor made preferential transfers
of money to Merisel Americas, Inc. ("Americas") in the amount of approximately
$6.3 million and an additional amount to MOCA, a former subsidiary of Americas,
which were avoidable and seeks to recover such transfers. The Company believes
that any such transfers alleged in the Complaint are the obligations of MOCA and
not that of the Company. The Company has been advised by counsel to Arrow
Electronics, Inc. ("Arrow"), the parent company of MOCA, that Arrow has agreed
to provide indemnification to the Company with respect to the allegations set
forth in the Complaint.
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.
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
For the three months ended March 31, 2003 and 2004, one vendor's products
accounted for 93.9% and 84.1%, respectively, of the Company's software licensing
sales. The termination of the Company's distribution agreement with its 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, 2003, 10 customers combined accounted for
approximately 72.2% of the Company's net sales, with the top three customers
individually accounting for approximately 21.9%, 16.8% and 7.4% of net sales,
compared to 69.1% of the
Company's net sales, with the top three customers individually accounting for
approximately 20.4%, 16.0% and 12.9% of net sales for the three months ended
March 31, 2004.
On March 15, 2004, the Company was notified by one customer, with an outstanding
accounts receivable balance of approximately $746,000, that it does not have
sufficient liquidity to repay the amount it owes the Company and has requested
an extended repayment plan. The Company is continuing to negotiate terms of a
potential repayment plan; however, no agreement has been reached with the
customer. There is no assurance that the customer's restructured business plan
will be successful or that the amounts owed will be collected. The Company
believes, based on historical write-offs and identified credit risks, it has
established an adequate reserve against the March 31, 2004 accounts receivable
balance.
RESULTS OF OPERATIONS
The Company reported net income available to common stockholders of $664,000, or
$0.09 per share, for the three months ended March 31, 2004, compared to net
income available to common stockholders of $584,000, or $0.08 per share, for the
2003 period. The discussion and analysis below includes the wound down portion
of the Company's U.S. distribution business.
Management analyzes the software licensing business separately from the business
being wound down, to the extent possible given the fact that a significant
amount of resources is shared between the groups. Over the past couple of years,
the Company reduced selling, general and administrative expenses that were
shared between the software licensing group and the wound down business as
certain settlements were reached with vendors and customers of the wound down
business. The Company does not expect that significant further cost reductions
of the Company's software licensing business will be possible in the future. The
following table of summary selected financial data shows the analysis management
uses to evaluate results of the business (amounts in thousands):
Three Months ended March 31, 2003 Three Months ended March 31, 2004
----------------------------------- ---------------------------------------
Software Other Total Software Other Total
Licensing Business Licensing Business
----------- ----------- ----------- ------------ ------------ -------------
Net sales $18,463 $18,463 $14,968 $14,968
Gross profit 730 $486 1,216 745 $1,116 1,861
Gross margin 4.0% 6.6% 5.0% 12.4%
Operating income (loss) (835) 1,301 465 (661) 1,599 938
Interest, other income and income
tax (expense) benefit, net (40) 525 485 128 128
----------- ----------- ----------- ------------ ------------ -------------
Net income (loss) $(875) $1,825 $950 $(661) $1,727 $1,066
Three Months Ended March 31, 2004 as Compared to the Three Months March 31, 2003
Net Sales - The Company's net sales decreased 18.9% from $18,463,000 in the
quarter ended March 31, 2003 to $14,968,000 in the quarter ended March 31, 2004.
The decrease in net sales resulted from changes by some of our software
publishers in their channel strategies, and changes in the Company's sales
organization.
Gross Profit - Gross profit increased $645,000 from $1,216,000 in the first
quarter of 2003 to $1,861,000 in the first quarter of 2004. Gross profit as a
percentage of sales, or gross margin, was 6.6% for the three months ended March
31, 2003 compared to 12.4% for the three months ended March 31, 2004. The 2003
and 2004 periods reflect reductions in cost of sales of approximately $486,000
and $1,116,000, 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
5.0% for the three months ended March 31, 2003 and 2004, respectively. The
increase in gross margins in the software licensing business are related to the
timing of the recognition of vendor discounts.
Selling, General and Administrative - Selling, general and administrative
expenses increased by 158.4% from $495,000 in the first quarter of 2003 to
$1,279,000 in the first quarter of 2004 and as a percentage of sales were 2.7%
in the first quarter of 2003 compared to 8.5% in 2004. 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. The
2004 period reflects approximately $127,000 of favorable adjustments related to
the wind-down of the U.S. distribution business. Excluding these adjustments,
selling, general and administrative expenses as a percentage of sales would have
been 8.5% in the first quarter of 2003 compared to 9.4% in 2004. The increase in
selling, general and administrative expenses as a percentage of sales is related
to certain fixed costs that could not be practically reduced as fast as sales
volumes fell.
Restructuring - During the first quarter 2004, the Company negotiated
settlements with certain of its lease commitment vendors resulting in a
favorable adjustment of $356,000 to previously recorded estimated restructuring
charges.
During the first quarter of 2003, the Company made the decision to reduce its
workforce by approximately 10 full-time positions, resulting in a restructuring
charge of $256,000 related to severance and employee benefits.
Operating Income - The Company had operating income of $938,000 for the
three-month period ended March 31, 2004 compared to $465,000 for the three-month
period ended March 31, 2003.
Interest Income - Interest income decreased from $288,000 in the first quarter
of 2003 to $127,000 in the first quarter of 2004. The decrease reflects a
decrease in the average interest rate earned on excess cash balances and the
cessation of recognizing interest income during the quarter ended June 30, 2003
on the note receivable related to the sale of the building in Cary, North
Carolina.
Other Income - Other income was $1,000 in each of the three-month periods ended
March 31, 2003 and 2004. Other income in both periods reflects a gain recognized
on the sale of property, plant and equipment that had been fully depreciated.
Income Taxes - The Company recognized an income tax benefit of $196,000 for the
three months ended March 31, 2003 due to various federal and state tax refunds.
The Company has not recognized any income tax expense for the quarter ended
March 31, 2004 due to the substantial federal and state net operating loss
carryforwards which are completely offset by a valuation allowance.
Income from Operations - As a result of the above items, the Company had income
from operations of $1,066,000 for the three months ended March 31, 2004 compared
to $950,000 for the three months ended March 31, 2003.
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 was $4,088,000 during the three months
ended March 31, 2004. The primary source of cash was a decrease in accounts
receivable of $9,915,000, which was partially offset by decreases in accounts
payable and accrued expenses of $5,487,000 and $1,356,000, respectively.
For the quarter ended March 31, 2004, net cash used for investing activities was
$53,000 which was used to purchase property and equipment. For the quarter ended
March 31, 2003, net cash used for investing activities was $62,000 to purchase
available for sale securities.
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, 2004, the Company had cash and cash equivalents of approximately
$49 million. The Company has developed an operating plan for 2004 that focuses
upon growing its software licensing 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.
The Company's lease on its El Segundo, California headquarters will expire on
November 1, 2004. The Company expects to either extend its current lease or
enter into a new lease agreement at another location on or before this date.
Based on the current size of the Company, it is estimated that approximately
15,000 square feet will be required and will be leased at substantially the same
cost per square foot as the current lease, including $15-$25 per square foot of
leasehold improvements. Based on current growth rates, and excluding
acquisitions, the Company expects to have capital expenditures of approximately
$300,000 for the software licensing business over the next three years, the
majority of which will be incurred during the next nine months.
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 stock (the "Convertible Preferred") issued by
the Company for an aggregate purchase price of $15 million. The Convertible
Preferred provides for an 8% annual dividend payable in 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 $4,882,000 and $5,284,000 were recorded at
December 31, 2003 and March 31, 2004, respectively. At the option of the holder,
the Convertible Preferred is convertible into the Company's common stock at a
per share conversion price of $17.50. At the option of the Company, the
Convertible Preferred can be converted into Common Stock when the average
closing price of the Common Stock for any 20 consecutive trading days is at
least $37.50. At the Company's option, on or after June 30, 2003, the Company
may redeem outstanding shares of the Convertible Preferred initially at $105 per
share and declining to $100 on or after June 30, 2008, plus accrued and unpaid
dividends. In the event of a defined change of control, holders of the
Convertible Preferred have the right to require the redemption of the
Convertible Preferred at $101 per share plus accrued and unpaid dividends. As of
March 31, 2004, no redemptions have been made and the Company has no plans to
exercise its redemption rights in the foreseeable future.
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, 2004,
the Company's three largest customers represented 51%, or $5,617,000, of the
Company's total trade receivables. The Company believes it has established an
adequate reserve against the March 31, 2004 accounts receivable balance.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
The Company has various contractual obligations which are recorded as
liabilities in our consolidated financial statements. There were no significant
changes, except payments, to the Company's contractual commitments and
obligations during the quarter ended March 31, 2004. The Company's contractual
obligations, commitment and off balance sheet arrangements are described in its
Annual Report on Form 10-K for the year ended December 31, 2003.
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. During the first quarter ended March 31,
2004, the Company increased the provision for bad debts due to an overall
deterioration in the Company's aging of accounts receivable and identified
customer credit risks.
The Company's critical accounting policies and estimates are described in its
Annual Report on Form 10-K for the year ended December 31, 2003.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
At March 31, 2004, the Company had cash investments of $47,855,000 held in
overnight, interest-bearing accounts invested through high-credit quality
financial institutions. Additionally, the Company had cash balances of
$1,129,000 maintained in various checking accounts at March 31, 2004. The
Company has no outstanding long-term debt and no significant foreign currency
risk.
Item 4. CONTROLS AND PROCEDURES
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, as
of the end of the period covered by this report, 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 occurred during the period covered by this report 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.
In February 2004, the Company was served with a summons and a complaint in an
adversary proceeding captioned Bridge Information Systems, Inc. et al, Debtor,
Scott P. Peltz, Chapter 11 Plan Administrator v. Merisel Americas, Inc. and MOCA
(the "Complaint"). The Complaint alleges that Debtor made preferential transfers
of money to Merisel Americas, Inc. ("Americas") in the amount of approximately
$6.3 million and an additional amount to MOCA, a former subsidiary of Americas,
which were avoidable and seeks to recover such transfers. The Company believes
that any such transfers alleged in the Complaint are the obligations of MOCA and
not that of the Company. The Company has been advised by counsel to Arrow
Electronics, Inc. ("Arrow"), the parent company of MOCA, that Arrow has agreed
to provide indemnification to the Company with respect to the allegations set
forth in the Complaint.
Item 5. Other Matters
The Company's 2004 annual meeting of stockholders ("2004 Meeting") will be held
more than 30 days after the date of the 2003 annual meeting of stockholders. As
of the date of the filing of this Report, the Company has not yet established
the date for the 2004 Meeting. When such date is set, the Company will inform
stockholders of the deadline date for the submission of proposals for inclusion
in the proxy statement related to the 2004 Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1-Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2-Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32-Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S. C Section 1350.
(b) The following Reports on Form 8-K were filed during the
quarter ended March 31, 2004.
Current report on Form 8-K, dated March 15, 2004, announcing
the Company's earnings for the period ended December 31, 2004.
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 14, 2004
Merisel, Inc.
By:/s/Timothy N. Jenson
-------------------------------------
Timothy N. Jenson
Chief Executive Officer, President
and Chief Financial Officer
(Principal Executive and Financial Officer)