Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 90245-0948
El Segundo, California -------------------------------------
- ------------------------------------- (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (310) 615-3080
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
- -------------------------------------------------------------------------------
TITLE OF CLASS
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [_]
As of March 29, 1996 the aggregate market value of voting stock held by non-
affiliates of the Registrant based on the last sales price as reported by the
Nasdaq National Market was $70,466,665 (28,909,401 shares at a closing price
of $2 7/16).
As of March 29, 1996 the Registrant had 29,863,495 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDEX TO FORM 10-K
MERISEL, INC.
PAGE REFERENCE
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 11
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................... 12
Item 6. Selected Financial Data........................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14
Item 8. Financial Statements and Supplementary Data....................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 43
PART III
Item 10. Directors and Executive Officers of the Registrant................ 44
Item 11. Executive Compensation............................................ 44
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 44
Item 13. Certain Relationships and Related Transactions.................... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 45
i
PART I
ITEM 1. BUSINESS.
OVERVIEW
Merisel, Inc. (together with its subsidiaries, "Merisel" or the "Company")
is the largest worldwide publicly held wholesale distributor of microcomputer
hardware and software products. Through its full-line, channel-specialized
distribution business, Merisel combines the comprehensive product selection
and operational efficiency of a full-line distributor with the customer
support of a specialty distributor offering dedicated sales organizations to
each of its customer groups. On January 31, 1994, the Company acquired the
ComputerLand franchise and Datago aggregation businesses (the "Franchise and
Aggregation Business") from Vanstar Corporation (the "ComputerLand
Acquisition"). Through this acquisition, Merisel became an aggregator, or
master reseller, of computer systems and related products from major
microcomputer manufacturers, including Apple, Compaq, Hewlett-Packard and IBM.
Such business consists of both an aggregation business conducted through its
Datago affiliates and a franchise business under the name ComputerLand.
Merisel's Datago aggregation business distributes products to affiliated
value-added resellers ("VARs") and dealers in the United States. The
ComputerLand franchise business provides networking, systems maintenance and
systems integration services through a nationwide network of independently
owned ComputerLand franchisees. Merisel is considered a master distributor
since it offers both full-line distribution and aggregation capabilities.
At December 31, 1995, Merisel stocked over 25,000 products from more than
500 of the microcomputer hardware and software industry's leading
manufacturers including American Power Conversion, Apple, AST, Compaq,
Creative Labs, Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard,
IBM/Lotus, Intel, Kingston Technology, Microsoft, NEC, Novell, Okidata, Sony,
Sun Microsystems, Symantec, Texas Instruments, 3Com, Toshiba and U.S.
Robotics. Merisel sells products to over 55,000 computer resellers worldwide,
including VARs, large retail chains, franchisees, computer superstores, mass
merchants, Macintosh and Sun Microsystems resellers, system integrators and
original equipment manufacturers. In order to effectively service its large
customer base, the Company currently maintains 19 distribution centers that
serve North America, Europe, Latin America and other international markets.
The breadth of the Company's product line, together with its international
distribution network, enable the Company to provide its customers with a
single source of supply and prompt delivery of products. For the fiscal year
ended December 31, 1995, the Company's net sales by geographic region were
generated as follows: United States, 67%; Canada, 10%; Europe, 18%; and other
international markets, 5%.
THE INDUSTRY
The microcomputer products distribution industry is large and growing,
reflecting both increasing demand worldwide for computer products and the use
of wholesale distribution channels by manufacturers for the distribution of
their products. The industry moves product from manufacturer to end-user
through a complex combination of distribution agreements between
manufacturers, wholesale distributors, aggregators and resellers.
Historically, there have been two types of companies within the industry:
those that sell directly to the end-user ("resellers") and those that sell to
resellers ("wholesale distributors" and "aggregators," which are also called
"master resellers").
Resellers sell directly to end-users, including large corporate accounts,
small and medium-sized businesses and home users. The major reseller channels
are dealers and corporate resellers, VARs, mail-order firms and retailers
(computer superstores, office supply chains and mass merchants). VARs, which
account for one of the largest segments of the overall reseller channel,
typically add value by combining proprietary software and/or services with
off-the-shelf hardware and software.
Wholesale distributors generally purchase a wide range of products in bulk
directly from manufacturers and then ship products in smaller quantities to
many different types of resellers, which typically include dealers,
1
VARs, system integrators, mail order resellers, computer products superstores
and mass merchants. Aggregators, or master resellers such as the Datago
aggregation business, are functionally similar to wholesale distributors, but
they focus on selling relatively few product lines, typically high-volume,
brand name computer systems, to a captive network of franchised dealers and
affiliates. The larger computer manufacturers, such as Apple, Compaq, Hewlett-
Packard and IBM, have historically required resellers to purchase their
products from an affiliated aggregator, such as the Company's Franchise and
Aggregation Business. Certain of these leading manufacturers, however, have
authorized a wholesale distributor-owned aggregator-type business to provide
their products to the dealer market on a limited basis. Within the last two
years, however, manufacturers are increasingly offering products through full-
line distributors' aggregation divisions, resulting in the distinction between
wholesale distributors and master resellers becoming less apparent.
BUSINESS STRATEGY
Merisel has achieved its position in the industry by pursuing a strategy of
offering the industry's leading products and services to its customers at
competitive prices, providing cost-effective customer service and targeting
its various customer groups using dedicated sales forces and marketing
programs.
Providing Leading Products and Services. The Company's objective is to offer
a broad range of leading product brands in each of the product categories it
carries. By stocking the leading brands, the Company generates sales of both
those product brands as well as other products, as reseller customers often
prefer to deal with a single source for many of their product needs. The
Company continuously evaluates new products, the demand for its current
products and its overall product mix and seeks to develop distribution
relationships with suppliers of products that enhance the Company's product
offerings. The Company believes that the size of its reseller customer base,
combined with the breadth and quality of its marketing support programs, give
it a competitive advantage over smaller, regional distributors in developing
supplier relationships.
As a result of acquiring the Franchise and Aggregation Business, the
Company, through this business, is offering its ComputerLand franchisees and
Datago affiliates a broad range of microcomputer systems and other products
from Apple, Compaq, Hewlett-Packard and IBM. Although the Company distributes
certain products of these leading manufacturers through its wholesale
distribution arrangements, the Company and its wholesale distribution
competitors are limited to distributing these products to the VAR reseller
market. Certain of these leading manufacturers have authorized wholesale
distributors to act as second-source providers of product to the dealer
industry segment, if a particular dealer's primary source does not have the
product in stock.
Customer Service and Satisfaction. The Company believes that a high level of
customer satisfaction is important to achieve and maintain success in the
highly competitive microcomputer products distribution industry. The Company
measures customer satisfaction by such standards as "ease of doing business,"
accuracy and efficiency in delivering products and expediting the delivery of
services and information. Merisel constantly strives to improve its
operational processes.
Targeting Customer Groups. Merisel serves a variety of reseller channels,
which have diverse product, financing and support needs. Merisel was the first
full-line distributor in the industry to offer its various customer groups a
channel-dedicated sales force as well as customized product offerings,
financing programs and marketing and technical support programs, all of which
are tailored to address the differing needs of these customer groups. The
Company intends to continue focusing on the profitability of the markets it
serves to identify customer opportunities and develop sales and marketing
programs that serve these groups more effectively.
1996 Business Plan. As described more fully below, Merisel incurred
substantial losses for the fourth quarter and fiscal year ended December 31,
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." As a result, Merisel was required to negotiate with
the lenders under various of its financing agreements to amend such agreements
and to waive certain defaults, which amendments and waivers were obtained. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 8 to the Consolidated
Financial Statements.
2
In connection with such negotiations, Merisel developed a business plan for
the remainder of fiscal 1996 that calls for curtailing of non-essential
capital expenditures during 1996 in order to maximize cash flow. In addition,
the Company intends to focus on its more profitable areas of operations and
product lines while slowing growth in its other less profitable areas of
operations. Merisel believes that, if successfully implemented, the 1996
business plan will allow the Company to operate without the need for
additional sources of financing or any asset sales in 1996. However, in order
to meet its obligations in 1997 the Company will need to engage in some
combination of asset sales, refinancing of its borrowings or obtaining new
sources of financing. While the Company believes it will be able to
successfully implement its 1996 business plan and implement one or more of the
foregoing strategies which will enable it to meet its obligations in 1997,
there can be no assurance that it will be able to do so. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Concurrently with the implementation of its business plan for 1996, Merisel
is also actively exploring all of its strategic options with the assistance of
Merrill Lynch & Co. These options include a business combination with, or sale
to, a strategic partner who could provide the capital necessary to enable
continued growth of the Company, or a sale of significant assets in geographic
regions around the world, which would also enable Merisel to fund its
remaining operations out of existing cash flow or restructured borrowings.
The Company's 1996 business plan assumes that the Company will not
experience any significant changes in payment terms to, or product
availability from, its key vendors. While management does not expect, and
there has not been, any material deterioration in such credit terms or product
availability, there can be no assurance that significant changes will not
occur. Any such deterioration in the absence of the development of alternate
financing sources or asset sales could adversely impact the Company's cash
flow and its future results of operations.
In light of the Company's current business plan to maximize cash flow,
management does not expect, nor does the 1996 business plan assume, that the
Company will return to profitability until the fourth quarter of 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The expected losses for the
first and second quarters of 1996 are in part attributable to i) costs
incurred in connection with amending the Company's financing agreements, ii)
costs incurred in connection with preparation of the 1996 business plan, and
iii) costs incurred to identify and begin improving certain business processes
which were not functioning satisfactorily in 1995.
The preceding preliminary financial information constitutes forward looking
information and actual results could differ materially from current
expectations. Among the factors that could impact actual results are the
following: additional adjustments in the Company's trade accounts payable and
any further unanticipated charges associated with the Company's computer
systems, asset dispositions or any potential restructuring.
PRODUCTS AND MANUFACTURER SERVICES
Merisel provides its manufacturers with access to one of the largest bases
of computer resellers worldwide while offering these manufacturers the means
to reduce the inventory, credit, marketing and overhead costs associated with
establishing a direct relationship with these resellers. Merisel's economies
of scale have allowed the Company to establish and develop long-term business
relationships with many of the leading manufacturers in the microcomputer
industry. Merisel distributes over 25,000 hardware and software products,
including products for the MS-DOS, OS/2, Macintosh, Apple and Sun
Microsystems/UNIX(R) operating environments. For the fiscal year ended
December 31, 1995, net worldwide sales of hardware and accessories accounted
for approximately 75% of the Company's sales, and sales of software products
accounted for the remaining 25% of net sales.
3
Merisel's suppliers include many of the leading microcomputer software and
hardware manufacturers, such as American Power Conversion, Apple, AST, Compaq,
Creative Labs, Digital Equipment Corporation, Epson, Hayes, Hewlett-Packard,
IBM/Lotus, Intel, Kingston Technology, Microsoft, NEC, Novell, Okidata, Sony,
Sun Microsystems, Symantec, Texas Instruments, 3Com, Toshiba and U.S.
Robotics. Merisel is one of only two distributors in the United States of Sun
Microsystem's products. Software products include business applications such
as spreadsheets, word processing programs and desktop publishing and graphics
packages, as well as a broad offering of operating systems, including local
area network operating systems, advanced language and utility products.
Hardware products offered by the Company include computer systems such as
servers, printers, monitors, disk drives and other storage devices, modems and
other connectivity products, networking products, plug-in boards and
accessories.
In addition to providing manufacturers access to one of the largest bases of
computer resellers worldwide, the Company, through its marketing department,
also provides manufacturers the opportunity to efficiently offer a number of
special promotions, training programs and marketing services targeted to the
needs of specific reseller groups. Merisel runs a variety of special
promotions for manufacturers' products, ranging from price discounts and
bundled purchase discounts to specialized computer reseller marketing
programs, including the Vantage program for its distribution business and the
Datago program for its aggregation business. These promotional programs are
designed to encourage computer resellers to increase their volume of
purchases, motivate resellers to purchase within a limited time period and
highlight specific manufacturers' products or promotion opportunities.
Additionally, Merisel provides marketing consultation services for
manufacturers' strategic marketing campaigns, as well as the opportunity to be
included in Merisel-sponsored trade advertisements. Merisel's marketing
program specialists work with designated manufacturers to develop and carry
out marketing programs such as dealer commission programs, sales contests and
other promotions. Merisel can also provide dedicated marketing support and
targeted customer information from its database to enhance manufacturers'
product promotions.
The Company also offers two exclusive training programs: Softeach, a two-day
worldwide seminar series whereby manufacturers train resellers on the use of
their products, and Selteach, a training seminar series that gives
manufacturers an opportunity to provide product information to Merisel's
United States sales force. In 1995, Merisel offered Softeach seminars in 21
cities and 9 countries. The Company believes that over 21,000 computer
resellers attended Softeach seminars in 1995. Merisel, in conjunction with
third-party consultants, also conducts training classes regarding certain
Novell, 3Com, The Santa Cruz Operation, Digital Equipment Corporation, Sun
Microsystems, Microsoft and Lotus products for its reseller customers.
Merisel generally enters into written distribution agreements with the
manufacturers of the products it distributes. As is customary in the industry,
these agreements usually provide non-exclusive distribution rights and often
contain territorial restrictions that limit the countries in which Merisel is
permitted to distribute the products. The agreements generally provide Merisel
with stock balancing and price protection provisions which reduce in part
Merisel's risk of loss due to slow-moving inventory, supplier price
reductions, product updates or obsolescence. The Company's agreements
generally have a term of at least one year, but often contain provisions
permitting earlier termination by either party upon written notice. Some of
these agreements contain minimum purchase amounts. Failure to purchase at such
minimum levels could result in the termination of the agreement.
Although Merisel regularly stocks products and accessories supplied by more
than 500 manufacturers, 63% of the Company's net sales in 1995 (as compared to
56% in 1994 and 45% in 1993) were derived from products supplied by Merisel's
ten largest manufacturers, with the sale of products manufactured by Hewlett-
Packard, Microsoft and Compaq accounting for approximately 16%, 14% and 11%,
respectively, of net sales in 1995 (as compared to 12% each for Microsoft and
Hewlett-Packard and 11% for Compaq in 1994, and 16%, 3% and 6%, respectively,
in 1993). Because reseller customers often prefer to deal with a single source
for many of their product needs, the loss of the ability to distribute a
particularly popular product could result in losses of sales unrelated to that
product. The loss of a direct relationship between the Company and any of its
key suppliers could have an adverse impact on the Company's business and
financial results.
4
In the course of its business, Merisel reconciles its accounts payable
balances to statements provided by its vendors. During the fourth quarter of
1995, the Company incurred charges resulting from adjustments to trade
accounts payable balances. The charge taken in the fourth quarter is related
to adjustments for price protection, returns to vendors by Merisel and
inventory receipt related issues, such as short-shipments identified through
the reconciliation process. In order to minimize further supplier account
reconciliation losses, in February 1996 Merisel began implementing processes
and procedures to address current system deficiencies and has engaged the
assistance of outside consultants to assist in this process. Management has
committed additional resources to assist in collecting a part of the charge
that may be determined to be recoverable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Fourth Quarter
Adjustments."
CUSTOMERS AND CUSTOMER SERVICES
In 1995, Merisel sold products and services to more than 55,000 computer
resellers worldwide. Merisel's customers include VARs, large hardware and
software retail chains and franchisees, computer superstores, mass merchants,
Macintosh, Sun Microsystems and other corporate resellers, systems
integrators, and original equipment manufacturers as well as independently
owned retail outlets and consultants. Merisel's smaller customers often do not
have the resources to establish a large number of direct purchasing
relationships or stock significant product inventories. Consequently, they
tend to purchase a high percentage of their products from distributors. Larger
resellers often establish direct relationships with manufacturers for their
more popular products, but utilize distributors for slower-moving products and
for fill-in orders of fast-moving products which may not be available on a
timely basis from manufacturers. No single customer accounted for more than 4%
of Merisel's net sales in 1993, 1994 or 1995.
Single Source Provider. Merisel offers computer resellers a single source
for over 25,000 competitively priced hardware and software products. By
purchasing from Merisel, the reseller only needs to comply with a single set
of ordering, billing and product return procedures and may also benefit from
attractive volume pricing and third-party financing programs. In addition,
resellers are allowed, within specified time limits, and for certain resellers
specified volume limits, to return slow-moving products from one manufacturer
in exchange for more popular products from other manufacturers. Merisel's
policy is not to grant cash refunds.
Prompt Delivery. In the United States and Canada, orders received by 5:00
p.m. local time are typically shipped the same day, provided the required
inventory is in stock. Merisel maintains sufficient inventory levels in the
United States to fill consistently in excess of 95% of all units ordered on
the day of receipt. As part of the Company's effort to improve accuracy, the
Company has installed computerized warehouse management systems in its North
American warehouses, which include infrared bar coding equipment and advanced
computer hardware and software systems. Of Merisel's nine North American
warehouses, eight were computerized between 1994 and 1995. The Company
anticipates computerizing its remaining North American warehouse in 1996.
Merisel typically delivers products from its regional warehouses via United
Parcel Service and other common carriers, with customers in most areas in the
United States receiving orders within one to two working days of shipment.
Merisel also will provide overnight air handling if requested and paid for by
the customer. These services allow computer resellers to minimize inventory
investment and provide responsive service to their customers. For larger
customers in the United States, Merisel also provides a fulfillment service so
that orders are shipped directly to the computer resellers' customer, thereby
reducing the need for computer resellers to maintain inventories of certain
products. The Company's foreign subsidiaries may have lower fill rates and
longer delivery times due to differing market requirements and operations.
Financing Programs. Merisel's credit policy for qualified resellers
eliminates the need to establish multiple credit relationships with a large
number of manufacturers. In addition, the Company arranges floor plan and
lease financing through a number of credit institutions and offers a program
that permits credit card purchases by qualified customers. To allow certain
resellers to purchase larger orders in the United States, the Company offers
to arrange alternative financing such as escrow programs and special bid
financing from financial institutions.
5
Customer Support. Merisel offers a number of customer loyalty programs,
including the Vantage program for its distribution business and the Datago
program for its aggregation business, which provide incentives to resellers to
aggregate their purchases through Merisel. The Vantage programs offer
Merisel's top-volume customers within the VAR and dealer channels increased
levels of service and pricing advantages. The Datago program offers incentives
for Datago customers to aggregate their purchases through Merisel and the
Franchise and Aggregation Business.
Merisel furnishes its computer resellers with a series of publications
containing detailed information on products, pricing, promotions and
developments in the industry. Merisel publishes a Confidential Reseller Price
Book, which lists Merisel's current product offerings. Merisel also publishes
the Hot List(R), which ranks Merisel's current best-selling hardware and
software products in four different reseller channels. In addition, Merisel's
On-Line Literature Library offers over 40,000 data sheets of product
information literature on a fax-back system and on CD-ROM.
Merisel provides training and product information to its reseller customers
through its well-respected Softeach program, a worldwide series of training
forums whereby manufacturers conduct seminars on how to sell their products.
See "--Products and Manufacturer Services." Merisel also provides computer
resellers with a technical support "hotline," as well as specialized technical
support for virtually all product lines sold by Merisel. In addition,
Merisel's Technical Support department provides regular product training
seminars to Merisel's sales representatives to help them increase their
product knowledge.
SALES AND MARKETING
During 1995, the Company's Sales department for its core distribution
business in the United States was organized into nine dedicated sales
divisions, which serve the dealer, VAR consumer, and Sun workstation channel
segments. The dealer channel is comprised of the following divisions: retail,
reseller fulfillment, major accounts and Macintosh. The VAR channel offers
specialized services and technical products to VARs through the VAR, system
integrator and OEM divisions. The consumer products channel is served by the
consumer products division, which targets mass merchants. The fourth channel
is primarily dedicated to selling and supporting Sun Microsystems and Sun-
complimentary products through its own sales, marketing, operations and
technical support departments. Merisel's Open Computing Alliance ("MOCA")
division serves this channel.
For each of the Company's international subsidiaries, the number and type of
specialized sales divisions vary based on market requirements, the size of the
subsidiary's sales force and the products carried by the subsidiary.
The Company's sales force is composed of field sales representatives who
manage relations with the larger accounts and inside telemarketing sales
representatives who receive product orders and answer customer inquiries. In
the United States and Canada, when a customer calls Merisel, screen
synchronization technology causes a sales profile to appear on the sales
representative's computer screen before greetings are exchanged. Customer
orders generally are placed via a toll-free telephone call to Merisel's inside
sales representatives and, in the United States, are entered on Merisel's
SalesNet for Windows order entry system, a proprietary local area network
created by Merisel to speed the process of taking and processing orders. Using
the SalesNet for Windows database, sales representatives can immediately enter
customer orders, obtain descriptive information regarding products, check
inventory status, determine customer credit availability and obtain special
pricing and promotion information. In the United States and Canada, Merisel
also offers SELline, a system that allows a customer, through the use of their
own personal computer and a modem, to access Merisel's database to examine
pricing, credit information, product description and availability, and
promotional information all in "real-time," and to place orders directly into
Merisel's order processing system. For certain of its larger customers, the
Company has installed electronic data interchange (EDI) systems which allow
participating customers to directly access the Company's mainframe computer
system for order processing and account information.
6
OPERATIONS, DISTRIBUTION AND INVESTMENT IN SYSTEMS
Locations. At December 31, 1995, the Company operated 19 distribution
centers around the world, including eight in the United States, one of which
serves Latin America and other export fulfillment, two in Canada, four in
Europe, and four in Mexico. All of these distribution centers are leased. In
1995, Merisel closed its Rancho Dominguez, California, and Munich, Germany,
warehouses and opened its new automated European Distribution Center (the
"EDC") located in Helmond, The Netherlands.
Systems. Merisel has made significant investments in new, advanced computer
and warehouse management systems for its North American operations to support
sales growth and improve service levels. Eight of Merisel's nine North
American warehouses operate utilizing advanced computerized warehouse
management systems, which use infrared bar coding and advanced computer
hardware and software to improve shipping, receiving and picking error rates.
One remaining North American warehouse is scheduled to be operating under this
new system in 1996.
Merisel is in the process of converting its North American operations to a
new computer operating system. The Company began designing the new system in
early 1993 and converted its Canadian operations from a mainframe to a
client/server operating system in August 1995. The new system is designed to
accommodate sales volumes significantly greater than current volumes as well
as provide greater transaction accuracy, more flexibility and custom pricing
applications. In the early implementation stages, the Canadian conversion
produced results below the Company's expectations. These results added to
Merisel's fourth quarter 1995 net operating loss. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-- Fourth Quarter
Adjustments." In addition, in the fourth quarter of 1995, the Company recorded
a non-cash asset valuation adjustment of $19.5 million related to charges for
impairment to Merisel's on-going computer operating system conversion. In late
February 1996, Merisel Canada's computer operating system began to produce
results closer to the Company's original expectations.
The Company plans to convert its United States operations in the future,
depending on the continued performance improvement in its Canadian systems.
The design and implementation of these new systems are complex projects and
involve risks and have produced cost overruns, which delayed implementing the
new system in Canada and caused the system to perform below anticipated
service levels. As a result, the United States system implementation will be
delayed beyond 1996. Until such implementation, the Company will need to
continue to make modifications to its existing United States systems and may
continue to experience difficulty in processing transactions in periods of
heavy volumes, which could adversely impact operating income and cash flows.
Merisel's EDC was built to address Merisel Europe's strategy of centralizing
and integrating its European operations. The warehouse opened in August 1995
and soon began shipping to Merisel's German and Austrian customers. Due to
system software problems, the EDC experienced substantial shipping and
receiving errors that adversely affected Merisel Germany's operations. The
additional start-up costs incurred also caused cost variances that negatively
affected Merisel Europe's 1995 financial performance.
In late February 1996, Merisel implemented numerous changes in the EDC's
software, which have produced some improved results. As of March 1996, the EDC
was able to handle Merisel Germany's and Merisel Austria's transaction volume,
but at reduced accuracy rates. However, until the warehouse management system,
mechanical system and operating system in the EDC all work together without
interruption, Merisel will continue to experience negative effects in its
European financial results. The overall operating loss for 1995 at Merisel
Europe was primarily the result of the business interruptions in Germany and
Austria associated with the EDC. Consistent with the Company's 1996 business
plan, the Company has decided to conserve cash by not extending EDC service to
any additional countries until systems deficiencies at the EDC can be
corrected. For further information concerning EDC issues see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Fourth Quarter Adjustments".
7
INTERNATIONAL OPERATIONS
The Company distributes microcomputer products throughout the world. Merisel
formed its first international subsidiary in 1982 and now operates in Canada,
the United Kingdom, France, Germany, Switzerland, Austria and Mexico. Merisel
also has a subsidiary based in Miami, Florida, which primarily sells products
to customers in Latin America and in other parts of the world where Merisel
does not have a physical presence. For information concerning the recent
disposition of Merisel's Australia operations, see "Management's Discussion
and Analysis--Fourth Quarter Adjustments."
The products and services offered by Merisel's international subsidiaries
are generally similar to those offered in the United States, although the
breadth of the subsidiaries' product lines and the range of manufacturers' and
customers' services offered by the subsidiaries are usually smaller due to the
smaller size of the subsidiaries and differing market requirements. Certain
subsidiaries provide products or services not offered in the United States due
to differing manufacturer relationships and market requirements.
Operationally, the management and distribution systems at the Company's
international subsidiaries vary depending on the size of the subsidiary, its
length of operation and local market requirements.
Because the Company conducts business in a number of countries, that portion
of operating results and cash flows that is non-United States dollar
denominated is subject to certain currency fluctuations. The Company generally
employs forward exchange contracts to limit the impact of fluctuations in the
relative values of some of the currencies in which it does business. In 1995,
the Company incurred foreign currency losses due to declines in values of the
Mexican Peso and other foreign currencies against the United States dollar.
The Company expects the devaluation of the Mexican Peso to continue in 1996
and, accordingly, is re-assessing its foreign currency strategies in Mexico to
minimize its foreign exchange transaction exposure resulting from further
devaluations.
In addition, international operations may also be subject to risks such as
the imposition of governmental controls, export license requirements,
restrictions on the export of certain technology, political instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
international operations and collecting accounts receivable and the impact of
local economic conditions and practices. While management believes that such
risks have been reduced to an acceptable level, there can be no assurance that
these or other factors will not have an adverse effect on the Company's
international operations.
For segment information regarding Merisel's United States and international
operations, see footnote 12 of Notes to Consolidated Financial Statements.
THE FRANCHISE BUSINESS AND AGGREGATION BUSINESS
As a result of the ComputerLand Acquisition, Merisel, through the
ComputerLand franchise business and Datago aggregation business, now operates
as a master reseller of computer systems and related products from the major
microcomputer manufacturers to a network of approximately 734 independently
owned resellers composed of two customer groups: the 156 ComputerLand
franchisees and the 578 Datago affiliates. Merisel FAB, Inc., a wholly owned
subsidiary of Merisel, Inc., acts as the franchisor to the ComputerLand
franchisees, who receive product and various support services, including sales
and marketing materials, management and sales support services and a
proprietary dealer management software system. At December 31, 1995, the
ComputerLand franchise business had agreements with 156 franchise owners
operating 183 locations, which are primarily located in secondary metropolitan
markets in the United States. Franchise owners and operating locations have
decreased since the ComputerLand Acquisition as a result of conversion of
certain franchises to Datago customers, which are independent dealers and VARs
that do not license the ComputerLand name, consolidation of locations by
franchise owners and franchisees that are no longer in business.
The Datago aggregation business' customers are independent dealers and VARs.
They generally enter into non-exclusive one-year renewable contracts
cancelable at the option of either party on short notice. At
8
December 31, 1995, the Datago aggregation business had 578 active Datago
affiliates. During the year ended December 31, 1995, no individual franchisee
or Datago affiliate accounted for more than 5% of the Franchise and
Aggregation Business revenues. Sales of product from Apple, IBM, Compaq and
Hewlett-Packard represent approximately 80% of the Franchise and Aggregation
Business revenue. Changes in the relationship with these manufacturers could
have a material adverse effect on the Franchise and Aggregation Business
See"Business Strategy-- 1996 Business Plan". In addition, over 75% of the
sales of the ComputerLand franchise business and Datago aggregation business
to their customers are financed by floor plan financing companies, and any
changes in the terms of such financing arrangements could have a material
adverse effect. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--The Franchise and Aggregation Business."
Merisel and Vanstar Corporation entered into a Distribution and Services
Agreement (the "Services Agreement") at the time of the ComputerLand
Acquisition, pursuant to which Vanstar Corporation purchases and warehouses
manufacturers' products and fulfills reseller orders for the products offered
by the ComputerLand franchise business and Datago aggregation business. The
ComputerLand franchise business and Datago aggregation business purchase such
products from Vanstar, rather than directly from the supplier, and pay Vanstar
a service fee for performing these distribution functions. Resellers place
product orders with the ComputerLand franchise business and Datago aggregation
business through the order placement system operated by Vanstar. Vanstar
typically ships products to a customer within two days of receipt of an order.
The Services Agreement was amended to extend the term through April 30, 1997
and revise the schedule of certain payments to be made to Vanstar by the
ComputerLand franchise business and Datago aggregation business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
Until April 30, 1997, the ComputerLand franchise business and Datago
aggregation business will be dependent upon Vanstar to purchase and maintain
inventories of products sufficient to meet resellers' requirements and to
receive and fulfill orders at acceptable service levels. Although Vanstar
maintains the direct contractual relationship with the suppliers, the
ComputerLand franchise business and Datago aggregation business and Vanstar
jointly maintain supplier relationships. While the Company has no reason to
believe that Vanstar will not be able to continue to perform its obligations
under the Services Agreement, in the event that Vanstar becomes unable to
continue to perform such obligations, there may be an adverse effect on the
operations and financial results of the Company. The Services Agreement
contains provisions for monetary penalties in the event that Vanstar fails to
achieve agreed-upon service levels, as well as provisions permitting the
ComputerLand franchise business and Datago aggregation business to take over a
portion of Vanstar's operations to fulfill such obligations under certain
circumstances. Under the terms of the Services Agreement with Vanstar, Merisel
is required to integrate these functions now being performed by Vanstar into
its facilities and systems in 1997. There can be no assurance, however, that
the Company will be able to obtain the funds necessary to integrate such
functions into its facilities and systems, and the cost of such integration
could be significant. In addition, pursuant to the terms of the amended
Services Agreement, the ComputerLand franchise business and Datago aggregation
business have been granted extended credit terms on their product purchases
from Vanstar, which are required to be repaid on or prior to July 31, 1997.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
The ComputerLand franchise business and Datago aggregation business generate
lower gross margins than the Company's core distribution business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview." Presently, the Company is exploring a number of
strategic alternatives with respect to either or both of the ComputerLand
franchise and Datago aggregation businesses. See "--Business Strategy--1996
Business Plan."
In the fourth quarter of 1995, the Company recorded non-cash asset valuation
adjustments of $30.0 million related to charges for impairment to goodwill
associated with Merisel's ComputerLand franchise business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Fourth Quarter Adjustments".
9
COMPETITION
Competition in the microcomputer products distribution industry is intense
and is based primarily on price, brand selection, breadth and availability of
product offering, financing options, speed of delivery, level of training and
technical support, marketing services and programs, and ability to influence a
buyer's decision.
Certain of Merisel's competitors have substantially greater financial
resources than Merisel. Merisel's principal competitors include large United
States-based international distributors such as Ingram, MicroAge and Tech Data
Corporation; non-United States based international distributors such as
Computer 2000; national distributors such as Gates/Arrow and regional
distributors and franchisors. The Company competes internationally with a
variety of national and regional distributors on a country-by-country basis.
Merisel also competes with manufacturers that sell directly to computer
resellers, sometimes at prices below those charged by Merisel for similar
products. The Company believes its broad product offering, product
availability, prompt delivery and support services may offset a manufacturer's
price advantage. In addition, many manufacturers focus their direct sales to
large computer resellers because of the high costs associated with dealing
with a large number of small-volume computer reseller customers.
The Franchise and Aggregation Business is subject to competition from other
franchisors and aggregators in obtaining and retaining franchisees and third-
party resellers, as well as competition from wholesale distributors with
respect to sales of products to customers in the Franchise and Aggregation
Business network. See "--The Industry." With respect to brand selection, the
Company believes that an important factor in the Franchise and Aggregation
Business' ability to attract customers is the fact that it is able to offer
computer systems and other hardware products from Apple, Compaq, Hewlett-
Packard and IBM. These manufacturers historically have sold their products
directly to resellers and through a limited number of master resellers such as
the Franchise and Aggregation Business. The loss of any of these
manufacturers, or any change in the way any such manufacturer markets, prices
or distributes its products, could have a material adverse effect on the
Franchise and Aggregation Business' operations and financial results. The
Franchise and Aggregation Business' principal competitors are Intelligent
Electronics, MicroAge and Inacom, all of which maintain networks of
franchisees and third-party dealers and which carry products of one or more of
the Company's major manufacturers. Certain of the Franchise and Aggregation
Business' competitors have greater financial resources than the Company.
EMPLOYEES
As of December 31, 1995 Merisel had 3,263 employees. Merisel considers its
relations with its employees to be good.
10
ITEM 2. PROPERTIES.
At December 31, 1995, the Company maintained distribution centers in the
following locations:
DISTRIBUTION
COUNTRY/AREA SERVED CENTERS
------------------- ------------
United States................... 7
Canada.......................... 2
France.......................... 1
Latin America/Caribbean......... 1*
Mexico.......................... 4
The Netherlands................. 1
Russia.......................... 1
Switzerland..................... 1
United Kingdom.................. 1
---
Total........................... 19
===
--------
* Located in Miami, Florida.
All of the Company's distribution centers are leased. The Company owns one
facility in Mexico, which used to serve as a distribution center. This
facility is now being leased to a third party. In its place, the Company has
leased a larger distribution facility in the same city. The Company's
Franchise and Aggregation Business is located in a 14,200 square-foot facility
in Pleasanton, California. The facility has been subleased from Vanstar until
July 31, 1997, with an option to further extend the term through December 31,
1997. Customers of the Franchise and Aggregation Business receive product
shipments directly from Vanstar's two warehouses located in Livermore,
California and Indianapolis, Indiana.
The Company's world headquarters are located in El Segundo, California,
where the Company owns a 112,500 square foot facility, and leases a 50,700
square foot facility. The Company also maintains sales offices in various
domestic and international locations. In addition, the Company owns 360 acres
of undeveloped land in Cary, North Carolina. The Company believes that its
facilities currently provide sufficient space for its present needs, and that
suitable additional space will be available on reasonable terms, if needed.
ITEM 3. LEGAL PROCEEDINGS.
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to represent a class of all persons who purchased
Merisel common stock between November 8, 1993 and June 7, 1994 (the "Class
Period"). The complaint, as amended and consolidated, alleges that the
defendants inflated the market price of Merisel's common stock with material
misrepresentations and omissions during the Class Period. Plaintiffs contend
that such alleged misrepresentations are actionable under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Following the granting of defendant's first motion to dismiss on
December 5, 1994, plaintiffs filed a second consolidated and amended complaint
on December 22, 1994. On April 3, 1995, Federal District Judge Real dismissed
the complaint with prejudice. The plaintiffs have appealed the dismissal. The
parties' appellate briefing to the Ninth Circuit was completed on November 6,
1995. The Ninth Circuit has not yet set a date for oral argument regarding the
appeal.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
impact on the financial condition or business of Merisel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol MSEL. The following
table sets forth the quarterly high and low sale prices for the Common Stock
as reported by the Nasdaq National Market.
HIGH LOW
------- -------
FISCAL YEAR 1994
First quarter........................................... $22 1/2 $16 5/8
Second quarter.......................................... 19 7/8 8
Third quarter........................................... 11 1/4 7
Fourth quarter.......................................... 10 3/4 6 1/4
FISCAL YEAR 1995
First quarter........................................... 8 1/2 3 7/8
Second quarter.......................................... 7 3/4 4 1/2
Third quarter........................................... 8 3/8 5 1/2
Fourth quarter.......................................... 6 5/8 4 1/8
FISCAL YEAR 1996
First quarter........................................... 5 7/8 2 1/4
On March 29, 1996, the closing sale price for the Company's Common Stock was
$2 7/16 per share. As of March 29, 1996, there were 1,237 record holders of
the Company's Common Stock.
Merisel has never declared or paid any dividends to stockholders. Certain of
the Company's debt agreements currently prohibit the payment of dividends by
the Company.
12
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT
DATA:(1)
Net sales............... $1,585,446 $2,238,715 $3,085,851 $5,018,687 $5,956,967
Cost of sales........... 1,427,491 2,036,292 2,827,315 4,676,164 5,633,278
---------- ---------- ---------- ---------- ----------
Gross profit............ 157,955 202,423 258,536 342,523 323,689
Selling, general & ad-
ministrative expenses.. 119,682 150,905 187,152 281,796 317,195
Impairment losses....... 51,383
Restructuring charge.... 9,333
---------- ---------- ---------- ---------- ----------
Operating income (loss). 38,273 51,518 71,384 60,727 (54,222)
Interest expense........ 15,972 15,742 17,810 29,024 37,583
Other expense........... 823 1,299 2,722 11,752 13,885
---------- ---------- ---------- ---------- ----------
Income (loss) before in-
come taxes............. 21,478 34,477 50,852 19,951 (105,690)
Provision (benefit) for
income taxes........... 10,652 14,812 20,413 8,341 (21,779)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 10,826 $ 19,665 $ 30,439 $ 11,610 $ (83,911)
========== ========== ========== ========== ==========
PER SHARE DATA:
Net income (loss) per
share.................. $ 0.43 $ 0.67 $ 1.00 $ 0.38 $ (2.82)
Weighted average number
of shares.............. 24,897 29,274 30,454 30,389 29,806
BALANCE SHEET DATA:
Working capital......... $ 92,510 $ 294,626 $ 359,765 $ 399,848 $ 280,864
Total assets............ 508,586 667,313 936,283 1,191,870 1,230,334
Long-term and subordi-
nated debt............. 25,316 153,433 208,500 357,685 356,271
Total debt.............. 164,632 179,124 259,429 395,556 382,395
Stockholders' equity.... 125,537 198,882 223,857 236,164 154,466
- --------
(1) Merisel's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. For clarity of presentation throughout this Annual
Report on Form 10-K, Merisel has described year ends presented as if the
year ended on December 31. Except for 1992, all fiscal years presented
were 52 weeks in duration. On January 31, 1994, the Company acquired the
Franchise and Aggregation Business in a transaction accounted for as a
purchase. The selected financial data set forth above includes that of
Merisel prior to the acquisition of the Franchise and Aggregation Business
and that of the combined entities subsequent to the acquisition of the
Franchise and Aggregation Business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company was founded in 1980 and has grown both through internal growth
and acquisitions of other computer products distributors and an aggregator. By
1989, the Company had achieved annual revenues of $629.4 million, principally
through internal expansion. In April 1990, the Company acquired Microamerica,
Inc. ("Microamerica"), another worldwide distributor of microcomputer
products, with net sales of approximately $526 million for the year ended
December 31, 1989. In the years following the Microamerica acquisition, the
Company's revenues increased from $3.1 billion in 1993 to $5.0 billion in
1994, partly reflecting substantial growth in both domestic and international
sales as the worldwide market for computer products expanded and manufacturers
increasingly turned to wholesale distributors for distribution of their
products. In addition, on January 31, 1994, the Company completed the
acquisition of certain assets of the Franchise and Aggregation Business from
Vanstar Corporation, which resulted in an additional $1.1 billion in revenue
in both 1994 and 1995. See "Business--The Franchise Business and Aggregation
Business" and "--The Franchise and Aggregation Business." In 1995, the
Company's revenues increased to $6.0 billion, due to sales growth in existing
distribution operations resulting from continued growth in the overall market
for hardware and software products and an increase in the number of products
certain vendors are selling through distribution. The Company's net income as
a percentage of sales, or net margin, declined from 1.0% and 0.2% for 1993 and
1994, respectively, to a loss of 1.4% for 1995, primarily due to certain
adjustments recorded in the fourth quarter of 1995. See "--Fourth Quarter
Adjustments". Prior to these adjustments, the Company's net loss as a
percentage of sales for 1995 was 0.2%. This was primarily a result of
declining gross profit margins resulting from continued competitive price
pressures, an increase in selling, general and administrative expenses
associated with the Company's increase in net sales, an increase in interest
expense and asset securitization fees resulting from higher borrowing levels
to finance the Company's higher sales levels and investments in warehouse
facilities and computer systems.
The Company anticipates that it will continue to face intense price
competition. In addition, the Company's Franchise and Aggregation Business
generates lower gross margins than the Company's core distribution business.
In 1994 and 1995, the gross margin as a percentage of sales for the Franchise
and Aggregation Business was 4.7% and 3.8%, respectively, compared to 7.4% and
5.8% of net sales, respectively, for the core distribution business. However,
the Franchise and Aggregation Business has lower selling, general and
administrative expenses as a percentage of sales than the Company's existing
wholesale distribution business. In 1994 and 1995, the Franchise and
Aggregation Business' selling, general and administration expenses were 3.7%
and 3.4% of net sales, compared to 6.2% and 5.8% of net sales, respectively,
for the Company's core distribution business. See "--The Franchise and
Aggregation Business." Management has undertaken various steps to reduce
selling, general and administrative expenses as a percentage of sales,
through, among other things, the establishment of business process
reengineering teams in the United States which are developing improvements to
existing practices. No assurance can be given as to whether such reductions
will, in fact, occur or as to the actual amount of any such reductions. In
addition, the Company has determined to delay implementation of certain
computer systems pursuant to its 1996 business plan in order to maximize cash
flow.
In 1995, in an attempt to address competitive pressures, the Company
assessed its cost structure and adopted a restructuring plan. In the first and
second quarters of 1995, the Company recorded an aggregate restructuring
charge of $9.3 million. This restructuring charge primarily included
reductions in the number of employees and the consolidation of warehouse
facilities. To the extent gross margins continue to decline and the Company is
not successful in sufficiently reducing selling, general and administrative
expenses as a percentage of sales, the Company will continue to experience a
negative impact on its operating income.
14
FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1995, the Company recorded several large
adjustments which reduced operating income by $89.4 million. Approximately
$25.8 million of the charge resulted from adjustments to trade accounts
payable balances. An additional $8.2 million charge was taken due to changes
made in estimates to certain asset and liability values. In the course of its
business, Merisel reconciles its accounts payable balances to statements
provided by its vendors. The accounts payable charge taken in the fourth
quarter is related to adjustments for price protection, returns to vendors by
Merisel and inventory receipt related issues, such as short-shipments,
identified through the reconciliation process. In order to minimize further
supplier account reconciliation losses, in February 1996 Merisel began
implementing processes and procedures to address current system deficiencies
and has engaged the assistance of outside consultants to assist in this
process. Management has committed additional resources to assist in collecting
a part of the charge that may be determined to be recoverable.
The Company's European Distribution Center experienced system software
start-up problems which created substantial shipping and receiving errors, and
resulted in an additional charge of $1.5 million in the fourth quarter.
Another $2.5 million charge was taken to expense start-up costs.
In addition, the Company determined that portions of the carrying values of
certain of its long-lived assets and identifiable intangibles will not be
recovered from their use in future operations. Accordingly, these assets were
written down to their fair values as of December 31, 1995, requiring the
recognition of impairment losses totaling $51.4 million. An adjustment was
recorded related to the impairment of intangible assets associated with the
Company's ComputerLand franchise business due to declining sales growth,
margins and earnings, and the resulting negative trend in projected cash
flows. ComputerLand's assets were acquired in January 1994 and included
intangibles with a net book value of $56.6 million at December 31, 1995 prior
to write down. Fair value of the ComputerLand long-lived assets was measured
by discounting expected future cash flows, which resulted in a required write
down of $30 million.
The Company is in the process of converting its North American operations to
new computer systems. The Company began designing the systems in early 1993
and converted its Canadian operations to the new system in August 1995. The
Company has delayed installation of these systems in the United States beyond
1996. Accumulated expenditures incurred to develop these systems have been
significantly in excess of amounts originally expected. Therefore, given the
cost overruns, the Company's experience in Canada, and the decision to delay
United States installation beyond 1996, it was determined that the value of
these assets had been impaired. Total capitalized costs of these systems
totaled $44.6 million at December 31, 1995. A write down of $19.5 million was
recorded to adjust capitalized development costs to $25.1 million. This amount
approximates the original budget for the project and represents the Company's
estimate of the fair value of these assets at December 31, 1995. See Note 3 to
Consolidated Financial Statements.
In March 1996, the Company sold its interest in its wholly owned Australian
subsidiary, Merisel Australia Pty Ltd. to Tech Pacific Holdings Ltd. Under the
terms of the agreement, the Company received consideration of $9.9 million in
the form of repayment of certain intercompany debt obligations. The Company
recognized a $1.9 million charge as an impairment loss for the writedown of
the Australian net assets to their net realizable value. These net assets,
after write down, totaled $9.9 million and were classified in the December 31,
1995 consolidated balance sheet as other current assets. The sale was made in
order to better position the Company to achieve its strategic growth
objectives, by abandoning its planned expansion into Asia and at the same time
disposing of an unprofitable business. Prior to the $1.9 million charge, the
Australian subsidiary reported a loss of $6.1 million for 1995.
Adjustments totaling $7.8 million were booked in the fourth quarter of 1994,
primarily due to changes made in estimates to certain asset and liability
values.
15
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth selected items
from the Company's Consolidated Statements of Operations, expressed as a
percentage of net sales:
PERCENTAGE OF NET
SALES
-------------------
YEAR ENDED
DECEMBER 31,
-------------------
1993 1994 1995
----- ----- -----
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 91.6 93.2 94.6
----- ----- -----
Gross profit.............................................. 8.4 6.8 5.4
Selling, general and administrative expenses.............. 6.1 5.6 5.3
Impairment losses......................................... 0.9
Restructuring charge...................................... 0.1
----- ----- -----
Operating income (loss)................................... 2.3 1.2 (0.9)
Interest expense.......................................... 0.6 0.6 0.6
Other expense............................................. 0.1 0.2 0.3
----- ----- -----
Income (loss) before income taxes......................... 1.6 0.4 (1.8)
Provision (benefit) for income taxes...................... 0.6 0.2 (0.4)
----- ----- -----
Net income (loss)......................................... 1.0% 0.2% (1.4)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net sales increased 19% to $6.0 billion in 1995 from $5.0
billion in 1994. The increase in net sales was primarily due to growth in
existing distribution operations in all geographic regions resulting from the
growth of the overall market for hardware and software products and an
increase in the number of products certain vendors are selling through
distribution.
Geographically, the Company's 1995 net sales were as follows: United States,
$4.0 billion, or 67%; Canada, $573 million, or 10%; Europe, $1.1 billion, or
18%; and other international markets, $337 million, or 5%. From 1994 to 1995,
these geographic regions experienced sales growth rates of 17%, 11%, 34% and
10%, respectively. For additional information on the Company's operating
results by geographic region, see Note 12 to Consolidated Financial
Statements.
The Company's sales of hardware and accessories, including the Franchise and
Aggregation Business, accounted for 75% of net sales, and software accounted
for 25% of net sales in 1994 and 1995.
Gross profit decreased 5.5% from $342.5 million in 1994 to $323.7 million in
1995. Gross profit as a percentage of sales, or gross margin, decreased from
6.8% in 1994 to 5.4% in 1995. In 1994, the gross margins as a percentage of
sales for the Franchise and Aggregation Business and the Company's core
distribution business were 4.7% and 7.4%, respectively, compared to 3.8% and
5.8%, respectively in 1995. The Company's core distribution business continued
to experience competitive pressures on pricing worldwide. In addition, the
decrease in the Franchise and Aggregation Business gross margin was the result
of intense price competition and the effect of a revised pricing structure
offered to new and existing franchisees to address this competition. The
Company anticipates that it will continue to experience intense price
competition. In addition, a portion of the fourth quarter adjustments were
charged to cost of sales, further contributing to the decrease in gross
profit.
Selling, general and administrative expenses ("SG&A") increased 13% from
$281.8 million in 1994 to $317.2 million in 1995. SG&A decreased as a
percentage of net sales from 5.6% in 1994 to 5.3% in 1995. In 1994, the SG&A
as a percentage of sales for the Franchise and Aggregation Business and the
Company's core distribution business were 3.7% and 6.2%, respectively,
compared to 3.4% and 5.8%, respectively, in 1995. The
16
increase in SG&A is primarily due to costs associated with the Company's 19%
increase in net sales and higher SG&A costs in Europe primarily due to the
start-up costs associated with the opening of the EDC. In addition, a portion
of the fourth quarter adjustments were charged to SG&A, further contributing
to the increase. The decrease in SG&A as a percentage of sales for the
Franchise and Aggregation Business resulted from decreases in net marketing
and promotion expense and in the distribution fee incurred under the existing
Distribution and Services Agreement with Vanstar. The Company's number of
full-time equivalent employees increased from 3,072 at December 31, 1994 to
3,263 at December 31, 1995.
Operating income decreased from $60.7 million in 1994 to a loss of $54.2
million in 1995. Operating income (loss) as a percentage of net sales was 1.2%
in 1994 and (0.9)% in 1995. This was primarily due to adjustments recorded by
the Company that reduced operating income by $89.4 million. See "--Fourth
Quarter Adjustments." Prior to these adjustments, the Company's operating
income in 1995 was $35.2 million, or 0.6% of net sales. Operating income as a
percentage of net sales for the Company's United States distribution business
declined as a result of lower gross margins and an increase in operating
expenses. The Company's European operations experienced net operating losses
in 1995 as a result of continued competitive pressure on margins, increased
operating expenses and the start-up costs associated with the opening of the
EDC.
Interest expense increased 29.5% to $37.6 million in 1995 from $29.0 million
in 1994, but remained level as a percentage of sales at 0.6%. The dollar
increase in interest expense is primarily attributable to the Company's higher
average borrowings in 1995, reflecting the need to finance the Company's
higher sales levels and, to a lesser extent, an increase in interest rates.
Other expense increased to $13.9 million in 1995 from $11.8 million in 1994.
The increase in other expense in 1995 primarily relates to an increase of $3.0
million in fees incurred in connection with accounts receivable
securitizations.
Provision for income taxes decreased to a benefit of $(21.8) million in 1995
from a provision of $8.3 million in 1994, reflecting the Company's loss
position in 1995. The Company's effective tax rate was a benefit of (20.6)% in
1995 compared to provision of 41.8% in 1994. The decrease in the effective
rate was principally the result of an increase in the valuation allowance
related to United States deferred tax assets.
Net income decreased from $11.6 million in 1994 to a net loss of $83.9
million in 1995. Net income per share decreased from $0.38 in 1994 to a loss
of $2.82 in 1995. In the fourth quarter of 1995, the Company recorded a loss
of $77.3 million compared to a loss of $2.5 million in the fourth quarter of
1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company's net sales increased 63% (28% excluding the Franchise and
Aggregation Business), to $5.0 billion in 1994 from $3.1 billion in 1993. The
increase in net sales was due to the impact of the ComputerLand Acquisition,
the growth of the overall market for hardware and software products, as well
as an increase in the number of vendors and products the Company is authorized
to sell in various geographic markets. The Company also increased its market
share of certain vendor products in various geographic markets. Net sales for
the Franchise and Aggregation Business for the 11 months ended December 31,
1994 were $1.1 billion or 21% of consolidated net sales for the year ended
December 31, 1994.
Geographically, the Company's 1994 net sales were as follows: United States,
$3.4 billion, or 68%; Canada, $517 million, or 10%; Europe, $784 million, or
16%; and other international markets, $305 million, or 6%. From 1993 to 1994,
these geographic regions experienced sales growth rates of 75%, (21% without
the Franchise and Aggregation Business), 31%, 47% and 47%, respectively. For
additional information on the Company's operating results by geographic
region, see Note 12 to Consolidated Financial Statements.
17
The Company's sales of hardware and accessories, including the Franchise and
Aggregation Business, accounted for 75% of net sales, and software accounted
for 25% of net sales in 1994, as compared to 60% and 40%, respectively, in
1993. The Company's hardware and accessories, excluding the Franchise and
Aggregation Business, accounted for 69% of net sales and software accounted
for 31% of net sales in 1994. The increase in hardware sales was due to the
Company obtaining additional rights to distribute hardware products throughout
the world from various vendors and that the Franchise and Aggregation
Business' revenues are predominantly hardware-related. The decrease in
software sales as a percentage of net sales was also partially the result of
lower prices on software products sold in the United States.
Gross profit increased 32.5% to $342.5 million in 1994 from $258.5 million
in 1993. Gross profit as a percentage of sales, or gross margin, decreased to
6.8%, from 8.4% in 1993. In 1994, the Franchise and Aggregation Business'
gross margin was 4.7% of net sales, compared to 7.4% of net sales for the
Company's core distribution business. The decrease in gross margin was
principally attributable to competitive pressures on pricing worldwide and the
effect of the ComputerLand Acquisition. The Franchise and Aggregation Business
operating expenses as a percentage of sales, however, were lower than those of
the Company's wholesale distribution business, which helped offset its lower
gross margins. See "--The Franchise and Aggregation Business."
Selling, general and administrative expenses increased 50.6% to $281.8
million in 1994 from $187.2 million in 1993. SG&A decreased as a percentage of
net sales from 6.1% in 1993 to 5.6% in 1994. In 1994, the Franchise and
Aggregation Business' SG&A was 3.7% of net sales, compared to 6.2% of net
sales for the core distribution business. The absolute dollar increase in SG&A
is primarily due to costs associated with the Company's 63% increase in net
sales and higher SG&A costs in Europe due to the costs associated with the
Company's implementation of its long-term strategy to centralize its European
operations. The decrease in SG&A as a percentage of net sales was due to the
Franchise and Aggregation Business' lower operating expenses as a percentage
of sales compared to those of Merisel's core distribution business. The
Company's number of full-time equivalent employees increased from 2,502 at
December 31, 1993 to 3,072 at December 31, 1994.
Operating income decreased 14.9% from $71.4 million in 1993 to $60.7 million
in 1994. Operating income as a percentage of net sales was 2.3% in 1993 and
1.2% in 1994. Operating income as a percentage of net sales for the Company's
United States distribution business declined as a result of lower gross
margins and an increase in operating expenses. The Company's European
operations experienced net operating losses in 1994 as a result of continued
competitive pressure on margins, increased operating expenses and the costs
associated with the implementation of the Company's long-term strategy to
centralize European operations. In the fourth quarter of 1994, the Company
recorded certain items which reduced operating income by approximately $7.8
million. These items related primarily to changes made in estimates to certain
asset and liability values. In addition, the Franchise and Aggregation
Business generates lower operating income as a percentage of net sales than
the Company's wholesale distribution business, which has the effect of
lowering overall consolidated operating income as a percentage of net sales.
Interest expense increased 63.0% to $29.0 million in 1994 from $17.8 million
in 1993, but remained level as a percentage of sales at 0.6%. The dollar
increase in interest expense is primarily attributable to the Company's higher
average borrowings in 1994, reflecting the need to finance the acquisition of
the Franchise and Aggregation Business and the Company's higher sales levels
and, to a lesser extent, an increase in interest rates.
Other expense increased to $11.8 million in 1994 from $2.7 million in 1993.
The increase in other expense in 1994 primarily relates to an increase of $6.5
million in fees incurred in connection with accounts receivable
securitizations and an increase in the amortization of financing fees of $1.2
million primarily related to the acquisition of the Franchise and Aggregation
Business. See "--Liquidity and Capital Resources." In addition, other expenses
includes foreign currency losses of $1.4 million, primarily due to the
devaluation of the Mexican Peso.
18
Provision for income taxes decreased to $8.3 million in 1994 from $20.4 in
1993, reflecting the Company's 60.8% decrease in income before income taxes.
The Company's effective tax rate was 41.8% in 1994 compared to 40.1% in 1993.
This increase was principally the result of certain of the Company's
subsidiaries that derived no tax benefit from such losses under local tax
laws.
Net income decreased 61.9% to $11.6 million in 1994 from $30.4 million in
1993, while net income per share decreased to $0.38 from $1.00. In the fourth
quarter of 1994, the Company recorded a loss of $2.5 million compared to net
income of $11.9 million in the fourth quarter of 1993. In response to the 1994
operating results and fourth quarter loss, the Company assessed its current
cost structure and anticipated incurring a restructuring charge of
approximately $10 million in the first quarter of 1995. This plan resulted in
a restructuring charge of $9.3 million. This restructuring charge primarily
included reductions in the number of employees and the consolidation of
warehouse facilities.
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. Management believes that the factors influencing quarterly
variability include: (i) the overall growth in the microcomputer industry;
(ii) shifts in short-term demand for the Company's products resulting, in
part, from the introduction of new products or updates of existing products;
and (iii) 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
fact that the Company participates in a highly dynamic industry, the Company's
revenues and earnings may be subject to material volatility, particularly on a
quarterly basis.
Additionally, the Company's net sales in the fourth quarter have been higher
than in its other 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 purchases and holiday period purchases.
As a result of this pattern the Company's cash requirements in the fourth
quarter have typically been greater. See "--Liquidity and Capital Resources."
For a tabular presentation of certain quarterly financial data with respect to
1994 and 1995, see Note 13 to Consolidated Financial Statements.
THE FRANCHISE AND AGGREGATION BUSINESS
As a result of the ComputerLand Acquisition, Merisel, through the
ComputerLand franchise business and Datago aggregation business, now operates
as a master reseller of computer systems and related products from the major
microcomputer manufacturers to a network of approximately 734 independently-
owned computer products resellers, including ComputerLand franchisees and
affiliated resellers purchasing through the Datago program. See "Business--The
Franchise Business and Aggregation Business."
The Company acquired the Franchise and Aggregation Business on January 31,
1994. For the eleven months ended December 31, 1994 and the year ended
December 31, 1995, the Franchise and Aggregation Business generated net sales
for both periods of $1.1 billion, gross profit of $49.1 million and $43.4
million, and income (loss) from operations of $10.3 million and $(28.1)
million respectively. The 1995 operating loss includes a $30 million write
down of intangible assets related to the ComputerLand franchise operations.
See "Business--The Franchise Business and Aggregation Business." Before this
write down, income from operations was $4.9 million in 1995. This write down
was reported as an impairment loss in the 1995 income statement. Gross margin
and SG&A as a percentage of net sales were 4.7% and 3.7% in 1994, and 3.8% and
3.4% in 1995, respectively, reflecting the lower margins and lower SG&A
incurred in the master reseller, or aggregator, business as compared to the
Company's core distribution business. The Franchise and Aggregation Business'
operating margin as a percentage of net revenues for 1995 was (2.2)%. The
Company anticipates downward pressure on gross margins as a result of intense
price competition and the effect of revised pricing structure offered to new
and existing franchisees. See "Business--The Franchise Business and
Aggregation Business."
19
For the eleven months ended December 31, 1994 and the year ended December
31, 1995, approximately 80% of the Franchise and Aggregation Business'
revenues were generated from the sale of products from four manufacturers:
Apple, Compaq, Hewlett-Packard and IBM. The loss of any one of these four
manufacturers, or a change in the way any of these manufacturers markets,
prices or distributes its products, could have a material adverse effect on
the Franchise and Aggregation Business' operating and financial results. In
1995, a change by one of these manufacturers has allowed certain of the
Company's larger customers to purchase product directly from this
manufacturer. Specifically, to the extent that one of the leading four
manufacturers changes its current system of limiting authorization to sell its
products to master resellers, the Franchise and Aggregation Business' sales
levels would be adversely affected. The Company believes, however, that its
distribution business may benefit from such changes.
All of the Franchise and Aggregation Business franchisees are electronically
linked for the purpose of order placement and other communications, reducing
the need for sales representatives and support personnel in comparison to the
Company's existing business. In addition, over 75% of the Franchise and
Aggregation Business customers currently finance their orders through "floor
plan" financing companies or pay on a C.O.D. basis, reducing the need for
credit and collection personnel and reducing financing costs because of
improved cash flow.
As a result of the foregoing as well as other factors, master resellers such
as the Franchise and Aggregation Business tend to generate both lower gross
margins and lower operating expenses as a percentage of sales than those
generated by the Company in its existing distribution business.
Competition among master resellers is intense (see "Business--Competition"),
and the Franchise and Aggregation Business may experience downward pressure on
its gross margins due to competitive pricing decisions. Under a Services
Agreement with Vanstar, Vanstar extended credit to the Company, and performs a
significant portion of the Franchise and Aggregation Business distribution
functions for a contractually agreed-upon fee through April 30, 1997. As a
result of this outsourcing arrangement, the Franchise and Aggregation Business
does not directly control the costs of those distribution functions, and
therefore will be limited in its ability to lower its costs in response to a
lower gross margin environment during the term of the Services Agreement. Due
to this limitation, the Services Agreement provides that the service fee, as a
percentage of sales volume, decreases if the Franchise and Aggregation
Business sales volume increases over a specified amount. Notwithstanding this
contractual provision, a material decline in the Franchise and Aggregation
Business gross margin could have a material adverse effect on the Company's
results of operations.
Over 75% of the Franchise and Aggregation Business sales currently are
financed on behalf of its customers by floor plan financing companies. The
Franchise and Aggregation Business typically receives payment from these
financing companies within three business days from the date of sale,
resulting in reduced cash requirements for the Franchise and Aggregation
Business as compared to the Company's existing wholesale distribution
business. This floor plan financing is typically subsidized for the Franchise
and Aggregation Business customers by its manufacturers. Any material change
in the availability or the terms of financing offered by such financing
companies or in the subsidies provided by manufacturers could require the
Franchise and Aggregation Business to provide such financing to its customers,
thereby substantially increasing the working capital necessary to operate its
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs primarily through
borrowing, securitizations of its trade receivables and the public and private
sales of its securities.
Net cash used for operating activities in 1995 was $62.4 million, as
compared to net cash used for operating activities of $82.4 million in 1994.
Sources of cash from operating activities consisted of $98.8 million increase
in accounts payable and $23.9 million increase in accrued liabilities. The
primary uses of cash in 1995 were a net loss of $83.9 million and increases in
inventories and accounts receivable of $43.5 million and $103.6
20
million, respectively. The increases in inventories and accounts receivable
were primarily related to the Company's higher sales volumes, especially in
December 1995. The increase in accounts payable was due to increased
purchasing associated with the higher sales volumes.
Net cash used for investing activities in 1995 was $49.1 million, consisting
of property and equipment expenditures. The expenditures for property and
equipment were primarily for the upgrading of the Company's computer systems,
expenditures for a new warehouse management system and the upgrading of
existing facilities and leasehold improvements. The Company presently
anticipates that its capital expenditures for 1996 will be approximately $13
million, consisting of costs of upgrading and modifying the new computer
system and the new warehouse management systems in North America, development
of new computer systems for the Company's European operations, and purchase of
warehouse and other equipment in North America, Europe and Latin America. In
addition, the Company has deferred non-essential capital expenditures to
maximize its cash flow in 1996. See "Business--Operations and Distribution"
and "Business--International Operations." The Company intends to finance its
anticipated capital expenditures with funds from existing operations.
Net cash provided by financing activities in 1995 was $108.3 million,
comprised principally of proceeds from the sale of an interest in the
Company's trade accounts receivable of $125.3 million, partially offset by net
repayments under domestic revolving lines of credit of $7.7 million, and net
repayments under local subsidiaries' lines of credit of $10.0 million.
The Company's wholly owned subsidiary Merisel Americas, Inc. ("Merisel
Americas") on an ongoing basis, sells trade receivable to its wholly owned
subsidiary, Merisel Capital Funding, Inc. ("Merisel Capital Funding"). For the
first three quarters of 1995, pursuant to a trade receivables purchase and
sales agreement with a securitization company, Merisel Capital Funding sold
these receivables to a syndicate of purchasers who purchased on an ongoing
basis up to $150 million of an undivided interest in such receivables.
Effective October 2, 1995, Merisel Capital Funding entered into a new
receivables purchase and servicing agreement with a securitization company to
replace the existing facility. In accordance with this agreement, Merisel
Capital Funding sells eligible receivables to an investor on an ongoing basis,
which yields proceeds of up to $300 million (the "U.S. Asset Securitization
Facility"). Merisel Capital Funding's sole business is the purchase of trade
receivables from Merisel Americas. Merisel Capital Funding is a separate
corporate entity with its own separate creditors, which upon its liquidation
will be entitled to be satisfied out of Merisel Capital Funding's assets prior
to any value in Merisel Capital Funding becoming available to Merisel Capital
Funding's equityholders. This facility expires in October 2000. Effective
October 16, 1995, Merisel U.K. Ltd. entered into a receivables purchase
agreement with a securitization company to provide funding for Merisel's U.K.
subsidiary. In accordance with this agreement, Merisel U.K. sells eligible
receivables to the securitization company on an ongoing basis, which yield
proceeds of up to 25 million pounds sterling. The facility has no fixed
expiration date but will expire no earlier than 18 months from the effective
date following three to six months prior written notice from the
securitization company. Effective December 15, 1995, Merisel Canada Inc.
entered into a receivables purchase agreement with a securitization company to
provide funding for Merisel's Canadian subsidiary. In accordance with this
agreement, Merisel Canada sells eligible receivables to the securitization
company, which yields proceeds of up to $150 million Canadian dollars. The
facility expires December 12, 2000, but is extendable by notice from the
securitization company, subject to the Company's approval. Under these
securitization facilities, the receivables are sold at face value, with
payment of a portion of the purchase price being deferred. Fees paid in
connection with such sales are recorded as other expense. As of March 29,
1996, the total amounts outstanding for the United States, United Kingdom, and
Canadian securitization facilities were $176 million, $28 million and $73
million, respectively, which were near the maximum amounts that could be
borrowed under such facilities at that time, based on the Company's eligible
receivables, as defined in the various agreements. However, at March 29, 1996
the Company had cash or cash equivalents on hand in excess of approximately
$70,000,000.
21
To provide capital for the Company's operating and investing activities, the
Company and its subsidiaries maintain a number of credit facilities including
a $150 million unsecured revolving bank credit facility expiring on May 31,
1997. At March 29, 1996, $150 million was outstanding under this facility. See
Note 8 to Consolidated Financial Statements. The Company and its subsidiaries
also maintain various local lines of credit, primarily to facilitate overnight
and other short-term borrowings. The total amount of outstanding borrowings
under these lines as of December 31, 1995 was $21.6 million.
At December 31, 1995 the Company and its subsidiaries also had outstanding
$125 million of 12 1/2% Senior Notes due December 31, 2004, $100 million of
8.58% senior notes due May 31, 1997 (the "Senior Notes") and $22 million of
11.28% senior subordinated notes (the "Subordinated Notes") repayable in five
equal annual installments beginning in March 1996. See Note 8 to Consolidated
Financial Statements. On March 10, 1996, the Company repaid the first such
installment.
As a result of the substantial losses incurred by the Company for the fourth
quarter and fiscal year ended December 31, 1995, Merisel was required to
obtain, and did obtain, amendments with respect to certain covenants under the
Revolving Credit Agreement, the purchase agreement related to the Senior
Notes, the purchase agreement related to the Subordinated Notes, and the U.S.
Asset Securitization Facility. See Note 8 to Consolidated Financial
Statements.
The amendments will enable the Company to operate its business for the
remainder of 1996 in compliance with the agreements if the Company achieves
its 1996 business plan. See "Business--Business Strategy--1996 Business Plan."
If the 1996 business plan is not successfully implemented, the Company may
need to obtain additional waivers from its lenders, or other sources of
capital through asset sales. While the Company believes it will be able to
successfully implement its 1996 business plan, if it can not do so, there can
be no assurance that such waivers or alternate sources of capital can be
obtained.
In connection with the ComputerLand Acquisition, Merisel FAB and Vanstar
entered into the Services Agreement pursuant to which Vanstar provides
significant distribution and other support services to the Franchise and
Aggregation Business for a contractually agreed upon fee. Effective July 12,
1995, this agreement was extended until April 30, 1997. Under the terms of the
Services Agreement extension, Merisel and Vanstar agreed that (i) the extended
credit terms under the Services Agreement would be increased to $31.4 million;
and (ii) the terms of the distribution fee would be adjusted. The amount of
the extended credit will be reduced by a scheduled amount of $844,000 monthly
through October 31, 1996. A final balance of $23.5 million will be payable in
four scheduled payments between May 15, 1997 and July 31, 1997. If an
inventory reduction plan is agreed upon between the two parties, then the
$23.5 million may decrease on an accelerated basis. In addition, on February
2, 1996 the Company paid Vanstar $13.4 million, which consisted of a
negotiated settlement of the Company's earn out obligation under the original
purchase agreement related to the ComputerLand acquisition of $14.6 million,
net of rebates of $1.2 million. See Note 4 to Consolidated Financial
Statements.
In light of the Company's current business plan to maximize its cash flow
during fiscal 1996, management does not expect, nor does the business plan
assume, that the Company will return to profitability until the fourth quarter
of 1996. The Company's amended debt agreements with the lenders under the
Revolving Credit Agreement, Senior Notes and Subordinated Notes require
principal payments of approximately $35 million in the remainder of 1996 and
$220 million in 1997, based on the amounts outstanding at March 29, 1996.
Assuming successful implementation of the existing business plan, and that the
Company does not experience any significant changes to payment terms or
product availability from its key vendors, the Company believes it can satisfy
its amortization requirements in 1996 without additional financing or asset
sales or debt restructuring. However, in light of the significant principal
payments required in 1997, as well as other obligations described herein, the
Company will not be able to finance its operations or amortize its debt in
1997 without engaging in significant asset sales, refinancing its borrowings,
obtaining new sources of financing, or some combination thereof. While the
Company believes it will be able to successfully implement its 1996 business
plan and implement one or more of the foregoing strategies which will enable
it to meet its obligations in 1997, there can be no assurance that it will be
able to do so.
22
ASSET MANAGEMENT
Merisel attempts to manage its inventory position to maintain levels
sufficient to achieve high product availability and same-day order fill rates.
Inventory levels may vary from period to period, due in part to increases or
decreases in sales levels, Merisel's practice of making large-volume purchases
when it deems the terms of such purchases to be attractive and the addition of
new manufacturers and products. The Company has negotiated agreements with
many of its manufacturers which contain stock balancing and price protection
provisions intended to reduce, in part, Merisel's risk of loss due to slow
moving or obsolete inventory or manufacturer price reductions. The Company is
not assured that these agreements will succeed in reducing this risk. In the
event of a manufacturer price reduction, the Company generally receives a
credit for products in inventory. In addition, the Company has the right to
return a certain percentage of purchases, subject to certain limitations.
Historically, price protection and stock return privileges as well as the
Company's inventory management procedures have helped to reduce the risk of
loss of carrying inventory.
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. The Company also offers
financing for its sales to certain of its customers through various floor plan
financing companies. With respect to credit sales, the Company attempts to
control its bad debt exposure through monitoring of customers'
creditworthiness and, where practicable, through participation in credit
associations that provide credit rating information about its customers. In
certain markets, the Company may elect to purchase credit insurance for
certain accounts.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Merisel, Inc.:
We have audited the accompanying consolidated balance sheets of Merisel,
Inc. and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
Our audits also included the financial statement schedules listed at Item 14.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Merisel, Inc. and
subsidiaries at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 15, 1996
24
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1994 1995
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 3,533 $ 1,378
Accounts receivable (net of allowances of $25,559 and
$24,786 at December 31, 1994 and 1995,
respectively)....................................... 451,246 413,057
Inventories.......................................... 517,706 561,230
Prepaid expenses and other current assets............ 13,256 17,919
Income taxes receivable.............................. 35,116
Deferred income tax benefit.......................... 12,128 6,657
---------- ----------
Total current assets............................... 997,869 1,035,357
PROPERTY AND EQUIPMENT, NET............................ 69,511 90,381
COST IN EXCESS OF NET ASSETS ACQUIRED, NET............. 113,115 93,287
OTHER ASSETS........................................... 11,375 11,309
---------- ----------
TOTAL ASSETS......................................... $1,191,870 $1,230,334
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 509,226 $ 621,990
Accrued liabilities.................................. 46,502 71,483
Short-term debt...................................... 37,871 21,620
Long-term debt--current.............................. 35,000
Subordinated debt--current........................... 4,400
Income taxes payable................................. 4,422
---------- ----------
Total current liabilities.......................... 598,021 754,493
LONG-TERM DEBT......................................... 335,685 299,271
SUBORDINATED DEBT...................................... 22,000 17,600
CAPITALIZED LEASE OBLIGATIONS.......................... 4,504
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000
shares; none issued or outstanding
Common stock, $.01 par value; authorized 50,000,000
shares; outstanding 29,716,600 and 29,863,500 at
December 31, 1994 and 1995, respectively............ 297 299
Additional paid-in capital........................... 141,249 141,938
Retained earnings.................................... 103,122 19,211
Cumulative translation adjustment.................... (8,504) (6,982)
---------- ----------
Total stockholders' equity......................... 236,164 154,466
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $1,191,870 $1,230,334
========== ==========
See accompanying notes to consolidated financial statements.
25
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
---------- ---------- ----------
NET SALES.................................... $3,085,851 $5,018,687 $5,956,967
COST OF SALES................................ 2,827,315 4,676,164 5,633,278
---------- ---------- ----------
GROSS PROFIT................................. 258,536 342,523 323,689
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 187,152 281,796 317,195
IMPAIRMENT LOSSES............................ 51,383
RESTRUCTURING CHARGE......................... 9,333
---------- ---------- ----------
OPERATING INCOME (LOSS)...................... 71,384 60,727 (54,222)
INTEREST EXPENSE............................. 17,810 29,024 37,583
OTHER EXPENSE................................ 2,722 11,752 13,885
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES............ 50,852 19,951 (105,690)
PROVISION (BENEFIT) FOR INCOME TAXES......... 20,413 8,341 (21,779)
---------- ---------- ----------
NET INCOME (LOSS)............................ $ 30,439 $ 11,610 $ (83,911)
========== ========== ==========
NET INCOME (LOSS) PER SHARE.................. $ 1.00 $ 0.38 $ (2.82)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES............ 30,454 30,389 29,806
========== ========== ==========
See accompanying notes to consolidated financial statements.
26
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
---------- ------ ---------- -------- ----------- --------
BALANCE AT DECEMBER 31,
1992................... 29,297,200 $293 $139,319 $61,073 $(1,803) $198,882
Exercise of stock
options and other..... 307,100 3 1,456 1,459
Cumulative translation
adjustment............ (6,923) (6,923)
Net income............. 30,439 30,439
---------- ---- -------- ------- ------- --------
BALANCE AT DECEMBER 31,
1993................... 29,604,300 296 140,775 91,512 (8,726) 223,857
Exercise of stock
options and other..... 112,300 1 474 475
Cumulative translation
adjustment............ 222 222
Net income............. 11,610 11,610
---------- ---- -------- ------- ------- --------
BALANCE AT DECEMBER 31,
1994................... 29,716,600 297 141,249 103,122 (8,504) 236,164
Exercise of stock
options and other..... 146,900 2 689 691
Cumulative translation
adjustment............ 1,522 1,522
Net loss............... (83,911) (83,911)
---------- ---- -------- ------- ------- --------
BALANCE AT DECEMBER 31,
1995................... 29,863,500 $299 $141,938 $19,211 $(6,982) $154,466
========== ==== ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
27
MERISEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
----------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ 30,439 $ 11,610 $ (83,911)
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization......... 10,476 16,101 20,509
Provision for doubtful accounts....... 17,441 18,851 16,335
Impairment losses..................... 51,383
Deferred income taxes................. (2,451) (4,973) 5,471
Changes in assets and liabilities, net
of the effects from acquisitions:
Accounts receivable................. (194,214) (152,912) (103,553)
Inventories......................... (142,866) (75,314) (43,524)
Prepaid expenses and other assets... (6,613) (6,604) (8,186)
Income taxes receivable............. (35,116)
Accounts payable.................... 166,296 94,385 98,756
Accrued liabilities................. (4,124) 19,690 23,872
Income taxes payable................ 208 (3,275) (4,422)
----------- ----------- ---------
Net cash used for operating
activities........................ (125,408) (82,441) (62,386)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...... (24,576) (40,163) (49,082)
Proceeds from sale of property and
equipment.............................. 1,004
Investments in unconsolidated
affiliates............................. (844)
Acquisitions, net of cash acquired...... (685) (86,343)
----------- ----------- ---------
Net cash used for investing
activities........................ (25,101) (126,506) (49,082)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of
credit................................. 1,113,967 1,766,300 937,275
Repayments under revolving line of
credit................................. (1,043,900) (1,742,114) (944,960)
Net borrowings (repayments) under
foreign bank facilities................ 10,237 (13,058) (9,980)
Borrowings under senior notes........... 125,000
Proceeds from sale of accounts
receivable............................. 75,000 75,000 125,320
Proceeds from issuance of common stock.. 1,459 475 691
----------- ----------- ---------
Net cash provided by financing
activities........................ 156,763 211,603 108,346
----------- ----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.. (6,373) 863 967
----------- ----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................. (119) 3,519 (2,155)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. 133 14 3,533
=========== =========== =========
CASH AND CASH EQUIVALENTS, END OF PERIOD. $ 14 $ 3,533 $ 1,378
=========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--
Cash paid during the year for:
Interest (net of interest capitalized
of $1,053 and $3,281 for 1994 and
1995 respectively)................... $ 20,741 $ 21,237 $ 27,118
Income taxes.......................... 20,924 11,185 10,747
Noncash activities:
Capital lease obligations entered into.. 5,708
See accompanying notes to consolidated financial statements.
28
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General--Merisel, Inc. ("Merisel" or the "Company") is a worldwide
distributor of microcomputer hardware and software products. In addition, as a
result of the ComputerLand Acquisition (see Note 4), the Company, through its
wholly-owned subsidiary Merisel FAB, Inc., is a leading aggregator, or master
reseller, of computer systems and related products from major microcomputer
manufacturers to ComputerLand franchisees and Datago resellers. The
consolidated financial statements include the accounts of Merisel and its
consolidated subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Liquidity--In 1995, the Company incurred a net loss of $83.9 million and
negative cash flows from operating activities of $62.4 million. As a result of
the loss in 1995, the Company was required to obtain, and did obtain,
amendments or waivers with respect to certain covenants under its senior
lending and other agreements. In connection with its negotiations with its
lenders, the Company has developed a business plan for the remainder of fiscal
1996 which, if successfully implemented, will allow it to operate without the
need for additional sources of financing or any asset sales in 1996, assuming
no significant changes in payment terms to or product availability from its
vendors. The Company is also continuing to actively explore all of its
strategic options with the assistance of a financial advisor. These options
include a business combination with, or sale to, a strategic partner who could
provide the capital necessary to enable continued growth of the Company, or a
sale of significant assets in geographic regions around the world, which would
also enable Merisel to fund its remaining operations out of existing cash flow
or restructured borrowings. In addition, management has undertaken various
steps to enhance profitability, through, among other things, the establishment
of business process reengineering teams that are developing improvements to
existing practices throughout the Company, particularly in the area of accounts
payable management, where the Company has engaged the assistance of outside
consultants. The Company also intends to curtail non-essential capital
expenditures during 1996 to maximize its cash flow. See Note 8 for information
about the Company's long-term obligations and activities to restructure the
debt.
Risks and Uncertainties--The Company is a leader in the distribution of
microcomputer hardware and software products, offering both full-line
distribution and aggregation capabilities. At December 31, 1995, approximately
40 percent of the company's identifiable assets were located outside the United
States, primarily in the major economically developed countries of Europe.
Additional geographic information on the company's assets can be found in Note
12. The diversity and breadth of the company's product and services offerings,
customers, and geographic operations mitigate significantly the risk that a
severe impact will occur in the near term as a result of changes in its
customer base, competition, or composition of its markets. Although Merisel
regularly stocks products and accessories supplied by more than 500
manufacturers, 63% of the Company's net sales in 1995 (as compared to 56% in
1994 and 45% in 1993) were derived from products supplied by Merisel's ten
largest manufacturers.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectibility of accounts receivable, inventory, accounts
payable, sales returns and recoverability of long-term assets.
New Accounting Pronouncements--The Company has not adopted the recently
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation," ("SFAS 123") which
29
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is required to be adopted in the first quarter of 1996. The Company currently
records compensation based on the provisions of Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees," as allowed by SFAS 123.
The Company expects to implement in 1996 the disclosure only provisions, as
permitted by SFAS 123. In 1995, the Company implemented Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This standard prescribes
the method for asset impairment evaluation for long-lived assets and certain
intangibles that are either held and used or to be disposed. The Company was
generally in conformance with this standard prior to adoption.
Revenue Recognition, Returns and Sales Incentives--The Company recognizes
revenue from hardware and software sales as products are shipped. The Company,
subject to certain limitations, permits its customers to exchange products or
receive credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds available
for cooperative promotion of product sales. Customers earn credit under such
programs based upon volume of purchases. The cost of these programs is
partially subsidized by marketing allowances provided by the Company's
manufacturers. The allowances for sales returns and costs of customer incentive
programs are accrued concurrently with the recognition of revenue.
In connection with its ComputerLand franchising operations, the Company
collects initial franchise fees, "cost plus" markups and royalties. Initial
franchise fees, which were not material in 1994 or 1995, are recognized as
income when substantially all services and conditions relating to the sale of
the franchise have been performed or satisfied. "Cost plus" markups, which
range from 1.95% to 3.10%, are charged to franchisees for products purchased
from ComputerLand. These markups, as well as royalties, which range from 0.5%
to 5.0% of franchise sales are recognized as such sales occur. Royalty revenues
were $19.2 million and $10.5 million in 1994 and 1995 respectively. Franchise
agreements range from 1 to 10 years in length.
Cash Equivalents--The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
Inventories--Inventories are valued at the lower of cost or market; cost is
determined on the average cost method.
Property and Depreciation--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are amortized over the shorter of the life of the lease
or the improvement.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and warehouse
management systems. Such amounts include the costs of materials and other
direct construction costs, purchased computer hardware and software, outside
programming and consulting fees, direct employee salaries and interest (see
Note 3).
Cost in Excess of Net Assets Acquired--Cost in excess of net assets acquired
results principally from the acquisition in January 1994 of the Franchise and
Aggregation Business and the acquisition in 1990 of Microamerica, Inc. The cost
in excess of net assets acquired from Microamerica, Inc. is being amortized
over a period of forty years using the straight line method. The cost in excess
of net assets acquired from the Franchise and Aggregation Business is being
amortized over an aggregate period of 25 years (see Note 3). Accumulated
amortization was $7,405,000 and $12,186,000 at December 31, 1994 and 1995
respectively.
30
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company reviews the recoverability of intangible assets to determine if
there has been any permanent impairment. This assessment is performed based on
the estimated undiscounted future cash flows from operating activities compared
with the carrying value of intangible assets. If the undiscounted future cash
flows are less than the carrying value, an impairment loss is recognized,
measured by the difference between the carrying value and fair value of the
assets (see Note 3).
Income Taxes--Deferred income taxes represent the amounts which will be paid
or received in future periods based on the tax rates that are expected to be in
effect when the temporary differences are scheduled to reverse.
At December 31, 1994 and 1995, the cumulative amount of undistributed
earnings on which the Company has not recognized United States income taxes was
approximately $16 million and $7 million, respectively, representing primarily
earnings in the Company's Canadian subsidiary. The Company intends to invest
the undistributed earnings of its foreign subsidiaries indefinitely.
Concentration of Credit Risks--Financial instruments which subject the
Company to credit risk consist primarily of cash equivalents, trade accounts
receivable, and forward foreign currency exchange contracts. Concentration of
credit risk with respect to trade accounts receivable are generally diversified
due to the large number of entities comprising the Company's customer base and
their geographic dispersion. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses, and in
certain locations maintains credit insurance. The Company diversifies its
credit risk with respect to forward foreign exchange contracts due to the
number of institutions with which it enters into contracts. The Company
actively evaluates the creditworthiness of the financial institutions with
which it conducts business.
Fair Values of Financial Instruments--The fair values of financial
instruments, other than long-term debt, closely approximate their carrying
value. The estimated fair value of long-term debt including current maturities,
based on reference to quoted market prices, was less than the carrying value by
approximately $6,900,000 and $32,300,000 as of December 31, 1994 and 1995,
respectively.
Foreign Currency Translation--Assets and liabilities of foreign subsidiaries
are translated into United States dollars at the exchange rate in effect at the
close of the period. Revenues and expenses of these subsidiaries are translated
at the average exchange rate during the period. The aggregate effect of
translating the financial statements of foreign subsidiaries at the above rates
is included in a separate component of stockholders' equity entitled Cumulative
Translation Adjustment. In addition, the Company advances funds in the normal
course of business, to certain of its foreign subsidiaries, which are not
expected to be repaid in the foreseeable future. Translation adjustments
resulting from these advances are also included in Cumulative Translation
Adjustment.
Foreign Exchange Instruments--The Company's use of derivatives is limited to
the purchase of foreign exchange contracts, which are used to minimize foreign
exchange transaction gains and losses. The Company purchases forward dollar
contracts to hedge short-term advances to its foreign subsidiaries and to hedge
commitments to acquire inventory for sale and does not use the contracts for
trading purposes. The Company's foreign exchange rate contracts minimize the
Company's exposure to exchange rate movement risk, as any gains or losses on
these contracts are offset by gains and losses on the transactions being
hedged. The foreign exchange contracts have varying maturities through April
23, 1996. At December 31, 1994 and 1995, the Company had approximately $110
million and $131 million of foreign exchange contracts outstanding, the
carrying value of which does not differ significantly from their fair value. In
1993 there was a net foreign currency gain of $283,000, and net foreign
currency losses of $1,422,000 and $806,000 in 1994 and 1995 respectively. The
1994 loss was primarily due to the devaluation of the Mexican Peso. Further
declines in value of the Mexican Peso against the United States dollar
contributed $383,000 to the loss in 1995, with the balance made up of losses
from transactions in other foreign currencies. These amounts are recorded as
other expense.
31
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income (Loss) per Share--Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock and common stock equivalents (common stock options) outstanding during
the related period, unless such inclusion is antidilutive. The weighted average
number of shares includes shares issuable upon the assumed exercise of stock
options less the number of shares assumed purchased with the proceeds available
from such exercise.
Fiscal Periods--The Company's fiscal year is the 52- or 53-week period ending
on the Saturday nearest to December 31 and its fiscal quarters are the 13- or
14-week periods ending on the Saturday nearest to March 31, June 30, September
30 and December 31. For clarity of presentation, the Company has described
year-ends presented as if the years ended on December 31 and quarter-ends
presented as if the quarters ended on March 31, June 30, September 30 and
December 31. The 1993, 1994 and 1995 fiscal years were 52 weeks in duration.
All quarters presented for 1994 and 1995 were 13 weeks in duration.
2. RESTRUCTURING CHARGE
During the first and second quarters of 1995, the Company recorded aggregate
charges of $9,333,000 associated with resizing and restructuring several of the
Company's operations. This amount consists of $4,578,000 of severance charges
for the involuntary termination of approximately 240 employees, $2,830,000 for
warehouse closures in North America and $1,925,000 for the consolidation of
certain warehouses in Europe. As of December 31, 1995, $4,543,000 of this
amount remained in accrued liabilities.
3. IMPAIRMENT LOSSES
In the fourth quarter of 1995, the Company determined that a portion of the
carrying values certain of its long-lived assets and identifiable intangibles
will not be recovered from their use in future operations. Accordingly, these
assets were written down to their fair values as of December 31, 1995. An
impairment was recognized in the long-lived assets of the ComputerLand
franchise operations, due to declining sales growth, margins, and earnings, and
the resulting negative trend in projected cash flows. The long-lived assets of
ComputerLand's franchise operations were acquired in January 1994 (see Note 4)
and included intangibles with a net book value of $56.6 million at December 31,
1995 prior to the write down. Fair value to the ComputerLand long-lived assets
was measured by discounting expected future cash flows, which resulted in a
required write down of $30 million.
The Company is in the process of converting its North American operations to
new computer operating systems. The Company began designing the systems in
early 1993 and converted its Canadian operations to the new system in August
1995. In the early implementation stages, the Canadian conversion produced
results below the Company's expectations. In late February 1996, Merisel
Canada's operating system had begun to show results closer to the Company's
original projection. However, this required substantial additional development
efforts and costs in the post-implementation period. Accumulated expenditures
incurred to develop these systems have been significantly in excess of the
amounts originally expected. In addition, the Company has delayed installation
of these systems in the United States beyond 1996. As a result of the cost
overruns, the Company's experience in Canada, and the decision to delay United
States installation beyond 1996, it was determined that the value of these
assets had been impaired. Total capitalized costs of these systems totaled
$44.6 million at December 31, 1995. It was determined that a write down of
$19.5 million was required to bring capitalized development costs to $25.1
million. This amount approximates the original budget for the project, and
represents the Company's estimate of the fair value of these assets at December
31, 1995. The write down was determined by identifying certain cost categories
that would be duplicated with future development efforts and which would not
provide value to the Company.
32
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March 1996, the Company sold its interest in its wholly owned Australian
subsidiary, Merisel Australia Pty Ltd. to Tech Pacific Holdings Ltd. Under the
terms of the agreement, the Company received consideration of $9.9 million in
the form of repayment of certain intercompany debt obligations. The Company
recognized a $1.9 million charge as an impairment loss for the writedown of
the Australian net assets to their net realizable value. These net assets,
after write down, totaled $9.9 million and were classified in the December 31,
1995 consolidated balance sheet as other current assets. The sale was made in
order to better position the Company to achieve its strategic growth
objectives, by abandoning its planned expansion into Asia and at the same time
disposing of an unprofitable business. Prior to the $1.9 million charge, the
Australian subsidiary reported a loss of $6.1 million for 1995.
4. ACQUISITIONS
On January 31, 1994, the Company, through its wholly-owned subsidiary,
Merisel FAB, acquired certain assets of the United States Franchise and
Distribution Division (the "F&D Division") of Vanstar Corporation (formerly
ComputerLand Corporation) (the "ComputerLand Acquisition"). The Company paid
$80.2 million in cash at closing for the acquired assets and $2.1 million of
direct acquisition costs. In addition, on February 2, 1996 the Company paid
Vanstar $13.4 million, which consisted of a negotiated settlement of the
Company's earn out obligation under the original purchase agreement related to
the ComputerLand acquisition of $14.6 million, net of rebates of $1.2 million.
The acquisition has been accounted for as a purchase. Under the purchase
method of accounting, an allocation of the purchase price to the Merisel FAB
assets and liabilities is required to reflect fair values. Based on an
independent valuation prepared for the Company, $82.3 million of the purchase
price and $14.0 million of the additional payment were allocated to intangible
assets with an estimated aggregate life of 25 years. A total of $35.4 million
was allocated to Datago and $60.9 million to ComputerLand. The ComputerLand
portion of these intangible assets was subsequently written down by $30
million in the fourth quarter of 1995 (see Note 3).
In connection with the ComputerLand acquisition, Merisel FAB entered into a
Distribution and Services Agreement (the "Services Agreement") with Vanstar
whereby Vanstar provided products and distribution and other support services
to Merisel FAB until January 31, 1996. On July 12, 1995 Merisel entered into a
non-binding letter of intent with Vanstar to extend the Services Agreement
until April 30, 1997. Under the terms of the Services Agreement extension,
Merisel and Vanstar agreed that (i) the extended credit terms under the
Services Agreement would be increased to $31.4 million; and (ii) the terms of
the distribution fee would be adjusted. The amount of the extended credit will
be reduced by a scheduled amount of $844,000 monthly through October 31, 1996.
A final balance of $23.5 million will be payable in four scheduled payments
between May 15, 1997 and July 31, 1997. If an inventory reduction plan is
agreed upon between the two parties, then the $23.5 million may decrease on an
accelerated basis.
Following is summarized unaudited pro forma operating results assuming that
the Company had acquired the F&D Division on January 1, 1993.
1993 1994
---------- ----------
(IN THOUSANDS)
Net sales............................................. $4,160,158 $5,120,419
Income before taxes................................... 56,498 20,289
Net income............................................ 33,826 11,839
Net income per share.................................. 1.11 0.39
Weighted average shares outstanding................... 30,454 30,389
33
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, effective August 1994, the Company acquired the remaining 40%
minority interest in the Company's Mexican subsidiary for approximately $5.0
million. Pro forma income statement information for this acquisition has not
been provided as the financial statement impact is not significant.
5. SALE OF ACCOUNTS RECEIVABLE
The Company's wholly-owned subsidiary Merisel Americas, Inc. ("Merisel
Americas") on an ongoing basis, sells trade receivables to its wholly-owned
subsidiary, Merisel Capital Funding, Inc. ("Merisel Capital Funding"). For the
first three quarters of 1995, pursuant to a trade receivables purchase and
sale agreement with a securitization company, Merisel Capital Funding sold
these receivables to a syndicate of purchasers who purchased on an ongoing
basis up to $150 million of an undivided interest in such receivables.
Effective October 2, 1995, Merisel Capital Funding entered into a new
receivables purchase and servicing agreement with a securitization company to
replace the existing facility. In accordance with this agreement, Merisel
Capital Funding sells receivables to an investor on an ongoing basis, which
yields proceeds of up to $300 million. Merisel Capital Funding's sole business
is the purchase of trade receivables from Merisel Americas. Merisel Capital
Funding is a separate corporate entity with its own separate creditors, which
upon its liquidation will be entitled to be satisfied out of Merisel Capital
Funding's assets prior to any value in Merisel Capital Funding becoming
available to Merisel Capital Funding's equityholders. This facility expires in
October 2000. Due to the losses incurred in the fourth quarter and year ended
December 31, 1995, certain covenants in the receivables purchase and servicing
agreement were amended to bring the Company into compliance with such
covenants.
Effective October 16, 1995, Merisel U.K. Ltd. entered into a receivables
purchase agreement with a securitization company to provide funding for
Merisel's U.K. subsidiary. In accordance with this agreement, Merisel U.K.
sells receivables to the securitization company on an ongoing basis, which
yields proceeds of up to 25 million pounds sterling. The facility has no fixed
expiration date but will expire no earlier than 18 months from the effective
date following three to six months prior written notice from the
securitization company. Effective December 15, 1995, Merisel Canada Inc.
entered into a receivables purchase agreement with a securitization company to
provide funding for Merisel's Canadian subsidiary. In accordance with this
agreement, Merisel Canada sells receivables to the securitization company,
which yields proceeds of up to $150 million Canadian dollars. The facility
expires December 12, 2000, but is extendable by notice from the securitization
company, subject to the Company's approval.
Under these securitization facilities, the receivables are sold at face
value with payment of a portion of the purchase price being deferred. As of
December 31, 1995 the total amount outstanding under these facilities was $275
million. Fees incurred in connection with the sale of accounts receivable for
the years ended December 31, 1994 and 1995 were $7,151,000 and $10,291,000,
respectively, and are recorded as other expense.
34
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIFE ----------------
(IN YEARS) 1994 1995
----------- ------- -------
Land and building............................. 20 $ 433 $13,558
Equipment..................................... 3 to 7 47,947 76,918
Furniture and fixtures........................ 3 to 5 9,701 13,777
Leasehold improvements........................ 3 to 20 12,546 15,963
Construction in progress...................... 37,511 21,365
------- -------
Total......................................... 108,138 141,581
Less accumulated depreciation and amortiza-
tion......................................... (38,627) (51,200)
------- -------
Property and equipment, net................... $69,511 $90,381
======= =======
7. INCOME TAXES
The components of income (loss) before income taxes consisted of the
following (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- ---------
Domestic......................................... $46,080 $23,430 $ (71,884)
Foreign.......................................... 4,772 (3,479) (33,806)
------- ------- ---------
Total............................................ $50,852 $19,951 $(105,690)
======= ======= =========
The provision (benefit) for income taxes consisted of the following (in
thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
Current:
Federal....................................... $15,552 $10,675 $(24,627)
State......................................... 3,994 2,429 130
Foreign....................................... 3,318 210 (2,753)
------- ------- --------
Total Current................................. 22,864 13,314 (27,250)
------- ------- --------
Deferred:
Domestic...................................... (2,636) (4,325) 7,120
Foreign....................................... 185 (648) (1,649)
------- ------- --------
Total deferred................................ (2,451) (4,973) 5,471
------- ------- --------
Total provision (benefit)..................... $20,413 $ 8,341 $(21,779)
======= ======= ========
35
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities and assets were comprised of the following (in
thousands):
DECEMBER 31,
----------------
1994 1995
------- -------
Deferred tax liabilities
State taxes............................................. $ 1,143
Depreciation............................................ 564
-------
Total................................................. $ 1,707
=======
Deferred tax assets
Net operating loss of foreign subsidiaries.............. $ 4,400 $ 2,350
Expense accruals........................................ 11,128 9,886
State taxes............................................. 1,056
Property and goodwill................................... 3,648
Other, net.............................................. 2,707 1,999
------- -------
18,235 18,939
Valuation allowances.................................... (4,400) (12,282)
------- -------
Total................................................. $13,835 $ 6,657
======= =======
Net deferred tax asset.................................... $12,128 $ 6,657
======= =======
The major elements contributing to the difference between the federal
statutory tax rate and the effective tax rate are as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1993 1994 1995
------ ------ -------
Statutory rate.................................... 35.0% 35.0% (35.0)%
Increase in U.S. valuation allowance.............. 9.3
State income taxes, less effect of federal deduc-
tion............................................. 4.1 4.0 0.1
Foreign income subject to tax at other than statu-
tory rate........................................ 1.0 2.5 3.2
Goodwill amortization............................. 0.5 1.3 0.4
Foreign losses with benefits at less than statu-
tory rate........................................ 2.6 6.7 0.1
Utilization of net operating losses of foreign
subsidiary....................................... (3.3) (5.3)
Other............................................. 0.2 (2.4) 1.3
------ ------ -------
Effective tax rate................................ 40.1% 41.8% (20.6)%
====== ====== =======
8. DEBT
At December 31, 1995, the Company's subsidiaries, Merisel Americas and
Merisel Europe, Inc. ("Merisel Europe") had unsecured senior borrowing
commitments, which consisted of $100 million of 8.58% senior notes (the
"Senior Notes") by Merisel Americas, a $150 million revolving credit agreement
(the "Revolving Credit Agreement") by Merisel Americas and Merisel Europe, and
a $50 million Canadian dollar unsecured revolving bank credit facility (the
"Canadian Revolver") by Merisel Canada. The Senior Notes and the Revolving
Credit Agreement, as amended, are due on May 31, 1997, and the Canadian
Revolver expired January 4, 1996. At December 31, 1995, there was $100 million
outstanding under the Senior Notes, $103 million outstanding under the
Revolving Credit Agreement, and no amount outstanding under the Canadian
Revolver. Advances under the Revolving Credit Agreement and the Canadian
Revolver bear interest at specific rates based upon market reference rates and
the Company's performance relative to specific levels of debt to total
capitalization. The combined average interest rate for the Revolving Credit
Agreement and the Canadian Revolver at December 31,
36
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 was approximately 8.50% and 7.25%, respectively. The Company is also
required to pay a commitment fee on the unused available funds on the
Revolving Credit Agreement. The Revolving Credit Agreement, which was amended
in February 1995, the Canadian Revolver agreement, and the Senior Notes
agreement each contain various covenants, including those which prohibit the
payment of cash dividends, require a minimum amount of tangible net worth, and
place limitations on the acquisition of assets. The agreements also require
the Company or certain of its subsidiaries to maintain certain specified
financial ratios, including interest coverage, minimum adjusted tangible net
worth, total debt equivalents to adjusted tangible net worth, inventory
turnover, minimum accounts payable and minimum accounts payable to inventory.
Subsequent to year end, the Revolving Credit Agreement and Senior Notes
agreement were amended as a result of the Company's noncompliance with certain
covenants.
Effective October 24, 1994, the Company issued $125 million principal amount
of senior notes (the "Notes") due December 31, 2004. The Company used the
proceeds from the Notes to repay in full the $65 million borrowed under an
unsecured credit agreement with a bank to finance the ComputerLand Acquisition
and to repay approximately $55.8 million of indebtedness under the Revolving
Credit Agreement. The Notes provide for an interest rate of 12.5% payable
semiannually commencing December 31, 1994. The Notes are effectively
subordinated to all liabilities of the Company's subsidiaries, including trade
payables. The Indenture relating to the Notes contains certain covenants that,
among other things, limit the type and amount of additional indebtedness that
may be incurred by the Company or any of its subsidiaries and impose
limitations on investment, loans, advances, sales or transfers of assets, the
making of dividends and other payments, the creation of liens, sale-leaseback
transactions with affiliates and certain mergers.
At December 31, 1995 Merisel Americas had outstanding an aggregate of
$22,000,000 of privately placed subordinated notes. The notes, as amended,
provide for interest at the rate of 11.28% per annum and are repayable in five
equal annual installments beginning March 1996 of which the first such
installment was paid. The subordinated debt agreement contains certain
restrictive covenants, including those that limit the Company's ability to
incur debt, acquire the stock of or merge with other corporations, or sell
certain assets and prohibits the payment of dividends. The subordinated debt
agreement also requires Merisel or its subsidiaries to maintain specified
financial ratios similar in nature to those required by the Senior Notes.
In addition, the Company and its subsidiaries have various unsecured lines
of credit denominated in their local currencies under which as of December 31,
1995 they were able to borrow an aggregate of approximately $34 million,
excluding the Canadian Revolver. The Company had borrowings outstanding under
such lines of credit of $37.9 million and $21.6 million at December 31, 1994
and 1995, respectively. The weighted average interest rate for such lines of
credit at December 31, 1995 was 10%. At December 31, 1995, approximately $130
million of outstanding debt was advanced to foreign subsidiaries.
Amendments to Financing Arrangements. As a result of the substantial losses
incurred by the Company for the fourth quarter and fiscal year ended December
31, 1995, Merisel was required to obtain, and did obtain, amendments or
waivers with respect to certain covenants under the Revolving Credit
Agreement, the purchase agreement related to the Senior Notes, the purchase
agreement related to the Subordinated Notes and the Notes.
As amended, the Revolving Credit Agreement and the Senior Note Agreement
provide that the Company pay a total of $10,000,000 on April 15, 1996, and pay
$5,000,000 on each of May 5, 1996, June 5, 1996, July 5, 1996, August 5, 1996,
and September 5, 1996, and a total of $65,000,000 on January 15, 1997. These
payments will be shared ratably by the banks under the Revolving Credit
Agreement and the holders of the Senior Notes, although to the extent that the
Company has not borrowed the full amount available under the Revolving Credit
Agreement, the banks' collective commitments under the Revolving Credit
Agreement will be reduced by the ratable amounts without any payment by the
Company. The applicable annual percentage interest rates under the
37
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revolving Credit Agreement and the Senior Notes have been increased by one
percent. Additionally, certain covenants of the Company under the Revolving
Credit Agreement and the Senior Note Agreement have been amended, and each of
the Revolving Credit Agreement and the Senior Note Agreement are scheduled to
mature on May 31, 1997.
The Company and the holders of the Subordinated Notes have also amended the
Subordinated Note Agreement. As amended, the Subordinated Note Agreement
incorporates the new financial covenants contained in the Senior Note Agreement
and the Revolving Credit Agreement. Additionally, the Company has agreed that
payments of accrued interest that had been scheduled to be made semi-annually
will instead be paid quarterly, commencing on September 10, 1996. The Company
has also agreed to increase the annual percentage interest rate payable on the
principal outstanding under the Subordinated Notes by 0.50%, commencing April
15, 1996.
In addition, the amendments required a waiver of certain provisions of the
Indenture pursuant to which the Notes were issued, which waiver was obtained.
9. CAPITALIZED LEASES
The Company leases certain warehouse and computer equipment under long-term
leases and has the option to purchase the equipment for a nominal cost at the
termination of the lease.
Property and equipment includes the following amounts for leases that have
been capitalized:
1995
----------
Machinery and equipment....................................... $5,708,000
Less accumulated depreciation................................. 313,000
----------
Total....................................................... $5,395,000
==========
Future minimum payments for capitalized leases were as follows at December
31, 1995:
1996.......................................................... $1,490,000
1997.......................................................... 1,490,000
1998.......................................................... 1,490,000
1999.......................................................... 1,155,000
2000.......................................................... 1,060,000
----------
Total minimum lease payments.................................. 6,685,000
Less amount representing interest............................. 1,073,000
----------
Present value of net minimum lease payments................... 5,612,000
Less current maturities....................................... 1,108,000
----------
Long-term obligation........................................ $4,504,000
==========
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
operating leases. Future minimum rental payments, under leases that have
initial or remaining noncancelable lease terms in excess of one year are
$14,038,000 in 1996, $12,200,000 in 1997, $11,094,000 in 1998, $9,947,000 in
1999, $7,800,000 in 2000 and $20,419,000 thereafter. Certain of the leases
contain inflation escalation clauses and requirements for the payment of
property taxes, insurance, and maintenance expenses. Rent expense for 1993,
1994 and 1995 was $12,617,000, $13,447,000 and $14,840,000, respectively.
38
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1994, the Company and certain of its officers and/or directors were
named in putative securities class actions filed in the United States District
Court for the Central District of California, consolidated as In re Merisel,
Inc. Securities Litigation. Plaintiffs, who are seeking damages in an
unspecified amount, purport to represent a class of all persons who purchased
Merisel common stock between November 8, 1993 and June 7, 1994 (the "Class
Period"). The complaint, as amended and consolidated, alleges that the
defendants inflated the market price of Merisel's common stock with material
misrepresentations and omissions during the Class Period. Plaintiffs contend
that such alleged misrepresentations are actionable under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Following the granting of defendant's first motion to dismiss on
December 5, 1994, plaintiffs filed a second consolidated and amended complaint
on December 22, 1994. On April 3, 1995, Federal District Judge Real dismissed
the complaint with prejudice. The plaintiffs have appealed the dismissal. The
parties' appellate briefing to the Ninth Circuit was completed on November 6,
1995. The Ninth Circuit has not yet set a date for oral argument regarding the
appeal.
The Company is involved in certain other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
impact on the Company's financial statements.
11. EMPLOYEE STOCK OPTIONS AND BENEFIT PLANS
Under the Company's stock option plans, incentive stock options and
nonqualified stock options may be granted to employees, directors, and
consultants. The plans authorize the issuance of an aggregate of
4,616,200 shares upon exercise of options granted thereunder. The optionees,
option prices, vesting provisions, dates of grant and number of shares granted
under the plans are determined primarily by the Board of Directors or the
option committee under the stock option plans, though incentive stock options
must be granted at prices which are no less than the fair market value of the
Company's common stock at the date of grant. Options granted under the plans
expire ten years from the date of grant. The following summarizes activity in
the plans for the three years ended December 31, 1995:
OPTION EXERCISE PRICE
NUMBER OF -------------------------
OPTIONS PER SHARE TOTAL
--------- ------------- -----------
Outstanding, December 31, 1992......... 1,863,540 $1.11--$11.38 $11,560,000
Granted................................ 327,000 11.75--11.88 3,883,000
Exercised.............................. (307,100) 1.11--11.38 (1,051,000)
Canceled............................... (27,300) 3.00--11.38 (266,000)
--------- -----------
Outstanding, December 31, 1993......... 1,856,140 2.00--11.88 14,126,000
Granted................................ 243,500 15.00--19.88 4,492,000
Exercised.............................. (112,300) 2.00--11.88 (475,000)
Canceled............................... (84,715) 2.00--19.88 (953,000)
--------- -----------
Outstanding, December 31, 1994......... 1,902,625 2.20--19.88 17,190,000
Granted................................ 1,680,241 4.58--6.31 9,929,000
Exercised.............................. (112,422) 2.20--6.25 (336,000)
Canceled............................... (279,155) 2.20--19.88 (3,471,000)
--------- -----------
Outstanding, December 31, 1995......... 3,191,289 $23,312,000
========= ===========
A total of 1,293,100 and 1,462,000 options were excercisable under the stock
option plans at December 31, 1994 and 1995, respectively.
39
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1987, the Company's Board of Directors authorized the issuance of
350,000 nonqualified stock options to an officer of the Company for the
purchase of common stock at an exercise price of $.01 per share. The options
vested over five years from the date of grant and are execrable for a period
of up to ten years. The difference between the fair market value of the common
stock underlying the nonqualified stock options as of the date of grant and
the exercise price, an aggregate of $1,484,000, was amortized as compensation
expense over the five-year vesting period. No compensation expense related to
these stock options was recognized in 1993, 1994 or 1995. As of December 31,
1995, 150,000 options remained outstanding.
The Company offers a 401(k) savings plan under which all employees who are
21 years of age with at least one year of service are eligible to participate.
The plan permits eligible employees to make contributions up to certain
limitations, with the Company matching certain of those contributions. The
Company's contributions vest 25% per year. The Company contributed $443,000,
$579,000, and $125,000 to the plan during the years ended December 31, 1993,
1994 and 1995, respectively.
12. SEGMENT INFORMATION
The Company's operations primarily involve a single industry segment--the
wholesale distribution of microcomputer hardware and software products. The
geographic areas in which the Company operates are the United States, Canada,
Europe (United Kingdom, France, Germany, Switzerland and Austria), and Other
International (Latin America, Australia and Mexico). Net sales, operating
income (before interest, other nonoperating expenses and income taxes) and
identifiable assets by geographical area were as follows (in thousands):
UNITED CANADA OTHER
STATES EUROPE INTERNATIONAL ELIMINATIONS CONSOLIDATED
---------- --------- ---------- ------------- ------------ ------------
1993:
Net sales:
Unaffiliated
customers............. $1,951,411 $ 395,375 $ 531,938 $207,127 $3,085,851
Transfers between
geographical areas.... 40,193 113 $(40,306)
---------- --------- ---------- -------- -------- ----------
Total................ $1,991,604 $ 395,375 $ 531,938 $207,240 $(40,306) $3,085,851
========== ========= ========== ======== ======== ==========
Operating income
(loss)................ $ 59,945 $ 7,421 $ 372 $ 3,646 $ 71,384
========== ========= ========== ======== ==========
Identifiable assets.... $ 588,711 $ 123,844 $ 192,097 $ 68,951 $(37,320) $ 936,283
========== ========= ========== ======== ======== ==========
1994:
Net sales:
Unaffiliated
customers............. $3,413,614 $ 516,616 $ 783,637 $304,820 $5,018,687
Transfers between
geographical areas.... 33,072 $(33,072)
---------- --------- ---------- -------- -------- ----------
Total................ $3,446,686 $ 516,616 $ 783,637 $304,820 $(33,072) $5,018,687
========== ========= ========== ======== ======== ==========
Operating income
(loss)................ $ 52,150 $ 9,871 $ (6,370) $ 5,076 $ 60,727
========== ========= ========== ======== ==========
Identifiable assets.... $ 715,082 $ 147,483 $ 231,470 $105,613 $ (7,778) $1,191,870
========== ========= ========== ======== ======== ==========
1995:
Net sales:
Unaffiliated
customers............. $3,996,346 $ 572,569 $1,051,493 $336,559 $5,956,967
Transfers between
geographical areas.... 43,704 $(43,704)
---------- --------- ---------- -------- -------- ----------
Total................ $4,040,050 $ 572,569 $1,051,493 $336,559 $(43,704) $5,956,967
========== ========= ========== ======== ======== ==========
Operating income
(loss)................ $ (37,825) $ (3,637) $ (11,960) $ (800) $ (54,222)
========== ========= ========== ======== ==========
Identifiable assets.... $ 738,220 $ 135,482 $ 300,230 $ 75,648 $(19,246) $1,230,334
========== ========= ========== ======== ======== ==========
40
MERISEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods for the fiscal
years ended 1994 and 1995 is presented below (in thousands, except per share
amounts):
1994
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Net sales.................. $1,154,622 $1,210,498 $1,230,562 $1,423,005
Gross profit............... 82,306 81,764 83,726 94,727
Net income (loss).......... 8,596 2,718 2,793 (2,497)
Net income (loss) per
share..................... 0.28 0.09 0.09 (0.08)
1995
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Net sales.................. $1,454,894 $1,379,864 $1,544,018 $1,578,191
Gross profit............... 93,223 85,475 89,253 55,738
Net income (loss).......... (1,789) (4,613) (253) (77,256)
Net income (loss) per
share..................... (0.06) (0.16) (0.01) (2.59)
In the fourth quarters of 1994 and 1995, the Company recorded certain items
which reduced operating income by approximately $7.8 million and $89.4
million, respectively. In 1994, these items related primarily to changes made
in estimates to certain asset and liability values. In 1995, these items
included impairment losses on long-lived assets totaling $51.4 million. The
remaining $38.0 million represents adjustments to account balances, primarily
in accounts payable. In the first and second quarters of 1995, the Company
recorded charges under its restructuring plan which reduced operating income
by approximately $5.0 million and $4.3 million, respectively.
41
SCHEDULE II
MERISEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1993, 1994 AND 1995
BALANCE AT BALANCE AT
DECEMBER CHARGED TO DECEMBER
31, COSTS AND 31,
1992 EXPENSES DEDUCTIONS 1993
----------- ----------- ----------- -----------
Accounts receivable--Doubtful
accounts...................... $11,160,000 $17,441,000 $12,058,000 $16,543,000
Accounts receivable--Other (1). 3,196,000 22,565,000 21,498,000 4,263,000
BALANCE AT BALANCE AT
DECEMBER CHARGED TO DECEMBER
31, COSTS AND 31,
1993 EXPENSES DEDUCTIONS 1994
----------- ----------- ----------- -----------
Accounts receivable--Doubtful
accounts...................... $16,543,000 $18,851,000 $18,883,000 $16,511,000
Accounts receivable--Other (1). 4,263,000 34,694,000 29,909,000 9,048,000
BALANCE AT BALANCE AT
DECEMBER CHARGED TO DECEMBER
31, COSTS AND 31,
1994 EXPENSES DEDUCTIONS 1995
----------- ----------- ----------- -----------
Accounts receivable--Doubtful
accounts...................... $16,511,000 $16,335,000 $12,647,000 $20,199,000
Accounts receivable--Other (1). 9,048,000 23,100,000 27,561,000 4,587,000
- --------
(1) Accounts receivable--Other includes allowances for net sales returns and
uncollectible cooperative advertising credits.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item will be filed by amendment to this
Form 10-K with the Securities and Exchange Commission on or about April 29,
1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item will be filed by amendment to this
Form 10-K with the Securities and Exchange Commission on or about April 29,
1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item will be filed by amendment to this
Form 10-K with the Securities and Exchange Commission on or about April 29,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item will be filed by amendment to this
Form 10-K with the Securities and Exchange Commission on or about April 29,
1996.
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)List of documents filed as part of this Report:
(1)FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1994 and 1995.
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1995.
Consolidated Statements of Changes in Stockholders' Equity for each
of the three years in the period ended December 31, 1995.
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1995.
Notes to Consolidated Financial Statements.
(2)FINANCIAL STATEMENT SCHEDULES INCLUDED IN ITEM 8:
Schedule II--Valuation and Qualifying Accounts.
Schedules other than that referred to above have been omitted
because they are not applicable or are not required under the
instructions contained in Regulation S-X or because the information
is included elsewhere in the Consolidated Financial Statements or
the Notes thereto.
(3)EXHIBITS
The exhibits listed on the accompanying Index of Exhibits are filed
as part of this Annual Report.
(b)No Reports on Form 8-K were filed during the quarter ended December 31,
1995.
45
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DATE: APRIL 12, 1996
Merisel, Inc.
/s/ James L. Brill
By___________________________________
James L. Brill
Senior Vice President, Finance,
Chief Financial Officer and
Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Dwight A. Steffensen Chairman of the Board of April 12, 1996
____________________________________ Directors, and Chief
Dwight A. Steffensen Executive Officer
(Principal Executive
Officer)
/s/ Ronald Rittenmeyer President and Director April 12, 1996
____________________________________
Ronald Rittenmeyer
/s/ James J. Brill Senior Vice President-- April 12, 1996
____________________________________ Finance, Chief Financial
James J. Brill Officer, Secretary and
Director (Principal
Financial Officer)
/s/ Bruce Zeedik Corporate Controller April 12, 1996
____________________________________ (Principal Accounting
Bruce Zeedik Officer)
/s/ Joseph Abrams Director April 12, 1996
____________________________________
Joseph Abrams
/s/ Lawrence J. Schoenberg Director April 12, 1996
____________________________________
Lawrence J. Schoenberg
/s/ David L. House Director April 12, 1996
____________________________________
David L. House
/s/ Dr. Arnold Miller Director April 12, 1996
____________________________________
Dr. Arnold Miller
46
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of Registrant.(1)
3.2 Amendment to Certificate of Incorporation of Registrant dated August
22, 1990.(6)
3.3 Bylaws, as amended, of Merisel, Inc.(8)
4 Indenture dated October 15, 1994 between the Company and NationsBank
of Texas, N.A. as Trustee, relating to the Company's 12 1/2% Senior
Notes Due 2004, including the form of such Senior Notes attached as
Exhibit A thereto.(14)
10.1 Microamerica Substitute Stock Option Plan of Registrant together
with related forms of Stock Option Agreements.(4)*
10.2 1983 Stock Option Plan of Softsel Computer Products, Inc., as
amended, together with Form of Incentive Stock Option Agreement and
Form of Nonqualified Stock Option Agreement under 1983 Employee
Stock Option Plan.(7)*
10.3 1983 Employee Stock Option Plan of Softsel Computer Products, Inc.,
as amended, together with Form of Incentive Stock Option Agreement
and Form of Nonqualified Stock Option Agreement under the 1983
Employee Stock Option Plan.(7)*
10.4 1991 Employee Stock Option Plan of Merisel, Inc. together with Form
of Incentive Stock Option Agreement and Form of Nonqualified Stock
Option Agreement under the 1991 Employee Stock Option Plan.(8)*
10.5 Merisel, Inc. 1992 Stock Option Plan for Nonemployee Directors.(10)*
10.6 Incentive Stock Option Agreements between Registrant and Michael D.
Pickett dated as of October 1, 1986 and March 4, 1987.(1)*
10.7 Nonqualified Stock Option Agreement between Registrant and Michael
D. Pickett dated as of December 11, 1987.(1)*
10.8 Amendment to Stock Option Agreements together with Joint Escrow
Instructions between Michael D. Pickett and Registrant dated as of
August 11, 1988.(1)*
10.9 Softsel Computer Products, Inc. Executive Deferred Compensation
Plan.(9)*
10.10 Employment Agreement between Registrant and Michael D. Pickett dated
as of August 14, 1992.(11)*
10.11 Merisel, Inc. Amended and Restated 401(k) Retirement Savings
Plan.(15)*
10.12 Asset Transfer, Assignment and Assumption Agreement dated as of
December 23, 1993 by and between Registrant and Merisel Americas,
Inc.(13)
10.13 Asset Transfer, Assignment and Assumption Agreement dated as of
December 23, 1993 by and between Registrant and Merisel Europe,
Inc.(13)
10.14 Lease between Registrant and Pacifica Holding Company dated April 6,
1989.(2)
10.15 Lease Agreement dated October 27, 1988 by and between Rosewood
Development Corporation and Microamerica, Inc. re: property located
in Marlborough, Massachusetts.(3)
10.16 Lease Agreement dated May 23, 1990 by and between Kilroy-Freehold El
Segundo Company and Softsel/Microamerica, Inc., re: property located
in El Segundo, California.(5)
10.17 Lease Agreement dated October 1991 by and between Koll Hayward
Associates II and Merisel, Inc.(9)
10.18 Asset Purchase Agreement dated January 31, 1994 between ComputerLand
Corporation, Merisel FAB, Inc. and for purposes of Section 2.2
thereof, the Registrant. Portions of this agreement have been
omitted pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.(12)
47
EXHIBIT
NO. DESCRIPTION
------- -----------
10.19 Guaranty Agreement dated January 31, 1994 between ComputerLand
Corporation and the Registrant.(12)
10.20 Distribution and Services Agreement dated January 31, 1994 between
ComputerLand Corporation and Merisel FAB, Inc. ("Services
Agreement") Portions of this agreement has been omitted pursuant to
Rule 24b-2 of Securities Act of 1934, as amended.(12)
10.21 Amendment Number 13 to Services Agreement dated as of January 31,
1996.
10.22 Stock Purchase Agreement dated January 31, 1994 between the
Registrant and ComputerLand Corporation.(12)
10.23 Amended and Restated Senior Note Purchase Agreement by and among
each of the purchasers named therein and Merisel Americas, Inc.,
dated as of December 23, 1993 ("Senior Note Purchase
Agreement").(13)
10.24 First Amendment, dated as of September 30, 1994 to Senior Note
Purchase Agreement, by and among the Noteholders named therein and
Merisel Americas, Inc.(16)
10.25 Form of Second Amendment dated as of June 23, 1995 to Senior Note
Purchase Agreement.
10.26 Amended and Restated Subordinated Note Purchase Agreement by and
among each of the purchasers named therein and Merisel Americas,
Inc., dated as of December 23, 1993 ("Subordinated Note Purchase
Agreement").(13)
10.27 First Amendment, dated as of September 30, 1994, to Subordinated
Note Purchase Agreement, by and among the Noteholders named therein
and Merisel Americas, Inc.(16)
10.28 Revolving Credit Agreement dated as of December 23, 1993 among
Merisel Americas, Inc., Merisel Europe, Inc., the Registrant, the
lender parties thereto, Citicorp USA, Inc., as agent, and Citibank,
N.A., as designated issuer ("Revolving Credit Agreement").(13)
10.29 First Amendment, dated as of September 29, 1994, to Revolving Credit
Agreement, by and among Merisel Americas, Inc., Merisel Europe,
Inc., Merisel, Inc. and the financial institutions named
therein.(16)
10.30 Second Amendment, dated as of December 1, 1994, to Revolving Credit
Agreement, by and among Merisel, Americas, Inc., Merisel Europe,
Inc., Merisel, Inc., and the financial institutions named
therein.(15)
10.31 Third Amendment, dated as of February 27, 1995, to Revolving Credit
Agreement, by and among Merisel Americas, Inc., Merisel Europe,
Inc., Merisel, Inc., and the financial institutions named
therein.(15)
10.32 Receivable Transfer Agreement dated as of October 2, 1995 by and
between Merisel Americas, Inc. and Merisel Capital Funding, Inc.(17)
10.33 Receivable Purchase and Servicing Agreement dated as of October 2,
1995 by and among Merisel Capital Funding, Inc., Redwood Receivables
Corporation, Merisel Americas, Inc. and General Electric Capital
Corporation.(17)
10.34 Annex X to Receivable Transfer Agreement and Receivables Purchase
and Servicing Agreement dated as of October 2, 1995.(17)
10.35 Form of Receivables Purchase Agreement between Merisel Canada, Inc.
and Canadian Master Trust dated as of December 15, 1995.
10.36 Form of Security Agreement between Merisel Properties, Inc. and
Heller Financial, Inc. dated December 29, 1995.
48
EXHIBIT
NO. DESCRIPTION
------- -----------
10.37 Deed of Trust, Security Agreement, Assignment of Leases and Rents
and Fixture Filing between Merisel Properties, Inc. and Heller
Financial, Inc. dated December 29, 1995.
10.38 Agreement for the Sale and Purchase of Debts between Deutche
Financial Services (UK) Limited and Merisel (UK) Limited dated
October 12, 1995.
10.39 Form of Agreement between Merisel, Inc. and Michael D. Pickett dated
February 12, 1996.
10.40 Share Purchase Agreement between Merisel, Inc. and Merisel Asia,
Inc. and Tech Pacific Holdings Ltd. dated March 7, 1996.
10.41 Form of Employment Agreement between Merisel, Inc. and the
following:
James L. Brill
Paul Lemerise
John Thompson
Tom Reeves
Marty Wolf (17)
10.42 Form of Retention Agreement between Merisel, Inc. and the following:
James L. Brill
Paul Lemerise
John Thompson
Tom Reeves
Marty Wolf (17)
21 Subsidiaries of the Registrant.
27 Financial Data Schedule for the year Ended December 31, 1995.
- --------
* Management contract or executive compensation plan or arrangement.
(1) Filed as an exhibit to the Form S-1 Registration Statement of Softsel
Computer Products, Inc., No. 33-23700, and incorporated herein by this
reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1989 of Softsel Computer Products, Inc., and
incorporated herein by this reference.
(3) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1990 of Softsel Computer Products, Inc., and incorporated
herein by this reference.
(4) Filed as an exhibit to the Form S-8 Registration Statement of Softsel
Computer Products, Inc., No. 33-34296, filed with the Securities and
Exchange Commission April 12, 1990, and incorporated herein by this
reference.
(5) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990 of Softsel Computer Products, Inc., and incorporated
herein by this reference.
(6) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, and incorporated herein by this reference.
(7) Filed as an exhibit to the Form S-8 Registration Statement of Softsel
Computer Products, Inc., No. 33-35648, filed with the Securities and
Exchange Commission June 29, 1990, and incorporated herein by this
reference.
49
(8) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991, and incorporated herein by this reference.
(9) Filed as an exhibit to the Form S-3 Registration Statement of Merisel,
Inc., No. 33-45696, filed with the Securities and Exchange Commission on
February 14, 1992 and incorporated herein by this reference.
(10) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992, and incorporated herein by this reference.
(11) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992 of Merisel, Inc., and incorporated herein by
this reference.
(12) Filed as an exhibit to the Current Report on Form 8-K dated February 14,
1994, as amended on March 24, 1994 and October 4, 1994 and incorporated
herein by this reference.
(13) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by this reference.
(14) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994 and incorporated herein by this reference.
(15) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by this reference.
(16) Filed as an exhibit to the Form S-3 Registration Statement of the
Registrant, No. 33-55195, filed with the Securities and Exchange
Commission, August 23, 1994, and incorporated herein by this reference.
(17) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 and incorporated herein by this reference.
50