SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: (DATE OF EARLIEST EVENT REPORTED) OCTOBER 4, 1996
------------------------
CHS ELECTRONICS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA
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(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-24244 65-0263022
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(COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
2153 N.W. 86TH AVENUE
MIAMI, FLORIDA 33122
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 716-8273
-------------------
NOT APPLICABLE
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Page 1 of __Pages
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On October 4, 1996, CHS Electronics, Inc. (the "Registrant" or
"CHS") consummated its acquisition of certain assets of Merisel, Inc., a
Delaware corporation ("Merisel"), pursuant to and in accordance with that
certain Purchase Agreement, dated as of September 27, 1996 (the "Purchase
Agreement"), by and among the Registrant and Merisel, as amended on October 4,
1996.
Pursuant to the Purchase Agreement, CHS acquired certain
subsidiaries of Merisel with operations in Austria, France, Germany, Mexico, The
Netherlands, Switzerland, the United Kingdom and Latin America (the "Acquired
Entities"). CHS also acquired certain assets of a Merisel subsidiary consisting
of certain operating systems in connection therewith (the assets acquired are
referred to herein as the "Acquired Assets"). The Acquired Entities are engaged
in the same business as CHS, the distribution of microcomputer products,
networking products and software.
The purchase price for the Acquired Entities and the Acquired Assets was
approximately $154 million, subject to an audit of the closing balance sheets of
the Acquired Entities.
CHS funded the acquisition of the Acquired Entities and the Acquired
Assets through a combination of approximately $36 million in cash (principally
with funds obtained through the sale of common stock of the Registrant to the
public in June 1996), $55 million received from the factoring of receivables of
the Acquired Entities and $63 million in asset secured borrowing including the
assumption of the continuing liability of Merisel (U.K.) Limited (one of the
Acquired Entities) under an Asset Securitization Agreement.
The acquisition will be accounted for as a "purchase" for financial
reporting purposes.
CHS presently intends to continue the respective operations of the
Acquired Entities and the Acquired Assets in substantially the same manner as
conducted prior to the acquisition and anticipates that its operations acquired
from Merisel will continue to grow from expanded sales to existing customers and
from an increased share of their markets. CHS will attempt to take advantage of
opportunities for profitable restructuring or disposition of certain of its
assets. CHS also intends to integrate the Acquired Entities and the Acquired
Assets to the extent appropriate in order to take advantage of certain
synergistic efficiencies presented by the acquisition.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The audited financial statements of Merisel, Inc.'s European,
Latin American and Mexican subsidiaries for the indicated periods are attached
hereto as Attachment 7(a) and are incorporated herein by this reference.
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<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION.
The unaudited pro forma condensed consolidated financial
statements of CHS Electronics, Inc. for the indicated periods are attached
hereto as Attachment 7(b) and are incorporated herein by this reference.
(c) EXHIBITS. SEQUENTIAL
PAGE NO.
2.1 Purchase Agreement, dated as of September 27, 1996,
by and among the Registrant, Merisel, Inc. and Merisel
Europe, Inc., together with Amendment thereto dated
October 4, 1996*
* Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Commission on October 18, 1996.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHS ELECTRONICS, INC.
Date: December 17, 1996 By: /S/ CRAIG TOLL
-----------------------------------------
Craig Toll
Treasurer and Chief Financial Officer
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<PAGE>
ATTACHMENT 7(a)
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MERISEL, INC.'S EUROPEAN, LATIN AMERICAN AND MEXICAN SUBSIDIARIES
COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994 AND COMBINED
STATEMENTS OF OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY, AND CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying combined balance sheets of Merisel, Inc.'s (the
"Company") European, Latin American and Mexican subsidiaries as of December 31,
1995 and 1994, and the related combined statements of operations, changes in
stockholder's equity, and of cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 out opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Merisel, Inc.'s. European, Latin
American and Mexican subsidiaries at December 31, 1995 and 1994, 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.
December 6, 1996
/s/ DELOITTE & TOUCHE LLP
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Deloitte & Touche LLP
<PAGE>
MERISEL, INC.'S EUROPEAN, LATIN AMERICAN AND MEXICAN SUBSIDIARIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
ASSETS 1995 1994
---- ----
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $2,204
Accounts receivable, net of allowance of
$6,329 and $5,291 at December 31, 1995
and 1994, respectively (Notes 1 and 3) $149,762 159,967
Inventories (Note 1) 161,732 110,214
Prepaid expenses and other current assets 1,654 4,164
Income taxes receivable (Notes 1 and 5) 6,947 1,996
-------- -------
Total current assets 320,095 278,545
PROPERTY AND EQUIPMENT, Net (Notes 1, 17,868 14,780
4 and 7)
COST IN EXCESS OF NET ASSETS ACQUIRED 1,058 509
OTHER ASSETS 2,682 1,438
TOTAL -------- -------
$341,703 $295,272
-------- -------
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
---- ----
CURRENT LIABILITIES:
Accounts payable $153,697 $99,075
Intercompany accounts payable
(Note 1) 2,926 5,826
Accrued liabilities 29,863 15,013
Short-term debt (Note 6) 21,620 21,408
Current portion of capitalized lease
obligation (Note 7) 1,109
Intercompany sundry payables (Note 1) 5,516 3,485
Income taxes payable (Notes 1 and 5) 696 443
-------- -------
Total current liabilities 215,427 145,250
-------- -------
ADVANCES FROM MERISEL, INC. (Note 1) 18,815 18,100
-------- -------
LONG-TERM DEBT (Note 6) 59,333 80,205
-------- -------
CAPITALIZED LEASE OBLIGATIONS (Note 7) 4,504
--------
DEFERRED INCOME TAXES (Notes 1 and 5) 89 238
-------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS EQUITY:
Capital Stock 3,878 3,878
Additional paid-in capital 58,612 58,761
Accumulated deficit (22,267) (8,188)
Cumulative translation adjustment 3,312 (2,972)
-------- -------
Total stockholder's equity 43,535 51,479
-------- -------
TOTAL $341,703 $295,272
-------- -------
See accompanying notes to combined financial statements.
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<PAGE>
MERISEL, INC.'S EUROPEAN, LATIN AMERICAN AND
MEXICAN SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
NET SALES (Note 1) $1,279,482 $994,189 $668,488
COST OF SALES (Note 1) 1,193,673 922,381 612,758
--------- ------- -------
GROSS PROFIT 85,809 71,808 55,730
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 1 and 8) 89,400 76,897 54,185
RESTRUCTING CHARGE (Note 2) 4,089
--------- ------- -------
OPERATING (LOSS) INCOME (7,680) (5,089) 1,545
INTEREST EXPENSE (Note 1 and 6) 9,759 8,531 3,623
OTHER EXPENSE (Note 3) 2,207 1,877 1,088
--------- ------- -------
LOSS BEFORE INCOME TAXES (19,646) (15,497) (3,166)
(BENEFIT) PROVISION FOR INCOME
TAXES (Note 1 and 5) (5,567) (3,352) 681
--------- ------- -------
NET LOSS $ (14,079) $ (12,145) $ (3,847)
--------- ------- -------
See accompanying notes to combined financial statements.
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<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC.'S EUROPEAN, LATIN AMERICAN AND
MEXICAN SUBSIDIARIES
COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
RETAINED
ADDITIONAL EARNINGS CUMULATIVE
CAPITAL PAID-IN (ACCUMULATED TRANSLATION
STOCK CAPITAL DEFICIT) ADJUSTMENT TOTAL
------- --------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1992 $3,878 $ 4,383 $ 7,804 $ 121 $16,186
Conversion of debt to equity 24,909 24,909
Cumulative translation
adjustment (4,519) (4,519)
Net loss (3,847) (3,847)
-------- -------- -------- ------ -------
BALANCE AT
DECEMBER 31, 1993 3,878 29,292 3,957 (4,398) 32,729
Conversion of debt to equity 29,469 29,469
Cumulative translation
adjustment 1,426 1,426
Net loss (12,145) (12,145)
-------- -------- -------- ------ -------
BALANCE AT
DECEMBER 31, 1994 3,878 58,761 (8,188) (2,972) 51,479
Other (149) (149)
Cumulative translation
adjustment 6,284 6,284
Net loss (14,079) (14,079)
-------- -------- -------- ------ -------
BALANCE AT
DECEMBER 31, 1995 $3,878 $58,612 (22,267) $3,312 $43,535
======== ======== ======== ====== =======
</TABLE>
See accompanying notes to combined financial statements.
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<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC'S. EUROPEAN, LATIN AMERICAN AND
MEXICAN SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net loss $(14,079) $(12,145) $ (3,847)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 3,847 3,064 2,181
Provision for doubtful accounts 4,223 5,893 3,738
Deferred income taxes (148) (678) 268
Changes in assets and liabilities, net of the effects from
acquisitions:
Accounts receivable (45,025) (51,606) (44,344)
Inventories (51,518) (22,013) (26,999)
Prepaid expenses and other assets 1,562 2,574 (3,910)
Income taxes receivable (3,864) (1,050)
Accounts payable 48,843 10,489 27,296
Accured liabilities 23,671 8,964 (3,951)
Income taxes payable (2,572) (898)
Intercompany payable 206 1,193 84
-------- -------- ---------
Net cash used for operating activities (32,282) (57,887) (50,382)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,157) (9,597) (5,405)
Proceeds from sale of property and equipment 1,610 182 776
-------- -------- ---------
Net cash used for investing activities (547) (9,415) (4,629)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 10,000 49,406 60,300
Repayments under revolving line of credit (33,045) (30,623) (13,194)
Short-term debt 212 503 8,387
Payment on capital lease obligation (1,204)
Borrowings from affiliates 2,859 45,530
Proceeds from sale of accounts receivable 46,559
-------- -------- ---------
Net cash provided by financing activities 25,381 64,816 55,493
-------- -------- ---------
</TABLE>
See accompanying notes to combined financial statements. (Continued)
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<PAGE>
<TABLE>
<CAPTION>
MERISEL, INC'S. EUROPEAN, LATIN AMERICAN AND
MEXICAN SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
<S> <C> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ 5,244 $ 1,613 $ (635)
-------- ------- -------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,204) (873) (153)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,204 3,077 3,230
-------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ 2,204 $ 3,077
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid (received) during the years for:
Interest $ 7,346 $ 3,694 $ 2,864
Income taxes (2,223) (727) 1,165
Noncash activities:
Capital lease obligations entered into 5,708
Debt to equity conversion 29,469 24,909
</TABLE>
See accompanying notes to combined financial statements. (Concluded)
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<PAGE>
MERISEL, INC'S. EUROPEAN, LATIN AMERICAN AND
MEXICAN SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The accompanying combined financial statements include the
accounts of Merisel Europe, Inc. and subsidiaries ("Europe"), Merisel
Mexico S.A. de C.V. ("Mexico") and Merisel Latin America Inc.
("Latin America"), (collectively referred to herein as "EML"
or the "Company") all of whom represent wholly owned subsidiaries of
Merisel, Inc. ("Merisel" or the "Parent") and were included in Merisel's
financial statements for the years ended December 31, 1993, 1994 and 1995.
Merisel is a distributor of computer hardware and software products.
On October 4, 1996, Merisel completed the sale of EML to CHS Electronics,
Inc. ("CHS").
RISKS AND UNCERTAINTIES - EML distributes computer hardware and software
products in Europe, Mexico and Latin America. The diversity and breadth of
its 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 EML regularly stocks products and
accessories supplied by more than 500 manufacturers, 66% of the Company's
net sales in 1995 (as compared to 62% in 1994 and 61% in 1993) were
derived from products sold by EML'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 - 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 impairment evaluation for long-lived
assets and certain intangibles that are either held and used or to be
disposed of. The Company was in compliance 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 that, 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.
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<PAGE>
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 and direct employee
salaries.
COSTS IN EXCESS OF NET ASSETS ACQUIRED - Costs in excess of net assets
acquired is being amortized over 40 years. Accumulated amortization
was $45,000 and $168,000 at December 31, 1994 and 1995, respectively.
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.
INCOME TAXES - Europe and Mexico file separate income tax returns. Latin
America, a United States Corporation, does not file separate federal and
state tax returns; instead its operating results are included with
Merisel's consolidated United States federal and state income tax returns.
In 1993, 1994 and 1995, Merisel allocated a tax provision to Latin
America, which was computed as if Latin America had filed its income tax
returns on a stand-alone basis. The 1993, 1994 and 1995 income tax
provision (benefit) also include amounts allocated by Merisel to Europe
related to the utilization of European net operating losses in Merisel's
United States federal income tax return.
INTERCOMPANY ACCOUNTS PAYABLE - Intercompany accounts payable represents
amounts due from Merisel related to the purchase of product. Total
purchases from Merisel were $24,568,000, $20,709,000 and $26,159,000
during the years ended December 31, 1995, 1994 and 1993, respectively.
INTERCOMPANY SUNDRY PAYABLES - Intercompany sundry payables represent
amounts due to Merisel for allocated expenses such as general corporate
functions and administrative personnel. These amounts do not bear
interest or have fixed repayment terms.
ADVANCES FROM MERISEL, INC. - Merisel advances funds to EML on a periodic
basis to assist EML on meeting its obligations on a timely basis. These
advances bear interest at Merisel's average cost of funds plus 1% and have
no fixed repayment terms. Interest expense related to these advances was
$2,881,000, $1,035,000 and $272,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
ALLOCATED EXPENSES FROM MERISEL - Selling, general and administrative
expenses include $5,368,000, $4,808,000 and $4,011,000 for the years ended
December 31, 1995, 1994 and 1993, respectively to reflect the allocation
of expenses for general corporate functions and administrative personnel.
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<PAGE>
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 evaluation of its customers, 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 institution with which it conducts business.
FAIR VALUES OF FINANCIAL INSTRUMENTS - Financial instruments consist of
cash and cash equivalents, accounts receivable, accounts payable,
long-term debt, advances from Merisel, Inc. and foreign exchange
contracts. The fair value of cash and cash equivalents, accounts
receivable and accounts payable closely approximate their carrying value
due to their short maturities. The fair value of long term debt and
foreign exchange contracts are estimated based on reference to quoted
market prices and closely approximate their carrying value. The fair value
of advances from Merisel, Inc. cannot be determined based on the related
party nature of the instrument.
FOREIGN CURRENCY TRANSLATION - EML's assets and liabilities were
translated into United States dollars at the exchange rate in effect at
the close of the period. Revenues and expenses of these subsidiaries were
translated at the average exchange rate during the period. The aggregate
effect of translating the financial statements of EML at the above rates
is included in a separate component of stockholder's equity entitled
Cumulative Translation Adjustments.
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 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, 1995, the Company had approximately $13.3 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 $261,000 and there were net foreign currency
losses of $642,000 and $1,292,000 in 1995 and 1994, 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.
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,
quarter-ends presented as if the quarters ended on March 31, June 30,
September 30 and December 31. The 1995, 1994 and 1993 fiscal years were 52
weeks in duration. All quarters presented for 1995 and 1994 were 13 weeks
in duration.
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<PAGE>
2. RESTRUCTURING CHARGE
In 1995, Merisel recorded aggregate charges of $4,089,000 associated with
re-sizing and restructuring its European operations. Of this amount,
$2,164,000 consisted of severance charges for the involuntary termination
of 61 employees and $1,925,000 for the consolidation of warehouses. As of
December 31, 1995, $1,932,000 of this charge remained in accrued
liabilities.
3. SALES OF ACCOUNTS RECEIVABLE
Effective October 16, 1995, Merisel U.K., Ltd. (the "United Kingdom")
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. 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 this facility was $26,000,000.
Effective December 31, 1994, the Company structured an intercompany asset
securitization agreement that provided funding for the United Kingdom. In
accordance with the agreement, the United Kingdom sold receivables at face
value to Merisel Canada on an ongoing basis which yielded proceeds of up
to 12.5 million pounds sterling. In January 1995, Merisel Canada purchased
$15,000,000 of United Kingdom accounts receivables. This facility expired
in October 1995.
In December 1995, the Company structured an intercompany asset
securitization agreement that provided funding for Merisel Germany DNS
("Germany"). In accordance with the agreement, Germany sells accounts
receivables at face value to Merisel Canada on an ongoing basis. As of
December 31, 1995, $20,483,000 of trade receivables were sold under this
agreement for which cash was received from Merisel Canada.
Fees incurred in connection with the sales of accounts receivable were
$1,308,000 for the year ended December 31, 1995, of which $1,140,000
relate to intercompany asset securitization. These fees are recorded in
other expenses.
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<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIFE -----------------------
(IN YEARS) 1995 1994
Land and building 20 $ 262 $ 433
Equipment 3 to 7 13,531 8,861
Furniture and fixtures 3 to 5 5,504 3,753
Leasehold improvements 3 to 20 8,962 2,408
Construction in progress 6,097
------- -------
Total 28,259 21,552
Less accumulated depreciation and amortization 10,391 6,772
------- -------
Property and equipment, net $17,868 $14,780
======= =======
5. INCOME TAXES
The (benefit) provision for income taxes consisted of the following (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
Current:
Federal $ 826 $ 469 $ 236
State 42 26 13
Foreign (6,287) (3,169) 164
------- ------- ------
Total current (5,419) (2,674) 413
Deferred:
Domestic (63) (120)
Foreign (85) (558) 268
------- ------- ------
Total deferred (148) (678) 268
------- ------- ------
Total (benefit) provision $(5,567) $(3,352) $ 681
======= ======= ======
The current foreign tax (benefit) provision includes $4,969,000,
$2,419,000 and $559,000 of benefit for the years ended December 31, 1995,
1994 and 1993 allocated by Merisel to Europe related to the utilization of
European net operating losses in Merisel's United States federal income
tax return.
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<PAGE>
Deferred tax liabilities and assets were comprised of the following (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994
Deffered tax liabilities -
Expenses accruals $ (312) $ (398)
-------- -------
Deferred tax assets:
Net operating loss foreign subsidiaries 2,350 3,095
Expense accurals 223 160
Valuation allowances (2,350) (3,095)
-------- -------
Total $ 223 $ 160
======== =======
Net deferred tax liability $ (89) $ (238)
======== =======
The major elements contributing to the difference between the federal
statutory tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
<S> <C> <C> <C>
Statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, less effect of federal deduction (1.2) (1.5) (2.9)
Foreign income subject to tax at other than statutory rate 2.8 2.0 4.1
Foreign losses with benefits at other than statutory rate 5.1 13.2 60.1
Utilization of net operating losses of foreign
subsidiary (0.3) (4.7)
Other (0.1)
------ ----- -----
Effective tax rate (28.3)% (21.6)% 21.5%
====== ===== =====
</TABLE>
6. DEBT
At December 31, 1995, Merisel Europe, Inc. and Merisel Americas, Inc. were
co-borrowers under a $150 million revolving credit agreement (the
"Revolving Credit Agreement"). The Revolving Credit Agreement, as amended,
is due on May 31, 1997. At December 31, 1995, $59.3 million of a total
$103 million outstanding under the Revolving Credit Agreement was advanced
to Europe. Advances under the Revolving Credit Agreement 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 average interest rate for the Revolving Credit Agreement was
approximately 8% and 6.4% at December 31, 1995 and 1994, respectively.
Merisel 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, contains 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
-12-
<PAGE>
assets. The agreement also requires Merisel 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 was amended as a result Merisel's noncompliance
with certain covenants.
In addition, certain of the European subsidiaries have 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. The Company had borrowings outstanding under such lines of credit
of $21.6 million and $21.4 million at December 31, 1995 and 1994,
respectively. The weighted average interest rate for such lines of credit
at December 31, 1995 was 10%.
7. 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 (in thousands):
Machinery and equipment $5,708
Less accumulated depreciation 313
------
Total $5,395
======
Future minimum payments for capitalized leases were as follows at December
31, 1995 (in thousands):
1996 $1,490
1997 1,490
1998 1,490
1999 1,156
2000 1,059
------
Total minimum lease payments 6,685
Less amount representing interest 1,072
------
Present value of net minimum lease payments 5,613
Less current maturities 1,109
------
Long-term obligation $4,504
======
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<PAGE>
<TABLE>
<CAPTION>
8. 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 $5,949,273 in 1996; $5,277,901 in 1997; $6,045,856 in
1998; $3,871,969 in 1999; $3,622,024 in 2000; and $12,743,541 thereafter.
Certain of the leases contain inflation escalation clauses and
requirements for the payment of property taxes, insurance, and maintenance
expenses. Rent expense for 1995, 1994 and 1993 was $4,615,000, $4,736,000
and $3,764,000, respectively.
EML 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 its financial statements.
9. SEGMENT INFORMATION
EML operations involve a single industry segment - the wholesale
distribution of computer hardware and software products. The geographic
areas in which the EML operates are Europe (United Kingdom, France,
Germany, Switzerland and Austria), and Other International (Latin America
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):
OTHER
EUROPE INTERNATIONAL ELIMINATIONS COMBINED
------ ------------- ------------ --------
<S> <C> <C> <C> <C>
1993
Net sales:
Unaffiliated customers $531,939 $136,549 $668,488
Transfers between
geographical areas 12,042 $ (12,042)
-------- --------- -------- --------
Total $543,981 $136,549 $ (12,042) $668,488
======== ========= ======== ========
Operating (loss) income $ (451) $ 1,996 $ 1,545
======== ========= ========
Identifiable assets $256,986 $ 42,216 $ (71,908) $227,294
======== ======== ======== ========
1994
Net sales:
Unaffiliated customers $783,637 $210,552 $994,189
Transfers between
geographical areas 94 $ (94)
-------- -------- -------- --------
Total $783,731 $210,552 $ (94) $994,189
======== ======== ======== ========
Operating (loss) income $ (9,023) $ 3,934 $ (5,089)
======== ======== ========
Identifiable assets $337,064 $ 62,463 $(104,255) $295,272
======== ======== ======== ========
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<PAGE>
Net sales:
Unaffiliated customers $1,051,493 $227,989 $1,279,482
Transfers between
geographical areas 46,003 $ (46,003)
--------- -------- -------- ---------
Total $1,097,496 $227,989 $ (46,003) $1,279,482
========= ======== ======== =========
Operating (loss) income $(12,530) $ 4,850 $ (7,680)
========= ======== =========
Identifiable assets $417,753 $ 62,960 $(139,010) $341,703
========= ======== ======== =========
</TABLE>
10. 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 $241,355 $221,124 $236,392 $295,318
Gross profit 17,015 16,722 16,948 21,123
Net (loss) (493) (1,719) (3,077) (6,856)
1995
------------------------------------------------------
March 31 June 30 September 30 December 31
Net sales $325,834 $279,559 $296,400 $359,689
Gross profit 22,909 20,313 20,255 22,232
Net (loss) (2,716) (2,814) (3,438) (5,111)
In the fourth quarter 1995, EML's European Distribution Center experienced
system software start-up problems that created substantial shipping and
receiving errors, and resulted in an additional charge of $1.5 million.
Another $2.5 million charge was taken in the fourth quarter of 1995 to
expense start-up costs of the European Distribution Center. In the first
and second quarters of 1995, EML recorded charges under its restructuring
plan which reduced operating income by approximately $2,890,000 and
$1,199,000, respectively.
******
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<PAGE>
ATTACHMENT 7(b)
CHS ELECTRONICS, INC.
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
The following pro forma condensed consolidated statements of operations
for the year ended December 31,1995 and the nine months ended September 30, 1996
give effect to the acquisition by the Company of the European, Latin American
and Mexican subsidiaries of Merisel Inc. on September 27,1996. This acquisition
is being accounted for using the purchase method of accounting. The pro forma
consolidated condensed statements of operations present the proforma results of
operations assuming the acquisition occurred on January 1,1995. A pro forma
consolidated condensed balance sheet is not presented since the acquisition was
recorded in the balance sheet presented in the Company's Form 10-Q for the
quarter ended September 30,1996.
The unaudited pro forma consolidated condensed statements of operations
have been prepared based upon the historical financial statements of the Company
and the acquired subsidiaries for the periods stated above. Such pro forma
statements may not be indicative of the results that would have occurred if the
acquisitions had been consummated on the indicated dates, or of the operating
results that may be achieved by the combined companies in the future. The pro
forma financial statements should be read in conjunction with the financial
statements and related notes of the Company.
-1-
<PAGE>
CHS ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(In $000, except share data)
HISTORICAL ACQUIRED PRO FORMA
CHS SUBSIDIARIES ADJUSTMENTS COMBINED
--------- ------------ ----------- --------
Net sales 936,703 1,279,482 2,216,185
Cost of sales 868,716 1,193,673 2,062,389
------------------------------ ---------
Gross profit 67,987 85,809 153,796
Operating expenses 57,188 95,696 (4,200) (b) 137,458
(2,078) (c)
(1,202) (d)
(7,946) (e)
------------------------------ ---------
Operating income 10,799 (9,887) 15,426 16,338
Interest expense (income) 4,697 9,759 (2,827) 14,722
3,093 (g)
------------------------------ ----------
Earnings before income tax 6,102 (19,646) 15,160 1,616
Provision for income tax 1,797 (5,567) 4,556 (h) 786
------------------------------ -----------
Net earnings $ 4,305 (14,079) $10,604 $ 830
============================== ===========
Net earnings per common share-
primary $0.59 $0.11
============ ===========
Net earnings per common share-
fully diluted $0.59 $0.11
============ ===========
Weighted average number
of common shares outstanding-
primary 7,282,785 7,282,785
============ ===========
Weighted average number
of common shares outstanding-
fully diluted 7,282,785 7,282,785
============ ===========
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<PAGE>
CHS ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
9 MONTHS ENDED SEPTEMBER 30, 1996
(In $000, except share data)
HISTORICA ACQUIRED PRO FORMA
CHS COMPANY ADJUSTMENTS COMBINED
--------- -------- ----------- --------
Net sales 995,710 1,059,912 2,055,622
Cost of sales 922,292 986,549 119 (e) 1,908,960
------------------------------ ---------
Gross profit 73,418 73,363 (119) 146,662
Operating expenses 58,134 68,351 (1,817)(b 123,125
(2,054)(c)
(639)(d)
1,150 (e)
------------------------------ ---------
Operating income 15,284 5,012 3,241 23,537
Interest expense(income) 4,455 9,577 (1,735)(f) 12,297
Earnings before income tax and ------------------------------ ---------
minority interest 10,829 (4,565) 4,976 11,240
Provision for income tax 3,539 1,690 210 (h) 5,439
------------------------------ ---------
Earnings before minority interest 7,290 (6,255) 4,766 5,801
Minority interest 1,250 0 0 1,250
------------------------------ ---------
Net earnings $ 6,040 $ (6,255) $ 4,766 $ 4,551
============================== =========
Net earnings per common share-
primary $0.62 $0.47
========= =========
Net earnings per common share-
fully diluted $0.57 $0.43
========= =========
Weighted average number
of common shares outstanding-
primary 9,687,440 9,687,440
========= =========
Weighted average number
of common shares outstanding-
fu1ly diluted 10,658,831 10,658,831
========== ==========
-3-
<PAGE>
CHS ELECTRONICS, INC.
Notes to Unaudited Pro Forma Consolidated Condensed Statements of Operations
a. On September 27,1996, the Company acquired certain assets as well as 100 %
of certain European, Latin American and Mexican subsidiaries of Merisel,
Inc. ( collectively referred to as ELM ) for consideration equal to book
value less certain deductions specified by the contract plus the assumption
of all intercompany debt due to Merisel, Inc. The operations acquired
served the market areas of France, U.K. Austria, Switzerland, Germany,
Mexico and Latin America. The facilities acquired were in France, U.K.,
Austria, Switzerland, Germany , Mexico, Miami, Florida and a warehouse in
Helmond, Netherlands. The business of ELM is distribution of computers and
peripherals in a similar manner to that of the Company. This transaction is
accounted for under purchase accounting. The actual purchase price of ELM
will not be known until an audit is completed of the balance sheet as of
the date of acquisition and a review of such audit is completed by the
Company. Based on preliminary information, the Company anticipates that the
discounts from book value related to the purchase price will be
approximately equal to the adjustments to fair value to the assets and
liabilities of ELM related to restructuring and other reserves. As a result
there is no goodwill anticipated at this time and therefore no amortization
of goodwill as a proforma adjustment.
b. To eliminate operating costs of European headquarters personnel no longer
employed by the Company after the acquisition.
c. To eliminate Merisel Inc. corporate overhead charged to ELM. The Company
has recorded all its overhead and does not anticipate hiring additional
staff to manage ELM.
d. To eliminate the cost of computer system rented from Merisel, Inc. in
excess of the cost of running the system currently.
e. To eliminate non recurring charges and credits related to restructing
charges, pre-opening, and other costs relating to the opening of the
warehouse facility in Helmond, that the Company will dispose of as a part
of the acquisition.
f. To reduce interest expense from the rates charged by Merisel, Inc. on the
intercompany debt to the interest rates being incurred on the debt that
replaced the intercompany debt.
g. To adjust interest expense for interest credits in the European
headquarters branch not acquired by the Company.
h To adjust tax benefit based on the above adjustments based on the
blended rate for the European subsidiaries.
-4-
