UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24244
CHS ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 87-0436376
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2153 N.W. 86TH AVENUE
MIAMI, FL 33122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(305) 716-8273
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SHARES OF COMMON STOCK OUTSTANDING
AS OF MAY 8, 1996: 7,582,534
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 ___.
<PAGE>
CHS ELECTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS .................... 1
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS ............ 2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW ........... 3
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ..... 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............ 7-8
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 9
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
1996 1995
------------ ---------------
(UNAUDITED) (RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................... $ 13,000 $ 11,171
Accounts receivable:
Trade, less allowance for doubtful accounts
of $4,545 in 1996 and $4,388 in 1995 ................ 110,606 112,501
Affiliates ............................................ 2,462 843
-------- --------
113,068 113,344
Inventories, net of obsolescence reserves .............. 113,318 102,159
Deferred tax asset ..................................... 456 456
Prepaid expenses ....................................... 10,084 9,824
-------- --------
Total current assets ................................. 249,926 236,954
PROPERTY AND EQUIPMENT, NET ............................. 10,464 9,126
COST IN EXCESS OF ASSETS ACQUIRED, NET .................. 17,709 17,305
OTHER ASSETS ............................................ 3,826 2,419
-------- --------
$281,925 $265,804
======== ========
LIABILITIES
CURRENT LIABILITIES
Notes payable .......................................... $ 52,237 $ 46,438
Accounts payable--trade ................................ 165,322 165,494
Accrued liabilities .................................... 15,818 14,242
Income taxes payable ................................... 1,317 937
-------- --------
Total current liabilities ............................ 234,694 227,111
LONG TERM DEBT .......................................... 13,510 8,801
MINORITY INTEREST ....................................... 2,116 --
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares; 0 shares
issued and outstanding ............................... -- --
Common stock, authorized 100,000,000 shares at $.001
par value; issued and outstanding, 7,582,534 shares at
March 31, 1996 and December 31, 1995 ................. 8 8
Additional paid-in capital ............................. 25,620 24,976
Retained earnings ...................................... 6,546 4,558
Cumulative foreign currency translation adjustment .... (569) 350
-------- --------
31,605 29,892
-------- --------
$281,925 $265,804
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
----------- -----------
(RESTATED)
(UNAUDITED)
<S> <C> <C>
Net sales (including sales to affiliates
of $15,100 in 1995 ...................... $302,995 $207,419
Cost of goods sold ........................ 280,453 192,508
-------- --------
Gross profit .............................. 22,542 14,911
Operating expenses ........................ 17,850 12,119
-------- --------
Operating income .......................... 4,692 2,792
Other income (expenses)
Interest income ......................... 614 505
Interest expense ........................ (1,940) (1,248)
-------- --------
(1,326) (743)
-------- --------
Earnings before income taxes and
minority interest ....................... 3,366 2,049
Income tax expense ........................ 1,059 382
Minority interest in subsidiaries ........ 319 --
-------- --------
Net earnings............................... $ 1,988 $ 1,667
======== ========
Net earnings per common
share--primary .......................... $ 0.25 $ 0.24
======== ========
Net earnings per common
share--fully diluted .................... $ 0.24 $ 0.24
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
-------- -------
(RESTATED)
(UNAUDITED)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings............................................ $ 1,988 $ 1,667
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................ 891 603
Deferred compensation amortized ...................... -- 69
Minority interest .................................... 319 --
Changes in assets and liabilities excluding effects
of acquisitions:
Accounts receivable--trade, net ...................... 2,461 685
Accounts receivable--affiliates, net ................. (1,631) 3,082
Inventories .......................................... (11,357) (52)
Prepaid expenses and other assets .................... (4,019) (3,734)
Accounts payable ..................................... 1,821 (2,997)
Accrued liabilities and income taxes ................. 1,545 1,176
-------- -------
Net cash provided by (used in) operating activities: . (7,982) 499
Cash flows from investing activities:
Purchase of fixed assets ............................. (1,618) (539)
-------- -------
Net cash (used in) investing activities: .............. (1,618) (539)
Cash flows from financing activities:
Proceeds from affiliate notes ........................ -- 36
Net borrowings from banks ............................ 11,657 5,384
-------- -------
Net cash provided by financing activities:............. 11,657 5,420
Effect of exchange rate changes on cash ................ (228) 512
-------- -------
INCREASE IN CASH ....................................... 1,829 5,892
Cash at beginning of period ............................ 11,171 8,368
-------- -------
Cash at end of period .................................. $ 13,000 $14,260
======== =======
</TABLE>
(CONTINUED)
3
<PAGE>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS--(CONTINUED)
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
----------- ---------
(RESTATED)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ...................................... $2,154 $793
Income taxes .................................. 291 435
</TABLE>
Non cash investing and financing activities:
These statements of cash flows do not include noncash investing and financing
transactions associated with the common stock issued for various
acquisitions. The components of the transactions in each period are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
----------- ---------
(RESTATED)
<S> <C> <C>
Fair value of assets acquired including
cash acquired ........................ $7,284 $ --
Less: Common stock or other
consideration issued ................. 2,515 --
------ ----
Liabilities assumed .................... $4,769 $ --
====== ====
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1995 included in the
Company's Annual Report on Form 10-K.
The consolidated condensed financial statements were prepared from the books and
records of the Company without audit or verification. In the opinion of
management, all adjustments, which are of a normal recurring nature, and
necessary to present fairly the financial position, results of operations and
cash flows for all the periods presented have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the operating results for the full fiscal year.
2. ACQUISITIONS
In March 1996, the Company acquired six companies from Comtrad for
the reduction of indebtedness of $7.8 million. These acquisitions have been
accounted for as an exchange between entities under common control in a manner
similar to a pooling of interests. Accordingly, these acquisitions have been
included in the accompanying financial statements from the date acquired by
Comtrad. As a result, financial statements for 1995 have been restated.
Companies in Bulgaria, Croatia, Lithuania and Romania were started by
Comtrad in 1993 and 1994 for a minimal investment and have had insignificant
operations. They are treated as if Comtrad acquired them on December 31,
1994. Sixty five percent of a company in Slovakia was acquired in early 1994
for a minimal investment and 1994 results were insignificant. The remaining
35% was acquired by Comtrad for a contingent payment in CHS shares to be
based on 1996 results. This acquisition has been recorded as of December 31,
1994 based on the cost of the 65% interest acquired with the remaining cost to
be recorded as goodwill when known. The acquisition in Brazil was in November
1994 for Comtrad common shares valued at $762,000. The acquisition was recorded
as of December 31, 1994 at this value, resulting in goodwill of $2,508,000.
In February 1996, the Company acquired 51% of an unaffiliated company in
Hungary for consideration based on the acquired company's results in 1996. The
consideration is 51% of the book value of equity at December 31, 1996 plus a
multiple of 51% of 1996 net earnings. Based on a history of profitable
operations, the acquisition was initially recorded at 51% of the book value on
January 31, 1996. Adjustments to purchase price will be made when the amount
of contingent consideration is known.
5
<PAGE>
3. NET EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents (common
stock options) outstanding during the year, unless such inclusion is
antidilutive. The weighted average number of shares was 6,966,120 and
7,862,349 in the three month periods ended March 31, 1995 and 1996,
respectively. The weighted average number of shares (8,183,391 shares) used
in the computation of fully diluted earnings per share for the quarter ended
March 31, 1996 assumes the contingent shares related to the acquisition of
51% of a company in Hungary were issued based on the acquisition formula
applied to the earnings of the acquired company in the interim period.
4. LONG TERM DEBT
The Company's long-term debt at March 31, 1996 consists principally of the
amount due at that date ($12,641,000) under CHS Promark's a revolving credit
agreement. Amounts outstanding are due February 1999. The agreement provides for
advances and letters of credit based upon eligible accounts receivable and
inventory up to a maximum of $20 million. Interest is at Prime plus 1.5% or
LIBOR plus 3.75% at borrower's option. CHS Promark's assets, including accounts
receivable and inventory of $25,683,000 are pledged as collateral.
The agreement provides that the interest rates will increase .75% if $3 million
is not invested into CHS Promark by July 1996. The agreement also limits
the liability of CHS Promark to pay dividends to the Company to 50% of CHS
Promark's net income.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net sales and net earnings have grown substantially during
the past several years, primarily due to acquisitions. In 1995, except for the
acquisition of 84% of the entity in the Czech Republic which was owned by a
non-affiliate and was accounted for as a purchase based on the effective date of
the acquisition of October 1, 1995, these acquisitions were generally from
Comtrad and were recorded in a manner similar to a pooling of interests.
Accordingly, these acquisitions have been included in the Company's financial
statements from the date the entity was acquired by Comtrad. The Company
recorded the cost of its acquisitions from Comtrad at Comtrad's cost basis. The
Company recorded goodwill with respect to these acquisitions if Comtrad recorded
goodwill when it purchased the subject entity. Such goodwill is being amortized
over 20 years. The following table sets forth the service areas of the
operations acquired, the date of the acquisition by Comtrad (which is generally
the date the results of operations were initially included in the Company's
financial statements) and the CHS acquisition date for acquisitions in the
quarter ended March 31, 1996.
<TABLE>
<CAPTION>
CHS ACQUISITIONS FROM COMTRAD
COMTRAD ACQUISITION CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE DATE
- ---------- ------------ ---------- ------
<S> <C> <C> <C>
CHS Brazil Brazil November 1994 March 1996
CHS Slovakia Slovakia January 1994 March 1996
CHS Baltic Lithuania, Lativia and Estonia June 1994 March 1996
CHS Bulgaria Bulgaria September 1994 March 1996
CHS Romania Romania September 1994 March 1996
CHS Croatia Croatia September 1994 March 1996
</TABLE>
<TABLE>
<CAPTION>
CHS DIRECT ACQUISITIONS
CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE
- ---------- ------------ ------
<S> <C> <C>
CHS Hungary(1) Hungary February 1996
CHS Peru(2) Peru March 1996
<FN>
(1) The Company owns 51% of CHS Hungary.
(2) The Company owns 60% of CHS Peru.
</FN>
</TABLE>
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
NET SALES. Net sales increased $98.2 million, or 47.7%, from $204.8
million in first quarter 1995 to $303.0 million in first quarter 1996 due
principally to acquisitions and to a lesser extent internal growth. Of the
increase in net sales, subsidiaries acquired in late 1995 or 1996 contributed
$66.2 million. Net sales of subsidiaries consolidated for both 1995 and 1996,
grew $32.0 million or 15.6%. Net Sales of CHS Germany in the first quarter of
1995 were favorably impacted by a vendor's promotion of one product. Excluding
the results of CHS Germany in both periods, net sales during the first quarter
of 1996 grew $31.8 million or 20.6% from the comparable period in the prior
year. This growth is attributed to increased consumer demand for microcomputer
products offered by the Company.
GROSS PROFIT. Gross profit increased $7.6 million, or 51.2%, from $14.9
million in first quarter 1995 to $22.5 million in first quarter 1996 due
principally to acquisitions and to a lesser extent internal growth. Gross
profit for subsidiaries included in the consolidation for both 1995 and 1996
increased in proportion to sales. Gross profit from such subsidiaries grew
$2.2 million or 14.4%. Newly acquired companies contributed $5.4 million of
gross profit.
Gross margin increased from 7.3% in first quarter 1995 to 7.4% in first
quarter 1996. The increase was due to higher gross margins from subsidiaries
acquired in late 1995 and 1996. The Company attributes the increase in gross
margin to higher gross margins in the geographical areas of the newly
acquired companies (specifically Finland, Hungary and Sweden, among others).
The Company expects that gross margins may decline in 1996 due to competitive
pricing pressures.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
remained unchanged at 5.9% in first quarter of 1996 and the first quarter of
1995.
7
<PAGE>
NET INTEREST EXPENSE. Net interest expense increased $0.6 million, or
78.5%, from $0.7 million in first quarter 1995 to $1.3 million in first
quarter 1996. The increase in interest expense is directly related to the
increase in average loan amounts outstanding.
INCOME TAX EXPENSE. Income taxes as a percentage of earnings before income
taxes increased from 18.6% in first quarter 1995 to 31.5% in first quarter
1996. The increase in the Company's net effective tax rate is attributed to
the utilization of net operating loss carryforwards in first quarter 1995,
especially from CHS England. Such net operating loss carryforwards of CHS
England were totally utilized in 1995. The Company expects to have an
effective tax rate lower than the statutory United States tax rate in 1996
principally due to its ability to use remaining net operating loss
carryforwards from certain subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities in the quarter ended March 31, 1996
was $8.0 million, due principally to increases in inventory, net of decreases
in accounts receivable and increases in accounts payable, as a result of
increases in net sales. Net cash used in investing activities in the first
quarter of 1996 was $1.6 million, due principally to investments in fixed
assets. Net cash provided by financing activities in the first quarter of
1996 was $11.7 million, due principally to borrowings under new debt
agreements and increased borrowings under other agreements.
On July 10, 1995, the Company entered into a credit agreement providing for
a $20 million line of credit. Both the Company and CHS Finance, S.A. ("CHS
Finance"), a subsidiary of the Company formed under the laws of Switzerland may
borrow under this line of credit. Included within the line of credit was
approximately $14.8 million of indebtedness of Comtrad the lender, which was
assumed by the Company. Approximately $7 million of this indebtedness had
previously been loaned by Comtrad to a subsidiary of the Company. Each advance
under the line is due on the earlier of demand or 180 days after the advance and
bears interest, at the election of the Company, at either LIBOR plus 2% or the
prime rate of the lender plus 2%. The line matures June 30, 1996 and the Company
expects that it will be renewed. The line is guaranteed by Comtrad and Claudio
Osorio, the Company's Chairman, Chief Executive Officer and President. Comtrad
has pledged certain shares of the Company owned by them to secure the line. The
line is also secured by a lien on essentially all of the Company's assets. The
Company was not in compliance with certain of the covenants of this agreement as
of March 31, 1996, but has received a waiver with respect to the same.
On February 5, 1996, the CHS Promark entered into a Loan and
Security Agreement providing for revolving credit advances and the issuance of
letters of credit against eligible accounts receivable and inventory up to a
maximum of $20 million. Amounts outstanding bear interest, at the election of
the borrower, at the prime rate of the lender plus 1.5% or 3-3/4% above LIBOR;
provided, however, that unless the Company's pending public offering
is successfully completed and $3 million of the proceeds are invested in CHS
Promark, the interest rates will increase to prime plus 2.25% and LIBOR plus
4.5% on July 1, 1996. The agreement limits the ability of CHS Promark to pay
dividends to the Company to 50% of net income after taxes. The agreement matures
in February, 1999 and is secured by a lien on essentially all of CHS Promark's
assets. The Company has guaranteed this indebtedness.
On March 29, 1996, CHS Finance entered into a one year revolving credit
agreement pursuant to which $18 million may be borrowed by certain of the
Company's Western European subsidiaries to finance purchases of Hewlett Packard
products for which customer orders have been received. Borrowings under the line
may be in Pounds, Deutschmarks, French Francs, Belgian Francs or Dollars.
Amounts borrowed bear interest at LIBOR plus 1 3/4%. The Company has guaranteed
the indebtedness of CHS Finance under the agreement. The loan is secured by a
lien on the accounts into which payments from customers for the products
financed are deposited. In addition, the Company has provided to the bank an
insurance policy protecting it against the risk of the Company's insolvency.
The Company's principal need for additional cash in 1996 will be for the
purchase of additional inventory to support growth and to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment. The Company is seeking additional cash for this
purpose through its existing bank credit lines and through additional credit
facilities, but management can give no assurance that financing will be
available on terms acceptable to the Company. If for any reason this
financing is not available, it could adversely affect the growth of the
Company.
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In certain
countries, exchange controls may limit the ability of the Company's subsidiaries
to make payments to the Company. At March 31, 1996, the only country with
exchange control limitations affecting the Company was Venezuela. The Company's
net investment in Venezuela is $2.8 million. Restrictions in financing or credit
arrangements may also limit such payments. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets and cash flow of such
subsidiaries over the claims of the Company or its shareholders.
8
<PAGE>
PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
On May 9, 1996 a report on Form 8-KA was filed to update form 8-K filed
on February 21, 1996 in respect to the acquisition of a Company in Hungary.
On April 26, 1996 a report on form 8-K was filed to report the acquisition of a
Company in Switzerland on March 29, 1996, effective April 1, 1996.
9
<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.
---------------------
(Registrant)
5/14/96 By /s/ ANTONIO BOCCALANDRO
- -------------------------------- ----------------------------------------
Date ANTONIO BOCCALANDRO
Secretary
5/14/96 By /s/ CRAIG S. TOLL
- -------------------------------- ----------------------------------------
Date CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,000
<SECURITIES> 0
<RECEIVABLES> 113,068
<ALLOWANCES> 4,545
<INVENTORY> 113,318
<CURRENT-ASSETS> 249,926
<PP&E> 10,464
<DEPRECIATION> 0
<TOTAL-ASSETS> 281,925
<CURRENT-LIABILITIES> 234,694
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 31,597
<TOTAL-LIABILITY-AND-EQUITY> 281,925
<SALES> 302,995
<TOTAL-REVENUES> 302,995
<CGS> 280,453
<TOTAL-COSTS> 17,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,326
<INCOME-PRETAX> 3,366
<INCOME-TAX> 1,059
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,988
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
</TABLE>
