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 SEPTEMBER 30, 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2153 NW 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 NOVEMBER 8, 1996: 12,197,483
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 [ ].
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CHS ELECTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS 3
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS 4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW 5-6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-11
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
2
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ -----------
(restated)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................................................ $ 37,753 $ 11,171
Accounts receivable:
Trade, less allowance for doubtful accounts
of $10,527 in 1996 and $4,388 in 1995 ....................................... 233,109 112,501
Affiliates .................................................................. 1,271 843
------------ -----------
234,380 113,344
Inventories, net of obsolescence reserves ................................... 217,053 102,159
Deferred tax asset .......................................................... 456 456
Prepaids and other current assets ........................................... 25,021 9,824
------------ -----------
TOTAL CURRENT ASSETS ........................................................ 514,663 236,954
PROPERTY AND EQUIPMENT, NET ................................................. 26,558 9,126
COST IN EXCESS OF ASSETS ACQUIRED, NET ...................................... 17,679 17,305
OTHER ASSETS ................................................................ 13,662 2,419
------------ -----------
$ 572,562 $ 265,804
============ ===========
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ............................................................... $ 93,318 $ 46,438
Accounts payable, trade ..................................................... 268,171 165,494
Accrued liabilities ......................................................... 69,046 14,242
Income taxes payable ........................................................ 1,019 937
------------ -----------
TOTAL CURRENT LIABILITIES ................................................... 431,554 227,111
LONG TERM DEBT .............................................................. 51,998 8,801
MINORITY INTEREST ........................................................... 3,017 --
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;
12,174,073 and 7,582,534 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively ...................... 12 8
Additional paid-in capital .................................................. 76,250 24,976
Retained earnings ........................................................... 10,598 4,558
Cumulative foreign currency translation adjustment .......................... (867) 350
------------ -----------
TOTAL SHAREHOLDERS' EQUITY .................................................. 85,993 29,892
------------ -----------
$ 572,562 $ 265,804
============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------ ------------
(restated) (restated)
<S> <C> <C> <C> <C>
Net sales (including sales to affiliates
of $0, $4,053, $0, $19,153
respectively) ........................................ $ 376,209 $ 239,074 $ 995,710 $ 619,237
Cost of goods sold ................................... 349,100 221,595 922,292 573,448
------------- ------------- ------------ ------------
Gross profit ......................................... 27,109 17,479 73,418 45,789
Operating expenses ................................... 21,557 14,590 58,134 37,649
------------- ------------- ------------ ------------
Operating income ..................................... 5,552 2,889 15,284 8,140
Other income (expense)
Interest income ...................................... 550 634 2,026 1,299
Interest expense ..................................... (1,977) (2,030) (6,481) (4,538)
------------- ------------- ------------ ------------
(1,427) (1,396) (4,455) (3,239)
Earnings before income taxes and ..................... 4,125 1,493 10,829 4,901
minority interest
Income tax expense ................................... (1,390) (330) (3,539) (1,121)
Minority interest in subsidiaries .................... (410) (--) (1,250) (--)
------------- ------------- ------------ ------------
Net earnings ......................................... $ 2,325 $ 1,163 $ 6,040 $ 3,780
============= ============= ============ ============
Net earnings per common share:
Primary ....................................... $ .19 $ .16 $ .62 $ .53
============= ============= ============ ============
Fully Diluted ................................. $ .17 $ .16 $ .57 $ .53
============= ============= ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---------- ----------
(restated)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows provided by (used in) operating activities:
Net earnings ............................................................... $ 6,040 $ 3,780
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization .............................................. 3,194 997
Deferred compensation amortized ............................................ -- 138
Minority interest .......................................................... 1,250 --
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net ............................................. (21,178) (16,559)
Acounts receivable-affiliates, net ......................................... (428) (7,432)
Inventories ................................................................ (26,647) (10,564)
Prepaids and other current assets .......................................... (10,698) (1,449)
Accounts payable ........................................................... (7,069) 13,273
Accrued liabilities and income taxes ....................................... 1,695 (208)
---------- ----------
Net cash (used in) operating activities: ................................... (53,841) (18,024)
Cash flows (used in) investing activities:
Purchase of fixed assets ................................................... (4,809) (2,830)
Acquisitions, net of cash acquired ......................................... (92,692) --
---------- ----------
Net cash (used in) investing activities: ................................... (97,501) (2,830)
Cash flows from financing activities:
Proceeds from public offering .............................................. 50,632 --
Net borrowings from banks .................................................. 71,609 22,448
Proceeds from sale of acquired company receivables ......................... 56,300 --
Proceeds from affiliate notes .............................................. -- 36
---------- ----------
Net cash provided by financing activities: ................................. 178,541 22,484
Effect of exchange rate changes on cash .................................... (617) 189
---------- ----------
INCREASE IN CASH ........................................................... 26,582 1,819
Cash at beginning of period ................................................ 11,171 8,368
---------- ----------
Cash at end of period ...................................................... $ 37,753 $ 10,187
========== ==========
</TABLE>
5
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CHS ELECTRONICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
Supplemental disclosure of cash flow information: 1996 1995
---- ----
(restated)
Cash paid during the period for:
Interest $6.665 $3,302
Income Taxes $1,861 $1,248
Non cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
The components of the transactions in each period are as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---- ----
(restated)
Fair value of assets acquired including cash acquired $7,284 --
Less: Common stock or other consideration issued 2,515 --
----- ---
Liabilities assumed $4,769 --
====== ===
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
6
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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 nine months ended September 30, 1996 are not
necessarily indicative of the operating results for the full fiscal year. Sales
in Europe in the first and fourth quarters are typically higher than the second
and third quarters. Sales in South America in the third and fourth quarters are
typically higher than the first and second quarters.
2. ACQUISITIONS
Effective September 27, 1996, the Company acquired the European and Latin
American operations of Merisel, Inc., an unaffiliated company. The operations
acquired included operating units in England, France, Germany, Switzerland,
Austria, Miami (exporting to Latin America) and Mexico. The purchase price of
approximately $154 million consisted of the net book value of these entities,
less certain adjustments to be determined by an audit, plus the assumption of
all intercompany liabilities to the parent company and one specific loan. The
consideration was cash, raised through a combination of debt, factoring and cash
on hand. The financial position of these entities and the transactions
associated with the closing of the acquisition are included in the accompaning
balance sheet as of September 30, 1996. The operations for the three days are
insignificant and will be included in the fourth quarter. The amounts
preliminarily allocated to assets and liabilities resulted in no goodwill. Such
allocations are subject to adjustment based on the completion of the audit and
management's plan to integrate five of the seven locations where the Company
also has an operating facilitiy and the Company's ultimate conclusion as to
utilization of semi-automated warehouse facility in the Netherlands.
In June 1996, the Company acquired 100% of a company in Russia for consideration
based on a multiple of that company's net income in its succeeding 12 months of
operations. The acquisition was initially recorded at no consideration, which
approximated the value of net assets acquired. An adjustment to purchase price
will be made when the amount of consideration is known.
In April 1996, the Company acquired 100% of an unaffiliated company in
Switzerland for consideration based on the acquired company's results in 1996.
The consideration is based on a multiple of 1996 net earnings but not less than
$1.7 million. The acquisition was initially recorded at $1.7 million resulting
in no goodwill. In October 1996, the agreement was modified to base the price on
results through September 30, 1996. Therefore, in the fourth quarter
approximately 180,000 CHS shares are expected to be issued and goodwill of $1.5
million will be recorded.
In March 1996, the Company acquired six companies from Comtrad for a 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. The 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. An adjustment to purchase price will be made when the actual
price is known.
Presented below is pro forma operating data showing selected operating results
as if the companies acquired from unaffiliated parties in 1996 (all of which are
being accounted for on the purchase method) were acquired on January 1, 1995.
Pro forma adjustments were made to include goodwill amortization in both nine
month periods as if the contingent payments were determined based on 1995 actual
results. Due to contingent payments not being determinable as of September 30,
1996, there is no goodwill amortization included in the actual 1996 results.
Other pro forma adjustments were made for the operations acquired from Merisel
to reduce expenses for: parent company charges, non recurring costs of
implementing a Pan European warehouse in 1995, European headquarter charges and
reduced interest rates after the acquisition. Pro forma net earnings per share
is based on the net earnings divided by the actual weighted average number of
shares plus the contingent shares. In the acquisition in Switzerland the
contingent shares are the actual shares that will be issued in the fourth
quarter of 1996 by applying the acquisition formula, and in the acquisitions in
Hungary and Russia the contingent shares are determined by applying the
acquisition formula to 1995 actual earnings and using the share price at
December 31, 1995.
7
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS EXCEPT PER SHARE DATA)
1996 1995
---- ----
Sales $2,080,964 $1,632,416
Net Earnings 5,701 2,123
Net Earnings Per Share $.52 $.25
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1995 or
of future results of the combined companies.
3. NET EARNINGS PER SHARE
Net 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 12,435,382 and 7,322,253
for the three month periods ended September 30, 1996 and 1995, respectively and
9,687,440 and 7,109,027 for the nine month periods ended September 30, 1996 and
1995, respectively. The weighted average number of shares of 13,834,969 and
10,658,831 used in the computation of fully diluted earnings per share for the
three and nine months ended September 30, 1996 assumes the contingent shares
related to the acquisition of 51% of a company in Hungary and the acquisition of
companies in Switzerland and Russia were issued based on the acquisition formula
applied to the earnings of the acquired company in the interim period. The
weighted average shares for the nine-month period in 1996 is significantly less
than the current outstanding shares due to the consummation of the public
offering in late June 1996.
4. LONG TERM DEBT
The Company's long-term debt at September 30, 1996, as amended, consists
principally of the amount due at that date $(41,662,000) under CHS Promark's
revolving credit agreement. Amounts outstanding are due October 1999. The
agreement provides for advances and letters of credit based upon eligible
accounts receivable and inventory up to a maximum of $60 million. Interest is at
a variable market rate based on the prime rate of the lender or LIBOR, at
borrower's option. CHS Promark's assets, including accounts receivable and
inventory, are pledged as collateral. The agreement also limits the ability of
CHS Promark to pay dividends to the Company to 50% of CHS Promark's net income.
5. COMMON STOCK OFFERING
In June 1996, the Company sold, through a public offering, 4,591,539 shares of
its common stock at a price of $12 per share. Net proceeds of the offering was
$50,632,000. In the offering, selling shareholders also sold 1,733,461 shares.
The Company has granted to the representative of the underwriters a warrant to
purchase 300,000 shares of the Company's stock for a four year period commencing
September 1997 at varying prices above the offering price.
8
<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, in large part due to acquisitions. In 1996 the Company made
acquisitions from unrelated parties as shown below. These acquisitions have been
included in the Company's financial statements from the date the entity was
acquired. Also, in March 1996, the Company acquired six entities from Comtrad,
then a majority owner of the Company, which 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 such 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 assumed date of the
acquisition by Comtrad (which is the date the results of operations were
initially included in the Company's financial statements) and the Company
acquisition date for acquisitions in the nine months ended September 30, 1996.
CHS DIRECT ACQUISITIONS
OPERATING CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE
- ---------- ------------ ---------------
CHS Hungary(1) Hungary February 1996
CHS Peru(2) Peru March 1996
CHS Switzerland Switzerland April 1996
CHS Ecuador(3) Ecuador June 1996
CHS Russia Russia June 1996
CHS Merisel UK UK September 1996
CHS Merisel France France September 1996
CHS Merisel Switzerland Switzerland September 1996
CHS Merisel Germany Germany September 1996
CHS Merisel Austria Austria September 1996
CHS Merisel Latin America Latin America September 1996
CHS Merisel Mexico Mexico September 1996
(1) The Company owns 51% of CHS Hungary. (2) The Company owns 60% of CHS Peru.
(3) The Company owns 51% of CHS Ecuador
CHS ACQUISITIONS FROM COMTRAD
ASSUMED
COMTRAD ACQUISITION CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE (A) DATE
- ---------- ------------ ------- ----
CHS Brazil Brazil November 1994 March 1996
CHS Slovakia Slovakia December 1994 March 1996
CHS Baltic Lithuania, Lativia
and Estonia December 1994 March 1996
CHS Bulgaria Bulgaria December 1994 March 1996
CHS Romania Romania December 1994 March 1996
CHS Croatia Croatia December 1994 March 1996
(A) See note 2 to Notes to Consolidated Condensed Financial Statements
RESULTS OF OPERATIONS
THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995
NET SALES. Net sales increased $137.1 million, or 57.4%, from $239.1 million in
third quarter 1995 to $376.2 million in third quarter 1996 due to internal
growth and, to a lesser extent, acquisitions. Of the increase in net sales,
subsidiaries acquired in late 1995 or 1996 contributed $56.6 million. Net sales
of subsidiaries consolidated for both 1995 and 1996 grew $80.5 million or 34.0%.
This growth is attributed to increased consumer demand for microcomputer
products offered by the Company and the expansion of sales by the Company's
subsidiaries to include a full range of products.
9
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GROSS PROFIT. Gross profit increased $9.6 million, or 55.1%, from $17.5 million
in third quarter 1995 to $27.1 million in third 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 $2.2
million or 12%. Newly acquired companies contributed $7.5 million of gross
profit.
Gross margin decreased from 7.3% in third quarter 1995 to 7.2% in third quarter
1996. The decrease was due to lower gross margins from subsidiaries located in
Western Europe. The Company attributes the decrease in gross margin to
competitive pressures in this region, especially in mass storage products.
Management believes the lower margin on mass storage products is temporary.
However, the Company expects that overall gross margins may decline in the
fourth quarter of 1996 due to competitive pricing pressures and the fact that
the gross margin of the former combined Merisel companies acquired by the
Company has been generally lower than that of the Company. The gross margin of
the combined Merisel companies for the nine months ended September 30, 1996 on a
pro forma basis was 6.9%.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 6.1% in the third quarter of 1995 to 5.7% in third quarter of 1996. The
decline was due to efficiencies gained through increased volume and the
Company's efforts to control costs.
NET INTEREST EXPENSE. Net interest expense was essentially unchanged despite
increased sales in the third quarter of 1996 due to the funds from the public
offering being used to pay off $20 million of debt at the beginning of the third
quarter.
INCOME TAX EXPENSE. Income taxes as a percentage of earnings before income taxes
increased from 22.0% in third quarter 1995 to 33.7% in third quarter 1996. This
change is due to the use of net operating loss carryforwards in 1995,
principally in the Company's UK subsidiary. All such carry forwards were
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 carry forwards from certain subsidiaries.
NINE MONTHS 1996 COMPARED TO NINE MONTHS 1995
NET SALES. Net sales increased $376.5 million, or 60.8%, from $619.2 million in
the first nine months of 1995 to $995.7 million in the first nine months of 1996
due to acquisitions and, to a lesser extent, to internal growth. Of the increase
in net sales, subsidiaries acquired in late 1995 or 1996 contributed $204.3
million. Net sales of subsidiaries consolidated for both 1995 and 1996, grew
$172.2 million or 27.8%. This growth is attributed to increased consumer demand
for microcomputer products offered by the Company and the expansion of sales by
the Company's subsidiaries to include a full range of products.
GROSS PROFIT. Gross profit increased $27.6 million, or 60.3%, from $45.8 million
in the first nine months of 1995 to $73.4 million in the first nine months of
1996 due to internal growth and, to a lesser extent, to acquisitions. Gross
profit for subsidiaries included in the consolidation for both 1995 and 1996
increased in proportion to sales. Gross profit from such subsidiaries grew $11.0
million or 24.0%. Newly acquired companies contributed $16.6 million of gross
profit.
Gross margin remained consistent at 7.4% in the first nine months of 1995 and
1996 respectively. Gross margin for the first nine months of 1996 compared to
the comparable period in 1995 were increased by higher gross margins in
geographical areas of newly acquired companies (such as Finland, Hungary, Russia
and Sweden, among others) offset by decreases caused by a competitive pressures,
including a temporary decline in gross margin experienced in the third quarter
on mass storage products. The Company expects that gross margins may decline in
the fourth quarter of 1996 due to competitive pricing pressures and the fact
that the gross margin of the former combined Merisel companies acquired by the
Company has been generally lower than that of the Company. The gross margin of
the combined Merisel companies for the nine months ended September 30, 1996 on a
pro forma basis was 6.9%.
OPERATING EXPENSES. Operating expenses as a percentage of net sales decreased
from 6.1% for the first nine months of 1995 to 5.8% in the first nine months of
1996. The decline was due to efficiencies gained through increased volume and
the Company's effort to control costs. Operating expenses for both periods
include the results of foreign currency transactions. Such results were $634,000
loss and $874,000 gain for 1996 and 1995, respectively.
NET INTEREST EXPENSE. Net interest expense increased $1.2 million, or 37.5%,
from $3.2 million in the first nine months of 1995 to $4.5 million in the first
nine months of 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 22.9% in the first nine months of 1995 to 32.7% in the first nine
months of 1996. The increase in the Company's net effective tax rate is
attributed to the utilization of net operating loss carryforwards in 1995,
especially from CHS UK. Such net operating loss carry forwards of CHS UK 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 carry forwards from certain
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities in the nine months ended September 30,
1996 and 1995 was $53.8 and $18.0 million respectively, due principally to
increases in receivables, inventory, and other current assets and decreases in
accounts payable in 1996. In 1996, while receivables, inventory and other
current assets increased due to sales increases, accounts payable decreased due
to the use of funds from the public offering to take advantage of early payment
discounts from vendors. In 1995 receivables, inventory and other current assets
increased due to sales increases and current payables also increased. Net cash
used in investing activities in the first nine months of 1996 and 1995 was $97.5
and $2.8 million respectively, due principally to acquisitions and, to a lesser
extent, to investments in fixed assets. Net cash provided by financing
activities in the first nine months of 1996 and 1995 was $178.5 and $22.5
million respectively, due principally in 1996 to proceeds of the public offering
and financing of the acquisition of Merisel subsidiaries and, in both years, to
borrowings under new debt agreements and increased borrowings under other
agreements.
10
<PAGE>
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. 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 a variable market rate based on LIBOR or the
prime rate of the lender. The line matured June 30, 1996 and was repaid.
On February 5, 1996, as amended, 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 $60
million. Amounts outstanding bear interest, at the election of the borrower, at
either a variable market rate based on the prime rate of the lender or LIBOR.
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 October, 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 a variable market rate based on LIBOR. 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. There was no amount outstanding under the line at September 30,
1996.
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. 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.
COMMENTS ON "FORWARD LOOKING" INFORMATION
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which represent the Company's expectations or beliefs, including, but not
limited to, statements concerning gross margins and sales of the Company's
products. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors,
including changes in economic conditions, demand for the company's products and
changes in the competitive environment.
11
<PAGE>
PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
On October 18, 1996, a report on form 8-K was filed to report the acquisition of
seven operations which had been subsidiaries of Merisel, Inc.
12
<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)
November 14, 1996 BY /S/ ANTONIO BOCCALANDRO
--------------------------
ANTONIO BOCCALANDRO
Secretary
November 14, 1996 BY /S/ CRAIG S. TOLL
--------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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