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, 1997
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 MAY 8, 1997: 14,697,435
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
CONDENSED CONSOLIDATED BALANCE SHEETS 3
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW 5-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-13
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
2
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31 DECEMBER 31
1997 1996
---------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $32,699 $35,137
Accounts receivable:
Trade, less allowance for doubtful accounts
of $15,465 in 1997 and $14,830 in 1996 331,580 340,098
Affiliates 4,019 3,241
---------- -----------
335,599 343,339
Inventories 349,246 321,770
Prepaids and other current assets 35,298 39,374
---------- -----------
TOTAL CURRENT ASSETS 752,842 739,620
PROPERTY AND EQUIPMENT, NET 36,706 30,947
COST IN EXCESS OF ASSETS ACQUIRED, NET 105,105 78,780
OTHER ASSETS 6,790 12,602
---------- -----------
$901,443 $861,949
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $172,497 $155,932
Accounts payable, trade 434,713 452,569
Accrued liabilities 60,365 44,873
Amounts due to sellers under acquisition agreements 42,200 49,200
Income taxes payable 3,577 5,120
Deferred income taxes 2,485 420
---------- -----------
TOTAL CURRENT LIABILITIES 715,837 708,114
LONG TERM DEBT 51,017 45,327
MINORITY INTEREST 4,150 3,975
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;
14,692,760 and 12,400,384 shares issued and outstanding at
March 31, 1997 and December 31, 1996, respectively 15 12
Additional paid-in capital 120,380 92,850
Retained earnings 23,435 16,724
Cumulative foreign currency translation adjustment (13,391) (5,053)
---------- -----------
TOTAL SHAREHOLDERS' EQUITY 130,439 104,533
---------- -----------
$901,443 $861,949
========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
(Unaudited)
1997 1996
---------- -----------
Net sales $877,103 $302,995
Cost of goods sold 814,640 280,453
---------- -----------
Gross profit 62,463 22,542
Operating expenses 47,838 17,850
---------- -----------
Operating income 14,625 4,692
Other (income) expenses
Interest income (1,767) (614)
Interest expense 6,616 1,940
---------- -----------
4,849 1,326
---------- -----------
Earnings before income taxes and
minority interest in subsidiaries 9,776 3,366
Income taxex 2,641 1,059
Minority interest in subsidiaries 424 319
---------- -----------
Net earnings $6,711 $1,988
========== ===========
Net earnings per common share:
Primary $.44 $.25
---------- -----------
Fully Diluted $.44 $.24
---------- -----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
1997 1996
---------- ----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $6,711 $1,988
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,658 891
Minority interest in net earnings 424 319
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 48,531 2,461
Acounts receivable-affiliates, net (778) (1,631)
Inventories 17,155 (11,357)
Prepaids and other current assets 23,305 (4,019)
Accounts payable (94,381) 1,821
Accrued liabilities and income taxes 3,420 1,545
---------- ---------
Net cash provided by (used in) operating activities: 8,045 (7,982)
Cash flows from investing activities:
Purchase of fixed assets (1,658) (1,618)
Acquisitions, net of cash acquired 2,800 --
---------- ---------
Net cash provided by (used in) investing activities: 1,142 (1,618)
Cash flows from financing activities:
Net borrowings from (repayments to) banks (10,317) 11,657
Proceeds from exercising stock options 605 --
---------- ---------
Net cash provided by (used in) financing activities: (9,712) 11,657
Effect of exchange rate changes on cash (1,913) (228)
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,438) 1,829
Cash and cash equivalents at beginning of period 35,137 11,171
---------- ---------
Cash and cash equivalents at end of period $32,699 $13,000
========== =========
5
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CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
THREE MONTHS ENDED
MARCH 31,
1997 1996
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $7,251 $2,154
Income Taxes $3,231 $291
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:
THREE MONTHS ENDED
MARCH 31,
1997 1996
---------- ----------
Fair value of assets acquired including cash acquired $131,498 $7,284
Less: Common stock or other consideration issued 26,928 2,515
Liabilities assumed $104,570 4,769
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated 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, 1996 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated 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, 1997 are not
necessarily indicative of the operating results for the full fiscal year. Sales
in Europe in the first and fourth quarters of each year are typically higher
than sales in the second and third quarters. In South America sales in the third
and fourth quarters are typically higher than sales in the first and second
quarters.
2. ACQUISITIONS
Effective January 1, 1997 the Company acquired 100% of Frank & Walter GmbH, a
distributor based in Germany, for 2,200,000 unregistered shares of common stock.
The acquisition was recorded as a purchase. The amounts preliminarily allocated
to assets and liabilities resulted in goodwill of $27.6 million. Such
allocations are subject to adjustment based on the completion of an appraisal
and management's plan to integrate the Company with its other operations in
Germany.
In September 1996, the Company aquired seven companies comprising the European
and Latin American businesses of a competitor, Merisel, Inc. The total
consideration paid was approximately $148 million consisting of $30 million of
cash and $118 million of debt assumed or refinanced. The Company financed the
acquisition primarily through borrowing or factoring at each subsidiary
acquired. The acquisition has been accounted for as a purchase. The cost of the
acquisition has been allocated to the assets acquired based on their fair
values. This resulted in approximately $10.5 million of goodwill.
In connection with this acquisition, the Company intends to consolidate former
Merisel operations and CHS operations in the 5 countries where each had
operations. Additionally, the Company intends to dispose of the former Merisel
warehouse located in the Netherlands and has entered into a letter of intent to
sell the warehouse. The consolidation of the operations in United Kingdom and
France is complete and the remainder of the consolidations should be completed
in 1997. The Company has accrued approximately $15 million for these activities,
consisting of severence cost-$1 million, lease termination-$4.6 million, loss on
sale in Netherlands warehouse-$6.4 million, writeoff of leasehold improvements
and computer systems-$3 million. Through March 31, 1997, $2.6 million has been
charged against this reserve, consisting principally of severance costs, lease
termination costs and writeoffs of leasehold improvements.
In June 1996, the Company acquired 100% of an unaffiliated company in Russia for
consideration based on a multiple of that company's net income in 1996. The
acquisition was initially recorded at no consideration, which approximated the
value of net assets acquired. Subsequently, the agreement was modified to
measure the value of the Company based 50% on 1996 results and 50% on 1997
results. The 1996 portion is payable in cash and the 1997 portion is payable in
cash or stock at the seller's option. In 1996, $20.6 million was recorded as
purchase price and goodwill.
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 was based on a multiple of 1996 net earnings but not less than
$1.7 million. In October 1996, the agreement was modified to base the price on
results through September 30, 1996. In the fourth quarter of 1996, 183,237 CHS
shares were issued and goodwill of $870,000 was recorded.
In February 1996, the Company acquired 51% of an unaffiliated company in Hungary
for consideration based on 51% of the book value of equity at December 31, 1996
plus a multiple of 51% of 1996 net earnings. Based on 1996 results the purchase
price was fixed at $17.6 million resulting in goodwill of $15.8 million. As
permitted by the agreement, the sellers have elected to receive the proceeds in
cash rather than stock.
Presented below is pro forma operating data showing selected operating results
as if the companies acquired in 1997 and 1996 were acquired on January 1, 1996.
Pro forma adjustments were made to include goodwill amortization in the three
month period ended March 31, 1996 based on 1996 actual results. Other pro forma
adjustments were made to the results of operations acquired from Merisel to
reduce expenses for parent company charges and European headquarter charges that
were discountinued after the acquisition and for 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 contingent shares
actually issued.
7
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CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996
---------- ----------
Sales $877,103 $917,864
Net Earnings 6,711 3,243
Net Earnings Per Share $.44 $.32
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1996 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 15,343,087 and 7,862,349
for the three month periods ended March 31, 1997 and 1996. The weighted average
number of shares used in the computation of fully diluted earnings per share was
15,423,433 and 8,183,391 for the three months ended March 31, 1997 and 1996,
respectively.
4. LONG TERM DEBT
The Company's long-term debt at March 31, 1997, consists principally of the
amount due at that date $(41 million) under CHS Promark 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. CONTINGENCIES
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company. The Company is
subject to a tax audit in Portugal where the tax authorities have preliminarily
found a deficiency of approximately $3 million. The Company believes it has
properly reported its income and paid taxes in Portugal and intends to contest
the proposed adjustments vigorously. The Company has requested a re-audit, which
has been granted, although no specific date is yet scheduled. The Company
expects the ultimate resolution of this matter will not have a material adverse
effect on the Company's financial position or results of operations.
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. The acquisitions from
unrelated parties for the past twelve months are shown below:
OPERATING CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE
- ---------- ------------ ---------------
CHS Frank & Walter Germany January 1997
CHS Estonia Estonia January 1997
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
CHS Russia Russia June 1996
CHS Ecuador(3) Ecuador June 1996
CHS Switzerland Switzerland April 1996
CHS Peru(2) Peru March 1996
CHS Hungary(1) Hungary February 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.
In March, 1996 the Company made six acquisitions from a related party. These
have been recorded in a manner similar to a pooling of interests and the
operations of the acquired entities are included in the quarter ended March 31,
1996
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
NET SALES. Net sales increased $574.1 million, or 189.5%, from $303.0 million in
first quarter 1996 to $877.1 million in first quarter 1997 due to acquisitions
and, to a lesser extent, internal growth. Of the increase in net sales, new
subsidiaries having no first quarter 1996 operations contributed $307.4 million.
Net sales of subsidiaries consolidated for both 1997 and 1996, excluding
operations where CHS companies were integrated with operations acquired from
Merisel, grew from $140.3 million to $184.3 million or 31.4%. 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. A meaningful comparison is not possible in the case of
countries in which CHS had a business which was integrated with an acquired
Merisel business (UK, France, Germany, Switzerland and Latin America) because in
such locations in 1997 the financial reporting and, to a great extent,
operations have been combined.
GROSS PROFIT. Gross profit increased $39.9 million, or 177.1%, from $22.5
million in first quarter 1996 to $62.5 million in first quarter 1997 due
principally to acquisitions and, to a lesser extent, internal growth. Newly
acquired companies contributed $22.9 million of gross profit. Gross profit of
subsidiaries consolidated for both 1997 and 1996, excluding operations where CHS
companies were integrated with former Merisel operations, grew from $11.4
million to $14.8 million or 30.4%.
Gross margin decreased from 7.4% in first quarter 1996 to 7.1% in first quarter
1997. The decrease was due to lower gross margins from subsidiaries located in
Eastern Europe and Latin America. The Company attributes the decrease in gross
margin to competitive pressures in these regions, and the fact that the gross
margin of the former Merisel companies acquired by the Company in Latin America
has been generally lower than that of the Company. The gross margin was also
negatively affected in the first quarter 1997 by lower gross margins from
subsidiaries in UK and France acquired from Merisel, offset by increased gross
margins in German operations. This increase in gross margins in Germany from
those in the first quarter of 1996 is attributed to a wider product offering
with better margins in the German operation acquired from Merisel, than the
offering in the Company's German operations. The Company expects that overall
gross margins may continue to decline in 1997 due to continued competitive
pricing pressures across all regions.
9
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OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.9% in the first quarter of 1996 to 5.5% in first quarter of 1997. The
decline was due to efficiencies gained through increased volume, the cost
savings of merging operations in England and France, and the Company's efforts
to control costs. Operating expenses for both periods include the results of
foreign currency transactions. Such results were a net gain of $75,000 and
$564,000 in first quarter of 1996 and 1997, respectively.
NET INTEREST EXPENSE. Net interest expense increased $3.5 million or 266% from
$1.3 million in first quarter 1996 to $4.8 million in first quarter 1997 due to
increased borrowings of the Company to support increased sales.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest decreased from 31.5% in first quarter 1996 to 27.2% in first
quarter 1997. This change is due to lower tax rates in certain countries,
non-taxed income in some countries and, the use of net operating loss carry
forwards offset, to some extent, by losses in subsidiaries with no tax benefit
and non-deductible goodwill amortization. The Company expects to have an
effective tax rate lower than the statutory United States tax rate in 1997
principally due to its ability to use remaining net operating loss carry
forwards from certain subsidiaries.
Liquidity And Capital Resources
Net cash of $8.0 million was provided by operating activities in the three
months ended March 31, 1997 and net cash of $8.0 million was used in operating
activities in the three months ended March 31, 1996. In first quarter 1997, cash
was generated due to decreases in receivables, inventory and other current
assets offset by decreases in accounts payable. In the first quarter 1996, cash
was used due principally due to increases in inventory, and other current assets
offset by increases in accounts payable and other current liabilities. The
factors in 1997 are consistent with a seasonal reduction in sales in first
quarter 1997 compared to the fourth quarter of 1996. Net cash used in investing
activities in 1997 and 1996 included approximately $1.6 million in each period
related to fixed asset additions and $2.8 million provided in 1997, due
principally to acquisitions. Net cash of $10.3 million was used in financing
activities in first quarter 1997 and $11.7 million of cash was provided from
financing activities in the first quarter 1996. The transactions in both years
principally pertained to borrowing or repayments under financing arrangements.
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 agreement
contains certain restrictive covenants. At December 31, 1996 CHS Promark was in
violation of two covenants relating to limitations on transactions with
affiliates and employee loans. These violations were waived until June 30, 1997.
The Company expects to be in compliance with the covenants when the waiver
period expires. The Company has guaranteed this indebtedness.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. As of March 31,
1997, the aggregate amount available under these agreements was $201 million and
$169 million was then outstanding. Such agreements are usually for a term of one
year and are secured by the receivables of the borrower. The weighted average
interest rate at March 31, 1997 was 6.7%. The Company typically guarantees these
loans.
The Company's principal need for additional cash in 1997 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 and to pay amounts due to sellers of businesses. 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.
CURRENCY RISK MANAGEMENT
FUNCTIONAL CURRENCY. The Company's functional currency, as defined by
Statement of Financial Accounting Standards No. 52, is the United States Dollar.
The local currencies of the countries where subsidiaries conduct operations are
considered the functional currencies for such entities. Most of the Company's
subsidiaries use the local currencies as their functional currency and translate
assets and liabilities using the exchange rates in effect at the balance sheet
date and results of operations using the average exchange rates prevailing
during the year. Translation effects are reflected in the cumulative foreign
currency translation adjustment in equity. The Company's exposure under these
translation rules, which is unhedged, may affect the carrying value of its
foreign net assets and therefore its equity
10
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and net tangible book value, but not its net income or cash flow. Exchange
differences arising from transactions and balances in currencies other than the
functional currency are recorded as expense or income in the subsidiaries and
the Company and affect the Statements of Earnings.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. The Company attempts to limit
its risk of currency fluctuations through hedging where possible. In the quarter
ended March 31, 1997, a significant amount of the purchases of products by the
Company were made in United States dollars and approximately 87% of Company
sales were made in currencies other than the United States dollar. The most
significant currencies in which sales were made were the German mark (35% of
sales), the French franc (10%) and the British pound (10%). At March 31, 1997,
approximately $161 million of accounts payable were attributable to foreign
currency liabilities denominated in other than the functional currency. Of
these, 132 million was denominated in U.S. dollars and 22 million was
denominated in German Marks. Approximately 60% of these liabilities were
unhedged. The most significant unhedged amounts were recorded in Dutch Gilders
(22 million), Czech Kruna (14 million) and Colombian pesos (9 million).
In March 1995, the Company formed CHS Finance as a finance company for the
Company's distribution activities. CHS Finance engages in central treasury
functions including hedging activities related to foreign currency for the
Company and short term working capital loans to the Company's subsidiaries to
enable them to take advantage of early payment discounts offered by certain
vendors. These loans are denominated in the currency of the borrower or U.S.
dollars. Generally, CHS Finance hedges its receivables denominated in currencies
other than its functional currency, the Swiss franc. It attempts to limit the
amount of unhedged receivables to an amount which approximates the U.S. dollar
denominated loans payable by the Company's subsidiaries. In the fourth quarter
of 1996, the Company modified this policy to allow unhedged receivables,
principally in U.S. dollars and German marks, of an amount approximately equal
to its total unhedged liabilities. This modified policy continued through the
first quarter of 1997. The Company intends to review this policy periodically
and may modify it in the future.
Through both hedging activities coordinated by CHS Finance and local
country activities in certain subsidiaries, the Company makes forward purchases
of dollars in an attempt to hedge local European currencies and reduce exposure
to fluctuations in exchange rates. Additionally, in certain countries in Eastern
Europe and in South America where it is not practical to make forward purchases,
to minimize exposure to currency devaluations, the Company has adopted a policy
of attempting to match accounts receivable with accounts payable and to limit
holdings of local currencies. In these countries, the Company attempts to sell
products at the U.S. dollar equivalent rate. Factors which affect exchange rates
are varied and no reliable prediction methods are available for determining the
likely future exchange rates. In general, countries make an effort to maintain
stability in rates for trade purposes. There can be no assurance that these
asset management programs will be effective in limiting the Company's exposure
to these risks.
11
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New Accounting Pronouncement
The FASB has issued SFAS No.128, "Earnings per Share", and SFAS No. 129,
"Disclosure of Information about Capital Structure", in February 1997.
SFAS No. 128 simplifies the earnings per share ("EPS") calculations required by
Accounting Principles Board ("APB") Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No.128 requires dual presentation of basic and diluted EPS by entities with
complex capital structures. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier applications is not permitted. When adopted,
SFAS No. 128 will require restatement of all prior-period EPS data presented.
The Company has not sufficiently analyzed SFAS No. 128 to determine what effect
SFAS No. 128 will have on its historical reported EPS amounts.
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SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval. 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 of 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 competitive environment.
13
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PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
1. On April 4, 1997, a report on Form 8-K was filed to report the
acquisition of Frank & Walter GmbH.
2. On May 14 , 1997, a report on Form 8-K-A was filed to amend the report of
the acquisition of seven operations which had been subsidiaries of
Merisel, Inc.
3. On May 14, 1997, a report on Form 8-K was filed to amend the report on
the acquisition of Frank & Walter GmbH.
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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)
May 15, 1997 BY /S/ ANTONIO BOCCALANDRO
-----------------------------------
ANTONIO BOCCALANDRO
Secretary
May 15, 1997 BY /S/ CRAIG S. TOLL
-----------------------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
15
<PAGE>
INDEX TO EXHIBIT
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 32,699
<SECURITIES> 0
<RECEIVABLES> 335,599
<ALLOWANCES> 15,465
<INVENTORY> 349,246
<CURRENT-ASSETS> 752,842
<PP&E> 36,706
<DEPRECIATION> 0
<TOTAL-ASSETS> 901,443
<CURRENT-LIABILITIES> 715,837
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 130,424
<TOTAL-LIABILITY-AND-EQUITY> 901,443
<SALES> 877,103
<TOTAL-REVENUES> 877,103
<CGS> 814,640
<TOTAL-COSTS> 47,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,849
<INCOME-PRETAX> 9,776
<INCOME-TAX> 2,641
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,701
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
