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 JUNE 30, 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 AUGUST 13, 1997: 30,955,869
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 9-12
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
2
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1997 1996
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $12,795 $35,137
Accounts receivable:
Trade, less allowance for doubtful accounts
of $15,142 in 1997 and $14,830 in 1996 340,646 340,098
Affiliates 4,356 3,241
----- -----
345,002 343,339
Inventories 310,919 321,770
Prepaid expenses and other current assets 43,303 39,374
------ ------
TOTAL CURRENT ASSETS 712,019 739,620
PROPERTY AND EQUIPMENT, NET 42,918 30,947
COST IN EXCESS OF ASSETS ACQUIRED, NET 90,156 78,780
OTHER ASSETS 7,023 12,602
----- ------
$852,116 $861,949
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $160,004 $155,932
Accounts payable, trade 401,467 452,569
Accrued liabilities 48,582 44,873
Amounts due to sellers under acquisition agreements 32,536 49,200
Income taxes payable 5,994 5,120
Deferred income taxes - 420
- ---
TOTAL CURRENT LIABILITIES 648,583 708,114
LONG TERM DEBT 60,194 45,327
MINORITY INTEREST 5,038 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;
14,727,012 and 12,400,384 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 15 12
Additional paid-in capital 120,731 92,850
Retained earnings 29,835 16,724
Cumulative foreign currency translation adjustment (12,280) (5,053)
------- -------
TOTAL SHAREHOLDERS' EQUITY 138,301 104,533
------- -------
$852,116 $861,949
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Unaudited) (Unaudited)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $946,955 $316,506 $1,824,058 $619,501
Cost of goods sold 876,783 292,742 1,691,423 573,192
------- ------- --------- -------
Gross profit 70,172 23,764 132,635 46,309
Operating expenses 52,846 18,725 100,683 36,578
------ ------ ------- ------
Operating income 17,326 5,039 31,952 9,731
Other (income) expenses
Interest income (1,799) (863) (3,567) (1,476)
Interest expense 8,018 2,564 14,634 4,504
----- ----- ------ -----
6,219 1,701 11,067 3,028
----- ----- ------ -----
Earnings before income taxes and
minority interest in subsidiaries 11,107 3,338 20,885 6,703
Income taxes 4,147 1,090 6,790 2,148
Minority interest in subsidiaries 559 522 983 840
--- --- --- ---
Net earnings $6,401 $1,726 $13,111 $3,715
====== ====== ======= ======
Net earnings per common share:
Primary $.41 $.20 $.85 $.45
---- ---- ---- ----
Fully Diluted $.40 $.19 $.83 $.42
---- ---- ---- ----
</TABLE>
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)
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $13,111 $3,715
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,585 1,842
Minority interest in net earnings 983 840
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 67,393 (2,089)
Accounts receivable-affiliates, net (1,115) 231
Inventories 67,643 (17,768)
Prepaids and other current assets 20,594 (5,052)
Accounts payable (153,860) (31,827)
Accrued liabilities and income taxes (9,794) 5,641
------ -----
Net cash provided by (used in) operating activities: 12,540 (44,467)
Cash flows from investing activities:
Purchase of fixed assets (9,348) (3,358)
Acquisitions, net of cash acquired 1,641 (579)
----- ----
Net cash provided by (used in) investing activities: (7,707) (3,937)
Cash flows from financing activities:
Proceeds from public offering -- 50,632
Net borrowings from (repayments to banks) (25,049) 6,361
Proceeds from exercising stock options 956 --
--- --
Net cash provided by (used in) financing activities: (24,093) 56,993
Effect of exchange rate changes on cash (3,082) (469)
------ -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,342) 8,120
Cash and cash equivalents at beginning of period 35,137 11,171
------ ------
Cash and cash equivalents at end of period $12,795 $19,291
======= =======
</TABLE>
5
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $13,363 $4,058
Income Taxes $ 7,288 $1,510
Non cash investing and financing activities:
</TABLE>
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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Fair value of assets acquired including cash acquired $138,087 $7,284
Less: Common stock or other consideration issued 28,378 2,515
--------- --------
Liabilities assumed $109,709 $4,769
========= ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
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 six months ended June 30, 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
In the second quarter of 1997 the Company purchased three companies, principally
under earn out arrangements. The acquisitions, which are being accounted for
under the purchase method, are immaterial to the Company's results.
Effective January 1, 1997 the Company acquired 100% of Frank & Walter Computer
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 were 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 the second quarter of 1997 the appraisal was completed
resulting in a reduction of goodwill of $.9 million.
In September 1996, the Company acquired 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 the second
quarter of 1997 certain reserves initially established were determined not to be
required, resulting in a reduction of goodwill of $8.9 million.
The Company intends to consolidate former Merisel operations and CHS operations
in the five countries where each had operations. The Company's original
intention to dispose of the former Merisel warehouse located in the Netherlands
is currently being reviewed as a result of a recent acquisition in which
warehouse services are being provided in a similar geographical area. The
consolidation of the operations in United Kingdom, France, Germany and
Switzerland is complete and the remaining consolidation should be completed in
the third quarter of 1997. The Company currently has approximately $9 million
accrued for these activities. The reserve consists of severance cost-$1 million,
lease termination-$4.6 million and writeoff of leasehold improvements and
computer systems-$3.1 million. Through June 30, 1997, $5.0 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 related to this acquisition.
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. The
sellers have elected to receive the proceeds in cash rather than stock. In the
second quarter of 1997 the agreement was modified to measure the value of the
company based 75% on 1996 results and 25% on 1997 results. As a result, goodwill
in the current quarter was reduced by $3.8 million.
Presented below is pro forma operating data showing selected operating results
as if the significant companies acquired in 1997 and 1996 were acquired on
January 1, 1996. Pro forma adjustments were made to include goodwill
amortization in the six month period ended June 30, 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 discontinued 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 weighted average number of shares plus
contingent shares actually issued.
7
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
SIX MONTHS ENDED
JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996
---- ----
Sales $1,824,058 $1,718,594
Net Earnings 13,111 6,671
Net Earnings Per Share $.85 $.63
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 and warrants) outstanding during the year, unless such inclusion
is antidilutive. The weighted average number of shares was 15,594,818 and
8,696,343 for the three month periods ended June 30, 1997 and 1996,
respectively, and 15,468,952 and 8,277,012 for the six months periods ended June
30, 1997 and 1996. The weighted average number of shares used in the computation
of fully diluted earnings per share was 16,066,423 and 9,277,348 for the three
months ended June 30, 1997 and 1996, respectively, and 15,744,928 and 8,743,899
for the six month periods ended June 30, 1997 and 1996, respectively. The
weighted average number of shares used in the computation of the fully diluted
earnings per share assumes the contingent shares related to acquisitions 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 June 30, 1997, consists principally of the
amount due at that date ($47 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
undergoing 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 does
not expect the ultimate resolution of this matter to have a material adverse
effect on the Company's financial position or results of operations.
6. RELATED PARTY TRANSACTIONS
A member of the Board of Directors and shareholder of the Company also serves as
a member of the Board of the Directors of a buying group which supplies product
to the Company. During the six months period ended June 30, 1997, the Company
received approximately $2.1 million net in vendor rebates from such buying
group. At June 30, 1997, the Company had a balance due from the buying group of
approximately $.7 million.
7. SUBSEQUENT EVENTS
On July 26, 1997 the Company completed a public offering of 13,000,000 shares of
common stock at a price of $31.75. Net proceeds were approximately $394 million.
Additionally, on August 14, 1997, the underwriters closed on an overallotment
option which increased net proceeds by $34.6 million and increased the number of
common shares outstanding by approximately 1.1 million. Furthermore, on August
14, 1997, the President of the Company exercised stock options to purchase
272,779 shares of common stock. This produced proceeds to the Company of
approximately $2.8 million.
In August 1997, the Company closed a purchase of Karma International S.A., a
distributor of computer components in 18 countries in Europe, Asia, and the
Middle East. The purchase price was $74 million (which was paid from the
proceeds of the 1997 public offering) and 3.2 million shares of common stock. In
the quarter ended March 31, 1997, Karma had net sales of $241 million and net
earnings of $4.9 million.
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 year ended June 30, 1997 are shown below:
<TABLE>
<CAPTION>
OPERATING CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE
- ---------- ------------ ----
<S> <C> <C>
CHS Dinexim Latin America May 1997
CHS Access and Agora Czech Republic May 1997
CHS International High Tech Marketing Africa April 1997
CHS Frank & Walter(1) Germany March 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
</TABLE>
(1) The results of operations of Frank & Walter have been included as of
January 1, 1997.
RESULTS OF OPERATIONS
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
NET SALES. Net sales increased $630.4 million, or 199.2%, from $316.5 million in
second quarter 1996 to $947.0 million in second quarter 1997 due to acquisitions
and, to a lesser extent, internal growth. Of the increase in net sales, new
subsidiaries having no second quarter 1996 operations contributed $260.8
million. Net sales of subsidiaries consolidated for both 1997 and 1996 second
quarters, excluding operations where CHS companies were integrated with
operations acquired from Merisel, grew from $150.5 million to $224.1 million or
49.0%. 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. 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 $46.4 million, or 195.3%, from $23.8
million in second quarter 1996 to $70.2 million in second quarter 1997 due
principally to acquisitions and, to a lesser extent, internal growth. Newly
acquired companies contributed $20.9 million of gross profit. Gross profit of
subsidiaries consolidated for both 1997 and 1996 second quarters, excluding
operations where CHS companies were integrated with former Merisel operations,
grew from $13.8 million to $19.1 million or 38.2%.
Gross margin decreased from 7.5% in second quarter 1996 to 7.4% in second
quarter 1997. 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, and the fact that the gross margin of
the former Merisel companies acquired by the Company has been generally lower
than that of the Company. The Company expects that overall gross margins may
continue to decline in 1997 due to continued competitive pricing pressures
across all regions.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.9% in the second quarter of 1996 to 5.6% in second quarter of 1997. The
decline was due to efficiencies gained through increased volume and the
Company's efforts to control costs.
NET INTEREST EXPENSE. Net interest expense increased $4.5 million from $1.7
million in second quarter 1996 to $6.2 million in second 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 increased from 32.6% in second quarter 1996 to 37.3% in second
quarter 1997. This change is principally due to realizing a greater percentage
of the quarter's income in jurisdictions with high effective income tax rates as
compared to the previous year's quarter, as well as incurring losses in
subsidiaries for which no benefit could be recorded. 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.
9
<PAGE>
SIX MONTHS 1997 COMPARED TO SIX MONTHS 1996
NET SALES. Net sales increased $1,204.6 million, or 194.4%, from $619.5 million
in the first six months of 1996 to $1,824.1 million in the first six months of
1997 due to acquisitions and, to a lesser extent, internal growth. Of the
increase in net sales, new subsidiaries having no1996 sales contributed $526.1
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 $290.7 million to $407.3 million or 40.1%. 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 $86.3 million, or 186.4%, from $46.3
million in the first six months of 1996 to $132.6 million in the first six
months of 1997 due principally to acquisitions and, to a lesser extent, internal
growth. Newly acquired companies contributed $40.8 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 $25.2 million to $33.8 million or 34.4%.
Gross margin decreased from 7.5% in the first six months of 1996 to 7.3% in the
first six months of 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 have been generally lower than that of the Company. The Company expects
that overall gross margins may continue to decline in 1997 due to continued
competitive pricing pressures across all regions.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.9% in the first six months of 1996 to 5.5% in the first six months of
1997. The decline was due to efficiencies gained through increased volume 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
loss (gain) of $137,000 and ($955,000) in the first six months of 1996 and 1997,
respectively.
NET INTEREST EXPENSE. Net interest expense increased $8.0 million from $3.0
million in the first six months of 1996 to $11.1 million in the first six months
of 1997 due to increased borrowings by the Company to support increased sales.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest increased from 32.0% in first six months of 1996 to 32.5% in
the first six months of 1997. This change was not significant. 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 $12.5 million was provided by operating activities in the six months
ended June 30, 1997 and net cash of $44.5 million was used in operating
activities in the six months ended June 30, 1996. In the six months ended June
30, 1997, cash was generated due to decreases in receivables, inventory and
other current assets partially offset by decreases in accounts payable, accrued
expenses and other current liabilities. In the six months ended June 30, 1996,
cash was used principally due to increases in inventories, trade accounts
receivable and prepaids and other current assets, in addition to decreases in
accounts payable offset by increases in other current liabilities. Net cash used
in investing activities in 1997 and 1996 included approximately $9.3 million and
$3.4 million, respectively, related to fixed asset additions. In 1997, $1.6
million was provided from acquisitions. Net cash of $24.1 million was used in
financing activities in the six month period ended June 30, 1997 and $57.0
million of cash was provided from financing activities in the six months ended
June 30, 1996, mainly due from the proceeds of the 1996 public offering. Other
than the 1996 public offering, the transactions in both years principally
pertained to borrowing or repayments under financing arrangements.
CHS Promark is a party to 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 September 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. At June 30,
1997, the aggregate amount available under these agreements was $209.3 million.
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 June 30, 1997
was 6.9%. 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. However, at
this time, the Company, through the proceeds of the 1997 public offering, has
sufficient funds to support its growth for the remainder of 1997.
10
<PAGE>
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 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 six months
period ended June 30, 1997, a significant amount of the purchases of products by
the Company were made in United States dollars and approximately 86% 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 (34% of
sales), the French franc (9%) and the British pound (9%). At June 30, 1997,
approximately $167.3 million of accounts payable were attributable to foreign
currency liabilities denominated in other than the functional currency. Of
these, $109.5 million was denominated in U.S. dollars and $16.1 million was
denominated in German marks. Approximately 44% of these liabilities were
unhedged. The most significant unhedged amounts were recorded in Argentine pesos
($9.9 million), Colombian pesos ($8.9 million) and Brazilian reals ($8.7
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 six months 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.
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 and SFAS
No. 130, "Comprehensive Income", and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", in June 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.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
11
<PAGE>
SFAS No. 130 requires that changes in the amounts of items that bypass the
income statement and are only reported within a balance in shareholders' equity
be included in a separate financial statement. Items that qualify as components
of comprehensive income currently bypassing a statement of income include
foreign currency translation adjustments. SFAS No. 130 becomes effective for
fiscal years beginning after December 15, 1997. The Company has not sufficiently
analyzed SFAS No. 130 to determine what effect SFAS No. 130 will have on the
Company's financial statements.
SFAS No. 131 requires the disclosure of segment data based on how management
makes decisions about allocating resources to segments and measuring their
performance. It also requires entity-wide disclosures in the annual and
quarterly financial statements about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise" and is effective for fiscal
years beginning after December 15, 1997. The Company has not sufficiently
analyzed SFAS No. 131 to determine what effect SFAS No. 131 will have on the
Company's disclosure of segment data.
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, 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.
12
<PAGE>
PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
1. On August 12, 1997, a report on Form 8-K was filed to report
the acquisition of Karma International S.A.
13
<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)
August 14, 1997 BY /S/ ANTONIO BOCCALANDRO
------------------------
ANTONIO BOCCALANDRO
Secretary
August 14, 1997 BY /S/ CRAIG S. TOLL
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,795
<SECURITIES> 0
<RECEIVABLES> 360,144
<ALLOWANCES> 15,142
<INVENTORY> 310,919
<CURRENT-ASSETS> 712,019
<PP&E> 42,918
<DEPRECIATION> 0
<TOTAL-ASSETS> 852,116
<CURRENT-LIABILITIES> 648,583
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 138,286
<TOTAL-LIABILITY-AND-EQUITY> 852,116
<SALES> 946,955
<TOTAL-REVENUES> 946,955
<CGS> 876,783
<TOTAL-COSTS> 52,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,219
<INCOME-PRETAX> 11,107
<INCOME-TAX> 4,147
<INCOME-CONTINUING> 6,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,401
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.40
</TABLE>
