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, 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.)
2000 NW 84TH AVENUE
MIAMI, FL 33122
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(305) 908-7200
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SHARES OF COMMON STOCK OUTSTANDING
AS OF NOVEMBER 12, 1997: 48,608,250
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
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 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
2
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CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 158,445 $ 35,137
Accounts receivable:
Trade, less allowance for doubtful accounts
of $15,805 in 1997 and $14,830 in 1996 465,688 340,098
Affiliates 19,265 3,241
----------- ---------
484,953 343,339
Inventories 520,376 321,770
Prepaid expenses and other current assets 68,987 39,374
----------- ---------
TOTAL CURRENT ASSETS 1,232,761 739,620
PROPERTY AND EQUIPMENT, NET 52,399 30,947
COST IN EXCESS OF ASSETS ACQUIRED, NET 215,614 78,780
OTHER ASSETS 47,925 12,602
----------- ---------
$ 1,548,699 $ 861,949
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 161,450 $ 155,932
Accounts payable, trade 611,290 452,569
Accrued liabilities 56,922 44,873
Amounts due to sellers under acquisition agreements -- 49,200
Income taxes payable 11,049 5,120
Deferred income taxes 1,349 420
----------- ---------
TOTAL CURRENT LIABILITIES 842,060 708,114
LONG TERM DEBT 53,138 45,327
MINORITY INTEREST 5,141 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;
48,605,271 and 18,600,576 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 49 19
Additional paid-in capital 620,964 92,843
Retained earnings 41,271 16,724
Cumulative foreign currency translation adjustment (13,924) (5,053)
----------- ---------
TOTAL SHAREHOLDERS' EQUITY 648,360 104,533
----------- ---------
$ 1,548,699 $ 861,949
=========== =========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited) (Unaudited)
1997 1996 1997 1996
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 1,097,567 $ 376,209 $ 2,921,625 $ 995,710
Cost of goods sold 1,012,623 349,100 2,704,046 922,292
----------- --------- ----------- ---------
Gross profit 84,944 27,109 217,579 73,418
Operating expenses 63,041 21,557 163,724 58,134
----------- --------- ----------- ---------
Operating income 21,903 5,552 53,855 15,284
Other (income) expenses:
Interest income (3,243) (550) (6,809) (2,026)
Interest expense 8,533 1,977 23,167 6,481
----------- --------- ----------- ---------
5,290 1,427 16,358 4,455
----------- --------- ----------- ---------
Earnings before income taxes and
minority interest in subsidiaries 16,613 4,125 37,497 10,829
Income taxes 4,785 1,390 11,575 3,539
Minority interest in subsidiaries 392 410 1,375 1,250
----------- --------- ----------- ---------
Net earnings $ 11,436 $ 2,325 $ 24,547 $ 6,040
=========== ========= =========== =========
Net earnings per common share:
Primary $ .27 $ .13 $ .82 $ .41
----------- --------- ----------- ---------
Fully Diluted $ .26 $ .11 $ .80 $ .38
----------- --------- ----------- ---------
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
(Unaudited)
1997 1996
---------- --------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 24,547 $ 6,040
Adjustments to reconcile net earnings to net
cash (used in) operating activities:
Depreciation and amortization 12,770 3,194
Minority interest in net earnings 1,375 1,250
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 3,271 (21,178)
Accounts receivable-affiliates, net (16,024) (428)
Inventories (4,777) (26,647)
Prepaids and other current assets (29,947) (10,698)
Accounts payable (115,834) (7,069)
Accrued liabilities and income taxes (41,264) 1,695
--------- ---------
Net cash (used in) operating activities: (165,883) (53,841)
Cash flows from investing activities:
Purchase of fixed assets (14,713) (4,809)
Acquisitions, net of cash acquired (73,212) (92,692)
--------- ---------
Net cash (used in) investing activities: (87,925) (97,501)
Cash flows from financing activities:
Proceeds from public offering 428,217 50,632
Net borrowings from (repayments to banks) (51,921) 71,609
Proceeds from sale of acquired company receivables -- 56,300
Proceeds from exercising stock options 4,206 --
--------- ---------
Net cash provided by financing activities: 380,502 178,541
Effect of exchange rate changes on cash (3,386) (617)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 123,308 26,582
Cash and cash equivalents at beginning of period 35,137 11,171
--------- ---------
Cash and cash equivalents at end of period $ 158,445 $ 37,753
========= =========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------- ------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $19,417 $6,665
Income Taxes $10,496 $1,861
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,
1997 1996
-------- ------
Fair value of assets acquired including cash acquired $323,629 $7,284
Less: Common stock or other consideration issued 95,728 2,515
-------- ------
Liabilities assumed $227,901 $4,769
======== ======
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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 nine months ended September 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 August 1997, the Company acquired 100% of Karma International S.A. ("Karma")
for $74 million in cash and $86 million in shares of unregistered stock. Karma
is engaged principally in the distribution of computer components in 18
countries in Europe, the Middle East, and Asia. The acquisition has been
accounted for as a purchase. The cost of the acquisition has been allocated to
the assets acquired and liabilities assumed. This resulted in approximately
$121.6 million of goodwill. The Company issued 4,813,432 shares of unregistered
common stock in connection with this acquisition.
Effective January 1, 1997 the Company acquired 100% of Frank & Walter Computer
GmbH, a distributor based in Germany, for 3,300,000 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.
Also, in the nine month period ended September 30, 1997, the Company purchased
nine companies, principally under earn out arrangements. The acquisitions, which
are being accounted for under the purchase method, are immaterial to the
Company's results.
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 initially resulted in approximately $10.5 million of goodwill. In
the second and third quarters of 1997, certain reserves initially established
were determined not to be required, resulting in a reduction of goodwill to $4.6
million.
The Company has now completed the consolidation of the former Merisel and CHS
operations in the five countries where each had operations. The Company accrued
approximately $13.0 million for the consolidation activities. The reserve
consists of severance costs-$.4 million, lease termination-$4.3 million,
writeoff of leasehold improvements and computer systems-$4.9 million, accounts
receivables and other costs-$3.4 million. Through September 30, 1997, $7.7
million has been charged against this reserve. The Company's original intent to
dispose of the former Merisel warehouse located in the Netherlands has been
revised as a result of the Karma acquisition in that the Company now intends to
relocate Karma's existing warehouse in the Netherlands to the former Merisel
warehouse.
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 was paid in 1997, while 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 connection with this
acquisition.
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, 274,855
shares of common stock of the Company 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. 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. The revised amount
was paid in 1997. As a result, goodwill in the current year was reduced by $3.8
million.
7
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CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
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 nine month period ended September 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.
NINE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996
---- ----
Sales $3,468,471 $2,986,882
Net Earnings 21,551 8,970
Net Earnings Per Share $.59 $.34
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 42,654,375 and
18,653,073 for the three month periods ended September 30, 1997 and 1996,
respectively, and 29,806,484 and 14,531,160 for the nine months periods ended
September 30, 1997 and 1996, respectively. The weighted average number of shares
used in the computation of fully diluted earnings per share was 43,926,338 and
20,752,453 for the three months ended September 30, 1997 and 1996, respectively,
and 30,509,744 and 15,988,246 for the nine month periods ended September 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 September 30, 1997, consists principally of the
amount due at that date ($40 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. COMMON STOCK
On July 26, 1997, the Company completed a public offering of 19,500,000 shares
of common stock at a price of $21.17 per share. Net proceeds were approximately
$393.6 million. Additionally, on August 14, 1997, the underwriters exercised an
overallotment option which increased net proceeds by $34.6 million and increased
the number of common shares outstanding by approximately 1.7 million.
Furthermore, on August 14, 1997, the President of the Company exercised stock
options to purchase 409,168 shares of common stock. This produced proceeds to
the Company of approximately $2.8 million.
In September 1997, the Company effectuated a 3 for 2 stock split. All share
information has been restated to reflect the three-for-two split.
6. 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
8
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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.
7. RELATED PARTY TRANSACTIONS
A member of the Board of Directors and shareholder of the Company also serves as
a member of the Board of Directors of a buying group which supplies product to
the Company. During the nine months period ended September 30, 1997, the Company
received approximately $5.7 million in vendor rebates from such buying group and
incurred $5.1 million in commissions to such group. At September 30, 1997, the
Company had a balance due from the buying group of approximately $.4 million.
During the third quarter of 1997, the Board of Directors of the Company approved
a loan to Comtrad Holdings, Inc. ("Comtrad"), a significant shareholder of the
Company, of approximately $13.8 million. The loan bears interest and is due upon
demand. At September 30, 1997, the amount due from Comtrad amounts to $18.6
million. This receivable is guaranteed by all the assets of Comtrad, which owns
approximately 5 million shares of the Company's stock.
8. SUBSEQUENT EVENTS
On October 3, 1997, the Company acquired 97.4% of Santech Micro Group ASA
("Santech") for approximately $125 million. Santech is a distributor with
operations in Norway, Sweden, and Denmark, which in 1996 had sales of $718
million. At September 30, 1997, approximately $19.1 million of the total
purchase price had been expended to acquire certain shares of Santech prior to
the closing of the transaction. On October 3, 1997, the Company completed the
acquisition and paid an additional $105.7 million in cash.
9
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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 since January 1, 1996 are shown below:
OPERATING CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE
- ---------- ------------ ---------------
Lars Krull Denmark, Norway, Sweden August 1997
Karma Europe, Middle East
and Asia August 1997
Ameritech Exports Latin America August 1997
Ameritech Argentina Argentina August 1997
Atlantis Skupina(2) Slovenia August 1997
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 Infocentro de Chile(2) Chile January 1997
CHS Merisel UK United Kingdom October 1996
CHS Merisel France France October 1996
CHS Merisel Switzerland Switzerland October 1996
CHS Merisel Germany Germany October 1996
CHS Merisel Austria Austria October 1996
CHS Merisel Latin America Latin America October 1996
CHS Merisel Mexico Mexico October 1996
CHS Ecuador(2) Ecuador June 1996
CHS Russia Russia June 1996
CHS Switzerland Switzerland April 1996
CHS Peru Peru March 1996
CHS Hungary(2) Hungary February 1996
(1) The results of operations of Frank & Walter have been included as of
January 1, 1997.
(2) The Company owns 51% of this company.
RESULTS OF OPERATIONS
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
NET SALES. Net sales increased $721.4 million, or 191.7%, from $376.2 million in
third quarter 1996 to $1,097.6 million in third quarter 1997 due to acquisitions
and, to a lesser extent, internal growth. Of the increase in net sales, newly
acquired subsidiaries contributed $504.4 million. Net sales of subsidiaries
consolidated for both 1997 and 1996 third quarters, excluding operations where
CHS companies were integrated with operations acquired from Merisel, grew from
$175.7 million to $223.9 million or 27.4%. 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 operations have been combined.
GROSS PROFIT. Gross profit increased $57.8 million, or 213.3%, from $27.1
million in third quarter 1996 to $84.9 million in third quarter 1997 due
principally to acquisitions and, to a lesser extent, internal growth. Newly
acquired companies contributed $32.9 million of gross profit. Gross profit of
subsidiaries consolidated for both 1997 and 1996 third quarters, excluding
operations where CHS companies were integrated with former Merisel operations,
grew from $14.0 million to $20.7 million or 47.9%.
Gross margin increased from 7.2% in third quarter 1996 to 7.7% in third quarter
1997. The increase was due to higher gross margins from subsidiaries located in
Western Europe. The principal reasons for the increase were increases in the
amount of early payment discounts utilized and greater volume rebates, offset to
some extent, by lower gross margins in the newly acquired Karma operations. The
Company expects that overall gross margins may decline during the remainder of
1997 due to continued competitive pricing pressures across all regions.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was at 5.7%
in the third quarter of 1996 and in the third quarter of 1997.
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NET INTEREST EXPENSE. Net interest expense increased $3.9 million from $1.4
million in third quarter 1996 to $5.3 million in third 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 33.7% in third quarter 1996 to 28.8% in third
quarter 1997. This change is principally due to a higher amount of income being
earned in tax jurisdictions with lower tax rates, non-taxed income in several
countries and the use of net operating loss carryforwards offset, to a certain
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 carryforwards from certain subsidiaries.
NINE MONTHS 1997 COMPARED TO NINE MONTHS 1996
NET SALES. Net sales increased $1,925.9 million, or 193.4%, from $995.7 million
in the first nine months of 1996 to $2,921.6 million in the first nine months of
1997 due to acquisitions and, to a lesser extent, internal growth. Of the
increase in net sales, newly acquired subsidiaries contributed $1,037.3 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 $466.4 million to $624.6 million or 33.9%. 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 $144.2 million, or 196.4%, from $73.4
million in the first nine months of 1996 to $217.6 million in the first nine
months of 1997 due principally to acquisitions and, to a lesser extent, internal
growth. Newly acquired companies contributed $74.4 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 $39.2 million to $53.8 million or 37.2%.
Gross margin remained at 7.4% in the first nine months of 1996 and 1997. The
Company expects that overall gross margins may decline in 1997 due to continued
competitive pricing pressures across all regions.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.8% in the first nine months of 1996 to 5.6% in the first nine 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
(gain) loss of $(0.2) million and $0.6 million in the first nine months of 1997
and 1996, respectively.
NET INTEREST EXPENSE. Net interest expense increased $11.9 million from $4.5
million in the first nine months of 1996 to $16.4 million in the first nine
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 decreased from 32.7% in first nine months of 1996 to 30.9% in
the first nine months of 1997. This change is due to higher amount of income
earned in jurisdictions with lower tax rates, non-taxed income in several
countries and the use of net operating loss carryforwards offset, to a certain
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 carryforwards from certain subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $165.9 million and $53.8 million were used in operating activities
in the nine months ended September 30, 1997 and 1996, respectively. In the nine
months ended September 30, 1997, cash was used principally to decrease accounts
payables and accrued liabilities, and to increase accounts receivables from
affiliates, prepaid expenses and other current assets. In the nine months ended
September 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
$14.7 million and $4.8 million, respectively, related to fixed asset additions.
In addition, $73.2 million and $92.7 million were used in acquisitions during
the nine months ended September 30, 1997 and 1996, respectively. Net cash of
$380.5 million and $178.5 million were provided by financing activities in the
nine month period ended September 30, 1997 and 1996, respectively, due
principally in 1997 to proceeds of the public offering of $428.2 million and
$50.6 million from the 1996 public offering. Furthermore, net borrowings
(repayments) to banks were $(51.9) million and $71.6 million in the nine months
ended September 30, 1997 and 1996, respectively.
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 November 30, 1997. The Company expects to be
in compliance with the covenants when the waiver period expires. The Company has
guaranteed this indebtedness.
11
<PAGE>
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At September 30,
1997, the aggregate amount available under these agreements was $224.1 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 September 30,
1997 was 10.1%. The Company typically guarantees these loans.
The Company has completed the risk assessment phase of its year 2000 compliance.
Based on the assessment, the Company has developed an action plan which
principally consists of replacing existing non-compliant systems with new
systems. The Company believes it is feasible to acquire such new systems before
the year 2000 and the cost of such systems are within its capital cost budget
and financing capabilities.
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.
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.
INFLATION
The Company operates in certain countries that have experienced high rates of
inflation and hyperinflation. However, inflation did not have any meaningful
impact on the Company's results of operations during the nine months periods
ended September 30, 1997 and 1996 and the Company does not expect that it will
have a material impact during the remainder of 1997.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and maintain a
low number of SKUs and thereby reduce the Company's working capital requirements
and improve return on equity. The Company's strategy to achieve this goal is to
both effectively manage its inventory and achieve high order fill rates.
To reduce the risk of loss to the Company due to vendor price reductions and
slow moving or obsolete inventory, the Company contracts with its vendors
generally provide price protection and stock rotation privileges, subject to
certain limitations. Price protection allows the Company to offset the accounts
payable owed to a particular vendor if such vendor reduces the price of products
the Company has purchased within a specified period of time and which remain in
inventory. Stock rotation permits the Company to return to the vendor for full
credit, with an offsetting purchase order for new products, predetermined
amounts of inventory purchased within a specified period of time. Such credit is
typically used to offset existing invoices due without incurring re-stocking
fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to balance the
needs of its customers to purchase on credit with its desire to minimize its
credit losses. Bad debt expense as a percentage of the Company's net sales for
the nine months ended September 30, 1997 was 0.2%. The Company's credit losses
have been minimized by its extensive credit approval process and the use of
credit insurance and factoring by its Western European subsidiaries. In its
sales to customers in Latin America, the Company often receives post-dated
checks at the time of sale. Customers who qualify for credit are typically
granted payment terms appropriate to the customs of each country.
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. 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 nine-month
period ended September 30, 1997, a significant amount of the purchases of
products by the Company were made in United States dollars and approximately 85%
of Company sales were made in currencies other than the United States dollar.
The primary currencies in which sales were made were the German mark (31% of
sales), the British pound (10%) and the French franc (9%). At September 30,
1997, approximately $169 million of accounts payable were attributable to
foreign currency liabilities denominated in other than the subsidiaries
functional currencies. Of these, $156.0 million was denominated in U.S. dollars
and $11.1 million was denominated in German marks. Approximately 48% of these
liabilities were unhedged. The most significant unhedged amounts were recorded
in Czechian korunas ($17.2 million), Argentine pesos ($14.9 million), the Polish
zloty ($10.4 million), and Brazilian reals ($6.8 million).
12
<PAGE>
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 functional currency of the borrowing
subsidiary 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 payables in certain of the Company's
subsidiaries. The Company intends to review this policy periodically and may
modify it in the future.
Through both hedging activities coordinated by CHS Finance and subsidiary
hedging, the Company makes forward purchases of dollars in an attempt to hedge
local Western 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 definitely
determining 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.
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.
13
<PAGE>
PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
1. EXHIBITS:
27 Financial Data Schedule.
2. REPORTS ON 8-K:
1. On October 15, 1997, a report on Form 8-K was filed to report the
acquisition of Santech Micro Group ASA.
2. On October 29, 1997, a report on Form 8-K/A was filed to amend
the report of the acquisition of Karma International S.A.
3. On October 31, 1997, a report on Form 8-K/A was filed to amend
the report of the acquisition of Santech Micro Group ASA.
14
<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, 1997 BY /s/ ANTONIO BOCCALANDRO
------------------------
ANTONIO BOCCALANDRO
Secretary
November 14, 1997 BY /s/ CRAIG S. TOLL
------------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 158,445
<SECURITIES> 0
<RECEIVABLES> 500,758
<ALLOWANCES> (15,805)
<INVENTORY> 520,376
<CURRENT-ASSETS> 1,232,761
<PP&E> 82,950
<DEPRECIATION> (30,551)
<TOTAL-ASSETS> 1,548,699
<CURRENT-LIABILITIES> 842,060
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 648,311
<TOTAL-LIABILITY-AND-EQUITY> 1,548,060
<SALES> 1,097,567
<TOTAL-REVENUES> 1,097,567
<CGS> 1,012,623
<TOTAL-COSTS> 63,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,290
<INCOME-PRETAX> 16,613
<INCOME-TAX> 4,785
<INCOME-CONTINUING> 11,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,436
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
