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, 1998
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 87-0435376
------------------------------- ------------------
(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 MAY 13, 1998: 50,157,057
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 7-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-17
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
2
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 74,907 $ 68,806
Accounts receivable:
Trade, less allowance for doubtful accounts
of $24,085 in 1998 and $18,347 in 1997 707,414 659,757
Affiliates 23,786 24,604
----------- -----------
731,200 684,361
Inventories 628,761 693,503
Prepaid expenses and other current assets 100,505 65,255
----------- -----------
TOTAL CURRENT ASSETS 1,535,373 1,511,925
PROPERTY AND EQUIPMENT, NET 67,465 61,468
COST IN EXCESS OF ASSETS ACQUIRED, NET 414,644 381,830
OTHER ASSETS 37,560 13,599
----------- -----------
$ 2,055,042 $ 1,968,822
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 372,223 $ 309,510
Accounts payable, trade 696,141 771,535
Accrued liabilities 67,891 83,309
Amounts due to sellers under acquisition agreements 114,430 54,866
Income taxes payable 14,271 12,711
Deferred income taxes 5,604 1,223
----------- -----------
TOTAL CURRENT LIABILITIES 1,270,560 1,233,154
LONG TERM DEBT 80,561 61,556
MINORITY INTEREST 6,958 6,348
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding -- --
Common stock, authorized 100,000,000 shares at $.001 par value;
49,741,348 and 48,910,999 shares outstanding at March 31, 1998
and December 31, 1997, respectively 50 49
Additional paid-in capital 633,779 621,021
Retained earnings 85,682 65,115
Cumulative foreign currency translation adjustment (22,548) (18,421)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 696,963 667,764
----------- -----------
$ 2,055,042 $ 1,968,822
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
(Unaudited)
1998 1997
----------- -----------
Net sales $ 1,751,338 $ 877,103
Cost of goods sold 1,628,744 814,640
----------- -----------
Gross profit 122,594 62,463
Operating expenses 85,714 47,838
----------- -----------
Operating income 36,880 14,625
Other (income) expenses:
Interest income (2,639) (1,767)
Interest expense 10,563 6,616
----------- -----------
7,924 4,849
----------- -----------
Earnings before income taxes and
minority interest in subsidiaries 28,956 9,776
Income taxes 7,779 2,641
Minority interest in subsidiaries 610 424
----------- -----------
Net earnings $ 20,567 $ 6,711
=========== ===========
Net earnings per common share:
Basic $ .42 $ .30
=========== ===========
Diluted $ .38 $ .29
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
(Unaudited)
1998 1997
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 20,567 $ 6,711
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 9,210 3,658
Minority interest in net earnings 610 424
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 30,052 (48,531)
Accounts receivable-affiliates, net 817 (778)
Inventories 120,970 (17,155)
Prepaids and other current assets 73,008 23,305
Accounts payable (170,020) (94,381)
Accrued liabilities and income taxes (73,059) 3,420
--------- ---------
Net cash provided by operating activities 12,155 8,045
Cash flows from investing activities:
Purchase of fixed assets (4,809) (1,658)
Acquisitions, net of cash acquired (42,858) 2,800
--------- ---------
Net cash (used in) provided by investing activities (47,667) 1,142
Cash flows from financing activities:
Net borrowings from (repayments to) banks 42,177 (10,317)
Proceeds from exercising stock options 135 605
--------- ---------
Net cash provided by (used in) financing activities 42,312 (9,712)
Effect of exchange rate changes on cash (699) (1,913)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,101 (2,438)
Cash and cash equivalents at beginning of period 68,806 35,137
--------- ---------
Cash and cash equivalents at end of period $ 74,907 $ 32,699
========= =========
</TABLE>
5
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Interest $9,895 $7,251
Income taxes $4,672 $3,231
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,
1998 1997
-------- --------
Fair value of assets acquired including cash acquired $234,038 $131,498
Less: Common stock or other consideration issued 93,492 26,928
-------- --------
Liabilities assumed $140,546 $104,570
======== ========
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, 1997 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, 1998 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 three month period ended March 31, 1998, the Company purchased four
companies. The acquisitions, which are being accounted for under the purchase
method, are immaterial to the Company's results.
In 1997 the Company made 15 acquisitions, of which three were significant. On
October 3, 1997, the Company completed the acquisition of Santech Micro Group
ASA ("Santech"), pursuant to which it acquired 97.4% of the capital stock of
Santech for approximately $125 million. The Company expects to acquire the
remainder of the shares of Santech at the same per share price. Santech is the
largest distributor of microcomputer products in Scandinavia with operations in
Norway, Sweden and Denmark and had revenues of $718 million in 1996. Santech
distributes the products of the same vendors as other subsidiaries of the
Company. The acquisition of Santech has been accounted for under the purchase
method, and accordingly the results of Santech have been included in the
consolidated operating results since the date of acquisition. The acquisition of
Santech resulted in the recognition of $109.1 million of goodwill.
Santech's operating results during 1997 were adversely impacted as a result of a
restructuring of its operations and the implementation of a new computer system.
The adverse impact included costs associated with reduction in the number of its
product lines and the number of employees from 450 to 320. The Company believes
that these factors have been addressed and that these issues should not have a
material adverse impact on Santech's or the Company's future operations.
On August 4, 1997, the Company completed the acquisition of Karma International
S.A. ("Karma"). Karma is a distributor of personal computer components to over
10,000 customers in Europe, the Middle East and Asia. The purchase price for
Karma was $160 million and was funded through (i) $74 million in cash and (ii)
4,813,432 shares of unregistered Common Stock. Karma's product line includes
mass storage products, CPU's, memory chips, motherboards, sound, video and other
cards and monitors. Karma operates in 18 countries through 28 offices in Europe,
the Middle East and Asia. Karma had net sales of approximately $700 million in
1996. The acquisition of Karma has been accounted for under the purchase method
and, accordingly the results of Karma have been included in the consolidated
operating results since the date of acquisition. The acquisition of Karma
resulted in the recognition of $123.0 million of goodwill.
7
<PAGE>
Effective January 1, 1997, the Company acquired 100% of Frank & Walter Computer
GmbH ("Frank & Walter"), a distributor based in Germany, for 3,300,000
unregistered shares of Common Stock. The acquisition of Frank & Walter has been
accounted for under the purchase method and, accordingly the results of Frank &
Walter have been included in the consolidated operating results since the date
of acquisition. The amounts allocated to assets acquired and liabilities assumed
resulted in a recognition of $26.6 million of goodwill.
Presented below is pro forma operating data showing selected operating results
as if the significant companies acquired in 1997 were acquired on January 1,
1997. Pro forma adjustments were made to include goodwill amortization in the
three month period ended March 31, 1997 based on 1997 actual results. 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.
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
---------- ---------
Sales $1,751,338 $1,271,926
Net earnings 20,567 6,854
Net earnings per share- basic $ .42 $ .19
Net earnings per share- diluted $ .38 $ .18
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1997 or
of future results of the combined companies.
3. NET EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. In accordance with this statement, basic earnings per share
is computed by dividing net earnings by the weighted averaged number of common
shares outstanding. Diluted earning per share includes the dilution caused by
common stock options and the shares that would be issued in existing earn outs
based upon applying the earn out multiple to annualized actual earnings and
dividing by the market price at period end. The weighted average number of
shares for basic earnings per share was 49,534,737 and 22,039,140 for the three
month periods ended March 31, 1998 and 1997, respectively. The weighted average
number of shares used in the diluted computation was 54,754,967 and 23,135,149
for the three month periods ended March 31, 1998 and 1997, respectively. All
share and per share information has been restated for a three for two stock
split effective in September 1997.
The following table illustrates the reconciliation of the income and weighted
average number of shares of the basic and diluted earnings per share
computations (amounts in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $20,567
=======
Net earnings per share- basic 20,567 49,535 $ .42
=======
Effect of dilutive shares:
Stock options outstanding -- 1,434
Earn out contingencies -- 1,631
------- ------
Net earnings per share- diluted $20,567 54,755 $ .38
======= ====== =======
8
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $6,711
======
Net earnings per share- basic 6,711 22,039 $.30
====
Effect of dilutive shares:
Stock options outstanding -- 1,096
------ ------
Net earnings per share- diluted $6,711 23,135 $.29
====== ====== ====
4. LONG TERM DEBT
The Company's long-term debt at March 31, 1998, consists principally of the
amount due at that date ($31 million) under revolving credit agreements of
certain of the Company's United States based subsidiaries. Amounts outstanding
are due October 1999. The agreement provides for advances and issuance of
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. The borrower's assets,
including accounts receivable and inventory, are pledged as collateral. The
agreement also limits the ability of the borrowers to pay dividends to the
Company. The amount also includes a short term payable to a bank of $30 million,
which was intended to be and was refinanced by the Senior Notes described below.
In April 1998, the Company issued $200 million of Senior Notes ("Notes") due
2005. The Notes bear interest of 9.875% per annum and interest is payable
semi-annually on April 15 and October 15 beginning October 15, 1998. The Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2002, initially at 104.938% of their principal amount, plus
accrued and unpaid interest, declining to 100% of their principal amount, plus
accrued and unpaid interest, on or after April 15, 2004. Certain of the
Company's direct and indirect subsidiaries fully and unconditionally jointly and
severally guarantee the Notes on an unsecured basis. The guarantor subsidiaries
are CHS Electronics, Inc. (Nevada), CHS Delaware, Inc., CHS Delaware L.L.C. and
CHS Americas, Inc. All these subsidiaries are non-operating holding companies.
The Notes are effectively subordinated to all existing and future liabilities of
the Company's subsidiaries that are not guarantors. The Notes contain certain
covenants which, among other things, will restrict the ability of the Company
and certain of its subsidiaries to incur additional indebtedness; pay dividends
or make other distributions in respect to their capital stock; enter into
certain transactions with shareholders and affiliates; make certain investments
and other restricted payments; create liens; enter into certain sale and
leaseback transactions and sell assets. The covenants are, however, subject to a
number of exceptions and qualifications.
The following condensed financial information presents the results of
operations, financial position and cash flows of the Company (on a stand alone
basis), the guarantor subsidiaries (on a combined basis), the non-guarantor
subsidiaries (on a combined basis) and the eliminations necessary to arrive at
the consolidated results for the Company. The results of operations and cash
flow presented below assume that the guarantor subsidiaries were in place for
all periods presented. The Company and guarantor subsidiaries have accounted for
investments in their respective subsidiaries on an unconsolidated basis using
the equity method of accounting. The Company has not presented separate
financial statements and other disclosures concerning the guarantors and
non-guarantor subsidiaries because it has determined they would not be material
to investors.
9
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash ...................................... $ 1,642 $ 1,065 $ 72,200 $ -- $ 74,907
Accounts receivables ...................... 17,770 3,364 710,066 -- 731,200
Intercompany receivables .................. 162,139 535 194,064 (356,738) --
Inventories ............................... -- -- 628,761 -- 628,761
Other current assets ...................... 13,258 530 90,628 (3,911) 100,505
----------- ----------- ----------- ----------- -----------
Total current assets ...... 194,809 5,494 1,695,719 (360,649) 1,535,373
Property and equipment, net ............... 2,102 45 67,077 (1,759) 67,465
Cost in excess of assets acquired, net .... -- -- 414,644 -- 414,644
Investments in affiliated companies ....... 696,962 569,411 -- (1,266,373) --
Other assets .............................. -- -- 37,560 -- 37,560
----------- ----------- ----------- ----------- -----------
Total assets .............. $ 893,873 $ 574,950 $ 2,215,000 $(1,628,781) $ 2,055,042
=========== =========== =========== =========== ===========
Notes payable ............................. $ -- $ 500 $ 371,733 $ -- $ 372,233
Intercompany payables ..................... -- 153,168 203,433 (356,601) --
Accounts payable .......................... 235 801 694,105 -- 696,141
Accrued expenses .......................... 60,825 175 6,891 -- 67,891
Amounts due to sellers .................... 144,430 -- -- -- 114,430
Income taxes payable and other ............ 1,362 (995) 17,977 1,531 19,875
----------- ----------- ----------- ----------- -----------
Total current liabilities 177,852 153,649 1,294,129 (355,070) 1,270,560
Long term debt ............................ 30,000 4,505 46,056 -- 80,561
Minority interests ........................ -- -- -- 6,958 6,958
Shareholders' equity ...................... 686,021 416,796 874,815 (1,280,669) 696,963
----------- ----------- ----------- ----------- -----------
$ 893,873 $ 574,950 $ 2,215,000 $(1,628,781) $ 2,055,042
=========== =========== =========== =========== ===========
AS OF MARCH 31, 1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Cash ........................................ $ 78 $ -- $ 32,621 $ -- $ 32,699
Accounts receivables ........................ 1,132 -- 334,467 -- 335,599
Intercompany receivables .................... 111,752 -- 210,855 (322,607) --
Inventories ................................. -- -- 349,246 -- 349,246
Other current assets ........................ 3,089 312 34,041 (2,144) 35,298
----------- ----------- ----------- ----------- -----------
Total current assets ....... 116,051 312 961,230 (324,751) 752,842
Property and equipment, net ................. 2,533 1 36,031 (1,859) 36,706
Cost in excess of assets acquired, net ...... -- -- 105,105 -- 105,105
Investments in affiliated companies ......... 130,439 280,508 -- (410,947) --
Other assets ................................ -- -- 6,790 -- 6,790
----------- ----------- ----------- ----------- -----------
Total assets .............. $ 249,023 $ 280,821 $ 1,109,156 $ (737,557) $ 901,443
=========== =========== =========== =========== ===========
Notes payable ............................... $ -- $ -- $ 172,497 $ -- $ 172,497
Intercompany payables ....................... 38,023 111,031 173,583 (322,637) --
Accounts payable ............................ 4,296 1,871 428,525 21 434,713
Accrued expenses ............................ 14,660 36,375 9,330 -- 60,365
Amounts due to sellers ...................... 42,200 -- -- -- 42,200
Income taxes payable and other .............. -- 312 3,213 1,770 6,062
----------- ----------- ----------- ----------- -----------
Total current liabilities 99,946 149,589 $ 787,148 $ (320,846) $ 715,837
Long term debt .............................. -- -- $ 51,017 $ -- $ 51,017
Minority interests .......................... -- -- -- 4,150 4,150
Shareholders' equity ........................ 149,077 131,232 270,991 (420,861) 130,439
----------- ----------- ----------- ----------- -----------
$ 249,023 $ 280,821 $ 1,109,156 $ (737,557) $ 901,443
=========== =========== =========== =========== ===========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE ENDED MARCH 31, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales ...................................... $ -- $ 31 $ 1,751,307 $ -- $ 1,751,338
Cost of goods sold ............................. -- (290) 1,629,034 -- 1,628,744
----------- ----------- ----------- ----------- -----------
Gross profit ............................... -- 321 122,273 -- 122,594
Operating expenses ............................. 2,468 13 83,233 -- 85,714
----------- ----------- ----------- ----------- -----------
Operating income (loss) .................... (2,468) 308 39,040 -- 36,880
Other (income) expense, net .................... (569) 146 8,347 -- 7,924
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries ....... (1,899) $ 162 $ 30,693 $ -- $ 28,956
Provision for income taxes ..................... 310 62 7,407 -- 7,779
Equity in (earnings) of affiliated
companies, net of tax ...................... (22,776) (22,581) -- 45,357 --
Minority interest .............................. -- -- -- 610 610
----------- ----------- ----------- ----------- -----------
Net earnings ................................... 20,567 $ 22,681 $ 23,286 $ (45,967) $ 20,567
=========== =========== =========== =========== ===========
THREE ENDED MARCH 31, 1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ---------- ------------ ------------
Net Sales ...................................... $ -- $ -- $ 877,103 $ -- $ 877,103
Cost of goods sold ............................. -- -- 814,640 -- 814,640
----------- ----------- ----------- ----------- -----------
Gross profit ............................... -- -- 62,463 -- 62,463
Operating expenses ............................. (581) -- 48,419 -- 47,838
----------- ----------- ----------- ----------- -----------
Operating income ............................... 581 -- 14,044 -- 14,625
Other (income) expense, net .................... 403 -- 4,446 -- 4,849
----------- ----------- ----------- ----------- -----------
Earnings before income taxes and
minority interest in subsidiaries ....... $ 178 $ -- $ 9,598 $ -- $ 9,776
Provision for income taxes .................... 764 -- 1,897 (20) 2,641
Equity in (earnings) of affiliated
companies, net of tax ...................... (7,297) (7,268) -- 14,565 --
Minority interest .............................. -- -- -- 424 424
----------- ----------- ----------- ----------- -----------
Net earnings ................................... $ 6,711 $ 7,268 $ 7,701 $ (14,969) $ 6,711
=========== =========== =========== =========== ===========
THREE ENDED MARCH 31, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ---------- ------------ ------------
Net cash provided (used) in operating activities $ -- $ -- $ 12,155 $ -- $ 12,155
Net cash provided (used) in investing activities (28,934) -- (18,733) -- (47,667)
Net cash provided (used) in financing activities 30,000 -- 12,312 -- 42,312
Effect of exchange rate ........................ -- -- (699) -- (699)
Cash at beginning .............................. 576 -- 68,230 -- 68,806
Cash at end .................................... 1,642 -- 73,265 -- 74,907
THREE ENDED MARCH 31, 1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ---------- ------------ ------------
Net cash provided (used) in operating activities $ -- $ -- $ 8,045 $ -- $ 8,045
Net cash provided (used) in investing activities (1,103) -- 2,245 -- 1,142
Net cash provided (used) in financing activities 605 -- (10,317) -- (9,712)
Effect of exchange rate ........................ -- -- (1,913) -- (1,913)
Cash at beginning .............................. 576 -- 34,461 -- 35,137
Cash at end .................................... 78 -- 32,621 -- 32,699
</TABLE>
11
<PAGE>
5. COMMON STOCK
On July 30, 1997, the Company completed a public offering of 21.2 million shares
of common stock at a price of $21.17 per share. Net proceeds were approximately
$428 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 three-for-two 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.
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. This company also has ownership interest in other companies which
do business with the Company. During the three months period ended March 31,
1998, the Company made sales to such parties of $12.9 million and purchased
goods and services of $1.7 million from such parties. At March 31, 1998, the
Company had a balance due from such parties of approximately $8.7 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 an additional amount of approximately $13.8 million. The loan bears
interest at the prime rate and is due upon demand. At March 31, 1998, the amount
due from Comtrad amounts to $17.6 million. This receivable is guaranteed by all
the assets of Comtrad, which owns approximately 5 million shares of the
Company's stock.
12
<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 since
January 1, 1997 are shown below:
<TABLE>
<CAPTION>
OPERATING CHS ACQUISITION
SUBSIDIARY SERVICE AREA DATE
- ---------- --------------- ----
<S> <C> <C>
SIS Distributors(4) China, Malaysia, Singapore,
Vietnam March 1998
TH' Systems Czech Republic, Poland,
Hungary and Slovakia February 1998
ARC Spain Spain January 1998
MicroInformatica Latin America January 1998
CHS Nexsys(3) Colombia December 1997
CHS Ledakon Colombia November 1997
CHS Romak Ireland October 1997
Compexpress Brazil October 1997
Santech Norway, Sweden, Denmark October 1997
Lars Krull Denmark, Norway, Sweden August 1997
Karma Europe, Middle East and China 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 199
<FN>
- ----------------------
(1) The results of operations of Frank & Walter have been included as of
January 1, 1997.
(2) The Company owns 51% of this company.
(3) The Company owns 65% of this company.
(4) The Company owns 80% of this company
</FN>
</TABLE>
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
NET SALES. Net sales increased $874.2 million, or 100.0%, from $877.1 million in
first quarter 1997 to $1,751.3 million in first quarter 1998 due to acquisitions
and, to a lesser extent, internal growth. Of the increase in net sales, newly
acquired subsidiaries contributed $681.8 million. Net sales of subsidiaries
consolidated for both 1998 and 1997 first quarters grew $192.4 million, or
21.9%. This growth is attributed to increased consumer demand for microcomputer
products offered by the Company.
13
<PAGE>
GROSS PROFIT. Gross profit increased $60.1 million, or 96.3%, from $62.5 million
in first quarter 1997 to $122.6 million in first quarter 1998 due principally to
acquisitions and, to a lesser extent, internal growth. Newly acquired companies
contributed $42.8 million of gross profit. Gross profit of subsidiaries
consolidated for both 1998 and 1997 first quarters, grew $17.4 million, or
27.8%.
Gross margin decreased from 7.1% in first quarter 1997 to 7.0% in first quarter
1998. The decrease was due to lower gross margins from subsidiaries located in
Western Europe. The Company expects that overall gross margins may decline
during the remainder of 1998 compared to 1997 due to continued competitive
pricing pressures across all regions and the impact of including Karma's
operations for the full year since such operations have a lower gross margin due
to the nature of the products sold. However, the Company attempts to offset this
decline through utilizing early payment discount opportunities and taking
advantage of volume rebates with certain key vendors.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was at 5.4%
in the first quarter of 1998 and 5.4% in the first quarter of 1997. The Company
expects that the inclusion of Karma's results in 1998 will result in operating
expenses being a lower percentage of net sales than in 1997 based on lower
operating expenses of Karma as a percentage of its sales. This factor is offset
to some extent by increased goodwill amortization in 1998, which was $5.4
million during the three month period ended March 31, 1998 compared to $1.2
million during the three month period ended March 31, 1997. Operating expenses
for both periods include the results of foreign currency transactions. Such
results were a net gain of $3.8 million and $0.6 million during the three month
periods ended March 31, 1998 and 1997, respectively.
NET INTEREST EXPENSE. Net interest expense increased $3.1 million from $4.8
million in first quarter 1997 to $7.9 million in first quarter 1998 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 was 27% in first quarter 1997 and in first quarter 1998. The
Company expects to have an effective tax rate lower than the statutory United
States tax rate in 1998 principally due to the proportion of income expected in
jurisdictions with lower tax rates and also its ability to use remaining net
operating loss carryforwards from certain subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $12.2 million and $8.0 million were provided by operating activities
in the three months ended March 31, 1998 and 1997, respectively. In the three
months ended March 31, 1998, cash was used principally to decrease accounts
payables and accrued liabilities, and cash was provided as a result of decreases
in accounts receivables (excluding the impact of acquisitions), inventories,
prepaid expenses and other current assets. Net cash used in investing activities
in the three month period ended March 31, 1998 and 1997 included approximately
$4.8 million and $1.7 million, respectively, related to fixed asset additions.
In addition, $42.8 million was used in and $2.8 million was provided by
acquisitions during the three months ended March 31, 1998 and 1997,
respectively. Net cash of $42.3 million was provided by and $9.7 million was
used in financing activities in the three month period ended March 31, 1998 and
1997, respectively, due principally to net borrowings from or repayments to
banks.
Certain of the Company's United States based subsidiaries are 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 the borrowers to pay
dividends to the Company. The agreement matures in October 1999 and is secured
by a lien on essentially all of the borrowers' assets. The agreement contains
certain restrictive covenants. The Company has guaranteed this indebtedness.
14
<PAGE>
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At March 31, 1998,
the aggregate amount available under these agreements was $527.9 million, and
the amount borrowed was $388.1 million. Such agreements are usually for a term
of one year and are secured by the receivables and inventories of the borrower.
The weighted average interest rate at March 31, 1998 was 7.9%. The Company
typically guarantees these loans.
In April 1998, the Company issued $200 million of Senior Notes ("Notes") due
2005. The Notes bear interest of 9.875% per annum and interest is payable
semi-annually on April 15 and October 15 beginning October 15, 1998. The Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2002, initially at 104.938% of their principal amount, plus
accrued and unpaid interest, declining to 100% of their principal amount, plus
accrued and unpaid interest, on or after April 15, 2004. Certain of the
Company's direct and indirect subsidiaries fully and unconditionally jointly and
severely guaranteed the Notes on an unsecured basis. The guarantor subsidiaries
are CHS Electronics, Inc. (Nevada), CHS Delaware, Inc., CHS Delaware L.L.C. and
CHS Americas, Inc. The Notes are effectively subordinated to all existing and
future liabilities of the Company's subsidiaries that are not guarantors. The
Notes contain certain covenants which, among other things, will restrict the
ability of the Company and certain of its subsidiaries to incur additional
indebtedness; pay dividends or make other distributions in respect to their
capital stock; enter into certain transactions with shareholders and affiliates;
make certain investments and other restricted payments; create liens; enter into
certain sale and leaseback transactions and sell assets. The covenants are,
however, subject to a number of exceptions and qualifications.
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 1998 will be: for the
purchase of additional inventory to support growth, to take greater advantage of
available cash discounts offered by certain of the Company's vendors for early
payment, to pay amounts due to sellers of businesses, and for the cash component
of possible future acquisitions. 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 and the issuance of
the Notes, has sufficient funds to support its expected growth for the remainder
of 1998.
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 three months periods
ended March 31, 1998 and 1997 and the Company does not expect that it will have
a material impact during the remainder of 1998.
15
<PAGE>
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's 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 three months ended March 31, 1998 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 three-month
period ended March 31, 1998, 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
primary currencies in which sales were made were the German mark (23% of sales),
the British pound (10%) and the French franc (8%). At March 31, 1998,
approximately $268 million of accounts payable were attributable to foreign
currency liabilities denominated in other than the subsidiaries functional
currencies. Of these, $251.2 million was denominated in U.S. dollars and $12.9
million was denominated in German marks. Approximately 67% of these liabilities
were unhedged.
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.
16
<PAGE>
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 Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Comprehensive Income", in June 1997.
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 believes that the
adoption of this standard will not have an effect on the Company's financial
position or results of operations.
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 expectations of gross margins, operating expenses to
sales, income taxes, its year 2000 compliance activities, inflation
expectations, 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.
17
<PAGE>
PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
27.1 Financial Data Schedule for 1998
27.2 Financial Data Schedule for 1997
2. Reports on 8-K
A) On April 22, 1998, a report on Form 8-K was filed to report the
issuance of a press release dated April 13, 1998 relating to the
closing of the Company's sale of $200,000,000 9 7/8% Senior Notes
due 2005.
18
<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)
May 13, 1998 BY /s/ ANTONIO BOCCALANDRO
------------------------
ANTONIO BOCCALANDRO
Secretary
May 13, 1998 BY /s/ CRAIG S. TOLL
------------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT DEXCRIPTION
- ------- -----------
27.1 Financial Data Schedule for 1998
27.2 Financial Data Schedule for 1997
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 74,907
<SECURITIES> 0
<RECEIVABLES> 755,285
<ALLOWANCES> (24,085)
<INVENTORY> 628,761
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<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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