UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER 12, 1998: 52,493,767.
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 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-21
PART II.
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
2
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
(Unaudited)
As Restated
(SEE NOTE 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 184,227 $ 68,806
Accounts receivable:
Trade, less allowance for doubtful accounts
of $33,116 in 1998 and $18,347 in 1997 938,735 659,757
Affiliates 46,806 24,604
----------- -----------
985,541 684,361
Inventories 830,263 693,503
Prepaid expenses and other current assets 90,035 65,255
----------- -----------
TOTAL CURRENT ASSETS 2,090,066 1,511,925
PROPERTY AND EQUIPMENT, NET 105,656 61,468
COST IN EXCESS OF ASSETS ACQUIRED, NET 620,452 381,830
OTHER ASSETS 40,413 13,599
----------- -----------
$ 2,856,587 $ 1,968,822
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 519,887 $ 309,510
Accounts payable, trade 1,024,788 771,535
Accrued liabilities 100,591 83,309
Amounts due to sellers under acquisition agreements 141,215 54,866
Income taxes payable 14,536 12,711
Deferred income taxes 4,277 1,223
----------- -----------
TOTAL CURRENT LIABILITIES 1,805,294 1,233,154
LONG TERM DEBT 271,833 61,556
MINORITY INTEREST 8,991 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;
52,482,966 and 48,910,999 shares outstanding at September 30, 1998
and December 31, 1997, respectively 53 49
Additional paid-in capital 682,365 621,021
Retained earnings 97,833 65,115
Cumulative foreign currency translation adjustment (9,782) (18,421)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 770,469 667,764
----------- -----------
$ 2,856,587 $ 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited) (Unaudited)
As Restated As Restated
SEE NOTE 2 SEE NOTE 2
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 2,166,943 $ 1,097,567 $ 5,687,775 $ 2,921,625
Cost of goods sold 2,025,607 1,012,623 5,309,921 2,704,046
----------- ----------- ----------- -----------
Gross profit 141,336 84,944 377,854 217,579
Operating expenses 112,130 63,041 287,676 163,724
----------- ----------- ----------- -----------
Operating income 29,206 21,903 90,178 53,855
Other (income) expense:
Interest income (3,966) (3,243) (10,964) (6,809)
Interest expense 20,346 8,533 47,813 23,167
----------- ----------- ----------- -----------
16,380 5,290 36,849 16,358
----------- ----------- ----------- -----------
Earnings before income taxes and
minority interest in subsidiaries 12,826 16,613 53,329 37,497
Income taxes 5,357 4,785 17,968 11,575
Minority interest in subsidiaries 826 392 2,643 1,375
----------- ----------- ----------- -----------
Net earnings $ 6,643 $ 11,436 $ 32,718 $ 24,547
=========== =========== =========== ===========
Net earnings per common share:
Basic $ 0.13 $ 0.28 $ 0.64 $ 0.86
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.26 $ 0.61 $ 0.81
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(Unaudited)
1998 1997
---------- ----------
As Restated
SEE NOTE 2
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 32,718 $ 24,547
Adjustments to reconcile net earnings to net cash (used in)
operating activities:
Depreciation and amortization 29,150 12,770
Minority interest in net earnings 2,643 1,375
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net (22,884) 3,271
Accounts receivable-affiliates, net (22,203) (16,024)
Inventories 50,412 (4,777)
Prepaids and other assets (16,561) (29,947)
Accounts payable (50,036) (115,834)
Accrued liabilities and income taxes (8,920) (41,264)
--------- ---------
Net cash (used in) operating activities (5,681) (165,883)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (33,045) (14,713)
Acquisitions, net of cash acquired (177,931) (73,212)
--------- ---------
Net cash (used in) investing activities (210,976) (87,925)
--------- ---------
Cash flows from financing activities:
Proceeds from public offering -- 428,217
Proceeds from the issuance of Senior Notes 200,000 --
Net borrowings from (repayments to) banks 129,665 (51,921)
Proceeds from exercising stock options 1,171 4,206
Repurchase of shares (371) --
--------- ---------
Net cash provided by financing activities 330,465 380,502
Effect of exchange rate changes on cash 1,613 (3,386)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 115,421 123,308
Cash and cash equivalents at beginning of period 68,806 35,137
--------- ---------
Cash and cash equivalents at end of period $ 184,227 $ 158,445
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $35,109 $19,417
Income taxes $10,454 $10,496
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,
1998 1997
-------- --------
Fair value of assets acquired including cash acquired $503,617 $323,629
Less: Common stock or other consideration issued 60,547 95,728
-------- --------
Liabilities assumed $443,070 $227,901
======== ========
Furthermore, these statements of cash flows exclude the non-cash impact on the
increase of amounts due to sellers under acquisition agreements of $70,499 in
1998.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED SEE NOTE 2)
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 nine months ended September 30, 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. RESTATEMENT
The Company recently announced the discovery of discrepancies related to the
amount of vendor incentives recorded in the fourth quarter of 1998. In
coordination with the Company's independent auditors and an investigation by
outside attorneys, the Company found that vendor rebates were overstated in the
second, third and fourth quarters of 1998. As a result of this discovery, the
consolidated financial statements as of June 30, 1998 and September 30, 1998 and
the quarters then ended were restated. The accompanying consolidated financial
statements as of September 30, 1998 and for the three and nine months then ended
present restated results.
3. ACQUISITIONS
In the nine month period ended September 30, 1998, the Company purchased
fourteen companies. These acquisitions, which are being accounted for under the
purchase method, had no significant impact on the results of operations of the
Company, as defined by Rule 3-05 of Regulation S-X of the Securities and
Exchange Commission. In order to reflect the Company's expectations of future
benefits, during 1998, the Company began to amortize goodwill (the excess of the
purchase price over the value of net assets acquired) of certain new
acquisitions over a period of approximately 35 years, while goodwill for
previous acquisitions is being amortized over 20 years.
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 acquired 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 purchase price was
preliminarily allocated based on estimated fair values at the date of
acquisition. This allocation has ultimately resulted in the recognition of
$108.8 million of goodwill.
Santech's operating results during 1997 prior to its acquisition by the Company
were adversely impacted as a result of a restructuring of its operations and the
implementation of a new computer system. The adverse impact
7
<PAGE>
included costs associated with reduction in the number of its product lines and
the number of employees from 450 to 320. Such costs are included in the pro
forma operating data below. 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 purchase price was preliminarily allocated based on estimated
fair values at the date of acquisition. This allocation has ultimately resulted
in the recognition of $131.4 million of goodwill.
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 $26.9 million of goodwill.
Presented below is pro forma operating data showing selected operating results
for the Company 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 nine month period ended September 30, 1997 based on 1997
actual results.
Nine Months Ended September 30,
(in thousands, except per share data)
1998 1997
------------- -------------
Net sales $ 6,494,821 $ 5,630,755
Net earnings $ 15,737 (9,071)
Net earnings per share- basic $ 0.31 $ (0.32)
Net earnings per share- diluted $ 0.29 $ (0.30)
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.
4. 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 average number of common
shares outstanding. Diluted earnings per share includes the dilution caused by
common stock options and warrants and the shares that would be issued in
existing earn outs based upon applying the earn out multiple to actual earnings
and dividing by the market price at period end. The weighted average number of
shares for basic earnings per share was 52,439,025 and 40,691,980 for the three
month periods ended September 30, 1998 and 1997, respectively, and 51,134,884
and 28,411,668 for the nine month periods ended September 30, 1998 and 1997,
respectively. The weighted average number of shares used in the diluted
computation was 55,848,719 and 43,639,984 for the three month periods ended
September 30, 1998 and 1997, respectively, and 53,933,927 and 30,255,357, for
the nine month periods ended September 30, 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):
8
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $6,643
======
Net earnings per share- basic 6,643 52,439 $0.13
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,007
Earn out contingencies -- 2,403
------ ------ -----
Net earnings per share- diluted $6,643 55,849 $0.12
====== ====== =====
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $11,436
=======
Net earnings per share- basic 11,436 40,692 $0.28
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,962
Earn out contingencies -- 986
------- -------
Net earnings per share-diluted $11,436 43,640 $0.26
======= ======= =====
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $32,718
=======
Net earnings per share- basic 32,718 51,135 $0.64
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,330
Earn out contingencies -- 1,469
------- -------
Net earnings per share-diluted $32,718 53,934 $0.61
======= ======= =====
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $24,547
=======
Net earnings per share- basic $24,547 28,412 $0.86
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,395
Earn out contingencies -- 448
------- -------
Net earnings per share-diluted $24,547 30,255 $0.81
======= ======= =====
5. COMPREHENSIVE INCOME
Effective in 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME, ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the Company's consolidated financial statements. Comprehensive
income is defined in SFAS 130 as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Total comprehensive income was $41.4 million and $15.7
million for the nine months ended September 30, 1998 and 1997, respectively, and
$22.1 million and $9.8 million for the three months ended September 30, 1998 and
1997 respectively. The primary difference from net income as reported is the
change in cumulative foreign currency translation adjustment.
9
<PAGE>
6. LONG TERM DEBT
The Company's long-term debt at September 30, 1998, consists principally of the
amount due at that date ($32 million) under a revolving credit agreement of
certain of the Company's United States based subsidiaries and $200 million
Senior Notes ("Notes") due 2005. Amounts outstanding under the revolving credit
agreement 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 Company issued the Notes on April 10, 1998. The Notes bear interest at
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.
10
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 2,882 $ 39 $ 181,306 $ -- $ 184,227
Accounts receivable 20,206 521 964,814 -- 985,541
Intercompany receivables 333,838 1,133 -- (334,971) --
Inventories -- -- 830,263 -- 830,263
Other current assets 2,338 711 86,986 -- 90,035
----------- ----------- ----------- ----------- -----------
Total current assets 359,264 2,404 2,063,369 (334,971) 2,090,066
Property and equipment, net 3,030 2,094 100,532 -- 105,656
Cost in excess of assets acquired, net -- -- 620,452 -- 620,452
Investments in affiliated companies 782,738 1,416,287 -- (2,199,025) --
Other assets 16,663 -- 23,750 -- 40,413
----------- ----------- ----------- ----------- -----------
Total assets $ 1,161,695 $ 1,420,785 $ 2,808,103 $(2,533,996) $ 2,856,587
=========== =========== =========== =========== ===========
Notes payable $ -- $ 479 $ 519,408 $ -- $ 519,887
Intercompany payables 3,275 149,017 182,679 (334,971) --
Accounts payable 10,731 78 1,013,979 -- 1,024,788
Accrued expenses 13,837 143 86,611 -- 100,591
Amounts due to sellers 141,215 -- -- -- 141,215
Income taxes payable and other 553 (1,427) 19,687 -- 18,813
----------- ----------- ----------- ----------- -----------
Total current liabilities 169,611 148,290 1,822,364 (334,971) 1,805,294
Long term debt 200,000 1,551 70,282 -- 271,833
Minority interests -- -- -- 8,991 8,991
Shareholders' equity 792,084 1,270,944 915,457 (2,208,016) 770,469
----------- ----------- ----------- ----------- -----------
$ 1,161,695 $ 1,420,785 $ 2,808,103 $(2,533,996) $ 2,856,587
=========== =========== =========== =========== ===========
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 66,391 $ -- $ 92,054 $ -- $ 158,445
Accounts receivable 15,311 -- 469,642 -- 484,953
Intercompany receivables 287,580 -- -- (287,580) --
Inventories -- -- 520,376 -- 520,376
Other current assets 3,030 -- 65,957 -- 68,987
----------- ----------- ----------- ----------- -----------
Total current assets 372,312 -- 1,148,029 (287,580) 1,232,761
Property and equipment, net 2,268 1 50,130 -- 52,399
Cost in excess of assets acquired, net -- -- 215,614 -- 215,614
Investments in affiliated companies 281,671 327,079 -- (608,750) --
Other assets -- -- 47,925 -- 47,925
----------- ----------- ----------- ----------- -----------
Total assets $ 656,251 $ 327,080 $ 1,461,698 $ (896,330) $ 1,548,699
=========== =========== =========== =========== ===========
Notes payable $ -- $ -- $ 161,450 $ -- $ 161,450
Intercompany payables 1,329 144,992 141,259 (287,580) --
Accounts payable 527 -- 610,763 -- 611,290
Accrued expenses 6,467 -- 50,455 -- 56,922
Amounts due to sellers -- -- -- -- --
Income taxes payable and other (432) (243) 13,073 -- 12,398
----------- ----------- ----------- ----------- -----------
Total current liabilities 7,891 144,749 977,000 (287,580) 842,060
Long term debt -- -- 53,138 -- 53,138
Minority interests -- -- -- 5,141 5,141
Shareholders' equity 648,360 182,331 431,560 (613,891) 648,360
----------- ----------- ----------- ----------- -----------
$ 656,251 $ 327,080 $ 1,461,698 $ (896,330) $ 1,548,699
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 31 $5,687,744 $ -- $5,687,775
Cost of goods sold -- (352) 5,310,273 -- 5,309,921
---------- ---------- ---------- ---------- ----------
Gross profit -- 383 377,471 -- 377,854
Operating expenses 3,182 652 283,842 -- 287,676
---------- ---------- ---------- ---------- ----------
Operating income (loss) (3,182) (269) 93,629 -- 90,178
Other (income) expense, net 5,854 254 30,741 -- 36,849
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (9,036) (523) 62,888 -- 53,329
Provision for income taxes (109) (201) 18,278 -- 17,968
Equity in (earnings) of affiliated
companies, net of tax (72,962) (73,474) -- 146,436 --
Minority interest -- -- -- 2,643 2,643
---------- ---------- ---------- ---------- ----------
Net earnings $ 64,035 $ 73,152 $ 44,610 $ (149,079) $ 32,718
========== ========== ========== ========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $2,921,625 $ -- $2,921,625
Cost of goods sold -- -- 2,704,046 -- 2,704,046
---------- ---------- ---------- ---------- ----------
Gross profit -- -- 217,579 -- 217,579
Operating expenses (6,935) 1 170,658 -- 163,724
---------- ---------- ---------- ---------- ----------
Operating income 6,935 (1) 46,921 -- 53,855
Other (income) expense, net (1,039) 892 16,505 -- 16,358
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries 7,974 (893) 30,416 -- 37,497
Provision for income taxes 47 (244) 11,772 -- 11,575
Equity in (earnings) of affiliated
companies, net of tax (16,620) (21,728) -- 38,348 --
Minority interest -- -- -- 1,375 1,375
---------- ---------- ---------- ---------- ----------
Net earnings $ 24,547 $ 21,079 $ 18,644 $ (39,723) $ 24,547
========== ========== ========== ========== ==========
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $2,166,943 $ -- $2,166,943
Cost of goods sold -- -- 2,025,607 -- 2,025,607
---------- ---------- ---------- ---------- ----------
Gross profit -- -- 141,336 -- 141,336
Operating expenses 2,851 279 109,000 -- 112,130
---------- ---------- ---------- ---------- ----------
Operating income (loss) (2,851) (279) 32,336 -- 29,206
Other (income) expense, net 4,004 54 12,322 -- 16,380
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (6,855) (333) 20,014 -- 12,826
Provision for income taxes (490) (128) 5,975 -- 5,357
Equity in (earnings) of affiliated
companies, net of tax (29,535) (28,199) -- 57,734 --
Minority interest -- -- -- 826 826
---------- ---------- ---------- ---------- ----------
Net earnings $ 23,170 $ 27,994 $ 14,039 $ (58,560) $ 6,643
========== ========== ========== ========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $1,097,567 $ -- $1,097,567
Cost of goods sold -- -- 1,012,623 -- 1,012,623
---------- ---------- ---------- ---------- ----------
Gross profit -- -- 84,944 -- 84,944
Operating expenses (5,193) -- 68,234 -- 63,041
---------- ---------- ---------- ---------- ----------
Operating income 5,193 -- 16,710 -- 21,903
Other (income) expense, net (2,257) 257 7,290 -- 5,290
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries 7,450 (257) 9,420 -- 16,613
Provision for income taxes (824) (489) 6,098 -- 4,785
Equity in (earnings) of affiliated
companies, net of tax (3,162) (7,574) -- 10,736 --
Minority interest -- -- -- 392 392
---------- ---------- ---------- ---------- ----------
Net earnings $ 11,436 $ 7,806 $ 3,322 $ (11,128) $ 11,436
========== ========== ========== ========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ (5,681) $ -- $ (5,681)
Net cash provided (used) in investing activities (200,286) (127) (10,563) -- (210,976)
Net cash provided (used) in financing activities 200,801 166 129,498 -- 330,465
Effect of exchange rate -- -- 1,613 -- 1,613
Cash at beginning 2,367 -- 66,439 -- 68,806
Cash at end $ 2,882 $ 39 $ 181,306 $ -- $ 184,227
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $(165,883) $ -- $(165,883)
Net cash provided (used) in investing activities (366,608) -- 278,683 -- (87,925)
Net cash provided (used) in financing activities 432,423 -- (51,921) -- 380,502
Effect of exchange rate -- -- (3,386) -- (3,386)
Cash at beginning 576 -- 34,561 -- 35,137
Cash at end $ 66,391 $ -- $ 92,054 $ -- $ 158,445
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13
<PAGE>
7. 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 additional 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.
8. CONTINGENCIES
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million (approximately $12 million) letter of credit provided to
Metro by the Company in connection with the transaction. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met. Metro has also announced that it may seek damages for an unspecified amount
against the Company as a result of the transaction not being consummated. The
purchase agreement calls for disputes to be settled by arbitration in Germany.
The purchase agreement does not provide for a break-up fee. Although no
prediction as to the outcome of either the attempted draw on the letter of
credit or any actions which may be commenced in connection with the purchase
agreement can be made at this time, the Company believes that it has defenses to
any potential claims of Metro and intends to assert them vigorously. As of the
date of this filing, no arbitration proceedings had been commenced by Metro.
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.
9. 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 nine months period ended September 30,
1998, the Company made sales to such parties of $53.6 million and purchased
goods and services of $4.3 million from such parties. At September 30, 1998, the
Company had a net balance due from such parties of approximately $25.4 million.
At September 30, 1998, the Company carried a receivable from Comtrad and Comtrad
Holdings, Inc. (CHI) in an amount of $19.2 million. CHI, and its wholly owned
subsidiary, Comtrad, are controlled by the Chief Executive Officer of the
Company and a member of the Board of Directors has a minority interest. This
receivable is in the form of a promissory note which Comtrad and CHI have
collateralized with all of their net assets. The principal asset of CHI and
Comtrad is shares of CHS common stock. Interest is charged on the promissory
note at prime rate. The amount is due on demand.
14
<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 SUBSIDIARY CHS ACQUISITION SERVICE AREA DATE
-------------------- ---------------------------- ----
<S> <C> <C>
Acron Argentina August 1998
Memory Set Spain July 1998
Cornejo Argentina July 1998
Intcomex Mexico, Panama, Guatemala, Chile, Peru and Uruguay July 1998
Metrologie International France, United Kingdom and Spain July 1998
Arena Turkey May 1998
Armada Turkey May 1998
Merisel Russia Russia May 1998
Raphael Informatika Italy May 1998
Aptec Middle East May 1998
SiS Distributors (1) China, Malaysia, Singapore and Vietnam March 1998
TH' Systems Czech Republic, Poland, Hungary and Slovakia February 1998
ARC Spain Spain January 1998
Micro Informatica Latin America January 1998
CHS Nexsys Colombia December 1997
CHS Ledakon (2) Colombia November 1997
CHS Romak Ireland October 1997
Compexpress Brazil October 1997
Santech Norway, Sweden and Denmark October 1997
Lars Krull Denmark, Norway and Sweden August 1997
Karma Europe, Middle East and China August 1997
Ameritech Exports Latin America August 1997
Ameritech Argentina Argentina August 1997
Atlantis Skupina (3) 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 (4) Germany March 1997
CHS Estonia Estonia January 1997
CHS Infocentro de Chile Chile January 1997
</TABLE>
- -------------
(1) The Company owns 80% of this company.
(2) The Company owns 65% of this company.
(3) The Company owns 51% of this company.
(4) The results of operations of Frank & Walter have been included as of
January 1, 1997.
RESULTS OF OPERATIONS
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
NET SALES. Net sales increased $1,069.4 million, or 97.4%, from $1,097.5 million
in third quarter 1997 to $2,166.9 million in third quarter 1998 due to
acquisitions and, to a lesser extent, internal growth. Of the increase in net
sales, newly acquired subsidiaries contributed $835.1 million. Net sales of
subsidiaries consolidated for both 1998 and 1997 third quarters grew $234.3
million, or 22.3%. This growth is attributed to increased consumer demand for
microcomputer products offered by the Company.
15
<PAGE>
GROSS PROFIT. Gross profit increased $56.4 million, or 66.4%, from $84.9 million
in third quarter 1997 to $141.3 million in third quarter 1998 entirely due to
acquisitions.
Gross margin was 6.5% for the quarter ended September 30, 1998 compared to 7.7%
for the quarter ended September 30, 1997. The decrease in gross margin was
caused by increased competitive pressure in all markets and the acquisition of
the Karma operation, which has a lower gross margin that the remainder of the
Company due to the nature of the products sold. The Company believes gross
margins in the future in its distribution to reseller business may be lower due
to competitive pressure but is attempting to offset the decrease through
expansion of enterprise system distribution and distribution of private label
products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was 5.2% in
the third quarter of 1998 and 5.7% in the third quarter of 1997. The Company
attributes this decrease to: (i) synergies realized from combining operating
entities; (ii) benefits of economies of scales; and (iii) the inclusion of
Karma's results in 1998 resulting 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 $6.5 million during the three month
period ended September 30, 1998 compared to $2.4 million during the three month
period ended September 30, 1997. Operating expenses for both periods include the
results of foreign currency transactions. Such results were a net gain of $1.8
million during the three month period ended September 30, 1998 and a net loss of
$0.7 million during the three month period ended September 30, 1997.
NET INTEREST EXPENSE. Net interest expense increased $11.1 million from $5.3
million in third quarter 1997 to $16.4 million in third quarter 1998 due to
interest on the Notes and 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 41.7% in third quarter 1998 and 28.8% in third quarter
1997. The change is due to a higher proportion of income earned in jurisdictions
with higher tax rates, by losses in subsidiaries with no tax benefit and
increased non-deductible goodwill amortization. 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.
NINE MONTHS 1998 COMPARED TO NINE MONTHS 1997
NET SALES. Net sales increased $2,766.2 million, or 94.7%, from $2,921.6 million
in the nine months ended September 30, 1997 to $5,687.8 million in the nine
months ended September 30, 1998 due to acquisitions and, to a lesser extent,
internal growth. Of the increase in net sales, newly acquired subsidiaries
contributed $2,203.5 million. Net sales of subsidiaries consolidated for both
nine month periods ended September 30, 1998 and 1997 grew $562.6 million, or
20.0%. This growth is attributed to increased consumer demand for microcomputer
products offered by the Company.
GROSS PROFIT. Gross profit increased $160.3 million, or 73.7%, from $217.6
million in the nine months ended September 30, 1997 to $377.9 million in the
nine months ended September 30, 1998 due principally to acquisitions and, to a
lesser extent, internal growth.
Gross margin was 6.6% for the nine months ended September 30, 1998 and 7.4% for
the nine months ended September 30, 1997. The decrease in gross margin was
caused by increased competitive pressure in all markets and the acquisition of
the Karma operation, which has a lower gross margin that the remainder of the
Company due to the nature of the products sold. The Company believes gross
margins in the future in its distribution to reseller business may be lower due
to competitive pressure but is attempting to offset the decrease through
expansion of enterprise system distribution and distribution of private label
products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was 5.1% in
the nine months ended September 30, 1998 and 5.6% in the nine months ended
September 30, 1997. The Company attributes this decrease to: (i) synergies
realized from combining operating entities; (ii) benefits of economies of
scales; and (iii) the inclusion of Karma's results in 1998 resulting in
operating expenses being a lower percentage of net
16
<PAGE>
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 $17.0 million during the nine month period ended
September 30, 1998 compared to $4.6 million during the nine month period ended
September 30, 1997. Operating expenses for both periods include the results of
foreign currency transactions. Such results were a net gain of $6.9 million and
$0.2 million during the nine month periods ended September 30, 1998 and 1997,
respectively.
NET INTEREST EXPENSE. Net interest expense increased $20.4 million from $16.4
million in nine months ended September 30, 1997 to $36.8 million in nine months
ended September 30, 1998 due to interest on the Notes and 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 33.7% in nine months ended September 30, 1998 and 30.9% in
nine months ended September 30, 1997. The change is due to a higher proportion
of income earned in jurisdictions with higher tax rates, by losses in
subsidiaries with no tax benefit and increased non-deductible goodwill
amortization. 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 $5.7 million and $165.9 million were used in operating activities in
the nine months ended September 30, 1998 and 1997, respectively. In each period
cash was used principally as a result of decreases in accounts payables and
accrued liabilities and increases in affiliate receivables and prepaids and
other assets. Cash was used as a result of an increase in accounts receivables,
while cash was provided as a result of a decrease in inventories during the nine
month period ended September 30, 1998. Net cash used in investing activities in
the nine month periods ended September 30, 1998 and 1997 included approximately
$33.0 million and $14.7 million, respectively, related to fixed asset additions.
In addition, $177.9 million and $73.2 million were used in acquisitions during
the nine months ended September 30, 1998 and 1997, respectively. Net cash of
$330.5 million and $380.5 million was provided by financing activities in the
nine month period ended September 30, 1998 and 1997, respectively, due
principally to issuance of the Notes, proceeds from a public common stock
offering and 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.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At September 30,
1998, the aggregate amount available under these agreements was $769 million,
and the amount borrowed was $544 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 September 30, 1998 was 7.4%. 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,
17
<PAGE>
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's principal need for additional cash in 1998 will be: (i) for the
purchase of additional inventory to support growth; (ii) to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment; (iii) to pay amounts due to sellers of businesses;
(iv) 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 in
existing operations 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.
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million (approximately $12 million) letter of credit provided to
Metro by the Company in connection with the transaction. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met. Metro has also announced that it may seek damages for an unspecified amount
against the Company as a result of the transaction not being consummated. The
purchase agreement calls for disputes to be settled by arbitration in Germany.
The purchase agreement does not provide for a break-up fee. Although no
prediction as to the outcome of either the attempted draw on the letter of
credit or any actions which may be commenced in connection with the purchase
agreement can be made at this time, the Company believes that it has defenses to
any potential claims of Metro and intends to assert them vigorously. As of the
date of this filing, no arbitration proceedings had been commenced by Metro.
YEAR 2000
The Company has completed the risk assessment phase of its Year 2000 compliance
efforts ("Year 2000 Project"). Based on the assessment, the Company has
developed an action plan and identified corporate, regional and subsidiary level
Year 2000 Project team members, charged with ensuring that the Company will be
compliant. The plan principally consists of replacing or repairing non-compliant
systems including both Information ("IT") systems and non-IT systems. The
initial focus of the plan is on high risk/high impact areas. The five areas
covered initially are shown below, in descending order of potential high
risk/impact.
o Transaction Processing Systems (includes all internal & external
interfaces)
o Telephony
o Network (Local Area Networks)
o Desktop Computing
o Third Parties (suppliers, customers, financial institutions, utilities)
The Company's current IT systems infrastructure is very decentralized, with each
subsidiary essentially a standalone operation from the IT system point of view.
Independent of the Year 2000 issue, the Company has been standardizing its
transaction processing platforms and ultimately reducing the number of
standalone systems. The Company has selected three platforms: JBA System 21,
Oracle Financials, and Scala. Various tasks in the platform standardization
project have been accelerated in order to resolve Year 2000 issues.
As a supplement to the risk assessment and other work already completed, the
Company is in the process of
18
<PAGE>
engaging a highly respected independent consulting firm to help perform a Year
2000 inventory and compliance assessment. If it is deemed appropriate, the
Company may engage this firm to continue to monitor the progress of the Year
2000 project.
STATE OF READINESS
The tables below set forth the Company's state of readiness.
Compliance Schedule for transaction processing systems:
-------------------------------------------------------
% OF 1998 GROSS SALES SYSTEM TO BE COMPLIANT
BUDGET
-------------------------------------------------------
36% Already compliant
-------------------------------------------------------
21% First Quarter 1999
-------------------------------------------------------
19% Second Quarter 1999
-------------------------------------------------------
24% Third Quarter 1999
-------------------------------------------------------
100%
-------------------------------------------------------
Other critical areas:
- ----------------------------- --------------------------------------------------
AREA TO BE COMPLIANT
- ----------------------------- --------------------------------------------------
Telephony October 1999
- ----------------------------- --------------------------------------------------
Network October 1999
- ----------------------------- --------------------------------------------------
Desktop Computing October 1999
- ----------------------------- --------------------------------------------------
Third Parties First Quarter 1999 Assessment Complete
- ----------------------------- --------------------------------------------------
Other non-IT equipment Second Quarter 1999 Assessment Complete
- ----------------------------- --------------------------------------------------
COSTS
The Company estimates its total Year 2000 costs to be $29 million. This is
primarily the cost of replacing transaction processing systems, but also
includes consulting fees and repair/replacement of other software and IT/non-IT
equipment. Approximately $12 million has been spent, from 1997 to date. This
estimate is based on current knowledge and assumes that the Company will not
incur additional costs due to the actions or status of third parties.
RISKS
Due to the Company's decentralized IT structure, the Company believes there is
no single point of failure. At this point in time, the Company believes the most
likely potential risks are:
o The inability of some customers of the Company's smaller subsidiaries to
pay on time
o The temporary inability of a few of the Company's more remote/small
subsidiaries, to take orders.
Though every effort will be made to ensure third party issues are resolved, the
Company has no direct means to influence such parties. It is therefore not
possible to be sure all such issues are resolved or to estimate the potential
impact on the Company's revenue. But particularly in the case of the Company's
major suppliers, the Company currently believes the risk is low. This is due, in
no small part, to the fact that since the Company is a focused distributor, the
Company's major suppliers are very large, strong, stable companies with
well-developed Year 2000 programs of their own.
CONTINGENCY PLANS
Contingency plans are currently being developed. Contingency plans for
transaction processing systems should be completed by first quarter 1999.
Contingency plans for telephony, network, and desktop computing should be
completed by second quarter 1999. The plans will potentially include remediation
of systems scheduled to be replaced, manual procedures, emergency power sources,
and the stock piling of certain equipment.
19
<PAGE>
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union are
scheduled to establish fixed conversion rates between their existing legal
currencies and one common currency - the euro. The euro will then trade on
currency exchanges and may be available for business transactions. The
conversion to the euro will eliminate currency exchange risk between the member
countries. Beginning January 1, 2002, the participating countries will issue
new-euro denominated bills and coins for use in cash transactions, and the legal
currencies will be withdrawn from circulation. The Company's subsidiaries
affected by the euro conversion have established plans to address the issues
raised by the euro currency conversion. These issues include, among others, the
need to adapt computer and financial systems, business processes and equipment
to accommodate euro-denominated transactions and the impact of one common
currency on pricing. Since financial systems and processes currently accommodate
multiple currencies, the plans contemplate conversion by mid 1999 as part of the
Company's Year 2000 project. The Company does not expect the conversion costs to
be material. Due to numerous uncertainties, the Company cannot reasonably
estimate the effects, if any, one common currency will have on pricing and on
the financial conditions or results of operations.
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, 1998 and 1997 and the Company does not expect that it will
have a material impact during the remainder of 1998.
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
each of the nine months periods ended September 30, 1998 and 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
Consolidated Statements of Earnings.
20
<PAGE>
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, 1998, a significant amount of the purchases of products by
the Company were made in United States dollars and approximately 88% 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 (20% of sales), the
French franc (10%) and the British pound (9%). At September 30, 1998,
approximately $287 million of accounts payable were attributable to foreign
currency liabilities denominated in other than the subsidiaries functional
currencies. Of these, $248 million was denominated in U.S. dollars and $31
million was denominated in German marks. Approximately 62% 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.
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.
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, the effects of the euro, 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.
21
<PAGE>
PART II
ITEM 5
OTHER INFORMATION
1. The deadline for submission of proposals by shareholders pursuant to
Rule 14a-8 issued under the Securities Exchange Act of 1934 (the
"Act") for inclusion in the proxy statement for the Company's 1999
Annual Meeting of Shareholders is January 8, 1999. Any proposals
submitted other than pursuant to Rule 14a-8 of the Act must be
received by the Company no later than March 24, 1999 or such proposals
will be considered untimely, and the Company may confer discretionary
voting with respect to such matters in its proxy for the 1999 Annual
Meeting of Shareholders.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibit 27 - Financial Data Schedule
22
<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 12, 1998 BY /s/ ANTONIO BOCCALANDRO
-----------------------------------------
ANTONIO BOCCALANDRO
Secretary
November 12, 1998 BY /s/ CRAIG S. TOLL
-----------------------------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
23
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-01-1998
<CASH> 184,227
<SECURITIES> 0
<RECEIVABLES> 1,018,657
<ALLOWANCES> (33,116)
<INVENTORY> 830,263
<CURRENT-ASSETS> 2,090,066
<PP&E> 105,656
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,856,587
<CURRENT-LIABILITIES> 1,805,294
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 770,416
<TOTAL-LIABILITY-AND-EQUITY> 2,856,587
<SALES> 5,687,775
<TOTAL-REVENUES> 5,687,775
<CGS> 5,309,921
<TOTAL-COSTS> 287,676
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,813
<INCOME-PRETAX> 53,329
<INCOME-TAX> 17,968
<INCOME-CONTINUING> 32,718
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,718
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.61
</TABLE>
