UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 16, 1999: 59,557,051
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
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CHS ELECTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 3
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW 5 - 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 - 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 - 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 34 - 36
PART II.
ITEM 1. LEGAL PROCEEDINGS 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 38
2
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash (including restricted cash of $79,727 in 1999) $ 163,475 $ 176,991
Accounts receivable:
Trade, less allowance for doubtful accounts
of $61,791 in 1999 and $34,486 in 1998 1,020,225 1,342,126
Affiliates 4,617 35,546
----------- -----------
1,024,842 1,377,672
Inventories 487,306 1,025,690
Prepaid expenses and other current assets 81,331 101,698
----------- -----------
TOTAL CURRENT ASSETS 1,756,954 2,682,051
PROPERTY AND EQUIPMENT, NET 119,084 120,201
COST IN EXCESS OF ASSETS ACQUIRED, NET 677,345 737,719
OTHER ASSETS 67,198 32,172
----------- -----------
$ 2,620,581 $ 3,572,143
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 586,244 $ 620,067
Accounts payable, trade 811,462 1,345,059
Accrued liabilities 106,619 125,076
Amounts due to sellers under acquisition agreements 275,267 185,853
Income taxes payable 16,477 13,997
----------- -----------
TOTAL CURRENT LIABILITIES 1,796,069 2,290,052
LONG TERM DEBT 280,670 433,582
MINORITY INTEREST 8,507 10,466
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding -- --
Common stock, authorized 100,000,000 shares at $.001 par value;
64,815,416 and 55,619,475 shares outstanding at September
30, 1999 and December 31, 1998, respectively 64 56
Additional paid-in capital 768,227 732,035
Retained earnings (losses) (203,410) 110,793
Cumulative foreign currency translation adjustment (29,546) (4,841)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 535,335 838,043
----------- -----------
$ 2,620,581 $ 3,572,143
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,066,026 $ 2,166,943 $ 6,879,372 $ 5,687,775
Cost of goods sold 1,956,766 2,025,607 6,499,702 5,309,921
----------- ----------- ----------- -----------
Gross profit 109,260 141,336 379,670 377,854
Operating expenses:
Selling, general & administrative 153,437 113,976 461,553 294,619
Restructuring & asset impairment 170,410 -- 184,372 --
----------- ----------- ----------- -----------
323,847 113,976 645,925 294,619
----------- ----------- ----------- -----------
Operating income (loss) (214,587) 27,360 (266,255) 83,235
Other (income) expense:
Interest income (4,972) (3,966) (15,565) (10,964)
Interest expense 24,075 20,346 75,995 47,813
Gain on sale of Sun Microsystems
distribution business (32,658) -- (32,658) --
Foreign currency (gain) loss (2,958) (1,846) (1,178) (6,943)
----------- ----------- ----------- -----------
(16,513) 14,534 26,594 29,906
----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (198,074) 12,826 (292,849) 53,329
Income taxes 27,232 5,357 21,237 17,968
Minority interest in subsidiaries (24) 826 117 2,643
----------- ----------- ----------- -----------
Net earnings (loss) $ (225,282) $ 6,643 $ (314,203) $ 32,718
=========== =========== =========== ===========
Net earnings (loss) per common share:
Basic $ (3.71) $ 0.13 $ (5.40) $ 0.64
=========== =========== =========== ===========
Diluted $ (3.71) $ 0.12 $ (5.40) $ 0.61
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings (loss) $(314,203) $ 32,718
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Goodwill write-off 169,392 --
Gain on sale of Sun Microsystems distribution business (32,658) --
Depreciation and amortization 45,123 29,150
Minority interest in net earnings 117 2,643
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 314,744 (22,884)
Accounts receivable-affiliates, net 30,598 (22,203)
Inventories 525,785 50,412
Prepaids and other assets (7,397) (16,561)
Accounts payable (556,882) (50,036)
Accrued liabilities and income taxes (11,550) (8,920)
--------- ---------
Net cash provided by (used in) operating activities 163,069 (5,681)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (26,914) (33,045)
Net proceeds from dispositions 29,803 --
Acquisitions, net of cash received (6,707) (177,931)
--------- ---------
Net cash used in investing activities (3,818) (210,976)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Convertible Debentures 50,000 --
Proceeds from the issuance of Senior Notes -- 200,000
Net borrowings from (repayments to) banks (212,895) 129,665
Proceeds from exercising stock options 617 1,171
Repurchase of shares -- (371)
--------- ---------
Net cash provided by (used in) financing activities (162,278) 330,465
Effect of exchange rate changes on cash (10,489) 1,613
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,516) 115,421
Cash and cash equivalents at beginning of period 176,991 68,806
--------- ---------
Cash and cash equivalents at end of period $ 163,475 $ 184,227
========= =========
</TABLE>
5
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<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
(continued)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 50,839 $ 35,109
Income taxes $ 7,626 $ 10,454
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.
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1998 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, 1999 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. Due to assets sales in the third quarter of 1999, and divestiture
activities and subsidiaries being placed in receiverships and voluntary creditor
protection in the fourth quarter of 1999, the results of the fourth quarter of
1999 are expected to differ significantly from those in prior years.
2. RESTRUCTURING AND ASSET IMPAIRMENT COSTS
On May 1, 1999 the Company implemented a restructuring plan with the goal of
reducing future operating costs. The restructuring has and will continue to
result in the writing-off of certain assets, a planned 10% reduction in the
number of employees and the closure of redundant warehouses. The restructuring
plan will be implemented throughout 1999. As of September 30, 1999,
approximately $8.0 million is accrued for restructuring costs and this amount is
included in accrued liabilities.
Additionally, prior to the issuance of this report, there have been dispositions
and closings of certain subsidiaries and certain other subsidiaries have been
placed in receivership or voluntary creditor protection in the fourth quarter of
1999. As a result, the Company has determined that goodwill, to the extent of
losses to be incurred with respect to these subsidiaries, is impaired and,
accordingly, has written off such amounts as of September 30, 1999. See Notes 4
and 6 for further discussion.
The components of the restructuring and asset impairment costs for the three and
nine months ended September 30, 1999 are as follows (in thousands):
3 MONTHS 9 MONTHS
-------- --------
Goodwill write-off $169,392 $169,392
Write-off of leasehold improvements and other
property and equipment 489 6,402
Lease payments in excess of sublease income 177 6,196
Employee severance costs 187 1,768
Other 165 614
-------- --------
Total $170,410 $184,372
======== ========
7
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3. ACQUISITIONS
In the nine month period ended September 30, 1999, the Company made four
insignificant acquisitions. During 1998, in addition to SiS Distribution Ltd.,
the Company completed 14 other acquisitions, which were considered not to be
significant. All acquisitions have been accounted for under the purchase method
and accordingly, the results of such acquired entities have been included in the
consolidated operating results since their acquisition dates.
Presented below is pro forma operating data showing selected operating results
for the Company as if the companies acquired in 1998 were acquired on January 1,
1998. The pro forma effect of the 1999 acquisitions is immaterial. Pro forma
adjustments were made to include goodwill amortization in the nine month period
ended September 30, 1998 based on 1998 actual results. Pro forma net earnings
per share is based on the net earnings (loss) divided by the weighted average
number of shares plus contingent shares actually issued.
Nine Months Ended September 30,
(in thousands, except per share data)
1999 1998
----------- -----------
Net sales $6,879,372 $6,494,821
Net earnings (loss) $ (314,203) $ 15,737
Net earnings (loss) per share - basic $ (5.40) $ 0.31
Net earnings (loss) per share - diluted $ (5.40) $ 0.29
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1998 or
of future results of the combined companies.
4. DISPOSITIONS
In September 1999, the Company completed the sale of a non-core business that
distributes Sun Microsystems products in Germany, Austria, Denmark, and Sweden
to UBS Capital, the private equity division of UBS AG. Under the terms of the
agreement, the business was sold for approximately $49.0 million. The Company
owned approximately 75% of this business and received approximately $36.7
million from the sale. The Company realized a pre-tax gain of approximately
$32.7 million from the sale. Proceeds from the sale were placed in escrow, and
classified as restricted cash as of September 30, 1999. The proceeds were
released in early October 1999 and were used for debt repayment and working
capital purposes. The business generated sales of approximately $81.7 million
and net losses of $1.1 million for 1999 through the date of sale.
As of September 30, 1999, the Company owed approximately $275.3 million to the
sellers of certain businesses that the Company had purchased. The Company has
commenced a program designed to eliminate such amounts owed by disposing of all
or a portion of the Company's interests in those operations.
In October 1999, the Company agreed to submit to arbitration the issue of the
portion of Memory Set that the Company will retain as a result of the
cancellation of the Company's purchase agreement for Memory Set. Memory Set is a
subsidiary of the Company operating in Spain. The Company originally agreed to
purchase Memory Set in July 1998. The Company was in default under the purchase
agreement because the Company had not paid the balance of the purchase price of
approximately $74.4 million. The Company believes the unpaid balance of the
purchase price represents approximately 91.5% of Memory Set and the amounts
already paid represent approximately 8.5%. The Company may cure its default by
paying the balance of the purchase price
8
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at any point prior to the completion of the arbitration. The Company does not
expect to cure the default. During the nine months ended September 30, 1999,
this subsidiary contributed $139.4 million in revenues. The estimated loss on
the disposition is $19.9 million. The Company recognized the loss as impairment
to goodwill as of September 30, 1999 as such amount is no longer deemed to be
realizable. In the fourth quarter of 1999, the Company will be offsetting the
unpaid purchase price of $74.4 million against its investment in the former
subsidiary that includes $49.5 million of goodwill. The Company will treat the
ongoing interest in this subsidiary under the cost method of accounting.
On October 4, 1999, the Company conveyed 80% of the shares of Arena Bilgisayar
Sanayi Ve Ticaret A.S. and Armada Bilgisayar A.S., the Company's subsidiaries
operating in Turkey, to the original owners of those companies in exchange for a
release of the Company's obligation to pay them the balance of the purchase
price for those subsidiaries of approximately $46.0 million. The sellers granted
back to the Company an option to reacquire those interests at any time prior to
the earlier of October 4, 2000 or a 60-day period beginning after the Company
receives new cash investments of $200 million or more. During the nine months
ended September 30, 1999, these subsidiaries contributed $115.3 million in
revenues. The estimated loss on the disposition is $21.1 million which includes
approximately $2.2 million of amounts due from the former subsidiary to the
Company that will not be realized. The Company recognized a goodwill impairment
loss of $18.9 million on this transaction as of September 30, 1999 as such
amount is no longer deemed to be realizable. In the fourth quarter of 1999, the
Company will be offsetting the unpaid purchase price of $46.0 million against
its investment in the former subsidiaries that includes an additional $31.5
million of goodwill.
The Company also conveyed all of the Company's interest in ARC Espana Cartera,
S.A., another of the Company's subsidiaries operating in Spain, to the original
owners in exchange for a release of the Company's obligation to pay them the
balance of the purchase price of approximately $29.3 million. During the nine
months ended September 30, 1999, the revenue attributed to this subsidiary was
approximately $67.2 million. The Company will realize a loss on the sale of this
subsidiary of $7.0 million, which includes a fee of approximately $3.9 million
to be paid to the original owners of the subsidiary. The Company recognized a
goodwill impairment loss of $3.1 million as of September 30, 1999 as such amount
is no longer deemed to be realizable. In the fourth quarter of 1999, the Company
will be offsetting the unpaid purchase price of $29.3 million against its
investment in the former subsidiary that includes an additional $21.8 million of
goodwill.
On October 20, 1999, the Company amended the terms of its purchase agreements
for International Corporation Services, Ltd. and related companies, subsidiaries
operating in seven locations in Latin America. Under the amendment, the Company
conveyed an aggregate 77.83% interest in these companies to the original owners
in exchange for a release of the Company's obligation to pay them the balance of
the purchase price of approximately $49.8 million. In addition, the original
owners granted the Company an option to repurchase the 77.83% interest for a
total purchase price of $55.0 million any time before the earlier of (1) October
20, 2000 or (2) 60 days after the Company receives new cash investments of $200
million or more. The Company also granted the original owners an option to
purchase the 22.17% interest that the Company retained in these companies for a
total purchase price of $15.6 million at any time that the Company's option to
repurchase their interest is in effect. During the nine months ended September
30, 1999, the revenues attributed to these subsidiaries totaled approximately
$180.4 million. The estimated loss on the transfer is $8.6 million. The Company
recognized the loss as impairment to goodwill as of September 30, 1999 as such
amount is no longer deemed to be realizable. In the fourth quarter of 1999, the
Company will be offsetting the unpaid purchase price of $49.8 million against
its investment in the former subsidiary that includes an additional $41.4
million of goodwill. The Company will treat the ongoing interest in these
companies under the equity method of accounting.
On October 20, 1999, the Company also amended the terms of its purchase
agreement for Cornejo Informatica, S.A. ("Cornejo"), another subsidiary
operating in Latin America. Under the
9
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amendment, the Company conveyed 86.55% interest in Cornejo to the original
owners in exchange for a release of its obligation to pay them the balance of
the purchase price of approximately $13.0 million. In addition, the original
owners granted the Company an option to repurchase the 86.55% interest for a
total purchase price of approximately $13.0 million any time before the earlier
of (1) October 20, 2000 or (2) 60 days after the Company receives a new cash
investment of $200 million or more. The Company also granted the original owners
the option to purchase the 13.45% interest that was retained in Cornejo by the
Company for a total purchase price of approximately $2.0 million at any time
that the Company's option to repurchase their interest is in effect. During the
nine months ended September 30, 1999, the revenues attributed to Cornejo totaled
approximately $33.0 million. The estimated loss on the transfer is estimated to
be $1.9 million. The Company recognized the loss as impairment to goodwill as of
September 30, 1999 as such amount is no longer deemed to be realizable. In the
fourth quarter of 1999, the Company will be offsetting the unpaid purchase price
of $13.0 million against its investment in the former subsidiary that includes
an additional $11.1 million of goodwill. The Company will treat the ongoing
interest in Cornejo under the cost method of accounting.
On October 27, 1999, the Company also conveyed its interest in Brightstar Corp.,
a subsidiary based in the United States, to the original owners in exchange for
a release of its obligation to pay the balance of the purchase price of
approximately $1.3 million. During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were approximately $94.1 million. The
Company will realize a loss of $3.2 on the sale of this subsidiary. The Company
wrote-off its goodwill of $25 thousand related to Brightstar as impairment to
goodwill as of September 30, 1999 as such amount is no longer deemed to be
realizable. In the fourth quarter of 1999, the Company will be offsetting the
unpaid purchase price of $1.3 million against its investment in the former
subsidiary and recognizing the remainder of the loss.
On October 31, 1999, the Company rescinded the purchase agreement with
MicroInformatica Corp. The Company had previously paid cash of $3.2 million and
issued shares with a value of $20.3 million in settlement of the acquisition of
MicroInformatica Corp. The rescission agreement provides for the return of the
cash and shares in exchange for the Company returning ownership of
MicroInformatica Corp. to its original owners. During the nine months ended
September 30, 1999, the revenues attributed to this subsidiary were $111.7
million. The Company will realize a loss of $21.8 million on the transaction.
The Company recognized the loss as impairment to goodwill as of September 30,
1999 as such amount is no longer deemed to be realizable.
The Company is currently in similar negotiations with the original owners of
seven other subsidiaries to reduce earn-out obligations by an additional $58
million. These subsidiaries include SiS Distribution Limited for which the
Company owes $42.4 million and is in default under the purchase agreement. If
the negotiations are successful, the amount due to sellers would be essentially
eliminated. For the nine months ended September 30, 1999, the seven subsidiaries
generated combined sales of approximately $556.6 million. The Company acquired
the companies in separate transactions during 1998. Four of the operations in
negotiation are located in Latin America, two in Asia and the Middle East and
one in Europe.
The Company has also closed a subsidiary located in Miami, Florida that serves
the Latin America market and that contributed revenues of $22.6 million during
the nine months ended September 30, 1999. Goodwill of approximately $6.3 million
was written of as of September 30, 1999 related to this subsidiary.
On November 10, 1999, the Company completed the sale of a 60% interest in its
subsidiary in Poland for $2 million. The Company retains a 40% interest in the
former subsidiary. During the nine months ended September 30, 1999, the revenues
attributed to this subsidiary was $89.6 million. The Company will treat its
ongoing interest in this subsidiary under the equity method of accounting.
No gain or loss is expected on the transaction.
10
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On November 12, 1999, the Company executed an agreement with a group of its
senior managers in Latin America for the Company to sell for $13 million in
cash, a 51% interest in certain of its operations in Latin America. Under the
terms of the agreement, the Company would retain a 49% interest in the
operations. As part of the agreement, the e-commerce component of the Latin
American operations would be transferred to a newly formed entity to be jointly
owned by the Company (51%) and the management group (49%). The transaction is
expected to be finalized prior to December 31, 1999
The following Pro Forma Condensed Consolidated Balance Sheet is presented to
reflect the effect of the seven transactions described above for the
subsidiaries disposed of in October 1999, in order to reduce the Company's
liability for amounts due to sellers under acquisition agreements, as if they
had occurred on September 30, 1999.
11
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CHS ELECTRONICS, INC.
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
Subsidiaries Pro Forma Pro Forma
Consolidated Disposed Adjustments Consolidated
------------ -------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 163,475 $ (8,019) $ -- $ 155,456
Accounts receivable:
Trade, less allowance for doubtful accounts
of $61,791 1,020,225 (135,874) 1,098 (a) 885,449
Affiliates 4,617 (622) -- 3,995
----------- ----------- ----------- -----------
1,024,842 (136,496) 1,098 889,444
Inventories 487,306 (62,399) -- 424,907
Prepaid expenses and other current assets 81,331 (34,428) 22,765 (a) 69,668
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 1,756,954 (241,342) 23,863 1,539,475
PROPERTY AND EQUIPMENT, NET 119,084 (12,379) -- 106,705
COST IN EXCESS OF ASSETS ACQUIRED, NET 677,345 -- (155,265)(b) 522,080
OTHER ASSETS 67,198 (4,679) 18,946 (c) 81,465
----------- ----------- ----------- -----------
$ 2,620,581 $ (258,400) $ (112,456) $ 2,249,725
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 586,244 $ (44,723) $ -- $ 541,521
Accounts payable, trade 811,462 (103,031) 20,235 (a) 728,666
Accrued liabilities 106,619 (4,424) 6,066 108,261
Amounts due to sellers under acquisition agreements 275,267 -- (213,878)(d) 61,389
Income taxes payable 16,477 (10,337) -- 6,140
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,796,069 (162,515) (187,577) 1,445,977
LONG TERM DEBT 280,670 (5,995) -- 274,675
MINORITY INTEREST 8,507 -- -- 8,507
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; -- -- -- --
0 shares outstanding
Common stock, authorized 100,000,000 shares at
$.001 par value; 64,815,416 shares outstanding
at September 30, 1999 64 (5,729) 5,723 (e) 58
Additional paid-in capital 768,227 (38,293) 32,773 (e) 762,707
Retained earnings (203,410) (47,568) 38,325 (f) (212,653)
Accumulated other comprehensive income (29,546) 1,700 (1,700)(g) (29,546)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 535,335 (89,890) 75,121 520,566
----------- ----------- ----------- -----------
$ 2,620,581 $ (258,400) $ (112,456) $ 2,249,725
=========== =========== =========== ===========
</TABLE>
PRO FORMA ADJUSTMENTS
(a) To reclassify the net intercompany receivable/payable to accounts
receivables.
(b) To record the write-off of the goodwill related to the entities disposed of.
(c) To record the minority interest investment retained.
(d) To reduce the amounts due to sellers.
(e) To restore common stock and additional paid-in capital removed and the
effect of taking back and retiring 6,314,899 shares valued at $5.5 million
related to the MicroInformatica Corp. transaction.
(f) To restore retained earnings removed of $47.6 million and reflect losses
on the transactions of $9.2 million
(g) To restore cumulative foreign currency translation adjustment removed.
12
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5. PER SHARE DATA
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 or loss by the weighted average number of
common shares outstanding. Diluted earnings per share includes the dilution
caused by common stock options and warrants. The weighted average number of
shares for basic earnings per share was 60,779,730 and 52,439,025 for the three
month periods ended September 30, 1999 and 1998, respectively, and 58,154,044
and 51,134,884 for the nine month periods ended September 30, 1999 and 1998,
respectively. The weighted average number of shares used in the diluted
computation was 60,779,730 and 55,848,719 for the three month periods ended
September 30, 1999 and 1998, respectively, and 58,154,044 and 53,933,927, for
the nine month periods ended September 30, 1999 and 1998, respectively.
Since the Company had a loss for the three and nine months ended September 30,
1999, all potentially dilutive securities were excluded from diluted earnings
per share during such period since the effect would be anti-dilutive. Such
potentially dilutive securities consist of the following: (i) unexercised stock
options and warrants to purchase 4,454,573 million shares of the Company's
common stock; and (ii) the floating rate convertible debentures due May 31,
2003, which is convertible into 9,090,909 shares of the Company's common stock.
The floating rate convertible debentures would require the issuance of
additional shares upon conversion if the average closing price of the Company's
common stock for the twenty trading days prior to the date of conversion is less
than $5.50 and under certain other conditions.
The following table illustrates, for periods with income, 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
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
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
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
======== ====== ======
</TABLE>
6. NOTES PAYABLE AND LONG TERM DEBT
The Company has been in violation of a covenant in a certain short term credit
facility since the first quarter of 1999. The amount outstanding on this
facility was approximately $19.8 million as of September 30, 1999. As a result
of the default, on October 22, 1999, CHS Electronics Plc, a
13
<PAGE>
subsidiary operating in the United Kingdom, was placed in receivership by the
lender. The loan was secured by approximately $33.5 million of receivables as of
September 30, 1999. The receiver has subsequently closed CHS Electronics Plc and
is liquidating its net assets. The Company has additionally sold certain assets
of Metrologie Ltd. and Karma UK Ltd., other United Kingdom based subsidiaries.
In the first nine months of 1999 these companies generated sales of $612.4
million and had a net loss of $17.0 million. The Company is presently unable to
determine if proceeds of the assets of such companies will be sufficient to pay
all liabilities. To the extent that there is a shortfall and the liabilities are
guaranteed by the Company, there may be additional charges incurred.
The Company is in violation of various requirements of a different short-term
credit facility at September 30, 1999. The Company has closed the subsidiary
that is the primary obligor under the loan and has arranged with the lender to
repay the credit facility through collections of receivables of the subsidiary.
The total amount outstanding at September 30, 1999 under such facility was $9.7
million. This subsidiary contributed revenues of $95.4 million for the nine
months ended September 30, 1999. The Company wrote-off goodwill of $26.5 million
as of September 30, 1999 related to this subsidiary. The Company is a guarantor
of this credit facility.
A Swiss subsidiary of the Company has two separate credit facilities providing
for advances for working capital needs based upon eligible inventory. The credit
facilities are secured by a lien on certain assets of the subsidiary and contain
covenants requiring certain levels of net worth and profitability. The
subsidiary was not in compliance with certain of the covenants as of September
30, 1999 and was consequently in default of the credit facilities. One of the
lenders has taken steps to seize the receivables, inventory and cash of the
subsidiary. At September 30, 1999 the amounts outstanding under the facilities
were $22.4 million. The Company is a guarantor of these credit facilities.
On December 30, 1998, CHS Frank & Walter, CHS Germany and CHS Austria
(collectively, the "Borrowers") entered into a three year DM 325 million
(approximately $180 million) Facility Agreement with a bank. Advances under the
agreement may be used for working capital needs of the Borrowers and are based
upon a borrowing base equal to the aggregate of 85% of eligible accounts
receivable, 50% of eligible inventory and 100% of inventory of a specific
vendor. The debt is secured by a lien on the receivables, inventories and
intangible assets of the Borrowers and two Austrian subsidiaries of the Company,
and a lien on the receivables of a Swiss subsidiary of the Company
(collectively, the "Pledgors"), and a pledge of the shares of the Borrowers and
the Pledgors. The indebtedness has been guaranteed by the Company, the Pledgors,
and certain other subsidiaries of the Company. Interest is at a variable rate
based on Euro LIBOR. At September 30, 1999, the interest rate on this credit
facility was 6.02%. The loan agreement was amended on August 31, 1999 which
changed the maturity date to November 30, 1999. In addition to limitations on
the ability of
14
<PAGE>
the Borrowers to incur additional indebtedness, the amendment reduced the amount
available under the loan to DM 310 million (approximately $170 million), which
amount will be further reduced upon certain events and requiring the lender's
consent for the Company to make future acquisitions or to transfer funds from
the Borrowers to other companies in the organization. The Borrowers were in
default of certain of the financial covenants in the loan agreement as of
September 30, 1999 and the Company is currently in default under certain
provisions of its guarantee.
On October 26, 1999, CHS Frank & Walter, CHS Germany and CHS Austria voluntarily
filed for creditor protection under German and Austrian law. The filing was
necessitated by continuing losses in the operations due to competitive industry
conditions in the region, restricted credit from the subsidiaries' vendors, a
reduced bank line and the inability to remedy the events of default in the
Facility Agreement. Insolvency administrators have been appointed by the court
to oversee each operation. Under German and Austrian insolvency laws, each of
the subsidiaries are required to prepare a recovery plan to be evaluated by the
insolvency administrator. The administrator will make a determination within
thirty days of the filing of whether to sell or close the businesses or return
them to their owner. During the thirty day period, the subsidiaries will be
under creditor protection. In the first nine months of 1999, CHS Frank & Walter,
CHS Germany and CHS Austria generated sales of $1,033.1 million and had a net
loss of $31.6 million. Although the subsidiaries have tangible book value, the
Company is presently unable to determine the ultimate results of the filing, and
if the businesses are closed, whether the proceeds of the assets of such
companies will be sufficient to pay all liabilities. To the extent that there is
a shortfall and the liabilities are guaranteed by the parent, there may be
additional charges incurred. At September 30, 1999, the total amount outstanding
under this credit facility was $99.9 million. The Company wrote-off goodwill of
$62.4 million as of September 30, 1999 related to these subsidiaries.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At September 30,
1999, of the $507.1 million aggregate amount available under these agreements,
$432.3 million was outstanding. Such agreements are usually for a term of one
year and are secured by the receivables of the borrower and, in certain
instances, inventories of the borrower. The weighted average interest rate at
September 30, 1999 was 6.1%. Certain of these agreements contain financial
covenants requiring, among other things, the maintenance of certain net worth
and loan-to-collateral value terms. The Company typically guarantees these
loans. The Company has also guaranteed the obligations of certain of its
subsidiaries to certain vendors. The Company has received demands on payments
under guarantees from many of its vendors, creditors and lenders.
The Company's long-term debt at September 30, 1999, consists principally of $50
million of floating rate convertible debentures ("Debentures") due May 31, 2003
and $200 million of Senior Notes ("Notes") due 2005.
In June, 1999 the Company issued the Debentures to Computer Associates
International, Inc. ("CA"). The interest rate on the debentures is the six month
LIBOR rate plus 2%, (7.17% for the initial interest period), adjusted
semiannually. The Company is using the proceeds for working capital purposes.
The Debentures are convertible into the Company's common stock at any time at a
conversion price of $5.50 per share. The conversion price is subject to
adjustment under certain conditions, including upon the average closing price of
the Company's common stock falling below $5.50 during the twenty days preceding
any conversion date or upon new issuance of shares at a price lower than $5.50.
In connection with the financing, the Company issued to CA a warrant expiring
May 31, 2004 for two million shares of common stock at an exercise price of
$5.50 per share. The exercise price of the warrant is reduced if new shares are
issued at a lower price. The warrant has been recorded at a fair value of $3
million as a discount to the Debentures and this amount is being amortized over
the life of the Debentures. The Company is currently not in compliance with
certain covenants of the Debentures and is exploring all available options to
remedy the situation.
15
<PAGE>
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. 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 principally 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, 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. In November 1999, the Company received
notification from one of the holders of the Notes informing it that they believe
that the Company is not in compliance with certain covenants of the Note
indenture. The Company is currently reviewing the claim made in the
notification.
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 (amounts in thousands).
16
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 1,512 $ (64) $ 162,027 $ -- $ 163,475
Accounts receivable 2 18,779 1,006,061 -- 1,024,842
Intercompany receivables 157,526 19,934 210,381 (387,841) --
Inventories -- 11,634 475,672 -- 487,306
Other current assets 1,332 3,470 76,529 -- 81,331
----------- ----------- ----------- ----------- -----------
Total current assets 160,372 53,753 1,930,670 (387,841) 1,756,954
Property and equipment, net 1,501 8,284 109,299 -- 119,084
Cost in excess of assets acquired, net -- -- 677,345 -- 677,345
Investments in affiliated companies 903,891 1,438,559 -- (2,342,450) --
Other assets 7,977 13,114 46,107 -- 67,198
----------- ----------- ----------- ----------- -----------
Total assets $ 1,073,741 $ 1,513,710 $ 2,763,421 $(2,730,291) $ 2,620,581
=========== =========== =========== =========== ===========
Notes payable $ -- $ 10,647 $ 575,597 $ -- $ 586,244
Intercompany payables 8,576 168,812 210,453 (387,841) --
Accounts payables 13,553 30,725 767,184 -- 811,462
Accrued expenses 4,813 1,076 100,730 -- 106,619
Amounts due to sellers 275,267 -- -- -- 275,267
Income taxes payable and other (11,053) 1,148 26,382 -- 16,477
----------- ----------- ----------- ----------- -----------
Total current liabilities 291,156 212,408 1,680,346 (387,841) 1,796,069
Long term debt 247,250 4,291 29,129 -- 280,670
Minority interests -- -- (2,100) 10,607 8,507
Shareholders' equity 535,335 1,297,011 1,056,046 (2,353,057) 535,335
----------- ----------- ----------- ----------- -----------
$ 1,073,741 $ 1,513,710 $ 2,763,421 $(2,730,291) $ 2,620,581
=========== =========== =========== =========== ===========
</TABLE>
<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 payables 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
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 181,967 $ 6,697,405 $ -- $ 6,879,372
Cost of goods sold -- 165,228 6,334,474 -- 6,499,702
----------- ----------- ----------- ----------- -----------
Gross profit -- 16,739 362,931 -- 379,670
Operating expenses 21,696 22,023 602,206 -- 645,925
----------- ----------- ----------- ----------- -----------
Operating loss (21,696) (5,284) (239,275) -- (266,255)
Other (income) expense, net 18,174 888 7,532 -- 26,594
----------- ----------- ----------- ----------- -----------
Loss before income taxes and
minority interest in subsidiaries (39,870) (6,172) (246,807) -- (292,849)
Provision for income taxes (7,225) 2,624 25,838 -- 21,237
Equity in loss of affiliated
companies, net of tax 281,558 108,737 -- (390,295) --
Minority interest -- -- -- 117 117
----------- ----------- ----------- ----------- -----------
Net loss $ (314,203) $ (117,533) $ (272,645) $ 390,178 $ (314,203)
=========== =========== =========== =========== ===========
</TABLE>
<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 3,182 652 290,785 -- 294,619
----------- ----------- ----------- ----------- -----------
Operating income (loss) (3,182) (269) 86,686 -- 83,235
Other (income) expense, net 5,854 254 23,798 -- 29,906
----------- ----------- ----------- ----------- -----------
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
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 65,460 $ 2,000,566 $ -- $ 2,066,026
Cost of goods sold -- 58,348 1,898,418 -- 1,956,766
----------- ----------- ----------- ----------- -----------
Gross profit -- 7,112 102,148 -- 109,260
Operating expenses 366 13,726 309,755 -- 323,847
----------- ----------- ----------- ----------- -----------
Operating income (loss) (366) (6,614) (207,607) -- (214,587)
Other (income) expense, net 6,814 388 (23,715) -- (16,513)
----------- ----------- ----------- ----------- -----------
Loss before income taxes and
minority interest in subsidiaries (7,180) (7,002) (183,892) -- (198,074)
Provision for income taxes (2,822) 1,435 28,619 -- 27,232
Equity in loss of affiliated
companies, net of tax 220,924 62,129 -- (283,053) --
Minority interest -- -- -- (24) (24)
----------- ----------- ----------- ----------- -----------
Net loss $ (225,282) $ (70,566) $ (212,511) $ 283,077 $ (225,282)
=========== =========== =========== =========== ===========
</TABLE>
18
<PAGE>
<TABLE>
<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 2,851 279 110,846 -- 113,976
--------- ---------- ----------- ---------- ----------
Operating income (loss) (2,851) (279) 30,490 -- 27,360
Other (income) expense, net 4,004 54 10,476 -- 14,534
--------- ---------- ---------- ---------- ----------
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>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ 163,069 $-- $ 163,069
Net cash provided (used) in investing activities (50,551) 1,181 45,552 -- (3,818)
Net cash provided (used) in financing activities 50,000 -- (212,278) -- (162,278)
Effect of exchange rate -- -- (10,489) -- (10,489)
Cash at beginning 2,063 (1,245) 176,173 -- 176,991
Cash at end $ 1,512 $ (64) $ 162,027 $-- $ 163,475
</TABLE>
<TABLE>
<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 activties (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
</TABLE>
19
<PAGE>
7. COMPREHENSIVE INCOME
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 (loss) 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 (loss) was
$(338.9)million and $41.4 million for the nine months ended September 30, 1999
and 1998, respectively, and $(206.5) million and $22.1 million for the three
months ended September 30, 1999 and 1998 respectively. The primary difference
from net income (loss) as reported is the change in cumulative foreign currency
translation adjustment.
8. CONTINGENCIES
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of
Florida. This complaint and others were purportedly filed on behalf of those
security holders of the Company who purchased such securities during specified
time frames. The complaints, which purports to be class action complaints,
generally allege that the Company and certain of its officers violated federal
securities laws (including Rule 10b-5 promulgated pursuant to the Securities
Exchange Act of 1934) in connection with financial reporting and disclosure.
Among other things, the plaintiffs allege that the Company and certain of its
officers and directors materially overstated financial disclosures. The
plaintiffs seek, among other relief, to be declared a class and to be awarded
compensatory damages and attorney's fees and costs. By order dated June 23,
1999, the Court consolidated the above-referenced cases and appointed lead
plaintiffs and approved the selection of lead counsel for the lead plaintiffs.
Pursuant to the direction of the Court, the parties have submitted a proposed
pre-trial schedule which is pending consideration with the Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed, however, appeals have subsequently been filed. The Vobis Group
purchase agreement called for disputes to be settled by arbitration in Germany
and an arbitration proceeding has been initiated by Metro. The arbitration
proceeding is in an early stage and no prediction can be made as to its outcome.
The purchase agreement did not provide for a break-up fee.
The Department of Commerce has commenced an investigation of the export
activities of one of the Company's subsidiaries and its management in relation
to alleged violations of certain Federal exportation laws and other related
violations including money laundering. Although the ultimate exposure could be
much higher if the Company were ultimately found to have violated these laws,
the Department of Commerce has offered to settle for a fine of $25 million and a
guilty plea to a representative sample of the charges. The Company intends to
vigorously defend itself against these claims.
DHL Airways, Inc. and DHL International, B.V. (collectively "DHL") has made a
claim against the Company for indemnification for assessments of approximately
$3.1 million made by the Dutch Government against DHL. The assessments are for
certain shipments made through DHL by certain of the Company's European
subsidiaries that have been alleged by the Dutch government to have understated
the declared values in order to reduce payments for value added tax and custom
fees. The Company intends to vigorously defend itself against this claim.
20
<PAGE>
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings 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, who is a more than 5% shareholder and
officer of the Company, had ownership interests and control over other companies
that did business with the Company. The accompanying financial statements
include the following transactions and balances which relate to this individual
or his related entities during the nine months ended September 30, 1999 and 1998
(amounts in thousands):
1999 1998
------- -------
Sales to such related parties $ 56 $53,600
Purchases from such related parties 163 4,300
Net amount due the Company 1,782 25,400
By agreement dated December 1998 and subsequently amended in March 1999, CHS
acquired certain of these companies for a net amount of 1.7 million shares of
common stock and $4.0 million in cash. In January 1999, the Company acquired,
for $5.4 million in cash, the remaining entity which had transactions with the
Company. In connection with the acquisitions, the Company recorded goodwill of
$38.5 million. As a result of these acquisitions, the Company expects no
significant transactions in the future.
During 1998, the Company sold two companies and rights to entities in which the
above individual has a minority ownership interest. The companies and rights
sold were ancillary operations acquired as part of the acquisition of Frank &
Walter in January 1997. The companies were sold for cash of $6.7 million, all of
which was collected during 1999.
The Company has a receivable from Comtrad Holdings, Inc. ("CHI") and its wholly
owned subsidiary, Comtrad, Inc. ("Comtrad"), of $20.7 million at September 30,
1999 and $19.2 million at September 30, 1998. CHI is controlled by the Chief
Executive Officer of the Company and an additional member of the Board of
Directors also has a minority interest in CHI. 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 the Company's
common stock which is pledged on a loan. The principal liabilities of these
companies is an amount due of approximately $10 million to a financial
institution and the amount due to the Company. Interest accrues on the
promissory note at prime rate and is due together with the principal amount
outstanding 180 days after demand. Interest charged to Comtrad and CHI during
the nine months ended September 30, 1999 and 1998 was $0.7 million and $1.0
million, respectively. The market value of the Company's shares currently and at
June 30, 1999 would have been insufficient to liquidate the indebtedness.
Therefore management established a valuation reserve of $20.7 million as of June
30, 1999 by a charge to operating expenses and discontinued accrual of interest
as of that date.
10. SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standard 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" ("SFAS
131"), which establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. SFAS 131 requires that the definition of operating segments
align with the measurements used internally to assess performance.
The Company's business activities involve the operating segments of distribution
of microcomputer equipment and software products. The operating segments are the
distribution to resellers and the
21
<PAGE>
distribution to assemblers. The former involves both universal products
(products that represent the basic components of a personal computer without
regard to the specific local language, regulatory and technical factors of
individual markets) and localized products while the latter is principally
universal products. In addition, another operating segment is the Company's
central treasury function. The accounting policies of the segments are the same
as those described in the Summary of Accounting Policies to the Company's
audited consolidated financial statements for the year ended December 31, 1998
(Note A). The segments are managed separately since each requires different
business and marketing strategies. The geographic areas in which the
distribution to resellers segment operates are Western Europe, Eastern Europe,
Latin America and Asia/Middle East. Net sales, gross profit, operating income
(loss) (before interest and income taxes) and total assets by segment were as
follows (in thousands):
<TABLE>
<CAPTION>
DISTRIBUTION TO RESELLERS
------------------------------------------------------
ASIA/ DISTRIBUTION
NINE MONTHS ENDED WESTERN EASTERN LATIN MIDDLE TO TOTAL
SEPTEMBER 30, EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY SEGMENTS
- ----------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Net sales $3,880,313 $ 636,641 $1,121,278 $ 413,592 $ 827,548 $ -- $6,879,372
Gross profit 195,455 42,055 82,606 22,540 37,014 -- $ 379,670
Operating income (loss) (20,457) 7,651 (26,944) 1,793 (23,212) (3,887) $ (65,056)
Total assets 1,334,304 180,449 588,459 139,606 277,810 162,046 $2,682,674
1998
Net sales $3,019,038 $ 402,400 $1,095,016 $ 238,562 $ 932,759 $ -- $5,687,775
Gross profit 203,096 33,756 72,464 15,338 53,200 -- $ 377,854
Operating income (loss) 58,283 13,441 21,326 4,331 13,382 (842) $ 109,921
Total assets 1,318,977 159,643 531,196 119,773 471,218 208,111 $2,808,918
</TABLE>
Reconciliation of total segments to consolidated total:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING INCOME:
Total operating income for reportable segments $ (65,147) $ 109,921
Corporate (expenses) income (6,154) (9,671)
Goodwill write-off not allocated (169,392) --
Goodwill amortization not allocated (25,562) (17,015)
----------- -----------
Total operating income (loss) $ (266,255) $ 83,235
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------
ASSETS: 1999 1998
----------- -----------
<S> <C> <C>
Total segments $ 2,682,674 $ 2,808,918
Elimination of intercompany receivables (620,402) (521,980)
Goodwill not allocated 677,345 620,452
Other assets, including reclassifications (119,036) (50,803)
----------- -----------
Total consolidated assets $ 2,620,581 $ 2,856,587
----------- -----------
</TABLE>
22
<PAGE>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
GEOGRAPHIC INFORMATION: 1999 1998
---------- ----------
Net sales:
Western Europe $4,456,260 $3,681,743
Eastern Europe 767,611 575,170
Latin America 1,121,278 1,081,086
Asia, Africa and Middle East 534,223 349,776
---------- ----------
Consolidated Total $6,879,372 $5,687,775
========== ==========
The Company's product mix by category was:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------ ------
Personal computers 23.5% 17.3%
Mass storage 19.7% 26.7%
Printers 11.5% 11.8%
Software 10.7% 10.6%
Components 6.8% 8.7%
Networking and multimedia 9.0% 8.6%
Peripherals 7.4% 7.8%
Other 11.4% 8.5%
------ ------
Total 100% 100%
====== ======
The Company's customers typically rely on distributors as their principal source
of microcomputer products and financing. The Company's backlog of orders is not
considered material to an understanding of its business. No single customer
accounted for more than one percent of the Company's net sales in the nine
months ended September 30, 1999 and 1998.
23
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
In the third quarter of 1999 several of the Company's major suppliers and
lenders changed the terms of their credit arrangements with the Company. The
suppliers have decreased the number of days the Company had to pay for product
purchases and in many cases began to require cash on delivery. Additionally,
suppliers reduced credit limits, required a stricter adherence to payment terms
and began to charge interest on certain outstanding balances. Certain lenders
also demanded payment on their loans and have been unwilling to renew loans.
These changes have increased the Company's working capital requirements and
financing costs and reduced the Company's ability to take advantage of early
payment discounts as compared to previous periods. Additionally, in the quarter
the Company experienced a reduction in the number and types of incentives
offered by certain vendors.
During the quarter the Company had net cash from operating activities of $94.6
million, which it used to repay bank loans and fund operations.
The Company announced in the second quarter of 1999, that in response to lower,
restated earnings in 1998 and disappointing results in first quarter of 1999, it
would begin a restructuring program to reduce operating cost by $30 million in
1998 and $40 million on an annual basis. Through September 30, 1999, 74% of
the planned headcount reduction and 56% of the planned warehouse reduction
were completed.
In October 1999, due to defaults on certain bank loans, certain subsidiaries of
the Company in the United Kingdom, Germany and Austria have been placed in
receivership or voluntary creditor protection. Additionally, In October 1999,
the Company commenced a program designed to reduce liabilities to sellers of
businesses by disposing of all or a portion of the Company's interests in
certain of those operations. As described in Note 4, the Company has concluded
agreements with seven of the sellers of the businesses and is in discussions
with the original owners of seven other subsidiaries to dispose of those
subsidiaries.
The Company hired an investment banker early in the third quarter to evaluate
strategic alternatives that could enhance shareholder value. The relationship
with the investment banker has been terminated. The Company has alternatively
retained the services of a financial advisor and other professionals to assist
in the development of a comprehensive plan to equitably satisfy its outstanding
obligations. There can be no assurance that the Company will be successful in
its plans.
24
<PAGE>
OVERVIEW
The Company's net sales and scope of operations have grown substantially during
the past several years, in large part due to acquisitions. The acquisitions
since January 1, 1998 are shown below:
<TABLE>
<CAPTION>
OPERATING SUBSIDIARY CHS ACQUISITION SERVICE AREA DATE
-------------------- ---------------------------- ----
<S> <C> <C>
Computer Hardware of Australia Australia July, 1999
BGS Slovakia Slovakia May 1999
M&V Technologies Thailand April 1999
Yakumo Germany, Hong Kong January 1999
MC DOS(1)(2) Germany, Netherlands December 1998
Lung(2) Hong Kong December 1998
Brightstar(6) Latin America November 1998
CHS Argentina(3) Argentina August 1998
Memory Set(6) Spain July 1998
Cornejo(6) Argentina July 1998
Intcomex(6) Mexico, Panama, Guatemala, Chile, Peru July 1998
and Uruguay
Metrologie International France, United Kingdom and Spain July 1998
Arena(6) Turkey May 1998
Armada(6) Turkey May 1998
Verisell Russia(4) Russia May 1998
Raphael Informatika Italy May 1998
Aptec Middle East May 1998
SiS Distributors(5) China, Malaysia, Singapore and Vietnam March 1998
TH' Systems Czech Republic, Poland, Hungary February 1998
and Slovakia
ARC Spain(6) Spain January 1998
MicroInformatica(6) Latin America January 1998
</TABLE>
- ----------------------
(1) The Company owns 60% of MC DOS Netherlands.
(2) Deemed by the Company to be a part of a single acquisition.
(3) Formerly known as Acron.
(4) Formerly known as Merisel Russia.
(5) The Company owns 80% of this company.
(6) These companies have been disposed of subsequent to September 30, 1999.
See Note 4.
RESULTS OF OPERATIONS
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
NET SALES. Net sales decreased $101 million, or 4.7%, from $2,166.9 million in
third quarter 1998 to $2,066.0 million in third quarter 1999. This decrease is
due principally to the Company's reduced ability to obtain products in
quantities similar to the prior year. The lower credit limits imposed on the
Company by its suppliers negatively affected sales, especially in September. The
Company expects the fourth quarter results to also be negatively affected if the
lower credit limits are continued. Net sales of subsidiaries consolidated for
both 1999 and 1998 third quarters decreased $270.4 million, or 12.5%.
GROSS PROFIT. Gross profit decreased $32.1 million, or 22.7%, from $141.3
million in third quarter 1998 to $109.3 million in third quarter 1999. Companies
acquired in 1999 contributed $7.2 million of gross profit. Gross profit of
subsidiaries consolidated for both 1999 and 1998 third quarters, decreased $39.3
million, or 28.5%.
25
<PAGE>
Gross profit was 5.3% for the quarter ended September 30, 1999 and 6.5% for the
quarter ended September 30, 1998. The decrease was due principally to lower
gross margins from subsidiaries located in Western Europe and Asia. The decrease
is attributable to an overall drop in gross margins caused by lower product
volume, deteriorating product mix, increased competition, cash flow pressures
that resulted in missed early payment discounts and reduced incentives offered
by or earned from certain vendors. The Company expects that overall gross
margins will continue to be lower during the remainder of 1999 compared to 1998
due to the Company's financial condition, vendor relationships and competitive
pricing pressures across all regions.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was 15.7% in
the third quarter of 1999 and 5.2% in the third quarter of 1998. The increase in
operating expense as a percentage of sales was due to decreased sales and
increased operating costs including charges for goodwill write-offs and
restructuring costs of $170.4 million. Excluding these charges, operating
expenses as a percent of sales was 7.4%. Operating expenses as a percentage of
sales also increased due to an increase in goodwill amortization and general
cost increases.
NET INTEREST EXPENSE. Net interest expense increased $2.7 million from $16.4
million in third quarter 1998 to $19.1 million in third quarter 1999 due to
interest on the Debentures, interest on delinquent vendor payables, interest on
certain delinquent amounts due to sellers under acquisition agreements and
increased borrowings by the Company.
INCOME TAXES. Income taxes were provided on the loss in the third quarter of
1999. The provision was principally due to the company fully reserving certain
deferred tax assets during the quarter related to subsidiaries in Germany that
have been put into voluntary creditor protection. Excluding reserving certain
tax assets there was a tax provision of $7 million for the quarter. Income taxes
as a percentage of earnings (loss) before income taxes and minority interest,
excluding the effect of reserving certain tax assets, was (3.5%) in third
quarter 1999 and 41.7% in third quarter 1998. This change is due to the Company
incurring income tax expense despite having a loss for the period due to
non-deductible goodwill write-offs, losses in subsidiaries for which no tax
benefit can be provided and increased non-deductible goodwill amortization.
NINE MONTHS 1999 COMPARED TO NINE MONTHS 1998
NET SALES. Net sales increased $1.2 billion, or 21.0%, from $5,687.8 million in
the nine months ended September 30, 1998 to $6,879.4 million in the nine months
ended September 30, 1999 due entirely to acquisitions. Net sales of subsidiaries
consolidated for both nine month periods ended September 30, 1999 and 1998
decreased by $256.6 million or 4.5%. This is attributable to decreased sales in
Latin America, where management made a decision to reduce sales due to economic
difficulties, and decreased sales in other locations due to the tightening
credit terms from vendors. Such terms reduced the availability of products to
the Company and the mix of such products, adversely affecting sales. The Company
expects the fourth quarter results to also be negatively affected if the lower
credit limits are continued.
GROSS PROFIT. Gross profit increased $1.8 million, or 0.5%, from $377.9 million
in the nine months ended September 30, 1998 to $379.7 million in the nine months
ended September 30, 1999 due entirely to acquisitions. Newly acquired companies
contributed $102.0 million of gross profit. Gross profit of subsidiaries
consolidated for both nine month periods ended September 30, 1999 and 1998,
decreased $100.2 million, or 26.8%.
Gross profit was 5.5% for the nine months ended September 30, 1999 and 6.6% for
the nine months ended September 30, 1998. The decrease was due principally to
lower gross margins from subsidiaries located in Western Europe and Asia. The
decrease is attributable to a severe drop in gross margins on mass storage
products in the second quarter and an overall drop in gross margins caused by
lower product volume, deteriorating product mix, increased competition, cash
flow
26
<PAGE>
pressures that resulted in missed early payment discounts and reduced
incentives offered by or earned from certain vendors. The Company expects that
overall gross margins will continue to be lower during the remainder of 1999
compared to 1998 due to competitive pricing pressures across all regions.
OPERATING EXPENSES. Operating expenses as a percentage of net sales were 9.4% in
the nine months ended September 30, 1999 and 5.1% in the nine months ended
September 30, 1998. The increase in operating expense was due to growth from
acquisitions, increased costs and specific charges recorded in the second and
third quarters of 1999. The most significant items were charges for goodwill
write-offs and restructuring costs of $184.4 million, a $20.7 million charge to
reserve a note from an affiliate and a charge for additional bad debt reserves,
principally in the Latin American region of $24.0 million. Excluding these
charges, operating expenses as a percent of sales were 6.7%. Operating expenses
as a percent of sales increased due to an increase in goodwill amortization and
general cost increases.
NET INTEREST EXPENSE. Net interest expense increased $23.6 million from $36.8
million in nine months ended September 30, 1998 to $60.4 million in nine months
ended September 30, 1999 due to interest on the Notes and the Debentures,
interest on delinquent vendor payables, interest on certain delinquent amounts
due to sellers under acquisition agreements and increased borrowings by the
Company to support increased sales.
INCOME TAXES. Income taxes were provided on the loss in 1999. The provision was
principally due to the company fully reserving certain deferred tax assets
during the period related to subsidiaries in Germany that have been put into
voluntary creditor protection. Excluding reserving certain tax assets there was
a tax provision of $1 million for the nine months ended September 30, 1999.
Income taxes as a percentage of earnings (loss) before income taxes and minority
interest, excluding the effect of reserving certain tax assets, was (0.3%) in
the nine months ended September 30, 1999 and 33.7% in the nine months ended
September 30, 1998. This change is due to the Company incurring income tax
expense despite having a loss for the period due to non-deductible goodwill
write-offs, losses in subsidiaries for which no tax benefit can be provided and
increased non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $163.1 million was provided by and net cash of $5.7 million was used
in operating activities in the nine months ended September 30, 1999 and 1998,
respectively. In 1999, net cash was provided by decreases in trade receivables
and inventory offset by decreases in accounts payable. In 1998, net cash was
used principally as a result of decreases in accounts payables and accrued
liabilities and increases in receivables and prepaids and other assets offset by
a decrease in inventories. Net cash used in investing activities in the nine
month periods ended September 30, 1999 and 1998 included approximately $26.9
million and $33.0 million, respectively, related to fixed asset additions. In
addition, $6.7 million and $177.9 million, respectively, was used in
acquisitions during the nine months ended September 30, 1999 and 1998. In the
nine months ended September 30, 1999, $29.8 million was received from the sale
of the Company's Sun Microsystems distribution business. Net cash of $162.3
million was used in financing activities during the nine months ended September
30, 1999. The Debentures provided $50 million net cash while there were
repayments to banks of $212.9 million. Net cash of $330.5 million was provided
by financing activities in the nine month period ended September 30, 1998, due
principally to issuance of the Notes and net borrowings from banks. As of
September 30, 1999, approximately $79.7 million of the cash balance was
restricted primarily for guarantees and payments on loans and letters of
credits.
In the third quarter of 1999 several of the Company's major suppliers and
lenders changed the terms of their credit arrangements with the Company. The
suppliers have decreased the number of days the Company has to pay for product
purchases and in many cases require cash on delivery. Additionally, suppliers
have reduced credit limits, require a stricter adherence to payment terms and
27
<PAGE>
charge interest on certain outstanding balances. Certain lenders have also
demanded payment on their loans and have been unwilling to renew loans. These
changes have increased the Company's working capital requirements and financing
costs and reduced the Company's ability to take advantage of early payment
discounts as compared to previous periods. Additionally, in the quarter the
Company experienced a reduction in the number and types of incentives offered by
certain vendors.
The Company's principal needs for additional cash in 1999 will be: (i) for the
purchase of inventory to support historically higher sales in the fourth
quarter; (ii) to take greater advantage of available cash discounts offered by
certain of the Company's vendors for early payment; and (iii) to satisfy banks
and creditors who have called for payment of their outstanding balances. There
can be no assurance that funds will be available.
The Company has liabilities to sellers of business of $275.3 million at
September 30, 1999 representing the remaining price of acquisitions for which
there is a minimum payment or where an earn out is complete. In October 1999,
the Company commenced a program designed to reduce such amounts owed by
disposing of all or a portion of the Company's interests in certain of those
operations. As described in Note 4, the Company has concluded agreements with
seven of the sellers of the businesses comprising $213.8 million of the balance.
After the effective date of these transactions, the results of such companies
will no longer be consolidated with the Company. On an aggregate basis the sales
of such companies included in the statements of operations for the nine months
ended September 30, 1999 was $741.1 million. The Company expects to record a
loss in the fourth quarter related to certain of these transactions of $9.3
million.
The Company is currently in similar negotiations with the original owners of
seven other subsidiaries to reduce earn-out obligations by an additional $58
million, which includes SiS Distribution Limited for which the Company owes
$42.4 million of the purchase price and is in default of the purchase agreement
due to non-payment. If successful, the remaining amount due to sellers would be
essentially eliminated. For the nine months ended September 30, 1999, the seven
subsidiaries generated combined sales of approximately $556.6 million. The
Company acquired the companies in separate transactions during 1998. Four of the
operations in negotiation are located in Latin America, two in Asia and the
Middle East and one in Europe.
The Company has been in violation of a covenant in a certain short term credit
facility since the first quarter of 1999. The amount outstanding on this
facility was approximately $19.8 million as of September 30, 1999. As a result
of the default, on October 22, 1999, CHS Electronics Plc, a subsidiary operating
in the United Kingdom, was placed in receivership by the lender. The loan was
secured by approximately $33.5 million of receivables as of September 30, 1999.
The receiver has subsequently closed CHS Electronics Plc and is liquidating its
net assets. The Company has additionally sold certain assets of Metrologie Ltd.
and Karma UK Ltd., other United Kingdom based subsidiaries. In the first nine
months of 1999 these companies generated sales of $612.4 million and had a net
loss of $17.0 million. The Company is presently unable to determine if proceeds
of the assets of such companies will be sufficient to pay all liabilities. To
the extent that there is a shortfall and the liabilities are guaranteed by the
Company, there may be additional charges incurred.
The Company is in violation of various requirements of a different short-term
credit facility at September 30, 1999. The Company has closed the subsidiary
that is the primary obligor under the loan and has arranged with the lender to
repay the credit facility through collections of receivables of the subsidiary.
The total amount outstanding at September 30, 1999 under such facility was $9.7
million. This subsidiary contributed revenues of $95.4 million for the nine
months ended September 30, 1999. The Company wrote-off goodwill of $26.5 million
as of September 30, 1999 related to this subsidiary. The Company is a guarantor
of this credit facility.
A Swiss subsidiary of the Company has two separate credit facilities providing
for advances for working capital needs based upon eligible inventory. The credit
facilities are secured by a lien on
28
<PAGE>
certain assets of the subsidiary and contain covenants requiring certain levels
of net worth and profitability. The subsidiary was not in compliance with
certain of the covenants as of September 30, 1999 and was consequently in
default of the credit facilities. One of the lenders has taken steps to seize
the receivables, inventory and cash of the subsidiary. At September 30, 1999 the
amounts outstanding under the facilities were $22.4 million. The Company is a
guarantor of these credit facilities.
On December 30, 1998, CHS Frank & Walter, CHS Germany and CHS Austria
(collectively, the "Borrowers") entered into a three year DM 325 million
(approximately $180 million) Facility Agreement with a bank. Advances under the
agreement may be used for working capital needs of the Borrowers and are based
upon a borrowing base equal to the aggregate of 85% of eligible accounts
receivable, 50% of eligible inventory and 100% of inventory of a specific
vendor. The debt is secured by a lien on the receivables, inventories and
intangible assets of the Borrowers and two Austrian subsidiaries of the Company,
and a lien on the receivables of a Swiss subsidiary of the Company
(collectively, the "Pledgors"), and a pledge of the shares of the Borrowers and
the Pledgors. The indebtedness has been guaranteed by the Company, the Pledgors,
and certain other subsidiaries of the Company. Interest is at a variable rate
based on Euro LIBOR. At September 30, 1999, the interest rate on this credit
facility was 6.02%. The loan agreement was amended on August 31, 1999 which
modified the maturity date to November 30, 1999. In addition to limitations on
the ability of the Borrowers to incur additional indebtedness, the amendment
reduced the amount available under the loan to DM 310 million (approximately
$170 million), which amount will be further reduced upon certain events and
requiring the lender's consent for the Company to make future acquisitions or to
transfer funds from the Borrowers to other companies in the organization.. The
Borrowers were in default of certain of the financial covenants in the loan
agreement as of September 30, 1999 and the Company is currently in default under
certain provisions of its guarantee.
On October 26, 1999, CHS Frank & Walter, CHS Germany and CHS Austria voluntarily
filed for creditor protection under German and Austrian law. The filing was
necessitated by continuing losses in the operations due to competitive industry
conditions in the region, restricted credit from the subsidiaries' vendors, a
reduced bank line and the inability to remedy the events of default in the
Facility Agreement. Insolvency administrators have been appointed by the court
to oversee each operation. Under German and Austrian insolvency laws, each of
the subsidiaries are required to prepare a recovery plan to be evaluated by the
insolvency administrator. The administrator will make a determination within
thirty days of the filing of whether to sell or close the businesses or return
them to their owner. During the thirty day period, the subsidiaries will be
under creditor protection. In the first nine months of 1999, CHS Frank & Walter,
CHS Germany and CHS Austria generated sales of $1,033.1 million and had a net
loss of $31.6 million. Although the subsidiaries have tangible book value, the
Company is presently unable to determine the ultimate results of the filing, and
if the businesses are closed, whether the proceeds of the assets of such
companies will be sufficient to pay all liabilities. To the extent that there is
a shortfall and the liabilities are guaranteed by the parent, there may be
additional charges incurred. At September 30, 1999, the total amount outstanding
under this credit facility was $99.9 million. The Company wrote-off goodwill of
$62.4 million as of September 30, 1999 related to these subsidiaries.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At September 30,
1999, of the $507.1 million aggregate amount available under these agreements,
$432.3 million was outstanding. Such agreements are usually for a term of one
year and are secured by the receivables of the borrower and, in certain
instances, inventories of the borrower. The weighted average interest rate at
September 30, 1999 was 6.1%. Certain of these agreements contain financial
covenants requiring, among other things, the maintenance of certain net worth
and loan-to-collateral value terms. The Company typically guarantees these
loans. The Company has also guaranteed the obligations of certain of its
subsidiaries to certain vendors. The Company has received demands on payments
under guarantees from many of its vendors, creditors and lenders.
29
<PAGE>
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In certain
countries, exchange controls may limit the ability of the Company's subsidiaries
to make payments to the Company. 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. Restrictions in
financing or credit arrangements may also limit access to such earnings. Certain
of these revolving credit agreements limit the ability of the respective
subsidiaries to pay dividends, make loans or provide other distributions to the
Company. Currently, the subsidiaries with such agreements are Santech Norway and
CHS Latin America. Such credit agreements have maximum available amounts of
$46.8 million in total.
In June 1999, the Company entered into an expanded strategic alliance with CA.
Under terms of the agreement, the Company supplied CA with marketing,
distribution and reseller rights with respect to its product offering. CA loaned
$50 million to the Company in the form of the Debentures. The interest rate on
the Debentures is the six month LIBOR rate plus 2% (7.17% for the initial
interest period), and adjusts semi-annually.
The Debentures are convertible into the Company's common stock at any time at a
conversion price of $5.50 per share. The conversion price is subject to
adjustment under certain conditions, including upon the average closing price of
the Company's common stock falling below $5.50 during the twenty days preceding
any conversion date or upon new issuance of shares at a price lower than $5.50.
In connection with the financing, the Company issued to CA a warrant expiring
May 31, 2004 for two million shares of common stock at an exercise price of
$5.50 per share. The exercise price of the warrant is reduced if new shares are
issued at a lower price. The warrant has been recorded at a fair value of $3
million as a discount to the Debentures and this amount is being amortized over
the life of the Debentures. The Company is currently not in compliance with
certain covenants of the Debentures and is exploring all available options to
remedy the situation.
In April 1998, the Company issued $200 million of 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 principally
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,
restricts 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. In
November 1999, the Company received notification from one of the holders of the
Notes informing it that they believe that the Company is not in compliance with
certain covenants of the Note indenture. The Company is currently reviewing the
claim made in the notification.
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of Florida
This complaint and others were purportedly filed on behalf of those security
holders of the Company who purchased such securities during specified time
frames. The complaints, which purports to be class action complaints, generally
allege that the Company and certain of its officers violated federal securities
laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act
of 1934) in connection with financial reporting and disclosure. Among other
things, the plaintiffs allege that the Company and certain of its officers and
directors materially overstated financial disclosures. The plaintiffs seek,
among other relief, to be declared a class and to be awarded compensatory
damages and attorney's fees and costs. By order
30
<PAGE>
dated June 23, 1999, the Court consolidated the above-referenced cases and
appointed lead plaintiffs and approved the selection of lead counsel for the
lead plaintiffs. Pursuant to the direction of the Court, the parties have
submitted a proposed pre-trial schedule which is pending consideration with the
Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed, however, appeals have subsequently been filed. The Vobis Group
purchase agreement called for disputes to be settled by arbitration in Germany
and an arbitration proceeding has been initiated by Metro. The arbitration
proceeding is in an early stage and no prediction can be made as to its outcome.
The purchase agreement did not provide for a break-up fee.
The Department of Commerce has commenced an investigation of the export
activities of one of the Company's subsidiaries and its management in relation
to alleged violations of certain Federal exportation laws and other related
violations including money laundering. Although the ultimate exposure could be
much higher if the Company were ultimately found to have violated these laws,
the Department of Commerce has offered to settle for a fine of $25 million and a
guilty plea to a representative sample of the charges. The Company intends to
vigorously defend itself against these claims.
DHL Airways, Inc. and DHL International, B.V. (collectively "DHL") has made a
claim against the Company for indemnification for assessments of approximately
$3.1 million made by the Dutch Government against DHL. The assessments are for
certain shipments made through DHL by certain of the Company's European
subsidiaries that have been alleged by the Dutch government to have understated
the declared values in order to reduce payments for value added tax and custom
fees. The Company intends to vigorously defend itself against this claim.
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
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 six areas
covered initially are shown below, in descending order of potential high
risk/impact.
o Transaction Processing Systems (includes all internal and external
interfaces)
o Telephony
o Network (Local Area Networks)
o Desktop Computing
o Third Parties (suppliers, customers, financial institutions, utilities)
o Other non-IT equipment
The Company's current IT systems infrastructure is decentralized. Independent of
the Year 2000 issue, the Company has been standardizing its transaction
processing platforms and ultimately reducing the number of separate systems. The
Company has selected a core of standard platforms: JBA System 21, Oracle
Financials, and Scala. Various tasks in the platform standardization project
31
<PAGE>
have been accelerated in order to resolve Year 2000 issues.
STATE OF READINESS. The tables below set forth the Company's state of readiness.
Compliance schedule for Transaction Processing Systems:
-------------------------------------- ----------------------------
TRANSACTION PROCESSING SYSTEM TO BE % OF 1999 GROSS SALES
COMPLIANT BUDGET
-------------------------------------- ----------------------------
Already compliant 87%
-------------------------------------- ----------------------------
Fourth Quarter 1999 13%
-------------------------------------- ----------------------------
100%
-------------------------------------- ----------------------------
Other critical areas:
-------------------------- ---------------------- ------------------------
AREA % COMPLIANT BALANCE TO BE COMPLIANT
-------------------------- ---------------------- ------------------------
Telephony 94% November 1999
-------------------------- ---------------------- ------------------------
Network 98% November 1999
-------------------------- ---------------------- ------------------------
Desktop Computing 98% November 1999
-------------------------- ---------------------- ------------------------
Other non-IT equipment 95% November 1999
-------------------------- ---------------------- ------------------------
COSTS. The Company estimates its total Year 2000 costs to be $24 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 $21.5 million has been spent to date. This estimate is
based on current knowledge and assumes that the Company will not incur
additional costs due to the actions or state of readiness of third parties.
RISKS. Due to its 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 smaller subsidiaries, to
take orders.
Although 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 ensure all such issues are resolved or to estimate the potential
impact on the Company. In the case of the Company's major suppliers, the Company
currently believes the risk is low.
CONTINGENCY PLANS. Contingency plans are expected to be complete and tested by
the end of the November 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.
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
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<PAGE>
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, 1999 and 1998 and the Company does not expect that it will
have a material impact during the remainder of 1999.
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. The
Company's current position with its vendors have adversely affected its ability
to achieve its strategy.
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, 1999 and 1998 was 1.2% and
0.2%, respectively. The percentage for 1999 was affected by a charge of $24
million to increase its reserve for bad debts, principally in Latin America, and
additional provisions recorded due to overall lower collections in 1999.
Beginning in the third quarter of 1999, the Company reduced credit sales in
Latin America. The Company attempts to minimize credit losses by an extensive
credit approval process and the use of credit insurance and factoring by its
Western European subsidiaries and credit issuance by certain Latin American
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.
33
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company principally enters into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates. Occasionally, the Company may enter into derivatives or
other financial instruments for speculative purposes. The counter parties are
major financial institutions and therefore credit risk associated with these
contracts is considered immaterial.
INTEREST RATE RISK. At September 30, 1999, the fair value of notes payable
approximated, their carrying value due to their short-term maturities. The fair
value of long-term fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt will increase as
interest rates fall and decrease as interest rates rise. Changes in interest
rates will affect the market value but do not impact earnings or cash flows.
Conversely for floating rate debt, interest rate changes generally do not affect
the fair market value but do impact future earnings and cash flows assuming
other factors are held constant. The estimated fair value of the Company's total
long-term debt at September 30, 1999 was $112.7 million. A 1% increase in
prevailing interest rates at September 30, 1999 would result in a decrease in
fair value of total long-term debt by approximately $0.6 million. Fair values
were determined from quoted market prices, where available, and from investment
bankers using current interest rates considering credit risk and the remaining
terms to maturity.
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. Due to its international business
presence, the Company transacts extensively in foreign countries and foreign
currencies. As a result, earnings may experience some volatility related to
movements in exchange rates. The Company attempts to limit its risk of currency
fluctuations through hedging where possible. In the nine month period ended
September 30, 1999, a significant amount of the purchases of products by the
Company were made in United States dollars and approximately 92% 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 (16% of sales), the
French franc (13%) and the British pound (9%). At September 30, 1999,
approximately $267.7 million of accounts payable were attributable to foreign
currency liabilities denominated in currencies other than the subsidiaries'
functional currencies. Of these, $217.4 million were denominated in United
States dollars, $3.9 million were denominated in German marks and $36.9 million
were denominated in Euros. Approximately 82% of these liabilities were unhedged.
34
<PAGE>
CHS Finance, a wholly owned subsidiary of the Company, 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 United States 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. This limit
is set by the Company taking into consideration the range of unhedged foreign
denominated liabilities. As a result, CHS Finance will take positions from time
to time, principally in US dollars, Euros and Swiss Francs, which may expose the
Company to foreign exchange risks. 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 activities, the Company makes forward purchases of United States dollars
in an attempt to hedge certain Western European currencies and reduce exposure
to fluctuations in exchange rates. Additionally, in certain countries in Eastern
Europe and in Latin 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 levels of local denominated accounts receivable with
accounts payable and to limit holdings of local currencies. In these countries,
the Company attempts to sell products at the United States dollar equivalent
rate. Factors which affect exchange rates are varied and no reliable prediction
methods are available for definitively 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.
The Company enters into foreign exchange contracts to hedge groups of foreign
currency transactions on a continuing basis for periods consistent with its
committed exposure. The foreign exchange contracts are valued at market and
generally have maturities which do not exceed three months. A portion of the
gains and losses on foreign exchange contracts are intended to offset losses and
gains on assets, liabilities and transactions being hedged. At September 30,
1999, the face value of foreign exchange forward contracts against trade
payables was $117.0 million, which approximated fair market value of these
contracts. Holding other variables constant, if there were a 10% adverse change
in foreign currency exchange rates, the decrease in market value of these
contracts at September 30, 1999 would be offset by decreases in trade payables.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES". This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently assessing the effects of
adopting SFAS No. 133, and has not yet made a determination of the impact on its
financial position or results of operations. In June 1999, the FASB issued SFAS
No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO.133", to defer the effective
date of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, will be
effective for the Company's first quarter of fiscal year 2001.
FORWARD LOOKING INFORMATION
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which represent the Company's expectations of beliefs, including, but not
limited to, statements concerning gross
35
<PAGE>
margins, operating expenses to sales, income taxes, year 2000 compliance
activities, inflation expectations, the effect 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 the financial condition of the Company's customer, changes in economic
conditions, demand for the Company's products, ability to negotiate agreements
with lenders including the holders of the Notes and the Debentures, vendors and
sellers of businesses, the outcome of the purported class action and other
litigation referred to herein, and changes in competitive environment.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
36
<PAGE>
PART II
ITEM 1.
LEGAL PROCEEDINGS
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of Florida
This complaint and others were purportedly filed on behalf of those security
holders of the Company who purchased such securities during specified time
frames. The complaints, which purports to be class action complaints, generally
allege that the Company and certain of its officers violated federal securities
laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act
of 1934) in connection with financial reporting and disclosure. Among other
things, the plaintiffs allege that the Company and certain of its officers and
directors materially overstated financial disclosures. The plaintiffs seek,
among other relief, to be declared a class and to be awarded compensatory
damages and attorney's fees and costs. By order dated June 23, 1999, the Court
consolidated the above-referenced cases and appointed lead plaintiffs and
approved the selection of lead counsel for the lead plaintiffs. Pursuant to the
direction of the Court, the parties have submitted a proposed pre-trial schedule
which is pending consideration with the Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed, however, appeals have subsequently been filed. The Vobis Group
purchase agreement called for disputes to be settled by arbitration in Germany
and an arbitration proceeding has been initiated by Metro. The arbitration
proceeding is in an early stage and no prediction can be made as to its outcome.
The purchase agreement did not provide for a break-up fee.
The Department of Commerce has commenced an investigation of the export
activities of one of the Company's subsidiaries and its management in relation
to alleged violations of certain Federal exportation laws and other related
violations including money laundering. Although the ultimate exposure could be
much higher if the Company were ultimately found to have violated these laws,
the Department of Commerce has offered to settle for a fine of $25 million and a
guilty plea to a representative sample of the charges. The Company intends to
vigorously defend itself against these claims.
DHL Airways, Inc. and DHL International, B.V. (collectively "DHL") has made a
claim against the Company for indemnification for assessments of approximately
$3.1 million made by the Dutch Government against DHL. The assessments are for
certain shipments made through DHL by certain of the Company's European
subsidiaries that have been alleged by the Dutch government to have understated
the declared values in order to reduce payments for value added tax and custom
fees. The Company intends to vigorously defend itself against this claim.
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
37
<PAGE>
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial data schedule
(b) REPORTS ON FORM 8-K
On October 19, 1999, a report on Form 8-K was filed to report the disposition of
certain subsidiaries.
38
<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 22, 1999 BY /s/ ANTONIO BOCCALANDRO
------------------------
ANTONIO BOCCALANDRO
Secretary
November 22, 1999 BY /s/ BURTON EMMER
-----------------
BURTON EMMER
Acting Chief Financial Officer
(Principal Financial and Accounting
Officer)
39
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 163,475
<SECURITIES> 0
<RECEIVABLES> 1,086,633
<ALLOWANCES> (61,791)
<INVENTORY> 487,306
<CURRENT-ASSETS> 1,756,954
<PP&E> 119,084
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,620,581
<CURRENT-LIABILITIES> 1,796,069
<BONDS> 200,000
0
0
<COMMON> 64
<OTHER-SE> 535,271
<TOTAL-LIABILITY-AND-EQUITY> 2,620,581
<SALES> 6,879,372
<TOTAL-REVENUES> 6,879,372
<CGS> 6,499,702
<TOTAL-COSTS> 645,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,995
<INCOME-PRETAX> (292,849)
<INCOME-TAX> 21,237
<INCOME-CONTINUING> (314,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (314,203)
<EPS-BASIC> (5.40)
<EPS-DILUTED> (5.40)
</TABLE>
