UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24244
CHS ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 87-0435376
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2000 NW 84TH AVENUE
MIAMI, FL 33122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(305) 908-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SHARES OF COMMON STOCK OUTSTANDING
AS OF AUGUST 11, 1998: 51,896,199
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
<PAGE>
CHS ELECTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 3
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW 5-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-19
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
2
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
As Restated (SEE NOTE 2)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 81,883 $ 68,806
Cash held in escrow 91,675 --
Accounts receivable:
Trade, less allowance for doubtful accounts
of $23,195 in 1998 and $18,347 in 1997 696,613 659,757
Affiliates 38,850 24,604
----------- -----------
735,463 684,361
Inventories 633,254 693,503
Prepaid expenses and other current assets 82,141 65,255
----------- -----------
TOTAL CURRENT ASSETS 1,624,416 1,511,925
PROPERTY AND EQUIPMENT, NET 82,878 61,468
COST IN EXCESS OF ASSETS ACQUIRED, NET 507,472 381,830
OTHER ASSETS 38,293 13,599
----------- -----------
$ 2,253,059 $ 1,968,822
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 422,411 $ 309,510
Accounts payable, trade 602,812 771,535
Accrued liabilities 89,958 83,309
Amounts due to sellers under acquisition agreements 138,986 54,866
Income taxes payable 15,887 12,711
Deferred income taxes 9,255 1,223
----------- -----------
TOTAL CURRENT LIABILITIES 1,279,309 1,233,154
LONG TERM DEBT 232,154 61,556
MINORITY INTEREST 6,922 6,348
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares;
0 shares outstanding -- --
Common stock, authorized 100,000,000 shares
at $.001 par value; 51,656,949 and 48,910,999
shares outstanding at June 30, 1998
and December 31, 1997, respectively 52 49
Additional paid-in capital 668,644 621,021
Retained earnings 91,189 65,115
Cumulative foreign currency translation adjustment (25,211) (18,421)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 734,674 667,764
----------- -----------
$ 2,253,059 $ 1,968,822
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Unaudited) (Unaudited)
As Restated As Restated
(SEE NOTE 2) (SEE NOTE 2)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 1,769,494 $ 946,955 $ 3,520,832 $ 1,824,058
Cost of goods sold 1,655,570 876,783 3,284,314 1,691,423
----------- --------- ----------- -----------
Gross profit 113,924 70,172 236,518 132,635
Operating expenses 89,832 52,846 175,546 100,683
----------- --------- ----------- -----------
Operating income 24,092 17,326 60,972 31,952
Other (income) expense:
Interest income (4,360) (1,799) (6,999) (3,567)
Interest expense 16,904 8,018 27,467 14,634
----------- --------- ----------- -----------
12,544 6,219 20,468 11,067
----------- --------- ----------- -----------
Earnings before income taxes and
minority interest in subsidiaries 11,548 11,107 40,504 20,885
Income taxes 4,833 4,147 12,613 6,790
Minority interest in subsidiaries 1,207 559 1,816 984
----------- --------- ----------- -----------
Net earnings $ 5,508 $ 6,401 $ 26,075 $ 13,111
=========== ========= =========== ===========
Net earnings per common share:
Basic $ 0.11 $ 0.29 $ 0.52 $ 0.59
=========== ========= =========== ===========
Diluted $ 0.10 $ 0.28 $ 0.47 $ 0.57
=========== ========= =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(Unaudited)
As Restated
(SEE NOTE 2)
1998 1997
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 26,075 $ 13,111
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation and amortization 18,610 7,585
Minority interest in net earnings 1,816 983
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 83,649 67,393
Accounts receivable-affiliates, net (14,247) (1,115)
Inventories 156,147 67,643
Prepaids and other assets (13,257) 20,594
Accounts payable (325,584) (153,860)
Accrued liabilities and income taxes 1,033 (9,794)
--------- ---------
Net cash (used in) provided by operating activities (65,758) 12,540
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (19,747) (9,348)
Acquisitions, net of cash acquired (27,865) 1,641
--------- ---------
Net cash (used in) investing activities (47,612) (7,707)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of Senior Notes 200,000 --
Net borrowings from (repayments to) banks 17,883 (25,049)
Proceeds from exercising stock options 502 956
--------- ---------
Net cash provided by (used in) financing activities 218,385 (24,093)
Effect of exchange rate changes on cash (263) (3,082)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 104,752 (22,342)
Cash and cash equivalents at beginning of period 68,806 35,137
--------- ---------
Cash and cash equivalents at end of period $ 173,558 $ 12,795
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
SIX MONTHS ENDED
JUNE 30,
1998 1997
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 18,625 $ 13,363
Income taxes $ 6,239 $ 7,288
Non cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
The components of the transactions in each period are as follows:
SIX MONTHS ENDED
JUNE 30,
1998 1997
---- ----
Fair value of assets acquired including cash acquired $ 250,752 $ 138,087
Less: Common stock or other consideration issued 11,195 28,378
--------- ---------
Liabilities assumed $ 239,557 $ 109,709
========= =========
Furthermore, these statements of cash flows exclude the non-cash impact on the
increase of amounts due to sellers under acquisition agreements of $87,793 in
1998.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED SEE NOTE 2)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1997 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements were prepared from the books and
records of the Company without audit or verification. In the opinion of
management, all adjustments, which are of a normal recurring nature, and
necessary to present fairly the financial position, results of operations and
cash flows for all the periods presented have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the operating results for the full fiscal year. Sales
in Europe in the first and fourth quarters of each year are typically higher
than sales in the second and third quarters. In South America sales in the third
and fourth quarters are typically higher than sales in the first and second
quarters.
2. RESTATEMENT
The Company recently announced the discovery of discrepancies related to the
amount of vendor incentives recorded in the fourth quarter of 1998. In
coordination with the Company's independent auditors and an investigation by
outside attorneys, the Company found that vendor rebates were overstated in the
second, third and fourth quarters of 1998. As a result of this discovery, the
consolidated financial statements as of June 30, 1998 and September 30, 1998 and
the quarters then ended were restated. The accompanying consolidated financial
statements as of June 30, 1998 and for the three and six months then ended
present restated results.
3. ACQUISITIONS
In the six month period ended June 30, 1998, the Company purchased nine
companies. These acquisitions, which are being accounted for under the purchase
method, had no significant impact on the results of operations of the Company.
During 1998, the Company began to amortize goodwill (the excess of the purchase
price over the value of net assets acquired) of certain new acquisitions over a
period of approximately 35 years, while goodwill for previous acquisitions is
being amortized over 20 years.
In 1997, the Company made 15 acquisitions, of which three were significant. On
October 3, 1997, the Company completed the acquisition of Santech Micro Group
ASA ("Santech"), pursuant to which it acquired 97.4% of the capital stock of
Santech for approximately $125 million. The Company acquired the remainder of
the shares of Santech at the same per share price. Santech is the largest
distributor of microcomputer products in Scandinavia with operations in Norway,
Sweden and Denmark and had revenues of $718 million in 1996. Santech distributes
the products of the same vendors as other subsidiaries of the Company. The
acquisition of Santech has been accounted for under the purchase method, and
accordingly the results of Santech have been included in the consolidated
operating results since the date of acquisition. The acquisition of Santech
resulted in the recognition of $111.2 million of goodwill.
Santech's operating results during 1997 were adversely impacted as a result of a
restructuring of its operations and the implementation of a new computer system.
The adverse impact included costs associated with reduction in the number of its
product lines and the number of employees from 450 to 320. The Company believes
that these factors have been addressed and that these issues should not have a
material adverse impact on Santech's or the Company's future operations.
On August 4, 1997, the Company completed the acquisition of Karma International
S.A. ("Karma"). Karma is a distributor of personal computer components to over
10,000 customers in Europe, the Middle East and Asia. The purchase price for
Karma was $160 million and was funded through (i) $74 million in cash and (ii)
4,813,432
7
<PAGE>
shares of unregistered Common Stock. Karma's product line includes mass storage
products, CPU's, memory chips, motherboards, sound, video and other cards and
monitors. Karma operates in 18 countries through 28 offices in Europe, the
Middle East and Asia. Karma had net sales of approximately $700 million in 1996.
The acquisition of Karma has been accounted for under the purchase method and,
accordingly the results of Karma have been included in the consolidated
operating results since the date of acquisition. The acquisition of Karma
resulted in the recognition of $126.4 million of goodwill.
Effective January 1, 1997, the Company acquired 100% of Frank & Walter Computer
GmbH ("Frank & Walter"), a distributor based in Germany, for 3,300,000
unregistered shares of Common Stock. The acquisition of Frank & Walter has been
accounted for under the purchase method and, accordingly the results of Frank &
Walter have been included in the consolidated operating results since the date
of acquisition. The amounts allocated to assets acquired and liabilities assumed
resulted in a recognition of $26.9 million of goodwill.
Presented below is pro forma operating data showing selected operating results
for the Company as if the significant companies acquired in 1997 were acquired
on January 1, 1997. Pro forma adjustments were made to include goodwill
amortization in the six month period ended June 30, 1997 based on 1997 actual
results. Pro forma net earnings per share is based on the net earnings divided
by the weighted average number of shares plus contingent shares actually issued.
Six Months Ended June 30,
(in thousands, except per share data)
1998 1997
---- ----
Net sales $ 4,311,297 $ 3,774,824
Net earnings $ 8,807 $ 5,599
Net earnings per share-basic $ 0.18 $ 0.25
Net earnings per share-diluted $ 0.16 $ 0.24
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1997 or
of future results of the combined companies.
4. NET EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. In accordance with this statement, basic earnings per share
is computed by dividing net earnings by the weighted average number of common
shares outstanding. Diluted earnings per share includes the dilution caused by
common stock options and warrants and the shares that would be issued in
existing earn outs based upon applying the earn out multiple to actual earnings
and dividing by the market price at period end. The weighted average number of
shares for basic earnings per share was 51,181,897 and 22,090,518 for the three
month periods ended June 30, 1998 and 1997, respectively, and 50,457,789 and
22,064,829 for the six month periods ended June 30, 1998 and 1997, respectively.
The weighted average number of shares used in the diluted computation was
57,018,660 and 23,200,139 for the three month periods ended June 30, 1998 and
1997, respectively, and 55,754,252 and 22,944,803, for the six month periods
ended June 30, 1998 and 1997, respectively. All share and per share information
has been restated for a three for two stock split effective in September 1997.
The following table illustrates the reconciliation of the income and weighted
average number of shares of the basic and diluted earnings per share
computations (amounts in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ------
Net earnings $ 5,508
=======
Net earnings per share-basic 5,508 51,182 $ 0.11
======
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,487
Earn out contingencies -- 4,350
------- ------
Net earnings per share-diluted $ 5,508 57,019 $ 0.10
======= ====== ======
8
<PAGE>
THREE MONTHS ENDED JUNE 30, 1997
--------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ------
Net earnings $ 6,401
=======
Net earnings per share-basic 6,401 22,091 $ 0.29
======
Effect of dilutive shares:
Stock options and warrants outstanding -- 843
Earn out contingencies -- 266
------- ------
Net earnings per share-diluted $ 6,401 23,200 $ 0.28
======= ====== ======
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ------
Net earnings $26,075
=======
Net earnings per share-basic 26,075 50,458 $ 0.52
======
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,491
Earn out contingencies -- 3,805
------- ------
Net earnings per share-diluted $26,075 55,754 $ 0.47
======= ====== ======
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ------
Net earnings $13,111
=======
Net earnings per share-basic $13,111 22,065 $ 0.59
======
Effect of dilutive shares:
Stock options and warrants outstanding -- 747
Earn out contingencies -- 133
------
Net earnings per share-diluted $13,111 22,945 $ 0.57
======= ====== ======
5. COMPREHENSIVE INCOME
Effective in 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME, ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the Company's consolidated financial statements. Comprehensive
income is defined in SFAS 130 as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Total comprehensive income was $19.3 million and $5.9
million for the six months ended June 30, 1998 and 1997, respectively, and $2.8
million and $7.5 million for the three months ended June 30, 1998 and 1997
respectively. The primary difference from net income as reported is the change
in cumulative foreign currency translation adjustment.
6. LONG TERM DEBT
The Company's long-term debt at June 30, 1998, consists principally of the
amount due at that date ($14 million) under revolving credit agreements of
certain of the Company's United States based subsidiaries and $200 million
Senior Notes ("Notes") due 2005. Amounts outstanding under the revolving credit
agreement are due October 1999. The agreement provides for advances and issuance
of letters of credit based upon eligible accounts receivable and inventory up to
a maximum of $60 million. Interest is at a variable market rate based on the
prime rate of the lender or LIBOR, at borrower's option. The borrower's assets,
including accounts receivable and inventory, are pledged as collateral. The
agreement also limits the ability of the borrowers to pay dividends to the
Company.
9
<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 beginning October 15, 1998. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after April 15, 2002, initially
at 104.938% of their principal amount, plus accrued and unpaid interest,
declining to 100% of their principal amount, plus accrued and unpaid interest,
on or after April 15, 2004.
Certain of the Company's direct and indirect subsidiaries fully and
unconditionally jointly and severally guarantee the Notes on an unsecured basis.
The guarantor subsidiaries are CHS Electronics, Inc. (Nevada), CHS Delaware,
Inc., CHS Delaware L.L.C. and CHS Americas, Inc. All these subsidiaries are
non-operating holding companies. The Notes are effectively subordinated to all
existing and future liabilities of the Company's subsidiaries that are not
guarantors. The Notes contain certain covenants which, among other things, will
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness; pay dividends or make other distributions in respect to
their capital stock; enter into certain transactions with shareholders and
affiliates; make certain investments and other restricted payments; create
liens; enter into certain sale and leaseback transactions and sell assets. The
covenants are, however, subject to a number of exceptions and qualifications.
The following condensed financial information presents the results of
operations, financial position and cash flows of the Company (on a stand alone
basis), the guarantor subsidiaries (on a combined basis), the non-guarantor
subsidiaries (on a combined basis) and the eliminations necessary to arrive at
the consolidated results for the Company. The results of operations and cash
flow presented below assume that the guarantor subsidiaries were in place for
all periods presented. The Company and guarantor subsidiaries have accounted for
investments in their respective subsidiaries on an unconsolidated basis using
the equity method of accounting. The Company has not presented separate
financial statements and other disclosures concerning the guarantors and
non-guarantor subsidiaries because it has determined they would not be material
to investors.
10
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash $ 16,667 $ 166 $ 156,725 $ -- $ 173,558
Accounts receivable 25,125 1,317 709,021 -- 735,463
Intercompany receivables 279,717 1,394 -- (281,111) --
Inventories -- -- 633,254 -- 633,254
Other current assets 1,735 664 79,742 -- 82,141
----------- ----------- ----------- ----------- ----------
Total current assets 323,244 3,541 1,578,742 (281,111) 1,624,416
Property and equipment, net 2,785 68 80,025 -- 82,878
Cost in excess of assets acquired, net -- -- 507,472 -- 507,472
Investements in affiliated companies 749,226 1,379,869 -- (2,129,095) --
Other assets 15,041 -- 23,252 -- 38,293
----------- ----------- ----------- ----------- ----------
Total assets $ 1,090,296 $ 1,383,478 $ 2,189,491 $(2,410,206) $2,253,059
=========== =========== =========== =========== ==========
Notes payable $ -- $ 700 $ 421,711 $ -- $ 422,411
Intercompany payables -- 148,958 132,153 (281,111) --
Accounts payable (318) 98 603,032 -- 602,812
Accrued expenses 9,492 284 80,182 -- 89,958
Amounts due to sellers 138,986 -- -- -- 138,986
Income taxes payable and other 854 (1,427) 25,715 -- 25,142
----------- ----------- ----------- ----------- ----------
Total current liabilities 149,014 148,613 1,262,793 (281,111) 1,279,309
Long term debt 200,000 -- 32,154 -- 232,154
Minority interests -- -- -- 6,922 6,922
Shareholders' equity 741,282 1,234,865 894,544 (2,136,017) 734,674
----------- ----------- ----------- ----------- ----------
$ 1,090,296 $ 1,383,478 $ 2,189,491 $(2,410,206) $2,253,059
=========== =========== =========== =========== ==========
AS OF JUNE 30, 1997
-------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash $ 400 $ -- $ 12,395 $ -- $ 12,795
Accounts receivable 1,160 -- 343,842 -- 345,002
Intercompany receivables 114,219 -- 43,596 (157,815) --
Inventories -- -- 310,919 -- 310,919
Other current assets 1,238 -- 42,065 -- 43,303
----------- ----------- ----------- ----------- ----------
Total current assets 117,017 -- 752,817 (157,815) 712,019
Property and equipment, net 2,369 1 40,548 -- 42,918
Cost in excess of assets acquired, net -- -- 90,156 -- 90,156
Investements in affiliated companies 96,008 284,873 -- (380,881) --
Other assets -- -- 7,023 -- 7,023
----------- ----------- ----------- ----------- ----------
Total assets $ 215,394 $ 284,874 $ 890,544 $ (538,696) $ 852,116
=========== =========== =========== =========== ==========
Notes payable $ -- $ -- $ 160,004 $ -- $ 160,004
Intercompany payables 45,824 111,991 -- (157,815) --
Accounts payable 505 1,871 399,091 -- 401,467
Accrued expenses 13,651 31,297 3,634 -- 48,582
Amounts due to sellers 32,536 -- -- -- 32,536
Income taxes payable and other 134 (245) 6,105 -- 5,994
----------- ----------- ----------- ----------- ----------
Total current liabilities 92,650 144,914 568,834 (157,815) 648,583
Long term debt -- -- 60,194 -- 60,194
Minority interests -- -- -- 5,038 5,038
Shareholders' equity 122,744 139,960 261,516 (385,919) 138,301
----------- ----------- ----------- ----------- ----------
$ 215,394 $ 284,874 $ 890,544 $ (538,696) $ 852,116
=========== =========== =========== =========== ==========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 31 $3,520,801 $ -- $3,520,832
Cost of goods sold -- (352) 3,284,666 -- 3,284,314
-------- -------- ---------- -------- ----------
Gross profit -- 383 236,135 -- 236,518
Operating expenses 331 373 174,842 -- 175,546
-------- -------- ---------- -------- ----------
Operating income (loss) (331) 10 61,293 -- 60,972
Other (income) expense, net 1,850 200 18,418 -- 20,468
-------- -------- ---------- -------- ----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (2,181) (190) 42,875 -- 40,504
Provision for income taxes 381 (73) 12,305 -- 12,613
Equity in (earnings) of affiliated
companies, net of tax (43,427) (45,275) -- 88,702 --
Minority interest -- -- -- 1,816 1,816
-------- -------- ---------- -------- ----------
Net earnings $ 40,865 $ 45,158 $ 30,570 $(90,518) $ 26,075
======== ======== ========== ======== ==========
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $1,824,058 $ -- $1,824,058
Cost of goods sold -- -- 1,691,423 -- 1,691,423
-------- -------- ---------- -------- ----------
Gross profit -- -- 132,635 -- 132,635
Operating expenses (1,742) 1 102,424 -- 100,683
-------- -------- ---------- -------- ----------
Operating income 1,742 (1) 30,211 -- 31,952
Other (income) expense, net 1,218 635 9,214 -- 11,067
-------- -------- ---------- -------- ----------
Earnings before income taxes and
minority interest in subsidiaries 524 (636) 20,997 -- 20,885
Provision for income taxes 871 245 5,674 -- 6,790
Equity in (earnings) of affiliated
companies, net of tax (13,458) (14,154) -- 27,612 --
Minority interest -- -- -- 984 984
-------- -------- ---------- -------- ----------
Net earnings $ 13,111 $ 13,273 $ 15,323 $(28,596) $ 13,111
======== ======== ========== ======== ==========
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $1,769,494 $ -- $1,769,494
Cost of goods sold -- (62) 1,655,632 -- 1,655,570
-------- -------- ---------- -------- ----------
Gross profit -- 62 113,862 -- 113,924
Operating expenses (2,137) 360 91,609 -- 89,832
-------- -------- ---------- -------- ----------
Operating income (loss) 2,137 (298) 22,253 -- 24,092
Other (income) expense, net 2,419 54 10,071 -- 12,544
-------- -------- ---------- -------- ----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (282) (352) 12,182 -- 11,548
Provision for income taxes 71 (135) 4,897 -- 4,833
Equity in (earnings) of affiliated
companies, net of tax (20,651) (22,694) -- 43,345 --
Minority interest -- -- -- 1,207 1,207
-------- -------- ---------- -------- ----------
Net earnings $ 20,298 $ 22,477 $ 7,285 $(44,552) $ 5,508
======== ======== ========== ======== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $ 946,955 $ -- $ 946,955
Cost of goods sold -- -- 876,783 -- 876,783
-------- ------- --------- -------- ---------
Gross profit -- -- 70,172 -- 70,172
Operating expenses (1,161) 1 54,006 -- 52,846
-------- ------- --------- -------- ---------
Operating income 1,161 (1) 16,166 -- 17,326
Other (income) expense, net 815 635 4,769 -- 6,219
-------- ------- --------- -------- ---------
Earnings before income taxes and
minority interest in subsidiaries 346 (636) 11,397 -- 11,107
Provision for income taxes 107 245 3,775 20 4,147
Equity in (earnings) of affiliated
companies, net of tax (6,161) (6,886) -- 13,047 --
Minority interest -- -- -- 559 559
-------- ------- --------- -------- ---------
Net earnings $ 6,400 $ 6,005 $ 7,622 $(13,626) $ 6,401
======== ======= ========= ======== =========
SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ (65,758) $ -- $ (65,758)
Net cash provided (used) in investment activities (34,559) -- (13,053) -- (47,612)
Net cash provided (used) in financing activities 48,859 166 169,360 -- 218,385
Effect of exchange rate -- -- (263) -- (263)
Cash at beginning 2,367 -- 66,439 -- 68,806
Cash at end $ 16,667 $ 166 $ 156,725 $ -- $ 173,558
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------------
CHS NON-
ELECTRONICS, GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ 12,540 $ -- $ 12,540
Net cash provided (used) in investing activities 1,641 -- (9,348) -- (7,707)
Net cash provided (used) in financing activities (1,817) -- (22,276) -- (24,093)
Effect of exchange rate -- -- (3,082) -- (3,082)
Cash at beginning 576 -- 34,561 -- 35,137
Cash at end $ 400 $ -- $ 12,395 $ -- $ 12,795
</TABLE>
13
<PAGE>
7. COMMON STOCK
On July 30, 1997, the Company completed a public offering of 21.2 million shares
of common stock at a price of $21.17 per share. Net proceeds were approximately
$428 million. Furthermore, on August 14, 1997, the President of the Company
exercised stock options to purchase 409,168 shares of common stock. This
produced additional proceeds to the Company of approximately $2.8 million.
In September 1997, the Company effectuated a three-for-two stock split. All
share information has been restated to reflect the three-for-two split.
8. CONTINGENCIES
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
9. RELATED PARTY TRANSACTIONS
A member of the Board of Directors and shareholder of the Company also serves as
a member of the board of directors of a buying group, which supplies product to
the Company. This company also has ownership interest in other companies which
do business with the Company. During the six months period ended June 30, 1998,
the Company made sales to such parties of $27.9 million and purchased goods and
services of $3.2 million from such parties. At June 30, 1998, the Company had a
net balance due from such parties of approximately $15.2 million.
At June 30, 1998, the Company carried a receivable from Comtrad and Comtrad
Holdings, Inc. (CHI) in an amount of $18.8 million. CHI, and its wholly owned
subsidiary, Comtrad, are controlled by the Chief Executive Officer of the
Company and a member of the Board of Directors has a minority interest. This
receivable is in the form of a promissory note which Comtrad and CHI have
collateralized with all of their net assets. The principal asset of CHI and
Comtrad is shares of CHS common stock. Interest is charged on the promissory
note at prime rate. The amount is due on demand.
14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net sales and net earnings have grown substantially during the
past several years, in large part due to acquisitions. The acquisitions since
January 1, 1997 are shown below:
<TABLE>
<CAPTION>
OPERATING SUBSIDIARY CHS ACQUISITION SERVICE AREA DATE
-------------------- ---------------------------- ----
<S> <C> <C>
Arena Turkey May 1998
Armada Turkey May 1998
Merisel Russia Russia May 1998
Raphael Informatika Italy May 1998
Aptec Middle East May 1998
SiS Distributors (1) China, Malaysia, Singapore and Vietnam March 1998
TH' Systems Czech Republic, Poland, Hungary and Slovakia February 1998
ARC Spain Spain January 1998
Micro Informatica Latin America January 1998
CHS Nexsys Colombia December 1997
CHS Ledakon (2) Colombia November 1997
CHS Romak Ireland October 1997
Compexpress Brazil October 1997
Santech Norway, Sweden and Denmark October 1997
Lars Krull Denmark, Norway and Sweden August 1997
Karma Europe, Middle East and China August 1997
Ameritech Exports Latin America August 1997
Ameritech Argentina Argentina August 1997
Atlantis Skupina (3) Slovenia August 1997
CHS Dinexim Latin America May 1997
CHS Access and Agora Czech Republic May 1997
CHS International High Tech Africa Marketing Africa April 1997
CHS Frank & Walter (4) Germany March 1997
CHS Estonia Estonia January 1997
CHS Infocentro de Chile Chile January 1997
<FN>
- ----------------------
(1) The Company owns 80% of this company.
(2) The Company owns 65% of this company.
(3) The Company owns 51% of this company.
(4) The results of operations of Frank & Walter have been included as of January 1, 1997.
</FN>
</TABLE>
RESULTS OF OPERATIONS
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
NET SALES. Net sales increased $822.5 million, or 86.9%, from $947.0 million in
second quarter 1997 to $1,769.5 million in second quarter 1998 due to
acquisitions and, to a lesser extent, internal growth. Of the increase in net
sales, newly acquired subsidiaries contributed $689.4 million. Net sales of
subsidiaries consolidated for both 1998 and 1997 second quarters grew $133.1
million, or 14.6%. This growth is attributed to increased consumer demand for
microcomputer products offered by the Company.
15
<PAGE>
GROSS PROFIT. Gross profit increased $43.7 million, or 62.3%, from $70.2 million
in second quarter 1997 to $113.9 million in second quarter 1998 due principally
to acquisitions. Newly acquired companies contributed $47.6 million of gross
profit. Gross profit of subsidiaries consolidated for both 1998 and 1997 second
quarters, decreased $9.5 million, or 13.5%.
Gross margin was 6.4% for the quarter ended June 30, 1998 and 7.4% for the
quarter ended June 30, 1997. The decrease in gross margin was caused by
increased competitive pressure in all markets and the acquisition of the Karma
operation, which has a lower gross margin that the remainder of the Company due
to the nature of the products sold. The Company believes gross margins in its
distribution to reseller business in the future may be lower due to competitive
pressure but is attempting to offset the decrease through expansion of
enterprise system distribution and distribution of private label products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was 5.1% in
the second quarter of 1998 and 5.6% in the second quarter of 1997. The Company
expects that the inclusion of Karma's results in 1998 will result in operating
expenses being a lower percentage of net sales than in 1997 based on lower
operating expenses of Karma as a percentage of its sales. This factor is offset
to some extent by increased goodwill amortization in 1998, which was $5.1
million during the three month period ended June 30, 1998 compared to $1.1
million during the three month period ended June 30, 1997. Operating expenses
for both periods include the results of foreign currency transactions. Such
results were a net gain of $1.3 million and $0.4 million during the three month
periods ended June 30, 1998 and 1997, respectively.
NET INTEREST EXPENSE. Net interest expense increased $6.3 million from $6.2
million in second quarter 1997 to $12.5 million in second quarter 1998 due to
interest on the Notes and increased borrowings of the Company to support
increased sales.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest was 42% in second quarter 1998 and 37% in second quarter 1997.
The change is due to a higher proportion of income earned in jurisdictions with
higher tax rates, by losses in subsidiaries with no tax benefit and increased
non-deductible goodwill amortization. The Company expects to have an effective
tax rate lower than the statutory United States tax rate in 1998 principally due
to the proportion of income expected in jurisdictions with lower tax rates and
also its ability to use remaining net operating loss carryforwards from certain
subsidiaries.
SIX MONTHS 1998 COMPARED TO SIX MONTHS 1997
NET SALES. Net sales increased $1,696.8 million, or 93.0%, from $1,824.1 million
in the six months ended June 30, 1997 to $3,520.8 million in the six months
ended June 30, 1998 due to acquisitions and, to a lesser extent, internal
growth. Of the increase in net sales, newly acquired subsidiaries contributed
$1,369.9 million. Net sales of subsidiaries consolidated for both six month
periods ended June 30, 1998 and 1997 grew $326.9 million, or 18.5%. This growth
is attributed to increased consumer demand for microcomputer products offered by
the Company.
GROSS PROFIT. Gross profit increased $103.9 million, or 78.3%, from $132.6
million in the six months ended June 30, 1997 to $236.5 million in the six
months ended June 30, 1998 due principally to acquisitions and, to a lesser
extent, internal growth. Newly acquired companies contributed $93.1 million of
gross profit. Gross profit of subsidiaries consolidated for both six month
periods ended June 30, 1998 and 1997, grew $10.7 million, or 8.1%.
Gross margin was 6.7% for the six months ended June 30, 1998 and 7.3% for the
six months ended June 30, 1997. The decrease in gross margin was caused by
increased competitive pressure in all markets and the acquisition of the Karma
operation, which has a lower gross margin that the remainder of the Company due
to the nature of the products sold. The Company believes gross margins in its
distribution to reseller business in the future may be lower due to competitive
pressure but is attempting to offset the decrease through expansion of
enterprise system distribution and distribution of private label products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was 5.0% in
the six months ended June 30, 1998 and 5.5% in the six months ended June 30,
1997. The Company expects that the inclusion of
16
<PAGE>
Karma's results in 1998 will result in operating expenses being a lower
percentage of net sales than in 1997 based on lower operating expenses of Karma
as a percentage of its sales. This factor is offset to some extent by increased
goodwill amortization in 1998, which was $10.4 million during the six month
period ended June 30, 1998 compared to $2.2 million during the six month period
ended June 30, 1997. Operating expenses for both periods include the results of
foreign currency transactions. Such results were a net gain of $5.1 million and
$1.0 million during the six month periods ended June 30, 1998 and 1997,
respectively.
NET INTEREST EXPENSE. Net interest expense increased $9.4 million from $11.1
million in six months ended June 30, 1997 to $20.5 million in six months ended
June 30, 1998 due to interest on the Notes and increased borrowings of the
Company to support increased sales.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest was 31% in six months ended June 30, 1998 and 33% in six
months ended June 30, 1997. The change is due to a higher proportion of income
earned in jurisdictions with higher tax rates, by losses in subsidiaries with no
tax benefit and increased non-deductible goodwill amortization. The Company
expects to have an effective tax rate lower than the statutory United States tax
rate in 1998 principally due to the proportion of income expected in
jurisdictions with lower tax rates and also its ability to use remaining net
operating loss carryforwards from certain subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $65.8 million was used and $12.5 million was provided by operating
activities in the six months ended June 30, 1998 and 1997, respectively. In each
period cash was used principally as a result of decreases in accounts payables
and accrued liabilities and increases in affiliate receivables. Cash was
provided in each period principally as a result of decreases in accounts
receivables and inventories. Net cash used in investing activities in the six
month periods ended June 30, 1998 and 1997 included approximately $19.7 million
and $9.3 million, respectively, related to fixed asset additions. In addition,
$27.9 million was used in and $1.6 million was provided by acquisitions during
the six months ended June 30, 1998 and 1997, respectively. Net cash of $218.4
million was provided by and $24.1 million was used in financing activities in
the six month period ended June 30, 1998 and 1997, respectively, due principally
to borrowings of the Notes and net borrowings from or repayments to banks.
Certain of the Company's United States based subsidiaries are party to a Loan
and Security Agreement providing for revolving credit advances and the issuance
of letters of credit against eligible accounts receivable and inventory up to a
maximum of $60 million. Amounts outstanding bear interest, at the election of
the borrower, at either a variable market rate based on the prime rate of the
lender or LIBOR. The agreement limits the ability of the borrowers to pay
dividends to the Company. The agreement matures in October 1999 and is secured
by a lien on essentially all of the borrowers' assets. The agreement contains
certain restrictive covenants. The Company has guaranteed this indebtedness.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At June 30, 1998,
the aggregate amount available under these agreements was $559.6 million, and
the amount borrowed was $420.6 million. Such agreements are usually for a term
of one year and are secured by the receivables and inventories of the borrower.
The weighted average interest rate at June 30, 1998 was 8.0%. The Company
typically guarantees these loans.
In April 1998, the Company issued $200 million of Senior Notes ("Notes") due
2005. The Notes bear interest of 9.875% per annum and interest is payable
semi-annually on April 15 and October 15 beginning October 15, 1998. The Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2002, initially at 104.938% of their principal amount, plus
accrued and unpaid interest, declining to 100% of their principal amount, plus
accrued and unpaid interest, on or after April 15, 2004. Certain of the
Company's direct and indirect subsidiaries fully and unconditionally jointly and
severely guaranteed the Notes on an unsecured basis. The guarantor subsidiaries
are CHS Electronics, Inc. (Nevada), CHS Delaware, Inc., CHS Delaware L.L.C. and
CHS Americas, Inc. The Notes are effectively subordinated to all existing and
future liabilities of the Company's subsidiaries that are not guarantors. The
Notes contain certain covenants which, among other things, will restrict the
ability of the Company and certain of its subsidiaries to incur additional
17
<PAGE>
indebtedness; pay dividends or make other distributions in respect to their
capital stock; enter into certain transactions with shareholders and affiliates;
make certain investments and other restricted payments; create liens; enter into
certain sale and leaseback transactions and sell assets. The covenants are,
however, subject to a number of exceptions and qualifications.
The Company has completed the risk assessment phase of its year 2000 compliance.
Based on the assessment, the Company has developed an action plan, which
principally consists of replacing existing non-compliant systems with new
systems. The Company believes it is feasible to acquire such new systems before
the year 2000 and the cost of such systems are within its capital cost budget
and financing capabilities. The Company estimates its investment in the new
systems to be in the aggregate of approximately $34 million in 1998 and 1999.
The Company's principal need for additional cash in 1998 will be: for the
purchase of additional inventory to support growth, to take greater advantage of
available cash discounts offered by certain of the Company's vendors for early
payment, to pay amounts due to sellers of businesses, and for the cash component
of possible future acquisitions. The Company is seeking additional cash for this
purpose through its existing bank credit lines and through additional credit
facilities, but management can give no assurance that financing will be
available on terms acceptable to the Company. However, at this time, the
Company, through the proceeds of the 1997 public offering and the issuance of
the Notes, has sufficient funds to support its expected growth in existing
operations for the remainder of 1998.
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In certain
countries, exchange controls may limit the ability of the Company's subsidiaries
to make payments to the Company. Restrictions in financing or credit
arrangements may also limit such payments. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets and cash flow of such
subsidiaries over the claims of the Company or its shareholders.
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 six months periods
ended June 30, 1998 and 1997 and the Company does not expect that it will have a
material impact during the remainder of 1998.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and maintain a
low number of SKUs and thereby reduce the Company's working capital requirements
and improve return on equity. The Company's strategy to achieve this goal is to
both effectively manage its inventory and achieve high order fill rates.
To reduce the risk of loss to the Company due to vendor price reductions and
slow moving or obsolete inventory, the Company's contracts with its vendors
generally provide price protection and stock rotation privileges, subject to
certain limitations. Price protection allows the Company to offset the accounts
payable owed to a particular vendor if such vendor reduces the price of products
the Company has purchased within a specified period of time and which remain in
inventory. Stock rotation permits the Company to return to the vendor for full
credit, with an offsetting purchase order for new products, predetermined
amounts of inventory purchased within a specified period of time. Such credit is
typically used to offset existing invoices due without incurring re-stocking
fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to balance the
needs of its customers to purchase on credit with its desire to minimize its
credit losses. Bad debt expense as a percentage of the Company's net sales for
each of the six months periods ended June 30, 1998 and 1997 was 0.2%. The
Company's credit losses have been minimized by its extensive credit approval
process and the use of credit insurance and factoring by its Western European
subsidiaries. In its sales to customers in Latin America, the Company often
receives post-dated checks at the time of sale. Customers who qualify for credit
are typically granted payment terms appropriate to the customs of each country.
18
<PAGE>
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.
CURRENCY MANAGEMENT ACTIVITIES. The Company attempts to limit its risk of
currency fluctuations through hedging where possible. In the six month period
ended June 30, 1998, a significant amount of the purchases of products by the
Company were made in United States dollars and approximately 88% of Company
sales were made in currencies other than the United States dollar. The primary
currencies in which sales were made were the German mark (22% of sales), the
British pound (9%) and the French franc (8%). At June 30, 1998, approximately
$238 million of accounts payable were attributable to foreign currency
liabilities denominated in other than the subsidiaries functional currencies. Of
these, $204 million was denominated in U.S. dollars and $30 million was
denominated in German marks. Approximately 74% of these liabilities were
unhedged.
In March 1995, the Company formed CHS Finance as a finance company for the
Company's distribution activities. CHS Finance engages in central treasury
functions including hedging activities related to foreign currency for the
Company and short term working capital loans to the Company's subsidiaries to
enable them to take advantage of early payment discounts offered by certain
vendors. These loans are denominated in the functional currency of the borrowing
subsidiary or U.S. dollars. Generally, CHS Finance hedges its receivables
denominated in currencies other than its functional currency, the Swiss franc.
It attempts to limit the amount of unhedged receivables to an amount which
approximates the U.S. dollar denominated payables in certain of the Company's
subsidiaries. The Company intends to review this policy periodically and may
modify it in the future.
Through both hedging activities coordinated by CHS Finance and subsidiary
hedging, the Company makes forward purchases of dollars in an attempt to hedge
local Western European currencies and reduce exposure to fluctuations in
exchange rates. Additionally, in certain countries in Eastern Europe and in
South America where it is not practical to make forward purchases, to minimize
exposure to currency devaluations, the Company has adopted a policy of
attempting to match accounts receivable with accounts payable and to limit
holdings of local currencies. In these countries, the Company attempts to sell
products at the U.S. dollar equivalent rate. Factors which affect exchange rates
are varied and no reliable prediction methods are available for definitely
determining future exchange rates. In general, countries make an effort to
maintain stability in rates for trade purposes. There can be no assurance that
these asset management programs will be effective in limiting the Company's
exposure to these risks.
FORWARD LOOKING INFORMATION
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations of beliefs, including, but not limited to,
statements concerning expectations of gross margins, operating expenses to
sales, income taxes, its year 2000 compliance activities, inflation
expectations, and sales of the Company's products. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control, and actual results may differ materially depending on a
variety of important factors, including changes in economic conditions, demand
for the Company's products and changes in competitive environment.
19
<PAGE>
PART II
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
1. On April 22, 1998, a report on Form 8-K was filed, under Item 5, Other
Events, to report the issuance of a press release dated April 13, 1998
relating to the closing of the Company's sale of $200,000,000 9 7/8% Senior
Notes due 2005.
EXHIBITS
27 Financial Data Schedule
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHS ELECTRONICS, INC.
(Registrant)
August 13, 1998 BY /s/ ANTONIO BOCCALANDRO
------------------------
ANTONIO BOCCALANDRO
Secretary
August 13, 1998 BY /s/ CRAIG S. TOLL
------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-01-1998
<CASH> 173,558
<SECURITIES> 0
<RECEIVABLES> 758,658
<ALLOWANCES> (23,195)
<INVENTORY> 633,254
<CURRENT-ASSETS> 1,624,416
<PP&E> 82,878
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,253,059
<CURRENT-LIABILITIES> 1,279,309
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 734,622
<TOTAL-LIABILITY-AND-EQUITY> 2,253,059
<SALES> 3,520,832
<TOTAL-REVENUES> 3,520,832
<CGS> 3,284,314
<TOTAL-COSTS> 175,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,467
<INCOME-PRETAX> 40,504
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,075
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.47
</TABLE>
