UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 MAY 10, 1999: 58,040,369
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 FLOWS .............. 5-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ......... 7-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............... 17-22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.... 23-25
PART II
ITEM 1. LEGAL PROCEEDINGS ........................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 26
2
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 131,523 $ 176,991
Accounts receivable:
Trade, less allowance for doubtful accounts
of $34,596 in 1999 and $34,486 in 1998 1,181,755 1,342,126
Affiliates 27,312 35,546
----------- -----------
1,209,067 1,377,672
Inventories 895,439 1,025,690
Prepaid expenses and other current assets 103,728 101,698
----------- -----------
TOTAL CURRENT ASSETS 2,339,757 2,682,051
PROPERTY AND EQUIPMENT, NET 114,035 120,201
GOODWILL, NET 732,746 737,719
OTHER ASSETS 50,335 32,172
----------- -----------
$ 3,236,873 $ 3,572,143
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 602,352 $ 620,067
Accounts payable, trade 1,057,305 1,345,059
Accrued liabilities 101,918 125,076
Amounts due to sellers under acquisition agreements 183,502 185,853
Income taxes payable 3,811 13,997
----------- -----------
TOTAL CURRENT LIABILITIES 1,948,888 2,290,052
LONG TERM DEBT 466,001 433,582
MINORITY INTEREST 10,964 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;
55,672,675 and 55,619,475 shares outstanding at March 31, 1999
and December 31, 1998, respectively 56 56
Additional paid-in capital 732,652 732,035
Retained earnings 111,027 110,793
Accumulated other comprehensive income (32,715) (4,841)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 811,020 838,043
----------- -----------
$ 3,236,873 $ 3,572,143
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
---------------------------
1999 1998
----------- -----------
Net sales $ 2,470,093 $ 1,751,338
Cost of goods sold 2,314,247 1,628,744
----------- -----------
Gross profit 155,846 122,594
Operating expenses 134,279 89,506
----------- -----------
Operating income 21,567 33,088
Other (income) expenses:
Interest income (5,030) (2,639)
Interest expense 24,392 10,563
Foreign currency (gain) loss 105 (3,792)
----------- -----------
19,467 4,132
----------- -----------
Earnings before income taxes
and minority interest in
subsidiaries 2,100 28,956
Income taxes 1,792 7,779
Minority interest in subsidiaries 74 610
----------- -----------
Net earnings $ 234 $ 20,567
=========== ===========
Net earnings per common share:
Basic $ -- $ 0.42
=========== ===========
Diluted $ -- $ 0.38
=========== ===========
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>
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 234 $ 20,567
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 13,807 9,210
Minority interes in net earnings 74 610
Changes in assets and liabilities excluding effects
of acquisitions:
Accounts receivable-trade, net 160,378 30,052
Accounts receivable-affiliates, net 8,234 817
Inventories 130,553 120,970
Prepaids and other assets (19,617) 73,008
Accounts payable (299,234) (170,020)
Acccrued liabilities and income taxes (33,856) (73,059)
--------- ---------
Net cash (used in) provided by operating activities (39,427) 12,155
Cash flows from investing activities:
Purchase of fixed assets (6,880) (4,809)
Acquisitions, net of cash acquired (5,371) (42,858)
--------- ---------
Net cash (used in) investing activities (12,251) (47,667)
Cash flows from financing activities:
Net borrowings from banks 14,704 42,177
Proceeds from exercising stock options 617 135
--------- ---------
Net cash provided by financing activities 15,321 42,312
Effect of exchange rate changes on cash (9,111) (699)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (45,468) 6,101
Cash and cash equivalents at beginning of period 176,991 68,806
--------- ---------
Cash and cash equivalents at end of period $ 131,523 $ 74,907
========= =========
</TABLE>
5
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(continued)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 16,533 $ 9,895
Income taxes $ 3,164 $ 4,672
Non cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
The components of the transactions in each period are as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -------------
Fair value of assets acquired including
cash acquired $ 8,124 $234,038
Less: Common stock or other consideration
issued 5,538 93,492
-------- --------
Liabilities assumed $ 2,586 $140,546
======== ========
These statements of cash flows exclude the non-cash impact on the net increase
of amount due to sellers under acquisition agreements of $1.6 million in 1999
and $55.3 million in 1998.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 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.
Certain amounts in the financial statements have been reclassified to conform to
the 1999 classifications.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the operating results for the full fiscal year. Sales
in Europe in the first and fourth quarters of each year are typically higher
than sales in the second and third quarters. In South America sales in the third
and fourth quarters are typically higher than sales in the first and second
quarters.
2. ACQUISITIONS
In the three month period ended March 31, 1999, the Company made one,
insignificant acquisition.
On July 1, 1998, the Company acquired a majority of the outstanding shares of
Metrologie International SA ("Metrologie"), a distributor of hardware and
software to more than 15,000 resellers in France, the United Kingdom and Spain
(all outstanding shares of Metrologie were acquired before the end of 1998). The
purchase price for the entire equity interests of Metrologie was approximately
$93.7 million. Metrologie had sales of $433.4 million for the six months ended
June 30, 1998 and $883.2 million for the year ended December 31, 1997.
On March 9, 1998, the Company acquired an 80% interest in the Hong Kong,
Malaysia and Singapore subsidiaries of SiS Distribution Ltd. ("SiS"), a Hong
Kong based distributor, for $70.4 million, and paid $28.2 million of such amount
on such date (representing 40% of the purchase price). Under the terms of the
agreement, as modified, the remainder of the purchase price is due in cash in
the second quarter of 1999. SiS had sales of $346.8 million during 1997.
During 1998, 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
as if the companies acquired in 1998 were acquired on January 1, 1998. Pro forma
adjustments were made to include goodwill amortization in the three month period
ended March 31, 1998 based on 1998 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.
7
<PAGE>
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
---------- ----------
Net sales $2,470,093 $2,194,369
Net earnings 234 10,154
Net earnings per share-basic $ -- $ 0.20
Net earnings per share-diluted $ -- $ 0.19
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.
3. NET EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted
averaged 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 to date and dividing by the market price at period
end. In certain earn outs where the Company has the option of settling the earn
out in cash or shares, the Company's current presumption is it will use cash and
therefore, such shares have not been included in the calculation of diluted
earnings per share. The weighted average number of shares for basic earnings per
share was 55,672,675 and 49,534,737 for the three-month periods ended March 31,
1999 and 1998, respectively. The weighted average number of shares used in the
diluted computation was 58,029,615 and 54,754,967 for the three-month periods
ended March 31, 1999 and 1998, respectively.
The following table illustrates the reconciliation of the income and weighted
average number of shares of the basic and diluted earnings per share
computations (amounts in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $ 234
------
Net earnings per share-basic 234 55,673 $ --
======
Effect of dilutive shares:
Stock options and warrants
outstanding -- 452
Earn out contingencies -- 1,905
------ ------
Net earnings per share-diluted $ 234 58,030 $ --
====== ====== ======
8
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
--------- -------------- ---------
Net earnings $ 20,567
--------
Net earnings per share-basic 20,567 49,535 $ 0.42
======
Effect of dilutive shares:
Stock options and warrants
outstanding -- 1,434
Earn out contingencies -- 1,631
-------- ------
Net earnings per share-diluted $ 20,567 54,755 $ 0.38
======== ====== ======
4. LONG TERM DEBT
The Company's long-term debt at March 31, 1999, consists principally of the
amount due at that date ($235 million) under revolving credit agreements of
certain of the Company's subsidiaries in Germany and Turkey and its $200 million
Senior Notes (the "Notes") due 2005.
On December 30, 1998, three of the Company's German subsidiaries (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 March 31,
1999, the balance outstanding on this credit facility was $167.7 million and the
total interest rate was 6.55%. The agreement, among other things, limits the
ability of the Borrowers to incur additional indebtedness. At March 31, 1999,
the Company was in violation of a certain covenant pertaining to the above
agreement. The Company has obtained a waiver from the lender. The waiver assumes
the lender and the Company will agree on revised covenants for the remainder of
1999. At March 31, 1999, the total amount outstanding under this credit facility
was $167.7 million.
The Company is in violation of a certain covenant pertaining to a minimum
tangible net worth requirement contained in a different short-term credit
facility at March 31, 1999. Total amount outstanding at March 31, 1999 under
such facility was $82.5 million. The Company is negotiating terms of a waiver
with the lender but can give no assurance of the successful completion of such
negotiation.
A subsidiary of the Company, located in Turkey has credit facilities with two
banks. These facilities provide for advances for working capital needs based
upon eligible inventory and are due in April, 2000 and November, 2000,
respectively. These debts are secured by a lien on inventory. At March 31, 1999,
the total amount outstanding on such credit facilities was $66.3 million. These
agreements contain certain covenants requiring certain levels of net worth and
profitability.
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
9
<PAGE>
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 MARCH 31, 1999
-------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 793 $ (5,664) $ 136,394 $ -- $ 131,523
Accounts receivables 21,068 25,399 1,162,600 -- 1,209,067
Intercompany receivables 370,284 11,500 -- (381,784) --
Inventories -- 6,536 888,903 -- 895,439
Other current assets 1,531 1,170 101,027 -- 103,728
----------- ----------- ----------- ----------- -----------
Total current assets 393,676 38,941 2,288,924 (381,784) 2,339,757
Property and equipment, net 1,464 7,060 105,511 -- 114,035
Cost in excess of assests acquired, net -- -- 732,746 -- 732,746
Investments in affiliated companies 804,647 1,344,128 -- (2,148,775) --
Other assets 10,564 13,006 26,765 -- 50,335
----------- ----------- ----------- ----------- -----------
Total assets $ 1,210,351 $ 1,403,135 $ 3,153,946 $(2,530,559) $ 3,236,873
=========== =========== =========== =========== ===========
Notes payable $ -- $ 7,507 $ 594,845 $ -- $ 602,352
Intercompany payables 12,899 158,432 182,679 (381,784) --
Accounts payable 9,961 15,087 1,032,257 -- 1,057,305
Accrued expenses 3,234 2,217 96,467 -- 101,918
Amounts due to sellers 183,502 -- -- -- 183,502
Income taxes payable and other (10,265) 1,255 12,821 -- 3,811
----------- ----------- ----------- ----------- -----------
Total current liabilities 199,331 184,498 1,919,069 (381,784) 1,948,888
Long term debt 200,000 4,824 261,177 -- 466,001
Minority interests -- -- -- 10,964 10,964
Shareholders' equity 811,020 1,213,813 1,160,285 (2,159,739) 811,020
----------- ----------- ----------- ----------- -----------
$ 1,210,351 $ 1,403,135 $ 3,340,531 $(2,530,559) $ 3,236,873
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash $ 1,642 $ 1,065 $ 72,200 $ -- $ 74,907
Accounts receivables 17,770 3,364 710,066 -- 731,200
Intercompany receivables 162,139 535 194,064 (356,738) --
Inventories -- -- 628,761 -- 628,761
Other current assets 13,258 530 90,628 (3,911) 100,505
----------- ----------- ----------- ----------- -----------
Total current assets 194,809 5,494 1,695,719 (360,649) 1,535,373
Property and equipment, net 2,102 45 67,077 (1,759) 67,465
Cost in excess of assests acquired, net -- -- 414,644 -- 414,644
Investments in affiliated companies 696,962 569,411 -- (1,266,373) --
Other assets -- -- 37,560 -- 37,560
----------- ----------- ----------- ----------- -----------
Total assets $ 893,873 $ 574,950 $ 2,215,000 $(1,628,781) $ 2,055,042
=========== =========== =========== =========== ===========
Notes payable $ -- $ 500 $ 371,723 $ -- $ 372,223
Intercompany payables -- 153,168 203,433 (356,601) --
Accounts payable 1,235 801 694,105 -- 696,141
Accrued expenses 60,825 175 6,891 -- 67,891
Amounts due to sellers 114,430 -- -- -- 114,430
Income taxes payable and other 1,362 (995) 17,977 1,531 19,875
----------- ----------- ----------- ----------- -----------
Total current liabilities 177,852 153,649 1,294,129 (355,070) 1,270,560
Long term debt 30,000 4,505 46,056 -- 80,561
Minority interests -- -- -- 6,958 6,958
Shareholders' equity 686,021 416,796 874,815 (1,280,669) 696,963
----------- ----------- ----------- ----------- -----------
$ 893,873 $ 574,950 $ 2,215,000 $(1,628,781) $ 2,055,042
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 73,101 $2,396,992 $ -- $2,470,093
Cost of goods sold -- 68,468 2,245,779 -- 2,314,247
---------- ---------- ---------- ---------- ----------
Gross profit -- 4,633 151,213 -- 155,846
Operating expenses (998) 4,452 130,825 -- 134,279
---------- ---------- ---------- ---------- ----------
Operating income 998 181 20,388 -- 21,567
Other (income) expense, net 5,113 387 13,967 -- 19,467
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes and minority interest
in subsidiaries (4,115) (206) 6,421 -- 2,100
Provision for income taxes (2,676) 2,131 2,337 -- 1,792
Equity in (earnings) of affiliated
companies, net of tax (1,673) (1,161) -- 2,834 --
Minority interest -- -- -- 74 74
---------- ---------- ---------- ---------- ----------
Net earnings $ 234 $ (1,176) $ 4,084 $ (2,908) $ 234
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 31 $1,751,307 $ -- $1,751,338
Cost of goods sold -- (290) 1,629,034 -- 1,628,744
---------- ---------- ---------- ---------- ----------
Gross profit -- 321 122,273 -- 122,594
Operating expenses 2,468 13 83,233 -- 85,714
---------- ---------- ---------- ---------- ----------
Operating income (loss) (2,468) 308 39,040 -- 36,880
Other (income) expense, net (569) 146 8,347 -- 7,924
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes and minority interest
in subsidiaries (1,899) 162 30,693 -- 28,956
Provision for income taxes 310 62 7,407 -- 7,779
Equity in (earnings) of affiliated
companies, net of tax (22,776) (22,581) -- 45,357 --
Minority interest -- -- -- 610 610
---------- ---------- ---------- ---------- ----------
Net earnings $ 20,567 $ 22,681 $ 23,286 $ (45,967) $ 20,567
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ (39,427) $-- $ (39,427)
Net cash provided (used) in investing activities (1,270) (4,419) (6,562) -- (12,251)
Net cash provided (used) in financing activities -- -- 15,321 -- 15,321
Effect of exchange rate -- -- (9,111) -- (9,111)
Cash at beginning 2,063 (1,245) 176,173 -- 176,991
Cash at end $ 793 $ (5,664) $ 136,394 $-- $ 131,523
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ 12,155 $-- $ 12,155
Net cash provided (used) in investing activities (28,934) -- (18,733) -- (47,667)
Net cash provided (used) in financing activities 30,000 -- 12,312 -- 42,312
Effect of exchange rate -- -- (699) -- (699)
Cash at beginning 576 -- 68,230 -- 68,806
Cash at end $ 1,642 $ -- $ 73,265 $-- $ 74,907
</TABLE>
12
<PAGE>
5. COMPREHENSIVE INCOME
In 1998 the Company adopted Statement of Financial Accounting Standards No. 130,
"REPORTING COMPREHENSIVE INCOME". SFAS No. 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 No. 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 (loss) income was $(27.6) million for the
three months ended March 31, 1999 and $16.4 million for the three months ended
March 31, 1998. The primary difference from net income as reported is the change
in cumulative foreign currency translation adjustment.
6. CONTINGENCIES
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET.AL., case No. 99-8186, was
filed in the United States District Court, Southern District of Florida.
Subsequently, other complaints have been filed. The complaints, which purport to
be class action complaints, generally allege that the Company and certain of its
officers violated federal securities laws in connection with financial reporting
and disclosure. The suits purport to be on behalf of those who purchased CHS
Electronics common stock during specified time frames. The Company, in
connection with its legal counsel, is in the process of carefully reviewing the
allegations of the complaints. However, the Company believes that it has no
liability and intends to vigorously defend the suits.
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 in Germany and Belgium 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. On April 30, 1999, the
court in Germany, in advance of a formal ruling, advised the parties that it
intended to dismiss the claim of Metro. Such ruling was on a preliminary basis
and is subject to modification in the final ruling, which itself may be
appealed. On March 30, 1999, the Commercial Court in Brussels, Belgium upheld
the Bank's refusal to honor Metro's demand for payment under the letter of
credit. Except for a determination of the party responsible for payment of
costs, the action has been dismissed.
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 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.
7. RELATED PARTY TRANSACTIONS
A member of the Board of Directors, who is a more than 5% shareholder and
officer of the Company has ownership interests and control over other companies
that do 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 three months ended March 31, 1999 and 1998 (amounts
in thousands):
1999 1998
------ -------
Sales to such related parties $ 37 $12,900
Purchases from such related parties 43 1,700
Net amount due the Company 1,417 8,700
13
<PAGE>
In an agreement in December 1998 and subsequently amended in March 1999, CHS
acquired certain of these companies for the net of 1.7 million shares of common
stock and $4.0 million in cash. In connection with the acquisitions, the Company
recorded goodwill of $32.7 million. In January 1999, the Company acquired for
$5.4 million in cash the remaining entity which had transactions with the
Company. As a result of these acquisitions, the Company expects a significant
reduction in such 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., of $21.1 million at March 31, 1999 and $17.6
million at March 31, 1998. In May 1999, CHI voluntarily repaid $0.75 million to
the Company. CHI is 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 accrues on the promissory note at prime rate and is due
with the principal amount outstanding 180 days after demand. Interest charged to
Comtrad and CHI during the three months ended March 31, 1999 and 1998 was $0.4
million and $0.3 million, respectively. Although the market value at March 31,
1999 was insufficient to liquidate the indebtedness there has been an increase
in market price subsequent to that date. Management, after considering all
relevant factors, believes no valuation reserve as of March 31, 1999 is
required.
8. 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. These
condensed consolidated financial statements reflect the adoption of SFAS 131.
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 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 segments operates are Western Europe,
Eastern Europe, Latin America and Asia/Middle East. Net sales, gross profit,
operating income (before interest and income taxes) and total assets by segment
were as follows (in thousands):
14
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION TO RESELLERS
--------------------------------------
ASIA/ DISTRIBUTION
Three Months WESTERN EASTERN LATIN MIDDLE TO
Ended March 31, EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY TOTAL SEGMENTS
---------- ---------- ---------- ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Net sales $1,480,145 $ 175,448 $ 361,315 $ 123,076 $ 330,109 $ -- $2,470,093
Gross profit 85,145 16,043 25,456 7,368 21,834 -- $ 155,846
Operating income 11,340 5,801 3,542 1,507 6,959 (912) $ 28,237
Total assets 1,749,787 181,262 514,640 131,215 439,857 182,313 $3,199,074
1998
Net sales $ 927,832 $ 129,177 $ 330,031 $ 33,790 $ 330,508 $ -- $1,751,338
Gross profit 68,283 10,246 21,622 2,313 20,130 -- $ 122,594
Operating income 24,722 4,250 5,166 1,433 5,276 (760) $ 40,087
Total assets 772,054 139,210 397,473 94,269 314,390 130,598 $1,847,994
</TABLE>
Reconciliation of total segments to consolidated total:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ------------
OPERATING INCOME:
Total operating income for reportable
segments $ 28,237 $ 40,087
Corporate (expenses) income 1,307 (1,626)
Goodwill amortization not allocated (7,977) (5,373)
-------- --------
Total operating income $ 21,567 $ 33,088
======== ========
AS OF MARCH 31,
-----------------------
ASSETS: 1999 1998
---------- ----------
Total segments $3,199,074 $1,847,994
Elimination of intercompany receivables (656,017) (356,738)
Goodwill not allocated 732,745 414,644
Other assets, including reclassifications (38,929) 149,141
---------- ----------
Total consolidated assets $3,236,873 $2,055,041
========== ==========
THREE MONTHS ENDED MARCH 31,
----------------------------
GEOGRAPHIC INFORMATION: 1999 1998
------------ -------------
Net sales:
Western Europe $1,722,819 $1,163,214
Eastern Europe 225,773 194,303
Latin America 361,315 324,783
Asia, Africa and Middle East 160,186 69,039
---------- ----------
Consolidated Total $2,470,093 $1,751,339
========== ==========
15
<PAGE>
The Company's product mix by category was:
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
--------- -----------
Personal computers 23% 14%
Mass storage 22% 30%
Printers 11% 12%
Software 9% 9%
Components 8% 11%
Networking and multimedia 8% 9%
Peripherals 8% 8%
Other 11% 7%
--- ---
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 three
months ended March 31, 1999 and 1998.
16
<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, 1998 are shown below:
<TABLE>
<CAPTION>
OPERATING SUBSIDIARY CHS ACQUISITION SERVICE AREA DATE
- -------------------- ---------------------------- -------------
<S> <C> <C>
Yakumo Germany, Hong Kong January 1999
MC DOS(1)(2) Germany, Netherlands December 1998
Lung(2) Hong Kong December 1998
Brightstar Latin America November 1998
Acron Argentina August 1998
Memory Set Spain July 1998
Cornejo Argentina July 1998
Intcomex Miami, Mexico, Panama, Guatemala July 1998
Chile, Peru and Uruguay
Metrologie International France, United Kingdom and Spain July 1998
Arena Turkey May 1998
Armada Turkey May 1998
Merisel Russia Russia May 1998
Raphael Informatika Italy May 1998
Aptec Middle East May 1998
SiS Distribution(3) China, Malaysia, Singapore March 1998
and Vietnam
TH' Systems Czech Republic, Poland, Hungary February 1998
and Slovakia
ARC Spain Spain January 1998
MicroInformatica Latin America January 1998
- -----------------------------
</TABLE>
(1) The Company owns 60% of MC DOS Netherlands.
(2) Deemed by the Company to be part of a single acquisition.
(3) The Company owns 80% of this company.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
NET SALES. Net sales increased $718.8 million, or 41.0%, from $1,751.3 million
in first quarter 1998 to $2,470.1 million in first quarter 1999 due principally
to acquisitions and, to a lesser extent, internal growth. Of the increase in net
sales, newly acquired subsidiaries contributed $660.7 million. Net sales of
subsidiaries consolidated for both 1999 and 1998 first quarters grew $58.1
million, or 3.3%. This growth is attributed to increased consumer demand for
microcomputer products offered by the Company, principally in Western Europe,
offset in part by economic difficulties in certain geographic areas, principally
Latin America and Russia.
GROSS PROFIT. Gross profit increased $33.3 million, or 27.1%, from $122.6
million in first quarter 1998 to $155.8 million in first quarter 1999 due
principally to acquisitions and, to a lesser extent, internal growth. Newly
acquired companies contributed $49.3 million of gross profit. Gross profit of
subsidiaries consolidated for both 1999 and 1998 first quarters, decreased $16.0
million, or 13.1%.
17
<PAGE>
Gross margin decreased from 7.0% in first quarter 1998 to 6.3% in first quarter
1999. The decrease was due principally to lower gross margins from subsidiaries
located in Western Europe. The Company expects that overall gross margins may
continue to be lower during the remainder of 1999 compared to 1998 due to
competitive pricing pressures across all regions. However, the Company will
attempt to offset this decline through the expansion of its enterprise system
distribution operations, assembly and distribution of private label products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was at 5.4%
in the first quarter of 1999 and 5.1% in the first quarter of 1998. This
increase is partially due to an increase in goodwill amortization from $5.4
million during the three months ended March 31, 1998 to $8.0 million during the
three month period ended March 31, 1999. The remaining increases were due to
general cost increases and additional provisions for bad debts of approximately
$1 million in Latin America in 1999.
NET INTEREST EXPENSE. Net interest expense increased $11.4 million from $7.9
million in first quarter 1998 to $19.4 million in first quarter 1999 due to
interest on the Company's Senior Notes due 2005 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 85.3% in first quarter 1999 and 26.9% in first quarter
1998. The change is due to a higher proportion of income earned in jurisdictions
with higher tax rates, losses incurred in subsidiaries with no tax benefits and
increased non-deductible goodwill amortization. The Company expects to have an
effective tax rate lower than the statutory United States tax rate in 1999
principally due to the proportion of income expected in jurisdictions with lower
tax rates than the U.S. rate and also its ability to use remaining net operating
loss carryforwards from certain subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $39.4 million was used and $12.2 million was provided by operating
activities in the three-months ended March 31, 1999 and 1998, respectively. In
the three months ended March 31, 1999 and 1998, cash was used principally to
decrease accounts payables and accrued liabilities, and cash was provided as a
result of decreases in accounts receivable and inventories. Net cash used in
investing activities in the three month period ended March 31, 1999 and 1998
included approximately $6.9 million and $4.8 million, respectively, related to
fixed asset additions. In addition, $5.4 million and $42.9 million was used in
acquisitions during the three months ended March 31, 1999 and 1998,
respectively. Net cash of $15.3 million and $42.3 million was provided by
financing activities in the three month period ended March 31, 1999 and 1998,
respectively, due principally to net borrowings from banks.
The Company has a liability to sellers of business of $183.5 million at March
31, 1999 representing the remaining price of acquisitions for which there is a
minimum payment or where an earn out is complete. Management believes such
amounts are best financed through long term debt or equity. The Company is
negotiating with each significant seller to extend such payments until long term
financing can be completed. While the Company believes such negotiations will be
successful, it may have to use current cash or financing facilities or issue
common stock to satisfy such liabilities within the next 12 months. If the
portion of such liabilities payable in stock or cash were settled in stock at a
current average price of approximately $5.00, the number of shares would be
18.0 million.
On December 30, 1998, three of the Company's German subsidiaries (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 March 31,
1999, the interest rate on this credit facility was 6.55%. The agreement, among
other things, limits the ability of the Borrowers to incur additional
indebtedness. At March 31, 1999, the Company was in violation of a certain
covenant pertaining to the above agreement. The Company has obtained a waiver
from the lender. The waiver assumes the lender and the Company will agree on
revised covenants for the remainder of 1999. At March 31, 1999 the total amount
outstanding under this credit facility was $167.7 million.
The Company is in violation of a certain covenant pertaining to a minimum
tangible net worth requirement contained in a different short-term credit
facility at March 31, 1999. Total amount outstanding at March 31, 1999 under
such facility was $82.5 million. The Company is negotiating terms of a waiver
with the lender but can give no assurance of the successful completion of such
negotiation.
18
<PAGE>
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At March 31, 1999,
of the $843.6 million aggregate amount available under these agreements, $590.9
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 March 31,
1999 was 6.6%. 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 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 CHS U.K., Santech
Norway, CHS Latin America and CHS Promark. Such credit agreements have maximum
available amounts of $147.8 million in total.
On May 13, 1999, the Company announced an agreement to enter into an expanded
strategic alliance with Computer Associates International, Inc. ("CA"). Under
terms of the agreement, the Company will supply CA with marketing, distribution
and reseller rights with respect to its product offering. CA will invest up to
$50 million in the Company.
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 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, will restrict the ability of the Company and certain of its
subsidiaries to incur additional indebtedness; pay dividends or make other
distributions in respect to their capital stock; enter into certain transactions
with shareholders and affiliates; make certain investments and other restricted
payments; create liens; enter into certain sale and leaseback transactions and
sell assets. The covenants are, however, subject to a number of exceptions and
qualifications.
The Company's principal need for additional cash in 1998 will be: (i) for the
purchase of additional inventory to support growth; (ii) to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment; and (iii) to pay amounts due to sellers of
businesses, including the $40.2 million due in connection with the SiS
acquisition. In certain earn outs where the Company has the option of settling
certain of the earn outs in cash or shares, the Company's current presumption is
it will use cash. 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.
19
<PAGE>
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET.AL., case No. 99-8186, was
filed in the United States District Court, Southern District of Florida.
Subsequently, other complaints have been filed. The complaints, which purport to
be class action complaints, generally allege that the Company and certain of its
officers violated federal securities laws in connection with financial reporting
and disclosure. The suits purport to be on behalf of those who purchased CHS
Electronics common stock during specified time frames. The Company, in
connection with its legal counsel, is in the process of carefully reviewing the
allegations of the complaints. However, the Company believes that it has no
liability and intends to vigorously defend the suits.
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 in Germany and Belgium 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. On April 30, 1999, the
court in Germany, in advance of a formal ruling, advised the parties that it
intended to dismiss the claim of Metro. Such ruling was on a preliminary basis
and is subject to modification in the final ruling, which itself may be
appealed. On March 30, 1999, the Commercial Court in Brussels, Belgium upheld
the Bank's refusal to honor Metro's demand for payment under the letter of
credit. Except for a determination of the party responsible for payment of
costs, the action has been dismissed.
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 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
have been accelerated in order to resolve Year 2000 issues.
20
<PAGE>
STATE OF READINESS.
The tables below set forth the Company's state of readiness.
Compliance schedule for Transaction Processing Systems:
------------------------------- ----------------------
TRANSACTION PROCESSING SYSTEM % OF 1999 GROSS SALES
TO BE COMPLIANT BUDGET
------------------------------- ----------------------
Already compliant 67%
------------------------------- ----------------------
Second Quarter 1999 12%
------------------------------- ----------------------
Third Quarter 1999 21%
------------------------------- ----------------------
100%
------------------------------- ----------------------
Other critical areas:
------------------------- --------------------------------
AREA TO BE COMPLIANT
------------------------- --------------------------------
Telephony October 1999
------------------------- --------------------------------
Network October 1999
------------------------- --------------------------------
Desktop Computing October 1999
------------------------- --------------------------------
Third Parties Second Quarter 1999
------------------------- --------------------------------
Other non-IT equipment Third Quarter 1999
------------------------- --------------------------------
Due to the fact that the Company has expanded the scope of the certification and
testing of third parties, the Company has moved the planned completion to the
second quarter of 1999, and other non-IT equipment to the third quarter of 1999.
These changes do not have a detrimental effect on the project or the planned
completion dates for other areas.
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 $16 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 for transaction processing systems, as
originally defined, were completed by the end of the first quarter 1999. The
Company has recently expanded the scope of such plans and expects them to be
completed in the second quarter of 1999. Contingency plans for telephony,
network, and desktop computing are expected to be completed by second quarter
1999. The plans will potentially include remediation of systems scheduled to be
replaced, manual procedures, emergency power sources, and the stock piling of
certain equipment.
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union had
to establish fixed conversion rates between their existing legal currencies and
one common currency - the euro. The euro trades on currency exchanges and is
available for business transactions. The conversion to the euro will eliminate
currency exchange risk between the member countries. Beginning January 1,
21
<PAGE>
2002, the participating countries will issue new-euro denominated bills and
coins for use in cash transactions, and the legal currencies will be withdrawn
from circulation. The Company's subsidiaries affected by the euro conversion
have established plans to address the issues raised by the euro currency
conversion. These issues include, among others, the need to adapt computer and
financial systems, business processes and equipment to accommodate
euro-denominated transactions and the impact of one common currency on pricing.
Since financial systems and processes currently accommodate multiple currencies,
the plans contemplate conversion by mid 1999 as part of the Company's Year 2000
project. The Company does not expect the conversion costs to be material. Due to
numerous uncertainties, the Company cannot reasonably estimate the effects, if
any, one common currency will have on pricing on its financial condition 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 three months periods
ended March 31, 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.
To reduce the risk of loss to the Company due to vendor price reductions and
slow moving or obsolete inventory, the Company's contracts with its vendors
generally provide price protection and stock rotation privileges, subject to
certain limitations. Price protection allows the Company to offset the accounts
payable owed to a particular vendor if such vendor reduces the price of products
the Company has purchased within a specified period of time and which remain in
inventory. Stock rotation permits the Company to return to the vendor for full
credit, with an offsetting purchase order for new products, predetermined
amounts of inventory purchased within a specified period of time. Such credit is
typically used to offset existing invoices due without incurring re-stocking
fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to balance the
needs of its customers to purchase on credit with its desire to minimize its
credit losses. Bad debt expense as a percentage of the Company's net sales for
the three months ended March 31, 1999 was 0.3%. 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.
22
<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. Occasionally, the Company may enter into
derivatives or other financial instruments for speculative purposes. The Company
enters into financial instruments to manage and reduce the impact of changes in
foreign currency exchange rates. The counter parties are major financial
institutions and therefore credit risk associated with these contracts is
considered immaterial.
INTEREST RATE RISK. At March 31, 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 March 31, 1999 was $423.7 million. A 1% increase in prevailing
interest rates at March 31, 1999 would result in a decrease in fair value of
total long-term debt by approximately $6.3 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 ("SFAS") No. 52, is the United States dollar.
Most of the Company's subsidiaries use their respective 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
accumulated other comprehensive income 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 three month period ended
March 31, 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 (19% of sales), the French franc
(13%) and the British pound (10%). At March 31, 1999, approximately $373.5
million of accounts payable were attributable to foreign currency liabilities
denominated in currencies other than the subsidiaries' functional currencies. Of
these, $298.7 million were denominated in United States dollars, $32.6 million
were denominated in German marks and $27.5 million were denominated in Euros.
Approximately 81% of these liabilities were unhedged.
23
<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. 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 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 March 31, 1999,
the face value of foreign exchange forward contracts against trade payables was
$194.4 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 March 31,
1999 would be offset by decreases in trade payables.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standard 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. SFAS No. 133 will be effective for the
Company's first quarter of fiscal year 2000.
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 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 level of acquisition
opportunities available to the Company and the Company's ability to efficiently
price and negotiate such acquisitions on a favorable basis, the financial
condition of the Company's customers, the failure to properly manage growth and
successfully integrate acquired companies and operations, changes in economic
conditions, demand for the Company's products, the outcome of the purported
class action litigation referred to herein, and changes in competitive
environment.
24
<PAGE>
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.
25
<PAGE>
PART II
ITEM 1.
LEGAL PROCEEDINGS
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET.AL., case No. 99-8186, was
filed in the United States District Court, Southern District of Florida.
Subsequently, other complaints have been filed. The complaints, which purport to
be class action complaints, generally allege that the Company and certain of its
officers violated federal securities laws in connection with financial reporting
and disclosure. The suits purport to be on behalf of those who purchased CHS
Electronics common stock during specified time frames. The Company, in
connection with its legal counsel, is in the process of carefully reviewing the
allegations of the complaints. However, the Company believes that it has no
liability and intends to vigorously defend the suits.
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 in Germany and Belgium 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. The Company believes that the conditions permitting Metro to
draw on the letter of credit were not met and intervened in the litigation. On
April 30, 1999, the court in Germany, in advance of a formal ruling, advised the
parties that it intended to dismiss the claim of Metro. Such ruling was on a
preliminary basis and is subject to modification in the final ruling which
itself may be appealed. On March 30, 1999, the Commercial Court in Brussels,
Belgium upheld the bank's refusal to honor Metro's demand for payment under the
letter of credit. Except for a determination of the party responsible for
payment of costs, the action has been dismissed.
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 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.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
1. On March 29, 1999, a report on Form 8-K was filed to report the issuance of
a press release dated March 22, 1999 relating to the announcement of fourth
quarter 1998 and 1998 year end results and strategic plan to reduce
operating expenses.
2. On March 29, 1999, a report on Form 8-K was filed to report the issuance of
a press release dated March 17, 1999 relating to the announcement of the
filing of a class action complaint against the Company and two of its
officers.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHS ELECTRONICS, INC.
(Registrant)
May 14, 1999 BY /s/ ANTONIO BOCCALANDRO
-----------------------------------------
Antonio Boccalandro
Secretary
May 14, 1999 BY /s/ CRAIG S. TOLL
------------------------------------------
Craig S. Toll
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
27
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 131,523
<SECURITIES> 0
<RECEIVABLES> 1,243,663
<ALLOWANCES> (34,596)
<INVENTORY> 895,439
<CURRENT-ASSETS> 2,339,757
<PP&E> 114,035
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,236,873
<CURRENT-LIABILITIES> 1,948,888
<BONDS> 200,000
0
0
<COMMON> 56
<OTHER-SE> 810,964
<TOTAL-LIABILITY-AND-EQUITY> 3,236,873
<SALES> 2,470,093
<TOTAL-REVENUES> 2,470,093
<CGS> 2,314,247
<TOTAL-COSTS> 134,279
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,392
<INCOME-PRETAX> 2,100
<INCOME-TAX> 1,792
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
