UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2000 N.W. 84TH AVENUE
MIAMI, FLORIDA 33122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 908-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates computed by reference to the high and low sales prices in the New
York Stock Exchange on March 18, 1999, was approximately $276,974,143. As of
March 18, 1999, the registrant had outstanding 56,171,934 shares of Common
Stock, par value $0.001.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated herein by this reference is the definitive proxy or information
statement for the 1999 Annual Meeting of Shareholders to be filed by the Company
with the Commission under Regulation 14A or Regulation 14C.
PART I
ITEM 1 - BUSINESS
"FORWARD-LOOKING" INFORMATION
This Form 10-K 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.
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.
GENERAL
CHS Electronics, Inc. ("CHS" or the "Company") is a leading international
distributor of microcomputer products, including personal computers,
peripherals, networking products and software. As of December 31, 1998, we
operated in 46 countries primarily in Western Europe, Eastern Europe and Latin
America, and serviced an active customer base of approximately 150,000
resellers. In 1998, approximately 80% of the products which we sold were
manufactured by 20 equipment and software vendors, including such market leaders
as Hewlett-Packard, IBM, Microsoft, Seagate, Compaq, Intel, Quantum, Western
Digital, 3Com, Toshiba, Acer, Yakumo, Epson and Sun. We are a focused
distributor, as opposed to a broadline distributor, and seek to represent
leading vendors within specific product categories. We believe that we are the
third largest distributor of microcomputer products in the world and the largest
distributor in Western Europe, Latin America and Eastern Europe. We have no
significant sales in the United States.
We operate under a decentralized structure in which managers familiar with the
customs and needs of a particular country are delegated the authority to make
daily decisions necessary to satisfy the particular demands of their respective
markets. Unlike certain competitors which operate under a more centralized
system, we believe that our business model of focused distribution through
locally managed full service facilities integrating warehousing, purchasing,
sales, credit and accounting services provides competitive and operating
advantages.
Our operating results have increased significantly in the five-year period ended
December 31, 1998, with net sales increasing from $359 million in 1994 to $8.5
billion in 1998 and operating income increasing from $3.4 million in 1994, to
$128.5 million in 1998.
Our world headquarters are located at 2000 N.W. 84th Avenue, Miami, Florida
33122, where our telephone number is (305) 908-7200.
RECENT DEVELOPMENTS
We recently announced the discovery of discrepancies related to the amount of
vendor incentives recorded in the fourth quarter of 1998. In coordination with
our independent auditors and an investigation by outside attorneys, we found
that vendor rebates were overstated in the second, third and fourth quarters of
1998. Some of the fourth quarter rebates were supported with invalid
documentation. All of the overstated rebates have been reversed and we have
restated our results for the second and third quarters of 1998. As a
consequence, the senior executive officer responsible for our European
operations has resigned.
In March 1999, a number of purported class action complaints were filed alleging
that we and certain of our officers violated federal securities laws in
connection with financial reporting and disclosure. The suits purport to be on
behalf of those who purchased our common stock during certain time frames. In
connection with our legal counsel, we are in the process of carefully reviewing
the allegations of the complaints. However, we believe that the claims are
without merit and intend to vigorously defend
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the suits. See Item 3 - Legal Proceedings.
On July 1, 1998, we 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. Metrologie is ISO-9001
certified to perform configurations of high-end network solutions and work
stations which we believe will be strategically important in strengthening our
ability to provide high-end platforms in Europe. As a result of this
acquisition, we have become the largest distributor of microcomputer products in
France and Spain. In addition, we anticipate improved operating margins through
the elimination of certain corporate overhead expenses, increases in the
utilization of volume purchase discounts, additional corporate rebates and the
eventual consolidation of warehousing and back office operations in France and
the United Kingdom.
On March 9, 1998, we 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.
Including the Metrologie acquisition, we have made 16 acquisitions from
January 1998 through December 1998.
RISK FACTORS
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS - OUR INTERNATIONAL BUSINESS
EXPOSES US TO RISKS RELATING TO INCREASED REGULATION AND POLITICAL OR ECONOMIC
INSTABILITY, GLOBALLY OR WITHIN CERTAIN FOREIGN COUNTRIES. Substantially all of
our sales are to customers outside of the United States. Approximately 90% of
our net sales were denominated in currencies other than the United States dollar
during the years ended December 31, 1997 and 1998. Sales in Germany represented
19% of net sales for the year ended December 31, 1998. Decreases in the volume
of sales in such regions or declines in operating margins could have a material
adverse effect on our business. Changes in the value of foreign currencies
relative to the United States dollar could adversely affect our results of
operations and financial position, and transaction gains and losses could
contribute to fluctuations in our results of operations. When possible, we
engage in currency hedging transactions and certain other practices to reduce
these risks. Fluctuations in foreign currency rates may have a material adverse
effect on our business.
Our existing and planned international operations are subject to political and
economic uncertainties, including among others, the burden of compliance with a
wide variety of laws, inflation, hyperinflation, risk of renegotiation or
modification of existing agreements or arrangements with governmental
authorities, transportation, tariffs, export controls, foreign exchange
restrictions which limit the repatriation of investments and earnings therefrom,
changes in taxation, changes in economic stability including currency
fluctuations (particularly in recent months with respect to Asia, Brazil and
Russia), governmental challenges to our tax reduction strategies, hostilities
and confiscation of property. Changes related to these matters could have a
material adverse effect on our business.
RELIANCE ON KEY MANUFACTURERS - BECAUSE WE OBTAIN A SUBSTANTIAL PORTION OF OUR
PRODUCTS FROM A LIMITED NUMBER OF MANUFACTURERS, THE LOSS OF OUR RELATIONSHIP
WITH ANY ONE OR MORE OF SUCH MANUFACTURERS COULD ADVERSELY AFFECT OUR BUSINESS.
We obtain our products from manufacturers under non-exclusive distribution
agreements which are subject to
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renewal annually and may be canceled by either party on short notice. During the
year ended December 31, 1998:
/bullet/ approximately 80% of our net sales were derived from the sale of
products supplied by 20 vendors;
/bullet/ 16% of our net sales were derived from the sale of products supplied by
Hewlett-Packard; and
/bullet/ 10% of net sales were derived from Microsoft and 10% of net sales were
derived from IBM.
The above percentages are based upon an analysis of a representative portion
(over 88%) of our total net sales. The loss of these relationships would, and
the loss of certain other relationships could, have a material adverse effect on
our business.
COMPETITION; DECLINING GROSS PROFIT MARGINS. Our business is highly competitive.
Certain of our competitors have greater financial, marketing, service and
technical support resources than we have. There can be no assurance that our
resources will be sufficient to allow us to compete effectively in the future.
Continued increases in competition could have a material adverse effect on our
results of operations because of price reductions and potential loss of market
share. Certain of our competitors may sell products at prices below ours. As a
result of this price competition, we along with our competitors, are
experiencing downward pressure on gross margins, which we expect to continue for
the foreseeable future. We intend to seek to offset the impact of declines in
our gross margins by reducing our operating expenses as a percentage of net
sales, although there can be no assurance of the success of this strategy in
future periods.
ACQUISITIONS - WE INTEND TO PURSUE FUTURE ACQUISITIONS WHICH, IF CONSUMMATED,
MAY ADVERSELY AFFECT OUR BUSINESS IF WE CANNOT EFFECTIVELY INTEGRATE THE
OPERATIONS OF THE ACQUIRED BUSINESSES. A major portion of our growth has been
attributable to acquisitions, and we intend to continue our practice of making
targeted purchases of high quality distributors, assets or product lines that we
believe would complement or expand our existing business. Acquisitions involve a
number of risks that could adversely affect our operating results, including:
/bullet/ the diversion of management's attention;
/bullet/ the assimilation of the operations and personnel of the acquired
companies;
/bullet/ the assumption of potential liabilities, disclosed or undisclosed,
associated with the businesses acquired, which liabilities may exceed
the amount of indemnification available from the seller;
/bullet/ the risk that the financial and accounting systems utilized by the
businesses acquired will not meet our standards;
/bullet/ the risk that the businesses acquired will not maintain the quality of
services that we have historically provided; and
/bullet/ the inability to attract and retain qualified local management.
We regularly engage in discussions with respect to potential acquisition and
investment opportunities.
YEAR 2000 ISSUE - THE YEAR 2000 PROBLEM MAY RESULT IN DECREASED SALES FOR US IF
WE OR OUR CUSTOMERS AND SUPPLIERS DO NOT ADEQUATELY ADDRESS OUR OR THEIR YEAR
2000 CONCERNS. Many computer systems and applications currently use two digits
to define the applicable year. As a result, date-sensitive systems may recognize
the year 2000 as 1900 or not at all, which could cause miscalculations or system
failures.
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We have assessed our computerized systems to determine their ability to
correctly identify the year 2000 and are devoting the necessary internal and
external resources to replace, upgrade or modify all significant systems which
do not correctly identify the year 2000. We anticipate that substantially all of
our systems will be year 2000 compliant before the end of 1999.
Based on current information, the costs of addressing the year 2000 issue have
not and are not expected to have a material impact on our financial position,
results of operations or cash flows.
INTRODUCTION OF THE "EURO" CURRENCY - THE EFFECTS OF THE INTRODUCTION OF THE
EURO CURRENCY ARE UNCERTAIN AND COULD ADVERSELY AFFECT OUR BUSINESS. On January
1, 1999, a new currency called the "Euro" was adopted as the common legal
currency in eleven of the fifteen member countries of the European Union. During
2002, all European Union countries are expected to be operating with the Euro as
their single currency. Uncertainty exists as to the effect the Euro will have on
the marketplace. Additionally, all of the final rules and regulations have not
yet been defined and finalized by the European Commission with regard to the
Euro currency. We cannot yet predict the anticipated impact of the Euro
conversion on our business.
INDUSTRY
The microcomputer products distribution industry has grown significantly in
recent years, primarily due to increasing demand worldwide for computer products
and the use of distribution channels by vendors for the distribution of their
products. Historically, there have been two types of companies within the
distribution industry: those that sell directly to the end-user ("resellers")
and those that sell to resellers ("distributors"). Distributors generally
purchase a wide range of products in bulk directly from vendors and then ship
products in smaller quantities to many different types of resellers, which
typically include dealers, VARs, system integrators, mail order resellers,
computer products superstores and mass merchants.
The Company believes that the microcomputer products industry is well suited for
distribution. The large number and diversity of resellers make it cost efficient
for manufacturers to outsource a portion of their distribution, credit,
inventory, marketing and customer support requirements to distributors such as
the Company. Similarly, due to the large number of vendors, resellers generally
cannot efficiently establish direct purchasing relationships with each vendor
and instead rely on distributors to satisfy a significant portion of their
product, financing, marketing and technical support needs.
The Western European, Eastern European and Latin American markets are each
highly fragmented. Different languages, cultures and technological factors
require experienced local management teams and products which meet the
requirements of the specific area. Requirements that are unique to an area
include customized manuals, approvals of safety factors by local authorities,
microcode which permits the generation of characters in local languages, and
voltage standards. These factors require distributors in these markets to carry
a variety of different SKUs to meet such demands. As a result, manufacturers
depend heavily on distributors such as the Company to meet the differing demands
of each locale.
STRATEGY
To achieve its objectives of strengthening its position as a leading distributor
of microcomputer products in Western Europe, Eastern Europe and Latin America
and expanding its operations in Asia, the Middle East, Africa and possibly the
United States, the Company has adopted the following strategies:
/bullet/ OPERATE A FOCUSED DISTRIBUTION MODEL. The Company's strategy is to
operate as a focused distributor by dealing with a select group of high
quality branded manufacturers in each major product category, such as
Hewlett-Packard for printers, Microsoft for software and networking,
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Seagate, Quantum and Western Digital for mass storage and
Hewlett-Packard, Compaq and IBM for personal computers. The Company
also attempts to be a significant distributor for each of its major
vendors and establish a partnering relationship with them. The Company
believes that, as a result of this strategy, it is able to respond more
quickly to customer requests and that it has greater availability of
products, access to new products and better pricing. The Company also
believes that it has developed greater expertise in the sale and
servicing of the products of these manufacturers and has been more
effective in asset management. The Company's customers may include both
assemblers of non-branded component products and resellers. Generally,
products from leading manufacturers are in greater demand, resulting in
more efficient inventory management, including greater inventory turns,
lower working capital requirements and fewer stock keeping units
(SKUs). The Company's largest operating subsidiaries maintain between
10,000 and 15,000 SKUs per location while broadline distributors
typically carry more than 45,000 SKUs.
The Company supplements its focused distribution model where feasible
with a centralized warehousing capability. In Europe, due to different
languages, electrical plugs and manufacturing standards, there is a
significant percentage of products that must be localized to the market
in which they will be sold. However, for the universal products
(generally components like hard drives, CD-ROM, supplies, etc.), the
Company utilizes a centralized warehouse to service its local country
warehouses. This approach allows the Company to make volume purchases
into the central warehouse and deliver products several times a week to
each local country warehouse. The Company believes this method is more
efficient and results in a lower inventory in each branch than ordering
products on a branch level.
/bullet/ PENETRATE AND FURTHER DEVELOP SELECTED MARKETS. The Company has focused
its activities on the distribution of microcomputer products in Western
Europe and the emerging markets of Eastern Europe and Latin America.
Additionally, the Company intends to expand its operations in Asia, the
Middle East and Africa. The Company believes that these regions are
under served with respect to the distribution of microcomputer products
and therefore provide significant growth opportunities. The Company
further believes that these markets are complex due to the diversity of
language, regulatory, technical and other factors and provide
attractive opportunities for us to add value to the Company's
relationships with its vendors and customers through the presence of
its knowledgeable local management. The Company is considering entering
the United States market in a way that would provide the economies of
scale which it believes are necessary to operate effectively in this
market. The Company believes that entering the United States market may
provide benefits to its existing operations by increasing the volume of
purchases which it makes from its vendors, thus assisting it in
obtaining enhanced volume discounts and other opportunities available
to large volume purchasers.
A major portion of the Company's growth has been attributable to
acquisitions. The Company intends to continue making targeted purchases
of high quality distributors in selected markets. However, outside of
the United States, the Company expects to purchase fewer companies than
in the past. After an acquisition, the new CHS subsidiary adopts the
Company's policies and financial reporting procedures. The Company
believes its acquisition strategy assists its vendors because, through
their relationship with the Company, vendors may gain entry into new
markets with established local distribution companies and can
substitute the Company's credit worthiness for that of the local
distributor.
/bullet/ OPERATE WITH A DECENTRALIZED OPERATING STRUCTURE. The Company operates
through a decentralized structure. Each of the Company's subsidiaries
is managed autonomously using the operating procedures which were
developed in response to local market conditions. The founders and
managers of acquired companies typically continue to manage the
operations and maintain local customer relationships. This
decentralized operating structure is complemented by centralized
financial controls, which provide the Company's senior managers with
frequent and regular status reports for each of its operating
subsidiaries. Management believes that this
6
structure provides the Company with significant operating advantages
including locally refined procedures within each of the Company's
geographic markets which have been developed to most effectively
address the heterogeneous commercial and cultural characteristics of
such markets. The Company is also developing a standardized model for
countries that have multiple CHS operations. In this model, one back
office and local country warehouse serve the focused distribution
enterprise and components distribution sales forces. The Company
believes it can achieve efficiencies and lower costs using this
approach. The Company intends to implement this approach in its three
largest customer countries, Germany, the United Kingdom and France, in
1999.
/bullet/ IMPROVE MARGINS THROUGH BTO PRODUCTION AND PRIVATE LABEL DISTRIBUTION.
The Company intends to take advantage of the higher margins and lower
inventory requirements associated with built-to-order and channel
assembly (collectively, BTO) and the higher margins available in
private label distribution. In general, BTO production includes the
production and assembly of both branded and private label products.
Private label distribution, in contrast, involves the marketing,
distribution and after-market support of products under the Company's
brand names. The Company conducts limited BTO activity and private
label distribution in some of its existing Western European
subsidiaries. The Company intends to further develop and expand its BTO
operations to include both other geographical regions as well as other
vendors. The Company also intends to expand the number and geographical
coverage of its private label products. The Company distributes private
label products in selected locations throughout the world. The Company
believes that such products can provide higher margins than branded
products if sourced and marketed effectively. The Company intends to
expand its distribution of such products and establish an internal
"vendor" operation to source, consistently label and market such
products in 1999.
/bullet/ FURTHER DEVELOP ENTERPRISE SYSTEM DISTRIBUTION. The Company intends to
take advantage of new distribution opportunities by aggressively
developing its Enterprise Systems Distribution business, which is the
distribution of mid-range products and services, often as complete
systems, through VARs. Working in conjunction with the vendors, the
VARs and often the end-user customer, the Company assists in the
development of the basic configuration, planning and installation of
enterprise systems. Consistent with the Company's focused distribution
model, these systems are designed around a limited number of selected
platforms from vendor partners such as IBM, Sun Microsystems, Compaq
and Hewlett-Packard. Systems are priced to include both the cost of the
component parts and a fee for the Company's services. The Company's
services include solutions for the technical, marketing and financing
requirements of the VARs. Enterprise System Distribution offerings are
available throughout the Company's operations through certain of its
subsidiaries. The Company plans to market these activities under the
DNS brand on a global basis.
PRODUCTS AND CUSTOMERS
The Company's sales consist of hardware and software products such as local area
networks, disk drives, personal computers and printers to an active customer
base, as of December 31, 1998, of approximately 150,000 VARs and computer
retailers. The Company's products also include components such as random access
memory chips, central processing units and integrated circuit boards. For the
year ended December 31, 1998, the Company's product mix by category was mass
storage (25%), personal computers (20%), printers (12%), software (11%),
components (8%), networking and multimedia (8%), peripherals (7%) and other
(9%).
The Company purchases its products directly from hardware manufacturers and
software publishers in large quantities. As a focused distributor, the Company
focuses on a small number of leading vendors in each product category and on a
small number of high volume items of that manufacturer or publisher. As a
result, the Company carries fewer individual products than broadline
distributors and works with fewer vendors. The largest Company operating
subsidiaries maintain between
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10,000 and 15,000 SKUs per location while broadline distributors typically carry
more than 45,000 SKUs.
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 year ended
December 31, 1998.
The Company is currently engaged in channel assembly at several locations in
Europe for both branded and private label products. The Company believes that
these new models of distribution may result in lower inventories and possibly
higher gross margins.
Since the fall of 1998, the Company has been aggressively developing its
Enterprise Systems Distribution business, the distribution of mid-range products
and services, often as complete systems, through VARs. Working in conjunction
with the vendors, the VARs and often the end-user customer, the Company assists
in the development of the basic configuration, planning and installation of
enterprise systems. These systems are designed around a limited number of
selected high end network solutions and work stations from vendor partners such
as IBM, Sun Microsystems, Compaq and Hewlett-Packard. Systems are priced to
include both the cost of the component parts and a fee for the services rendered
by the Company. The services offered by the Company include solutions for the
technical, marketing and financing requirements of the VARs. Enterprise Systems
Distribution offerings are available throughout the Company's operations through
certain subsidiaries of the Company. The Company plans to market these
activities under the DNS brand on a global basis.
VENDOR RELATIONS
The Company obtains its products from its vendors under non-exclusive
distribution agreements, which are subject to renewal annually and may be
canceled by either party on short notice. Under these agreements, the Company
has the right to purchase products at discounts from the list prices. The
amounts of the discounts are determined each year at the time of renewal on the
basis of the projected sales of the Company for the following year and vary for
each vendor. The Company is not required to make additional product payments if
it fails to achieve its projected sales level for the year, but its product
discounts in the following year may be reduced because of the lower sales
levels. In 1998, approximately 80% of the products distributed by the Company
were purchased from 20 vendors; 16%, 19% and 34% of its net sales during the
years ended December 31, 1998, 1997 and 1996, respectively, were derived from
the sale of products supplied by Hewlett-Packard and 10%, 10% and 12%,
respectively, were derived from the sales of products supplied by Microsoft. The
third largest supplier in 1998 was IBM with 10% of the Company's net sales. The
Company's agreements with vendors provide a form of price protection specifying
that if the list price of a product is reduced by the vendor, the Company will
typically receive a credit in the amount of the reduction in distributor cost
for each item of the product in inventory.
The Company also has stock rotation arrangements with substantially all of its
vendors. Stock rotation permits the Company to return inventory for full credit
in an amount equal to a certain percentage of the Company's purchases from the
supplier over a specific period. In certain cases, the Company must purchase
inventory at least equal in value to that returned. These agreements permit the
Company to maintain higher inventory levels while limiting the amount of
committed working capital related to slow-moving items.
Vendors deliver products against purchase orders tendered by the Company. The
Company will often request specific delivery dates in its purchase orders and
lead times for delivery from vendors are typically short. Delivery is, however,
subject to availability, and vendors have no liability to the Company for
failure to meet a delivery date. The Company experiences delivery delays and
inventory shortages from time to time. In the opinion of management, these
delays and shortages are common
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to other distributors of microcomputer products in general, and do not have a
significant adverse impact on the Company's operations.
The Company's vendors have increased available credit to the Company
commensurate with its growth. Many of the Company's vendors provide discounts
for prompt payment. Generally, the Company is required to make payment within 14
to 90 days following delivery of products. With some vendors, the Company can
earn a discount for early payment of between 1% and 3% of the invoice amount. To
the extent sufficient funds are available, the Company attempts to take
advantage of these discounts.
Several of the Company's vendors also provide for rebates or other incentives
based on achieving a predetermined goal of volume or type of products sold or
other types of goals during a fiscal quarter. We recently announced the
discovery of discrepancies related to the amount of vendor incentives recorded
in the fourth quarter of 1998. In coordination with our independent auditors and
an investigation by outside attorneys, we found that vendor rebates were
overstated in the second, third and fourth quarters of 1998. Some of the fourth
quarter rebates were supported with invalid documentation. All of the overstated
rebates have been reversed and we have restated our results for the second and
third quarters of 1998. As a consequence, the senior executive officer
responsible for our European operations has resigned.
Generally, the Company's vendors have the right to terminate their respective
distribution agreements on short notice to the Company. In some cases, the
Company must be given a reasonable opportunity to cure any violation of the
agreement before it may be terminated. The Company similarly has the right to
terminate its distribution agreements on short notice to the vendor. The Company
is of the opinion that its relationships with its vendors are good, and has no
reason to believe that its current material distribution agreements will be
terminated or not renewed in the foreseeable future.
SALES, MARKETING AND CUSTOMER SUPPORT
In order to address the individual customs, practices and business conventions
within countries effectively, each operating subsidiary of the Company maintains
general autonomy with respect to sales, marketing and customer support.
Oversight and strategic direction are provided by senior management of the
Company.
SALES. The Company markets its products to resellers, who either package the
Company's products with other computer equipment or sell the products on an
individual basis to end-users. As of December 31, 1998, the Company distributed
products to approximately 88,000 active resellers in Western Europe, 33,000 in
Latin America, 24,000 in Eastern Europe and 5,000 in Asia and the Middle East.
Each operating subsidiary maintains a sales staff organized to interface
effectively with its respective customer base. As of December 31, 1998,
approximately 40% of the Company's employees were involved in sales activities.
The Company's customers typically place orders with a sales representative.
Almost all orders are for pick-up or next day delivery. The Company's computer
systems generally allow the representative to check customer credit limits,
current inventory levels and pricing.
MARKETING. The Company utilizes a variety of programs to market its major
vendors' products, including direct mailings, periodic advertising by facsimile,
advertisements in industry trade publications, product brochures, seminars and
participation in selected trade shows. Marketing programs are effectuated at the
subsidiary level and are designed to build awareness of the Company, its
products and their collective capability. Each operating subsidiary maintains
staff to provide marketing support.
Funds for the Company's advertising budget generally are obtained from
cooperative advertising reimbursements and market development funds provided by
vendors. Cooperative reimbursements have typically represented approximately 1%
to 2% of the dollar amount of products purchased from those major vendors.
Marketing programs designed for cooperative reimbursement are vendor and product
specific and are designed with vendor approval. Market development funds are
provided to create market awareness of vendors' products. Cooperative
advertising reimbursements and market
9
development funds are recorded in the Company's financial statements as a
reduction of operating expenses.
CUSTOMER SUPPORT. Under several vendor agreements, the Company is required to
maintain a staff of qualified and trained sales, repair, and support employees
who are able to provide information and advice to resellers, provide warranty
repair service and train resellers on the vendor's products, their applications,
configurations with other computer products, and installation and support
requirements. The employees of the Company fulfilling these functions are
required to complete training courses provided by the vendor.
In addition, the Company supports all products with a full manufacturer's
warranty and maintains an industry standard return policy, similar to that of
its competitors.
INTERNAL AUDIT
The Company currently maintains 14 internal auditors on its staff; nine for
Europe and Karma, four for Latin America, and the Director of Internal Audit.
The Company has two auditors that specialize in inventory audits. The Company
intends to expand its internal audit staff consistent with its growth. During
1998, there were 81 internal and 35 inventory audits performed with respect to
the Company.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability, provision of credit to
customers, delivery time, customer support services and breadth of product line.
Competition exists in a variety of forms including direct sales by vendors, mail
order sales, international distributors, and local distributors. Some of the
Company's competitors have greater financial and administrative resources than
the Company. The Company believes availability of products is a key element of
competitiveness and attempts to differentiate itself from its competition by
providing a select number of name brands in each product line and maintaining a
sufficient inventory of select products to meet demand. The Company enhances its
competitive position by providing responsive customer service through support
and employee training programs. The Company believes that its vendors and their
products are respected in the industry for high quality and performance.
Vendor contracts frequently limit sales of their products to specific geographic
areas. Although these restrictions limit the ability of the Company's
subsidiaries to sell outside of their jurisdictions, competition in the
subsidiary's area is also reduced.
EMPLOYEES
At December 31, 1998, the Company employed approximately 6,800 full-time
employees of whom 500 were located in the United States. Of the total number of
employees, approximately 2,700 worked in marketing and sales, 1,300 worked in
warehousing and delivery and 2,800 were employed in other positions, including
administration. Employees in certain countries are represented by labor councils
mandated by government regulations which determine compensation and benefits.
With these exceptions, none of the Company's employees are represented by
unions. Severance costs associated with termination of employment in many
countries are higher than in the United States. There has been no disruption of
operations due to a labor dispute. Management considers its employee relations
to be good.
ITEM 2 - PROPERTIES
The corporate headquarters of the Company is located at 2000 N.W. 84th Avenue,
Miami, Florida, which is also the principal operational facility for its Latin
America regional operations and the
10
operations of CHS Latin America, Inc. The Company's subsidiaries operate through
approximately 110 locations totaling approximately four million square feet.
Most locations consist of an administrative office utilized by the subsidiary
and an adjoining or nearby warehouse and distribution facility.
In each of the countries, the size set forth above includes sales,
administrative and warehousing functions and may be composed of multiple
facilities. The Company considers its existing facilities to be adequate for its
foreseeable needs.
ITEM 3 - 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. The
complaint, which purports to be a class action complaint, alleges that the
Company and two of its officers violated federal securities laws in connection
with financial reporting and disclosure during the period February 27, 1997
through March 10, 1999. The suit purports to be on behalf of those who purchased
CHS Electronics common stock during that time frame. The Company, in connection
with its legal counsel, is in the process of carefully reviewing the allegations
of the complaint. However, the Company believes that the claims are without
merit and intends to vigorously defend the suit. The Company is aware that
certain other purported class actions have been filed. However, the Company has
not received service of any such other suits.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth for the periods indicated the high and low
closing sales prices of the Company's common stock (symbol: NYSE = HS and
previously Nasdaq = CHSE) through August 7, 1998 on the Nasdaq National Market,
and thereafter on the New York Stock Exchange. The Company effected a
one-for-two reverse stock split on March 14, 1996. On September 15, 1997, the
Company effected a three-for-two forward split for all shareholders of record as
of September 2, 1997. All prior amounts have been adjusted to reflect the
effects of such splits. Such prices are based on inter-dealer bid and asked
prices, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
HISTORIC PRICES
--------------------
FISCAL YEAR PERIOD HIGH LOW
----------- ------ ---- ---
1997 First Quarter $16.08 $10.33
Second Quarter $17.75 $11.50
Third Quarter $29.75 $17.21
Fourth Quarter $30.75 $14.75
1998 First Quarter $23.88 $12.63
Second Quarter $24.31 $15.88
Third Quarter $19.00 $10.75
Fourth Quarter $17.88 $6.00
11
The last reported sale price of the common stock as reported on the New York
Stock Exchange on March 18, 1999 was $5.875 per share. As of March 18, 1999, the
outstanding common stock was held of record by 415 shareholders. The Company
believes that it has in excess of 600 beneficial owners.
The Company has never paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements, covenants in financing agreements to
which the Company is a party and such other factors as the Board of
Directors deems relevant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In connection with its acquisition activities, the Company issued the following
net shares of its common stock during 1998:
January 137,132
February 645,000
March 179,658
April -
May 1,664,546
June -
July 226,481
August -
September 535,073
October 32,751
November 1,000,000
December 2,026,789
---------
6,447,430
=========
In January 1998, the Company implemented a Preferred Stock Purchase Rights Plan
and distributed one right (a "Right") for each share of the Company's common
stock outstanding. Each Right has an initial exercise price of $100 for one-one
thousandth of a share of the Company's Series A junior participating preferred
stock. The Rights are not exercisable or transferable, apart from the Company's
common stock, until after a person or group acquires, or has the right to
acquire, beneficial ownership of 15% or more of the Company's common stock
(which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the Company's
common stock. Upon such occurrence, each Right (other than Rights owned by such
person or group) will entitle the holder to purchase from the Company, or the
particular acquiring person or group under certain circumstances and conditions,
the number of shares of the Company's, or such person's or group's, common stock
having a market value equal to twice the exercise price of the Right. The Rights
are redeemable by the Company, upon approval of the Board of Directors under
certain circumstances. The Plan was amended as of March 18, 1999.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain financial data for each year in the five
year period ended December 31, 1998. The information presented as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998, is derived from the
audited consolidated financial statements of the Company, which statements have
been audited by Grant Thornton LLP, independent public accountants. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
12
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
INCOME STATEMENT DATA:
Net sales $ 8,545,773 $ 4,756,383 $ 1,855,540 $ 936,703 $ 359,169
Cost of goods sold 7,983,736 4,409,714 1,724,432 868,716 333,983
----------- ----------- ----------- ----------- -----------
Gross profit 562,037 346,669 131,108 67,987 25,186
Operating expenses 433,567 257,508 102,235 57,188 21,798
----------- ----------- ----------- ----------- -----------
Operating income 128,470 89,161 28,873 10,799 3,388
Interest income (16,581) (11,470) (3,199) (1,757) (250)
Interest expense 71,373 35,618 11,712 6,454 2,070
----------- ----------- ----------- ----------- -----------
Earnings before income taxes and
minority interest in subsidiaries 73,678 65,013 20,360 6,102 1,568
Provision for income taxes 23,871 13,988 6,086 1,797 603
Minority interest 4,129 2,634 2,108 - -
----------- ----------- ----------- ----------- -----------
Net earnings $ 45,678 $ 48,391 $ 12,166 $ 4,305 $ 965
=========== =========== =========== =========== ===========
Net earnings per share--basic $ 0.88 $ 1.44 $ 0.80 $ 0.41 $ 0.14
Net earnings per share--diluted 0.82 1.32 0.78 0.37 0.14
Weighted average shares outstanding--basic 51,616 33,527 15,244 10,618 7,039
Weighted average shares outstanding--diluted 55,917 36,592 15,656 11,522 7,039
OTHER DATA:
Number of countries 46 39 28 15 10
Inventory turns (1) 12 11 12 14 12
Days sales in receivables (2) 43 33 36 35 32
AT DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 176,991 $ 68,806 $ 35,137 $ 11,171 $ 8,368
Working capital 334,072 278,771 31,506 9,843 14,004
Total assets 3,572,143 1,968,822 861,949 265,804 164,468
Total debt 1,053,649 371,066 201,259 55,239 23,302
Shareholders' equity 838,043 667,764 104,533 29,892 19,870
- ------------
(1) Calculated by dividing cost of sales for the last quarter of each year by
the average of beginning and ending inventory of the last quarter of each
year.
(2) Calculated by dividing ending trade receivables by the average sales per day
for the last quarter of each year.
13
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO CONTAINED ELSEWHERE
HEREIN.
OVERVIEW
CHS distributes microcomputer products, including personal computers,
peripherals, networking products and software in 46 countries, primarily in
Western Europe, Eastern Europe and Latin America. The Company has pursued and
expects to continue to pursue a strategy of growth through acquisitions of
distributors in these and other regions but at a slower pace than in prior
years. Together with growth in its existing business, such acquisitions have
enabled the Company to significantly increase net sales and achieve strong
operating results. From 1994 to 1998, the Company's net sales increased from
$359 million to $8.5 billion. The Company attributes these increases in sales to
its acquisitions, increased consumer demand for the Company's products and an
expansion of the range of products offered.
The Company derives all of its operating income and cash flow from its operating
subsidiaries, most of which are organized and operated outside the United
States. Generally, the Company purchases its inventory with a combination of
United States dollars and local currency and sells in local currency. The
Company seeks to limit its exposure to the risk of currency fluctuations through
hedging. See "Currency Risk Management".
The following table sets forth acquisitions made by the Company, the service
areas of the operations acquired and the dates as of which the results of
operations of the acquired company were included in the Company's financial
statements from the beginning of 1996 through 1998.
14
DATE INCLUDED IN
SUBSIDIARY(1) SERVICE AREA FINANCIAL STATEMENTS
- ------------- ------------ --------------------
MC DOS(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........................................ Mexico, Panama, Guatemala, Chile July 1998
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 Distributors(3)............................. China, Malaysia, Singapore and March 1998
Vietnam
TH' Systems..................................... Czech Republic, Poland, Hungary and February 1998
Slovakia
ARC Spain....................................... Spain January 1998
Micro Informatica............................... Latin America January 1998
CHS Nexsys...................................... Colombia December 1997
CHS Ledakon(4).................................. Colombia November 1997
CHS Romak....................................... Ireland October 1997
CompExpress..................................... Brazil October 1997
Santech......................................... Norway, Sweden, Denmark October 1997
Ameritech Argentina(5).......................... Argentina August 1997
Ameritech Exports(5)............................ Latin America August 1997
Atlantis Skupina(6)............................. Slovenia August 1997
Karma........................................... Europe, Middle East and Asia August 1997
Lars Krull...................................... Denmark, Norway, Sweden August 1997
CHS Dinexim..................................... Latin America May 1997
CHS Access and Agora............................ Czech Republic May 1997
CHS International High Tech Marketing........... Africa April 1997
Frank & Walter.................................. Germany January 1997
CHS Estonia..................................... Estonia January 1997
Infocentro de Chile(6).......................... Chile January 1997
CHS Merisel United Kingdom(7)................... United Kingdom October 1996
CHS Merisel France(7)........................... France October 1996
CHS Merisel Switzerland(7)...................... Switzerland October 1996
CHS Merisel Germany(7).......................... Germany October 1996
CHS Merisel Austria(7).......................... Austria October 1996
CHS Merisel Latin America(7).................... Latin America October 1996
CHS Merisel Mexico(7)........................... Mexico October 1996
CHS Ecuador(6).................................. Ecuador June 1996
CHS Russia...................................... Russia June 1996
CHS Switzerland................................. Switzerland April 1996
CHS Peru........................................ Peru March 1996
CHS Hungary(6).................................. Hungary February 1996
- ------------
(1) The names are those by which the Company refers to its subsidiaries and are
not necessarily the legal names of the entities
(2) The Company acquired this entity as of December 31, 1998, therefore the
accompanying financial statements do not include any results of operations
from such acquisition. Deemed by the Company to be part of one acquisition.
The Company owns 60% of MC DOS Netherlands.
(3) The Company owns 80% of this company.
(4) The Company owns 65% of this company.
(5) Deemed by the Company to be part of one acquisition.
(6) The Company owns 51% of this company.
(7) Deemed by the Company to be part of one acquisition.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage of net
sales represented by certain items in the Company's Consolidated Statements of
Earnings:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----- ----- -----
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold 93.4 92.7 92.9
----- ----- -----
Gross profit 6.6 7.3 7.1
Operating expenses 5.1 5.4 5.5
----- ----- -----
Operating income 1.5 1.9 1.6
Interest income (0.2) (0.2) (0.1)
Interest expense 0.8 0.7 0.6
----- ----- -----
Earnings before income taxes 0.9 1.4 1.1
Income taxes 0.3 0.3 0.3
Minority interest 0.1 0.1 0.1
----- ----- -----
Net earnings 0.5 % 1.0 % 0.7 %
===== ===== =====
1998 COMPARED TO 1997
NET SALES. Net sales increased $3.8 billion, or 79.7%, from $4.8 billion in 1997
to $8.5 billion in 1998 due principally to acquisitions and, to a lesser extent,
internal growth. Of the increase in net sales, newly acquired subsidiaries
contributed $3.1 billion. Net sales of subsidiaries consolidated for both 1997
and 1998 grew $742.5 million or 15.6%. This growth is attributed to increased
consumer demand for microcomputer products offered by the Company. The growth is
slower than the prior year due principally to economic difficulties in Latin
America and Russia.
GROSS PROFIT. Gross profit increased $215.4 million, or 62.1%, from $346.7
million in 1997 to $562.0 million in 1998 due principally to acquisitions and,
to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1997 and 1998 increased $1.0 million, or
0.3%. Newly acquired subsidiaries contributed $214.4 million of increased gross
profit.
Gross margin was 7.3% in 1997 and 6.6% in 1998. The decrease in gross margin was
caused by increased competitive pressure in all markets and the inclusion of a
full year of the Karma operation, which has a lower gross margin than the
remainder of the Company due to the nature of the products sold. The Company
believes that 1999 gross margins in its distribution to reseller business may be
lower due to competitive pressure. The Company is attempting to offset the
decrease through expansion of its enterprise system distribution operations and
distribution of private label products. Although the Company has been achieving
higher gross margins (9.3% in 1997 and 8.6% in 1998) in its Eastern European
operations than in other areas, the Company expects gross margins in Eastern
Europe to continue to decline due to increased competition and a Company
strategy to increase sales through more competitive pricing. The Company expects
that the impact on gross profit due to decreased gross margins in this
geographic area will be partially offset by increased sales.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.4% in 1997 to 5.1% in 1998. The Company attributes this decrease to: (i)
synergies realized from combining operating entities; (ii) benefits of economies
of scale and (iii) the inclusion of the results of Karma in 1998 for a whole
year based on lower operating expenses of Karma as a percentage of its
16
sales. This factor is partially offset by increased goodwill amortization in
1998, which was $25.8 million during 1998 compared to $8.9 million during 1997.
Operating expenses for both periods include the results of foreign currency
transactions. Such results were a net gain of $5.2 million in 1998 and $1.2
million in 1997.
NET INTEREST EXPENSE. Net interest expense increased $30.6 million, or 127%,
from $24.1 million in 1997 to $54.8 million in 1998. The increase is directly
related 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 in subsidiaries increased from 21.5% in 1997 to 32.4% in 1998.
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 1999 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.
1997 COMPARED TO 1996
NET SALES. Net sales increased $2.9 billion, or 156.3%, from $1.9 billion in
1996 to $4.8 billion in 1997 due principally to acquisitions and, to a lesser
extent, internal growth. Of the increase in net sales, newly acquired
subsidiaries (including existing CHS companies for the first nine months of 1997
which were integrated with companies acquired from Merisel) contributed $2.5
billion. Net comparable sales of subsidiaries consolidated for both 1996 and
1997 grew $371.3 million or 28.0%. This growth is attributed to increased
consumer demand for microcomputer products offered by the Company.
GROSS PROFIT. Gross profit increased $215.6 million, or 164.4%, from $131.1
million in 1996 to $346.7 million in 1997 due principally to acquisitions and,
to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1996 and 1997 increased $42.4 million, or
48.8%. Newly acquired subsidiaries (including existing CHS companies for the
first nine months of 1997 which were integrated with companies acquired from
Merisel) contributed $173.1 million of increased gross profit. For purposes of
determining the increase in gross profit, the Company allocated manufacturers'
rebates to its more significant subsidiaries.
Gross margin increased from 7.1% in 1996 to 7.3% in 1997. The change in gross
margin was due to increased early payment discounts and vendor rebates offset to
some extent by lower gross margins of the recently acquired Karma operations.
The Company utilized more early payment discount opportunities as a result of
the cash generated by its public equity offering in July 1997. Additionally, the
Company's growth has resulted in more favorable volume rebates with certain key
vendors. The increase in gross margin attributable to early payment discounts
(0.2%) and volume rebates (1.4%) was offset by the fact that the Karma operation
has a lower gross margin due to the nature of the products sold. The Company
expects that 1998 gross margins will be lower than in 1997 due to the impact of
having the Karma operations included in the entire year and due to continued
competitive pressures. Although the Company has been achieving higher gross
margins (10.5% and 9.3% in 1996 and 1997, respectively) in its Eastern European
operations than in other areas, the Company expects gross margins in Eastern
Europe to continue to decline due to increased competition and a Company
strategy to increase sales through more competitive pricing. The Company expects
that the impact on gross profit due to decreased gross margins in this
geographic area will be fully offset by increased sales.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.5% in 1996 to 5.4% in 1997. Included were the expenses of maintaining a
minimally utilized warehouse in the Netherlands in 1997 and $1.4 million in
Merisel restructuring expenses in 1996. In 1998, such warehouse is expected to
be utilized for distribution of universal products (such as mass storage and
17
components). The comparative operating expense ratios without these items would
have been 5.4% for 1997 and 5.4% for 1996. The Company expects that the
inclusion of Karma's results for a full year will result in operating expenses
being a lower percentage of net sales based on the lower operating expenses of
Karma. Operating expenses for both periods include the results of foreign
currency transactions. Such results were a net gain of $1.2 million in 1997 and
$1.6 million in 1996.
NET INTEREST EXPENSE. Net interest expense increased $15.6 million, or 183.7%,
from $8.5 million in 1996 to $24.1 million in 1997. The increase is directly
related to the increase in average loan amounts outstanding.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest in subsidiaries decreased from 29.9% in 1996 to 21.5% in 1997.
The change is due to a higher proportion of income earned in jurisdictions with
lower tax rates and the use of net operating loss carryforwards, offset, to a
certain extent, by losses in subsidiaries with no tax benefit and 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 its ability
to use remaining net operating loss carryforwards from certain subsidiaries and
the proportion of income expected in jurisdictions with lower tax rates.
SEASONALITY
The Company typically experiences variability in its net sales and net income on
a quarterly basis as a result of many factors, including the condition of the
microcomputer industry in general, shifts in demand for software and hardware
products and industry announcements of new products or upgrades. Sales in Europe
in the fourth quarter of each year are typically higher than in the other
quarters. In Latin America, sales in the third and fourth quarters of each year
are typically higher than in the first and second quarters.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $240.1 million and $248.5 million were used in operating activities
in the years ended December 31, 1998 and 1997, respectively. In 1998, such
amount was funded by increases in borrowings from banks of $246.8 million and
new long-term debt of $139.0 million. In 1997, such amount was funded from
increases in bank borrowings and proceeds of a public offering. In both years,
cash was used principally due to increases in inventories and trade accounts
receivable. In 1998, cash was provided by increases in accounts payables and
accrued expenses. Net cash used in investing activities in 1998 and 1997
included $52.5 million and $19.5 million, respectively, related to fixed asset
additions. In addition, $189.7 million and $201.5 million were used for
acquisitions during such years respectively. Net cash of $588.6 million and
$507.2 million was provided by financing activities in the years ended December
31, 1998 and 1997, respectively, due principally to net borrowings of $385.8
million and $74.7 million, respectively, the issuance of the Company's Senior
Notes due 2005 during 1998, which proceeds were used for acquisitions, and
proceeds of equity public offering totaling $428.2 million in 1997.
On December 30, 1998, three of the Company's German subsidiaries (collectively,
the "Borrowers") entered into a three year DM 325 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. The loan bears
interest at 1.95% per annum above Deutschmark (now Euro) LIBOR. The agreement,
among other things, limits the ability of the Borrowers to incur additional
indebtedness. The Company has used this credit facility
18
as a replacement to off-balance sheet financing, which carried a higher interest
cost. As a result, the consolidated amount of trade receivables and debt has
increased as of December 31, 1998 as compared to previous periods. The increase
in trade receivables caused the Company's days sales in receivables to increase
from previous periods.
The Company's subsidiaries typically enter into short term credit agreements
with financial institutions in their countries of operations. At December 31,
1998, of the $882.5 million aggregate amount available under these agreements,
$648.3 million was outstanding. Such agreements are usually for a term of one
year and are secured by the receivables of the borrower and, in certain
instances, inventories of the borrower. The weighted average interest rate at
December 31, 1998 was 6.5%. 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. At December 31, 1998, the Company was not in
compliance with a minimum tangible net worth covenant contained in a short term
credit facility. The Company has obtained a waiver from the lender.
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. EBITDA of all subsidiaries with such limitations amounted to 7.6% and
16.6% of the Company's consolidated EBITDA for the years ended December 31, 1998
and 1997, respectively. Currently, the subsidiaries with such agreements are CHS
U.K., Santech Norway, BEK International, CHS Latin America and CHS Promark. Such
credit agreements have maximum available amounts of $160 million in total.
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 wholly-owned subsidiaries fully and
unconditionally jointly and severally guaranteed the Notes on an unsecured
basis. The guarantor subsidiaries are principally non-operating subsidiaries in
the United States. 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 1999 will be: (i) for the
purchase of additional inventory to support growth; (ii) to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment; (iii) to pay amounts due to sellers of businesses;
and (iv) 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, has sufficient funds to support its expected growth in
existing operations for the remainder of 1999.
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million
19
(approximately $12 million) letter of credit provided to Metro by the Company in
connection with the transaction. The Company believes that the conditions
permitting Metro to draw on the letter of credit were not met. Metro has also
announced that it may seek damages for an unspecified amount against the Company
as a result of the transaction not being consummated. The purchase agreement
calls for disputes to be settled by arbitration in Germany. The purchase
agreement does not provide for a break-up fee. Although no prediction as to the
outcome of either the attempted draw on the letter of credit or any actions
which may be commenced in connection with the purchase agreement can be made at
this time, the Company believes that it has defenses to any potential claims of
Metro and intends to assert them vigorously. As of the date of this filing, no
arbitration proceedings had been commenced by Metro.
YEAR 2000
The Company has completed the risk assessment phase of its Year 2000 compliance
efforts ("Year 2000 Project"). Based on the assessment, the Company has
developed an action plan and identified corporate, regional and subsidiary level
Year 2000 Project team members, charged with ensuring that the Company will be
compliant. The plan principally consists of replacing or repairing non-compliant
systems including both information ("IT") systems and non-IT systems. The
initial focus of the plan is on high risk/high impact areas. The six areas
covered initially are shown below, in descending order of potential high
risk/impact.
/bullet/ Transaction Processing Systems (includes all internal and external
interfaces)
/bullet/ Telephony
/bullet/ Network (Local Area Networks)
/bullet/ Desktop Computing
/bullet/ Third Parties (suppliers, customers, financial institutions, utilities)
/bullet/ 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.
STATE OF READINESS. The tables below set forth the Company's state of readiness.
Compliance schedule for Transaction Processing Systems:
TRANSACTION PROCESSING % OF 1999 GROSS
SYSTEM TO BE COMPLIANT SALES BUDGET
---------------------- ----------------
Already compliant 61%
First Quarter 1999 4%
Second Quarter 1999 15%
Third Quarter 1999 20%
100%
20
Other critical areas:
AREA TO BE COMPLIANT
---- ---------------
Telephony October 1999
Network October 1999
Desktop Computing October 1999
Third Parties First Quarter 1999
Other non-IT equipment Second Quarter 1999
COSTS. The Company estimates its total Year 2000 costs to be $29 million. This
is primarily the cost of replacing transaction processing systems, but also
includes consulting fees and repair/replacement of other software and IT/non-IT
equipment. Approximately $14 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:
/bullet/ The inability of some customers of the Company's smaller subsidiaries
to pay on time.
/bullet/ The temporary inability of a few of the Company's more small
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 that 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 are
expected to be completed by first quarter 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, 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
21
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 year ended December 31,
1998 nor during the three-year period ended December 31, 1998, and the Company
does not expect that it will have a material impact during 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 manage its inventory effectively 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 years ended 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.
ITEM 7A - 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 December 31, 1998, 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 (including current portion) at December 31, 1998 was $398.4
million. A 1% increase in prevailing interest rates at December 31, 1998 would
result in a decrease in fair value of total
22
long-term debt by approximately $8.6 million. Fair values were determined from
quoted market prices, where available, and from investment bankers using current
interest rates considering credit risk and the remaining terms to maturity.
CURRENCY RISK MANAGEMENT
FUNCTIONAL CURRENCY. The Company's functional currency, as defined by Statement
of Financial Accounting Standards ("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 year ended December 31,
1998, a significant amount of the purchases of products by the Company were made
in United States dollars and approximately 90% 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 (11%) and
the British pound (9%). At December 31, 1998, approximately $436.6 million of
accounts payable were attributable to foreign currency liabilities denominated
in currencies other than the subsidiaries' functional currencies. Of these,
$357.8 million were denominated in United States dollars and $50.8 million were
denominated in German marks. Approximately 80% of these liabilities were
unhedged.
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 to an
amount which approximates the total European unhedged 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 denominationed 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
23
exchange contracts are valued at market and generally have maturities which do
not exceed three months. Gains and losses on foreign exchange contracts are
intended to offset losses and gains on assets, liabilities and transactions
being hedged. As a result, the Company does not anticipate any material adverse
effect due to exchange rate movements over the short period covered by these
contracts. At December 31, 1998, the face value of foreign exchange forward
contracts against trade payables was $269.3 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 December 31, 1998 would be offset by decreases in
trade payables.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("SFAS 133"). 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 133, and has not made a determination of
the impact on our financial position or results of operations. SFAS 133 will be
effective for our first quarter of year 2000.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear beginning at page
F-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Company.
The information required regarding the identification of the Company's
directors is incorporated by reference to the information contained in the
Proxy Statement for the 1999 Annual Meeting of Shareholders of the Company.
(b) Executive Officers of the Company.
The executive officers of the Company, as well as certain key employees,
and their ages as of March 24, 1999, are as follows:
NAME AGE POSITION
---- --- --------
Claudio Osorio........................ 40 Chairman of the Board, Chief Executive Officer and President
Carsten Frank......................... 35 Executive Vice President--Logistics and Director
Clifford Dyer(1)...................... 60 Executive Vice President--Latin American Region
Craig Toll............................ 50 Executive Vice President--Finance, Chief Financial Officer
and Treasurer
24
Antonio Boccalandro................... 31 Chief Officer of Mergers and Acquisitions, Secretary
and Director
- ------------
(1) Key employee, but not an executive officer of the Company.
CLAUDIO OSORIO (full name--Claudio Eleazar Osorio Rodriguez), the founder of the
Company's current business and operations, has served as the Chairman of the
Board, President, and Chief Executive Officer of the Company since 1993. Mr.
Osorio has served as President of Comtrad, Inc. ("Comtrad") since 1988. He is a
director of Comtrad and the President and a director of Comtrad Holdings, Inc.
("CHI"). Comtrad and CHI hold in the aggregate, 5,483,453 shares of the Company.
See "Principal Shareholders".
CARSTEN FRANK has been a director of the Company since May 1997 and has been
Executive Vice President--Logistics since January 1, 1999. From March 1, 1998
until December 31, 1998, Mr. Frank was Executive Vice President--Asian Region of
the Company. From March 1997 until February 28, 1998, he was the Executive Vice
President--European Region of the Company. Mr. Frank founded Frank & Walter in
1988 and has served as such company's Managing Director since its formation.
Frank & Walter was acquired by the Company effective January 1997.
CLIFFORD DYER has been the Executive Vice President--Latin American Region of
the Company since August 1997. From January 1997 until July 1997 he was the
Chief Operating Officer--Latin American Region. From February 1987 until it was
acquired by the Company in October 1996, Mr. Dyer was President of Merisel Latin
America, Inc. and was responsible for all Latin American operations. He was the
founder in 1982 of the predecessor company to Merisel Latin America, Inc. Prior
to 1982, Mr. Dyer was President of GTE Venezuela and held directorships in
various companies.
CRAIG TOLL has been the Executive Vice President--Finance of the Company since
August 1997 and has been the Chief Financial Officer of the Company since July
1994 and its Treasurer since June 1995. Mr. Toll was self-employed as a
consultant to CHS Promark from April 1994 to June 1994. For over five years
prior to April 1994, Mr. Toll was a partner in the accounting firm of Deloitte &
Touche.
ANTONIO BOCCALANDRO has been the Chief Officer of Mergers and Acquisitions of
the Company since August 1997 and has been a director and the Secretary of the
Company since 1993. He was Treasurer of the Company from December 1993 to June
1995. He has also been employed in various capacities by Comtrad since 1988. Mr.
Boccalandro became a director of Comtrad in 1990 and he has been a director of
CHI since June 1994.
25
ITEM 11 - EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference
to the information contained in the Proxy Statement for the 1999 Annual Meeting
of Shareholders of the Company.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by reference
to the information contained in the Proxy Statement for the 1999 Annual Meeting
of Shareholders of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by reference
to the information contained in the Proxy Statement for the 1999 Annual Meeting
of Shareholders of the Company.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report.
(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data" for Financial
Statements included under this Annual Report on Form 10-K.
26
(2) Financial Statement Schedules - Not applicable.
(3)
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (8)
4.1 Amended and Restated 1998 Preferred Stock Purchase Rights Agreement dated as of
March 18, 1999 (8)
4.2 Indenture dated as of April 9, 1998 among the Company, CHS Delaware, Inc., CHS Delaware
L.L.C., CHS Americas, Inc. and the Chase Manhattan Bank (7)
4.3 Subsidiary Guarantee dated as of April 9, 1998 by CHS Delaware, Inc., CHS Delaware
L.L.C. and CHS Americas, Inc. (7)
10.1 Plan of Acquisition dated June 30, 1994 (2)
10.2 Form of Registration Agreement (2)
10.3 Agreement and Plan of Exchange dated June 30, 1994 (2)
10.4 Purchase and Sale Agreement dated June 30, 1994 (2)
10.5 Repurchase Option Agreement dated June 30, 1994 (2)
10.6 Stockholders Agreements dated June 30, 1994 (2)
10.7 Employment Agreement for Alvin Perlman (2)
10.8 Notes Payable to Comtrad, Inc., dated May 23, November 14, and December 29, 1994 (2)
10.9 Revolving Credit Agreement with the First National Bank of
Boston, dated March 1, 1993 as amended (2)
10.10 Reseller Agreement with Hewlett Packard dated March 1, 1994 (2)
10.11 Reseller Agreement with Hewlett Packard dated November 1, 1994 (2)
10.12 Stock Incentive Plan (2)
10.13 Lease for Miami, Florida Facility dated June 29, 1993 (2)
10.14 Real Estate Leasing Contract for Nenndorf, Germany Facility dated November 12, 1994 (2)
10.15 Loan and Security Agreement by and between Congress Financial Corporation (Florida),
as Lender and Zemex Electronics International, Inc. as Borrower, dated February 5, 1996,
together with the guarantee thereof by the Company (1)
10.16 Credit Agreement by and between MashreqBank PSC, New York Branch, as lender and the Company,
as borrower, dated July 10, 1995 (1)
and Amendment dated as of August 17, 1995 (3)
10.17 Employment Agreement between the Company and Claudio Osorio dated March 22, 1996 (3)
10.18 Employment Agreement between the Company and Craig Toll dated March 22, 1996 (3)
10.19 Form of Indemnity Agreement between the Company and each of the
Directors of the Company and Craig Toll (3)
10.20 Noncompetition Agreement dated April 11, 1996 among the Company, Comtrad, Inc. and Comtrad Holdings, Inc. (3)
10.21 Purchase and Sale Agreement between Comtrad, Inc. and the Company dated December 8, 1993 (CHS Germany) (2)
10.22 Agreement and Plan of Exchange between the Company and Comtrad, Inc., dated April 25, 1995
(CHS Belgium, CHS England, CHS France and CHS Portugal) (3)
10.23 Agreement and Plan of Exchange between the Company and Comtrad Holdings, Inc. dated October 13, 1995 (CHS BEK) (3)
10.24 Agreement and Plan of Exchange between the Company, CHS Czechia s.r.o., Comtrad, Inc.
and Zbynek Kraus dated October 27, 1995 (CHS Czechia) (3)
10.25 Stock Purchase Agreement between the Company and Comtrad Holdings, Inc. dated December
29, 1995 (CHS Poland) (3)
10.26 Stock purchase agreement between the Company and Comtrad, Inc. dated December 29, 1995 (CHS Sweden) (3)
10.27 Stock Purchase Agreement between the Company and Comtrad, Inc. dated December 29, 1995 (CHS Finland) (3)
10.28 Purchase Agreement dated January 31, 1996 between the Company and Comtrad Holdings, Inc and
the individual persons comprising the "KVENTA QUOTAHOLDERS" (CHS Hungary) (4)
10.29 Stock Purchase Agreement between the Company, Comtrad Holdings, Inc. and Comtrad, Inc. dated
March 27, 1996 (CHS Baltic, CHS Bulgaria, CHS Romania, CHS Croatia, CHS Brazil and CHS Slovakia) (3)
10.30 Purchase Agreement dated March 1996 between Zemex Electronics International and Cosapi
Organizacion Empresarial S.A. (CHS Peru) (3)
10.31 Stock Purchase Agreement dated March 29, 1996 between the Company and Hugo Wyrsch (CHS Switzerland) (3)
10.32 Loan Agreement dated 29 March 1996 among CHS Finance S.A., Singer
and Friedlander Limited and certain banks named in the Agreement (3)
10.33 Purchase Agreement by and among CHS Electronics, Inc., as Buyer, and Merisel, Inc. and Merisel
Europe, Inc. as Sellers dated as of August 29, 1996 as amended by First Amendment to Purchase
Agreement dated as of October 4, 1996 (4)
10.34 Second Amendment to Purchase Agreement by and among CHS Electronics, Inc. as Buyer and
Merisel, Inc. and Merisel Europe, Inc. as Sellers dated as of December 27, 1996 (5)
10.35 Settlement agreement and Release by and among CHS Electronics, Inc. as Buyer and Merisel, Inc.
and Merisel Europe, Inc. as Sellers dated February 13, 1997 (5)
10.36 Agreement as of October 31, 1996 between CHS Electronics, Inc. and Comtrad, Inc. (5)
10.37 Stock Exchange Agreement dated December 19, 1996 between CHS Electronics, Inc. and Frank
& Walter Computer GmbH (5)
10.38 Modification of Re-Purchase Agreement dated July 1996 (6)
27
10.39 Amendment to Stock Purchase Agreement dated October 16, 1996 between CHS Electronics, Inc.
and Hugo Wyrsch (6)
10.40 Employment Agreement between the Company and Carsten Frank dated December 19, 1996 (6)
10.41 First Amendment to Employment Agreement of Claudio Osorio dated May 12, 1997 (6)
10.42 Amended and Joinder to Loan and Security Agreement between Zemex Electronics International,
Inc. and Merisel Latin America, Inc. as Borrowers and Congress Financial Corporation (Florida)
as Lender dated October 4, 1996 (6)
10.43 Shareholder Letter Agreement dated December 19, 1996 among Carsten Frank, Comtrad, Inc. and
Comtrad Holdings, Inc. (6)
10.44 Share Exchange Agreement dated June 20, 1997 among the Company and the shareholders of
Karma International S.A. (6)
21 Subsidiaries of the Company (8)
23.1 Consent of Independent Certified Public Accountant (8)
27.1 Financial Data Schedule (8)
- ------------
(1) Incorporated herein by this reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(2) Incorporated herein by this reference from the Company's registration
statement on Form 10 filed with the Securities and Exchange Commission on
May 26, 1994 and the amendments thereto filed on August 1, 1994, September
9, 1994, December 2, 1994 and January 12, 1995.
(3) Incorporated herein by this reference from the Company's Registration
Statement on Form S-1 (File No. 333-03864).
(4) Incorporated herein by this reference from the Company's Current Report on
Form 8-K filed on October 18, 1996.
(5) Incorporated herein by this reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(6) Incorporated herein by this reference from the Company's Registration
Statement on Form S-3 (File No. 333-29779).
(7) Incorporated herein by reference from the Company's Current Report on Form
8-K filed on April 22, 1998.
(8) Filed herewith.
(b) Reports on Form 8-K
28
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended (the "Act"), the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHS ELECTRONICS, INC.
BY: /S/ CLAUDIO OSORIO
-------------------
Claudio Osorio
President
Dated: March 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Claudio Osorio President and Director March 22, 1999
Claudio Osorio (principal executive officer)
/s/ Carsten Frank Executive Vice President--Logistics March 22, 1999
Carsten Frank and Director
/s/ Antonio Boccalandro Secretary and Director March 22, 1999
Antonio Boccalandro
/s/ Craig Toll Chief Financial Officer and Treasurer March 22, 1999
Craig Toll (principal financial officer and
principal accounting officer)
/s/ Otto Gerlach Director March 22, 1999
Otto Gerlach
/s/ Bernd Karre Director March 22, 1999
Bernd Karre
/s/ Zbynek Kraus Director March 22, 1999
Zbynek Kraus
/s/ Pierino Lardi Director March 22, 1999
Pierino Lardi
/s/ Donald D. Winstead Director March 22, 1999
Donald D. Winstead
29
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHS Electronics, Inc.--Historical Financial Statements
Report of Independent Certified Public Accountants......................F-2
Consolidated Balance Sheets.............................................F-3
Consolidated Statements of Earnings.....................................F-4
Consolidated Statements of Shareholders' Equity.........................F-5
Consolidated Statements of Cash Flows...................................F-6
Notes to the Consolidated Financial Statements..........................F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders CHS Electronics, Inc.
We have audited the accompanying consolidated balance sheets of CHS Electronics,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CHS Electronics,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Miami, Florida
March 19, 1999
F-2
CHS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 176,991 $ 68,806
Accounts receivable:
Trade, less allowance for doubtful account of $34,486 in 1998
and $18,347 in 1997 1,342,126 659,757
Affiliates 35,546 24,604
----------- -----------
1,377,672 684,361
Inventories 1,025,690 693,503
Prepaid expenses and other current assets 101,698 65,255
----------- -----------
TOTAL CURRENT ASSETS 2,682,051 1,511,925
PROPERTY AND EQUIPMENT, NET 120,201 61,468
GOODWILL, NET 737,719 381,830
OTHER ASSETS 32,172 13,599
----------- -----------
$ 3,572,143 $ 1,968,822
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 677,994 $ 309,510
Accounts payable, trade 1,345,059 771,535
Accrued liabilities 125,076 83,309
Amounts due to sellers under acquisition agreements 185,853 54,866
Income taxes payable 13,997 13,934
----------- -----------
TOTAL CURRENT LIABILITIES 2,347,979 1,233,154
LONG TERM DEBT 375,655 61,556
MINORITY INTEREST 10,466 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;
outstanding 55,619,475 shares at December 31, 1998 and
48,910,999 shares at December 31, 1997 56 49
Additional paid-in capital 732,035 621,021
Retained earnings 110,793 65,115
Accumulated other comprehensive income (4,841) (18,421)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 838,043 667,764
----------- -----------
$ 3,572,143 $ 1,968,822
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Net sales $ 8,545,773 $ 4,756,383 $ 1,855,540
Cost of goods sold 7,983,736 4,409,714 1,724,432
----------- ----------- -----------
Gross profit 562,037 346,669 131,108
Operating expenses 433,567 257,508 102,235
----------- ----------- -----------
Operating income 128,470 89,161 28,873
Other (income) expense:
Interest income (16,581) (11,470) (3,199)
Interest expense 71,373 35,618 11,712
----------- ----------- -----------
54,792 24,148 8,513
----------- ----------- -----------
Earnings before income taxes and minority
interest in subsidiaries 73,678 65,013 20,360
Income taxes 23,871 13,988 6,086
Minority interest in subsidiaries 4,129 2,634 2,108
----------- ----------- -----------
Net earnings $ 45,678 $ 48,391 $ 12,166
=========== =========== ===========
Net earnings per common share--basic $ 0.88 $ 1.44 $ 0.80
=========== =========== ===========
Net earnings per common share--diluted $ 0.82 $ 1.32 $ 0.78
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(In thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL INCOME
------ --------- --------- ------------ --------- -------------
Balance at January 1, 1996 $ 11 $ 24,973 $ 4,558 $ 350 $ 29,892
Common stock or other consideration
issued in acquisitions - 16,982 - - 16,982
Common stock issued in public offering 7 50,607 - - 50,614
Stock options exercised 1 281 - - 282
Comprehensive income:
Net earnings - - 12,166 - 12,166 $ 12,166
Foreign currency translation adjustment (5,403) (5,403) (5,403)
--------
Total comprehensive income $ 6,763
---- --------- --------- -------- --------- ========
Balance at December 31, 1996 19 92,843 16,724 (5,053) 104,533
Common stock issued in acquisitions 8 95,720 - - 95,728
Common stock issued in public offering 21 428,195 - - 428,216
Stock options exercised 1 4,263 - - 4,264
Comprehensive income:
Net earnings - - 48,391 - 48,391 $ 48,391
Foreign currency translation adjustment - - - (13,368) (13,368) (13,368)
--------
Total comprehensive income - - $ 35,023
---- --------- --------- -------- --------- ========
Balance at December 31, 1997 49 621,021 65,115 (18,421) 667,764
Common stock issued in acquisitions 7 108,153 - - 108,160
Stock options exercised - 3,233 - - 3,233
Common stock repurchased - (372) - - (372)
Comprehensive income:
Net earnings - - 45,678 - 45,678 $ 45,678
Foreign currency translation adjustment - - - 13,580 13,580 13,580
--------
Total comprehensive income $ 59,258
---- --------- --------- -------- --------- ========
Balance at December 31, 1998 $ 56 $ 732,035 $ 110,793 $ (4,841) $ 838,043
==== ========= ========= ======== =========
The accompanying notes are an integral part of these statements.
F-5
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 45,678 $ 48,391 $ 12,166
Adjustments to reconcile net earnings to net cash
(used in) operating activities:
Depreciation and amortization 46,611 21,789 6,632
Minority interest in net earnings 4,128 2,634 2,108
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net (427,899) (121,163) (118,694)
Accounts receivable-affiliates, net (41,230) (21,363) (2,398)
Inventories (141,159) (139,923) (129,357)
Prepaid expenses and other assets (13,744) 5,404 (22,345)
Accounts payable, trade 277,815 (10,773) 173,244
Accrued liabilities and income taxes 9,709 (33,511) (20,481)
--------- --------- ---------
Net cash (used in) operating activities (240,091) (248,515) (99,125)
--------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets (52,490) (19,511) (11,624)
Cash used in acquisitions, net (189,671) (201,517) (26,876)
--------- --------- ---------
Net cash (used in) investing activities (242,161) (221,028) (38,500)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from public offering - 428,216 50,614
Proceeds from issuance of Senior Notes 200,000 - -
Proceeds from long-term debt 138,961 - -
Proceeds from stock options exercised 3,233 4,263 281
Net borrowing from banks 246,823 74,699 112,453
Repurchase of shares (372) - -
--------- --------- ---------
Net cash provided by financing activities 588,645 507,178 163,348
Effect of exchange rate changes on cash 1,792 (3,966) (1,757)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 108,185 33,669 23,966
Cash at beginning of year 68,806 35,137 11,171
--------- --------- ---------
Cash at end of year $ 176,991 $ 68,806 $ 35,137
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 62,555 $ 30,454 $ 10,064
Income taxes $ 13,900 $ 10,585 $ 3,892
F-6
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 year are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS)
1998 1997 1996
-------- -------- --------
Fair value of assets acquired including cash $655,938 $689,550 $ 14,691
Less: Common stock or other consideration issued 173,812 232,748 3,278
-------- -------- --------
Liabilities assumed $482,126 $456,802 $ 11,413
======== ======== ========
In 1996, $13.7 million was credited to additional paid-in capital representing
additional consideration paid by an affiliated company under acquisition
agreements for subsidiaries now held by the Company and accounted for as an
exchange between entities under common control. Furthermore, these statements of
cash flows exclude the non-cash impact on the net increase of amounts due to
sellers under acquisition agreements of $89.6 million in 1998, $5.7 million
in 1997 and $49.2 million in 1996.
The accompanying notes are an integral part of these statements.
F-7
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. NATURE OF OPERATIONS
The Company is an international distributor of computer equipment, peripherals
and software. The products are sold, principally to resellers, in Western
Europe, Eastern Europe, Latin America and Asia.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, wholly owned and majority owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. FOREIGN CURRENCY TRANSLATION
For purposes of preparation of its financial statements, the Company uses the
local currency as the functional currency except in highly inflationary
countries. For subsidiaries where the local currency is the functional currency,
assets and liabilities are translated into United States dollars at the exchange
rate in effect at the end of the year. Revenues and expenses of these
subsidiaries are translated at the average exchange rate during the year. The
aggregate effect of translating the financial statements of foreign subsidiaries
is included in a separate component of shareholders' equity entitled accumulated
other comprehensive income. In the normal course of business, the Company
advances funds to certain of its foreign subsidiaries, which are not expected to
be repaid in the foreseeable future. Translation adjustments resulting from
these advances are included in accumulated other comprehensive income. For
entities in highly inflationary countries, the U.S. dollar is considered the
functional currency and a combination of current and historical rates are used
in translating assets, liabilities, revenues and expenses. The related exchange
adjustments are included in earnings. The Company's operations in Bulgaria,
Mexico, Russia, Turkey and Venezuela are considered to operate in highly
inflationary economies.
4. CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
5. CONCENTRATION OF CREDIT RISK
The Company's credit risk on trade receivables is diversified over several
geographic areas and many customers. The largest customer accounts for less than
1% of sales. The Company performs ongoing credit evaluations of its customers.
In South America, the Company obtains personal guarantees from its customers in
some cases. The Company uses credit insurance in several locations (covering
$694.1 million in receivables at December 31, 1998) and factoring without
recourse in other locations to mitigate risk. The Company provides for estimated
credit losses at time of sale based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
6. INVENTORIES
Inventories, consisting of finished products, are stated at the lower of cost or
market, with cost being determined principally by the first-in first-out method.
F-8
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. Leasehold improvements and
capital leases are amortized over the lives of respective leases or the service
lives of the improvements whichever is shorter.
The straight-line and accelerated methods of depreciation are followed for
financial reporting purposes. The useful lives are as follows:
YEARS
-----
Buildings.................................... 10-50
Leasehold improvements....................... 3-10
Computer equipment........................... 2-5
Office equipment and furniture............... 3-10
Vehicles..................................... 3-10
Expenditures for renewals and improvements that significantly extend the useful
life of an asset are capitalized. The costs of software used in business
operations are capitalized and amortized over their expected useful lives.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are removed from the accounts and any gain or loss is
recognized at such time.
8. INCOME TAXES
The Company utilizes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability
method specified by SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the current enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is the
result of changes in deferred tax assets and liabilities.
The Company intends to invest the undistributed earnings of substantially all of
its foreign subsidiaries indefinitely. At December 31, 1998 and 1997, the
cumulative amount of undistributed earnings on which the Company has not
recognized United States income taxes was approximately $84 million and $53
million, respectively. However, it is anticipated that United States income
taxes on such amounts would be partially offset by available foreign income tax
credits.
9. REVENUE RECOGNITION
The Company recognizes sales upon shipment, as there is no significant post-sale
obligation and collectibility is reasonably assured. Income from vendor rebates,
discounts, and cooperative advertising is recognized when earned, as a reduction
of the cost of inventory sold or as a reduction of operating expenses.
10. GOODWILL, NET
Goodwill is being amortized on a straight-line basis to earnings over periods
ranging from 20 to 35 years to reflect the Company's current expectation of
future benefit. The Company evaluates the realizability of its goodwill when an
event occurs that indicates that impairment may have occurred. The Company
determines potential impairment by comparing the carrying value to the
undiscounted future cash flows of the related assets. The Company adjusts the
value of goodwill related to a subsidiary if an impairment is indicated by the
difference between the undiscounted cash flows and the carrying value. The
Company considers a history of operating losses
F-9
to be a primary indicator of potential impairment. Assets are grouped and
evaluated for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of cash flows of other groups of assets.
Assets are generally grouped at the country level of operations. The Company
deems an asset to be impaired if a forecast of undiscounted future operating
cash flows directly related to the asset, including disposal value if any, is
less than its carrying amount. All of the Company's goodwill is identified with
the assets acquired. As of December 31, 1998 and 1997, no impairment was
indicated. Accumulated amortization was $37.0 million and $10.8 million at
December 31, 1998 and 1997, respectively.
11. EARNINGS PER COMMON SHARE
In calculating earnings per common 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 51,616,109, 33,527,256, and
15,243,672 in 1998, 1997, and 1996, respectively. The weighted average number of
shares used in the diluted computation was 55,917,007, 36,592,368, and
15,656,178 in 1998, 1997, and 1996, respectively.
The following table presents a 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):
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $45,678
-------
Net earnings per share--basic 45,678 51,616 $0.88
------- ------- =====
Effect of dilutive shares:
Stock options and warrants outstanding - 1,152
Earnout contingencies - 3,149
------- -------
Net earnings per share--diluted $45,678 55,917 $0.82
======= ======= =====
YEAR ENDED DECEMBER 31, 1997
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $48,391
-------
Net earnings per share--basic 48,391 33,527 $1.44
------- ------ =====
Effect of dilutive shares:
Stock options and warrants outstanding - 1,434
Earnout contingencies - 1,631
------- ------
Net earnings per share--diluted $48,391 36,592 $1.32
======= ====== =====
F-10
YEAR ENDED DECEMBER 31, 1996
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
Net earnings $12,166
-------
Net earnings per share--basic 12,166 15,244 $0.80
------- ------ =====
Effect of dilutive shares:
Stock options and warrants outstanding - 412
------- ------
Net earnings per share--diluted $12,166 15,656 $0.78
======= ====== =====
Options to purchase approximately 4.0 million shares of common stock at a range
from $15.75 to $25.46 were not included in the computation of the diluted
earnings per share for the year ended December 31, 1998 since they would have
had an anti-dilutive effect.
12. STOCK OPTIONS
Options granted under the Company's 1994 Stock Incentive Plan, the 1996 and 1997
Chief Executive Officer stock option plans and the Directors and Officers 1997
stock option plan are accounted for under APB Opinion 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES". As to grants requiring shareholder approval, the Company
considers the date of grant to be the date of action by the Board of Directors
when, on such date, shareholder approval is deemed to be perfunctory.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Company operates internationally with distribution facilities in various
locations around the world. The Company reduces its exposure to fluctuations in
foreign exchange rates by creating offsetting positions through the use of
derivative financial instruments, primarily foreign exchange forward contracts.
The market risk related to the foreign exchange agreements is offset by changes
in the valuation of the underlying items being hedged. The majority of the
Company's derivative financial instruments have terms of 90 days or less.
Occasionally, the Company may enter into derivative financial instruments for
speculative purposes. The Company is not party to leveraged derivatives.
The notional amount of forward exchange contracts and options is the amount of
foreign currency bought or sold at maturity. Notional amounts are indicative of
the extent of the Company's involvement in the various types and uses of
derivative financial instruments and are not a measure of the Company's exposure
to credit or market risks through its use of derivatives. The estimated fair
value of derivative financial instruments represents the amount required to
enter into like off-setting contracts with similar remaining maturities based on
the end of year spot rates, which approximate quoted market rates. As of
December 31, 1998, the notional amount of foreign exchange forward contracts
outstanding against trade payables was $269.3 million, which approximated fair
value.
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these items.
The carrying amounts of debt issued pursuant to bank credit agreements
approximate fair value because interest rates on those instruments approximate
current market interest rates. 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 (including current portion) at
December 31, 1998 was $398.4 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.
F-11
14. NEW ACCOUNTING STANDARDS
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.
15. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
NOTE B--ACQUISITIONS
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.
Metrologie is ISO-9001 certified to perform configurations of high-end network
solutions and work stations which the Company believes will be strategically
important in strengthening the Company's ability to provide high-end platforms
in Europe. As a result of this acquisition, the Company has become the largest
distributor of microcomputer products in France and Spain.
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.
In 1997 the Company made 15 acquisitions, of which three were significant.
Effective October 1997, the Company completed the acquisition of Santech Micro
Group ASA ("Santech"), for approximately $125 million. Santech was 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 $107.3 million of goodwill.
Santech's operating results during 1997, included in the pro-forma amounts at
the end of this note, were adversely impacted as a result of restructuring its
operations after a July 1996 merger.
F-12
Operating results were also impacted adversely by the implementation of a new
computer system in the first six months of 1997. 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 accrued approximately $2
million for the costs of consolidating former Santech operations. The reserve
consists of inventory reserves, severance costs, lease termination costs and
other costs. As of December 31, 1998, $1.3 million had been charged against such
reserve.
Effective August 1997, the Company completed the acquisition of Karma
International S.A. ("Karma"). Karma was a distributor of personal computer
components to over 10,000 customers in Europe, the Middle East and Asia. The
purchase price for Karma was $160 million and was funded through (i) $74 million
in cash and (ii) 4,813,432 shares of unregistered common stock. Karma's product
line includes mass storage products, CPUs, memory chips, motherboards, sound,
video and other cards and monitors. Karma operated 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 1997, the Company completed the acquisition of Frank & Walter
Computer GmbH ("Frank & Walter") for 3,300,000 unregistered shares of common
stock. Frank & Walter had net sales of approximately $686 million in 1996. The
Company believes that Frank & Walter was, at the time of acquisition, the fourth
largest computer distributor in Germany with over 10,000 active dealers. 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.
The Company completed other acquisitions during 1997 which were considered not
to be significant. Such 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.
In 1996 the Company acquired 18 companies. The largest acquisition was of seven
companies comprising the European and Latin American businesses of a competitor,
Merisel, Inc. These seven companies were acquired for cash and debt assumptions.
The total consideration paid was approximately $148 million consisting of $30
million of cash and $118 million of debt assumed or refinanced. The Company
financed the acquisition primarily through borrowing or factoring at each
subsidiary acquired. The acquisition has been accounted for as a purchase,
effective as of September 30, 1996. The cost of the acquisition has been
allocated to the assets acquired based on their fair values. This initially
resulted in approximately $10.5 million of goodwill. In the second and third
quarters of 1997, certain reserves initially established were determined not to
be required, resulting in a reduction of goodwill to $4.6 million.
The Company originally accrued approximately $12.8 million for the consolidation
of former Merisel and CHS operations. The reserve consisted of lease
termination--$4.1 million, write-off of leasehold improvements and computer
systems--$4.9 million, and accounts receivable and other costs--$3.8 million.
Through December 31, 1998, $11.0 million has been charged against this accrual.
In June 1996, the Company acquired 100% of an unaffiliated company in Russia for
consideration based on a multiple of that company's net income in 1996. The
acquisition was initially recorded at no consideration, which approximated the
value of net assets acquired. Subsequently, the agreement was modified to
measure the value of the Company based 50% on 1996 results and 50% on 1997
results. The 1996 portion was paid in cash in 1997 and the 1997 portion was paid
in 1998 by issuing 1,426,191 shares of common stock. In 1996 and 1997, $20.6 and
$25.3 million was recorded as purchase price and goodwill.
F-13
In April 1996, the Company acquired 100% of an unaffiliated company in
Switzerland for consideration based on a multiple of 1996 net earnings but not
less than $1.7 million. The acquisition was initially recorded at $1.7 million
resulting in no goodwill. Subsequently, the agreement was modified to base the
price on results through September 30, 1996. In the 1996 fourth quarter, 274,855
shares of common stock were issued and goodwill of $870,000 was recorded.
In March 1996, the Company acquired six companies from Comtrad, Inc., an
affiliate, for a reduction of indebtedness of $7.8 million. These acquisitions
have been accounted for as an exchange between entities under common control in
a manner similar to a pooling of interests. Accordingly, these acquisitions have
been included in the accompanying financial statements from the date acquired by
Comtrad. The companies in Bulgaria, Croatia, Lithuania and Romania were started
by Comtrad in 1993 and 1994 for a minimal investment and had insignificant
operations. They are treated as if Comtrad acquired them on December 31, 1994.
Sixty-five percent of a company in Slovakia was acquired in early 1994 for a
minimal investment and 1994 results were insignificant. The remaining 35% was
acquired by Comtrad for a contingent payment which was insignificant and was
recorded in 1997. Comtrad acquired the Brazil company in November 1994 for
Comtrad common shares valued at $762,000. The acquisition was recorded by the
Company as of December 31, 1994 at this value, resulting in goodwill of $2.5
million. An additional amount of $240,000 was paid by Comtrad in 1996 to
complete its acquisition of this company, which had the effect of increasing
goodwill to $2.8 million.
In February 1996, the Company acquired 51% of an unaffiliated company in Hungary
for consideration based on 51% of the book value of equity at December 31, 1996
plus a multiple of 51% of 1996 net earnings. Based on 1996 results, the purchase
price was fixed at $17.6 million resulting in goodwill of $15.8 million. The
sellers elected to receive the proceeds in cash rather than stock. In the second
quarter of 1997 the agreement was modified to measure the value of the company
based 75% on 1996 results and 25% on 1997 results. The 1996 amount was paid in
1997. As a result, goodwill in 1996 was reduced by $3.8 million. The 1997
amount, estimated at $5.6 million, was recorded in 1997 and paid in 1998 and
increased goodwill.
The following represents the unaudited pro forma results of operations assuming
all significant 1998 and 1997 acquisitions had taken place on January 1, 1997
(amounts in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
Net sales $9,461,281 $8,247,223
Net earnings 19,083 13,403
Net earnings per share--basic $0.37 $0.40
Net earnings per share--diluted $0.34 $0.37
Pro forma adjustments have been made to add goodwill amortization. The pro forma
information is not necessarily indicative of the actual results of operations
that would have occurred had the acquisitions taken place on January 1, 1997, or
of results which may occur in the future.
F-14
NOTE C--ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Allowance for doubtful accounts:
Beginning balance $ 18,347 $ 14,830 $ 4,388
Provision for bad debt 20,683 11,636 3,412
Write-offs (17,324) (14,162) (3,775)
Acquired through acquisition 12,780 6,043 10,805
-------- -------- --------
Ending balance $ 34,486 $ 18,347 $ 14,830
======== ======== ========
NOTE D--PROPERTY AND EQUIPMENT
DECEMBER 31,
----------------------------
1998 1997
--------- --------
(IN THOUSANDS)
Land and buildings $ 41,451 $ 19,358
Office equipment and furniture 44,129 22,047
Leasehold improvements 23,931 7,330
Computer equipment 55,645 43,470
Vehicles and other 6,332 3,497
------------ ------------
171,488 95,702
Less accumulated depreciation and amortization 51,287 34,234
--------- --------
$ 120,201 $ 61,468
========= ========
NOTE E--INCOME TAXES
The components of earnings (loss) before income taxes and minority interest in
subsidiaries consist of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Domestic $ (2,364) $ 3,450 $ 1,361
Foreign 76,041 61,563 18,999
-------- -------- --------
Total $ 73,677 $ 65,013 $ 20,360
======== ======== ========
F-15
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Current:
U.S. Federal $ 1,444 $ 2,243 $ 1,721
U.S. State 167 329 228
Foreign 16,878 8,493 4,520
-------- -------- --------
18,489 11,065 6,469
-------- -------- --------
Deferred:
U.S. Federal (111) (569) (258)
U.S. State (18) (92) (47)
Foreign 5,511 3,584 (78)
-------- -------- --------
5,382 2,923 (383)
-------- -------- --------
Total $ 23,871 $ 13,988 $ 6,086
======== ======== ========
Deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating losses of foreign subsidiaries $ 47,587 $ 16,839
Accruals not currently deductible 2,820 1,896
Allowances for bad debts 2,061 1,115
Other - 27
-------- --------
Total deferred tax assets 52,468 19,877
-------- --------
Deferred tax liabilities:
Inventory differences (7,861) (7,424)
Other (461) -
-------- --------
Total deferred tax liabilities (8,322) (7,424)
-------- --------
44,146 12,453
Valuation allowance (41,884) (13,676)
-------- --------
Total $ 2,262 $ (1,223)
======== ========
The net deferred tax asset (liability) is reflected in the accompanying
consolidated balance sheets in other assets as of December 31, 1998 and in
income taxes payable as of December 31, 1997.
F-16
The major elements contributing to the difference between taxes at the U.S.
federal statutory tax rate and the effective tax rate are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Income taxes at the United States statutory rate $ 25,050 $ 22,104 $ 6,922
Foreign income subject to tax at other than U.S. statutory rate (11,630) (15,690) (1,356)
Losses without tax benefit 4,693 5,127 1,329
Non deductible goodwill amortization 8,563 2,834 255
Utilizations of net operating losses of foreign subsidiaries (2,181) (759) (1,196)
Other (624) 372 132
-------- -------- --------
Income taxes at the effective tax rate $ 23,871 $ 13,988 $ 6,086
======== ======== ========
At December 31, 1998, the Company has net operating loss carry forwards in
certain foreign jurisdictions that expire as follows (in thousands):
1999 $ 15,248
2000 2,003
2001 1,013
2002 12,557
2003 1,705
2004 - 2008 13,634
No expiration 82,832
---------
Total $ 128,992
=========
In assessing the realization of net operating loss carry forwards, management
considers whether it is more likely than not that some portion or all of these
net operating loss carry forwards will not be realized. The ultimate realization
of these net operating loss carry forwards and other deferred tax assets are
dependent upon the generation of future taxable income during the periods prior
to the expiration of the operating loss carry forwards. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
operating loss carry forward periods, management believes it is more likely than
not the Company will not realize the benefits of all of these net operating loss
carry forwards and other deferred tax assets. Accordingly, a valuation allowance
has been established since the full realization of such benefits is not likely.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1998 will be allocated to income from
continuing operations or reduce goodwill. In the event that the tax benefits
relating to net operating losses are realized, $24.0 million of such benefits
would reduce future provision for income taxes and $23.6 million would reduce
goodwill.
NOTE F--NOTES PAYABLE AND LONG TERM DEBT
Several of the Company's subsidiaries have short-term credit lines with local
banks. As of December 31, 1998, of the $882.5 million aggregate amount available
under these agreements, $648.3 million was outstanding. Generally, borrowings
under such lines are collateralized by receivables or inventory. The lines are
principally of one year duration and are renewable by the banks. Some of these
lines contain restrictions on dividends to the parent company. In 1998, the
maximum and average amounts outstanding were $777.0 million and $614.5 million,
respectively. The weighted average interest rate at December 31, 1998 was 6.5%.
F-17
The Company's long-term debt consists of the following:
DECEMBER 31,
--------------------
1998 1997
-------- -------
(IN THOUSANDS)
Senior Notes ("Senior Notes") due 2005. The
Notes bear interest of 9.875% per annumn
and interest is payable semi-annually on
April 15 and October 15 beginning
October 15, 1998. The Senior 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, on or after
April 15, 2004. Certain of the Company's
direct and indirect wholly-owned subsidiaries
fully and unconditionally jointly and severally
guaranteed the Senior Notes on an unsecured
basis. $200,000 $ -
Three subsidiaries in Germany share a
revolving credit agreement of DM 325
million ($195 million at December 31,
1998) with a financial institution. The
agreement, which expires December 2001,
provides for advances based upon
eligible accounts receivable and
inventories. Interest is at a variable
market rate based on a German base rate
(5.2% at December 31, 1998). The debt is
secured by the borrowers' receivables,
inventories and intangible assets
amounting to $376.5 million at December
31, 1998. The agreement contains certain
restrictive covenants, including the
ability by the borrowers to incur
additional indebtedness. 138,961 -
Two subsidiaries serving Latin America
share a $60 million revolving credit
agreement with a financial institution.
The agreement, which expires in October
1999, provides for advances and letters
of credit based upon eligible accounts
receivable and inventories. Interest is
at a variable market rate based on the
prime rate of the lender or LIBOR, at
the borrowers' option (9.5% at December
31, 1998). All of the borrowers' assets,
including accounts receivable and
inventories totaling $83.3 million at
December 31, 1998, are pledged as
collateral. The agreement contains
certain restrictive covenants, including
limitations on transactions with
affiliated companies and employee loans.
The agreement also limits the ability of
these companies to pay dividends to the
Company to 50% of the borrowers' net
income. 21,019 $46,286
Mortgages on buildings, interest ranging
from 3.9% to 11.0% with maturities
through 2009, collateralized by
buildings, accounts receivables and
inventories with net book value at
December 31, 1998 of $91.7 million. 15,262 11,318
Capitalized leases, collateralized by
computer equipment, bearing interest
ranging from 4% to 22% with maturities
through September 2002. 13,655 10,983
Industrial bonds, unsecured, bearing
interest rate of 2%, due August 2000 9,462 -
Other debt 6,996 484
-------- -------
Total 405,355 69,071
Less current portion of long-term debt,
included in notes payable 29,700 7,515
-------- -------
Total long-term debt $375,655 $61,556
======== =======
F-18
Scheduled maturities of long-term debt are as follows (in thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
1999 $29,700
2000 23,657
2001 143,709
2002 1,524
2003 693
Thereafter 206,072
In April 1998, the Company issued the Senior Notes. The Notes are effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries that are not guarantors. The guarantor subsidiaries are principally
non-operating subsidiaries in the United States. The Senior 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 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 consolidated 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 flows are presented below as if the guarantor subsidiaries were in
place for all periods presented. The Company and subsidiary guarantors have
accounted for investments in their respective subsidiaries on an unconsolidated
basis using the equity method of accounting.
F-19
AS OF DECEMBER 31, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
Cash $ 2,063 $ (1,245) $ 176,173 $ - $ 176,991
Accounts receivable 199 131,392 1,246,081 - 1,377,672
Intercompany receivables 179,574 34,295 262,332 (476,201) -
Inventories - 5,598 1,020,092 - 1,025,690
Other current assets 814 2,038 98,846 - 101,698
----------- ----------- ----------- ----------- -----------
Total current assets 182,650 172,078 2,803,524 (476,201) 2,682,051
Property and equipment, net 1,538 7,015 111,648 - 120,201
Cost in excess of assets acquired, net - - 737,719 - 737,719
Investments in affiliated companies 1,037,660 1,364,888 - (2,402,548) -
Other assets 10,873 771 20,528 - 32,172
----------- ----------- ----------- ----------- -----------
Total assets $ 1,232,721 $ 1,544,752 $ 3,673,419 $(2,878,749) $ 3,572,143
=========== =========== =========== =========== ===========
Notes payable $ - $ 8,782 $ 669,212 $ - $ 677,994
Intercompany payables 2,343 291,179 182,679 (476,201) -
Accounts payable 5,092 14,736 1,325,231 - 1,345,059
Accrued expenses 4,663 893 119,520 - 125,076
Amounts due to sellers 185,853 - - - 185,853
Income taxes payable and other
current liabilities (3,273) (150) 17,420 - 13,997
----------- ----------- ----------- ----------- -----------
Total current liabilities 194,678 315,440 2,314,062 (476,201) 2,347,979
Long term debt 200,000 4,904 170,751 - 375,655
Minority interests - - - 10,466 10,466
Shareholders' equity 838,043 1,224,408 1,188,606 (2,413,014) 838,043
----------- ----------- ----------- ----------- -----------
$ 1,232,721 $ 1,544,752 $ 3,673,419 $(2,878,749) $ 3,572,143
=========== =========== =========== =========== ===========
AS OF DECEMBER 31, 1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
Cash $ 2,367 $ 83 $ 66,356 $ - $ 68,806
Accounts receivable 17,356 1 667,004 - 684,361
Intercompany receivables 191,627 - 251,010 (442,637) -
Inventories - - 693,503 - 693,503
Other current assets 1,454 316 69,806 (6,321) 65,255
----------- ----------- ----------- ----------- -----------
Total current assets 212,804 400 1,747,679 (448,958) 1,511,925
Property and equipment, net 2,247 24 59,197 - 61,468
Cost in excess of assets acquired, net - - 381,830 - 381,830
Investments in affiliated companies 517,774 289,244 - (807,018) -
Other assets - - 13,599 - 13,599
----------- ----------- ----------- ----------- -----------
Total assets $ 732,825 $ 289,668 $ 2,202,305 $(1,255,976) $ 1,968,822
=========== =========== =========== =========== ===========
Notes payable $ - $ - $ 309,510 $ - $ 309,510
Intercompany payables 1,835 145,217 295,199 (442,251) -
Accounts payable 1,207 - 770,328 - 771,535
Accrued expenses 7,153 44 76,112 - 83,309
Amounts due to sellers 54,866 - - - 54,866
Income taxes payable and other
current liabilities - - 14,607 (673) 13,934
----------- ----------- ----------- ----------- -----------
Total current liabilities 65,061 145,261 1,465,756 (442,924) 1,233,154
Long term debt - - 70,134 (8,578) 61,556
Minority interests - - - 6,348 6,348
Shareholders' equity 667,764 144,407 666,415 (810,822) 667,764
----------- ----------- ----------- ----------- -----------
$ 732,825 $ 289,668 $ 2,202,305 $(1,255,976) $ 1,968,822
=========== =========== =========== =========== ===========
F-20
1998
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ 105,827 $8,439,946 $ - $8,545,773
Cost of goods sold - 98,275 7,885,461 - 7,983,736
---------- ---------- ---------- ---------- ----------
Gross profit - 7,552 554,485 - 562,037
Operating expenses 4,812 5,266 423,489 - 433,567
---------- ---------- ---------- ---------- ----------
Operating income (4,812) 2,286 130,996 - 128,470
Other (income) expense, net 10,435 884 43,473 - 54,792
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries (15,247) 1,402 87,523 - 73,678
Provision for income taxes (2,627) 1,671 24,827 - 23,871
Equity in (earnings) of affiliated
companies, net of tax (58,298) (62,282) - 120,580 -
---------- ---------- ---------- ---------- ----------
Minority interest - - - 4,129 4,129
Net earnings $ 45,678 $ 62,013 $ 62,696 $ (124,709) $ 45,678
========== ========== ========== ========== ==========
1997
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ - $5,026,155 $ (269,772) $4,756,383
Cost of goods sold - - 4,684,548 (274,834) 4,409,714
---------- ---------- ---------- ---------- ----------
Gross profit - - 341,607 5,062 346,669
Operating expenses 1,375 181 255,952 - 257,508
---------- ---------- ---------- ---------- ----------
Operating income (1,375) (181) 85,655 5,062 89,161
Other (income) expense, net (2,771) 892 25,647 380 24,148
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries 1,396 (1,073) 60,008 4,682 65,013
Provision for income taxes 308 (313) 12,623 1,370 13,988
Equity in (earnings) of affiliated -
companies, net of tax (47,303) (47,351) - 94,654 -
Minority interest - - - 2,634 2,634
---------- ---------- ---------- ---------- ----------
Net earnings $ 48,391 $ 46,591 $ 47,385 $ (93,976) $ 48,391
========== ========== ========== ========== ==========
1996
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ - $1,879,707 $ (24,167) $1,855,540
Cost of goods sold - - 1,748,599 (24,167) 1,724,432
---------- ---------- ---------- ---------- ----------
Gross profit - - 131,108 - 131,108
Operating expenses 1,408 1 103,027 (2,201) 102,235
---------- ---------- ---------- ---------- ----------
Operating income (1,408) (1) 28,081 2,201 28,873
Other (income) expense, net 1,197 - 7,316 - 8,513
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries (2,605) (1) 20,765 2,201 20,360
Provision for income taxes 560 - 5,526 - 6,086
Equity in (earnings) of affiliated -
companies, net of tax (15,331) (15,246) - 30,577 -
Minority interest - - - 2,108 2,108
---------- ---------- ---------- ---------- ----------
Net earnings $ 12,166 $ 15,245 $ 15,239 $ (30,484) $ 12,166
========== ========== ========== ========== ==========
F-21
1998
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $(240,091) $ - $(240,091)
Net cash provided (used) in
investing activitie $(203,165) $ (1,245) $ (37,751) $ - $(242,161)
Net cash provided (used) in
financing activities $ 202,861 $ - $ 385,784 $ - $ 588,645
Effect of exchange rate $ - $ - $ 1,792 $ - $ 1,792
Cash at beginning $ 2,367 $ - $ 66,439 $ - $ 68,806
Cash at end $ 2,063 $ (1,245) $ 176,173 $ - $ 176,991
1997
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $(248,515) $ - $(248,515)
Net cash provided (used) in
investing activitie $(201,517) $ - $ (19,511) $ - $(221,028)
Net cash provided (used) in
financing activities $ 203,308 $ - $ 303,870 $ - $ 507,178
Effect of exchange rate $ - $ - $ (3,966) $ - $ (3,966)
Cash at beginning $ 576 $ - $ 34,561 $ - $ 35,137
Cash at end $ 2,367 $ - $ 66,439 $ - $ 68,806
1996
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $ (99,125) $ - $ (99,125)
Net cash provided (used) in
investing activities $ (26,876) $ - $ (11,624) $ - $ (38,500)
Net cash provided (used) in
financing activities $ 27,367 $ - $ 135,981 $ - $ 163,348
Effect of exchange rate $ - $ - $ (1,757) $ - $ (1,757)
Cash at beginning $ 85 $ - $ 11,086 $ - $ 11,171
Cash at end $ 576 $ - $ 34,561 $ - $ 35,137
As discussed above, borrowings of certain of the Company's subsidiaries contain
restrictions on dividends to the Company. For the year ended December 31, 1998,
earnings before interest expense, income taxes and depreciation and amortization
("EBITDA") of such subsidiaries represented 7.6% of the Company's consolidated
EBITDA. 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.
At December 31, 1998, the Company was not in compliance with a minimum tangible
net worth covenant contained in a short term credit facility. The Company
obtained a waiver from the lender.
NOTE G--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. The primary difference from net income as reported is the
change in cumulative foreign currency translation adjustment.
NOTE H--CONCENTRATIONS
Substantially all of the Company's operations are outside the United States with
most of the Company's sales made in local currencies other than the U.S. dollar.
In 1998, the largest amount of sales occurred in Germany (in German marks),
which comprised 19% of total sales. The Company also had sales of approximately
11% in France (in French francs) and 9% in England (in British pounds). While
these countries are considered politically stable, there is risk that economic
difficulties in any of these countries could adversely affect the Company's
business. The Company also has operations in less politically stable countries.
In some countries, certain purchases and the resulting payables are in
currencies (principally the U.S. dollar) different than the functional currency.
Further, certain subsidiaries have loans receivable or payable denominated in
currencies other than their functional currency. Transaction gains and losses on
these receivables and liabilities are included in the determination of earnings
for
F-22
the relevant periods. In 1998, 1997 and 1996 foreign currency gains were
$5,232,000, $1,219,000, and $1,559,000, respectively, which are included in
operating expenses in the accompanying consolidated statements of earnings.
At December 31, 1998, the face value of foreign exchange forward contracts
against trade payables was $269.3 million, which approximated the fair market
value of the contracts. At December 31, 1998, approximately $436.6 million of
accounts payable were attributable to foreign currency liabilities denominated
in currencies other than the subsidiaries' functional currencies (principally
$357.8 million in U.S. dollars and $50.8 million in German marks). The largest
unhedged amounts of trade payables were in subsidiaries in Czech Republic, Hong
Kong, Poland, Argentina and Mexico.
In some countries there are risks of continuing periodic devaluations or of
large devaluations. In these countries, no hedging mechanism exists. The Company
has risks in these countries that such devaluations could cause economic loss
and negatively impact future sales since its product cost would increase in
local terms after such devaluations. The Company attempts to limit its economic
loss through structural mechanisms of limiting its holdings of local currency
and receivables to the amount of its local currency payables.
Products of Hewlett-Packard (HP), accounted for 16%, 19%, and 34% of the
Company's sales for 1998, 1997 and 1996, respectively. Sales of products
supplied by Microsoft accounted for 10%, 10% and 12% during 1998, 1997 and 1996,
respectively. The third largest supplier in 1998 was IBM with 10% of the
Company's net sales. HP has the right to terminate its distribution agreement
with any Company subsidiary if the subsidiary is unable to cure, within a
reasonable period of time, any violation of the agreement after having received
notice from HP of the violation. Each Company subsidiary has the right to
terminate the HP agreement on 90 days notice. Each Company subsidiary believes
that its relationship with HP is good, and has no reason to believe that its
distribution arrangement will not be a long-term relationship. No assurance can
be given, however, that HP will renew each Company subsidiary's agreement at the
time of its annual review or in subsequent years. Management has not formulated
alternative plans of action in the event the HP contracts are terminated.
NOTE I--LEASE OBLIGATIONS AND OTHER CONTINGENCIES
The Company leases equipment and office and warehouse space under non-cancelable
operating leases. The following is a schedule by year of the minimum rental
commitments remaining on leased property and equipment (in thousands) with terms
greater than one year:
YEAR ENDING DECEMBER 31, TOTAL
- ------------------------ -----
1999 $19,617
2000 17,382
2001 15,474
2002 12,415
2003 10,658
Subsequent years 16,957
Total rental expense was $25,281,000, $14,542,000 and $6,715,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
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. The
complaint, which purports to be a class action complaint, alleges that the
Company and two of its officers violated federal securities laws in connection
with financial reporting and disclosure during the period February 27, 1997
through March 10, 1999. The suit purports to be on behalf of those who purchased
CHS Electronics common stock during that time frame. The Company, in connection
with its legal counsel, is in the process of carefully reviewing the allegations
of the complaint. However, the Company believes that the claims are without
merit and intends to vigorously defend the suit. The Company is aware that
certain other purported class actions have been filed. However, the Company has
not received service of any such other suits.
F-23
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million (approximately $12 million) letter of credit provided to
Metro by the Company in connection with the transaction. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met. Metro has also announced that it may seek damages for an unspecified amount
against the Company as a result of the transaction not being consummated. The
purchase agreement calls for disputes to be settled by arbitration in Germany.
The purchase agreement does not provide for a break-up fee. Although no
prediction as to the outcome of either the attempted draw on the letter of
credit or any actions which may be commenced in connection with the purchase
agreement can be made at this time, the Company believes that it has defenses to
any potential claims of Metro and intends to assert them vigorously. As of the
date of this filing, no arbitration proceedings had been commenced by Metro.
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
NOTE J--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 (amounts in thousands):
1998 1997
---- ----
Sales to such related parties $57,034 $102,724
Purchases from such related parties 5,004 57,376
Commissions paid to such related parties 2,054 10,116
Rebates received from such related parties 4,000 11,163
Due from the individual above 2,178 -
Net amount due the Company 8,088 12,193
The rebates received pertain to vendor rebates passed from such related parties
to the Company.
In an agreement dated 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 the remaining entity which had transactions with the Company. 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 gain of $6.9 million was included in
operating expenses in the accompanying consolidated statement of earnings. The
after tax profit on the sales was $3.8 million.
At December 31, 1998 and 1997, the Company carried a receivable from Comtrad
and Comtrad
F-24
Holdings, Inc. (CHI) in an amount of $20.7 million and $17.4 million,
respectively. 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. Interest charged to Comtrad was $1,393,000, $684,000, and $86,000 in
1998, 1997 and 1996, respectively. At December 31, 1998, the collateral was
sufficient to liquidate the indebtedness due the Company. On March 19, 1999, the
market value of the CHS shares was computed to be insufficient and in the event
market conditions do not improve, the Company will have to arrange for
additional collateral or establish a valuation reserve up to the full amount of
the receivable.
In 1996, the Company purchased a company in Romania from Comtrad for $375,000.
Subsequently, the Company loaned $800,000 to the subsidiary to enable it to
purchase an office building. In December 1996, the Company sold this subsidiary
back to Comtrad for the original purchase price plus an amount equal to the
losses from April to date of sale ($200,000). No gain was recognized on the
sale, which had the impact of increasing the amount due from Comtrad by $1.4
million.
A director of the Company served the Company as a management consultant under a
consulting agreement specifying payments of $4,000 per month. The agreement was
terminated at the end of 1996. In 1996, $48,000 was paid under this agreement.
NOTE K--SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
In September 1997, the Board approved a 3 for 2 stock split. In March 1996, the
shareholders approved a reincorporation as a Florida company, a reverse 1 for 2
stock split and the authorization of 5,000,000 shares of preferred stock in such
class or series and with such rights as approved by the Board of Directors. All
share information has been restated to reflect all stock splits. Under Florida
law, a majority vote by the holders of the preferred stock as well as the
holders of common stock is necessary to vote affirmatively on matters of
mergers, sales of substantially all the Company's assets, exchanges of stock or
changes in the articles of incorporation.
In August 1997, the Company completed a public offering of common shares in
which the Company sold 21,208,134 shares and selling shareholders sold 1,216,866
shares. The Company's shares were sold at $21.17 per share which raised $428.2
million for the Company net of expenses and commissions.
In June 1996, the Company completed a public offering of common shares in which
the Company sold 6,887,308 shares and selling shareholders sold 2,600,191
shares. The Company shares were sold at $8 per share which raised $50.6 million
for the Company net of expenses and commissions. As part of the offering the
underwriter received warrants entitling the purchase of 450,000 shares of stock
in a 4 year period beginning in June 1997 at a price starting at $8.80 and
increasing each year.
In August 1994, the Board of Directors, and subsequently the shareholders,
approved the 1994 Stock Incentive Plan. The maximum number of shares issuable
under the Plan has been amended several times and is 4,620,500 at December 31,
1998. Certain of the grants (363,787 at December 31, 1998) are intended to
qualify as incentive stock options and the remaining are non-qualified options.
All options were issued with an exercise price equal to the market price and
have a life of 10 years. Vesting periods are generally 25% a year for four
years.
In 1997 the Board of Directors, and subsequently the shareholders, approved the
Directors and Officers 1997 Stock Option Plan. The Plan, as amended, authorizes
options covering up to 2,150,000 shares of CHS Stock to be granted to executive
officers and Directors. The options are to be granted at fair market value and
generally vest over 3 years. In 1998 and 1997, 255,000 and 1,275,000 options,
respectively, were granted under this Plan.
In 1997 the Board of Directors, and subsequently the shareholders, approved the
1997 Chief Executive Officer Stock Option Plan. The Plan, as amended, authorizes
options covering up to 1,250,000 shares of CHS Stock to be issued to the CEO
upon approval by the Board of a business
F-25
acquisition. The options are granted at market value and vest based on the
earnings of the acquired company. In 1998 and 1997, 500,000 and 750,000 options,
respectively, were granted.
In June 1996, the Board of Directors, and subsequently the shareholders,
approved the 1996 Chief Executive Officer Stock Option Plan. The Plan provides
for options covering up to 750,000 shares of CHS stock to be issued to the CEO
upon the approval by the Board of Directors of a qualifying acquisition, as
defined or of any acquisition if recommended by the Compensation Committee and
approved by the Board. A qualifying acquisition is one where greater than 50% of
the purchase price is comprised of common stock calculated by an earn out
formula. The options are granted at market value and vest based on the earnings
of the acquired company. In 1997 and 1996, all the options authorized by this
plan were granted.
The Company accounts for its stock options under APB 25. No compensation cost
has been recognized as the exercise price of each option is not less than the
fair value of the underlying stock at the date of grant. Had compensation cost
for the plan been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", the Company's net earnings per share would have been reduced to
the pro forma amounts indicated below (amounts in thousands, except per share
date).
1998 1997 1996
---- ---- ----
Net earnings As reported $45,678 $48,391 $12,166
Pro forma 39,820 44,362 11,777
Net earnings per share--basic As reported $0.88 $1.44 $0.80
Pro forma 0.77 1.32 0.77
Net earnings per share--diluted As reported $0.82 $1.32 $0.78
Pro forma 0.71 1.21 0.75
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively; dividend yield of 0%
for each year; expected volatility of 67% in 1998 and 67.9% in 1997; risk-free
interest rates ranging from 4.49% to 5.67% in 1998 and ranging from 5.68% to
6.47% in 1997; and expected lives of 4.5 years for each year.
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below.
1998 1997 1996
----------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year 4,617,813 $ 15.17 2,314,299 $ 8.01 846,132 $ 4.60
Granted 1,570,480 20.73 3,191,381 18.09 1,583,720 9.75
Exercised (200,592) 6.80 (705,469) 10.40 (61,611) 4.57
Cancelled (397,430) 12.01 (182,398) 8.36 (53,942) 10.28
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 5,590,271 $ 16.86 4,617,813 $ 15.17 2,314,299 $ 8.01
========= ========= ========= ========= ========= =========
Options exercisable at year end 2,502,712 $ 13.35 1,095,037 $ 4.58 773,442 $ 5.89
Weighted-average fair value of
options granted during the year $ 11.64 $10.61 $ 5.89
F-26
The following information applies to options outstanding at December 31, 1998:
Number outstanding $4.00-$6.00 $6.67-$8.42 $10.50-$12.41 $15.75-$19.75 $21.69-$25.46
Range of exercise prices 187,992 316,280 1,523,184 1,490,597 2,072,219
Weighted-average exercise price $ 4.92 $ 7.55 $ 11.42 $ 17.52 $ 22.90
Currently exercisable 161,283 173,324 679,331 815,335 673,439
Weighted average remaining contractual life 6.3 years 7.5 years 8.1 years 8.6 years 9.2 years
In January 1998, the Company implemented a Preferred Stock Purchase Rights Plan
and distributed one right (a "Right") for each share of the Company's Common
Stock outstanding. Each Right has an initial exercise price of $100 for one-one
thousandth of a share of the Company's Series A junior participating preferred
stock. The Rights are not exercisable or transferable apart from the Company's
Common Stock, until after a person or group acquires, or has the right to
acquire, beneficial ownership of 15% or more of the Company's Common Stock
(which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the Company's
Common Stock. Upon such occurrence, each Right (other than Rights owned by such
person or group) will entitle the holder to purchase from the Company, or the
particular acquiring person or group under certain circumstances and conditions,
the number of shares of the Company's, or such person's or group's, Common Stock
having a market value equal to twice the exercise price of the Right. The Rights
are redeemable by the Company's Board of Directors under certain circumstances.
NOTE L--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
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 functions. The accounting policies of the
segments are the same as those described in the Summary of Accounting Policies
(Note A). The segments are managed separately since each requires different
business and marketing strategies. The geographic areas in which the localized
product segments operate 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):
F-27
DISTRIBUTION TO RESELLERS
-------------------------------------------------------
ASIA/ DISTRIBUTION
WESTERN EASTERN LATIN MIDDLE TO TOTAL
EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY SEGMENTS
---------- ---------- ---------- ---------- ---------- -------- ----------
1998
Net sales $4,572,505 $ 730,205 $1,516,528 $ 365,507 $1,361,028 $ - $8,545,773
Gross profit 301,764 62,653 105,982 19,300 72,338 - $ 562,037
Operating income 79,272 23,370 30,669 4,721 22,619 711 $ 161,362
Total assets 1,900,257 232,651 527,018 129,941 449,561 238,317 $3,477,745
1997
Net sales $2,676,905 $ 389,553 $1,118,504 $ - $ 571,421 $ - $4,756,383
Gross profit 197,400 36,329 82,393 - 30,547 - $ 346,669
Operating income 42,867 18,871 17,891 - 14,501 3,185 $ 97,315
Total assets 768,087 125,447 349,159 - 372,713 147,150 $1,762,556
1996
Net sales $1,063,997 $ 215,518 $ 576,025 $ - $ - $ - $1,855,540
Gross profit 69,088 22,522 39,498 - - - $ 131,108
Operating income 9,559 11,440 10,663 - - 1,539 $ 33,201
Total assets 727,406 70,405 216,031 - - 81,659 $1,095,501
1998 1997 1996
----------- ----------- -----------
Operating income:
Total operating income for reportable segments $ 161,362 $ 97,315 $ 33,201
Corporate expenses (7,173) 710 (3,364)
Unallocated goodwill amortization (25,719) (8,864) (964)
----------- ----------- -----------
Earnings before income taxes and minority
interest in subsidiaries $ 128,470 $ 89,161 $ 28,873
=========== =========== ===========
Assets:
Total assets for reportable segments $ 3,477,745 $ 1,762,556 $ 1,095,501
Elimination of intercompany receivables (759,636) (442,637) (369,798)
Goodwill not allocated 737,719 381,830 78,780
Other assets 116,315 267,073 57,466
----------- ----------- -----------
Total consolidated assets $ 3,572,143 $ 1,968,822 $ 861,949
=========== =========== ===========
GEOGRAPHIC INFORMATION: 1998 1997 1996
Net sales:
Western Europe $5,534,829 $3,051,641 $1,063,997
Eastern Europe 984,265 524,273 215,518
Latin America 1,516,528 1,118,504 576,025
Asia and Middle East 510,151 61,965 -
---------- ---------- ----------
Consolidated Total $8,545,773 $4,756,383 $1,855,540
========== ========== ==========
The Company's product mix by category was:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Mass storage 25% 21% 10%
Personal computers 20% 17% 22%
Printers 12% 15% 28%
Software 11% 10% 18%
Components 8% 10% 4%
Networking and multimedia 8% 10% 8%
Peripherals 7% 9% 0%
Other 9% 8% 10%
--- --- ---
Total 100% 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 years
ended December 31, 1998, 1997 and 1996.
F-28
NOTE M--SUMMARIZED QUARTERLY FINANCIAL DATA FOR 1998 AND 1997 (UNAUDITED)
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. Some of the fourth quarter rebates
were supported with invalid documentation and all of the overstated rebates have
been reversed. As a result of the discovery, the consolidated financial
statements for the second and third quarters of 1998 were restated. The senior
executive officer responsible for the European office has resigned from the
Company.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
------------- -------------- ------------- -------------- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
1998
Net sales $1,751,338 $1,769,494 $2,166,943 $2,857,998 $8,545,773
Gross profit 122,594 113,924 141,337 184,182 562,037
Net earnings 20,567 5,508 6,643 12,960 45,678
Earnings per share--basic 0.42 0.11 0.13 0.24 0.88
Earnings per share--diluted 0.38 0.10 0.12 0.23 0.82
1997
Net sales $ 877,103 $ 946,955 $1,097,567 $1,834,758 $4,756,383
Gross profit 62,463 70,173 84,944 129,089 346,669
Net earnings 6,710 6,401 11,436 23,844 48,391
Earnings per share--basic 0.30 0.29 0.28 0.49 1.44
Earnings per share--diluted 0.29 0.28 0.26 0.45 1.32
F-29
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3.2 Amended and Restated Bylaws
4.1 Amended and Restated 1998 Preferred Stock Purchase Rights Agreement dated as of March 18, 1999
21 Subsidiaries of the Company
23.1 Consent of Independent Certified Public Accountant
27.1 Financial Data Schedule