5,500,000 SHARES
CHS LOGO
COMMON STOCK
---------------
OF THE 5,500,000 SHARES OF COMMON STOCK OFFERED HEREBY, 3,766,539 ARE
BEING ISSUED AND SOLD BY CHS ELECTRONICS, INC. ("CHS" OR THE "COMPANY") AND
1,733,461 ARE BEING SOLD BY CERTAIN SHAREHOLDERS OF THE COMPANY (THE "SELLING
SHAREHOLDERS"). SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL
NOT RECEIVE ANY PROCEEDS FROM THE SALE OF COMMON STOCK BY THE SELLING
SHAREHOLDERS. SEE "USE OF PROCEEDS" AND "PRINCIPAL AND SELLING SHAREHOLDERS."
THE COMMON STOCK IS CURRENTLY TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE
TRADING SYMBOL "CHSE." ON JUNE 6, 1996, THE LAST REPORTED SALES PRICE OF THE
COMMON STOCK WAS $16-1/8. SEE "PRICE RANGE OF COMMON STOCK."
ON MARCH 14, 1996, THE COMPANY REINCORPORATED IN FLORIDA AND THE
OUTSTANDING COMMON STOCK WAS REVERSE SPLIT ON A ONE-FOR-TWO BASIS. EXCEPT AS
OTHERWISE NOTED, ALL SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS HAS
BEEN ADJUSTED TO REFLECT THE REVERSE SPLIT.
---------------
SEE "RISK FACTORS" ON PAGES 7 THROUGH 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-SION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
Per Share $12.00 $0.84 $11.16 $11.16
Total(3) $66,000,000 $4,620,000 $42,034,575 $19,345,425
(1) Does not include additional compensation to the Representative of (a) a
non-accountable expense allowance of $100,000 and (b) Representative's
Warrants entitling the Representative to purchase up to 300,000 shares of
Common Stock (the "Representative's Warrants") for a period of four years
commencing one year from the date of the Prospectus at 110% of the public
offering price and increasing to 114%, 121% and 128% of the public offering
price in the second, third and fourth years, respectively. In addition, the
Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $700,000, which are payable by CHS.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 825,000 additional shares of Common Stock on the same terms and
conditions as the Common Stock offered hereby solely to cover
over-allotments, if any. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $75,900,000, $5,313,000 and $51,241,575, respectively. See
"Underwriting."
---------------
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS,
SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THEM, AND
SUBJECT TO OTHER CONDITIONS INCLUDING THE RIGHT OF THE UNDERWRITERS TO
WITHDRAW, CANCEL, MODIFY OR REJECT ANY ORDER IN WHOLE OR IN PART. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT JUNE 12, 1996
AT THE OFFICE OF RAYMOND JAMES & ASSOCIATES, INC., ST. PETERSBURG, FLORIDA.
RAYMOND JAMES & ASSOCIATES, INC.
The date of this Prospectus is June 7, 1996
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
FINANCIAL INFORMATION AND SHARE DATA IN THIS PROSPECTUS (I) HAVE BEEN
ADJUSTED TO REFLECT A ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMPANY'S COMMON
STOCK (THE "COMMON STOCK") ON MARCH 14, 1996, AND (II) ASSUME NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
CHS Electronics, Inc. ("CHS" or the "Company") is a leading international
distributor of microcomputer products, networking products and software. CHS
operates in 24 countries across three regions, including Western Europe, Eastern
Europe and South America and services an active customer base of greater than
24,300 resellers. Products sold by the Company are manufactured by approximately
35 vendors including Hewlett-Packard, Seagate, Microsoft, Novell, Acer, Creative
Labs, 3Com, Canon, Epson and Intel. The Company recently was selected by IBM to
be one of a limited number of distributors offering the complete IBM
microcomputer product line in Western Europe, Eastern Europe and South America.
The Company is a focused distributor, as opposed to a broadline distributor, and
seeks to represent leading vendors within specific product categories. The
Company has no significant sales in the United States.
The large number and diversity of resellers make it cost efficient for
vendors to outsource to wholesale distributors such as the Company some
portion of their distribution, credit, inventory, marketing and customer
support requirements. Similarly, due to the large number of product vendors,
resellers generally cannot efficiently establish direct purchasing
relationships with each vendor and instead rely on distributors to satisfy
their product, financing, marketing and technical support needs. The Company
believes the wholesale distribution industry is consolidating as access to
financial resources and economies of scale become more critical and as
certain vendors limit the number of authorized distributors of their
respective products.
According to International Data Corporation ("IDC"), Western Europe
represents approximately 23% of the worldwide personal computer ("PC")
market. The Company's pan-European presence strategically positions the
Company to take advantage of the consolidation trend in the distribution
industry and increase its market share in Western Europe. Additionally, the
regions in which the Company operates are relatively underpenetrated compared
to the United States. The penetration rate, defined as number of PCs per
person, in Western Europe is 15.3% compared to a penetration rate of 35.8% in
the United States. A significant portion of the Company's sales are in the
emerging markets of Eastern Europe and South America, regions which the
Company believes are underserved relative to the entire industry and offer
substantial growth opportunities. IDC projects PC sales in Eastern Europe
(including the Middle East and Africa) will grow from $3.9 billion in 1995 to
$7.6 billion in 1999, representing a compound annual growth rate of 18.5%.
IDC projects PC sales in South America (including Mexico and Central America)
will grow from $3.5 billion in 1995 to $7.8 billion in 1999, representing a
compound annual growth rate of 22.2%. This compares favorably to a 9.6%
compound annual growth rate projected by IDC for PC sales in the United
States over the same period.
CHS operates under a decentralized structure which delegates to managers
familiar with the customs and needs of a particular country the authority to
make daily operational decisions including those necessary to satisfy the
particular demands of their market. As compared to certain competitors which
operate under a more centralized system, the Company believes that its
business model of focused distribution through locally managed full service
facilities integrating warehousing, purchasing, sales, credit and accounting
services provides competitive cost and operating advantages.
3
<PAGE>
The Company's objective is to strengthen its position as a leading
distributor of microcomputer products in Western Europe, Eastern Europe and
South America. In order to achieve this objective, CHS intends to continue to
implement the following strategies:
/bullet/ OPERATE A FOCUSED DISTRIBUTION MODEL. The Company's strategy is
to be a focused distributor by concentrating on a limited number
of products from a select group of high quality branded vendors
in each major product category, such as Hewlett-Packard for
printers, Microsoft for software, Novell for networking, Seagate
for mass storage and Hewlett-Packard and IBM for PCs.
Additionally, the Company seeks to be a significant distributor
for each of its vendors and establish a partnering relationship
with them. For example, the Company believes that it is one of
the largest distributors of Hewlett-Packard products in Western
Europe and the largest in Eastern Europe and South America. The
Company believes this focused strategy enables it to respond more
quickly to customer requests and gives it greater availability of
products, enhanced access to new products and better pricing. The
Company believes this strategy also enables it to develop greater
expertise in the sale and servicing of the products of these
vendors. The Company believes that its focused distribution model
also results in more effective asset management. Generally,
products from leading vendors are in greater demand, resulting in
higher inventory turns and lower working capital requirements.
Additionally, fewer stock keeping units ("SKUs") result in more
efficient inventory management. CHS currently maintains up to
4,000 SKUs while broadline distributors typically carry greater
than 15,000 SKUs.
/bullet/ FURTHER DEVELOP AND PENETRATE INTERNATIONAL MARKETS. The Company
has focused its activities on the distribution of microcomputer
products in Western Europe and the emerging markets of Eastern
Europe and South America, regions which it believes are
underserved with respect to the distribution of microcomputer
products and therefore provide significant growth opportunities.
The Company believes that the markets in Western Europe, Eastern
Europe and South America are complex due to the diversity of
language, regulatory, technical and other factors and provide
increased opportunities for CHS to add value to its relationships
with its vendors and customers because of the presence of its
knowledgeable local management. The Company attempts to limit its
exposure to declines in any one area or economy by its presence
in a large number of markets.
/bullet/ GROW THROUGH ACQUISITIONS. A major portion of the Company's
growth is attributable to acquisitions and the Company intends to
continue its practice of making targeted purchases of high
quality distributors in selected markets in the future. The
Company typically structures an acquisition with an earnout
component payable in shares of Common Stock one year subsequent
to the acquisition and based on the performance of the acquired
company. These local distributors generally are attracted to
combining with CHS in order to gain personal financial liquidity,
access to key product lines provided by CHS and enhanced vendor
credit facilities. Over the past three years, the Company has
acquired over 20 companies. The Company seeks acquisition
candidates that have strong entrepreneurial management teams and
experience in the local market and that could benefit from the
synergies arising out of the Company's superior product line.
After an acquisition, the new CHS subsidiary adopts the policies
and financial reporting procedures of the Company but operates as
a relatively autonomous business unit, consistent with the
Company's decentralized structure. The Company believes its
acquisition strategy is advantageous to its vendors because,
through their relationship with CHS, vendors gain entry into new
markets with established local distribution companies.
4
<PAGE>
The Company's operating results have increased significantly in the
three-year period ending December 31, 1995, with net sales increasing from
$146.4 million in 1993 to $936.7 million in 1995 and operating earnings
increasing from $365,000 in 1993 to $10.8 million in 1995. Additionally, for
the three months ended March 31, 1996 compared to the three months ended
March 31, 1995, the Company's net sales increased to $303.0 million from
$204.8 million and operating earnings increased to $4.7 million from $2.8
million. On a pro forma basis, assuming all 1995 and 1996 acquisitions were
made on January 1, 1995, the Company's 1995 net sales and operating earnings
would have been $1.1 billion and $15.5 million and the Company's net sales
and operating earnings for the quarter ended March 31, 1996 would have been
$327.0 million and $5.3 million, respectively. See "Summary Consolidated
Financial Data" and "Reincorporation and Acquisitions."
THE OFFERING
Common Stock Offered by the Company................ 3,766,539 shares
Common Stock Offered by the Selling
Shareholders.................................... 1,733,461 shares
Common Stock to be Outstanding after the
Offering(1)..................................... 11,349,073 shares
Use of Proceeds ................................... To provide funds for working
capital and other general
corporate purposes including
acquisitions.
Nasdaq National Market Symbol ..................... CHSE
- --------------
(1) Does not include 1,028,080 shares of Common Stock reserved for issuance
upon exercise of currently outstanding options and additional options
which may be granted under the Company's 1994 Stock Option Plan, other
outstanding options and the Representative's Warrants. See
"Management--Stock Option Plans," "Certain Transactions," and
"Underwriting."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
----------------- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------ --------------------------------
1991 1992 1993(2) 1994(2)(3) 1995 1995 1996 1996
------- ------- -------- ---------- ----------------------- -------- -------- ------------
ACTUAL(4) PRO FORMA(5) ACTUAL ACTUAL FRO FORMA(6)
---------- ------------ -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ................... $41,644 $79,884 $146,408 $359,169 $936,703 $1,140,130 $204,835 $302,995 $326,946
Gross profit ................ 4,042 7,178 9,440 25,186 67,987 84,714 14,911 22,542 24,818
Operating earnings .......... 428 2,078 365 3,388 10,799 15,459 2,792 4,692 5,302
Earnings (loss) before
income taxes .............. 215 1,812 (482) 1,568 6,102 10,023 2,049 3,366 3,830
Net earnings (loss) ......... 215 1,156 (723) 965 4,305 5,962 1,667 1,988 2,177
Net earnings (loss)
per share
primary ................... N/A N/A (.32) .21 .59 .63 .24 .25 .23
fully diluted ............. N/A N/A (.32) .21 .59 .63 .24 .24 .23
Weighted average
shares outstanding
primary ................... N/A N/A 2,269 4,693 7,283 9,539 6,966 7,862 9,612
fully diluted ............. N/A N/A 2,269 4,693 7,283 9,539 6,966 8,183 9,612
OTHER DATA:
Number of countries ......... 1 1 2 10 15 24 10 23 24
Inventory turns ............. 16 17 23 10 10 12 12 10 10
Days receivable ............. 34 32 31 32 35 31 30 34 34
</TABLE>
AT MARCH 31, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
------------ ------------- ---------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 13,000 $ 7,817 $ 49,152
Working capital............ 15,232 13,741 55,076
Total assets............... 281,925 313,199 354,534
Lines of credit............ 52,237 57,272 57,272
Long-term debt............. 13,510 13,510 13,510
Shareholders' equity ...... 31,605 50,860 92,195
- --------------
(1) In December 1993, the Company acquired its operating subsidiary in
Germany. The Predecessor information provided represents the operations
of this acquired company prior to the acquisition and is derived from the
financial statements of the acquired company.
(2) Restated to give effect to the acquisition in 1995 of CHS Portugal and 16%
of CHS Czechia as of January 1, 1993. See "Reincorporation and Acquisitions"
and Note B to the Company's Consolidated Financial Statements.
(3) Restated to give effect to the acquisition in 1995 of CHS England, CHS
France and CHS Belgium as of September 1, 1994, the date Comtrad, Inc.
("Comtrad") acquired these companies. See "Reincorporation and Acquisitions"
and Note B to the Company's Consolidated Financial Statements.
(4) Restated to give effect to the acquisition in 1995 of CHS Finland, CHS
Sweden and CHS BEK as of July 1, 1995, CHS Poland as of November 1, 1995,
and the acquisition in 1996 of CHS Brazil, CHS Slovakia, CHS Baltic, CHS
Bulgaria, CHS Romania and CHS Croatia as of December 31, 1994, the dates
Comtrad or Comtrad Holdings, Inc. acquired these companies. See
"Reincorporation and Acquisitions" and Note B to the Company's Consolidated
Financial Statements.
(5) Gives effect to the acquisition in 1995 of CHS BEK, CHS Czechia, CHS
Finland, CHS Sweden and CHS Poland and in 1996 of CHS Hungary (51%), CHS
Peru (60%) and CHS Switzerland, assuming such transactions had occurred as
of January 1, 1995. See "Reincorporation and Acquisitions" and Note B to the
Company's Consolidated Financial Statements and Pro Forma Condensed
Consolidated Financial Information (Unaudited).
(6) Gives effect to the acquisition in 1996 of CHS Hungary (51%), CHS Peru (60%)
and CHS Switzerland, assuming such transactions had occurred as of January
1, 1996. See "Reincorporation and Acquisitions" and Note B to the Company's
Consolidated Financial Statements and Pro Forma Condensed Consolidated
Financial Information (Unaudited).
(7) Gives pro forma effect to the acquisitions in 1996 of CHS Hungary and CHS
Switzerland, assuming such transactions had occurred as of March 31, 1996.
See "Reincorporation and Acquisitions" and
6
<PAGE>
"Pro Forma Condensed Consolidated Financial Information (Unaudited)."
(8) Adjusted to give effect to the sale of 3,766,539 shares of Common Stock
offered by the Company and the application of the net proceeds therefrom, as
set forth in "Use of Proceeds."
6
<PAGE>
RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE
RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS BEFORE PURCHASING THE SHARES OFFERED HEREBY.
MANAGEMENT OF GROWTH. The Company's significant growth and recent
acquisitions have placed, and are expected to continue to place, substantial
demands on the Company's managerial, operational, financial and other
resources. Further acquisitions will require the Company to continue to
invest in its operations, including its financial and management information
systems, and to retain, motivate and effectively manage its employees. There
can be no assurance that the management skills and systems currently in place
will be adequate to implement its strategy. This could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Strategy."
RELIANCE ON VENDORS. 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. While the
Company distributes the products of approximately 35 vendors, approximately
90%, 49%, 35% and 36% of its net sales during the years ended December 31,
1993, 1994 and 1995, and the three months ended March 31, 1996 respectively,
were derived from the sale of products supplied by Hewlett-Packard. An
additional 9% of net sales during 1995 were derived from the Company's next
largest supplier, Seagate. The loss of certain of these relationships could
have a material adverse effect on the Company. See "Business--Vendor
Relations."
VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE OF CUSTOMER COMMITMENTS ON
ORDERS. The level and timing of orders placed by the Company's customers vary
due to a number of factors, including customer attempts to manage inventory,
changes in customers' strategies and variations in demand for products. The
Company relies on its estimate of anticipated future volumes when making
commitments regarding the quantities and the mix of products that it intends
to carry in inventory. The Company does not have long term contracts with its
customers and a variety of conditions could cause customers to reduce their
orders. Any significant reduction in customer orders could adversely impact
the Company. See "Business--Products and Customers."
POTENTIAL QUARTERLY FLUCTUATIONS; SEASONALITY OF SALES. The Company may
experience 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. The Company's planned
operating expenditures are based on sales forecasts. If revenues do not meet
expectations in any given quarter, operating results may be materially
adversely affected. Sales in Europe in the first and fourth quarters of each
year are typically higher than in the second and third quarters. In South
America, sales in the third and fourth quarters of each year are typically
higher than in the first and second quarters. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Seasonality."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company anticipates that its
existing capital resources, including the net proceeds of this offering and
interest income earned thereon, will enable the Company to maintain its
current and planned operations for at least 12 months after completion of the
offering. The Company has grown through both acquisitions and internal
expansion, both of which have resulted in the need for significant amounts of
capital. To maintain historical levels of growth, the Company may need to
seek additional funding through public or private financing, including equity
financing, and may, when attractive sources of capital become available,
elect to obtain capital in anticipation of such needs. Adequate funds for
these purposes may not be available when needed or may not be available on
terms favorable to the Company. If additional funds are raised by issuing
equity securities, dilution to existing shareholders may result. If funding
is insufficient, the Company may be required to delay, reduce the scope of or
eliminate some or all of its expansion programs. As of March 31, 1996, the
Company was not in compliance with certain of the covenants of a July 10,
1995 Credit Agreement providing for a $20 million line of credit, but has
received a waiver with respect to the same. The line of credit is secured by a
lien on essentially all of the Company's assets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
7
<PAGE>
ACQUISITIONS. The Company intends to pursue the acquisition of other
companies, assets or product lines that would complement or expand its
existing business. Acquisitions involve a number of risks that could
adversely affect the Company's operating results, including the diversion of
management's attention, the assimilation of the operations and personnel of
the acquired companies, the amortization of acquired intangible assets and
the potential loss of key employees of the acquired companies. There can be
no assurance that the Company will consummate future acquisitions on
satisfactory terms, that adequate financing will be available on terms
acceptable to the Company, or that any acquired operations will be
successfully integrated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Strategy."
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon its
ability to retain its current personnel and to continue to attract and retain
qualified personnel. The Company is particularly dependent on the services of
its President, Claudio Osorio. The Company does not possess any key-man life
insurance policies with respect to Mr. Osorio or any other officer of the
Company. There is intense competition for qualified personnel, and there can
be no assurance that the Company will be able to continue to attract and
retain the qualified personnel necessary for the development of its business.
Loss of the services of, or failure to recruit, key personnel could be
detrimental to the Company. See "Management--Executive Officers, Directors
and Key Employees" and "Certain Transactions."
COMPETITION; DECLINING GROSS PROFIT MARGINS. The Company's business is
highly competitive. Certain of the Company's competitors have greater
financial, marketing, service and technical support resources than the
Company. There can be no assurance that the Company's resources will be
sufficient to allow the Company to compete effectively in the future.
Continued increases in competition could have a material adverse effect on
the Company's results of operations because of price reductions and potential
loss of market share. Certain of the Company's competitors may sell products
at prices below that charged by the Company. As a result of this price
competition, the Company and its competitors currently are experiencing
downward pressure on gross margins, which the Company expects to continue for
the foreseeable future. The Company expects to offset the impact of declines
in its gross margin by reducing its operating expenses as a percentage of net
sales, although there can be no assurance of the success of this strategy in
future periods. See "Business--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL SALES. Substantially all of the
Company's sales are to customers outside of the United States. Changes in the
value of foreign currencies relative to the United States Dollar could
adversely affect the Company's results of operations and financial position,
and transaction gains and losses could contribute to fluctuations in the
Company's results of operations. When possible, the Company engages in
currency hedging transactions and certain other practices to ameliorate these
risks. There can be no assurance that such efforts will materially reduce the
effects of fluctuations in foreign currency exchange rates on the Company's
results of operations. See "Management's Discussion and Analysis of Results
of Operations--Asset Management" and "Business--Competition."
The Company's existing and planned international operations are subject to
political and economic uncertainties, including among others, 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, hostilities and
confiscation of property. Changes related to these matters could have a
material adverse effect on the Company's results of operations or financial
condition.
LIMITATION ON DISTRIBUTIONS FROM SUBSIDIARIES. The Company derives all of
its operating income and cash flow from its subsidiaries and relies on
payments from, distributions 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 which may limit the repatriation of investments
and earnings therefrom. Restrictions in financing or credit arrangements may
also limit such payments. Claims of creditors of the Company's subsidiaries will
generally have priority as to the assets and cash flow of such subsidiaries over
the claims of the Company or its shareholders.
8
<PAGE>
EFFECTS OF TECHNOLOGICAL CHANGE. The products sold by the Company are
characterized by rapidly changing technology, frequent new product
introductions and evolving industry standards that can render the products
marketed by the Company obsolete or unmarketable in a relatively short period
of time. The Company's future success will depend upon its ability to limit
its exposure to obsolescence in its inventory and to gain access to the
product lines of vendors of new technology. Although the Company attempts to
enter into stock rotation agreements with its vendors permitting the return
of inventory, there can be no assurance that these efforts will be
successful. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset Management."
CHANGING METHODS OF MICROCOMPUTER SOFTWARE DISTRIBUTION. In the quarter ended
March 31, 1996, approximately 10% of the Company's sales were related to
software products. The manner in which microcomputer software is distributed and
sold is changing and new methods of distribution and sales may emerge or expand.
Software vendors have sold, and may intensify their efforts to sell, their
products directly to end users. From time to time certain vendors have
instituted programs for the direct sale of large order quantities of software to
certain major corporate accounts and these types of programs may continue to be
developed and used by various vendors. In addition, certain major vendors have
implemented programs for master copy distribution (site licensing) of software.
These programs generally grant an organization the right to make any number of
copies of software for distribution within the organization provided that the
organization pays a fee to the vendor for each copy made. Also, vendors may
attempt to increase the volume of software products distributed electronically
via the Internet or through CD-ROM. Any of these competitive programs, if
successful, could have a material adverse effect on the Company's business and
financial results.
SHARE PRICE VOLATILITY. The market for securities of technology companies
historically has been more volatile than the market for stocks in general.
The trading of the Common Stock may be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcement
of acquisitions, vendor additions or cancellations and the availability of
new products. The stock market has from time to time experienced extreme
price and volume fluctuations that have particularly affected the market
price for many high technology companies and that often have been unrelated
to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Common Stock. In
addition, quotations for the Common Stock began in July 1994 and there has
only been a limited public trading market to date. See "Price Range of Common
Stock."
CONCENTRATION OF COMMON STOCK OWNERSHIP AND ANTI-TAKEOVER CONSIDERATIONS.
Following this offering, the Company's directors and executive officers and
certain of their affiliates will beneficially own approximately 36.1% of the
outstanding shares of Common Stock. Accordingly, these shareholders will have
the ability to control the election of the Company's directors and the
outcome of most other matters submitted to a vote of the Company's
shareholders. The Company has the authority to issue 5,000,000 shares of
Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative rights thereof without any further vote or action by
the Company's shareholders. The issuance of Preferred Stock could dilute the
voting power of holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company's Articles of Incorporation provide that the holders of a majority of
the Preferred Stock, voting separately from the holders of the Common Stock,
must approve certain transactions. These, and certain other provisions of the
Company's Articles of Incorporation and By-laws, as well as Florida law, may
operate in a manner that could discourage or render more difficult a takeover of
the Company or the removal of management or may limit the price certain
investors may be willing to pay in the future for shares of Common Stock. See
"Principal and Selling Shareholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. A substantial number of shares of Common
Stock will become available for sale in the public market at prescribed times
following the completion of the offering. The availability for sale or the
sale of substantial amounts of Common Stock in the public market, including
sales pursuant to Rule 144 promulgated under the Securities Act or otherwise,
could adversely affect the market price of the Common Stock. Upon completion
of this offering, the Company will have 11,349,073
9
<PAGE>
shares of Common Stock outstanding. Of these shares, all of the 5,500,000 shares
sold in this offering will be freely tradeable without restriction or further
registration under the Securities Act. Of the remaining 5,849,073 shares,
5,170,760 shares are deemed "restricted shares" under Rule 144 in that they were
originally issued and sold by the Company in private transactions in reliance
upon exemptions under the Securities Act. Of those shares, 4,025,300 shares are
held by persons deemed "affiliates" of the Company as such term is defined in
Rule 144 and 1,145,460 shares are held by persons who are not affiliates of the
Company. The restricted shares may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration such as the exemption provided by Rule 144 under the Securities
Act. Of the restricted shares (i) 734 shares held by non-affiliates are eligible
for immediate resale under the provisions of Rule 144(k), and (ii) 377,200
shares held by certain shareholders and 4,501,839 shares held by executive
officers, directors and certain other shareholders are subject to lock-up
agreements, that prohibit their resale prior to 90 and 180 days, respectively,
from the date of this Prospectus without the prior consent of Raymond James &
Associates, Inc. and thereafter may be sold subject to the volume limitations of
Rule 144. See "Principal and Selling Shareholders," "Description of Capital
Stock" and "Underwriting."
REINCORPORATION AND ACQUISITIONS
In December 1993, CHS commenced its operations as an international
distributor of microcomputer products, networking products and software. On
March 14, 1996, the Company reincorporated from Utah to Florida and
effectuated a one-for-two reverse stock split.
The Company has grown significantly in the last three years, principally
through acquisitions from Comtrad Holdings, Inc. ("CHI") and Comtrad, Inc. (a
wholly-owned subsidiary of CHI), which collectively beneficially own
approximately 74.4% of the Company's outstanding Common Stock (except as
otherwise noted, CHI and Comtrad are collectively for purposes of this
Prospectus, referred to as "Comtrad"). Pursuant to the Company's acquisition
strategy, acquisitions were originally made by Comtrad rather than the
Company. The entities were then operated as subsidiaries of Comtrad until
such time as the Company deemed their operating controls and financial
reporting capabilities consistent with those of the Company. The Company
acquired Comtrad-owned entities after completing its own evaluations (which
for significant acquisitions involved the consideration of a valuation report
prepared by an independent third party), and the affirmative vote of an
independent director of the Company. The acquisitions by the Company from
Comtrad prior to May 1, 1996 are listed below with principal market focus,
dates of acquisition and certain other information. The Company does not
intend to purchase any additional entities from or enter into any new
transactions with Comtrad in the future. Comtrad has also agreed not to
engage in businesses competitive with the Company. See "Certain
Transactions."
The founder, chairman, chief executive officer and controlling shareholder
of Comtrad is Claudio Osorio who is also the founder, Chairman and Chief
Executive Officer of CHS. Under his employment agreement with the Company,
Mr. Osorio is required to devote his full time and attention to the affairs
of CHS. See "Executive Compensation Employment Arrangements."
The following tables indicate certain information regarding acquisitions
made by CHS during the past three years:
10
<PAGE>
CHS ACQUISITIONS FROM COMTRAD
SUBSIDIARY(1) SERVICE AREA CHS ACQUISITION DATE
- --------------------------------------------------------------------------------
CHS Germany Germany December 1993
CHS Promark South America(2) July 1994
CHS Belgium Belgium and Luxembourg April 1995
CHS England(3) England April 1995
CHS France France April 1995
CHS Portugal Portugal April 1995
CHS BEK South America October 1995
CHS Czechia (16%) Czech Republic October 1995
CHS Finland Finland December 1995
CHS Sweden Sweden December 1995
CHS Poland Poland December 1995
CHS Brazil Brazil March 1996
CHS Slovakia Slovakia March 1996
CHS Baltic Lithuania, Latvia and Estonia March 1996
CHS Bulgaria Bulgaria March 1996
CHS Romania Romania March 1996
CHS Croatia Croatia March 1996
- --------------
(1) The names set forth are those by which the Company commonly refers to its
subsidiaries and are not necessarily the legal names of the entities.
(2) In addition to operating through subsidiaries in Argentina, Chile, Colombia,
Peru (60% owned), Uruguay (50% owned) and Venezuela, CHS Promark also sells
directly to customers throughout Central America, South America and the
Caribbean from its location in Miami, Florida.
(3) The Company owns 99.2% of CHS England.
In addition to the acquisitions from Comtrad listed above, the Company has
made the direct (except for CHS Czechia) acquisitions listed below. In each
case the Seller was an unrelated third party and the purchase price was
determined through arms-length negotiations. The Company acquired the 84%
interest in CHS Czechia from Zbynek Kraus who, at the time of the
acquisition, was a minority shareholder of Penrose Trading Co. S.A. which was
then a shareholder of Comtrad and is now a shareholder of the Company and
CHI. See "Certain Transactions" and "Principal and Selling Shareholders." In
each case, the remainder of the ownership interests are held by the parties
from whom the Company purchased its interest.
CHS DIRECT ACQUISITIONS
SUBSIDIARY(1) SERVICE AREA CHS ACQUISITION DATE CONSIDERATION
- --------------------------------------------------------------------------------
CHS Czechia (84%) Czech Republic October 1995 483,000 shares of
CHS Common Stock
CHS Hungary(2) Hungary February 1996 (3)
CHS Peru(4) Peru March 1996 $500,000
CHS Switzerland Switzerland April 1996 (5)
- --------------
(1) The names set forth below are those by which the Company refers to its
subsidiaries and are not necessarily the legal names of the entities.
(2) The Company owns 51% of CHS Hungary.
(3) The consideration will be 51% of the book value of the equity of CHS Hungary
at December 31, 1996 plus 51% of seven times 1996 net earnings.
(4) The Company owns 60% of CHS Peru.
(5) The consideration will be the greater of eight times 1996 net earnings or
$1.7 million.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company (after deducting underwriting discounts
and commissions and estimated offering expenses) from the sale of 3,766,539
shares of Common Stock offered by the Company, at a public offering
price of $12 per share, are estimated to be approximately $41.3 million
($50.5 million if the Underwriters' over-allotment option is exercised in
full). The Company will not receive any of the proceeds from the sale of
1,733,461 shares of Common Stock offered hereby by the Selling Shareholders.
The Company expects to use the proceeds for working capital and other
general corporate purposes including acquisitions. While the Company
frequently enters into discussions with the owners of potential acquisition
candidates, the Company is not currently engaged in any discussions for any
material acquisitions and no assurance can be given that any such
acquisitions will be consummated or when additional expansions will occur.
Based upon its currently planned activities, the Company anticipates that the
net proceeds of the offering will be sufficient to meet its capital and
operational requirements for at least 12 months after the completion of the
offering. See "Risk Factors--Possible Need for Additional Capital" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Pending utilization as described above, the net proceeds of this offering
will be invested in short-term, high-grade, interest-bearing securities.
DIVIDEND POLICY
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 and such other factors
as the Board of Directors deem relevant.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table sets forth for the periods indicated the high and low
closing sales prices of the Common Stock (symbol: CHSE) through April 16, 1995
in the over-the-counter market and thereafter on the Nasdaq Small-Cap Market.
The Common Stock commenced trading on the Nasdaq National Market on June 7,
1996. Such prices are based on inter-dealer bid and asked prices, without
markup, markdown, commissions, or adjustments and may not represent actual
transactions. Due to the inactivity of the Company prior to 1994 and the 1 for
300 reverse split (which substantially reduced the number of shares of Common
Stock held by non-affiliates), quotations for the Common Stock began in July
1994, and there has only been a limited public trading market for the Common
Stock in the over-the-counter market. The Company effected a one-for-two reverse
stock split on March 14, 1996. Also shown are prices prior to the effective date
of the one-for-two reverse stock split which have been adjusted to reflect the
effect of the reverse stock split.
<TABLE>
<CAPTION>
AS ADJUSTED FOR 1-FOR-2
HISTORIC PRICES REVERSE STOCK SPLIT
---------------------------- -----------------------------
YEAR PERIOD HIGH LOW HIGH LOW
- ---- ------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
1994 First Quarter .............................. No Market No Market No Market No Market
Second Quarter ............................. No Market No Market No Market No Market
Third Quarter (from July 25, 1994) ........ 6 1/2 3 13 6
Fourth Quarter ............................. 6 1/2 3 13 6
1995 First Quarter .............................. 4 1/4 3 8 1/2 6
Second Quarter ............................. 5 5/8 4 11 1/4 8
Third Quarter .............................. 5 3/4 3 1/2 11 1/2 7
Fourth Quarter ............................. 5 3/4 3 1/2 11 1/2 7
1996 First Quarter (through March 14, 1996) .... 8 1/4 4 16 1/2 8
First Quarter (from March 15, 1996) ....... N/A N/A 12 10
Second Quarter (through June 6, 1996) ..... N/A N/A 17 10
</TABLE>
The last reported sale price of the Common Stock as reported on the Nasdaq
Small-Cap Market on June 6, 1996 was $16-1/8 per share. As of May 7, 1996, the
outstanding Common Stock was held of record by 227 shareholders. The Company
believes that there are in excess of 400 beneficial owners of the Common
Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving pro forma effect to the acquisitions of CHS Hungary and CHS
Switzerland and (iii) pro forma as adjusted to give pro forma effect to the
acquisitions of CHS Hungary and CHS Switzerland and the sale of the 3,766,539
shares of the Common Stock offered hereby. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- --------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Lines of credit(1)..................................... $52,237 $57,272 $57,272
======== ======== ========
Long-term debt(1) ..................................... $ 13,510 $ 13,510 $ 13,510
Shareholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding, pro
forma and pro forma as adjusted .................... -- -- --
Common Stock, $.001 par value, 100,000,000 shares
authorized; 7,582,534 shares issued and outstanding
actual, 9,538,785 pro forma and 13,305,324 pro forma
as adjusted(3) ..................................... 8 10 13
Additional paid-in capital ........................... 25,620 44,873 86,205
Retained earnings .................................... 6,546 6,546 6,546
Foreign currency translation adjustment .............. (569) (569) (569)
-------- -------- --------
Total shareholders' equity .......................... 31,605 50,860 92,195
-------- -------- --------
Total capitalization ................................ $ 45,115 $ 64,370 $105,705
======== ======== ========
<FN>
- --------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note F to the Company's Consolidated Financial
Statements.
(2) Gives pro forma effect to the acquisitions in 1996 of CHS Hungary and CHS
Switzerland, assuming such transactions had occurred as of March 31, 1996.
See "Reincorporation and Acquisitions" and Proforma Condensed Consolidated
Financial Information (Unaudited).
(3) Adjusted to give effect to the sale of 3,766,539 shares of Common Stock
offered by the Company and the application of the net proceeds therefrom, as
set forth in the "Use of Proceeds." See "Use of Proceeds."
</FN>
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
The following tables set forth certain financial data for each year in the
five year period ended December 31, 1995. The information presented as of and
for the years ended December 31, 1993, 1994 and 1995, is derived from the
audited consolidated financial statements of the Company, which statements
have been audited by Grant Thornton LLP, independent public accountants and
appear elsewhere in this Prospectus. The information presented below as of
and for the years ended December 31, 1991 and 1992 is derived from the
financial statements of the Predecessor (the German entity acquired by the
Company in December 1993). The Selected Consolidated Financial Data for the
three month periods ended March 31, 1995 and 1996 have been derived from the
Company's unaudited consolidated financial statements. In the opinion of
management, all unaudited consolidated financial statements used to derive
the information presented have been prepared on the same basis as the audited
financial statements and include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results for the
periods presented. 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 in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
------------------ --------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------- -----------------------------------
1991 1992 1993(2) 1994(2)(3) 1995 1995 1996 1996
------- -------- --------- ---------- ------------------------ --------- ---------- ------------
ACTUAL(4) PRO FORMA(5) ACTUAL ACTUAL FRO FORMA(6)
--------- ------------ --------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net sales .............$ 41,644 $ 79,884 $ 146,408 $ 359,169 $ 936,703 $ 1,140,130 $ 204,835 $ 302,995 $ 326,946
Cost of goods sold .... 37,602 72,706 136,968 333,983 868,716 1,055,416 189,924 280,453 302,128
Gross profit .......... 4,042 7,178 9,440 25,186 67,987 84,714 14,911 22,542 24,818
Operating expenses .... 3,614 5,100 9,075 21,798 57,188 69,255 12,119 17,850 19,516
Operating earnings .... 428 2,078 365 3,388 10,799 15,459 2,792 4,692 5,302
Interest income ....... (66) (97) (229) (250) (1,757) (1,963) (505) (614) (614)
Interest expense ...... 279 363 1,076 2,070 6,454 7,399 1,248 1,940 2,086
Earnings (loss)
before income
taxes ............... 215 1,812 (482) 1,568 6,102 10,023 2,049 3,366 3,830
Income tax expense .... -- 656 241 603 1,797 3,059 382 1,059 1,185
Minority interest ..... -- -- -- -- -- 1,002 -- 319 468
Net earnings (loss) ...$ 215 $ 1,156 $ (723) $ 965 $ 4,305 $ 5,962 $ 1,667 $ 1,988 2,177
Net earnings (loss)
per share-primary ... N/A N/A $ (.32) $ .21 $ .59 $ .63 $ .24 $ .25 .23
Net earnings (loss)
per share-fully
diluted ............. N/A N/A $ (.32) $ .21 $ .59 $ .63 $ .24 $ .24 $ .23
Weighted average
shares
outstanding-
primary.............. N/A N/A 2,269 4,693 7,283 9,539 6,966 7,862 9,612
Weighted average
shares
outstanding-
fully diluted........ N/A N/A 2,269 4,693 7,283 9,539 6,966 8,183 9,612
OTHER DATA:
Number of
countries........ ... 1 1 2 10 15 24 10 23 24
Inventory turns ....... 16 17 23 10 10 12 12 10 10
Days receivable ....... 34 32 31 32 35 31 30 34 34
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
------------------- ---------------------------------------------------------------
AT DECEMBER 31, AT MARCH 31,
--------------------------------------------------------- -------------------------
1991 1992 1993(2) 1994(2)(3) 1995(4) 1996 1996
-------- --------- ---------- ---------- ---------- ---------- ------------
ACTUAL PRO FORMA(7)
---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 383 $ 210 $ 603 $ 8,368 $ 11,171 $ 13,000 $ 7,817
Working capital (deficit) (159) 662 (1,426) 14,004 9,843 15,232 13,741
Total assets .............. 9,770 16,013 29,058 164,468 265,804 281,925 313,199
Lines of credit ........... 2,016 2,988 6,949 15,198 46,438 52,237 57,272
Long-term debt ............ -- -- -- 8,104 8,801 13,510 13,510
Shareholders' equity ..... 179 988 1,930 19,870 29,892 31,605 50,860
<FN>
- --------------
(1) In December 1993, the Company acquired its operating subsidiary in
Germany. The Predecessor information provided represents the operations
of this acquired company prior to the acquisition and is derived from the
financial statements of the acquired company.
(2) Restated to give effect to the acquisition in 1995 of CHS Portugal and 16%
of CHS Czechia as of January 1, 1993. See "Reincorporation and Acquisitions"
and Note B to the Company's Consolidated Financial Statements.
(3) Restated to give effect to the acquisition in 1995 of CHS England, CHS
France and CHS Belgium as of September 1, 1994, the date Comtrad acquired
these companies. See "Reincorporation and Acquisitions" and Note B to the
Company's Consolidated Financial Statements.
(4) Restated to give effect to the acquisition in 1995 of CHS Finland and CHS
Sweden as of May 1, 1995, CHS BEK as of July 1, 1995 and CHS Poland as of
November 1, 1995, and in 1996 the acquisitions of CHS Brazil, CHS Slovakia,
CHS Baltic, CHS Bulgaria, CHS Romania, CHS Croatia as of December 31, 1994,
the dates Comtrad or CHI acquired these companies. See "Reincorporation and
Acquisitions" and Note B to the Company's Consolidated Financial Statements.
(5) Gives effect to the acquisition in 1995 of CHS BEK, CHS Czechia, CHS
Finland, CHS Sweden and CHS Poland and in 1996 of CHS Hungary (51%), CHS
Peru (60%) and CHS Switzerland, assuming such transactions had occurred as
of January 1, 1995. See "Reincorporation and Acquisitions" and Note B to the
Company's Consolidated Financial Statements and the Proforma Condensed
Consolidated Financial Information (Unaudited).
(6) Gives effect to the acquisition in 1996 of CHS Hungary (51%), CHS Peru (60%)
and CHS Switzerland, assuming such transactions had occurred as of January
1, 1996. See "Reincorporation and Acquisition" and Note B to the Company's
Consolidated Financial Statements and Pro Forma Condensed Consolidated
Financial Information (Unaudited).
(7) Gives pro forma effect to the acquisitions in 1996 of CHS Hungary and CHS
Switzerland, assuming such transactions had occurred as of March 31, 1996.
See "Reincorporation and Acquisitions" and "Pro Forma Condensed Consolidated
Financial Information (Unaudited)."
</FN>
</TABLE>
15
<PAGE>
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 AND
THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONTAINED ELSEWHERE HEREIN.
OVERVIEW
The Company's net sales and net earnings have grown substantially during
the past several years, primarily due to acquisitions. Except for the
acquisition of 84% of the entity in the Czech Republic which was owned by a
non-affiliate and was accounted for as a purchase based on the effective date
of the acquisition of October 1, 1995, these acquisitions were generally from
Comtrad and were recorded in a manner similar to a pooling of interests.
Accordingly, these acquisitions have been included in the financial
statements from the date the entity was acquired by Comtrad. The Company
recorded the cost of its acquisitions from Comtrad at Comtrad's cost basis.
The Company recorded goodwill with respect to these acquisitions if Comtrad
recorded goodwill when it purchased the subject entity. Such goodwill is
being amortized over 20 years. The following table sets forth the service
areas of the operations acquired, the date of the acquisition by Comtrad
(which is the date as of which the results of operations were initially
included in the Company's financial statements) and the CHS Acquisition Date.
<TABLE>
<CAPTION>
CHS ACQUISITIONS FROM COMTRAD
COMTRAD CHS
SUBSIDIARY(1) SERVICE AREA ACQUISITION DATE ACQUISITION DATE
- ------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
CHS Germany Germany January 1993 December 1993
CHS Promark South America(3) July 1994 July 1994
CHS Belgium Belgium and Luxembourg September 1994 April 1995
CHS France France September 1994 April 1995
CHS England England September 1994 April 1995
CHS Portugal Portugal January 1993 April 1995
CHS BEK South America July 1995 October 1995
CHS Czechia(2) Czech Republic January 1993 October 1995
CHS Finland Finland July 1995 December 1995
CHS Sweden Sweden July 1995 December 1995
CHS Poland Poland November 1995 December 1995
CHS Brazil Brazil November 1994 March 1996
CHS Slovakia Slovakia January 1994 March 1996
CHS Baltic Lithuania, Lativia and Estonia September 1994 March 1996
CHS Bulgaria Bulgaria September 1994 March 1996
CHS Romania Romania September 1994 March 1996
CHS Croatia Croatia September 1994 March 1996
</TABLE>
CHS DIRECT ACQUISITIONS
CHS
SUBSIDIARY(1) SERVICE AREA ACQUISITION DATE
- ------------- ------------ ----------------
CHS Czechia (84%) Czech Republic October 1995
CHS Hungary(4) Hungary February 1996
CHS Peru(5) Peru March 1996
CHS Switzerland Switzerland April 1996
(1) The names set forth below are those by which the Company refers to its
subsidiaries and are not necessarily the legal names of the entities.
(2) Acquisition of 16% interest
(3) Includes operating subsidiaries in Argentina, Chile, Colombia and Venezuela.
(4) The Company owns 51% of CHS Hungary.
(5) The Company owns 60% of CHS Peru.
16
<PAGE>
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 historical
Consolidated Statements of Operations and the Pro Forma Condensed
Consolidated Statement of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 1995 1996 1996
------- ------ ------ --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................ 93.6 93.0 92.7 92.6 92.7 92.6 92.4
----- ----- ----- ----- ----- ----- -----
Gross profit ...................... 6.4 7.0 7.3 7.4 7.3 7.4 7.6
Operating expenses ................ 6.2 6.1 6.1 6.1 5.9 5.9 6.0
----- ----- ----- ----- ----- ----- -----
Operating earnings ................ .2 .9 1.2 1.4 1.4 1.5 1.6
Interest income ................... .2 .1 .1 .1 .2 .2 .2
Interest expense .................. .7 .6 .6 .6 .6 .6 .6
----- ----- ----- ----- ----- ----- -----
Earnings (loss) before income taxes (.3) .4 .7 .9 1.0 1.1 1.2
Income tax expense ................ .2 .2 .2 .3 .2 .3 .4
Minority interest ................. -- -- -- .1 -- .1 .1
----- ----- ----- ----- ----- ----- -----
Net earnings (loss) ............... (.5) .3 .5 .5 .8 .7 .7
===== ===== ===== ===== ===== ===== =====
</TABLE>
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
NET SALES. Net sales increased $98.2 million, or 47.9%, from $204.8
million in first quarter 1995 to $303.0 million in first quarter 1996 due
principally to acquisitions and to a lesser extent internal growth. Of the
increase in net sales, subsidiaries acquired in late 1995 or 1996 contributed
$66.2 million. Net sales of subsidiaries consolidated for both 1995 and 1996,
grew $31.9 million or 15.6%. Net sales of CHS Germany in the first quarter of
1995 were favorably impacted by a vendor's promotion of one product.
Excluding the results of CHS Germany, net sales in the first quarter of 1996
grew $31.8 million or 20.6% from the comparable period in the prior year.
This growth is attributed to increased consumer demand for microcomputer
products offered by the Company.
GROSS PROFIT. Gross profit increased $7.6 million, or 51.2%, from $14.9
million in first quarter 1995 to $22.5 million in first quarter 1996 due
principally to acquisitions and to a lesser extent internal growth. Gross
profit for subsidiaries included in the consolidation for both 1995 and 1996
increased in proportion to sales. Gross profit from such subsidiaries grew
$2.2 million or 14.4%. Newly acquired companies contributed $5.4 million of
gross profit.
Gross margin increased from 7.3% in first quarter 1995 to 7.4% in first
quarter 1996. The increase was due to higher gross margins from subsidiaries
acquired in late 1995 and 1996. The Company attributes the increase in gross
margin to higher gross margins in the geographical areas of the newly
acquired companies (specifically Finland, Hungary and Sweden, among others).
The Company expects that gross margins may decline in 1996 due to competitive
pricing pressures.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
remained unchanged at 5.9% in the first quarter of 1996 and the first
quarter of 1995.
NET INTEREST EXPENSE. Net interest expense increased $0.6 million, or
78.5%, from $0.7 million in first quarter 1995 to $1.3 million in first
quarter 1996. The increase in interest expense is directly related to the
increase in average loan amounts outstanding.
INCOME TAX EXPENSE. Income taxes as a percentage of earnings before income
taxes increased from 18.6% in first quarter 1995 to 31.5% in first quarter
1996. The increase in the Company's net
17
<PAGE>
effective tax rate is attributed to the utilization of net operating loss
carryforwards in first quarter 1995, especially from CHS England. Such net
operating loss carryforwards of CHS England were totally utilized in 1995. The
Company expects to have an effective tax rate lower than the statutory United
States tax rate in 1996 principally due to its ability to use remaining net
operating loss carryforwards from certain subsidiaries. See Note E to the
Consolidated Financial Statements.
1995 COMPARED TO 1994
NET SALES. Net sales increased $577.5 million, or 160.8%, from $359.2
million in 1994 to $936.7 million in 1995 due principally to acquisitions and
to a lesser extent internal growth. Of the increase in net sales,
subsidiaries formed or acquired in 1995 contributed $177.7 million. Net sales
of subsidiaries consolidated for part of 1994 and all of 1995 (CHS Promark,
CHS England, CHS France and CHS Belgium) contributed $352.2 million of the
increase in net sales. Net sales of subsidiaries consolidated for all of 1994
and 1995, which included CHS Germany, CHS Portugal and 16% of CHS Czechia
grew $47.6 million or 26.3%. This growth is attributed to increased consumer
demand for microcomputer products offered by the Company.
Net sales to Comtrad related companies decreased from $52.4 million in
1994 to $21.1 million in 1995 and had a gross profit margin equivalent to
sales to unaffiliated parties for similar products. The Company expects that
there will be minimal sales to affiliates in 1996.
GROSS PROFIT. Gross profit increased $42.8 million, or 169.9%, from $25.2
million in 1994 to $68.0 million in 1995 due principally to acquisitions and
to a lesser extent internal growth. Gross profit for subsidiaries included in
the consolidation for all of 1994 and 1995 did not increase in proportion to
sales as a result of the lowering of prices in Germany in response to
increased competition. Gross profit from such subsidiaries grew $1.7 million
or 17.9%. Gross profit from subsidiaries consolidated for part of 1994 and
all of 1995 grew $28.6 million. Newly acquired companies contributed $12.5
million of gross profit.
Gross margin increased from 7.0% in 1994 to 7.3% in 1995. The increase was
principally due to higher gross margins from subsidiaries consolidated for
part of 1994 and all of 1995. The Company attributes the increase in gross
margin to greater sales of networking and software products which had higher
gross margins than other products offered by the Company. The Company expects
that gross margins may decline in 1996 due to competitive pricing pressures
and the impact of including CHS BEK, a subsidiary primarily selling random
access memory chips with relatively high revenues but margins significantly
below that of the Company's other businesses, for the full year.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
remained unchanged at 6.1% in 1994 and 1995.
NET INTEREST EXPENSE. Net interest expense increased $2.9 million, or
158.1%, from $1.8 million in 1994 to $4.7 million in 1995. The increase in
interest expense is directly related to the increase in average loan amounts
outstanding.
18
<PAGE>
INCOME TAX EXPENSE. Income taxes as a percentage of earnings before income
taxes decreased from 38.5% in 1994 to 29.4% in 1995. The decrease in the
Company's net effective tax rate is attributed to the utilization of net
operating loss carryforwards and lower foreign tax rates, offset to some
extent by non-deductible goodwill amortization. The Company expects to have
an effective tax rate lower than the statutory United States tax rate in 1996
principally due to its ability to use remaining net operating loss
carryforwards. See Note E to the Consolidated Financial Statements.
1994 COMPARED TO 1993
NET SALES. Net sales increased $212.8 million, or 145.3%, from $146.4
million in 1993 to $359.2 million in 1994 due principally to acquisitions and
to a lesser extent internal growth. Subsidiaries formed or acquired in 1994
contributed $178.0 million of the increase in net sales. Net sales of
subsidiaries consolidated for all of 1993 and 1994 (CHS Germany, CHS Portugal
and 16% of CHS Czechia) grew 23.8% and contributed $34.8 million of the
increase in net sales. Such growth is attributed to higher consumer demand
for microcomputer products offered by the Company and the emphasis placed by
the Company on expanding its dealer network in Germany.
Net sales to Comtrad subsidiaries in Eastern Europe increased from $9.6
million in 1993 to $32.5 million in 1994. Such sales had a gross profit
margin equivalent to sales to unaffiliated parties. CHS Promark sales to
affiliates were $19.9 million in 1994. Such sales were generally of
non-inventoried products which were purchased locally based on a specific
order. These sales were made on a cash basis and had a gross margin of
approximately 3%.
GROSS PROFIT. Gross profit increased $15.7 million, or 166.8%, from $9.4
million in 1993 to $25.2 million in 1994, almost entirely due to
acquisitions. Gross profit of subsidiaries included in the consolidation for
all of 1993 and 1994 did not increase in proportion to sales as a result of
the lowering of prices in Germany in response to increased competition. Gross
profit also includes sales to entities owned by Comtrad and CHI. Initially,
such amounts were computed at 2% of sales. In the last quarter of 1994, a
study of the actual handling costs was completed. Based on such study, the
actual cost for the year was 4.5% of sales. As a result, an additional $0.5
million, representing the cumulative effect of the difference between 4.5%
and 2%, was billed to the affiliates and recorded in gross profit.
Gross margin increased from 6.4% in 1993 to 7.0% in 1994. The increase was
entirely due to higher gross margins from subsidiaries acquired or formed in
1994. Such margins were 8.8% versus margins for subsidiaries included in the
consolidation for all of 1993 and 1994 of 5.2%. The Company attributes the
increase in gross margin to greater sales of networking and software products
which had higher gross margins than other products offered by the Company.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
decreased from 6.2% in 1993 to 6.1% in 1994 as a result of efficiencies
gained through increased sales volume and the Company's focus on controlling
costs. In 1993, the Company was charged a management fee by Comtrad in the
amount of 0.7% of net sales. In the fourth quarter of 1994, a study was
performed of the actual costs of the services rendered for the management fee
charged by Comtrad and its affiliates. Based on such study, the Company has
applied for and received credit against such fees in the amount of $0.6
million. Such amount has been reported as a reduction of operating expenses
in 1994.
NET INTEREST EXPENSE. Net interest expense increased $1.0 million, or
114.9%, from $0.8 million in 1993 to $1.8 million in 1994. The increase in
interest expense is directly related to the increase in average loan amounts
outstanding.
INCOME TAX EXPENSE. The income tax expense for 1993 does not bear a
relationship to pretax income consistent with United States statutory tax
rates. In 1993, the provision was higher than expected due to German local
taxes combined with the effect of losses with no tax benefit.
SEASONALITY
The Company may experience 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
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demand for software and hardware products and industry announcements of new
products or upgrades. Sales in Europe in the first and fourth quarters of each
year are typically higher than in the second and third quarters. In South
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 used in operating activities in the quarter ended March 31, 1996
was $8.0 million, due principally to increases in inventory, net of decreases
in accounts receivable and increases in accounts payable, as a result of
increases in net sales. Net cash used in investing activities in the first
quarter of 1996 was $1.6 million, due principally to investments in fixed
assets. Net cash provided by financing activities in the first quarter of
1996 was $11.7 million, due principally to borrowings under new debt
agreements and increased borrowings under other agreements.
Net cash used in operating activities in 1995 was $22.1 million, due
principally to increases in inventory and accounts receivable, net of
increases in accounts payable, as a result of increases in net sales. Net
cash used in investing activities in 1995 was $5.5 million, due principally
to investments in fixed assets which were partially offset by cash balances
of acquired companies. Net cash provided by financing activities in 1995 was
$29.9 million, due principally to borrowings under new debt agreements and
increased borrowings under other agreements.
On July 10, 1995, the Company entered into a credit agreement providing
for a $20 million line of credit. Both the Company and CHS Finance, S.A.
("CHS Finance"), a subsidiary of the Company formed under the laws of
Switzerland, may borrow under this line of credit. Included within the line
of credit was approximately $14.8 million of indebtedness of Comtrad to the
lender which was assumed by the Company. Approximately $7 million of this
indebtedness had previously been loaned by Comtrad to a subsidiary of the
Company. See "Certain Transactions." Each advance under the line is due on
the earlier of demand or 180 days after the advance and bears interest, at
the election of the Company, at either LIBOR plus 2% or the prime rate of the
lender plus 2%. The line matures June 30, 1996 and the Company expects that
it will be renewed. The line is guaranteed by Comtrad and Claudio Osorio, the
Company's Chairman, Chief Executive Officer and President. Comtrad has
pledged certain shares of the Company owned by them to secure the line. The
line is also secured by a lien on essentially all of the Company's assets.
The Company was not in compliance with certain of the covenants of this
agreement as of March 31, 1996, but has received a waiver with respect to the
same.
On February 5, 1996, CHS Promark entered into a Loan and Security
Agreement providing for revolving credit advances and the issuance of letters
of credit against eligible accounts receivable and inventory up to a maximum
of $20 million. Amounts outstanding bear interest, at the election of the
borrower, at the prime rate of the lender plus 1.5% or 3-3/4% above LIBOR;
provided, however, that unless the offering is successfully completed and $3
million of the proceeds are invested in CHS Promark, the interest rates will
increase to prime plus 2.25% and LIBOR plus 4.5% on July 1, 1996. The
agreement limits the ability of CHS Promark to pay dividends to the Company
to 50% of net income after taxes. The agreement matures in February, 1999 and
is secured by a lien on essentially all of CHS Promark's assets. The Company
has guaranteed this indebtedness.
On March 29, 1996, CHS Finance entered into a one year revolving credit
agreement pursuant to which $18 million may be borrowed by certain of the
Company's Western European subsidiaries to finance purchases of
Hewlett-Packard products for which customer orders have been received.
Borrowings under the line may be in British Pounds, German Marks, French
Francs, Belgian Francs or United States Dollars. Amounts borrowed bear
interest at LIBOR plus 1 3/4 %. The Company has guaranteed the indebtedness
of CHS Finance under the agreement. The loan is secured by a lien on the
accounts into which payments from customers for the products financed are
deposited, which accounts must have a minimum balance equal to 30% of the
outstanding indebtedness. In addition, the Company has provided to the bank
an insurance policy protecting it against the risk of the Company's
insolvency.
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The Company's principal need for additional cash in 1996 will be for the
purchase of additional inventory to support growth and to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment. 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. If for any reason this
financing is not available, it could adversely affect the growth of the
Company.
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. At March 31, 1996, the only
country with exchange control limitations affecting the Company was
Venezuela. The Company's net investment in Venezuela is $2.8 million.
Restrictions in financing or credit arrangements may also limit such
payments. Claims of creditors of the Company's subsidiaries will generally
have priority as to the assets and cash flow of such subsidiaries over the
claims of the Company or its shareholders.
INFLATION
The Company operates in certain countries that have experienced high rates
of inflation and hyperinflation. However, inflation did not have a material
impact on the Company's results of operations in the three year period ended
December 31, 1995 and the quarter ended March 31, 1996, and the Company does
not expect that it will have a material impact in 1996.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and
maintain a low number of SKUs and thereby reduce the Company's working
capital requirements and improve return on equity. The Company's strategy to
achieve this goal is to both effectively manage its inventory and achieve
high order fill rates.
To reduce the risk of loss to the Company due to vendor price reductions
and slow moving or obsolete inventory, the Company's contracts with its
vendors generally provide price protection and stock rotation privileges,
subject to certain limitations. Price protection allows the Company to offset
the accounts payable owed to a particular vendor if such vendor reduces the
price of products the Company has purchased within a specified period of time
and which remain in inventory. Stock rotation permits the Company to return
to the vendor for full credit, with an offsetting purchase order for new
products, pre-determined amounts of inventory purchased within a specified
period of time. Such credit is typically used to offset existing invoices due
without incurring re-stocking fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to
balance the needs of its customers to purchase on credit with its desire to
minimize its credit losses. Bad debt expense as a percentage of the Company's
net sales for the years ended 1993, 1994 and 1995 were 0.1%, 0.4%, 0.3%,
respectively. The Company's credit losses have been minimized by its credit
approval process, the use of credit insurance and factoring by its Western
European subsidiaries. In its sales to customers in South America, the
Company often receives post-dated checks at the time of sale. Customers who
qualify for credit are typically granted net 30-day payment terms.
HEDGING. The Company attempts to limit its risk of currency fluctuations
through hedging where possible. In 1995, although the majority of the
purchases of products by the Company was made in United States Dollars,
approximately 77% of Company sales were made in currencies other than the
United States Dollar, the most significant of which were the German Mark (20%
of sales), the British Pound (14%) and the French Franc (13%). Transfers of
inventories between Miami and South America are denominated in United States
Dollars. At December 31, 1995, approximately $57 million of accounts payable,
or 35% of total accounts payable, were attributable to foreign currency
liabilities denominated in United States Dollars and approximately 52% of
these liabilities were unhedged. CHS
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Czechia and CHS Poland accounted for $10.4 million and $8.5 million of the
unhedged accounts, respectively. The Company believes that these two
subsidiaries accounted for a majority of the unhedged exposure at March 31,
1996.
CHS FINANCE. In March 1995, the Company formed CHS Finance as a finance
company for the Company's distribution activities. CHS Finance engages in
central treasury functions including hedging activities related to foreign
currency for the Company and short term working capital loans to the
Company's subsidiaries to enable them to take advantage of early payment
discounts offered by certain vendors.
Through both hedging activities coordinated by CHS Finance and local
country activities in certain subsidiaries, the Company makes forward
purchases of dollars in an attempt to hedge local European currencies and
reduce exposure to fluctuations in exchange rates. Additionally, in certain
countries in Eastern Europe and South America where it is not practical to
make forward purchases, to minimize exposure to currency devaluations, the
Company has adopted a policy of attempting to match accounts receivable with
accounts payable and to limit holdings of local currencies. Factors which
affect exchange rates are varied and no reliable prediction methods are
available for determining the likely 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.
FUNCTIONAL CURRENCY. The Company's functional currency, as defined by
Statement of Financial Accounting Standards No. 52, is the United States
Dollar. The local currencies of the countries where subsidiaries conduct
operations are considered the functional currencies for such entities. Most
of the Company's subsidiaries use the local currencies as their functional
currency and translate assets and liabilities using the exchange rates in
effect at the balance sheet date and results of operations using the average
exchange rates prevailing during the year. Translation effects are reflected
in the cumulative foreign currency translation adjustment in equity. The
Company's exposure under these translation rules, which is unhedged, may
affect the carrying value of its foreign net assets and therefore its equity
and net tangible book value, but not its net income or cash flow. Exchange
differences arising from transactions and balances in foreign currencies are
recorded as expense or income and affect the Statements of Operations.
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BUSINESS
CHS is a leading international distributor of microcomputer products,
networking products and software. CHS operates in 24 countries across three
regions, including Western Europe, Eastern Europe and South America and
services an active customer base of greater than 24,300 resellers. Products
sold by the Company are manufactured by approximately 35 vendors including
Hewlett-Packard, Seagate, Microsoft, Novell, Acer, Creative Labs, 3Com,
Canon, Epson and Intel. The Company recently was selected by IBM to be one of
a limited number of distributors offering the complete IBM microcomputer
product line in Western Europe, Eastern Europe and South America. The Company
is a focused distributor, as opposed to a broadline distributor, and seeks to
represent leading vendors within specific product categories. The Company has no
significant sales in the United States.
CHS operates under a decentralized structure which delegates to managers
familiar with the customs and needs of a particular country the authority to
make daily operational decisions including those necessary to satisfy the
particular demands of their market. As compared to certain competitors which
operate under a more centralized system, the Company believes that its
business model of focused distribution through locally managed full service
facilities integrating warehousing, purchasing, sales, credit and accounting
services provides competitive cost and operating advantages.
The world headquarters of the Company are located at 2153 N.W. 86th
Avenue, Miami, Florida 33122, where its telephone number is (305) 716-8273.
INDUSTRY
The microcomputer products distribution industry is large and growing,
reflecting both increasing demand worldwide for computer products and the use
of wholesale distribution channels by vendors for the distribution of their
products. Historically, there have been two types of companies within the
industry: those that sell directly to the end-user ("resellers") and those
that sell to resellers ("wholesale distributors"). Wholesale 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, value-added resellers ("VARs"),
system integrators, mail order resellers, computer products superstores and
mass merchants.
The Company believes that the microcomputer products industry is
well-suited for wholesale distribution. The large number and diversity of
resellers make it cost efficient for vendors to outsource to wholesale
distributors some portion of their distribution, credit, inventory, marketing
and customer support requirements. Similarly, due to the large number of
microcomputer product vendors, resellers often cannot efficiently establish
direct purchasing relationships with each vendor and instead rely on
wholesale distributors, such as the Company, to satisfy a significant portion
of their product, financing, marketing and technical support needs.
The Company believes the wholesale distribution segment of the
microcomputer products industry will continue to grow. More vendors are using
the wholesale distribution channel as declining hardware prices, coupled with
rising selling costs, make it difficult for vendors to efficiently deal
directly with resellers. The Company believes that resellers are increasingly
relying on wholesale distributors for inventory management and credit rather
than stocking large inventories themselves and maintaining credit lines to
finance resellers' working capital needs. The Company also believes the
wholesale distribution industry is consolidating as access to financial
resources and economies of scale become more critical and as certain vendors
limit the number of authorized distributors of their respective products.
According to International Data Corporation ("IDC"), Western Europe
represents approximately 23% of the worldwide PC market. The Company's
pan-European presence strategically positions the Company to take advantage of
the consolidation trend in the distribution industry and increase its market
share in Western Europe. Additionally, the regions in which the Company operates
are
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relatively underpenetrated as compared to the United States. The penetration
rate, defined as number of PCs per person, in Western Europe is 15.3% compared
to a penetration rate of 35.8% in the United States. A significant portion of
the Company's sales are in the emerging markets of Eastern Europe and South
America, regions which the Company believes are underserved relative to the
entire industry and offer substantial growth opportunities. IDC projects PC
sales in Eastern Europe (including the Middle East and Africa) will grow from
$3.9 billion in 1995 to $7.6 billion in 1999, representing a compound annual
growth rate of 18.5%. IDC projects PC sales in South America (including Mexico
and Central America) will grow from $3.5 billion in 1995 to $7.8 billion in
1999, representing a compound annual growth rate of 22.2%. This compares
favorably to a 9.6% compound annual growth rate projected by IDC for PC sales in
the United States over the same period.
The Western European, Eastern European and South 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. Localization includes customized manuals,
approvals of safety factors by local authorities, microcode which permit the
generation of characters in local languages, and voltage requirements. These
factors require distributors in these markets to carry a variety of different
SKUs to meet the demands. As a result, vendors depend heavily on distributors
such as the Company to meet the differing demands of each locale.
STRATEGY
To achieve its objective of strengthening its position as a leading
distributor of microcomputer products in Western Europe, Eastern Europe and
South America, the Company has adopted a strategy of operating a focused
distribution model, further developing and penetrating international markets
and growing through acquisitions.
OPERATE A FOCUSED DISTRIBUTION MODEL. The Company's strategy is to be a
focused distributor by concentrating on a limited number of products from a
select group of high quality branded vendors in each major product category,
such as Hewlett-Packard for printers, Microsoft for software, Novell for
networking, Seagate for mass storage and Hewlett-Packard and IBM for PCs.
Additionally, the Company seeks to be a significant distributor for each of
its vendors and establish a partnering relationship with them. For example,
the Company believes that it is one of the largest distributors of
Hewlett-Packard products in Western Europe and the largest in Eastern Europe
and South America. The Company believes this focused strategy enables it to
respond more quickly to customer requests and gives it greater availability
of products, enhanced access to new products and better pricing. The Company
believes this strategy also enables it to develop greater expertise in the
sale and servicing of the products of these vendors. The Company believes
that its focused distribution model also results in more effective asset
management. Generally, products from leading vendors are in greater demand,
resulting in higher inventory turns and lower working capital requirements.
Additionally, fewer SKUs result in more efficient inventory management. CHS
currently maintains up to 4,000 SKUs while broadline distributors typically
carry greater than 15,000 SKUs.
FURTHER DEVELOP AND PENETRATE INTERNATIONAL MARKETS. The Company has
focused its activities on the distribution of microcomputer products in
Western Europe and the emerging markets of Eastern Europe and South America,
regions which it believes are underserved with respect to the distribution of
microcomputer products and therefore provide significant growth
opportunities. The Company believes that the markets in Western Europe,
Eastern Europe and South America are complex due to the diversity of
language, regulatory, technical and other factors and provide increased
opportunities for CHS to add value to its relationships with its vendors and
customers because of the presence of its knowledgeable local management. The
Company attempts to limit its exposure to declines in any one area or economy
by its presence in a large number of markets.
GROW THROUGH ACQUISITIONS. A major portion of the Company's growth is
attributable to acquisitions and the Company intends to continue its practice
of making targeted purchases of high
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quality distributors in selected markets in the future. In order to reduce
financial risk and incentivize operating performance, the Company typically
structures an acquisition with an earnout component payable in shares of Common
Stock one year subsequent to the acquisition and based on the performance of the
acquired company. These local distributors generally are attracted to combining
with CHS in order to gain personal financial liquidity, access to key product
lines provided by CHS and enhanced vendor credit facilities. Over the past three
years, the Company has acquired over 20 companies. The Company seeks acquisition
candidates that have strong entrepreneurial management teams and experience in
the local market and that could benefit from the synergies arising out of the
Company's superior product line. After an acquisition, the new CHS subsidiary
adopts the policies and financial reporting procedures of the Company but
operates as a relatively autonomous business unit, consistent with the Company's
decentralized structure. The Company believes its acquisition strategy is
advantageous to its vendors because through their relationship with CHS vendors
gain entry into new markets with established local distribution companies.
PRODUCTS AND CUSTOMERS
The Company's sales consist of microcomputer related hardware and software
products such as local area networks, disk drives, microcomputers and
printers to an active customer base of more than 24,300 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 three months ended March 31, 1996, the Company's product mix by
category was printers (25%), mass storage (18%), networking (9%), PCs (11%),
software (10%), semiconductors (9%), multimedia (4%) and peripherals and
other (14%).
The Company purchases its products directly from hardware manufacturers
and software publishers in large quantities and distinguishes itself from
broadline distributors by being 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 the broadliners and works
with fewer vendors. A Company operation will typically deal with 25 to 35
vendors and have between 1,000 and 4,000 inventory items in stock as compared
to broadliners that typically deal with more than 500 vendors and have over
15,000 products in stock.
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 6% of the Company's net sales during
1995 or the first quarter of 1996.
VENDOR RELATIONS
The Company obtains its products from its vendors under non-exclusive
distribution agreements, which are subject to renewal annually and may be
cancelled 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 ensuing year and
vary for each vendor. The Company is not required to make additional payments
if it fails to achieve its projected sales level for the year, but in the
following year, these product discounts may be reduced because of such lower
sales levels.
The Company's agreements with most vendors include 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 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 vendor over a specific period. In certain cases, the
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Company must purchase inventory at least equal in value to that returned. These
agreements permit the Company to maintain higher inventory levels while limiting
its committed working capital to slow-moving items.
Vendors deliver product 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 to other wholesalers of
computer 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 1.5% and 4.0% of the invoice
amount. To the extent sufficient funds are available, the Company attempts to
take advantage of these discounts. The Company believes that after the
completion of this offering it will be better able to utilize such discounts.
Generally, the Company's vendors have the right to terminate the
distribution agreement 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
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 March 31, 1996, the Company
distributed products to approximately 12,900 resellers in Western Europe,
7,600 in South America and 3,800 in Eastern Europe.
In order to effectively address the individual customs, practices and
business conventions within countries, each subsidiary of the Company
maintains general autonomy with respect to sales, marketing and distribution.
Oversight and strategic direction is provided by senior management of the
Company.
Each operation maintains a sales staff organized to interface effectively
with its respective customer base. As of March 31, 1996, approximately 43% of
the Company's employees were involved with 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 salesperson to check customer
credit limits, current inventory levels and pricing.
MARKETING. The Company utilizes a variety of programs to market its
vendors' products, including direct mailings, periodic advertising by
facsimiles, advertisements in industry trade publications, product brochures,
seminars and participation in select 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 typically have 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
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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 development funds are recorded in the
Company's financial statements as a reduction to selling, general and
administrative 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 maintains two internal auditors on its staff, one for Europe
and one for South America. These auditors report directly to the President
and the Chief Financial Officer of the Company and to the Audit Committee of
the Board of Directors.
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. Competitors exist in a variety of forms including direct sales by
vendors, mail order sales, international distributors, and local
distributors. Many of the Company's competitors have greater financial and
administrative resources than the Company. The Company believes availability
of product 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.
As a result of price competition, the Company and its competitors
currently are experiencing downward pressure on gross margins, which the
Company expects to continue for the foreseeable future. The Company expects
to offset the impact of declines in its gross margin by reducing its
operating expenses as a percentage of net sales by limiting the increase in
the fixed component of operating expenses to a percentage which is below the
percentage increase in sales. Additionally, in certain subsidiaries, sales
commissions are based on gross profits which has the effect of reducing
operating expenses as a percentage of sales as gross margin declines. There
can be no assurance of the success of this strategy in future periods.
EMPLOYEES
At March 31, 1996, the Company had 968 full-time employees of whom 100
were located in the United States. Of the total number of employees, 416
worked in marketing and sales, 133 worked in warehousing and delivery and 419
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.
27
<PAGE>
FACILITIES
The corporate headquarters of the Company are located at 2153 N.W. 86th
Avenue, Miami, Florida, which is also the principal operational facility for
CHS Promark. Approximately 1,200 square feet of this facility is allocated to
the Company's offices and the remaining 32,800 square feet are used as
administrative, service, and warehouse space for CHS Promark.
The Company's other facilities are described below:
LEASE
COUNTRY SQUARE FEET EXPIRATION
- ------- ----------- ----------
Argentina 4,361 *
Belgium 25,016 1998-2003
Brazil 16,100 2001
Bulgaria 1,000 1997
Chile 19,350 2001
Colombia 6,300 1996
Croatia 1,300 2000
Czech Republic 28,525 *
6,135 1998
Finland 5,134 1996
France 47,986 1998-2001
Germany 49,188 2010
Hungary 5,600 2006
Lithuania 1,300 1996
Peru 8,100 2000
Poland 21,097 1997
Portugal 12,500 2002
Romania 4,300 *
Slovakia 1,900 2000
Sweden 11,840 1998
Switzerland 3,000(1) 2001
19,300(2) 1998
United Kingdom 15,600 2016
10,000 *
United States 27,900(3) 1998-2000
Uruguay 5,300 1999
Venezuela 18,275 2000
- --------------
* Owned facility.
(1) CHS Finance facility.
(2) CHS Switzerland facility.
(3) CHS BEK 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.
LEGAL PROCEEDINGS
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.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers and directors of the Company, as well as certain
key employees, and their ages as of May 1, 1996, are as follows:
NAME AGE POSITION
- ----- --- --------
Claudio Osorio 36 Chairman of the Board, Chief Executive Officer and
President
Alvin Perlman 69 Executive Vice President--South American Region and
Director
Craig Toll 48 Chief Financial Officer and Treasurer
Antonio Boccalandro 29 Secretary and Director
Garry Boon(1) 36 Chief Operating Officer--European Region
Pasquale Giordano(1) 46 Chief Operating Officer--South American Region
Zbynek Kraus(1) 43 Vice President--East European Region and Director
Otto Gerlach 69 Director
Donald D. Winstead 58 Director
- --------------
(1) Each of these persons is a 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
President, Chief Executive Officer, and a Director of the Company since 1993.
Mr. Osorio has served as president of Comtrad since 1988. Mr. Osorio is an
attorney with a degree from UCAB (Catholic University of Andres Bello),
located in Venezuela. He also holds a Master of Business Administration
degree from IESA, also located in Venezuela. He is a director of Comtrad and
the president and a director of Comtrad Holdings, Inc.
ALVIN PERLMAN has been a Director and the Executive Vice President and
Chief Operating Officer, South American Region, of the Company since 1994. He
has served for the past five years as the chief executive officer of Zemex
Electronics, Inc., d/b/a CHS Promark, and was the sole owner of CHS Promark
prior to its acquisition by the Company in June 1994. Mr. Perlman has also
served as a director of Comtrad Holdings, Inc. since November 1994. Mr.
Perlman has a Bachelor of Science degree from the University of Connecticut.
CRAIG TOLL 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. Mr. Toll has a Bachelor of Science degree in Economics and
a Master of Science degree in Accounting, both from the Wharton School of the
University of Pennsylvania.
ANTONIO BOCCALANDRO has been a Director and 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 Comtrad Holdings, Inc. since June 1994.
GARRY BOON has been the Chief Operating Officer--European Region of the
Company since January 1996. From February 1989 until January 1996, Mr. Boon
was the Managing Director of the United Kingdom operations which were
acquired by the Company. Mr. Boon has a Bachelor of Science degree from
University College London.
29
<PAGE>
PASQUALE GIORDANO has been the Chief Operating Officer--South American
Region of the Company since January 1, 1996. From January 1989, Mr. Giordano
has been the president and chief operating officer of CHS Promark. Prior to
such service, he was a Vice President of CHS Promark in charge of its New
York office. From 1988 until he joined CHS Promark in 1989, Mr. Giordano was
the operating vice president of the electronics division of Caldor, Inc. Mr.
Giordano has a Bachelors degree from City College of New York.
ZBYNEK KRAUS has been a Director since March 1996 and the Vice
President--East European Region of the Company since January 1996. He was an
owner and from 1990 to 1993 the sales director and thereafter the general
manager of the Czech Republic operations which were acquired by the Company.
Mr. Kraus holds a degree in engineering from Chemical University in Pribram
in the Czech Republic.
OTTO GERLACH has been a Director of the Company since August 1994 and is a
principal owner and has served for over five years as the president of Larco,
C.A., a privately-owned wholesale import/ export and manufacturing company
based in Caracas, Venezuela.
DONALD D. WINSTEAD has been a Director of the Company since 1993 and has
been self-employed as a business consultant since June 1991. In connection
with his consulting activities he has served since October 1993, as the chief
executive officer and a director of Medical Resource Group Inc., a
closely-held Nevada corporation engaged in the business of medical equipment
leasing and rental. For over three years prior to June 1991, Mr. Winstead was
the chairman of the board and chief executive officer of Netcor Inc., a
company engaged in the manufacture and sale of communications equipment. Mr.
Winstead has a Bachelor of Science degree in Electrical Engineering from Ohio
Northern University.
The term of office of each director of the Company ends at the next annual
meeting of the Company's shareholders or when his successor is elected and
qualified. Officers of the Company serve at the discretion of the Board of
Directors, subject to the terms of any employment agreements with the
Company. See "--Employment Arrangements." There are no family relationships
among any of the Company's executive officers and directors.
All of the Company's directors receive $250 for attendance at each Board
meeting and are reimbursed for travel expenses incurred to attend such
meetings. No separate payment is made for attending committee meetings.
The Company has an Audit Committee and a Compensation Committee. The Audit
Committee is responsible for reviewing and making recommendations regarding
the Company's employment of independent auditors, the annual audit of the
Company's financial statements and the Company's internal accounting
practices and policies. It consists of Messrs. Gerlach and Winstead. The
Compensation Committee, composed of Messrs. Gerlach and Winstead, is
responsible for making recommendations to the Board of Directors regarding
compensation arrangements for senior management, recommendations concerning
the adoption of any compensation plans in which management is eligible to
participate and grants of stock options or other benefits under such plans.
30
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during each of the
three years ended December 31, 1995 to the Company's Chief Executive Officer
and each of the other two executive officers of the Company whose total 1995
salary and bonus exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Claudio Osorio, 1995 $359,800 -0- -0- 139,240
Chief Executive Officer and President 1994 108,167 -0- 56,080 142,160
1993 -0- -0- -0- -0-
Alvin Perlman, 1995 500,000 -0- -0- 1,000
Executive Vice President--South 1994 248,726 -0- -0- -0-
American Region 1993 -0- -0- -0-
Craig Toll, 1995 110,000 -0- -0- -0-
Chief Financial Officer and Treasurer 1994 53,308 -0- 87,500 -0-
1993 -0- -0- -0-
</TABLE>
EMPLOYMENT ARRANGEMENTS
In August 1994, the Board of Directors approved a compensation arrangement
for Claudio Osorio, the Chief Executive Officer and President of the Company,
pursuant to which he was entitled to receive a salary of $219,600 per year,
in addition to stock awards with a total value of $280,400 for the year ended
June 1995. The stock awards may have been made in any one or a combination of
Company stock, stock options, stock appreciation rights, or phantom stock
grants, as determined by agreement between the Compensation Committee and Mr.
Osorio, subject to the approval of the Board of Directors. Mr. Osorio was
also entitled to participate in any group or employee benefit or insurance
plans. In June 1995, the Board of Directors approved a compensation arrangement
for Mr. Osorio with an annualized salary and bonus of $500,000, excluding option
grants, for the year ended June 1996. Mr. Osorio's aforementioned employment
arrangement has been modified as set forth below.
In August 1994, the Board of Directors approved an employment arrangement
for Craig Toll, the Chief Financial Officer of the Company, pursuant to which he
was entitled to receive an annual salary of $110,000 for the year ended June
1995. Mr. Toll was also granted certain options to purchase Common Stock. Mr.
Toll was also entitled to participate in any group or employee benefit or
insurance plans. In June 1995, the Board of Directors approved a compensation
arrangement for Mr. Toll with an annualized salary of $150,000 for the year
ended June 1996.
The Company has entered into three-year employment agreements with Messrs.
Osorio and Toll. Mr. Osorio's agreement was effective January 1, 1996 and Mr.
Toll's agreement will be effective July 1, 1996. The agreements for Messrs.
Osorio and Toll provide for annual salaries of $350,000 and $150,000,
respectively, and require the executives to devote their full time and
attention to the business and affairs of the Company. Mr. Osorio's agreement
also provides for a minimum bonus of $150,000 per year. The agreements also
provide that upon termination of employment by the Company without "cause" or
termination by the executive for "good reason" (which includes a change of
control of the Company), the executive is entitled to receive, in addition to
all accrued or earned but unpaid salary, bonus or benefits, an amount equal to
two and one-half times base salary paid to the executive during the last full
year prior to termination of employment, together with an amount equal to the
bonus paid to the executive in the prior year multiplied by a fraction, the
numerator of which is the number of days
31
<PAGE>
elapsed in the then current year through termination and the denominator of
which is 365. The agreements also provide that the executive will not compete
with the Company during his employment and for two years thereafter unless the
Company terminates the executive without "cause" or the executive terminates his
employment for "good reason."
Under the terms of the Company's employment agreement with Alvin Perlman
dated June 30, 1994, Mr. Perlman is employed as an Executive Vice
President--South American region of the Company, and chief executive officer
and chairman of the board of CHS Promark. The term of the agreement is five
years. Mr. Perlman receives an annual salary of $500,000 and other benefits
commensurate with his position, and is entitled to participate in any group
or employee benefit or insurance plans. Upon termination of Mr. Perlman's
employment as a result of death or disability, he (or his estate) receives
50% of his compensation for the balance of the term of the agreement. Mr.
Perlman may terminate the agreement upon a change in more than 50% of the
ownership of CHS Promark in which case he is to receive his full compensation
for the balance of the term of the agreement. Under the agreement, Mr.
Perlman is prohibited from competing with the Company for two years in the
Western Hemisphere.
On March 22, 1996, the Board of Directors of the Company adopted an
Executive Bonus Plan for 1996 and subsequent years in which Messrs. Osorio
and Perlman currently participate. Under this plan, cash bonuses will be
awarded based on the Company's operations achieving certain established
targets.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 1995 were Donald D.
Winstead and Otto Gerlach. Neither of these persons has previously served as
an officer or employee of the Company or any of its subsidiaries.
Mr. Winstead provided consulting services to the Company for a fee of
$4,000 per month, which resulted in payments from the Company to Mr. Winstead
of $48,000 in 1995.
Otto Gerlach holds, indirectly, 11.8% of the outstanding Common Shares of
CHI and 16.7% of the shares of Class A common stock of CHI which, subject to
the claims of certain creditors, have a liquidation preference on the 965,000
shares of Company stock owned by Comtrad. In the past, the Company has
engaged in numerous transactions with Comtrad. See "Certain Transactions."
OPTION GRANTS DURING 1995
Of the options to purchase 223,000 shares of Common Stock granted in 1995,
none were granted to any of the Named Executive Officers.
32
<PAGE>
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR END OPTION VALUES
The following table sets forth information with respect to (i) the number
of unexercised options held by the Named Executive Officers as of December
31, 1995 and (ii) the value as of December 31, 1995 of unexercised
in-the-money options. No options were exercised by any of the Named Executive
Officers in 1995.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1995 OPTIONS AT DECEMBER 31, 1995(1)
-------------------------------- --------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ----------------- -------------- ---------------
Claudio Osorio 28,040 28,040 $224,320 $224,320
Alvin Perlman -- -- -- --
Craig Toll 43,750 43,750 $131,250 $131,250
(1) Market value of shares covered by in-the-money options on December 31,
1995, less option exercise price. Options are in-the-money if the market
value of the shares covered thereby is greater than the option exercise
price.
STOCK INCENTIVE PLAN
In June 1995, the Company adopted its 1994 Stock Incentive Plan (the "1994
Plan") pursuant to which 497,000 shares of Common Stock were reserved for
issuance upon exercise of options and other incentive awards. The 1994 Plan
provides for the grant of both incentive stock options intended to qualify as
such under Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified stock options. The 1994 Plan also provides for restricted stock
awards and stock appreciation rights. The 1994 Plan will terminate in August
2004, unless sooner terminated by the Board of Directors. In November 1995,
the Board approved an amendment, subject to shareholder approval, to the 1994
Plan to increase the number of shares available for grant of options by
175,000 to a total of 672,000. Options to purchase 123,500 of these shares
have been granted. As of December 31, 1995, the Company had outstanding
options to purchase an aggregate of 508,008 shares (of which 110,815 are
exercisable as of December 31, 1995). The exercise price of all options
granted under the 1994 Plan has been at least equal to the fair market value
of the Common Stock on the date of grant. As of December 31, 1995, no options
granted under the 1994 Plan had been exercised. As of May 1, 1996, there were
86,491 shares of Common Stock available for future grants under the 1994
Plan, as amended.
Options granted under the 1994 Plan that would otherwise qualify as
incentive stock options will not be treated as incentive stock options to the
extent that the aggregate fair market of the shares covered by stock options
which are exercisable for the first time by any individual during any
calendar year exceeds $100,000.
Options granted under the 1994 Plan will be exercisable after the period
or periods specified in the option agreement. Options granted under the 1994
Plan are not exercisable after the expiration of ten years from the date of
grant and are not transferable other than by will or by the laws of descent
and distribution. Adjustments in the number of shares subject to options
granted under the 1994 Plan can be made by the Board of Directors or the
appropriate committee in the event of a stock dividend or recapitalization
resulting in a stock split-up, combination or exchange of shares. Under the
1995 Plan, options may become immediately exercisable in the event of a
change in control or approval by shareholders of the Company of a merger,
reorganization, liquidation, dissolution or disposition of all or
substantially all of the assets of the Company.
33
<PAGE>
CERTAIN TRANSACTIONS
The Company acquired many of its subsidiaries from Comtrad. In certain
cases, Comtrad organized the entities which were subsequentially purchased by
the Company. Comtrad has advised the Company that the entities purchased by
it and subsequently sold to the Company were acquired from unrelated parties.
The Company acquired Comtrad-owned entities after completing its own
evaluations (which for significant acquisitions involved the consideration of
a valuation report prepared by an independent third party), and the
affirmative vote of an independent director of the Company. The Company does
not intend to purchase any additional entities from or enter into any new
transactions with Comtrad in the future. Comtrad also loaned funds to and
borrowed funds from the Company during the years in which it was first
developing its European and South American operations. The Company does not
intend to purchase any operations from or enter into any new transactions
with Comtrad in the future, including the borrowing or loaning of funds. As
of March 31, 1996, the Company was not indebted to Comtrad. Comtrad has
advised the Company that it intends to repay all of the indebtedness owed by
it to the Company, approximately $2.5 million, as of March 31, 1996, with the
proceeds from the sale of the shares of Common Stock to be sold by it in this
offering. See "Principal and Selling Shareholders." Comtrad has also agreed
not to engage in businesses competitive with those of the Company.
<TABLE>
<CAPTION>
CHS
CHS PURCHASE COMTRAD COMTRAD
SUBSIDIARY(1) ACQUISITION DATE PRICE(2)(3) ACQUISITION DATE PURCHASE PRICE
- ------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
CHS Germany December 1993 2,000,000 shares January 1993 $3,200,000
and
$4,000,000
CHS Promark July 1994 2,000,000 shares July 1994 (4)
CHS Belgium April 1995 1,750,000 shares September 1994 (5)
CHS England September 1994
CHS France September 1994
CHS Portugal January 1993 (6)
CHS BEK October 1995 287,500 shares July 1995 (7)
CHS Czechia October 1995 92,000 shares January 1993 $758,000(8)
CHS Finland December 1995 $2,300,000 July 1995 (9)
CHS Sweden December 1995 $2,400,000 July 1995 (10)
CHS Poland December 1995 $2,300,000 November 1995 (11)
CHS Brazil March 1996 $5,300,000 November 1994 52,632 shares
of Comtrad(12)
CHS Slovakia March 1996 $1,000,000 January 1994 (13)
CHS Baltic March 1996 $1,500,000 September 1994 $50,000
CHS Bulgaria
CHS Romania
CHS Croatia
<FN>
- --------------
(1) The names set forth are those by which the Company commonly refers to
its subsidiaries and are not necessarily the legal names of the
entities.
(2) References to "shares" are to shares of Common Stock.
(3) At the time of the acquisition by the Company of CHS Germany and CHS
Promark, the Common Stock was not actively traded, however the Company
believes that the aggregate value of the shares delivered in connection
with the CHS Germany acquisition was $38,400 and with respect to the CHS
Promark acquisition was $12 million. With respect to the acquisitions in
April 1995 (CHS Belgium, CHS England, CHS France and CHS Portugal),
October 1995 (CHS BEK) and October 1995 (CHS Czechia), the aggregate
value of the Common Stock delivered was $17.5 million, $2,587,000 and
$758,000, respectively.
(4) The Company's acquisition of CHS Promark was made through a series of
transactions, the result of which was that Alvin Perlman, the Executive
Vice President--South American Region and a director of the Company, and
who was the sole owner of CHS Promark, received 230,000 shares of
Comtrad, 460,000 shares of CHS Common Stock, a $100,000 payment
34
<PAGE>
and a promissory note from Comtrad in the original principal amount of
$2.4 million. Comtrad received 1,540,000 shares of CHS Common Stock. The
Company believes that the aggregate value of the consideration paid by
Comtrad was $11.3 million.
(5) Comtrad delivered 600,000 shares of Common Stock with an aggregate value
of $5,344,000, a $7 million promissory note and cash of $861,000.
(6) Comtrad delivered 22,956 of its shares with an aggregate value of
$800,000.
(7) CHI delivered 1,000 of its Class B shares which, upon liquidation of
CHI, have a preferential claim to 258,750 shares of Common Stock which
at the time of the acquisition had an aggregate value of $2,328,750. Up
to 28,750 additional shares of Common Stock owned by Comtrad may be
subject to this preference based upon an earnout formula.
(8) Represents an investment by Comtrad in exchange for a 16% interest.
(9) Comtrad has agreed to deliver an as yet undetermined number of shares of
Common Stock owned by Comtrad based upon the 1996 financial performance
of CHS Finland.
(10) Comtrad has agreed to deliver an as yet undetermined number of shares of
Common Stock owned by Comtrad based upon the 1996 financial performance
of CHS Sweden.
(11) Comtrad delivered 23,077 of its shares and a promissory note for
$600,000. The Company believes that the aggregate value of the Comtrad
shares was $1.2 million. In addition, Comtrad has agreed to deliver an
as yet undetermined number of shares of Common Stock owned by Comtrad
based upon the 1996 financial performance of CHS Poland.
(12) The Company believes that the aggregate value of the Comtrad shares was
$762,000.
(13) Comtrad purchased 65% of the equity interest for $3,200 and has
purchased the remaining 35% by agreeing to deliver an as yet
undetermined number of shares of Common Stock owned by Comtrad based
upon the 1996 financial performance of CHS Slovakia.
</FN>
</TABLE>
In 1993, Comtrad established a number of operating subsidiaries to market
microcomputer equipment and peripherals throughout Europe. Comtrad used the
name "CHS" in establishing these subsidiaries. Comtrad subsidiaries purchased
products from the Company for resale. These subsidiaries were initially
invoiced at cost plus 2% for goods purchased in 1994, and this pricing was
retroactively adjusted at the end of 1994 to cost plus 4.5% based on a study
of the actual costs conducted in the last quarter of 1994. This resulted in
an increase in gross profit for 1994 of $500,000. Comtrad subsidiaries
accounted for approximately $9,591,000 of the Company's net sales in 1993,
$52,421,000 in 1994 and $21,063,000 in 1995.
In 1994, Comtrad made working capital loans to the Company aggregating
approximately $1.7 million. At December 31, 1994, the Company had a net
payable to Comtrad and its subsidiaries of $4,776,000 and at December 31,
1995, a net receivable from Comtrad of $843,000 (which arose from loans and
the sale of goods). Interest expensed on the payables to Comtrad was $117,000
in 1994 and $126,000 in 1995. Interest charged to Comtrad was $162,000 in
1994 and $438,000 in 1995. At March 31, 1996, the Company had a receivable
from Comtrad of $2,462,000. Subsequent to March 31, 1996, the Company became
contingently liable on an obligation of Comtrad to a third party for an
amount currently estimated to be approximately $1.6 million.
In July 1995, the Company obtained a $20 million line of credit, a portion
of which represented the assumption of an approximately $14.8 million
obligation owed by Comtrad to the same lender. Approximately $7 million of
such obligation had previously been loaned by Comtrad to a subsidiary of the
Company. This $7 million obligation to Comtrad was cancelled as a result of
this transaction. The resulting $7.8 million receivable from Comtrad was
offset against amounts due to Comtrad as a result of the acquisition of
certain entities by the Company from Comtrad, and was recorded as of December
31, 1994.
Management services were provided by Comtrad to the Company, which
resulted in a management fee of $896,000 for 1993. As a result of a study of
the actual costs of the services rendered for the management fee charged, the
Company and Comtrad agreed on a credit to the Company of $579,000 with respect
to the 1993 management fee. In 1994 and 1995, Comtrad provided administrative
and support services in Europe to the Company on an as needed basis, and was
paid $179,000 and $887,000, respectively, for such services.
Effective October 27, 1995, the Company acquired CHS Czechia s.r.o., a
limited liability company formed under the laws of the Czech Republic ("CHS
Czechia") from Comtrad and Zbynek Kraus, an
35
<PAGE>
individual who was the manager and principal owner of CHS Czechia prior to its
acquisition by Comtrad. Mr. Kraus became a director of the Company in March
1996. Based upon an independent valuation of CHS Czechia which placed the value
at approximately $4,800,000, the Company issued 575,000 shares of Common Stock,
483,000 of which were issued to Mr. Kraus and 92,000 of which were issued to
Comtrad. Pursuant to agreements entered into in January 1993 between Mr. Kraus
and Comtrad, Mr. Kraus contributed the shares of Common Stock received by him to
Penrose Trading Co. S.A. in exchange for an 8.4% interest in Penrose. Mr. Osorio
owns 50.2% of Penrose Trading Co. S.A. which is a shareholder of Comtrad.
Effective March 1996, the Company guaranteed the obligations of Comtrad
arising under the Stock Purchase Agreement dated October 12, 1995 pursuant to
which Comtrad acquired CHS Poland. Under such agreement, as amended, Comtrad
is obligated to deliver shares of Common Stock as calculated pursuant to an
earnout provision based on the 1996 calendar year earnings of CHS Poland. If
Comtrad fails to deliver such shares, the Company has agreed to do so.
Assuming that CHS Poland's earnings are consistent with current estimates,
Comtrad will be obligated to deliver approximately 125,000 shares of Common
Stock.
Comtrad and Claudio Osorio, the Chairman of the Company, have guaranteed
the obligations of the Company under a $20 million credit agreement. Comtrad
has pledged certain shares of the Company owned by it to secure its guarantee
of repayment of amounts advanced under the line of credit. Comtrad has also
guaranteed the obligation of CHS Promark under a Loan and Security Agreement
providing for borrowings up to $20 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity."
During 1994 and 1995, assets of CHS Germany were pledged to secure a loan
from a third party lender to Comtrad. This loan was repaid by Comtrad in
1995.
Comtrad has guaranteed the Company's obligations to certain vendors.
The Company is party to a separate consulting agreement with Donald D.
Winstead, a director of the Company. Under the terms of the agreement, Mr.
Winstead provides management consulting and related services for a fee of
$4,000 per month. Mr. Winstead received $45,700 under the arrangement in 1994
and $48,000 in 1995.
36
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of May 8, 1996 and as adjusted to
reflect the sale of 3,766,539 shares by the Company and the sale of 1,733,461
shares by the Selling Shareholders by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock, (ii)
each of the Selling Shareholders, (iii) each director of the Company, (iv)
each of the Named Executive Officers, and (v) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
BEFORE THE OFFERING AFTER THE OFFERING
NAME OF BENEFICIAL --------------------- SHARES BEING ----------------------
OWNER(1)(2)(3) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------ --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Claudio Osorio(4)(5) 5,663,340 74.4 0 4,053,340 35.6
Alvin Perlman(4) 5,663,340 74.4 460,000 4,053,340 35.6
Antonio Boccalandro(6) 0 * 0 0 *
Otto Gerlach(7) 0 * 0 0 *
Zbynek Kraus(8) 0 * 0 0 *
Donald D. Winstead(9) 45,000 * 0 45,000 *
Craig Toll(10) 43,750 * 0 43,750 *
All officers and directors as a
group (7 persons) 5,752,090 74.7 460,000 4,142,090 36.1
Comtrad(4)(11) 5,663,340 74.4 1,150,000 4,053,340 35.6
Peter Hammett(12) 56,410 * 56,410 0 0
Jean Jacques Charrier(13) 7,051 * 7,051 0 0
Pierre Delphin(14) 119,872 1.6 60,000 59,872 *
<FN>
- --------------
* Less than 1%
(1) The address for each of the executive officers and directors is 2153
N.W. 86th Avenue, Miami, Florida 33122, except for Alvin Perlman which
is 5771 Bridleway Circle, Boca Raton, Florida 33496.
(2) Except as noted, all shares are held beneficially and of record.
(3) Under Rule 13d-3 of the Securities Exchange Act of 1934, as amended,
certain shares may be deemed to be beneficially owned by more than one
person (if, for example, persons share the power to vote or the power to
dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire
the shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of Common Stock
actually outstanding as of May 8, 1996.
(4) Includes 2,864,800 shares held of record by Comtrad, a wholly-owned
subsidiary of CHI, 1,827,500 shares held of record by CHI, 460,000
shares held of record by Alvin Perlman, 483,000 shares held of record by
Penrose Trading Co. S.A. (a shareholder of CHI and of which Mr. Osorio
has effective control) and currently exercisable options to purchase
28,040 shares held by Mr. Osorio. Claudio Osorio and Alvin Perlman
together own and control a majority of the issued and outstanding
capital stock of CHI, and Messrs. Osorio and Perlman have entered into
an agreement pursuant to which they have agreed to vote their shares of
CHI common stock together on certain matters submitted to the
shareholders of CHI. Claudio Osorio, Alvin Perlman, CHI and Comtrad are
parties to another agreement, in which they agree to vote all shares of
the Common Stock they own or control, together on any matter submitted
to the shareholders of the Company. In addition, Messrs. Osorio and
Perlman and Comtrad are parties to an agreement which grants to Mr.
Osorio and Comtrad, until December 31, 1996, the right to acquire all,
but not less than all, of the shares of Common Stock and the shares of
Comtrad common stock owned by Mr. Perlman. Mr. Perlman may reject all or
a portion of such exercise; provided, however, that any shares as to
which the option exercise is rejected are excluded from a right granted
by the agreement to Mr. Perlman to put the referenced shares to Mr.
Osorio. The put option may be exercised during the period beginning
January 1 and ending January 31, 1997. Comtrad has guaranteed Mr.
Osorio's obligations and has pledged 1,540,000 shares of Common Stock in
connection therewith, which shares are included in the above aggregate
ownership. Subject to the claims of certain creditors, the holders of
CHI Class A common stock (which includes Penrose Trading Co. S.A.) have
a liquidation preference on the 965,000 shares of Common Stock owned by
Comtrad. Further, subject to the claims of certain creditors and subject
to the rights of holders of CHI Class A common stock, the holders of CHI
Class B common stock have
37
<PAGE>
a liquidation preference on 287,500 shares of Company Common Stock held by
CHI or any subsidiary thereof. Based on the foregoing relationships and
agreements, Claudio Osorio, Alvin Perlman, CHI, and Comtrad may be deemed
to have shared voting and investment control over the above-indicated
aggregate number of shares of Common Stock. Such aggregate number of shares
of Common Stock includes 1,985,654 shares pledged to a lender to secure the
Company's obligation under a line of credit and 1,166,667 shares pledged to
the former owners of certain of the Company's subsidiaries to secure the
unpaid portion of the purchase price of the sale of the subsidiaries to
Comtrad. Excludes 100,000 shares which Comtrad is obligated to deliver to
the sellers of three entities purchased by Comtrad and subsequently sold to
the Company.
(5) Mr. Osorio is the holder of options to purchase a total of 56,080 shares
of the Common Stock, of which 28,040 vested on December 7, 1995.
(6) Mr. Boccalandro is a director of CHI, who serves at the discretion of
the controlling shareholders of CHI, Messrs. Osorio and Perlman.
Accordingly, Mr. Boccalandro disclaims any investment or voting control
with respect to the Common Stock owned and controlled by CHI.
(7) Mr. Gerlach owns approximately 11.8% of the outstanding common shares of
CHI and 16.7% of the shares of Class A common stock of CHI which,
subject to the claims of certain creditors, have a liquidation
preference on the 965,000 shares of Common Stock owned by Comtrad. Mr.
Gerlach disclaims beneficial ownership of the shares of Common Stock
held by CHI and Comtrad.
(8) Mr. Kraus is a shareholder of Penrose Trading Co. S.A. which is a
shareholder of CHI and the Company. Mr. Kraus disclaims beneficial
ownership of the shares of the Company held by Penrose Trading Co. S.A.
and CHI.
(9) Mr. Winstead is the holder of options to purchase 45,000 shares of
Common Stock.
(10) Mr. Toll is the holder of options to purchase a total of 87,500 shares
of Common Stock. Options to purchase 43,750 shares vested on August 17,
1995. The balance will vest on August 17, 1996, assuming Mr. Toll's
continued employment with the Company.
(11) The address for Comtrad and CHI is 3620 North East Miami Place, Miami,
Florida 33137.
(12) Includes 5,128 shares which Comtrad is obligated to deliver to Mr.
Hammett under an agreement pursuant to which he sold interests in three
entities to Comtrad which entities were subsequently acquired by CHS from
Comtrad.
(13) Includes 641 shares which Comtrad is obligated to deliver to Mr.
Charrier under an agreement pursuant to which he sold interests in three
entities to Comtrad which entities were subsequently acquired by CHS from
Comtrad.
(14) Includes 10,898 shares which Comtrad is obligated to deliver to Mr.
Delphin under an agreement pursuant to which he sold interests in three
entities to Comtrad. Mr. Delphin had an ownership interest in a company
acquired by CHS from Comtrad and was an employee of the Company until
April 1996. He currently serves as a consultant to the Company.
</FN>
</TABLE>
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. Holders of Common Stock have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of Preferred Stock, if any, then outstanding. The
shares of Common Stock offered hereby will be, when issued and paid for, fully
paid and not liable for further call or assessment.
PREFERRED STOCK
The Company is authorized to issue Preferred Stock with such designation,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of the Company's Common Stock and, in
certain instances, could adversely affect the market price of such stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change
in control of the Company. The Company has no present intention to issue any
shares of its Preferred Stock.
The holders of Common and Preferred Stock vote as a single group on all
matters except the following, which require the affirmative vote of a
majority of the holders of Common Stock and a majority of the holders of
Preferred Stock: (a) any merger or consolidation of the Company with or into
any other corporation except in the case of a merger into the Company of a
subsidiary of the Company 90% or more of which is owned by the Company and
which does not require a vote of shareholders of either corporation pursuant
to the laws of the State of Florida; (b) any share exchange in which a
corporation, person or entity acquires the issued or outstanding shares of
stock of the Company pursuant to a vote of shareholders of the Company; (c)
any sale, lease, exchange or other transfer of all, or substantially all, of
the assets of the Company to any other corporation, person or entity; or (d)
any amendment to the Articles of Incorporation.
REGISTRATION RIGHTS
Under June 30, 1994 agreements, the Company granted to Comtrad and Alvin
Perlman registration rights with respect to 1,540,000 and 460,000 shares of
Common Stock, respectively. Comtrad and Mr. Perlman may, until August 31,
1997, require the Company to file a registration statement with respect to
these shares. The shares being sold by Comtrad and Mr. Perlman in this
offering are included pursuant to these registration rights. Until June 30,
1999, to the extent it still owns any of these shares, Comtrad may also
include these shares in certain other offerings by the Company. The Company
has further agreed to register certain shares pledged to a lender upon its
demand if there is a default under the loan. See "Principal and Selling
Shareholders" and "Shares Eligible for Future Sales" and "Underwriting."
CERTAIN FLORIDA LEGISLATION
The State of Florida has enacted legislation that may deter or frustrate
takeovers of Florida corporations. The Florida Control Share Act generally
provides that shares acquired in excess of certain specified thresholds will
not possess any voting rights unless such voting rights are approved by a
majority of a corporation's disinterested shareholders. The Florida
Affiliated Transactions Act generally
39
<PAGE>
requires supermajority approval by disinterested shareholders of certain
specified transactions between a public corporation and holders of more than 10%
of the outstanding voting shares of the corporation (or their affiliates).
Florida law and the Company's Articles of Incorporation also authorize the
Company to indemnify the Company's directors, officers, employees and agents. In
addition, Florida law and the Company's Articles of Incorporation presently
limit the personal liability of corporate directors for monetary damages, except
where the directors (i) breach their fiduciary duties and (ii) such breach
constitutes or includes certain violations of criminal law, a transaction from
which the directors derived an improper personal benefit, certain unlawful
distributions or certain other reckless, wanton or willful acts or misconduct.
The Company may also indemnify any person who was or is a party to any
proceeding by reason of the fact that he is or was a director, officer, employee
or agent of such corporation (or is or was serving at the request of such
corporation in such a position for another entity) against liability to be in
the best interests of such corporation and, with respect to criminal
proceedings, had no reasonable cause to believe his conduct was unlawful.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved shares of Common
Stock and Preferred Stock may enable the Board of Directors to issue shares
to persons friendly to current management which would render more difficult
or discourage an attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger or otherwise, and thereby protect the
continuity of the Company's management.
CERTAIN LIMITATIONS ON SHAREHOLDER ACTIONS
NOTICE PROCEDURES FOR SHAREHOLDER PROPOSALS AT ANNUAL MEETING. The
Articles of Incorporation of the Company establish advance notice procedures
with respect to shareholder proposals to be brought before an annual meeting
of shareholders. These procedures, which are in addition to any other
applicable requirements of law, require that a shareholder must give notice
to the Company not less than 120 days nor more than 180 days prior to the
first anniversary of the date of the notice of annual meeting provided with
respect to the previous year's annual meeting.
AMENDMENTS TO CHARTER. The Articles of Incorporation of the Company
include a provision requiring the affirmative vote of a majority of both the
holders of the Common Stock and the Preferred Stock to amend its Articles of
Incorporation.
SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings of a Florida
corporation's shareholders may be called by its board of directors, by the
persons authorized to do so in its Articles of Incorporation or bylaws or by
the holders of not less than 10% of all votes entitled to be cast on any
issue proposed to be considered at the special meeting, unless a greater
percentage, not to exceed 50%, is required by the articles of incorporation.
The Articles of Incorporation of the Company contain a 50% requirement for
the calling of special meetings by the shareholders.
SHAREHOLDER VOTES ON CERTAIN MATTERS. The holders of the Common and
Preferred Stock vote as a single group on all matters except the following,
which require the affirmative vote of a majority of the holders of the
Company's Common Stock and a majority of the holders of the Company's
Preferred Stock: (a) any merger or consolidation of the Company with or into
any other corporation except in the case of a merger into the Company of a
subsidiary of the Company 90% or more of which is owned by the Company and which
does not require a vote of shareholders of either corporation pursuant to the
laws of the State of Florida; (b) any share exchange in which a corporation,
person or entity acquires the issued or outstanding shares of stock of the
Company pursuant to a vote of stockholders of the
40
<PAGE>
Company; (c) any sale, lease, exchange or other transfer of all, or
substantially all, of the assets of the Company to any other corporation, person
or entity; or (d) any amendment to the Articles of Incorporation of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Interwest
Transfer Company.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Effective June 7, 1996, the Common Stock of the Company commenced trading on
the Nasdaq National Market under the symbol "CHSE." Prior to such time, the
Company's Common Stock traded on the Nasdaq Small Cap Market. Sales of
substantial amounts of shares in the public market or their availability for
sale could adversely affect prevailing market prices of the Common Stock and
make it more difficult for the Company to sell equity securities in the future
at a time and price which is deemed appropriate.
Upon completion of this offering, the Company will have 11,349,073 shares
of Common Stock outstanding. Of these shares, all of the 5,500,000 shares
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act. Of the remaining 5,849,073 shares,
5,170,760 shares are deemed "restricted shares" under Rule 144 in that they
were originally issued and sold by the Company in private transactions in
reliance upon exemptions under the Securities Act. Of those shares, 4,025,300
shares are held by persons deemed "affiliates" of the Company as such term is
defined in Rule 144 and 1,145,460 shares are held by persons who are not
affiliates of the Company. The restricted shares may not be sold except in
compliance with the registration requirements of the Securities Act or
pursuant to an exemption from registration, such as the exemption provided by
Rule 144 under the Securities Act. Of the restricted shares (i) 734 shares
held by non-affiliates are eligible for immediate resale under the provisions
of Rule 144(k) and (ii) 377,200 shares held by certain shareholders and
4,501,839 shares held by executive officers, directors and certain other
shareholders are subject to lock-up agreements that prohibit their resale
prior to 90 and 180 days, respectively, from the date of this Prospectus
without the prior consent of Raymond James & Associates, Inc. and thereafter
may be sold subject to the volume limitations of Rule 144.
In general, Rule 144 allows a stockholder (including persons who may be
deemed "affiliates" of the Company under Rule 144) who has beneficially owned
restricted shares for at least two years to sell a number of shares within
any three-month period that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (113,491 shares after giving effect to
this offering) or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks immediately preceding such sale. Sales under
Rule 144 are also subject to certain requirements as to the manner and notice
of sale and the availability of public information about the Company. A
stockholder (or stockholder whose shares are aggregated) who is not an
"affiliate" of the Company at any time during the 90 days immediately
preceding a sale, and who has beneficially owned his shares for at least
three years (as computed under Rule 144), is entitled to sell shares under
Rule 144 without regard to the volume and manner of sale limitations
described above. Shares properly sold in reliance upon Rule 144 to persons
who are not "affiliates" are thereafter freely tradable without restriction
or registration under the Securities Act.
Comtrad has the right to demand that the Company file registration
statements with respect to shares owned by it and to include shares owned by
it in registered offerings by the Company. The shares being sold by Comtrad
in this offering are included pursuant to these registration rights. In
addition, the Company has further agreed to register certain shares pledged
to a lender upon its demand if there is a default under the loan. See
"Description of Capital Stock--Registration Rights."
42
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representative, Raymond
James & Associates, Inc. (the "Representative"), has agreed, subject to the
terms and conditions of the underwriting agreement by and among the Company,
the Selling Shareholders and the Underwriters (the "Underwriting Agreement"),
to purchase from the Company and the Selling Shareholders the number of
shares of Common Stock set forth opposite their respective names below:
NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------
Raymond James & Associates, Inc. ................................. 3,052,500
Bear, Stearns & Co. Inc. ......................................... 110,000
Alex. Brown & Sons Incorporated .................................. 110,000
Dillon, Read & Co. Inc. .......................................... 110,000
Donaldson, Lufkin & Jenrette Securities Corporation .............. 110,000
A.G. Edwards & Sons, Inc. ........................................ 110,000
Goldman, Sachs & Co. ............................................. 110,000
Hambrecht & Quist LLC ............................................ 110,000
Lazard Freres & Co. LLC .......................................... 110,000
Lehman Brothers Inc. ............................................. 110,000
Montgomery Securities ............................................ 110,000
Morgan Stanley & Co. Incorporated ................................ 110,000
NatWest Securities Corporation ................................... 110,000
Salomon Brothers Inc ............................................. 110,000
Smith Barney Inc. ................................................ 110,000
J.C. Bradford & Co. .............................................. 55,000
Cowen & Company .................................................. 55,000
Dain Bosworth Incorporated ....................................... 55,000
Gerard Klauer Mattison & Co., LLC ................................ 55,000
Interstate/Johnson Lane Corporation .............................. 55,000
Janney Montgomery Scott Inc. ..................................... 55,000
Legg Mason Wood Walker, Incorporated ............................. 55,000
McDonald & Company Securities, Inc. .............................. 55,000
Needham & Company, Inc. .......................................... 55,000
Piper Jaffray Inc. ............................................... 55,000
Punk, Ziegel & Knoell ............................................ 55,000
The Robinson-Humphrey Company, Inc. .............................. 55,000
Vector Securities International, Inc. ............................ 55,000
Wheat First Butcher Singer ....................................... 55,000
Allen & Company of Florida Inc. .................................. 27,500
Cleary, Gull, Reiland & McDevitt Inc. ............................ 27,500
Allen C. Ewing & Co. ............................................. 27,500
Southeast Research Partners, Inc. ................................ 27,500
Van Kasper & Company ............................................. 27,500
------------
Total ........................................................... 5,500,000
============
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares offered hereby, if any are purchased. The Company
and the Selling Shareholders have been advised by the Representative that the
Underwriters propose initially to offer the shares to the public at the
offering price set forth on the cover page of this Prospectus and to certain
selected dealers, including the Underwriters, at such price less a concession
not in excess of $0.50 per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per share to certain other
dealers. The public offering price and concession may be changed after the
initial offering
43
<PAGE>
to the public. The Representative has informed the Company and the Selling
Shareholders that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The Underwriting Agreement provides for indemnification among the Company,
the Selling Shareholders and the Underwriters against certain liabilities in
connection with this offering, including liabilities under the Securities
Act.
The Company and each of its officers and directors and Comtrad have agreed
not to sell any shares of Common Stock to the public, other than shares
offered hereby, without the consent of Raymond James & Associates, Inc., for
a period of 180 days following the closing of this offering. This restriction
does not apply to certain issuances of Common Stock by the Company pursuant
to its stock option plans. Certain other holders have agreed not to sell any
shares for 90 days following the closing of the offering without such
consent. See "Shares Eligible for Future Sale."
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date of this Prospectus to purchase up to an
aggregate of 825,000 additional shares at the same price per share as the
Company receives for the 3,766,539 shares which the Underwriters have agreed
to purchase from the Company, for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase a number of the additional shares of Common Stock proportionate to
each Underwriter's initial commitment.
The Underwriters and certain selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in
the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule
10b-6A permits, upon the satisfaction of certain conditions, Underwriters and
selling group members participating in a distribution that are also Nasdaq
market makers in the security being distributed to engage in limited market
making transactions during the period when Rule 10b-6A under the Exchange Act
would otherwise prohibit such activity. In general, under Rule 10b-6A any
Underwriter or selling group member engaged in passive market making in the
Common Stock (i) may not effect transactions in, or display bids for, the Common
Stock at a price that exceeds the highest bid for the Common Stock displayed on
Nasdaq by a market maker that is not participating in the distribution of the
Common Stock, (ii) may not have net daily purchases of the Common Stock that
exceed 30% of its average daily trading volume in the Common Stock for the two
full consecutive calendar months immediately preceding the filing date of the
Registration Statement of which this Prospectus forms a part and (iii) must
identify its bids as bids made by a passive market maker.
The Company has agreed to pay the Representative a nonaccountable expense
allowance of $100,000, none of which has been paid to date. The Company has
also agreed to pay all expenses in connection with qualifying the shares of
Common Stock offered hereby for sale under the laws of such states as the
Underwriters may designate, including expenses of counsel retained for such
purpose by the Underwriters.
The Company has agreed to sell to the Representative and its designees for
an aggregate of $100, warrants (the "Representative's Warrants") to purchase
up to 300,000 shares of Common Stock for a period of four years commencing one
year from the date of the Prospectus at 110% of the public offering price and
increasing to 114%, 121% and 128% of the public offering price in the second,
third and fourth years, respectively. The Representative's Warrants may not be
transferred for one year from the date of this Prospectus, except to the
officers, employees and shareholders of the Representative and are exercisable
during the four-year period commencing one year from the date of this Prospectus
(the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of
the Representative's Warrants are given, at nominal cost, the opportunity to
profit from a rise in the market price of the Common Stock. Any profit realized
by the Representative on the sale of the Representative's Warrants or the
underlying shares of Common Stock may be deemed additional underwriting
compensation.
44
<PAGE>
The foregoing contains a summary of the principal terms of the
Underwriting Agreement and does not purport to be complete. Reference is made
to the copy of the Underwriting Agreement that is on file as an exhibit to
the Registration Statement of which this Prospectus is a part.
Effective June 7, 1996, the Common Stock of the Company commenced trading on
the Nasdaq National Market under the symbol CHSE. Prior to such time, the
Company's Common Stock traded on the Nasdaq Small Cap Market.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company and certain of the Selling Shareholders by Greenberg, Traurig,
Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, Florida. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Holland
& Knight, Miami, Florida.
EXPERTS
The financial statements included in this Prospectus have been audited by
Grant Thornton LLP, independent certified public accountants, BDO Binder
A.G., independent public accountants, and Arthur Andersen & Co. Kft.,
independent public accountants, as indicated in their respective reports, as
listed in the Index to Consolidated Financial Statements, and are included
herein in reliance upon the authority of said firms as experts in giving said
reports.
AVAILABLE INFORMATION
A Registration Statement under the Securities Act of 1933 has been filed
with the Securities and Exchange Commission (the "Commission"), Washington,
D.C. 20549, with respect to the Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement
and exhibits and schedules thereto, certain portions having been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and 500 W. Madison Street, 14th Floor, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained
from the Public Reference Section of the Commission upon payment of
prescribed fees.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at, or obtained from, the public
reference facilities maintained by the Commission as specified above. In
addition, the Common Stock of the Company is included in the Nasdaq National
Market, and the aforementioned materials may also be inspected at the offices
of the Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CHS ELECTRONICS, INC.--PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED):
Basis of Presentation ..................................................... F-2
Pro Forma Condensed Consolidated Balance Sheet ............................ F-3
Pro Forma Condensed Consolidated Statements of Operations ................. F-4
Notes to Pro Forma Condensed Consolidated Financial Statements ........... F-5
CHS ELECTRONICS, INC.--HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants--Grant Thornton LLP ... F-8
Consolidated Balance Sheets ............................................... F-9
Consolidated Statements of Operations ..................................... F-10
Consolidated Statements of Shareholders' Equity ........................... F-11
Consolidated Statements of Cash Flows ..................................... F-12
Notes to the Consolidated Financial Statements ............................ F-14
WYRSCH TRADING LTD. (CHS SWITZERLAND)--HISTORICAL FINANCIAL STATEMENTS:
Report of Independent Auditors--BDO Binder AG ............................. F-32
Statements of Income ...................................................... F-33
Balance Sheets ............................................................ F-34
Statements of Shareholders' Equity ........................................ F-36
Statements of Cash Flows .................................................. F-37
Notes to the Financial Statements ......................................... F-38
KVENTA, KFT. (CHS HUNGARY)--HISTORICAL FINANCIAL STATEMENTS:
Report of Independent Public Accountants--Arthur Andersen & Co. Kft. ...... F-47
Balance Sheet ............................................................. F-48
Statement of Operations ................................................... F-49
Statement of Quotaholders' Equity ......................................... F-50
Statement of Cash Flows ................................................... F-51
Notes to Financial Statements ............................................. F-52
</TABLE>
F-1
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The following Pro Forma Condensed Consolidated Balance Sheet as of March
31, 1996 and the Pro Forma Condensed Consolidated Statements of Operations
for the year ended December 31, 1995 and the three months ended March 31,
1996 give effect to the acquisition by the Company of five companies during
1995 and three companies subsequent to December 31, 1995. Four of the five
companies acquired during 1995 were acquired from Comtrad. These acquisitions
were transfers between entities under common control and therefore are
accounted for in a manner similar to a pooling of interests. The remaining
four companies were acquired from unrelated parties and are accounted for
using the purchase method of accounting. The Pro Forma Condensed Consolidated
Balance Sheet as of March 31, 1996 is presented as if the acquisition of CHS
Switzerland (the only acquisition not already reflected in the historical
financial statements) had taken place on March 31, 1996. The Pro Forma
Condensed Consolidated Statements of Operations for the year ended December
31, 1995 and the three months ended March 31, 1996 presents the pro forma
results of operations assuming all acquisitions occurred on January 1, 1995.
A list of the companies included in each period is shown below.
COMPANIES INCLUDED IN ACQUIRED COMPANIES COLUMN IN PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
--------------------- -------------------
CHS Hungary CHS Hungary
CHS Peru CHS Peru
CHS Switzerland CHS Switzerland
CHS BEK
CHS Czechia
CHS Finland
CHS Poland
CHS Sweden
The unaudited pro forma condensed consolidated financial statements have
been prepared based upon the historical financial statements of CHS and the
acquired companies for the periods stated above. Such pro forma statements
may not be indicative of the results that would have occurred if the
acquisitions had been consummated on the indicated dates, or of the operating
results that may be achieved by the combined companies in the future. The pro
forma statements should be read in conjunction with the financial statements
and related notes of CHS contained elsewhere herein.
F-2
<PAGE>
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------
CHS ACQUIRED PRO FORMA
HISTORICAL COMPANY ADJUSTMENTS COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash ....................... $ 13,000 $ 36 $ (5,219)(a) $ 7,817
Accounts receivable--net .. 113,068 7,087 -- 120,155
Inventories ................ 113,318 7,167 -- 120,485
Deferred tax asset ......... 456 -- -- 456
Other current assets ....... 10,084 1,457 -- 11,541
-------- ------- ----------- --------
Total current assets ..... 249,926 15,747 (5,219) 260,454
PROPERTY AND EQUIPMENT--NET 10,464 606 -- 11,070
COSTS IN EXCESS OF ASSETS
ACQUIRED--NET ............. 17,709 -- 20,140 (b) 37,849
OTHER ASSETS ................ 3,826 -- 22,603 (a) 3,826
(22,603)(b)
-------- ------- ----------- --------
$281,925 $16,353 $ 14,921 $313,199
======== ======= =========== ========
LIABILITIES
CURRENT LIABILITIES
Bank notes payable ......... $ 52,237 $ 5,035 $ -- $ 57,272
Accounts payable ........... 165,322 7,933 -- 173,255
Accrued liabilities ........ 15,818 922 (1,871)(a) 14,869
Income taxes payable ....... 1,317 -- -- 1,317
-------- ------- ----------- --------
Total current liabilities 234,694 13,890 (1,871) 246,713
LONG TERM DEBT .............. 13,510 -- -- 13,510
MINORITY INTEREST ........... 2,116 -- -- 2,116
SHAREHOLDERS' EQUITY
Common stock ............... 8 417 2 (a) 10
(417)(b)
Additional paid-in capital 25,620 928 19,253 (a) 44,873
(928)(b)
Retained earnings .......... 6,546 1,118 (1,118)(b) 6,546
Translation adjustment .... (569) -- -- (569)
-------- ------- ----------- --------
Total shareholders' equity 31,605 2,463 16,792 50,860
-------- ------- ----------- --------
$281,925 $16,353 $ 14,921 $313,199
======== ======= =========== ========
</TABLE>
F-3
<PAGE>
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
CHS ACQUIRED PRO FORMA
HISTORICAL COMPANIES ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales ............................ $ 936,703 $ 230,194 $(26,767)(c) $1,140,130
Cost of sales ........................ 868,716 213,467 (26,767)(c) 1,055,416
---------- ---------- -------- ----------
Gross profit ......................... 67,987 16,727 -- 84,714
Operating expenses ................... 57,188 11,342 1,187 (d) 69,255
-- -- (462)(e) --
---------- ---------- -------- ----------
Operating income ..................... 10,799 5,385 (725) 15,459
Interest income ...................... (1,757) (206) -- (1,963)
Interest expense ..................... 6,454 945 -- 7,399
---------- ---------- -------- ----------
Earnings before income taxes and
minority interest .................. 6,102 4,646 (725) 10,023
Provision for income taxes ........... 1,797 1,082 180 (e) 3,059
Minority interest .................... -- -- 1,002 (f) 1,002
---------- ---------- -------- ----------
Net earnings ......................... $ 4,305 $ 3,564 $ (1,907) $ 5,962
========== ========== ======== ==========
Net earnings per share--primary ..... $ 0.59 $ 0.63
========== ==========
Net earnings per share--fully diluted $ 0.59 $ 0.63
========== ==========
Weighted average number of common
shares outstanding--primary ........ 7,282,785 2,256,000 9,538,785
Weighted average number of common
shares outstanding--fully diluted .. 7,282,785 2,256,000 9,538,785
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------------
CHS ACQUIRED PRO FORMA
HISTORICAL COMPANIES ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales ............................ $ 302,995 $ 23,951 -- $ 326,946
Cost of sales ........................ 280,453 21,675 -- 302,128
---------- ---------- -------- ----------
Gross profit ......................... 22,542 2,276 -- 24,818
Operating expenses ................... 17,850 1,518 148 (d) 19,516
---------- ---------- -------- ----------
Operating income ..................... 4,692 758 (148) 5,302
Interest income ...................... (614) -- -- (614)
Interest expense ..................... 1,940 146 -- 2,086
---------- ---------- -------- ----------
Earnings before income tax and
minority interest .................. 3,366 612 (148) 3,830
Provision for income taxes............ 1,059 126 1,185
Minority interest .................... 319 -- 149 (f) 468
---------- ---------- -------- ----------
Net earnings ......................... $ 1,988 $ 486 $(297) $ 2,177
========== ========== ======== ==========
Net earnings per share--primary ..... $ 0.25 $ 0.23
========== ==========
Net earnings per share--fully diluted $ 0.24 $ 0.23
========== ==========
Weighted average number of common
shares--primary .................... 7,862,349 1,750,000 9,612,349
Weighted average number of common
shares--fully diluted .............. 8,183,391 1,428,958 9,612,349
</TABLE>
F-4
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) In 1995 the Company acquired 100% ownership of four companies from
Comtrad. It also acquired the remaining 84% ownership of a Czech Republic
company directly from its non affiliated owner in September 1995. All of
these companies are engaged in the distribution of microcomputer
products. The names, consideration and dates of acquisition by CHS of the
companies from Comtrad are shown in the table below. The Pro Forma
Statement of Operations includes the results of their operations and the
operations of the Czech Republic company and other adjustments to present
them from January 1, 1995 as compared to the date that they were included
in the 1995 historical financial statements. The weighted average shares
are adjusted to include the shares issued in connection with these
acquisitions for the entire year. See Note B to the Company's
Consolidated Financial Statements.
CHS
COMPANY CONSIDERATION ACQUISITION DATE
------- -------------- ----------------
CHS BEK 287,500 shares October 1995
CHS Finland $2,300,000 December 1995
CHS Sweden $2,400,000 December 1995
CHS Poland $2,300,000 December 1995
In January 1996, effective February 1, 1996, the Company acquired 51% of
Kventa KFT. (CHS Hungary) for contingent consideration equal to 51% of the
book value of CHS Hungary, measured under U.S. generally accepted
accounting principles ("U.S. GAAP") on December 31, 1996 and 51% of seven
times earnings for the year then ending. CHS Hungary is based in Budapest,
Hungary and is a distributor and retailer of products similar to those
distributed by the Company. In March 1996 the Company acquired 60% of CHS
Peru for consideration of $500,000 paid through forgiveness of debt. CHS
Peru is a distributor of products similar to those distributed by the
Company. These two acquisitions have been recorded in the March 31, 1996
historical financial statements from the date acquired. In April 1996 the
Company acquired 100% of Wyrsch Trading Ltd. (CHS Switzerland) for
contingent consideration equal to eight times net earnings measured under
U.S. GAAP for the year ending December 31, 1996 but not less than $1.7
million. CHS Switzerland is a distributor of computers and computer
peripherals located in Lucerne, Switzerland. These transactions are
accounted for under purchase accounting.
For purposes of the pro forma, the purchase price of CHS Hungary was
derived by adding the 1996 budgeted net earnings of CHS Hungary of
$3,100,000 to the book value of $3,800,000 at December 31, 1995 to obtain
the expected December 31, 1996 book value. The purchase price was then
calculated to be $14,586,000. Per the agreement, the book value portion is
payable in cash and the earnout portion is payable in stock or cash at the
seller's option. For purposes of the pro forma, it was assumed 1,006,000
shares would be issued for the earnout portion at a price of $11 per
share. In the March 31, 1996 pro forma balance sheet the acquisition entry
includes the $1,871,000 recorded in accrued liabilities in the historical
balance sheet.
For purposes of the pro forma, the purchase price of CHS Switzerland was
calculated based on the budgeted 1996 net earnings of $1,236,000. Per the
agreement, $1.7 million is payable in cash with the balance in stock. For
purposes of the pro forma, $11 per share was used as the value of the
stock to be issued resulting in the assumed issuance of 744,000 shares.
F-5
<PAGE>
Therefore, the acquisition entry is (in thousands of dollars):
(DR.) (DR.) (CR.) (CR.)
COMPANY INVESTMENT ACCRUED LIABILITIES CASH EQUITY
- ------- ---------- ------------------- ----- ------
CHS Hungary 12,715 1,871 3,519 11,067
CHS Switzerland 9,888 -- 1,700 8,188
------ ----- ----- ------
22,603 1,871 5,219 19,255
====== ===== ===== ======
(b) To eliminate the investment account, record goodwill of $12,648,000 for
CHS Hungary and $7,523,000 for CHS Switzerland.
(c) To eliminate intercompany sales.
(d) To record amortization of goodwill over a period of 20 years.
Amortization was provided for CHS Hungary, CHS Switzerland, CHS Czechia,
CHS BEK, CHS Peru and CHS Poland based on goodwill of $12,648,000,
$7,523,000, $2,400,000, $1,700,000, $183,000 and $700,000, respectively,
and the period of time during which each company was added to the pro
forma.
(e) To record an adjustment to salary expense to record the salary based on
signed employment agreements. A tax expense at 39% has also been provided
for this item.
(f) To record an adjustment for minority interest for CHS Hungary and CHS
Peru.
(g) Details of the Acquired Companies column in the accompanying Statements
of Operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CHS CHS CHS CHS CHS CHS CHS CHS
HUNGARY PERU SWITZERLAND BEK CZECHIA FINLAND POLAND SWEDEN TOTAL
------- ------- ------- ------- ------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........... $21,082 $11,218 $67,349 $69,310 $36,925 $1,954 $20,375 $1,981 $230,194
Cost of sales ....... 17,894 10,252 60,656 68,091 34,973 1,789 17,935 1,877 213,467
------- ------- ------- ------- ------- ------ ------- ------ --------
Gross profit ........ 3,188 966 6,693 1,219 1,952 165 2,440 104 16,727
Operating expenses... 770 685 4,735 1,590 1,145 27 2,251 139 11,342
------- ------- ------ ------- ------ ------- ------- ------- --------
Operating income..... 2,418 281 1,958 (371) 807 138 189 (35) 5,385
Interest income...... (206) -- -- -- -- -- -- (206)
Interest expense..... 116 192 320 16 232 (17) 83 3 945
Earnings before
income taxes....... 2,508 89 1,638 (387) 575 155 106 (38) 4,646
Provision for income
taxes ............. 462 93 334 (122) 227 24 65 (1) 1,082
------- ------- ------ ------- ------ ------- ------- ------- --------
Net earnings ........ 2,046 (4) 1,304 (265) 348 131 41 (37) 3,564
======= ======= ====== ======= ====== ======= ======= ======= ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------
(IN THOUSANDS)
CHS CHS CHS
HUNGARY PERU SWITZERLAND TOTAL
------- ------------ ------ -------
Net sales ..................... $18,048 $4,001 $1,902 $23,951
Cost of sales ................. 16,449 3,723 1,503 21,675
------- ------ ------ -------
Gross profit .................. 1,599 278 399 2,276
Operating expenses ............ 1,307 160 51 1,518
------- ------ ------ -------
Operating income .............. 292 118 348 758
Interest income ............... -- -- -- --
Interest expense .............. 66 76 4 146
------- ------ ------ -------
Earnings before income taxes
and minority interest ......... 226 42 344 612
Provision for income taxe ..... 50 15 61 126
------- ------ ------ -------
Net earnings .................. $ 476 $ 27 $ 283 $ 486
======= ====== ====== =======
F-6
<PAGE>
(h) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated into United
States dollars at the exchange rate in effect at the close of the period.
Revenues and expenses of these subsidiaries are translated at the average
exchange rate during the period. 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
and liabilities. The related exchange adjustments are included in
operations.
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
CHS Electronics, Inc.
We have audited the accompanying consolidated balance sheets of CHS
Electronics, Inc. and Subsidiaries (the "Company") as of December 31, 1995
and 1994 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1995. 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 audit.
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. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Grant Thornton LLP
Miami, Florida
February 23, 1996
F-8
<PAGE>
CHS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ -----------
(RESTATED) (RESTATED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash .................................................................. $ 8,368 $ 11,171 $ 13,000
Accounts receivable:
Trade, less allowance for doubtful accounts
of $3,358 in 1994, $4,388 in 1995 and $4,545
in 1996 ............................................................ 68,633 112,501 110,606
Affiliates ........................................................... -- 843 2,462
-------- -------- --------
68,633 113,344 113,068
Inventories, net of obsolescence reserves ............................. 63,427 102,159 113,318
Deferred tax asset .................................................... 330 456 456
Prepaid expenses ...................................................... 5,579 9,824 10,084
-------- -------- --------
Total current assets ................................................ 146,337 236,954 249,926
PROPERTY AND EQUIPMENT, NET ............................................ 2,972 9,126 10,464
COST IN EXCESS OF ASSETS ACQUIRED, NET ................................. 13,142 17,305 17,709
OTHER ASSETS ........................................................... 2,017 2,419 3,826
-------- -------- --------
$164,468 $265,804 $281,925
======== ======== ========
LIABILITIES
CURRENT LIABILITIES
Notes payable ........................................................... $ 15,198 $ 46,438 $ 52,237
Accounts payable--trade ................................................. 102,003 165,494 165,322
Accounts payable to affiliate ........................................... 4,776 -- --
Accrued liabilities ..................................................... 8,934 14,242 15,818
Income taxes payable .................................................... 1,422 937 1,317
--------- -------- ---------
Total current liabilities ............................................. 132,333 227,111 234,694
LONG TERM DEBT (including $1,500 in 1994 due to an
affiliated company) .................................................... 8,104 8,801 13,510
EXCESS OF ASSETS ACQUIRED OVER COST ...................................... 4,161 -- --
MINORITY INTEREST ........................................................ -- -- 2,116
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares; 0 shares
issued and outstanding ................................................ -- -- --
Common stock, authorized 100,000,000 shares at $.001
par value; issued and outstanding, 6,812,115 shares at
December 31, 1994, 7,582,534 shares at December 31,
1995 and March 31, 1996 ............................................... 14 8 8
Additional paid-in capital .............................................. 19,618 24,976 25,620
Retained earnings ....................................................... 253 4,558 6,546
Deferred compensation ................................................... (138) -- --
Cumulative foreign currency translation adjustment ...................... 123 350 (569)
--------- -------- ---------
19,870 29,892 31,605
--------- -------- ---------
$ 164,468 $265,804 $ 281,925
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- --------- ---------- ---------- --------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (including sales to affiliates
of $9,591, $52,421, $21,063, $15,100
and $0, respectively) ................... $146,408 $359,169 $936,703 $204,835 $302,995
Cost of goods sold ........................ 136,968 333,983 868,716 189,924 280,453
-------- --------- -------- -------- --------
Gross profit .............................. 9,440 25,186 67,987 14,911 22,542
Operating expenses ........................ 9,075 21,798 57,188 12,119 17,850
-------- --------- -------- -------- --------
Operating income .......................... 365 3,388 10,799 2,792 4,692
Other income (expenses)
Interest income .......................... 229 250 1,757 505 614
Interest expense ......................... (1,076) (2,070) (6,454) (1,248) (1,940)
-------- --------- -------- -------- --------
(847) (1,820) (4,697) (743) (1,326)
-------- --------- -------- -------- --------
Earnings (loss) before income taxes and
minority interest ....................... (482) 1,568 6,102 2,049 3,366
Income tax expense ........................ 241 603 1,797 382 1,059
Minority interest in subsidiaries ........ -- -- -- -- 319
-------- --------- -------- -------- --------
Net earnings (loss) ....................... $ (723) $ 965 $ 4,305 $ 1,667 $ 1,988
======== ========= ======== ======== ========
Net earnings (loss) per common
share--primary. ......................... $ (0.32) $ 0.21 $ 0.59 $ 0.24 $ 0.25
======== ========= ======== ======== ========
Net earnings (loss) per common
share--fully diluted .................... $ (0.32) $ 0.21 $ 0.59 $ 0.24 $ 0.24
======== ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<PAGE>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
AND THREE MONTHS ENDED MARCH 31, 1996
(in thousands)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL RETAINED CURRENCY
PAID-IN EARNINGS DEFERRED TRANSLATION
COMMON STOCK CAPITAL (DEFICIT) COMPENSATION ADJUSTMENT TOTAL
------------ ---------- --------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993 .............. 4 5,626 11 -- (178) 5,463
Capital contribution ................. -- 1,616 -- -- -- 1,616
Reclassification of equity to debt in
connection with acquisition ........ -- (4,000) -- -- -- (4,000)
Issuance of common stock in
acquisition ........................ 2 5 -- -- -- 7
Net loss ............................. -- -- (723) -- -- (723)
Foreign currency translation
adjustment ......................... -- -- -- -- (433) (433)
---- ------- ------ ------ ---- -------
Balance at December 31, 1993 ......... 6 3,247 (712) -- (611) 1,930
Issuance of common stock through
private offering ................... 2 3,998 -- -- -- 4,000
Issuance of common stock in
acquisitions ....................... 6 18,841 -- -- -- 18,847
Issuance of compensatory stock
options ............................ -- 280 -- (280) -- --
Deferred compensation recognized .... -- -- -- 142 -- 142
Net income ........................... -- -- 965 -- -- 965
Foreign currency translation
adjustment ......................... -- -- -- -- 734 734
---- ------- ------ ------ ---- -------
Balance at December 31, 1994, as
previously reported ................ 14 26,366 253 (138) 123 26,618
Adjustment for acquisition of 6
companies (Note B) ................. -- (6,748) -- -- -- (6,748)
---- ------- ------ ------ ---- -------
Balance at December 31, 1994,
as restated ........................ 14 19,618 253 (138) 123 19,870
Adjustment for 1 for 2 reverse split (7) 7 -- -- -- --
Deferred compensation recognized .... -- -- -- 138 -- 138
Issuance of common stock in
acquisitions ....................... 1 5,351 -- -- -- 5,352
Net income ........................... -- -- 4,305 -- -- 4,305
Foreign currency translation
adjustment ......................... -- -- -- -- 227 227
---- ------- ------ ------ ---- -------
Balance at December 31, 1995 ......... 8 24,976 4,558 -- 350 29,892
Net income (unaudited) ............... -- -- 1,988 -- -- 1,988
Additional consideration on
acquisition ........................ -- 644 -- -- -- 644
Foreign currency translation
adjustment (unaudited) ............. -- -- -- -- (919) (919)
---- ------- ------ ------ ---- -------
Balance at March 31, 1996 (unaudited) $ 8 $25,620 $6,546 $ -- $(569) $31,605
==== ======= ====== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- -----------
(RESTATED) (RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings (loss) ............................... $ (723) $ 965 $ 4,305 $ 1,667 $ 1,988
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .................... 410 874 2,456 603 891
Deferred compensation amortized .................... -- 138 148 69 --
Loss on sale of facility ........................... 26 -- -- -- --
Minority interest .................................. -- -- -- -- 319
Interest expense pushed down from parent,
net of tax ....................................... 105 -- -- -- --
Changes in assets and liabilities excluding
effects of acquisitions:
Accounts receivable--trade, net ................ (4,734) (9,242) (37,724) 685 2,461
Accounts receivable--affiliates, net .............. (3,053) (1,022) (12,285) 3,082 (1,631)
Inventories ....................................... 845 (18,798) (32,204) (52) (11,357)
Prepaid expenses and other assets ................. 932 (2,429) (1,742) (3,734) (4,019)
Accounts payable .................................. 1,199 36,617 51,818 (2,997) 1,821
Accrued liabilities and income taxes .............. 700 758 3,175 1,176 1,545
------- -------- -------- -------- --------
Net cash provided by (used in) operating activities: (4,293) 7,861 (22,053) 499 (7,982)
Cash flows from investing activities:
Purchase of fixed assets .......................... (462) (1,728) (6,866) (539) (1,618)
Proceeds from sale of facilities .................. 6 -- -- -- --
Cash provided from acquisitions ................... 74 4,890 1,317 -- --
------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities: ............................ (382) 3,162 (5,549) (539) (1,618)
Cash flows from financing activities:
Proceeds from private placement ................... -- 4,000 -- -- --
Payment on notes to affiliate ..................... -- (3,771) -- -- --
Proceeds from affiliate notes ..................... 374 1,650 -- 36 --
Net borrowings from (repayments to) banks ......... 3,320 (5,254) 29,855 5,384 11,657
Capital contributed ............................... 1,511 -- -- -- --
Dividends paid .................................... (782) -- -- -- --
------- -------- -------- -------- --------
Net cash provided by (used in) financing activities: 4,423 (3,375) 29,855 5,420 11,657
Effect of exchange rate changes on cash ............. (389) 117 550 512 (228)
------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH ......................... (641) 7,765 2,803 5,892 1,829
------- -------- -------- -------- --------
Cash at beginning of period ......................... 1,244 603 8,368 8,368 11,171
------- -------- -------- -------- --------
Cash at end of period ............................... $ 603 $ 8,368 $ 11,171 $ 14,260 $ 13,000
======= ======== ======== ======== ========
</TABLE>
(CONTINUED)
F-12
<PAGE>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
------- ---------- ---------- ---------- --------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest ................................. $906 $1,532 $4,944 $793 $2,154
Income taxes .................................. -- 747 1,753 435 291
</TABLE>
Non cash investing and financing activities:
These statements of cash flows do not include noncash investing and financing
transactions associated with the common stock issued for various
acquisitions. The components of the transactions in each year are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
------- ---------- ---------- ---------- -------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Fair value of assets acquired including
cash acquired ........................ $551 $92,049 $19,216 $ -- $7,284
Less: Common stock or other
consideration issued ................. 7 26,647 7,152 -- 2,515
---- ------- ------- ---- ------
Liabilities assumed .................... $544 $65,402 $12,064 $ -- $4,769
==== ======= ======= ==== ======
</TABLE>
In 1994 and 1995, a $6,748,000 and $5,200,000, respectively, reduction in
receivable from affiliate was charged to additional paid-in capital.
Compensatory stock options of $280,000 were issued in 1994.
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. FORMATION OF BUSINESS
On January 1, 1993, CHS Electronic Publishing Service GmbH, ("CHS
Germany") was acquired by Comtrad, Inc. ("Comtrad"), a U.S. corporation based
in Miami, Florida for $3,200,000. Goodwill arising from this transaction
($2,212,000) has been pushed down to the CHS Germany level as of the date of
acquisition and is reflected in the accompanying financial statements. On
December 8, 1993, Comtrad transferred ownership of CHS Germany to a newly
formed subsidiary of Comtrad for 4,000,000 shares of its common stock and a
$4,000,000 promissory note. Such acquisition was accounted for in a manner
similar to a pooling of interests since it was between entities under common
control. Assets and liabilities were transferred to the subsidiary at their
historical cost. On December 21, 1993, Comtrad exchanged the stock of the
subsidiary for 2,000,000 shares of Safety Technology, Inc., ("STI") (which
represented 96.5% of STI's shares) a publicly held, inactive Utah corporation
with essentially no assets or liabilities. After this exchange STI changed
its name to CHS Electronics, Inc. (the "Company"). This transaction has been
accounted for in the 1993 financial statements as a reverse acquisition so
that CHS Germany is the reporting entity.
2. 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, South America and Eastern Europe.
3. RESTATEMENT
The 1994 balance sheet and the 1995 financial statements have been
restated for the effects of companies acquired in a manner similar to a
pooling of interests due to a common control (see note B). All share and per
share information have been restated for a one for two reverse stock split
approved by the shareholders in March 1996.
4. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
5. FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated into United
States dollars at the exchange rate in effect at the close of the period.
Revenues and expenses of these subsidiaries are translated at the average
exchange rate during the period. The aggregate effect of translating the
financial statements of foreign subsidiaries is included in a separate
component of shareholders' equity entitled foreign currency translation
adjustment. 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 foreign currency translation adjustment. For entities in
highly inflationary countries, the U.S. dollar is
F-14
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
considered the functional currency and a combination of current and
historical rates are used in translating assets and liabilities. The related
exchange adjustments are included in operations.
6. CASH EQUIVALENTS
For the purpose of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
7. CONCENTRATION OF CREDIT RISK
The Company's credit risk on trade receivables is diversified over a wide
geographic area and many customers. The largest customer accounts for less
than 6% of sales. The Company performs ongoing credit evaluations of its
customers. In South America, the Company obtains guarantees from its
customers in some cases. The Company uses credit insurance in several
locations (covering $59 million in receivables at December 31, 1995) and
factoring without recourse in other locations to mitigate risk and provides
for estimated credit losses at time of sale.
8. INVENTORIES
Inventories, consisting of finished products, are stated at the lower of
cost or market, with cost being determined principally by current replacement
cost, which approximates the first-in first-out method.
9. DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. Leasehold improvements 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 ..................... 30-50
Leasehold improvements ........ 3-7
Computer equipment ............ 2-5
Office equipment and furniture 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 eliminated from the accounts and any
gain or loss is recognized at such time.
F-15
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
10. 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 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 its foreign
subsidiaries indefinitely. At December 31, 1994 and 1995, the cumulative
amount of undistributed earnings on which the Company has not recognized
United States income taxes was approximately $1,418,000 and $6,015,000,
respectively. However, it is anticipated that United States income taxes on
such amounts would be partially offset by available foreign income tax
credits.
11. 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.
12. COST IN EXCESS OF ASSETS ACQUIRED, NET
The cost in excess of assets acquired is being amortized to operations
over a 20 year period on a straight-line basis. The Company evaluates its
goodwill annually to determine potential impairment by comparing the carrying
value to undiscounted future cash flows of the related assets. The Company
modifies or adjusts the value of the subsidiary's goodwill if an impairment
is indicated by the difference between the undiscounted cash flows and the
carrying value. Accumulated amortization was $431,000 and $1,187,000 at
December 31, 1994 and 1995, respectively. In March 1995, the Financial
Accounting Standards Board issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
All of the Company's goodwill is identified with the assets acquired and
falls under the scope of SFAS 121. This Statement will have no impact on the
Company's results of operations or financial position upon adoption in
January 1996.
13. EARNINGS PER COMMON SHARE
Earnings per share for 1994 and 1995 is computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents (common stock options) outstanding during the year, unless such
inclusion is antidilutive. The weighted average number of shares was
4,693,332 in 1994, 7,282,785 in 1995, 6,966,120 and 7,862,349 in the three
month periods ended March 31, 1995 and 1996, respectively. Earnings per
common share for the year ended December 31, 1993 is computed using the total
shares outstanding of the Company at December 31, 1993 (2,269,000 shares).
The weighted average number of shares (8,183,391 shares) used in the
computation of fully
F-16
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
diluted earnings per share for the quarter ended March 31, 1996 assumes the
contingent shares related to the acquisition of 51% of a company in Hungary
were issued based on the acquisition formula applied to the earnings of the
acquired company in the interim period.
14. STOCK OPTIONS
Options granted under the Company's 1994 Stock Option Plan are accounted
for under APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES AND
RELATED INTERPRETATIONS. In October 1995, the Financial Accounting Standards
Board issued Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123), which will require additional proforma disclosures for companies that
will continue to account for employee stock options under the intrinsic value
method specified in APB 25. The Company plans to continue to apply APB 25 and
the only effect of adopting SFAS 123 in 1996 will be the new disclosure
requirement.
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.
16. INTERIM FINANCIAL INFORMATION
The financial statements at March 31, 1996 and for the three month periods
ended March 31, 1995 and 1996 are unaudited and prepared on the same basis as
the audited consolidated financial statements included herein. In the opinion
of management, such interim financial statements included all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results for such periods. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year or any other interim period.
NOTE B--ACQUISITIONS
In 1995, the Company acquired nine companies in as many countries. Eight
of these were acquired from Comtrad Holdings, Inc. (CHI) or Comtrad (a wholly
owned subsidiary of CHI) and 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 or CHI. The
acquisition of the company in the Czech Republic was partially (16%) from
Comtrad and partially from an individual. The portion from Comtrad was valued
at Comtrad's basis of $758,000. The portion purchased from the unrelated
individual has been accounted for as a purchase. Results of the remaining 84%
of the Czech Republic company have been included in the accompanying
financial statements from October 1, 1995. Information about the pooled
acquisitions is shown below:
F-17
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE B--ACQUISITIONS--(CONTINUED)
<TABLE>
<CAPTION>
CHS COMTRAD OR CHI
COMPANY SERVICE AREA CONSIDERATION ACQUISITION DATE ACQUISITION DATE
- ------- ---------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
CHS England England 1,750,000 April 1995 September 1994
CHS France France shares April 1995 September 1994
CHS Belgium Belgium and Luxembourg April 1995 September 1994
CHS Portugal Portugal April 1995 January 1993
CHS BEK South America 287,500 shares October 1995 July 1995
CHS Czechia (16%) Czech Republic 92,000 shares October 1995 January 1993
CHS Finland Finland $2,300,000 December 1995 July 1995
CHS Sweden Sweden $2,400,000 December 1995 July 1995
CHS Poland Poland $2,300,000 December 1995 November 1995
</TABLE>
In these transactions, assets and liabilities were transferred to the
Company at Comtrad's or CHI's original cost basis. In several of these
transactions Comtrad's cost is subject to adjustment from earnout agreements.
Comtrad's purchase price for the three companies in the United Kingdom,
France and Belgium consisted of a $7,000,000 note and an amount determined by
an earn out based on 1994 and 1995 earnings. In accounting for this
transaction initially, after reducing fixed assets to zero, there was an
excess of net assets acquired over cost ($4,161,000 at December 31, 1994). In
May 1995, the acquisition agreement was modified to reduce to 100,000 the
maximum number of additional Company shares that could become due to such
sellers based on 1995 operating results, in return for Comtrad's payment to
the sellers of $794,000 and 500,000 shares of Company stock owned by Comtrad.
The 100,000 additional shares were issued by Comtrad in early 1996. The value
of this additional purchase price ($5,344,000), less what had previously been
recorded as a liability for the 1994 earn out ($617,000), has been recorded
in the accompanying balance sheet as an increase in additional paid in
capital, a reduction of the excess of net assets acquired over cost to zero
and restoration of a portion of fixed assets. In 1995, $975,000 of
depreciation which would have applied to fixed assets reduced to zero was not
incurred.
As consideration for the acquisition of the company in Portugal, Comtrad
delivered common stock valued at $800,000. The acquisition was recorded at
this value, resulting in goodwill of $450,000.
As consideration for the acquisition of CHS BEK, CHI delivered CHI class B
common shares which have preference rights in liquidation to a specified
number of Company shares held by CHI depending on a one year earn out. As of
December 31, 1995, the acquisition was recorded at CHI's basis of $1,747,000,
based on the six month results. This amount is subject to change based on the
final earnout amount. The goodwill recorded at December 31, 1995 was $1.7
million, which is being amortized over a 20 year life. In April 1996 the
number of the preference shares were further defined to be between 258,750
and 287,500 based on 1996 results. Accordingly, additional consideration of
$644,000 was recorded as additional paid-in capital and goodwill in the three
months ended March 31, 1996.
In Comtrad's acquisition of two companies in Sweden and Finland, Comtrad's
consideration was a number of Company shares to be determined by an earnout
based on 1996 results. Accordingly, the
F-18
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE B--ACQUISITIONS--(CONTINUED)
contingent amount has not been recorded as it is not determinable beyond a
reasonable doubt. The acquisition has been recorded by the Company as a
charge to additional paid-in capital until the value of the consideration can
be determined.
In consideration for the acquisition of the company in Poland, CHI
delivered shares of its stock, a $600,000 note and an unknown number of
Company shares to be determined by an earnout based on 1996 results. The
contingent amount has not been recorded as it is not determinable beyond a
reasonable doubt. The value given to date by CHI was determined to be $1.8
million and the difference of $500,000 between that amount and the price paid
by the Company has been charged to additional paid-in capital. Goodwill of
$.7 million has been recorded on this transaction, which will be amortized
over 20 years.
In March 1996, the Company acquired six companies from Comtrad or CHI for
the 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 interest. Accordingly, these acquisitions have
been included in the accompanying financial statements from the date acquired
by Comtrad or CHI.
Companies in Bulgaria, Croatia, Lithuania and Romania were started by
Comtrad in 1993 and 1994 for a minimal investment and have 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 in CHS shares to be
based on 1996 results. This acquisition has been recorded as of December 31,
1994 based on the cost of the 65% with the remaining cost to be recorded as
goodwill when known. The acquisition in Brazil was in November 1994 for CHI
common shares valued at $762,000. The acquisition was recorded as of December
31, 1994 at this value, resulting in goodwill of $2,508,000.
Combined and separate results of the companies for 1995 are shown below
(in thousands):
<TABLE>
<CAPTION>
(AS ORIGINALLY
PRESENTED) (RESTATED)
CHS BALTIC BRAZIL BULGARIA CROATIA ROMANIA SLOVAKIA COMBINED
-------------- ------ ------ -------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Sales ................ $862,324 2,610 45,934 4,236 4,820 3,592 13,187 $936,703
Net earnings (loss)... 4,743 63 (147) (25) (100) (152) (77) 4,305
</TABLE>
As noted above, terms of several of the acquisitions by Comtrad provided
for contingent consideration. The Company believes such contingent
consideration, when paid, will be additional purchase price. The Company's
conclusion is based on the terms of each agreement, which provide that the
contingent consideration is not dependent on the continued employment of
sellers, is based on a multiple of earnings over a short time period, is the
major portion of the purchase price and is in addition to fair compensation
paid to the former owner through salary and bonus.
The Company acquired 84% of the Czech Republic company from an individual
by issuing 483,000 shares which were valued at their market value of
$3,246,000. This produced goodwill of $2.4 million which is being amortized
over 20 years.
F-19
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE B--ACQUISITIONS--(CONTINUED)
On June 30, 1994, the Company entered into a Plan of Acquisition ("Plan"),
with Comtrad, CHI, and Alvin Perlman ("Perlman"), the sole shareholder of CHS
Promark and the owner of the minority interests in certain subsidiaries.
Under the terms of the Plan, the Company acquired from CHI 77% of the capital
stock of CHS Promark and 30% of the outstanding capital of three companies
operating in Argentina, Chile and Colombia (the South American subsidiaries)
in exchange for 1,540,000 shares of the Company's common stock. In a
simultaneous transaction, the Company acquired the remaining 23% of the stock
of CHS Promark (which owned the remaining 70% of the South American
subsidiaries) from Perlman in exchange for 460,000 shares of the Company's
common stock. In July 1994, CHS Promark acquired the Venezuelan operations of
Comtrad for nominal consideration. The exchange between the Company and CHI
has been accounted for as an exchange between entities under common control
with CHI's cost basis in the acquired assets being pushed down to the
Company. The exchange between the Company and Perlman for the remaining 23%
interest in CHS Promark has been accounted for by the Company as a purchase.
The Company recorded a total investment of $11,300,000, which was the fair
market value of CHS Promark as determined by an independent appraisal. The
excess of the cost over the fair value of the net assets acquired was
approximately $8,364,000 and is being amortized over 20 years.
The following represents the unaudited pro forma results of operations
assuming all of these acquisitions had taken place on January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
-------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Net sales ................................ $699,371 $1,067,248
Net earnings ............................. 1,242 4,643
Net earnings per share ................... $ .16 $ .60
</TABLE>
The amounts above include adjustments of goodwill amortization, salary
adjustments to reflect new compensation agreements and income taxes on CHS
Promark, which was a Subchapter S corporation.
The pro forma information is not necessarily indicative of the actual
results of operation that would have occurred had the acquisitions taken
place on January 1, 1994, or of results which may occur in the future.
In February 1996, the Company acquired 51% of an unaffiliated company in
Hungary for consideration based on the acquired company's results in 1996.
The consideration is 51% of the book value of equity plus a multiple of 51%
of 1996 net earnings. Based on a history of profitable operations, the
acquisition was initially recorded at 51% of the book value on January 31,
1996. Adjustments to purchase price will be made when the amount of
contingent consideration is known.
F-20
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE C--VALUATION ACCOUNTS
Changes in certain valuation accounts are shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts
Beginning balance ....................... $298 $ 546 $ 3,358
Provision for bad debt .................. 213 1,596 3,035
Write-offs .............................. -- (473) (2,161)
Acquired through acquisition ............ 35 1,689 156
---- ------- -------
Ending balance .......................... $546 $ 3,358 $ 4,388
==== ======= =======
Reserve for inventory obsolescence
Beginning balance ....................... $-- $ 48 $ 1,362
Provision for obsolescence .............. -- 386 1,128
Write-downs ............................. -- (150) (919)
Acquired through acquisition ............ 48 1,078 185
---- ------- -------
Ending balance .......................... $ 48 $ 1,362 $ 1,756
==== ======= =======
</TABLE>
NOTE D--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings ..................................... $ 106 $ 1,943
Furniture and fixtures ................................. 842 6,973
Leasehold improvements ................................. 695 1,790
Computers and office equipment ......................... 2,465 2,498
Vehicles and other ..................................... 304 1,992
------- -------
4,412 15,196
Less accumulated depreciation and amortization ......... 1,440 6,070
------- -------
$ 2,972 $ 9,126
======= =======
</TABLE>
F-21
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE E--INCOME TAXES
The components of income before income taxes consist of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
------ ------ -------
(IN THOUSANDS)
Domestic .................... (80) $1,258 $ 741
Foreign ..................... (402) 310 5,361
----- ------ ------
Total ....................... $(482) $1,568 $6,102
===== ====== ======
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
------- -------- --------
(IN THOUSANDS)
Current
U.S. Federal ................. $-- $ 776 $ 525
U.S. State ................... -- 122 41
Foreign ...................... 241 35 1,357
----- ------- -------
241 933 1,923
----- ------- -------
Deferred
U.S. Federal ................. -- (289) 67
U.S. State ................... -- (41) 5
Foreign ...................... -- -- (198)
----- ------- -------
-- (330) (126)
----- ------- -------
$ 241 $ 603 $ 1,797
===== ======= =======
Deferred tax assets are comprised of the following at:
DECEMBER 31,
--------------------
1994 1995
------- -------
(IN THOUSANDS)
Deferred tax assets
Net operating losses of foreign subsidiaries ........ $ 4,777 $ 4,162
Employee compensation not currently deductible ...... 158 127
Inventory differences ............................... 51 66
Allowance for bad debts ............................. 121 265
------- -------
3,344 2,857
Valuation allowance ................................. (4,777) (4,162)
------- -------
Total ............................................. $ 330 $ 456
======= =======
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:
F-22
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE E--INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory rate ............................................. $(164) $ 533 $2,070
Foreign income subject to tax at other than statutory rate 6 (53) (212)
State or local income taxes, less effect of federal
benefits ................................................. 94 53 55
Losses without tax benefit ................................. 275 390 613
Goodwill amortization ...................................... 38 108 190
Utilization of net operating losses of foreign subsidiaries -- (382) (826)
Other ...................................................... (8) (46) (93)
----- ----- ------
Effective tax rate ......................................... $ 241 $ 603 $1,797
===== ===== ======
</TABLE>
At December 31, 1995, the Company has net operating loss carry forwards in
certain foreign jurisdictions that expire as follows:
1998 ................. $2,533,000
1999 ................. 185,000
2000 ................. 846,000
No expiration date.... 3,811,000
As disclosed in Note I, CHS Germany paid an administrative fee of .7% of
net sales ($896,000) to its affiliate, Comtrad, during 1993. CHS Germany had
deducted this fee in arriving at its taxable income. Although management of
CHS Germany considers the charges levied to approximate those under normal
commercial arrangements, they could be challenged by the German Fiscal
Authorities. Should any challenge be successful, CHS Germany would be liable
for additional tax on the disallowed portion of the deduction. The Company is
not indemnified against any such eventuality. In 1994, the Company conducted
a study to help determine the probable deductibility of such amounts. Based
on such study, a credit of $579,000 was issued by Comtrad in 1994. Management
believes that any potential liability to the Company arising from this matter
would not have a material adverse effect upon the results of operations or
financial condition of the Company. In September 1994, the German Fiscal
Authorities completed an audit of years up to fiscal 1992. No significant
liabilities resulted from the audit.
NOTE F--NOTES PAYABLE AND LONG TERM DEBT
Several of the Company's subsidiaries have credit lines with local banks
totaling $56,000,000 at December 31, 1995. 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. In 1995, the
maximum and average amounts outstanding were $56,000,000 and $46,000,000,
respectively. The 1995 average and year end interest rates on a weighted
basis were 8.87% and 8.36%, respectively.
Included in the lines above is a $20 million credit line with a bank of
which $19,848,000 was outstanding at December 31, 1995. The debt is
guaranteed by Comtrad, CHI and the Company's chairman. Certain shares of the
Company held by Comtrad and CHI are also pledged under the guarantee. The
line is also collateralized by essentially all of the Company's assets.
During 1995, the
F-23
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE F--NOTES PAYABLE AND LONG TERM DEBT--(CONTINUED)
Company was in violation of certain covenants relating principally to
obtaining bank approval for certain transactions. Such approval has been
received as has a waiver of such violations.
CHS Promark's new revolving credit agreement provides that the interest
rates will increase .75% if $3 million is not invested into CHS Promark by
July 1996. The agreement also limits the ability of CHS Promark to pay
dividends to the Company to 50% of CHS Promark's net income.
The Company's long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- ----------
1994 1995 1996
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revolving credit agreement, due February 1999, providing for advances and
letter of credit based upon eligible accounts receivable and inventory up to a
maximum of $20 million. Interest at Prime plus 1.5% or LIBOR plus 3.75% at
borrower's option. CHS Promark's assets, including accounts receivable and
inventory of $25,683,000 pledged as collateral ............................... $-- $-- $12,641
CHS Promark had a $12,000,000 revolving credit agreement with a bank. The
agreement, which was refinanced on February 5, 1996, included banker's
acceptances and a line of credit. Interest on the advances under the line was
at the bank's base rate plus 1.5% for the first 5 months of 1995 and at a
penalty rate of base plus 4.5% for the remainder of 1995 (13.25% at December
31, 1995) and for the banker's acceptances, interest rates were determined at
the time of borrowing. CHS Promark's accounts receivable and inventories
($22,544,000 at December 31, 1995) were pledged as collateral. One million
dollars of the loan was guaranteed by an officer of CHS Electronics, Inc.
Advances were based on a percentage of accounts receivable and inventories, as
defined in the agreement. In addition, the credit agreement contained certain
restrictive covenants. CHS Promark was in violation of the ratio of
liabilities to equity covenant for all of 1995. .............................. 6,060 8,004 --
Mortgage on building, interest at 9.5%, due in 2002 with monthly payments of
$5,964 including interest, collateralized by a building with a net book value
at December 31, 1995 of $637,000 ............................................. -- 343 298
Unsecured note to Comtrad bearing interest at 8%, due January 1996 (classified
with affiliate receivables at December 31, 1995) ............................. 1,500 -- --
Unsecured note due in 1997, bearing interest at 11% ............................ -- 276 276
Installment and other notes, collateralized by computer equipment, and
commercial vehicles, bearing interest ranging from 7.4% to 11%, with
maturities through September 1998 ............................................ 614 352 728
------ ------ -------
Total .......................................................................... 8,174 8,975 13,943
Less current portion of long-term debt, included in notes payable ............. 70 174 433
------ ------ -------
Total long-term debt ........................................................... $8,104 $8,801 $13,510
====== ====== =======
Scheduled maturities of long-term debt are as follows (in thousands):
Year Ending December 31,
1996 .......................................................................... 174
1997 .......................................................................... 440
1998 .......................................................................... 105
1999 .......................................................................... 8,059
2000 .......................................................................... 59
</TABLE>
F-24
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE G--CONCENTRATIONS
The Company's markets are substantially all outside the United States. The
largest amount of sales occurred in 1995 in Germany, which comprised 20% of
total sales. The Company also had sales of almost 14% in each of France and
England. 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 the less politically stable countries
of Venezuela and Colombia. In Venezuela, currency export restrictions have
extremely limited the subsidiary's ability to pay its obligations to its
parent. The Company's investment in this subsidiary is $2.8 million.
Much of the Company's sales are made in local currencies other than the
U.S. dollar. In some countries, certain purchases and the resulting payables
are in dollars. This situation creates a risk in that changes in foreign
exchange rates could produce gains or losses. The current liabilities
denominated in U.S. dollars were $57 million at December 31, 1995.
Transaction gains and losses on these liabilities are included in the
determination of operating results for the relevant periods. In 1993, 1994
and 1995 foreign currency gains (losses) were ($213,000), $385,000 and
$74,000 respectively.
The Company enters into foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with its
committed exposure. The foreign exchange contracts are valued at market and
generally have maturities which do not exceed six months. Gains and losses on
foreign exchange contracts 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 term
period covered by these contracts. At December 31, 1995 the face value of
foreign exchange forward contracts was $29.5 million, which approximated the
fair market value of the contracts. CHS Czechia and CHS Poland accounted for
$10.4 million and $8.5 million of the unhedged amounts at December 31, 1995.
In other countries, there is a risk that high inflation will result in
devaluation of the local currency either periodically or in a large
devaluation. In these countries, no hedging mechanism exists. The Company has
risks in these countries that devaluation could cause economic loss and
negatively impact future sales since the products cost would increase in
local terms after a devaluation. 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.
NOTE H--LEASE OBLIGATIONS AND OTHER CONTINGENCIES
The Company leases equipment, offices, sales and warehouse space under
non-cancelable leases. The following is a schedule by years of the minimum
rental commitments remaining on leased property and equipment (in thousands):
F-25
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE H--LEASE OBLIGATIONS AND OTHER CONTINGENCIES--(CONTINUED)
YEAR ENDING
DECEMBER 31, BUILDINGS EQUIPMENT AUTOS TOTAL
------------ --------- --------- ----- -------
1996 $2,165 $279 $450 $2,893
1997 2,212 259 238 2,709
1998 1,966 158 88 2,212
1999 1,777 76 9 1,862
2000 1,386 19 -- 1,405
Subsequent Years 8,096 -- -- 8,096
Total rental expense was $1,084,000, $1,583,000 and $2,503,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
Rental expense includes $64,840 for monthly rent due on a CHS facility in
Germany under a lease agreement dated November 1993 with a term of 17 years.
CHS Germany has the option to purchase the leased property at both the end of
the seventh year of the lease term, and at the end of the lease, for the net
book value of the property as calculated under applicable German tax laws.
The option prices at the end of the seventh and seventeenth year would
approximate $5,911,000 and $2,974,000, respectively. In addition, the lessor
has the right to adjust the minimum rental payments at the end of 1999 if
certain economic conditions prevail.
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.
NOTE I--RELATED PARTY TRANSACTIONS
On January 1, 1993 CHS Germany was acquired by Comtrad for $3,200,000.
Comtrad subsequently provided additional equity in June 1993 by investing an
additional 2,400,000 DM ($1,511,000). During 1993 only, various management
services, in the areas of reporting, marketing, product development and
training were provided to CHS Germany by Comtrad or its affiliates. As
compensation for these services, a management charge of .7% of net sales was
levied. For the year ended December 31, 1993 this amount aggregated $896,000
and has been reflected as a component of administrative expenses in the
accompanying statements of operations. In the fourth quarter of 1994, a study
was performed of the actual costs relating to the services provided by
Comtrad and affiliates. Based on such study the Company applied for and
received a credit from Comtrad against such fees of $579,000. Such amount has
been recorded as a reduction of administrative expenses in 1994. In each year
the Company billed Comtrad for actual costs of salaries, space and other
administrative costs it incurred on Comtrad's behalf. Such amounts were
$185,000, $670,000 and $495,000 in 1993, 1994 and 1995, respectively. In
1995, Comtrad billed the Company $887,000 for the Company's share of actual
costs incurred by Comtrad for salaries, space and other administrative
expenses for shared employees. In 1996, in conjunction with Comrad's sale to
the Company of its remaining operating companies, it is expected that such
arrangements will cease or be insignificant.
Comtrad owned operating subsidiaries in several countries in Europe. The
subsidiary companies engaged in essentially the same business as CHS Germany.
Comtrad used the recognized "CHS" name
F-26
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE I--RELATED PARTY TR4ANSACTIONS--(CONTINUED)
in the local market place for all of these subsidiaries. During 1993 and the
ten months ended October 31, 1994, certain Comtrad subsidiaries purchased
substantially all of their goods for resale from CHS Germany. These entities
were initially invoiced at cost plus 2% for all goods purchased. This
arrangement was necessary since formal distributorship agreements between the
Comtrad subsidiary companies and the principal supplier of goods,
Hewlett-Packard, had not been finalized. In the last quarter of 1994, a study
of the actual handling costs was completed, which concluded the actual costs
for the year were 4.5% of such sales. As a result an additional $500,000,
representing the cumulative effect of the difference between 4.5% and 2%, was
billed to the affiliates and recorded in gross profit. Handling costs billed
to Comtrad, which are recorded as a reduction in operating costs, were
$183,000, $900,000 and $73,000 in 1993 1994 and 1995, respectively.
At December 31, 1994 and 1995, the Company carried a receivable from
Comtrad and its subsidiaries in an amount of $0 and $843,000, respectively,
and had payables due to Comtrad at December 31, 1994 and 1995 of $4,776,000
and $0, respectively. Interest charged to Comtrad on advances was $162,000 in
1994 and $438,000 in 1995. Interest expensed on the payables to Comtrad was
$117,000 in 1994 and $126,000 in 1995.
A director of the Company serves the Company as a management consultant
under a consulting agreement specifying payments of $4,000 per month. In 1994
and 1995, $45,700 and $48,000 was paid under this agreement.
Immediately prior to the Company's acquisition of CHS Promark, CHI,
Comtrad, the shareholders of Comtrad, the Company and Alvin Perlman entered
into an Agreement and Plan of Exchange ("Exchange Agreement"). Under the
terms of the Exchange Agreement, all of the Comtrad shareholders exchanged
100% of the outstanding Comtrad common stock for 770,000 shares of CHI common
stock and 100,000 shares of CHI class A common stock. Perlman exchanged 77%
of the issued and outstanding capital stock of CHS Promark for 230,000 shares
of CHI common stock. The class A common stock of CHI has no dividend,
liquidation, participation or voting rights, except it is redeemable at the
election of CHI with 1,540,000 shares of the Company's common stock held by
Comtrad and has preference in liquidation over the CHI common stock with
respect to the same 1,540,000 shares. In a related transaction, Perlman sold
CHI 30% of the capital stock of each of the South American subsidiaries for
$2,500,000 paid in the form of $100,000 in cash and a 7% promissory note in
the principal amount of $2,400,000 which has been fully satisfied.
The Company has guaranteed the obligation of CHI to pay to the former
owner of CHS Poland an earnout amount. Such amount, when known, is to be paid
in Company stock.
NOTE J--COMMON STOCK AND STOCK OPTION PLANS
In March 1996, the shareholders approved 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. 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.
F-27
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE J--COMMON STOCK AND STOCK OPTION PLANS--(CONTINUED)
On February 17, 1994, the Company completed a private placement offering
for 896,523 shares of its common stock. The stock was sold to unrelated
investors at an offering price of $4.46 a share. The net proceeds of
$3,998,493 were used to partially repay the $4,000,000 promissory note owed
to Comtrad. Comtrad subsequently loaned the Company $150,000 at 8% interest
for working capital needs, which amount has been paid.
In 1994, Claudio Osorio, CHI, and Alvin Perlman entered into an option
agreement. The option agreement grants to CHI and Mr. Osorio an option until
June 30, 1996 to purchase all shares of the Company's common stock and CHI
common stock held by Mr. Perlman for $15,000,000. For the month of July 1996,
Mr. Perlman has an option to put all shares of the Company's common stock and
the CHI common stock held by him to Mr. Osorio for $15,000,000, and CHI has
guaranteed Mr. Osorio's performance if the put option is exercised. The
payment obligations of CHI under the option agreement, should they arise, are
secured by 1,540,000 shares of the Company's common stock held by CHI. The
exercise of any of these options could result in one party to the option
agreement gaining increased ownership of the Company.
In August 1994, a Stock Incentive Plan was adopted by the Company's Board
of Directors and subsequently approved by the Company's shareholders in June
1995. The maximum number of shares issuable under the Plan was 497,000. In
September 1995, the Board of Directors approved, subject to approval by the
Company's shareholders, the issuance of an additional 175,000 shares under
the plan. Certain of the grants (156,509 at December 31, 1995) 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. Vesting periods are generally 25% a year for four years. No options
were exercisable as of December 31, 1994 and 110,815 options were exercisable
at December 31, 1995.
The following summarizes activity in the Stock Incentive Plan:
NUMBER OPTION EXERCISE PRICE
OF --------------------------
OPTIONS PER SHARE TOTAL
------- ------------ -----------
Outstanding December 31, 1992 and 1993 -- -- --
Granted .............................. 365,925 $ 6.00 $ 2,195,550
Exercised ............................ -- --
Canceled ............................. (20,000) $ 6.00 (120,000)
-------- -----------
Outstanding December 31, 1994 ........ 345,925 $ 6.00 2,075,550
Granted .............................. 223,000 $8.76-$10.00 2,135,500
Exercised ............................ -- --
Canceled ............................. (60,917) $6.00-$ 9.00 (375,249)
-------- -----------
Outstanding December 31, 1995 ........ 508,008 $6.00-$10.00 $ 3,835,801
======== ===========
In December 1994, when the estimated fair value was $6.00, the Board
granted the Company's Chief Executive Officer non-qualified options to
purchase 56,080 shares for which the exercise price is $1.00 per share. The
vesting period is two years and the options expire in ten years. At December
31, 1995, 28,040 of these options are exercisable. The compensation element
of $280,400 is considered
F-28
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE J--COMMON STOCK AND STOCK OPTION PLANS--(CONTINUED)
applicable to this individual's year of service beginning July 1, 1994 and
the full amount has been amortized to compensation expense in the
accompanying financial statements.
In March 1996, the Company granted 77,500 additional options, under the
1994 plan, at an exercise price equal to the market price. No options were
exercised in the three month period ended March 31, 1996.
NOTE K--MAJOR SUPPLIER
The Company has a major supplier, Hewlett-Packard (HP), whose products
accounted for 90%, 49% and 35% of sales for 1993, 1994 and 1995,
respectively. No other vendor accounted for more than 10% of sales in any
year. 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 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 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. The amounts outstanding to HP at December 31, 1994 and 1995 were
$8,565,000 and $32,174,000, respectively.
NOTE L--SEGMENT INFORMATION
The Company's operations involve a single industry segment -distribution
of microcomputer equipment and software products. The geographic areas in
which the Company operates are Western Europe, Eastern Europe and Latin
America (excluding Mexico). Net sales, operating income (before interest and
income taxes) and identifiable assets by geographical area were as follows
(in thousands):
F-29
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE J--COMMON STOCK AND STOCK OPTION PLANS--(CONTINUED)
<TABLE>
<CAPTION>
WESTERN EASTERN LATIN
EUROPE EUROPE AMERICA ELIMINATIONS CONSOLIDATED
--------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1993
Net sales ........... $ 144,928 $ 1,480 -- -- $146,408
========
Operating income..... 537 19 -- -- 556
Corporate expenses... (191)
--------
365
========
Identifiable assets.. 28,057 551 -- -- 28,608
========
1994
Net sales ........... $ 287,244 $ 6,559 $ 65,366 -- $359,169
========
Operating income..... 1,809 43 2,004 -- 3,856
Corporate expenses... (468)
--------
3,388
========
Identifiable assets.. 110,457 4,868 49,433 $ (419) 164,339
Corporate assets..... 129
--------
164,468
========
1995
Net sales ........... $ 542,438 $65,320 $328,945 -- $936,703
========
Operating income..... 7,358 252 3,934 -- 11,544
Corporate expenses... (745)
--------
10,799
========
Identifiable assets.. 169,442 33,283 85,409 $(22,677) 265,457
Corporate assets..... 347
--------
265,804
========
</TABLE>
F-30
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(INFORMATION RELATING TO THE INTERIM PERIODS ENDED--(CONTINUED)
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE M--SUMMARIZED QUARTERLY FINANCIAL DATA FOR 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
1995
Net sales .................... $207,419 $172,744 $239,074 $317,466 $936,703
Gross profit ................. 14,910 13,400 17,425 22,252 67,987
Net earnings ................. 1,667 950 1,163 525 4,305
Net earnings per share ....... 0.24 0.14 0.16 0.07 0.59
1994
Net sales .................... $ 41,705 $ 38,938 $100,373 $178,153 $359,169
Gross profit ................. 2,263 2,257 6,994 13,672 25,186
Net earnings (loss) .......... 96 (13) (112) 994 965
Net earnings (loss) per share 0.04 -- (0.02) 0.14 0.21
</TABLE>
Note: Amounts for 1995 have been restated for the effect of acquisitions
accounted for in a manner similar to a pooling of interests.
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Wyrsch Trading Ltd, Littau
We have audited the accompanying balance sheets as of December 31, 1995
and 1994, of Wyrsch Trading Ltd, Littau (as defined in Note 1 to the
financial statements) and the related statements of income, shareholders'
equity and cash flows for the years ended December 31, 1995 and 1994, all
expressed in Swiss Francs. 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 auditing standards generally
accepted in the United States. 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 financial position of Wyrsch Trading Ltd,
Littau, as of December 31, 1995 and 1994, and the results of their operations
and the changes in shareholders' equity for the years ended December 31, 1995
and 1994, in conformity with accounting principles according to the
Commercial Law of Switzerland, the results of the cash flows for the years
ended December 31, 1995 and 1994, in conformity with accounting principles
generally accepted in the United States.
Accounting principles according to the Commercial Law of Switzerland vary
in certain important respects from accounting principles generally accepted
in the United States. The application of the latter would have affected the
determination of net income expressed in Swiss Francs for the two years ended
December 31, 1995 and 1994, and the determination of the shareholders' equity
also expressed in Swiss Francs as of December 31, 1995 and 1994, to the
extent summarized in Note 2 to the financial statements.
BDO Binder AG
Heinz Vogel
Swiss chartered accountant
ppa. Josef Kiener
Auditor in charge
Swiss chartered accountant
Lucerene, January 26, 1996,
except for the statement of
cash flows and the notes to which
the date is March 8, 1996
F-32
<PAGE>
WYRSCH TRADING LTD, LITTAU
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1995 1994
NOTES SFR. % SFR. %
---------- -------------- ------ -------------- -----
<S> <C> <C> <C> <C> <C>
Operating revenue
Sales
Gross sales ................. 10 78,069,687.16 51,512,250.31
Other operating revenue ... 10 932,472.57 423,089.60
------------- ----- ------------- -----
79,002,159.73 100.3 51,935,339.91 100.4
Deductions on sales
Sales discounts ............ (213,125.62) (0.3) (192,249.32) (0.4)
------------- ----- ------------- -----
78,789,034.11 100.0 51,743,090.59 100.0
Purchases of merchandise ... 2, 11 72,583,667.84 92.1 47,123,705.98 91.1
------------- ----- ------------- -----
Gross profit ................ 6,205,366.27 7.9 4,619,384.61 8.9
------------- ----- ------------- -----
Personnel expenses .......... 12, 13, 26 3,410,942.54 4.3 2,747,865.48 5.3
Selling and marketing
expenses .................. 692,095.84 0.9 805,050.10 1.6
Administrative and other
expenses
Rental costs ............. 276,410.00 203,496.55
Losses on trade accounts
receivable ............... 2, 14 348,228.54 342,654.65
Other administrative and
other expenses ........... 574,908.58 351,218.45
------------- ----- ------------- -----
1,199,547.12 1.5 897,369.65 1.7
------------- ----- ------------- -----
Depreciation ................ 18 293,993.89 0.4 196,217.55 0.4
------------- ----- ------------- -----
Cost and expenses ........... 5,596,579.39 7.1 4,646,502.78 9.0
------------- ----- ------------- -----
Operating profit/loss before
interest/taxes ............ 608,786.88 0.8 (27,118.17) (0.1)
------------- ----- ------------- -----
Financial result
Interest income ............ 0.00 10,093.47
Interest expenses .......... (374,892.48) (300,627.41)
Exchange differences ....... (12,736.72) (9,748.51)
------------- ----- ------------- -----
(387,629.20) (0.5) (300,282.45) (0.6)
------------- ----- ------------- -----
Profit/loss before taxes ... 221,157.68 0.3 (327,400.62) (0.6)
Taxes ....................... 2, 15 (18,962.55) (23,432.85)
------------- ----- ------------- -----
Net profit/net loss ......... 202,195.13 0.3 (350,833.47) (0.7)
</TABLE>
F-33
<PAGE>
WYRSCH TRADING LTD, LITTAU
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
NOTES SFR. % SFR. %
----------- -------------- ------ ------------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash on hand and in banks
Cash .................................. 9 12,632.55 24,813.90
Postal cheque account ................. 7,310.30 16,869.80
Bank current accounts ................. 14,636.13 1,032.55
------------- ---- ------------- ----
34,578.98 0.2 42,716.25 0.4
------------- ---- ------------- ----
Securities (not marketable) ............ 3 1.00 0.0 1.00 0.0
Trade accounts receivable
Trade accounts receivable ............. 4, 9, 16, 25 10,654,252.29 7,749,529.00
Allowance for doubtful
accounts ............................ 2, 4, 16 (1,088,225.78) (782,566.40)
------------- ---- ------------- ----
9,566,026.51 48.7 6,966,962.60 62.7
------------- ---- ------------- ----
Other accounts receivable
Loan to shareholder ................... 55,065.60 30,144.75
Loan to affiliated company ............ 91,561.11 169,923.90
Accounts receivable for goods returned
to suppliers ........................ 937,645.75 19,926.55
Other accounts receivable ............. 20,490.85 0.00
------------- ---- ------------- ----
1,104,763.31 5.6 219,995.20 2.0
Inventories ............................ 2, 5, 17 7,391,042.78 37.6 2,899,095.18 26.1
------------- ---- ------------- ----
Prepaid expenses and accruals .......... 843,344.10 4.3 541,552.52 4.9
------------- ---- ------------- ----
18,939,756.68 96.4 10,670,322.75 96.1
------------- ---- ------------- ----
Fixed assets
Financial assets
Investment ............................. 6, 18 1.00 1.00
------------- ---- ------------- ----
Tangible assets
Office equipment ...................... 7, 19, 30 417,152.22 291,434.20
EDP equipment ......................... 7, 19, 30 264,274.30 137,769.40
Motor vehicles ........................ 7, 19, 30 29,413.10 5,000.00
------------- ---- ------------- ----
710,839.62 3.6 434,203.60 3.9
------------- ---- ------------- ----
Total assets ........................... 19,650,597.30 100.0 11,104,527.35 100.0
</TABLE>
(CONTINUED ON NEXT PAGE)
F-34
<PAGE>
WYRSCH TRADING LTD, LITTAU
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
NOTES SFR. % SFR. %
----------------- ------------- ---- ------------- ----
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Trade accounts payable
Suppliers ........................... 8, 9 12,600,940.03 5,969,631.95
------------- ----- ------------- -----
12,600,940.03 64.1 5,969,631.95 53.8
------------- ----- ------------- -----
Other short-term liabilities
Other accounts payable .............. 8 579,533.96 476,353.44
Customer prepayments ................ 0.00 58,819.35
Current bank overdrafts ............. 8, 9, 20, 25 1,790,390.92 1,703,489.75
Short-term bank loans ............... 8, 20, 25 3,000,000.00 2,000,000.00
Other short-term loans .............. 500,000.00 0.00
------------- ----- ------------- -----
5,869,924.88 29.9 4,238,662.54 38.2
------------- ----- ------------- -----
Provisions
Provisions for deferred income
taxes ............................. 8, 15, 23 0.00 0.00
Accrued expenses .................... 8, 12, 22, 28, 30 591,526.52 3.0 510,222.12 4.6
------------- ----- ------------- -----
19,062,391.43 97.0 10,718,516.61 96.5
------------- ----- ------------- -----
Shareholder's equity
Share capital ....................... 23 480,000.00 2.4 480,000.00 4.3
Legal reserves
General legal reserve ............... 23 14,100.00 0.1 14,100.00 0.1
Retained earnings/deficit ........... 94,105.87 0.5 (108,089.26) (1.0)
------------- ----- ------------- -----
588,205.87 3.0 386,010.74 3.5
------------- ----- ------------- -----
Total liabilities and shareholders'
equity ............................ 19,650,597.30 100.0 11,104,527.35 100.0
</TABLE>
F-35
<PAGE>
WYRSCH TRADING LTD, LITTAU
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARE LEGAL RETAINED SHAREHOLDERS'
SFR. CAPITAL RESERVES EARNINGS/DEFICIT EQUITY
- ---- ---------- --------- ---------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.... 480,000.00 14,100.00 242,744.21 736,844.21
Net loss 1994 ................ (350,833.47) (350,833.47)
---------- --------- ----------- -----------
Balance at December 31, 1994 480,000.00 14,100.00 (108,089.26) 386,010.74
Net profit 1995 .............. 202,195.13 202,195.13
---------- --------- ----------- -----------
Balance at December 31, 1995.. 480,000.00 14,100.00 94,105.87 588,205.87
</TABLE>
F-36
<PAGE>
WYRSCH TRADING LTD, LITTAU
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994
NOTES SFR. SFR.
------------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ 2 1,522,734 (807,103)
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in allowance for doubtful accounts .............. 2, 16 237,621 (63,883)
Allowance for loan to affiliated company ................. 80,000 0
Depreciation ............................................. 19 293,994 196,218
Change in provisions for deferred income taxes .......... 2, 21 372,500 (128,700)
---------- ----------
Subtotal .................................................. 2,506,849 (803,468)
Changes in operating assets and liabilities:
Trade accounts receivable ................................ (2,904,723) (1,430,191)
Loan to shareholder ...................................... (24,921) 110,368
Loan to affiliated company ............................... (1,637) (77,271)
Accounts receivable from goods return to suppliers ...... (917,719) (1,334)
Other accounts receivable ................................ (20,491) 0
Inventories .............................................. 2, 17 (6,141,948) (125,082)
Prepaid expenses and accruals ............................ 2 (301,792) (250,172)
Trade accounts payable ................................... 6,631,308 2,233,264
Other accounts payable ................................... 103,180 194,569
Customer prepayments ..................................... (58,819) 10,676
Accrued expenses ......................................... 12, 22, 26, 28 106,305 (27,557)
---------- ----------
Net cash used in operating activities ..................... (1,024,408) (166,198)
Cash flows from investing activities:
Office equipment .......................................... 7, 19 (217,016) (91,560)
EDP equipment ............................................. 7, 19 (316,994) (158,834)
Motor vehicles ............................................ 7, 19 (36,620) 0
---------- ----------
Net cash used in investing activities ..................... (570,630) (250,394)
Cash flows from financing activities:
Net borrowings under line-of-credit agreement ........... 86,901 408,852
Proceeds from increase of short-term bank loans ......... 1,000,000 0
Proceeds from increase of other short-term loans ........ 500,000 0
---------- ----------
Net cash provided in financing activities ................. 1,586,901 408,852
Cash and cash equivalents:
Net decrease in cash and cash equivalents ................. (8,137) (7,740)
Cash, cash equivalents at the beginning of the year ...... 42,716 50,456
---------- ----------
Cash, cash equivalents at the end of the year ............. 34,579 42,716
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid ........................................... 283,132 275,346
Income taxes .............................................. 0 18,829
</TABLE>
F-37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. GENERAL INFORMATION ON THE SIGNIFICANT PRINCIPLES OF ACCOUNTING AND
EVALUATION
1 GENERAL PRINCIPLES
The present income statements, balance sheets and statements of
shareholders' equity have been established according to the Commercial Law of
Switzerland. The significant differences to the generally accepted accounting
principles in the United States are explained in notes 2. The statements of
cash flows have been established according to the accounting principles being
generally accepted by the United States.
2 RECONCILIATION OF STATEMENTS OF INCOME AND BALANCE SHEETS 1995 AND 1994
ESTABLISHED ACCORDING TO COMMERCIAL LAW OF SWITZERLAND INTO STATEMENTS OF
INCOME AND BALANCE SHEETS 1995 AND 1994 ESTABLISHED ACCORDING TO
ACCOUNTING PRINCIPLES BEING GENERALLY ACCEPTED BY THE UNITED STATES.
2.1 Reconciliation of statements of income
<TABLE>
<CAPTION>
SFR. 1995 1994
---- ----------- ----------
<S> <C> <C>
Net profit/net loss according to the Commercial Law of
Switzerland ................................................... 202,195 (350,833)
Adjustments:
Increase in excessive allowance for doubtful accounts,
managerial not necessary(Note 14) ............................. 68,039 67,952
Increase/decrease in excessive allowance on inventories,
managerial not necessary(Note 11) ............................. 1,650,000 (652,922)
Dissolution of provisions for transportation damage,
managerial not necessary(Note 11) ............................. (25,000) 0
Change in deferred income taxes(Note 15) ........................ (372,500) 128,700
------------ ------------
1,320,539 (456,270)
------------ ------------
Net income/net loss according to generally accepted accounting
principles in the United States ................................ 1,522,734 (807,103)
============ ===========
</TABLE>
2.2 Reconciliation of balance sheets
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
SFR. 1995 1994
- ---- --------------- ---------------
<S> <C> <C>
Shareholders' equity established according to the
Commercial Law of Switzerland ............................. 588,206 386,011
--------------- ---------------
Adjustments:
On allowance for doubtful accounts Notes(4)(16) ........... 250,420 182,381
On inventories Notes(5)(17) ................................ 2,483,162 833,162
On provisions for transportation damage .................... 0 25,000
Less deferred income taxes on revaluation reserves
(22%)(15) ................................................ (601,400) (228,900)
--------------- ---------------
2,132,182 811,643
--------------- ---------------
Shareholders' equity established according to generally
accepted accounting principles in the United States ....... 2,720,388 1,197,654
=============== ==============
</TABLE>
3 SECURITIES
Securities are evaluated at their market value.
F-38
<PAGE>
4 ACCOUNTS RECEIVABLE
Accounts receivable from goods and services have been evaluated at the
nominal value, and allowance carried out for operational reasons to cover
loss-risks were immediately deducted from nominal value. For tax reasons, the
Commercial Law of Switzerland allows an additional allowance of 5 percent for
remaining accounts receivable after an itemized allowance has already been
deducted. This additional allowance would partly not be permitted under
accounting principles generally accepted in the United States.
5 INVENTORIES
Goods in stock are evaluated at their purchase price or their lower market
price. In any case, they are surely evaluated at a reasonable net sales
value. The purchase price is determined using the first-in/ first-out method.
Goods being low in demand are devaluated and removed from stock. Risks of
obsolescence are covered by sufficient allowance. In addition to the
obsolescence reserve, Swiss Tax Law allows the recognition of an additional
general inventory reserve of up to one third of the effective value of the
goods in stock. This additional general inventory reserve would not be
permitted under accounting principles generally accepted in the United
States.
6 FINANCIAL ASSETS
Financial assets are evaluated at their market value.
7 TANGIBLE ASSETS
Tangible assets are evaluated at their purchase value less accumulated
depreciations. Depreciation is done in a linear way over the period of use
expected. Maintenance, repair and minor servicing work costs are recorded in
the charge side of the statement of income at the moment they arise.
Important servicing work as well as value-increasing investments are
capitalized and depreciated over the period of use estimated.
Tangible assets having been removed from operation or sold or completely
depreciated are entered into the books at book-values drawn from the tangible
assets account together with the respective accumulated depreciations.
Profits and losses arising from decreases in tangible assets are taken into
consideration in the statement of income. The following periods are used to
depreciate the different tangible assets:
Office equipment 8 years
EDP equipment 3 years
Vehicles 3 years
8 LIABILITIES
Liabilities are evaluated at their nominal value.
F-39
<PAGE>
9 CURRENCY EXCHANGE
The currency exchange rate applied on the day the balance sheets are made
out is used to translate assets and liabilities from foreign currencies into
Swiss francs. At the end of the respective financial years the following
exchange rates for foreign currencies were applied:
<TABLE>
<CAPTION>
FOREIGN CURRENCY 1995 1994
- ----------------- ---------- ----------
<S> <C> <C>
DM (per 100) ... 79,4800 85,4500
US$ ............. 1,1375 1,3505
</TABLE>
Gains and losses resulting from foreign currency transactions are included
in the income statement, using the rates at the dates the transactions
occurred.
B. DETAILS ON SIGNIFICANT ITEMS OF THE STATEMENTS OF INCOME
10 GROSS TURNOVER
Geographical classification:
<TABLE>
<CAPTION>
SFR. 1995 % 1994 %
- ----- ------------- -------- ----------- -------
<S> <C> <C> <C> <C>
Switzerland .............. 78,750,168 99.7 51,935,340 100.0
Other European countries.. 251,992 0.3 0 0.0
------------- -------- ------------ -------
Total .................... 79,002,160 100.0 51,935,340 100.0
============= ======== ============= =======
</TABLE>
The whole turnover, at 100 per cent, is achieved with retail traders.
11 PURCHASES OF MERCHANDISE
Purchases of merchandise are made up of goods ordered having been invoiced
in both SFr. and foreign currencies. On payment, the amounts paid in foreign
currencies are immediately recorded in the statement of income after having
been translated by using the exchange rate of the respective day. In the
financial year 1995, purchases in foreign currencies equaled an amount of
SFr. 5,4 Mio. (DM + US$) while SFr. 2,5 Mio. (DM + US$) were recorded in the
year before. The company invests in foreign currencies only for specific
transactions, not for investment purposes.
As a reason of the different accounting principles according to the
Commercial Law of Switzerland and the accounting principles being generally
accepted by the United States, changes of the purchases of merchandise
result:
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- ------------ ------------
<S> <C> <C>
Purchases of merchandise according to the Commercial
Law of Switzerland ................................... 72,583,668 47,123,706
Change in excessive allowance on inventories,
managerial not necessary ............................. (1,650,000) 652,922
Dissolution of provisions for transportation damage,
managerial not necessary ............................. 25,000 0
-------------- -------------
Purchases of merchandise according to generally
accepted accounting principles in the
United States......................................... 70,958,668 47,776,628
============== ============
</TABLE>
12 PERSONNEL EXPENSES
Personnel expenses of SFr. 3,410,943 were recorded in 1995. In the year
before, these expenses ranked at SFr. 2,747,865. In 1995, provisions of SFr.
20,000 for holiday and overtime allowances have been included. The working
contracts of Wyrsch Trading Ltd do not provide for any separations
allowances.
F-40
<PAGE>
13 PARTICIPATION IN PROFITS
The working contracts of Wyrsch Trading Ltd do not grant any right to
participation in profits. Because of the positive operating results, the
company, of its own free will, granted a non-recurring bonus to its
executives and sales personnel in the financial year 1995:
SFR. 1995 1994
- ---- --------- -------
PARTICIPATION IN PROFITS 86,583 0
14 LOSSES ON TRADE ACCOUNTS RECEIVABLE
As a reason of the different accounting principles according to the
Commercial Law of Switzerland and the accounting principles being generally
accepted by the United States, changes of the losses on trade accounts
receivable result:
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- ---------- -----------
<S> <C> <C>
Losses on trade accounts receivable according to the
Commercial Law of Switzerland ............................ 348,229 342,655
Change in excessive allowance for doubtful accounts,
managerial not necessary ............................... (68,039) (67,952)
----------- ----------
Losses on trade accounts receivable according to
generally accepted accounting principles in the
United States........................................... 280,190 274,703
=========== ==========
</TABLE>
15 TAXATION
Being a legal entity standing on its own, the company as such is liable to
taxation. It is assessed in Littau/Switzerland.
Since January 1, 1995, the year long period-method for taxation applies to
the company (in contrary to a period of 2 years until end of 1994). As a
consequence of this change, only part of the total loss recorded in 1994,
established according to the rules of Swiss Commercial Law, could be offset
against the profit achieved in 1995. In the financial year 1996 there will be
no more retained loss carrying tax privileges.
In this transition period, tax expenditures shown hereafter covering
current income and capital gains taxes show the real expenditure of both the
financial year 1994 and 1995 with loss having been set off against profit, as
far as having been entitled to by the new assessment method.
From 1996 onwards, income and capital gains taxes arising from business
activity will be charged to the statement of income of the same financial
year. Income taxes and capital gains taxes have not been recorded separately,
since the amount of the capital gains taxes are not material.
The amount of deferred taxes for revaluation reserves was evaluated
according to the so-called "Liability-Method". This method takes both future
tax rates and possible change in laws into consideration. Such changes
therefore will always be directly included in tax evaluation. Deferred taxes
for revaluation reserves have been evaluated at full tax rate (22 per cent).
This evaluation is based on evaluation differences occurring between the
financial statements established according to accounting principles being
generally accepted by the United States and the financial statements
established according to Swiss Commercial and Trade Laws. Such evaluation
differences occur in the fields of goods in stock as well as in the field of
allowances for bad debts. The presently applied Swiss tax laws allow
revaluation reserves of up to 33 1/3 per cent with goods in stock and a
lump-sum value-adjustment of 5 per cent with domestic debtors.
F-41
<PAGE>
Tax expenditures charged to the statements of income are made up as
follows:
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- ---------- -----------
<S> <C> <C>
Current income taxes to be paid on profits achieved and
capital gains obtained(1) ............................ 18,963 23,433
Fluctuations in deferred taxes for revaluation reserves 372,500 (128,700)
---------- -----------
Total tax expenditures according to generally accepted
accounting principles in the United States............ 391,463 (105,267)
========== ===========
<FN>
- --------------
(1) Result of the statements of income according to the Commercial Law of
Switzerland.
</FN>
</TABLE>
In the balance sheets according to the Commercial Law of Switzerland, the
following tax provisions are foreseen:
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- ---------- ---------
<S> <C> <C>
Current profit and capital gains taxes becoming due in a short-
term (integrated in accrued expenses)............................ 5,000 0
========== =========
Additional long-term deferred income taxes for revaluation
reserves according to generally accepted accounting
principles in the United States ................................. 601,400 228,900
========== =========
</TABLE>
C. DETAILS ON SIGNIFICANT ITEMS OF THE BALANCE SHEETS
16 ACCOUNTS RECEIVABLE FROM GOODS AND SERVICES PROVIDED
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- ------------ -----------
<S> <C> <C>
Accounts receivable from goods and services ....................... 10,654,252 7,749,529
Itemized allowance ................................................ (637,471) (454,280)
Compulsory allowance for remaining accounts receivable ........... (200,335) (145,905)
Additional allowance for remaining accounts receivable according
to the Swiss Tax Law ............................................ (250,420) (182,381)
------------- ------------
Total accounts receivable--net value .............................. 9,566,026 6,966,963
============= ===========
</TABLE>
17 INVENTORIES
The stocks are made up as follows:
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- ------------ -----------
<S> <C> <C>
Merchandise ........................................................ 9,639,232 3,941,558
Spare parts ........................................................ 485,346 30,370
Operational allowance for obsolete goods or goods low in demand ... (250,373) (239,671)
Additional allowance on inventories for tax reasons according to
the Swiss Tax Law ................................................ (2,483,162) (833,162)
------------- ------------
Total stocks ....................................................... 7,391,043 2,899,095
============= ============
</TABLE>
Year-end taking of stocks was carried out with the board of auditors being
present.
18 DETAILS ON FINANCIAL ASSETS
They consist of an equity interest in Swisscomp Ltd, Tampa, Florida, USA.
This company is at 100 per cent an affiliated company of Wyrsch Trading Ltd.
The company is subsequently inactive and presents no value.
F-42
<PAGE>
DECEMBER 31, DECEMBER 31,
US$ 1995 1994
- --- --------------- ---------------
SHARE-CAPITAL SWISSCOMP LTD, TAMPA, FLORIDA 2,000 2,000
19 TANGIBLE ASSETS AND ACCUMULATED DEPRECIATIONS
<TABLE>
<CAPTION>
1995 PURCHASE- ACCUMULATED NET BOOK-VALUES
SFR. VALUES DEPRECIATIONS DECEMBER 31, 1995
- ---- ------------ ---------------- ------------------
<S> <C> <C> <C>
Office equipment.. 730,382 313,230 417,152
EDP equipment..... 571,468 307,194 264,274
Motor vehicles.... 41,620 12,207 29,413
------------ ---------------- ------------------
Total ............ 1,343,470 632,631 710,839
============ ================ ==================
</TABLE>
<TABLE>
<CAPTION>
1994 PURCHASE- ACCUMULATED NET BOOK-VALUES
SFR. VALUES DEPRECIATIONS DECEMBER 31, 1994
- ---- ----------- ---------------- -----------------
<S> <C> <C> <C>
Office equipment.. 513,366 221,932 291,434
EDP equipment..... 396,140 258,371 137,769
Motor vehicles.... 5,000 0 5,000
----------- ---------------- ------------------
Total ............ 914,506 480,303 434,203
=========== ================ ==================
</TABLE>
Depreciations carried out on an annual basis:
SFR. 1995 1994
- ---- ---------- ---------
DEPRECIATIONS.. 293,994 196,218
20 SHORT-TERM LIABILITIES TO BANKS
<TABLE>
<CAPTION>
SFR. 1995 1994
- ---- --------- ---------
<S> <C> <C>
Current bank overdrafts (interest at 5.75% to 7%)... 1,790,391 1,703,490
Short-term bank loans (interest at 5% to 5.63%)..... 3,000,000 2,000,000
--------- ---------
Total liabilities to banks.......................... 4,790,391 3,703,490
========= =========
Total credit line with banks........................ 5,000,000 4,000,000
</TABLE>
21 PROVISIONS FOR DEFERRED INCOME TAXES FOR REVALUATION RESERVES
Please refer to the information given in section 15.
22 ACCRUED EXPENSES
In addition to the usual accrued expenses, there are two provisions
included in this account:
/bullet/ Provisions for both holiday and overtime allowances have
already been referred to in section 12.
/bullet/ Liabilities to personal insurance institutions will be dealt
with later on in section 26.
/bullet/ Provisions for current law-suits will be dealt with later on in
section 28.2.
23 SHAREHOLDERS' EQUITY
The basic share-capital of the company is make up as follows:
480 registered shares--nominal value: SFr. 1,000 = Total SFr. 480,000
Companies in Switzerland are required to appropriate to a legal reserve 5
percent of the profits in local currency for each calendar year until the
legal reserve is equivalent to 20 percent of the aggregate
F-43
<PAGE>
par value of the share capital. In addition, the Swiss companies must
transfer to legal reserve 10 percent of the amount by which any dividend
exceeds 5 percent of the par value of the share capital. This additional
allocation must be made until the legal reserve amounts to 50 percent of the
share capital. Legal reserves are not free for distribution. The legal
reserves are a non distributional portion of equity and do not present
liabilities in any form.
D. FURTHER INFORMATION
24 EMPLOYEES
The number of employees is in line with the full time jobs to be done
within the company. The annual average value is established by basing
calculation on the effective number of personnel employed at the beginning of
each month (twelve-months average).
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
January 1 ............ 40 35
December 31 .......... 48 36
Annual average value.. 43 37
</TABLE>
25 ENCUMBRANCE OF ASSETS TO SECURE OWN LIABILITIES (DEPOSITED ASSETS):
<TABLE>
<CAPTION>
SFR. DECEMBER 31, 1995 DECEMBER 31, 1994
- ----- ------------------ ------------------
<S> <C> <C>
Accounts receivable assigned to Schweizerische
Kreditanstalt (SKA), Emmenbrucke, to secure own
bank liabilities ............................... 10,654,252 7,749,529
------------------ -----------------
</TABLE>
26 LIABILITIES TO PERSONAL INSURANCE INSTITUTIONS
The company does not have its own pension fund. Personal insurance is
taken care of by a group insurance with Waadt Versicherungen at Lausanne. It
is up to the insurance company to cover the minimal standards set up by the
legislator.
27 EVENTS HAVING OCCURRED AFTER THE DAY THE BALANCE SHEETS HAD BEEN MADE OUT
Please see details given in section 28.2, Scotoni v. Wyrsch Trading Ltd.
No other events that might seriously affect both income and financial
situation have been reported up to the day the balance sheets were made out
(March 8, 1996).
28 PENDING TAX MATTERS AND LEGAL SUITS
28.1 Tax matters
The company has been fully assessed up to the financial year 1994. This
assessment is legally binding. At the time being, no tax matters, such as
appeals or proceedings are pending.
28.2 Legal suits'
On December 31, 1995 two affairs were pending:
Scotoni v. Wyrsch Trading Ltd.
At the end of June 1993, Mrs. Patricia Scotoni, the former manager of the
Geneva office was removed from office with immediate effect. That measure
could be substantiated by many reasons. To the opinion of the company's
lawyers, Mrs. Scotoni wouldn't stand many chances in case she
F-44
<PAGE>
instituted proceedings against the company. Unfortunately this opinion
proved wrong. The court's verdict was in favor of Mrs. Scotoni and
substantiated by quite strange reasons: Being employees of the company,
the witnesses were said to be credible. The company then decided to lodge
an appeal.
In its 1995-statements, the company therefore built up provisions of SFr.
50,000 to cover the costs of this case. According to the verdict of the
Local Industrial Court of Geneva, Wyrsch Trading would have to pay a total
amount of SFr. 69,421 to Mrs. Scotoni (salaries + interests). The Board of
Directors of Wyrsch Trading Ltd does not at all agree with this verdict.
The company is now considering lodging an appeal with Swiss Federal Court.
An appeal against the pending verdict would have to be lodged until March
20, 1996 at the latest.
The company estimates that the additional lawyers fees in this matter will
not exceed SFr. 25,000. Since lawyers fees are not expected to be
material, no provision for such fees has been recorded in the financial
statements.
Interconnection AG v. Wyrsch Trading Ltd
On August 24, 1994 Wyrsch Trading Ltd signed a contract for AST products
with Interconnection AG, Zug. This contract once effective, AST, from
January 1, 1995 took over payment to Interconnection AG, as agreed on in
the document stated before. In April 1995, a contract was signed between
AST and Interconnection AG for this so called "help-line". AST had missed
to clearly stipulate in that contract that the previous one with Wyrsch
Trading Ltd would come to a term once a new agreement between AST and
Interconnection AG signed. Throughout July 1995 this seemed to be quite
clear to all parties. But once Interconnection AG had got into serious
trouble with the whole operation, they started to insist both contracts be
fulfilled.
Wyrsch Trading Ltd is involved in this matter because of an error
committed by AST. There will probably be no way to avoid this case be
dealt with in court. All the same, Wyrsch Ltd is still hoping an amicable
arrangement be achieved.
AST agrees Wyrsch Trading Ltd will have to be reimbursed in case the
verdict said Wyrsch Trading Ltd was to pay any damages whatsoever.
Nevertheless, reserves of SFr. 100,000 to cover this case were built up.
They are shown in the 1995 balance sheets. They will surely be sufficient
to cover all costs including both fees for lawyers, costs of the
proceedings and possible contribution in case an amicable arrangement
could be achieved.
There are no other cases pending. Those stated above are the only ones the
company had to face up with since its foundation in 1988.
29 COMMITMENTS TO TAKE DELIVERY AND SUPPLYING CONTRACTS
There are several distribution contracts (AST, Microsoft, Hewlett Packard,
Ozalid, CalComp etc.) showing the usual term of one year. These contracts are
renegotiated every year or exceptionally renewed by tacit agreement. No
commitments to take delivery are included in the distribution contracts
referred to.
F-45
<PAGE>
E. ADDITIONAL NOTES ACCORDING TO THE COMMERCIAL LAW OF SWITZERLAND
30 LEASING LIABILITIES NOT SHOW IN THE BALANCE SHEETS (NOT MATERIAL)
SFR. DECEMBER 31, 1995 DECEMBER 31, 1994
- ---- ----------------- -----------------
LEASING LIABILITIES 107,617 84,262
31 FIRE INSURANCE VALUES OF FIXED ASSETS
SFR. DECEMBER 31, 1995 DECEMBER 31, 1994
- ---- ----------------- -----------------
FIRE INSURANCE VALUES OF FIXED ASSETS 850,000 600,000
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
SEE BASIS OF PRESENTATION (NOTE 1)
To the Management of CHS Electronics, Inc.:
We have audited the accompanying balance sheet of Kventa Kft. (a Hungarian
limited liability company) (the "Company") as of December 31, 1995, and the
related statements of operations, quotaholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kventa Kft. as of
December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN & Co. Kft.
Budapest, Hungary,
April 1, 1996.
F-47
<PAGE>
KVENTA KFT.
BALANCE SHEET
DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS OF HUF)
<TABLE>
<CAPTION>
NOTE
-------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ............................................................ 4 23,551
Bank deposits ................................................... 4 141,351
Trade receivables, less allowance for doubtful accounts of 5,276. 354,017
Other receivables ............................................... 5 68,114
Inventories ..................................................... 155,662
Prepayments for inventories ..................................... 21,893
Shares .......................................................... 13 57,081
----------
TOTAL CURRENT ASSETS ............................................. 821,669
----------
LONG-TERM ASSETS
Intangibles ..................................................... 6 5,168
Property, plant and equipment--net .............................. 7 20,169
Investments ..................................................... 8 5,800
Long-term loans ................................................. 1,609
Other assets .................................................... 5,011
----------
TOTAL LONG-TERM ASSETS ........................................... 37,757
----------
TOTAL ASSETS ..................................................... 859,426
==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable ................................................ 190,943
Short-term loans ................................................ 4,230
Income taxes payable ............................................ 9 59,314
Payable for shares .............................................. 13 81,961
Other short-term liabilities .................................... 10 46,543
----------
TOTAL CURRENT LIABILITIES ........................................ 382,991
----------
QUOTAHOLDERS' EQUITY
Issued quotas ................................................... 1,000
Retained earnings ............................................... 475,435
----------
TOTAL QUOTAHOLDERS' EQUITY ....................................... 476,435
----------
TOTAL LIABILITIES AND QUOTAHOLDERS' EQUITY ....................... 859,426
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-48
<PAGE>
KVENTA KFT.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS OF HUF)
<TABLE>
<CAPTION>
NOTE 1995
------- ------------
<S> <C> <C>
Domestic revenues ......................... 2,450,058
Export revenues ........................... 178,665
------------
GROSS REVENUES ............................ 2,628,723
COST OF GOODS SOLD ........................ 2,231,126
------------
GROSS PROFIT .............................. 397,597
Selling, general & administrative expense.. 54,711
------------
OPERATING PROFIT .......................... 342,886
------------
OTHER INCOME (EXPENSES)
Other expenditures ........................ 12 (70,114)
Interest expense .......................... (14,484)
Interest income ........................... 25,690
Other income .............................. 11 28,869
------------
Total other income (expense) .............. (30,039)
------------
EARNINGS BEFORE INCOME TAXES .............. 312,847
------------
Income tax expense ........................ 9 57,626
------------
NET EARNINGS .............................. 255,221
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-49
<PAGE>
KVENTA KFT.
STATEMENT OF QUOTAHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS OF HUF)
<TABLE>
<CAPTION>
ISSUED RETAINED
QUOTAS EARNINGS TOTAL
--------- ----------- ----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994,
as previously presented .... 1,000 224,027 225,027
Prior period adjustment ..... -- (3,813) (3,813)
--------- ----------- ----------
BALANCE AS RESTATED .......... 1,000 220,214 221,214
Net earnings ................ 0 255,221 255,221
Dividends declared .......... 0 0 0
--------- ----------- ----------
BALANCE AT DECEMBER 31, 1995 1,000 475,435 476,435
========= =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-50
<PAGE>
KVENTA KFT.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS OF HUF)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .................................... 255,221
Adjustments to reconcile net earnings to net
cash
provided by operating activities:
Depreciation and amortization ............... 3,055
Provisions:
Receivables ................................... 5,276
Accrued interest .............................. 7,514
Other provisions .............................. 21,823
Changes in assets and liabilities:
Trade receivables .............................. (163,284)
Other receivables .............................. 9,088
Prepayments .................................... (6,893)
Inventories .................................... (74,215)
Other assets ................................... (12,002)
Accounts payable ............................... 64,482
Other liabilities .............................. 36,704
Other .......................................... (906)
------------
Net cash provided by operating activities ....... 145,863
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of fixed assets ........................... 5,045
Purchase of shares .............................. (57,081)
------------
Net cash used in investing activities ............ (52,036)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in loans granted ....................... (1,609)
------------
Net cash used in financing activities ............ (1,609)
------------
INCREASE IN CASH ................................. 92,218
CASH AT JANUARY 1, 1995 .......................... 72,684
------------
CASH AT DECEMBER 31, 1995 ........................ 164,902
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
KVENTA KFT.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
(ALL AMOUNTS IN THOUSANDS OF HUF, UNLESS OTHERWISE INDICATED)
1. BASIS OF PRESENTATION
The books and records of Kventa Kft. (the "Company") are maintained in
accordance with Law XVIII of 1991 on Accounting, as amended (the "Law"), and
with generally accepted accounting principles in Hungary. Such principles
differ from generally accepted accounting principles ("GAAP") in the United
States. The accompanying financial statements reflect certain adjustments not
recorded on the Company's books to present these statements in accordance
with generally accepted accounting principles of the United States. These
adjustments and their effect on income for the year ended December 31, 1995,
and retained earnings at that date are set forth below. The financial
statements are presented in the functional currency of the Company, the
Hungarian Forint ("HUF").
Earnings before income taxes before adjustment ........... 331,769
Write off of certain past due accrued interest ........... (7,514)
Additional provisions against receivables ................. (4,000)
Net effect of additional expenses for salaries ........... (3,408)
Other provisions .......................................... (4,000)
-----------
Total adjustments ......................................... (18,922)
-----------
Earnings before income taxes in accordance with US GAAP .. 312,847
===========
Total retained earnings before adjustment ................. 496,482
===========
Effect of above adjustments on earnings before income
taxes ................................................... (18,922)
Additional write off of accrued interest related to 1994 . (3,813)
Creation of deferred tax asset (Note 9) ................... 1,688
-----------
Total retained earnings in accordance with US GAAP ....... 475,435
===========
2. OPERATIONS
The Company is based in Budapest, Hungary, and is engaged in the
distribution of computers and computer peripherals, accessories and systems
integration. The Company has more than 600 dealers and resellers located
throughout Hungary. Its main customers include state and local
government-owned institutions, banks, insurance companies and other
educational institutions.
The Company was established on February 8, 1990, with an issued capital of
HUF 1 million. The Company was established by four individuals.
3. SIGNIFICANT ACCOUNTING POLICIES
The books and records of the Company are maintained in accordance with the
Law and generally accepted accounting principles in Hungary. A summary of the
significant accounting policies of the Company and the method and procedures
of evaluation are described below, together with the changes in the
accounting policies during the year.
F-52
<PAGE>
KVENTA KFT.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995--(CONTINUED)
(ALL AMOUNTS IN THOUSANDS OF HUF, UNLESS OTHERWISE INDICATED)
3. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
3.1. Rental rights
Rental rights are depreciated over 6 years and softwares over 3 years.
Rental rights represent payments made by the Company to the local Hungarian
government to secure the rights to rent property.
3.2. Property, plant and equipment--net
Purchased tangible fixed assets are stated at acquisition cost less
accumulated depreciation. Tangible fixed assets with a purchase price below
20 are fully depreciated when put into use. Depreciation is calculated on a
straight line basis over the estimated useful life of the related asset. The
estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
----------
<S> <C>
Buildings ..... 50
Computers ..... 3
Machinery ..... 7
Vehicles ...... 5
</TABLE>
3.3. Investments
Investments are stated at the lower of cost or net realizable value. The
Company has not recognized any equity in earnings of affiliates in which the
Company owns over 20%. (See Note 8.)
3.4. Inventories
Inventories purchased are stated at the lower of weighted average cost or
market value. Obsolete and slow moving inventories identified by management
have been written down to their net realizable value in the relevant period.
3.5. Revenue Recognition
The Company recognizes sales upon shipment, as there is no significant
post-sale obligation and collectibility is reasonably assured.
3.5. Income taxes
Adjustments have been made to the accompanying financial statements in
order to reflect the computation of income taxes in accordance with the
liability method employed in the United States. Under the liability method,
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 benefits are the result of changes in
deferred tax assets and liabilities.
3.6. Statement of cash flows
Interest and income taxes paid by the Company in cash during 1995 were 467
and 52,209, respectively.
F-53
<PAGE>
KVENTA KFT.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995--(CONTINUED)
(ALL AMOUNTS IN THOUSANDS OF HUF, UNLESS OTHERWISE INDICATED)
4. CASH AND BANK DEPOSITS
As of December 31, 1995, the Company's cash and bank balances are
summarized as follows:
Cash on hand ....................... 23,551
Cash at bank (in HUF) .............. 128,510
Cash at bank (in foreign currency) 12,841
----------
Total .............................. 164,902
==========
Included in cash at bank (in HUF) above is 40,000 which was paid by the
Company as a deposit to enable the Company to defer the payment of customs
duties.
5. OTHER RECEIVABLES
Other receivables as of December 31, 1995, are summarized as follows:
Loans granted ........................... 38,059
Reclaimable VAT paid for imported goods 25,161
Other receivables ....................... 4,894
---------
Total ................................... 68,114
=========
Included in loans granted above are loans to related parties. These loans
include a 14,500 loan to Muker 94 Kft., a loan for the amount of 14,950 to
Kventa Trade and a loan for 2,385 to Kventa Invest Kft. All of these loans
were granted with a market rate of interest. All of these loans have been
extended past the contract date. All accrued interest related to these loans
has been written off in the 1995 statement of operations.
6. INTANGIBLES
The following is a summary of the movements in intangible fixed assets
during the year ended December 31, 1995.
<TABLE>
<CAPTION>
RENTAL RIGHTS SOFTWARES TOTAL
---------------- ------------ ---------
<S> <C> <C> <C>
GROSS VALUE:
Opening balances as of January 1, 1995.... 10,000 520 10,520
Additions ................................ 0 49 49
---------------- ------------ ---------
Closing balance as of December 31, 1995... 10,000 569 10,569
---------------- ------------ ---------
ACCUMULATED AMORTIZATION:
Opening balances as of January 1, 1995 ... 3,300 433 3,733
Additions ................................ 1,580 88 1,668
---------------- ------------ ---------
Closing balances as of December 31, 1995.. 4,880 521 5,401
---------------- ------------ ---------
NET VALUE as of December 31, 1995 ........ 5,120 48 5,168
================ ============ =========
</TABLE>
F-54
<PAGE>
KVENTA KFT.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995--(CONTINUED)
(ALL AMOUNTS IN THOUSANDS OF HUF, UNLESS OTHERWISE INDICATED)
7. PROPERTY, PLANT AND EQUIPMENT--NET
The following is a summary of the movements in property, plant and
equipment during the year ended December 31, 1995.
<TABLE>
<CAPTION>
TECHNICAL
EQUIPMENT,
LAND AND MACHINERY
BUILDINGS AND OTHER VEHICLES TOTAL
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
GROSS VALUE:
Opening balances as of January 1, 1995 .. 22,580 5,559 1,731 29,870
Additions ................................ 6,342 1,479 1,670 9,491
Disposals and other decreases ............ (13,842) 0 (694) (14,536)
------------ ------------- ----------- -----------
Closing balances as of December 31, 1995 15,080 7,038 2,707 24,825
============ ============= =========== ===========
ACCUMULATED DEPRECIATION:
Opening balances as of January 1, 1995 .. 157 2,926 450 3,533
Annual depreciation ...................... 408 626 353 1,387
Disposals and other decreases ............ 0 0 (264) (264)
------------ ------------- ----------- -----------
Closing balances as of December 31, 1995 565 3,552 539 4,656
------------ ------------- ----------- -----------
NET VALUE as of December 31, 1995 ....... 14,515 3,486 2,168 20,169
============ ============= =========== ===========
</TABLE>
8. INVESTMENTS
As of December 31, 1995, the Company's investments are summarized as
follows:
<TABLE>
<CAPTION>
%
OWNERSHIP AMOUNT
------------ ---------
<S> <C> <C>
Karaj Kft. ......... 50% 3,900
Kventa Invest Kft. 90% 900
Muker 94 Kft. ...... 90% 900
Pirmex Kft. ........ 10% 100
---------
Total .............. 5,800
=========
</TABLE>
As a part of the agreement noted in footnote 14, the Company has agreed to
dispose of all investments by the closing date of the transaction noted in
that same footnote. Management of the Company does not expect to incur a
significant gain or loss on these transactions. These entities are therefore
not consolidated given the temporary control.
F-55
<PAGE>
KVENTA KFT.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995--(CONTINUED)
(ALL AMOUNTS IN THOUSANDS OF HUF, UNLESS OTHERWISE INDICATED)
9. INCOME TAX EXPENSE
The provision (benefit) for income taxes consists of the following at
December 31, 1995:
Current expense... 59,314
Deferred benefit (1,688)
----------
Total expense..... 57,626
==========
The total net deferred tax asset is comprised of the following:
Receivable write offs .............. 720
Accrued interest income write offs 1,352
Other .............................. (384)
--------
Total .............................. 1,688
========
The Company is subject to periodic tax inspections conducted on behalf of
the Hungarian Government. These inspections could result in the Company
incurring a liability as a result of assessments made by the taxing
authorities. No such liability for assessments has been recorded in the
accompanying financial statements as the Company has not undergone a recent
inspection.
10. DIVIDENDS
No dividend has been declared by the Company related to 1995. A dividend
payable of 32,000 is included in Other Short-Term Liabilities in the
accompanying balance sheet as of December 31, 1995, and relates to the
dividends declared from 1992, 1993 and 1994 profits. Of this amount, 2,000
relates to 1992, 10,000 relates to 1993 and 20,000 relates to 1994.
Management has determined that the 2,000 will not be paid, and thus will be
capitalized as equity in 1996, the 10,000 will be paid in 1996. Management is
uncertain at this time as to the ultimate disposition of the remaining
20,000.
11. OTHER INCOME
Other income for the year ended December 31, 1995, consisted of the
following:
Foreign exchange gains ........... 14,509
Late payment interest received .. 2,460
Release of prior year provisions 525
Other ............................ 11,375
---------
Total ............................ 28,869
=========
F-56
<PAGE>
KVENTA KFT.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995--(CONTINUED)
(ALL AMOUNTS IN THOUSANDS OF HUF, UNLESS OTHERWISE INDICATED)
12. OTHER EXPENDITURES
Other expenditures for the year ended December 31, 1995, consisted of the
following:
Statistical fee ....... 27,044
Loan write offs ....... 15,497
Foreign exchange loss 7,019
Receivable writeoffs... 5,276
Local taxes ........... 4,711
Other ................. 10,567
---------
Total ................. 70,114
=========
13. INVESTMENT IN ELZETT
In 1995, the Company and other entities in a consortium entered into an
agreement with the State Privatization Agency which allowed the Company to
purchase a 35% ownership interest in ELZETT Rt. for 106,000. ELZETT was a
previously 100% state-owned enterprise which produced various parts including
metal locks for doors. 57,081 was paid by the Company in December of 1995,
with the agreement being at that time that the rest of the shares would be
purchased in 1996 with the proceeds from the receipt of an "E loan" received
from a financial institution in the amount of 49,000. This E loan, which is a
special type of loan guaranteed by the government, will not become an
obligation of Kventa, but of ELZETT. Thus, no liability related to the
repayment of this loan will be recorded on the books of Kventa. Due to the
transaction entered into and described in Note 14 below, the Company was
required to dispose of all non operating investments, including the ownership
in ELZETT.
This disposal of ELZETT will be effected with the transfer of the entire
amount of shares to the members of the consortium in the fashion described
below. Prior to this transaction, members of the consortium had purchased a
bond issued by the Company for the amount of 50,000. This was purchased in
1994. As of December 31, 1995, the bond was still outstanding, as was accrued
interest related to the bond of 19,945 related to 1994 and 12,016 related to
1995. Thus, in total, the Company owed those who had purchased the bond a
total of 81,961, which had not yet been paid to the purchasers of the bond.
Upon receipt of the E loan and completion of purchase of the shares of
ELZETT, the entire amount of the shares will be transferred to the purchasers
of the bond to satisfy Kventa's obligations of principal and interest related
to the bond. No gain related to this transaction was recorded in the
accompanying statements.
14. SUBSEQUENT EVENT
In accordance with a purchase agreement dated January 31, 1996, (the
"Agreement") the Company entered into a transaction with CHS Electronics
("CHS"), a public company headquartered in Miami, Florida which calls for CHS
to purchase 51% of the quotas of the Company. The agreement calls for the
Company to dispose of all investments owned by the Company before the closing
date, as defined in the Agreement. Management of the Company does not expect
to incur any significant losses on the disposal of such shares.
F-57
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER TO SELL IS NOT AUTHORIZED, OR IN WHICH
THE PERSON IS NOT AUTHORIZED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ...................... 3
Risk Factors ............................ 7
Reincorporation and Acquisitions ....... 10
Use of Proceeds ......................... 12
Dividend Policy ......................... 12
Price Range of Common Stock ............. 13
Capitalization .......................... 14
Selected Consolidated Financial Data ... 15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ............... 16
Business ................................ 23
Management .............................. 29
Certain Transactions .................... 34
Principal and Selling Shareholders ..... 37
Description of Capital Stock ............ 39
Shares Eligible for Future Sale ........ 42
Underwriting ............................ 43
Legal Matters ........................... 45
Experts ................................. 45
Available Information ................... 45
Index to Consolidated Financial
Statements .............................. F-1
</TABLE>
================================================================================
================================================================================
5,500,000 SHARES
CHS LOGO
COMMON STOCK
----------
PROSPECTUS
----------
RAYMOND JAMES &
ASSOCIATES, INC.
JUNE 7, 1996
===============================================================================
