UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 0-24244
CHS ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 87-0435376
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2000 N.W. 84TH AVENUE
MIAMI, FLORIDA 33122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 908-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates computed by reference to the high and low sales prices in the New
York Stock Exchange on March 18, 1999, was approximately $276,974,143. As of
March 18, 1999, the registrant had outstanding 56,171,934 shares of Common
Stock, par value $0.001.
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DOCUMENTS INCORPORATED BY REFERENCE
Incorporated herein by this reference is the definitive proxy or information
statement for the 1999 Annual Meeting of Shareholders to be filed by the Company
with the Commission under Regulation 14A or Regulation 14C.
PART I
ITEM 1 - BUSINESS
"FORWARD-LOOKING" INFORMATION
This Form 10-K contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which represent the Company's expectations of beliefs, including, but not
limited to, statements concerning gross margins, operating expenses to sales,
income taxes, year 2000 compliance activities, inflation expectations, the
effect of the euro and sales of the Company's products. These statements by
their nature involve substantial risks and uncertainties, certain of which are
beyond the Company's control, and actual results may differ materially depending
on a variety of important factors, including the level of acquisition
opportunities available to the Company and the Company's ability to efficiently
price and negotiate such acquisitions on a favorable basis, the financial
condition of the Company's customers, the failure to properly manage growth and
successfully integrate acquired companies and operations, changes in economic
conditions, demand for the Company's products, the outcome of the purported
class action litigation referred to herein, and changes in competitive
environment.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
GENERAL
CHS Electronics, Inc. ("CHS" or the "Company") is a leading international
distributor of microcomputer products, including personal computers,
peripherals, networking products and software. As of December 31, 1998, we
operated in 46 countries primarily in Western Europe, Eastern Europe and Latin
America, and serviced an active customer base of approximately 150,000
resellers. In 1998, approximately 80% of the products which we sold were
manufactured by 20 equipment and software vendors, including such market leaders
as Hewlett-Packard, IBM, Microsoft, Seagate, Compaq, Intel, Quantum, Western
Digital, 3Com, Toshiba, Acer, Yakumo, Epson and Sun. We are a focused
distributor, as opposed to a broadline distributor, and seek to represent
leading vendors within specific product categories. We believe that we are the
third largest distributor of microcomputer products in the world and the largest
distributor in Western Europe, Latin America and Eastern Europe. We have no
significant sales in the United States.
We operate under a decentralized structure in which managers familiar with the
customs and needs of a particular country are delegated the authority to make
daily decisions necessary to satisfy the particular demands of their respective
markets. Unlike certain competitors which operate under a more centralized
system, we believe that our business model of focused distribution through
locally managed full service facilities integrating warehousing, purchasing,
sales, credit and accounting services provides competitive and operating
advantages.
Our operating results have increased significantly in the five-year period ended
December 31, 1998, with net sales increasing from $359 million in 1994 to $8.5
billion in 1998 and operating income increasing from $3.4 million in 1994, to
$128.5 million in 1998.
Our world headquarters are located at 2000 N.W. 84th Avenue, Miami, Florida
33122, where our telephone number is (305) 908-7200.
RECENT DEVELOPMENTS
We recently announced the discovery of discrepancies related to the amount of
vendor incentives recorded in the fourth quarter of 1998. In coordination with
our independent auditors and an investigation by outside attorneys, we found
that vendor rebates were overstated in the second, third and fourth quarters of
1998. Some of the fourth quarter rebates were supported with invalid
documentation. All of the overstated rebates have been reversed and we have
restated our results for the second and third quarters of 1998. As a
consequence, the senior executive officer responsible for our European
operations has resigned.
In March 1999, a number of purported class action complaints were filed alleging
that we and certain of our officers violated federal securities laws in
connection with financial reporting and disclosure. The suits purport to be on
behalf of those who purchased our common stock during certain time frames. In
connection with our legal counsel, we are in the process of carefully reviewing
the allegations of the complaints. However, we believe that the claims are
without merit and intend to vigorously defend
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the suits. See Item 3 - Legal Proceedings.
On July 1, 1998, we acquired a majority of the outstanding shares of Metrologie
International SA ("Metrologie"), a distributor of hardware and software to more
than 15,000 resellers in France, the United Kingdom and Spain (all outstanding
shares of Metrologie were acquired before the end of 1998). The purchase price
for the entire equity interests of Metrologie was approximately $93.7 million.
Metrologie had sales of $433.4 million for the six months ended June 30, 1998
and $883.2 million for the year ended December 31, 1997. Metrologie is ISO-9001
certified to perform configurations of high-end network solutions and work
stations which we believe will be strategically important in strengthening our
ability to provide high-end platforms in Europe. As a result of this
acquisition, we have become the largest distributor of microcomputer products in
France and Spain. In addition, we anticipate improved operating margins through
the elimination of certain corporate overhead expenses, increases in the
utilization of volume purchase discounts, additional corporate rebates and the
eventual consolidation of warehousing and back office operations in France and
the United Kingdom.
On March 9, 1998, we acquired an 80% interest in the Hong Kong, Malaysia and
Singapore subsidiaries of SiS Distribution Ltd. ("SiS"), a Hong Kong based
distributor, for $70.4 million, and paid $28.2 million of such amount on such
date (representing 40% of the purchase price). Under the terms of the agreement,
as modified, the remainder of the purchase price is due in cash in the second
quarter of 1999. SiS had sales of $346.8 million during 1997.
Including the Metrologie acquisition, we have made 16 acquisitions from
January 1998 through December 1998.
RISK FACTORS
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS - OUR INTERNATIONAL BUSINESS
EXPOSES US TO RISKS RELATING TO INCREASED REGULATION AND POLITICAL OR ECONOMIC
INSTABILITY, GLOBALLY OR WITHIN CERTAIN FOREIGN COUNTRIES. Substantially all of
our sales are to customers outside of the United States. Approximately 90% of
our net sales were denominated in currencies other than the United States dollar
during the years ended December 31, 1997 and 1998. Sales in Germany represented
19% of net sales for the year ended December 31, 1998. Decreases in the volume
of sales in such regions or declines in operating margins could have a material
adverse effect on our business. Changes in the value of foreign currencies
relative to the United States dollar could adversely affect our results of
operations and financial position, and transaction gains and losses could
contribute to fluctuations in our results of operations. When possible, we
engage in currency hedging transactions and certain other practices to reduce
these risks. Fluctuations in foreign currency rates may have a material adverse
effect on our business.
Our existing and planned international operations are subject to political and
economic uncertainties, including among others, the burden of compliance with a
wide variety of laws, inflation, hyperinflation, risk of renegotiation or
modification of existing agreements or arrangements with governmental
authorities, transportation, tariffs, export controls, foreign exchange
restrictions which limit the repatriation of investments and earnings therefrom,
changes in taxation, changes in economic stability including currency
fluctuations (particularly in recent months with respect to Asia, Brazil and
Russia), governmental challenges to our tax reduction strategies, hostilities
and confiscation of property. Changes related to these matters could have a
material adverse effect on our business.
RELIANCE ON KEY MANUFACTURERS - BECAUSE WE OBTAIN A SUBSTANTIAL PORTION OF OUR
PRODUCTS FROM A LIMITED NUMBER OF MANUFACTURERS, THE LOSS OF OUR RELATIONSHIP
WITH ANY ONE OR MORE OF SUCH MANUFACTURERS COULD ADVERSELY AFFECT OUR BUSINESS.
We obtain our products from manufacturers under non-exclusive distribution
agreements which are subject to
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renewal annually and may be canceled by either party on short notice. During the
year ended December 31, 1998:
/bullet/ approximately 80% of our net sales were derived from the sale of
products supplied by 20 vendors;
/bullet/ 16% of our net sales were derived from the sale of products supplied by
Hewlett-Packard; and
/bullet/ 10% of net sales were derived from Microsoft and 10% of net sales were
derived from IBM.
The above percentages are based upon an analysis of a representative portion
(over 88%) of our total net sales. The loss of these relationships would, and
the loss of certain other relationships could, have a material adverse effect on
our business.
COMPETITION; DECLINING GROSS PROFIT MARGINS. Our business is highly competitive.
Certain of our competitors have greater financial, marketing, service and
technical support resources than we have. There can be no assurance that our
resources will be sufficient to allow us to compete effectively in the future.
Continued increases in competition could have a material adverse effect on our
results of operations because of price reductions and potential loss of market
share. Certain of our competitors may sell products at prices below ours. As a
result of this price competition, we along with our competitors, are
experiencing downward pressure on gross margins, which we expect to continue for
the foreseeable future. We intend to seek to offset the impact of declines in
our gross margins by reducing our operating expenses as a percentage of net
sales, although there can be no assurance of the success of this strategy in
future periods.
ACQUISITIONS - WE INTEND TO PURSUE FUTURE ACQUISITIONS WHICH, IF CONSUMMATED,
MAY ADVERSELY AFFECT OUR BUSINESS IF WE CANNOT EFFECTIVELY INTEGRATE THE
OPERATIONS OF THE ACQUIRED BUSINESSES. A major portion of our growth has been
attributable to acquisitions, and we intend to continue our practice of making
targeted purchases of high quality distributors, assets or product lines that we
believe would complement or expand our existing business. Acquisitions involve a
number of risks that could adversely affect our operating results, including:
/bullet/ the diversion of management's attention;
/bullet/ the assimilation of the operations and personnel of the acquired
companies;
/bullet/ the assumption of potential liabilities, disclosed or undisclosed,
associated with the businesses acquired, which liabilities may exceed
the amount of indemnification available from the seller;
/bullet/ the risk that the financial and accounting systems utilized by the
businesses acquired will not meet our standards;
/bullet/ the risk that the businesses acquired will not maintain the quality of
services that we have historically provided; and
/bullet/ the inability to attract and retain qualified local management.
We regularly engage in discussions with respect to potential acquisition and
investment opportunities.
YEAR 2000 ISSUE - THE YEAR 2000 PROBLEM MAY RESULT IN DECREASED SALES FOR US IF
WE OR OUR CUSTOMERS AND SUPPLIERS DO NOT ADEQUATELY ADDRESS OUR OR THEIR YEAR
2000 CONCERNS. Many computer systems and applications currently use two digits
to define the applicable year. As a result, date-sensitive systems may recognize
the year 2000 as 1900 or not at all, which could cause miscalculations or system
failures.
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We have assessed our computerized systems to determine their ability to
correctly identify the year 2000 and are devoting the necessary internal and
external resources to replace, upgrade or modify all significant systems which
do not correctly identify the year 2000. We anticipate that substantially all of
our systems will be year 2000 compliant before the end of 1999.
Based on current information, the costs of addressing the year 2000 issue have
not and are not expected to have a material impact on our financial position,
results of operations or cash flows.
INTRODUCTION OF THE "EURO" CURRENCY - THE EFFECTS OF THE INTRODUCTION OF THE
EURO CURRENCY ARE UNCERTAIN AND COULD ADVERSELY AFFECT OUR BUSINESS. On January
1, 1999, a new currency called the "Euro" was adopted as the common legal
currency in eleven of the fifteen member countries of the European Union. During
2002, all European Union countries are expected to be operating with the Euro as
their single currency. Uncertainty exists as to the effect the Euro will have on
the marketplace. Additionally, all of the final rules and regulations have not
yet been defined and finalized by the European Commission with regard to the
Euro currency. We cannot yet predict the anticipated impact of the Euro
conversion on our business.
INDUSTRY
The microcomputer products distribution industry has grown significantly in
recent years, primarily due to increasing demand worldwide for computer products
and the use of distribution channels by vendors for the distribution of their
products. Historically, there have been two types of companies within the
distribution industry: those that sell directly to the end-user ("resellers")
and those that sell to resellers ("distributors"). Distributors generally
purchase a wide range of products in bulk directly from vendors and then ship
products in smaller quantities to many different types of resellers, which
typically include dealers, VARs, system integrators, mail order resellers,
computer products superstores and mass merchants.
The Company believes that the microcomputer products industry is well suited for
distribution. The large number and diversity of resellers make it cost efficient
for manufacturers to outsource a portion of their distribution, credit,
inventory, marketing and customer support requirements to distributors such as
the Company. Similarly, due to the large number of vendors, resellers generally
cannot efficiently establish direct purchasing relationships with each vendor
and instead rely on distributors to satisfy a significant portion of their
product, financing, marketing and technical support needs.
The Western European, Eastern European and Latin American markets are each
highly fragmented. Different languages, cultures and technological factors
require experienced local management teams and products which meet the
requirements of the specific area. Requirements that are unique to an area
include customized manuals, approvals of safety factors by local authorities,
microcode which permits the generation of characters in local languages, and
voltage standards. These factors require distributors in these markets to carry
a variety of different SKUs to meet such demands. As a result, manufacturers
depend heavily on distributors such as the Company to meet the differing demands
of each locale.
STRATEGY
To achieve its objectives of strengthening its position as a leading distributor
of microcomputer products in Western Europe, Eastern Europe and Latin America
and expanding its operations in Asia, the Middle East, Africa and possibly the
United States, the Company has adopted the following strategies:
/bullet/ OPERATE A FOCUSED DISTRIBUTION MODEL. The Company's strategy is to
operate as a focused distributor by dealing with a select group of high
quality branded manufacturers in each major product category, such as
Hewlett-Packard for printers, Microsoft for software and networking,
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Seagate, Quantum and Western Digital for mass storage and
Hewlett-Packard, Compaq and IBM for personal computers. The Company
also attempts to be a significant distributor for each of its major
vendors and establish a partnering relationship with them. The Company
believes that, as a result of this strategy, it is able to respond more
quickly to customer requests and that it has greater availability of
products, access to new products and better pricing. The Company also
believes that it has developed greater expertise in the sale and
servicing of the products of these manufacturers and has been more
effective in asset management. The Company's customers may include both
assemblers of non-branded component products and resellers. Generally,
products from leading manufacturers are in greater demand, resulting in
more efficient inventory management, including greater inventory turns,
lower working capital requirements and fewer stock keeping units
(SKUs). The Company's largest operating subsidiaries maintain between
10,000 and 15,000 SKUs per location while broadline distributors
typically carry more than 45,000 SKUs.
The Company supplements its focused distribution model where feasible
with a centralized warehousing capability. In Europe, due to different
languages, electrical plugs and manufacturing standards, there is a
significant percentage of products that must be localized to the market
in which they will be sold. However, for the universal products
(generally components like hard drives, CD-ROM, supplies, etc.), the
Company utilizes a centralized warehouse to service its local country
warehouses. This approach allows the Company to make volume purchases
into the central warehouse and deliver products several times a week to
each local country warehouse. The Company believes this method is more
efficient and results in a lower inventory in each branch than ordering
products on a branch level.
/bullet/ PENETRATE AND FURTHER DEVELOP SELECTED MARKETS. The Company has focused
its activities on the distribution of microcomputer products in Western
Europe and the emerging markets of Eastern Europe and Latin America.
Additionally, the Company intends to expand its operations in Asia, the
Middle East and Africa. The Company believes that these regions are
under served with respect to the distribution of microcomputer products
and therefore provide significant growth opportunities. The Company
further believes that these markets are complex due to the diversity of
language, regulatory, technical and other factors and provide
attractive opportunities for us to add value to the Company's
relationships with its vendors and customers through the presence of
its knowledgeable local management. The Company is considering entering
the United States market in a way that would provide the economies of
scale which it believes are necessary to operate effectively in this
market. The Company believes that entering the United States market may
provide benefits to its existing operations by increasing the volume of
purchases which it makes from its vendors, thus assisting it in
obtaining enhanced volume discounts and other opportunities available
to large volume purchasers.
A major portion of the Company's growth has been attributable to
acquisitions. The Company intends to continue making targeted purchases
of high quality distributors in selected markets. However, outside of
the United States, the Company expects to purchase fewer companies than
in the past. After an acquisition, the new CHS subsidiary adopts the
Company's policies and financial reporting procedures. The Company
believes its acquisition strategy assists its vendors because, through
their relationship with the Company, vendors may gain entry into new
markets with established local distribution companies and can
substitute the Company's credit worthiness for that of the local
distributor.
/bullet/ OPERATE WITH A DECENTRALIZED OPERATING STRUCTURE. The Company operates
through a decentralized structure. Each of the Company's subsidiaries
is managed autonomously using the operating procedures which were
developed in response to local market conditions. The founders and
managers of acquired companies typically continue to manage the
operations and maintain local customer relationships. This
decentralized operating structure is complemented by centralized
financial controls, which provide the Company's senior managers with
frequent and regular status reports for each of its operating
subsidiaries. Management believes that this
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structure provides the Company with significant operating advantages
including locally refined procedures within each of the Company's
geographic markets which have been developed to most effectively
address the heterogeneous commercial and cultural characteristics of
such markets. The Company is also developing a standardized model for
countries that have multiple CHS operations. In this model, one back
office and local country warehouse serve the focused distribution
enterprise and components distribution sales forces. The Company
believes it can achieve efficiencies and lower costs using this
approach. The Company intends to implement this approach in its three
largest customer countries, Germany, the United Kingdom and France, in
1999.
/bullet/ IMPROVE MARGINS THROUGH BTO PRODUCTION AND PRIVATE LABEL DISTRIBUTION.
The Company intends to take advantage of the higher margins and lower
inventory requirements associated with built-to-order and channel
assembly (collectively, BTO) and the higher margins available in
private label distribution. In general, BTO production includes the
production and assembly of both branded and private label products.
Private label distribution, in contrast, involves the marketing,
distribution and after-market support of products under the Company's
brand names. The Company conducts limited BTO activity and private
label distribution in some of its existing Western European
subsidiaries. The Company intends to further develop and expand its BTO
operations to include both other geographical regions as well as other
vendors. The Company also intends to expand the number and geographical
coverage of its private label products. The Company distributes private
label products in selected locations throughout the world. The Company
believes that such products can provide higher margins than branded
products if sourced and marketed effectively. The Company intends to
expand its distribution of such products and establish an internal
"vendor" operation to source, consistently label and market such
products in 1999.
/bullet/ FURTHER DEVELOP ENTERPRISE SYSTEM DISTRIBUTION. The Company intends to
take advantage of new distribution opportunities by aggressively
developing its Enterprise Systems Distribution business, which is the
distribution of mid-range products and services, often as complete
systems, through VARs. Working in conjunction with the vendors, the
VARs and often the end-user customer, the Company assists in the
development of the basic configuration, planning and installation of
enterprise systems. Consistent with the Company's focused distribution
model, these systems are designed around a limited number of selected
platforms from vendor partners such as IBM, Sun Microsystems, Compaq
and Hewlett-Packard. Systems are priced to include both the cost of the
component parts and a fee for the Company's services. The Company's
services include solutions for the technical, marketing and financing
requirements of the VARs. Enterprise System Distribution offerings are
available throughout the Company's operations through certain of its
subsidiaries. The Company plans to market these activities under the
DNS brand on a global basis.
PRODUCTS AND CUSTOMERS
The Company's sales consist of hardware and software products such as local area
networks, disk drives, personal computers and printers to an active customer
base, as of December 31, 1998, of approximately 150,000 VARs and computer
retailers. The Company's products also include components such as random access
memory chips, central processing units and integrated circuit boards. For the
year ended December 31, 1998, the Company's product mix by category was mass
storage (25%), personal computers (20%), printers (12%), software (11%),
components (8%), networking and multimedia (8%), peripherals (7%) and other
(9%).
The Company purchases its products directly from hardware manufacturers and
software publishers in large quantities. As a focused distributor, the Company
focuses on a small number of leading vendors in each product category and on a
small number of high volume items of that manufacturer or publisher. As a
result, the Company carries fewer individual products than broadline
distributors and works with fewer vendors. The largest Company operating
subsidiaries maintain between
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10,000 and 15,000 SKUs per location while broadline distributors typically carry
more than 45,000 SKUs.
The Company's customers typically rely on distributors as their principal source
of microcomputer products and financing. The Company's backlog of orders is not
considered material to an understanding of its business. No single customer
accounted for more than one percent of the Company's net sales in the year ended
December 31, 1998.
The Company is currently engaged in channel assembly at several locations in
Europe for both branded and private label products. The Company believes that
these new models of distribution may result in lower inventories and possibly
higher gross margins.
Since the fall of 1998, the Company has been aggressively developing its
Enterprise Systems Distribution business, the distribution of mid-range products
and services, often as complete systems, through VARs. Working in conjunction
with the vendors, the VARs and often the end-user customer, the Company assists
in the development of the basic configuration, planning and installation of
enterprise systems. These systems are designed around a limited number of
selected high end network solutions and work stations from vendor partners such
as IBM, Sun Microsystems, Compaq and Hewlett-Packard. Systems are priced to
include both the cost of the component parts and a fee for the services rendered
by the Company. The services offered by the Company include solutions for the
technical, marketing and financing requirements of the VARs. Enterprise Systems
Distribution offerings are available throughout the Company's operations through
certain subsidiaries of the Company. The Company plans to market these
activities under the DNS brand on a global basis.
VENDOR RELATIONS
The Company obtains its products from its vendors under non-exclusive
distribution agreements, which are subject to renewal annually and may be
canceled by either party on short notice. Under these agreements, the Company
has the right to purchase products at discounts from the list prices. The
amounts of the discounts are determined each year at the time of renewal on the
basis of the projected sales of the Company for the following year and vary for
each vendor. The Company is not required to make additional product payments if
it fails to achieve its projected sales level for the year, but its product
discounts in the following year may be reduced because of the lower sales
levels. In 1998, approximately 80% of the products distributed by the Company
were purchased from 20 vendors; 16%, 19% and 34% of its net sales during the
years ended December 31, 1998, 1997 and 1996, respectively, were derived from
the sale of products supplied by Hewlett-Packard and 10%, 10% and 12%,
respectively, were derived from the sales of products supplied by Microsoft. The
third largest supplier in 1998 was IBM with 10% of the Company's net sales. The
Company's agreements with vendors provide a form of price protection specifying
that if the list price of a product is reduced by the vendor, the Company will
typically receive a credit in the amount of the reduction in distributor cost
for each item of the product in inventory.
The Company also has stock rotation arrangements with substantially all of its
vendors. Stock rotation permits the Company to return inventory for full credit
in an amount equal to a certain percentage of the Company's purchases from the
supplier over a specific period. In certain cases, the Company must purchase
inventory at least equal in value to that returned. These agreements permit the
Company to maintain higher inventory levels while limiting the amount of
committed working capital related to slow-moving items.
Vendors deliver products against purchase orders tendered by the Company. The
Company will often request specific delivery dates in its purchase orders and
lead times for delivery from vendors are typically short. Delivery is, however,
subject to availability, and vendors have no liability to the Company for
failure to meet a delivery date. The Company experiences delivery delays and
inventory shortages from time to time. In the opinion of management, these
delays and shortages are common
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to other distributors of microcomputer products in general, and do not have a
significant adverse impact on the Company's operations.
The Company's vendors have increased available credit to the Company
commensurate with its growth. Many of the Company's vendors provide discounts
for prompt payment. Generally, the Company is required to make payment within 14
to 90 days following delivery of products. With some vendors, the Company can
earn a discount for early payment of between 1% and 3% of the invoice amount. To
the extent sufficient funds are available, the Company attempts to take
advantage of these discounts.
Several of the Company's vendors also provide for rebates or other incentives
based on achieving a predetermined goal of volume or type of products sold or
other types of goals during a fiscal quarter. We recently announced the
discovery of discrepancies related to the amount of vendor incentives recorded
in the fourth quarter of 1998. In coordination with our independent auditors and
an investigation by outside attorneys, we found that vendor rebates were
overstated in the second, third and fourth quarters of 1998. Some of the fourth
quarter rebates were supported with invalid documentation. All of the overstated
rebates have been reversed and we have restated our results for the second and
third quarters of 1998. As a consequence, the senior executive officer
responsible for our European operations has resigned.
Generally, the Company's vendors have the right to terminate their respective
distribution agreements on short notice to the Company. In some cases, the
Company must be given a reasonable opportunity to cure any violation of the
agreement before it may be terminated. The Company similarly has the right to
terminate its distribution agreements on short notice to the vendor. The Company
is of the opinion that its relationships with its vendors are good, and has no
reason to believe that its current material distribution agreements will be
terminated or not renewed in the foreseeable future.
SALES, MARKETING AND CUSTOMER SUPPORT
In order to address the individual customs, practices and business conventions
within countries effectively, each operating subsidiary of the Company maintains
general autonomy with respect to sales, marketing and customer support.
Oversight and strategic direction are provided by senior management of the
Company.
SALES. The Company markets its products to resellers, who either package the
Company's products with other computer equipment or sell the products on an
individual basis to end-users. As of December 31, 1998, the Company distributed
products to approximately 88,000 active resellers in Western Europe, 33,000 in
Latin America, 24,000 in Eastern Europe and 5,000 in Asia and the Middle East.
Each operating subsidiary maintains a sales staff organized to interface
effectively with its respective customer base. As of December 31, 1998,
approximately 40% of the Company's employees were involved in sales activities.
The Company's customers typically place orders with a sales representative.
Almost all orders are for pick-up or next day delivery. The Company's computer
systems generally allow the representative to check customer credit limits,
current inventory levels and pricing.
MARKETING. The Company utilizes a variety of programs to market its major
vendors' products, including direct mailings, periodic advertising by facsimile,
advertisements in industry trade publications, product brochures, seminars and
participation in selected trade shows. Marketing programs are effectuated at the
subsidiary level and are designed to build awareness of the Company, its
products and their collective capability. Each operating subsidiary maintains
staff to provide marketing support.
Funds for the Company's advertising budget generally are obtained from
cooperative advertising reimbursements and market development funds provided by
vendors. Cooperative reimbursements have typically represented approximately 1%
to 2% of the dollar amount of products purchased from those major vendors.
Marketing programs designed for cooperative reimbursement are vendor and product
specific and are designed with vendor approval. Market development funds are
provided to create market awareness of vendors' products. Cooperative
advertising reimbursements and market
9
<PAGE>
development funds are recorded in the Company's financial statements as a
reduction of operating expenses.
CUSTOMER SUPPORT. Under several vendor agreements, the Company is required to
maintain a staff of qualified and trained sales, repair, and support employees
who are able to provide information and advice to resellers, provide warranty
repair service and train resellers on the vendor's products, their applications,
configurations with other computer products, and installation and support
requirements. The employees of the Company fulfilling these functions are
required to complete training courses provided by the vendor.
In addition, the Company supports all products with a full manufacturer's
warranty and maintains an industry standard return policy, similar to that of
its competitors.
INTERNAL AUDIT
The Company currently maintains 14 internal auditors on its staff; nine for
Europe and Karma, four for Latin America, and the Director of Internal Audit.
The Company has two auditors that specialize in inventory audits. The Company
intends to expand its internal audit staff consistent with its growth. During
1998, there were 81 internal and 35 inventory audits performed with respect to
the Company.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability, provision of credit to
customers, delivery time, customer support services and breadth of product line.
Competition exists in a variety of forms including direct sales by vendors, mail
order sales, international distributors, and local distributors. Some of the
Company's competitors have greater financial and administrative resources than
the Company. The Company believes availability of products is a key element of
competitiveness and attempts to differentiate itself from its competition by
providing a select number of name brands in each product line and maintaining a
sufficient inventory of select products to meet demand. The Company enhances its
competitive position by providing responsive customer service through support
and employee training programs. The Company believes that its vendors and their
products are respected in the industry for high quality and performance.
Vendor contracts frequently limit sales of their products to specific geographic
areas. Although these restrictions limit the ability of the Company's
subsidiaries to sell outside of their jurisdictions, competition in the
subsidiary's area is also reduced.
EMPLOYEES
At December 31, 1998, the Company employed approximately 6,800 full-time
employees of whom 500 were located in the United States. Of the total number of
employees, approximately 2,700 worked in marketing and sales, 1,300 worked in
warehousing and delivery and 2,800 were employed in other positions, including
administration. Employees in certain countries are represented by labor councils
mandated by government regulations which determine compensation and benefits.
With these exceptions, none of the Company's employees are represented by
unions. Severance costs associated with termination of employment in many
countries are higher than in the United States. There has been no disruption of
operations due to a labor dispute. Management considers its employee relations
to be good.
ITEM 2 - PROPERTIES
The corporate headquarters of the Company is located at 2000 N.W. 84th Avenue,
Miami, Florida, which is also the principal operational facility for its Latin
America regional operations and the
10
<PAGE>
operations of CHS Latin America, Inc. The Company's subsidiaries operate through
approximately 110 locations totaling approximately four million square feet.
Most locations consist of an administrative office utilized by the subsidiary
and an adjoining or nearby warehouse and distribution facility.
In each of the countries, the size set forth above includes sales,
administrative and warehousing functions and may be composed of multiple
facilities. The Company considers its existing facilities to be adequate for its
foreseeable needs.
ITEM 3 - LEGAL PROCEEDINGS
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET AL., case No. 99-8186, was
filed in the United States District Court, Southern District of Florida. The
complaint, which purports to be a class action complaint, alleges that the
Company and two of its officers violated federal securities laws in connection
with financial reporting and disclosure during the period February 27, 1997
through March 10, 1999. The suit purports to be on behalf of those who purchased
CHS Electronics common stock during that time frame. The Company, in connection
with its legal counsel, is in the process of carefully reviewing the allegations
of the complaint. However, the Company believes that the claims are without
merit and intends to vigorously defend the suit. The Company is aware that
certain other purported class actions have been filed. However, the Company has
not received service of any such other suits.
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth for the periods indicated the high and low
closing sales prices of the Company's common stock (symbol: NYSE = HS and
previously Nasdaq = CHSE) through August 7, 1998 on the Nasdaq National Market,
and thereafter on the New York Stock Exchange. The Company effected a
one-for-two reverse stock split on March 14, 1996. On September 15, 1997, the
Company effected a three-for-two forward split for all shareholders of record as
of September 2, 1997. All prior amounts have been adjusted to reflect the
effects of such splits. Such prices are based on inter-dealer bid and asked
prices, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
<TABLE>
<CAPTION>
HISTORIC PRICES
--------------------
FISCAL YEAR PERIOD HIGH LOW
----------- ------ ---- ---
<S> <C> <C> <C>
1997 First Quarter $16.08 $10.33
Second Quarter $17.75 $11.50
Third Quarter $29.75 $17.21
Fourth Quarter $30.75 $14.75
1998 First Quarter $23.88 $12.63
Second Quarter $24.31 $15.88
Third Quarter $19.00 $10.75
Fourth Quarter $17.88 $6.00
</TABLE>
11
<PAGE>
The last reported sale price of the common stock as reported on the New York
Stock Exchange on March 18, 1999 was $5.875 per share. As of March 18, 1999, the
outstanding common stock was held of record by 415 shareholders. The Company
believes that it has in excess of 600 beneficial owners.
The Company has never paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements, covenants in financing agreements to
which the Company is a party and such other factors as the Board of
Directors deems relevant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In connection with its acquisition activities, the Company issued the following
net shares of its common stock during 1998:
<TABLE>
<S> <C>
January 137,132
February 645,000
March 179,658
April -
May 1,664,546
June -
July 226,481
August -
September 535,073
October 32,751
November 1,000,000
December 2,026,789
---------
6,447,430
=========
</TABLE>
In January 1998, the Company implemented a Preferred Stock Purchase Rights Plan
and distributed one right (a "Right") for each share of the Company's common
stock outstanding. Each Right has an initial exercise price of $100 for one-one
thousandth of a share of the Company's Series A junior participating preferred
stock. The Rights are not exercisable or transferable, apart from the Company's
common stock, until after a person or group acquires, or has the right to
acquire, beneficial ownership of 15% or more of the Company's common stock
(which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the Company's
common stock. Upon such occurrence, each Right (other than Rights owned by such
person or group) will entitle the holder to purchase from the Company, or the
particular acquiring person or group under certain circumstances and conditions,
the number of shares of the Company's, or such person's or group's, common stock
having a market value equal to twice the exercise price of the Right. The Rights
are redeemable by the Company, upon approval of the Board of Directors under
certain circumstances. The Plan was amended as of March 18, 1999.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain financial data for each year in the five
year period ended December 31, 1998. The information presented as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998, is derived from the
audited consolidated financial statements of the Company, which statements have
been audited by Grant Thornton LLP, independent public accountants. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
12
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 8,545,773 $ 4,756,383 $ 1,855,540 $ 936,703 $ 359,169
Cost of goods sold 7,983,736 4,409,714 1,724,432 868,716 333,983
----------- ----------- ----------- ----------- -----------
Gross profit 562,037 346,669 131,108 67,987 25,186
Operating expenses 433,567 257,508 102,235 57,188 21,798
----------- ----------- ----------- ----------- -----------
Operating income 128,470 89,161 28,873 10,799 3,388
Interest income (16,581) (11,470) (3,199) (1,757) (250)
Interest expense 71,373 35,618 11,712 6,454 2,070
----------- ----------- ----------- ----------- -----------
Earnings before income taxes and
minority interest in subsidiaries 73,678 65,013 20,360 6,102 1,568
Provision for income taxes 23,871 13,988 6,086 1,797 603
Minority interest 4,129 2,634 2,108 - -
----------- ----------- ----------- ----------- -----------
Net earnings $ 45,678 $ 48,391 $ 12,166 $ 4,305 $ 965
=========== =========== =========== =========== ===========
Net earnings per share--basic $ 0.88 $ 1.44 $ 0.80 $ 0.41 $ 0.14
Net earnings per share--diluted 0.82 1.32 0.78 0.37 0.14
Weighted average shares outstanding--basic 51,616 33,527 15,244 10,618 7,039
Weighted average shares outstanding--diluted 55,917 36,592 15,656 11,522 7,039
OTHER DATA:
Number of countries 46 39 28 15 10
Inventory turns (1) 12 11 12 14 12
Days sales in receivables (2) 43 33 36 35 32
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 176,991 $ 68,806 $ 35,137 $ 11,171 $ 8,368
Working capital 334,072 278,771 31,506 9,843 14,004
Total assets 3,572,143 1,968,822 861,949 265,804 164,468
Total debt 1,053,649 371,066 201,259 55,239 23,302
Shareholders' equity 838,043 667,764 104,533 29,892 19,870
</TABLE>
- ------------
(1) Calculated by dividing cost of sales for the last quarter of each year by
the average of beginning and ending inventory of the last quarter of each
year.
(2) Calculated by dividing ending trade receivables by the average sales per day
for the last quarter of each year.
13
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO CONTAINED ELSEWHERE
HEREIN.
OVERVIEW
CHS distributes microcomputer products, including personal computers,
peripherals, networking products and software in 46 countries, primarily in
Western Europe, Eastern Europe and Latin America. The Company has pursued and
expects to continue to pursue a strategy of growth through acquisitions of
distributors in these and other regions but at a slower pace than in prior
years. Together with growth in its existing business, such acquisitions have
enabled the Company to significantly increase net sales and achieve strong
operating results. From 1994 to 1998, the Company's net sales increased from
$359 million to $8.5 billion. The Company attributes these increases in sales to
its acquisitions, increased consumer demand for the Company's products and an
expansion of the range of products offered.
The Company derives all of its operating income and cash flow from its operating
subsidiaries, most of which are organized and operated outside the United
States. Generally, the Company purchases its inventory with a combination of
United States dollars and local currency and sells in local currency. The
Company seeks to limit its exposure to the risk of currency fluctuations through
hedging. See "Currency Risk Management".
The following table sets forth acquisitions made by the Company, the service
areas of the operations acquired and the dates as of which the results of
operations of the acquired company were included in the Company's financial
statements from the beginning of 1996 through 1998.
14
<PAGE>
<TABLE>
<CAPTION>
DATE INCLUDED IN
SUBSIDIARY(1) SERVICE AREA FINANCIAL STATEMENTS
- ------------- ------------ --------------------
<S> <C> <C>
MC DOS(2)....................................... Germany, Netherlands December 1998
Lung(2)......................................... Hong Kong December 1998
Brightstar...................................... Latin America November 1998
Acron........................................... Argentina August 1998
Memory Set...................................... Spain July 1998
Cornejo......................................... Argentina July 1998
Intcomex........................................ Mexico, Panama, Guatemala, Chile July 1998
Peru and Uruguay
Metrologie International........................ France, United Kingdom and Spain July 1998
Arena........................................... Turkey May 1998
Armada.......................................... Turkey May 1998
Merisel Russia.................................. Russia May 1998
Raphael Informatika............................. Italy May 1998
Aptec........................................... Middle East May 1998
SiS Distributors(3)............................. China, Malaysia, Singapore and March 1998
Vietnam
TH' Systems..................................... Czech Republic, Poland, Hungary and February 1998
Slovakia
ARC Spain....................................... Spain January 1998
Micro Informatica............................... Latin America January 1998
CHS Nexsys...................................... Colombia December 1997
CHS Ledakon(4).................................. Colombia November 1997
CHS Romak....................................... Ireland October 1997
CompExpress..................................... Brazil October 1997
Santech......................................... Norway, Sweden, Denmark October 1997
Ameritech Argentina(5).......................... Argentina August 1997
Ameritech Exports(5)............................ Latin America August 1997
Atlantis Skupina(6)............................. Slovenia August 1997
Karma........................................... Europe, Middle East and Asia August 1997
Lars Krull...................................... Denmark, Norway, Sweden August 1997
CHS Dinexim..................................... Latin America May 1997
CHS Access and Agora............................ Czech Republic May 1997
CHS International High Tech Marketing........... Africa April 1997
Frank & Walter.................................. Germany January 1997
CHS Estonia..................................... Estonia January 1997
Infocentro de Chile(6).......................... Chile January 1997
CHS Merisel United Kingdom(7)................... United Kingdom October 1996
CHS Merisel France(7)........................... France October 1996
CHS Merisel Switzerland(7)...................... Switzerland October 1996
CHS Merisel Germany(7).......................... Germany October 1996
CHS Merisel Austria(7).......................... Austria October 1996
CHS Merisel Latin America(7).................... Latin America October 1996
CHS Merisel Mexico(7)........................... Mexico October 1996
CHS Ecuador(6).................................. Ecuador June 1996
CHS Russia...................................... Russia June 1996
CHS Switzerland................................. Switzerland April 1996
CHS Peru........................................ Peru March 1996
CHS Hungary(6).................................. Hungary February 1996
</TABLE>
- ------------
(1) The names are those by which the Company refers to its subsidiaries and are
not necessarily the legal names of the entities
(2) The Company acquired this entity as of December 31, 1998, therefore the
accompanying financial statements do not include any results of operations
from such acquisition. Deemed by the Company to be part of one acquisition.
The Company owns 60% of MC DOS Netherlands.
(3) The Company owns 80% of this company.
(4) The Company owns 65% of this company.
(5) Deemed by the Company to be part of one acquisition.
(6) The Company owns 51% of this company.
(7) Deemed by the Company to be part of one acquisition.
15
<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 Consolidated Statements of
Earnings:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold 93.4 92.7 92.9
----- ----- -----
Gross profit 6.6 7.3 7.1
Operating expenses 5.1 5.4 5.5
----- ----- -----
Operating income 1.5 1.9 1.6
Interest income (0.2) (0.2) (0.1)
Interest expense 0.8 0.7 0.6
----- ----- -----
Earnings before income taxes 0.9 1.4 1.1
Income taxes 0.3 0.3 0.3
Minority interest 0.1 0.1 0.1
----- ----- -----
Net earnings 0.5 % 1.0 % 0.7 %
===== ===== =====
</TABLE>
1998 COMPARED TO 1997
NET SALES. Net sales increased $3.8 billion, or 79.7%, from $4.8 billion in 1997
to $8.5 billion in 1998 due principally to acquisitions and, to a lesser extent,
internal growth. Of the increase in net sales, newly acquired subsidiaries
contributed $3.1 billion. Net sales of subsidiaries consolidated for both 1997
and 1998 grew $742.5 million or 15.6%. This growth is attributed to increased
consumer demand for microcomputer products offered by the Company. The growth is
slower than the prior year due principally to economic difficulties in Latin
America and Russia.
GROSS PROFIT. Gross profit increased $215.4 million, or 62.1%, from $346.7
million in 1997 to $562.0 million in 1998 due principally to acquisitions and,
to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1997 and 1998 increased $1.0 million, or
0.3%. Newly acquired subsidiaries contributed $214.4 million of increased gross
profit.
Gross margin was 7.3% in 1997 and 6.6% in 1998. The decrease in gross margin was
caused by increased competitive pressure in all markets and the inclusion of a
full year of the Karma operation, which has a lower gross margin than the
remainder of the Company due to the nature of the products sold. The Company
believes that 1999 gross margins in its distribution to reseller business may be
lower due to competitive pressure. The Company is attempting to offset the
decrease through expansion of its enterprise system distribution operations and
distribution of private label products. Although the Company has been achieving
higher gross margins (9.3% in 1997 and 8.6% in 1998) in its Eastern European
operations than in other areas, the Company expects gross margins in Eastern
Europe to continue to decline due to increased competition and a Company
strategy to increase sales through more competitive pricing. The Company expects
that the impact on gross profit due to decreased gross margins in this
geographic area will be partially offset by increased sales.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.4% in 1997 to 5.1% in 1998. The Company attributes this decrease to: (i)
synergies realized from combining operating entities; (ii) benefits of economies
of scale and (iii) the inclusion of the results of Karma in 1998 for a whole
year based on lower operating expenses of Karma as a percentage of its
16
<PAGE>
sales. This factor is partially offset by increased goodwill amortization in
1998, which was $25.8 million during 1998 compared to $8.9 million during 1997.
Operating expenses for both periods include the results of foreign currency
transactions. Such results were a net gain of $5.2 million in 1998 and $1.2
million in 1997.
NET INTEREST EXPENSE. Net interest expense increased $30.6 million, or 127%,
from $24.1 million in 1997 to $54.8 million in 1998. The increase is directly
related to interest on the Company's Senior Notes due 2005 and increased
borrowings of the Company to support increased sales.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest in subsidiaries increased from 21.5% in 1997 to 32.4% in 1998.
The change is due to a higher proportion of income earned in jurisdictions with
higher tax rates, by losses in subsidiaries with no tax benefit and increased
non-deductible goodwill amortization. The Company expects to have an effective
tax rate lower than the statutory United States tax rate in 1999 principally due
to the proportion of income expected in jurisdictions with lower tax rates and
also its ability to use remaining net operating loss carryforwards from certain
subsidiaries.
1997 COMPARED TO 1996
NET SALES. Net sales increased $2.9 billion, or 156.3%, from $1.9 billion in
1996 to $4.8 billion in 1997 due principally to acquisitions and, to a lesser
extent, internal growth. Of the increase in net sales, newly acquired
subsidiaries (including existing CHS companies for the first nine months of 1997
which were integrated with companies acquired from Merisel) contributed $2.5
billion. Net comparable sales of subsidiaries consolidated for both 1996 and
1997 grew $371.3 million or 28.0%. This growth is attributed to increased
consumer demand for microcomputer products offered by the Company.
GROSS PROFIT. Gross profit increased $215.6 million, or 164.4%, from $131.1
million in 1996 to $346.7 million in 1997 due principally to acquisitions and,
to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1996 and 1997 increased $42.4 million, or
48.8%. Newly acquired subsidiaries (including existing CHS companies for the
first nine months of 1997 which were integrated with companies acquired from
Merisel) contributed $173.1 million of increased gross profit. For purposes of
determining the increase in gross profit, the Company allocated manufacturers'
rebates to its more significant subsidiaries.
Gross margin increased from 7.1% in 1996 to 7.3% in 1997. The change in gross
margin was due to increased early payment discounts and vendor rebates offset to
some extent by lower gross margins of the recently acquired Karma operations.
The Company utilized more early payment discount opportunities as a result of
the cash generated by its public equity offering in July 1997. Additionally, the
Company's growth has resulted in more favorable volume rebates with certain key
vendors. The increase in gross margin attributable to early payment discounts
(0.2%) and volume rebates (1.4%) was offset by the fact that the Karma operation
has a lower gross margin due to the nature of the products sold. The Company
expects that 1998 gross margins will be lower than in 1997 due to the impact of
having the Karma operations included in the entire year and due to continued
competitive pressures. Although the Company has been achieving higher gross
margins (10.5% and 9.3% in 1996 and 1997, respectively) in its Eastern European
operations than in other areas, the Company expects gross margins in Eastern
Europe to continue to decline due to increased competition and a Company
strategy to increase sales through more competitive pricing. The Company expects
that the impact on gross profit due to decreased gross margins in this
geographic area will be fully offset by increased sales.
OPERATING EXPENSES. Operating expenses as a percentage of net sales declined
from 5.5% in 1996 to 5.4% in 1997. Included were the expenses of maintaining a
minimally utilized warehouse in the Netherlands in 1997 and $1.4 million in
Merisel restructuring expenses in 1996. In 1998, such warehouse is expected to
be utilized for distribution of universal products (such as mass storage and
17
<PAGE>
components). The comparative operating expense ratios without these items would
have been 5.4% for 1997 and 5.4% for 1996. The Company expects that the
inclusion of Karma's results for a full year will result in operating expenses
being a lower percentage of net sales based on the lower operating expenses of
Karma. Operating expenses for both periods include the results of foreign
currency transactions. Such results were a net gain of $1.2 million in 1997 and
$1.6 million in 1996.
NET INTEREST EXPENSE. Net interest expense increased $15.6 million, or 183.7%,
from $8.5 million in 1996 to $24.1 million in 1997. The increase is directly
related to the increase in average loan amounts outstanding.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes and
minority interest in subsidiaries decreased from 29.9% in 1996 to 21.5% in 1997.
The change is due to a higher proportion of income earned in jurisdictions with
lower tax rates and the use of net operating loss carryforwards, offset, to a
certain extent, by losses in subsidiaries with no tax benefit and non deductible
goodwill amortization. The Company expects to have an effective tax rate lower
than the statutory United States tax rate in 1998 principally due to its ability
to use remaining net operating loss carryforwards from certain subsidiaries and
the proportion of income expected in jurisdictions with lower tax rates.
SEASONALITY
The Company typically experiences variability in its net sales and net income on
a quarterly basis as a result of many factors, including the condition of the
microcomputer industry in general, shifts in demand for software and hardware
products and industry announcements of new products or upgrades. Sales in Europe
in the fourth quarter of each year are typically higher than in the other
quarters. In Latin America, sales in the third and fourth quarters of each year
are typically higher than in the first and second quarters.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $240.1 million and $248.5 million were used in operating activities
in the years ended December 31, 1998 and 1997, respectively. In 1998, such
amount was funded by increases in borrowings from banks of $246.8 million and
new long-term debt of $139.0 million. In 1997, such amount was funded from
increases in bank borrowings and proceeds of a public offering. In both years,
cash was used principally due to increases in inventories and trade accounts
receivable. In 1998, cash was provided by increases in accounts payables and
accrued expenses. Net cash used in investing activities in 1998 and 1997
included $52.5 million and $19.5 million, respectively, related to fixed asset
additions. In addition, $189.7 million and $201.5 million were used for
acquisitions during such years respectively. Net cash of $588.6 million and
$507.2 million was provided by financing activities in the years ended December
31, 1998 and 1997, respectively, due principally to net borrowings of $385.8
million and $74.7 million, respectively, the issuance of the Company's Senior
Notes due 2005 during 1998, which proceeds were used for acquisitions, and
proceeds of equity public offering totaling $428.2 million in 1997.
On December 30, 1998, three of the Company's German subsidiaries (collectively,
the "Borrowers") entered into a three year DM 325 million Facility Agreement
with a bank. Advances under the agreement may be used for working capital needs
of the Borrowers and are based upon a borrowing base equal to the aggregate of
85% of eligible accounts receivable, 50% of eligible inventory and 100% of
inventory of a specific vendor. The debt is secured by a lien on the
receivables, inventories and intangible assets of the Borrowers and two Austrian
subsidiaries of the Company, and a lien on the receivables of a Swiss subsidiary
of the Company (collectively, the "Pledgors"), and a pledge of the shares of the
Borrowers and the Pledgors. The indebtedness has been guaranteed by the Company,
the Pledgors, and certain other subsidiaries of the Company. The loan bears
interest at 1.95% per annum above Deutschmark (now Euro) LIBOR. The agreement,
among other things, limits the ability of the Borrowers to incur additional
indebtedness. The Company has used this credit facility
18
<PAGE>
as a replacement to off-balance sheet financing, which carried a higher interest
cost. As a result, the consolidated amount of trade receivables and debt has
increased as of December 31, 1998 as compared to previous periods. The increase
in trade receivables caused the Company's days sales in receivables to increase
from previous periods.
The Company's subsidiaries typically enter into short term credit agreements
with financial institutions in their countries of operations. At December 31,
1998, of the $882.5 million aggregate amount available under these agreements,
$648.3 million was outstanding. Such agreements are usually for a term of one
year and are secured by the receivables of the borrower and, in certain
instances, inventories of the borrower. The weighted average interest rate at
December 31, 1998 was 6.5%. Certain of these agreements contain financial
covenants requiring, among other things, the maintenance of certain net worth
and loan-to-collateral value terms. The Company typically guarantees these
loans. The Company has also guaranteed the obligations of certain of its
subsidiaries to certain vendors. At December 31, 1998, the Company was not in
compliance with a minimum tangible net worth covenant contained in a short term
credit facility. The Company has obtained a waiver from the lender.
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In certain
countries, exchange controls may limit the ability of the Company's subsidiaries
to make payments to the Company. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets and cash flow of such
subsidiaries over the claims of the Company or its shareholders. Restrictions in
financing or credit arrangements may also limit access to such earnings. Certain
of these revolving credit agreements limit the ability of the respective
subsidiaries to pay dividends, make loans or provide other distributions to the
Company. EBITDA of all subsidiaries with such limitations amounted to 7.6% and
16.6% of the Company's consolidated EBITDA for the years ended December 31, 1998
and 1997, respectively. Currently, the subsidiaries with such agreements are CHS
U.K., Santech Norway, BEK International, CHS Latin America and CHS Promark. Such
credit agreements have maximum available amounts of $160 million in total.
In April 1998, the Company issued $200 million of Senior Notes ("Notes") due
2005. The Notes bear interest of 9.875% per annum and interest is payable
semi-annually on April 15 and October 15 beginning October 15, 1998. The Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2002, initially at 104.938% of their principal amount, plus
accrued and unpaid interest, declining to 100% of their principal amount, plus
accrued and unpaid interest, on or after April 15, 2004. Certain of the
Company's direct and indirect wholly-owned subsidiaries fully and
unconditionally jointly and severally guaranteed the Notes on an unsecured
basis. The guarantor subsidiaries are principally non-operating subsidiaries in
the United States. The Notes are effectively subordinated to all existing and
future liabilities of the Company's subsidiaries that are not guarantors. The
Notes contain certain covenants which, among other things, will restrict the
ability of the Company and certain of its subsidiaries to incur additional
indebtedness; pay dividends or make other distributions in respect to their
capital stock; enter into certain transactions with shareholders and affiliates;
make certain investments and other restricted payments; create liens; enter into
certain sale and leaseback transactions and sell assets. The covenants are,
however, subject to a number of exceptions and qualifications.
The Company's principal need for additional cash in 1999 will be: (i) for the
purchase of additional inventory to support growth; (ii) to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment; (iii) to pay amounts due to sellers of businesses;
and (iv) for the cash component of possible future acquisitions. The Company is
seeking additional cash for this purpose through its existing bank credit lines
and through additional credit facilities, but management can give no assurance
that financing will be available on terms acceptable to the Company. However, at
this time, the Company, has sufficient funds to support its expected growth in
existing operations for the remainder of 1999.
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million
19
<PAGE>
(approximately $12 million) letter of credit provided to Metro by the Company in
connection with the transaction. The Company believes that the conditions
permitting Metro to draw on the letter of credit were not met. Metro has also
announced that it may seek damages for an unspecified amount against the Company
as a result of the transaction not being consummated. The purchase agreement
calls for disputes to be settled by arbitration in Germany. The purchase
agreement does not provide for a break-up fee. Although no prediction as to the
outcome of either the attempted draw on the letter of credit or any actions
which may be commenced in connection with the purchase agreement can be made at
this time, the Company believes that it has defenses to any potential claims of
Metro and intends to assert them vigorously. As of the date of this filing, no
arbitration proceedings had been commenced by Metro.
YEAR 2000
The Company has completed the risk assessment phase of its Year 2000 compliance
efforts ("Year 2000 Project"). Based on the assessment, the Company has
developed an action plan and identified corporate, regional and subsidiary level
Year 2000 Project team members, charged with ensuring that the Company will be
compliant. The plan principally consists of replacing or repairing non-compliant
systems including both information ("IT") systems and non-IT systems. The
initial focus of the plan is on high risk/high impact areas. The six areas
covered initially are shown below, in descending order of potential high
risk/impact.
/bullet/ Transaction Processing Systems (includes all internal and external
interfaces)
/bullet/ Telephony
/bullet/ Network (Local Area Networks)
/bullet/ Desktop Computing
/bullet/ Third Parties (suppliers, customers, financial institutions, utilities)
/bullet/ Other non-IT equipment
The Company's current IT systems infrastructure is decentralized.
Independent of the Year 2000 issue, the Company has been standardizing its
transaction processing platforms and ultimately reducing the number of
separate systems. The Company has selected a core of standard platforms: JBA
System 21, Oracle Financials, and Scala. Various tasks in the platform
standardization project have been accelerated in order to resolve Year 2000
issues.
STATE OF READINESS. The tables below set forth the Company's state of readiness.
Compliance schedule for Transaction Processing Systems:
<TABLE>
<CAPTION>
TRANSACTION PROCESSING % OF 1999 GROSS
SYSTEM TO BE COMPLIANT SALES BUDGET
---------------------- ----------------
<S> <C>
Already compliant 61%
First Quarter 1999 4%
Second Quarter 1999 15%
Third Quarter 1999 20%
100%
</TABLE>
20
<PAGE>
Other critical areas:
<TABLE>
<CAPTION>
AREA TO BE COMPLIANT
---- ---------------
<S> <C>
Telephony October 1999
Network October 1999
Desktop Computing October 1999
Third Parties First Quarter 1999
Other non-IT equipment Second Quarter 1999
</TABLE>
COSTS. The Company estimates its total Year 2000 costs to be $29 million. This
is primarily the cost of replacing transaction processing systems, but also
includes consulting fees and repair/replacement of other software and IT/non-IT
equipment. Approximately $14 million has been spent to date. This estimate is
based on current knowledge and assumes that the Company will not incur
additional costs due to the actions or state of readiness of third parties.
RISKS. Due to its decentralized IT structure, the Company believes there is
no single point of failure. At this point in time, the Company believes the most
likely potential risks are:
/bullet/ The inability of some customers of the Company's smaller subsidiaries
to pay on time.
/bullet/ The temporary inability of a few of the Company's more small
subsidiaries, to take orders.
Although every effort will be made to ensure third party issues are resolved,
the Company has no direct means to influence such parties. It is therefore not
possible to ensure that all such issues are resolved or to estimate the
potential impact on the Company. In the case of the Company's major suppliers,
the Company currently believes the risk is low.
CONTINGENCY PLANS. Contingency plans for transaction processing systems are
expected to be completed by first quarter 1999. Contingency plans for telephony,
network, and desktop computing are expected to be completed by second quarter
1999. The plans will potentially include remediation of systems scheduled to be
replaced, manual procedures, emergency power sources, and the stock piling of
certain equipment.
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union had
to establish fixed conversion rates between their existing legal currencies and
one common currency - the euro. The euro trades on currency exchanges and is
available for business transactions. The conversion to the euro will eliminate
currency exchange risk between the member countries. Beginning January 1, 2002,
the participating countries will issue new-euro denominated bills and coins for
use in cash transactions, and the legal currencies will be withdrawn from
circulation. The Company's subsidiaries affected by the euro conversion have
established plans to address the issues raised by the euro currency conversion.
These issues include, among others, the need to adapt computer and financial
systems, business processes and equipment to accommodate euro-denominated
transactions and the impact of one common currency on pricing. Since financial
systems and processes currently accommodate multiple currencies, the plans
contemplate conversion by mid 1999
21
<PAGE>
as part of the Company's Year 2000 project. The Company does not expect the
conversion costs to be material. Due to numerous uncertainties, the Company
cannot reasonably estimate the effects, if any, one common currency will have on
pricing on its financial condition or results of operations.
INFLATION
The Company operates in certain countries that have experienced high rates of
inflation and hyperinflation. However, inflation did not have any meaningful
impact on the Company's results of operations during the year ended December 31,
1998 nor during the three-year period ended December 31, 1998, and the Company
does not expect that it will have a material impact during 1999.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and maintain a
low number of SKUs and thereby reduce the Company's working capital requirements
and improve return on equity. The Company's strategy to achieve this goal is to
both manage its inventory effectively and achieve high order fill rates.
To reduce the risk of loss to the Company due to vendor price reductions and
slow moving or obsolete inventory, the Company's contracts with its vendors
generally provide price protection and stock rotation privileges, subject to
certain limitations. Price protection allows the Company to offset the accounts
payable owed to a particular vendor if such vendor reduces the price of products
the Company has purchased within a specified period of time and which remain in
inventory. Stock rotation permits the Company to return to the vendor for full
credit, with an offsetting purchase order for new products, predetermined
amounts of inventory purchased within a specified period of time. Such credit is
typically used to offset existing invoices due without incurring re-stocking
fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to balance the
needs of its customers to purchase on credit with its desire to minimize its
credit losses. Bad debt expense as a percentage of the Company's net sales for
each of the years ended 1998 and 1997 was 0.2%. The Company's credit losses have
been minimized by its extensive credit approval process and the use of credit
insurance and factoring by its Western European subsidiaries. In its sales to
customers in Latin America, the Company often receives post-dated checks at the
time of sale. Customers who qualify for credit are typically granted payment
terms appropriate to the customs of each country.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. Occasionally, the Company may enter into
derivatives or other financial instruments for speculative purposes. The Company
enters into financial instruments to manage and reduce the impact of changes in
foreign currency exchange rates. The counter parties are major financial
institutions and therefore credit risk associated with these contracts is
considered immaterial.
INTEREST RATE RISK. At December 31, 1998, the fair value of notes payable
approximated, their carrying value due to their short-term maturities. The fair
value of long-term fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt will increase as
interest rates fall and decrease as interest rates rise. Changes in interest
rates will affect the market value but do not impact earnings or cash flows.
Conversely for floating rate debt, interest rate changes generally do not affect
the fair market value but do impact future earnings and cash flows assuming
other factors are held constant. The estimated fair value of the Company's total
long-term debt (including current portion) at December 31, 1998 was $398.4
million. A 1% increase in prevailing interest rates at December 31, 1998 would
result in a decrease in fair value of total
22
<PAGE>
long-term debt by approximately $8.6 million. Fair values were determined from
quoted market prices, where available, and from investment bankers using current
interest rates considering credit risk and the remaining terms to maturity.
CURRENCY RISK MANAGEMENT
FUNCTIONAL CURRENCY. The Company's functional currency, as defined by Statement
of Financial Accounting Standards ("SFAS") No. 52, is the United States dollar.
Most of the Company's subsidiaries use their respective local currencies as
their functional currency and translate assets and liabilities using the
exchange rates in effect at the balance sheet date and results of operations
using the average exchange rates prevailing during the year. Translation effects
are reflected in the cumulative foreign currency translation adjustment in
accumulated other comprehensive income in equity. The Company's exposure under
these translation rules, which is unhedged, may affect the carrying value of its
foreign net assets and therefore its equity and net tangible book value, but not
its net income or cash flow. Exchange differences arising from transactions and
balances in currencies other than the functional currency are recorded as
expense or income in the subsidiaries and the Company and affect the Statements
of Earnings.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. Due to its international business
presence, the Company transacts extensively in foreign countries and foreign
currencies. As a result, earnings may experience some volatility related to
movements in exchange rates. The Company attempts to limit its risk of currency
fluctuations through hedging where possible. In the year ended December 31,
1998, a significant amount of the purchases of products by the Company were made
in United States dollars and approximately 90% of Company sales were made in
currencies other than the United States dollar. The primary currencies in which
sales were made were the German mark (19% of sales), the French franc (11%) and
the British pound (9%). At December 31, 1998, approximately $436.6 million of
accounts payable were attributable to foreign currency liabilities denominated
in currencies other than the subsidiaries' functional currencies. Of these,
$357.8 million were denominated in United States dollars and $50.8 million were
denominated in German marks. Approximately 80% of these liabilities were
unhedged.
CHS Finance, a wholly owned subsidiary of the Company, engages in central
treasury functions including hedging activities related to foreign currency for
the Company and short-term working capital loans to the Company's subsidiaries
to enable them to take advantage of early payment discounts offered by certain
vendors. These loans are denominated in the functional currency of the borrowing
subsidiary or United States dollars. Generally, CHS Finance hedges its
receivables denominated in currencies other than its functional currency, the
Swiss franc. It attempts to limit the amount of unhedged receivables to an
amount which approximates the total European unhedged liabilities. The Company
intends to review this policy periodically and may modify it in the future.
Through both hedging activities coordinated by CHS Finance and subsidiary
hedging activities, the Company makes forward purchases of United States dollars
in an attempt to hedge certain European currencies and reduce exposure to
fluctuations in exchange rates. Additionally, in certain countries in Eastern
Europe and in Latin America where it is not practical to make forward purchases,
to minimize exposure to currency devaluations, the Company has adopted a policy
of attempting to match levels of local denominationed accounts receivable with
accounts payable and to limit holdings of local currencies. In these countries,
the Company attempts to sell products at the United States dollar equivalent
rate. Factors which affect exchange rates are varied and no reliable prediction
methods are available for definitively determining future exchange rates. In
general, countries make an effort to maintain stability in rates for trade
purposes. There can be no assurance that these asset management programs will be
effective in limiting the Company's exposure to these risks.
The Company enters into foreign exchange contracts to hedge groups of foreign
currency transactions on a continuing basis for periods consistent with its
committed exposure. The foreign
23
<PAGE>
exchange contracts are valued at market and generally have maturities which do
not exceed three months. Gains and losses on foreign exchange contracts are
intended to offset losses and gains on assets, liabilities and transactions
being hedged. As a result, the Company does not anticipate any material adverse
effect due to exchange rate movements over the short period covered by these
contracts. At December 31, 1998, the face value of foreign exchange forward
contracts against trade payables was $269.3 million, which approximated fair
market value of these contracts. Holding other variables constant, if there were
a 10% adverse change in foreign currency exchange rates, the decrease in market
value of these contracts at December 31, 1998 would be offset by decreases in
trade payables.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("SFAS 133"). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is currently
assessing the effects of adopting SFAS 133, and has not made a determination of
the impact on our financial position or results of operations. SFAS 133 will be
effective for our first quarter of year 2000.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear beginning at page
F-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Company.
The information required regarding the identification of the Company's
directors is incorporated by reference to the information contained in the
Proxy Statement for the 1999 Annual Meeting of Shareholders of the Company.
(b) Executive Officers of the Company.
The executive officers of the Company, as well as certain key employees,
and their ages as of March 24, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Claudio Osorio........................ 40 Chairman of the Board, Chief Executive Officer and President
Carsten Frank......................... 35 Executive Vice President--Logistics and Director
Clifford Dyer(1)...................... 60 Executive Vice President--Latin American Region
Craig Toll............................ 50 Executive Vice President--Finance, Chief Financial Officer
and Treasurer
24
<PAGE>
Antonio Boccalandro................... 31 Chief Officer of Mergers and Acquisitions, Secretary
and Director
</TABLE>
- ------------
(1) Key employee, but not an executive officer of the Company.
CLAUDIO OSORIO (full name--Claudio Eleazar Osorio Rodriguez), the founder of the
Company's current business and operations, has served as the Chairman of the
Board, President, and Chief Executive Officer of the Company since 1993. Mr.
Osorio has served as President of Comtrad, Inc. ("Comtrad") since 1988. He is a
director of Comtrad and the President and a director of Comtrad Holdings, Inc.
("CHI"). Comtrad and CHI hold in the aggregate, 5,483,453 shares of the Company.
See "Principal Shareholders".
CARSTEN FRANK has been a director of the Company since May 1997 and has been
Executive Vice President--Logistics since January 1, 1999. From March 1, 1998
until December 31, 1998, Mr. Frank was Executive Vice President--Asian Region of
the Company. From March 1997 until February 28, 1998, he was the Executive Vice
President--European Region of the Company. Mr. Frank founded Frank & Walter in
1988 and has served as such company's Managing Director since its formation.
Frank & Walter was acquired by the Company effective January 1997.
CLIFFORD DYER has been the Executive Vice President--Latin American Region of
the Company since August 1997. From January 1997 until July 1997 he was the
Chief Operating Officer--Latin American Region. From February 1987 until it was
acquired by the Company in October 1996, Mr. Dyer was President of Merisel Latin
America, Inc. and was responsible for all Latin American operations. He was the
founder in 1982 of the predecessor company to Merisel Latin America, Inc. Prior
to 1982, Mr. Dyer was President of GTE Venezuela and held directorships in
various companies.
CRAIG TOLL has been the Executive Vice President--Finance of the Company since
August 1997 and has been the Chief Financial Officer of the Company since July
1994 and its Treasurer since June 1995. Mr. Toll was self-employed as a
consultant to CHS Promark from April 1994 to June 1994. For over five years
prior to April 1994, Mr. Toll was a partner in the accounting firm of Deloitte &
Touche.
ANTONIO BOCCALANDRO has been the Chief Officer of Mergers and Acquisitions of
the Company since August 1997 and has been a director and the Secretary of the
Company since 1993. He was Treasurer of the Company from December 1993 to June
1995. He has also been employed in various capacities by Comtrad since 1988. Mr.
Boccalandro became a director of Comtrad in 1990 and he has been a director of
CHI since June 1994.
25
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference
to the information contained in the Proxy Statement for the 1999 Annual Meeting
of Shareholders of the Company.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by reference
to the information contained in the Proxy Statement for the 1999 Annual Meeting
of Shareholders of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by reference
to the information contained in the Proxy Statement for the 1999 Annual Meeting
of Shareholders of the Company.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report.
(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data" for Financial
Statements included under this Annual Report on Form 10-K.
26
<PAGE>
(2) Financial Statement Schedules - Not applicable.
(3)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (8)
4.1 Amended and Restated 1998 Preferred Stock Purchase Rights Agreement dated as of
March 18, 1999 (8)
4.2 Indenture dated as of April 9, 1998 among the Company, CHS Delaware, Inc., CHS Delaware
L.L.C., CHS Americas, Inc. and the Chase Manhattan Bank (7)
4.3 Subsidiary Guarantee dated as of April 9, 1998 by CHS Delaware, Inc., CHS Delaware
L.L.C. and CHS Americas, Inc. (7)
10.1 Plan of Acquisition dated June 30, 1994 (2)
10.2 Form of Registration Agreement (2)
10.3 Agreement and Plan of Exchange dated June 30, 1994 (2)
10.4 Purchase and Sale Agreement dated June 30, 1994 (2)
10.5 Repurchase Option Agreement dated June 30, 1994 (2)
10.6 Stockholders Agreements dated June 30, 1994 (2)
10.7 Employment Agreement for Alvin Perlman (2)
10.8 Notes Payable to Comtrad, Inc., dated May 23, November 14, and December 29, 1994 (2)
10.9 Revolving Credit Agreement with the First National Bank of
Boston, dated March 1, 1993 as amended (2)
10.10 Reseller Agreement with Hewlett Packard dated March 1, 1994 (2)
10.11 Reseller Agreement with Hewlett Packard dated November 1, 1994 (2)
10.12 Stock Incentive Plan (2)
10.13 Lease for Miami, Florida Facility dated June 29, 1993 (2)
10.14 Real Estate Leasing Contract for Nenndorf, Germany Facility dated November 12, 1994 (2)
10.15 Loan and Security Agreement by and between Congress Financial Corporation (Florida),
as Lender and Zemex Electronics International, Inc. as Borrower, dated February 5, 1996,
together with the guarantee thereof by the Company (1)
10.16 Credit Agreement by and between MashreqBank PSC, New York Branch, as lender and the Company,
as borrower, dated July 10, 1995 (1)
and Amendment dated as of August 17, 1995 (3)
10.17 Employment Agreement between the Company and Claudio Osorio dated March 22, 1996 (3)
10.18 Employment Agreement between the Company and Craig Toll dated March 22, 1996 (3)
10.19 Form of Indemnity Agreement between the Company and each of the
Directors of the Company and Craig Toll (3)
10.20 Noncompetition Agreement dated April 11, 1996 among the Company, Comtrad, Inc. and Comtrad Holdings, Inc. (3)
10.21 Purchase and Sale Agreement between Comtrad, Inc. and the Company dated December 8, 1993 (CHS Germany) (2)
10.22 Agreement and Plan of Exchange between the Company and Comtrad, Inc., dated April 25, 1995
(CHS Belgium, CHS England, CHS France and CHS Portugal) (3)
10.23 Agreement and Plan of Exchange between the Company and Comtrad Holdings, Inc. dated October 13, 1995 (CHS BEK) (3)
10.24 Agreement and Plan of Exchange between the Company, CHS Czechia s.r.o., Comtrad, Inc.
and Zbynek Kraus dated October 27, 1995 (CHS Czechia) (3)
10.25 Stock Purchase Agreement between the Company and Comtrad Holdings, Inc. dated December
29, 1995 (CHS Poland) (3)
10.26 Stock purchase agreement between the Company and Comtrad, Inc. dated December 29, 1995 (CHS Sweden) (3)
10.27 Stock Purchase Agreement between the Company and Comtrad, Inc. dated December 29, 1995 (CHS Finland) (3)
10.28 Purchase Agreement dated January 31, 1996 between the Company and Comtrad Holdings, Inc and
the individual persons comprising the "KVENTA QUOTAHOLDERS" (CHS Hungary) (4)
10.29 Stock Purchase Agreement between the Company, Comtrad Holdings, Inc. and Comtrad, Inc. dated
March 27, 1996 (CHS Baltic, CHS Bulgaria, CHS Romania, CHS Croatia, CHS Brazil and CHS Slovakia) (3)
10.30 Purchase Agreement dated March 1996 between Zemex Electronics International and Cosapi
Organizacion Empresarial S.A. (CHS Peru) (3)
10.31 Stock Purchase Agreement dated March 29, 1996 between the Company and Hugo Wyrsch (CHS Switzerland) (3)
10.32 Loan Agreement dated 29 March 1996 among CHS Finance S.A., Singer
and Friedlander Limited and certain banks named in the Agreement (3)
10.33 Purchase Agreement by and among CHS Electronics, Inc., as Buyer, and Merisel, Inc. and Merisel
Europe, Inc. as Sellers dated as of August 29, 1996 as amended by First Amendment to Purchase
Agreement dated as of October 4, 1996 (4)
10.34 Second Amendment to Purchase Agreement by and among CHS Electronics, Inc. as Buyer and
Merisel, Inc. and Merisel Europe, Inc. as Sellers dated as of December 27, 1996 (5)
10.35 Settlement agreement and Release by and among CHS Electronics, Inc. as Buyer and Merisel, Inc.
and Merisel Europe, Inc. as Sellers dated February 13, 1997 (5)
10.36 Agreement as of October 31, 1996 between CHS Electronics, Inc. and Comtrad, Inc. (5)
10.37 Stock Exchange Agreement dated December 19, 1996 between CHS Electronics, Inc. and Frank
& Walter Computer GmbH (5)
10.38 Modification of Re-Purchase Agreement dated July 1996 (6)
27
<PAGE>
10.39 Amendment to Stock Purchase Agreement dated October 16, 1996 between CHS Electronics, Inc.
and Hugo Wyrsch (6)
10.40 Employment Agreement between the Company and Carsten Frank dated December 19, 1996 (6)
10.41 First Amendment to Employment Agreement of Claudio Osorio dated May 12, 1997 (6)
10.42 Amended and Joinder to Loan and Security Agreement between Zemex Electronics International,
Inc. and Merisel Latin America, Inc. as Borrowers and Congress Financial Corporation (Florida)
as Lender dated October 4, 1996 (6)
10.43 Shareholder Letter Agreement dated December 19, 1996 among Carsten Frank, Comtrad, Inc. and
Comtrad Holdings, Inc. (6)
10.44 Share Exchange Agreement dated June 20, 1997 among the Company and the shareholders of
Karma International S.A. (6)
21 Subsidiaries of the Company (8)
23.1 Consent of Independent Certified Public Accountant (8)
27.1 Financial Data Schedule (8)
</TABLE>
- ------------
(1) Incorporated herein by this reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(2) Incorporated herein by this reference from the Company's registration
statement on Form 10 filed with the Securities and Exchange Commission on
May 26, 1994 and the amendments thereto filed on August 1, 1994, September
9, 1994, December 2, 1994 and January 12, 1995.
(3) Incorporated herein by this reference from the Company's Registration
Statement on Form S-1 (File No. 333-03864).
(4) Incorporated herein by this reference from the Company's Current Report on
Form 8-K filed on October 18, 1996.
(5) Incorporated herein by this reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(6) Incorporated herein by this reference from the Company's Registration
Statement on Form S-3 (File No. 333-29779).
(7) Incorporated herein by reference from the Company's Current Report on Form
8-K filed on April 22, 1998.
(8) Filed herewith.
(b) Reports on Form 8-K
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended (the "Act"), the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHS ELECTRONICS, INC.
BY: /S/ CLAUDIO OSORIO
-------------------
Claudio Osorio
President
Dated: March 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Claudio Osorio President and Director March 22, 1999
Claudio Osorio (principal executive officer)
/s/ Carsten Frank Executive Vice President--Logistics March 22, 1999
Carsten Frank and Director
/s/ Antonio Boccalandro Secretary and Director March 22, 1999
Antonio Boccalandro
/s/ Craig Toll Chief Financial Officer and Treasurer March 22, 1999
Craig Toll (principal financial officer and
principal accounting officer)
/s/ Otto Gerlach Director March 22, 1999
Otto Gerlach
/s/ Bernd Karre Director March 22, 1999
Bernd Karre
/s/ Zbynek Kraus Director March 22, 1999
Zbynek Kraus
/s/ Pierino Lardi Director March 22, 1999
Pierino Lardi
/s/ Donald D. Winstead Director March 22, 1999
Donald D. Winstead
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
CHS Electronics, Inc.--Historical Financial Statements
Report of Independent Certified Public Accountants......................F-2
Consolidated Balance Sheets.............................................F-3
Consolidated Statements of Earnings.....................................F-4
Consolidated Statements of Shareholders' Equity.........................F-5
Consolidated Statements of Cash Flows...................................F-6
Notes to the Consolidated Financial Statements..........................F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders CHS Electronics, Inc.
We have audited the accompanying consolidated balance sheets of CHS Electronics,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CHS Electronics,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Miami, Florida
March 19, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 176,991 $ 68,806
Accounts receivable:
Trade, less allowance for doubtful account of $34,486 in 1998
and $18,347 in 1997 1,342,126 659,757
Affiliates 35,546 24,604
----------- -----------
1,377,672 684,361
Inventories 1,025,690 693,503
Prepaid expenses and other current assets 101,698 65,255
----------- -----------
TOTAL CURRENT ASSETS 2,682,051 1,511,925
PROPERTY AND EQUIPMENT, NET 120,201 61,468
GOODWILL, NET 737,719 381,830
OTHER ASSETS 32,172 13,599
----------- -----------
$ 3,572,143 $ 1,968,822
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 677,994 $ 309,510
Accounts payable, trade 1,345,059 771,535
Accrued liabilities 125,076 83,309
Amounts due to sellers under acquisition agreements 185,853 54,866
Income taxes payable 13,997 13,934
----------- -----------
TOTAL CURRENT LIABILITIES 2,347,979 1,233,154
LONG TERM DEBT 375,655 61,556
MINORITY INTEREST 10,466 6,348
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding - -
Common stock, authorized 100,000,000 shares at $.001 par value;
outstanding 55,619,475 shares at December 31, 1998 and
48,910,999 shares at December 31, 1997 56 49
Additional paid-in capital 732,035 621,021
Retained earnings 110,793 65,115
Accumulated other comprehensive income (4,841) (18,421)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 838,043 667,764
----------- -----------
$ 3,572,143 $ 1,968,822
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 8,545,773 $ 4,756,383 $ 1,855,540
Cost of goods sold 7,983,736 4,409,714 1,724,432
----------- ----------- -----------
Gross profit 562,037 346,669 131,108
Operating expenses 433,567 257,508 102,235
----------- ----------- -----------
Operating income 128,470 89,161 28,873
Other (income) expense:
Interest income (16,581) (11,470) (3,199)
Interest expense 71,373 35,618 11,712
----------- ----------- -----------
54,792 24,148 8,513
----------- ----------- -----------
Earnings before income taxes and minority
interest in subsidiaries 73,678 65,013 20,360
Income taxes 23,871 13,988 6,086
Minority interest in subsidiaries 4,129 2,634 2,108
----------- ----------- -----------
Net earnings $ 45,678 $ 48,391 $ 12,166
=========== =========== ===========
Net earnings per common share--basic $ 0.88 $ 1.44 $ 0.80
=========== =========== ===========
Net earnings per common share--diluted $ 0.82 $ 1.32 $ 0.78
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(In thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL INCOME
------ --------- --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 11 $ 24,973 $ 4,558 $ 350 $ 29,892
Common stock or other consideration
issued in acquisitions - 16,982 - - 16,982
Common stock issued in public offering 7 50,607 - - 50,614
Stock options exercised 1 281 - - 282
Comprehensive income:
Net earnings - - 12,166 - 12,166 $ 12,166
Foreign currency translation adjustment (5,403) (5,403) (5,403)
--------
Total comprehensive income $ 6,763
---- --------- --------- -------- --------- ========
Balance at December 31, 1996 19 92,843 16,724 (5,053) 104,533
Common stock issued in acquisitions 8 95,720 - - 95,728
Common stock issued in public offering 21 428,195 - - 428,216
Stock options exercised 1 4,263 - - 4,264
Comprehensive income:
Net earnings - - 48,391 - 48,391 $ 48,391
Foreign currency translation adjustment - - - (13,368) (13,368) (13,368)
--------
Total comprehensive income - - $ 35,023
---- --------- --------- -------- --------- ========
Balance at December 31, 1997 49 621,021 65,115 (18,421) 667,764
Common stock issued in acquisitions 7 108,153 - - 108,160
Stock options exercised - 3,233 - - 3,233
Common stock repurchased - (372) - - (372)
Comprehensive income:
Net earnings - - 45,678 - 45,678 $ 45,678
Foreign currency translation adjustment - - - 13,580 13,580 13,580
--------
Total comprehensive income $ 59,258
---- --------- --------- -------- --------- ========
Balance at December 31, 1998 $ 56 $ 732,035 $ 110,793 $ (4,841) $ 838,043
==== ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 45,678 $ 48,391 $ 12,166
Adjustments to reconcile net earnings to net cash
(used in) operating activities:
Depreciation and amortization 46,611 21,789 6,632
Minority interest in net earnings 4,128 2,634 2,108
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net (427,899) (121,163) (118,694)
Accounts receivable-affiliates, net (41,230) (21,363) (2,398)
Inventories (141,159) (139,923) (129,357)
Prepaid expenses and other assets (13,744) 5,404 (22,345)
Accounts payable, trade 277,815 (10,773) 173,244
Accrued liabilities and income taxes 9,709 (33,511) (20,481)
--------- --------- ---------
Net cash (used in) operating activities (240,091) (248,515) (99,125)
--------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets (52,490) (19,511) (11,624)
Cash used in acquisitions, net (189,671) (201,517) (26,876)
--------- --------- ---------
Net cash (used in) investing activities (242,161) (221,028) (38,500)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from public offering - 428,216 50,614
Proceeds from issuance of Senior Notes 200,000 - -
Proceeds from long-term debt 138,961 - -
Proceeds from stock options exercised 3,233 4,263 281
Net borrowing from banks 246,823 74,699 112,453
Repurchase of shares (372) - -
--------- --------- ---------
Net cash provided by financing activities 588,645 507,178 163,348
Effect of exchange rate changes on cash 1,792 (3,966) (1,757)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 108,185 33,669 23,966
Cash at beginning of year 68,806 35,137 11,171
--------- --------- ---------
Cash at end of year $ 176,991 $ 68,806 $ 35,137
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 62,555 $ 30,454 $ 10,064
Income taxes $ 13,900 $ 10,585 $ 3,892
</TABLE>
F-6
<PAGE>
Non-cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
The components of the transactions in each year are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fair value of assets acquired including cash $655,938 $689,550 $ 14,691
Less: Common stock or other consideration issued 173,812 232,748 3,278
-------- -------- --------
Liabilities assumed $482,126 $456,802 $ 11,413
======== ======== ========
</TABLE>
In 1996, $13.7 million was credited to additional paid-in capital representing
additional consideration paid by an affiliated company under acquisition
agreements for subsidiaries now held by the Company and accounted for as an
exchange between entities under common control. Furthermore, these statements of
cash flows exclude the non-cash impact on the net increase of amounts due to
sellers under acquisition agreements of $89.6 million in 1998, $5.7 million
in 1997 and $49.2 million in 1996.
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. NATURE OF OPERATIONS
The Company is an international distributor of computer equipment, peripherals
and software. The products are sold, principally to resellers, in Western
Europe, Eastern Europe, Latin America and Asia.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, wholly owned and majority owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. FOREIGN CURRENCY TRANSLATION
For purposes of preparation of its financial statements, the Company uses the
local currency as the functional currency except in highly inflationary
countries. For subsidiaries where the local currency is the functional currency,
assets and liabilities are translated into United States dollars at the exchange
rate in effect at the end of the year. Revenues and expenses of these
subsidiaries are translated at the average exchange rate during the year. The
aggregate effect of translating the financial statements of foreign subsidiaries
is included in a separate component of shareholders' equity entitled accumulated
other comprehensive income. In the normal course of business, the Company
advances funds to certain of its foreign subsidiaries, which are not expected to
be repaid in the foreseeable future. Translation adjustments resulting from
these advances are included in accumulated other comprehensive income. For
entities in highly inflationary countries, the U.S. dollar is considered the
functional currency and a combination of current and historical rates are used
in translating assets, liabilities, revenues and expenses. The related exchange
adjustments are included in earnings. The Company's operations in Bulgaria,
Mexico, Russia, Turkey and Venezuela are considered to operate in highly
inflationary economies.
4. CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
5. CONCENTRATION OF CREDIT RISK
The Company's credit risk on trade receivables is diversified over several
geographic areas and many customers. The largest customer accounts for less than
1% of sales. The Company performs ongoing credit evaluations of its customers.
In South America, the Company obtains personal guarantees from its customers in
some cases. The Company uses credit insurance in several locations (covering
$694.1 million in receivables at December 31, 1998) and factoring without
recourse in other locations to mitigate risk. The Company provides for estimated
credit losses at time of sale based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
6. INVENTORIES
Inventories, consisting of finished products, are stated at the lower of cost or
market, with cost being determined principally by the first-in first-out method.
F-8
<PAGE>
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. Leasehold improvements and
capital leases are amortized over the lives of respective leases or the service
lives of the improvements whichever is shorter.
The straight-line and accelerated methods of depreciation are followed for
financial reporting purposes. The useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................... 10-50
Leasehold improvements....................... 3-10
Computer equipment........................... 2-5
Office equipment and furniture............... 3-10
Vehicles..................................... 3-10
</TABLE>
Expenditures for renewals and improvements that significantly extend the useful
life of an asset are capitalized. The costs of software used in business
operations are capitalized and amortized over their expected useful lives.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are removed from the accounts and any gain or loss is
recognized at such time.
8. INCOME TAXES
The Company utilizes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability
method specified by SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the current enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is the
result of changes in deferred tax assets and liabilities.
The Company intends to invest the undistributed earnings of substantially all of
its foreign subsidiaries indefinitely. At December 31, 1998 and 1997, the
cumulative amount of undistributed earnings on which the Company has not
recognized United States income taxes was approximately $84 million and $53
million, respectively. However, it is anticipated that United States income
taxes on such amounts would be partially offset by available foreign income tax
credits.
9. REVENUE RECOGNITION
The Company recognizes sales upon shipment, as there is no significant post-sale
obligation and collectibility is reasonably assured. Income from vendor rebates,
discounts, and cooperative advertising is recognized when earned, as a reduction
of the cost of inventory sold or as a reduction of operating expenses.
10. GOODWILL, NET
Goodwill is being amortized on a straight-line basis to earnings over periods
ranging from 20 to 35 years to reflect the Company's current expectation of
future benefit. The Company evaluates the realizability of its goodwill when an
event occurs that indicates that impairment may have occurred. The Company
determines potential impairment by comparing the carrying value to the
undiscounted future cash flows of the related assets. The Company adjusts the
value of goodwill related to a subsidiary if an impairment is indicated by the
difference between the undiscounted cash flows and the carrying value. The
Company considers a history of operating losses
F-9
<PAGE>
to be a primary indicator of potential impairment. Assets are grouped and
evaluated for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of cash flows of other groups of assets.
Assets are generally grouped at the country level of operations. The Company
deems an asset to be impaired if a forecast of undiscounted future operating
cash flows directly related to the asset, including disposal value if any, is
less than its carrying amount. All of the Company's goodwill is identified with
the assets acquired. As of December 31, 1998 and 1997, no impairment was
indicated. Accumulated amortization was $37.0 million and $10.8 million at
December 31, 1998 and 1997, respectively.
11. EARNINGS PER COMMON SHARE
In calculating earnings per common share, basic earnings per share is computed
by dividing net earnings by the weighted averaged number of common shares
outstanding. Diluted earnings per share includes the dilution caused by common
stock options and warrants and the shares that would be issued in existing earn
outs based upon applying the earn out multiple to actual earnings to date and
dividing by the market price at period end. In certain earn outs where the
Company has the option of settling the earn out in cash or shares, the Company's
current presumption is it will use cash and therefore, such shares have not been
included in the calculation of diluted earnings per share. The weighted average
number of shares for basic earnings per share was 51,616,109, 33,527,256, and
15,243,672 in 1998, 1997, and 1996, respectively. The weighted average number of
shares used in the diluted computation was 55,917,007, 36,592,368, and
15,656,178 in 1998, 1997, and 1996, respectively.
The following table presents a reconciliation of the income and weighted average
number of shares of the basic and diluted earnings per share computations
(amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $45,678
-------
Net earnings per share--basic 45,678 51,616 $0.88
------- ------- =====
Effect of dilutive shares:
Stock options and warrants outstanding - 1,152
Earnout contingencies - 3,149
------- -------
Net earnings per share--diluted $45,678 55,917 $0.82
======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $48,391
-------
Net earnings per share--basic 48,391 33,527 $1.44
------- ------ =====
Effect of dilutive shares:
Stock options and warrants outstanding - 1,434
Earnout contingencies - 1,631
------- ------
Net earnings per share--diluted $48,391 36,592 $1.32
======= ====== =====
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $12,166
-------
Net earnings per share--basic 12,166 15,244 $0.80
------- ------ =====
Effect of dilutive shares:
Stock options and warrants outstanding - 412
------- ------
Net earnings per share--diluted $12,166 15,656 $0.78
======= ====== =====
</TABLE>
Options to purchase approximately 4.0 million shares of common stock at a range
from $15.75 to $25.46 were not included in the computation of the diluted
earnings per share for the year ended December 31, 1998 since they would have
had an anti-dilutive effect.
12. STOCK OPTIONS
Options granted under the Company's 1994 Stock Incentive Plan, the 1996 and 1997
Chief Executive Officer stock option plans and the Directors and Officers 1997
stock option plan are accounted for under APB Opinion 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES". As to grants requiring shareholder approval, the Company
considers the date of grant to be the date of action by the Board of Directors
when, on such date, shareholder approval is deemed to be perfunctory.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Company operates internationally with distribution facilities in various
locations around the world. The Company reduces its exposure to fluctuations in
foreign exchange rates by creating offsetting positions through the use of
derivative financial instruments, primarily foreign exchange forward contracts.
The market risk related to the foreign exchange agreements is offset by changes
in the valuation of the underlying items being hedged. The majority of the
Company's derivative financial instruments have terms of 90 days or less.
Occasionally, the Company may enter into derivative financial instruments for
speculative purposes. The Company is not party to leveraged derivatives.
The notional amount of forward exchange contracts and options is the amount of
foreign currency bought or sold at maturity. Notional amounts are indicative of
the extent of the Company's involvement in the various types and uses of
derivative financial instruments and are not a measure of the Company's exposure
to credit or market risks through its use of derivatives. The estimated fair
value of derivative financial instruments represents the amount required to
enter into like off-setting contracts with similar remaining maturities based on
the end of year spot rates, which approximate quoted market rates. As of
December 31, 1998, the notional amount of foreign exchange forward contracts
outstanding against trade payables was $269.3 million, which approximated fair
value.
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these items.
The carrying amounts of debt issued pursuant to bank credit agreements
approximate fair value because interest rates on those instruments approximate
current market interest rates. The fair value of long-term fixed interest rate
debt is subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. Changes in interest rates will affect the market value but do not
impact earnings or cash flows. Conversely for floating rate debt, interest rate
changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant. The estimated
fair value of the Company's total long-term debt (including current portion) at
December 31, 1998 was $398.4 million. Fair values were determined from quoted
market prices, where available, and from investment bankers using current
interest rates considering credit risk and the remaining terms to maturity.
F-11
<PAGE>
14. NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company is currently assessing the effects of adopting SFAS
No. 133, and has not yet made a determination of the impact on its financial
position or results of operations. SFAS No. 133 will be effective for the
Company's first quarter of fiscal year 2000.
15. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
NOTE B--ACQUISITIONS
On July 1, 1998, the Company acquired a majority of the outstanding shares of
Metrologie International SA ("Metrologie"), a distributor of hardware and
software to more than 15,000 resellers in France, the United Kingdom and Spain
(all outstanding shares of Metrologie were acquired before the end of 1998). The
purchase price for the entire equity interests of Metrologie was approximately
$93.7 million. Metrologie had sales of $433.4 million for the six months ended
June 30, 1998 and $883.2 million for the year ended December 31, 1997.
Metrologie is ISO-9001 certified to perform configurations of high-end network
solutions and work stations which the Company believes will be strategically
important in strengthening the Company's ability to provide high-end platforms
in Europe. As a result of this acquisition, the Company has become the largest
distributor of microcomputer products in France and Spain.
On March 9, 1998, the Company acquired an 80% interest in the Hong Kong,
Malaysia and Singapore subsidiaries of SiS Distribution Ltd. ("SiS"), a Hong
Kong based distributor, for $70.4 million, and paid $28.2 million of such amount
on such date (representing 40% of the purchase price). Under the terms of the
agreement, as modified, the remainder of the purchase price is due in cash in
the second quarter of 1999. SiS had sales of $346.8 million during 1997.
During 1998, the Company completed 14 other acquisitions which were considered
not to be significant. All acquisitions have been accounted for under the
purchase method and accordingly, the results of such acquired entities have been
included in the consolidated operating results since their acquisition dates.
In 1997 the Company made 15 acquisitions, of which three were significant.
Effective October 1997, the Company completed the acquisition of Santech Micro
Group ASA ("Santech"), for approximately $125 million. Santech was the largest
distributor of microcomputer products in Scandinavia with operations in Norway,
Sweden and Denmark and had revenues of $718 million in 1996. Santech distributes
the products of the same vendors as other subsidiaries of the Company. The
acquisition of Santech has been accounted for under the purchase method and,
accordingly the results of Santech have been included in the consolidated
operating results since the date of acquisition. The acquisition of Santech
resulted in the recognition of $107.3 million of goodwill.
Santech's operating results during 1997, included in the pro-forma amounts at
the end of this note, were adversely impacted as a result of restructuring its
operations after a July 1996 merger.
F-12
<PAGE>
Operating results were also impacted adversely by the implementation of a new
computer system in the first six months of 1997. The adverse impact included
costs associated with reduction in the number of its product lines and the
number of employees from 450 to 320. The Company accrued approximately $2
million for the costs of consolidating former Santech operations. The reserve
consists of inventory reserves, severance costs, lease termination costs and
other costs. As of December 31, 1998, $1.3 million had been charged against such
reserve.
Effective August 1997, the Company completed the acquisition of Karma
International S.A. ("Karma"). Karma was a distributor of personal computer
components to over 10,000 customers in Europe, the Middle East and Asia. The
purchase price for Karma was $160 million and was funded through (i) $74 million
in cash and (ii) 4,813,432 shares of unregistered common stock. Karma's product
line includes mass storage products, CPUs, memory chips, motherboards, sound,
video and other cards and monitors. Karma operated in 18 countries through 28
offices in Europe, the Middle East and Asia. Karma had net sales of
approximately $700 million in 1996. The acquisition of Karma has been accounted
for under the purchase method and, accordingly the results of Karma have been
included in the consolidated operating results since the date of acquisition.
The acquisition of Karma resulted in the recognition of $126.4 million of
goodwill.
Effective January 1997, the Company completed the acquisition of Frank & Walter
Computer GmbH ("Frank & Walter") for 3,300,000 unregistered shares of common
stock. Frank & Walter had net sales of approximately $686 million in 1996. The
Company believes that Frank & Walter was, at the time of acquisition, the fourth
largest computer distributor in Germany with over 10,000 active dealers. The
acquisition of Frank & Walter has been accounted for under the purchase method
and, accordingly the results of Frank & Walter have been included in the
consolidated operating results since the date of acquisition. The amounts
allocated to assets acquired and liabilities assumed resulted in a recognition
of $26.9 million of goodwill.
The Company completed other acquisitions during 1997 which were considered not
to be significant. Such acquisitions have been accounted for under the purchase
method and accordingly, the results of such acquired entities have been included
in the consolidated operating results since their acquisition dates.
In 1996 the Company acquired 18 companies. The largest acquisition was of seven
companies comprising the European and Latin American businesses of a competitor,
Merisel, Inc. These seven companies were acquired for cash and debt assumptions.
The total consideration paid was approximately $148 million consisting of $30
million of cash and $118 million of debt assumed or refinanced. The Company
financed the acquisition primarily through borrowing or factoring at each
subsidiary acquired. The acquisition has been accounted for as a purchase,
effective as of September 30, 1996. The cost of the acquisition has been
allocated to the assets acquired based on their fair values. This initially
resulted in approximately $10.5 million of goodwill. In the second and third
quarters of 1997, certain reserves initially established were determined not to
be required, resulting in a reduction of goodwill to $4.6 million.
The Company originally accrued approximately $12.8 million for the consolidation
of former Merisel and CHS operations. The reserve consisted of lease
termination--$4.1 million, write-off of leasehold improvements and computer
systems--$4.9 million, and accounts receivable and other costs--$3.8 million.
Through December 31, 1998, $11.0 million has been charged against this accrual.
In June 1996, the Company acquired 100% of an unaffiliated company in Russia for
consideration based on a multiple of that company's net income in 1996. The
acquisition was initially recorded at no consideration, which approximated the
value of net assets acquired. Subsequently, the agreement was modified to
measure the value of the Company based 50% on 1996 results and 50% on 1997
results. The 1996 portion was paid in cash in 1997 and the 1997 portion was paid
in 1998 by issuing 1,426,191 shares of common stock. In 1996 and 1997, $20.6 and
$25.3 million was recorded as purchase price and goodwill.
F-13
<PAGE>
In April 1996, the Company acquired 100% of an unaffiliated company in
Switzerland for consideration based on a multiple of 1996 net earnings but not
less than $1.7 million. The acquisition was initially recorded at $1.7 million
resulting in no goodwill. Subsequently, the agreement was modified to base the
price on results through September 30, 1996. In the 1996 fourth quarter, 274,855
shares of common stock were issued and goodwill of $870,000 was recorded.
In March 1996, the Company acquired six companies from Comtrad, Inc., an
affiliate, for a reduction of indebtedness of $7.8 million. These acquisitions
have been accounted for as an exchange between entities under common control in
a manner similar to a pooling of interests. Accordingly, these acquisitions have
been included in the accompanying financial statements from the date acquired by
Comtrad. The companies in Bulgaria, Croatia, Lithuania and Romania were started
by Comtrad in 1993 and 1994 for a minimal investment and had insignificant
operations. They are treated as if Comtrad acquired them on December 31, 1994.
Sixty-five percent of a company in Slovakia was acquired in early 1994 for a
minimal investment and 1994 results were insignificant. The remaining 35% was
acquired by Comtrad for a contingent payment which was insignificant and was
recorded in 1997. Comtrad acquired the Brazil company in November 1994 for
Comtrad common shares valued at $762,000. The acquisition was recorded by the
Company as of December 31, 1994 at this value, resulting in goodwill of $2.5
million. An additional amount of $240,000 was paid by Comtrad in 1996 to
complete its acquisition of this company, which had the effect of increasing
goodwill to $2.8 million.
In February 1996, the Company acquired 51% of an unaffiliated company in Hungary
for consideration based on 51% of the book value of equity at December 31, 1996
plus a multiple of 51% of 1996 net earnings. Based on 1996 results, the purchase
price was fixed at $17.6 million resulting in goodwill of $15.8 million. The
sellers elected to receive the proceeds in cash rather than stock. In the second
quarter of 1997 the agreement was modified to measure the value of the company
based 75% on 1996 results and 25% on 1997 results. The 1996 amount was paid in
1997. As a result, goodwill in 1996 was reduced by $3.8 million. The 1997
amount, estimated at $5.6 million, was recorded in 1997 and paid in 1998 and
increased goodwill.
The following represents the unaudited pro forma results of operations assuming
all significant 1998 and 1997 acquisitions had taken place on January 1, 1997
(amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $9,461,281 $8,247,223
Net earnings 19,083 13,403
Net earnings per share--basic $0.37 $0.40
Net earnings per share--diluted $0.34 $0.37
</TABLE>
Pro forma adjustments have been made to add goodwill amortization. The pro forma
information is not necessarily indicative of the actual results of operations
that would have occurred had the acquisitions taken place on January 1, 1997, or
of results which may occur in the future.
F-14
<PAGE>
NOTE C--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts:
Beginning balance $ 18,347 $ 14,830 $ 4,388
Provision for bad debt 20,683 11,636 3,412
Write-offs (17,324) (14,162) (3,775)
Acquired through acquisition 12,780 6,043 10,805
-------- -------- --------
Ending balance $ 34,486 $ 18,347 $ 14,830
======== ======== ========
</TABLE>
NOTE D--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings $ 41,451 $ 19,358
Office equipment and furniture 44,129 22,047
Leasehold improvements 23,931 7,330
Computer equipment 55,645 43,470
Vehicles and other 6,332 3,497
------------ ------------
171,488 95,702
Less accumulated depreciation and amortization 51,287 34,234
--------- --------
$ 120,201 $ 61,468
========= ========
</TABLE>
NOTE E--INCOME TAXES
The components of earnings (loss) before income taxes and minority interest in
subsidiaries consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic $ (2,364) $ 3,450 $ 1,361
Foreign 76,041 61,563 18,999
-------- -------- --------
Total $ 73,677 $ 65,013 $ 20,360
======== ======== ========
</TABLE>
F-15
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Current:
<S> <C> <C> <C>
U.S. Federal $ 1,444 $ 2,243 $ 1,721
U.S. State 167 329 228
Foreign 16,878 8,493 4,520
-------- -------- --------
18,489 11,065 6,469
-------- -------- --------
Deferred:
U.S. Federal (111) (569) (258)
U.S. State (18) (92) (47)
Foreign 5,511 3,584 (78)
-------- -------- --------
5,382 2,923 (383)
-------- -------- --------
Total $ 23,871 $ 13,988 $ 6,086
======== ======== ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating losses of foreign subsidiaries $ 47,587 $ 16,839
Accruals not currently deductible 2,820 1,896
Allowances for bad debts 2,061 1,115
Other - 27
-------- --------
Total deferred tax assets 52,468 19,877
-------- --------
Deferred tax liabilities:
Inventory differences (7,861) (7,424)
Other (461) -
-------- --------
Total deferred tax liabilities (8,322) (7,424)
-------- --------
44,146 12,453
Valuation allowance (41,884) (13,676)
-------- --------
Total $ 2,262 $ (1,223)
======== ========
</TABLE>
The net deferred tax asset (liability) is reflected in the accompanying
consolidated balance sheets in other assets as of December 31, 1998 and in
income taxes payable as of December 31, 1997.
F-16
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at the United States statutory rate $ 25,050 $ 22,104 $ 6,922
Foreign income subject to tax at other than U.S. statutory rate (11,630) (15,690) (1,356)
Losses without tax benefit 4,693 5,127 1,329
Non deductible goodwill amortization 8,563 2,834 255
Utilizations of net operating losses of foreign subsidiaries (2,181) (759) (1,196)
Other (624) 372 132
-------- -------- --------
Income taxes at the effective tax rate $ 23,871 $ 13,988 $ 6,086
======== ======== ========
</TABLE>
At December 31, 1998, the Company has net operating loss carry forwards in
certain foreign jurisdictions that expire as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 15,248
2000 2,003
2001 1,013
2002 12,557
2003 1,705
2004 - 2008 13,634
No expiration 82,832
---------
Total $ 128,992
=========
</TABLE>
In assessing the realization of net operating loss carry forwards, management
considers whether it is more likely than not that some portion or all of these
net operating loss carry forwards will not be realized. The ultimate realization
of these net operating loss carry forwards and other deferred tax assets are
dependent upon the generation of future taxable income during the periods prior
to the expiration of the operating loss carry forwards. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
operating loss carry forward periods, management believes it is more likely than
not the Company will not realize the benefits of all of these net operating loss
carry forwards and other deferred tax assets. Accordingly, a valuation allowance
has been established since the full realization of such benefits is not likely.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1998 will be allocated to income from
continuing operations or reduce goodwill. In the event that the tax benefits
relating to net operating losses are realized, $24.0 million of such benefits
would reduce future provision for income taxes and $23.6 million would reduce
goodwill.
NOTE F--NOTES PAYABLE AND LONG TERM DEBT
Several of the Company's subsidiaries have short-term credit lines with local
banks. As of December 31, 1998, of the $882.5 million aggregate amount available
under these agreements, $648.3 million was outstanding. Generally, borrowings
under such lines are collateralized by receivables or inventory. The lines are
principally of one year duration and are renewable by the banks. Some of these
lines contain restrictions on dividends to the parent company. In 1998, the
maximum and average amounts outstanding were $777.0 million and $614.5 million,
respectively. The weighted average interest rate at December 31, 1998 was 6.5%.
F-17
<PAGE>
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes ("Senior Notes") due 2005. The
Notes bear interest of 9.875% per annumn
and interest is payable semi-annually on
April 15 and October 15 beginning
October 15, 1998. The Senior Notes are
redeemable at the option of the Company,
in whole or in part, at any time on or
after April 15, 2002, initially at
104.938% of their principal amount, plus
accrued and unpaid interest, on or after
April 15, 2004. Certain of the Company's
direct and indirect wholly-owned subsidiaries
fully and unconditionally jointly and severally
guaranteed the Senior Notes on an unsecured
basis. $200,000 $ -
Three subsidiaries in Germany share a
revolving credit agreement of DM 325
million ($195 million at December 31,
1998) with a financial institution. The
agreement, which expires December 2001,
provides for advances based upon
eligible accounts receivable and
inventories. Interest is at a variable
market rate based on a German base rate
(5.2% at December 31, 1998). The debt is
secured by the borrowers' receivables,
inventories and intangible assets
amounting to $376.5 million at December
31, 1998. The agreement contains certain
restrictive covenants, including the
ability by the borrowers to incur
additional indebtedness. 138,961 -
Two subsidiaries serving Latin America
share a $60 million revolving credit
agreement with a financial institution.
The agreement, which expires in October
1999, provides for advances and letters
of credit based upon eligible accounts
receivable and inventories. Interest is
at a variable market rate based on the
prime rate of the lender or LIBOR, at
the borrowers' option (9.5% at December
31, 1998). All of the borrowers' assets,
including accounts receivable and
inventories totaling $83.3 million at
December 31, 1998, are pledged as
collateral. The agreement contains
certain restrictive covenants, including
limitations on transactions with
affiliated companies and employee loans.
The agreement also limits the ability of
these companies to pay dividends to the
Company to 50% of the borrowers' net
income. 21,019 $46,286
Mortgages on buildings, interest ranging
from 3.9% to 11.0% with maturities
through 2009, collateralized by
buildings, accounts receivables and
inventories with net book value at
December 31, 1998 of $91.7 million. 15,262 11,318
Capitalized leases, collateralized by
computer equipment, bearing interest
ranging from 4% to 22% with maturities
through September 2002. 13,655 10,983
Industrial bonds, unsecured, bearing
interest rate of 2%, due August 2000 9,462 -
Other debt 6,996 484
-------- -------
Total 405,355 69,071
Less current portion of long-term debt,
included in notes payable 29,700 7,515
-------- -------
Total long-term debt $375,655 $61,556
======== =======
</TABLE>
F-18
<PAGE>
Scheduled maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999 $29,700
2000 23,657
2001 143,709
2002 1,524
2003 693
Thereafter 206,072
</TABLE>
In April 1998, the Company issued the Senior Notes. The Notes are effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries that are not guarantors. The guarantor subsidiaries are principally
non-operating subsidiaries in the United States. The Senior Notes contain
certain covenants which, among other things, restrict the ability of the Company
and certain of its subsidiaries to incur additional indebtedness; pay dividends
or make distributions in respect to their capital stock; enter into certain
transactions with shareholders and affiliates; make certain investments and
other restricted payments; create liens; enter into certain sale and leaseback
transactions and sell assets. The covenants are, however, subject to a number of
exceptions and qualifications.
The following condensed consolidated financial information presents the results
of operations, financial position and cash flows of the Company (on a stand
alone basis), the guarantor subsidiaries (on a combined basis), the
non-guarantor subsidiaries (on a combined basis) and the eliminations necessary
to arrive at the consolidated results for the Company. The results of operations
and cash flows are presented below as if the guarantor subsidiaries were in
place for all periods presented. The Company and subsidiary guarantors have
accounted for investments in their respective subsidiaries on an unconsolidated
basis using the equity method of accounting.
F-19
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 2,063 $ (1,245) $ 176,173 $ - $ 176,991
Accounts receivable 199 131,392 1,246,081 - 1,377,672
Intercompany receivables 179,574 34,295 262,332 (476,201) -
Inventories - 5,598 1,020,092 - 1,025,690
Other current assets 814 2,038 98,846 - 101,698
----------- ----------- ----------- ----------- -----------
Total current assets 182,650 172,078 2,803,524 (476,201) 2,682,051
Property and equipment, net 1,538 7,015 111,648 - 120,201
Cost in excess of assets acquired, net - - 737,719 - 737,719
Investments in affiliated companies 1,037,660 1,364,888 - (2,402,548) -
Other assets 10,873 771 20,528 - 32,172
----------- ----------- ----------- ----------- -----------
Total assets $ 1,232,721 $ 1,544,752 $ 3,673,419 $(2,878,749) $ 3,572,143
=========== =========== =========== =========== ===========
Notes payable $ - $ 8,782 $ 669,212 $ - $ 677,994
Intercompany payables 2,343 291,179 182,679 (476,201) -
Accounts payable 5,092 14,736 1,325,231 - 1,345,059
Accrued expenses 4,663 893 119,520 - 125,076
Amounts due to sellers 185,853 - - - 185,853
Income taxes payable and other
current liabilities (3,273) (150) 17,420 - 13,997
----------- ----------- ----------- ----------- -----------
Total current liabilities 194,678 315,440 2,314,062 (476,201) 2,347,979
Long term debt 200,000 4,904 170,751 - 375,655
Minority interests - - - 10,466 10,466
Shareholders' equity 838,043 1,224,408 1,188,606 (2,413,014) 838,043
----------- ----------- ----------- ----------- -----------
$ 1,232,721 $ 1,544,752 $ 3,673,419 $(2,878,749) $ 3,572,143
=========== =========== =========== =========== ===========
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
Cash $ 2,367 $ 83 $ 66,356 $ - $ 68,806
Accounts receivable 17,356 1 667,004 - 684,361
Intercompany receivables 191,627 - 251,010 (442,637) -
Inventories - - 693,503 - 693,503
Other current assets 1,454 316 69,806 (6,321) 65,255
----------- ----------- ----------- ----------- -----------
Total current assets 212,804 400 1,747,679 (448,958) 1,511,925
Property and equipment, net 2,247 24 59,197 - 61,468
Cost in excess of assets acquired, net - - 381,830 - 381,830
Investments in affiliated companies 517,774 289,244 - (807,018) -
Other assets - - 13,599 - 13,599
----------- ----------- ----------- ----------- -----------
Total assets $ 732,825 $ 289,668 $ 2,202,305 $(1,255,976) $ 1,968,822
=========== =========== =========== =========== ===========
Notes payable $ - $ - $ 309,510 $ - $ 309,510
Intercompany payables 1,835 145,217 295,199 (442,251) -
Accounts payable 1,207 - 770,328 - 771,535
Accrued expenses 7,153 44 76,112 - 83,309
Amounts due to sellers 54,866 - - - 54,866
Income taxes payable and other
current liabilities - - 14,607 (673) 13,934
----------- ----------- ----------- ----------- -----------
Total current liabilities 65,061 145,261 1,465,756 (442,924) 1,233,154
Long term debt - - 70,134 (8,578) 61,556
Minority interests - - - 6,348 6,348
Shareholders' equity 667,764 144,407 666,415 (810,822) 667,764
----------- ----------- ----------- ----------- -----------
$ 732,825 $ 289,668 $ 2,202,305 $(1,255,976) $ 1,968,822
=========== =========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 105,827 $8,439,946 $ - $8,545,773
Cost of goods sold - 98,275 7,885,461 - 7,983,736
---------- ---------- ---------- ---------- ----------
Gross profit - 7,552 554,485 - 562,037
Operating expenses 4,812 5,266 423,489 - 433,567
---------- ---------- ---------- ---------- ----------
Operating income (4,812) 2,286 130,996 - 128,470
Other (income) expense, net 10,435 884 43,473 - 54,792
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries (15,247) 1,402 87,523 - 73,678
Provision for income taxes (2,627) 1,671 24,827 - 23,871
Equity in (earnings) of affiliated
companies, net of tax (58,298) (62,282) - 120,580 -
---------- ---------- ---------- ---------- ----------
Minority interest - - - 4,129 4,129
Net earnings $ 45,678 $ 62,013 $ 62,696 $ (124,709) $ 45,678
========== ========== ========== ========== ==========
<CAPTION>
1997
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ - $5,026,155 $ (269,772) $4,756,383
Cost of goods sold - - 4,684,548 (274,834) 4,409,714
---------- ---------- ---------- ---------- ----------
Gross profit - - 341,607 5,062 346,669
Operating expenses 1,375 181 255,952 - 257,508
---------- ---------- ---------- ---------- ----------
Operating income (1,375) (181) 85,655 5,062 89,161
Other (income) expense, net (2,771) 892 25,647 380 24,148
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries 1,396 (1,073) 60,008 4,682 65,013
Provision for income taxes 308 (313) 12,623 1,370 13,988
Equity in (earnings) of affiliated -
companies, net of tax (47,303) (47,351) - 94,654 -
Minority interest - - - 2,634 2,634
---------- ---------- ---------- ---------- ----------
Net earnings $ 48,391 $ 46,591 $ 47,385 $ (93,976) $ 48,391
========== ========== ========== ========== ==========
<CAPTION>
1996
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ - $1,879,707 $ (24,167) $1,855,540
Cost of goods sold - - 1,748,599 (24,167) 1,724,432
---------- ---------- ---------- ---------- ----------
Gross profit - - 131,108 - 131,108
Operating expenses 1,408 1 103,027 (2,201) 102,235
---------- ---------- ---------- ---------- ----------
Operating income (1,408) (1) 28,081 2,201 28,873
Other (income) expense, net 1,197 - 7,316 - 8,513
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries (2,605) (1) 20,765 2,201 20,360
Provision for income taxes 560 - 5,526 - 6,086
Equity in (earnings) of affiliated -
companies, net of tax (15,331) (15,246) - 30,577 -
Minority interest - - - 2,108 2,108
---------- ---------- ---------- ---------- ----------
Net earnings $ 12,166 $ 15,245 $ 15,239 $ (30,484) $ 12,166
========== ========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in
operating activities $ - $ - $(240,091) $ - $(240,091)
Net cash provided (used) in
investing activitie $(203,165) $ (1,245) $ (37,751) $ - $(242,161)
Net cash provided (used) in
financing activities $ 202,861 $ - $ 385,784 $ - $ 588,645
Effect of exchange rate $ - $ - $ 1,792 $ - $ 1,792
Cash at beginning $ 2,367 $ - $ 66,439 $ - $ 68,806
Cash at end $ 2,063 $ (1,245) $ 176,173 $ - $ 176,991
<CAPTION>
1997
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $(248,515) $ - $(248,515)
Net cash provided (used) in
investing activitie $(201,517) $ - $ (19,511) $ - $(221,028)
Net cash provided (used) in
financing activities $ 203,308 $ - $ 303,870 $ - $ 507,178
Effect of exchange rate $ - $ - $ (3,966) $ - $ (3,966)
Cash at beginning $ 576 $ - $ 34,561 $ - $ 35,137
Cash at end $ 2,367 $ - $ 66,439 $ - $ 68,806
<CAPTION>
1996
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $ (99,125) $ - $ (99,125)
Net cash provided (used) in
investing activities $ (26,876) $ - $ (11,624) $ - $ (38,500)
Net cash provided (used) in
financing activities $ 27,367 $ - $ 135,981 $ - $ 163,348
Effect of exchange rate $ - $ - $ (1,757) $ - $ (1,757)
Cash at beginning $ 85 $ - $ 11,086 $ - $ 11,171
Cash at end $ 576 $ - $ 34,561 $ - $ 35,137
</TABLE>
As discussed above, borrowings of certain of the Company's subsidiaries contain
restrictions on dividends to the Company. For the year ended December 31, 1998,
earnings before interest expense, income taxes and depreciation and amortization
("EBITDA") of such subsidiaries represented 7.6% of the Company's consolidated
EBITDA. The Company has not presented separate financial statements and other
disclosures concerning the guarantors and non-guarantor subsidiaries because it
has determined they would not be material to investors.
At December 31, 1998, the Company was not in compliance with a minimum tangible
net worth covenant contained in a short term credit facility. The Company
obtained a waiver from the lender.
NOTE G--COMPREHENSIVE INCOME
In 1998 the Company adopted Statement of Financial Accounting Standards No. 130,
"REPORTING COMPREHENSIVE Income". SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income and its components in the
Company's consolidated financial statements. Comprehensive income is defined in
SFAS No. 130 as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The primary difference from net income as reported is the
change in cumulative foreign currency translation adjustment.
NOTE H--CONCENTRATIONS
Substantially all of the Company's operations are outside the United States with
most of the Company's sales made in local currencies other than the U.S. dollar.
In 1998, the largest amount of sales occurred in Germany (in German marks),
which comprised 19% of total sales. The Company also had sales of approximately
11% in France (in French francs) and 9% in England (in British pounds). While
these countries are considered politically stable, there is risk that economic
difficulties in any of these countries could adversely affect the Company's
business. The Company also has operations in less politically stable countries.
In some countries, certain purchases and the resulting payables are in
currencies (principally the U.S. dollar) different than the functional currency.
Further, certain subsidiaries have loans receivable or payable denominated in
currencies other than their functional currency. Transaction gains and losses on
these receivables and liabilities are included in the determination of earnings
for
F-22
<PAGE>
the relevant periods. In 1998, 1997 and 1996 foreign currency gains were
$5,232,000, $1,219,000, and $1,559,000, respectively, which are included in
operating expenses in the accompanying consolidated statements of earnings.
At December 31, 1998, the face value of foreign exchange forward contracts
against trade payables was $269.3 million, which approximated the fair market
value of the contracts. At December 31, 1998, approximately $436.6 million of
accounts payable were attributable to foreign currency liabilities denominated
in currencies other than the subsidiaries' functional currencies (principally
$357.8 million in U.S. dollars and $50.8 million in German marks). The largest
unhedged amounts of trade payables were in subsidiaries in Czech Republic, Hong
Kong, Poland, Argentina and Mexico.
In some countries there are risks of continuing periodic devaluations or of
large devaluations. In these countries, no hedging mechanism exists. The Company
has risks in these countries that such devaluations could cause economic loss
and negatively impact future sales since its product cost would increase in
local terms after such devaluations. The Company attempts to limit its economic
loss through structural mechanisms of limiting its holdings of local currency
and receivables to the amount of its local currency payables.
Products of Hewlett-Packard (HP), accounted for 16%, 19%, and 34% of the
Company's sales for 1998, 1997 and 1996, respectively. Sales of products
supplied by Microsoft accounted for 10%, 10% and 12% during 1998, 1997 and 1996,
respectively. The third largest supplier in 1998 was IBM with 10% of the
Company's net sales. HP has the right to terminate its distribution agreement
with any Company subsidiary if the subsidiary is unable to cure, within a
reasonable period of time, any violation of the agreement after having received
notice from HP of the violation. Each Company subsidiary has the right to
terminate the HP agreement on 90 days notice. Each Company subsidiary believes
that its relationship with HP is good, and has no reason to believe that its
distribution arrangement will not be a long-term relationship. No assurance can
be given, however, that HP will renew each Company subsidiary's agreement at the
time of its annual review or in subsequent years. Management has not formulated
alternative plans of action in the event the HP contracts are terminated.
NOTE I--LEASE OBLIGATIONS AND OTHER CONTINGENCIES
The Company leases equipment and office and warehouse space under non-cancelable
operating leases. The following is a schedule by year of the minimum rental
commitments remaining on leased property and equipment (in thousands) with terms
greater than one year:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, TOTAL
- ------------------------ -----
<S> <C>
1999 $19,617
2000 17,382
2001 15,474
2002 12,415
2003 10,658
Subsequent years 16,957
</TABLE>
Total rental expense was $25,281,000, $14,542,000 and $6,715,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET AL., case No. 99-8186, was
filed in the United States District Court, Southern District of Florida. The
complaint, which purports to be a class action complaint, alleges that the
Company and two of its officers violated federal securities laws in connection
with financial reporting and disclosure during the period February 27, 1997
through March 10, 1999. The suit purports to be on behalf of those who purchased
CHS Electronics common stock during that time frame. The Company, in connection
with its legal counsel, is in the process of carefully reviewing the allegations
of the complaint. However, the Company believes that the claims are without
merit and intends to vigorously defend the suit. The Company is aware that
certain other purported class actions have been filed. However, the Company has
not received service of any such other suits.
F-23
<PAGE>
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million (approximately $12 million) letter of credit provided to
Metro by the Company in connection with the transaction. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met. Metro has also announced that it may seek damages for an unspecified amount
against the Company as a result of the transaction not being consummated. The
purchase agreement calls for disputes to be settled by arbitration in Germany.
The purchase agreement does not provide for a break-up fee. Although no
prediction as to the outcome of either the attempted draw on the letter of
credit or any actions which may be commenced in connection with the purchase
agreement can be made at this time, the Company believes that it has defenses to
any potential claims of Metro and intends to assert them vigorously. As of the
date of this filing, no arbitration proceedings had been commenced by Metro.
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
NOTE J--RELATED PARTY TRANSACTIONS
A member of the Board of Directors, who is a more than 5% shareholder and
officer of the Company has ownership interests and control over other companies
that do business with the Company. The accompanying financial statements include
the following transactions and balances which relate to this individual or his
related entities (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Sales to such related parties $57,034 $102,724
Purchases from such related parties 5,004 57,376
Commissions paid to such related parties 2,054 10,116
Rebates received from such related parties 4,000 11,163
Due from the individual above 2,178 -
Net amount due the Company 8,088 12,193
</TABLE>
The rebates received pertain to vendor rebates passed from such related parties
to the Company.
In an agreement dated December 1998 and subsequently amended in March 1999, CHS
acquired certain of these companies for the net of 1.7 million shares of common
stock and $4.0 million in cash. In connection with the acquisitions, the Company
recorded goodwill of $32.7 million. In January 1999, the Company acquired for
$5.4 million the remaining entity which had transactions with the Company. The
Company expects a significant reduction in such transactions in the future.
During 1998, the Company sold two companies and rights to entities in which the
above individual has a minority ownership interest. The companies and rights
sold were ancillary operations acquired as part of the acquisition of Frank &
Walter in January 1997. The companies were sold for cash of $6.7 million, all of
which was collected during 1999. The gain of $6.9 million was included in
operating expenses in the accompanying consolidated statement of earnings. The
after tax profit on the sales was $3.8 million.
At December 31, 1998 and 1997, the Company carried a receivable from Comtrad
and Comtrad
F-24
<PAGE>
Holdings, Inc. (CHI) in an amount of $20.7 million and $17.4 million,
respectively. CHI, and its wholly owned subsidiary, Comtrad, are controlled by
the Chief Executive Officer of the Company and a member of the Board of
Directors has a minority interest. This receivable is in the form of a
promissory note which Comtrad and CHI have collateralized with all of their net
assets. The principal asset of CHI and Comtrad is shares of CHS common stock.
Interest is charged on the promissory note at prime rate. The amount is due on
demand. Interest charged to Comtrad was $1,393,000, $684,000, and $86,000 in
1998, 1997 and 1996, respectively. At December 31, 1998, the collateral was
sufficient to liquidate the indebtedness due the Company. On March 19, 1999, the
market value of the CHS shares was computed to be insufficient and in the event
market conditions do not improve, the Company will have to arrange for
additional collateral or establish a valuation reserve up to the full amount of
the receivable.
In 1996, the Company purchased a company in Romania from Comtrad for $375,000.
Subsequently, the Company loaned $800,000 to the subsidiary to enable it to
purchase an office building. In December 1996, the Company sold this subsidiary
back to Comtrad for the original purchase price plus an amount equal to the
losses from April to date of sale ($200,000). No gain was recognized on the
sale, which had the impact of increasing the amount due from Comtrad by $1.4
million.
A director of the Company served the Company as a management consultant under a
consulting agreement specifying payments of $4,000 per month. The agreement was
terminated at the end of 1996. In 1996, $48,000 was paid under this agreement.
NOTE K--SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
In September 1997, the Board approved a 3 for 2 stock split. In March 1996, the
shareholders approved a reincorporation as a Florida company, a reverse 1 for 2
stock split and the authorization of 5,000,000 shares of preferred stock in such
class or series and with such rights as approved by the Board of Directors. All
share information has been restated to reflect all stock splits. Under Florida
law, a majority vote by the holders of the preferred stock as well as the
holders of common stock is necessary to vote affirmatively on matters of
mergers, sales of substantially all the Company's assets, exchanges of stock or
changes in the articles of incorporation.
In August 1997, the Company completed a public offering of common shares in
which the Company sold 21,208,134 shares and selling shareholders sold 1,216,866
shares. The Company's shares were sold at $21.17 per share which raised $428.2
million for the Company net of expenses and commissions.
In June 1996, the Company completed a public offering of common shares in which
the Company sold 6,887,308 shares and selling shareholders sold 2,600,191
shares. The Company shares were sold at $8 per share which raised $50.6 million
for the Company net of expenses and commissions. As part of the offering the
underwriter received warrants entitling the purchase of 450,000 shares of stock
in a 4 year period beginning in June 1997 at a price starting at $8.80 and
increasing each year.
In August 1994, the Board of Directors, and subsequently the shareholders,
approved the 1994 Stock Incentive Plan. The maximum number of shares issuable
under the Plan has been amended several times and is 4,620,500 at December 31,
1998. Certain of the grants (363,787 at December 31, 1998) are intended to
qualify as incentive stock options and the remaining are non-qualified options.
All options were issued with an exercise price equal to the market price and
have a life of 10 years. Vesting periods are generally 25% a year for four
years.
In 1997 the Board of Directors, and subsequently the shareholders, approved the
Directors and Officers 1997 Stock Option Plan. The Plan, as amended, authorizes
options covering up to 2,150,000 shares of CHS Stock to be granted to executive
officers and Directors. The options are to be granted at fair market value and
generally vest over 3 years. In 1998 and 1997, 255,000 and 1,275,000 options,
respectively, were granted under this Plan.
In 1997 the Board of Directors, and subsequently the shareholders, approved the
1997 Chief Executive Officer Stock Option Plan. The Plan, as amended, authorizes
options covering up to 1,250,000 shares of CHS Stock to be issued to the CEO
upon approval by the Board of a business
F-25
<PAGE>
acquisition. The options are granted at market value and vest based on the
earnings of the acquired company. In 1998 and 1997, 500,000 and 750,000 options,
respectively, were granted.
In June 1996, the Board of Directors, and subsequently the shareholders,
approved the 1996 Chief Executive Officer Stock Option Plan. The Plan provides
for options covering up to 750,000 shares of CHS stock to be issued to the CEO
upon the approval by the Board of Directors of a qualifying acquisition, as
defined or of any acquisition if recommended by the Compensation Committee and
approved by the Board. A qualifying acquisition is one where greater than 50% of
the purchase price is comprised of common stock calculated by an earn out
formula. The options are granted at market value and vest based on the earnings
of the acquired company. In 1997 and 1996, all the options authorized by this
plan were granted.
The Company accounts for its stock options under APB 25. No compensation cost
has been recognized as the exercise price of each option is not less than the
fair value of the underlying stock at the date of grant. Had compensation cost
for the plan been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", the Company's net earnings per share would have been reduced to
the pro forma amounts indicated below (amounts in thousands, except per share
date).
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings As reported $45,678 $48,391 $12,166
Pro forma 39,820 44,362 11,777
Net earnings per share--basic As reported $0.88 $1.44 $0.80
Pro forma 0.77 1.32 0.77
Net earnings per share--diluted As reported $0.82 $1.32 $0.78
Pro forma 0.71 1.21 0.75
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively; dividend yield of 0%
for each year; expected volatility of 67% in 1998 and 67.9% in 1997; risk-free
interest rates ranging from 4.49% to 5.67% in 1998 and ranging from 5.68% to
6.47% in 1997; and expected lives of 4.5 years for each year.
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,617,813 $ 15.17 2,314,299 $ 8.01 846,132 $ 4.60
Granted 1,570,480 20.73 3,191,381 18.09 1,583,720 9.75
Exercised (200,592) 6.80 (705,469) 10.40 (61,611) 4.57
Cancelled (397,430) 12.01 (182,398) 8.36 (53,942) 10.28
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 5,590,271 $ 16.86 4,617,813 $ 15.17 2,314,299 $ 8.01
========= ========= ========= ========= ========= =========
Options exercisable at year end 2,502,712 $ 13.35 1,095,037 $ 4.58 773,442 $ 5.89
Weighted-average fair value of
options granted during the year $ 11.64 $10.61 $ 5.89
</TABLE>
F-26
<PAGE>
The following information applies to options outstanding at December 31, 1998:
<TABLE>
<S> <C>
Number outstanding $4.00-$6.00 $6.67-$8.42 $10.50-$12.41 $15.75-$19.75 $21.69-$25.46
Range of exercise prices 187,992 316,280 1,523,184 1,490,597 2,072,219
Weighted-average exercise price $ 4.92 $ 7.55 $ 11.42 $ 17.52 $ 22.90
Currently exercisable 161,283 173,324 679,331 815,335 673,439
Weighted average remaining contractual life 6.3 years 7.5 years 8.1 years 8.6 years 9.2 years
</TABLE>
In January 1998, the Company implemented a Preferred Stock Purchase Rights Plan
and distributed one right (a "Right") for each share of the Company's Common
Stock outstanding. Each Right has an initial exercise price of $100 for one-one
thousandth of a share of the Company's Series A junior participating preferred
stock. The Rights are not exercisable or transferable apart from the Company's
Common Stock, until after a person or group acquires, or has the right to
acquire, beneficial ownership of 15% or more of the Company's Common Stock
(which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the Company's
Common Stock. Upon such occurrence, each Right (other than Rights owned by such
person or group) will entitle the holder to purchase from the Company, or the
particular acquiring person or group under certain circumstances and conditions,
the number of shares of the Company's, or such person's or group's, Common Stock
having a market value equal to twice the exercise price of the Right. The Rights
are redeemable by the Company's Board of Directors under certain circumstances.
NOTE L--SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standard 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" ("SFAS
131"), which establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. SFAS 131 requires that the definition of operating segments
align with the measurements used internally to assess performance. These
financial statements reflect the adoption of SFAS 131.
The Company's business activities involve the operating segments of distribution
of microcomputer equipment and software products. The operating segments are the
distribution to resellers and the distribution to assemblers. The former
involves both universal products (products that represent the basic components
of a personal computer without regard to the specific local language, regulatory
and technical factors of individual markets) and localized products while the
latter is principally universal products. In addition, another operating segment
is the Company's central treasury functions. The accounting policies of the
segments are the same as those described in the Summary of Accounting Policies
(Note A). The segments are managed separately since each requires different
business and marketing strategies. The geographic areas in which the localized
product segments operate are Western Europe, Eastern Europe, Latin America and
Asia/Middle East. Net sales, gross profit, operating income (before interest and
income taxes) and total assets by segment were as follows (in thousands):
F-27
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION TO RESELLERS
-------------------------------------------------------
ASIA/ DISTRIBUTION
WESTERN EASTERN LATIN MIDDLE TO TOTAL
EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY SEGMENTS
---------- ---------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Net sales $4,572,505 $ 730,205 $1,516,528 $ 365,507 $1,361,028 $ - $8,545,773
Gross profit 301,764 62,653 105,982 19,300 72,338 - $ 562,037
Operating income 79,272 23,370 30,669 4,721 22,619 711 $ 161,362
Total assets 1,900,257 232,651 527,018 129,941 449,561 238,317 $3,477,745
1997
Net sales $2,676,905 $ 389,553 $1,118,504 $ - $ 571,421 $ - $4,756,383
Gross profit 197,400 36,329 82,393 - 30,547 - $ 346,669
Operating income 42,867 18,871 17,891 - 14,501 3,185 $ 97,315
Total assets 768,087 125,447 349,159 - 372,713 147,150 $1,762,556
1996
Net sales $1,063,997 $ 215,518 $ 576,025 $ - $ - $ - $1,855,540
Gross profit 69,088 22,522 39,498 - - - $ 131,108
Operating income 9,559 11,440 10,663 - - 1,539 $ 33,201
Total assets 727,406 70,405 216,031 - - 81,659 $1,095,501
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating income:
Total operating income for reportable segments $ 161,362 $ 97,315 $ 33,201
Corporate expenses (7,173) 710 (3,364)
Unallocated goodwill amortization (25,719) (8,864) (964)
----------- ----------- -----------
Earnings before income taxes and minority
interest in subsidiaries $ 128,470 $ 89,161 $ 28,873
=========== =========== ===========
Assets:
Total assets for reportable segments $ 3,477,745 $ 1,762,556 $ 1,095,501
Elimination of intercompany receivables (759,636) (442,637) (369,798)
Goodwill not allocated 737,719 381,830 78,780
Other assets 116,315 267,073 57,466
----------- ----------- -----------
Total consolidated assets $ 3,572,143 $ 1,968,822 $ 861,949
=========== =========== ===========
</TABLE>
<TABLE>
GEOGRAPHIC INFORMATION: 1998 1997 1996
<S> <C> <C> <C>
Net sales:
Western Europe $5,534,829 $3,051,641 $1,063,997
Eastern Europe 984,265 524,273 215,518
Latin America 1,516,528 1,118,504 576,025
Asia and Middle East 510,151 61,965 -
---------- ---------- ----------
Consolidated Total $8,545,773 $4,756,383 $1,855,540
========== ========== ==========
</TABLE>
The Company's product mix by category was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mass storage 25% 21% 10%
Personal computers 20% 17% 22%
Printers 12% 15% 28%
Software 11% 10% 18%
Components 8% 10% 4%
Networking and multimedia 8% 10% 8%
Peripherals 7% 9% 0%
Other 9% 8% 10%
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
The Company's customers typically rely on distributors as their principal source
of microcomputer products and financing. The Company's backlog of orders is not
considered material to an understanding of its business. No single customer
accounted for more than one percent of the Company's net sales in the years
ended December 31, 1998, 1997 and 1996.
F-28
<PAGE>
NOTE M--SUMMARIZED QUARTERLY FINANCIAL DATA FOR 1998 AND 1997 (UNAUDITED)
The Company recently announced the discovery of discrepancies related to the
amount of vendor incentives recorded in the fourth quarter of 1998. In
coordination with the Company's independent auditors and an investigation by
outside attorneys, the Company found that vendor rebates were overstated in the
second, third and fourth quarters of 1998. Some of the fourth quarter rebates
were supported with invalid documentation and all of the overstated rebates have
been reversed. As a result of the discovery, the consolidated financial
statements for the second and third quarters of 1998 were restated. The senior
executive officer responsible for the European office has resigned from the
Company.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
------------- -------------- ------------- -------------- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
1998
Net sales $1,751,338 $1,769,494 $2,166,943 $2,857,998 $8,545,773
Gross profit 122,594 113,924 141,337 184,182 562,037
Net earnings 20,567 5,508 6,643 12,960 45,678
Earnings per share--basic 0.42 0.11 0.13 0.24 0.88
Earnings per share--diluted 0.38 0.10 0.12 0.23 0.82
1997
Net sales $ 877,103 $ 946,955 $1,097,567 $1,834,758 $4,756,383
Gross profit 62,463 70,173 84,944 129,089 346,669
Net earnings 6,710 6,401 11,436 23,844 48,391
Earnings per share--basic 0.30 0.29 0.28 0.49 1.44
Earnings per share--diluted 0.29 0.28 0.26 0.45 1.32
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.2 Amended and Restated Bylaws
4.1 Amended and Restated 1998 Preferred Stock Purchase Rights Agreement dated as of March 18, 1999
21 Subsidiaries of the Company
23.1 Consent of Independent Certified Public Accountant
27.1 Financial Data Schedule
</TABLE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
CHS ELECTRONICS, INC.
(A FLORIDA CORPORATION)
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE
NUMBER
------
<S> <C>
ARTICLE ONE - OFFICES.............................................................................................3
1. Registered Office...............................................................................3
2. Other Offices...................................................................................3
ARTICLE TWO - MEETINGS OF SHAREHOLDERS............................................................................3
1. Place...........................................................................................3
2. Time of Annual Meeting..........................................................................3
3. Call of Special Meetings........................................................................3
4. Conduct of Meetings.............................................................................3
5. Notice and Waiver of Notice.....................................................................3
6. Notice Requirements for Director Nominations and Shareholder Proposals..........................4
7. Business of Special Meeting.....................................................................6
8. Quorum..........................................................................................6
9. Voting Per Share................................................................................6
10. Voting of Shares................................................................................6
11. Proxies.........................................................................................7
12. Shareholder List................................................................................7
13. Fixing Record Date..............................................................................8
14. Inspectors and Judges...........................................................................8
15. Voting for Directors............................................................................8
ARTICLE THREE - DIRECTORS.........................................................................................8
1. Number, Election and Term.......................................................................8
2. Vacancies.......................................................................................9
3. Powers..........................................................................................9
4. Place of Meetings...............................................................................9
5. Annual Meeting..................................................................................9
6. Regular Meetings................................................................................9
7. Special Meetings and Notice.....................................................................9
8. Quorum; Required Vote; Presumption of Assent...................................................10
9. Action Without Meeting.........................................................................10
10. Conference Telephone or Similar Communications Equipment Meetings..............................10
11. Committees.....................................................................................10
12. Compensation of Directors......................................................................11
13. Chairman of the Board..........................................................................11
1
<PAGE>
ARTICLE FOUR - OFFICERS..........................................................................................11
1. Positions......................................................................................11
2. Election of Specified Officers by Board........................................................11
3. Election or Appointment of Other Officers......................................................11
4. Salaries.......................................................................................11
5. Term; Resignation..............................................................................11
6. President......................................................................................12
7. Vice Presidents................................................................................12
8. Secretary......................................................................................12
9. Treasurer......................................................................................12
10. Other officers, employees and agents...........................................................12
ARTICLE FIVE - CERTIFICATES FOR SHARES...........................................................................13
1. Issue of Certificates..........................................................................13
2. Legends for Preferences and Restrictions on Transfer...........................................13
3. Facsimile Signatures...........................................................................13
4. Lost Certificates..............................................................................13
5. Transfer of Shares.............................................................................14
6. Registered Shareholders........................................................................14
7. Redemption of Control Shares...................................................................14
ARTICLE SIX - GENERAL PROVISIONS................................................................................14
1. Dividends......................................................................................14
2. Reserves.......................................................................................14
3. Checks.........................................................................................14
4. Fiscal Year....................................................................................14
5. Seal...........................................................................................15
6. Gender.........................................................................................15
ARTICLE SEVEN - AMENDMENTS OF BYLAWS.............................................................................15
ARTICLE EIGHT - AMENDMENT OF RIGHTS PLAN.........................................................................15
</TABLE>
2
<PAGE>
BYLAWS
ARTICLE ONE
OFFICES
1. REGISTERED OFFICE. The registered office of CHS Electronics, Inc., a
Florida corporation (the "Corporation"), shall be located in the City of Miami,
State of Florida, unless otherwise designated by the Board of Directors.
2. OTHER OFFICES. The Corporation may also have offices at such other
places, either within or without the State of Florida, as the Board of Directors
of the Corporation (the "Board of Directors") may from time to time determine or
as the business of the Corporation may require.
ARTICLE TWO
MEETINGS OF SHAREHOLDERS
1. PLACE. All annual meetings of shareholders shall be held at such
place, within or without the State of Florida, as may be designated by the Board
of Directors and stated in the notice of the meeting or in a duly executed
waiver of notice thereof. Special meetings of shareholders may be held at such
place, within or without the State of Florida, and at such time as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
2. TIME OF ANNUAL MEETING. Annual meetings of shareholders shall be
held on such date and at such time fixed, from time to time, by the Board of
Directors, provided that there shall be an annual meeting held every year at
which the shareholders shall elect a Board of Directors and transact such other
business as may properly be brought before the meeting.
3. CALL OF SPECIAL MEETINGS. Special meetings of the shareholders shall
be held if called by the Board of Directors, the President, or if the holders of
not less than fifty percent (50%) of all the votes entitled to be cast on any
issue proposed to be considered at the proposed special meeting sign, date, and
deliver to the Secretary one or more written demands for the meeting describing
the purpose or purposes for which it is to be held.
4. CONDUCT OF MEETINGS. The Chairman of the Board (or in his absence,
the President or such other designee of the Chairman of the Board) shall preside
at the annual and special meetings of shareholders and shall be given full
discretion in establishing the rules and procedures to be followed in conducting
the meetings, except as otherwise provided by law or in these Bylaws.
5. NOTICE AND WAIVER OF NOTICE. Except as otherwise provided by law,
written or printed notice stating the place, day and hour of the meeting and, in
the case of a special meeting,
3
<PAGE>
the purpose or purposes for which the meeting is called, shall be delivered not
less than ten (10) nor more than sixty (60) days before the day of the meeting,
either personally or by first-class mail, by or at the direction of the
President, the Secretary, or the officer or person calling the meeting, to each
shareholder of record entitled to vote at such meeting. If the notice is mailed
at least thirty (30) days before the date of the meeting, it may be done by a
class of United States mail other than first-class. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail addressed to
the shareholder at his address as it appears on the stock transfer books of the
Corporation, with postage thereon prepaid. If a meeting is adjourned to another
time and/or place, and if an announcement of the adjourned time and/or place is
made at the meeting, it shall not be necessary to give notice of the adjourned
meeting unless the Board of Directors, after adjournment, fixes a new record
date for the adjourned meeting. Whenever any notice is required to be given to
any shareholder, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether signed before, during or after the time of the
meeting stated therein, and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records, shall be equivalent to the giving
of such notice. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the shareholders need be specified in any
written waiver of notice. Attendance of a person at a meeting shall constitute a
waiver of (a) lack of or defective notice of such meeting, unless the person
objects at the beginning to the holding of the meeting or the transacting of any
business at the meeting, or (b) lack of defective notice of a particular matter
at a meeting that is not within the purpose or purposes described in the meeting
notice, unless the person objects to considering such matter when it is
presented.
6. NOTICE REQUIREMENTS FOR DIRECTOR NOMINATIONS AND SHAREHOLDER
PROPOSALS.
Only persons who are nominated in accordance with the procedures set
forth in these Bylaws shall be eligible to serve as directors. Nominations of
persons for election to the Board of Directors of the Corporation may be made at
a meeting of shareholders (i) by or at the direction of the Board of Directors
or (ii) by any shareholder of the Corporation who is a shareholder of record at
the time of giving of notice provided for in this Bylaw, who shall be entitled
to vote for the election of directors at the meeting and who complies with the
notice procedures set forth in this Bylaw.
(a) Nominations by shareholders shall be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an annual meeting, not less than
120 days nor more than 180 days prior to the first anniversary of the date of
the notice of preceding year's annual meeting; PROVIDED, HOWEVER, that in the
event that the date of the annual meeting is changed by more than 30 days from
such anniversary date, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure was made, and (b) in the case of a special meeting at which
directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public disclosure was made. Such shareholder's notice shall set
forth (i) as to each person whom the shareholder
4
<PAGE>
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for elections of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to the
shareholder giving the notice (A) the name and address, as they appear on the
Corporation's books, of such shareholder and (B) the class and number of shares
of the Corporation which are beneficially owned by such shareholder and also
which are owned by such shareholder and also which are owned of record by such
shareholder; and (iii) as to the beneficial owner, if any, on whose behalf the
nomination is made, (A) the name and address of such person and (B) the class
and number of shares of the Corporation which are beneficially owned by such
person. At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a director shall furnish to the Secretary of
the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
(b) No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Bylaw. The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also
comply with all applicable requirements of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder with respect to the matters
set forth in this Bylaw.
(c) At an annual meeting of the shareholders, only such business shall
be conducted as shall have been brought before the meeting (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any shareholder of the Corporation who is a shareholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
(d) For business to be properly brought before an annual meeting by a
shareholder pursuant to clause (iii) of paragraph (d) of this Bylaw, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 120 days nor more than 180 days prior to the first anniversary of the
date of the notice of the preceding year's annual meeting; PROVIDED, HOWEVER,
that in the event that the date of the meeting is changed by more than 30 days
from such anniversary date, to be timely, notice by the shareholder must be
received no later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure was made. A shareholder's notice to the Secretary shall set
forth as to each matter the shareholder proposes to bring before the meeting (i)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made, (iii) the class and number of shares of the
Corporation which are
5
<PAGE>
owned beneficially and of record by such shareholder of record and by the
beneficial owner, if any, on whose behalf the proposal is made and (iv) any
material interest of such shareholder of record and the beneficial owner, if
any, on whose behalf the proposal is made in such business.
(e) Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Bylaw. The Chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by this Bylaw, and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted. Notwithstanding the foregoing provisions of this Bylaw, a
shareholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Bylaw.
7. BUSINESS OF SPECIAL MEETING. Business transacted at any special
meeting shall be confined to the purposes stated in the notice thereof.
8. QUORUM. Shares entitled to vote as a separate voting group may take
action on a matter at a meeting only if a quorum of these shares exists with
respect to that matter. Except as otherwise provided in the Articles of
Incorporation or by law, a majority of the shares entitled to vote on the matter
by each voting group, represented in person or by proxy, shall constitute a
quorum at any meeting of shareholders, but in no event shall a quorum consist of
less than one-third (1/3) of the shares of each voting group entitled to vote.
If less than a majority of outstanding shares entitled to vote are represented
at a meeting, a majority of the shares so represented may adjourn the meeting
from time to time without further notice. After a quorum has been established at
any shareholders' meeting, the subsequent withdrawal of shareholders, so as to
reduce the number of shares entitled to vote at the meeting below the number
required for a quorum, shall not affect the validity of any action taken at the
meeting or any adjournment thereof. Once a share is represented for any purpose
at a meeting, it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of that meeting unless a new record date is or
must be set for that adjourned meeting.
9. VOTING PER SHARE. Except as otherwise provided in the Articles of
Incorporation or by law, each shareholder is entitled to one (1) vote for each
outstanding share held by him on each matter voted at a shareholders' meeting.
10. VOTING OF SHARES. A shareholder may vote at any meeting of
shareholders of the Corporation, either in person or by proxy. Shares standing
in the name of another corporation, domestic or foreign, may be voted by the
officer, agent or proxy designated by the bylaws of such corporate shareholder
or, in the absence of any applicable bylaw, by such person or persons as the
board of directors of the corporate shareholder may designate. In the absence of
any such designation, or, in case of conflicting designation by the corporate
shareholder, the chairman of the board, the president, any vice president, the
secretary and the treasurer of the corporate shareholder, in that order, shall
be presumed to be fully authorized to vote such shares. Shares held by an
administrator, executor, guardian, personal representative, or conservator may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name or the name of his
nominee. Shares held by or under the control of a receiver, a trustee in
bankruptcy proceedings, or an assignee for the benefit of creditors may be voted
by such person without the transfer thereof into his name. If shares stand of
record in the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety or
otherwise, or if two or more persons have the same fiduciary relationship
respecting the same shares, unless the Secretary of the Corporation is given
notice to the contrary and is furnished with a copy of the instrument or order
appointing them or creating the relationship wherein it is so provided, then
acts with respect to voting shall have the following effect: (a) if only one
votes, in person or by proxy, his act binds all; (b) if more than one vote, in
person or by proxy, the act of the majority so voting binds all; (c) if more
than one vote, in person or by proxy, but the vote is evenly split on any
particular matter, each faction is entitled to vote the share or shares in
question proportionally; or (d) if the instrument or order so filed shows that
any such tenancy is held in unequal interest, a majority or a vote evenly split
for purposes hereof shall be a majority or a vote evenly split in interest. The
principles of this paragraph shall apply, insofar as possible, to execution of
proxies, waivers, consents, or objections and for the purpose of ascertaining
the presence of a quorum.
11. PROXIES. Any shareholder of the Corporation, other person entitled
to vote on behalf of a shareholder pursuant to law, or attorney-in-fact for such
persons may vote the shareholder's shares in person or by proxy. Any shareholder
of the Corporation may appoint a proxy to vote or otherwise act for him by
signing an appointment form, either personally or by his attorney-in-fact. An
executed telegram or cablegram appearing to have been transmitted by such
person, or a photographic, photostatic, or equivalent reproduction of an
appointment form, shall be deemed a sufficient appointment form. An appointment
of a proxy is effective when received by the Secretary of the Corporation or
such other officer or agent which is authorized to tabulate votes, and shall be
valid for up to 11 months, unless a longer period is expressly provided in the
appointment form. The death or incapacity of the shareholder appointing a proxy
does not affect the right of the Corporation to accept the proxy's authority
unless notice of the death or incapacity is received by the secretary or other
officer or agent authorized to tabulate votes before the proxy exercises his
authority under the appointment. An appointment of a proxy is revocable by the
shareholder unless the appointment is coupled with an interest.
12. SHAREHOLDER LIST. After fixing a record date for a meeting of
shareholders, the Corporation shall prepare an alphabetical list of the names of
all its shareholders who are entitled to notice of the meeting, arranged by
voting group with the address of, and the number and class and series, if any,
of shares held by each. The shareholders' list must be available for inspection
by any shareholder for a period of ten (10) days prior to the meeting or such
shorter time as exists between the record date and the meeting and continuing
through the meeting at the Corporation's principal office, at a place identified
in the meeting notice in the city where the meeting will be held, or at the
office of the Corporation's transfer agent or registrar. Any shareholder of the
Corporation or his agent or attorney is entitled on written demand to inspect
the shareholders' list (subject to the requirements of law), during regular
business hours and at his expense, during the period it is available for
inspection. The Corporation shall make the shareholders' list available at the
meeting of shareholders, and any shareholder or his agent or attorney is
entitled to inspect the list at any time during the meeting or any adjournment.
13. FIXING RECORD DATE. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in order
to make a determination of shareholders for any other proper purposes, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than sixty
(60) days, and, in case of a meeting of shareholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which the notice of the meeting is mailed or the date on which the
resolutions of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section 13, such determination
shall apply to any adjournment thereof, except where the Board of Directors
fixes a new record date for the adjourned meeting or as required by law.
14. INSPECTORS AND JUDGES. The Board of Directors in advance of any
meeting may, but need not, appoint one or more inspectors of election or judges
of the vote, as the case may be, to act at the meeting or any adjournment(s)
thereof. If any inspector or inspectors, or judge or judges, are not appointed,
the person presiding at the meeting may, but need not, appoint one or more
inspectors or judges. In case any person who may be appointed as an inspector or
judge fails to appear or act, the vacancy may be filled by the Board of
Directors in advance of the meeting, or at the meeting by the person presiding
thereat. The inspectors or judges, if any, shall determine the number of shares
of stock outstanding and the voting power of each, the shares of stock
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots and consents, hear and determine
all challenges and questions arising in connection with the right to vote, count
and tabulate votes, ballots and consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all shareholders.
On request of the person presiding at the meeting, the inspector or inspectors
or judge or judges, if any, shall make a report in writing of any challenge,
question or matter determined by him or them, and execute a certificate of any
fact found by him or them.
15. VOTING FOR DIRECTORS. Unless otherwise provided in the Articles of
Incorporation, directors shall be elected by a plurality of the votes cast by
the shares entitled to vote in the election at a meeting at which a quorum is
present.
ARTICLE THREE
DIRECTORS
1. NUMBER, ELECTION AND TERM. The number of directors of the
Corporation shall be fixed from time to time, within the limits specified by the
Articles of Incorporation, by resolution of the Board of Directors; provided,
however, no director's term shall be shortened by reason of a resolution
reducing the number of directors. The directors shall be elected at the annual
meeting of the shareholders, except as provided in Section 2 of this Article,
and each director elected shall hold office for the term for which he is elected
and until his successor is elected and qualified or until his earlier
resignation, removal from office or death. Directors must be natural persons who
are 18 years of age or older but need not be residents of the State of Florida,
shareholders of the Corporation or citizens of the United States. Any director
may be removed at any time, with or without cause, at a special meeting of the
shareholders called for that purpose.
2. VACANCIES. A director may resign at any time by giving written
notice to the Corporation, the Board of Directors or the Chairman of the Board.
Such resignation shall take effect when the notice is delivered unless the
notice specifies a later effective date, in which event the Board of Directors
may fill the pending vacancy before the effective date if they provide that the
successor does not take office until the effective date. Any vacancy occurring
in the Board of Directors and any directorship to be filled by reason of an
increase in the size of the Board of Directors shall be filled by the
affirmative vote of a majority of the current directors though less than a
quorum of the Board of Directors, or may be filled by an election at an annual
or special meeting of the shareholders called for that purpose, unless otherwise
provided by law. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office, or until the next election of one
or more directors by shareholders if the vacancy is caused by an increase in the
number of directors.
3. POWERS. Except as provided in the Articles of Incorporation and by
law, all corporate powers shall be exercised by or under the authority of, and
the business and affairs of the Corporation shall be managed under the direction
of, its Board of Directors.
4. PLACE OF MEETINGS. Meetings of the Board of Directors, regular or
special, may be held either within or without the State of Florida.
5. ANNUAL MEETING. The first meeting of each newly elected Board of
Directors shall be held, without call or notice, immediately following each
annual meeting of shareholders.
6. REGULAR MEETINGS. Regular meetings of the Board of Directors may
also be held without notice at such time and at such place as shall from time to
time be determined by the Board of Directors.
7. SPECIAL MEETINGS AND NOTICE. Special meetings of the Board of
Directors may be called by the Chairman of the Board or by the President and
shall be called by the Secretary on the written request of any two directors.
Written notice of special meetings of the Board of Directors shall be given to
each director at least forty-eight (48) hours before the meeting. Except as
required by statute, neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting. Notices to directors shall be
in writing and delivered personally or mailed to the directors at their
addresses appearing on the books of the Corporation. Notice by mail shall be
deemed to be given at the time when the same shall be received. Notice to
directors may also be given by telegram, teletype or other form of electronic
communication. Notice of a meeting of the Board of Directors need not be given
to any director who signs a written waiver of notice before, during or after the
meeting. Attendance of a director at a meeting shall constitute a waiver of
notice of such meeting and a waiver of any and all objections to the place of
the meeting, the time of the meeting and the manner in which it has been called
or convened, except when a director states, at the beginning of the meeting or
promptly upon arrival at the meeting, any objection to the transaction of
business because the meeting is not lawfully called or convened.
8. QUORUM; REQUIRED VOTE; PRESUMPTION OF ASSENT. A majority of the
number of directors fixed by, or in the manner provided in, these bylaws shall
constitute a quorum for the transaction of business; provided, however, that
whenever, for any reason, a vacancy occurs in the Board of Directors, a quorum
shall consist of a majority of the remaining directors until the vacancy has
been filled. The act of a majority of the directors present at a meeting at
which a quorum is present when the vote is taken shall be the act of the Board
of Directors. A director of the Corporation who is present at a meeting of the
Board of Directors or a committee of the Board of Directors when corporate
action is taken shall be presumed to have assented to the action taken, unless
he objects at the beginning of the meeting, or promptly upon his arrival, to
holding the meeting or transacting specific business at the meeting, or he votes
against or abstains from the action taken.
9. ACTION WITHOUT MEETING. Any action required or permitted to be taken
at a meeting of the Board of Directors or a committee thereof may be taken
without a meeting if a consent in writing, setting forth the action taken, is
signed by all of the members of the Board of Directors or the committee, as the
case may be, and such consent shall have the same force and effect as a
unanimous vote at a meeting. Action taken under this section is effective when
the last director signs the consent, unless the consent specifies a different
effective date. A consent signed under this Section 9 shall have the effect of a
meeting vote and may be described as such in any document.
10. CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT MEETINGS.
Members of the Board of Directors may participate in a meeting of the Board by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time. Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground the
meeting is not lawfully called or convened.
11. COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may designate from among its members an
executive committee and one or more other committees, each of which, to the
extent provided in such resolution, shall have and may exercise all of the
authority of the Board of Directors in the business and affairs of the
Corporation except where the action of the full Board of Directors is required
by statute. Each committee must have two or more members who serve at the
pleasure of the Board of Directors. The Board of Directors, by resolution
adopted in accordance with this Article Three, may designate one or more
directors as alternate members of any committee, who may act in the place and
stead of any absent member or members at any meeting of such committee.
Vacancies in the membership of a committee shall be filled by the Board of
Directors at a regular or special meeting of the Board of Directors. The
executive committee shall keep regular minutes of its proceedings and report the
same to the Board of Directors when required. The designation of any such
committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed
upon it or him by law.
12. COMPENSATION OF DIRECTORS. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
13. CHAIRMAN OF THE BOARD. The Board of Directors may, in its
discretion, choose a chairman of the board who shall preside at meetings of the
shareholders and of the directors and shall be an ex officio member of all
standing committees. The Chairman of the Board shall have such other powers and
shall perform such other duties as shall be designated by the Board of
Directors. The Chairman of the Board shall be a member of the Board of Directors
but no other officers of the Corporation need be a director. The Chairman of the
Board shall serve until his successor is chosen and qualified, but he may be
removed at any time by the affirmative vote of a majority of the Board of
Directors.
ARTICLE FOUR
OFFICERS
1. POSITIONS. The officers of the Corporation shall consist of a
President, a Secretary and a Treasurer, and, if elected by the Board of
Directors by resolution, a Chairman of the Board and/or one or more Vice
Presidents. Any two or more offices may be held by the same person.
2. ELECTION OF SPECIFIED OFFICERS BY BOARD. The Board of Directors at
its first meeting after each annual meeting of shareholders shall elect a
President, a Secretary, a Treasurer and may elect one or more Vice Presidents.
3. ELECTION OR APPOINTMENT OF OTHER OFFICERS. Such other officers and
assistant officers and agents as may be deemed necessary may be elected or
appointed by the Board of Directors, or, unless otherwise specified herein,
appointed by the President of the Corporation. The Board of Directors shall be
advised of appointments by the President at or before the next scheduled Board
of Directors meeting.
4. SALARIES. The salaries of all officers of the Corporation to be
elected by the Board of Directors pursuant to Article Four, Section 2 hereof
shall be fixed from time to time by the Board of Directors or pursuant to its
discretion. The salaries of all other elected or appointed officers of the
Corporation shall be fixed from time to time by the President of the Corporation
or pursuant to his direction.
5. TERM; RESIGNATION. The officers of the Corporation shall hold office
until their successors are chosen and qualified. Any officer or agent elected or
appointed by the Board of Directors or the President of the Corporation may be
removed, with or without cause, by the Board of Directors. Any officers or
agents appointed by the President of the Corporation pursuant to Section 3 of
this Article Four may also be removed from such officer positions by the
President, with or without cause. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise shall be filled by the
Board of Directors, or, in the case of an officer appointed by the President of
the Corporation, by the President or the Board of Directors. Any officer of the
Corporation may resign from his respective office or position by delivering
notice to the Corporation. Such resignation is effective when delivered unless
the notice specifies a later effective date. If a resignation is made effective
at a later date and the Corporation accepts the future effective date, the Board
of Directors may fill the pending vacancy before the effective date if the Board
provides that the successor does not take office until the effective date.
6. PRESIDENT. The President shall be the Chief Executive Officer of the
Corporation, shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. In the absence of the Chairman of the Board
or in the event the Board of Directors shall not have designated a chairman of
the board, the President shall preside at meetings of the shareholders and the
Board of Directors.
7. VICE PRESIDENTS. The Vice Presidents in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President. They shall perform such other duties and have such
other powers as the Board of Directors shall prescribe or as the President may
from time to time delegate.
8. SECRETARY. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the shareholders and record all the proceedings of
the meetings of the shareholders and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the shareholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall keep in safe custody
the seal of the Corporation and, when authorized by the Board of Directors,
affix the same to any instrument requiring it.
9. TREASURER. The Treasurer shall have the custody of corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors at its regular meetings or when the
Board of Directors so requires an account of all his transactions as treasurer
and of the financial condition of the Corporation unless otherwise specified by
the Board of Directors, the Treasurer shall be the Corporation's Chief Financial
Officer.
10. OTHER OFFICERS, EMPLOYEES AND AGENTS. Each and every other officer,
employee and agent of the corporation shall possess, and may exercise, such
power and authority, and shall perform such duties, as may from time to time be
assigned to him by the board of directors, the officer so appointing him and
such officer or officers who may from time to time be designated by the board of
directors to exercise such supervisory authority.
ARTICLE FIVE
CERTIFICATES FOR SHARES
1. ISSUE OF CERTIFICATES. The Corporation shall deliver certificates
representing all shares to which shareholders are entitled; and such
certificates shall be signed by the Chairman of the Board, President or a Vice
President, and by the Secretary or an Assistant Secretary of the Corporation,
and may be sealed with the seal of the Corporation or a facsimile thereof.
2. LEGENDS FOR PREFERENCES AND RESTRICTIONS ON TRANSFER. The
designations, relative rights, preferences and limitations applicable to each
class of shares and the variations in rights, preferences and limitations
determined for each series within a class (and the authority of the Board of
Directors to determine variations for future series) shall be summarized on the
front or back of each certificate. Alternatively, each certificate may state
conspicuously on its front or back that the Corporation will furnish the
shareholder a full statement of this information on request and without charge.
Every certificate representing shares that are restricted as to the sale,
disposition, or transfer of such shares shall also indicate that such shares are
restricted as to transfer and there shall be set forth or fairly summarized upon
the certificate, or the certificate shall indicate that the Corporation will
furnish to any shareholder upon request and without charge, a full statement of
such restrictions. If the Corporation issues any shares that are not registered
under the Securities Act of 1933, as amended, and registered or qualified under
the applicable state securities laws, the transfer of any such shares shall be
restricted substantially in accordance with the following legend:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S
EXPENSE, AN OPINION (SATISFACTORY TO THE CORPORATION) OF COUNSEL
(SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT REQUIRED."
3. FACSIMILE SIGNATURES. The signatures of the Chairman of the Board,
the President or a Vice President and the Secretary or Assistant Secretary upon
a certificate may be facsimiles, if the certificate is manually signed by a
transfer agent, or registered by a registrar, other than the Corporation itself
or an employee of the Corporation. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of the
issuance.
4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
5. TRANSFER OF SHARES. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
6. REGISTERED SHAREHOLDERS. The Corporation shall be entitled to
recognize the exclusive rights of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Florida.
7. REDEMPTION OF CONTROL SHARES. As provided by the Florida Business
Corporation Act, if a person acquiring control shares of the Corporation does
not file an acquiring person statement with the Corporation, the Corporation may
redeem the control shares at fair market value at any time during the 60-day
period after the last acquisition of such control shares. If a person acquiring
control shares of the Corporation files an acquiring person statement with the
Corporation, the control shares may be redeemed by the Corporation only if such
shares are not accorded full voting rights by the shareholders as provided by
law.
ARTICLE SIX
GENERAL PROVISIONS
1. DIVIDENDS. The Board of Directors may from time to time declare, and
the Corporation may pay, dividends on its outstanding shares in cash, property,
or its own shares pursuant to law and subject to the provisions of the Articles
of Incorporation.
2. RESERVES. The Board of Directors may by resolution create a reserve
or reserves out of earned surplus for any proper purpose or purposes, and may
abolish any such reserve in the same manner.
3. CHECKS. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
4. FISCAL YEAR. The fiscal year of the Corporation shall end on
December 31 of each year, unless otherwise fixed by resolution of the Board of
Directors.
5. SEAL. The corporate seal shall have inscribed thereon the name and
state of incorporation of the Corporation. The seal may be used by causing it or
a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
6. GENDER. All words used in these Bylaws in the masculine gender shall
extend to and shall include the feminine and neuter genders.
ARTICLE SEVEN
AMENDMENTS OF BYLAWS
Unless otherwise provided by law, these Bylaws may only be altered,
amended, repealed or replaced if not less than 75% of the directors then
constituting the Board of Directors so alter, amend, repeal or replace these
Bylaws.
ARTICLE EIGHT
AMENDMENT OF RIGHTS PLAN
Unless otherwise provided by law, the Corporation's Amended and
Restated Rights Plan may only be altered, amended, repealed or replaced in
accordance with the Board voting requirements set forth in such Amended and
Restated Rights Plan.
EXHIBIT 4.1
================================================================================
CHS ELECTRONICS, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
RIGHTS AGENT
AMENDED AND RESTATED
1998 PREFERRED STOCK PURCHASE RIGHTS AGREEMENT
DATED AS OF MARCH 18, 1999
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
Section 1. Certain Definitions....................................................................................1
Section 2. Appointment of Rights Agent............................................................................5
Section 3. Issuance of Rights Certificates........................................................................5
Section 4. Form of Rights Certificates............................................................................6
Section 5. Countersignature and Registration......................................................................7
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed,
Lost or Stolen Rights Certificates..............................................................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights..........................................9
Section 8. Cancellation and Destruction of Rights Certificates...................................................10
Section 9. Reservation and Availability of Preferred Stock; Registration.........................................11
Section 10. Preferred Stock Record Date..........................................................................12
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights; Exchange of
Rights for Shares of Capital Stock.............................................................12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares...........................................20
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.................................20
Section 14. Fractional Rights and Fractional Shares..............................................................22
Section 15. Rights of Action.....................................................................................23
Section 16. Agreement of Rights Holders..........................................................................24
Section 17. Rights Certificate Holder Not Deemed a Shareholder...................................................24
Section 18. Concerning the Rights Agent..........................................................................25
Section 19. Merger or Consolidation or Change of Name of Rights Agent............................................25
Section 20. Duties of Rights Agent...............................................................................26
Section 21. Change of Rights Agent...............................................................................27
Section 22. Issuance of New Rights Certificates..................................................................28
Section 23. Redemption and Termination...........................................................................28
Section 24. Notice of Certain Events.............................................................................30
Section 25. Notices..............................................................................................30
Section 26. Supplements and Amendments...........................................................................31
Section 27. Successors...........................................................................................32
Section 28. Determinations and Actions by the Board of Directors, etc............................................32
Section 29. Benefits of this Agreement...........................................................................32
Section 30. Severability.........................................................................................32
Section 31. Governing Law........................................................................................33
Section 32. Consent to Jurisdiction; Service of Process..........................................................33
Section 33. Counterparts.........................................................................................33
Section 34. Descriptive Headings.................................................................................33
</TABLE>
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AMENDED AND RESTATED
1998 PREFERRED STOCK PURCHASE RIGHTS AGREEMENT
1998 PREFERRED STOCK PURCHASE RIGHTS AGREEMENT, dated as of January 16,
1998 and amended and restated as of March 18, 1999 (the "Agreement"), between
CHS ELECTRONICS, INC., a Florida corporation (the "Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, on January 16, 1998 (the "Rights Dividend Declaration Date"),
the Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each share of common stock, $.001 par value, of
the Company (the "Common Stock") outstanding at the close of business on January
30, 1998 (the "Record Date") and has authorized the issuance of one Right (as
such number may hereinafter be adjusted pursuant to the provisions of Section
11(i) hereof) for each share of Common Stock issued between the Record Date
(whether originally issued or delivered from the Company's treasury) and the
Distribution Date (as defined below). Each Right shall initially represent the
right to purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock, $.001 par value (the "Series A Preferred Stock"), of the
Company, having the rights and preferences set forth in the Form of Certificate
of Designation attached hereto as Exhibit A, upon the terms and subject to the
conditions hereinafter set forth (the "Rights");
WHEREAS, on January 16, 1998, the Company entered into the 1998
Preferred Stock Purchase Rights Agreement (the "Rights Agreement");
WHEREAS, the Board of Directors of the Company has determined that
certain provisions of the Rights Agreement should be amended, that the Company's
current transfer agent should replace the existing Rights Agent and that the
Rights Agreement should be restated as set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding.
Notwithstanding the foregoing, the term "Acquiring Person" shall not include (i)
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan, or (ii) any Person who or which, together with all Affiliates and
Associates of such Person, would be an Acquiring Person solely by reason of a
reduction in the number of issued and outstanding shares of Common Stock of the
Company pursuant to a transaction or a series of
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related transactions approved by the Board of Directors (provided that such
transaction or series of related transactions are approved by the affirmative
vote of at least 80% of the members of the Board of Directors of the Company);
provided, further, however, that in the event that such Person described in the
foregoing clause (ii) does not become an Acquiring Person by reason of a
reduction in the number of issued and outstanding shares of Common Stock of the
Company, such Person shall nonetheless become an Acquiring Person in the event
such Person thereafter acquires Beneficial Ownership of an additional 1% of the
Common Stock of the Company, unless the acquisition of such additional Common
Stock would not result in such Person becoming an Acquiring Person by reason of
a reduction in the number of issued and outstanding shares of Common Stock of
the Company.
(b) (i) "Act" shall mean the Securities Act of 1933,
as amended.
(ii) "Adverse Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person,
shall become the direct or indirect Beneficial Owner of 10% or more of
the shares of Common Stock and is deemed by a majority of the Board of
Directors of the Company to be a Person whose ownership interest would
cause a material adverse impact on the business or prospects of the
Company or its shareholders.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(d) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right to
acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants or options, or
otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," (A) securities
tendered pursuant to a tender or exchange offer made by such Person or
any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange, or (B) securities
issuable upon exercise of Rights at any time prior to the occurrence of
a Triggering Event, or (C) securities issuable upon exercise of Rights
from and after the occurrence of a Triggering Event which Rights were
acquired by such Person or any of such Person's Affiliates or
Associates prior to the Distribution Date or pursuant to Section 3(a)
or Section 22 hereof (the "Original Rights") or pursuant to Section
11(i) hereof in connection with an adjustment made with respect to any
Original Rights;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right to vote
or dispose of or has "beneficial ownership" of (as determined pursuant
to Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), including pursuant to any agreement, arrangement or
understanding,
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whether or not in writing; PROVIDED, HOWEVER, that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable provisions of the
General Rules and Regulations under the Exchange Act, and (B) is not
also then reportable by such Person on Schedule 13D under the Exchange
Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate thereof)
with which such Person (or any of such Person's Affiliates or
Associates) has any agreement, arrangement or understanding (whether or
not in writing), for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy as described in proviso (A) to
subparagraph (ii) of this paragraph (d)) or disposing of any voting
securities of the Company; PROVIDED, HOWEVER, that nothing in this
paragraph (d) shall cause a person engaged in business as an
underwriter of securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired through such person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
Notwithstanding anything in this Section 1(d) to the contrary, a Person
engaged in the business of underwriting securities shall not be deemed a
"Beneficial Owner" of, or to "beneficially own", any securities acquired in good
faith in a firm commitment underwriting until the expiration of 40 days after
the date of such acquisition.
(e) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(f) "Close of business" on any given date shall mean 5:00
P.M., New York time, on such date; PROVIDED, HOWEVER, that if such date if not a
Business Day it shall mean 5:00 P.M., New York time, on the next succeeding day
which is a Business Day.
(g) "Common Stock" shall mean the common stock, $.001 par
value, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company shall mean the capital stock of such Person
with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person.
(h) "Current market price" shall have the meaning set forth in
Section 11(d) hereof.
(i) "Distribution Date" shall have the meaning set forth in
Section 3(a) hereof.
(j) "Exchange Act" shall have the meaning set forth in Section
1(c) hereof.
(k) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
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(l) "Final Expiration Date" shall have the meaning set forth
in Section 7(a) hereof.
(m) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(n) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
(o) "Purchase Price" shall have the meaning set forth in
Section 4(a) hereof.
(p) "Redemption Price" shall have the meaning set forth in
Section 23(a) hereof.
(q) "Rights" shall have the meaning set forth in the WHEREAS
clause at the beginning of this Agreement.
(r) "Rights Certificates" shall have the meaning set forth in
Section 3(a) hereof.
(s) "Section 11(a)(ii) Event" shall mean any event described
in Section 11(a)(ii) hereof.
(t) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.
(u) "Series A Preferred Stock" shall have the meaning set
forth in the WHEREAS clause at the beginning of this Agreement.
(v) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall include, a
report filed pursuant to the Exchange Act) by the Company, an Acquiring Person
or an Adverse Party that an Acquiring Person and/or an Adverse Party has become
such.
(w) "Subsidiary" shall mean, with reference to any Person, any
corporation of which an amount of voting securities sufficient to elect at least
a majority of the directors of such corporation is beneficially owned, directly
or indirectly, by such Person, or otherwise controlled by such Person.
(x) "Trading Day" shall have the meaning set forth in Section
11(d) hereof.
(y) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.
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SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
SECTION 3. ISSUANCE OF RIGHTS CERTIFICATES.
(a) Until the earlier of (i) the close of business on the
tenth day after the Stock Acquisition Date (or, if the tenth day after the Stock
Acquisition Date occurs before the Record Date, the close of business on the
Record Date), or (ii) the close of business on the tenth business day (or such
later date as may be determined by action of the Board of Directors (but only if
such action is approved by the affirmative vote of at least 80% of the members
of the Board of Directors of the Company prior to such time as any Person
becomes an Acquiring Person or an Adverse Party) after the date that a tender or
exchange offer by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan) is first published or
sent or given within the meaning of Rule 14d-2(a) of the General Rules and
Regulations under the Exchange Act, if upon consummation thereof, such Person
would be an Acquiring Person or an Adverse Party (the earlier of (i) or (ii)
being herein referred to as the "Distribution Date"), (x) the Rights will be
evidenced (subject to the provisions of paragraph (b) of this Section 3) by the
certificates for the Common Stock registered in the names of the holders of the
Common Stock (which certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates, and (y) the Rights
will be transferable only in connection with the transfer of the underlying
shares of Common Stock (including a transfer to the Company). As soon as
practicable after the Distribution Date, the Rights Agent will send by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, one or more rights
certificates, in substantially the form attached hereto as Exhibit B (the
"Rights Certificates"), evidencing one Right for each share of Common Stock so
held, subject to adjustment as provided herein. In the event that an adjustment
in the number of Rights per share of Common Stock has been made pursuant to
Section 11(i) hereof, at the time of distribution of the Rights Certificates,
the Company shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates representing
only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates.
(b) After the Record Date, the Company sent a copy of a
Summary of Rights, in substantially the form attached to the Rights Agreement
dated as of January 16, 1999 as Exhibit C (the "Summary of Rights"), by
first-class, postage prepaid mail, to each record holder of the Common Stock as
of the close of business on the Record Date, at the address of such holder shown
on the records of the Company. Attached hereto is an Amended and Restated
Summary of Rights which the Company may, but shall not be required to, send to
holders of its Common Stock. With respect to certificates for the Common Stock
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates for the
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Common Stock and the registered holders of the Common Stock shall also be the
registered holders of the associated Rights. Until the earlier of the
Distribution Date or the Expiration Date, the transfer of any certificates
representing shares of Common Stock in respect of which Rights have been issued
shall also constitute the transfer of the Rights associated with such shares of
Common Stock.
(c) Rights shall be issued in respect of all shares of Common
Stock which are issued after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date. Certificates representing such shares
of Common Stock issued after the date hereof and prior to the earlier of the
Distribution Date or the Expiration Date shall also be deemed to be certificates
for Rights, and shall bear the following legend:
"This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between CHS
Electronics, Inc. (the "Company") and Interwest Transfer Company, as
Rights Agent (the "Rights Agent"), dated as of January 16, 1998, as
amended and restated as of March 18, 1999 (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a copy
of which is on file at the principal offices of the Company. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. The Rights Agent will mail to the holder
of this certificate a copy of the Rights Agreement, as in effect on the
date of mailing, without charge promptly after the receipt of a written
request therefor. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR
BECOMES AN ACQUIRING PERSON, AN ADVERSE PARTY OR ANY AFFILIATE OR
ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT),
WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY
SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID."
SECTION 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
in substantially the form attached hereto as Exhibit B and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever distributed, shall be
dated as of the Record Date and on their face shall entitle the holders thereof
to purchase such number of one one-thousandths of a share of Series A Preferred
Stock as shall be set forth therein at the price per one one-thousandths of a
share of Series A Preferred Stock set forth therein (such exercise price per
share being hereinafter referred to as the "Purchase Price"), but the amount and
type of securities purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided herein.
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(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by: (i) an Acquiring
Person, an Adverse Person or any Associate or Affiliate thereof, (ii) a
transferee of an Acquiring Person or an Adverse Person (or of any such Associate
or Affiliate) who becomes a transferee after the Acquiring Person or Adverse
Person becomes such or (iii) a transferee of an Acquiring Person or an Adverse
Person (or of any such Associate or Affiliate) who becomes a transferee prior to
or concurrently with the Acquiring Person or the Adverse Person becoming such
and receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person or the Adverse Person to holders of
equity interests in such Acquiring Person or Adverse Person or to any Person
with whom such Acquiring Person or Adverse Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect avoidance
of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6
or Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Rights Certificate referred to in this sentence, shall contain (to the
extent feasible) the following legend:
"The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person,
an Adverse Person or an Affiliate or Associate thereof (as such terms
are defined in the Rights Agreement between CHS Electronics, Inc. and
Interwest Transfer Company, as Rights Agent (the "Rights Agreement").
Accordingly, this Rights Certificate and the Rights represented hereby
may become null and void in the circumstances specified in Section 7(e)
of the Rights Agreement."
SECTION 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Rights Certificates shall be manually or by facsimile
signature countersigned by the Rights Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Rights Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company; and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Rights Certificate, shall be a proper officer of the Company authorized to
sign such Rights Certificate, although at the date of the execution of this
Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the name and addresses of the respective
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holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of Section 4(b), Section 7(e)
and Section 14 hereof, at any time after the close of business on the
Distribution Date, and at or prior to the close of business on the Expiration
Date, any Rights Certificate or Certificates may be transferred, split up,
combined or exchanged for another Rights Certificate or Certificates, entitling
the registered holder thereof to purchase a like number of one one-thousandths
of a share of Series A Preferred Stock as the Rights Certificate or Certificates
surrendered then entitled such holder (or former holder in the case of a
transfer) to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Rights Certificate or Certificates shall make such
request in writing delivered to the Rights Agent and shall surrender the Rights
Certificate or Certificates to be transferred, split up, combined or exchanged
at the principal office or offices of the Rights Agent designated for such
purpose. Neither the Rights Agent nor the Company shall be obligated to take any
action whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will execute and deliver a new Rights
Certificate of like tenor to the Rights Agent for countersignature and delivery
to the registered owner in lieu of the Rights Certificate so lost, stolen,
destroyed or mutilated.
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Subject to Section 7(e) hereof, the registered holder of
any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c) and Section 23(a) hereof) in whole or
in part at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
or offices of the Rights Agent designated for such purpose, together with
payment of the Purchase Price for each one one-thousandths of a share of Series
A Preferred Stock as to which such surrendered Rights are
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then exercisable, at or prior to the earlier of (i) the close of business on
January 15, 2008 earlier of (i) and (ii) being herein referred to as the
"Expiration Date").
(b) The Purchase Price for each one one-thousandth of a share
of Series A Preferred Stock pursuant to the exercise of a Right shall initially
be $100, and shall be subject to adjustment from time to time as provided in
Sections 11 and 13(a) hereof and shall be payable in accordance with paragraph
(c) below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one one-thousandth of a share of Series A Preferred
Stock to be purchased, as set forth below and an amount equal to any applicable
transfer tax, the Rights Agent shall, subject to Section 20(j) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the shares of Series A
Preferred Stock (or make available, if the Rights Agent is the transfer agent
for such shares) certificates for the total number of shares of Series A
Preferred Stock to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests or (B) if the Company shall
have elected to deposit the total number of shares of Series A Preferred Stock
issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of shares of Series A Preferred Stock as are to be purchased (in which
case certificates for the shares of Series A Preferred Stock represented by such
receipts shall be deposited by the transfer agent with the depositary agent) and
the Company will direct the depositary agent to comply with such request, (ii)
requisition from the Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 14 hereof, (iii) after receipt of
such certificates or depositary receipts, cause the same to be delivered to or
upon the order of the registered holder of such Rights Certificate, registered
in such name or names as may be designated by such holder and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price shall be
made in cash or by certified or cashier's check payable to the Company.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 14
hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person, an Adverse Person or an
Associate or Affiliate thereof, (ii) a transferee of an Acquiring Person or an
Adverse Person (or of any such Associate or Affiliate) who becomes a transferee
after the Acquiring Person or Adverse Person becomes such or (iii) a transferee
of an Acquiring Person or an Adverse Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person or Adverse Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person or the Adverse Person to holders of equity interests in such Acquiring
Person or Adverse Person or to any Person with whom the Acquiring Person or the
Adverse Person has any continuing agreement, arrangement or understanding
regarding the transferred
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Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise. The Company shall use all reasonable efforts to
ensure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Rights Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person, an Adverse Person or their respective
Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the form
of election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Rights Certificates to the Company, or shall, at the written request
of the Company, destroy such cancelled Rights Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
SECTION 9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK;
REGISTRATION.
(a) The Company covenants and agrees that, from and after the
Distribution Date, it will cause to be reserved and kept available out of its
authorized and unissued shares of Series A Preferred Stock not reserved for
another purpose the number of shares of Series A Preferred Stock that, as
provided in this Agreement, will be sufficient to permit the exercise in full of
all outstanding Rights in accordance with Section 7 hereof.
(b) So long as the shares of Series A Preferred Stock issuable
and deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as is required by law following the Distribution Date, a registration
statement under the Act, with respect to the
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securities purchasable upon exercise of the Rights on an appropriate form, (ii)
cause such registration statement to become effective as soon as practicable
after such filing, and (iii) cause such registration statement to remain
effective (with a prospectus at all times meeting the requirements of the Act)
until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the date of the expiration of the
Rights. The Company will also take such action as may be appropriate under, or
to ensure compliance with, the securities or "blue sky" laws of the various
states in connection with the exercisability of the Rights. The Company may
temporarily suspend, for a period of time not to exceed ninety (90) days after
the date set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect. Notwithstanding any provision of
this Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction unless the requisite qualification in such jurisdiction shall have
been obtained.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all shares of Series A Preferred
Stock delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such shares (subject to payment of the Purchase Price), be duly
and validly authorized and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of shares of Series A
Preferred Stock upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect of any transfer
or delivery of Rights Certificates to a Person other than, or the issuance or
delivery of a number of shares of Series A Preferred Stock in respect of a name
other than that of, the registered holder of the Rights Certificates evidencing
Rights surrendered for exercise or to issue or deliver any certificates for a
number of shares of Series A Preferred Stock in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
SECTION 10. PREFERRED STOCK RECORD DATE. Each person in whose name any
certificate for a number of shares of Series A Preferred Stock (or other
securities, as the case may be) is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of such shares of
Series A Preferred Stock (or other securities) represented thereby on, and such
certificates shall be dated, the date upon which the Rights Certificate
evidenced such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the
date of such surrender and payment is a date upon which the Series A Preferred
Stock transfer books of the Company are closed, such Person shall be deemed to
have become the record holder of such shares on, and such certificate shall be
dated, the next succeeding Business Day on which the Series A Preferred Stock
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate shall not be entitled to
any rights of a shareholder of
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the Company with respect to shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceeding of the Company except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR
NUMBER OF RIGHTS; EXCHANGE OF RIGHTS FOR SHARES OF CAPITAL STOCK. The Purchase
Price, the number and kind of shares covered by each Right and the number of
Rights outstanding are subject to adjustment from time to time as provided in
this Section 11.
(a) (i) In the event the Company shall at any time
after the date of this Agreement (A) declare a dividend on the Series A
Preferred Stock payable in shares of Series A Preferred Stock, (B)
subdivide the outstanding Series A Preferred Stock, (C) combine the
outstanding Series A Preferred Stock into a smaller number of shares,
or (D) issue any shares of its capital stock in a reclassification of
the Series A Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), except as otherwise provided in
this Section 11(a) and Section 7(e) hereof, the Purchase Price in
effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification,
and the number and kind of shares of capital stock issuable on such
date, shall be proportionately adjusted so that the holder of any Right
exercised after such time shall be entitled to receive the aggregate
number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the
Series A Preferred Stock transfer books of the Company were open, he
would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification;
PROVIDED, HOWEVER, that in no event shall the consideration to be paid
upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of
one Right. If an event occurs which would require an adjustment under
both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment
provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section
11(a)(ii) hereof.
(ii) the event that any Person shall, at any time
after the Rights Dividend Declaration Date (as defined in the WHEREAS
clause at the beginning of this Agreement), becomes an Acquiring Person
or an Adverse Person, unless the event causing such Person to become an
Acquiring Person or an Adverse Person is an acquisition of shares of
Common Stock pursuant to a cash tender offer for all outstanding shares
of Common Stock at a price and on terms determined by the affirmative
vote of at least 80% of the members of the Board of Directors of the
Company, after receiving advice from one or more investment banking
firms, to be (a) at a price which is fair to shareholders (taking into
account all factors which such members of the Board deem relevant
including, without limitation, prices which could reasonably be
achieved if the Company or its assets were sold on an orderly basis
designed to realize maximum value) and (b) otherwise in the best
interests of the Company and its shareholders (a "Qualifying Tender
Offer"), then, subject to the last sentence of Section 23(a) and except
as otherwise
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provided in this Section 11, each holder of a Right (except as provided
in Section 7(e) hereof) shall thereafter have the right to receive,
upon exercise thereof, at a price equal to the then current Purchase
Price multiplied by the number of one one-thousandths of a share of
Series A Preferred Stock for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of shares of
Series A Preferred Stock, such number of shares of the Common Stock as
shall equal the result obtained by (x) multiplying the then current
Purchase Price by the number of one one-thousandths of a share of
Series A Preferred Stock for which a Right is then exercisable and
dividing that product by (y) 50% of the then current market price per
share of the Company's Common Stock (determined pursuant to Section
11(d) hereof) on the date of the occurrence of such 11(a)(ii) Event.
(iii) In the event that there shall not be sufficient
shares of Common Stock issued but not outstanding or authorized but
unissued to permit the exercise in full of the Rights in accordance
with the foregoing subparagraph (ii), the Company shall take all such
action as may be necessary to authorize additional shares of Common
Stock for issuance upon exercise of the Rights. In the event that the
Company shall, after good faith effort, be unable to take all such
action as may be necessary to authorize such additional shares of
Common Stock, the Company shall substitute, for each share of Common
Stock that would otherwise be issuable upon exercise of a Right, a
number of shares of Series A Preferred Stock or fraction thereof such
that the current market price per share of one share of Series A
Preferred Stock multiplied by such number or fraction is equal to the
current market price per share of one share of Common Stock as of the
date of issuance of such shares of Series A Preferred Stock or fraction
thereof.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Series A Preferred
Stock entitling them to subscribe for or purchase (for a period expiring within
forty-five (45) calendar days after such record date) Series A Preferred Stock
(or shares having the same rights, privileges and preference as the shares of
Series A Preferred Stock ("equivalent preferred stock")) or securities
convertible into Series A Preferred Stock or equivalent preferred stock at a
price per share of Series A Preferred Stock or per share of equivalent preferred
stock (or having a conversion price per share, if a security convertible into
Series A Preferred Stock or equivalent preferred stock) less than the current
market price as determined pursuant to Section 11(d) hereof) per share of Series
A Preferred Stock on such record date, the Purchase Price to be in effect after
such record date, shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of shares of Series A Preferred Stock outstanding on
such record date, plus the number of shares of Series A Preferred Stock which
the aggregate offering price of the total number of shares of Series A Preferred
Stock and/or equivalent preferred stock so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price, and the denominator of which shall be the
number of shares of Series A Preferred Stock outstanding on such record date,
plus the number of additional shares of Series A Preferred Stock and/or
equivalent preferred stock to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially convertible);
PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon the
exercise of one Right be less than the aggregate
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<PAGE>
par value of the shares of capital stock of the Company issuable upon exercise
of one Right. In case such subscription price may be paid by delivery of
consideration part or all of which may be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Shares of Series A Preferred Stock owned by or held for
the account of the Company shall not be deemed outstanding for the purpose of
any such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights, options or warrants are
not so issued, the Purchase Price shall be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Series A Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of indebtedness, cash (other
than a regular quarterly or semi-annual cash dividend out of the earnings or
retained earnings of the Company), assets (other than a dividend payable in
Series A Preferred Stock, but including any dividend payable in stock other than
Series A Preferred Stock) or subscription rights or warrants (excluding those
referred to in Section 11(b) hereof), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per share of Series A Preferred Stock on such record date, less the fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent) of the portion of the cash, assets or evidences of indebtedness so
to be distributed or of such subscription rights or warrants applicable to a
share of Series A Preferred Stock and the denominator of which shall be such
current market price (as determined pursuant to Section 11(d) hereof) per share
of Series A Preferred Stock; PROVIDED, HOWEVER, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company to be issued
upon exercise of one Right. Such adjustments shall be made successively whenever
such a record date is fixed, and in the event that such distribution is not so
made, the Purchase Price shall be adjusted to be the Purchase Price which would
have been in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder,
the "current market price" per share of any security (a "Security" for
the purpose of this Section 11(d)(i)) on any date shall be deemed to be
the average of the daily closing prices per share of such Security for
the 30 consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; PROVIDED HOWEVER, that in the event
that the current market price per share of the Security is determined
during a period following the announcement by the issuer of such
Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or
(B) any subdivision, combination or reclassification of such Security
and prior to the expiration of 30 Trading Days after the ex-dividend
date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
case, the current market price per share shall be appropriately
adjusted to reflect the
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current market price per share equivalent of such Security. The closing
price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange
or, if the Security is not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the Security is listed
or admitted to trading or, if the Security is not listed or admitted to
trading on any national securities exchange, the last quoted price or,
if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System ("Nasdaq") or such
other system then in use, or, if on any such date the Security is not
quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a
market in the Security selected by the Board of Directors of the
Company. If on any such date no market maker is making a market in the
Security, the fair value of such Security on such date as determined in
good faith by the Board of Directors of the Company shall be used. The
term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Security is listed or admitted to
trading is open for the transaction of business or, if the Security is
not listed or admitted to trading on any national securities exchange,
a Business Day.
(ii) For the purpose of any computation hereunder,
the "current market price per share" of the Series A Preferred Stock
shall be determined in accordance with the method set forth in Section
11(d)(i). If the Series A Preferred Stock is not publicly traded, the
"current market price per share" of the Series A Preferred Stock shall
be conclusively deemed to be the current market price per share of the
Common Stock as determined pursuant to Section 11(d))(i) (appropriately
adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one
thousand. If neither the Common Stock nor the Series A Preferred Stock
is publicly held or so listed or traded, "current market price per
share" shall mean the fair value per share as determined in good faith
by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Purchase
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one-ten-thousandth of a
share of Series A Preferred Stock or other share or security as the case may be.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction which mandates such adjustment, or
(ii) the Expiration Date.
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(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares or fraction of a share of capital
stock other than Series A Preferred Stock, thereafter the number or fraction of
such other shares so receivable upon exercise of any Right and the Purchase
Price thereof shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Series A Preferred Stock contained in Sections 11(a), (b), (c), (e), (g),
(h), (i), (j), (k) and (m), and the provisions of Sections 7, 9, 10, 13 and 14
hereof with respect to the Series A Preferred Stock shall apply on like terms to
any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of Series A Preferred Stock purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a share of Series A Preferred Stock (calculated to the
nearest one-ten-thousandth) obtained by (i) multiplying (x) the number of one
one-thousandths of a share covered by a Right immediately prior to this
adjustment, by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price, and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one one-thousandths of a share of Series A Preferred
Stock purchasable upon the exercise of a Right. Each of the Rights outstanding
after the adjustment in the number of Rights shall be exercisable for the number
of one one-thousandths of a share of Series A Preferred Stock for which a Right
was exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one-ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Rights Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and
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upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-thousandths of a share of Series A Preferred
Stock issuable upon the exercise of the Rights, the Rights Certificates
theretofore and thereafter issued may continue to express the Purchase Price per
share and the number of one one-thousandths of a share of Series A Preferred
Stock which were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the then stated or par
value, if any, of the shares of Series A Preferred Stock issuable upon exercise
of the Rights, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly and
legally issue such number of fully paid and nonassessable shares of Series A
Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of shares of Series A Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of shares of Series A Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in its good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any (i)
consolidation or subdivision of the Series A Preferred Stock, (ii) issuance
wholly for cash of any shares of Series A Preferred Stock at less than the
current market price, (iii) issuance wholly for cash of shares of Series A
Preferred Stock or securities which by their terms are convertible into or
exchangeable for shares of Series A Preferred Stock, (iv) dividends on Series A
Preferred Stock payable in Series A Preferred Stock or (v) issuance of rights,
options or warrants referred to in this Section 11, hereafter made by the
Company to holders of its Series A Preferred Stock shall not be taxable to such
shareholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section
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11(o) hereof) or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements in
effect which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale, the stockholders of the
Person who constitute, or would constitute, the "Principal Party" for purposes
of Section 13(a) hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 26
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Distribution Date (i) declare
a dividend on the outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, then in
any such case (A) the number of one one-thousandths of a share of Series A
Preferred Stock purchasable after such event upon proper exercise of each Right
shall be determined by multiplying the number of one one-thousandths of a share
of Series A Preferred Stock so purchasable immediately prior to such event by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately before such event and the denominator of which is the
number of shares of Common Stock outstanding immediately after such event, and
(B) each share of Common Stock outstanding immediately after such event shall
have issued with respect to it that number of Rights which each share of Common
Stock outstanding immediately prior to such event had issued with respect to it.
The adjustments provided for in this Section 11(p) shall be made successively
whenever such a dividend is declared or paid or such a subdivision, combination
or consolidation is effected.
(q) (i) The Board of Directors of the Company may, at
its option, at any time after any Person becomes an Acquiring Person or
an Adverse Person, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become
void pursuant to the provisions of Section 7(e) hereof) for Common
Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall not be
empowered to effect such exchange at any time after any Person (other
than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or
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any such Subsidiary, or any entity holding Common Stock for or pursuant
to the terms of any such plan), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50% or more
of the Common Stock then outstanding.
(ii) Immediately upon the action of the Board of
Directors of the Company ordering the exchange of any Rights pursuant
to paragraph (i) of this Section 11(q) and without any further action
and without any notice, the right to exercise such Rights shall
terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of shares of Common Stock equal to the
number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such
exchange; PROVIDED, HOWEVER, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The
Company promptly shall mail a notice of any such exchange to all of the
holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method
by which the exchange of the Common Stock for Rights will be effected
and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void
pursuant to the provisions of Section 7(e) hereof), held by each holder
of Rights.
(iii) In the event that there shall not be sufficient
Common Stock available for issuance to permit any exchange of Rights as
contemplated in accordance with this Section 11(q), the Company shall
take all such action as may be necessary to authorize additional Common
Stock for issuance upon exchange of the Rights. In the event that the
Company shall, after good faith effort, be unable to take all such
action as may be necessary to authorize such additional Common Stock,
the Company shall substitute, for each share of Common Stock that would
otherwise be issuable upon exchange of a Right, a number of shares of
Series A Preferred Stock or fraction thereof such that the current
market price per share of one share of Series A Preferred Stock
multiplied by such number or fraction is equal to the current market
price per share of one share of Common Stock as of the date of issuance
of such share of Series A Preferred Stock or fraction thereof.
(iv) The Company shall not be required to issue
fractions of shares of Common Stock or to distribute certificates which
evidence fractional shares of Common Stock. In lieu of such fractional
shares of Common Stock, the Company shall pay to the registered holders
of the Right Certificates with regard to which such fractional shares
of Common Stock would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole share of
Common stock. For the purposes of this paragraph (iv), the current
market value of a whole share of Common Stock shall be the closing
price of a share of Common Stock (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 11.
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SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 and Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with the transfer agent for the
Series A Preferred Stock or Common Stock, a copy of such certificate and (c)
mail a brief summary thereof to each holder of a Rights Certificate (or, if
prior to the Distribution Date, to each holder of a certificate representing
shares of Common Stock) in accordance with Section 25 hereof.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) In the event that, following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), and the Company shall not
be the continuing or surviving corporation of such consolidation or merger, (y)
any Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof) shall consolidate with, or merge with or
into, the Company, and the Company shall be the continuing or surviving
corporation of such consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding shares of Common Stock
shall be changed into or exchanged for stock or other securities of any other
Person or cash or any other property or (z) the Company shall sell or otherwise
transfer (or one or more of its Subsidiaries shall sell or otherwise transfer)
in one transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any Subsidiary of the Company in one or more transactions each of which
complies with Section 11(o) hereof), then, and in each such case, proper
provisions shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e) hereof, shall thereafter have the right to receive, upon the
exercise thereof at a price equal to the then current Purchase Price multiplied
by the number of one one-thousandths of a share of Series A Preferred Stock for
which a Right is then exercisable (disregarding any adjustment of the Purchase
Price pursuant to Section 11(a)(ii) hereof) in accordance with the terms of this
Agreement, such number of validly authorized and issued, fully paid,
nonassessable and freely tradable shares of Common Stock of the Principal Party
(as such term is hereinafter defined), not subject to any liens, encumbrances,
rights of first refusal or other adverse claims, as shall be equal to the result
obtained by (1) multiplying the then current Purchase Price by the number of one
one-thousandths of a share of Series A Preferred Stock for which a Right is
exercisable immediately prior to the first occurrence of a Section 13 Event (or,
if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a
Section 13 Event, multiplying the number of one one-hundredths of a share for
which a Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to
such first occurrence), and dividing that product (which, following the first
occurrence of a Section 13 Event, shall be referred to as the "Purchase Price"
for each Right and for all purposes of this Agreement) by (2) 50% of the current
market price (determined pursuant to Section 11(d)(i) hereof) per share of the
Common Stock of such Principal Party on the date of consummation of such Section
13 Event; (ii) such Principal Party shall thereafter be liable for, and shall
assume, by
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virtue of such Section 13 Event, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed
to refer to such Principal Party, it being specifically intended that the
provisions of Section 11 hereof shall apply only to such Principal Party
following the first occurrence of a Section 13 Event; (iv) such Principal Party
shall take such steps (including, but not limited to, the reservation of a
sufficient number of shares of its Common Stock) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its shares of Common Stock thereafter deliverable upon the
exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof shall
be of no effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (x) or (y) of the first sentence of Section 13(a), the Person
that is the issuer of any securities into which shares of Common Stock
of the Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in
clause (z) of the first sentence of Section 13(a), the Person that is
the party receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
PROVIDED, HOWEVER, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stocks of five or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and further providing that, as soon as practicable after the date of
any consolidation, merger or sale of assets mentioned in paragraph (a) of this
Section 13, the Principal Party will
(i) prepare and file a registration statement under
the Act, with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective as
soon as practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Act) until the
Expiration Date; and
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(ii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its Affiliates
which comply in all respects with the requirements for registration on
Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event
shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the
Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction described in
subparagraphs (x) and (y) of Section 13(a) if (i) such transaction is
consummated with a Person or Persons who acquired shares of Common Stock
pursuant to a cash tender offer for all outstanding shares of Common stock which
complies with the provisions of Section 11(a)(ii) hereof (or a wholly owned
Subsidiary of any such Person or Persons), (ii) the price per share of Common
Stock offered in such transaction is not less than the price per share of Common
Stock paid to all holders of shares of Common Stock whose shares were purchased
pursuant to such tender offer, and (iii) the form of consideration being offered
to the remaining holders of shares of Common stock pursuant to such transaction
is the same as the form of consideration paid pursuant to such tender offer.
Upon consummation of any such transaction contemplated by this Section 13(d),
all Rights hereunder shall expire.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered holders
of the Rights Certificates with regard to which such fractional Rights would be
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For purposes of this Section 14(a), the
current market value of a whole Right shall be the closing price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable. The closing price of the Rights for
any day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading, or if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by Nasdaq or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights the fair value of the
Rights on such date as determined in good faith by the Board of Directors of the
Company shall be used.
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(b) The Company shall not be required to issue fractions of
shares of Series A Preferred Stock (other than fractions which are integral
multiples of one one-thousandths of a share of Series A Preferred Stock) upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Series A Preferred Stock (other than fractions which are integral
multiples of one one-thousandths of a share of Series A Preferred Stock). In
lieu of fractional shares of Series A Preferred Stock that are not integral
multiples of one one-thousandth of a share of Series A Preferred Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of a share of Series A Preferred Stock. For
purposes of this Section 14(b), the current market value of a share of Series A
Preferred Stock shall be the closing price of a share of Series A Preferred
Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate and in this Agreement.
Without limiting the foregoing or any remedies available to the holders of the
Rights, the holders of the Rights would not have an adequate remedy at law for
any breach of this Agreement and shall be entitled to specific performance of
the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
SECTION 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by
accepting of the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the
Company and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated Common
Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or
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writing on the Rights Certificates or the associated Common Stock certificate
made by anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent, subject to the last
sentence of Section 7(e) hereof, shall be required to be affected by any notice
to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligations.
SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the fraction of a share (or
number of shares) of Series A Preferred Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate, as
such, any of the rights of a shareholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in Section 24 hereof), or to receive dividends or subscription rights,
or otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.
SECTION 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Series A Preferred Stock or for other securities
of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
Person or Persons.
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SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; PROVIDED, HOWEVER, that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel of its
choice (which may be counsel to the Company) subject to the approval of the
Company which approval shall not be unreasonably withheld. the opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in accordance
with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "current market price") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, the Vice Chairman of the Board, if any, the
President, any Vice President, the Treasurer or the Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent and shall release the Rights Agent from any liability for
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any action taken or suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own negligence, bad faith or willful misconduct, and shall not be liable for any
action it takes or omits to take in good faith which it believes to be
authorized or within its rights or powers granted hereunder. The Rights Agent
need only perform such duties which are specifically set forth herein.
(d) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any adjustment required under the provisions of
Section 11 or Section 13 hereof or responsible for the manner, method or amount
of any such adjustment (except with respect to the exercise of Rights evidenced
by Rights Certificates after actual notice of any such adjustment); nor shall it
by any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Series A Preferred Stock to be
issued pursuant to this Agreement or any Rights Certificate or as to whether any
shares of Series A Preferred Stock will, when so issued, be validly authorized
and issued, fully paid and nonassessable.
(e) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(f) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the Vice Chairman of the Board, if any, the
President, any Vice President, the Secretary or the Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer. The
Rights Agent may rely upon any instruction and shall not be responsible to
investigate any factual matters set forth in any such instruction which it
reasonably believes in good faith to have been signed and presented to it by an
authorized officer of the Company.
(g) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(h) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect
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or misconduct; PROVIDED, HOWEVER, reasonable care was exercised in the selection
and continued employment thereof.
(i) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder, including personnel and other
internal costs, or in the exercise of its rights unless there shall be
reasonable grounds for believing that repayment of such funds or adequate
indemnification against such risk or liability is assured to it.
(j) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon sixty (60) days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon sixty (60) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to the transfer agent of the Common Stock, by registered or certified
mail, and to the holders of the Rights Certificates by first-class mail. If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of sixty (60) days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Rights Certificate (who shall, with such notice, submit his
Rights Certificate for inspection by the Company), then any registered holder of
any Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be a corporation organized and doing
business under the laws of the United States or of any state of the United
States, in good standing, which is authorized under such laws to exercise
corporate trust powers and is subject to supervision or examination by federal
or state authority and which has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $5,000,000. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Stock and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
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SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
PROVIDED, HOWEVER, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii)
no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
SECTION 23. REDEMPTION AND TERMINATION.
(a) The Board of Directors of the Company may, at its option,
at any time prior to the earlier of (i) the close of business on the tenth day
following the Stock Acquisition Date (or, if the Stock Acquisition Date shall
have occurred prior to the Record Date, the close of business on the tenth day
following the Record Date) subject to extension by the Company pursuant to
Section 26 hereof, or (ii) the Final Expiration Date, redeem all but not less
than all the then outstanding Rights for cash at a redemption price of $.000001
per Right, as such amount may be appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption Price");
PROVIDED, HOWEVER, if the Board of Directors of the Company authorizes
redemption of the Rights in either of the circumstances set forth in clauses (i)
and (ii) below, then such authorization shall require the affirmative vote of at
least 80% of the members of the Board of Directors of the Company: (i) such
authorization occurs on or after the time a Person becomes an Acquiring Person
or an Adverse Person or (ii) such authorization occurs on or after the date of a
change (resulting from a proxy or consent solicitation) in a majority of the
directors in office at the commencement of such solicitation if any Person who
is a participant in such solicitation has stated (or, if upon the commencement
of such solicitation, a majority of the Board of Directors of the Company has
determined in good faith) that such person (or any of its Affiliates or
Associates) intends to take, or may consider taking, any action which would
result in such Person becoming an Acquiring Person or an Adverse Person or which
would cause the occurrence of a Triggering Event; PROVIDED FURTHER, however,
that if, following the occurrence of a Stock Acquisition Date and following the
expiration of the right of redemption hereunder but prior to any Triggering
Event, (i) a Person who is an Acquiring Person or an Adverse Person shall have
transferred or otherwise disposed of a number of shares of Common Stock in one
transaction or a series of transactions, not directly or indirectly involving
the Company or any of its Subsidiaries, which did not result in the occurrence
of a Triggering Event such that such Person is thereafter a
28
<PAGE>
Beneficial Owner of less than 10% of the outstanding shares of Common Stock, and
(ii) there are no other Persons, immediately following the occurrence of the
event described in clause (i), who are Acquiring Persons or Adverse Persons,
then the right of redemption shall be reinstated and thereafter be subject to
the provisions of this Section 23. Notwithstanding anything contained in this
Agreement to the contrary, the Rights shall not be exercisable after the first
occurrence of a Section 11(a)(ii) Event until such time as the Company's right
of redemption hereunder has expired.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to all such holders at each holder's last address as it appears upon
the registry books of the Rights Agent or, prior to the Distribution Date, on
the registry books of the Transfer Agent for the Common Stock; PROVIDED,
HOWEVER, that the failure to give, or any defect in, any such notice shall not
affect the validity of such redemption. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
SECTION 24. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Series A Preferred Stock or to make any other distribution to the
holders of Series A Preferred Stock (other than a regular quarterly cash
dividend out of earnings or retained earnings of the Company), or (ii) to offer
to the holders of Series A Preferred Stock rights or warrants to subscribe for
or to purchase any additional shares of Series A Preferred Stock or shares of
stock of any class or any other securities, rights or options, or (iii) to
effect any reclassification of its Series A Preferred Stock (other than a
reclassification involving only the subdivision of outstanding shares of Series
A Preferred Stock), or (iv) to effect any consolidation or merger into or with
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), or to effect any sale or other transfer (or
to permit one or more of its Subsidiaries to effect any sale or other transfer),
in one transaction or a series of related transactions, of more than 50% of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section
11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of
the Company, or (vi) to declare or pay any dividend on the Common Stock payable
in shares of Common Stock or to effect a subdivision, combination or
consolidation of the Common Stock (by reclassification or otherwise than by
payment of dividends in Common Stock), then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 25 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification,
29
<PAGE>
consolidation, merger, sale, transfer, liquidation, dissolution, or winding up
is to take place and the date of participation therein by the holders of the
shares of Series A Preferred Stock, if any such date is to be fixed, and such
notice shall be so given in the case of any action covered by clause (i) or (ii)
above at least twenty (20) days prior to the record date for determining holders
of the shares of Common Stock for purposes of such action, and in the case of
any such other action, at least twenty (20) days prior to the date of the taking
of such proposed action or the date of participation therein by the holders of
the shares of Common Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii)
hereof shall occur, then, in any such case, (i) the Company shall as soon as
practicable thereafter give to each holder of a Rights Certificate, to the
extent feasible and in accordance with Section 25 hereof, a notice of the
occurrence of such event, which shall specify the event and the consequences of
the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all
references in the preceding paragraph to Series A Preferred Stock shall be
deemed thereafter to refer, if appropriate, to other securities.
SECTION 25. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
Attention: Chairman of the Board,
Chief Executive Officer and President
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
Attention: Vice President, Stock Transfer
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage pre-paid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
SECTION 26. SUPPLEMENTS AND AMENDMENTS. For as long as the Rights are
then redeemable and except as provided in the last sentence of this Section 26,
the Company may in its sole and absolute discretion, and the Rights Agent shall
if the Company so directs,
30
<PAGE>
supplement or amend any provision of this Agreement without the approval of any
holders of the Rights or the Common Stock. At any time when the Rights are not
then redeemable and except as provided in the last sentence of this Section 26,
the Company may, and the Rights Agent shall if the Company so directs,
supplement or amend this Agreement without the approval of any holders of Rights
Certificates in order (a) to cure any ambiguity, (b) to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provisions herein or (c) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable, provided, that
no such supplement or amendment pursuant to clause (c) above shall materially
adversely affect the interests of the holders of Rights Certificates as such.
Upon the delivery of a certificate from an appropriate officer of the Company
which states that the proposed supplement or amendment is in compliance with the
terms of this Section 26, the Rights Agent shall execute such supplement or
amendment. Notwithstanding anything contained in this Rights Agreement to the
contrary, no supplement or amendment shall be made which changes the Redemption
Price or the Final Expiration Date and supplements or amendments may be made
after the time that any Person becomes an Acquiring Person or an Adverse Person
(other than pursuant to a Qualifying Tender Offer), unless such supplement or
amendment is approved by the affirmative vote of at least 80% of the members of
the Board of Directors of the Company.
SECTION 27. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 28. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board of Directors of the Company (subject to the
required vote as set forth herein) shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board (subject to the required vote as set forth herein) or to
the Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i) interpret
the provisions of this Agreement and (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement (including a
determination to redeem or not redeem the Rights or to amend the Agreement). All
such actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board (subject to the required vote as set forth herein)
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties and (y) not
subject to the Board to any liability to the holders of the Rights.
SECTION 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this
31
<PAGE>
Agreement shall be for the sole and exclusive benefit of the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock).
SECTION 30. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
Without limiting the foregoing, if any provision requiring that a determination
be made by less than the entire Board (or at a time or with the concurrence of a
group of directors consisting of less than the entire Board) is held by a court
of competent jurisdiction or other authority to be invalid, void or
unenforceable, such determination shall then be made by the Board in accordance
with applicable law and the Company's Articles of Incorporation and By-laws.
SECTION 31. GOVERNING LAW. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Florida and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
SECTION 32. CONSENT TO JURISDICTION; SERVICE OF PROCESS. The Company,
the Rights Agent and the holders of the Rights Certificates hereby irrevocably
submit to the jurisdiction of the state or federal courts located in Dade
County, Florida in connection with any suit, action or other proceeding arising
out of or relating to this Agreement and the transactions contemplated hereby,
and hereby agree not to assert, by way of motion, as a defense, or otherwise in
any such suit, action or proceeding that the suit, action or proceeding is
brought in an inconvenient forum, that the venue of the suit, action or
proceeding is improper or that this Agreement or the subject matter hereof may
not be enforced by such courts.
SECTION 33. COUNTERPARTS. This Agreement may be executed in
counterparts and both of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
SECTION 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
(SIGNATURES ON FOLLOWING PAGE.)
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the date first above written.
Attest: CHS ELECTRONICS, INC.
By: By:
--------------------------------- ------------------------------------
Name: Antonio Boccalandro Name: Claudio Osorio
Title: Secretary Title: Chairman of the Board, Chief
Executive Officer
and President
Attest: AMERICAN STOCK TRANSFER & TRUST COMPANY
By: By:
---------------------------------- ------------------------------------
Name: Name:
Title: Title:
33
EXHIBIT 21
SUBSIDIARIES OF CHS ELECTRONICS
<TABLE>
<S> <C>
1. CHS Electronics, Inc., a Nevada corporation ("CHS Nevada").
2. BEK International, Inc. d.b.a. CHS BEK, a Florida corporation.
3. MIFINCO, Inc., a Delaware corporation ("MIFINCO").
4. Merisel France, Inc., a Delaware corporation.
5. CHS Electronics Ges.m.b.H., a limited liability company formed under the laws of Austria.
6. CHS Electronics Benelux N.V., a limited liability company formed under the laws of Belgium.
7. CHS Bulgaria Ltd, a limited liability company formed under the laws of Bulgaria.
8. CHS Elektronika d.o.o., a company formed under the laws of Croatia.
9. CHS Czechia s.r.o., a limited liability company formed under the laws of the Czech Republic.
10. CHS Electronics PLC, a limited liability company formed under the laws of England.
11. Merisel (U.K.) Limited, a limited liability company formed under the laws of England.
12. CHS Electronics Finland OY, a limited liability company formed under the laws of Finland.
13. CHS France S.A., a limited liability company formed under the laws of France.
14. Merisel France, SNC, a French partnership.
15. CHS Electronic Deutschland GmbH, f/k/a Merisel, GmbH, a limited liability
company formed under the laws of Germany.
16. Merisel Factoring GMBH, a German limited liability company.
17. CHS Hungary Kft, a limited liability company formed under the laws of Hungary.
18. CHS Baltic, a foreign capital company formed under the laws of Lithuania.
19. ABC Data, Limited, a limited liability company formed under the laws of Jersey.
20. ABC Data z.o.o., a limited liability company formed under the laws of Poland.
21. CHS Next D.S., a limited liability company formed under the laws of the country of Portugal.
22. Computer Software and Hardware Ltd., a company formed under the laws of the Isle of Man.
23. Computer Hardware and Software Ltd., a company formed under the laws of Russia.
24. CHS Slovakia SRO, a company formed under the laws of Slovakia.
25. CHS Sweden AB, a limited liability company formed under the laws of Sweden.
26. CHS Finance SA, a limited liability company formed under the laws of Switzerland.
27. CHS Services, A.G., a corporation formed under the laws of Switzerland.
28. CHS MC DOS GmbH, a corporation formed under the laws of Germany.
29. CHS Memory Set, a corporation formed under the laws of Spain.
30. CHS Metrologie, a corporation formed under the laws of France.
31. CHS Aptec SA, a corporation formed under the laws of Saudi Arabia.
32. CHS Merisel Russia, a corporation formed under the laws of Russia.
33. CHS Raphael Informatika, a corporation formed under the laws of Italy.
34. CHS Arena, a corporation formed under the laws of Turkey.
35. CHS Armada, a corporation formed under the laws of Turkey.
36. CHS TH' Systems, a corporation formed under the laws of Czech Republic.
37. CHS ARC Spain, a corporation formed under the laws of Spain.
38. Merisel Argentina, S.A., a corporation formed under the laws of Argentina.
39. Promark de Argentina SRL, a limited liability partnership formed under the laws of Argentina.
40. Via Brazil & Informatica Ltda, a limited liability company formed under the laws of Brazil.
41. Comercial Promark Chile LTDA, a limited liability company formed under the laws of Chile.
42. Infocentro de Chile S.A., a corporation formed under the laws of Chile.
43. CHS Promark Colombia Ltda., a limited liability company formed under the laws of Colombia.
44. Merisel Mexico, S.A. de C.V., a corporation formed under the laws of Mexico.
45. Merisel Services, S.A. de C.V., a corporation formed under the laws of Mexico.
46. CHS Promark Peru S.A., a corporation formed under the laws of Peru.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
47. Masimar Sociedad Anonima, a commercial anonymous society organized under the laws of Uruguay.
48. CHS Promark Venezuela C.A., a company formed under the laws of Venezuela.
49. CHS Acron, a corporation formed under the laws of Argentina.
50. CHS Cornejo, a corporation formed under the laws of Argentina.
51. CHS Americas, Inc., a Florida corporation.
52. International High Tech Marketing, Inc., a Florida corporation.
53. CHS Latin America Holding Corp., a Florida corporation.
54. Dinorall Corporation, d/b/a Dinexim, a Florida corporation.
55. Ameritech Exports, Inc., a Florida corporation.
56. CHS Brightstar, a corporation formed under the laws of Delaware.
57. CHS Intcomex, a corporation formed under the laws of Mexico.
58. Ameritech Argentina, S.A., an Argentinian corporation.
59. Access and Agora s.v.o., a joint stock company formed under the laws of the Czech Republic.
60. A & A Spol s.r.o., a company formed under the laws of Slovakia.
61. A & A s.r.l., a company formed under the laws of Romania.
62. A & A d.o.o., a company formed under the laws of Crotia.
63. Microlink Ltd., a company formed under the laws of Florida.
64. Karma International, S.A., a company organized under the laws of Luxembourg.
65. Lars Krull Holding A/S, a company organized under the laws of Denmark.
66. Santech Micro Group ASA, a company organized under the laws of Norway.
67. Atlantis Skupina d.o.o., a company organized under the laws of Slovenia.
68. Romak Computers Limited, a company organized under the laws of Ireland.
69. CompExpress Informatica Ltda., a corporation under the laws of Brazil.
70. CHS Nexsys, a company organized under the laws of Colombia.
71. CHS Ledakon, a company organized under the laws of Colombia.
72. CHS Eesti, A.S., a corporation formed under the laws of Estonia.
73. CHS Merisel Austria, a corporation formed under the laws of Austria.
74. Macro Sistemas, S.A., a corporation formed under the laws of Ecuador.
75. CHS Electronics, Inc., a Delaware corporation.
76. CHS Cayman L.P., a corporation under the laws of the Cayman Islands.
77. CHS Electronics, L.L.C., a Delaware limited liabilty company.
78. CHS Distribution, SA, a corporation formed under the laws of Switzerland.
79. KORB GmbH, a corporation under the laws of Germany.
80. CHS Logistic Services B.V., a Netherlands corporation.
81. Perifericos S.A., a company organized under the laws of Chile.
82. CHS Technologies, Inc., a Florida corporation.
83. CHS Micro Informatica, Inc., a Florida corporation.
84. CHS Latin America, Inc., a Florida corporation.
85. CHS Promark, Inc., a Florida corporation.
86. CHS Lung Electronics, a corporation formed under the laws of the
Peoples Republic of China.
87. CHS SiS, a corporation formed under the laws of the Peoples Republic
of China.
</TABLE>
- -----------------
* Except for director's qualifying shares.
EXHIBIT 23.1
We have issued our report dated March 19, 1999, accompanying the consolidated
financial statements included in the Annual Report of CHS Electronics, Inc. on
Form 10-K for the year ended December 31, 1998. We hereby consent to the
incorporation by reference of said report in the Registration Statements of CHS
Electronics, Inc. on Form S-3 (File No. 333-29779, effective July 25, 1997) and
on Forms S-8 (File No. 333-40537, filed on November 19, 1997, as amended by File
No. 333-61941 filed on August 20, 1998; File No. 333-40545, filed on November
19, 1997, as amended by File No. 333-61943 filed on August 20, 1998; File No.
333-40547, filed on November 19, 1997, as amended by File No. 333-61931 filed on
August 20, 1998; File No. 333-61933 filed on August 20, 1998).
GRANT THORNTON LLP
Miami, Florida
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 176,991
<SECURITIES> 0
<RECEIVABLES> 1,412,158
<ALLOWANCES> (34,486)
<INVENTORY> 1,025,690
<CURRENT-ASSETS> 2,682,051
<PP&E> 171,488
<DEPRECIATION> (51,287)
<TOTAL-ASSETS> 3,572,143
<CURRENT-LIABILITIES> 2,347,979
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 837,987
<TOTAL-LIABILITY-AND-EQUITY> 3,572,143
<SALES> 8,545,773
<TOTAL-REVENUES> 8,545,773
<CGS> 7,983,736
<TOTAL-COSTS> 433,567
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,373
<INCOME-PRETAX> 73,678
<INCOME-TAX> 23,871
<INCOME-CONTINUING> 45,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,678
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.82
</TABLE>
