UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24244
CHS ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 87-0435376
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2000 NW 84TH AVENUE
MIAMI, FL 33122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(305) 908-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SHARES OF COMMON STOCK OUTSTANDING
AS OF AUGUST 11, 1999: 60,693,369
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
<PAGE>
CHS ELECTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 5 - 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 - 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 - 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 27 - 29
PART II
ITEM 1 LEGAL PROCEEDINGS 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
2
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 133,247 $ 176,991
Accounts receivable:
Trade, less allowance for doubtful accounts
of $53,260 in 1999 and $34,486 in 1998 1,116,909 1,342,126
Affiliates 7,228 35,546
----------- -----------
1,124,137 1,377,672
Inventories 661,889 1,025,690
Prepaid expenses and other current assets 90,631 101,698
----------- -----------
TOTAL CURRENT ASSETS 2,009,904 2,682,051
PROPERTY AND EQUIPMENT, NET 120,107 120,201
COST IN EXCESS OF ASSETS ACQUIRED, NET 844,545 737,719
OTHER ASSETS 63,365 32,172
----------- -----------
$ 3,037,921 $ 3,572,143
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 517,579 $ 620,067
Accounts payable, trade 919,039 1,345,059
Accrued liabilities 106,403 125,076
Amounts due to sellers under acquisition agreements 299,003 185,853
Income taxes payable 3,980 13,997
----------- -----------
TOTAL CURRENT LIABILITIES 1,846,004 2,290,052
LONG TERM DEBT 459,776 433,582
MINORITY INTEREST 10,607 10,466
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding -- --
Common stock, authorized 100,000,000 shares at $.001 par value;
58,099,461 and 55,619,475 shares outstanding at June 30, 1999
and December 31, 1998, respectively 58 56
Additional paid-in capital 747,936 732,035
Retained earnings 21,872 110,793
Accumulated other comprehensive income (48,332) (4,841)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 721,534 838,043
----------- -----------
$ 3,037,921 $ 3,572,143
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 2,343,253 $ 1,769,494 $ 4,813,346 $ 3,520,832
Cost of goods sold 2,228,689 1,655,570 4,542,936 3,284,314
----------- ----------- ----------- -----------
Gross profit 114,564 113,924 270,410 236,518
Operating expenses:
Selling, general & administrative 173,837 91,137 308,116 180,643
Restructuring & asset impairment 13,962 -- 13,962 --
----------- ----------- ----------- -----------
187,799 91,137 322,078 180,643
----------- ----------- ----------- -----------
Operating income (loss) (73,235) 22,787 (51,668) 55,875
Other (income) expenses:
Interest income (5,563) (4,360) (10,593) (6,999)
Interest expense 27,528 16,904 51,920 27,467
Foreign currency (gain) loss 1,675 (1,305) 1,780 (5,097)
----------- ----------- ----------- -----------
23,640 11,239 43,107 15,371
----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (96,875) 11,548 (94,775) 40,504
Income taxes (benefit) (7,787) 4,833 (5,995) 12,613
Minority interest in subsidiaries 67 1,207 141 1,816
----------- ----------- ----------- -----------
Net earnings (loss) $ (89,155) $ 5,508 $ (88,921) $ 26,075
=========== =========== =========== ===========
Net earnings (loss) per common share:
Basic $ (1.55) $ 0.11 $ (1.57) $ 0.52
=========== =========== =========== ===========
Diluted $ (1.55) $ 0.10 $ (1.57) $ 0.47
=========== =========== =========== ===========
</TABLE>
4
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings (loss) $ (88,921) $ 26,075
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation and amortization 28,635 18,610
Minority interest in net earnings 141 1,816
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 230,968 83,649
Accounts receivable-affiliates, net 28,318 (14,247)
Inventories 366,536 156,147
Prepaids and other assets (13,904) (13,257)
Accounts payable (453,905) (325,584)
Accrued liabilities and income taxes (29,377) 1,033
--------- ---------
Net cash provided by (used in) operating activities 68,491 (65,758)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (23,542) (19,747)
Acquisitions, net of cash acquired (2,378) (27,865)
--------- ---------
Net cash (used in) investing activities (25,920) (47,612)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of Convertible Debentures 50,000 --
Proceeds from the issuance of Senior Notes -- 200,000
Net borrowings from (repayments to) banks (123,652) 17,883
Proceeds from exercising stock options 617 502
--------- ---------
Net cash provided by (used in) financing activities (73,035) 218,385
Effect of exchange rate changes on cash (13,280) (263)
--------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (43,744) 104,752
Cash and cash equivalents at beginning of period 176,991 68,806
--------- ---------
Cash and cash equivalents at end of period $ 133,247 $ 173,558
========= =========
</TABLE>
5
<PAGE>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 44,902 $ 18,625
Income taxes $ 8,971 $ 6,239
</TABLE>
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.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements were prepared from the books and
records of the Company without audit. In the opinion of management, all
adjustments, which are of a normal recurring nature, and necessary to present
fairly the financial position, results of operations and cash flows for all the
periods presented have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the operating results for the full fiscal year. Sales
in Europe in the first and fourth quarters of each year are typically higher
than sales in the second and third quarters. In South America sales in the third
and fourth quarters are typically higher than sales in the first and second
quarters.
2. RESTRUCTURING AND ASSET IMPAIRMENT COSTS
On May 1, 1999 the Company implemented a restructuring plan with the goal of
reducing future operating costs. The restructuring will result in the
writing-off of certain assets, a planned 10% reduction in the number of
employees and the closure of redundant warehouses. The restructuring plan will
be implemented throughout 1999. As of June 30, 1999, approximately $8.5 million
is accrued for restructuring costs and this amount is included in accrued
liabilities.
The components of the restructuring and asset impairment cost for the three and
six months ended June 30, 1999 are as follows (in thousands):
Lease payments in excess of sublease income $ 6,019
Write-off of leasehold improvements and other property
and equipment 5,913
Employee severance costs 1,581
Other 449
--------
Total $ 13,962
========
3. ACQUISITIONS
In the six month period ended June 30, 1999, the Company made three
insignificant acquisitions. During 1998, in addition to the Sis Distribution
Ltd. ("SiS") acquisition discussed below, 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 March 1998, the Company acquired an 80% interest in the Hong Kong, Malaysia
and Singapore subsidiaries of 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 in June 1999,
$10 million of the remaining purchase price was due in cash in June 1999 and the
remainder is due in cash in August 1999. The Company also agreed to loan SiS $15
million for working capital purposes in June 1999 of which $5 million has been
made, and to make an addition $1.4 million late payment fee, which has been
recorded as
7
<PAGE>
interest expense in the three months ended June 30, 1999. The $10 million
purchase price and $1.4 million amounts are currently not paid and, as a result,
the Company is in default of the terms of the acquisition agreement, as
modified. The Company is currently negotiating with the sellers to arrange
payment terms that will be mutually agreeable.
In January 1998, the Company acquired MicroInformatica Corp., a Latin America
based distributor, for a purchase price based on an earn out which has now been
determined to be $22.7 million. Under the acquisition agreement as modified in
June 1999, the Company was obligated to pay $2.1 million in cash in June 1999
with the remainder of the purchase price to be paid in Company stock by July 30.
To date $1.3 million of the cash has been paid and the issuance of Company stock
has not occurred. As a result, the Company is in default of the agreement. The
Company is currently negotiating with the sellers to arrange payment terms that
will be mutually agreeable.
The Company can give no assurance that it will reach a mutually acceptable
resolution on these matters.
Presented below is pro forma operating data showing selected operating results
for the Company as if the companies acquired in 1998 were acquired on January 1,
1998. The pro forma effect of the 1999 acquisitions is immaterial. Pro forma
adjustments were made to include goodwill amortization in the six month period
ended June 30, 1998 based on 1998 actual results. Pro forma net earnings per
share is based on the net earnings (loss) divided by the weighted average number
of shares plus contingent shares actually issued.
Six Months Ended June 30,
(in thousands, except per share data)
1999 1998
---- ----
Net sales $4,813,346 $4,311,297
Net earnings (loss) $ (88,921) $ 8,807
Net earnings (loss) per share-basic $ (1.57) $ 0.18
Net earnings (loss) per share-diluted $ (1.57) $ 0.16
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1998 or
of future results of the combined companies.
4. PER SHARE DATA
Basic earnings (loss) per share is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted earnings (loss)
per share includes the dilution caused by common stock options and warrants, the
shares that would be issued in existing earn outs based upon applying the earn
out multiple to actual earnings and dividing the result by the market price at
period end and the effect of the convertible debentures on an as if converted
basis. The basic weighted average number of shares is not adjusted, in the
diluted computation where the impact is anti-dilutive. 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 that it will use shares based on an issuance
price of $4.37, the price at June 30, 1999. The weighted average number of
shares for basic (loss) earnings per share was 57,449,991 and 51,181,897 for the
three month periods ended June 30, 1999 and 1998, respectively, and 56,819,441
and 50,457,789 for the six month periods ended June 30, 1999 and 1998,
respectively. The weighted average number of shares used in the diluted
computation was
8
<PAGE>
57,449,991 and 57,018,660 for the three month periods ended June 30, 1999 and
1998, respectively, and 56,819,441 and 55,754,252, for the six month periods
ended June 30, 1999 and 1998, respectively.
Since the Company had a loss for the three and six months ended June 30, 1999,
all potentially dilutive securities were excluded from diluted earnings per
share during such period since the effect would be anti-dilutive. For the
quarter ended June 30, 1999, such potentially dilutive securities consist of the
following: (i) unexercised stock options and warrants to purchase 4.5 million
shares of the Company's common stock, which would have added approximately
600,000 weighted average shares using the treasury method; (ii) the floating
rate convertible debentures due May 31, 2003, which would have added
approximately 11.8 million weighted average shares, had they been outstanding
from the beginning of the quarter and assuming conversion; (iii) earn out
contingencies, which the Company intends to satisfy through the issuance of
shares of the Company's common stock and would have added 48.6 million weighted
average shares.
The following table illustrates, for periods with income, the reconciliation of
the income and weighted average number of shares of the basic and diluted
earnings per share computations (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ------
<S> <C> <C> <C>
Net earnings $ 5,508
=======
Net earnings per share-basic 5,508 51,182 $0.11
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,487
Earn out contingencies -- 4,350
------- ------- -----
Net earnings per share-diluted $ 5,508 57,019 $0.10
======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ------
<S> <C> <C> <C>
Net earnings $26,075
=======
Net earnings per share-basic 26,075 50,458 $0.52
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,491
Earn out contingencies -- 3,805
------- ------- -----
Net earnings per share-diluted $26,075 55,754 $0.47
======= ======= =====
</TABLE>
5. LONG TERM DEBT
The Company's long-term debt at June 30, 1999, consists principally of a $140
million facility agreement for certain subsidiaries, $27 million due by a
subsidiary under a revolving credit agreement, $50 million of floating rate
convertible debentures ("Debentures") due May 31, 2003 and $200 million of
Senior Notes ("Notes") due 2005.
In June, 1999 the Company issued the Debentures to Computer Associates
International, Inc. ("CA"). The interest rate on the debentures is the six month
LIBOR rate plus 2%, (7.17% for the initial interest period), adjusted
semiannually. The Company is using the proceeds for working capital purposes.
9
<PAGE>
The Debentures are convertible into the Company's common stock at any time at a
conversion price of $5.50 per share. The conversion price is subject to
adjustment under certain conditions, including upon the average closing price of
the Company's common stock falling below $5.50 during the twenty days preceding
any conversion date or upon new issuance of shares at a price lower than $5.50.
In connection with the financing, the Company issued to CA a warrant expiring
May 31, 2004 for two million shares of common stock at an exercise price of
$5.50 per share. The exercise price of the warrant is reduced if new shares are
issued at a lower price. The warrant has been recorded at a fair value of $3
million as a discount to the Debentures and this amount is being amortized over
the life of the Debentures.
On December 30, 1998, three of the Company's German subsidiaries (collectively,
the "Borrowers") entered into a three year DM 325 million (approximately $180
million) Facility Agreement with a bank. Advances under the agreement may be
used for working capital needs of the Borrowers and are based upon a borrowing
base equal to the aggregate of 85% of eligible accounts receivable, 50% of
eligible inventory and 100% of inventory of a specific vendor. The debt is
secured by a lien on the receivables, inventories and intangible assets of the
Borrowers and two Austrian subsidiaries of the Company, and a lien on the
receivables of a Swiss subsidiary of the Company (collectively, the "Pledgors"),
and a pledge of the shares of the Borrowers and the Pledgors. The indebtedness
has been guaranteed by the Company, the Pledgors, and certain other subsidiaries
of the Company. Interest is at a variable rate based on Euro LIBOR. At June 30,
1999, the interest rate on this credit facility was 6.02%. The agreement, among
other things, limits the ability of the Borrowers to incur additional
indebtedness. At June 30, 1999 the Company was in violation of a certain
covenant pertaining to the above agreement. The Company is negotiating terms of
a waiver with such lender but can give no assurance of the successful completion
of such negotiations. If negotiations are unsuccessful, the amount may
ultimately have to be classified as a current liability. At June 30, 1999, the
total amount outstanding under this credit facility was $139.7 million.
A Swiss subsidiary of the Company has a long term credit facility due November
2000 which provides for advances for working capital needs based upon eligible
inventory. This debt is secured by a lien on inventory and contains covenants
requiring certain levels of net worth and profitability. At June 30, 1999 the
amount outstanding under the facility was $27 million.
The Company issued the Notes on April 10, 1998. The Notes bear interest at
9.875% per annum and interest is payable semi-annually on April 15 and October
15. The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after April 15, 2002, initially at 104.938% of their principal
amount, plus accrued and unpaid interest, declining to 100% of their principal
amount, plus accrued and unpaid interest, on or after April 15, 2004.
Certain of the Company's direct and indirect subsidiaries fully and
unconditionally jointly and severally guarantee the Notes on an unsecured basis.
The guarantor subsidiaries are principally non-operating holding companies. The
Notes are effectively subordinated to all existing and future liabilities of the
Company's subsidiaries that are not guarantors. The Notes contain certain
covenants which, among other things, restrict the ability of the Company and
certain of its subsidiaries to incur additional indebtedness; pay dividends or
make other distributions in respect to their capital stock; enter into certain
transactions with shareholders and affiliates; make certain 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.
10
<PAGE>
The following condensed financial information presents the results of
operations, financial position and cash flows of the Company (on a stand alone
basis), the guarantor subsidiaries (on a combined basis), the non-guarantor
subsidiaries (on a combined basis) and the eliminations necessary to arrive at
the consolidated results for the Company. The results of operations and cash
flow presented below assume that the guarantor subsidiaries were in place for
all periods presented. The Company and guarantor subsidiaries have accounted for
investments in their respective subsidiaries on an unconsolidated basis using
the equity method of accounting. The Company has not presented separate
financial statements and other disclosures concerning the guarantors and
non-guarantor subsidiaries because it has determined they would not be material
to investors (amounts in thousands).
11
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 79 $ (6,036) $ 139,204 $ -- $ 133,247
Accounts receivable 19 29,011 1,095,107 -- 1,124,137
Intercompany receivables 528,288 16,284 -- (544,572) --
Iventories -- 11,350 650,539 -- 661,889
Other current assets 2,893 1,690 86,048 -- 90,631
----------- ----------- ----------- ----------- -----------
Total current assets 531,279 52,299 1,970,898 (544,572) 2,009,904
Property and equipment, net 1,591 8,537 109,979 -- 120,107
Cost in excess of assets acquired, net -- -- 844,545 -- 844,545
Investments in affliliated companies 722,427 1,498,518 -- (2,220,945) --
Other assets 18,620 12,341 32,404 -- 63,365
----------- ----------- ----------- ----------- -----------
Total assets $ 1,273,917 $ 1,571,695 $ 2,957,826 $(2,765,517) $ 3,037,921
=========== =========== =========== =========== ===========
Notes payable $ -- $ 9,532 $ 508,047 $ -- $ 517,579
Intercompany payables 3,976 330,143 210,453 (544,572) --
Accounts payable 7,467 22,878 888,694 -- 919,039
Accrued expenses 5,003 5,428 95,972 -- 106,403
Amount due to sellers 299,003 -- -- -- 299,003
Income taxes payable (10,129) 494 13,615 -- 3,980
----------- ----------- ----------- ----------- -----------
Total current liabilities 305,320 368,475 1,716,781 (544,572) 1,846,004
Long term debt 247,063 4,465 208,248 -- 459,776
Minority interests -- -- -- 10,607 10,607
Shareholders' equity 721,534 1,198,755 1,032,797 (2,231,552) 721,534
----------- ----------- ----------- ----------- -----------
$ 1,273,917 $ 1,571,695 $ 2,957,826 $(2,765,517) $ 3,037,921
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 16,667 $ 166 $ 156,725 $ -- $ 173,558
Accounts receivable 25,125 1,317 709,021 -- 735,463
Intercompany receivables 279,717 1,394 -- (281,111) --
Iventories -- -- 633,254 -- 633,254
Other current assets 1,735 664 79,742 -- 82,141
----------- ----------- ----------- ----------- -----------
Total current assets 323,244 3,541 1,578,742 (281,111) 1,624,416
Property and equipment, net 2,785 68 80,025 -- 82,878
Cost in excess of assets acquired, net -- -- 507,472 -- 507,472
Investments in affliliated companies 749,226 1,379,869 -- (2,129,095) --
Other assets 15,041 -- 23,252 -- 38,293
----------- ----------- ----------- ----------- -----------
Total assets $ 1,090,296 $ 1,383,478 $ 2,189,491 $(2,410,206) $ 2,253,059
=========== =========== =========== =========== ===========
Notes payable $ -- $ 700 $ 421,711 $ -- $ 422,411
Intercompany payables -- 148,958 132,153 (281,111) --
Accounts payable (318) 98 603,032 -- 602,812
Accrued expenses 9,492 284 80,182 -- 89,958
Amount due to sellers 138,986 -- -- -- 138,986
Income taxes payable and other 854 (1,427) 25,715 -- 25,142
----------- ----------- ----------- ----------- -----------
Total current liabilities 149,014 148,613 1,262,793 (281,111) 1,279,309
Long term debt 200,000 -- 32,154 -- 232,154
Minority interests -- -- -- 6,922 6,922
Shareholders' equity 741,282 1,234,865 894,544 (2,136,017) 734,674
----------- ----------- ----------- ----------- -----------
$ 1,090,296 $ 1,383,478 $ 2,189,491 $(2,410,206) $ 2,253,059
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 116,507 $ 4,696,839 $ -- $ 4,813,346
Cost of goods sold -- 106,880 4,436,056 -- 4,542,936
----------- ----------- ----------- ----------- -----------
Gross profit -- 9,627 260,783 -- 270,410
Operating expenses 21,330 8,297 292,451 -- 322,078
----------- ----------- ----------- ----------- -----------
Operating income (loss) (21,330) 1,330 (31,668) -- (51,668)
Other (income) expense, net 11,360 500 31,247 -- 43,107
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (32,690) 830 (62,915) -- (94,775)
Income taxes (benefit) (4,403) 1,189 (2,781) -- (5,995)
Equity in (earnings) losses of affiliated
companies, net of tax 60,634 46,608 -- (107,242) --
Minority interest -- -- -- 141 141
----------- ----------- ----------- ----------- -----------
Net earnings $ (88,921) $ (46,967) $ (60,134) $ 107,101 $ (88,921)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 31 $ 3,520,801 $ -- $ 3,520,832
Cost of goods sold -- (352) 3,284,666 -- 3,284,314
----------- ----------- ----------- ----------- -----------
Gross profit -- 383 236,135 -- 236,518
Operating expenses 331 373 174,842 -- 175,546
----------- ----------- ----------- ----------- -----------
Operating income (loss) (331) 10 61,293 -- 60,972
Other (income) expense, net 1,850 200 18,418 -- 20,468
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (2,181) (190) 42,875 -- 40,504
Provision for income taxes 381 (73) 12,305 -- 12,613
Equity in (earnings) of affiliated
companies, net of tax (43,427) (45,275) -- 88,702 --
Minority interest -- -- -- 1,816 1,816
----------- ----------- ----------- ----------- -----------
Net earnings $ 40,865 $ 45,158 $ 30,570 $ (90,518) $ 26,075
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 43,406 $ 2,299,847 $ -- $ 2,343,253
Cost of goods sold -- 38,412 2,190,277 -- 2,228,689
----------- ----------- ----------- ----------- -----------
Gross profit -- 4,994 109,570 -- 114,564
Operating expenses 22,328 3,845 161,626 -- 187,799
----------- ----------- ----------- ----------- -----------
Operating income (loss) (22,328) 1,149 (52,056) -- (73,235)
Other (income) expense, net 6,247 113 17,280 -- 23,640
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (28,575) 1,036 (69,336) -- (96,875)
Income taxes (benefit) (1,727) (942) (5,118) -- (7,787)
Equity in (earnings) losses of affiliated
companies, net of tax 62,307 47,769 -- (110,076) --
Minority interest -- -- -- 67 67
----------- ----------- ----------- ----------- -----------
Net earnings $ (89,155) $ (45,791) $ (64,218) $ 110,009 $ (89,155)
=========== =========== =========== =========== ===========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $1,769,494 $ -- $1,769,494
Cost of goods sold -- (62) 1,655,632 -- 1,655,570
---------- ---------- ---------- ---------- ----------
Gross profit -- 62 113,862 -- 113,924
Operating expenses (2,137) 360 91,609 -- 89,832
---------- ---------- ---------- ---------- ----------
Operating income (loss) 2,137 (298) 22,253 -- 24,092
Other (income) expense, net 2,419 54 10,071 -- 12,544
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (282) (352) 12,182 -- 11,548
Income taxes (benefit) 71 (135) 4,897 -- 4,833
Equity in (earnings) losses of affiliated
companies, net of tax (20,651) (22,694) -- 43,345 --
Minority interest -- -- -- 1,207 1,207
---------- ---------- ---------- ---------- ----------
Net earnings $ 20,298 $ 22,477 $ 7,285 $ (44,552) $ 5,508
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ 68,491 $ -- $ 68,491
Net cash provided (used) in investing activities (51,984) (4,791) 30,855 -- (25,920)
Net cash provided (used) in financing activities 50,000 -- (123,035) -- (73,035)
Effect of exchange rate -- -- (13,280) -- (13,280)
Cash at beginning 2,063 (1,245) 176,173 -- 176,991
Cash at end $ 79 $ (6,036) $ 139,204 $ -- $ 133,247
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ (65,758) $ -- $ (65,758)
Net cash provided (used) in investing activities (34,559) -- (13,053) -- (47,612)
Net cash provided (used) in financing activities 48,859 166 169,360 -- 218,385
Effect of exchange rate -- -- (263) -- (263)
Cash at beginning 2,367 -- 66,439 -- 68,806
Cash at end $ 16,667 $ 166 $ 156,725 $ -- $ 173,558
</TABLE>
The Company is in violation of various requirements contained in two different
short-term credit facilities at June 30, 1999. Total amount outstanding at June
30, 1999 under such facilities was $67.4 million. The Company is negotiating
terms of a waiver with such lenders but can give no assurance of the successful
completion of such negotiations.
14
<PAGE>
6. COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME, ("SFAS 130"). SFAS 130 establishes
standards for reporting and displaying of comprehensive income (loss) and its
components in the Company's consolidated financial statements. Comprehensive
income (loss) is defined in SFAS 130 as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Total comprehensive (loss) income was
$(132.4) million and $19.3 million for the six months ended June 30, 1999 and
1998, respectively, and $(104.8) million and $2.8 million for the three months
ended June 30, 1999 and 1998, respectively. The primary difference from net
income as reported is the change in cumulative foreign currency translation
adjustment.
7. CONTINGENCIES
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of
Florida. This complaint and others were purportedly filed on behalf of those
security holders of the Company who purchased such securities during specified
time frames. The complaints, which purport to be class action complaints,
generally allege that the Company and certain of its officers violated federal
securities laws (including Rule 10b-5 promulgated pursuant to the Securities
Exchange Act of 1934) in connection with financial reporting and disclosure.
Among other things, the plaintiffs allege that the Company and certain of its
officers and directors materially overstated financial disclosures. The
plaintiffs seek, among other relief, to be declared a class and to be awarded
compensatory damages and attorney's fees and costs. By order dated June 23,
1999, the Court consolidated the above-referenced cases and appointed lead
plaintiffs and approved the selection of lead counsel for the lead plaintiffs.
Pursuant to the direction of the Court, the parties have submitted a proposed
pre-trial schedule which is pending consideration with the Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed. The Vobis Group purchase agreement called for disputes to be settled
by arbitration in Germany and an arbitration proceeding has been initiated by
Metro. The arbitration proceeding is in an early stage and no prediction can be
made as to its outcome. The purchase agreement did not provide for a break-up
fee.
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
8. RELATED PARTY TRANSACTIONS
A member of the Board of Directors, who is a more than 5% shareholder and
officer of the Company had ownership interests and control over other companies
that did business with the Company. The accompanying financial statements
include the following transactions and balances which relate to this individual
or his related entities during the six months ended June 30, 1999 and 1998
(amounts in thousands):
1999 1998
---- ----
Sales to such related parties $ 56 $27,900
Purchases from such related parties 163 3,200
Net amount due the Company 1,768 15,200
15
<PAGE>
In an agreement in December 1998 and subsequently amended in March 1999, CHS
acquired certain of these companies for a net amount of 1.7 million shares of
common stock and $4.0 million in cash. In January 1999, the Company acquired for
$5.4 million in cash the remaining entity which had transactions with the
Company. In connection with the acquisitions, the Company recorded goodwill of
$38.5 million. As a result of these acquisitions, the Company expects no
significant transactions in the future.
During 1998, the Company sold two companies and rights to entities in which the
above individual has a minority ownership interest. The companies and rights
sold were ancillary operations acquired as part of the acquisition of Frank &
Walter in January 1997. The companies were sold for cash of $6.7 million, all of
which was collected during 1999.
The Company has a receivable from Comtrad Holdings, Inc. ("CHI") and its wholly
owned subsidiary, Comtrad, Inc. ("Comtrad"), of $20.7 million at June 30, 1999
and $18.9 million at June 30, 1998. CHI is controlled by the Chief Executive
Officer of the Company and a member of the Board of Directors has a minority
interest. This receivable is in the form of a promissory note which Comtrad and
CHI have collateralized with all of their net assets. The principal asset of CHI
and Comtrad is shares of the Company's common stock. The principal liabilities
of these companies is an amount due of approximately $10 million to a financial
institution and the amount due to the Company. Interest accrues on the
promissory note at prime rate and is due together with the principal amount
outstanding 180 days after demand. Interest charged to Comtrad and CHI during
the six months ended June 30, 1999 and 1998 was $0.7 million for each period,
respectively. The market value of the Company's shares at June 30, 1999 would
have been insufficient to liquidate the indebtedness. Management, after
considering all relevant factors and the fact that there has been no increase in
market prices subsequent to June, has established a valuation reserve of $20.7
million as of June 30, 1999 by a charge to operating expenses.
9. 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.
The Company's business activities involve the operating segments of distribution
of microcomputer equipment and software products. The operating segments are the
distribution to resellers and the distribution to assemblers. The former
involves both universal products (products that represent the basic components
of a personal computer without regard to the specific local language, regulatory
and technical factors of individual markets) and localized products while the
latter is principally universal products. In addition, another operating segment
is the Company's central treasury function. The accounting policies of the
segments are the same as those described in the Summary of Accounting Policies
to the Company's audited consolidated financial statements for the year ended
December 31, 1998 (Note A). The segments are managed separately since each
requires different business and marketing strategies. The geographic areas in
which the distribution to resellers segment operates are Western Europe,
Eastern Europe, Latin America and Asia/Middle East. Net sales, gross profit,
operating income (before interest and income taxes) and total assets by segment
were as follows (in thousands):
16
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION TO RESELLERS
-----------------------------------------------
ASIA/ DISTRIBUTION
Six Months Ended WESTERN EASTERN LATIN MIDDLE TO TOTAL
June 30 EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY SEGMENTS
------ ------ ------- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Net sales $ 2,835,378 $ 397,179 $ 743,194 $ 272,752 $ 564,843 $ - $ 4,813,346
Gross profit 146,581 28,671 53,316 15,307 26,535 - $ 270,410
Operating income
(loss) 109 4,380 (14,930) 3,496 (4,140) (3,026) $ (14,111)
Total assets 1,533,304 163,903 473,712 133,866 339,797 198,837 $ 2,843,419
1998
Net sales $ 1,838,051 $ 269,892 $ 680,304 $ 129,859 $ 602,726 $ - $ 3,520,832
Gross profit 127,893 21,696 42,274 9,048 35,607 - $ 236,518
Operating income
(loss) 44,593 9,241 11,439 3,959 9,032 (1,563) $ 76,701
Total assets 772,054 139,210 397,473 94,269 314,390 195,195 $ 1,912,591
</TABLE>
Reconciliation of total segments to consolidated total:
SIX MONTHS ENDED
JUNE 30,
------------------------------
ASSETS: 1999 1998
---- ----
OPERATING INCOME:
Total operating income for reportable segments $ (14,111) $ 76,701
Corporate (expenses) income (21,390) (10,359)
Goodwill amortization not allocated (16,167) (10,467)
----------- -----------
Total operating income $ (51,668) $ 55,875
=========== ===========
AS OF JUNE 30,
------------------------------
ASSETS: 1999 1998
---- ----
Total segments $ 2,843,419 $ 1,912,591
Elimination of intercompany receivables (627,458) (530,993)
Goodwill not allocated 844,545 507,472
Other assets, including reclassifications (22,585) 363,989
----------- -----------
Total consolidated assets $ 3,037,921 $ 2,253,059
=========== ===========
SIX MONTHS ENDED
JUNE 30,
------------------------------
GEOGRAPHIC INFORMATION: 1999 1998
---- ----
Net sales:
Western Europe $ 3,233,201 $ 2,262,092
Eastern Europe 487,629 387,635
Latin America 743,194 670,788
Asia, Africa and Middle East 349,322 200,317
----------- -----------
Consolidated Total $ 4,813,346 $ 3,520,832
=========== ===========
17
<PAGE>
The Company's product mix by category was:
SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
---- ----
Personal computers 23% 16%
Mass storage 21% 28%
Printers 11% 12%
Software 10% 10%
Components 7% 9%
Networking and multimedia 9% 9%
Peripherals 7% 8%
Other 12% 8%
---- ----
Total 100% 100%
==== ====
The Company's customers typically rely on distributors as their principal source
of microcomputer products and financing. The Company's backlog of orders is not
considered material to an understanding of its business. No single customer
accounted for more than one percent of the Company's net sales in the six months
ended June 30, 1999 and 1998.
18
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
In the second quarter of 1999 several of the Company's major suppliers and
lenders changed the terms of their credit arrangements with the Company. These
changes included a decrease in the number of days the Company had to pay for
product purchases, a stricter adherence to payment terms and higher interest
rates. These changes have increased the Company's working capital requirements
and financing costs and reduced the Company's ability to take advantage of early
payment discounts as compared to previous periods. Additionally, in the quarter
the Company experienced a reduction in the number and types of incentives
offered by certain vendors.
The Company's response to these actions was to reduce inventory levels, which
increased turns and reduced working capital requirements. During the quarter
the Company had net cash from operating activities of $107.9 million, which it
used to repay bank loans and fund operations.
The Company announced in the second quarter of 1999, that in response to lower,
restated earnings in 1998 and disappointing results in Q1 1999, that it would
begin in May a restructuring program to reduce operating cost by $30 million in
1998 and $40 million on an annual basis. Through June 30, 1999, 50% of the
planned headcount reduction and 25% of the planned warehouse reduction were
completed. Another 35% of the headcount reduction and 25% of the warehouse
reduction is anticipated to be completed in Q3 1999.
The Company recently announced it intends to immediately hire an investment
banker to evaluate strategic alternatives that would enhance shareholder value.
There can be no assurance that this will result in any action being taken by the
Company.
OVERVIEW
The Company's net sales and net earnings have grown substantially during the
past several years, in large part due to acquisitions. The acquisitions from
January 1, 1998 to June 30, 1999 are shown below:
<TABLE>
<CAPTION>
OPERATING SUBSIDIARY CHS ACQUISITION SERVICE AREA DATE
- -------------------- ---------------------------- ----
<S> <C> <C>
BGS Slovakia Slovakia May 1999
M&V Technologies Thailand April 1999
Yakumo Germany, Hong Kong January 1999
MC DOS(1)(2) Germany, Netherlands December 1998
Lung(2) Hong Kong December 1998
Brightstar Latin America November 1998
CHS Argentina(3) 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
Verisell Russia(4) Russia May 1998
19
<PAGE>
Raphael Informatika Italy May 1998
Aptec Middle East May 1998
SiS Distribution(5) China, Malaysia, Singapore and Vietnam March 1998
TH' Systems Czech Republic, Poland, Hungary and
Slovakia February 1998
ARC Spain Spain January 1998
MicroInformatica Latin America January 1998
<FN>
- ----------------------
(1) The Company owns 60% of MC DOS Netherlands.
(2) Deemed by the Company to be part of a single acquisition.
(3) Formerly known as Acron.
(4) Formerly known as Merisel Russia.
(5) The Company owns 80% of this company.
</FN>
</TABLE>
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
NET SALES. Net sales increased $573.8 million, or 32.4%, from $1.77 billion in
second quarter 1998 to $2.34 billion in second quarter 1999 due principally to
acquisitions. Of the increase in net sales, newly acquired subsidiaries
contributed $629.8 million. Net sales of subsidiaries consolidated for both 1999
and 1998 second quarters decreased $56 million, or 3.2%. This change is
attributed to increased consumer demand for microcomputer products offered by
the Company, principally in Western Europe, more than offset by economic
difficulties in Latin America where management has made a decision to reduce
credit sales.
GROSS PROFIT. Gross profit increased $.6 million, or .6%, from $113.9 million in
second quarter 1998 to $114.6 million in second quarter 1999. Newly acquired
companies contributed $38.2 million of gross profit. Gross profit of
subsidiaries consolidated for both 1999 and 1998 second quarters, decreased
$37.6 million, or 33%.
Gross profit was 4.9% for the quarter ended June 30, 1999 and 6.4% for the
quarter ended June 30, 1998. The decrease was due principally to lower gross
margins from subsidiaries located in Western Europe. The decrease is
attributable to a severe drop in gross margins on mass storage products in the
second quarter, increased competition, cash flow pressures that resulted in
significant missed early payment discounts and reduced incentives offered by
certain vendors. The Company expects that overall gross margins may continue to
be lower during the remainder of 1999 compared to 1998 due to competitive
pricing pressures across all regions. However, the Company will attempt to
offset this decline through expansion of enterprise system distribution
operations, computer assembly and distribution of private label products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales was 8.0% in
the second quarter of 1999 and 5.1% in the second quarter of 1998. The increase
in operating expense was due to growth from acquisitions, internal growth and
specific charges recorded in the second quarter. The most significant items were
a charge for restructuring costs of $14.0 million, a $20.7 million charge to
reserve a note from an affiliate and a charge for additional bad debt reserves,
principally in the Latin American region of $24.0 million. Excluding these
charges, operating expenses as a percent of sales was 5.5%. Operating expenses
as a percentage of sales also increased due to an increase in goodwill
amortization and general cost increases. In May 1999, the Company began
implementing a cost reduction and restructuring program intended to reduce
operating expenses. Approximately 50% of the personnel reduction and 33% of the
warehouse closing were accomplished late in the quarter and it is expected that
the benefits of these actions will be fully realized in the third quarter. The
Company expects to be approximately 70% complete with the program by the end of
the third quarter.
20
<PAGE>
NET INTEREST EXPENSE. Net interest expense increased $9.5 million from $12.5
million in second quarter 1998 to $22.0 million in second quarter 1999 due to
interest on the Notes, the Debentures and increased borrowings of the Company to
support increased sales.
INCOME TAXES (BENEFIT). Income taxes (benefit) as a percentage of earnings
(loss) before income taxes and minority interest was 8% in second quarter 1999
and 42% in second quarter 1998. The change is due to losses in subsidiaries for
which no tax benefit can be provided and increased non-deductible goodwill
amortization.
SIX MONTHS 1999 COMPARED TO SIX MONTHS 1998
NET SALES. Net sales increased $1.29 billion, or 36.7%, from $3.52 billion in
the six months ended June 30, 1998 to $4.81 billion in the six months ended June
30, 1999 due to acquisitions. The newly acquired subsidiaries contributed all of
the increase in net sales. Net sales of subsidiaries consolidated for both six
month periods ended June 30, 1999 and 1998 did not grow. This result is
attributed to increased consumer demand for microcomputer products offered by
the Company, principally in Western Europe and Asia, offset by economic
difficulties in Latin America where management has made a decision to reduce
credit sales.
GROSS PROFIT. Gross profit increased $33.9 million, or 14.3%, from $236.5
million in the six months ended June 30, 1998 to $270.4 million in the six
months ended June 30, 1999 due principally to acquisitions. Newly acquired
companies contributed $88.8 million of gross profit. Gross profit of
subsidiaries consolidated for both six month periods ended June 30, 1999 and
1998, decreased $54.9 million, or 23.2%.
Gross profit was 5.6% for the six months ended June 30, 1999 and 6.7% for the
six months ended June 30, 1998. The decrease was due principally to lower gross
margins from subsidiaries located in Western Europe. The decrease is
attributable to a severe drop in gross margins on mass storage products,
increased competition, cash flow pressures that resulted in missed early
payment discounts and reduced incentives offered by certain vendors. The Company
expects that overall gross margins may continue to be lower during the remainder
of 1999 compared to 1998 due to competitive pricing pressures across all
regions. However, the Company will attempt to offset this decline through
expansion of enterprise system distribution operations, computer assembly and
distribution of private label products.
OPERATING EXPENSES. Operating expenses as a percentage of net sales were 6.7% in
the six months ended June 30, 1999 and 5.0% in the six months ended June 30,
1998. The increase in operating expense was due to growth from acquisitions,
internal growth and specific charges recorded in the second quarter of 1999. The
most significant items were a charge for restructuring costs of $14.0 million, a
$20.7 million charge to reserve a note from an affiliate and a charge for
additional bad debt reserves, principally in the Latin American region of $24.0
million. Excluding these charges, operating expenses as a percent of sales were
5.5%. Operating expenses as a percent of sales increased due to an increase in
goodwill amortization and general cost increases. In May 1999, the Company began
implementing a cost reduction and restructuring program. Approximately 50% of
the personnel reduction and 33% of the warehouse closing were accomplished late
in the quarter and it is expected that the benefits of these actions will be
fully realized in the third quarter. The Company expects to be approximately 70%
complete with the program by the end of the third quarter.
NET INTEREST EXPENSE. Net interest expense increased $20.8 million from $20.5
million in six months ended June 30, 1998 to $41.3 million in six months ended
June 30, 1999 due to interest on the Notes, the debentures and increased
borrowings of the Company to support increased sales.
INCOME TAXES (BENEFIT). Income taxes (benefit) as a percentage of earnings
before income taxes and minority interest was 6.3% in six months ended June 30,
1999 and 31% in six months ended June 30, 1998.
21
<PAGE>
The change is due to losses in subsidiaries with no tax benefit and increased
non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $68.5 million was provided by and net cash of $65.8 million was used
in operating activities in the six months ended June 30, 1999 and 1998,
respectively. In 1999, net cash was provided by decreases in trade receivables
and inventory reduced by decreases in accounts payable. In 1998, net cash was
used principally as a result of decreases in accounts payables reduced by
decreases in accounts receivables and inventories. Net cash used in investing
activities in the six month periods ended June 30, 1999 and 1998 included
approximately $23.5 million and $19.7 million, respectively, related to fixed
asset additions. In addition, $2.4 million and $27.9 million, respectively, was
used in acquisitions during the six months ended June 30, 1999 and 1998. Net
cash of $73.1 million was used in financing activities during the six months
ended June 30, 1999. The Debentures provided $50 million net cash while there
were repayments to banks of $123.7 million. Net cash of $218.4 million was
provided by financing activities in the six month period ended June 30, 1998,
due principally to borrowings of the Notes and net borrowings from banks.
In the second quarter several of the Company's major suppliers and lenders
changed the terms of their credit arrangements with the Company. These changes
included a decrease in the number of days the Company had to pay for product
purchases, a stricter adherence to payment terms and higher interest rates.
These changes have increased the Company's working capital requirement and
financing costs and reduced the Company's ability to take advantage of early
payment discounts as compared to previous periods. Additionally, in the quarter,
the Company experienced a reduction in the number and types of incentives
offered by certain vendors.
The Company's response to these actions was to reduce inventory levels which
increased turns and reduced working capital requirements. During the quarter the
Company had net cash from operating activities of $107.9 million which it used
to repay bank loans and fund operations.
The Company's principal needs 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; and (iii) to pay amounts due to sellers of
businesses. In certain earn outs where the Company has the option of settling
certain of the earn outs in cash or shares, the Company's current presumption is
it will use shares. The Company is seeking additional cash through its existing
bank credit lines and through additional credit facilities for those earn outs
that it will not be able to settle in shares, but there can be no assurance that
financing will be available on terms acceptable to the Company.
The Company has liabilities to sellers of business of $299.0 million at June 30,
1999 representing the remaining price of acquisitions for which there is a
minimum payment or where an earn out is complete. Management believes such
amounts are best financed through long term debt or equity. The Company is
negotiating with each significant seller to extend such payments until long term
financing can be completed. There are two acquisitions where the Company is in
default of the acquisition agreement and is negotiating with the sellers for
mutually agreeable payment terms. While the Company believes such negotiations
will be successful there can be no assurance of the same and it may have to use
current cash or financing facilities or issue common stock to satisfy such
liabilities within the next 12 months. If the portion of such liabilities
payable in stock were settled in stock at the market price on June 30, 1999 of
approximately $4.37, the number of shares issued would be 48.6 million, which is
in excess of the authorized but unissued number of shares available for
issuance.
22
<PAGE>
On December 30, 1998, three of the Company's German subsidiaries (collectively,
the "Borrowers") entered into a three year DM 325 million (approximately $180
million) Facility Agreement with a bank. Advances under the agreement may be
used for working capital needs of the Borrowers and are based upon a borrowing
base equal to the aggregate of 85% of eligible accounts receivable, 50% of
eligible inventory and 100% of inventory of a specific vendor. The debt is
secured by a lien on the receivables, inventories and intangible assets of the
Borrowers and two Austrian subsidiaries of the Company, and a lien on the
receivables of a Swiss subsidiary of the Company (collectively, the "Pledgors"),
and a pledge of the shares of the Borrowers and the Pledgors. The indebtedness
has been guaranteed by the Company, the Pledgors, and certain other subsidiaries
of the Company. Interest is at a variable rate based on Euro LIBOR. At June 30,
1999, the interest rate on this credit facility was 6.02%. The agreement, among
other things, limits the ability of the Borrowers to incur additional
indebtedness. At June 30, 1999 the Company was in violation of a certain
covenant pertaining to the above agreement. The Company is negotiating terms of
a waiver with such lender but can give no assurance of the successful completion
of such negotiation. If the negotiations are unsuccessful the amount may
ultimately have to be reclassified as a current liability. At June 30, 1999, the
total amount outstanding under this credit facility was $139.7 million.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At June 30, 1999,
of the $655.0 million aggregate amount available under these agreements, $512.0
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. Additionally, cash of $32.8 million is held by
certain banks as additional collateral. The weighted average interest rate at
June 30, 1999 was 6.3%. Certain of these agreements contain financial covenants
requiring, among other things, the maintenance of certain net worth and
loan-to-collateral value terms. The Company typically guarantees these loans.
The Company has also guaranteed the obligations of certain of its subsidiaries
to certain vendors.
The Company is in violation of various requirements contained in two different
short-term credit facilities at June 30, 1999. Total amount outstanding at June
30, 1999 under such facilities was $67.4 million. The Company is negotiating
terms of a waiver with such lenders but can give no assurance of the successful
completion of such negotiations.
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In certain
countries, exchange controls may limit the ability of the Company's subsidiaries
to make payments to the Company. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets and cash flow of such
subsidiaries over the claims of the Company or its shareholders. Restrictions in
financing or credit arrangements may also limit access to such earnings. Certain
of these revolving credit agreements limit the ability of the respective
subsidiaries to pay dividends, make loans or provide other distributions to the
Company. Currently, the subsidiaries with such agreements are CHS U.K., Santech
Norway, CHS Latin America and CHS Promark. Such credit agreements have maximum
available amounts of $152.5 million in total.
In June, 1999, the Company entered into an expanded strategic alliance with CA.
Under terms of the agreement, the Company supplied CA with marketing,
distribution and reseller rights with respect to its product offering. CA loaned
$50 million to the Company in the form of the Debentures. The interest rate on
the Debentures is the six month LIBOR rate plus 2% (7.17% for the initial
interest period), and adjusts semi-annually.
The Debentures are convertible into the Company's common stock at any time at a
conversion price of $5.50 per share. The conversion price is subject to
adjustment under certain conditions, including upon the average closing price of
the Company's common stock falling below $5.50 during the twenty days preceding
any conversion date or upon new issuance of shares at a price lower than $5.50.
In connection with the financing, the Company issued to CA a warrant expiring
May 31, 2004 for two million shares of common stock at an exercise price of
$5.50 per share. The exercise price of the
23
<PAGE>
warrant is reduced if new shares are issued at a lower price. The warrant has
been recorded at a fair value of $3 million as a discount to the Debentures and
this amount is being amortized over the life of the Debentures.
In April 1998, the Company issued $200 million of Notes due 2005. The Notes bear
interest of 9.875% per annum and interest is payable semi-annually on April 15
and October 15 beginning October 15, 1998. The Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after April 15,
2002, initially at 104.938% of their principal amount, plus accrued and unpaid
interest, declining to 100% of their principal amount, plus accrued and unpaid
interest, on or after April 15, 2004. Certain of the Company's direct and
indirect subsidiaries fully and unconditionally jointly and severely guaranteed
the Notes on an unsecured basis. The guarantor subsidiaries are principally
non-operating holding companies. The Notes are effectively subordinated to all
existing and future liabilities of the Company's subsidiaries that are not
guarantors. The Notes contain certain covenants which, among other things,
restricts 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 is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of Florida
This complaint and others were purportedly filed on behalf of those security
holders of the Company who purchased such securities during specified time
frames. The complaints, which purport to be class action complaints, generally
allege that the Company and certain of its officers violated federal securities
laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act
of 1934) in connection with financial reporting and disclosure. Among other
things, the plaintiffs allege that the Company and certain of its officers and
directors materially overstated financial disclosures. The plaintiffs seek,
among other relief, to be declared a class and to be awarded compensatory
damages and attorney's fees and costs. By order dated June 23, 1999, the Court
consolidated the above-referenced cases and appointed lead plaintiffs and
approved the selection of lead counsel for the lead plaintiffs. Pursuant to the
direction of the Court, the parties have submitted a proposed pre-trial schedule
which is pending consideration with the Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed. The Vobis Group purchase agreement called for disputes to be settled
by arbitration in Germany and an arbitration proceeding has been initiated by
Metro. The arbitration proceeding is in an early stage and no prediction can be
made as to its outcome. The purchase agreement did not provide for a break-up
fee.
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
YEAR 2000
The Company has completed the risk assessment phase of its Year 2000 compliance
efforts ("Year 2000 Project"). Based on the assessment, the Company has
developed an action plan and identified corporate, regional and subsidiary level
Year 2000 Project team members, charged with ensuring that the Company will be
compliant. The plan principally consists of replacing or repairing non-compliant
systems including both information ("IT") systems and non-IT systems. The
initial focus of
24
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the plan is on high risk/high impact areas. The six areas covered initially are
shown below, in descending order of potential high risk/impact.
o Transaction Processing Systems (includes all internal and external
interfaces)
o Telephony
o Network (Local Area Networks)
o Desktop Computing
o Third Parties (suppliers, customers, financial institutions, utilities)
o Other non-IT equipment
The Company's current IT systems infrastructure is decentralized. Independent of
the Year 2000 issue, the Company has been standardizing its transaction
processing platforms and ultimately reducing the number of separate systems. The
Company has selected a core of standard platforms: JBA System 21, Oracle
Financials, and Scala. Various tasks in the platform standardization project
have been accelerated in order to resolve Year 2000 issues.
STATE OF READINESS. The tables below set forth the Company's state of readiness.
Compliance schedule for Transaction Processing Systems:
--------------------------------------- ----------------------------
TRANSACTION PROCESSING SYSTEM TO BE % OF 1999 GROSS SALES
COMPLIANT BUDGET
--------------------------------------- ----------------------------
Already compliant 81%
--------------------------------------- ----------------------------
Third Quarter 1999 10%
--------------------------------------- ----------------------------
Fourth Quarter 1999 9%
--------------------------------------- ----------------------------
100%
--------------------------------------- ----------------------------
Other critical areas:
------------------------------- ---------------------------------------------
AREA TO BE COMPLIANT
------------------------------- ---------------------------------------------
Telephony October 1999
------------------------------- ---------------------------------------------
Network October 1999
------------------------------- ---------------------------------------------
Desktop Computing October 1999
------------------------------- ---------------------------------------------
Third Parties Third Quarter 1999
------------------------------- ---------------------------------------------
Other non-IT equipment Third Quarter 1999
------------------------------- ---------------------------------------------
COSTS. The Company estimates its total Year 2000 costs to be $24 million. This
is primarily the cost of replacing transaction processing systems, but also
includes consulting fees and repair/replacement of other software and IT/non-IT
equipment. Approximately $20 million has been spent to date. This estimate is
based on current knowledge and assumes that the Company will not incur
additional costs due to the actions or state of readiness of third parties.
RISKS. Due to its decentralized IT structure, the Company believes there is no
single point of failure. At this point in time, the Company believes the most
likely potential risks are:
o The inability of some customers of the Company's smaller subsidiaries
to pay on time.
o The temporary inability of a few of the Company's smaller subsidiaries,
to take orders.
Although every effort will be made to ensure third party issues are resolved,
the Company has no direct means to influence such parties. It is therefore not
possible to ensure all such issues are resolved or to estimate the potential
impact on the Company. In the case of the Company's major suppliers, the Company
currently believes the risk is low.
CONTINGENCY PLANS. Contingency plans are expected to be complete and tested by
the end of the third quarter 1999. The plans will potentially include
remediation of systems scheduled to be
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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
established 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 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 six months periods
ended June 30, 1999 and 1998 and the Company does not expect that it will have a
material impact during the remainder of 1999.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and maintain a
low number of SKUs and thereby reduce the Company's working capital requirements
and improve return on equity. The Company's strategy to achieve this goal is to
both effectively manage its inventory and achieve high order fill rates.
To reduce the risk of loss to the Company due to vendor price reductions and
slow moving or obsolete inventory, the Company's contracts with its vendors
generally provide price protection and stock rotation privileges, subject to
certain limitations. Price protection allows the Company to offset the accounts
payable owed to a particular vendor if such vendor reduces the price of products
the Company has purchased within a specified period of time and which remain in
inventory. Stock rotation permits the Company to return to the vendor for full
credit, with an offsetting purchase order for new products, predetermined
amounts of inventory purchased within a specified period of time. Such credit is
typically used to offset existing invoices due without incurring re-stocking
fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to balance the
needs of its customers to purchase on credit with its desire to minimize its
credit losses. Bad debt expense as a percentage of the Company's net sales for
each of the six months periods ended June 30, 1999 and 1998 was 1.1% and 0.2%,
respectively. The percentage for 1999 was affected by a charge of $24 million to
increase its reserve for bad debts, principally in Latin America. The Company
presently intends to reduce credit sales in Latin America. The Company
attempts to minimize credit losses by an extensive credit approval process and
the use of credit insurance and factoring by its Western European subsidiaries
and credit issuance by certain Latin American 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.
26
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company principally enters into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates. Occasionally, the Company may enter into derivatives or
other financial instruments for speculative purposes. The counter parties are
major financial institutions and therefore credit risk associated with these
contracts is considered immaterial.
INTEREST RATE RISK. At June 30, 1999, the fair value of notes payable
approximated, their carrying value due to their short-term maturities. The fair
value of long-term fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt will increase as
interest rates fall and decrease as interest rates rise. Changes in interest
rates will affect the market value but do not impact earnings or cash flows.
Conversely for floating rate debt, interest rate changes generally do not affect
the fair market value but do impact future earnings and cash flows assuming
other factors are held constant. The estimated fair value of the Company's total
long-term debt at June 30, 1999 was $254.1 million. A 1% increase in prevailing
interest rates at June 30, 1999 would result in a decrease in fair value of
total long-term debt by approximately $5.0 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 No. 52, is the United States dollar. Most of
the Company's subsidiaries use the local currencies as their functional currency
and translate assets and liabilities using the exchange rates in effect at the
balance sheet date and results of operations using the average exchange rates
prevailing during the year. Translation effects are reflected in the cumulative
foreign currency translation adjustment in equity. The Company's exposure under
these translation rules, which is unhedged, may affect the carrying value of its
foreign net assets and therefore its equity and net tangible book value, but not
its net income or cash flow. Exchange differences arising from transactions and
balances in currencies other than the functional currency are recorded as
expense or income in the subsidiaries and the Company and affect the Statements
of Earnings.
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 six month period ended June
30, 1999, a significant amount of the purchases of products by the Company were
made in United States dollars and approximately 92% of Company sales were made
in currencies other than the United States dollar. The primary currencies in
which sales were made were the German mark (17% of sales), the French franc
(13%) and the British pound (9%). At June 30, 1999, approximately $241.1 million
of accounts payable were attributable to foreign currency liabilities
denominated in currencies other than the subsidiaries' functional currencies. Of
these, $173.9 million were denominated in United States dollars, $16.1 million
were denominated in German marks and $31.5 million were denominated in Euros.
Approximately 70% of these liabilities were unhedged.
27
<PAGE>
CHS Finance, a wholly owned subsidiary of the Company, engages in central
treasury functions including hedging activities related to foreign currency for
the Company and short-term working capital loans to the Company's subsidiaries
to enable them to take advantage of early payment discounts offered by certain
vendors. These loans are denominated in the functional currency of the borrowing
subsidiary or United States dollars. Generally, CHS Finance hedges its
receivables denominated in currencies other than its functional currency, the
Swiss franc. It attempts to limit the amount of unhedged receivables. This limit
is set by the Company taking into consideration the range of unhedged foreign
denominated liabilities. As a result, CHS Finance will take positions from time
to time, principally in U.S. dollars, Euros and Swiss Francs, which may expose
the Company to foreign exchange risks. 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 Western European currencies and reduce exposure
to fluctuations in exchange rates. Additionally, in certain countries in Eastern
Europe and in Latin America where it is not practical to make forward purchases,
to minimize exposure to currency devaluations, the Company has adopted a policy
of attempting to match levels of local denominated accounts receivable with
accounts payable and to limit holdings of local currencies. In these countries,
the Company attempts to sell products at the United States dollar equivalent
rate. Factors which affect exchange rates are varied and no reliable prediction
methods are available for definitively determining future exchange rates. In
general, countries make an effort to maintain stability in rates for trade
purposes. There can be no assurance that these asset management programs will be
effective in limiting the Company's exposure to these risks.
The Company enters into foreign exchange contracts to hedge groups of foreign
currency transactions on a continuing basis for periods consistent with its
committed exposure. The foreign exchange contracts are valued at market and
generally have maturities which do not exceed three months. A portion of the
gains and losses on foreign exchange contracts are intended to offset losses and
gains on assets, liabilities and transactions being hedged. At June 30, 1999,
the face value of foreign exchange forward contracts against trade payables was
$143.9 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 June 30, 1999
would be offset by decreases in trade payables.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standard
("SFAS") 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. In June 1999, the FASB issued SFAS
No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO.133", to defer the effective
date of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, will be
effective for the Company's first quarter of fiscal year 2001.
FORWARD LOOKING INFORMATION
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which represent the Company's expectations of beliefs, including, but not
limited to, statements concerning gross margins, operating expenses to sales,
income taxes, year 2000 compliance activities, inflation expectations, the
effect of the Euro and sales of the Company's products. These statements by
their nature involve substantial risks and uncertainties, certain of which are
beyond the Company's
28
<PAGE>
control, and actual results may differ materially depending on a variety of
important factors, including 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, ability to negotiate agreements with lenders and sellers of
business, the outcome of the purported class action and other 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.
29
<PAGE>
PART II
ITEM 1.
LEGAL PROCEEDINGS
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of Florida
This complaint and others were purportedly filed on behalf of those security
holders of the Company who purchased such securities during specified time
frames. The complaints, which purport to be class action complaints, generally
allege that the Company and certain of its officers violated federal securities
laws (including Rule 10b-5 promulgated pursuant to the Securities Exchange Act
of 1934) in connection with financial reporting and disclosure. Among other
things, the plaintiffs allege that the Company and certain of its officers and
directors materially overstated financial disclosures. The plaintiffs seek,
among other relief, to be declared a class and to be awarded compensatory
damages and attorney's fees and costs. By order dated June 23, 1999, the Court
consolidated the above-referenced cases and appointed lead plaintiffs and
approved the selection of lead counsel for the lead plaintiffs. Pursuant to the
direction of the Court, the parties have submitted a proposed pre-trial schedule
which is pending consideration with the Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed. The Vobis Group purchase agreement called for disputes to be settled
by arbitration in Germany and an arbitration proceeding has been initiated by
Metro. The arbitration proceeding is in an early stage and no prediction can be
made as to its outcome. The purchase agreement did not provide for a break-up
fee.
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
- ------------
10.1 Employment agreement dated June 1, 1999 between CHS Electronics, Inc.
and Antonio Boccalandro.
10.2 Employment agreement dated June 1, 1999 between CHS Electronics, Inc.
and Claudio Osorio.
10.3 Employment agreement dated June 1, 1999 between CHS Electronics, Inc.
and Craig Toll.
10.4 First amendment to the CHS Electronics, Inc. 1996 Chief Executive
Officer Stock Option Plan
10.5 First amendment to the CHS Electronics, Inc. 1997 Chief Executive
Officer Stock Option Plan, as amended
10.6 First amendment to the CHS Electronics, Inc. Directors and Officers
1997 Stock Option Plan, as amended
27. Financial data schedule
(b) REPORTS ON FORM 8-K
- ------------------------
On June 17, 1999, a report on Form 8-K was filed to report the issuance of $50
million of floating rate convertible debentures due May 31, 2003, and the
issuance of warrants expiring May 31, 2004 to purchase two million shares of
common stock at $5.50 per share, to Computer Associates International, Inc.
30
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHS ELECTRONICS, INC.
(Registrant)
August 16, 1999 BY /S/ ANTONIO BOCCALANDRO
------------------------
ANTONIO BOCCALANDRO
Secretary
August 16, 1999 BY /S/ CRAIG S. TOLL
------------------------
CRAIG S. TOLL
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Employment agreement dated June 1, 1999 between CHS Electronics, Inc.
and Antonio Boccalandro.
10.2 Employment agreement dated June 1, 1999 between CHS Electronics, Inc.
and Claudio Osorio.
10.3 Employment agreement dated June 1, 1999 between CHS Electronics, Inc.
and Craig Toll.
10.4 First amendment to the CHS Electronics, Inc. 1996 Chief Executive
Officer Stock Option Plan
10.5 First amendment to the CHS Electronics, Inc. 1997 Chief Executive
Officer Stock Option Plan, as amended
10.6 First amendment to the CHS Electronics, Inc. Directors and Officers
1997 Stock Option Plan, as amended
27. Financial data schedule
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1ST day of JUNE , 1999 by and between CHS ELECTRONICS, INC., a Florida
corporation (the "Company"), and ANTONIO BOCCALANDRO (the "Executive").
RECITALS
A. The Executive is currently Secretary of the Company and Chief
Officers of Mergers and Acquisitions.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors (the "Board") of the Company recognizes that
the Executive's contribution, as Secretary of the Company and Chief Officer of
Mergers and Acquisitions, to the growth and success of the Company has been
substantial and desires to assure the Company of the Executive's continued
employment in an executive capacity and to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. Employment.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ
the Executive and the Executive shall continue to serve the Company, on the
terms and conditions set forth herein, for an initial period of three years (the
"Term") commencing on the Effective Date (as defined hereafter) and shall
thereafter self-renew for additional one year periods unless terminated by
either party upon 60 days written notice prior to such annual renewal date.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the
Secretary of the Company and Chief Officer of Mergers and Acquisitions and shall
perform the duties of an executive commensurate with such position, shall
diligently perform all services as may be reasonably assigned to him by the
Board and shall exercise such Power and authority as may from time to time be
delegated to him by the Board. The Executive shall devote his full time and
<PAGE>
attention to the business and affairs of the Company, render such services to
the best of his ability, and use his best efforts to promote the interests of
the Company.
1.3 PLACE OF PERFORMANCE. In connection with his employment by
the Company, the Executive shall be based at the Company's principal executive
offices in Miami, Florida except for required travel on the Company's business
to an extent substantially consistent with his present travel obligations.
2. COMPENSATION. During the Term, the Executive shall receive a base
salary at the annual rate of $275,000 (the "Base Salary"), such Base Salary to
be payable in substantially equal installments consistent with the Company's
normal payroll schedule, subject to applicable withholding and other taxes. At
the discretion of the Board of Directors or the Compensation Committee thereof,
such Base Salary may be, at any time, increased, but shall in no event be
decreased. Effective upon any increase, the term "Base Salary" shall be without
further action modified to mean such increased amount. Executive shall also be
entitled to such additional compensation, bonuses and benefits, if any, as shall
be determined from time to time by the Board, in its sole authority and
discretion, based upon the performance of the Company and the Executive.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon
the submission of supporting documentation by the Executive, shall reimburse the
Executive for all reasonable expenses actually paid or incurred by the Executive
in the course of, and pursuant to, the business of the Company, including
expenses for travel and entertainment.
3.2 WELFARE BENEFITS. The Company shall obtain or shall
continue in force comprehensive major medical and hospitalization insurance
coverages, including dental coverages, either group or individual, for the
Executive and his dependents, and shall obtain or shall continue in force
disability and life insurance for the Executive (collectively, the "Policies"),
which Policies the Company shall keep in affect at its sole expense for so long
as the Executive is employed hereunder. The Policies to be provided by the
Company shall be on terms as determined by the Board; provided, however, that
such Policies shall in no event provide benefits to Executive which are less
than the benefits to which be is currently entitled.
3.3 WORKING FACILITIES. The Company shall furnish the
Executive with an office, a secretary and such other facilities and services
suitable to his position and adequate for the performance of his duties
hereunder.
3.4 FRINGE BENEFITS. During the term, the Executive shall be
entitled to fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained
in this Agreement to the contrary, the Executive's employment may be terminated
by the Company for
2
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Cause. As used in this Agreement, "Cause" shall only mean (i) subject to the
following sentences, any action or omission of the Executive which constitutes a
willful and material breach of this Agreement which is not cured or as to which
diligent attempts to cure have not commenced within 30 business days after
receipt by Executive of notice of same, (ii) fraud, embezzlement or
misappropriation as against the Company or (iii) the conviction (from which no
appeal can be taken) of Executive for any criminal act which is a felony. Upon
any determination by the Company's Board of Directors that Cause exists under
clause (i) of the preceding sentence, the Company shall cause a special meeting
of the Board to be called and held at a time mutually convenient to the Board
and Executive, but in no event later than 10 business days after Executive's
receipt of the notice contemplated by clause (i). Executive shall have the right
to appear before such special meeting of the Board with legal counsel of his
choosing to refute any determination of Cause specified in such notice, and any
termination of Executive's employment by reason of such Cause determination
shall not be effective until Executive is afforded such opportunity to appear.
Any termination for Cause pursuant to clause (ii) or (iii) of the first sentence
of this Section 4.1 shall be made in writing to Executive, which notice shall
set forth in detail all acts or omissions upon which the Company is relying for
such termination. Upon any termination pursuant to this Section 4.1, the Company
shall pay to the Executive any unpaid Base Salary accrued through the effective
date of termination specified in such notice. Except as provided above, the
Company shall have no further liability hereunder (other than for reimbursement
for reasonable business expenses incurred prior to the date of termination,
subject, however to the provisions of Section 3.1).
4.2 DISABILITY. Notwithstanding anything contained in this
Agreement to the contrary, the Company, by written notice to the Executive,
shall at a times have the right to terminate this Agreement, and the Executive's
employment hereunder, if the Executive shall, as the result of mental or
physical incapacity, illness or disability, fail to perform his duties and
responsibilities provided for herein for a period of more than 180 days in any
12-month period. Upon any termination pursuant to this Section 4.2, the Company
shall pay to the Executive any unpaid Base Salary accrued through the effective
date of termination, as well as a lump sum severance payment equal to 12 months'
Base Salary at the rate prevailing at such termination. Except as provided
above, the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Section 3.1).
4.3 DEATH. In the event of the death of the Executive during
his employment hereunder, the Company shall pay to the personal representative
of the estate of the deceased Executive any unpaid Base Salary accrued through
the date of his death, as well as a lump sum payment equal to 12 months' Base
Salary at the rate prevailing on the date of the death of the Executive. Except
as provided above, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Section
3.1).
4.4 GOOD REASON. The Executive's employment may be terminated
by the Executive for "Good Reason." For purposes of this Agreement, "Good
Reason" shall mean:
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(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 1 of this Agreement, or any other
action by the Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of
the provisions of Section 2 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than that described in Section 1.3 hereof,
except for travel reasonably required in the performance of the Executive's
responsibilities;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this Agreement;
or
(v) any Change of Control (as defined hereafter) of
the Company, provided that the Executive terminates his employment within one
(1) year of the Change of Control.
4.5 CHANGE OF CONTROL. For the purpose of this Agreement, a
"Change of Control" shall mean:
(i) The acquisition (other than by or from the
Company), at any time after the date hereof, by any person, entity or "group",
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of common stock or the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the election of
directors; or
(ii) The individuals who, as of the date hereof,
constitute the Board of Directors of the Company (as of the date hereof the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board of Directors of the Company, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; or
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(iii) Approval by the shareholders of the Company of
(A) a reorganization merger or consolidation with respect to which persons who
were the shareholders of the Company immediately prior to such reorganization
merger or consolidation do not, immediately thereafter, own more than 50% of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged or consolidated company's then outstanding voting
securities, (B) a liquidation or dissolution of the Company, or (C) the sale of
all or substantially all of the assets of the Company, unless the approved
reorganization, merger, consolidation, liquidation, dissolution or sale is
subsequently abandoned.
4.6 GOOD REASON, OTHER THAN FOR CAUSE OR DISABILITY. If,
during the Term, the Company shall terminate the Executive's employment other
than for Cause, or as provided in Sections 4.2 and 4.3, or if the Executive
shall terminate his employment for Good Reason:
(i) the Company shall pay to the Executive in a lump
sum in cash within 30 days after the effective date of such termination (the
"Date of Termination") the aggregate of the following amounts:
A. to the extent not theretofore paid, the
Executive's Base Salary through the Date of Termination;
B. in the event of termination by the Company for
any reason other than Cause, death or disability, or in the event of termination
by the Executive for Good Reason other than Change of Control, the sum of (i)
two and one-half (2 1/2) multiplied times the Executive's base salary plus, (ii)
a prorated bonus for the current fiscal year based upon the Executive's bonus
paid during the last full fiscal year prior to the Date of Termination;
C. in the event of termination by the Executive
as a result of a Change of Control, the result of three (3) multiplied times the
average of the Executive's Annual Compensation (defined for the purpose of this
subpart as Base Salary plus any bonuses earned, but excluding stock options
exercised) during the three (3) calendar year periods preceding the Date of
Termination;
D. in the case of compensation previously
deferred by the Executive, all amounts previously deferred (together with any
accrued interest thereon) and not yet paid by the Company, and any accrued
vacation pay not yet paid by the Company; and
E. all other amounts accrued or earned by the
Executive through the Date of Termination and amounts otherwise owing under the
then existing plans and policies at the Company; and
(a) for the remainder of the Term, or such longer period as
any plan, program, practice or policy may provide, the Company shall continue
benefits to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 3.2 of this Agreement if the
Executive's employment had not been terminated, including health, dental,
disability insurance and life insurance, in accordance with the most favorable
plans, practices,
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programs or policies of the Company and its subsidiaries during the 180-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to other key
executives and their families and, for purposes of eligibility for retiree
benefits pursuant to such plans, practices, programs and policies, the Executive
shall be considered to have remained employed until the end of the Term and to
have retired on the last day of such period.
5. EXCISE TAX REIMBURSEMENT AND GROSS-UP. The Company shall promptly
reimburse the Executive for any federal excise tax (if any) imposed on and paid
by (and not refunded to) the Executive under Section 4999 of the Tax Code as a
direct result of the payments or benefits actually paid by the Company to the
Executive upon termination pursuant to Section 4.6 of this Agreement, together
with an amount equal to the gross-up (as may be reasonably calculated by the
Company) with respect thereto.
6. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claims right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement.
7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of two
years following the termination (other than without Cause, as defined in Section
4.1) of the Executive's employment by the Company (including upon Executive's
voluntary resignation or expiration of the Term, but not including a termination
by the Executive for Good Reason), Executive shall not, directly or indirectly
engage in or have any interest in, directly or indirectly, any sole
proprietorship, partnership, corporation, business or any other person or entity
(whether as an employee, officer, director, partner, agent, security holder,
creditor, consultant or otherwise) that, directly or indirectly, engages in
competition with the Company or any of its subsidiaries in any and all locations
in which the Company and/or any subsidiary conducts its business at the time
Executive's employment with the Company is terminated (the "Territory");
PROVIDED, HOWEVER, that Executive may continue to hold Company securities and/or
acquire, solely as an investment, shares of capital stock or other equity
securities of any company which are traded on any national securities exchange
or are regularly quoted in the over-the-counter market, so long as Executive
does not control, acquire a controlling interest in or become a member of a
group which exercises direct or indirect control of, more than five percent of
any class of capital stock of such corporation.
7.2 NONDISCLOSURE. During the Executive's employment hereunder
and following termination of the Executive's employment with the Company,
Executive shall not divulge, communicate, use to the detriment of the Company or
for the benefit of any other person or persons, or misuse in any way, any
Confidential Information (as hereinafter defined) pertaining to the business of
the Company. Any Confidential Information or data now or hereafter acquired by
the Executive with respect to the business of the Company (which shall
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include, but not be limited to, information concerning the Company's financial
condition, prospects, technology, customers, suppliers, partners, methods of
doing business and marketing and promotion of the Company's products) shall be
deemed a valuable, special and unique asset of the Company that is received by
the Executive in confidence and as a fiduciary, and Executive shall remain a
fiduciary to the Company with respect to all of such information. For purposes
of this Agreement "Confidential Information" means information disclosed to the
Executive or known by the Executive as a consequence of or through his
employment by the Company (including information conceived, originated,
discovered or developed by the Executive) prior to or after the date hereof, and
not generally known, about the Company or its business. Notwithstanding the
foregoing, nothing herein shall be deemed to restrict the Executive from
disclosing Confidential Information to the extent required by law.
7.3 NONSOLICITATION OF EMPLOYEES. During the Executive's
employment and for a period of one year following termination of the Executive's
employment with the Company, Executive shall not directly or indirectly, for
himself or for any other person, firm, corporation, partnership, association or
other entity, attempt to employ or enter into any contractual arrangement with
any employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of six
months.
7.4 BOOKS AND RECORDS. All books, records, accounts and
similar repositories of Confidential Information of the Company, whether
prepared by the Executive or otherwise coming into the Executive's possession,
shall be the exclusive property of the Company and shall be returned immediately
to the Company on termination of this Agreement or on the Board's request at any
time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Section 7 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 7 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
9. EFFECTIVE DATE. This Agreement shall become effective June 1, 1999.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
11. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered by hand or when deposited in the United States mail, by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
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If to the Company: CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
Attention: President
If to the Executive: Antonio Boccalandro
CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner.
12. BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns. Notwithstanding the foregoing, neither party may assign its rights or
benefits, or delegate any of its duties, hereunder without the prior written
consent of the other party hereto. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
13. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by duration, geographic scope or
both, the otherwise invalid provision will be considered to be reduced to a
period or area which would cure such invalidity.
14. WAIVERS. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.
15. DAMAGES. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained either or both of them as a result of its or his breach of any term or
provision of this Agreement. In the event that either party hereto brings suit
for the collection of any damages resulting from, or the injunction of any
action constituting, a breach of any of the terms or provisions of this
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Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
(other than the parties hereto and, in the case of Executive, his heirs,
personal representative(s) and/or legal representative) any rights or remedies
under or by reason of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
CHS ELECTRONICS, INC.
By:
---------------------------------------
---------------------------------------
ANTONIO BOCCALANDRO
9
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1ST day of JUNE , 1999, by and between CHS ELECTRONICS, INC., a Florida
corporation (the "Company"), and CLAUDIO OSORIO (the "Executive"). This
agreement supercedes the Employment Agreement between the parties dated March
22, 1996 and amended on July 31, 1997.
RECITALS
A. The Executive is currently Chief Executive Officer of the Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors (the "Board") of the Company recognizes that
the Executive's contribution, as Chief Executive Officer of the Company, to the
growth and success of the Company has been substantial and desires to assure the
Company of the Executive's continued employment in an executive capacity and to
compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. Employment.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ
the Executive and the Executive shall continue to serve the Company, on the
terms and conditions set forth herein, for an initial period of three years (the
"Term") commencing on the Effective Date (as defined hereafter) and shall
thereafter self-renew for additional one year periods unless terminated by
either party upon 60 days written notice prior to such annual renewal date.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the
Chief Executive Officer of the Company and shall perform the duties of an
executive commensurate with such position, shall diligently perform all services
as may be reasonably assigned to him by the
<PAGE>
Board and shall exercise such Power and authority as may from time to time be
delegated to him by the Board. The Executive shall devote substantially all of
his time to the business and affairs of the Company, render such services to the
best of his ability, and use his best efforts to promote the interests of the
Company.
2. COMPENSATION. The Executive shall receive a base salary at the
annual rate of $750,000 (the "Base Salary"), such Base Salary to be payable in
substantially equal installments consistent with the Company's normal payroll
schedule, subject to applicable withholding and other taxes. At the discretion
of the Board of Directors or the Compensation Committee thereof, such Base
Salary may be, at any time, increased, but shall in no event be decreased.
Effective upon an increase, the term "Base Salary" shall be without further
action modified to mean such increased amount. The Executive shall also be
entitled to such additional compensation, bonuses and benefits, if any, as shall
be determined from time to time by the Board and/or as prescribed by any benefit
or bonus plan adopted thereby, in its sole authority and discretion, based upon
the performance of the Company and the Executive.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon
the submission of supporting documentation by the Executive, shall reimburse the
Executive for all reasonable expenses actually paid or incurred by the Executive
in the course of, and pursuant to, the business of the Company, including
expenses for travel and entertainment.
3.2 WELFARE BENEFITS. The Company shall obtain or shall
continue in force comprehensive major medical and hospitalization insurance
coverages, including dental coverages, either group or individual, for the
Executive and his dependents, and shall obtain or shall continue in force
disability and life insurance for the Executive (collectively, the "Policies"),
which Policies the Company shall keep in affect at its sole expense for so long
as the Executive is employed hereunder. The Policies to be provided by the
Company shall be on terms as determined by the Board; provided, however, that
such Policies shall in no event provide benefits to Executive which are less
than the benefits to which he is currently entitled.
3.3 WORKING FACILITIES. The Company shall furnish the
Executive with an office, a secretary and such other facilities and services
suitable to his position and adequate for the performance of his duties
hereunder.
3.4 FRINGE BENEFITS. During the term, the Executive shall be
entitled to fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained
in this Agreement to the contrary, the Executive's employment may be terminated
by the Company for Cause. As used in this Agreement, "Cause" shall only mean (i)
subject to the following sentences, any action or omission of the Executive
which constitutes a willful and material breach of this Agreement which is not
cured or as to which diligent attempts to cure have not commenced within 30
business days after receipt by Executive of notice of same, (ii) fraud,
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embezzlement or misappropriation as against the Company or (iii) the conviction
(from which no appeal can be taken) of Executive for any criminal act which is a
felony. Upon any determination by the Company's Board of Directors that Cause
exists under clause (i) of the preceding sentence, the Company shall cause a
special meeting of the Board to be called and held at a time mutually convenient
to the Board and Executive, but in no event later than 10 business days after
Executive's receipt of the notice contemplated by clause (i). Executive shall
have the right to appear before such special meeting of the Board with legal
counsel of his choosing to refute any determination of Cause specified in such
notice, and any termination of Executive's employment by reason of such Cause
determination shall not be effective until Executive is afforded such
opportunity to appear. Any termination for Cause pursuant to clause (ii) or
(iii) of the first sentence of this Section 4.1 shall be made in writing to
Executive, which notice shall set forth in detail all acts or omissions upon
which the Company is relying for such termination. Upon any termination pursuant
to this Section 4.1, the Company shall pay to the Executive any unpaid Base
Salary accrued through the effective date of termination specified in such
notice. Except as provided above, the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however to the provisions of
Section 3.1).
4.2 DISABILITY. Notwithstanding anything contained in this
Agreement to the contrary, the Company, by written notice to the Executive,
shall at a times have the right to terminate this Agreement, and the Executive's
employment hereunder, if the Executive shall, as the result of mental or
physical incapacity, illness or disability, fail to perform his duties and
responsibilities provided for herein for a period of more than 180 days in any
12-month period. Upon any termination pursuant to this Section 4.2, the Company
shall pay to the Executive any unpaid Base Salary accrued through the effective
date of termination, as well as a lump sum severance payment equal to 12 months'
Base Salary at the rate prevailing at such termination. Except as provided
above, the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Section 3.1).
4.3 DEATH. In the event of the death of the Executive during
his employment hereunder, the Company shall pay to the personal representative
of the estate of the deceased Executive any unpaid Base Salary accrued through
the date of his death, as well as a lump sum payment equal to 12 months' Base
Salary at the rate prevailing on the date of the death of the Executive. Except
as provided above, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Section
3.1).
4.4 GOOD REASON. The Executive's employment may be terminated
by the Executive for "Good Reason." For purposes of this Agreement, "Good
Reason" shall mean:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 1 of this Agreement, or any other
action by the Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and
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inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of
the provisions of Section 2 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this Agreement;
or
(iv) any Change of Control (as defined hereafter) of
the Company, provided that the Executive terminates his employment within one
(1) year of the Change of Control.
4.5 CHANGE OF CONTROL. For the purpose of this Agreement, a
"Change of Control" shall mean:
(i) The acquisition (other than by or from the
Company), at any time after the date hereof, by any person, entity or "group",
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of common stock or the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the election of
directors; or
(ii) The individuals who, as of the date hereof,
constitute the Board of Directors of the Company (as of the date hereof the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board of Directors of the Company, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; or
(iii) Approval by the shareholders of the Company of
(A) a reorganization merger or consolidation with respect to which persons who
were the shareholders of the Company immediately prior to such reorganization
merger or consolidation do not, immediately thereafter, own more than 50% of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged or consolidated company's then outstanding voting
securities, (B) a liquidation or dissolution of the Company, or (C) the sale of
all or substantially all of the assets of the Company, unless the approved
reorganization, merger, consolidation, liquidation, dissolution or sale is
subsequently abandoned.
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4.6 GOOD REASON, OTHER THAN FOR CAUSE OR DISABILITY. If,
during the Term, the Company shall terminate the Executive's employment for any
reason other than for Cause, death, or disability, or if the Executive shall
terminate his employment for Good Reason:
(i) the Company shall pay to the Executive in a lump
sum in cash within 30 days after the effective date of such termination (the
"Date of Termination") the aggregate of the following amounts:
A. to the extent not theretofore paid, the
Executive's Base Salary through the Date of Termination;
B. in the event of termination by the Company
for any reason other than Cause, death or disability, or in the event of
termination by the Executive for Good Reason other than Change of Control, the
sum of (i) two and one-half (2 1/2) multiplied times the Executive's base salary
plus (ii) a prorated bonus for the current fiscal year based upon the
Executive's bonus paid during the last full fiscal year prior to the Date of
Termination;
C. in the event of termination by the Executive
as a result of a Change of Control, the sum of three (3) multiplied times the
average of the Executive's Annual Compensation (defined for the purpose of this
subpart as Base Salary plus any bonuses earned, but excluding stock options
exercised) during the three (3) calendar year period preceding the Date of
Termination;
D. in the case of compensation previously
deferred by the Executive, all amounts previously deferred (together with any
accrued interest thereon) and not yet paid by the Company, and any accrued
vacation pay not yet paid by the Company; and
E. all other amounts accrued or earned by the
Executive through the Date of Termination and amounts otherwise owing under the
then existing plans and policies at the Company; and
(a) for the remainder of the Term, or such longer period as
any plan, program, practice or policy may provide, the Company shall continue
benefits to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 3.2 of this Agreement if the
Executive's employment had not been terminated, including health, dental,
disability insurance and life insurance, in accordance with the most favorable
plans, practices, programs or policies of the Company and its subsidiaries
during the 180-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect at any time thereafter with respect to
other key executives and their families and, for purposes of eligibility for
retiree benefits pursuant to such plans, practices, programs and policies, the
Executive shall be considered to have remained employed until the end of the
Term and to have retired on the last day of such period.
5. EXCISE TAX REIMBURSEMENT AND GROSS-UP. The Company shall promptly
reimburse the Executive for any federal excise tax (if any) imposed on and paid
by (and not refunded to) the Executive under Section 4999 of the Tax Code as a
direct result of the payments
5
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or benefits actually paid by the Company to the Executive upon termination
pursuant to Section 4.6 of this Agreement, together with an amount equal to the
gross-up (as may be reasonably calculated by the Company) with respect thereto.
6. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claims right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement.
7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of two
years following the termination of the Executive's employment for any reason,
Executive shall not, directly or indirectly engage in or have any interest in,
directly or indirectly, any sole proprietorship, partnership, corporation,
business or any other person or entity (whether as an employee, officer,
director, partner, agent, security holder, creditor, consultant or otherwise)
that, directly or indirectly, engages in competition with the Company or any of
its subsidiaries in any and all locations in which the Company and/or any
subsidiary conducts its business at the time Executive's employment with the
Company is terminated (the "Territory"); PROVIDED, HOWEVER, that Executive may
continue to hold Company securities and/or acquire, solely as an investment,
shares of capital stock or other equity securities of any company which are
traded on any national securities exchange or are regularly quoted in the
over-the-counter market, so long as Executive does not control, acquire a
controlling interest in or become a member of a group which exercises direct or
indirect control of, more than five percent of any class of capital stock of
such corporation.
7.2 NONDISCLOSURE. During the Executive's employment hereunder
and following termination of the Executive's employment with the Company,
Executive shall not divulge, communicate, use to the detriment of the Company or
for the benefit of any other person or persons, or misuse in any way, any
Confidential Information (as hereinafter defined) pertaining to the business of
the Company. Any Confidential Information or data now or hereafter acquired by
the Executive with respect to the business of the Company (which shall include,
but not be limited to, information concerning the Company's financial condition,
prospects, technology, customers, suppliers, partners, methods of doing business
and marketing and promotion of the Company's products) shall be deemed a
valuable, special and unique asset of the Company that is received by the
Executive in confidence and as a fiduciary, and Executive shall remain a
fiduciary to the Company with respect to all of such information. For purposes
of this Agreement "Confidential Information" means information disclosed to the
Executive or known by the Executive as a consequence of or through his
employment by the Company (including information conceived, originated,
discovered or developed by the Executive) prior to or after the date hereof, and
not generally known, about the Company or its business. Notwithstanding the
foregoing, nothing herein shall be deemed to restrict the Executive from
disclosing Confidential Information to the extent required by law.
6
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7.3 NONSOLICITATION OF EMPLOYEES. During the Executive's
employment and for a period of one year following termination of the Executive's
employment with the Company, Executive shall not directly or indirectly, for
himself or for any other person, firm, corporation, partnership, association or
other entity, attempt to employ or enter into any contractual arrangement with
any employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of six
months.
7.4 BOOKS AND RECORDS. All books, records, accounts and
similar repositories of Confidential Information of the Company, whether
prepared by the Executive or otherwise coming into the Executive's possession,
shall be the exclusive property of the Company and shall be returned immediately
to the Company on termination of this Agreement or on the Board's request at any
time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Section 7 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 7 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
9. EFFECTIVE DATE. This Agreement shall become effective June 1, 1999.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
11. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered by hand or when deposited in the United States mail, by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
Attention: President
If to the Executive: Mr. Claudio Osorio
CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner.
7
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12. BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns. Notwithstanding the foregoing, neither party may assign its rights or
benefits, or delegate any of its duties, hereunder without the prior written
consent of the other party hereto. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
13. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by duration, geographic scope or
both, the otherwise invalid provision will be considered to be reduced to a
period or area which would cure such invalidity.
14. WAIVERS. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.
15. DAMAGES. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained either or both of them as a result of its or his breach of any term or
provision of this Agreement. In the event that either party hereto brings suit
for the collection of any damages resulting from, or the injunction of any
action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
(other than the parties hereto and, in the case of Executive, his heirs,
personal representative(s) and/or legal representative) any rights or remedies
under or by reason of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
CHS ELECTRONICS, INC.
By:
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CLAUDIO OSORIO
8
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1ST day of JUNE , 1999, by and between CHS ELECTRONICS, INC., a Florida
corporation (the "Company"), and CRAIG TOLL (the "Executive"). This agreement
supercedes the Employment Agreement between the parties dated March 22, 1996 and
amended on July 31, 1997 and March 31, 1998.
RECITALS
A. The Executive is currently Chief Financial Officer and Treasurer of
the Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors (the "Board") of the Company recognizes that
the Executive's contribution, as Chief Financial Officer and Treasurer of the
Company, to the growth and success of the Company has been substantial and
desires to assure the Company of the Executive's continued employment in an
executive capacity and to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. Employment.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ
the Executive and the Executive shall continue to serve the Company, on the
terms and conditions set forth herein, for an initial period of three years (the
"Term") commencing on the Effective Date (as defined hereafter) and shall
thereafter self-renew for additional one year periods unless terminated by
either party upon 60 days written notice prior to such annual renewal date.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the
Chief Financial Officer and Treasurer of the Company and shall perform the
duties of an executive commensurate with such position, shall diligently perform
all services as may be reasonably
<PAGE>
assigned to him by the Board and shall exercise such Power and authority as may
from time to time be delegated to him by the Board. The Executive shall devote
his full time and attention to the business and affairs of the Company, render
such services to the best of his ability, and use his best efforts to promote
the interests of the Company.
1.3 PLACE OF PERFORMANCE. In connection with his employment by
the Company, the Executive shall be based at the Company's principal executive
offices in Miami, Florida except for required travel on the Company's business
to an extent substantially consistent with his present travel obligations.
2. COMPENSATION. During the Term, the Executive shall receive a base
salary at the annual rate of $350,000 (the "Base Salary"), such Base Salary to
be payable in substantially equal installments consistent with the Company's
normal payroll schedule, subject to applicable withholding and other taxes. At
the discretion of the Board of Directors or the Compensation Committee thereof,
such Base Salary may be, at any time, increased, but shall in no event be
decreased. Effective upon any increase, the term "Base Salary" shall be without
further action modified to mean such increased amount. Executive shall also be
entitled to such additional compensation, bonuses and benefits, if any, as shall
be determined from time to time by the Board, in its sole authority and
discretion, based upon the performance of the Company and the Executive.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon
the submission of supporting documentation by the Executive, shall reimburse the
Executive for all reasonable expenses actually paid or incurred by the Executive
in the course of, and pursuant to, the business of the Company, including
expenses for travel and entertainment.
3.2 WELFARE BENEFITS. The Company shall obtain or shall
continue in force comprehensive major medical and hospitalization insurance
coverages, including dental coverages, either group or individual, for the
Executive and his dependents, and shall obtain or shall continue in force
disability and life insurance for the Executive (collectively, the "Policies"),
which Policies the Company shall keep in affect at its sole expense for so long
as the Executive is employed hereunder. The Policies to be provided by the
Company shall be on terms as determined by the Board; provided, however, that
such Policies shall in no event provide benefits to Executive which are less
than the benefits to which he is currently entitled.
3.3 WORKING FACILITIES. The Company shall furnish the
Executive with an office, a secretary and such other facilities and services
suitable to his position and adequate for the performance of his duties
hereunder.
3.4 FRINGE BENEFITS. During the term, the Executive shall be
entitled to fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company.
4. TERMINATION.
2
<PAGE>
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained
in this Agreement to the contrary, the Executive's employment may be terminated
by the Company for Cause. As used in this Agreement, "Cause" shall only mean (i)
subject to the following sentences, any action or omission of the Executive
which constitutes a willful and material breach of this Agreement which is not
cured or as to which diligent attempts to cure have not commenced within 30
business days after receipt by Executive of notice of same, (ii) fraud,
embezzlement or misappropriation as against the Company or (iii) the conviction
(from which no appeal can be taken) of Executive for any criminal act which is a
felony. Upon any determination by the Company's Board of Directors that Cause
exists under clause (i) of the preceding sentence, the Company shall cause a
special meeting of the Board to be called and held at a time mutually convenient
to the Board and Executive, but in no event later than 10 business days after
Executive's receipt of the notice contemplated by clause (i). Executive shall
have the right to appear before such special meeting of the Board with legal
counsel of his choosing to refute any determination of Cause specified in such
notice, and any termination of Executive's employment by reason of such Cause
determination shall not be effective until Executive is afforded such
opportunity to appear. Any termination for Cause pursuant to clause (ii) or
(iii) of the first sentence of this Section 4.1 shall be made in writing to
Executive, which notice shall set forth in detail all acts or omissions upon
which the Company is relying for such termination. Upon any termination pursuant
to this Section 4.1, the Company shall pay to the Executive any unpaid Base
Salary accrued through the effective date of termination specified in such
notice. Except as provided above, the Company shall have no further liability
hereunder (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however to the provisions of
Section 3.1).
4.2 DISABILITY. Notwithstanding anything contained in this
Agreement to the contrary, the Company, by written notice to the Executive,
shall at a times have the right to terminate this Agreement, and the Executive's
employment hereunder, if the Executive shall, as the result of mental or
physical incapacity, illness or disability, fail to perform his duties and
responsibilities provided for herein for a period of more than 180 days in any
12-month period. Upon any termination pursuant to this Section 4.2, the Company
shall pay to the Executive any unpaid Base Salary accrued through the effective
date of termination, as well as a lump sum severance payment equal to 12 months'
Base Salary at the rate prevailing at such termination. Except as provided
above, the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Section 3.1).
4.3 DEATH. In the event of the death of the Executive during
his employment hereunder, the Company shall pay to the personal representative
of the estate of the deceased Executive any unpaid Base Salary accrued through
the date of his death, as well as a lump sum payment equal to 12 months' Base
Salary at the rate prevailing on the date of the death of the Executive. Except
as provided above, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Section
3.1).
4.4 GOOD REASON. The Executive's employment may be terminated
by the Executive for "Good Reason." For purposes of this Agreement, "Good
Reason" shall mean:
3
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(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 1 of this Agreement, or any other
action by the Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of
the provisions of Section 2 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than that described in Section 1.3 hereof,
except for travel reasonably required in the performance of the Executive's
responsibilities;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this Agreement;
or
(v) any Change of Control (as defined hereafter) of
the Company, provided that the Executive terminates his employment within one
(1) year of the Change of Control.
4.5 CHANGE OF CONTROL. For the purpose of this Agreement, a
"Change of Control" shall mean:
(i) The acquisition (other than by or from the
Company), at any time after the date hereof, by any person, entity or "group",
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of common stock or the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the election of
directors; or
(ii) The individuals who, as of the date hereof,
constitute the Board of Directors of the Company (as of the date hereof the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board of Directors of the Company, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; or
4
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(iii) Approval by the shareholders of the Company of
(A) a reorganization merger or consolidation with respect to which persons who
were the shareholders of the Company immediately prior to such reorganization
merger or consolidation do not, immediately thereafter, own more than 50% of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged or consolidated company's then outstanding voting
securities, (B) a liquidation or dissolution of the Company, or (C) the sale of
all or substantially all of the assets of the Company, unless the approved
reorganization, merger, consolidation, liquidation, dissolution or sale is
subsequently abandoned.
4.6 GOOD REASON, OTHER THAN FOR CAUSE OR DISABILITY. If,
during the Term, the Company shall terminate the Executive's employment for any
reason other than for Cause, death, or disability, or if the Executive shall
terminate his employment for Good Reason:
(i) the Company shall pay to the Executive in a lump
sum in cash within 30 days after the effective date of such termination (the
"Date of Termination") the aggregate of the following amounts:
A. to the extent not theretofore paid, the
Executive's Base Salary through the Date of Termination;
B. in the event of termination by the Company
for any reason other than Cause, death or disability, or in the event of
termination by the Executive for Good Reason other than Change of Control, the
sum of (i) two and one-half (2 1/2) multiplied times the Executive's base salary
plus, (ii) a prorated bonus for the current fiscal year based upon the
Executive's bonus paid during the last full fiscal year prior to the Date of
Termination;
C. in the event of termination by the Executive
as a result of a Change of Control, the result of three (3) multiplied times the
average of the Executive's Annual Compensation (defined for the purpose of this
subpart as Base Salary plus any bonuses earned, but excluding stock options
exercised) during the three (3) calendar year periods preceding the Date of
Termination;
D. in the case of compensation previously
deferred by the Executive, all amounts previously deferred (together with any
accrued interest thereon) and not yet paid by the Company, and any accrued
vacation pay not yet paid by the Company; and
E. all other amounts accrued or earned by the
Executive through the Date of Termination and amounts otherwise owing under the
then existing plans and policies at the Company; and
(a) for the remainder of the Term, or such longer period as
any plan, program, practice or policy may provide, the Company shall continue
benefits to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 3.2 of this Agreement if the
Executive's employment had not been terminated, including health, dental,
disability insurance and life insurance, in accordance with the most favorable
plans, practices, programs or policies of the Company and its subsidiaries
during the 180-day period immediately
5
<PAGE>
preceding the Effective Date or, if more favorable to the Executive, as in
effect at any time thereafter with respect to other key executives and their
families and, for purposes of eligibility for retiree benefits pursuant to such
plans, practices, programs and policies, the Executive shall be considered to
have remained employed until the end of the Term and to have retired on the last
day of such period.
5. EXCISE TAX REIMBURSEMENT AND GROSS-UP. The Company shall promptly
reimburse the Executive for any federal excise tax (if any) imposed on and paid
by (and not refunded to) the Executive under Section 4999 of the Tax Code as a
direct result of the payments or benefits actually paid by the Company to the
Executive upon termination pursuant to Section 4.6 of this Agreement, together
with an amount equal to the gross-up (as may be reasonably calculated by the
Company) with respect thereto.
6. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claims right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement.
7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of two
years following the termination of the Executive's employment for any reason,
Executive shall not, directly or indirectly engage in or have any interest in,
directly or indirectly, any sole proprietorship, partnership, corporation,
business or any other person or entity (whether as an employee, officer,
director, partner, agent, security holder, creditor, consultant or otherwise)
that, directly or indirectly, engages in competition with the Company or any of
its subsidiaries in any and all locations in which the Company and/or any
subsidiary conducts its business at the time Executive's employment with the
Company is terminated (the "Territory"); PROVIDED, HOWEVER, that Executive may
continue to hold Company securities and/or acquire, solely as an investment,
shares of capital stock or other equity securities of any company which are
traded on any national securities exchange or are regularly quoted in the
over-the-counter market, so long as Executive does not control, acquire a
controlling interest in or become a member of a group which exercises direct or
indirect control of, more than five percent of any class of capital stock of
such corporation.
7.2 NONDISCLOSURE. During the Executive's employment hereunder
and following termination of the Executive's employment with the Company,
Executive shall not divulge, communicate, use to the detriment of the Company or
for the benefit of any other person or persons, or misuse in any way, any
Confidential Information (as hereinafter defined) pertaining to the business of
the Company. Any Confidential Information or data now or hereafter acquired by
the Executive with respect to the business of the Company (which shall include,
but not be limited to, information concerning the Company's financial condition,
prospects, technology, customers, suppliers, partners, methods of doing business
and marketing and promotion of the Company's products) shall be deemed a
valuable, special and unique asset
6
<PAGE>
of the Company that is received by the Executive in confidence and as a
fiduciary, and Executive shall remain a fiduciary to the Company with respect to
all of such information. For purposes of this Agreement "Confidential
Information" means information disclosed to the Executive or known by the
Executive as a consequence of or through his employment by the Company
(including information conceived, originated, discovered or developed by the
Executive) prior to or after the date hereof, and not generally known, about the
Company or its business. Notwithstanding the foregoing, nothing herein shall be
deemed to restrict the Executive from disclosing Confidential Information to the
extent required by law.
7.3 NONSOLICITATION OF EMPLOYEES. During the Executive's
employment and for a period of one year following termination of the Executive's
employment with the Company, Executive shall not directly or indirectly, for
himself or for any other person, firm, corporation, partnership, association or
other entity, attempt to employ or enter into any contractual arrangement with
any employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of six
months.
7.4 BOOKS AND RECORDS. All books, records, accounts and
similar repositories of Confidential Information of the Company, whether
prepared by the Executive or otherwise coming into the Executive's possession,
shall be the exclusive property of the Company and shall be returned immediately
to the Company on termination of this Agreement or on the Board's request at any
time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Section 7 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 7 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
9. EFFECTIVE DATE. This Agreement shall become effective June 1, 1999.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida.
11. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered by hand or when deposited in the United States mail, by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
Attention: President
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If to the Executive: Mr. Craig Toll
CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner.
12. BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns. Notwithstanding the foregoing, neither party may assign its rights or
benefits, or delegate any of its duties, hereunder without the prior written
consent of the other party hereto. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
13. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by duration, geographic scope or
both, the otherwise invalid provision will be considered to be reduced to a
period or area which would cure such invalidity.
14. WAIVERS. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.
15. DAMAGES. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained either or both of them as a result of its or his breach of any term or
provision of this Agreement. In the event that either party hereto brings suit
for the collection of any damages resulting from, or the injunction of any
action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other.
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
(other than the parties hereto
8
<PAGE>
and, in the case of Executive, his heirs, personal representative(s) and/or
legal representative) any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
CHS ELECTRONICS, INC.
By:
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CRAIG TOLL
9
EXHIBIT 10.4
FIRST AMENDMENT TO THE
CHS ELECTRONICS, INC.
1996 CHIEF EXECUTIVE OFFICER STOCK OPTION PLAN
THIS FIRST AMENDMENT, made as of this 1st day of July, 1999 by CHS
ELECTRONICS, INC. (hereinafter called the "Employer");
W I T N E S S E T H:
WHEREAS, the Employer did establish the CHS Electronics, Inc. 1996
Chief Executive Officer Stock Option Plan (the "1996 Plan") for the purpose of
providing an additional incentive to Claudio Osorio, the Employer's Chief
Executive Officer, to pursue future acquisitions on behalf of the Employer; and
WHEREAS, the Employer reserved the right to amend said 1996 Plan;
NOW, THEREFORE, the 1996 Plan shall be amended as follows, effective as
of July 1, 1999:
1. A new Section 15 is hereby added to the 1996 Plan to read as
follows:
"15. TRANSFERABILITY OF OPTIONS. Unless (a) (i) the Board's prior
written consent is obtained, and (ii) the transaction does not violate
the requirements of Rule 16b-3 promulgated under the Exchange Act, or
(b) the transfer is by Osorio by will or the laws of decent and
distribution, no Option shall be subject to alienation, assignment,
pledge, charge or other transfer, and any attempt to make any
prohibited transfer shall be void."
2. In all other respects, the 1996 Plan shall remain unchanged by this
Amendment.
IN WITNESS WHEREOF, the Employer has caused this instrument to be
executed the day and year first above written.
CHS ELECTRONICS, INC.
By: /s/ ANTONIO BOCCALANDO
---------------------------------------
Antonio Boccalando, Secretary
A-1
EXHIBIT 10.5
FIRST AMENDMENT TO THE
CHS ELECTRONICS, INC.
1997 CHIEF EXECUTIVE OFFICER STOCK OPTION PLAN, AS AMENDED
THIS FIRST AMENDMENT, made as of this 1st day of July, 1999 by CHS
ELECTRONICS, INC. (hereinafter called the "Employer");
W I T N E S S E T H:
WHEREAS, the Employer did establish the CHS Electronics, Inc. 1997
Chief Executive Officer Stock Option Plan, as amended (the "1997 Plan") for the
purpose of providing an additional incentive to Claudio Osorio, the Employer's
Chief Executive Officer, to pursue future acquisitions on behalf of the
Employer; and
WHEREAS, the Employer reserved the right to amend said 1997 Plan;
NOW, THEREFORE, the 1997 Plan shall be amended as follows, effective as
of July 1, 1999:
1. A new Section 15 is hereby added to the 1997 Plan to read as
follows:
"15. TRANSFERABILITY OF OPTIONS. Unless (a) (i) the Board's prior
written consent is obtained, and (ii) the transaction does not violate
the requirements of Rule 16b-3 promulgated under the Exchange Act, or
(b) the transfer is by Osorio by will or the laws of decent and
distribution, no Option shall be subject to alienation, assignment,
pledge, charge or other transfer, and any attempt to make any
prohibited transfer shall be void."
2. In all other respects, the 1997 Plan shall remain unchanged by this
Amendment.
IN WITNESS WHEREOF, the Employer has caused this instrument to be
executed the day and year first above written.
CHS ELECTRONICS, INC.
By: /s/ ANTONIO BOCCALANDO
---------------------------------------
Antonio Boccalando, Secretary
A-2
EXHIBIT 10.6
FIRST AMENDMENT TO THE
CHS ELECTRONICS, INC.
DIRECTORS AND OFFICERS 1997 STOCK OPTION PLAN, AS AMENDED
THIS FIRST AMENDMENT, made as of this 1st day of July, 1999 by CHS
ELECTRONICS, INC. (hereinafter called the "Employer");
W I T N E S S E T H:
WHEREAS, the Employer did establish the CHS Electronics, Inc. 1997
Directors and Officers Stock Option Plan (the "D&O Plan") for the purpose of
attracting, motivating, retaining and rewarding high-quality directors and
officers, and enabling such persons to acquire or increase a proprietary
interest in the Employer; and
WHEREAS, the Employer reserved the right to amend said D&O Plan;
NOW, THEREFORE, the D&O Plan shall be amended as follows, effective as
of July 1, 1999:
1. The first sentence of subsection 11(a) of the D&O Plan is hereby
amended to read as follows:
"No Incentive Stock Option, and unless the Committee's prior written
consent is obtained and the transaction does not violate the
requirements of Rule 16b-3 promulgated under the Exchange Act, no
Non-Qualified Stock Option, shall be subject to alienation, assignment,
pledge, charge or other transfer, and any attempt to make any
prohibited transfer shall be void; PROVIDED, HOWEVER, that the
foregoing restriction shall not apply to a transfer by the Optionee by
will or the laws of decent and distribution."
2. In all other respects, the D& O Plan shall remain unchanged by this
Amendment.
IN WITNESS WHEREOF, the Employer has caused this instrument to be
executed the day and year first above written.
CHS ELECTRONICS, INC.
By: /s/ ANTONIO BOCCALANDO
---------------------------------------
Antonio Boccalando
A-3
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