EXHIBIT 2.3
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
Miami Division
In re: Case No. 00-12731-BKC-RAM
CHS ELECTRONICS, INC.,
Chapter 11 Proceeding
Debtor.
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CHS ELECTRONICS, INC.'S SECOND AMENDED DISCLOSURE STATEMENT IN
SUPPORT OF THIRD AMENDED LIQUIDATING PLAN OF REORGANIZATION
JUNE 28, 2000
CHS ELECTRONICS, INC., Debtor in Possession (the "Debtor" or "CHS"),
files its Second Amended Disclosure Statement in support of its Third Amended
Liquidating Plan of Reorganization (the "Plan") dated June 28, 2000.
PLEASE ADDRESS ALL INQUIRIES CONCERNING THE DEBTOR, THE PLAN AND THIS
DISCLOSURE STATEMENT AND VOTING TO:
TEW CARDENAS REBAK KELLOGG
LEHMAN DEMARIA & TAGUE L.L.P.
ATTORNEY FOR THE DEBTOR
201 SOUTH BISCAYNE BOULEVARD
MIAMI CENTER, SUITE 2600
MIAMI, FL 33131-4336
TEL: (305) 536-1112
FAX: (305) 536-1116
ATTN: THOMAS R. LEHMAN, P.A. OR
LYNN MAYNARD GOLLIN, ESQ.
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Case No. 00-12731-BKC-RAM
BANKRUPTCY LAW RELATED DISCLOSURES
NO PERSON MAY GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER
THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DISCLOSURE STATEMENT,
REGARDING THE PLAN OR THE SOLICITATION OF ITS ACCEPTANCE.
ALL CREDITORS AND INTEREST HOLDERS ARE HEREBY ADVISED AND ENCOURAGED TO
READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO
ACCEPT OR REJECT THE PLAN. THE SUMMARIES AND STATEMENTS IN THIS DISCLOSURE
STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCES TO THE PLAN, THE
EXHIBITS HERETO, AND OTHER DOCUMENTS REFERENCED AS FILED WITH THE COURT PRIOR TO
OR CONCURRENT WITH THE FILING OF THIS DISCLOSURE STATEMENT. SUBSEQUENT TO THE
DATE HEREOF, THERE CAN BE NO ASSURANCE MADE THAT (A) THE INFORMATION AND
REPRESENTATIONS CONTAINED HEREIN ARE MATERIALLY ACCURATE; OR (B) THIS DISCLOSURE
STATEMENT CONTAINS ALL MATERIAL INFORMATION.
AFTER THE EFFECTIVE DATE OF THE PLAN, A PORTION OF CERTAIN
DISTRIBUTIONS UNDER THE PLAN MAY BE SUBJECT TO SUBSTANTIAL DELAYS FOR CREDITORS
AND INTEREST HOLDERS WHOSE CLAIMS AND INTERESTS ARE CLASSIFIED IN CLASSES THAT
CONTAIN DISPUTED CLAIMS OR INTERESTS. THE AMOUNT OF ANY DISTRIBUTION MAY VARY
SUBSTANTIALLY DEPENDING UPON THE TOTAL AMOUNT OF ALLOWED GENERAL UNSECURED
CLAIMS.
THIS DISCLOSURE STATEMENT HAS BEEN REQUIRED TO BE PREPARED IN
ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND NOT IN ACCORDANCE WITH
FEDERAL OR STATE SECURITIES LAWS OR OTHER APPLICABLE NON-BANKRUPTCY LAW. PERSONS
OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING, OR TRANSFERRING
INTERESTS IN CHS SHOULD EVALUATE THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH IT
WAS PREPARED.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
THE FINANCIAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS
BEEN PREPARED BY THE DEBTOR WITH INFORMATION
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Case No. 00-12731-BKC-RAM
FROM THE DEBTOR'S BOOKS AND RECORDS AND FROM INFORMATION FROM THE DEBTOR'S
MANAGEMENT COMPANY, JOURNEY HOLDINGS, LTD. N/K/A, EUROPA IT APS, AND HAS NOT
BEEN SUBJECT TO CERTIFIED AUDIT. THE DEBTOR HAS MADE EVERY EFFORT TO ENSURE THAT
THE INFORMATION CONTAINED HEREIN IS COMPLETE AND ACCURATE; HOWEVER, THE DEBTOR
IS UNABLE TO WARRANT OR REPRESENT THAT THIS INFORMATION IS WITHOUT ANY
INACCURACY.
A BALLOT ACCOMPANIES THIS DISCLOSURE STATEMENT FOR THE USE OF CREDITORS
IN VOTING ON THE PLAN. YOUR VOTE IS IMPORTANT. YOU ARE URGED TO CAREFULLY REVIEW
THE PLAN, THIS DISCLOSURE STATEMENT, AND THE BALLOT.
DISCLOSURE REGARDING EUROPA, MARK KEOUGH AND THE
PROPOSED EUROPA TRANSACTION REQUESTED BY
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
THE FOLLOWING DISCLOSURES ARE THE VIEW OF THE TRADE COMMITTEE AND NOT
NECESSARILY THAT OF ANY OTHER PERSON OR ENTITY. THE DEBTOR, THE NOTEHOLDER
COMMITTEE AND EUROPA MAY DISAGREE WITH SOME OR ALL OF THE FACTUAL CONTENTIONS
AND OPINIONS SET FORTH BELOW.
THE OFFICIAL COMMITTEE OF UNSECURED TRADE CREDITORS WAS CONSTITUTED BY THE
OFFICE OF THE UNITED STATES TRUSTEE ON APRIL 19, 2000 (THE "TRADE COMMITTEE").
THE TRADE COMMITTEE IS COMPRISED OF:
MAXTOR CORPORATION
CIT BUSINESS CREDIT, INC.
CREDIT AGRICOLE
VIEW SONIC
SEAGATE TECHNOLOGY (CHAIR)
HEWLETT-PACKARD COMPANY (VICE CHAIR)
KBC BANK, N.V.
IBM CREDIT CORP.
QUANTUM CORPORATION
COMPAQ COMPUTER LTD
THE TRADE COMMITTEE IS THE STATUTORY REPRESENTATIVE FOR APPROXIMATELY $ 300
MILLION IN CLAIMS AGAINST THE DEBTOR'S ESTATE,
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Case No. 00-12731-BKC-RAM
COMPRISING MORE THAN HALF OF THE DEBT AGAINST THE DEBTOR'S ESTATE.
THE TRADE COMMITTEE BELIEVES THE FOLLOWING GENERAL DISCLOSURES ARE IMPORTANT TO
CREDITORS' ASSESSMENT OF THE DEBTOR'S PLAN AND THE PROPOSED EUROPA TRANSACTION.
MARK KEOUGH, PRINCIPAL OF EUROPA, WAS THE FORMER CHIEF OPERATING OFFICER OF THE
DEBTOR. HE NEGOTIATED THE INITIAL TRANSACTION TO ACQUIRE THE DEBTOR'S EUROPEAN
SUBSIDIARIES WHILE HE WAS AN EMPLOYEE OF THE DEBTOR. UNDER BANKRUPTCY LAW, MARK
KEOUGH AND EUROPA ARE CONSIDERED INSIDERS OF THE DEBTOR.
IN ADDITION TO NEGOTIATING THE INITIAL TRANSACTION TO ACQUIRE THE DEBTOR'S
EUROPEAN ASSETS WHILE MR. KEOUGH WAS AN EMPLOYEE OF THE DEBTOR, MR. KEOUGH ALSO
NEGOTIATED AN ARRANGEMENT BY WHICH A COMPANY OWNED BY HIM WOULD MANAGE
SUBSTANTIALLY ALL OF THE BUSINESS AND AFFAIRS OF THE DEBTOR'S EUROPEAN
SUBSIDIARIES STARTING IN DECEMBER 1999. MR. KEOUGH AND HIS MANAGEMENT COMPANY
CONTINUE TO MANAGE THE DEBTOR'S EUROPEAN SUBSIDIARIES THROUGH TO THIS DATE.
MR. KEOUGH HAS MANAGEMENT RESPONSIBILITY FOR/AND CONTROL OVER THE FINANCIAL
REPORTING AND THE DISSEMINATION OF THE SAME FOR THE DEBTOR'S EUROPEAN
SUBSIDIARIES WHICH HE IS SEEKING TO BUY UNDER THE DEBTOR'S PLAN. MR. KEOUGH IS
OBVIOUSLY SELF-INTERESTED, AND THE TRADE COMMITTEE BELIEVES THAT CREDITORS'
SHOULD BE AWARE OF THESE FACTS IN CONNECTION WITH THEIR REVIEW OF THE FINANCIAL
INFORMATION CONTAINED IN THE DISCLOSURE STATEMENT AND THE OTHER EXHIBITS TO THE
PLAN.
THE TRADE COMMITTEE SOUGHT TO BE INVOLVED IN THE NEGOTIATION AND THE
DOCUMENTATION OF THE IMPORTANT DOCUMENTS FOR THE EUROPA TRANSACTION. BOTH THE
DEBTOR AND MR. KEOUGH EXCLUDED THE TRADE COMMITTEE AND ITS ADVISORS FROM THE
NEGOTIATION AND DOCUMENTATION PROCESS. NOTWITHSTANDING THE EXCLUSION OF THE
TRADE COMMITTEE AND ITS ADVISORS, THE DEBTOR AND MR. KEOUGH INVITED
REPRESENTATIVES OF AND ADVISORS TO THE NOTEHOLDERS' COMMITTEE TO PARTICIPATE IN
THE DEAL NEGOTIATION AND DOCUMENTATION PROCESS. IN FACT, CERTAIN OF THE KEY
TRANSACTIONAL DOCUMENTS WERE DRAFTED BY ATTORNEYS FOR THE
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Case No. 00-12731-BKC-RAM
NOTEHOLDERS' COMMITTEE.
EUROPA IS NOT PAYING ANY CASH FOR THE DEBTOR'S EUROPEAN SUBSIDIARIES. INSTEAD,
EUROPA IS PAYING FOR THE DEBTOR'S EUROPEAN SUBSIDIARIES WITH STOCK AND NOTES.
EUROPA IS A CORPORATION ORGANIZED UNDER THE LAWS OF DENMARK. THIS DISCLOSURE
STATEMENT FAILS TO PROVIDE ANY EXPLANATION OF WHY EUROPA IS ORGANIZED AS A
DANISH CORPORATION OR ANY INFORMATION ABOUT DANISH LAW OR THE EXTENT TO WHICH
DANISH LAW IS DIFFERENT FROM UNITED STATES' CORPORATE AND CREDITORS' RIGHTS LAW.
FINALLY, THE TRADE COMMITTEE SUBMITS THAT THE REPEATED REFERENCE TO THE
CREDITORS' RECEIPT OF 20 % OF THE COMMON STOCK OF EUROPA AS PART OF THE
CONSIDERATION FOR THE DEBTOR'S EUROPEAN SUBSIDIARIES IS MATERIALLY MISLEADING.
UNDER THE EUROPA STOCK PURCHASE AGREEMENT AND RELATED DOCUMENTS, THERE ARE
ABSOLUTELY NO SAFEGUARDS AGAINST THE DILUTION OF THE CREDITORS' INITIAL 20%
SHARE OF THE COMMON STOCK. THE TRADE COMMITTEE'S MORE DETAILED DISCUSSION OF
THIS ISSUE IS DISCUSSED IN SECTION V(F) OF THE DISCLOSURE STATEMENT.
DEBTOR'S STATEMENT IN RESPONSE TO
TRADE COMMITTEE'S DISCLOSURES
THE DEBTOR BELIEVES THAT CERTAIN OF THE FOREGOING DISCLOSURES, AS CHARACTERIZED
BY THE TRADE COMMITTEE, ARE SLANTED AND MISLEADING TO CREDITORS.
IN PARTICULAR, THE DEBTOR DISPUTES THAT THE DEBTOR AND MR. KEOUGH EXCLUDED THE
TRADE COMMITTEE FROM THE NEGOTIATION AND DOCUMENTATION PROCESS OF THE EUROPA
TRANSACTION. ON MAY 24, 2000, THE STOCK PURCHASE AGREEMENT WAS FILED WITH THE
COURT WITH RELATED TRANSACTIONAL DOCUMENTS. SINCE THEN, THE TRADE COMMITTEE AND
THE NOTEHOLDERS COMMITTEE HAVE REPEATEDLY BEEN ASKED TO PROVIDE THEIR INPUT ON
THE PLAN, THE DISCLOSURE STATEMENT AND THE STOCK PURCHASE AGREEMENT. THE TRADE
COMMITTEE NEGOTIATED WITH EUROPA (WITHOUT THE PARTICIPATION OF THE DEBTOR OR THE
NOTEHOLDERS COMMITTEE) FOR TWO WEEKS REGARDING THE TERMS OF THE STOCK PURCHASE
AGREEMENT AND MANY CHANGES WERE MADE TO THE STOCK PURCHASE AGREEMENT IN RESPONSE
TO THE TRADE COMMITTEE'S INPUT DURING NEGOTIATIONS.
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Case No. 00-12731-BKC-RAM
TABLE OF CONTENTS
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SECTION I - INTRODUCTION ............................................................................................. 1
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A. Purpose of Disclosure Statement .................................................................... 1
B. Source of Information .............................................................................. 1
C. Important Highlights of the Plan ................................................................... 3
D. Summary of Plan .................................................................................... 5
E. Recommendation ..................................................................................... 5
F. Voting ............................................................................................. 6
SECTION II - HISTORICAL BACKGROUND INFORMATION ....................................................................... 9
A. History and Organization of the Debtor ............................................................. 9
B. Pre-Petition Financial History and Results of Operations ........................................... 18
C. Events Leading to Chapter 11 Filing ................................................................ 25
D. Pre-Petition Litigation ............................................................................ 42
SECTION III - SUMMARY OF THE DEBTOR'S BANKRUPTCY CASE ................................................................ 43
A. Post-Petition Financial/Operations ................................................................. 43
B. Significant Events During Chapter 11 Case .......................................................... 44
SECTION IV - INFORMATION REGARDING CLAIMS AND SUMMARY
OF PLAN OF REORGANIZATION ............................................................................... 50
A. Administrative Claims .............................................................................. 50
B. Class 1 - Priority Tax Claims ...................................................................... 53
C. Class 2 - Other Priority Claims .................................................................... 54
D. Class 3 - Unsecured Claims Other than Guarantee Claims ............................................. 55
E. Class 4 - Guarantee Claims ......................................................................... 57
F. Class 5 - Secured Claims ........................................................................... 57
G. Class 6 - Administrative Convenience Unsecured Claims .............................................. 59
H. Class 7 - Subordinated Securities Claims .......................................................... 59
I. Class 8 - Old Common Stock Interestholders ........................................................ 59
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SECTION V - SOURCE OF FUNDING AND MEANS FOR IMPLEMENTING PLAN......................................................... 60
A. Management/Ownership of Europa ..................................................................... 60
B. Assets To Be Purchased By Europa ................................................................... 66
C. The PC Way ......................................................................................... 72
D. Other Subsidiaries ................................................................................. 74
E. Consideration Offered By Europa .................................................................... 74
F. Trade Committee's Views on Europa Consideration .................................................... 78
G. Market Context, Europa Business Plan and Risk Factors .............................................. 81
H. The Liquidating Trust .............................................................................. 104
I. The Post Confirmation Creditors Committee .......................................................... 113
SECTION VI - EXECUTORY CONTRACTS AND LEASES .......................................................................... 113
A. Assumed Executory Contracts and Unexpired Leases ................................................... 113
B. Rejection Claims ................................................................................... 114
C. Treatment of Rejection Claims ...................................................................... 114
SECTION VII - VOIDABLE TRANSFERS AND OTHER CAUSES OF ACTION .......................................................... 114
SECTION VIII - CERTAIN FEDERAL INCOME TAX CONSEQUENCES AND
SECURITIES ISSUES ..................................................................................... 115
SECTION IX - ALTERNATIVES TO THE PLAN ................................................................................ 118
SECTION X - CONCLUSION ............................................................................................... 118
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Case No. 00-12731-BKC-RAM
EXHIBITS TO DISCLOSURE STATEMENT
Exhibit "1" Debtor's Third Amended Liquidating Plan of Reorganization
Exhibit "2" List of Companies in which Debtor has Interest
Composite
Exhibit "3" Financial Information Regarding the European Subsidiaries
Composite
Exhibit "4" Pro Formas for European Subsidiaries
Exhibit "5" List of Subsidiaries placed in Receiverships or Voluntary
Creditor Proceedings
Exhibit "6" Europa Opening Balance Sheet
Exhibit "7" Europa's Incorporation Documents and By-Laws
Composite
Exhibit "8" Profile of European Assets
Exhibit "9" Europa Pro Forma
Exhibit "10" Pre-Petition Litigation
Exhibit "11" Liquidation Analysis
Exhibit "12" Journey Management Agreement
Exhibit "13" Europa Officer and Director Salary/Expense Chart
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Case No. 00-12731-BKC-RAM
SECTION I
INTRODUCTION
A. PURPOSE OF DISCLOSURE STATEMENT
Pursuant to section 1125 of the Bankruptcy Code, the Debtor submits
this Second Amended Disclosure Statement (the "Disclosure Statement") to the
holders of claims against the Debtor's estate, in order to disclose adequate
information deemed material, important and necessary for the Debtor's Creditors
and interested parties to arrive at a reasonably informed decision in exercising
their right to vote to accept, reject or object to the Third Amended Liquidating
Plan of Reorganization (the "Plan"). This Disclosure Statement discusses, among
other things, voting instructions, recovery information, classification and
treatment of Claims and Interests, the Debtor's history, business, assets,
causes of action, results of operations, projections of future operations and a
summary and analysis of the Plan. All Creditors are advised to read this
Disclosure Statement, including the Plan attached hereto as EXHIBIT "1" and the
other exhibits in their entirety before voting to accept or reject the Plan.
This Disclosure Statement has been approved by the Bankruptcy Court for
use in the solicitation of acceptances of the Plan. The Bankruptcy Court's
approval of the Disclosure Statement does not constitute an endorsement of any
of the representations contained either in this Disclosure Statement nor the
Plan, nor does it constitute an endorsement of the Plan itself.
B. SOURCE OF INFORMATION
Except as otherwise expressly indicated, the exhibits to and portions
of this Disclosure Statement describing the Debtor's European Assets and the
business operations of the Debtor's European Assets (including financial
information, forecasts, and operating data) were prepared
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Case No. 00-12731-BKC-RAM
by Europa IT ApS ("Europa").(1) The Debtor was the source of all other
information in the Disclosure Statement. Certain background material in the
Disclosure Statement was obtained from reports previously filed by the Debtor
with the Securities and Exchange Commission (the "SEC"). Where applicable,
financial data has been compiled using generally accepted accounting principles
and standards based upon information derived from the Debtor's and its
subsidiaries' business records. However, the information contained in this
Disclosure Statement has not been subject to a certified audit and may be
subject to correction.
No representation concerning the Debtor, particularly the value of the
Debtor's assets, other than as set forth in this Statement, is authorized by the
Debtor. Any representations or inducements made to secure your acceptance or
rejection of the Plan which are other than as contained in this Statement should
not be relied upon in arriving at a decision whether to vote for or against the
Plan; and any such additional representations and inducements should be reported
to counsel for the Debtor or the United States Trustee, who in turn shall seek
such relief from the Court as may be deemed appropriate under the circumstances.
CAPITALIZED TERMS USED IN THIS STATEMENT AND NOT EXPRESSLY DEFINED
HEREIN ARE DEFINED IN THE PLAN. A REFERENCE IN THIS STATEMENT TO AN "ARTICLE"
REFERS TO AN ARTICLE OF THE PLAN. A REFERENCE IN THIS STATEMENT TO A "SECTION"
REFERS TO A SECTION OF THIS STATEMENT.
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(1) Europa f/k/a Journey Holdings has been managing the European Assets
pursuant to a management agreement with the Debtor since December 1999. Europa
is owned and controlled by Mark Keough, a former officer of CHS and therefore,
an insider of the Debtor. Europa is the entity which the Debtor discloses in the
Disclosure Statement and Plan as the proposed purchaser of the Debtor's European
Assets, a list of which assets are reflected in Exhibits "A" and "B" to Exhibit
"E" of the Plan.
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Case No. 00-12731-BKC-RAM
C. IMPORTANT HIGHLIGHTS OF THE PLAN
The Plan provides for the liquidation and the distribution of the
Debtor's Assets to Creditors in two ways. First, the Plan provides for the sale
of the Debtor's European Assets to Europa ITApS, a Danish corporation, pursuant
to the Amended and Restated Stock Purchase Agreement (the "Stock Purchase
Agreement"), free and clear of all liens, claims, encumbrances and interests.
Subject to Court approval, some or all of the European Assets may be sold to an
entity other than Europa if a higher and better offer for some or all of the
European Assets is filed with the Court and served by July 14, 2000, consistent
with the Competing Transaction Order. Second, the Excepted Assets shall be
transferred to the Liquidating Trust and the proceeds from the liquidation of
the Excepted Assets shall be distributed to Creditors as provided in the Plan.
The European Assets represent a very substantial portion of the Debtor's total
assets. In exchange for the transfer of the Debtor's European Assets, the Debtor
will receive 20% of the Europa Common Stock subject to dilution, Europa Thirty
Month Notes and Europa Preferred Stock. All the foregoing consideration
transferred by Europa in exchange for the European Assets shall be distributed
to Creditors under this Plan, either directly by the Debtor or through the
Liquidating Trust. If another entity is approved by the Court to purchase all or
some of the European Assets, the consideration of such sale will be distributed
to Creditors under the Plan, either by the Debtor or through the Liquidating
Trust.
This Plan provides for distributions to Claimholders (other than the
holders of Subordinated Securities Claims) who hold Claims as of the Record
Date. The holders of Subordinated Securities Claims, including Federal
Securities Litigation Claims, shall be limited
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Case No. 00-12731-BKC-RAM
to recovering from the proceeds of the D & O Insurance, to the extent so
entitled, and shall not otherwise receive or retain any property under the Plan.
There will not be a distribution to Interestholders and their Interests shall be
canceled.
The Plan cannot become effective until after it is confirmed by the
Court. The Effective Date of the Plan shall be the later of thirty days after
the Confirmation Date or the date on which the Estate obtains unconditional
rights in the Europa Consideration other than consideration paid by an entity
whose higher and better bid for some of the European Assets is approved by the
Court. The Effective Date shall be no later than December 31, 2000 unless
extended by unanimous consent of the Debtor, Europa and the Creditors
Committees. If Europa is selected as highest and best offeror, and there is no
Closing pursuant to the Stock Purchase Agreement, the Plan will not become
effective and there will not be an Effective Date.
The Stock Purchase Agreement provides in Section 6.5 that any amendment
to the terms of the Plan must be consistent with the Stock Purchase Agreement
and acceptable to Europa in all material respects.
Prior to or in conjunction with the Confirmation Date, the Creditors
Committees, shall select, subject to Court approval, the person who will become
the Liquidating Trustee on the Effective Date. The person selected as the
Liquidating Trustee shall function as the Responsible Person under the Plan. The
Responsible Person shall be subject to oversight by the Creditors Committees
until the Effective Date. Notwithstanding the designation of the Responsible
Person, the Debtor's existing management will remain in control of the Debtor to
the extent necessary to carry out the Confirmation Order, to the extent
necessary to close the sale of the
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Case No. 00-12731-BKC-RAM
European Assets and perform other duties required by a debtor in possession,
post-confirmation. Any changes to the foregoing allocation of responsibilities
between the Debtor's management and the Responsible Person shall be subject to
Court Order.
Europa has advised the Debtor that it is indebted to its officers and
directors in an amount not to exceed $1.5 million. The amount owed by Europa to
its respective officers and directors is listed in their respective biographical
informational sections of the Disclosure Statement (Section V(A)) and in EXHIBIT
"13" attached hereto. These obligations to officers and directors will be paid
by Europa prior to payments on the Europa Thirty Month Notes if money is
available prior to the commencement of such payments under the Europa Thirty
Month Notes.
D. SUMMARY OF PLAN
The classification and treatment of Creditors and Interest holders
under the Plan are discussed in Articles III, IV and V of the Plan and are
generally summarized in Section IV of the Disclosure Statement. Section IV of
the Disclosure Statement does not include estimates for unresolved, unreconciled
or Disputed Claims.(2) The Debtor believes that resolution of such claims is
likely to materially decrease the estimated amount of Unsecured Claims in Class
3 of the Plan.
E. RECOMMENDATION
The Debtor recommends that all Creditors entitled to vote on the Plan
cast their ballots to
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(2) This Case is proceeding on an expedited basis. The Claims Bar Date
was May 31, 2000. A total of 247 proofs of Claim were filed with the Court. The
Debtor is in the process of reviewing the proofs of Claim. The Debtor cannot
complete the process prior to the hearing on approval of the Disclosure
Statement. Therefore, estimates for unresolved, unreconciled or Disputed Claims
cannot be included in Section IV of the Disclosure Statement.
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Case No. 00-12731-BKC-RAM
accept the Plan based on the belief that the Plan provides the greatest and
earliest possible recoveries to the Debtor's Creditors since no other purchaser
has definitively offered to purchase the European Assets for the consideration
being offered by Europa or a higher amount as of June 28, 2000. For the reasons
disclosed in detail in this Disclosure Statement and based on the information
Debtor has at this time, the Debtor believes that acceptance of the Plan is in
the best interests of all parties in interest and any alternative plan or sale
would result in further delay, uncertainty and expense to the Debtor's Estate
and a significantly reduced recovery by Creditors.(3)
F. VOTING
1. ELIGIBILITY TO VOTE. Classes of claims or equity interests that are
not "impaired" under a plan of reorganization are conclusively presumed to have
accepted the plan of reorganization and, therefore, are not entitled to vote.
Acceptances of the Plan in this Case are being solicited only from those persons
who hold Claims in an impaired class. A class is "impaired" if the legal,
equitable, or contractual rights attaching to the claims or equity interests of
that class are modified. Modification for purpose of determining impairment,
however, does not include curing defaults and reinstating maturity or payment in
full in cash.
The Debtor's Plan divides Creditors' Claims against and Interests in
the Debtor into various classes and provides separate treatment for each Class.
Under the Plan, Classes 1, 2, and 5 are not unimpaired and not entitled to vote.
Holders of Administrative Expense Claims under
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(3) The Trade Creditors' Committee disagrees with the Debtor.
Furthermore, the Trade Creditors' Committee believes that current management of
the Debtor has an interest in the early confirmation of the Plan because of
certain bonuses they may receive. The Noteholders Committee has not indicated it
agrees with this position.
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Case No. 00-12731-BKC-RAM
the Plan are not entitled to vote. Classes 3, 4, and 6 are impaired under the
Plan, and holders of Claims in such Classes are entitled to vote pursuant to
Article IV of the Plan. Classes 7 and 8 will not receive a Distribution under
the Plan, are deemed to have rejected the Plan and are not entitled to vote.
The Record Date for determining any Creditor's eligibility to vote on
the Plan shall be the Confirmation Date. Only those Creditors entitled to vote
on the Plan will receive a Ballot with this Statement.
The Creditors whose Claims are objected to prior to the Ballot Date are
not eligible to vote unless the objection is resolved, or after notice and
hearing pursuant to Bankruptcy Rule 3018(a), the Court allows the Claim
temporarily for the purpose of voting to accept or reject the Plan. Any Creditor
that wants its Claim or Interest to be allowed temporarily for the purpose of
voting must take the steps necessary to arrange an appropriate hearing with the
Court under Rule 3018(a). Creditors whose Claims are being objected to will be
sent notice of same pursuant to the Rules.
2. BALLOTS In voting for or against the Plan, please use only the
Ballot or Ballots sent to you with this Disclosure Statement. You may receive
more than one Ballot, and if you do, you should assume each Ballot is for a
Claim in a different Class in which you are entitled to vote. Votes cast to
accept or reject the Plan will be counted by Class. You are not required to vote
all of your Claims in different Classes in the same way. However, you are
required to vote all of your Claims within a Class the same way. Please read the
voting instructions contained within the Ballot for a thorough explanation of
voting procedures applicable to your Claim.
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Case No. 00-12731-BKC-RAM
PLEASE COMPLETE AND RETURN EACH BALLOT YOU RECEIVE. ANY EXECUTED BALLOT
THAT DOES NOT INDICATE ACCEPTANCE OR REJECTION WILL NOT BE COUNTED AS A VOTE FOR
OR AGAINST THE PLAN.
PUT YOUR TAXPAYER IDENTIFICATION (OR SOCIAL SECURITY) NUMBER ON YOUR
BALLOT IN THE PLACE INDICATED. THE DISBURSING AGENT AND THEREAFTER, THE
LIQUIDATING TRUSTEE CANNOT MAKE DISTRIBUTIONS WITHOUT YOUR NUMBER.
IF YOU BELIEVE THAT YOU ARE A MEMBER OF A VOTING CLASS FOR WHICH YOU
DID NOT RECEIVE A BALLOT, IF YOUR BALLOT IS DAMAGED OR LOST, OR IF YOU HAVE ANY
QUESTIONS CONCERNING VOTING PROCEDURES, PLEASE CONTACT COUNSEL FOR THE DEBTOR.
3. VOTING PROCEDURE Mail completed Ballots in the stamped, self
addressed envelope to attached to the Ballot to: Clerk of the United States
Bankruptcy Court, 51 S.W. 1st Avenue, Miami, Florida 33130 (Attn. Chapter 11
Balloting) (CHS Electronics, Inc.). You may enclose a self-addressed postage
prepaid envelope and a copy of your Ballot to be returned stamped "filed" from
the Clerk of the Court confirming the delivery and filing of your Ballot. You
may not change your vote after it is cast unless the Court permits you to do so
after notice and a hearing to determine whether sufficient cause exists to
permit the change. DO NOT RETURN ANY INSTRUMENTS EVIDENCING YOUR CLAIM WITH YOUR
BALLOT.
4. DEADLINE FOR VOTING. BALLOTS MUST BE FILED WITH THE COURT BY 5:00
P.M. EASTERN DAYLIGHT SAVINGS TIME, JULY 21, 2000 IN ORDER TO BE
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Case No. 00-12731-BKC-RAM
COUNTED.
5. IMPORTANCE OF VOTE. Your vote as a Creditor is important to the
Case. Section 1129(a)(10) of the Code requires, with certain exceptions, that at
least one impaired class of claims under a proposed plan of reorganization
accept the plan. The Code defines acceptance by a class to be acceptance of the
plan by at least two-thirds (2/3) in amount and a majority in number of claims
in that class that vote. ONLY THOSE CREDITORS WHO ACTUALLY VOTE ARE COUNTED FOR
THE PURPOSE OF DETERMINING WHETHER A PLAN HAS BEEN ACCEPTED. YOUR FAILURE TO
VOTE WILL LEAVE THE OTHER CREDITORS WITH THE DECISION TO ACCEPT OR REJECT THE
PLAN. TO HAVE YOUR VOTE COUNT YOU MUST COMPLETE AND RETURN THE BALLOT BY THE
DEADLINE INDICATED ABOVE.
SECTION II
HISTORICAL BACKGROUND INFORMATION
A. HISTORY AND ORGANIZATION OF THE DEBTOR
1. BACKGROUND AND OPERATIONAL HISTORY
CHS was a leading international distributor of microcomputer products,
including personal computers, peripherals, networking products and software. It
was a publicly traded company with approximately 17,000 to 20,000 stockholders.
In 1999, CHS operated in approximately 30 countries primarily in Western Europe,
Eastern Europe and Latin America, and serviced an active customer base of
approximately 100,000 resellers. A list of all companies in which CHS has an
interest is attached as EXHIBIT "2" to the Disclosure Statement.
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Approximately 78% of the products which CHS sold were manufactured by
20 equipment and software vendors, including such market leaders as
Hewlett-Packard, IBM, Microsoft, Seagate, Compaq, Intel, Quantum, Western
Digital, 3Com, Toshiba, Acer, Yakumo, Epson and Samsung. CHS was a focused
distributor, as opposed to a broad line distributor, and sought to represent
leading vendors within specific product categories. CHS was among the top three
(3) largest distributors of microcomputer products in the world and one of the
largest distributors in Western Europe, Latin America and Eastern Europe. CHS
had no significant sales in the United States.
CHS' sales consisted of hardware and software products such as local
area networks, personal computers and printers to an active customer base. CHS'
products also included components such as disk drives, random access memory
chips, central processing units and integrated circuit boards. CHS purchased its
products directly from hardware manufacturers and software publishers in large
quantities. As a focused distributor, CHS focused on a small number of high
volume items of that manufacturer or publisher. As a result, CHS carried fewer
individual products than broad line distributors and worked with fewer vendors.
CHS marketed its products to resellers, who either packaged CHS'
products with other computer equipment or sold the products on an individual
basis to end-users. CHS' customers typically relied on distributors as their
principal source of microcomputer products and financing. No single customer
accounted for more than one percent of CHS' net sales in the year ended December
31, 1998.
CHS obtained its products from its vendors under non-exclusive
distribution agreements,
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which agreements were subject to renewal annually and could be canceled by
either party on short notice. Under these agreements, CHS had the right to
purchase products at discounts from the list prices. The amounts of the
discounts were determined each year at the time of renewal on the basis of the
projected sales of the Company for the following year and varied for each
vendor. CHS was not required to make additional product payments if it failed to
achieve its projected sales level for the year, but its product discounts in the
following year could be reduced because of the lower sales levels.
Hewlett-Packard, Microsoft and IBM were CHS' three (3) largest vendors.
CHS also had stock rotation arrangements with substantially all of its
vendors. Stock rotation permitted CHS to return inventory for full credit in an
amount equal to a certain percentage of CHS' purchases from the supplier over a
specific period. In certain cases, CHS was required to purchase inventory at
least equal in value to that returned. These agreements permitted CHS to
maintain higher inventory levels while limiting the amount of committed working
capital related to slow-moving items.
In 1998, CHS' vendors had increased available credit to CHS
commensurate with its growth. Many of CHS' vendors provided discounts for prompt
payment. CHS was required to make payments to vendors within 14 to 90 days
following delivery of products. Certain vendors allowed CHS to earn a discount
for early payment of between 1% and 3% of the invoice amount to the extent
sufficient funds were available.
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2. MANAGEMENT/EMPLOYEES/CORPORATE STRUCTURE
a. CORPORATE STRUCTURE
CHS operated under a decentralized structure in which managers familiar
with the customs and needs of a particular country were delegated the authority
to make daily decisions necessary to satisfy the particular demands of their
respective markets. Unlike its competitors which operate under a more
centralized system, CHS believed that its business model of focused distribution
through locally managed full service facilities integrating, warehousing,
purchasing, sales, credit and accounting services provided competitive and
operating advantages. Oversight and strategic direction were provided by senior
management of CHS.
The corporate headquarters of CHS were located in Miami, Florida, which
also served as the principal operational facility for its Latin America regional
operations and the operations of CHS Latin America, Inc. CHS' subsidiaries
operated through approximately 110 locations totaling approximately four million
square feet. Most locations consisted of an administrative office utilized by
the subsidiary and an adjoining or nearby warehouse and distribution facility.
b. PRIOR MANAGEMENT/OFFICERS(4)
Claudio Osorio served as the Chairman of the Board of CHS, Chief
Executive Officer and President from 1993 through April, 2000 when he resigned.
Mr. Osorio was involved with CHS' day to day operations and familiar with all
aspects of the company. Mr. Osorio participated in virtually every CHS merger,
acquisition and sale of assets through April 1, 2000.
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(4) All of the officers and directors discussed in this section have
resigned from CHS. Current management believes the stated reason for all
resignations was for "personal reasons."
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Although Mr. Osorio was familiar with every aspect of CHS and its subsidiaries
and affiliates operations, no other one officer had such a breadth of knowledge
regarding CHS. Mr. Osorio compartmentalized CHS' operations and assigned
individual officers/management personnel to discreet subject matters concerning
the company. Accordingly, since the Petition Date CHS has requested that Mr.
Osorio provide current management with information regarding CHS transactions
and investments to include in the Disclosure Statement. In response, Mr. Osorio
has communicated with Debtor's counsel. CHS believes that Mr. Osorio has a
wealth of information regarding the company's past operations, the disposition
of the company's assets prior to the bankruptcy being filed and the status of
operations of CHS' subsidiaries and affiliates. Mr. Osorio's counsel has
represented that Mr. Osorio is and will continue to be available to the Debtor
and the respective committees to provide them with background information and
assist in CHS' and the committees efforts to marshal assets of the bankruptcy
estate. Mr. Osorio resigned from CHS effective April 2, 2000.(5)
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(5) Mr. Osorio was paid $750,000 per year by CHS Finance pursuant to
the terms of his employment agreement. CHS Finance would charge CHS through its
inter-company account with CHS. In April 1999, CHS' officers voluntarily reduced
their salaries by 15%. The amount of the annual salary not paid through 1999 was
thereafter paid by CHS in January 2000 in the approximate amount of $140,000.
Mr. Osorio was also paid his monthly salary of $32,500 by CHS in April 2000,
although he resigned early in the month. Demand has been made by the Debtor for
the return of the salary paid in April 2000. Additionally, in May 1999 Mr.
Osorio was paid a $500,000 bonus by CHS. Finally, certain expenses related to a
residence in Switzerland were paid on his behalf, which expenses Mr. Osorio
contends was approved by the board of directors and were paid because he was
required to maintain the foreign residence in connection with his employment
with CHS. Finally, Mr. Osorio's counsel has indicated that Mr. Osorio may not be
required to reimburse the salary paid to him. These payments and any other
payments made or transfers to or for the benefit of Mr. Osorio and any other
officer or insider of the Debtor during the one year period prior to the
Petition Date will be reviewed by the Debtor and/or the respective committees to
determine if any claim exists to recover the payment ("Insider Claims").
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Antonio Boccalandro was CHS' Chief Officer of Mergers and Acquisitions,
Secretary and Director until April 2, 2000 when he resigned. Mr. Boccalandro and
Mr. Osorio have worked together in various enterprises for approximately 15
years. Mr. Boccalandro worked with Mr. Osorio on substantially all of CHS'
mergers and acquisitions and is a valuable source of information regarding CHS'
mergers and acquisitions. Mr. Boccalandro's counsel has represented that Mr.
Boccalandro is and will continue to be available to the Debtor and the
respective committees to provide them with background information and assist in
CHS' and the committees efforts to marshal assets of the bankruptcy estate.(6)
Clifford Dyer was CHS' Executive Vice President/Latin American Region
from 1996 through June 30, 1999 when his employment agreement terminated by its
terms. In this position Mr. Dyer was paid an annual salary of approximately
$276,000. Thereafter, Mr. Dyer entered into a consulting agreement with CHS. The
consulting agreement provided that Mr. Dyer would be paid by CHS $25,000 per
month for an eight month period and further, his COBRA insurance payments would
be paid by CHS until Mr. Dyer was 65 years old. Mr. Dyer received all payments
due.(7)
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(6) Mr. Boccalandro received an annual salary from CHS of approximately
$250,000 pursuant to the terms of his employment agreement. In January 2000, Mr.
Boccalandro received a lump sum payment of $31,730.80 as reimbursement for the
salary not paid to him during 1999. The Debtor and/or the respective committees
will analyze this payment and any other payments and transfers made to Mr.
Boccalandro to determine whether an Insider Claim exists.
(7) The Debtor and/or the respective committees will analyze this
payment and any other payments and transfers made to Mr. Dyer to determine
whether an Insider Claim exists.
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Craig Toll was CHS' Chief Financial Officer from 1996 through November
5, 1999 when he resigned. He was also CHS' Executive Vice President of Finance
and Treasurer for a period of time. As CFO, Mr. Toll was responsible for all of
CHS' financial affairs and was involved in certain sales of assets.(8) Mr. Toll
is a valuable source of information regarding CHS' financial affairs. Mr. Toll's
counsel has represented that Mr. Toll is and will continue to be available to
the Debtor and the respective committees to provide them with background
information and assist in CHS' and the committees efforts to marshal assets of
the bankruptcy estate.
Carsten Frank was Executive Vice President of Asia Worldwide Logistics
for approximately three (3) years before he resigned in late 1999. Mr. Frank's
employment agreement expired according to its terms in December 1999(9). Mr.
Frank's annual salary was approximately $350,000.(10)
From July 1999 through December 14, 1999 Mark Keough was the Chief
Operating
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(8) Mr. Toll received an annual salary from CHS of approximately
$323,000 pursuant to the terms of his employment agreement. As part of his
severance agreement, Mr. Toll received $475,000 from CHS between November 11,
1999 and December 23, 1999. Additionally, Mr. Toll received payments from CHS
for consulting services from December 1999 through January 2000 in the
approximate amount of $10,000. The Debtor and/or the respective committees will
analyze these payments and any other payments and transfers made to Mr. Toll to
determine whether an Insider Claim exists.
(9) The Debtor and/or the respective committees will analyze whether
any payments made to Mr. Frank by CHS constitute Insider Claims.
(10) Several other officers of CHS had employment agreements as
follows: Pasquale Giordano, Chief Operating Officer/European Operations;
Jean-Pierre Robinot, Chief Operating Officer/.European Region; Ofer Magen, Chief
Operating Officer, Karma International; Burt Emmer; Mark Keough; and Tony
Shalom. The Debtor and/or the respective committees will analyze whether any
payments made or transfers to or for the benefit of these officers by CHS
constitute Insider Claims.
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Officer of CHS.(11) As discussed later in some detail, Mr. Keough, through
Europa, negotiated the terms of an exchange agreement (a management buyout) for
the purchase CHS' European subsidiaries. Mr. Keough negotiated the terms of the
exchange agreement during the time he was serving as CHS' Chief Operating
Officer. In December 1999, in connection with the exchange agreement, Mr. Keough
resigned from CHS.(12)
c. CURRENT MANAGEMENT
In December 1999, CHS entered into a Management Agreement with Journey
n/k/a Europa for the management of the European Assets.(13) The Management
Agreement, by its terms, expires June 30, 2000. CHS, through Mr. Osorio,
continued to be involved in the management of other subsidiaries which remained
operational. As described in Section C(2)(b) of the Disclosure Statement,
numerous subsidiaries were either sold or returned to former owners through
reversals of acquisitions and earn-out agreements. This process continued
through March 1999. Furthermore, local management of the subsidiaries became
increasingly independent from CHS and reporting of their activities became
virtually non-existent. Accordingly, CHS' involvement in the management of
operational entities was significantly diminished by the Petition Date.
The Debtor's management in Miami, Florida, as of the Petition Date,
consisted primarily
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(11) Mr. Keough began working at CHS on July 15, 1999.
(12) Mr. Keough was paid approximately $245,700 by CHS. CHS did not
commence to pay Mr. Keough's salary until late October or early November 1999
when CHS paid Mr. Keough his past due salary for the payroll periods commencing
July 1999.
(13) See Section B(2) for further discussion of the Management
Agreement.
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of three individuals who focused their attention on preserving the value of the
remaining assets and winding down the affairs of CHS in anticipation of a sale
of substantially all of CHS' assets through the bankruptcy process.(14) Current
management's responsibilities include: responding to inquiries of creditors;
working with both the Noteholders and Trade Committees in an effort to reach a
consensual confirmation process; responding to inquiries from subsidiaries;
reviewing proofs of Claims and communicating with claimants regarding their
proofs of Claim; meeting with committee consultants; administrative matters
(record retention and performing Debtor duties required by U.S. Trustee, the
Court and the Bankruptcy Code); analyzing corporate governance issues concerning
subsidiaries; participating in the valuation of assets; marshaling estate asset;
providing information for the disclosure statement; assisting with compliance
with SEC reporting requirements; and resolving insurance issues.
i. BURTON EMMER: Mr. Emmer is the Acting Chief
Financial Officer of CHS. Mr. Emmer has been employed by CHS for 1 1/2years as
Special Projects Officer and Acting CFO. His annual compensation is $250,000.
Mr. Emmer is a certified public accountant. Prior to coming to CHS he was an
Assurance Services Partner and Managing Partner with Grant Thornton for twenty
four (24) years. Grant Thornton was the external auditor for CHS.
ii. RICHARD KAMINSKY: Mr. Kaminsky is the
Assistant Treasurer for CHS. He has held this position and been employed by CHS
for two years and is paid an annual
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(14) Initially, CHS intended to reorganize it affairs through the
bankruptcy process, as reflected by the initial plan of reorganization filed
with CHS' bankruptcy petition on April 4, 2000. The initial reorganization plan
contemplated the sale of the European Assets and the emergence of a reorganized
CHS entity which would focus its operations in the e-commerce industry.
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salary of $140,000. At CHS, Mr. Kaminsky has been responsible for investor
relations, public relations, company securities issues and corporate treasury
functions, including fixed asset financing and oversight of foreign currency
hedging. Before joining CHS, Mr. Kaminsky: served as Treasurer (1994-1996) and
Director of Marketing Administration & Contracts (1996-1998) for Greenwich Air
Services, Inc. in Miami, Florida; Vice President and Treasurer (1991-1994) for
The Wackenhut Corporation; and held various management positions at Florida
Power & Light (1978-1991).
iii. ANDREW CHUNG: Mr. Chung is CHS' Director of
Financial Reporting. He has been employed by CHS since July 1999 and is paid an
annual salary of $100,000. Mr. Chung's responsibilities at CHS have included:
preparation of consolidation journal entries, reviewing general ledger accounts,
including financial statement consolidations, statement of cash flows and EPS
calculations; external and SEC financial reporting; special accounting projects;
assistance in implementing CHS' restructuring efforts; and coordination of
reviews and audits. Prior to July 1999, Mr. Chung was employed by Arthur
Anderson LLP in Miami, Florida as an Audit Manager (1994-1999) and as an Audit
Staff/Senior (1989-1994).
iv. CURRENT OFFICERS/DIRECTORS: Since the
Petition Date, there has been no officers nor has there been a board of
directors.
B. PRE-PETITION FINANCIAL HISTORY AND RESULTS OF OPERATIONS
1. FINANCIAL HISTORY
Selected financial data and a general discussion and analysis of the
Debtor's historical
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financial condition and results of operations of the European Assets(15) prior
to the Petition Date is included in COMPOSITE EXHIBITS "3" AND "4" of the
Disclosure Statement.(16) As of September 30, 1999, CHS had a tangible book
deficit of approximately $142 million.
At or about the Petition Date, CHS' tangible book deficit was
approximately $487,733,617. Since the Petition Date, CHS believes that the
tangible book deficit has significantly increased as a result of demands for
payment on CHS' guarantees of subsidiaries' debt being made upon CHS by the
subsidiaries' creditors.
a. Comparison of 1998 to 1999 Income Statement and
Working Capital for THE EUROPEAN BUSINESSES
For the full year 1998 compared to 1999 (after adjusting for the
full-year effect of the Metrologie acquisition in mid 1998), sales show a
decline of approximately 11%, while the overall market for IT equipment
distribution was forecast to grow by 16% during the same
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(15) CHS has historical information regarding its Latin American
subsidiaries through September 1999. CHS' current management has attempted to
obtain current financial information on the Latin American subsidiaries, but has
been unable to do so. Management requested that the Trade Committee's
consultant, PWC assist CHS, on a local level in Latin America, to discover more
detail about the Latin American subsidiaries. The information CHS has about its
remaining Latin American subsidiaries is included in Section G(1) of the
Disclosure Statement.
(16) The financial statements presented here are based on data supplied
by CHS for periods prior to Q4 1999 and Journey's (Europa) best estimates for
Q4-99 and Q1-00. The Debtor cannot confirm or refute the veracity of Journey's
estimates in that it has no independent knowledge with which to do so. These
statements are unaudited and Mark Keough, a former insider of CHS and the
principal of Europa, the proposed purchaser of the European Assets in the Plan,
prepared these exhibits. Furthermore, 1998 statements have been adjusted to
reflect full year operations for Metrologie France (acquired mid-1998) thereby
facilitating year to year comparisons.
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period, according to International Data Corporation (IDC).(17) In management's
opinion, the decline in CHS' sales was primarily due to the massive withdrawal
of credit from the CHS European subsidiaries following a press release by CHS in
February 1999 regarding its investigation of certain rebate issues and the
subsequent earnings restatement released by CHS in March 1999 and a $90 million
loss in the second quarter of 1999. From December 1998 to December 1999, CHS'
accounts payable were more than halved and short term debt was reduced by
approximately 25% for France , Scandinavia, Eastern Europe, Portugal and Ireland
(the "European Assets"). The total loss of cash from credit lines approximated
$170 million during this period. There were multiple effects on CHS'
subsidiaries' revenues attributable to the credit crunch, including weaker
inventories (from 37 days to 21 days), loss of key sales people, loss of some
franchises and an inability to participate in quarter-end purchasing
opportunities and new product launches. The loss of revenues and generally
weaker financial performance led to poorer payment patterns, thereby propagating
a vicious cycle of further credit reductions. Another factor which contributed
to the loss of revenue by CHS during 1999 was the integration of operations in
Denmark and Sweden which led to a loss of sales people and customers.
Notwithstanding, these problems, two of the largest subsidiaries, Norway and
Metrologie France actually managed to show a growth in revenues during this
tumultuous period.
Gross margins for this period declined by nearly one full point (14%
decline in the
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(17) Overview of IT Distribution Channels in Western Europe: Country
Reviews and Channel Outlook, 1997-2003 by Brian Pearce, published October 1998.
Also: "From Traditional IT Distribution Channels to eChannels in Western Europe
1999-2000" by Brian Pearce, published March 2000.
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margin rate). Specific factors drove the decline: 1) the pressure to keep
revenue flow at any cost, since revenue was directly related to short-term cash
flow through factoring arrangements; 2) the loss of "extra" margin opportunities
available from vendors to reward growth in specific product categories and
quarter-end buy-in due to cash pressures; 3) reduced availability of private
label products, which tend to be higher margin, since these manufacturers
typically operate on a cash basis; 4) loss of cash discount for those
subsidiaries unable to make timely payments; 5) a loss of focus by management on
the day-to-day battle to maintain margins due to extreme credit pressures.
Operating expense shows a decline during this period, but the decline
was not fast enough to make up for the loss of revenue, resulting in a higher
operating expense as a percentage of sales. Furthermore, operating expense was
affected by restructuring charges related to cost reduction and integration
efforts. In addition, CHS' interest expense increased considerably as a
percentage of sales as a result of penalty interest rates, fees, etc. related to
technical defaults of credit lines or simply the higher risk inherent in the
situation.
The resulting profitability from the above factors was disappointing,
with a decline of over $30 million in net profit and a loss for 1999 of 0.7% of
sales. CHS believes the primary force behind the dramatic shift in CHS' fortunes
was the catastrophic loss in credit.
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b. Q1-99 VS Q1-00 WITH RESPECT TO THE EUROPEAN ASSETS(18)
Comparing the first quarter of 1999 to the first quarter of 2000, the
striking difference is the significant decline in sales, 35% overall. Exchange
rate movements can explain part of this. According to Europa, during the first
quarter of this year, the Euro had declined against the dollar by about 12%
compared to the same period in 1999. However, most of the decline in sales can
be attributed to the loss of credit and the consequent detrimental effects on
inventory. For most of the first quarter of 1999, trade credit was at normal
levels. Following CHS's announcement of possible rebate problems in February
1999 and a restatement of earnings in March 1999, trade credit began to be
reduced. By the end of the first quarter of 1999, payable days had declined to
28 (compared to 41 days at the end of 1998). According to Europa, by the end of
the first quarter of this year, trade credit had declined to 20 days. The actual
decline in dollar terms was significantly worse, with a 53% decline in payables
from March 31, 1999 to March 31 2000. This equates to a cash withdrawal from
these businesses of over $80 million by trade creditors. Europa reported that by
the end of March 2000, inventory fell to half the level it was in March 1999.
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(18) The majority of the information in this section concerning the
European Assets' performance in the year 2000 was prepared for an provided to
the Debtor by Mark Keough, a principal of Europa, the proposed purchaser of the
European Assets. The Debtor's Acting CFO, Burt Emmer verified the trade credit
pressure and lack of inventory through discussions with management in Europe
after the Petition Date when he visited several of the subsidiaries' facilities.
Mr. Emmer's trip to Europe was investigative. He did not attempt to market the
European Assets. Rather, any inquiries from parties regarding the purchase of
some or all the assets were directed to the respective committees. Mr. Emmer
declined to allow PriceWaterhouse Coopers to accompany him on his trip to
Europe. The Trade Committee questions the foregoing findings and conclusions
with respect to Mr. Emmer's trip to Europe.
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The decline in sales was particularly noticeable in Scandinavia and CHS
France. Metrologie managed to stay even in Euro terms, but declined by 12% in
dollar terms. Eastern Europe generally did better, with several countries,
including the Baltic States, showing growth over this period despite the credit
pressures. The decline in Scandinavia was also impacted by overall market
declines when government-subsidized PC purchase programs came to an end.
Europa reported that gross margin rate declined by a full point (-17%)
from the first quarter of 1999 to the first quarter of 2000. Management believes
that this decline is primarily attributable to the dynamics caused by reduced
credit, i.e. less efficient purchasing, sell-off of old inventory at a discount,
loss of rebates and loss of private label products.
The decline in operating expense (-9%) was insufficient to avoid a
significant decline in operating profits. Many of the key expenses are
relatively fixed, for example systems and logistics centers. Europa reported
that despite an improvement in interest and other expense, net income was
severely affected by the loss in sales volume with a decline of nearly 200%.
In terms of the capital structure, the equity of the combined
subsidiaries is significantly weakened by the losses incurred during the
remainder of 1999 through the first quarter of 2000. Availability of credit
lines from short-term lending facilities also declined by $50 million, though
interest expense improved and the debt to equity ratio was reduced from 1.91 to
1.67.
In summary, CHS' credit crisis began by late in the first quarter of
1999, though not early enough in the quarter to dampen sales performance. By the
first quarter of 2000, the credit crisis was in full swing, and worsening. The
impact on sales volume, inventory and payable levels has been devastating,
though the equity base of the combined European subsidiaries is still largely
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intact.
2. MANAGEMENT AGREEMENT
By December, 1999, CHS' relationships with vendors and its subsidiaries
was severely damaged. CHS' subsidiaries had stopped virtually all required
reporting of finances to CHS and further, ceased making payments owed to CHS.
Vendors and lenders tightened credit terms to the subsidiaries to the extent
that continuing operations at the local subsidiary level became increasingly
difficult.
In an attempt to distance CHS from its subsidiaries' operations and
restore good will and vendor/lender relationships, CHS turned over management of
substantially all of its European subsidiaries' operations to Journey Holdings,
Ltd., a Gibraltar company ("Journey") n/k/a Europa. Europa f/n/a Journey, is
owned by Mark Keough, the former Chief Operating Officer of CHS from July 15,
1999 through December 14, 1999. Journey was constituted on December 13, 1999. On
December 14, 1999, CHS and Journey entered into a management contract for the
purpose of engaging Journey to manage these European subsidiaries (the
"Management Contract"), a copy of which was filed with the Securities and
Exchange Commission.(19) The Management Contract provides for the payment of
$100.00 per year by CHS to Europa as compensation. Europa also charges the
subsidiaries fees in connection with its management of their affairs pursuant to
the same terms as management fees were formerly paid to CHS prior to
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(19) Simultaneous to the Management Contract, CHS entered into an
Exchange Agreement whereby Journey would acquire substantially all of the
European subsidiaries of CHS, which agreement was also filed with the SEC and is
described in more detail in Section C of the Disclosure Statement. Journey's
interest in the Exchange Agreement and the Management Contract were assigned to
EuropaIT ApS ("Europa"), a Danish Company, in mid-February 2000.
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the Management Contract. Since December 1999, Europa has invoiced the
subsidiaries comprising the European Assets for management related fees
approximately $534,750 and collected from these subsidiaries approximately
$103,834.50, to date of which approximately $47,000 is disputed by the Norwegian
subsidiary. A copy of the Management Contract is attached as EXHIBIT "12" to
this Disclosure Statement.
According to Europa, financial reporting by the European subsidiaries
only recently began again. To the extent financial reports regarding the
European Assets are available, Europa claims they have been provided to the
Debtor by Europa. See Composite Exhibits "3" and "4" attached to this Disclosure
Statement.
C. EVENTS LEADING TO CHAPTER 11 FILING
CHS' business suffered serious deterioration from April 1, 1999 through
the Petition Date due to a number of factors, including (1) a reduction of
incentive programs by vendors, such as price protection, volume rebates and
inventory protection rebates which caused reduction in CHS' gross margins; (2)
the industry trend by manufacturers to increase direct sales and eliminate
wholesale distributors for their products; and (3) the reduction in the amount
of credit extended to CHS by vendors and third party vendors.
In early 1999, CHS discovered discrepancies related to the amount of
vendor incentives recorded in the last three quarters of 1998. In coordination
with its independent auditors (Grant Thornton) and an investigation by outside
attorneys (Greenberg Traurig), CHS found that vendor rebates were overstated in
the second, third and fourth quarters of 1998. Some of the fourth quarter
rebates were supported with invalid documentation. All of the overstated rebates
were
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reversed and CHS restated its results for the second and third quarters of 1998.
As a result of this rebate issue, the senior executive officer responsible for
CHS' European operations resigned.(20) This information was made public and CHS
was severely impacted.
3. CHS' DOWNSIZED OPERATIONS
On May 1, 1999 CHS implemented a restructuring plan with the goal of
reducing future operating costs. The restructuring resulted in the writing-off
of certain assets, a reduction in the number of employees and the closure of
redundant warehouses. The restructuring plan was implemented through 1999. As of
September 30, 1999, approximately $8.0 million was accrued for restructuring
costs and this amount was included in accrued liabilities.
4. CHS SOLD ASSETS, RETURNED INTERESTS AND RECEIVERSHIPS
In 1999 and 2000, certain CHS subsidiaries' which had been acquired
were returned to the former owners, others were sold and certain other
subsidiaries were placed in receivership or voluntary creditor protection
proceedings. To the extent that these events took place prior to September 1999,
CHS determined that goodwill, to the extent of losses to be incurred with
respect to these subsidiaries, was impaired and, accordingly, wrote off such
amounts as of September 30, 1999.
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(20) The Debtor issued a press release on March 22, 1999, which stated
that as a consequence of the rebate issue, a senior executive officer of CHS
resigned . The officer was Pasguale Giordano. In connection with his resignation
he was paid $350,000 by CHS. Additionally, a SEC investigation of the financial
reporting practices of CHS was initiated in the second quarter of 1999.
Presently, the investigation is inactive.
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a. ASSETS SOLD(21)
In September 1999, CHS completed the sale of a non-core business that
distributes Sun Microsystems products in Germany, Austria, Denmark, and Sweden
to UBS Capital, the private equity division of UBS AG. Under the terms of the
agreement, the business was sold for approximately $49.0 million. CHS owned
approximately 75% of this business and received approximately $36.7 million from
the sale. CHS realized a pre-tax gain of approximately $32.7 million from the
sale. Proceeds from the sale were placed in escrow and classified as restricted
cash as of September 30, 1999. The proceeds were released in early October 1999
and were used for debt repayment (IBMCC) and working capital purposes ($1
million). The business generated sales of approximately $81.7 million and net
losses of $1.1 million for 1999 through the date of sale.(22)
On November 10, 1999, CHS completed the sale of a 60% interest in its
subsidiary in Poland for $2 million. CHS retained a 40% interest in the former
subsidiary. During the nine
----------------
(21) For the most part, the discussion regarding assets if the Debtor
which were sold pre- petition Date was derived from the January 2000 proxy
statement which was filed with the SEC. Additionally, information for this
section was derived from current management and documents regarding the
transactions were obtained from the Debtor's pre-Petition Date Counsel, Shutts &
Bowen.
(22) All payments disclosed herein or any transfers of assets of the
Debtor may be recoverable as preferential transfers, or as fraudulent
conveyances. The Trade and Noteholders Committee reserve their respective rights
to investigate any and all transactions between the Debtor and former management
and other third parties. Furthermore, the Trade Committee expects to investigate
all of the historical transactions of the Debtor and that the terms, discoveries
and positions taken by the Debtor in this Disclosure Statement are not intended
to be, and shall not bind, any other party in interest, including the Estate
with respect to any future claims, arising from, or relating to any of these
transactions.
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months ended September 30, 1999, the revenues attributed to this subsidiary were
$89.6 million. No gain or loss was attributed to this transaction. Subsequently,
in March 2000, CHS sold its remaining 40% in the subsidiary and received
$1,300,000.
In November, 1999, the former owners of Kventa Kft., the parent company
of CHS Hungary, acquired 2% of Kventa Kft. from CHS and CHS retained a 49%
interest in the subsidiary. CHS received $445,000 as a result of this
transaction. CHS has an option to buy back the 2% interest until December 2000
for $445,000. In June 2000 the Kventa Kft. majority interest sold CHS Hungary to
another corporation which is owned by the principals of the Kventa Kft. majority
interest. CHS considers this transfer to be an illegal transaction and subject
to reversal and/or a claim for damages (the "Kventa claim").
On November 18, 1999, CHS completed the sale of CHS Switzerland to
Actebeis, a competing distribution company. CHS received net proceeds from the
sale of approximately $5.3 million, $4.7 million of which was paid directly to
IBMCC.
In August 1997, CHS acquired a group of companies known as the "Karma
Group" which was a network of computer component distributors with operations in
Europe, the Middle East and Asia. For the nine months ended September 30, 1999,
the Karma Group contributed $506 million to the consolidated revenues of CHS and
was responsible for $4.7 million of the consolidated net losses of CHS. In
November 1999, the managing director of Karma International, S.a.r.l. ("Karma
International"), a Luxembourg company which directly or indirectly owned
substantially all of the Karma Group, caused Karma International to transfer
ownership of 10 Karma Group companies and their subsidiaries (Germany, Benelux,
Swiss,
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Czech, Portuguese, Italian, Austrian, Turkish, Greek and Belgian) to Austin
Commercial Enterprises, Ltd. (unaffiliated with CHS). The transferred Karma
companies accounted for substantially all of the revenue of the Karma Group. The
transfer of these Karma companies was done without the knowledge or consent of
CHS' board of directors or the shareholders of Karma International. Karma
International was credited with $4.7 million from this transfer, which amount
was used to retire indebtedness of the Karma Group guaranteed by Karma
International. CHS believes that it has a cause of action against those parties
responsible for this transaction, which cause of action may have value (the
"Karma Action").
In February, 2000 CHS' subsidiaries, CHS Finland and Karma Finland were
transferred to the former owner and manager of CHS Finland. This sale was forced
by the withdrawal of secured lending facilities following the mass resignation
of Finland's management, which resignations were announced on December 17, 1999.
CHS received $1.3 million and $200,000 respectively for this transaction. In
connection with this transaction, CHS recently learned that approximately
$100,000 of CHS' money is being held in an escrow account (the "CHS Finland
Escrow"). CHS is attempting to secure the release of the CHS Finland Escrow.
Europa, a successor company to Journey was paid $250,000 in connection with the
transaction.(23)
In March 2000, CHS transferred its rights to use a corporate jet to
Bombadier Aerospace in exchange for the payment of $293,872. In April 2000, CHS
transferred its rights to use a
----------------
(23) The $250,000 paid to Europa was, in part, compensation akin to a
commission to Europa for assisting CHS to preserve the value of CHS Finland and
negotiating the sales transactions (keeping the company operating and intact
after local management had abandoned the company).
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second corporate jet to Claudio Osorio in exchange for Mr. Osorio's payment to
CHS of $454,529 and the payment of liabilities owed by CHS connected with the
corporate jet of $74,378.(24) In April 2000, CHS sold significantly all of its
office equipment and furniture to Miami Worldwide Partners(25) in exchange for
the payment of $60,000.
b. ASSETS RETURNED TO FORMER OWNERS THROUGH REVERSALS OF
ACQUISITIONS AND EARN-OUT AGREEMENTS
As of September 30, 1999, CHS owed approximately $275.3 million to the
sellers of certain businesses that CHS had purchased. CHS commenced a program
designed to eliminate such amounts owed by disposing of all or a portion of CHS'
interests in those operations.
Memory Set was a subsidiary of CHS operating in Spain. CHS entered into
an agreement to purchase Memory Set in July 1998. Subsequently, a default
occurred under the purchase agreement because CHS had not paid the balance of
the purchase price of approximately $74.4 million. CHS did not cure the default.
In October 1999, CHS agreed to submit to arbitration the issue of the portion of
Memory Set that CHS would retain as a result of the cancellation of CHS'
purchase agreement for Memory Set. Recently, CHS received a document concerning
the arbitration and which may contain the ruling. However, the document is in
Spanish and CHS has not received a translation. During the nine months ended
September 30, 1999, this subsidiary contributed $139.4 million in revenue. The
loss on the disposition was $19.9 million.
----------------
(24) Burt Emmer, on behalf of CHS determined the sales price by
procuring comparables from Bombadier. CHS did not otherwise "market" the sale of
the jet.
(25) Claudio Osorio has an interest in Miami Worldwide Partners. Burt
Emmer, on behalf of CHS determined the sales price for the personal property by
researching comparables. CHS did not otherwise "market" the sale of the personal
property.
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On October 4, 1999, CHS conveyed 80% of the shares of Arena Bilgisayer
Sanayi Ve Ticaret A.S. and Armada Bilfisayer A.S., CHS' subsidiaries operating
in Turkey, to the original owners of those companies in exchange for a release
of CHS' obligation to pay them the balance of the purchase price for those
subsidiaries of approximately $46.0 million. The sellers granted back to CHS an
option to reacquire those interests at any time prior to the earlier of October
4, 2000 or a 60-day period beginning after CHS receives new cash investments of
$200 million or more. During the nine months ended September 30, 1999, these
subsidiaries contributed $115.3 million in revenues. The loss on the disposition
of this asset was $21.1 million which includes approximately $2.2 million of
amounts due from the former subsidiary to CHS that will not be realized.
CHS conveyed all of CHS's interest in ARC Espana Cartera, S.A., another
of CHS' subsidiaries operating in Spain, to the original owners in exchange for
a release of CHS' obligation to pay them the balance of the purchase price of
approximately $29.3 million. During the nine months ended September 30, 1999,
the revenue attributed to this subsidiary was approximately $67.2 million. CHS
realized a loss on the sale of this subsidiary of $7.0 million, which included a
fee of approximately $3.9 million to be paid to the original owners of the
subsidiary.
On October 20, 1999, CHS amended the terms of its purchase agreements
for International Corporation Services, Ltd. and related companies, subsidiaries
operating in seven locations in Latin America. Under the amendment, CHS conveyed
an aggregate 77.83% interest in these companies to the original owners in
exchange for a release of CHS' obligation to pay
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them the balance of the purchase price of approximately $49.8 million. In
addition, the original owners granted CHS an option to repurchase the 77.83%
interest for a total purchase price of $55.0 million any time before the earlier
of (1) October 20, 2000 or (2) 60 days after CHS received new cash investment of
$200 million or more. CHS also granted the original owners an option to purchase
the 22.17% interest that CHS retained in these companies for a total purchase
price of $15.6 million at any time that CHS's option to repurchase their
interest is in effect. During the nine months ended September 30, 1999, the
revenues attributed to these subsidiaries totaled approximately $180.4 million.
The loss on the transfer was $8.6 million. Thereafter, in March 2000, 22.17% of
the International Corporation Services subsidiary ("Intcomex"), which operates
in seven Latin American countries, was returned to sellers, Michael Shalom,
Anthony Shalom, and Esther Shalom in exchange for forgiveness of approximately
$4.8 million owed to sellers and $3.5 million, of which $1.3 million remains
outstanding as of June 6, 2000 (the "Intcomex obligation").(26) The value of the
percentage of the subsidiary is unknown, however, CHS' investment in the 22.17%
returned as of September 30, 1999 was estimated to be approximately $5.6
million.
On October 20, 1999, CHS amended the terms of its purchase agreement
for Cornejo Informatica, S.A. ("Cornejo"), another subsidiary operating in Latin
America. Under the amendment, CHS conveyed an 86.55% interest in Cornejo to the
original owners in exchange for
----------------
(26) Intcomex has been making timely payments to CHS pursuant to the
terms of its promissory note with the Debtor. However, Intcomex has indicated to
the Debtor that it may have the right to a set off against the amount due to the
Debtor. At this juncture, Intcomex has not raised its right of set off, if any,
in the Debtor's bankruptcy proceeding.
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a release of it obligation to pay them the balance of the purchase price of
approximately $13.0 million. In addition, the original owners granted CHS an
option to repurchase the 86.55% interest for a total purchase price of
approximately $2.0 million at any time before the earlier of (1) October 20,
2000 or (2) 60 days after CHS receives a new cash investment of $200 million or
more. CHS also granted the original owners the option to purchase the 13.45%
interest that was retained in Cornejo by CHS for a total purchase price of
approximately $2.0 million at any time that CHS's option to repurchase their
interest is in effect. During the nine months ended September 30, 1999, the
revenues attributed to Cornejo by CHS totaled approximately $33.0 million. The
estimated loss on the transfer was $1.9 million.
On October 27, 1999, CHS conveyed its interest in Brightstar Corp., a
subsidiary based in the United States, to the original owner in exchange for a
release of its obligation to pay the balance of the purchase price of
approximately $1.3 million. During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were approximately $94.1 million. CHS
realized a loss of $3.2 million the sale of this subsidiary.
On October 31, 1999, CHS rescinded the purchase agreement with
MicroInformatica Corp. CHS had previously paid cash of $3.2 million and issued
6,314,899 shares of CHS with a value of $20.3 million in settlement of the
acquisition of MicroInformatica Corp. The rescission agreement provided for the
return of the cash (offset against intercompanies) and shares in exchange for
CHS returning ownership of MicroInformatica Corp. to its original owners. The
approximate amount of MicroInformatica's obligation to CHS as of the Petition
Date was $850,000, payable on or before October 2000 (the "MicroInformatica
Obligation"). During the
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nine months ended September 30, 1999, the revenue attributed to this subsidiary
were $111.7 million.
On November 22, 1999, CHS conveyed its interest in CHS Aptec, a
subsidiary based in the Middle East, to the original owner in exchange for the
forgiveness of approximately $2.6 million owed by CHS to the sellers. The value
of the subsidiary is unknown, however, CHS' investment in the subsidiary as of
September 30, 1999 was estimated to be $4 million.
On December 2, 1999, the Acron subsidiary in Buenos Aires, Argentina,
was returned to sellers, Fabian Dido Sherman, Alexandra Perez Dutch, Gustav
Guillermo Geldart, and Hugo Sergio Lombardo in exchange for the return of
approximately $2 million previously paid. The Acron subsidiary paid the $2
million to CHS over a period of time. As of June 6, 2000, the Acron subsidiary
owed CHS $62,500.00 (the "Acron Obligation"). The value of the subsidiary is
unknown, however, CHS' investment in the subsidiary as of September 30, 1999 was
estimated to be approximately $3.5 million.
On December 9, 1999, CHS Brazil, CHS Promark Colombia, CHS Promark
Uruguay, CHS Latin America and CHS Mexico were transferred to a newly formed
company, DistributionTech.com, Ltd. a/k/a e-LatinCo.com
("DistributionTech.com"), for a total purchase price of $23.5 million, including
cash of $2 million, a promissory note for $16,235,809 and DistributionTech.com's
assumption of certain liabilities. Under the terms of the agreement, CHS
received a 49% interest in DistributionTech.com. Recently, CHS received
information that DistributionTech.com is in negotiations to sell CHS Latin
America to a newly formed entity, DistributionTech, Inc., a Florida corporation
which CHS understands may then sell CHS Latin
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America to an undisclosed third party. CHS understands that the purchase price
will be the assumption of CHS Latin America's debt. CHS is a minority
shareholder and as such, may not be able to prevent the transfers from
occurring. Furthermore, CHS has two (2) board seats which are vacant as a result
of Claudio Osorio and Antonio Boccalandro resigning their board seats. As of the
Petition Date, DistributionTech.com has not made any payments to CHS on the
promissory note obligation (the "DistributionTech.com obligation"). During the
nine months ended September 30, 1999, the operations generated sales of $456
million and had a net loss of $1.8 million. The Debtor believes that
DistributionTech.com may be a distressed company and therefore, the Debtor
cannot make any representations regarding the collectibility of the
DistributionTech.com obligation of the value of the estate's interest in the
company.(27)
On December 17, 1999, CHS conveyed its 65% interest in Ledakon Ltda., a
subsidiary based in Colombia, South America, to the original owner in exchange
for a release of its obligation to pay the balance of the purchase price of
approximately $582 thousand and the return of 211,417 of CHS' shares previously
issued. The shares were valued at approximately $300 thousand at the date of
return to CHS. During the nine months ended September 30, 1999, the revenue
attributed to this subsidiary were approximately $6.8 million. CHS realized a
loss of approximately $1.5 million on the sale of this subsidiary in the fourth
quarter of 1999.
As a result of CHS being in default on $42.4 million of the purchase
price owed for the acquisition of SiS Distribution Limited, a subsidiary based
in Asia ("SiS Hong Kong"), the
----------------
(27) Current management had no role in the Distributiontech.com
transaction. The transaction was negotiated and consummated by Claudio Osorio
and Antonio Boccalandro.
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original owners declared CHS in default of the purchase agreement in December
1999 and obtained a judgment for the return of the shares of SiS Distribution
Limited out of escrow (the "SiS Hong Kong Action"). Although CHS realized a loss
of approximately $36.6 million on the possible return of this subsidiary in the
fourth quarter of 1999, the return of the subsidiary is still disputed and CHS
is pursuing recovery of all or some of its cash investment of $29 million (the
"SiS Hong Kong Action"). During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were approximately $296.8 million.
On February 10, 2000, CHS' Nexsys subsidiary in Bogata, Colombia, was
returned to sellers, Gilbert Chalem, Samuel Burzstyn, Diana Perez, Dallyz
Montenegro and Sandra Horowitz in exchange for the return of 245,911 shares of
CHS previously issued with a value of $1.3 million at issuance and forgiveness
of amounts owned to sellers of $520,000. The value of the subsidiary is unknown,
however, CHS' investment in the subsidiary as of September 30, 1999 was
estimated to be approximately $1.5 million.
On February 25, 2000, CHS's Slovenia subsidiary was returned to seller,
Borut Rismal for forgiveness of approximately $1.1 million owed to seller. The
value of the subsidiary is unknown, however, CHS' investment in the subsidiary
as of September 30, 1999 was estimated to be approximately $1.5 million.
In March, 2000, the Raphael Informatica subsidiary was returned to
sellers, Marino Arzilli, Claudio Antoniotto, Aldo Mei, and Vittorio Carones in
exchange for the forgiveness of approximately $12 million owed to sellers. The
value of the subsidiary is unknown, however, CHS' investment in the subsidiary
as of September 30, 1999 was estimated to be approximately
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$13.7 million.
c. RECEIVERSHIPS
Numerous CHS subsidiaries were placed in receiverships or voluntary
creditor protection proceedings as reflected in EXHIBIT "5" attached to the
Disclosure Statement. The filings were necessitated by continuing losses in the
subsidiaries operations due to competitive industry conditions in the regions,
restricted credit from their vendors and the inability to remedy events of
default under their credit facilities.(28) CHS had guaranteed the debt owed to
creditors of most of these subsidiaries.
d. OTHER ASSET DISPOSITIONS
In March 2000 CHS paid $500,000 to the Dutch Tax authorities to settle
a tax claim of unpaid value added taxes (VAT)in excess of $5 million against CHS
Logistics Service B.V. The payment was made to protect this subsidiary's assets.
CHS Logistics Services B.V. had no operations at the time the taxes were paid.
The Dutch tax authorities were threatening to file bankruptcy against the
Company as were the Company's Creditors. The tax payment was made in response to
this threat.(29) Payments of approximately $250,000 to Network Associates
----------------
(28) In Belgium, certain Belgian banks who were also creditors of CHS
Finance took action to block the accounts of the Belgian subsidiary because CHS
Benelux had co-signed certain CHS finance loans that were then in default.
(29) The Debtor's initial Disclosure Statement and Plan of
Reorganization contemplated that a Reorganized CHS would emerge as an e-commerce
company post-Petition Date. In connection with the CHS Logistics' facilities as
the company's foreign base of operations. In this regards it was necessary to
prevent CHS logistics from going into bankruptcy. Claudio Osorio (perhaps other
former management) was relieved of personal liability for the taxes owed to the
Dutch taxing authority as a result of this settlement.
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(vendor) and Delagelandan (landlord) were also made by CHS during this period
(the "CHS Logistics Payments"). Neither Mark Keough nor Europa had any
involvement with these payments. International High Tech Marketing, Inc.
("International High Tech") during the investigation by the United States
Department of Commerce and the United States Department of Justice of alleged
violations of U.S. export laws. At the time the Firm was retained, the
government was seeking a corporate plea to criminal violations of the export
laws by the Debtor and International High Tech and was seeking a fine against
the Debtor of up to $250 million. An indictment by the government against the
Debtor and International High Tech and the government's attempt to impose such a
massive fine would have harmed the Debtor's efforts to negotiate a sale of its
remaining operating subsidiaries and propose a plan for the distribution of the
proceeds of the sale to the Debtor's creditors. The Firm negotiated a plea
agreement with the government that resolved the investigation and avoided an
indictment of the Debtor . The plea agreement provided that International High
Tech plead guilty to five (5) charges of delivering computer equipment to Libya
and Sudan and undervaluing computer sales and pay a fine of $250,000 plus a
special assessment were paid from the Debtor's funds on March 27, 2000. There
was no liability funding against the Debtor nor any admission of guilt by the
Debtor.
5. THE EXCHANGE AGREEMENT
On December 13, 1999 CHS entered into an Exchange Agreement (the
"Exchange Agreement") with Journey, a predecessor organization of Europa,
whereby it agreed to sell to Journey virtually all of its operating subsidiaries
in Europe in exchange for Journey's assumption
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of CHS debt, a cash payment of $11 million and issuance of stock to CHS in
Europa.(30) The Exchange Agreement also provided for a cash payment and issuance
of securities by Europa to certain creditors of CHS. A copy of the Exchange
Agreement was filed with the Securities and Exchange Commission (the "SEC") by
CHS as an exhibit to CHS' proposed Shareholders Proxy on January 7, 2000 (the
"Proxy Statement"). The Exchange Agreement is attached as an Exhibit to the
Plan.
The terms of the Exchange Agreement contemplated, among other things,
that CHS' 28% interest in CHS France S.A. and its 100% interest in CHS Czechia
S.r.o. and Karma International S.a.r.l. would be transferred by Drake, S.a.r.l.
to Europa. Drake is a wholly owned subsidiary of CHS. The parties to the
Exchange Agreement intended that CHS' interest in the European subsidiaries
being purchased by Europa would be transferred, one at a time, into a single
entity and then that entity would cause its interests in the subsidiaries to be
transferred to Europa. Drake Point, S.a.r.l. ("Drake") was the entity created
for that purpose. Drake is a company organized under the laws of Luxembourg.
Pursuant to a Share Purchase Agreement dated January 13, 2000, CHS Logistic
Services B.V. ("CHS Logistic") transferred its shares of Karma International
S.a.r.l., CHS France S.A. and CHS Czechia s.r.o. (collectively, the "Companies")
to Drake (the "Drake Agreement"). The consideration for the transfer of CHS
----------------
(30) At the time the Exchange Agreement was being negotiated between
Europa, through its principal, Mark Keough, Mr. Keough was an officer of the
Debtor. The Exchange Agreement was a management buyout. CHS' management (other
than Keough) negotiated the terms of the Exchange Agreement with Europa. CHS was
represented by U.S. counsel and consulted with foreign counsel regarding the
terms of the Exchange Agreement.
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Logistics' shares in the Companies was $5,000 at the time of the transfer and an
additional amount to be paid by Drake to CHS Logistic from the proceeds
allocated to the shares of the Companies derived by CHS from the sale of the
European subsidiaries as contemplated by the Exchange Agreement. In April 2000,
CHS Logistic was forced into bankruptcy. The Exchange Agreement was not
completed and Europa, a subsidiary of Journey Holdings, Ltd. ("Journey"),
entered into the Stock Purchase Agreement which amended and replaced the
Exchange Agreement. In order to effectuate the transfer of the European Assets
(including the shares in the Companies) to Europa pursuant to the Plan, the
consideration owed to CHS Logistic will be paid. The Debtor values Drake's
interest in the subsidiaries to be between $3 to 5 million. The sale by Drake to
CHS Logistic of the shares of the Companies and the valuations given to the
shares of the Companies in the Stock Purchase Agreement may be challenged by the
CHS Logistic receiver. Furthermore, the Drake Agreement specifies that the
portion of the consideration that is received by the Debtor in the Stock
Purchase Agreement must be allocated to the value of the Shares of the Companies
as established by an independent third party. The Debtor will be initiating
efforts to effectuate the transfer of the shares of the Companies to Europa with
the assistance of local Dutch counsel.
The Exchange Agreement was entered into as a result of approximately
two months of negotiation among CHS, an informal Committee of Senior
Subordinated Noteholders (the "Noteholders") represented by Alliance Capital
Management, and Mark Keough, on behalf of the European management team. The
parties agreed that separating the European subsidiaries from CHS offered the
best hope for these assets in light of the severe credit restrictions imposed on
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CHS and all of its subsidiaries as a result of the companies financial
deterioration. Furthermore, CHS, the Noteholders and Journey n/k/a Europa
believed that a viable European-scale business would provide better value to
creditors than a slow liquidation of the European assets.
At the time the Exchange Agreement was signed, the European
subsidiaries represented substantially all of the assets of CHS. Under Florida
law, the transaction required a shareholder vote. Therefore, in accordance with
the agreement, CHS submitted a Proxy Statement for approval by the SEC on
January 7, 2000. Also, as contemplated by the Exchange Agreement, Mr. Keough
formed a new European entity to serve as the parent company for the European
subsidiaries: EuropaIT ApS, a Danish corporation. Journey's rights to the
December Exchange Agreement and Management Contract were assigned to Europa in
mid-February 2000.
6. THE LETTER AGREEMENT
By late February 2000, it became apparent that the contemplated
transaction had met several roadblocks: 1) the SEC had extensive comments on the
proposed Proxy Statement, including a requirement to submit audited financial
statements for 1999 (CHS did not believe the audited statements could be
completed in a timely fashion); 2) several key assets, to be included in the
deal, were either sold, filed for bankruptcy, or were involved in ownership
disputes; 3) key trade creditors were not receptive to the proposed financial
structure in the Exchange Agreement, particularly the resulting debt to equity
ratios; 4) due to the fragile financial condition of CHS there were significant
legal risks to a transaction that did not address the concerns of all creditors.
As a result of these problems, in March 2000 a decision was made to
change the terms of the Exchange Agreement to create a financial structure
capable of attracting trade credit, reduce
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the transaction price to reflect the lost assets and proceed with the
transaction as part of a voluntary bankruptcy reorganization by CHS under
Chapter 11. Furthermore, discussions with certain large guarantee-holders were
initiated in an effort to broaden creditor participation in the process,
including IBM, Seagate, and Computer Associates. A letter agreement (the "Letter
Agreement") was drafted in anticipation of the Chapter 11 process to encourage a
fast-track procedure (a copy of the Letter Agreement is attached as Exhibit "A"
to the Plan).(31) A rapid resolution of a bankruptcy proceeding was critical in
view of the continuing deterioration of the assets. Several creditors signed the
Letter Agreement to signal their support for the transaction, including IBM,
Microsoft, Computer Associates, and approximately 80% of the face value of the
Noteholders. One other significant creditor, Seagate was involved in an initial
discussion of the Letter Agreement and informed of the progress of discussions,
but declined to sign the agreement.
D. PRE-PETITION LITIGATION
In March 1999, a purported class action complaint was filed against CHS
alleging that CHS and certain of its officers violated federal securities laws
in connection with financial reporting and disclosure. The suit further alleged
that CHS issued false and misleading financial reports, participated in insider
trading and disclosed to the class plaintiffs misleading information regarding
the success of the company's operations. The suit purported to be on behalf of
those
----------------
(31) The Letter Agreement obligated CHS to pay certain attorneys fees
and expenses: the Noteholders' counsel, Cadwalder, Wickersham and Taft was paid
$100,000 and Europa was paid $125,000 for the costs of due diligence and related
fees and expenses. The Trade Committee reserves its right, if any, to
investigate and challenge all pre-Petition Date transfers of the Debtor,
including the transfers to counsel for Europa and counsel for the Noteholders
Committee.
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who purchased CHS common stock during certain time frames. The class action case
is styled IN RE: CHS ELECTRONICS, INC. SECURITIES LITIGATION pending as Case No.
99-8186-CIV-Gold/Simonton in the United States District Court for the Southern
District of Florida, Miami Division.
Other litigation pending against CHS as of Petition Date is reflected
on EXHIBIT "10" attached to the Disclosure Statement.
SECTION III
SUMMARY OF THE DEBTOR'S BANKRUPTCY CASE
A. POST-PETITION FINANCIAL/OPERATIONS
CHS' operations were dramatically scaled back commencing pre-Petition
Date and continuing after the company filed for bankruptcy protection.
Europa f/n/a Journey continues to manage the European subsidiaries with
general the same level of supervision which CHS maintained when it managed its
subsidiaries.(32) Financial reporting by the subsidiaries is erratic. To the
extent that the subsidiaries are reporting to Europa regarding their operations,
the results of such operations are in the exhibits attached to the disclosure
statement.
CHS in Miami continues to manage CHS' assets other than the European
subsidiaries, however activity is limited to pursuing collection of Accounts
Receivables, identifying and marshaling assets, procuring possible purchasers
for the Excluded Assets,(33) reviewing claims,
----------------
(32) See generally, Section II of the Disclosure Statement.
(33) Current management has been approached by parties who may be
interested in purchasing assets of the Debtor. All such inquiries have been
directed to the Trade and Noteholders
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participation in the negotiations for the sale of the European Assets to Europa
and compiling information for the Disclosure Statement, bankruptcy schedules and
the respective creditors' committees and their counsel. CHS' Miami operation has
moved to a significantly smaller office space with three employees.(34) Expenses
of operation are approximately $65,000 per month which includes administrative
expenses, rent, compensation to employees and costs related to the bankruptcy
proceeding.
B. SIGNIFICANT EVENTS DURING CHAPTER 11 CASE
Since the Petition Date, the Debtor has remained in possession of its
assets and in control of its operations as a debtor-in-possession pursuant to
sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has
been sought or appointed in the Debtor's Case. The following is a summary of
significant events which have occurred since the Petition Date.
1. Appointment of Official Committee of Creditors Holding
Unsecured Claims and COMMITTEE OF NOTEHOLDERS
The Official Committee of Creditors Holding Unsecured Claims (the
"Trade Committee") and the Official Committee of Noteholders (the "Noteholders
Committee") were formed pursuant to an Appointment issued by the Office of the
United States Trustee on April 19, 2000. Both committees have taken active roles
in the Case and have been and continue to be
----------------
Committees, as agreed to between CHS and the committees. Current management is
not actively marketing for sale any of the Debtor's assets. However, the Debtor
understands that the Trade Committee and its consultant, PWC recently began
marketing the Debtor's Assets, including the European Assets to potential
bidders.
(34) See also, Section II(A)(2) of the Disclosure Statement for
information regarding the nature of the Debtor's post-Petition Date operations.
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instrumental in attempting to achieve a favorable outcome for creditors.
2. FAST TRACK PLAN AND DISCLOSURE STATEMENT
The sale to Europa includes the Debtor's interest in eighteen operating
European subsidiaries. The Debtor's European subsidiaries was negatively
impacted by the Debtor's bankruptcy filing. Credit terms previously extended by
vendors to the Debtor's European subsidiaries were terminated or severely
limited. As a result, Europa requested that the sale of these assets occur by
June 30, 1999. CHS requested that the Court schedule an early hearing on
approval of the Disclosure Statement and Plan of Reorganization. The Court
granted CHS' motion and scheduled the hearing on approval of the Disclosure
Statement for June 23, 2000.(35) If the Disclosure Statement is approved by the
Court, the confirmation hearing will be heard commencing July 26, 2000.
3. EARLY CLAIMS BAR DATE
In connection with the confirmation of the Plan, the Debtor needs to
know and establish the extent and magnitude of claims asserted against the
Debtor's estate. Therefore, CHS requested that the Court fix a claims bar date
for a date prior to confirmation. Upon motion by the Debtor, the Court fixed the
deadline for filing proofs of Claims for May 31, 2000.
CHS has begun analyzing the 256 Claims filed. CHS is requesting
substantiating documentation for numerous claims and providing the holders of
those Claims to provide the documentation within seven (7) days of the date of
the letter. For those Claims with
----------------
(35) The hearing on approval of the Debtor's initial Disclosure
Statement was scheduled for June 8, 2000.
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substantiating documentation, CHS is reviewing the Claims to determine their
validity. The Debtor may file objections to Claims prior to the Confirmation
Hearing for estimation and voting purposes. Objections to Claims for
Distribution purposes will be handled post-Confirmation Date as described in
Article VII of the Plan.
4. STAY BONUSES - The Court has authorized management stay bonuses of
up to $150,000 for Burton Emmer (Acting CFO), $100,000 for Richard Kaminsky
(Assistant Treasurer) and $80,000 for Andrew Chung (Director of Financial
Reporting). The stay bonuses are payable subject to the terms of the Court's
order, as amended.
5. COMPETING TRANSACTION ORDER - The Court ordered that competing
offers to purchase all or some of the European Assets be filed by July 14, 2000
with a deposit of $1,000,000. At the Confirmation Hearing, competing bids will
be considered by the Court and there is a possibility that a competing bid will
be accepted by the Court in lieu of the Europa transaction. In the event that
there are competing bids, the Court will determine at the Confirmation Hearing
which bid (or the Europa transaction) is the highest and best bid and is the
most beneficial to the creditors of the CHS bankruptcy estate. As a result, a
vote to accept the Plan is a vote to accept the Europa transaction or any other
bid or transaction the Court deems to be higher and better.
6. BREAK UP/TOPPING FEE - The Court authorized the Debtor to pay Europa
a Break- Up Fee of up to $500,000 or a Topping Fee of up to $850,000, under the
terms of the Court's Order authorizing payment of these fees.
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7. TH SYSTEMS SHAREHOLDERS' STAY RELIEF MOTION - In November 1999 the
former owners of the TH Systems U.S. (100% subsidiary of CHS) purchased an
inactive subsidiary of the TH System A.S., called TH Systems Czech for
approximately $10,000. This transaction was not known to CHS at the time. After
the announcement of the Exchange Agreement in December 1999, the former owners
of TH Systems Czech declared that CHS was not the true owner of TH System A.S.
and that the original sale to CHS (which occurred in 1997 was invalid). The
former shareholders of TH Systems Czechia (not affiliated with CHS) filed a
motion seeking relief from the automatic stay to allow the local courts of the
Czech Republic to make a final determination of the pending lawsuit in which the
purported ownership of TH Systems A.S. by CHS is disputed by the shareholders of
TH Systems Czech. The former shareholders claim that CHS failed to perform under
its contract to purchase shares of TH Systems A.S. and further, citing Czech
law, that CHS never took the proper steps under Czech law to effectuate the
transfer of TH Systems A.S. shares to CHS (i.e., no approval by TH Systems board
A.S. was obtained as required by the company's articles of association; para.
156, Article 4 of the Czech Republic's Commercial Code voids a transfer of
shares unless the transfer is made pursuant to a company's articles of
association; the transfer of shares was never recorded as required by Czech law;
TH Systems' shareholders entered into the contract with CHS based on false
financial statements provided by CHS which voids the contract pursuant to Czech
law.) As a result of the foregoing, and after the assets of TH Systems A.S. were
wrongfully transferred and used as security for the debt of CHS Czechia,TH
Systems Czech filed suit requesting declaratory relief by the Czech court and a
finding that the actions taken on behalf of TH Systems A.S. were
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invalid and the transfer of ownership of shares to CHS was never effectuated.
The shareholders of the Th Systems Czech claim that a Czech court should decide
these issues because the final determination of the issues will be made under
Czech law, otherwise, the shareholders will be severely prejudiced. The Debtor
and the Trade Committee each filed objections to the relief sought and disputing
the allegations raised by Th Systems Czech in their motion for relief from the
automatic stay. The matter has not yet been noticed for hearing.
8. SIS HONG KONG ACTION - On March 11, 1998, CHS and SiS Hong Kong
executed a Share Charge Agreement pursuant to which CHS's indebtedness to SIS
was secured by the shares of SiS Hong Kong. The Share Charge Agreement was
supplemented on June 11, 1999. Earlier this year, SIS Hong Kong commenced legal
proceedings in Hong Kong against CHS seeking the enforcement of the Share Charge
Agreement and supplement thereto. On April 28, 2000, after it received an
unfavorable procedure ruling from the lower tribunal, SIS Hong Kong filed a
Notice of Appeal in the High Court of the Hong Kong Special Administrative
Region Court of First Instance. SiS Hong Kong filed the Notice of Appeal
notwithstanding actual knowledge of CHS' bankruptcy proceeding as evidenced by
the fact that SiS Hong Kong filed a proof of Claim in the Case. CHS filed a
complaint for violation of the automatic stay and injunctive relief. In
response, SiS Hong Kong agreed not to proceed with the appeal unless and until
it obtains relief from the automatic stay from the bankruptcy court.
9. INTENTION TO PROSECUTE CLAIMS POST CONFIRMATION/PRESERVATION OF
CLAIMS - To the extent not liquidated by the Debtor prior to the Confirmation
Date, the Excepted Assets will be transferred to the Liquidating entity and any
actions to recover assets will prosecuted by the
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Liquidating Manager. Proofs of Claims which have been filed are being evaluated
by the Debtor for the objections to Claims process. Objections to Claims will be
filed and prosecuted post Confirmation Date by the Liquidating Trustee and/or
the Responsible Person.
10. TERMINATIONS OR THREATENED TERMINATIONS OF FRANCHISE AGREEMENTS -
Certain subsidiaries' franchises have been terminated or threatened to by
several vendors. 3Com canceled all European franchises effective November 1999
although 3Com, through Shane Buckley, its vice president of Channel Management
Europe, has recently indicated to Europa a willingness to reopen franchises on a
country by country basis once the Europa has purchased the European Assets.
Compaq canceled CHS Russia and Croatia and may have transferred their contract
from TH Systems to TH Systems Czech, a company which is not owned by CHS.
Current management believes that HP threatened to cancel its franchise with
Croatia, Sweden (PC's only in Sweden), Denmark and Russia.(36) Furthermore, HP
may have transferred their contract from TH Systems to TH Systems Czech, a
company which is not owned by CHS. Microsoft sent a termination notice to CHS
France and Metrologie France in April 2000 (effective June 30) due to
administrative issues which arose because of the subsidiaries had not credit
line. Microsoft informed CHS that the cancellation notice was sent at the
request of Microsoft France. CHS is presently in discussions with Microsoft to
postpone its cancellation until after the Confirmation Date. Microsoft confirmed
that other franchises would not be affected. These franchise issues have
detrimentally impacted the subsidiaries' operations.
----------------
(36) HP asserts that it did not cancel the franchises.
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Case No. 00-12731-BKC-RAM
SECTION IV
INFORMATION REGARDING CLAIMS
AND SUMMARY OF PLAN OF REORGANIZATION
A. ADMINISTRATIVE CLAIMS
Administrative Claims are entitled to priority in payment pursuant to
Sections 503 and 507(a)(1) of the Bankruptcy Code. The Plan provides for the
payment of each Allowed Administrative Claim, to the extent not previously paid,
in full, and in cash ten (10) days after the Confirmation Date.(37) After the
Confirmation Hearing, but prior to the Effective Date, professionals may submit
supplemental fee applications for approval by the Court. All amounts awarded
pursuant to supplemental applications of professionals after the Confirmation
Hearing shall be paid no later than the Effective Date or ten days after the
entry of the Order awarding professional fees if after the Effective Date.
The Debtor contemplates payment of the following Administrative Claims:
1. PROFESSIONAL FEES: These Administrative Claims include the fees of
accountants and bankruptcy counsel and any other professionals retained by the
Debtor and the Creditors' Committees. CHS estimates that Allowed Administrative
Claims may total up to $2 million.(38) The following professionals have been
retained or may be retained in the Case:
a. TEW CARDENAS REBAK KELLOGG LEHMAN DEMARIA & TAGUE,
L.L.P. ("Tew
----------------
(37) If there is insufficient cash to pay Administrative Claims in full
on the Confirmation Date, the holders of Administrative Claims must consent to
less than full payment or the Plan will not be confirmed.
(38) The Debtor requested that professionals who have been retained in
this case and who will seek to be paid an administrative claimant provide the
Debtor with an estimate of their fees and expenses through a Confirmation
Hearing. The Debtor has not received any responses.
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Cardenas"): this firm represents the Debtor as its Court approved general
bankruptcy counsel in the Case. Tew Cardenas' total fees and expenses will
approximate $225,000. Tew Cardenas received a pre-Petition Date retainer of
$75,000 which will be applied to reduce the amount of any Court awarded fees and
expenses.
b. BERGER DAVIS AND SINGERMAN: Berger Davis and
Singerman represents the Trade Committee as its Court approved counsel in this
Case.
c PRICEWATERHOUSECOOPERS ("PWC"): PWC was retained by
the Trade Committee as its Court approved financial consultants in this Case.
d. CIBC: CIBC was retained by the Noteholders Committee
as its Court approved financial consultants in this Case.
e. CADWALDER, WICKERSHAM AND TAFT: Cadwalder,
Wickersham and Taft is the attorney for the Noteholders' Committee.
f. BUCHANAN INGERSOLL P.C.: Buchanan Ingersoll is local
counsel to the Noteholders Committee.
g. STEEL HECTOR & DAVIS: Steel Hector & Davis is the
Debtor's corporate and securities counsel.
h. DE LA VEGA & MORGADE AND THE ACCOUNTING FIRM OF
STEVEN J. PRESTON, C.P.A.: the accounting firm of Steven J. Preston, C.P.A. and
De La Vega & Morgade are the Debtor's accountant for tax purposes.
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i. SQUIRE, SANDERS & DEMPSEY, L.L.P.: Squire, Sanders &
Dempsey, L.L.P. is the Debtor's special counsel in foreign legal disputes and
litigation involving TH Systems and Kventa and
j. OTHER PROFESSIONALS: The Debtor will be filing
applications for approval by the Court to retain Dutch counsel, Clifford Chance
(SIS Hong Kong) and such other counsel as is necessary to effectuate the terms
of the Plan.
k. OTHER ADMINISTRATIVE EXPENSE: The Indenture Trustee
and the Responsible Person.
2. UNITED STATES TRUSTEE'S FEES: These Administrative Claims are fees
required by the United States Trustee's office to be paid by all debtors on a
quarterly basis based upon the disbursements made by the Debtor during the
quarter.
3. EUROPA BREAK-UP OR TOPPING FEES: If the conditions for payment of
Europa's Break-Up or Topping Fees occur, these fees shall be Administrative
Expenses of the Estate. In the event that a Topping Fee is required to be paid
to Europa, the funds necessary to pay the Topping Fee will be derived from the
sales proceeds received by the CHS by any other successful bidder.
4. SUBSTANTIAL CONTRIBUTION COMPENSATION AND EXPENSES BAR DATE. Any
Person or entity who requests compensation or expense reimbursement for making a
substantial contribution in this Case pursuant to Sections 503(b)(3), (4),
and(5) of the Bankruptcy Code must file an application with the Clerk of the
Bankruptcy Court, on or before July 14, 2000 (the "503 Deadline"), and serve
such application on counsel for the Debtor, and as otherwise required by
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the Bankruptcy Court, the Bankruptcy Code, and the Bankruptcy Rules, on or
before the 503 Deadline, or be forever barred from seeking such compensation or
expense reimbursement.(39)
5. STAY BONUS CLAIMS. All amounts owed the holders of Stay Bonus Claims
shall be paid in accordance with the Stay Bonus Order.
The Debtor estimates that Administrative Claims, other than the
Break-Up and Topping Fees, will aggregate up to $2 million. The Debtor estimates
that as of the Confirmation Date there will be up to $1.5 million available to
pay holders of Allowed Administrative Claims. The Debtor anticipates that by
approximately August 30, 2000, an additional $1.7 million in Cash will be
received from the Internal Revenue Service representing an income tax return.
Ten days after the Confirmation Date, the Debtor shall distribute to
each holder of an Allowed Administrative Claim, other than the Claim held by the
United States Trustee, the full amount of the Administrative Claim as of the
Confirmation Hearing, unless otherwise agreed to by the parties, or ordered by
the Court. To the extent such claims are not paid in full ten days after the
Confirmation Date, all such claims shall be paid in full on or before the
Effective Date. All amounts awarded pursuant to supplemental applications of
professionals after the Confirmation Hearing shall be paid no later than the
Effective Date or ten days after the entry of the Order awarding professional
fees if after the Effective Date.
B. CLASS 1 - PRIORITY TAX CLAIMS
Tax Claims which are Allowed Priority Claims, at the sole option of the
Debtor, will be
----------------
(39) The Debtor has not filed a motion to establish a bar date for the
filing of administrative expenses Claims. Thus, it is the Trade Committee's
position that there is currently no bar date for the filing of such Claims.
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entitled to receive on account of such Allowed Priority Tax Claim, (a) equal
Cash payments made on the last Business Day of every three-month period
following the Effective Date, over a period not exceeding six (6) years after
the assessment of the tax on which such Claim is based, totaling the principal
amount of such Claim plus simple interest on any outstanding balance from the
Effective Date calculated at the interest rate available on ninety (90) day
United States Treasury Securities on the Effective Date, (b) such other
treatment agreed to by the holder of an Allowed Priority Tax Claim and the
Debtor, provided such treatment is on more favorable terms to the Debtor, as the
case may be, than the treatment set forth in clause (a) hereof, or (c) payment
in full.
The Debtor estimates the total amount of Tax Priority Claims to be
$0.00.
C. CLASS 2 - OTHER PRIORITY CLAIMS
Other Priority Claims consist of claims of employees accrued, but
unpaid employment benefits. The Debtor estimates the total amount of the Other
Priority Claims to be $13,500.
On the Effective Date, or as soon as practicable thereafter, each
holder of an Allowed Priority Claim shall receive, in full satisfaction,
settlement release, and discharge of and in exchange for such Allowed Other
Priority Claim, (a) Cash equal to the amount of such Allowed Other Priority
Claim, or (b) such other treatment as to which the Debtor and such holder of an
Allowed Other Priority Claim shall have agreed upon in writing.
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D. CLASS 3 - UNSECURED CLAIMS OTHER THAN GUARANTEE CLAIMS(40)
Unsecured Claims Other than Guarantee Claims consists of the holders of
all general Unsecured Claims other than Guarantee Claims. All Unsecured Claims
Other than Guarantee Claims shall be Allowed or Disallowed in accordance with
the provisions for resolving Disputed Claims as set forth in Article VII of the
Plan.
The Debtor estimates the total amount of Allowed Unsecured Claims Other
than Guarantee Claims to be approximately $250,000,000.
The holders of Class 3 Claims and Class 4 Claims shall be treated
together for the purpose of pro rating Distributions to these Classes under the
Plan. Each holder of a Class 3 or 4 Claim, must select on their Ballot one of
the following types of treatment to be afforded Class 3 and 4 Claims: a) the
Debt Package; b) the Equity Package; or c) a combination of the two where the
holder of a Class 3 or 4 Claim elects to subdivide the treatment of its Claim
between the Debt Package and the Equity Package (the "Selected Treatment"). On
the Effective Date, or as soon thereafter as practicable, each holder of a Class
3 or 4 Claim will receive, in full satisfaction, settlement, release and
discharge(41) of and in exchange for each and every Class 3 and 4 Claim, its
----------------
(40) The Plan separately classifies Guarantee Claims (Class 4) from
Claims other than Guarantee Claims (Class 3). While both Class 3 and Class 4
claimants contain holders of Unsecured Claims and treatment of the Classes is
identical under the Plan, the Debtor believes that the separate classification
of the Claims is appropriate under the Bankruptcy Code. The Trade Committee
reserves its right to object to the separate classification of these Claims (and
reserves its rights in respect to all other confirmation issues). The
Noteholders Committee supports the separate classification.
(41) The Debtor is not receiving a discharge as that term is
contemplated by 11 U.S.C. ss.1141(b)(3). The Trade Committee opposes the
granting of any releases under the Plan.
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Pro Rata share of the securities issued pursuant to that holder of a Class 3 or
4 Claim's Selected Treatment of its Class 3 or 4 Claim such that the ratio of
distribution under the Debt Package shall be no less than $7.50 principal amount
of Europa Thirty Month Notes per $100 of Class 3 and 4 Claims and that the ratio
of Distribution under the Equity Package shall be no less than $21.75 par value
of Europa Preferred Stock per $100 of Class 3 and 4 Claims (the "Class 3 and 4
Distribution Ratio"). If the Selected Treatment would result in a Distribution
under the Debt Package or the Equity Package of less than the Class 3 and 4
Distribution Ratio (the "Oversubscribed Package"), the Distribution will be made
to holders of a Class 3 or 4 Claim selecting such Oversubscribed Package at the
Class 3 and 4 Distribution Ratio on a Pro Rata basis, and the Claims not
satisfied in such Distribution shall be allocated to the Debt Package or Equity
Package, as the case may be, that is not the Oversubscribed Package.
Notwithstanding the foregoing, if, on the Effective Date, the sum of the amount
of Allowed Class 3 and 4 Claims, plus the amount of Disputed Claims as filed
exceeds $500,000,000, then the minimum distribution ratios for the Debt Package
and Equity set forth in Section 5.3 shall be reduced commensurate with the
amount by which total Allowed Class 3 and 4 Claims and Disputed Claims exceed
$500,000,000 and an initial Distribution shall be made to the holders of Allowed
Class 3 and 4 Claims accordingly. In addition, on the Effective Date, each
holder of a Class 3 or 4 Claim shall receive its Pro Rata share of any Cash
recoveries from or in connection with the Excepted Assets prior to the Effective
Date, and the consideration paid the Debtor by any entity other than Europa who
purchases some or all of the European Assets. Each holder of a Class 3 Claim or
Class 4 Claim is hereby deemed to have received a beneficial interest in the
Liquidating
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Trust and be entitled to participate in subsequent Distributions therefrom. The
consideration paid by any entity or entities whose higher and better bids for
some or all of the European Assets shall be distributed, Pro Rata, on the
Effective Date to each holder of a Class 3 or Class 4 Claim. Claims, if any,
between the corporations constituting the European Assets and the Debtor shall
be canceled and deemed null and void on the Effective Date and receive no
Distributions under the Plan. Distributions to holders of Fixed Rate Notes shall
be made by the Disbursing Agent to the Indenture Trustee for the benefit of
holders of Fixed Rate Notes. The Indenture Trustee shall in turn be authorized
and directed to make distributions under the Plan and the Indenture to holders
of the Fixed Rate Notes who hold such Fixed Rate Notes as of the Record Date.
E. CLASS 4 - GUARANTEE CLAIMS
Class 4 consists of all unsecured creditors holding Guarantee Claims,
including vendors of CHS subsidiaries and lending institutions. All Guarantee
Claims shall be Allowed or Disallowed in accordance with the provisions for
resolving Disputed Claims as set forth in Article VII of the Plan.
The Debtor estimates the total amount of Guarantee Claims will be
between $250,000,000 and $300,000,000.
The treatment of Allowed Guarantee Claims is the same treatment as that
afforded holders of Allowed Class 3 Claims.
F. CLASS 5 - SECURED CLAIMS
All Secured Claims shall be Allowed or Disallowed in accordance with
the provisions for resolving Disputed Claims as set forth in Article VII of the
Plan. The Debtor estimates the total
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amount of Secured Claims to be $0.00.
For all purposes, including voting, confirmation and Distribution under
the Plan, the amount of any Allowed Secured Claim will be determined based on
the value of the Collateral securing such Claim to the extent that such
Collateral is part of the Excepted Assets to be transferred by the Debtor to the
Liquidating Trust. Any Claim that is secured by an unavoidable Lien on Property
of the Debtor that is to be surrendered by the Debtor on or prior to the
Effective Date shall be treated as a Class 3 Claim, but shall be reduced by the
extent of the value of the surrendered Collateral securing such Claim, as
determined by the Court pursuant to Section 506(a) of the Code. With respect to
Property that is transferred to the Liquidating Trust that is Collateral subject
to an Allowed Secured Claim, the legal, equitable and contractual rights of the
holder of the Allowed Secured Claim shall be Reinstated on the Effective Date
and all payments required to be made to effectuate Reinstatement shall be made
by the Liquidating Trust. The Debtor's failure to object to such Secured Claim
in the Case shall be without prejudice. The Liquidating Trust's right to contest
or otherwise defend against such Claim, in the appropriate forum, when and if
such Claim is sought to be enforced by a holder of an Allowed Secured Claim is
hereby reserved. Notwithstanding Section 1141(c) or any other provision of the
Bankruptcy Code, all Pre-Petition Date Liens on Property of the Debtor held by
or on behalf of the holders of Allowed Secured Claims with respect to such
Claims shall survive the Effective Date and continue in accordance with the
contractual terms of the underlying agreements with such holders of an Allowed
Secured Claim until, as to each such holder of an Allowed Secured Claim, the
Allowed Claims of such holders of Secured Claims are paid in full.
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G. CLASS 6 - ADMINISTRATIVE CONVENIENCE UNSECURED CLAIMS
All Administrative Convenience Unsecured Claims shall be Allowed or
Disallowed in accordance with the provisions for resolving Disputed Claims as
set forth in Article VII of the Plan. The Debtor estimates the total amount of
Administrative Convenience Unsecured Claims to be $20,000.
The holders of Allowed Administrative Convenience Unsecured Claims will
receive payment in Cash on the Effective Date or as soon thereafter as is
practicable in an amount equal to 100% of the Face Amount of such Allowed amount
of such Claims, not to exceed $1,000. Any holder of an Allowed Unsecured Claim
(or Claims) in excess of $1,000 that desires treatment of such Claim (or Claims)
as an Allowed Administrative Convenience Unsecured Claim shall make an
irrevocable election to reduce its Claim (or aggregate Claims) to $1,000 in
writing on the Ballot and return such Ballot on or prior to the Ballot Date. Any
election made after the Ballot Date shall not be binding on the Debtor unless
the Ballot Date deadline is expressly waived in writing by the Debtor for the
express benefit of any holder.
H. CLASS 7 - SUBORDINATED SECURITIES CLAIMS
The holders of Subordinated Securities Claims, including Federal
Securities Litigation Claims, shall be limited to recovering from the proceeds
of the D&O Insurance, to the extent so entitled, and shall not otherwise receive
or retain any property under the Plan. This Class of claims is described in
Section II of the Disclosure Statement in more detail.
I. CLASS 8 - OLD COMMON STOCK INTERESTHOLDERS
Old Common Stock Interestholders shall receive no Distributions under
the Plan. All Old
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Common Stock Interests shall be deemed to be canceled and extinguished on the
Effective Date.
SECTION V
SOURCE OF FUNDING AND
MEANS FOR IMPLEMENTING THE PLAN
A. MANAGEMENT/OWNERSHIP OF EUROPA
As described earlier, Europa is a newly formed entity incorporated in
Denmark (Europa's incorporation documents and by-laws are attached as EXHIBIT
"7" to the Disclosure Statement). Europa has no significant business activities
apart from its Management Contract with CHS. Europa has entered into management
fee arrangements with most European subsidiaries, which are nearly identical to
those previously maintained by CHS in 1999. However, due to the current shortage
of available, unencumbered and unrestricted cash in the subsidiaries, Europa has
invoiced the subsidiaries comprising the European Assets for management related
fees approximately $534,750 and collected from these subsidiaries approximately
$103,834.50, to date of which approximately $47,000 is disputed by the Norwegian
subsidiary.(42)
Europa's opening balance sheet is attached as EXHIBIT "6" to the
Disclosure Statement. The balance sheet reflects no assets apart from cash and
receivables (management fees payable) from the European subsidiaries.
Currently, 100% of the capital stock of Europa is owned by Plectrum
Holdings, a Gibraltar company, which was formed, in late 1999 to serve as the
vehicle for management's equity interest. After the proposed transaction is
completed, Plectrum will own 80% of the fully
----------------
(42) Although the Liquidation Analysis (Exhibit 11 to the Disclosure
Statement) reflects cash at the subsidiary level, current management believes
that the cash is either encumbered or restricted and cannot be upstreamed to
CHS.
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diluted Preferred Stock of Europa, with the creditors of CHS owning the
remaining 20%. At present, Mark Keough is the sole Director of Plectrum, and
Mark Keough and Ross Mullins are the Directors ("Registered Managers" according
to company by-laws) of Europa. After the transaction, management will have the
following five representatives on the Boards of both Plectrum and Europa. A
brief description of their backgrounds is as follows:(43)
1. MARK E. KEOUGH - Mr. Keough, who is 45 years old and a dual national
of the US and Ireland, will serve as Chief Executive of Europa. For the period
July 15, 1999 through December 14, 1999, Mr. Keough was the Chief Operating
Officer of CHS Electronics, where he was primarily responsible for the operation
of the European subsidiaries. Effective December 14, 1999, the date on which the
December 1999 Exchange Agreement with Journey was signed, Mr. Keough resigned
from CHS.
For several months prior to his role at CHS, Mr. Keough worked with
several prominent private equity firms to identify appropriate acquisitions in
the distribution sector in Europe. He participated in the due diligence efforts
at a large European plumbing distributor and a major electrical wholesaler based
in Germany. From March 1994 to June 1998, Mr. Keough was Vice- President of
Product Management and Supply at Wesco Distribution, the no. 2 electrical
wholesaler in North America. At Wesco, he was responsible for relationships with
manufacturers, operation of central distribution centers and inventory policy.
Wesco was formerly the distribution subsidiary of the Westinghouse Electric
Company, who sold it to an
----------------
(43) Europa's management team was selected by Mark Keough. All
individuals who will be a part of the management team, have an equity interest
in Europa or are otherwise presently involved in Europa are described herein.
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Case No. 00-12731-BKC-RAM
investor group led by Clayton, Dubilier & Rice (CD&R) in February 1994. Mr.
Keough was recruited to Wesco by CD&R. From 1994 to 1998, Wesco's sales grew
from $1.5 billion to $2.5 billion and operating profit improved from an $11
million loss to an $89 million profit. In June 1998 Wesco was sold for $1.1
billion, which represented an equity gain approximately $550 million on the $100
million invested in 1994. It was one of the most successful leveraged buy- outs
of the 1990's, yielding an IRR of over 50% per annum. Prior to his post at
Wesco, Mr. Keough was a partner (Principal) with McKinsey & Company, the
management consulting firm. Most of Mr. Keough's experience at McKinsey
(1982-1994) was in Europe (Spain, UK, Italy, Portugal, Holland), where he
focused on manufacturing and supply chain management. As a partner he was the
world-wide leader of the firm's supply management practice and authored several
articles on strategic purchasing. Mr. Keough received two undergraduate degrees
from the Massachusetts Institute of Technology, in Urban Planning and System
Dynamics. In 1982 he received an M.B.A. from the Graduate School of Business
Administration at Harvard, where he was elected by the faculty as a Tutor in
Managerial Economics.(44)
2. ROSS H. MULLINS - Mr. Mullins will serve as the Chief Financial
Officer of Europa. Mr. Mullins, who is 51 years old and a U.S. citizen, has been
resident in Europe since 1973. He is currently Managing Director of a corporate
finance boutique, RCF Corporate Finance S.A., based in Geneva, Switzerland. Mr.
Mullins founded RCF in 1994 to provide out-sourced capital markets and banking
expertise to high growth companies and financial institutions. Using his
----------------
(44) Europa has advised the Debtor that it is indebted to its officers
and directors in an amount not to exceed $1.5 million. The anticipated and
accrued obligations of Europa to Mark Keough is $504,848. A breakdown of this
amount is contained in Exhibit 13 attached hereto.
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banking experience with Chase Manhattan, Mr. Mullins has built a business at RCF
which has advised on approximately $1.5 billion in financing. RCF specializes in
advising its clients on asset securitization, high yield bond issues and
syndicated loans. From an industry perspective it concentrates on the telecoms,
computer and banking (Eastern European financial institutions) segments. Prior
to setting up RCF, Mr. Mullins was employed from 1992 to 1994 by the Swiss
subsidiary of Merisel Inc. (at that time a FORTUNE 500 computer products
distributor) as Managing Director in a turnaround situation. Prior to Merisel,
Mr. Mullins founded, operated and subsequently sold a financial consulting
business which marketed risk management software to banks in the period 1987 to
1992. During this period he also did some venture capital investing in Russia,
creating two companies on whose Boards of Directors he still sits. Earlier in
his career, Mr. Mullins spent almost 10 years with Digital Equipment in Spain
(as Financial Director) and in Geneva (as Financial Controller for the
Laboratory Data Products Group), before joining Chase Manhattan and working with
Chase as a Vice President and Manager of Corporate Banking in French-speaking
Switzerland from 1984 to 1987. Mr. Mullins holds a B.A. in Economics from
Wesleyan University in Connecticut, U.S.A. and was awarded a Thomas J. Watson
Fellowship upon graduation from Wesleyan.(45)
3. F. ROBERT MOUNTAIN - Mr. Mountain is the Director of Business
Development for Europa IT, which includes responsibility for strategic vendor
relationships, mergers & acquisitions, market research, and the Romak computer
assembly business. Mr. Mountain is 56
----------------
(45) Europa has advised the Debtor that it is indebted to its officers
and directors in an amount not to exceed $1.5 million. The anticipated and
accrued obligations of Europa to Ross H. Mullins is $119,856. A breakdown of
this amount is contained in Exhibit 13 attached hereto.
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Case No. 00-12731-BKC-RAM
and is a UK citizen based in Paris. Originally qualifying as an Industrial and
Mechanical Engineer he moved quickly into General Management. Early in his
career he gained experience in a variety of manufacturing and distribution
businesses including FMCG and electronic toys and games and held a number of
management position with ITT (STC) in their Power Components Division in UK. He
entered the Computer Industry in 1983 and in 1985 founded a new value-added
distribution company, Trinitec, PLC which, after five years of rapid growth in
sales and profits, became part of the Metrologie Group in 1990. He was first
Managing Director and then chairman of the Metrologie operations in the UK
between 1990 and mid - 1998. Metrologie had acquired two businesses in the UK,
and at the start of the recession in the early 90's, Mr. Mountain implemented a
program of rationalization and cost reduction, which resulted in operating costs
being reduced by more than 60%. He then saw the UK Company through a period of
fast, profitable growth to a turnover of some $300m. Metrologie UK had
approximately 80% of its sales in Value Added Distribution and was the biggest
European customer for Digital (subsequently Compaq) Alpha products. He sat on
the Main Board of Metrologie International S.A., (listed on the Paris Bourse)
from 1992 until its acquisition by CHS in 1998. He played a significant role in
the operational and financial restructuring of the Group. Metrologie
International was recapitalized in 1995 through an investment by APAX Partners
and the Managers. The share price doubled during the three years leading up to
the sale. He has considerable experience in both Volume and Value Added
Distribution in many countries
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Case No. 00-12731-BKC-RAM
throughout Europe.(46)
4. RENE-LUC CAILLUD - Mr. Caillud is the general Manager of Metrologie
France and has been recently appointed as General Manager of CHS France, thereby
uniting the two key subsidiaries in France and supervising approximately 60% of
Europa's total business. Mr. Caillud has been with the Metrologie group
(acquired by CHS in 1998) for seven years. For four of those years he was
General Manager of Metrologie France, the largest unit of the Metrologie Group.
Prior to that he spent one year as Managing Director of Metrologie Germany, and
two years as a General Manager responsible for integration of acquisitions.
Before joining the Metrologie Group, Mr. Caillud was General Manager of CMG, a
French corporate reseller. Earlier in his career he worked in the finance
function at Matra and ICL France.
Mr. Caillud earned an undergraduate degree in Mathematics and graduate
degrees in law and business (M.B.A.) from the H.E.C. (Haute Etudes
Commerciales), a leading French business school. Mr. Caillud is fluent in
English and German in addition to his native tongue.(47)
5. ALEXIS LOPE-BELLO - Mr. Lope-Bello is the Director responsible for
Europa's Eastern European businesses. Mr. Lope-Bello brings to Europa in-depth
experience in the Eastern European and Russian market place, where he has worked
since 1998 ("before the wall came down"). During this period, he also resided in
Russia for three years. Mr. Lope-Bello
----------------
(46) Europa has advised the Debtor that it is indebted to its officers
and directors in an amount not to exceed $1.5 million. The anticipated and
accrued obligations of Europa to F. Robert Mountain is $181,600. A breakdown of
this amount is contained in Exhibit 13 attached hereto.
(47) Europa has advised the Debtor that it is indebted to its officers
and directors in an amount not to exceed $1.5 million. The anticipated and
accrued obligations of Europa to Rene-Luc Caillud is $0.00. A breakdown of this
amount is contained in Exhibit 13 attached hereto.
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played the leading role in building CHS's Eastern European presence to $800
million in sales through acquisitions and aggressive development of new and
existing businesses. He has also developed an extensive network of contacts with
vendor management in Eastern Europe.
Mr. Lope Bello, a citizen of Venezuela, is 34 years old and was
graduated from IUNP in Caracas with a degree in Computer Science. He has also
attended several vendor-sponsored training courses in general management.(48)
B. ASSETS TO BE PURCHASED BY EUROPA(49)
The transaction now proposed to the creditors of CHS is, in most
respects, what was agreed to in the Letter Agreement.(50) The assets to be
included in the transaction are the capital stock of CHS' European operating
subsidiaries. (A detailed profile of the European Assets, including summary
financials, number of employees, market size, etc. is presented in COMPOSITE
EXHIBIT "8" attached to the Disclosure Statement.)(51) The combined subsidiaries
had sales of
----------------
(48) Europa has advised the Debtor that it is indebted to its officers
and directors in an amount not to exceed $1.5 million. The anticipated and
accrued obligations of Europa to Alexis Lope- Bello is $127,120. A breakdown of
this amount is contained in Exhibit 13 attached hereto.
(49) Europa has no present intention to sell the European Assets once
they are acquired.
(50) The Trade Committee disputes that the terms of the Stock Purchase
Agreement is, in many respects, that which was agreed to in the Letter
Agreement.
(51) This exhibit and Exhibit 4 were prepared by Mark Keough, the
principal of Journey n/k/a Europa, the company which has been in control of the
management of the European Assets since December 1999. Europa is controlled by
Mark Keough who is a former officer and an insider of the Debtor. The Debtor has
limited knowledge regarding the present operations of the European Assets.
Europa prepared the exhibits from the reporting information received from the
subsidiaries. The managers of the European Assets have indicated that there are
no financial reports available after March 31, 2000.
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Case No. 00-12731-BKC-RAM
approximately $1.9 billion in 1999 and total assets of $454 million as of
December 31, 1999 (unaudited). Attached as Composite Exhibit "4" to the
Disclosure Statement are Pro Forma for the European Assets. In addition to the
capital stock of the operating subsidiaries, certain other assets will also be
transferred to Europa, where the companies involved are inactive, have the
rights to certain legal actions, or have ownership disputes.(52)
1. FRANCE - the two French operating subsidiaries represent about 60%
of the total sales of the entities included in the transaction. Metrologie
France is approximately 25% bigger in sales than CHS France, but CHS France is
the better capitalized company.(53) Both companies are located in the Paris
region. Metrologie was acquired in mid 1998 by CHS and has been run as a
separate company since then. More recently, a plan has been developed to combine
the "back office" of the two entities while maintaining multiple front-ends to
serve the needs of targeted customer segments, including, retail, large VAR's,
smaller VAR's/dealers, and higher end product segments ("value-added"
business).(54)
----------------
(52) Valuations of the European Assets are included in Exhibit "A" and
"B" attached to the Stock Purchase Agreement. The valuations were prepared by
and agreed to by Europa (Mark Keough) and Burt Emmer (CHS).
(53) France and Portugal are involved in Value Added Tax disputes with
their taxing authorities. These tax obligations, if any, should not effect the
Debtor because Europa's agreement with the Debtor, includes the assumption of
substantially all obligations of the Debtor.
(54) CHS France has bond debt of approximately $8 million, which bonds
mature in early August 2000. CHS France is attempting to procure an extension of
the bond maturity date, but if an extension is granted the interest on the bonds
will likely increase which would put further pressure on CHS France. CHS
France's management has indicated that a final resolution of CHS' bankruptcy
would improve its present circumstances and provide the company with more
stability.
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2. SCANDINAVIA - Scandinavia is comprised of 3 principal operating
entities: SMG Norway, SMG Sweden and SMG Denmark. The Scandinavian region
accounts for approximately 30% of total sales of the combined subsidiaries, with
Sweden and Norway approximately equal in size and Denmark considerably smaller.
The companies represent various combinations of three previous acquisitions of
CHS, including Santech Micro Group, Bitlink Systems AB, and Lars Krull. Over the
past 2 years, these acquisitions were gradually combined to form the three
current entities. Historically, all three companies have been well financed and
viewed as solid performers, though operating cost has tended to be higher than
elsewhere in Europe. Another distinguishing feature of the Scandinavian
operation is their success with component sales to OEM customers.
3. EASTERN EUROPE - The IT distribution industry is considerably less
developed in Eastern Europe and market information is difficult to obtain. The
market is generally viewed as substantially smaller than Western Europe, perhaps
10% of the total, but with potential for rapid growth. CHS has had a strong
presence in Eastern Europe, which is viewed as an attractive feature by leading
IT vendors. Whereas distribution is relatively easy to find in Western Europe
for the leading manufacturers, reliable channel partners are more difficult to
identify in the developing markets of Eastern Europe and Russia. The Eastern
Europe subsidiaries included in the transaction cover the three Baltic states,
Russia, Croatia, Slovakia, Hungary and Czech Republic. Eastern Europe
subsidiaries represent approximately 8% of the sales of the combined total.
There are some special circumstances to take into account in Hungary
and Czech
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Republic. In Hungary, the CHS operation (CHS Hungary) is owned by Kventa Kft, a
Hungarian company owned in turn 51% by local management and 49% by CHS
Electronics, Inc. CHS also owns an option to purchase back the controlling 2% of
Kventa Kft, which was sold to the local management in October 1999. Europa is
proposing to purchase both the 49% ownership interest and the option for the
further 2%, either separately, or as a 51% interest after the option is
exercised by CHS. However, CHS has not presently agreed to exercise the option
to purchase the controlling 2% of Kventa Kft. Exercising the option prematurely
could result in a damaging reduction in credit for the Hungarian operation.
Furthermore, the sale of CHS' 49% ownership interest to Europa is subject to a
right of first refusal by Kventa Kft, the owner of the 51% interest. The Kventa
claim will also be transferred to Europa in connection with the proposed
transaction.
In the Czech Republic, the principal entity is TH Systems, which enjoys
a strong presence in the Czech market. Following the announcement of the
December 1999 Exchange Agreement, TH Systems management announced that their
company was not actually owned by CHS, in the first instance. CHS and Europa
believe that local management indirectly established a new company (TH Systems
Czech) and have taken action to transfer TH Systems employees and customers to
this similar-sounding company. CHS filed a criminal complaint against local
management in the Czech Republic. Europa believes that it may be possible to
negotiate a solution to this situation and recover the business of TH Systems.
Financial information for TH Systems is not included in Europa's pro forma
because of the uncertainty surrounding the outcome of the Czech situation.
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4. PORTUGAL AND IRELAND - Portugal represents approximately 2% of the
total sales of the combined entities and distributes a relatively broad range of
IT products. The operation in Ireland, called Romak, focuses on PC assembly
rather than IT equipment distribution. Europa believes that while Romak is small
in sales today, it could play a larger role in the group by providing
private-label PC's and participating in channel assembly programs sponsored by
the larger PC manufacturers.
5. KARMA - The proposed transaction includes the sale of the capital
stock of Karma International, S.a.r.l. (KISA). KISA is the Luxembourg holding
company of the Karma operation, which was acquired by CHS in 1997. Karma was
viewed as the world's leading component distributor, particularly for hard
drives, operating primarily in Europe. In 1998, the Karma Group had sales of
approximately $1.3 billion. The Karma organization was distinctive in its
operating approach: product was purchased centrally (instead of within each
operating subsidiary) with most administrative functions located in Istanbul.
Another important feature was the culture of "partnership" in Karma. Each local
office manager was treated like a partner and a substantial portion of the
compensation was derived from the profits of the local office. The company
prospered with this centralized, low cost, partnership and for this reason, CHS
generally kept a "hands-off" attitude towards the company, allowing it to
operate with some independence from other CHS subsidiaries located in the same
geographic territory. As previously disclosed, in October and November 1999,
several of the Karma managers, including a former CHS Board member, Bernd Karre
and the manager of Karma Germany, Gottfried Hackbarth, developed a plan to
purchase the sales subsidiaries of Karma, but leaving behind the
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central purchasing entity, CHS-CPO G.m.B.H., a Swiss company. Europa believes
the plan was developed with the assistance of Deutsche Financial Services (DFS),
who held a lien on the shares of the Karma subsidiaries for the unpaid balance
of a loan to KISA of approximately $4.7 million. On November 24,1999 KISA sold
to Austin Commercial Enterprises, a British Virgin Islands company ("Austin"),
the 10 largest sales subsidiaries of Karma, representing over 80% of Karma's
revenue stream. An eleventh subsidiary was added shortly thereafter. One
Director of KISA approved the sale: Gottfried Hackbarth, who was also named
Chief Executive of the spinoff. Under Luxembourg law, one Director can authorize
the sale of substantially all the assets of an S.a.r.L. (a particular corporate
form typically used for small businesses). The consideration was approximately
$9 million, of which $4.7 m was paid immediately and the balance was to be paid
at a time to be agreed by both parties. The $4.7 million was then sent to DFS to
release the lien on the Karma subsidiary shares. Neither the Boards of KISA nor
CHS were aware of these transactions at the time. Senior management of CHS only
found out about the transaction through an obscure Internet press release
announcing a Karma MBO in December 1999.(55) As of September 30, 1999, the total
Karma Group had $294 million in assets. As a result, CHS was left with CHS-CPO
G.m.B.H., a Swiss Company used as the central purchasing entity of Karma, and a
subsidiary of KISA. This company has total debts of approximately $90 million
and its principal asset is receivables against the Karma sales subsidiaries
which were sold to Austin. Austin denies responsibility for these receivables.
CHS-CPO is under the supervision
----------------
(55) CHS-CPO is not included within the debt cancellation provisions of
the Plan and Disclosure Statement. Each and every claim of CHS-CPO against any
affiliate or other subsidiary is expressly preserved post-Confirmation Date.
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Case No. 00-12731-BKC-RAM
of the bankruptcy court in Switzerland. CHS, through KISA, has filed a criminal
complaint against Hackbarth and a civil complaint against Austin. In
anticipation of possible legal problems, Europa reports that Karma managers are
creating "mirror" companies, which companies Europa presumes will be used for
transferring employees and assets from the legal entities in dispute (e.g. Karma
Portugal was newly formed and Europa has heard rumors that similar action was
taken in Switzerland).
With regard to the Karma situation, Europa proposes the following
approach. 1) negotiate with Austin for the return of the Karma subsidiaries,
pursuing legal avenues as necessary; and 2) negotiate with the creditors of
CHS-CPO to resolve the debt problem, possibly through a restart of the
centralized component business mode pioneered successfully by Karma. Several
Europa entities have significant component sales. This would only be feasible
with the support of the CHS-CPO creditors, since they are also the major
suppliers to the component industry. Resolution of the debt at CHS-CPO could
reduce the claims against CHS, since the major CHS-CPO creditors (Seagate,
Quantum, Maxtor, Iomega) also hold CHS guarantees for the CHS-CPO debt. Because
of uncertainty of the outcome of the negotiations with Austin and the CHS-CPO
creditors, no Karma financial data is included in the pro-forma statements of
Europa.
C. THE PC WAY
Although not included as an asset being purchased in the Letter
Agreement, The PC Way was intended to be included as an asset of the Stock
Purchase and Sale Agreement as a substitute
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Case No. 00-12731-BKC-RAM
asset for CHS' 40% interest in Poland which was included in the Letter
Agreement.(56)
CHS owns 49% of the shares in a joint venture to assemble private label
PC's with Tri Gem Computer Netherlands, B.V. ("Tri Gem") in The PC Way, with an
option to purchase an additional 1% of the shares. The PC Way is operated from a
warehouse in Holland. The net book value of this business is approximately $1.3
million. In 1999, The PC Way had sales of $16 million and generated a net loss
of $200,000. Tri Gem, CHS' joint venture partner is one of the world's leading
manufacturers of PC's and components. Europa believes that this entity could
offer potentially attractive synergies in the PC distribution business.
After the Petition Date, Tri Gem served CHS with a notice of default
pursuant to the joint venture agreement between the parties, alleging the
following events of default: (1) CHS' filing of a voluntary petition under
Chapter 11 of Bankruptcy Code; (2) CHS' failure to pay its debts as they came
due; (3) CHS' failure to transfer the trademark Yakumo to the joint venture; and
(4) CHS' failure to cause its subsidiaries and affiliates to contract on an
exclusive basis with The PC Way. After receiving the default notice, CHS met Tri
Gem's representatives to discuss The PC Way's intent with respect to the future
of The PC Way and explore a possible resolution of issues raised in notice of
default. Thus far, these discussions have not been successful. Tri Gem has
indicated that it wants to terminate the joint venture agreement and wind up the
business affairs of The PC Way. Furthermore, Tri Gem does not have an interest
in voluntarily participating in the proposed transaction to sell CHS' shares to
Europa. CHS is investigating whether Tri Gem
----------------
(56) As previously disclosed, CHS' 40% interest in Poland was sold in
March 2000 for $1.3 million, subsequent to the development of the Letter
Agreement.
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can be compelled, notwithstanding CHS' alleged defaults under the joint venture,
to continue to be a joint venture partner in The PC Way.
Even if CHS is successful in preserving The PC Way joint venture with
Tri Gem, the company's future is in some doubt. The PC Way operated in a small
area of a warehouse that was rented by CHS for its Karma components business.
CHS is now in default on the rent for the warehouse and The PC Way may not be
able or willing to transfer its assembly fixtures to another location. Given
these recent developments, Europa will not purchase The PC Way and the original
consideration in the Stock Purchase Agreement was adjusted downward by $1.5
million (with respect to the Preferred Stock) as a result.
D. OTHER SUBSIDIARIES
In addition to the Karma and Czech subsidiaries described above, Europa
proposes to purchase other inactive companies, as listed the Stock Purchase and
Sale Agreement. In Europa's opinion, these companies have no book value, but may
have some residual value as owners of useful trading names (e.g. ALA and
Czechia).
E. CONSIDERATION OFFERED BY EUROPA
In exchange for the assets described above, Europa proposes to offer
securities with a face value of $66 million plus a 20% interest in Europa's
Preferred Stock ($2.5 million tangible book value after giving effect to the new
securities issued by Europa). Under the proposed transaction, creditors will be
asked to choose their share of either the equity or debt securities paid to CHS
by Europa. Holders may make more than one election by subdividing their claims.
If either the debt securities or the equity securities paid to CHS by Europa are
over-subscribed,
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the over-subscribed portion of the claims will be allocated under-subscribed
securities on a PRO RATA basis. The terms of the equity and debt securities
being offered are as follows (assumes $500 million in claims all distributions
adjust proportionately if claims are other than $500 million):
1. DEBT PACKAGE
30 Month Notes Distribution by CHS: $7.50 per $100 claim
Issue Size $22.5 million
Interest Rate: 10% p.a. (57)
Maturity: 30 months
Principal Repayments: 5 equal installments on
each 6 month anniversary
of issue date
Registration Rights: Registration rights are
explained in detail in
the Registration Rights
Agreement attached as
Exhibit "I" to the Stock
Purchase Agreement
attached as Exhibit "E"
to the Plan
Callable: at any time at par plus
accrued interest
2. EQUITY PACKAGE
Redeemable Distribution by CHS: $21.75 per $100 claim
Converitable
Preferred
Stock Issue Size: $43.5 million
Dividend Rate: 10% if paid in cash;
----------------
(57) After default, to the extent permitted by New York law, interest
on interest is charged under the Notes.
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Case No. 00-12731-BKC-RAM
alternatively, at the
option of Europa,
payable in kind at 12%
for first two years, 13%
in year 3, and 14% in
year 4
Conversion Date: Fourth anniversary
Redeemable: Anytime at par plus
accrued interest
Registration Rights: Registration rights are
explained in detail in
the Registration Rights
Agreement attached as
Exhibit "I" to the Stock
Purchase Agreement
attached as Exhibit "E"
to the Plan
Conversion Rate: Each $1.0 million of
preferred is convertible
into 2% of Europa Common
Stock (i.e. up to a
maximum 90% of equity on
a fully diluted basis.)
Common Stock 20% of the equity
capital of Europa IT as
of the closing date,
subject to dilution.
Pursuant to the Registration Rights Agreement, Europa has committed to
register the Notes and Preferred Stock. If an exchange registration statement
for the Notes is not declared effective by the end of the twenty-second month
following the Closing Date, the Notes will accrue additional interest at the
rate of .25% per annum for a period of 120 days, increasing to .50% per annum
thereafter until the exchange registration statement is declared effective. The
Registration Rights Agreement also contains provisions for the payment of
additional interest on the Notes in certain other prescribed circumstances, but
in all events the total additional interest cannot exceed .50% per annum. In
connection with the Registration Rights Agreement, the
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Case No. 00-12731-BKC-RAM
Articles of Association for Europa will be amended to provide for a .25% per
annum increase in the interest rate attributable to the Preferred Stock if a
registration statement for the Preferred Stock is not effective within 22 months
after the Closing Date, which shall be increased by an additional .25% per annum
if the registration statement is not effective within 26 months after the
Closing Date. Further details on the securities, including the form of the
securities and the indenture for the notes (58) are included as Exhibits to the
Stock Purchase Agreement which is attached as Exhibit "E" to the Plan.(59)
3. POTENTIAL PRICE ADJUSTMENTS TO STOCK PURCHASE AGREEMENT
a. CHS HUNGARY PRICE ADJUSTMENT: Pursuant to the Stock
Purchase Agreement, if Europa recovers shares of CHS Hungary within nine months
of the Closing Date (as defined in the Stock Purchase Agreement) then the value
deducted from the Closing which is attributed to the shares, shall be paid to
the Estate or the Liquidating Trust. However, if Europa recovers any other form
of consideration in respect of CHS Hungary, including Cash, then pursuant to the
Stock Purchase Agreement, the Debtor or the Liquidating Trust does not
participate in any such recovery.
----------------
(58) The Noteholders Committee and Europa were the primary drafters of
the Indenture Agreement. The May 24, 2000 version of the Stock Purchase
Agreement was negotiated and drafted by Europa and the Debtor's current
management. The Trade Committee was not involved inn the drafting of the
Indenture Agreement. Since May 24, 2000, the Trade Committee, the Noteholders
Committee and Europa have all participated (or been asked to participate) in the
drafting of all transactional documents and the Disclosure Statement and Plan.
(59) The Trade Creditors' Committee has questioned the extent which CHS
pursued other potential purchasers of the European Assets and therefore, whether
the consideration being offered by Europa is sufficient.
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b. POTENTIAL DOWNWARD AND UPWARD PURCHASE PRICE ADJUSTMENTS:
i. Potential Downward Adjustment: Under the terms of the
Stock Purchase Agreement, there is provision for additional downward price
adjustments at the Closing in the event that the Debtor is unable to satisfy its
obligations to transfer assets in addition to CHS Hungary.
ii. Potential Upward Adjustment: The Stock Purchase
Agreement also provides for upward price adjustments if there is a resale of the
assets conveyed by the Debtor to Europa.
F. TRADE COMMITTEE'S VIEWS ON EUROPA CONSIDERATION
1. RESTRICTIONS ON TRANSFER OF PREFERRED STOCK AND NOTES.
The Europa Preferred Stock and Notes will not be registered under the securities
laws of the United States or of any foreign jurisdiction. There is no
established market in which any of these Europa securities may be transferred.
Under the Registration Rights Agreement covering the Preferred Stock
and Notes, Europa does not commit to attempt to register these securities until
more than a year has passed. Creditors should not expect registration to be
effective until 30 months afer the closing. The registration rights do not
compel Europa to list the securities for sale on any particular securities
exchange; and therefore it is likely that even after registration, these
securities can only be transferred privately, and not over the facilities of any
exchange.
2. RESTRICTION ON TRANSFER OF COMMON STOCK.
The registration rights applicable to the Preferred Stock and notes do
not apply to the
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Common Stock. The Trade Committee believes the Common Stock will likely never be
registered for sale on any market. Moreover, the Articles of Association provide
Europa with rights of first refusal as to all the Common Stock (until
registration) except for transfers to an affiliate. Under these arrangements, no
creditor can sell any Common Stock whatsoever unless and until the refusal right
of the other Europa shareholders expire or are terminated.
3. INABILITY TO MAKE MEANINGFUL CONVERSION OF THE PREFERRED STOCK.
Although the Preferred Stock is convertible into Common Stock, the
Trade Committee asserts that Europa has conditioned the conversion option in
order to make it meaningless. According to the Trade Committee, convertible
securities ordinarily allow their holder to benefit from appreciation in the
class of securities into which it is convertible. This gives the convertible
securities potential for "upside" appreciation. The Europa preferred has no such
potential. Instead, this security can only be converted after 4 years from the
Closing. Even at that time, Europa has the option to redeem the security at par,
before its holder can convert Common Stock. Therefore, at any time when the
conversion feature can have only value, Europa will capture that value for the
benefit of other stockholders by redeeming the Preferred Stock.
4. DILUTION POTENTIAL
The Common Stock and Preferred Stock, which comprise 2/3 of face amount
of the Europa consideration, are in the view of the Trade Committee at risk for
immediate and substantial dilution. The Trade Committee believes that there are
a myriad of ways in which there risks can be actualized, including the
following:
a. Europa can conduct a private offering, either to third
parties, or, more
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likely, to "friendly" or inside investors. Based on valuations immediately after
the Closing, a relatively small financing could substantially dilute the
creditor's position.
b. In addition to dilutive offering of Common Stock, Europa
could issue any number of other convertible or preferred securities, the terms
of which could substantially adversely affect the creditors' position.
c. The Europa subsidiaries, themselves, have substantial cash
reserves. In a familiar tactic, these cash reserves could be structured as the
consideration for a Europa offering, in which the cash is only re-shuffled but
the creditors' interest wind up substantially diluted.
d. The interests of Keough-friendly investors in Europa (e.g.,
Keough himself, and perhaps his favored managing directors) may be protected
against the dilution, but creditors will suffer. These favored investors could
participate in the dilutive offering, by buying the offered securities at
preferential terms. Moreover, these investors could receive warrants or options
based either on their participation in the offering (e.g., "finding" the
friendly investors) or on their role as management.
e. Europa can also employ the last mechanism, options and
warrants issued to management, without conducting an offering or raising any
financing at all. Under the guise of "incentive", the Keough-friendly insiders
could be awarded substantial equity interests, to the sole detriment of the
creditors in this case.
The Trade Committee believes that under any of these structures, the
creditor's equity position can be substantially reduced, while Keough-friendly
investors' positions are enhanced. Europa is issuing these securities
predominantly to US investors, but Europa is organized in
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Denmark and may not be subject to all of the benefits and protections afforded
investors by U.S. Securities laws.
5. BANKRUPTCY RISKS
The Thirty Month Notes to be issued by Europa are unsecured and pari
passu with trade debt. The balance of the Europa Consideration is subordinate to
trade debt, and the Trade Committee believes that nothing would be received on
account of it in a subsequent reorganization of Europa.
G. MARKET CONTEXT, EUROPA BUSINESS PLAN AND RISK FACTORS(60)
1. INDUSTRY STRUCTURE
According to the International Data Corporation ("IDC Report") the
total expenditure on IT hardware and software in 1999 in Western Europe was $254
billion, up from $192 billion in 1996. This product flows through to end users
via two generic routes: direct from the manufacturer, and indirectly, through
various intermediaries, including distributors such as CHS. According to the IDC
data, the portion flowing through the direct route has declined from about 56%
in 1996 to 49% by 1999 in its 1998 report. IDC forecast that the indirect sales
will grow at 10.3% per annum for the period 1998-2003, which is twice the rate
of growth of the direct sales approach, resulting in only 45% of sales through
the direct route by 2003. More recent information from IDC (March 2000 report)
confirms this tendency but indicates a more gradual
----------------
(60) Section F has been prepared by Europa for inclusion in the
disclosure statement for projections purposes and to inform creditors of
Europa's anticipated future performance as a company. The Debtor has no
independent knowledge of the information contained in this section.
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decline in direct sales than previously forecast.
The IDC report defines five types of intermediaries in the channel, who
collectively comprise the indirect route to market, as follows:
a. RETAILERS/MASS MARKET - $22.9 billion through this channel
in 1999 according to IDC. Retailers sell stand-alone systems to home and small
business users. They are forecast to grow at a rate of 17.9% per year through
2003, the fastest growing of any channel partner.
b. PC DEALERS - These intermediaries are the traditional
distribution route for small to medium business end users, representing an
estimated $29.3 billion in IT equipment sales in 1999. PC dealers may or may not
have a 'shop front' and can often sell to home users. This channel is expected
to remain essentially flat over the next few years, with a growth rate of just
under 1% per year.
c. VALUE-ADDED RESELLERS/SYSTEM INTEGRATORS - This channel
focuses on more complex installations, usually (by definition) adding their own
hardware, software, or consulting services to manufacturer's hardware package.
The total channel sales were estimated by IDC to be $38.7 billion in 1999, and
forecast to grow at an above-average rate of 11.7% per year through 2003.
d. MAJOR RESELLERS - This channel focuses on the needs of
large business and government customers, providing hardware, software,
installation, and project management services on a large scale. This channel
represents $39 billion in sales and is expected to grow at 10.9% per year
through 2003.
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e. DISTRIBUTION - Distributors are by far the largest
intermediary in the IT channel, with total sales of $69 billion in 1999
according to IDC. The role of the distributor is to essentially sell to the
other intermediaries (an estimated 65,000 - 100,000 in total) and simplify the
interface to the market for the manufacturer. The trend has been for
manufacturers to reduce their direct relationships with intermediaries, focusing
on the larger relationships. This has tended to favor distributors, who are
forecast to grow their sales at a rate of 14.7% per year (14.9% in the March
2000 report) according to IDC, substantially greater than the rate of the
overall growth for total IT expenditure in Western Europe.
In early 1999, CHS was on track to be the market share leader within
the IT equipment distribution industry in Western Europe, with an estimated
market share of 10% followed by Ingram Micro at 8% and Tech Data (Computer 2000)
at about 6%. With the bankruptcies in Germany, Austria, Spain, Belgium and the
UK, the sale of Poland, Finland, DNS and Switzerland, the ownership disputes of
Karma, TH Systems (Czech Republic) and finally the loss of the companies with
unpaid earn-outs (Arena Turkey, Armada Turkey, Raphael Informatica Italy, Memory
Set Spain, ARC Spain, BGS Slovakia, CAT Holdings Russia), CHS's position has
been reduced to number four in the market, with a share of 2.8% (still one of
the largest distributors in Europe). The third-ranking distributor is Raab
Karcher with half the sales of the current CHS subsidiaries in Europe. In this
market the top five entities only account for 20-25% of the total, which
suggests the market is still quite fragmented.
In summary, the IT equipment distribution market appears to be large
and growing at an above average rate and relatively fragmented.
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2. FUTURE ROLE OF DISTRIBUTION
The declining importance of direct selling seems at odds with today's
conventional wisdom to "go direct". Direct selling can assume several less
efficient and more traditional forms than e-commerce. In classical marketing
analysis, manufacturers sell directly to customers in the early stages of a
product's life cycle when a high-margin, technical sale is required (usually
with an expensive outside sales force) to move the product to a small "early
adopter" group of customers. As the product matures, margins decline and the
product becomes more standardized and widely accepted. The need for a direct
sales force diminishes. Consequently, more mature products (like PC's) are sold
indirectly, to share selling and logistics costs with other manufacturers
through an intermediary such as a wholesaler. This is at the heart of a
wholesaler's economic role. As a bundling agent offering one stop shopping to a
broad range of customers, wholesalers reduce the overall channel cost because
they are in a position to share distribution costs across many manufacturers
which brings economics that no one manufacturer is able to match. Wholesalers
also significantly reduce the number of transactions required to move product to
the customer. For example, 10 manufacturers shipping once a month to 100,000
customers results in 1,000,000 transactions per month (customer placing an
order, manufacturer checking credit, warehouse picking, packing and delivery,
issuance of an invoice, and payment by the customer). With a distributor as an
intermediary, the number of transactions drops geometrically since each
manufacturer ships once to the wholesaler (10 transactions) then the wholesaler
ships once to each customer (100,000 transactions) for a total of 110,000
transactions, an order of magnitude less than the direct method. It is this
economic reality that pays for the
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existence of wholesalers in even highly commoditized industries. Wholesalers can
be the least expensive avenue to the customer.
There are two factors that could erode or eliminate the role of the
wholesaler: 1) consolidation of either the manufacturers or the customers; and
2) reduction in transaction costs such that the order-of-magnitude difference in
the number of transactions still does not pay for the existence of the
wholesaler, i.e. a frictionless economy. There are several examples of
consolidation forcing the disappearance of wholesalers, particularly in relation
to the US retail industry. Toy wholesalers have been almost eliminated in the US
because of the emergence of retail category-killers such as Toys-R-Us, that have
eliminated the wholesaler's traditional customer: the small toy shop. Similar
trends have forced dramatic consolidation of office supply wholesalers due to
competition from alternative channels such as Office Depot reaching out to small
business users. The consolidation of the US grocery retail industry will
continue to put pressure on food wholesalers, since the larger retail chains can
effectively self distribute. At this stage, Europa does not see evidence of
consolidation among either the customer base (resellers) or the manufacturers,
either one of which could be detrimental to the viability of the wholesaler.
In the 1980's one of the popular business mantras was "re-engineering",
and a favorite target of this exercise was to reduce or eliminate transactions
such as placing an order, which consultants claimed could cost between $50 and
$200 per transaction. Many of these re- engineering exercises resulted in
"out-sourcing" often to distributors, particularly for the purchase of material
that was not central to the business. With the advent of e-commerce in the new
century, the traditional view of transaction cost is being challenged, and in
some cases
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reshaping the industrial landscape. The rationale is if transactions can be
automated by the e- commerce engine, the economics of direct sales is more
attractive. Certain aspects of the order- delivery-payment cycle will
undoubtedly be dramatically improved with an e-commerce approach, e.g.
information gathering by the customer on price and availability, the actual
order placement and probably credit checking and payment. The physical aspects
of the cycle are not impacted, e.g. pick, pack, ship and handle returns. The
e-commerce technology available to the manufacturers is also available to
distributors who are then in a position to reduce their own transaction cost.
Whether applied by the distributor, the manufacturer, or both, e-commerce will
reduce transaction cost somewhat, which will impact margins. If distributors
keep pace with e- commerce developments they should be in a position to match
the reduction in margins with a corresponding reduction in cost attributable to
this phenomenon.
While there is a great deal of pressure today from Wall Street to "go
direct" (like Dell), the lowest cost method for getting product to the customer
will be the method that survives. Europa believes that distributors have a
strong opportunity to compete because of a distributor's natural economy of
scale advantage over manufacturers acting on their own. In the European market,
a distributor with a 20% market share ($14 billion in sales) surpasses even the
largest manufacturers in Europe in terms of economies of scale and these
economies are still important to achieve a low cost position. The need to
achieve lower and lower cost will continue to drive consolidation in the IT
equipment distribution industry and provide a sustainable role for distribution.
In summary despite the challenges faced by distributors in this
industry, independent
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industry experts (IDC) have concluded that distribution will benefit from the
changes in the industry, with sales through distributors rising from 29% to 24%
by 2003. This view is confirmed in their more recent report (March 2000) where
distribution is expected to grow at 14.9% per annum after taking account of
Commerce and direct sales. See Europa's Pro Forma attached as EXHIBIT "9" to the
Disclosure Statement.
3. THE TURNAROUND PLAN
After executing the proposed transaction, the short-term priority for
Europa is to focus on correcting the disastrous consequences of the credit
crisis. Europa's approach to this issue will be to develop specific initiatives
for each element of the ROCE tree, i.e. the components of Return on Capital
Employed:
a. REVENUE - The prime method for restarting the revenue flow
is to re- establish normal credit lines as quickly as possible. Such an action
will reassure customers, employees and local vendor sales managers that "Europa
is back in business". Europa has been in close communication with key suppliers
for months regarding this issue. Based upon its discussions, Europa believes
that the moment the subsidiaries are no longer owned by CHS, normal credit will
return. Europa has requested that key suppliers provide a written commitment to
Europa that they will extend trade credit to Europa once Europa purchases the
European Assets.(61) Europa has specifically structured this transaction to
assure the return of credit lines.(62)
----------------
(61) Europa has not received written assurances that credit lines will
be re-established once the transfer of European Assets to Europa is complete. To
the extent that any written commitments are received by Europa, they will be
presented to the Court and interested parties at the Confirmation Hearing. The
Trade Committee has requested that Europa provide the committee with more
information regarding the identity of the vendors and lenders from which Europa
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The financial condition of the subsidiaries that are included in this
transaction is generally sound and capable of attracting credit. The financial
pressures on the subsidiaries are a result of the unresolved debt problems of
the parent company, CHS which, in turn, affects the credit worthiness of the
operating subsidiaries. Once the Plan is confirmed and Europa owns the assets,
Europa expects a substantial improvement in credit. Europa has been conservative
in its forecast of how quickly credit lines will come back. The business plan
calls for a gradual increase in credit lines from the current level of 21 days
payable to 30 days in the third quarter of 2000 and 35 days in fourth quarter of
2000. Traditionally, the fourth quarter represents about a one-third of total
sales for the year and manufacturers tend to have more credit flexibility at
this time of the year to allow the ramp-up in sales. Beyond 2000, Europa expects
a slower return to normal credit, achieving 40 days payable by the end of 2001.
b. MARGIN RATE - In addition to the crucial issue of credit
lines, Europa believes that better management of price and near-price factors
(order minimums, delivery minimums, cash discounts, etc.) will lead to improved
revenue and margins. Currently, Europa believes that there is a "cost-plus"
mentality in the price-setting approach which can be modified by sales training,
incentives based on margin improvement, smarter systems interfaces and tighter
customer segmentation.
----------------
claims to have received assurances. Europa has declined to provide such
additional information to the committee.
(62) As discussed in the Disclosure Statement under "Risk Factors", in
the event that trade credit is not restored to Europa the result will be
detrimental and may affect Europa's projected operations.
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Another short-term lever on margin rate is the ability to shift the
product mix towards more profitable private label products. These products
typically require cash up-front, but often turn margins that are double the
margin on branded product. More flexibility in working capital will enable a
return to this business.
Europa also believes that the company will soon be in a position to
participate in special offers by manufacturers (e.g. new product launch, end of
quarter deals) that will provide further margin rate opportunities in the short
term.
c. OPERATING EXPENSE - An important component of Europa's
near-term focus will be to continue efforts to reduce operating expense,
primarily through the consolidation of facilities and back office operations.
The French companies (which comprise 60% of the total) are now in consultation
with employee representatives to implement a plan to create a single back office
and a logistics platform for the French businesses. Currently, the combined
French businesses operate two administrative facilities and two warehouses with
two separate management teams and system platforms. All of these activities
occur within the Paris region. Under the plan, Europa will move to a single back
office and warehouse by the end of 2000. The French management team believes
that operating expense can be driven below 4% of sales. In Scandinavia,
management is beginning to explore the possibility of consolidating some back
office and logistic activities on a region-wide basis. Recent developments in
infrastructure (road links to Denmark, cross-agreements with the various Postal
authorities) may facilitate this transition.
In addition to the efforts underway to consolidate back office
activities, Europa has
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continued the initiative begun by CHS to reduce European headquarters cost. In
particular, European product management, marketing, and finance functions have
been reduced significantly. Most recently, Europa has eliminated a layer of
management (regions) which operated as "span-breakers" between the European
headquarters and the subsidiary P&L's. The subsidiaries in Western Europe now
report directly to the center, instead of through a European sub-regional
structure.
d. CAPITAL - The increase in credit lines to normal levels
anticipated will reduce working capital requirements significantly.(63) Europa's
principal challenge is to ensure that any capital increases are closely
monitored. Europa expects to increase inventory in particular, but does not
believe that it is necessary to return to CHS' 1998 levels to ensure competitive
levels of customer service. Europa does not see any significant fixed capital
requirements in the short term.
Europa also sees near term opportunity to improve the company's access
to secured credit facilities. Today, the European subsidiaries have access to
over $100 million in secured credit lines, but because of CHS' financial
problems, the lenders have imposed restrictions on these lines, including extra
fees, higher interest and more importantly, lower advance rates against the
security (usually accounts receivable). Once the proposed transaction is
complete, Europa
----------------
(63) Europa has no agreements or understandings with either the
Noteholders Committee or the Trade Committee regarding future transactions
involving Europa, its subsidiaries or the European Assets.
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believes that secured credit lines will improve.(64)
In summary, the objective of the turnaround plan is to return to CHS'
1998 levels of profitability and revenue generation (with a more efficient usage
of working capital). Europa believes that these targets are realistic in that
these same entities were able to demonstrate this level of performance in the
recent past, especially since the levels of profitability demonstrated by CHS in
1998 were still below those shown by competitors such as Ingram Micro and Tech
Data during the same period. This provides further comfort that the short-term
objectives are reasonable and achievable.
e. STRATEGIC DIRECTION
While the short-term focus is necessarily on an operational turnaround,
Europa is developing the key principles that will define its strategy and
sustainable competitive advantage. As a consequence, Europa's plan is to move
the company in the following directions simultaneous to the turnaround
activities described above:
i. EXPLOIT E-COMMERCE - Europa believes that e-commerce
technologies represent an opportunity to reduce transaction costs for certain
elements of the order processing cycle. Already, the European subsidiaries have
developed extensive experience with these technologies. For example in Sweden,
over 30% of order lines received from customers
----------------
(64) Europa has not received written assurances that credit lines will
be re-established once the transfer of European Assets to Europa is complete. To
the extent that any written commitments are received by Europa, they will be
presented to the Court and interested parties at the Confirmation Hearing. The
Trade Committee has requested that Europa provide the committee with more
information regarding the identity of the vendors and lenders from which Europa
claims to have received assurances. Europa has declined to provide such
additional information to the committee.
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are via the web. In France, the integration plan mentioned above, includes the
development of a stand-alone pure e-commerce entity to focus on developing the
"next generation" business process for IT equipment distribution.
Europa plans to take further, more radical steps to develop green-field
pure e-commerce distribution operations in those geographies where CHS has no
presence today (e.g. Germany). In many of these geographies, Europa has, or
believes it can obtain, the customer databases of former CHS companies operating
in that country market. Based on rough, back-of the-envelope calculations,
Europa believes that a pure e-commerce distribution business can operate at the
2- 3% cost level; less than half the cost level of a traditional distribution
business.
ii. INCREASE VALUE-ADD - An important component of Europa's
strategic direction will be to seek ways to sensibly add greater value in the
supply chain. In particular, Europa will be looking for ways to build stronger,
multi-faceted relationships with its customers (the resellers) and, indirectly,
the end users. As a consequence, Europa hopes to build higher and more
sustainable margins and provide better value to the vendors. Europa sees four
methods for implementing this initiative:
iii. LOGISTICS SERVICES - Europa is going to place more focus
on providing more sophisticated and useful logistics services to its customers,
possibly including direct deliver to end users, emergency service, 24 by 7
availability, special labeling and packaging capabilities. Europa has also begun
discussions with third party logistics companies for possible joint venture
activities. Providing logistics services to its vendors, particularly channel
assembly and configuration will also be a feature of its value add offering. In
the
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Scandinavian region, Europa is already offering logistics services to third
parties and considering whether to set up the logistics function as a
stand-alone profit center. The U.S. mail-order fulfillment houses have
successfully developed logistics services for web-based companies. This might
also be an opportunity for Europa in Europe.
iv. MARKETING SERVICES - While distribution has traditionally
had a logistics role in the supply chain, the most successful distributors have
also developed as effective marketers. Europa intends to develop a sharper and
more professional marketing focus through better segmentation of the customer
base, alignment of its business offering to focus on priority segments, and
development of products and programs to satisfy the specific needs of those
segments. Europa will encourage the development of customer-focused sales and
marketing teams (as opposed to product-focused teams). This organization is
already being implemented in France as part of the back-office integration
project, now under discussion with employee committees. Europa also believes
that product integration (from multiple manufacturers) may offer marketing
opportunities that are not available to any one manufacturer.
v. NEW GEOGRAPHIES - Europa has developed in depth experience
in emerging markets, particularly in the former Soviet Union and Eastern Europe.
These markets are difficult for manufacturers to penetrate and competition is
much reduced compared to the developed markets of Western Europe, resulting in
higher margins, generally. As part of its strategy, Europa expects to apply this
expertise to low risk entry into new merging markets (e.g. Ukraine), thereby
offering a distinctive distribution service to vendors.
vi. CLOSER TO THE CUSTOMER - Europa will encourage its
operations to
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move up the value chain towards the end user. Europa is already in discussions
with resellers on co-operative ventures. Europa would not rule out the
possibility of acquiring specialized resellers, if this were compatible with its
marketing strategy. So-called "hybrid" distributors, such as Computacenter and
SCH in the UK have managed to build successful and well-regarded business models
through the combination of distribution and reseller functions. Europa will be
alert and receptive to these opportunities if this can be done without damaging
relationships with its existing base of reseller customers.
f. ACHIEVE SCALE - A fundamental component to Europa's
strategy is to continue the drive to achieve scale. The distribution of IT
equipment is still quite fragmented in the European market, which presents
excellent opportunities for consolidation. Driving for scale is essential to
develop a sustainable competitive advantage, but the scale can be developed at
several levels, each of which has its cost benefits:
i. ORDER SCALE - Much of the cost of distribution is driven
by order size. Within reasonable limits, the cost to process a small order is
comparable to the cost of processing a large order. These costs extend through
to transportation, since drop size is a key component of transportation unit
costs. Increasing order size through greater product breadth, order minimums and
enhanced customer relationships will be high on Europa's list of priorities.
ii. NATIONAL SCALE - Scale within a country operation can
be beneficial to the overall cost and effectiveness of a distribution operation.
Most products in the IT industry in Europe are still country-specific, which
limits the benefits of centralized European stocking. Today, vendors and
distributors are very much organized on a country by country basis. Scale
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within a country can reduce the per unit cost of country level headquarters,
warehouse cost and marketing expense. Country level scale also leads to better
utilization of inventory since larger volumes tend to reduce the level of safety
stock required to meet a given level of customer service. The French
subsidiaries enjoy a significant scale advantage in France, where Europa will be
twice the size of the nearest competitor. Scale on a European level does not
necessarily translate into benefit at the national level. A distributor who has
mediocre operations in all European countries can appear to have more scale, but
having scale in Germany does not help to reduce cost of operations in France. It
will be Europa's intention to develop national scale in key markets, where
Europa will seek to have twice the volume of its nearest competitor.
iii. EUROPEAN SCALE - While European scale does not
necessarily help with in-country operations, it is still strategically important
for other reasons. Vendors, in particular, are seeking to reduce the complexity
of their relationships with channel partners, which drives them towards large
multi-country distributors, even if this is considered sub- optimal for some
country markets. As the No. 4 distributor in Europe, it will be Europa's
intention is to stay at the forefront of vendor programs and initiatives, to
participate in their strategic processes. To make progress in this area, Europa
believes it will be necessary to acquire or merge with high quality local
distributors in key country markets, such as UK, Italy, Finland, and Spain.
Europa's intention is to enter into a joint venture in Germany. In addition to
the strategic vendor advantages of scale, pan-European scale can lead to more
effective operations for universal products, i.e., products that are not
country-specific, such as monitors, motherboards, and hard drives. Europa's
believes there will be an increasing trend towards
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universal products, or assemble-to-order products with universal components. In
addition to the benefits of vendor strategy and universal product scale,
European size gives advantages in several cost areas such as IT systems and
group headquarters expense, that are, or can be, shared across country
operations.
4. FINANCIAL PROJECTIONS
Taking into account the actions described above for the short-term
turnaround and the longer term strategy, Europa developed an estimate for the
financial performance of the new company for the period 2000-2004. This is
presented in Exhibit 4 attached to the Disclosure Statement. Europa has also
included in the exhibit unaudited internal accounts for 1998, and Q1 2000 on an
apples to apples basis to facilitate comparison. Note also, that Europa has an
"adjusted 1998" to give a pro-forma full year effect for the acquisition of
Metrologie in mid- 1998.
The financial projections are presented in three pieces: 1) an income
statement; 2) a statement of working capital and capital structure; and 3) a
cash flow statement.
a. INCOME STATEMENT - with the return of credit lines(65),
Europa expects the acquired businesses to rapidly recover revenue. The same
forces at work that caused the vicious cycle of credit reduction and revenue
loss can be reversed and work in the opposite direction. Better credit lines
will enable better inventories, and vendor marketing and sales efforts will once
again be applied. The fourth quarter is crucial in any year, but particularly
the first year of
----------------
(65) The discussion with respect to the Income Statement assumes that
trade credit lines will be restored.
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operation for the new company. Typically 35% of the year is sold in the fourth
quarter. Overall for 2000, Europa expects to reach revenues that are slightly
above levels experienced in 1999. Beyond 2000, the revenues are projected to
grow at 10% per year, less than the forecasted market growth rate of 14.7% per
year.
In light of the return in credit and the turnaround actions on pricing
and mix, Europa expects the margin rate to improve slowly from Q1 2000 levels.
The first quarter is traditionally a low margin period whereas the fourth
quarter has higher than average margins. Beyond 2000, Europa is forecasting a
slow increase in margin rate through initiative to add value to the supply
chain, as described above. Europa does not, however, expect margin rate to reach
the levels experienced in 1998 due to the general downward pressure on industry
margins as a result of e- commerce and other forces at work.
The principal task of management is to get the operating expense under
control. Several important initiatives are already underway to effect the
consolidation of facilities, as outlined above. Most of the cost for
implementing this consolidation had been reserved in the 1999 income statements.
Longer term, with aggressive implementation of e-commerce and other cost savings
approaches, Europa expects to drive the cost towards the 4% mark. This level is
already being achieved by some of its more efficient operations.
The total operation will lose money in 2000 but develop the necessary
momentum to move into profitability in the following year. By 2004 Europa
expects, conservatively, to achieve between 0.5% and 1% net profit. This is
still below profit levels reported by publicly quoted competitors, which gives
reason to believe that these targets are realistically achievable.
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b. CAPITAL - Working capital is by far the most important
financial asset in the distribution business. Management of the working capital
flows is crucial to financial stability, particularly as these flows are far
larger than the operating expense of the business. Europa believes that the
critical element to the turnaround is the return of normal trade credit. Europa
has requested that key suppliers provide a written commitment to Europa that
they will extend trade credit to Europa once Europa purchases the European
Assets.(66) The business plan projects a gradual return of credit from the
current level of about 20 days to 25 days in Q2 and 35 days for the big fourth
quarter sales push. While Europa works with its key vendors to increase the
trade credit levels, it needs to exercise restraint on inventory increases to
keep cash flows under control. Europa has requested that key suppliers provide a
written commitment to Europa that they will extend trade credit to Europa once
Europa purchases the European Assets.(67) Europa is confident that the business
can operate longer-term at the 25 day level for inventory,
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(66) Europa has not received written assurances that credit lines will
be re-established once the transfer of European Assets to Europa is complete. To
the extent that any written commitments are received by Europa, they will be
presented to the Court and interested parties at the Confirmation Hearing. The
Trade Committee has requested that Europa provide the committee with more
information regarding the identity of the vendors and lenders from which Europa
claims to have received assurances. Europa has declined to provide such
additional information to the committee.
(67) Europa has not received written assurances that credit lines will
be re-established once the transfer of European Assets to Europa is complete. To
the extent that any written commitments are received by Europa, they will be
presented to the Court and interested parties at the Confirmation Hearing. The
Trade Committee has requested that Europa provide the committee with more
information regarding the identity of the vendors and lenders from which Europa
claims to have received assurances. Europa has declined to provide such
additional information to the committee.
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particularly in light of its plans to consolidate warehouses. At this stage
Europa does not expect any significant improvement in receivables management
from current levels of about 50 days.
Europa believes that secured credit lines will fluctuate with
receivables levels at an advance rate of approximately 65%. As the financial
situation begins to show signs of a turnaround, Europa believes it will be
possible to increase the advance rate to 70% of receivables in 2001 and beyond.
The business plan also takes into account the need to repay Metrologie public
bonds, due in early August 2000. Management has begun a procedure to renegotiate
the maturity of the bonds to allow a bit more breathing room in the early days
of the new company.
The acquisition debt of $22.5 million is included in the financial
projections, with semi- annual repayments of principal, as specified in the
description of the notes. With the consolidation into Europa of the acquisition
debt, the book value of the equity declines to approximately $54 million
(including preferred equity). The debt to equity ratio peaks at 4 to 1 by late
2000 and declines gradually thereafter.
c. CASH FLOW - The cash flow statement is a consequence of the
assumptions described above for the income statement and the working capital
plan. The statement shows a positive cash flow, after financing from secured
credit lines, from the fourth quarter forward. We do not expect any significant
investment in fixed capital beyond the depreciation allowance.
The financial projections described above do not take into account any
acquisitions, as was mentioned in the strategy description earlier. Europa
believes that it will be possible to attract a new equity investor who will
provide the funds to expand the business and help meet the
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strategic targets described earlier. First, in Europa's view, it will be
necessary to effect the transaction contemplated and then demonstrate reasonable
evidence that a turnaround in operations is underway. At that stage a new
investor could view Europa as an attractive "buy and build" platform, given the
favorable industry characteristics of size, growth, and fragmentation. Europa
has been in discussion with several private equity firms on these matters and
expects those discussions to continue, with the interested parties monitoring
the progress of the recovery.
5. RISK FACTORS - The creditors of CHS are being asked to accept the
securities of Europa in exchange for their claims. As with any investment of
this sort, there are numerous risk factors:
a. LEVERAGE - The opening balance sheet of Europa indicates a
debt-to-equity ratio of approximately three to one. This is more highly
leveraged than larger competitors such as Ingram Micro or Tech Data, but it is
within the range of financial leverage observed within the industry, according
to vendors. Financial leverage increases the risk of default and makes the
enterprise more susceptible to interest rate increases.
b. LOSS OF FRANCHISES - As described earlier, distributors
rely on agreements with manufacturers to get access to product and discounts
allowed to authorized distributors. These contracts can be terminated at
relatively short notice (30-90 days) and, due to the credit crisis of the past
several months, the European subsidiaries have lost several franchises,
including 3Com, HP PC's in Sweden, HP in Croatia, and Compaq in Russia.
c. LOSS OF KEY PERSONNEL - The European companies rely on the
skills of its
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senior managers. The loss of any senior employee does create a risk for the
entity. This would be particularly true for the loss of any senior Europa
executives or the senior managers of the French subsidiaries.
d. CHANGE IN DISTRIBUTION METHOD/INDUSTRY STRUCTURE - Several
vendors have publicly announced changes in their channel strategy that could
worsen the business climate for some distributors. Such changes include the
reduction in number of distributors, the shift to a fee-based compensation
model, and efforts to develop a direct-to-end user approach.
e. EXCHANGE RATE - The vast majority of Europa's activities
are conducted in Western Europe, whereas the securities offered by Europa are
dollar-based. This could represent an exchange risk.
f. FRENCH BONDS AND BETTER FORTUNE CLAUSE - One of the French
subsidiaries, CHS France, has long-term bonds outstanding in the public market,
totaling $8 million approximately. These bonds were issued by Metrologie
International prior to the acquisition by CHS. The bonds mature on August 4,
2000. The company is attempting to renegotiate the maturity of these bonds.
Without a negotiated solution, the maturity of the bonds presents a difficult
financial challenge for the company. In addition, as a result of a previous
restructuring of the Metrologie business, certain banks in France are
beneficiaries of a "better fortune" clause, whereby certain repayments of
previously forgiven loans are required if Metrologie net income exceeds
specified levels. The company is renegotiating these arrangements.
g. RE-ESTABLISHMENT OF CREDIT LINES - Europa has relied on
verbal and some written assurances that credit lines will be re-established once
the transfer of assets to Europa is
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complete. However, these assurances have not been specific in the amount of
credit to be granted.(68) Over the next several weeks, Europa will be seeking
more specific written assurances on this point. The company's business plan
relies on the re-establishment of at least some trade credit. Europa has
requested that key suppliers provide a written commitment to Europa that they
will extend trade credit to Europa once Europa purchases the European
Assets.(69)
h. TAX MATTERS AND DISPUTES - Several of the entities included
in the transaction are embroiled in tax disputes in their local jurisdictions.
Management has set aside provisions for these disputes in most cases (with the
exception of Portugal, where a $3 million provision is likely to be posted in
the near future). In making these provisions, there is a risk that management
may have underestimated the true impact of these tax matters.
i. NO MARKET FOR SECURITIES - There is currently no market for
the securities of Europa and there is unlikely to be one in the near future.
Holders of the securities do have demand rights for registration of the
securities after 18 months.
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(68) Europa has not received written assurances that credit lines will
be re-established once the transfer of European Assets to Europa is complete. To
the extent that any written commitments are received by Europa, they will be
presented to the Court and interested parties at the Confirmation Hearing. The
Trade Committee has requested that Europa provide the committee with more
information regarding the identity of the vendors and lenders from which Europa
claims to have received assurances. Europa has declined to provide such
additional information to the committee.
(69) Europa has not received written assurances that credit lines will
be re-established once the transfer of European Assets to Europa is complete. To
the extent that any written commitments are received by Europa, they will be
presented to the Court and interested parties at the Confirmation Hearing. The
Trade Committee has requested that Europa provide the committee with more
information regarding the identity of the vendors and lenders from which Europa
claims to have received assurances. Europa has declined to provide such
additional information to the committee.
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j. FOREIGN ISSUER - Europa is a company organized under the
laws of Denmark. CHS believes that Keough chose to incorporate Europa in Denmark
due to its advantageous tax treatment of dividends and distributions received by
a holding company from its subsidiaries. Certain of the directors, officers and
controlling persons, if any, of Europa are residents of jurisdictions other than
the United States and substantially all of Europa's assets are located outside
the United States. As a result, it may be difficult for holders of Europa Notes
to effect service of process within the United States upon the directors,
officers and controlling persons to realize in the United States upon judgments
of courts of the United States. CHS has not determined whether Danish law
regarding the rights of common or preferred shareholders is more or less
advantageous than the laws of other jurisdictions.
k. BETTER PLAN ASSUMPTIONS - Europa has made several
assumptions about the future in developing its five year plan. These assumptions
were made in good faith, based on the best available data and management
judgment. There is a risk, of course, that these assumptions turn out to be
incorrect.
l. POTENTIAL SALES OF SUBSIDIARIES AFTER EXPIRATION OF THE
NINE MONTH PURCHASE ADJUSTMENT PERIOD. The Stock Purchase Agreement provides for
a purchase price adjustment in the event of one or more sales of the European
Assets during the 9 month period following closing. The purchase price
adjustment feature is intended to allow the Estate to share for a limited period
of time in any consideration realized by Europa in excess of the value ascribed
to such sold European Assets in the Stock Purchase Agreement. Computer
distributors earn a large percentage of profits in the fourth calendar quarter
of each year. One of the pacing items in the
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Europa deal, itself, is to capture these profits by having a Confirmation
Hearing in the third quarter of 2000. If Europa were to sell some or all of the
assets it is acquiring, a purchaser may be interested in capturing 4th quarter
profits. By limiting the protection to 9 months, the Trade Committee believes
that Europa could delay its transaction and yet allow subsequent buyers to
capture the 4th quarter profits without incurring the purchase price adjustment.
H. THE LIQUIDATING TRUST
1. THE LIQUIDATING TRUST ASSETS: On the Effective Date of the
Plan, the Excepted
Assets (those assets not being purchased by Europa or other successful bidder)
will transferred to a Liquidating Trust. The Excepted Assets include, but are
not limited to, the following:
a. The Acron, Intcomex, MicroInformatica and the
DistributionTech.com Obligations.
b. The SiS Hong Kong action.
c. CHS' interest in the Latin American entities. CHS has an
interest in the following Latin American entities:
i. CHS Ecuador: CHS Ecuador is an operating entity and
continues to liquidate its debt. CHS owns 49% and Banco del Pichincha owns 51%.
The value to the state cannot be determined by the Debtor at this juncture.
Additionally, a claim for employee theft is pending with CHS' insurance company
for $500,000, which claim is still under investigation.
ii. Ledakon: Ledakon is an earnout. CHS holds a 20%
minority interest in the company. As far as current management is aware, the
company is still operating.
iii. Nexsys: Nexsys is an earnout. CHS holds a 20%
minority interest
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in the company.
iv. CHS Peru and CHS Chile: both companies ceased
operations in the fourth quarter of 1999. There are some old receivables, but
the bank debt exceeds the companies' assets.
v. CHS Venezuala: Claudio Osorio's brother-in-law was
operating CHS Venezuala. However, its current operations are unknown.
d. CHS' interest in CHS Electronics (Australia) Pty Ltd.: on
March 29, 1999, CHS entered into an acquisition agreement with the shareholders
of Sabaram Holdings. The Debtor's current management does not believe that CHS
invested any funds in connection with this agreement. By letter dated April 11,
2000, the shareholders of Sabaram Holdings notified CHS (notice received by
current management on June 4, 2000) that they considered CHS' failure to
financially close the transaction and subsequent bankruptcy, to be a breach of
the agreement entitling them to elect to return the shares to the shareholders
of Sabaram Holdings. This asset may have minimal value to the Liquidating
entity.
e. The D&O Insurance proceeds: CHS has a $20 million directors
and officers insurance policy which may have value for liquidating entity.
Certain former officers and directors have notified CHS that they dispute that
the D&O Insurance is an asset of the Debtor's estate and to the extent that the
Debtor succeeds in having the Subordinated Securities Claims discharged through
the Plan, the proceeds of the D&O Insurance would not be available to satisfy
Claims of creditors, but would only be available to the beneficiaries of the
insurance policy. In the event that this view prevails, the D&O Insurance will
be of no value to the
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Liquidating entity. The Debtor believes that the D&O Policy and the proceeds
thereof are property of the Estate.
f. Insider Claims.
g. Attorneys fees preference claims: approximately $250,000
was paid by CHS to Shutts & Bowen for legal fees and expenses within 90 days
prior to the Petition Date. The payments of these fees may or may not be a
preferential payment recoverable by the estate.
h. Claim for overpayment of attorneys fees: in connection with
the Securities Litigation, approximately $200,000 in attorneys fees were
overpaid and not reimbursed to CHS by the law firms (including Greenberg
Traurig) or the Royal Insurance Company.
i. Avoidable transactions: all sales of CHS' assets which
occurred during the year prior to the Petition Date must be evaluated to assure
that sufficient consideration was given to CHS for the transfer of the assets.
While this is listed as an Excepted Asset, there may or may not be value to the
liquidating entity.
j. CHS Trading Claim: CHS Trading was a Swiss company which
was created by CHS for its subsidiary, CHS Russia to benefit from the Swiss tax
laws. BGS Slovakia is a company which CHS acquired, but was returned to the
original owner pursuant to an earnout agreement in 1999. The owner of BGS
Slovakia (the "broker") independently brokered the sale of PC's and used CHS
Trading as a vehicle. Sometime after November 1999, CHS Trading was transferred
to a trust. At some point this year, CHS understands that CHS Trading was sold
to another company, Comdotcom, for 20,000 Swiss. Current management understands
that there may have been $5-9 million in cash in CHS Trading which CHS could not
recover because the
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broker claimed ownership of the cash as a result of sales of his PC's through
CHS Trading. CHS has been unable to obtain any additional information regarding
the status of this potential claim, but it may have value for the Liquidating
Trust.
k. Claim against CHS Finance: CHS Financial was the financial
arm of the Debtor. CHS Finance held funds of the Debtor on the Petition Date
which it claimed a right of set off against. Since the Petition date, CHS
Finance went into bankruptcy. Accordingly, the Debtor cannot determine if any
claims the estate has are collectible from CHS Finance.
l. The CHS Logistic Payments.
m. All property of the Debtor, except the European Assets or
any Assets sold pursuant to the Plan, wherever located, including claims, Causes
of Action and general intangibles. All Causes of Action available to the Debtor
through the exercise of the powers granted pursuant to Sections 542 through 550
of the Bankruptcy Code.
n. Claims Against the Debtor's Pre-Petition Advisors: claims,
if any, against all pre-Petition Date advisors to CHS and its subsidiaries.
2. TRANSFER OF EXCEPTED ASSETS. Prior to the Effective Date and subject
to Article 8.12 of the Plan (described herein at Section H(3)), the Debtor shall
continue to operate its business subject to all applicable requirements of the
Bankruptcy Code, the Bankruptcy Rules and where applicable, Orders entered by
the Court. Except as may be otherwise provided in the Plan or the Confirmation
Order, title to the Excepted Assets shall vest in the Liquidating Trust free and
clear of all Claims and Interests on the Effective Date. Thereafter, the Debtor
shall cease its business. On the Effective Date, the Debtor shall execute the
CHS Liquidating Trust
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Agreement and, thereupon, and until all payments and Distributions to holders of
all Allowed Claims have been made under the Plan, the CHS Liquidating Trust
shall remain constituted and in existence, with the affairs and administration
thereof governed by the Plan, the Confirmation Order, the CHS Liquidating Trust
Agreement, and applicable bankruptcy and non-bankruptcy law. The CHS Liquidating
Trust shall have all rights and powers of a debtor in possession under Section
1107 of the Code and, in accordance with Section 1123(b)(3)(B) of the Code,
shall be designated and serve as the representative of the Estate. On the
Effective Date, Debtor shall transfer to the CHS Liquidating Trust all property
of the Estate, free and clear of any liens, claims or encumbrances, except those
expressly recognized by this Plan. Thereafter, the CHS Liquidating Trust shall
complete the liquidation and monetization of such assets. The proceeds thereof
will be expended by the CHS Liquidating Trust for (a) first, the administration
of the CHS Liquidating Trust, and (b) second, the payment and satisfaction of
Allowed Claims in accordance with the provisions of this Plan. On the Effective
Date, the Debtor shall execute and deliver all documents reasonably required by
the CHS Liquidating Trust , including the endorsement of any instruments, all
business records of the Debtor, and authorizations to permit the CHS Liquidating
Trust to access all bank records, tax returns, and other files and records of
the Debtor. All business records of the Debtor shall constitute the business
records of the CHS Liquidating Trust pursuant to Federal Rule of Evidence 803(b)
in any subsequent legal proceedings. The CHS Liquidating Trust, after the
Effective Date, shall control all of the Debtor's applicable legal privileges,
including control over the work product and attorney-client privilege, for
matters arising from or relating to transactions occurring, in whole or in part,
prior to the
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Effective Date. The Liquidating Trust Agreement is attached as Exhibit "B" to
the Plan.
3. DESIGNATION OF RESPONSIBLE PERSON PRIOR TO EFFECTIVE DATE: Prior to
or in conjunction with the Confirmation Date, the Creditors Committees, shall
select, subject to Court approval, the person who will become the Liquidating
Trustee on the Effective Date. The person selected as the Liquidating Trustee
shall function as the Responsible Person under the Plan. The Responsible Person
shall be subject to oversight by the Creditors Committees. The Responsible
Person shall be the Estate's representative under 11 U.S.C. ss.1123(b)(3)(B) to
enforce, investigate and prosecute the Retained Actions in the name of the
Debtor until the Effective Date, when the Liquidating Trustee shall be
substituted for the Responsible Person. The Responsible Person may also, in the
name of the Debtor, investigate, negotiate and request approval for the sale of
Excepted Assets and file and prosecute Objections to Claims. The Responsible
Person shall be authorized, with the approval of the Creditors Committees, to
employ such professionals and other persons as it may deem necessary to enable
it to perform its functions and fulfill its duties hereunder, and the costs of
such employment and other expenditures shall be paid from the Estate. Such
attorneys, accountants or other professionals, if any, shall be compensated and
shall be reimbursed for their reasonable and necessary out-of-pocket expenses
upon application to the Court. Notwithstanding the designation of the
Responsible Person, the Debtor's existing management will remain in control of
the Debtor to the extent necessary to carry out the Confirmation Order, to the
extent necessary to close the sale of the European Assets and perform other
duties required by a debtor in possession, post-confirmation. Any changes to the
foregoing allocation of responsibilities between the Debtor's management and the
Responsible Person shall
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be subject to Court Order.
4. TITLE TO EXCEPTED ASSETS: Except as otherwise provided under the
Plan, all of the Debtor's right, title and interest in and to assets, as of the
Effective Date of the Plan, shall vest in the CHS Liquidating Trust for
administration, liquidation, and distribution in accordance with Article XIV of
the Plan. The assets shall vest in the CHS Liquidating Trust free and clear of
all claims, liens, interests and encumbrances, including interests of equity
security holders, except as otherwise provided under the Plan. Notwithstanding
the foregoing, to the extent that the conveyance or assignment of any of the
Debtor's claims for causes of actions of the CHS Liquidating Trust would
preclude or impair the prosecution thereof by the CHS Liquidating Trust or the
CHS Liquidating Trust's Trustee, then the CHS Liquidating Trust is intended to
and shall be deemed to be a "representative of the estate" approved to retain
and enforce such claims and causes of action, as contemplated by 11 U.S.C.
ss.1123(b)(3)(A) and (3)(B). On the Effective Date, Debtor will assign and
transfer to the CHS Liquidating Trust, for the benefit of the Estate and its
Creditors, all recovery rights, including, but not limited to, causes of action
and claims for relief on account and in respect of the provisions of Sections
362, 510, 542, 544, 545, 547, 548, 549, 550, and 553 of the Code and any causes
of action or claims for relief existing under state or federal law. Pursuant to,
among other authority, Section 1123(b) (3) (B) of the Code, the CHS Liquidating
Trust shall have the full power, authority and standing to prosecute, compromise
or otherwise resolve such recovery rights, with all proceeds derived therefrom
to become property of the CHS Liquidating Trust and distributed in accordance
with the Plan. The CHS Liquidating Trust shall not be subject to any
counterclaims in respect of the recovery rights, provided,
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however, that the recovery rights will be subject to any setoff rights to the
same extent as if the Debtor had pursued the recovery rights. Notwithstanding
anything to the contrary in the Plan or in the Disclosure Statement, the
provisions of the Disclosure Statement and the Plan that permit the Debtor, the
Post Confirmation Creditors Committee or the CHS Liquidating Trust to enter into
settlements and compromises of any potential litigation shall not have, and are
not intended to have, any res judicata effect with respect to any pre-petition
Claims and Causes of Action that are not otherwise treated under the Plan and
shall not be deemed a bar to asserting such claims and causes of action,
regardless of whether or to what extent such claims and causes of action are
specifically described in the Plan or the Disclosure Statement relating hereto.
The intent is to preserve all possible claims, known or unknown, against all
potential defendants and their parties. The CHS Liquidating Trust shall have the
authority to settle Claims and litigation provided that all such settlements
shall nevertheless be subject to settlement standards imposed by Bankruptcy Rule
9019 and the standards set forth in IN RE JUSTICE OAKS II, LTD., 898 F.2d 1544,
1549 (11th Cir. 1990), cert den., 498 U.S. 959, 1126 L.Ed. 398, 111 S.Ct. 389
(1990). Furthermore, except for the Claims to be waived pursuant to the Stock
Purchase Agreement,(70)
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(70) Under the terms of the Stock Purchase Agreement, the completion of
the transactions contemplated by the Agreement on the Closing Date shall
constitute the complete and unconditional release by, and in favor of, each of
CHS and Europa and their respective officers, directors and employees, of all
rights, claims and liabilities arising out of any event or circumstance prior to
the closing, except for claims arising under or in connection with the Stock
Purchase Agreement and the documents executed at the Closing. CHS' release does
not include the release of unknown claims, or claims that cannot be determined
from information reasonably available to CHS. Accordingly, assuming the Closing
Date occurs, claims that CHS, the estate or the Liquidating Trust might
otherwise have against Europa and/or Keough will be released (except for claims,
if any, under the Stock Purchase Agreement and documents executed in connection
therewith).
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and notwithstanding any provision or interpretation to the contrary, nothing in
the Plan or the Confirmation Order, including the entry thereof, shall
constitute or be deemed to constitute a release, waiver, impediment,
relinquishment or bar, in whole or in part, of or to any recovery rights or any
other claim, right or cause of action possessed by the Debtor prior to the
Effective Date. In the event that the Court, or any other court of competent
jurisdiction, determines that the assignment of any claim, right or cause of
action, including without limitation, the recovery rights, to the CHS
Liquidating Trust pursuant to this Plan is invalid or does not grant to the CHS
Liquidating Trust the standing and all other right necessary to pursue such
claim, right or cause of action, then in such case the CHS Liquidating Trust
shall be deemed appointed as the representative of the Estate for purposes of
enforcing and pursuing such claim, right or cause of action, including without
limitation, the recovery rights, and the proceeds thereof shall be distributed
in accordance with terms of the Plan.
5. THE LIQUIDATING TRUSTEE: Pursuant to the terms of the Liquidating
Trust, the Liquidating Trustee will be selected and the compensation to be paid
to the trustee will be determined by the Post Confirmation Creditors Committee
and brought before the Court for approval. The CHS Liquidating Trust shall be
authorized, with the approval of the Post Confirmation Committee, to employ such
professionals and other persons as it may deem necessary to enable it to perform
its functions and fulfill its duties hereunder, and the costs of such employment
and other expenditures shall be paid from the property of the CHS Liquidating
Trust. Such attorneys, accountants or other professionals, if any, shall be
compensated and shall be reimbursed for their reasonable and necessary
out-of-pocket expenses from the CHS
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Liquidating Trust, upon approval of such fees and expenses by the Post
Confirmation Creditors Committee. The Post Confirmation Creditors Committee
shall have ten (10) days from the submission of an invoice within which to
object to the invoice or to all or any portion of the compensation requested
therein. Any dispute in fees, expenses, engagement or other matters concerning
professionals retained or sought to be retained by the CHS Liquidating Trust
shall be decided by the Court, after a hearing on notice.
I. THE POST CONFIRMATION CREDITORS COMMITTEE
The Post Confirmation Creditors Committee shall consist of five
members: two members designated by each Creditors' Committee for a total of four
members and a fifth member selected by mutual agreement of the Creditors'
Committees. If the Creditors' Committees are unable to mutually agree on the
fifth member, the Creditors' Committees shall each designate a nominee and the
Court shall select the fifth member. The Post-Confirmation Creditors' Committee
shall have the right but not the obligation to employ professional and other
persons as it may deem necessary to enable it to perform its functions and
fulfill its duties hereunder, and the costs of such employment and other
expenditures shall be paid from the property of the Liquidating Trust. The Trade
Committee opposes the manner in which the Debtor has described and proposed, for
confirmation, how the Post Confirmation Creditors Committee will be constituted.
SECTION VI
EXECUTORY CONTRACTS AND LEASES
A. ASSUMED EXECUTORY CONTRACTS AND UNEXPIRED LEASES.
Executory contracts and unexpired leases not assumed or rejected
pursuant to the Plan or
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by Order of the Court shall be deemed to have been rejected by the Debtor upon
the Effective Date. CHS will not assume any executory contracts or unexpired
leases pursuant to the Plan.(71) CHS reserves the right to amend this exhibit
prior to the Confirmation Date.
B. REJECTION CLAIMS.
The Plan provides that each person who is a party to the executory
contract or unexpired lease whose executory contract or unexpired lease is
rejected shall be entitled to file a proof of claim no later than thirty (30)
days after the entry of the Order authorizing such rejection if rejection is
made through the terms of the Plan and not by specific motion, then thirty (30)
days after the entry of the Confirmation Order. If a proof of Claim is not filed
within the thirty (30) day period, the right to file a proof of Claim is waived
unless otherwise ordered by the Court.
C. TREATMENT OF REJECTION CLAIMS.
Unless otherwise ordered by the Court, all Allowed Claims arising from
the rejection of executory contracts or unexpired leases shall be treated as
Class 3 General Unsecured Claims.
SECTION VII
VOIDABLE TRANSFERS AND OTHER CAUSES OF ACTION
CLAIMS RECONCILIATION PROCESS,
A. VOIDABLE TRANSFERS AND OTHER CAUSES OF ACTION.
The Debtor will retain and transfer to the Liquidating Trust under the
Plan all claims and causes of actions to recover transfers of Property of the
Debtor under 11 U.S.C. ss.ss.548, 542, 543, 545, 549, 547, 553, 544 and 550,
and, if necessary, to recover damages and obtain equitable
----------------
(71) Any executory contracts or unexpired leases to be assumed under
the Plan are reflected in Exhibit "D" attached to the Plan.
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relief under federal and state law against third parties. See Exhibit "C"
attached to the Plan for a list of all retained causes of actions. CHS is
presently investigating whether any claims exist against Insiders and/or
Interest holders of the Debtor who may have received fraudulent or preferential
transfer(s) of the Debtor's Property prior to the Petition Date and claims
against other Insiders of the Debtor for having authorized or directed payments
to these parties and in this respect, reserve the right to amend the Plan to
include such causes of action in the Plan once the investigation is concluded.
B. CLAIMS RECONCILIATION PROCESS.
Section 7.6 of the Plan provides for a claims reconciliation process to
attempt to narrow issues with respect to contingent or unliquidated claims prior
to filing objections to contingent and unliquidated claims. This claims
reconciliation process provides for claimants to meet with representatives of
the Responsible Person or the Liquidating Trustee and representatives of both
Creditors Committees to attempt to resolve issues with respect to contingent and
unliquidated claims. The claims reconciliation process was not subject to a
motion and is not the result of an order of the Court approving the claims
reconciliation process. Morever, the Trade Committee opposes the claims
reconciliation process.
SECTION VIII
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
AND
SECURITIES ISSUES
A. TAX ISSUES
The federal income tax consequences of the Plan to Debtors are diminis.
The Debtor has
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not requested a ruling from the Internal Revenue Service (the "IRS"), nor will
any opinion of counsel be obtained by the Debtor, with respect to the federal
income tax consequences of the Plan.
THE DEBTOR'S MANAGEMENT AND THEIR RESPECTIVE COUNSEL AND FINANCIAL
ADVISORS ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR
TAX CONSEQUENCES OF CONFIRMATION AND CONSUMMATION OF THE PLAN, WITH
RESPECT TO THE DEBTOR, CREDITORS OR INTEREST HOLDERS, NOR ARE THEY
RENDERING ANY FORM OF LEGAL OPINION OR TAX ADVICE ON SUCH TAX
CONSEQUENCES. THE TAX LAWS APPLICABLE TO CORPORATIONS IN BANKRUPTCY ARE
EXTREMELY COMPLEX. CREDITORS AND INTEREST HOLDERS ARE STRONGLY URGED TO
CONSULT THEIR TAX ADVISORS REGARDING TAX CONSEQUENCES OF THE PLAN,
INCLUDING FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES.
B. SECURITIES ISSUES
The Debtor does not anticipate the payment of dividends on the stock to
be issued pursuant to the Plan in the foreseeable future. No trading market
currently exists for the stock.
Europa will authorize and issue 156,250 shares of its Common Stock,
$43,500,000 shares of its Preferred Stock (the Preferred Stock together with the
Common Stock, the "Stock") and $22.5 million in aggregate principal amount of
its senior notes (the Notes together with the Stock, the "Securities"). Europa
will issue all of the Securities in accordance with the Confirmation Order and
Plan. (A more complete description of the Securities is set forth in the Plan
and the Stock Purchase Agreement and the Exhibits attached thereto.) All of the
outstanding shares of Stock issued pursuant to the Stock Purchase Agreement will
be fully paid and non-assessable.
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The Securities will be issued without registration under the Securities
Act of 1933, as amended (the "Securities Act") or any similar law, generally in
reliance on the exemptions set forth in section 1145 of the Bankruptcy Code. The
Debtor believes that the issuance of the Securities will be eligible for the
exemption provided by section 1145 of the Bankruptcy Code because (a) the
Securities issued will be issued by Europa, which is a successor of the Debtor
(b) issuance of the Securities will be specifically mandated under the Plan; (c)
the Securities will only be issued to holders of Claims against the Debtor; and
(d) the issuance of the Securities will be solely in exchange for such Claims. A
finding by the Court that the exemption set forth in section 1145 is applicable
to the issuance of the Securities in accordance with the Plan will be a
condition to confirm on the Plan. With respect to the Notes, to the extent
applicable, Europa will take whatever steps as are necessary to comply with the
Trust Indenture Act of 1939 as amended.
The issuance by Europa of the Securities will be deemed to be a public
offering of such Securities pursuant to section 1145(c) of the Bankruptcy Code.
Accordingly, holders of Claims who receive the Securities may be able to
transfer their securities without registration. However, given the complex,
fact-specific nature of the question of whether a particular offering requires
registration under applicable securities laws, the Debtor makes no
representation herein concerning the right of any person to transfer any
Securities. The Debtor recommends that holders or potential holders of
Securities under the Plan consult with their own counsel concerning any
limitations on their right to transfer such Securities.
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Case No. 00-12731-BKC-RAM
SECTION IX
ALTERNATIVES TO THE PLAN
One alternative to CHS' Plan is a bankruptcy liquidation of its assets.
CHS believes that based upon the disclosures contained herein that in a forced
liquidation of its assets, Creditors would receive little or no distribution. In
a chapter 7 liquidation no monies would remain for the distribution to Unsecured
Creditors after payment of Administrative expenses. To further support this
conclusion, attached as EXHIBIT "11" is a Liquidation Analysis of the European
Assets. At this time, the Debtor is uncertain what value, if any, may be
attributed to the Excluded Assets.
SECTION X
CONCLUSION
CHS believes that the Plan provides Creditors with the best possible
Distribution given the circumstances.
Respectfully submitted,
Tew Cardenas Rebak Kellogg
Lehman DeMaria & Tague L.L.P.
Attorneys for the Debtor
201 South Biscayne Boulevard
Miami Center, Suite 2600
Miami, FL 33131-4336
Tel: (305) 536-1112
Fax: (305) 536-1116
By: ______________________________
THOMAS R. LEHMAN, P.A.
Fla. Bar. No. 260746
LYNN MAYNARD GOLLIN, ESQ.
Fla. Bar. No. 621668
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Case No. 00-12731-BKC-RAM
CHS Electronics, Inc., the Debtor
By: ______________________________
BURTON EMMER
Acting Chief Financial Officer
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