SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[X] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
CHS ELECTRONICS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined): The value was determined
by adding the following elements of the consideration to be received by
the Registrant in the transaction: (a) $11 million in cash, (b) $47
million of corporate guarantees of the Registrant to be cancelled and (c)
the 10% interest in NewCo to be received by the Registrant, which is
valued at $10 million.
4) Proposed maximum aggregate value of transaction: $68,000,000
5) Total fee paid: $13,600
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[CHS LOGO]
EXCHANGE TRANSACTION WITH JOURNEY HOLDINGS, LTD.
YOUR VOTE IS VERY IMPORTANT
The Board of Directors of CHS Electronics, Inc. has recommended and
approved a transaction in which CHS and a to-be-formed subsidiary of Journey
Holdings, Ltd., referred to in the accompanying Proxy Statement as "NewCo," will
conduct an asset exchange. CHS will transfer to NewCo all of its equity
interests in substantially all of its European subsidiaries in exchange for $11
million in cash or releases of existing indebtedness of CHS totaling $11
million, cancellation of up to $287.5 million of indebtedness of CHS and 10% of
the stock of NewCo (the "Exchange Proposal"). CHS is seeking your vote for this
important transaction.
CHS is an international distributor of microcomputers, peripherals, and
software. As of January 2000, CHS distributes its products to over 100,000
resellers in approximately 30 countries in Europe, Latin America, Asia, the
Middle East and Africa. Journey Holdings, Ltd. is a Gibraltar company controlled
by Mark Keough, the former Chief Operating Officer of CHS. CHS has no ownership
interest in Journey Holdings, Ltd.
The exchange transaction described above between CHS and NewCo is
subject to the approval of the shareholders of CHS and to the successful
completion of a second exchange transaction between NewCo, on the one hand, and
the bondholders and certain creditors of CHS, on the other. Under the second
exchange transaction, NewCo would offer $19 million in cash, $75 million
aggregate principal amount of 10% six year notes issued by NewCo, and warrants
to acquire a total of 20% of the equity of NewCo in exchange for (i) the
currently outstanding $200 million aggregate principal amount of 9.875% fixed
rate notes of CHS, (ii) the currently outstanding $40.5 million aggregate
principal amount of floating rate convertible debentures of CHS, and (iii) up to
$47 million of indebtedness of the European subsidiaries of CHS that are
currently in liquidation or receivership, which indebtedness is guaranteed by
CHS. CHS is not required to proceed with its exchange transaction with NewCo
unless holders of at least 95% of the fixed rate notes and 95% of the claims
under CHS's purported guarantees of the indebtedness of CHS's subsidiaries in
liquidation or receivership participate in the second exchange transaction with
NewCo. At the closing of the exchange transaction between CHS and NewCo, NewCo
will: (i) deliver to CHS the fixed rate notes and the floating rate convertible
debentures that it acquires in the exchange offer, (ii) provide CHS with
releases from the beneficiaries of the guarantees that have participated in the
exchange offer, (iii) pay CHS $11 million in cash or provide CHS with releases
of existing indebtedness of CHS totaling $11 million and (iv) issue to CHS 10%
of NewCo's stock. In return, CHS will transfer to NewCo the stock of
substantially all of its European subsidiaries.
After the proposed exchange transaction between CHS and NewCo, CHS
intends to create an e-commerce distribution business that will ship products
from a central distribution center in the Netherlands. CHS intends to conduct
this business through a new company to be called CHSE.com and The PC Way, a
European assembler of PCs which is owned equally by CHS and Trigem Computer.
Following the exchange, CHS will also have a majority interest in a Latin
American e-commerce business shipping microcomputers, peripherals and software
to resellers in Latin America, a 49% interest in five of its former Latin
American distributors and other minority interests in former CHS subsidiaries.
CHS does not expect any payment to be made to its common shareholders
upon consummation of the exchange transaction with NewCo described above, and
CHS believes that any payment to its shareholders in the future ultimately will
depend upon the success of CHS in implementing its e-commerce strategy.
Although the proposed exchange transaction between CHS and NewCo will
not result in any proceeds to the common shareholders of CHS, CHS believes that
if you do not approve this transaction and CHS does not receive the cash and
cancellation of indebtedness contemplated by this transaction, CHS will not be
able to satisfy its creditors and will be forced to seek protection immediately
by filing for bankruptcy. In light of its current financial position, and in
order to induce Journey to enter into the agreement to conduct the asset
exchange with CHS, CHS has agreed with Journey that, if the second exchange
transaction between NewCo and the bondholders and creditors of CHS is
unsuccessful, or if the shareholders of CHS do not approve the exchange
transaction between CHS and NewCo, or if a bankruptcy petition under U.S. law
has been filed against CHS or any of the United States subsidiaries that own the
companies to be transferred to NewCo pursuant to the exchange transaction,
<PAGE>
then CHS and such United States subsidiaries of CHS will voluntarily file for
bankruptcy. In such a bankruptcy proceeding, CHS will attempt to accomplish the
same exchange transaction as that which is described in the accompanying Proxy
Statement. However, in a bankruptcy proceeding it is unlikely that there would
be any assets remaining for common shareholders. Accordingly, CHS believes the
approval and consummation of the proposed exchange transaction offers the best
chance for its common shareholders to receive value for their equity interest in
CHS. There can be no assurance, however, that if you approve the proposed
exchange transaction CHS will be able to maximize the value of its remaining
assets and have adequate proceeds and resources to satisfy its creditors. As a
result, CHS may in any event be required to seek bankruptcy protection in the
future.
As of September 30, 1999, CHS had a tangible book deficit of
approximately $142 million. On a pro forma basis, after giving effect to the
proposed exchange transaction and application of the proceeds, as of September
30, 1999, CHS would have had a tangible book value of approximately $152.8
million. See "Unaudited Pro Forma Condensed Consolidated Financial Information."
This pro forma information is not necessarily indicative of the financial
position which would actually have been reported had the proposed asset exchange
occurred at September 30, 1999 or which may be reported in the future.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
special meeting of shareholders, please take the time to vote by completing and
mailing the enclosed proxy card to us. If you sign, date and mail your proxy
card without indicating how you want to vote, your proxy will be counted as a
vote in favor of the exchange transaction described in the accompanying Proxy
Statement. If you fail to return your card, unless you appear in person at the
CHS special meeting, the effect may be that a quorum will not be present at the
special meeting and no business will be able to be conducted.
The date, time and place of the special meeting are as follows:
March 22, 2000
10:00 a.m. (local time)
2000 Northwest 84th Avenue
Miami, Florida 33122
The accompanying Proxy Statement provides you with detailed information
about the proposed exchange transaction. You may also obtain information about
CHS from documents filed with the Securities and Exchange Commission. We
encourage you to read the Proxy Statement, including its annexes, completely and
carefully.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF MATERIAL
RISKS WHICH SHOULD BE CONSIDERED BY SHAREHOLDERS WITH RESPECT TO THE PROPOSED
TRANSACTION WITH JOURNEY HOLDINGS, LTD.
The Proxy Statement is dated February 1, 2000 and is first being mailed
to shareholders on or about February __, 2000.
Sincerely,
CLAUDIO OSORIO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
CHS ELECTRONICS, INC.
2000 NORTHWEST 84TH AVENUE
MIAMI, FLORIDA 33122
NOTICE OF SPECIAL MEETING
TO BE HELD ON MARCH 22, 2000
To the Shareholders of CHS Electronics, Inc.:
Notice is hereby given that a special meeting of shareholders of CHS
Electronics, Inc., a Florida corporation, will be held at 10:00 a.m., local
time, on March 22, 2000, at CHS's corporate offices located at 2000 Northwest
84th Avenue, Miami, Florida 33122, to consider and act upon the following
proposals of CHS Electronics, Inc.
1. a proposal recommended and approved by the CHS Board of Directors to
approve the Exchange Agreement, dated as of December 14, 1999, between Journey
Holdings, Ltd. and CHS, and the transactions contemplated thereby, which, among
other matters, provides for the transfer by CHS of substantially all of its
European subsidiaries to Journey Holdings, Ltd. in exchange for cash, stock and
forgiveness of debt, as described in the Proxy Statement accompanying this
notice (the "Exchange Proposal"); and
2. the transaction of such other business as may properly come before
the special meeting or any adjournment or postponement of the special meeting.
Only shareholders of record at the close of business on February 1,
2000 are entitled to notice of and to vote at the CHS special meeting or any
adjournment or postponement of the special meeting.
All shareholders are cordially invited to attend the CHS special
meeting. To ensure your representation at the special meeting, please complete
and promptly mail your proxy in the return envelope enclosed. This will not
prevent you from voting in person, but will help to secure a quorum and avoid
added solicitation costs. Your proxy may be revoked at any time before it is
voted. Please review the Proxy Statement accompanying this notice for more
complete information regarding the Exchange Proposal.
THE BOARD OF DIRECTORS OF CHS UNANIMOUSLY RECOMMENDS THAT CHS
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE EXCHANGE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY. YOUR COOPERATION IS APPRECIATED.
By Order of the Board of Directors
ANTONIO BOCCALANDRO
Director, Chief Officer of Mergers and
Acquisitions and Secretary
Miami, Florida
February __, 2000
IMPORTANT
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN
TO ATTEND THE CHS SPECIAL MEETING. IF YOU USE THE ENCLOSED ENVELOPE ADDRESSED
TO CHS, NO POSTAGE IS REQUIRED.
<PAGE>
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS................................... 1
SUMMARY..................................................................... 3
The Companies...................................................... 3
The Special Meeting................................................ 3
The Proposed Exchange Transaction.................................. 4
Consequences of the Proposed Exchange Transaction.................. 4
Shareholder Vote Required.......................................... 5
Interests of Officers and Directors in the Proposed Transaction.... 5
Conditions of the Proposed Exchange Transaction.................... 5
Termination of the Exchange Agreement.............................. 5
Opinion of CHS's Financial Advisor................................. 6
Dissenter's Rights................................................. 6
Reasons for the Proposed Exchange Transaction...................... 6
Recommendation to Shareholders..................................... 6
RISK FACTORS................................................................ 7
FORWARD LOOKING INFORMATION................................................. 9
SELECTED FINANCIAL DATA OF CHS..............................................10
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION...............................................................12
CHS SPECIAL MEETING.........................................................20
Date, Time and Place of Special Meeting............................20
Purpose of the CHS Special Meeting.................................20
Solicitation of Proxies............................................20
Record Date; Voting Rights; Proxies................................20
Quorum.............................................................21
Certifying Accountants.............................................21
Other Information..................................................21
PROPOSAL 1:
THE PROPOSED SALE OF ASSETS.................................................22
Background of the Transaction......................................22
Reasons of CHS for the Transaction.................................22
Recommendation of the Board of Directors of CHS....................22
Opinion of Financial Advisor to CHS's Board of Directors...........22
Interests of Certain Persons.......................................22
Dissenter's Rights.................................................23
MATERIAL PROVISIONS OF THE EXCHANGE AGREEMENT...............................24
Representations and Warranties.....................................25
Conditions to the Transaction......................................25
Termination........................................................26
Management Agreement...............................................27
MARKET PRICES AND DIVIDENDS.................................................28
BUSINESS OF CHS.............................................................29
Recent Developments................................................29
Industry...........................................................33
Strategy...........................................................33
Products and Customers.............................................34
Vendor Relations...................................................34
Sales, Marketing and Customer Support..............................35
Competition........................................................36
Employees..........................................................36
Properties.........................................................36
Legal Proceedings..................................................36
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................38
Recent Developments................................................38
Overview...........................................................38
Results of Operations..............................................39
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998.............................39
Year Ended December 31, 1998 Compared to Ended December 31, 1997...40
Year Ended December 31, 1997 Compared to Ended December 31, 1996...40
Seasonality........................................................41
Liquidity and Capital Resources....................................41
Inflation..........................................................45
Asset Management...................................................45
Market Risk........................................................45
Currency Risk Management...........................................46
New Accounting Pronouncement.......................................47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION..................50
Treatment of CHS...................................................50
Treatment of CHS Shareholders......................................50
DEFAULT UNDER CHS DEBENTURES................................................50
REGULATORY APPROVALS........................................................51
OTHER MATTERS; SHAREHOLDER APPROVALS........................................51
INDEPENDENT CERTIFYING ACCOUNTANTS..........................................51
WHERE TO FIND MORE INFORMATION..............................................51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
ANNEXES
Annex A -- Exchange Agreement
Annex B -- Opinion of Capitalink, L.C.
Annex C -- Management Agreement
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q: WHY AM I RECEIVING THESE MATERIALS?
A: The Board of Directors of CHS Electronics, Inc. is providing these
proxy materials to give you information to determine how to vote in
connection with a special meeting of shareholders which will take place
on March 22, 2000 at CHS's corporate offices located at 2000 Northwest
84th Avenue, Miami, Florida 33122
Q: WHAT WILL BE VOTED ON AT THE SPECIAL MEETING?
A: Whether to approve an Exchange Agreement pursuant to which CHS will
transfer all of its equity interests in substantially all of its
European subsidiaries to Journey Holdings, Ltd. (the "Exchange
Proposal").
Q: WHY HAS THE BOARD OF DIRECTORS APPROVED THE EXCHANGE AGREEMENT?
A: Because the CHS Board of Directors believes that the exchange
transaction with Journey Holdings, Ltd., if completed, might ultimately
yield some value to CHS's shareholders. The Board of Directors believes
that, if the transaction with Journey Holdings, Ltd. were not
completed, CHS would have no alternative but to file for bankruptcy,
which likely would yield no value for CHS shareholders. After the
exchange transaction with Journey Holdings, Ltd., CHS will attempt to
utilize the remaining assets owned by CHS in a manner that would allow
CHS to satisfy its creditors and result in some value to CHS's common
shareholders in the future.
Q: WILL ANY OTHER MATTERS BE VOTED ON AT THE SPECIAL MEETING?
A: No.
Q: WHO CAN VOTE?
A: All shareholders of record as of the close of business on February 1,
2000.
Q: WHAT SHOULD I DO NOW?
A: Please vote. You are invited to attend the special meeting. However,
you should mail your signed and dated proxy card in the enclosed
envelope as soon as possible, so that your shares will be represented
at the special meeting in case you are unable to attend. No postage is
required if the proxy card is returned in the enclosed postage prepaid
envelope and mailed in the United States.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY OR VOTING
INSTRUCTION CARD?
A: It means your shares are registered differently or are held in more
than one account. Please provide voting instructions for each proxy
card that you receive.
Q: HOW CAN I VOTE SHARES HELD IN MY BROKER'S NAME?
A: If your broker holds your shares in its name (or in what is commonly
called "street name"), then you should give your broker instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Without
instructions, your broker is not entitled to vote your shares and your
shares will not be voted.
Q: CAN I CHANGE MY VOTE?
A: You may change your proxy instructions at any time prior to the vote at
the special meeting. For shares held directly in your name, you may
accomplish this by completing a new proxy or by attending the special
meeting and voting in person. Attendance at the special meeting alone
will not cause your previously granted proxy to be revoked unless you
vote in person. For shares held in "street name," you may accomplish
this by submitting new voting instructions to your broker or nominee.
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Q: WHAT VOTE IS REQUIRED TO APPROVE THE EXCHANGE PROPOSAL?
A: A majority of all the votes entitled to be cast are required to approve
the Exchange Proposal.
Q: WHEN WILL THE PROPOSED EXCHANGE TRANSACTION TAKE EFFECT?
A: CHS expects that the proposed exchange transaction will be completed
promptly after CHS shareholders approve the transaction at the special
meeting, provided that the necessary regulatory approvals have been
obtained and the second exchange transaction to be conducted by Journey
Holdings, Ltd. with the bondholders and creditors of CHS has been
successfully completed.
Q: WILL I HAVE DISSENTER'S RIGHTS?
A: No. You will not be entitled to dissenter's rights as a result of the
proposed exchange transaction.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
TO BETTER UNDERSTAND THE PROPOSED EXCHANGE TRANSACTION AND FOR A MORE COMPLETE
DESCRIPTION OF THE TERMS OF THE EXCHANGE PROPOSAL, YOU SHOULD READ COMPLETELY
AND CAREFULLY THIS PROXY STATEMENT AND THE DOCUMENTS TO WHICH YOU HAVE BEEN
REFERRED.
THE COMPANIES
In this Proxy Statement:
/bullet/ we refer to CHS Electronics, Inc. as "CHS" or the "Company"
/bullet/ we refer to Journey Holdings, Ltd. as "Journey"
/bullet/ we refer to the to-be-formed subsidiary of Journey that will conduct
the exchange transaction with CHS as "NewCo"
CHS ELECTRONICS, INC.
2000 N.W. 84th Avenue
Miami, Florida 33122
(305) 908-7200
CHS is a leading international distributor of microcomputer products,
including personal computers, peripherals, networking products and software. CHS
presently operates in approximately 30 countries primarily in Western Europe,
Eastern Europe and Latin America, and services an active customer base of
approximately 100,000 resellers. In 1999, approximately 78% of the products
sold by CHS were manufactured by approximately 20 equipment and software
vendors, including such market leaders as Hewlett-Packard, IBM, Microsoft,
Seagate, Compaq, Intel, Quantum, Western Digital, 3Com, Toshiba, Acer, Yakumo,
Epson and Sun. CHS is a focused distributor, as opposed to a broadline
distributor, and seeks to represent leading vendors within specific product
categories. CHS believes that it is the third largest distributor of
microcomputer products in the world and is one of the leading distributors in
Western Europe, Latin America and Eastern Europe. CHS has no significant sales
in the United States.
CHS's business has suffered serious deterioration since April 1, 1999
due to a number of factors, including (i) a reduction of incentive programs by
vendors, such as price protection, volume rebates and inventory protection
rebates, which caused reductions in CHS's gross margins; (ii) the desire of
manufacturers to eliminate CHS from the distribution channel for their products,
and (iii) the reduction in the amount of credit extended to CHS by vendors and
third party lenders.
For further information concerning the business and results of
operations of CHS, see "Business of CHS" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
JOURNEY HOLDINGS, LTD.
Abbott Building, 2nd Floor
Tortola, B.V.I.
44-171-289-3753
Journey is a Gibraltar company owned by Mark Keough, the former Chief
Operating Officer of CHS. Journey was constituted on December 13, 1999. On
December 14, 1999, CHS and Journey entered into a management agreement for the
purpose of engaging Journey to manage those European subsidiaries of CHS that
are the subject of the Exchange Proposal, pending the closing of the exchange
transaction. Other than the management of those subsidiaries, Journey has no
other operations.
NEWCO
NewCo is a company to be formed by Journey for the purpose of engaging
in the exchange transaction with CHS and the separate exchange transaction with
the bondholders and creditors of CHS.
THE SPECIAL MEETING (PAGE 20)
The special meeting of the CHS shareholders will be held on March 22,
2000 at 10:00 a.m. local time at CHS's corporate offices located at 2000
Northwest 84th Avenue, Miami, Florida 33122.
The record date for CHS shareholders entitled to receive notice of and
to vote at the CHS special meeting is February 1, 2000. At the close of business
on that date, there were ________ shares of CHS common stock outstanding.
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<PAGE>
THE PROPOSED EXCHANGE TRANSACTION (PAGE 24)
THE LEGAL DOCUMENT THAT GOVERNS THE PROPOSED EXCHANGE TRANSACTION IS
THE EXCHANGE AGREEMENT BETWEEN CHS AND JOURNEY. THE EXCHANGE AGREEMENT IS
ATTACHED TO THE BACK OF THIS PROXY STATEMENT AS ANNEX A (THE "EXCHANGE
AGREEMENT"). YOU ARE ENCOURAGED TO READ THIS DOCUMENT COMPLETELY AND CAREFULLY.
CONSEQUENCES OF THE PROPOSED EXCHANGE TRANSACTION
Pursuant to the Exchange Agreement, CHS and NewCo will conduct an
exchange transaction in which CHS will transfer to NewCo substantially all of
its European subsidiaries in exchange for $11 million in cash or releases of
existing indebtedness of CHS totaling $11 million, cancellation of up to $287.5
million of indebtedness of CHS and 10% of the stock of NewCo. This exchange
transaction between CHS and NewCo is subject, among other things, to the
approval of the transaction by the shareholders of CHS and to the successful
completion of a second exchange transaction between NewCo, on the one hand, and
the bondholders and certain creditors of CHS, on the other. Under this second
exchange transaction, NewCo has agreed to offer $19 million in cash, $75 million
aggregate principal amount of 10% six year notes issued by NewCo, and warrants
to acquire a total of 20% of the stock of NewCo in exchange for (i) the
currently outstanding $200 million aggregate principal amount of fixed rate
notes of CHS (the "Notes"), (ii) the currently outstanding $40.5 million
aggregate principal amount of floating rate convertible debentures of CHS (the
"Debentures"), and (iii) up to $47 million of indebtedness of European
subsidiaries of CHS that are currently in liquidation or receivership, which
indebtedness is guaranteed by CHS. CHS is not required to proceed with its asset
exchange with NewCo unless holders of at least 95% of the Notes and 95% of the
claims up to $47 million under CHS's purported guarantees of the indebtedness of
CHS's subsidiaries in liquidation or receivership participate in the second
exchange transaction with NewCo. At the closing of the exchange transaction
between CHS and NewCo, NewCo will: (i) deliver to CHS the Notes and the
Debentures that it acquires in its exchange transaction with the bondholders,
(ii) provide CHS with releases from the beneficiaries of the guarantees that
have participated in the exchange transaction with NewCo, (iii) pay CHS $11
million in cash or provide CHS with releases of existing indebtedness of CHS
totaling $11 million, and (iv) issue to CHS 10% of the stock of NewCo. In
return, CHS will transfer to NewCo the stock of substantially all of its
European subsidiaries. See "Material Provisions of the Exchange Agreement" for a
more detailed description of the exchange transaction.
After the proposed exchange transaction between CHS and NewCo, CHS
intends to create an e-commerce distribution business that will ship products
from a central distribution center in the Netherlands. CHS intends to conduct
this business through a new company to be called CHSE.com and The PC Way, a
European assembler of PCs which is owned equally by CHS and Trigem Computer.
Following the exchange, CHS will also have a majority interest in a Latin
American e-commerce business shipping microcomputers, peripherals and software
to resellers in Latin America, a minority interest in five of its former
Latin American distributors and other minority interests in its former
subsidiaries.
CHS does not expect any payment to be made to its common shareholders
upon consummation of the exchange with NewCo described above, and CHS believes
that any payment in the future is unlikely, but will ultimately depend upon the
success of CHS in implementing its e-commerce strategy.
Although the proposed exchange transaction will not result in any
proceeds to the common shareholders of CHS, CHS believes that if the
shareholders of CHS do not approve this transaction and CHS does not receive the
cash and cancellation of indebtedness contemplated by this transaction, CHS will
not be able to satisfy its creditors and will be forced to seek protection
immediately by filing for bankruptcy. In light of its current financial
position, and in order to induce Journey to enter into the agreement to conduct
the exchange transaction with CHS, CHS has agreed with Journey that, if the
separate exchange transaction among NewCo and the bondholders and creditors of
CHS is unsuccessful, or if the shareholders of CHS do not approve the exchange
transaction between CHS and NewCo, or if a bankruptcy petition under U.S. law is
filed against CHS or the United States subsidiaries of CHS that own the European
subsidiaries, then CHS and such United States subsidiaries of CHS will
voluntarily file for bankruptcy. In such a bankruptcy proceeding, CHS will
attempt to accomplish the same exchange transaction as that which is described
in this Proxy Statement. However, in a bankruptcy proceeding it is unlikely that
there would be any assets remaining for common shareholders. Accordingly, CHS
believes the approval and consummation of the proposed exchange transaction
offers the best chance for its common shareholders to receive value for their
equity interest in CHS. There can be no assurance, however, that if the
transaction is approved by CHS shareholders, CHS will be able to maximize the
value of its remaining assets and have adequate proceeds and resources to
satisfy its creditors. As a result, CHS may in any event be required to seek
bankruptcy protection in the future.
As of September 30, 1999, CHS had a tangible book deficit of
approximately $142 million. On a pro forma basis, after giving effect to the
proposed exchange transaction and application of the proceeds, as of September
30, 1999, CHS would have had a tangible book value of approximately $152.8
million. See "Unaudited Pro
4
<PAGE>
Forma Condensed Consolidated Financial Information." This pro forma information
is not necessarily indicative of the financial position which would actually
have been reported had the proposed exchange transaction occurred at September
30, 1999 or which may be reported in the future.
Although the proposed exchange transaction is not expected to have any
direct federal income tax effect on the common shareholders of CHS, the
transaction will result in a taxable disposition for CHS. See "Certain Federal
Income Tax Consequences of the Transaction."
SHAREHOLDER VOTE REQUIRED
In order for action to be taken on the Exchange Proposal at the special
meeting, a quorum (more than 50% of the outstanding shares of CHS common stock)
must be present in person or represented by proxy. In order for the Exchange
Proposal to be approved at the special meeting, it must receive the affirmative
vote of a majority of all the shares of CHS common stock outstanding and
entitled to vote.
IF YOU FAIL TO RETURN YOUR PROXY CARD, UNLESS YOU APPEAR IN PERSON AT
THE CHS SPECIAL MEETING, THE EFFECT MAY BE THAT A QUORUM WILL NOT BE PRESENT AT
THE SPECIAL MEETING AND NO BUSINESS WILL BE ABLE TO BE CONDUCTED.
INTERESTS OF OFFICERS AND DIRECTORS IN THE PROPOSED TRANSACTION
No current or former officers or directors of CHS have any interest,
direct or indirect, in the Exchange Proposal, except for Mark Keough, who served
as the Chief Operating Officer of CHS from July 15, 1999 until December 14,
1999. Mr. Keough owns all of the stock of Journey and is the sole director and
officer of that company. Pursuant to a management agreement entered into with
CHS, Journey is presently managing the European subsidiaries to be transferred
to NewCo under the Exchange Proposal. The compensation to Journey under the
management agreement is $100 per year. Accordingly, Mr. Keough has a personal
interest in the outcome of the Exchange Proposal. Effective December 14, 1999,
the date on which the Exchange Agreement was signed, Mr. Keough voluntarily
terminated his employment with CHS and surrendered any unaccrued rights under
his employment agreement with CHS. Mr. Keough has surrendered outstanding
options to acquire 1,000,000 shares of CHS common stock.
CONDITIONS OF THE PROPOSED EXCHANGE TRANSACTION
The consummation of the proposed exchange transaction depends upon
satisfaction of a number of conditions, including:
/bullet/ approval of the Exchange Agreement by CHS shareholders;
/bullet/ approval of the second exchange transaction by the holders of
at least 95% of CHS's outstanding $200 million aggregate
principal amount of fixed rate notes and 95% of the claims
of up to $47 million under CHS's purported guarantees of the
indebtedness of CHS's subsidiaries in liquidation or
receivership;
/bullet/ absence of legal restraints to the consummation of the
transaction;
/bullet/ receipt of any required regulatory approvals; and
/bullet/ receipt of any required third party consents.
For further details and other conditions, see "Material Provisions of
the Exchange Agreement-Conditions to the Transaction."
TERMINATION OF THE EXCHANGE AGREEMENT
Either CHS or Journey may terminate the Exchange Agreement if:
/bullet/ both parties consent in writing;
/bullet/ the transaction is not completed by June 30, 2000; or
/bullet/ legal restraints prevent the transaction.
Journey may terminate the Exchange Agreement if Journey's due diligence
review of the European subsidiaries to be acquired reveals a material adverse
change in the business of such subsidiaries related to tax matters, litigation
or intercompany transactions.
5
<PAGE>
CHS may terminate the Exchange Agreement if the CHS Board of Directors
determines that another transaction is more favorable to the CHS shareholders
from a financial point of view than the Exchange Proposal.
For further details, see "Certain Provisions of the Exchange Agreement
- - - Termination."
OPINION OF CHS'S FINANCIAL ADVISOR
CHS's financial advisor, Capitalink, L.C. has given a written opinion
dated February 6, 2000 to the CHS Board of Directors as to the fairness to CHS
from a financial point of view of the consideration to be received from Journey
pursuant to the Exchange Proposal. The full text of the written opinion of
Capitalink is attached to this Proxy Statement as Annex B and should be read
completely and carefully. THE OPINION OF CAPITALINK, LC IS DIRECTED TO THE CHS
BOARD OF DIRECTORS, WILL NOT BE UPDATED AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON THE EXCHANGE
PROPOSAL.
DISSENTER'S RIGHTS
Because the common stock of CHS is traded on the New York Stock
Exchange, CHS shareholders will not have dissenter's rights by reason of the
exchange transaction.
REASONS FOR THE PROPOSED EXCHANGE TRANSACTION (PAGE 22)
For CHS, the proposed exchange transaction will provide CHS with an
opportunity to avoid having to file for bankruptcy protection. Although the
proposed transaction with Journey will not result in any proceeds for CHS common
shareholders, the CHS Board of Directors believes that the only other
alternative for CHS at this point would be to file for bankruptcy protection. It
is unlikely that a bankruptcy would result in any assets remaining for common
shareholders. In the judgment of the CHS Board of Directors, the proposed
transaction with Journey will maximize the value of CHS's assets. After the
exchange transaction with Journey Holdings, Ltd., CHS will attempt to utilize
the remaining assets owned by CHS in a manner that would allow CHS to satisfy
its creditors and result in some value to CHS's common shareholders in the
future.
To review the reasons for the proposed exchange transaction, see
"Proposal 1: The Proposed Exchange Transaction - Reasons of CHS for the
Transaction."
RECOMMENDATION TO SHAREHOLDERS (PAGE 22)
The CHS Board of Directors has recommended the proposed exchange
transaction and approved the Exchange Agreement. The CHS Board of Directors
believes that the proposed exchange transaction with Journey is a better
alternative than filing for bankruptcy protection because a bankruptcy would not
result in any assets remaining for common shareholders, and the proposed
transaction with Journey should permit CHS to attempt to realize the maximum
value of CHS's remaining assets. See "Proposal 1: The Proposed Exchange
Transaction - Reasons of CHS for the Transaction." THE CHS BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL TO APPROVE THE EXCHANGE
PROPOSAL.
In reaching its recommendations in favor of approving the Exchange
Proposal, the CHS Board of Directors considered the risks associated with and
the benefits anticipated from, but in no case assured by, the proposed exchange
transaction. These risks and benefits are further described in "Risk Factors"
beginning on page __ and "Proposal 1: The Proposed Exchange Transaction -
Reasons of CHS for the Transaction" beginning on page __.
6
<PAGE>
RISK FACTORS
IN EVALUATING CHS AND CHS'S BUSINESS, THE EXCHANGE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE EXCHANGE AGREEMENT, CHS SHAREHOLDERS SHOULD
CAREFULLY FOCUS ON THE FOLLOWING RISKS, AS WELL AS OTHER INFORMATION INCLUDED IN
THIS PROXY STATEMENT:
OUR BONDHOLDERS OR OTHER CREDITORS MAY FORCE US INTO BANKRUPTCY. CHS is
currently in default of certain covenants under its agreement with Computer
Associates International, Inc. related to the approximately $40.5 million of
outstanding Debentures and failed to make an interest payment of approximately
$1.7 million due on November 30, 1999. One of the holders of the Notes has
advised CHS in writing that CHS is not in compliance with certain covenants of
the Note indenture. In addition, CHS is in violation of various requirements of
short-term credit facilities. CHS cannot provide any assurance that the holders
of its outstanding Notes and Debentures or its other creditors will forebear
from exercising their rights to file an involuntary bankruptcy case against CHS
or its subsidiaries.
CHS MAY INCUR ADDITIONAL LIABILITIES AS A RESULT OF NEWCO'S EXCHANGE
TRANSACTION WITH THE HOLDERS OF NOTES AND DEBENTURES AND OTHER CREDITORS OF CHS.
As of September 30, 1999, the liabilities of CHS's European subsidiaries that
are currently in liquidation or receivership approximated $409.4 million. CHS
has guaranteed such liabilities. To the extent that the proceeds from the
liquidation of the assets of the companies in liquidation or receivership are
insufficient to pay off the debt of the companies and such debt exceeds the $47
million of debt to be transferred to NewCo under NewCo's exchange transaction,
CHS will incur additional liabilities after the exchange transactions are
completed.
IF THE EXCHANGE PROPOSAL IS NOT APPROVED BY CHS SHAREHOLDERS, CHS WILL
HAVE TO FILE FOR BANKRUPTCY. If the Exchange Proposal is not approved, the
transaction cannot be consummated. CHS currently has no other potential
transaction available to it and has experienced significant losses since April
1, 1999. If the transaction with Journey is not completed, CHS will have no
alternative available other than to file for bankruptcy. In light of its current
financial position, and in order to induce Journey to enter into the agreement
to conduct the asset exchange with CHS, CHS has agreed with Journey that, if the
second exchange transaction between NewCo and the bondholders and creditors of
CHS is unsuccessful, or if the shareholders of CHS do not approve the exchange
transaction between CHS and NewCo, or if a bankruptcy petition under U.S. law
has been filed against CHS or the United States subsidiaries of CHS that own the
European subsidiaries, then CHS and such United States subsidiaries of CHS will
voluntarily file for bankruptcy.
AFTER CONSUMMATION OF THE EXCHANGE TRANSACTION, CHS's CREDITORS MAY
STILL FORCE CHS INTO BANKRUPTCY. After the consummation of the proposed exchange
transaction between CHS and NewCo, CHS intends to create an e-commerce business
that will ship products from a central distribution center in the Netherlands.
CHS intends to conduct this business through a new company to be called
CHSE.com and The PC Way, a European assembler of PCs which is owned equally by
CHS and Trigem Computer. Following the exchange, CHS will also have a majority
interest in a Latin American e-commerce business shipping microcomputers,
peripherals and software to resellers in Latin America, and a 49% interest in
five of its former Latin American distributors. CHS may still have material
amounts of indebtedness following the consummation of the proposed transaction,
consisting largely of guarantees on behalf of its remaining subsidiaries and
claims under guarantees related to its subsidiaries in liquidation or
receivership, which claims are not eliminated through the proposed transaction.
In light of that indebtedness and the intense competition CHS will face in its
e-commerce business, CHS can provide no assurance that its creditors will not be
able to force CHS into bankruptcy.
LACK OF FINANCING. Journey is in the process of obtaining the financing
necessary to pay the $11 million cash portion of the exchange transaction
between CHS and Journey and the $19 million cash portion of the exchange
transaction between Journey and the current bondholders and certain creditors of
CHS. If Journey is unable to secure such financing, the Exchange Agreement gives
CHS the flexibility to accept forgiveness of indebtedness in the amount of $11
million in lieu of the $11 million cash payment from Journey.
DISPUTES REGARDING THE KARMA COMPANIES. In August 1997, CHS acquired
the Karma group of companies, a network of distributors with operations in
Europe, the Middle East and Asia. For the nine months ended September 30, 1999,
the Karma group of companies 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., a Luxembourg company which directly or indirectly owned substantially
all of the Karma group of companies, caused Karma International to transfer the
ownership of 10 Karma companies and their subsidiries, which companies account
for substantially all of the revenue of the Karma group of companies, to Austin
Commercial Enterprises Ltd., a British Virgin Islands company unaffiliated with
CHS. The transferred Karma companies represent approximately 13.2% of the total
assets and approximately 19% of the revenues of the companies proposed to be
transferred to NewCo in the exchange transaction. The transfer of the Karma
companies by Karma International was done without the knowledge of the Board of
Directors of CHS or the shareholders of Karma International S.a.r.l. Karma
International was credited with $4.7 million from this transfer, which amount
was used to retire indebtedness of the Karma companies guaranteed by Karma
International.
CHS is currently considering its legal remedies to challenge and annul
the transfer of such companies as well as other legal remedies related to these
events and will file appropriate lawsuits during the week of January 10, 2000.
As the first action taken by CHS, the managing director of Karma International
has been removed from office. To the extent that CHS is successful in
re-establishing its ownership of the Karma companies that were the subject of
the transfer, such companies will be included in the exchange transaction with
NewCo. If CHS is unable to convey ownership of any of the Karma companies (or
any other subsidiaries which it has agreed to transfer to NewCo in the exchange
transaction), CHS and Journey have agreed to negotiate an equitable reduction to
the consideration to be paid to CHS in the exchange transaction. The basis of
the equitable reduction in the consideration to be paid to CHS is not set forth
in the Exchange Agreement between CHS and NewCo.
7
<PAGE>
TRANSFERS OF COMPANIES BY CHS PRIOR TO THE CLOSING. CHS is currently in
the process of evaluating an internal reorganization of certain of its
subsidiaries prior to the transfer of those subsidiaries to NewCo in the
exchange transaction. Among other things, CHS formed Drake Point S.a.r.l., a
Luxembourg company, which will hold the shares of all of CHS's directly held
European subsidiaries that are to be transferred to NewCo in the exchange
transaction. In addition, CHS intends to cause CHS Logistic Services B.V., a
Netherlands company that is indirectly owned by CHS, to sell its shares in
several companies to a newly formed Luxembourg subsidiary of CHS, which company
would in turn transfer such stock to NewCo as part of the Exchange Proposal .
Those companies whose stock would be sold by CHS Logistic Services include
Metrologie International, a French company, CHS Trading SARL, a Swiss company,
CHS Czechia s.r.o., a Czech company and Karma International S.a.r.l., a
Luxembourg company which is the holding company for the Karma group of
companies. The purchase price to be paid to CHS Logistic Services would consist
of a small amount of cash paid immediately, and a deferred contingent purchase
price. This deferred purchase price would be a portion of the consideration that
is received by CHS or its subsidiaries in the exchange transaction with NewCo
corresponding to the value of the stock sold by CHS Logistic Services in
relation to the total stock transferred to NewCo in the asset exchange. In the
event that CHS Logistic Services is forced into an insolvency proceeding in the
Netherlands, creditors of CHS Logistic Services may seek to rescind the sale of
the stock in these companies by CHS Logistic Services. CHS believes that the
proposed sale of the stock of these companies by CHS Logistic Services should
not be rescinded by a Netherlands court. If, however, the sale is set aside and
CHS is unable to transfer the stock to NewCo in the exchange transaction, CHS
and Journey have agreed to negotiate an equitable reduction to the consideration
to be paid to CHS in the asset exchange. The basis of the equitable reduction in
the consideration to be paid to CHS is not set forth in the Exchange Agreement
between CHS and NewCo.
NO ASSURANCE THAT THE COURT WILL APPROVE THE SETTLEMENT OF CLASS ACTION
LITIGATION. In March 1999, Darby v. CHS Electronics, Inc. et al, case No.
99-8186, was filed in the United States District Court, Southern District of
Florida. The complaints, which purport to be class action complaints, generally
allege that CHS and certain of its officers violated fedral securities laws
(including Rule 10b-5 promulgated under the Securities Exchange Act of 1934) in
connection with financial reporting and disclosure. Among other things, the
plaintiffs allege that CHS and certain of its officers and directors materially
overstated financial disclosures. The plaintiffs sought, among other relief, to
be declared a class and to be awarded compensatory damages and attorney's fees
and costs. On December 18, 1999, CHS reached an agreement to settle this
litigation. In the settlement, CHS has agreed to pay $11.75 million in cash,
which will be fully funded by CHS's insurance policies and to issue 1,650,000
shares of common stock. The settlment covers purchasers of common stock and
related options during the period August 7, 1997 through May 13, 1999 who
suffered losses. The settlement is subject to court approval. The Company
expects the court to rule on the settlement in six to eight months. There can be
no assurance that the court will approve the settlement.
A LAWSUIT TO ENJOIN FUTURE TRANSFERS OF CHS SUBSIDIARIES HAS BEEN FILED
IN FEDERAL COURT IN CALIFORNIA. In December 1999, Quantum Corporation
("Quantum") filed a complaint in the United States District Court for the
Northern District of California, San Jose Division, against CHS in a case
entitled Quantum Corp. v. CHS Electronics, Inc., et al. (Case No. C-9921229).
Quantum sued CHS on its guarantee of the obligations of one of its subsidiaries,
CHS C.P.O. Gmbh. Quantum is seeking damages of approximately $10 million, an
injuction to prevent CHS from transferring any more of its subsidiaries to third
parties and an order of attachment of the assets of CHS that have already been
transferred to purchasers. CHS will vigorously defend the injunction and
attachment actions brought by Quantum. Because there can be no assurance that
CHS will prevail in this litigation, it is possible that the court could issue
an order prohibiting CHS from completing the exchange transaction.
CHS'S BUSINESS HAS SERIOUSLY DETERIORATED. Several of the Company's
major suppliers and lenders have changed the terms of their credit arrangements
with the Company. The suppliers have decreased the number of days the Company
has to pay for product purchases and in many cases have begun to require cash on
delivery. Suppliers have reduced credit limits, have required a stricter
adherence to payment terms and have begun to charge interest on certain
outstanding balances. Certain lenders have demanded payment on their loans and
have been unwilling to renew loans. These changes have increased the Company's
working capital requirements and financing costs and reduced the Company's
ability to take advantage of early payment discounts. The Company has
experienced a reduction in the number and types of incentives offered by certain
vendors. Some vendors wish to eliminate CHS from the distribution channel for
their products. As a result of all of these factors, CHS has reported a
significant loss from operations for the third quarter of 1999 and expects to
report significant losses for the fourth quarter of 1999. CHS has suffered
damage to its reputation and its operations that are difficult to repair,
including losses of customers, suppliers and employees.
THE HISTORICAL PERFORMANCE OF CHS IS NO INDICATION OF ITS FUTURE
PERFORMANCE. The historical share price and earnings performance of CHS prior to
April 1, 1999 were achieved prior to the adverse developments described in the
preceding paragraph. These developments, among others, have severely restricted
the ability of the subsidiaries of CHS to access credit. Because of the
liquidity crisis affecting CHS and its subsidiaries and the recent financial
results of CHS, CHS believes that the historical share price and earnings
performance of CHS are not indicative of CHS's future share price or earnings
results.
CHS'S INTERNATIONAL BUSINESS EXPOSES CHS TO RISKS RELATING TO INCREASED
REGULATION AND POLITICAL OR ECONOMIC INSTABILITY, GLOBALLY OR WITHIN CERTAIN
FOREIGN COUNTRIES. Substantially all of CHS's sales are to customers outside of
the United States. Approximately 92% of CHS's net sales were denominated in
currencies other than the United States dollar during the nine months ended
September 30, 1999. Sales in Germany represented 16% of net sales for the nine
months ended September 30, 1999. Decreases in the volume of sales in Germany or
declines in operating margins could have a material adverse effect on our
business. Changes in the value of foreign currencies relative to the United
States dollar could adversely affect our results of operations and financial
position, and transaction gains and losses could contribute to fluctuations in
our results of operations. When possible, the Company engages in currency
hedging transactions and certain other practices to reduce these risks. Our
existing and planned international operations are subject to political and
economic uncertainties including, among others, the burden of compliance with a
wide variety of laws, inflation, hyperinflation, risk of renegotiation or
modification of existing agreements or arrangements with governmental
authorities, transportation, tariffs, export controls, foreign exchange
restrictions which limit the repatriation of investments and earnings therefrom,
changes in taxation, changes in economic stability including currency
fluctuations, governmental challenges to our tax reduction strategies,
hostilities and confiscation of property. Changes related to these matters could
have a material adverse effect on our business.
BECAUSE CHS OBTAINS A SUBSTANTIAL PORTION OF ITS PRODUCTS FROM A
LIMITED NUMBER OF MANUFACTURERS, THE LOSS OF OUR RELATIONSHIP WITH ANY ONE OR
MORE OF SUCH MANUFACTURERS COULD ADVERSELY AFFECT OUR BUSINESS. We obtain our
products from manufacturers under
8
<PAGE>
non-exclusive distribution agreements which are subject to renewal annually and
may be canceled by either party on short notice. During the nine months ended
September 30, 1999:
-approximately 78% of our net sales were derived from the sale of
products supplied by our 20 largest vendors;
-18% of our net sales were derived from the sale of products supplied
by Hewlett-Packard;
-12% of net sales were derived from Compaq and
-10% of net sales were derived from IBM.
The above percentages are based upon an analysis of a representative
portion (over 71%) of our total net sales. The loss of these relationships
would, and the loss of certain other relationships could, have a material
adverse effect on our business.
COMPETITION; DECLINING GROSS PROFIT MARGINS. Our business is highly
competitive. Certain of our competitors have greater financial, marketing,
service and technical support resources than we have. There can be no assurance
that our resources will be sufficient to allow us to compete effectively in the
future. Continued increases in competition could have a material adverse effect
on our results of operations because of price reductions and potential loss of
market share. Certain of our competitors may sell products at prices below ours.
As a result of this price competition, we along with our competitors, are
experiencing downward pressure on gross margins, which we expect to continue for
the foreseeable future. We intend to seek to offset the impact of declines in
our gross margins by reducing our operating expenses as a percentage of net
sales, although there can be no assurance of the success of this strategy in
future periods.
THE SUCCESS OF CHS'S E-COMMERCE BUSINESS STRATEGY DEPENDS ON THE
CONTINUED GROWTH OF THE INTERNET AS A VIABLE COMMERCIAL MARKETPLACE. If the
proposed exchange transaction between CHS and NewCo is approved by the
shareholders, CHS intends to create an e-commerce distribution business for the
products that it has historically distributed through traditional means.
Accordingly, CHS's e-commerce strategy depends upon the widespread acceptance of
the Internet as a vehicle to purchase products. The e-commerce market is at an
early stage of development, and demand and continued market acceptance is
uncertain. CHS cannot predict the extent to which its current customers will
shift their purchasing habits from traditional means to online transactions. If
CHS's customers are unwilling to use the Internet to conduct business, CHS's
e-commerce strategy will fail. It is possible that the Internet may not become a
viable long-term commercial marketplace due to the potentially inadequate
development of the necessary network infrastructure, the delayed development of
enabling technologies and performance improvements and the high cost of shipping
products. The commercial acceptance and use of the Internet may not continue to
develop at historical rates, or may not develop as quickly as CHS expects. In
addition, concerns over security and privacy may inhibit the growth of the
Internet.
IF CHS'S COMMON STOCK IS DELISTED FROM THE NEW YORK STOCK EXCHANGE, IT
WILL BE MORE DIFFICULT TO TRADE. In order for a company to maintain a listing of
its securities for trading on the New York Stock Exchange, it must satisfy
certain quantative and qualitative criteria. One of the conditions for continued
listing is that the average closing price of a security must be at least $1.00
per share over a consecutive 30 trading-day period. Although the average closing
price of CHS's Common Stock has been above $1.00 per share since December 13,
1999, CHS's closing price of its common stock on the New York Stock Exchange was
less than $1.00 from October 22, 1999 to December 10, 1999. If CHS common stock
is delisted from the New York Stock Exchange, its common stock will be traded in
the over-the-counter market on the NASD's "OTC Electronic Bulletin Board." The
liquidity of CHS's common stock may be impaired not only by the number of shares
of common stock which can be bought and sold, but also through delays in the
timing of the transactions, reduction in security analysts' and the news media's
coverage of CHS and lower prices for CHS's common stock than might otherwise be
attained.
CHS MAY NOT BE ABLE TO TIMELY FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1999, THEREBY CAUSING ITS COMMON STOCK TO BE DELISTED FROM THE NEW YORK STOCK
EXCHANGE. CHS has serious questions about its ability to timely file with the
Securities and Exchange Commission its Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 ("1999 Form 10-K"), primarily due to the fact that
CHS may not be able to obtain all of the financial information that it needs to
prepare its consolidated financial statements from the entities that it sold
during 1999 and from the Karma group of companies, the ownership of which was
transferred to Austin Commercial Enterprises, Ltd., a company unaffiliated with
CHS. If CHS is unable to file its 1999 Form 10-K for an extended period of time
because of its inability to prepare its consolidated financial statements, CHS's
common stock may be delisted from the New York Stock Exchange. As a result,
CHS's common stock would be traded in the over-the-counter market on the NASD's
"OTC Electronic Bulletin Board." The liquidity of CHS's common stock may be
impaired as a result of such delisting. In addition, CHS's inability to timely
file the 1999 Form 10-K could materially adversely affect CHS's ability to raise
capital until CHS files its 1999 Form 10-K and could precipitate an
investigation into the matter by the Securities and Exchange Commisssion.
FORWARD LOOKING INFORMATION
This Proxy Statement contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. You
can identify forward looking statements by the use of such words as "expect,"
"estimate," "intend," "project," "forecast," "anticipate," "plan," "hope," "in
the process of" and similar expressions. Forward looking statements include all
statements regarding statements concerning gross margins, operating expenses to
sales, income taxes, inflation expectations and sales of the Company's products.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including the financial
condition of the Company's customers, changes in economic conditions, demand for
the Company's products, ability to negotiate
9
<PAGE>
agreements with lenders including the holders of the Notes and the Debentures,
vendors and sellers of businesses, the outcome of the litigation referred to
herein, and changes in competitive environment.
The Company cautions that the risks enumerated in "Risk Factors" and the other
risk factors described in this Proxy Statement could cause actual results or
outcomes to differ materially from those expressed in any forward looking
statements of the Company made by or on behalf of the Company. Any forward
looking statement speaks only as of the date on which such statement is made,
and the Company undertakes no obligation to update any forward looking statement
or statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors. Further, management cannot assess the impact of
each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward looking statements.
SELECTED FINANCIAL DATA OF CHS
The following information is being provided to assist you in analyzing
the financial aspects of the proposed exchange of assets and is only a summary.
The historical income statement data and balance sheet data set forth below as
of and for the fiscal years ended December 31, 1994, 1995, 1996, 1997 and 1998
is derived from the audited consolidated financial statements of CHS, which
statements have been audited by Grant Thornton LLP, independent certified public
accountants. The historical income statement data and balance sheet data set
forth below as of and for the nine months ended September 30, 1998 and 1999 have
been derived from our unaudited consolidated financial statements that have been
prepared on the same basis as our audited consolidated financial statements and
include all adjustments, consisting of normal recurring accruals that CHS
considers necessary for a fair presentation of the financial position and
results of operations for such periods.
Operating results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. This data should be read in conjunction with "Business of
CHS-Recent Developments," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Liquidity and Capital Resources" and
the Consolidated Financial Statements and Notes thereto. References in this
Proxy Statement to "$" mean United States dollars. No summary financial
information regarding the other parties to the proposed transaction (i.e.,
Journey and NewCo) is provided in this Proxy Statement. To the knowledge of CHS,
Journey had no operations until December 14, 1999 and NewCo has not yet been
incorporated.
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 359,169 $ 936,703 $1,855,540 $4,756,383 $8,545,773 $5,687,775 $6,879,372
Cost of goods sold 333,983 868,716 1,724,432 4,409,714 7,983,736 5,309,921 6,499,702
--------- --------- ---------- ---------- ---------- ---------- ----------
Gross profit 25,186 67,987 131,108 346,669 562,037 377,854 379,670
Operating expenses(1)(4) 22,183 57,262 103,794 258,708 438,799 294,619 645,925
--------- --------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 3,003 10,725 27,314 87,961 123,238 83,235 (266,255)
Interest income(1) (250) (1,757) (3,199) (11,470) (16,581) (10,964) (15,565)
Interest expense 2,070 6,454 11,712 35,618 71,373 47,813 75,995
Other income (5) (385) (74) (1,559) (1,200) (5,232) (6,943) (33,836)
--------- --------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
income taxes and
minority interest
in subsidiaries 1,568 6,102 20,360 65,013 73,678 53,329 (292,849)
Provision for income taxes 603 1,797 6,086 13,988 23,871 17,968 21,237
Minority interest - - 2,108 2,634 4,129 2,643 117
--------- --------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 965 $ 4,305 $ 12,166 $ 48,391 $ 45,678 $ 32,718 $ (314,203)
========= ========= ========== ========== ========== ========== ==========
Net earnings (loss) per common
share--basic $ 0.14 $ 0.41 $ 0.80 $ 1.44 $ 0.88 $ 0.64 $ (5.40)
Net earnings (loss) per common
share--diluted 0.14 0.37 0.78 1.32 0.82 $ 0.61 $ ( 5.40)
Weighted average shares
outstanding--basic 7,039 10,618 15,244 33,527 51,616 51,135 58,154
Weighted average shares
outstanding--diluted 7,039 11,522 15,656 36,592 55,917 53,934 58,154
OTHER DATA (Unaudited):
Number of countries 10 15 28 39 46 46 49
Inventory turns (2) 10 10 10 9 9 7 7
Days sales in receivables (3) 32 35 36 33 43 40 45
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 8,368 $ 11,171 $ 35,137 $ 68,806 $ 176,991 184,227 163,475
Working capital 14,004 9,843 31,506 278,771 334,072 284,769 (39,115)
Total assets 164,468 265,804 861,949 1,968,822 3,572,143 2,856,588 2,620,581
Total debt 23,302 55,239 201,259 371,066 1,053,649 791,719 866,914
Shareholders' equity 19,870 29,892 104,533 667,764 838,043 770,467 535,335
</TABLE>
- - ----------
(1) Certain reclassifications have been made to the 1994-1998 amounts to conform
to 1999 presentation.
(2) Calculated by dividing cost of sales for the last quarter of each year by
the average of beginning and ending inventory of the last quarter of each
year.
(3) Calculated by dividing ending trade receivables by the average sales per day
for the last quarter of each year.
(4) 1999 includes $184,372 million of restructuring and asset impairment
expenses.
(5) 1999 includes $36,658 million gain on sale of assets.
11
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed consolidated financial
information consists of the "Significant Events Pro Forma Financial Information"
and the "Exchange Proposal Pro Forma Financial Information." The Significant
Events Pro Forma Financial Information gives pro forma effect to a number of
significant events that have occurred since September 30, 1999, and consists of
a Balance Sheet at September 30, 1999 and Statements of Operations for the nine
month period ended September 30, 1999 and the year ended December 31, 1998. The
Significant Events Pro Forma Financial Information gives pro forma effect to the
following categories of events: (a) subsidiaries returned to former owners to
whom purchase price was owed (referred to below as "Acquisitions Rescinded");
(b) subsidiaries sold, (c) subsidiaries in receivership or voluntary creditor
protection, and (d) subsidiaries sold to management of the Company's Latin
American division, in each case as if the event had occurred on September 30,
1999 for the Balance Sheet and at the beginning of the respective periods for
the Statements of Operations. The Significant Events Pro Forma Financial
Information also gives pro forma effect to the conversion by Computer Associates
International, Inc. of $9.5 million of Debentures into common stock of CHS and
provide reserves on accounts receivables and inventory of certain subsidiaries.
Set forth immediately below is a list of subsidiaries of the Company, the
disposition of which is the subject of the Significant Events Pro Forma
Financial Information.
<TABLE>
<CAPTION>
OPERATING SUBSIDIARY SERVICE AREA DATE
- - -------------------- ------------ ----
<S> <C> <C>
ACQUISITIONS RESCINDED
- - ----------------------
Brightstar Latin America October 1999
Memory Set Spain October 1999
Cornejo Argentina October 1999
Intcomex Mexico, Panama, Guatemala, Chile, Peru October 1999
and Uruguay
MicroInformatica Latin America October 1999
Arena Turkey October 1999
Armada Turkey October 1999
ARC Spain Spain October 1999
Aptec Middle East November 1999
Ledakon Colombia December 1999
CHS Argentina (Acron) Argentina December 1999
SIS Distribution China, Malaysia, Singapore, and Vietnam December 1999
SOLD
- - ----
CHS Switzerland Switzerland November 1999
CHS Hungary (2%, retain 49%) Hungary November 1999
CHS Poland (60%) Poland November 1999
RECEIVERSHIP
- - ------------
CHS UK United Kingdom October 1999
Karma UK United Kingdom October 1999
Frank & Walter Germany October 1999
MC DOS Germany, Netherlands October 1999
CHS Germany Germany October 1999
CHS Austria Germany October 1999
Metrologie Iberica, S.A. Spain December 1999
CHS Benelux Belgium January 2000
LATIN AMERICAN MANAGEMENT BUYOUT (MBO)
- - --------------------------------------
CHS Brazil Brazil December 1999
CHS Promark Colombia Colombia December 1999
CHS Promark Uruguay Uruguay December 1999
CHS Latin America Latin America December 1999
CHS Mexico Mexico December 1999
</TABLE>
The Exchange Proposal Pro Forma Financial Information makes adjustments
to the pro forma financial information resulting from the Significant Events Pro
Forma Financial Information in order to give pro forma effect to the Exchange
Proposal as if the Exchange Proposal had been consummated on September 30, 1999
for the Balance Sheet and at the beginning of the respective periods for the
Statements of Operations. The Exchange Proposal Pro Forma Financial Information
consists of a Balance Sheet at September 30, 1999 and Statements of Operations
for the nine month period ended September 30, 1999 and the year ended December
31, 1998.
12
<PAGE>
The accompanying pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position that
would actually have been reported had such events occurred on September 30, 1999
for the Balance Sheet or at the beginning of the respective periods for the
Statements of Operations, or which may be reported in the future. The pro forma
adjustments are described in the accompanying notes and are based upon available
information and certain assumptions that CHS believes are reasonable. The
unaudited pro forma condensed consolidated financial information has been
prepared in accordance with generally accepted accounting principles. These
principles require management to make extensive use of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements. Actual results will differ from those estimates. The accompanying
unaudited pro forma condensed consolidated financial information should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Proxy Statement.
13
<PAGE>
SIGNIFICANT EVENTS PRO FORMA FINANCIAL INFORMATION
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
--------------------------
SIGNIFICANT
ACQUISITIONS PRO FORMA EVENTS
CONSOLIDATED RESCINDED SOLD RECEIVERSHIP LA MBO ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash ($79,727 restricted) $ 163,475 $ (12,894) $ (4,884) $ (4,593) $ (6,665) $ 9,742 (a) $ 144,181
Accounts receivable:
Trade, less allowance for
doubtful accounts
of $61,791 1,020,225 (205,474) (41,891) (233,364) (83,804) (6,534)(b) 449,158
Affiliates 4,617 (717) (366) (1,781) -- 4,153 (c) 5,906
----------- ----------- ----------- ----------- ----------- ----------- -----------
1,024,842 (206,191) (42,257) (235,145) (83,804) (2,381) 455,064
Inventories 487,306 (89,478) (26,159) (84,782) (45,837) (15,000)(d) 226,050
Prepaid expenses and other
current assets 81,331 (63,339) (5,499) (66,247) (22,489) 115,865 (e) 39,622
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 1,756,954 (371,902) (78,799) (390,767) (158,795) 108,226 864,917
PROPERTY AND EQUIPMENT, NET 119,084 (14,501) (4,029) (20,753) (3,608) -- 76,193
COST IN EXCESS OF ASSETS ACQUIRED,
NET 677,345 -- -- -- -- (244,045)(f) 433,300
OTHER ASSETS 67,198 (5,915) (1,227) (3,002) (6,928) 23,207 (g) 73,333
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,620,581 $ (392,318) $ (84,055) $ (414,522) $ (169,331) $ (112,612) $ 1,447,743
=========== =========== =========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY CURRENT LIABILITIES:
Notes payable $ 586,244 $ (57,133) $ (26,800) $ (149,309) $ (29,036) $ -- $ 323,966
Accounts payable, trade 811,462 (195,286) (29,467) (215,739) (88,670) 83,122 (h) 365,422
Accrued liabilities 106,619 (10,431) (2,683) (40,334) (4,944) 53,066 (i) 101,293
Amounts due to sellers under
acquisition agreements 275,267 -- -- -- -- (259,259)(j) 16,008
Income taxes payable 16,477 (10,766) (46) 52 (8,494) 2,777 (e) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,796,069 (273,616) (58,996) (405,330) (131,144) (120,294) 806,689
LONG TERM DEBT 280,670 (6,219) -- (4,110) (5) (9,500)(k) 260,836
MINORITY INTEREST 8,507 (77) -- (17) (66) -- 8,347
SHAREHOLDERS' EQUITY:
Preferred stock, authorized
5,000,000 shares;
0 shares outstanding -- -- -- -- -- -- --
Common stock, authorized
100,000,000 shares at $.001
par value; 64,815,416
shares outstanding, pro forma
69,868,154 shares 64 (7,776) (183) (10,060) (7,115) 25,140 (l) 70
Additional paid-in capital 768,227 (54,336) (15,847) (59,949) (27,941) 161,724 (l) 771,878
Retained earnings (losses) (203,410) (52,788) (15,377) 72,536 (8,188) (169,682)(m) (376,909)
Accumulated other
comprehensive income (29,546) 2,494 6,348 (7,592) 5,128 -- (23,168)
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 535,335 (112,406) (25,059) (5,065) (38,116) 17,182 371,871
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,620,581 $ (392,318) $ (84,055) $ (414,522) $ (169,331) $ (112,612) $ 1,447,743
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
- - ----------
a. To record cash of -
- $7.7 million received for Acquisitions Rescinded
- $2.0 million received from the Latin America ("LA") MBO
b. To record -
- net intercompany balance receivables from Acquisitions Rescinded of
$4.0 million that the Company has no minority interest remaining
- net intercompany balance receivables from subsidiaries Sold of $5.4
million that the Company has no minority interest remaining
- accounts receivables reserves of $16.0 million, based upon
management's best estimates of amounts that will ultimately not be
collected, against the receivables of the Latin American operations
remaining after the LA MBO of approximately $32.0 million, due to
deteriorating collections of accounts receivables in those companies
c. To record -
- net intercompany balance receivables from Acquisitions Rescinded of
$2.0 million that the Company has minority interest remaining
- net intercompany balance receivables from subsidiaries Sold of $2.2
million that the Company has minority interest remaining
d. To record inventory valuation reserves of $15.0 million, based upon
management's best estimates of amounts that will ultimately not be
realized, for the inventory of the Latin American operations remaining
after the LA MBO of approximately $30.0 million, due to type of products
remaining in inventory and discounts being given to sell products
e. To -
- adjust balance for $113.1 million of intercompany receivables
included on the balance sheet of the subsidiaries removed from the
consolidated entity
- reclassify negative amount of $2.8 million included in income taxes
payable to income taxes receivables
f. To remove goodwill of -
- $210.6 for Acquisitions Rescinded
- $15.1 million for subsidiaries Sold
- $18.3 million for the LA MBO
g. To record minority interest investment retained in unconsolidated
subsidiaries of -
- - - $6.2 million for Acquisitions Rescinded
- - - $8.7 million for subsidiaries Sold
- - - $8.3 million for the LA MBO
h. To -
- adjust balance for $104.7 million of intercompany payables included
on the balance sheet of the subsidiaries removed from the consolidated
entity
- record the removal of $21.6 million of payables assumed by the LA MBO
as part of purchase price consideration
i. To record -
- Accrual for $6.1 million of expenses incurred for Acquisitions
Rescinded
- An estimate of $47 million in accrual for expenses to be
incurred in connection with subsidiaries in Europe in receivership or
voluntary creditor protection. This amount will be subsequently
assumed by Journey Holdings, Ltd.
j. To record the reduction of $259.3 million of amounts due to sellers under
acquisition agreements from Acquisitions Rescinded
k. To record the conversion of $9.5 million of Computer Associates Debentures
at $0.82 into 11,579,054 shares
1. To -
- adjust for common stock and additional paid -in capital of $25.1
million and $158.1 million, respectively, included on the balance
sheet of the subsidiaries removed from the consolidated entity
- record return and cancellation of 6,526,316 shares of common stock at
a value of $5.8 million in connection with two Acquisitions Rescinded.
- record the issuance of 11,585,366 shares for the conversion of $9.5
million of the Computer Associates Debentures at $0.82 per share
m. To -
- adjust for retained earnings included on the balance sheet of the
subsidiaries removed from the consolidated entity of $3.8 million
- record a loss of $62.2 million for the Acquisitions Rescinded
- record a loss of $30.1 million for the subsidiaries Sold
- record a loss of $41.7 million for the Receivership subsidiaries
- record a loss of $8.5 million for the LA MBO
- record a loss of $31.0 million for receivables and inventory reserves
on remaining Latin American subsidiaries
14
<PAGE>
SIGNIFICANT EVENTS PRO FORMA FINANCIAL INFORMATION
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
------------------------------------------ SIGNIFICANT
ACQUISITIONS PRO FORMA EVENTS
CONSOLIDATED RESCINDED SOLD RECEIVERSHIP LA MBO ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 6,879,372 $(1,136,023) $(292,730) $(1,793,513) $(456,028) $ - $ 3,201,078
Cost of goods sold 6,499,702 (1,044,703) (273,707) (1,726,689) (424,926) - 3,029,677
----------- --------- --------- ----------- --------- ------- -----------
Gross profit 379,670 (91,320) (19,023) (66,824) (31,102) - 171,401
Operating expenses:
Selling, general &
administrative 461,553 (49,899) (13,997) (97,288) (26,420) (8,121)(a) 265,828
Restructuring & asset
impairment 184,372 (297) - (7,831) (449) - 175,795
----------- --------- --------- ----------- --------- ------- -----------
645,925 (50,196) (13,997) (105,119) (26,869) (8,121) 441,623
----------- --------- --------- ----------- --------- ------- -----------
Operating income (loss) (266,255) (41,124) (5,026) 38,295 (4,233) 8,121 (270,222)
Other (income) expenses:
Interest income (15,565) 2,916 987 813 1,854 - (8,995)
Interest expense 75,995 (4,453) (2,095) (15,265) (4,961) - 49,221
Gain on sale of
Sun Microsystems
distribution business (32,658) - - - - - (32,658)
Equity in unconsolidated
subsidiaries - - - - - (1,447)(b) (1,447)
Foreign currency
(gain) loss (1,178) (1,704) (1,353) 54 (1,648) - (5,829)
----------- --------- --------- ----------- --------- ------- -----------
26,594 (3,241) (2,461) (14,398) (4,755) (1,447) 292
----------- --------- --------- ----------- --------- ------- -----------
Earnings (loss) before
income taxes and
minority interest
in subsidiaries (292,849) (37,883) (2,565) 52,693 522 9,568 (270,514)
Income taxes (benefit) 21,237 (12,005) (555) (237) (1,177) - 7,263
Minority interest
in subsidiaries 117 (95) - - (68) - (46)
----------- --------- --------- ----------- --------- ------- -----------
Net earnings (loss) $ (314,203) $ (25,783) $ (2,010) $ 52,930 $ 1,767 $ 9,568 $ (277,731)
=========== ========= ========= =========== ========= ======= ===========
Net earnings (loss)
per common share:
Basic $ (5.40) $ (4.85)
=========== ===========
Diluted $ (5.40) $ (4.85)
=========== ===========
Weighted average shares:
Basic 58,154,044 895,729 (c) 57,258,315
=========== ======= ===========
Diluted 58,154,044 895,729 (c) 57,258,315
=========== ======= ===========
</TABLE>
- - ----------
a. Represents add back of goodwill expense amortization for the period.
b. To record equity in earnings of subsidiaries accounted for under the equity
method.
c. To record the removal of 895,729 weighted average shares returned to the
company in connection with two subsidiaries returned to their former owners.
15
<PAGE>
SIGNIFICANT EVENTS PRO FORMA FINANCIAL INFORMATION
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------- SIGNIFICANT
ACQUISITIONS PRO FORMA EVENTS
CONSOLIDATED RESCINDED SOLD RECEIVERSHIP LA MBO ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 8,545,773 $(1,020,577) $(341,934) $(2,276,741) $(456,524) $ - $ 4,449,997
Cost of goods sold 7,983,736 (945,272) (318,780) (2,163,410) (414,541) - 4,141,733
----------- --------- --------- ----------- --------- ------- -----------
Gross profit 562,037 (75,305) (23,154) (113,331) (41,983) - 308,264
Operating expenses 438,799 (36,807) (15,886) (109,178) (31,848) (5,916)(a) 239,164
----------- --------- --------- ----------- --------- ------- -----------
Operating income 123,238 (38,498) (7,268) (4,153) (10,135) 5,916 69,100
Other (income) expenses:
Interest income (16,581) 2,190 737 2,311 990 - (10,353)
Interest expense 71,373 (3,560) (1,538) (17,090) (5,962) - 43,223
Equity in
unconsolidated
subsidiaries - - - - - (3,983)(b) (3,983)
Foreign currency
(gain) loss (5,232) (542) (135) (1,125) (960) - (7,994)
----------- --------- --------- ----------- --------- ------- -----------
49,560 (1,912) (936) (15,904) (5,932) (3,983) 20,893
----------- --------- --------- ----------- --------- ------- -----------
Earnings (losses) before
income taxes and
minority interest
in subsidiaries 73,678 (36,586) (6,332) 11,751 (4,203) 9,899 48,207
Income taxes 23,871 (10,517) (1,349) 3,285 (2,447) - 12,843
Minority interest in
subsidiaries 4,129 (124) - (15) (78) - 3,912
----------- --------- --------- ----------- --------- ------- -----------
Net earnings $ 45,678 $ (25,945) $ (4,983) $ 8,481 $ (1,678) $ 9,899 $ 31,452
=========== ========= ========= =========== ========= ======= ===========
Net earnings per
common share:
Basic $ 0.88 $ 0.61
=========== ===========
Diluted $ 0.82 $ 0.56
=========== ===========
Weighted average shares:
Basic 51,616,109 51,616,109
=========== ===========
Diluted 55,917,007 55,917,007
=========== ===========
</TABLE>
- - ----------
a. Represents add back of goodwill expense amortization for the period related
to entities divested.
b. To record equity in earnings of subsidiaries accounted for under the equity
method.
16
<PAGE>
EXCHANGE PROPOSAL PRO FORMA FINANCIAL INFORMATION
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
-----------------------------
SIGNIFICANT EXCHANGE
EVENTS EXCHANGE PRO FORMA PROPOSAL
PRO FORMA PROPOSAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ($80,891 restricted) $ 144,181 $ (49,767) $ 8,000 (a) $ 102,414 (k)
Accounts receivable:
Trade, less allowance for doubtful accounts
of $61,791 $ 449,158 (353,835) 95,323
Affiliates 5,906 (1,934) 4,800 (b) 8,772
----------- ----------- ----------- -----------
455,064 (355,769) 4,800 104,095
Inventories 226,050 (185,114) -- 40,936
Prepaid expenses and other current assets 39,622 (148,782) 116,154 (c) 6,994
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 864,917 (739,432) 128,954 254,439
PROPERTY AND EQUIPMENT, NET 76,193 (32,121) -- 44,072
COST IN EXCESS OF ASSETS ACQUIRED, NET 433,300 -- (416,564)(d) 16,736
OTHER ASSETS 73,333 (16,252) 10,178 (e) 67,259
----------- ----------- ----------- -----------
$ 1,447,743 $ (787,805) $ (277,432) $ 382,506
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 323,966 $ (251,846) $ -- $ 72,120
Accounts payable, trade 365,422 (358,693) 45,918 (f) 52,647
Accrued liabilities 101,293 (35,652) -- 65,641
Amounts due to sellers under acquisition agreements 16,008 -- -- 16,008
Income taxes payable -- (1,241) 1,241 (c) --
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 806,689 (647,432) 47,159 206,416
LONG TERM DEBT 260,836 (16,599) (237,750)(g) 6,487
MINORITY INTEREST 8,347 -- (8,347)(h) --
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; -- -- -- --
0 shares outstanding
Common stock, authorized 100,000,000 shares at
$.001 par value; pro forma 69,868,154 shares
outstanding 70 (39,564) 39,564 (i) 70
Additional paid-in capital 771,878 (59,861) 59,861 (i) 771,878
Retained earnings (losses) (376,909) (36,778) (177,919)(j) (591,606)
Accumulated other comprehensive income (23,168) 12,429 -- (10,739)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 371,871 (123,774) (78,494) 169,603
----------- ----------- ----------- -----------
$ 1,447,743 $ (787,805) $ (277,432) $ 382,506
=========== =========== =========== ===========
</TABLE>
- - ----------
a. To record cash of $11 million to be received less direct expenses to
consummate the transaction of $3 million
b. To record $4.8 million of receivables to be paid for outstanding management
and other fees due
c. To -
- restore balance of $114.9 million for intercompany receivables
included on the balance sheet of the subsidiaries removed from the
Significant Events Pro Forma
- reclassify negative amount of $1.2 million included in income taxes
payable to income taxes receivables
d. To remove goodwill of $416.6 million related to Exchange Proposal entities
e. To record 10% minority interest investment retained in unconsolidated
subsidiaries of $10.2 million
f . To -
- restore balance of $92.9 million for intercompany payables included on
the balance sheet of the subsidiaries removed from the Significant
Events Pro Forma
- record the removal of $47.0 million of payables assumed by Journey
Holdings, Ltd. as part of purchase price consideration
g. To record the assumption of $200 million of Notes and $37.75 million of
Debentures to be assumed as part of the purchase price
h. To remove minority interest liability transferred as part of sale of $8.3
million
i. To restore common stock and additional paid -in capital of $39.6 million
and $59.9 million, respectively, included on the balance sheet of the
subsidiaries removed from Significant Events Pro Forma
j. To -
- restore retained earnings included on the balance sheet of the
subsidiaries removed from the Significant Events Pro Forma of $36.8
million
- record a loss of $214.7 million on the Exchange Proposal transaction
k. Exchange Proposal Cash consist primarily of -
- $7.7 million received from subsidiaries sold, subsequent to
September 30, 1999, of which $5.8 million was used to pay secured
creditors of those subsidiaries
- $32.4 million received in September 1999 from the sale of the
Company's Sun Microsystems Distribution Business of which $31.4
million was used to pay secured creditors of those business in October
1999
- $43.7 million of cash restricted under letter of credit and other
guarantees of the Company
- $2.0 million received from the LA MBO sale
- $8.0 million received from the Exchange Proposal
17
<PAGE>
EXCHANGE PROPOSAL PRO FORMA FINANCIAL INFORMATION
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
-----------------------------------------------
SIGNIFICANT EXCHANGE
EVENT EXCHANGE PRO FORMA PROPOSAL
PRO FORMA PROPOSAL ADJUSTMENTS PRO FORMA
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,201,078 $(2,701,132) $ - $ 499,946
Cost of goods sold 3,029,677 (2,554,646) - 475,031
----------- ----------- -------- -----------
Gross profit 171,401 (146,486) - 24,915
Operating expenses:
Selling, general & administrative 265,828 (146,365) (14,879)(a) 104,584
Restructuring & asset impairment 175,795 (7,279) - 168,516
----------- ----------- -------- -----------
441,623 (153,644) (14,879) 273,100
----------- ----------- -------- -----------
Operating income (loss) (270,222) 7,158 14,879 (248,185)
Other (income) expenses:
Interest income (8,995) 6,786 - (2,209)
Interest expense 49,221 (21,102) - 28,119
Gain on sale of Sun Microsystems
distribution business (32,658) - - (32,658)
Equity in unconsolidated
subsidiaries (1,447) 944 2,699 (b) 2,196
Foreign currency (gain) loss (5,829) (2,606) - (8,435)
----------- ----------- -------- -----------
292 (15,978) 2,699 (12,987)
----------- ----------- -------- -----------
Earnings (loss) before
income taxes and minority
interest in subsidiaries (270,514) 23,136 12,180 (235,198)
Income taxes (benefit) 7,263 (2,907) - 4,356
Minority interest in subsidiaries (46) - - (46)
----------- ----------- -------- -----------
Net earnings (loss) $ (277,731) $ 26,043 $ 12,180 $ (239,508)
=========== =========== ======== ===========
Net earnings (loss) per common share:
Basic $ (4.85) $ (4.18)
=========== ===========
Diluted $ (4.85) $ (4.18)
=========== ===========
Weighted average shares:
Basic 57,258,315 57,258,315
=========== ===========
Diluted 57,258,315 57,258,315
=========== ===========
</TABLE>
- - ----------
a. Represents add back of goodwill expense amortization for the period.
b. To record equity in loss of subsidiaries accounted for under the equity
method.
18
<PAGE>
EXCHANGE PROPOSAL PRO FORMA FINANCIAL INFORMATION
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
--------------------------------
SIGNIFICANT EXCHANGE
EVENTS EXCHANGE PRO FORMA PROPOSAL
PRO FORMA PROPOSAL ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 4,449,997 $(3,498,812) $ - $ 951,185
Cost of goods sold 4,141,733 (3,286,966) - 854,767
----------- ----------- -------- -----------
Gross profit 308,264 (211,846) - 96,418
Operating expenses 239,164 (158,559) (20,395)(a) 60,210
----------- ----------- -------- -----------
Operating income 69,100 (53,287) 20,395 36,208
Other (income) expenses:
Interest income (10,353) 4,642 - (5,711)
Interest expense 43,223 (22,663) - 20,560
Equity in unconsolidated subsidiaries (3,983) 2,054 (2,445)(b) (4,374)
Foreign currency (gain) loss (7,994) 2,994 - (5,000)
----------- ----------- -------- -----------
20,893 (12,973) (2,445) 5,475
----------- ----------- -------- -----------
Earnings before income taxes and
minority interest in subsidiaries 48,207 (40,314) 22,840 30,733
Income taxes 12,843 (13,807) - (964)
Minority interest in subsidiaries 3,912 - - 3,912
----------- ----------- -------- -----------
Net earnings $ 31,452 $ (26,507) $ 22,840 $ 27,785
=========== =========== ======== ===========
Net earnings per common share:
Basic $ 0.61 $ 0.54
=========== ===========
Diluted $ 0.56 $ 0.50
=========== ===========
Weighted average shares:
Basic 51,616,109 51,616,109
=========== ===========
Diluted 55,917,007 55,917,007
=========== ===========
</TABLE>
- - ----------
a. Represents add back of goodwill expense amortization for the period.
b. To record equity in earnings of subsidiaries accounted for under the equity
method.
19
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CHS SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting of the CHS shareholders will be held on March 22,
2000 at 10:00 a.m. local time at CHS's corporate offices located at 2000
Northwest 84th Avenue, Miami, Florida 33122.
PURPOSE OF THE CHS SPECIAL MEETING
At the special meeting, holders of CHS common stock will consider and
vote upon: (1) a proposal to approve the Exchange Agreement, dated as of
December 14, 1999, between Journey and CHS, and the transactions contemplated
thereby, which agreement, among other matters, provides for the transfer by CHS
of all of its equity interests in substantially all of its European subsidiaries
to Journey in exchange for cash, stock and forgiveness of debt, as further
described in this Proxy Statement and (2) such other matters that may properly
come before the special meeting or any adjournment or postponement thereof.
THE CHS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CHS SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE EXCHANGE PROPOSAL. SEE "PROPOSAL 1: THE PROPOSED
EXCHANGE OF ASSETS."
Only shareholders of record at the close of business on February 1,
2000 are entitled to notice of and to vote at the CHS special meeting or any
adjournment or postponement of the special meeting.
SOLICITATION OF PROXIES
The solicitation of proxies in the form enclosed is made on behalf of
the CHS Board of Directors. The expenses of the solicitation of proxies,
including preparing, handling, printing and mailing the proxy soliciting
material, will be borne by CHS. Solicitation will be made by use of the mails,
and if necessary, by electronic telecommunications or in person. CHS has
retained the services of Innisfree M&A Incorporated, a professional proxy
solicitation firm, to assist in connection with the soliciting of proxies for a
fee of $10,000 plus out-of-pocket expenses. In soliciting proxies, CHS
management may use the services of its directors, officers and employees, who
will not receive any additional compensation therefor, but who will be
reimbursed for their out-of-pocket expenses. CHS will reimburse banks, brokers,
nominees, custodians and fiduciaries for their expenses in forwarding copies of
the proxy soliciting material to the beneficial owners of the stock held by such
persons and in requesting authority for the execution of proxies.
RECORD DATE; VOTING RIGHTS; PROXIES
Only shareholders of record of CHS common stock at the close of
business on February 1, 2000 (the "Record Date") are entitled to notice of and
to vote at the special meeting of shareholders or any adjournment or
postponement thereof.
As of the Record Date, there were 71,145,316 issued and outstanding
shares of CHS common stock held by approximately 492 holders of record. Each
issued and outstanding share of common stock is entitled to one vote per share
on any matter that properly comes before the CHS special meeting.
In order for action to be taken on the Exchange Proposal at the special
meeting, a quorum (more than 50% of the outstanding shares of CHS common stock)
must be present in person or represented by proxy. In order for the Exchange
Proposal to be approved at the special meeting, it must receive the affirmative
vote of a majority of all the shares of CHS common stock outstanding and
entitled to vote.
All shares of CHS common stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED ON SUCH PROXIES, SUCH SHARES OF CHS COMMON STOCK WILL BE VOTED IN
FAVOR OF APPROVAL OF THE EXCHANGE PROPOSAL.
CHS does not know of any matters that are to come before the special
meeting other than the Exchange Proposal. If any other matter or matters are
properly presented for action at the special meeting, including a motion to
adjourn the meeting to another time or place, the persons named in the enclosed
form of proxy will have the discretion to vote on such matters in accordance
with their best judgment, unless such authorization is withheld by notation on
the proxy. A shareholder who has given a proxy may revoke it at any time prior
to its exercise by giving written notice of revocation to the Secretary of CHS,
by signing and returning a later dated proxy, or by voting in person at the
special meeting. However, mere attendance at the special meeting will not, in
and of itself, have the effect of revoking the proxy.
20
<PAGE>
Votes cast by proxy or in person at the special meeting will be
tabulated by the election inspectors appointed for the meeting, who will
determine whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the shareholders for a vote.
Accordingly, since Florida law requires the affirmative vote of a majority of
the votes entitled to be cast by the holders of common stock, an abstention will
constitute a vote against approval of the Exchange Proposal. If a broker
indicates on the proxy that it does not have authority to vote certain shares on
a particular matter, those shares will be counted for purposes of determining
the presence of a quorum but will not be entitled to vote on such matter.
Without instruction from the beneficial owner, brokers will not have authority
to vote shares held in "street name" at the special meeting.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of CHS common stock entitled to
vote is necessary to constitute a quorum at the CHS special meeting.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Representatives of CHS's independent certified public accountants will
(i) be present at the special meeting, (ii) have an opportunity to make a
statement if they request, and (iii) be available to respond to appropriate
questions.
OTHER INFORMATION
On the Record Date, the executive officers and directors of CHS,
including their affiliates, had voting power with respect to an aggregate of
10,074,620 shares of CHS common stock or approximately 14.2% of the shares of
CHS common stock then outstanding. CHS currently expects that such directors and
officers will vote all of such shares in favor of the Exchange Proposal.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE CHS SHAREHOLDERS. ACCORDINGLY, CHS SHAREHOLDERS ARE URGED TO
READ COMPLETELY AND CAREFULLY THE INFORMATION PRESENTED IN THIS PROXY STATEMENT,
AND TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE PRE-PAID RETURN ENVELOPE.
21
<PAGE>
PROPOSAL 1:
THE PROPOSED EXCHANGE TRANSACTION
This section of the Proxy Statement, as well as the next section of the
Proxy Statement entitled "Material Provisions of the Exchange Agreement,"
describe the material aspects of the proposed exchange transaction with NewCo.
Refer to the Exchange Agreement, which is attached as Annex A to this Proxy
Statement, and to the other agreements and documents that are attached as
annexes to this Proxy Statement for additional information. YOU SHOULD READ THE
EXCHANGE AGREEMENT COMPLETELY AND CAREFULLY AS IT IS THE LEGAL DOCUMENT THAT
GOVERNS THE EXCHANGE TRANSACTION BETWEEN CHS AND NEWCO.
BACKGROUND OF THE TRANSACTION
On February 25, 1999, CHS announced the discovery of discrepancies
related to the amount of vendor incentives recorded in the fourth quarter of
1998. In coordination with its independent auditors and an investigation by
outside attorneys, 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. CHS reversed all of the overstated rebates
and restated its financial results for the second and third quarters of 1998.
CHS's restatement of financial results created a credibility issue with
its suppliers and lenders. Several of CHS's major suppliers and lenders changed
the terms of their credit arrangements with CHS. The suppliers decreased the
number of days CHS had to pay for product purchases and in many cases required
cash on delivery. In addition, suppliers reduced credit limits, required a
stricter adherence to payment terms and charged interest on certain outstanding
balances. Certain lenders demanded payment on their loans and were unwilling to
renew loans. These changes increased CHS's working capital requirements and
financing costs and reduced CHS's ability to take advantage of early payment
discounts. CHS also experienced a reduction in the number and types of
incentives offered by certain vendors, including volume rebates, price
protection and inventory protection rebates. At approximately the same time, CHS
experienced increased price competition from its competitors, which resulted in
decreased margins, and manufacturers, in order to protect their pricing
structure, began eliminating wholesale distributors, like CHS, from the
distribution channel for their products.
As a result of these factors, it became apparent to CHS's Board of
Directors that it would be necessary for CHS to divest itself of some or all its
ownership interest in its operating subsidiaries if they were to continue as
going concerns. The CHS Board of Directors gave consideration to the separate
sale of the European subsidiaries or groups of the European subsidiaries to
their managers. However, this alternative was rejected in favor of the proposed
exchange transaction because the separate sale of subsidiaries or groups of
subsidiaries did not lend itself to an organized and systematic method of
reducing the long-term debt of CHS. In addition, such a strategy would have
called for an accumulation of cash proceeds and subsequent retirement of debt at
amounts estimated to be comparable to the par value of the debt rather than the
discounted values that CHS hopes to obtain through the exchange transactions.
On October 25 and 27, 1999, CHS's Board of Directors considered a
proposal from a group of investors led by Mark Keough, the sole officer,
director and shareholder of Journey, to acquire 51% of CHS's operations in
Europe and the Middle East at an amount equal to 51% of the consolidated
tangible net book value of the entities comprising such operations. CHS's Board
of Directors did not approve the proposal because the group of investors did not
have financing arrangements in place and the investors were insisting that CHS
agree not to offer the operations subject to the proposal to third parties while
the investor group attempted to obtain the funds required to complete the
transaction.
REASONS OF CHS FOR THE TRANSACTION
At a meeting of the CHS Board of Directors held on December 12, 1999,
after careful consideration and consultation with representatives of Jefferies &
Company, Inc., an investment banking firm that has been retained by CHS to
assist the Company in connection with NewCo's exchange transaction with the
bondholders and other creditors of CHS, the CHS Board of Directors unanimously
approved a Term Sheet which set forth the material terms of the Exchange
Agreement and the transactions contemplated thereby. The CHS Board of Directors
determined that the Exchange Agreement provided the best alternative available
to the Company at the time to discharge its indebtedness to creditors and to
provide shareholders with an opportunity to obtain value over time for their
investment in CHS.
At a subsequent meeting of the CHS Board of Directors held on January
6, 2000, after careful consideration and consultation with Capitalink, L.C. the
CHS Board of Directors unanimously (i) approved the Exchange Agreement and the
transactions contemplated thereby and the Management Agreement, (ii) determined
that the value that CHS would receive from NewCo for the exchange of the
European subsidiaries is fair value for the assets being transferred, and (iii)
recommended that holders of shares of CHS common stock vote FOR approval of the
Exchange Agreement and the other transactions contemplated thereby.
In reaching its decision to approve the Exchange Agreement and to
recommend its approval by the holders of CHS's common stock, CHS's Board of
Directors considered many factors, including, but not limited to, the following:
1. alternatives to proceeding with the Exchange Agreement,
including other sales of CHS assets;
2. the unsuccessful results of efforts over the past six months
to solicit potential interest from third parties to purchase
the European subsidiaries which CHS intends to transfer to
NewCo pursuant to the Exchange Agreement;
3. the prospects of CHS continuing its operations without
completing the transaction with NewCo;
4. the impact of a bankruptcy proceeding on the prospects of
CHS's shareholders and creditors realizing value for their
interest in or claims against CHS;
5. The financial and other analysis presented by Capitalink and
the oral opinion of Capitalink, L.C. (subsequently confirmed
in writing) as to the fairness to the shareholders of CHS from
a financial point of view of the consideration to be received
from NewCo in the Exchange Agreement. A copy of the opinion,
dated January 6, 2000, setting forth the assumptions and
qualifications made, facts considered and the scope of the
review undertaken is attached to this Proxy Statement as Annex
B. Shareholders of CHS are encouraged to read the opinion of
Capitalink carefully and completely;
6. information concerning the financial condition, results of
operations, prospects and business of CHS; and
7. The recognition of CHS that Mark Keough, the former Chief
Operating Officer of CHS, has an interest in NewCo, which the
Board of Directors considered in connection with its approval
of the proposed transaction with NewCo. See "-Interests of
Certain Persons."
CHS's Board of Directors also considered (i) the risk that the proposed
transaction with NewCo would not be consummated, and (ii) the matters described
in "Risk Factors." In the judgment of CHS's Board of Directors, the potential
benefits of the proposed transaction outweigh these considerations.
The discussion of the information and factors considered and the weight
given to such factors by CHS's Board of Directors is not intended to be
exhaustive but includes all material factors considered by CHS's Board of
Directors. In view of the variety of factors considered in connection with their
evaluation of the proposed transaction, CHS's Board of Directors did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of CHS's Board of Directors may have given different weights
to different factors.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF CHS
CHS'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF CHS
COMMON STOCK VOTE "FOR" APPROVAL OF THE EXCHANGE PROPOSAL.
OPINION OF FINANCIAL ADVISOR TO CHS'S BOARD OF DIRECTORS
In connection with the proposed exchange transaction between CHS and
NewCo (the "Proposed Transaction"), CHS engaged Capitalink, L.C. ("Capitalink")
to render an opinion as to the fairness, from a financial point of view, to the
CHS shareholders of the consideration to be received. On January 6, 2000,
Capitalink delivered its written opinion to the Board of Directors of CHS that,
based upon and subject to the assumptions made, matters considered, and
limitations on its review as set forth in the opinion, from a financial point of
view, the consideration to be received in the Proposed Transaction is fair to
the CHS shareholders. For purposes of the discussion of the opinion of
Capitalink, the companies included in Schedule 1 of the Exchange Agreement are
referred to collectively as "EuroCos."
THE FULL TEXT OF THE WRITTEN OPINION OF CAPITALINK DATED AS OF JANUARY
6, 2000 IS ATTACHED AS ANNEX B AND IS INCORPORATED BY REFERENCE (THE "CAPITALINK
OPINION"). CHS SHAREHOLDERS ARE URGED TO READ THE CAPITALINK OPINION CAREFULLY
AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS
CONSIDERED, PROCEDURES FOLLOWED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
CAPITALINK IN RENDERING ITS OPINION. THE SUMMARY OF THE CAPITALINK OPINION SET
FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
No limitations were imposed by CHS on the scope of Capitalink's
investigation or the procedures to be followed by Capitalink in rendering its
opinion. Capitalink was not requested to and did not make any recommendation to
the Board of Directors of CHS as to the form or amount of consideration received
in the Proposed Transaction, which, Capitalink assumed, was determined through
arms length negotiations between parties. The Capitalink Opinion is for the use
and benefit of the Board of Directors of CHS in connection with its
consideration of the Proposed Transaction and is not intended to be and does not
constitute a recommendation to any shareholder of CHS as to how such shareholder
should vote with respect to the Proposed Transaction. Capitalink was not
requested to opine as to, and its opinion does not address, CHS's underlying
business decision to proceed with or effect the Proposed Transaction. In
addition, Capitalink was not requested to explore any alternatives to the
Proposed Transaction.
Capitalink took into account its assessment of general economic, market
and financial conditions as well as its experience in connection with similar
transactions and securities valuations generally. Capitalink was not asked to
consider, and its opinion does not address, the relative merits of the Proposed
Transaction as compared to any alternative business strategy that might exist
for CHS.
In arriving at its opinion, Capitalink, among other things: (i)
reviewed the Exchange Agreement; (ii) reviewed the Management Agreement dated as
of December 14, 1999, between Journey and CHS; (iii) reviewed publicly available
financial information and other data with respect to CHS, including the Form
10-K for the fiscal year ended December 31, 1998, the Form 10-Q for the
quarterly period ended September 30, 1999, the Current Reports on Form 8-K,
dated October 19, 1999, June 17, 1999, and March 29, 1999, and certain other
relevant financial and operating data relating to CHS made available from
published sources and from the internal records of CHS; (iv) considered the
historical financial results and present financial condition of CHS and EuroCos
with those of other companies that we deemed relevant; (v) reviewed and analyzed
the financial terms of certain transactions that Capitalink deemed comparable to
the Proposed Transaction; (vi) reviewed certain publicly available information
concerning the trading of, and the trading market for, the common stock of CHS;
(vii) reviewed and analyzed certain publicly available information concerning
the trading of, and the trading market for, companies that Capitalink believed
to be comparable to EuroCos; (viii) reviewed and discussed with representatives
of the managements of CHS and EuroCos certain financial and operating
information furnished to Capitalink; (ix) inquired about and discussed the
Proposed Transaction with CHS management; and (x) performed such other analyses
and examinations as were deemed appropriate.
In arriving at its opinion, Capitalink relied upon and assumed the
accuracy and completeness of all of the financial and other information that was
used without assuming any responsibility for any independent verification of any
such information and further relied upon the assurances of CHS's and EuroCos'
management that they were not aware of any facts or circumstances that would
make any such information inaccurate or misleading. In arriving at its opinion,
Capitalink did not make a physical inspection of the properties and facilities
of EuroCos, and has not made or obtained any evaluations or appraisals of the
assets and liabilities (contingent or otherwise) of EuroCos. Capitalink assumed
that the Proposed Transaction will be consummated in a manner that complies in
all respects with the applicable provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and all other
applicable federal and state statutes, rules and regulations. In addition,
Capitalink assumed that the Proposed Transaction will comply, in all respects,
with the securities laws, trade regulations and other applicable statutes and
regulations of the various foreign jurisdictions by which the Proposed
Transaction is governed. Capitalink's opinion was necessarily based upon market,
economic and other conditions as they existed on, and could be evaluated as of,
January 6, 2000. Accordingly, although subsequent developments may affect its
opinion, Capitalink did not assume any obligation to update, review or reaffirm
its opinion.
Each of the analyses conducted by Capitalink was carried out in order
to provide a different perspective on the Proposed Transaction, and to enhance
the total mix of information available. Capitalink did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to the fairness, from a financial point of view, of the
Proposed Transaction to the CHS shareholders. Capitalink did not place any
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
Capitalink believes that its analyses must be considered as a whole and that
selecting portions of its analyses or the factors it considered, without
considering all analyses and factors collectively, could create an incomplete
view of the process underlying the analyses performed by Capitalink in
connection with the preparation of its opinion.
Capitalink analyzed the fairness of the Proposed Transaction using the
following methodologies:
SELECTED COMPARABLE COMPANY ANALYSIS: The selected comparable publicly
traded company analysis involves the review of companies deemed comparable to
the pro forma combined EuroCos. Capitalink reviewed and compared certain
financial information relating to the pro forma combined EuroCos to
corresponding financial information, ratios and public market multiples for nine
publicly traded companies that it deemed comparable to the pro forma combined
EuroCos. No company used in Capitalink's analysis was deemed to be identical to
the pro forma combined EuroCos; accordingly, Capitalink considered the multiples
for the composite Publicly-Traded Comparables (as defined hereafter) to be more
relevant than the multiples of any single company. The companies used for
purposes of this analysis were Ingram Micro Inc. ("IM"), Tech Data Corporation
("Tech Data"), Merisel Inc., Microage Inc., Savoir Technology Group Inc.
("STG"), European Micro Hldgs Inc., SED International Hldgs Inc., Bell
Microproducts, Inc. ("Bell"), and Scribona AB (collectively, the
"Publicly-Traded Comparables").
Based on publicly available information, Capitalink reviewed various
financial information of the Publicly-Traded Comparables, including, among other
things, market value, revenue, earnings per share, assets, earnings before
interest and taxes ("EBIT"), and cash flow. Subsequent to such review,
Capitalink analyzed and compared (i) the latest twelve months ("LTM") revenue,
and (ii) the LTM EBIT with those of the pro forma combined EuroCos. Capitalink
also calculated a range of enterprise value multiples for such companies by
dividing the respective enterprise values (defined as market value plus Net
Debt, which is equal to the aggregate book value of all debt, preferred stock
and minority interest, minus the aggregate book value of cash and cash
equivalents) by items (i) and (ii) above for each of the Publicly-Traded
Comparables.
This analysis indicated that the approximate enterprise value multiple
of revenue ranged from .12x to .34x, with a mean of .25x, and a median of .26x;
and the approximate enterprise value multiple of EBIT ranged from 10.62x to
35.62x, with a mean of 19.23x, and a median of 15.48x.
Based on the revenue multiples noted above, Capitalink derived an
implied enterprise value for the pro forma combined EuroCos of approximately
$460.5 million to $1,293.7 million, with a mean of $930.7 million, and a median
of $971.4. After subtracting Net Debt totaling $221.8 million, the implied
equity value range of the pro forma combined EuroCos was approximately $238.7
million to $1,071.9 million, with a mean of $708.9 million, and a median of
$749.6 million. Based on the EBIT multiples noted above, Capitalink derived an
implied enterprise value for the pro forma combined EuroCos of approximately
$144.5 million to $484.4 million, with a mean of $261.6 million, and a median of
$210.5 million. After subtracting Net Debt totaling $221.8 million, the implied
equity value range of the pro forma combined EuroCos was negligible to $262.6
million, with a mean of $39.8 million.
Capitalink also compared (i) common equity and (ii) total assets with
those of the pro forma combined EuroCos. Capitalink calculated a range of equity
value multiples for such companies by dividing the respective market values by
items (i) and (ii) above for each of the Publicly-Traded Comparables.
This analysis indicated that the approximate equity value multiple of
common equity ranged from .24x to 2.22x, with a mean of 1.00x, and a median of
1.02x; and the approximate equity value multiple of total assets ranged from
.08x to .95x, with a mean of .29x, and a median of .24x.
Based on the common equity multiples noted above, Capitalink derived an
implied equity value for the pro forma combined EuroCos of approximately $30.4
million to $285.3 million, with a mean of $128.4 million, and a median of $131.2
million. Based on the total assets multiples noted above, Capitalink derived an
implied equity value for the pro forma combined EuroCos of approximately $61.2
million to $764.0 million, with a mean of $236.6 million, and a median of $192.6
million.
None of the Publicly-Traded Comparables utilized as a comparison is
identical to the pro forma combined EuroCos. Accordingly, an analysis of
publicly-traded comparable companies is not mathematical, rather it involves
complex consideration and judgements concerning differences in financial and
operating characteristics of the comparable companies and other factors that
could affect the public trading of the comparable companies or company to which
they are being compared.
Selected Comparable Transaction Analysis: The comparable transaction
analysis involves a review of merger, acquisition and asset purchase
transactions involving companies deemed comparable to the pro forma combined
EuroCos. Information is typically not disclosed for transactions involving a
private seller, even when the buyer is a public company, unless the acquisition
is deemed to be "material" for the acquiror. As a result, the comparable
transaction analysis is limited to transactions involving the acquisition of a
public company, or substantially all of its assets, or the acquisition of a
large private company, or substantially all of its assets, by a public company.
Capitalink began its analysis by searching for transactions entered
into recently which were deemed comparable to the Proposed Transaction.
Capitalink located eight transactions where financial data of the acquired
company and the terms of the transaction were disclosed. The resulting
transactions are as follows: (i) Bell's purchase of certain assets of Future
Tech International, Inc.; (ii) Compucom Systems' purchase of certain assets of
Technology Acquisition Services; (iii) STG's purchase of Enlaces; (iv) IM's
purchase of the remaining 74% of Ingram Micro Asia; (v) STG's purchase of
Infinite Solutions; (vi) Inacom Corp.'s merger with Vanstar Corporation; (vii)
STG's purchase of certain assets of REAL Distributor; and (viii) Tech Data's
acquisition of 80% of Computer 2000 AG (collectively, the "Comparable
Transactions").
Based on the information disclosed in the Comparable Transactions,
Capitalink compared (i) the LTM revenue, and (ii) total assets of such companies
prior to the transaction with those of the pro forma combined EuroCos.
Capitalink also calculated a range of transaction value multiples for such
transactions by dividing the respective transaction values (including cash paid,
assumption of debt and other consideration to the seller) by items (i) and (ii)
above for each of the Comparable Transactions.
This analysis indicated that the approximate transaction value multiple
of revenues ranged from .07x to .72x, with a mean of .23x, and a median of .18x;
and the approximate transaction value multiple of total assets ranged from .27x
to .92x, with a mean of .60x, and a median of .71x.
Capitalink subsequently applied such multiplies to the corresponding
financial information for the pro forma combined EuroCos based on the pro forma
combined EuroCos' LTM ended September 30, 1999, to determine the pro forma
combined EuroCos' implied transaction value.
Based on the revenue multiples noted above, Capitalink derived an
implied transaction value for the pro forma combined EuroCos of approximately
$279.3 million to $2,721.2 million, with a mean of $857.7 million, and a median
of $676.3 million. After subtracting Net Debt totaling $221.8 million, the
implied equity value range of the pro forma combined EuroCos was approximately
$57.5 million to $2,499.4 million, with a mean of $635.9 million, and a median
of $454.5 million. Based on the total assets multiples noted above, Capitalink
derived an implied transaction value for the pro forma combined EuroCos of
approximately $218.5 million to $740.4 million, with a mean of $485.8 million,
and a median of $573.3 million. After subtracting Net Debt totaling $221.8
million, the implied equity value range of the pro forma combined EuroCos was
negligible to $518.6 million, with a mean of $264.0 million, and a median of
$351.5 million.
None of the Comparable Transactions, or other business combinations
utilized as a comparison, is identical to the Proposed Transaction. Accordingly,
an analysis of comparable business combinations is not mathematical, rather it
involves complex considerations and judgements concerning differences in
financial and operating characteristics of the parties to the Comparable
Transactions and other factors that could affect the acquisition value of the
comparable companies or company to which they are being compared.
DISCOUNTED CASH FLOW. Capitalink performed a discounted cash flow
("DCF") analysis, aggregating (x) the present value of EuroCos' projected
unlevered free cash flows over the three year forecast period with (y) the
present value of a range of terminal values described below. Free cash flow
represents the amount of cash generated and available for principal, interest
and dividend payments after providing for ongoing business operations; these
free cash flow figures were based upon operating and financial forecasts
provided to Capitalink by the management of EuroCos. The range of terminal
values represents the residual value of EuroCos at the end of the forecast
period; this range of terminal values was calculated by applying a range of
implied multiples to EuroCos' revenue in the final year of the forecast period.
As part of the DCF analysis, Capitalink utilized (i) discount rates of
20% to 45%, which were chosen based upon several assumptions including interest
rates, the inherent business risk of EuroCos and EuroCos' estimated cost of
capital; and (ii) a range of terminal multiples. The resulting range of equity
values were then adjusted to account for Net Debt by subtracting approximately
$221.8 million, yielding a range of enterprise values for EuroCos.
Based upon a range of terminal multiples of revenue for fiscal year
2002 of .05x to .55x, the implied enterprise value of EuroCos ranged from
negligible to approximately $1,085.2 million; after subtracting Net Debt, the
implied equity value of EuroCos ranged from negligible to approximately $863.4
million.
ASSET ACCUMULATION ANALYSIS. The Asset Accumulation Method is a balance
sheet oriented valuation method whereby a company's balance sheet is restated to
fair market value. This involves the revaluation of the assets and liabilities
recorded on the balance sheet, and the identification and valuation of otherwise
unrecorded tangible and intangible assets and liabilities.
For the purpose of using the Asset Accumulation Method, Capitalink
utilized the pro forma combined EuroCos' balance sheet as of September 30, 1999,
the latest available financial data prior to the date of the opinion. The
balance sheet items have been analyzed to determine whether any adjustments are
necessary to the carrying values in order for the fair market values to be
accurately reflected.
In order to determine the extent of the adjustments, if any, to the
balance sheet items, there are four alternative premises of value: (i) value in
continued use, as part of a going concern; (ii) value in place, as part of a
mass assemblage of assets; (iii) value in exchange, in an orderly disposition;
and, (iv) value in exchange, in a forced liquidation.
Based on discussions with CHS management, and the actions taken by CHS
in connection with the Proposed Transaction (i.e., the relinquishment of the
control of the EuroCos via the Management Agreement prior to closing of the
Proposed Transaction), the value in exchange, in an orderly liquidation has been
utilized in determining adjustments to the balance sheet items. This methodology
assumes that the assets are sold piecemeal, not as part of a mass assemblage. It
is further assumed that the assets have been given adequate exposure in their
normal secondary market. After applying this methodology, Capitalink estimated
the value of the EuroCos to be negligible.
PRO FORMA VALUATION ANALYSIS. Through a pro forma valuation analysis,
Capitalink determined the potential variance in the consideration received in
the Proposed Transaction. The Best Case Pro Forma Valuation assumes that the
consideration in the Proposed Transaction is the sum of (i) $11 million payable
by Journey in either cash or the release of certain liabilities; (ii) the Notes;
(iii) the Debentures; (iv) the release of the CHS guarantees of the indebtedness
of all of the CHS entities in receivership or liquidation in Germany and the
United Kingdom; and (v) a 10% interest in NewCo. The Best Case Pro Forma
Valuation assumes that Computer Associates International, Inc. participates in
the Proposed Transaction through the exchange of the remaining $40.5 million of
Debentures pursuant to the offer set forth in the Exchange Agreement.
Capitalink then calculated the Worst Case Pro Forma Valuation by taking
the Best Case Pro Forma Valuation and assuming that Computer Associates
International, Inc. does not participate in the Proposed Transaction through the
exchange of the remaining $40.5 million of Debentures. In such a scenario, the
Company will receive, as a participant in the exchange offer under the terms of
the Exchange Agreement, $600,000 in cash, $2.4 million in notes issued by NewCo,
and warrants to purchase such number of shares equivalent to an equity interest
of approximately 0.64% in NewCo; however, the Debentures remain a liability of
the Company.
HISTORICAL STOCK PRICE ANALYSIS. Capitalink reviewed the daily closing
market price and trading volume of the CHS common stock over the twelve-month
period December 14, 1998 through December 14, 1999. Capitalink calculated total
trading volumes at various closing trade ranges of CHS common stock. In
addition, Capitalink calculated closing price ranges as a percentage of total
trading days in the twelve month period, and calculated trading volume per price
range as a percentage of total volume in the twelve month period.
Capitalink also prepared and compared the following indices for the
twelve-month period December 14, 1998 through December 14, 1999; (i) CHS common
stock price; (ii) the market capitalization-weighted stock prices of the
Publicly-Traded Comparables (excluding Scribona AB); and (iii) the Russell 3000
Index.
HISTORICAL FINANCIAL DATA ANALYSIS. Capitalink reviewed and analyzed
the financial information for CHS including the Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q. In addition, Capitalink reviewed and analyzed
the financial information provided by CHS management for the pro forma combined
EuroCos, including the pro forma financial statements as of and for the nine
months ended September 30, 1999 and for the year ended December 31, 1998.
In connection with its services in connection with the Proposed
Transaction, Capitalink received $175,000. In addition, CHS has agreed to
indemnify Capitalink for certain liabilities that may arise out of the rendering
of this opinion.
Capitalink is an investment banking firm which, as part of its
investment banking business, regularly is engaged in the evaluation of
businesses and their securities in connection with mergers, acquisitions, and
private placements.
INTEREST OF CERTAIN PERSONS
No current or former officers or directors of CHS have any interest,
direct or indirect, in the Exchange Proposal, except for Mark Keough, who served
as the Chief Operating Officer of CHS from July 15, 1999 until December 14,
1999.
Mr. Keough owns all of the stock of Journey and is the sole director
and officer of that company. Accordingly, he has a personal interest in the
outcome of the Exchange Proposal. Effective December 14, 1999, the date on which
the Exchange Agreement was signed, Mr. Keough voluntarily terminated his
employment with CHS and surrendered any unaccrued rights under his employment
agreement with CHS. Mr. Keough has surrendered outstanding options to acquire
1,000,000 shares of CHS common stock. On December 14, 1999, Journey and CHS
entered into a management agreement pursuant to which Journey assumed the
22
<PAGE>
management and control of the subsidiaries of CHS that are the subject of the
Exchange Proposal, pending the consummation of the transaction. The management
agreement is attached as Annex C. The compensation payable to Journey under the
management agreement is $100 per year.
DISSENTER'S RIGHTS
The Florida Business Corporation Act (the "FBCA") provides dissenter's
rights in the event of certain corporate actions, including a disposition of
substantially all the assets of a corporation. The Exchange Proposal may be
deemed to constitute a disposition of substantially all the assets of CHS. The
FBCA further provides, however, that if, as of the Record Date, the CHS common
shares were either registered on a national securities exchange or held of
record by 2,000 or more shareholders, dissenter's rights are not available.
Since the common shares of CHS are traded on the New York Stock Exchange, which
is a national securities exchange, and is held of record by more than 2,000
shareholders, the shareholders of CHS that vote against the Exchange Proposal
will not enjoy dissenter's rights.
23
<PAGE>
MATERIAL PROVISIONS OF THE EXCHANGE AGREEMENT
This section of the Proxy Statement describes the material provisions
of the Exchange Agreement. For the full text of the Exchange Agreement see Annex
A to this Proxy Statement, which is incorporated herein by reference. In
addition, important information about the Exchange Agreement and the proposed
exchange of assets between CHS and NewCo is provided in the section entitled
"Proposal 1: The Proposed Sale of Assets."
OVERVIEW
Pursuant to the Exchange Agreement, CHS and NewCo will conduct an
exchange transaction in which CHS will transfer to NewCo all of its equity
interests in substantially all of its European subsidiaries in exchange for $11
million in cash or releases of existing indebtedness of CHS totaling $11
million, cancellation of up to $287.5 million of indebtedness of CHS and 10% of
the stock of NewCo. This exchange transaction between CHS and NewCo is subject,
among other things, to the approval of the transaction by the shareholders of
CHS and to the successful completion of a second exchange transaction between
NewCo, on the one hand, and the bondholders and certain creditors of CHS on the
other. Under the second exchange transaction, NewCo has agreed to offer $19
million in cash, $75 million aggregate principal amount of 10% six year notes
issued by NewCo, and warrants to acquire a total of 20% of the stock of NewCo in
exchange for (i) the currently outstanding $200 million aggregate principal
amount of Notes of CHS, (ii) the currently outstanding $40.5 million aggregate
principal amount of Debentures of CHS, and (iii) up to $47 million of
indebtedness of European subsidiaries of CHS that are currently in liquidation
or receivership, which indebtedness is guaranteed by CHS. CHS is not required to
proceed with its exchange transaction with NewCo unless holders of at least 95%
of the Notes and 95% of the claims totaling up to $47 million under CHS's
purported guarantees of the indebtedness of CHS's subsidiaries in liquidation or
receivership participate in the second exchange transaction with NewCo. At the
closing of the exchange transaction between CHS and NewCo, NewCo will: (i)
transfer to CHS the Notes and the Debentures that it acquires in its exchange
offer with the bondholders, (ii) provide CHS with releases from the
beneficiaries of the guarantees that have participated in the exchange offer
with NewCo, (iii) pay CHS $11 million in cash or provide CHS with releases of
existing indebtedness of CHS totaling $11 million and (iv) issue to CHS 10% of
the stock of NewCo.
The following list of companies comprise all of the European
subsidiaries which CHS has agreed to transfer to NewCo under the Exchange
Agreement:
<TABLE>
<S> <C>
- - --------------------------------------------------------------------- --------------------------------------------------------------
CHS Denmark (Denmark subs) Karma Czeck AS
CHS Finland Oy Karma M.E. Dubai
CHS France S.A. (Meterologie International) Karma Finland OY
Meterologie SA Karma SARL
CHS Next DS Karma Oktabit S.A.
Romak Computers Ltd. Karma Oktabit S.A.
Santech Microgroup Norway ASA Karma Asia Pacific Ltd.
Santech Microgroup Sweden AB Karma Italy srl
CHS Sweden AB Karma Norway
Metrologie Gmbh Karma ROW
Metrologie OH Karma Russia
A&A Data Storage Services a.s. Karma Distribution Singapore Pte Ltd.
CHS Baltic Karma Solvakia
CHS Riga Karma Component SA
CHS Bulgaria Ltd. Karma International Group sp zozo
CHS Electronica d.o.o. (Karma Switzerland) Karma Component GMBH
CHS Czechia sro Karma International gmbh
CHS EEsti AS (CHS Estonia) Karma Donanim Yazilim San Ve Tic
Merisel Russia Karma Viewpoint
CHS Trading SARL Carre & Ribiero Informatica LDA (Karma Portugal)
CHS TH'system Czech Karma Udas
Karma Computerhandels AG KIAG
Karma Belgium Karma International S.a.r.l.
- - --------------------------------------------------------------------- --------------------------------------------------------------
</TABLE>
24
<PAGE>
REPRESENTATIONS AND WARRANTIES
CHS and Journey have made various customary mutual representations and
warranties in the Exchange Agreement relating to, among other things,
organization, power and authority to conduct business as presently conducted,
power and authority to enter into the Exchange Agreement and to consummate the
transactions contemplated in that agreement, and the lack of broker's or
finder's fees.
CONDITIONS TO THE TRANSACTION
The obligation of CHS to consummate the exchange of assets with NewCo
is subject to the following conditions:
(i) CHS shall have received the approval of its shareholders of
the Exchange Agreement and the transactions contemplated
therein;
(ii) Journey shall have obtained the approval of, and the
participation in, the second exchange transaction by the
holders of at least 95% of the Notes and 95% of the claims
totaling up to $47 million under CHS's purported guarantees of
the indebtedness of CHS's subsidiaries in liquidation or
receivership;
(iii) CHS shall have received a fairness opinion from an investment
banking firm that the transactions described in the Exchange
Agreement are fair to the shareholders of CHS from a
financial point of view;
(iv) CHS shall have received applicable approvals from governmental
authorities required for the consummation of the proposed
exchange of assets;
(v) CHS shall have received all material approvals of third
parties required for the consummation of the proposed exchange
of assets, including consents required under agreements
between CHS and its vendors and creditors, and consents under
the indenture related to the Notes and the agreement governing
the Debentures;
(vi) Mark Keough, the controlling shareholder of Journey, shall
have terminated his employment agreement with CHS with no
liability to CHS, and shall have provided CHS with a release
from any obligations under such agreement;
(vii) CHS and Journey shall have entered into an agreement among
shareholders providing CHS with certain rights, including
anti-dilution protection, preemptive rights, rights of first
refusal, drag-along and tag-along rights, a covenant by
Journey not to sell its shares of NewCo to a competitor of
NewCo and the right to appoint at least one member to NewCo's
board of directors or other body performing similar functions;
(viii) $4.8 million of outstanding intercompany payments and
management fees owed to CHS by the subsidiaries to be
transferred to NewCo in the exchange transaction shall have
been previously repaid to CHS; and
(ix) the representations and warranties of Journey shall have been
true in all material respects when made and as of the
consummation of the exchange transaction.
The obligation of Journey to consummate the exchange transaction
between CHS and NewCo is subject to the following conditions:
(i) Journey shall have obtained the approval of, and the
participation in, the second exchange transaction by the
holders of at least 95% of the Notes and 95% of the claims
totaling up to $47 million under CHS's purported guarantees of
the indebtedness of CHS's subsidiaries in liquidation or
receivership;
(ii) the representations and warranties of CHS shall have been true
in all material respects when made and as of the consummation
of the exchange transaction.
INDEMNIFICATION
The representations and warranties of each party survive until 18
months after the closing of the Exchange Agreement. All covenants and agreements
of the parties survive the closing indefinitely and without limitation. Each
party has agreed to indemnify and hold harmless the other party and its
affiliates, directors, officers, employees, agents, successors and assigns for
any losses arising out of any (i) breach of a representation or a warranty and
(ii) non-performance or breach of any covenant or agreement of the party
25
<PAGE>
contained in the Exchange Agreement. CHS has also agreed to indemnify and hold
harmless Journey and its shareholders, employees, officers, directors and agents
for any losses to which such persons may become subject under the Securities
Exchange Act of 1934, as amended, if such losses arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the disclosure documents delivered to the participants in the second exchange
transaction, provided that such misstatement or omission was based on or omitted
from information provided by CHS in writing to Journey for inclusion in the
disclosure documents for the second exchange transaction. CHS's total liability
for indemnification under the Exchange Agreement is limited to the cash
consideration CHS receives from NewCo in the second exchange transaction.
TERMINATION
The Exchange Agreement may be terminated at any time prior to the
consummation of the proposed transaction:
(i) by mutual written agreement of the parties;
(ii) by either party in the event of a material breach by the other
party of the representations and warranties or any covenant
under the Exchange Agreement which is not cured within thirty
(30) days after written notice of such breach;
(iii) by either party on written notice to the other, if a
governmental authority (including any court) issues an order
that disapproves the asset exchange;
(iv) by either party if the consummation of the transaction has not
taken place on or before June 30, 2000;
(v) by either party on written notice to the other party, if there
is in effect any stay or injunction prohibiting the
consummation of the transactions contemplated by the Exchange
Agreement;
(vi) by CHS, if an unsolicited alternative transaction to the
Exchange Proposal becomes available to CHS, and counsel to the
Board of Directors of CHS advises the Board of Directors that
the failure to participate in discussions or negotiations
regarding the alternative transaction or to provide any
information to a third party in connection with the
alternative transaction, could involve the members of the
Board of Directors in a breach of their fiduciary duties to
the shareholders of CHS, or the Board of Directors determines
in its discretion, after consultation with its financial
advisors, that any such proposal is more favorable to the
shareholders of CHS from a financial point of view than the
transactions contemplated in the Exchange Agreement; or
(vii) by Journey, in the event that Journey's limited due diligence
review of tax matters, litigation and intercompany
transactions reveals a material adverse effect to the
companies to be transferred to NewCo of which Journey and its
owners, directors and affiliates had no actual knowledge.
BANKRUPTCY
In order to induce Journey to enter into the Exchange Agreement, CHS
has agreed with Journey that, if the separate exchange transaction among NewCo
and the bondholders and creditors of CHS is unsuccessful, or if the shareholders
of CHS do not approve the Exchange Agreement, or if a bankruptcy petition under
Chapter 11 of the United States Bankruptcy Code is filed against CHS or the
United States subsidiaries of CHS that own any of the European subsidiaries,
then CHS and such United States subsidiaries will file a voluntary petition for
bankruptcy under Chapter 11 of the United States Bankruptcy Code. If an
involuntary petition is filed to liquidate CHS or its United States subsidiaries
that own the European subsidiaries, then CHS will cause the debtors in these
cases to convert the cases to Chapter 11 proceedings under the United States
Bankruptcy Code.
As part of any bankruptcy proceeding, CHS has agreed to file a
reorganization plan and to cause its United States subsidiaries to file
reorganization plans that provide for classification and treatment of creditors'
claims in a manner consistent with the terms of the Exchange Agreement. It is
expected that the reorganization plans will be funded on the effective date of
the plans by NewCo transferring to CHS the NewCo stock and other consideration
set forth in the Exchange Agreement and that CHS and the United States
subsidiaries of CHS that own the European subsidiaries will transfer their
interest in the European subsidiaries to NewCo.
26
<PAGE>
AMENDMENT; PARTIES IN INTEREST
CHS and Journey may amend the Exchange Agreement by a written
instrument signed on behalf of CHS and Journey by their authorized
representatives.
The Exchange Agreement is binding upon and inures to the benefit of the
parties thereto and their respective successors and assigns. Nothing in the
Exchange Agreement confers upon any other person any right, remedy, obligation
or liability.
MANAGEMENT AGREEMENT
Simultaneously with the entry by CHS and Journey into the Exchange
Agreement on December 14, 1999, the parties entered into a management agreement
pursuant to which Journey assumed the management and control of the subsidiaries
of CHS that are the subject of the Exchange Proposal, pending the consummation
of the transaction. The management agreement is attached as Annex C. The
compensation payable to Journey under the management agreement is $100 per year.
THE SEPARATE EXCHANGE TRANSACTION BETWEEN NEWCO AND THE BONDHOLDERS AND
CREDITORS OF CHS
The terms of the separate exchange transaction involving NewCo and the
bondholders and certain creditors of NewCo (the "Second Exchange") are described
in the following paragraphs. The CHS shareholders will not vote on the Second
Exchange at the special meeting and will not, by right of their ownership of CHS
common stock, have any right to participate in the Second Exchange. The
consummation of the Exchange Proposal, however, is conditioned on participation
in the Second Exchange by holders of at least 95% of the Notes and 95% of the
claims totaling up to $47 million under CHS's purported guarantees of the
indebtedness of CHS's subsidiaries in liquidation or receivership. Pursuant to
the Exchange Agreement between the Company and Journey, Journey may revise the
terms of the Second Exchange only with the consent of the Company.
Under the Second Exchange, the cash portion to be paid by NewCo is $19
million. NewCo will offer to purchase for cash 100% of the amounts outstanding
under the Notes, the Debentures, and up to $47 million of indebtedness
guaranteed by CHS related to subsidiaries currently in receivership or
liquidation, in each case at a purchase price of 12.5% of the total claim
amount. The total claim amount in the case of the Notes and the Debentures will
be the outstanding principal amount of such notes and debentures. As to the
guaranteed indebtedness, CHS will advise NewCo of the total claim amounts of the
guarantees related to indebtedness of CHS subsidiaries currently in receivership
or liquidation. No more than $152 million of claims will be permitted to
participate in the cash portion of the Second Exchange. If more than $152
million of claims elect to receive cash, only the first $152 million to tender
will be permitted to participate.
The $75 million aggregate principal amount of notes to be issued by
NewCo as part of the Second Exchange (the "NewCo Notes") will be repayable six
years from issuance, will bear interest at 10% annually, with semi-annual
payments of interest payable in cash or payment in kind, and will be subject to
repayment at any time at par without penalty. Such notes will be allocated among
the holders of the Notes, the Debentures and the holders of up to $47 million of
guaranteed indebtedness on a pro rata basis, after taking into account the total
claims to be purchased under the cash portion of the Second Exchange.
As part of the Second Exchange, NewCo will issue two series of
warrants, the Series A Warrants and the Series B Warrants, to acquire NewCo
stock to the holders of the NewCo Notes on a pro rata basis, based on their
respective shares of the face amount of the NewCo Notes. The terms of the
warrants will provide that they will be cancelled if the NewCo Notes are repaid
prior to the fourth anniversary of the issue date of the NewCo Notes. The Series
A Warrants, in the aggregate, will give the holders the right to acquire 10% of
NewCo's stock, and will be exercisable when the Equity Value (as defined below)
of NewCo exceeds $200,000,000. The Series B Warrants, in the aggregate, will
give the holders the right to acquire 10% of NewCo's stock, and will be
exercisable when the Equity Value of NewCo exceeds $350,000,000. The "Equity
Value" of NewCo is to be determined annually within 120 days of the close of the
fiscal year, based upon NewCo's audited consolidated financial statements for
the year then ended, and will be equal to six times NewCo's consolidated net
earnings before interest, taxes, depreciation and amortization, less
indebtedness for borrowed money of NewCo, determined in accordance with
generally accepted accounting principles, as reflected on such consolidated
financial statements.
If Computer Associates International, Inc., the holder of the
Debentures, does not participate in the Second Exchange, then the Company will
have the right to receive the amount of cash, NewCo Notes and warrants that
Computer Associates International, Inc. would have received had it participated.
If Computer Associates International, Inc. elects to participate in the Second
Exchange, it may not tender less than the full amount of the Debenturres.
27
<PAGE>
MARKET PRICES AND DIVIDENDS
CHS common stock is listed and traded on the New York Stock Exchange
under the symbol "HS." The following table sets forth the high and low sales
prices per share of CHS common stock as reported on the New York Stock Exchange
for the quarterly periods presented below. The high and low sales price of CHS
common stock as reported on the New York Stock Exchange on Friday, December 10,
1999, the last trading day preceding the public announcement of the proposed
exchange transaction between CHS and NewCo, were $0.69 and $0.56, respectively.
<TABLE>
<CAPTION>
- - ------------------------------------ ---------------- ------------------
FISCAL YEAR HIGH LOW
- - ------------------------------------ ---------------- ------------------
<S> <C> <C>
1997:
First quarter $16.08 $10.33
Second quarter $17.75 $11.50
Third quarter $29.75 $17.21
Fourth quarter $30.75 $14.75
- - ------------------------------------ ---------------- ------------------
1998:
First quarter $23.88 $12.63
Second quarter $24.31 $15.88
Third quarter $19.00 $10.75
Fourth quarter $17.88 $ 6.00
- - ------------------------------------ ---------------- ------------------
1999:
First quarter $19.13 $ 3.06
Second quarter $ 5.75 $ 7.81
Third quarter $ 4.38 $ 1.44
Fourth quarter $ 1.63 $ 0.44
- - ------------------------------------ ---------------- ------------------
</TABLE>
28
<PAGE>
BUSINESS OF CHS
CHS is a leading international distributor of microcomputer products,
including personal computers, peripherals, networking products and software. CHS
operates in approximately 30 countries primarily in Western Europe, Eastern
Europe and Latin America, and services an active customer base of approximately
100,000 resellers. In the nine months ended September 30,1999, approximately 78%
of the products which were sold by CHS were manufactured by approximately 20
equipment and software vendors, including such market leaders as
Hewlett-Packard, IBM, Microsoft, Seagate, Compaq, Intel, Quantum, Western
Digital, 3Com, Toshiba, Acer, Yakumo, Epson and Sun. CHS is a focused
distributor, as opposed to a broadline distributor, and seeks to represent
leading vendors within specific product categories. CHS believes that it is the
third largest distributor of microcomputer products in the world and one of the
leading distributors in Western Europe, Latin America and Eastern Europe. CHS
has no significant sales in the United States.
CHS operates under a decentralized structure in which managers familiar
with the customs and needs of a particular country are delegated the authority
to make daily decisions necessary to satisfy the particular demands of their
respective markets. Unlike certain competitors which operate under a more
centralized system, CHS believes that its business model of focused distribution
through locally managed full service facilities integrating warehousing,
purchasing, sales, credit and accounting services provides competitive and
operating advantages.
CHS's world headquarters are located at 2000 N.W. 84th Avenue, Miami,
Florida 33122, where our telephone number is (305) 908-7200.
RECENT DEVELOPMENTS
On May 1, 1999 the Company implemented a restructuring plan with the
goal of reducing future operating costs. The restructuring has and will continue
to result in the writing-off of certain assets, a planned 10% reduction in the
number of employees and the closure of redundant warehouses. The restructuring
plan was implemented throughout 1999. As of September 30, 1999, approximately
$8.0 million was accrued for restructuring costs and this amount was included in
accrued liabilities.
Additionally, there have been dispositions and closings of certain
subsidiaries and certain other subsidiaries have been placed in receivership or
voluntary creditor protection in the fourth quarter of 1999. As a result, the
Company has determined that goodwill, to the extent of losses to be incurred
with respect to these subsidiaries, is impaired and, accordingly, has written
off such amounts as of September 30, 1999. See the Consolidated Financial
Statements and Notes thereto.
In September 1999, the Company 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. The Company owned approximately 75% of this business and received
approximately $36.7 million from the sale. The Company 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
and working capital purposes. The business generated sales of approximately
$81.7 million and net losses of $1.1 million for 1999 through the date of sale.
As of September 30, 1999, the Company owed approximately $275.3 million
to the sellers of certain businesses that the Company had purchased. The Company
has commenced a program designed to eliminate such amounts owed by disposing of
all or a portion of the Company's interests in those operations.
In October 1999, the Company agreed to submit to arbitration the issue
of the portion of Memory Set that the Company will retain as a result of the
cancellation of the Company's purchase agreement for Memory Set. Memory Set is a
subsidiary of the Company operating in Spain. The Company originally agreed to
purchase Memory Set in July 1998. The Company was in default under the purchase
agreement because the Company had not paid the balance of the purchase price of
approximately $74.4 million. The Company believes the unpaid balance of the
purchase price represents approximately 91.5% of Memory Set and the amounts
already paid represent approximately 8.5%. The Company may cure its default by
paying the balance of the purchase price at any point prior to the completion of
the arbitration. The Company does not expect to cure the default. During the
nine months ended September 30, 1999, this subsidiary contributed $139.4 million
in revenues. The estimated loss on the disposition is $19.9 million. The Company
recognized the loss as impairment to goodwill as of September 30, 1999 as such
amount is no longer deemed to be realizable. In the fourth quarter of 1999, the
Company will be offsetting the unpaid purchase price of $74.4 million against
its investment in the former subsidiary that includes $49.5 million of goodwill.
The Company will treat the ongoing interest in this subsidiary under the cost
method of accounting. Under the Exchange Agreement, if NewCo is able to
negotiate a complete release of
29
<PAGE>
the Company by all of the parties to the Memory Set dispute, in a form
satisfactory to the Company, the Company has agreed to assign to NewCo at the
closing of the Exchange Agreement all of the Company's interest in Memory Set.
On October 4, 1999, the Company conveyed 80% of the shares of Arena
Bilgisayar Sanayi Ve Ticaret A.S. and Armada Bilgisayar A.S., the Company's
subsidiaries operating in Turkey, to the original owners of those companies in
exchange for a release of the Company's obligation to pay them the balance of
the purchase price for those subsidiaries of approximately $46.0 million. The
sellers granted back to the Company an option to reacquire those interests at
any time prior to the earlier of October 4, 2000 or a 60-day period beginning
after the Company 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 estimated loss on the disposition is $21.1 million
which includes approximately $2.2 million of amounts due from the former
subsidiary to the Company that will not be realized. The Company recognized a
goodwill impairment loss of $18.9 million on this transaction as of September
30, 1999 as such amount is no longer deemed to be realizable. In the fourth
quarter of 1999, the Company will be offsetting the unpaid purchase price of
$46.0 million against its investment in the former subsidiaries that includes an
additional $31.5 million of goodwill.
The Company also conveyed all of the Company's interest in ARC Espana
Cartera, S.A., another of the Company's subsidiaries operating in Spain, to the
original owners in exchange for a release of the Company's 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. The Company will realize a loss on
the sale of this subsidiary of $7.0 million, which includes a fee of
approximately $3.9 million to be paid to the original owners of the subsidiary.
The Company recognized a goodwill impairment loss of $3.1 million as of
September 30, 1999 as such amount is no longer deemed to be realizable. In the
fourth quarter of 1999, the Company will be offsetting the unpaid purchase price
of $29.3 million against its investment in the former subsidiary that includes
an additional $21.8 million of goodwill.
On October 20, 1999, the Company 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,
the Company conveyed an aggregate 77.83% interest in these companies to the
original owners in exchange for a release of the Company's obligation to pay
them the balance of the purchase price of approximately $49.8 million. In
addition, the original owners granted the Company 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 the Company receives new
cash investments of $200 million or more. The Company also granted the original
owners an option to purchase the 22.17% interest that the Company retained in
these companies for a total purchase price of $15.6 million at any time that the
Company'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 estimated loss on the transfer is $8.6
million. The Company recognized the loss as impairment to goodwill as of
September 30, 1999 as such amount is no longer deemed to be realizable. In the
fourth quarter of 1999, the Company will be offsetting the unpaid purchase price
of $49.8 million against its investment in the former subsidiary that includes
an additional $41.4 million of goodwill. The Company will treat the ongoing
interest in these companies under the equity method of accounting.
On October 20, 1999, the Company also amended the terms of its purchase
agreement for Cornejo Informatica, S.A. ("Cornejo"), another subsidiary
operating in Latin America. Under the amendment, the Company conveyed an 86.55%
interest in Cornejo to the original owners in exchange for a release of its
obligation to pay them the balance of the purchase price of approximately $13.0
million. In addition, the original owners granted the Company an option to
repurchase the 86.55% interest for a total purchase price of approximately $13.0
million any time before the earlier of (1) October 20, 2000 or (2) 60 days after
the Company receives a new cash investment of $200 million or more. The Company
also granted the original owners the option to purchase the 13.45% interest that
was retained in Cornejo by the Company for a total purchase price of
approximately $2.0 million at any time that the Company's option to repurchase
their interest is in effect. During the nine months ended September 30, 1999,
the revenues attributed to Cornejo totaled approximately $33.0 million. The
estimated loss on the transfer is $1.9 million. The Company recognized the loss
as impairment to goodwill as of September 30, 1999 as such amount is no longer
deemed to be realizable. In the fourth quarter of 1999, the Company will be
offsetting the unpaid purchase price of $13.0 million against its investment in
the former subsidiary that includes an additional $11.1 million of goodwill. The
Company will treat the ongoing interest in Cornejo under the cost method of
accounting.
On October 27, 1999, the Company also conveyed its interest in
Brightstar Corp., a subsidiary based in the United States, to the original
owners 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. The Company will realize a loss of $3.2 million on
the sale of this subsidiary. The Company wrote-off its goodwill of $25 thousand
related to Brightstar as impairment to goodwill as of September 30, 1999 as such
amount is no longer deemed to be realizable. In the fourth quarter of 1999, the
Company will be offsetting the unpaid purchase price of $1.3 million against its
investment in the former subsidiary and recognizing the remainder of the loss.
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On October 31, 1999, the Company rescinded the purchase agreement with
MicroInformatica Corp. The Company had previously paid cash of $3.2 million and
issued shares with a value of $20.3 million in settlement of the acquisition of
MicroInformatica Corp. The rescission agreement provides for the return of the
cash and shares in exchange for the Company returning ownership of
MicroInformatica Corp. to its original owners. During the nine months ended
September 30, 1999, the revenues attributed to this subsidiary were $111.7
million. The Company will realize a loss of $21.8 million on the transaction.
The Company recognized the loss as impairment to goodwill as of September 30,
1999 as such amount is no longer deemed to be realizable.
On November 10, 1999, the Company completed the sale of a 60% interest
in its subsidiary in Poland for $2 million. The Company retains a 40% interest
in the former subsidiary. During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were $89.6 million. The Company will
treat its ongoing interest in this subsidiary under the equity method of
accounting. No gain or loss is expected on the transaction.
On November 18, 1999, the Company completed the sale of CHS Switzerland
for approximately $6.4 million. The Company will record a loss on the
transaction of approximately $3.4 million during the fourth quarter of 1999.
During the nine months ended September 30, 1999, the revenues attributed to this
subsidiary were $156.9 million.
On November 22, 1999, the Company conveyed its interest in CHS Aptec, a
subsidiary based in the Middle East, to the original owner in exchange for a
release of its obligation to pay the balance of the purchase price of
approximately $2.6 million. During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were approximately $35.2 million. The
Company will realize a loss of $1.6 million on the sale of this subsidiary in
the fourth quarter of 1999.
On December 2, 1999, the Company conveyed its interest in Acron Corp.,
a subsidiary based in the United States, to the original owner in exchange for
the return of approximately $2 million that had been previously paid by the
Company. During the nine months ended September 30, 1999, the revenues
attributed to this subsidiary were approximately $11.3 million. The Company will
realize a loss of approximately $449 thousand on the sale of this subsidiary in
the fourth quarter of 1999.
On December 9, 1999, the Company completed the sale of certain of its
Latin American operations to a newly formed company to be known as
DistributionTech.com for $23.5 million, with a substantial portion of the
purchase price consisting of the assumption of liabilities of CHS's other Latin
American subsidiaries. Under the terms of the agreement, the Company will also
receive a 49% interest in DistributionTech.com. During the nine months ended
September 30, 1999, the operations generated sales of $456 million and had a net
loss of $1.8 million. Going forward, the 49% interest in DistributionTech.com
received by CHS will be accounted for as a minority interest under the equity
method of accounting. As part of the agreement, the e-commerce component of the
Latin American operations will be transferred to a newly formed entity to be
jointly owned by the Company (51%) and DistributionTech.com (49%), to be known
as e-LatinCo.com.
On December 16, 1999 Computer Associates International, Inc. converted
approximately $9.5 million of it's $50 million of floating rate debentures into
11,579,054 shares of CHS common stock.
On December 17, 1999, the Company 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 the Company's
shares previously issued. The shares were valued at approximately $300 thousand
at the date of return to the Company. During the nine months ended September 30,
1999, the revenues attributed to this subsidiary were approximately $6.8
million. The Company will realize a loss of approximately $1.5 million on the
sale of this subsidiary in the fourth quarter of 1999.
As a result of the Company being in default on $42.4 million of the
purchase price owed for the acquisition of SiS Distribution Limited, a
subsidiary based in Asia, the original owners declared the Company in default of
the purchase agreement in December 1999 and have received a judgement for the
return of the shares of SiS Distribution Limited out of escrow. Although the
Company is contesting this action, because of the uncertainty of the ultimate
outcome and the Company's current inability to pay the $42.4 million owed, the
Company believes that it may not prevail and accordingly expects to realize a
loss of approximately $36.6 million on the return of this subsidiary in the
fourth quarter of 1999. During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were approximately $296.8 million.
The Company is currently in similar negotiations with the original
owners of three other subsidiaries to reduce earn-out obligations by an
additional $12.6 million. If the negotiations are successful, the amount due to
sellers would be essentially eliminated. For the nine months ended September 30,
1999, the three subsidiaries generated combined sales of approximately $162.2
million. The Company acquired the companies in separate transactions during
1998. One of the operations in negotiation is located in Latin America and two
in Europe.
The Company has also closed a subsidiary located in Miami, Florida that
serves the Latin America market and that contributed revenues of $22.6 million
during the nine months ended September 30, 1999. Goodwill of approximately $6.3
million was written off as of September 30, 1999 related to this subsidiary.
In December 1999 and January 2000, two subsidiaries of CHS, Metrologie
Iberica, S.A. and CHS Benelux, voluntarily filed for creditor protection under
Spanish and Belgium law, respectively. The filings were necessitated by
continuing losses in their 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 facility totaling $6.7 million as of
September 30, 1999. CHS has provided the creditors of these companies with
corporate guarantees for the debt.
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E-COMMERCE STRATEGY
After the successful completion of the exchange transaction with NewCo,
the Company intends to focus its attention on the creation of a new e-commerce
distribution business built around an e-commerce approach. The Company plans to
capitalize on its industry expertise, while eliminating the unnecessary cost
structure and investment associated with a more traditional distribution
business. As an e-commerce distributor, the Company believes it has an
opportunity to establish a leadership position by developing an information
technology equipment brand space, particularly for those business customers who
require `one-stop' shopping for multiple brands of information technology
equipment, rather than being restricted to one brand through manufacturers'
websites.
The Company believes that it can combine the following key elements
into a new e-commerce business:
/bullet/ CUSTOMER BASE OF OVER 100,000 DEALERS, RESELLERS, ORIGINAL EQUIPMENT
MANUFACTURERS AND VALUE ADDED RESELLERS. - These customers would be
targeted by the Company for correspondence, e-mail, trade conferences,
incentive trips and other methods to be developed by the Company.
/bullet/ SUPPLIER RELATIONSHIPS - The Company believes that it has good
relationships with all of the key information technology vendors, many
of whom are looking for an alternative distribution model, such as the
Company's planned e-commerce distribution business.
/bullet/ TECHNOLOGY - THE COMPANY HAS DEVELOPED AN E-COMMERCE ENGINE, WHICH IS
CURRENTLY OPERATIONAL.
/bullet/ HELMOND DISTRIBUTION CENTER - Helmond is a central distribution
facility operating in the eastern part of the Netherlands. The Company
has used this facility to distribute product on a pan-European basis.
In the short to medium term, the Company believes that Helmond could
provide fulfillment services for the e-commerce business, as the
operational systems of the facility are already integrated into the
e-commerce and business transaction systems of the Company. By
controlling the fulfillment aspect of the Company's e-commerce
operations through Helmond, the Company believes that it will be able
to control inventory levels and provide good customer support, which
would be critical to establishing brand reputation in the initial
stages of the Company's e-commerce operations.
/bullet/ THE PC-WAY - The PC-Way is a 50-50-joint venture between CHS and Trigem
Computers, one of the world's leading manufacturers of information
technology components and equipment. The purpose of the joint venture
is to assemble and market high quality private label personal
computers. Trigem Computers has been successful in the United States
selling private label personal computers with the "e-machine" brand.
The PC-Way assembly facility is located within the Helmond distribution
center, and it is the only assembly facility operated by Trigem
Computers in Europe.
The Company believes that these elements can be combined to form an
e-commerce business with a defined customer base, supplier support, and critical
mass from the early stages of operations. The Company intends to launch its
e-commerce business in three phases:
/bullet/ PHASE I - The Company initially intends to market universal products
(not country-specific) to all European countries through four websites,
all connected to the Helmond back-office functions. One website will be
a generic European site, the other three
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tailored to the specific needs of the three largest country markets in
Europe: United Kingdom, Germany and France. The Company's goals for
Phase I are to commence operations and to build a brand reputation for
competitive pricing, ease of use and high reliability.
/bullet/ PHASE II -- During Phase II, the Company plans to extend the e-commerce
model to include country-specific information technology products
marketed through local country operations. The Company would evolve
towards true one-stop shopping for a wide range of equipment.
/bullet/ PHASE III - The Company plans to expand the e-commerce concept in phase
III by creating an information technology -specific portal that would
provide specific content for the information technology industry. This
content would include the opportunity to purchase products from the
Company's own website established in Phase I or from other websites.
The Company expects the portal to generate revenue from commissions on
sales and site referrals, as well as advertising revenue.
The following sections of this Proxy Statement describe the Company's
traditional distribution business, as it is currently constituted.
INDUSTRY
The microcomputer products distribution industry has grown
significantly in recent years, primarily due to increasing demand worldwide for
computer products and the use of distribution channels by vendors for the
distribution of their products. Historically, there have been two types of
companies within the distribution industry: those that sell directly to the
end-user ("resellers") and those that sell to resellers ("distributors").
Distributors generally purchase a wide range of products in bulk directly from
vendors and then ship products in smaller quantities to many different types of
resellers, which typically include dealers, value added resellers ("VARs"),
system integrators, mail order resellers, computer products superstores and mass
merchants.
The Company believes that the microcomputer products industry is well
suited for distribution. The large number and diversity of resellers make it
cost efficient for manufacturers to outsource a portion of their distribution,
credit, inventory, marketing and customer support requirements to distributors
such as the Company. Similarly, due to the large number of vendors, resellers
generally cannot efficiently establish direct purchasing relationships with each
vendor and instead rely on distributors to satisfy a significant portion of
their product, financing, marketing and technical support needs.
The Western European, Eastern European and Latin American markets are
each highly fragmented. Different languages, cultures and technological factors
require experienced local management teams and products which meet the
requirements of the specific area. Requirements that are unique to an area
include customized manuals, approvals of safety factors by local authorities,
microcode which permits the generation of characters in local languages, and
voltage standards. These factors require distributors in these markets to carry
a variety of different fewer stock keeping units ("SKUs") to meet such demands.
As a result, manufacturers depend heavily on distributors such as the Company to
meet the differing demands of each locale.
STRATEGY
To achieve its objectives of strengthening its position as a leading
distributor of microcomputer products in Western Europe, Eastern Europe and
Latin America and expanding its operations in Asia, the Middle East, Africa and
possibly the United States, the Company has pursued the following strategies:
OPERATE A FOCUSED DISTRIBUTION MODEL. The Company's strategy is to
operate as a focused distributor by dealing with a select group of high quality
branded manufacturers in each major product category, such as Hewlett-Packard
for printers, Microsoft for software and networking, Seagate, Quantum and
Western Digital for mass storage and Hewlett-Packard, Compaq and IBM for
personal computers. The Company also attempts to be a significant distributor
for each of its major vendors and establish a partnering relationship with them.
The Company believes that, as a result of this strategy, it is able to respond
more quickly to customer requests and that it has greater availability of
products, access to new products and better pricing. The Company also believes
that it has developed greater expertise in the sale and servicing of the
products of these manufacturers and has been more effective in asset management.
The Company's customers may include both assemblers of non-branded component
products and resellers. Generally, products from leading manufacturers are in
greater demand, resulting in more efficient inventory management, including
greater inventory turns, lower working capital requirements and fewer SKUs. The
Company's largest operating subsidiaries maintain between 10,000 and 15,000 SKUs
per location while broadline distributors typically carry more than 45,000 SKUs.
The Company supplements its focused distribution model where feasible
with a centralized warehousing capability. In Europe, due to different
languages, electrical plugs and manufacturing standards, there is a significant
percentage of products that
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must be localized to the market in which they will be sold. However, for the
universal products (generally components like hard drives, CD-ROM, supplies,
etc.), the Company utilizes a centralized warehouse to service its local country
warehouses. This approach allows the Company to make volume purchases into the
central warehouse and deliver products several times a week to each local
country warehouse. The Company believes this method is more efficient and
results in a lower inventory in each branch than ordering products on a branch
level.
OPERATE WITH A DECENTRALIZED OPERATING STRUCTURE. The Company operates
through a decentralized structure. Each of the Company's subsidiaries is managed
autonomously using the operating procedures that were developed in response to
local market conditions. The founders and managers of acquired companies
typically continue to manage the operations and maintain local customer
relationships. This decentralized operating structure is complemented by
centralized financial controls, which provide the Company's senior managers with
frequent and regular status reports for each of its operating subsidiaries.
Management believes that this structure provides the Company with significant
operating advantages including locally refined procedures within each of the
Company's geographic markets that have been developed to most effectively
address the heterogeneous commercial and cultural characteristics of such
markets. The Company is also developing a standardized model for countries that
have multiple CHS operations. In this model, one back office and local country
warehouse serve the focused distribution enterprise and components distribution
sales forces. The Company believes it can achieve efficiencies and lower costs
using this approach.
IMPROVE MARGINS THROUGH BTO PRODUCTION AND PRIVATE LABEL DISTRIBUTION.
The Company intends to take advantage of the higher margins and lower inventory
requirements associated with built-to-order and channel assembly (collectively,
"BTO") and the higher margins available in private label distribution. In
general, BTO production includes the production and assembly of both branded and
private label products. Private label distribution, in contrast, involves the
marketing, distribution and after-market support of products under the Company's
brand names. The Company conducts limited BTO activity and private label
distribution in some of its existing Western European subsidiaries. The Company
intends to further develop and expand its BTO operations to include both other
geographical regions as well as other vendors. The Company also intends to
expand the number and geographical coverage of its private label products. The
Company distributes private label products in selected locations throughout the
world. The Company believes that such products can provide higher margins than
branded products if sourced and marketed effectively. The Company intends to
expand its distribution of such products and establish an internal "vendor"
operation to source, consistently label and market such products.
PRODUCTS AND CUSTOMERS
The Company's sales consist of hardware and software products such as
local area networks, disk drives, personal computers and printers to an active
customer base, as of September 30, 1999, of approximately 125,000 VARs and
computer retailers. The Company's products also include components such as
random access memory chips, central processing units and integrated circuit
boards. For the nine months ended September 30, 1999, the Company's product mix
by category was personal computers (24%), mass storage (20%), printers (12%),
software (11%), networking and multimedia (9%), components (7%), peripherals
(7%) and other (11%).
The Company purchases its products directly from hardware manufacturers
and software publishers in large quantities. As a focused distributor, the
Company focuses on a small number of leading vendors in each product category
and on a small number of high volume items of that manufacturer or publisher. As
a result, the Company carries fewer individual products than broadline
distributors and works with fewer vendors. The largest Company operating
subsidiaries maintain between 10,000 and 15,000 SKUs per location while
broadline distributors typically carry more than 45,000 SKUs.
The Company's customers typically rely on distributors as their
principal source of microcomputer products and financing. The Company's backlog
of orders is not considered material to an understanding of its business. No
single customer accounted for more than one percent of the Company's net sales
in the nine months ended September 30, 1999.
VENDOR RELATIONS
The Company obtains its products from its vendors under non-exclusive
distribution agreements, which are subject to renewal annually and may be
canceled by either party on short notice. Under these agreements, the Company
has the right to purchase products at discounts from the list prices. The
amounts of the discounts are determined each year at the time of renewal on the
basis of
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the projected sales of the Company for the following year and vary for each
vendor. The Company is not required to make additional product payments if it
fails to achieve its projected sales level for the year, but its product
discounts in the following year may be reduced because of the lower sales
levels. In the nine months ended September 30, 1999, approximately 78% of the
products distributed by the Company were purchased from the Company's 20 largest
vendors. 18%, 12% and 10% of net sales during that period were derived from the
sale of products supplied by Hewlett-Packard, Compaq and IBM, respectively. The
Company's agreements with vendors provide a form of price protection specifying
that if the list price of a product is reduced by the vendor, the Company will
typically receive a credit in the amount of the reduction in distributor cost
for each item of the product in inventory.
The Company also has stock rotation arrangements with substantially all
of its vendors. Stock rotation permits the Company to return inventory for full
credit in an amount equal to a certain percentage of the Company's purchases
from the supplier over a specific period. In certain cases, the Company must
purchase inventory at least equal in value to that returned. These agreements
permit the Company to maintain higher inventory levels while limiting the amount
of committed working capital related to slow-moving items.
Vendors deliver products against purchase orders tendered by the
Company. The Company will often request specific delivery dates in its purchase
orders and lead times for delivery from vendors are typically short. Delivery
is, however, subject to availability, and vendors have no liability to the
Company for failure to meet a delivery date. The Company experiences delivery
delays and inventory shortages from time to time. In the opinion of management,
these delays and shortages are common to other distributors of microcomputer
products in general, and do not have a significant adverse impact on the
Company's operations.
Several of the Company's vendors also provide for rebates or other
incentives based on achieving a predetermined goal of volume or type of products
sold or other types of goals during a fiscal quarter. On February 25, 1999, the
Company announced the discovery of discrepancies related to the amount of vendor
incentives recorded in the fourth quarter of 1998. In coordination with its
independent auditors and an investigation by outside attorneys, the Company
found that vendor rebates were overstated in the second, third and fourth
quarters of 1998. Some of the fourth quarter rebates were supported with invalid
documentation. All of the overstated rebates have been reversed and the Company
has restated its results for the second and third quarters of 1998. As a
consequence, the senior executive officer responsible for our European
operations resigned.
Generally, the Company's vendors have the right to terminate their
respective distribution agreements on short notice to the Company. In some
cases, the Company must be given a reasonable opportunity to cure any violation
of the agreement before it may be terminated. The Company similarly has the
right to terminate its distribution agreements on short notice to the vendor.
SALES, MARKETING AND CUSTOMER SUPPORT
In order to address the individual customs, practices and business
conventions within countries effectively, each operating subsidiary of the
Company maintains general autonomy with respect to sales, marketing and customer
support. Oversight and strategic direction are provided by senior management of
the Company.
SALES. The Company markets its products to resellers, who either
package the Company's products with other computer equipment or sell the
products on an individual basis to end-users. The Company distributes products
to approximately 100,000 active resellers in Western Europe, Latin America,
Eastern Europe, Asia and the Middle East.
Each operating subsidiary maintains a sales staff organized to
interface effectively with its respective customer base. At least 20% of the
Company's employees are involved in sales activities.
The Company's customers typically place orders with a sales
representative. Almost all orders are for pick-up or next day delivery. The
Company's computer systems generally allow the representative to check customer
credit limits, current inventory levels and pricing.
MARKETING. The Company utilizes a variety of programs to market its
major vendors' products, including direct mailings, periodic advertising by
facsimile, advertisements in industry trade publications, product brochures,
seminars and participation in selected trade shows. Marketing programs are
effectuated at the subsidiary level and are designed to build awareness of the
Company, its products and their collective capability. Each operating subsidiary
maintains staff to provide marketing support.
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Funds for the Company's advertising budget generally are obtained from
cooperative advertising reimbursements and market development funds provided by
vendors. Cooperative reimbursements have typically represented approximately 1%
to 2% of the dollar amount of products purchased from those major vendors.
Marketing programs designed for cooperative reimbursement are vendor and product
specific and are designed with vendor approval. Market development funds are
provided to create market awareness of vendors' products. Cooperative
advertising reimbursements and market development funds are recorded in the
Company's financial statements as a reduction of operating expenses.
CUSTOMER SUPPORT. Under several vendor agreements, the Company is
required to maintain a staff of qualified and trained sales, repair, and support
employees who are able to provide information and advice to resellers, provide
warranty repair service and train resellers on the vendor's products, their
applications, configurations with other computer products, and installation and
support requirements. The employees of the Company fulfilling these functions
are required to complete training courses provided by the vendor.
In addition, the Company supports all products with a full
manufacturer's warranty and maintains an industry standard return policy,
similar to that of its competitors.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability, provision of credit to
customers, delivery time, customer support services and breadth of product line.
Competition exists in a variety of forms including direct sales by vendors, mail
order sales, international distributors, and local distributors. Some of the
Company's competitors have greater financial and administrative resources than
the Company. The Company believes availability of products is a key element of
competitiveness and attempts to differentiate itself from its competition by
providing a select number of name brands in each product line and maintaining a
sufficient inventory of select products to meet demand. The Company enhances its
competitive position by providing responsive customer service through support
and employee training programs. The Company believes that its vendors and their
products are respected in the industry for high quality and performance.
Vendor contracts frequently limit sales of their products to specific
geographic areas. Although these restrictions limit the ability of the Company's
subsidiaries to sell outside of their jurisdictions, competition in the
subsidiary's area is also reduced.
EMPLOYEES
At September 30, 1999, the Company employed approximately 4,300
full-time employees of whom 500 were located in the United States. Of the total
number of employees, approximately 1,700 worked in marketing and sales, 800
worked in warehousing and delivery and 1,800 were employed in other positions,
including administration. Employees in certain countries are represented by
labor councils mandated by government regulations which determine compensation
and benefits. With these exceptions, none of the Company's employees are
represented by unions. Severance costs associated with termination of employment
in many countries are higher than in the United States. There has been no
disruption of operations due to a labor dispute. Management considers its
employee relations to be good.
PROPERTIES
The corporate headquarters of the Company is located at 2000 N.W. 84th
Avenue, Miami, Florida 33122. The Company's subsidiaries operate through
approximately 70 locations totaling approximately four million square feet. Most
locations consist of an administrative office utilized by the subsidiary and an
adjoining or nearby warehouse and distribution facility.
In each of the countries, the size set forth above includes sales,
administrative and warehousing functions and may be composed of multiple
facilities. The Company considers its existing facilities to be adequate for its
foreseeable needs.
LEGAL PROCEEDINGS
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET. AL., case No.
99-8186, was filed in the United States District Court, Southern District of
Florida. This complaint and others were purportedly filed on behalf of those
security holders of the Company who purchased such securities during specified
time frames. The complaints, which purport to be class action complaints,
generally allege that the Company and certain of its officers violated federal
securities laws (including Rule 10b-5 promulgated pursuant to the Exchange Act)
in connection with financial reporting and disclosure. Among other things, the
plaintiffs allege that the Company and certain of its officers and directors
materially overstated financial disclosures. The plaintiffs sought, among other
relief, to be declared a
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class and to be awarded compensatory damages and attorney's fees and costs. By
order dated June 23, 1999, the Court consolidated the above-referenced cases and
appointed lead plaintiffs and approved the selection of lead counsel for the
lead plaintiffs. On December 8, 1999, the Company reached an agreement to settle
this litigation. The settlement does not reflect any admission of liability by
the Company, and there has been no finding of any violation of federal
securities laws. In the settlement, CHS has agreed to pay $11.75 million in
cash, which will be fully funded by the Company's insurance policies, and issue
1,650,000 shares of common stock. The settlement covers purchasers of common
stock and related options during the period August 7, 1997 through May 13, 1999
who suffered a loss. The Company does not anticipate that the settlement will
have any impact on its cash flow. The settlement is subject to court approval.
The Company expects the court to rule on the settlement within the next six to
eight months. There can be no assurance that the court will approve the
settlement.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its
planned sale of the Vobis Group to the Company would not be concluded. Metro
commenced suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed, however, appeals have subsequently been filed. The Vobis Group
purchase agreement called for disputes to be settled by arbitration in Germany
and an arbitration proceeding has been initiated by Metro. The arbitration
proceeding is in an early stage and no prediction can be made as to its outcome.
The purchase agreement did not provide for a break-up fee.
The Department of Commerce has commenced an investigation of the export
activities of one of the Company's subsidiaries and its management in relation
to alleged violations of certain Federal exportation laws and other related
violations including money laundering. Although the ultimate exposure could be
much higher if the Company were ultimately found to have violated these laws,
the Department of Commerce has offered to settle for a fine of $25 million and a
guilty plea to a representative sample of the charges. Most of the transactions
under review by the Department of Commerce occurred prior to the date that the
Company acquired the subsidiary. The Company intends to vigorously defend itself
against these claims.
During the last quarter of 1999, nine lawsuits were filed against CHS
to collect on CHS guarantees of its subsidiaries' debts to vendors and financial
institutions. Six of the lawsuits have been filed in the state court located in
Miami, Florida, two lawsuits have been filed in United States District Court in
Miami, Florida, and one lawsuit has been filed by Quantum Corporation
("Quantum") in United States District Court for the Northern District of
California, San Jose Division (Case No. C-99 21229). The aggregate amount
demanded in these suits is approximately $45 million. CHS is defending all of
the lawsuits and at the same time is engaging in settlement negotiations with
the claimants. Since all of the cases were recently filed, CHS is unable to
determine at this time when and how the cases will be resolved by the various
courts.
In addition to seeking to collect approximately $10 million on CHS's
corporate guarantee, Quantum is also seeking to enjoin CHS from transferring any
more of its subsidiaries to third parties and to attach the assets of CHS that
have already been transferred to purchasers. CHS will vigorously defend the
injunction and attachment actions brought by Quantum.
The Company is involved in litigation relating to claims arising out of
its operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The principal focus of the following narrative is on the financial
information through the filing of CHS's third quarter 1999 Form 10-Q. Reference
is made to "Risk Factors" and "Business of CHS-Recent Developments" for
important information regarding liquidity and other financial concerns.
RECENT DEVELOPMENTS
In the third quarter of 1999 several of the Company's major suppliers
and lenders changed the terms of their credit arrangements with the Company. The
suppliers have decreased the number of days the Company had to pay for product
purchases and in many cases began to require cash on delivery. Additionally,
suppliers reduced credit limits, required a stricter adherence to payment terms
and began to charge interest on certain outstanding balances. Certain lenders
also demanded payment on their loans and have been unwilling to renew loans.
These changes have increased the Company's working capital requirements and
financing costs and reduced the Company's ability to take advantage of early
payment discounts as compared to previous periods. Additionally, in the quarter
the Company experienced a reduction in the number and types of incentives
offered by certain vendors.
During the third quarter of 1999 the Company had net cash from
operating activities of $94.6 million, which it used to repay bank loans and
fund operations.
In October 1999, due to defaults on certain bank loans, certain
subsidiaries of the Company in the United Kingdom, Germany and Austria have been
placed in receivership or voluntary creditor protection. Additionally, in
October 1999, the Company commenced a program designed to reduce liabilities to
sellers of businesses by disposing of all or a portion of the Company's
interests in certain of those operations. The Company has concluded agreements
with eleven of the sellers of the businesses and is in discussions with the
original owners of three other subsidiaries to dispose of those subsidiaries.
The Company hired an investment banker early in the third quarter of
1999 to evaluate strategic alternatives that could enhance shareholder value.
The relationship with the investment banker has been terminated. The Company has
alternatively retained the services of a financial advisor and other
professionals to assist in the development of a comprehensive plan to equitably
satisfy its outstanding obligations. There can be no assurance that the Company
will be successful in its plans.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items in the Company's
Consolidated Statements of Earnings.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 9 MONTHS ENDED
(UNAUDITED)
1996 1997 1998 9/30/98 9/30/99
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Cost of goods sold 92.9 92.7 93.4 93.4 94.5
----- ----- ----- ----- -----
Gross profit 7.1 7.3 6.6 6.6 5.5
Operating expenses 5.6 5.4 5.1 5.2 9.4
----- ----- ----- ----- -----
Operating income (loss) 1.5 1.9 1.5 1.4 (3.9)
Interest income (0.2) (0.2) (0.2) (0.2) (0.2)
Interest expense 0.6 0.7 0.8 0.8 1.1
Other income (0.1) 0.0 (0.1) (0.1) (0.5)
----- ----- ----- ----- -----
Earnings (loss) before
income taxes 1.2 1.4 1.0 0.9 (4.3)
Income taxes 0.3 0.3 0.3 0.3 0.3
Minority interest 0.1 0.1 0.0 0.0* 0.0*
----- ----- ----- ----- -----
Net earnings (loss) 0.8 % 1.0 % 0.7 % 0.6 % (4.6 %)
===== ===== ===== ===== =====
</TABLE>
- - ----------
* Rounded down to zero.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales increased $1.2 billion, or 21.0%, from $5,687.8
million in the nine months ended September 30, 1998 to $6,879.4 million in the
nine months ended September 30, 1999 due entirely to acquisitions. Net sales of
subsidiaries consolidated for both nine month periods ended September 30, 1999
and 1998 decreased by $256.6 million or 4.5%. This is attributable to decreased
sales in Latin America, where management made a decision to reduce sales due to
economic difficulties, and decreased sales in other locations due to the
tightening credit terms from vendors. Such terms reduced the availability of
products to the Company and the mix of such products, adversely affecting sales.
The company expects the fourth quarter results to also be negatively affected if
the lower credit limits are continued.
GROSS PROFIT. Gross profit increased $1.8 million, or 0.5%, from $377.9
million in the nine months ended September 30, 1998 to $379.7 million in the
nine months ended September 30, 1999 due entirely to acquisitions. Newly
acquired companies contributed $102.0 million of gross profit. Gross profit of
subsidiaries consolidated for both nine month periods ended September 30, 1999
and 1998, decreased $100.2 million, or 26.8%.
Gross profit was 5.5% for the nine months ended September 30, 1999 and
6.6% for the nine months ended September 30, 1998. The decrease was due
principally to lower gross margins from subsidiaries located in Western Europe
and Asia. The decrease is attributable to a severe drop in gross margins on mass
storage products in the second quarter and an overall drop in gross margins
caused by lower product volume, deteriorating product mix, increased
competition, cash flow pressures that resulted in missed early payment discounts
and reduced incentives offered by or earned from certain vendors. The Company
expects that overall gross margins will continue to be lower during the
remainder of 1999 compared to 1998 due to the factors described in the preceding
sentence.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
were 9.4% in the nine months ended September 30, 1999 and 5.1% in the nine
months ended September 30, 1998. The increase in operating expense was due to
growth from acquisitions, increased costs and specific charges recorded in the
second and third quarters of 1999. The most significant items were charges for
goodwill write-offs and restructuring costs of $184.4 million, a $20.7 million
charge to reserve a note from an affiliate and a charge for additional bad debt
reserves, principally in the Latin American region of $24.0 million. Excluding
these charges,
39
<PAGE>
operating expenses as a percent of sales were 6.7%. Operating expenses as a
percent of sales increased due to an increase in goodwill amortization and
general cost increases.
NET INTEREST EXPENSE. Net interest expense increased $23.6 million from
$36.8 million in the nine months ended September 30, 1998 to $60.4 million in
the nine months ended September 30, 1999 due to interest on the Notes and the
Debentures, interest on delinquent vendor payables, interest on certain
delinquent amounts due to sellers under acquisition agreements and increased
borrowings by the Company to support increased sales.
INCOME TAXES. Income taxes were provided on the loss in the nine months
ended September 30, 1999. The provision was principally due to the company fully
reserving certain deferred tax assets during the period related to subsidiaries
in Germany that have been put into voluntary creditor protection. Excluding
reserving certain tax assets there was a tax provision of $1 million for the
nine months ended September 30, 1999. Income taxes as a percentage of earnings
(loss) before income taxes and minority interest, excluding the effect of
reserving certain tax assets, was (0.3%) in the nine months ended September 30,
1999 and 33.7% in the nine months ended September 30, 1998. This change is due
to the Company incurring income tax expense despite having a loss for the period
due to non-deductible goodwill write-offs, losses in subsidiaries for which no
tax benefit can be provided and increased non-deductible goodwill amortization.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO ENDED DECEMBER 31, 1997
NET SALES. Net sales increased $3.8 billion, or 79.7%, from $4.8
billion in 1997 to $8.5 billion in 1998 due principally to acquisitions and, to
a lesser extent, internal growth. Of the increase in net sales, newly acquired
subsidiaries contributed $3.1 billion. Net sales of subsidiaries consolidated
for both 1997 and 1998 grew $742.5 million or 15.6%. This growth is attributed
to increased consumer demand for microcomputer products offered by the Company.
The growth was slower than the prior year due principally to economic
difficulties in Latin America and Russia.
GROSS PROFIT. Gross profit increased $215.4 million, or 62.1%, from
$346.7 million in 1997 to $562.0 million in 1998 due principally to acquisitions
and, to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1997 and 1998 increased $1.0 million, or
0.3%. Newly acquired subsidiaries contributed $214.4 million of increased gross
profit.
Gross margin was 7.3% in 1997 and 6.6% in 1998. The decrease in gross
margin was caused by increased competitive pressure in all markets and the
inclusion of a full year of the Karma operation, which has a lower gross margin
than the remainder of the Company due to the nature of the products sold.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
declined from 5.4% in 1997 to 5.1% in 1998. The Company attributes this decrease
to: (i) synergies realized from combining operating entities; (ii) benefits of
economies of scale; and (iii) the inclusion of the results of Karma in 1998 for
a whole year based on lower operating expenses of Karma as a percentage of its
sales. This factor was partially offset by increased goodwill amortization in
1998, which was $25.8 million during 1998 compared to $8.9 million during 1997.
Operating expenses for both periods include the results of foreign currency
transactions. Such results were a net gain of $5.2 million in 1998 and $1.2
million in 1997.
NET INTEREST EXPENSE. Net interest expense increased $30.6 million, or
127%, from $24.1 million in 1997 to $54.8 million in 1998. The increase is
directly related to interest on the Company's Senior Notes due 2005 and
increased borrowings of the Company to support increased sales.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes and minority interest in subsidiaries increased from 21.5% in 1997 to
32.4% in 1998. The change is due to a higher proportion of income earned in
jurisdictions with higher tax rates, by losses in subsidiaries with no tax
benefit and increased non-deductible goodwill amortization. The Company expects
to have income tax expense in 1999 despite having a loss for the period due to:
(i) having fully reserved previously recognized deferred tax assets, (ii)
non-deductible goodwill write-offs, and (iii) losses in subsidiaries for which
no tax benefit can be provided.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO ENDED DECEMBER 31, 1996
NET SALES. Net sales increased $2.9 billion, or 156.3%, from $1.9
billion in 1996 to $4.8 billion in 1997 due principally to acquisitions and, to
a lesser extent, internal growth. Of the increase in net sales, newly acquired
subsidiaries (including existing CHS companies for the first nine months of 1997
which were integrated with companies acquired from Merisel) contributed $2.5
billion. Net comparable sales of subsidiaries consolidated for both 1996 and
1997 grew $371.3 million or 28.0%. This growth is attributed to increased
consumer demand for microcomputer products offered by the Company.
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<PAGE>
GROSS PROFIT. Gross profit increased $215.6 million, or 164.4%, from
$131.1 million in 1996 to $346.7 million in 1997 due principally to acquisitions
and, to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1996 and 1997 increased $42.4 million, or
48.8%. Newly acquired subsidiaries (including existing CHS companies for the
first nine months of 1997 which were integrated with companies acquired from
Merisel) contributed $173.1 million of increased gross profit. For purposes of
determining the increase in gross profit, the Company allocated manufacturers'
rebates to its more significant subsidiaries.
Gross margin increased from 7.1% in 1996 to 7.3% in 1997. The change in
gross margin was due to increased early payment discounts and vendor rebates
offset to some extent by lower gross margins of the recently acquired Karma
operations. The Company utilized more early payment discount opportunities as a
result of the cash generated by its public equity offering in July 1997.
Additionally, the Company's growth resulted in more favorable volume rebates
with certain key vendors. The increase in gross margin attributable to early
payment discounts (0.2%) and volume rebates (1.4%) was offset by the fact that
the Karma operation has a lower gross margin due to the nature of the products
sold.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
declined from 5.5% in 1996 to 5.4% in 1997. Included were the expenses of
maintaining a minimally utilized warehouse in the Netherlands in 1997 and $1.4
million in Merisel restructuring expenses in 1996. In 1998, such warehouse is
expected to be utilized for distribution of universal products (such as mass
storage and components). The comparative operating expense ratios without these
items would have been 5.4% for 1997 and 5.4% for 1996. Operating expenses for
both periods include the results of foreign currency transactions. Such results
were a net gain of $1.2 million in 1997 and $1.6 million in 1996.
NET INTEREST EXPENSE. Net interest expense increased $15.6 million, or
183.7%, from $8.5 million in 1996 to $24.1 million in 1997. The increase is
directly related to the increase in average loan amounts outstanding.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes and minority interest in subsidiaries decreased from 29.9% in 1996 to
21.5% in 1997. The change is due to a higher proportion of income earned in
jurisdictions with lower tax rates and the use of net operating loss
carryforwards, offset, to a certain extent, by losses in subsidiaries with no
tax benefit and non-deductible goodwill amortization.
SEASONALITY
The Company typically experiences variability in its net sales and net
income on a quarterly basis as a result of many factors, including the condition
of the microcomputer industry in general, shifts in demand for software and
hardware products and industry announcements of new products or upgrades. Sales
in Europe in the fourth quarter of each year are typically higher than in the
other quarters. In Latin America, sales in the third and fourth quarters of each
year are typically higher than in the first and second quarters.
LIQUIDITY AND CAPITAL RESOURCES
1998 AND 1997. Net cash of $240.1 million and $248.5 million were used
in operating activities in the years ended December 31, 1998 and 1997,
respectively. In 1998, such amount was funded by increases in borrowings from
banks of $246.8 million and new long-term debt of $139.0 million. In 1997, such
amount was funded from increases in bank borrowings and proceeds of a public
offering. In both years, cash was used principally due to increases in
inventories and trade accounts receivable. In 1998, cash was provided by
increases in accounts payables and accrued expenses. Net cash used in investing
activities in 1998 and 1997 included $52.5 million and $19.5 million,
respectively, related to fixed asset additions. In addition, $189.7 million and
$201.5 million were used for acquisitions during such years respectively. Net
cash of $588.6 million and $507.2 million was provided by financing activities
in the years ended December 31, 1998 and 1997, respectively, due principally to
net borrowings of $385.8 million and $74.7 million, respectively, the issuance
of the Company's Senior Notes due 2005 during 1998, which proceeds were used for
acquisitions, and proceeds of equity public offering totaling $428.2 million in
1997.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND NINE MONTHS ENDED SEPTEMBER
30, 1998. Net cash of $163.1 million was provided by and net cash of $5.7
million was used in operating activities in the nine months ended September 30,
1999 and 1998, respectively. In 1999, net cash was provided by decreases in
trade receivables and inventory offset by decreases in accounts payable. In
1998, net cash was used principally as a result of decreases in accounts
payables and accrued liabilities and increases in receivables and prepaids and
other assets offset by a decrease in inventories. Net cash used in investing
activities in the nine month periods ended September 30, 1999 and 1998 included
approximately $26.9 million and $33.0 million, respectively, related to fixed
asset additions. In addition, $6.7 million and $177.9 million, respectively, was
used in acquisitions during the nine months ended September 30, 1999 and 1998.
In the nine months ended September 30, 1999, $29.8 million was received from the
sale of the Company's Sun
41
<PAGE>
Microsystems distribution business. Net cash of $162.3 million was used in
financing activities during the nine months ended September 30, 1999. The
Debentures provided $50 million net cash while there were repayments to banks of
$212.9 million. Net cash of $330.5 million was provided by financing activities
in the nine month period ended September 30, 1998, due principally to issuance
of the Notes and net borrowings from banks. As of September 30, 1999,
approximately $79.7 million of the cash balance was restricted primarily for
guarantees and payments on loans and letters of credits.
In the third quarter of 1999 several of the Company's major suppliers
and lenders changed the terms of their credit arrangements with the Company. The
suppliers have decreased the number of days the Company has to pay for product
purchases and in many cases require cash on delivery. Additionally, suppliers
have reduced credit limits, require a stricter adherence to payment terms and
charge interest on certain outstanding balances. Certain lenders have also
demanded payment on their loans and have been unwilling to renew loans. These
changes have increased the Company's working capital requirements and financing
costs and reduced the Company's ability to take advantage of early payment
discounts as compared to previous periods. Additionally, in the third quarter of
1999 the Company experienced a reduction in the number and types of incentives
offered by certain vendors.
The Company had liabilities to sellers of business of $275.3 million at
September 30, 1999 representing the remaining price of acquisitions for which
there is a minimum payment or where an earn out is complete. In October 1999,
the Company commenced a program designed to reduce such amounts owed by
disposing of all or a portion of the Company's interests in certain of those
operations. The Company has concluded agreements with eleven of the sellers of
the businesses comprising $259.3 million of the balance. After the effective
date of these transactions, the results of such companies will no longer be
consolidated with the Company. On an aggregate basis the sales of such companies
included in the statements of operations for the nine months ended September 30,
1999 was $1,136.0 million. The Company expects to record a loss in the fourth
quarter related to certain of these transactions of $62.2 million.
The Company is currently in similar negotiations with the original
owners of three other subsidiaries to reduce earn-out obligations by an
additional $12.6 million. If successful, the remaining amount due to sellers
would be essentially eliminated. For the nine months ended September 30, 1999,
the three subsidiaries generated combined sales of approximately $162.2 million.
The Company acquired the companies in separate transactions during 1998. One of
the operations in negotiation is located in Latin America, and two in Europe.
The Company has been in violation of a covenant in a certain short-term
credit facility since the first quarter of 1999. The amount outstanding on this
facility was approximately $19.8 million as of September 30, 1999. As a result
of the default, on October 22, 1999, CHS Electronics Plc, a subsidiary operating
in the United Kingdom, was placed in receivership by the lender. The loan was
secured by approximately $33.5 million of receivables as of September 30, 1999.
The receiver has subsequently closed CHS Electronics Plc and is liquidating its
net assets. The Company has additionally sold certain assets of Metrologie Ltd.
and Karma UK Ltd., other United Kingdom based subsidiaries. In the first nine
months of 1999 these companies generated sales of $612.4 million and had a net
loss of $17.0 million. The Company is presently unable to determine if proceeds
of the assets of such companies will be sufficient to pay all liabilities. To
the extent that there is a shortfall and the liabilities are guaranteed by the
Company, there may be additional charges incurred.
The Company is in violation of various requirements of a different
short-term credit facility at September 30, 1999. The Company has closed the
subsidiary that is the primary obligor under the loan and has arranged with the
lender to repay the credit facility through collections of receivables of the
subsidiary. The total amount outstanding at September 30, 1999 under such
facility was $9.7 million. This subsidiary contributed revenues of $95.4 million
for the nine months ended September 30, 1999. The Company wrote-off goodwill of
$26.5 million as of September 30, 1999 related to this subsidiary. The Company
is a guarantor of this credit facility.
A Swiss subsidiary of the Company has two separate credit facilities
providing for advances for working capital needs based upon eligible inventory.
The credit facilities are secured by a lien on certain assets of the subsidiary
and contain covenants requiring certain levels of net worth and profitability.
The subsidiary was not in compliance with certain of the covenants as of
September 30, 1999 and was consequently in default of the credit facilities. One
of the lenders has taken steps to seize the receivables, inventory and cash of
the subsidiary. At September 30, 1999 the amounts outstanding under the
facilities were $22.4 million. The Company is a guarantor of these credit
facilities.
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<PAGE>
On December 30, 1998, CHS Frank & Walter, CHS Germany and CHS Austria
(collectively, the "Borrowers") entered into a three year DM 325 million
(approximately $180 million) facility agreement (the "Facility Agreement") with
a bank. Advances under the Facility Agreement may be used for working capital
needs of the Borrowers and are based upon a borrowing base equal to the
aggregate of 85% of eligible accounts receivable, 50% of eligible inventory and
100% of inventory of a specific vendor. The debt is secured by a lien on the
receivables, inventories and intangible assets of the Borrowers and two Austrian
subsidiaries of the Company, and a lien on the receivables of a Swiss subsidiary
of the Company (collectively, the "Pledgors"), and a pledge of the shares of the
Borrowers and the Pledgors. The indebtedness has been guaranteed by the Company,
the Pledgors, and certain other subsidiaries of the Company. Interest is at a
variable rate based on Euro LIBOR. At September 30, 1999, the interest rate on
this credit facility was 6.02%. The Facility Agreement was amended on August 31,
1999 which modified the maturity date to November 30, 1999. In addition to
limitations on the ability of the Borrowers to incur additional indebtedness,
the amendment reduced the amount available under the loan to DM 310 million
(approximately $170 million), which amount will be further reduced upon certain
events, and requires the lender's consent for the Company to make future
acquisitions or to transfer funds from the Borrowers to other companies in the
organization. The Borrowers were in default of certain of the financial
covenants in the Facility Agreement as of September 30, 1999 and the Company is
currently in default under certain provisions of its guarantee.
On October 26, 1999, CHS Frank & Walter, CHS Germany and CHS Austria
voluntarily filed for creditor protection under German and Austrian law. The
filing was necessitated by continuing losses in the operations due to
competitive industry conditions in the region, restricted credit from the
subsidiaries' vendors, a reduced bank line and the inability to remedy the
events of default in the Facility Agreement. Insolvency administrators have been
appointed by the court to oversee each operation. Under German and Austrian
insolvency laws, each of the subsidiaries are required to prepare a recovery
plan to be evaluated by the insolvency administrator. The administrator will
make a determination within thirty days of the filing of whether to sell or
close the businesses or return them to their owner. During the thirty day
period, the subsidiaries will be under creditor protection. In the first nine
months of 1999, CHS Frank & Walter, CHS Germany and CHS Austria generated sales
of $1,033.1 million and had a net loss of $31.6 million. Although the
subsidiaries have tangible book value, the Company is presently unable to
determine the ultimate results of the filing, and if the businesses are closed,
whether the proceeds of the assets of such companies will be sufficient to pay
all liabilities. To the extent that there is a shortfall and the liabilities are
guaranteed by the parent, there may be additional charges incurred. At September
30, 1999, the total amount outstanding under this credit facility was $99.9
million. The Company wrote-off goodwill of $62.4 million as of September 30,
1999 related to these subsidiaries.
The Company's subsidiaries typically enter into short-term credit
agreements with financial institutions in their countries of operations. At
September 30, 1999, of the $507.1 million aggregate amount available under these
agreements, $432.3 million was outstanding. Such agreements are usually for a
term of one year and are secured by the receivables of the borrower and, in
certain instances, inventories of the borrower. The weighted average interest
rate at September 30, 1999 was 6.1%. Certain of these agreements contain
financial covenants requiring, among other things, the maintenance of certain
net worth and loan-to-collateral value terms. The Company typically guarantees
these loans. The Company has also guaranteed the obligations of certain of its
subsidiaries to certain vendors. The Company has received demands on payments
under guarantees from many of its vendors, creditors and lenders.
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In certain
countries, exchange controls may limit the ability of the Company's subsidiaries
to make payments to the Company. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets and cash flow of such
subsidiaries over the claims of the Company or its shareholders. Restrictions in
financing or credit arrangements may also limit access to such earnings. Certain
of these revolving credit agreements limit the ability of the respective
subsidiaries to pay dividends, make loans or provide other distributions to the
Company. Currently, the subsidiaries with such agreements are Santech Norway and
CHS Latin America. Such credit agreements have maximum available amounts of
$46.8 million in total.
In June 1999, the Company entered into an expanded strategic alliance
with Computer Associates International, Inc. ("CA"). Under terms of the
agreement, the Company supplied CA with marketing, distribution and reseller
rights with respect to its product offering. CA loaned $50 million to the
Company in the form of the Debentures. The interest rate on the Debentures is
the six month LIBOR rate plus 2% (7.17% for the initial interest period), and
adjusts semi-annually. On December 16, 1999, CA converted approximately $9.5
million of the debentures into 11,579,054 shares of CHS common stock.
The Debentures are convertible into the Company's common stock at any
time at a conversion price of $5.50 per share. The conversion price is subject
to adjustment under certain conditions, including upon the average closing price
of the Company's common stock falling below $5.50 during the twenty days
preceding any conversion date or upon new issuance of shares at a price lower
than $5.50. In connection with the financing, the Company issued to CA a warrant
expiring May 31, 2004 for two million
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<PAGE>
shares of common stock at an exercise price of $5.50 per share. The exercise
price of the warrant is reduced if new shares are issued at a lower price. The
warrant has been recorded at a fair value of $3 million as a discount to the
Debentures and this amount is being amortized over the life of the Debentures.
The Company is currently not in compliance with certain covenants of the
Debentures and is exploring all available options to remedy the situation.
In April 1998, the Company issued $200 million of Notes due 2005. The
Notes bear interest of 9.875% per annum and interest is payable semi-annually on
April 15 and October 15 beginning October 15, 1998. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after April
15, 2002, initially at 104.938% of their principal amount, plus accrued and
unpaid interest, declining to 100% of their principal amount, plus accrued and
unpaid interest, on or after April 15, 2004. Certain of the Company's direct and
indirect subsidiaries fully and unconditionally jointly and severally guaranteed
the Notes on an unsecured basis. The guarantor subsidiaries are principally
non-operating holding companies. The Notes are effectively subordinated to all
existing and future liabilities of the Company's subsidiaries that are not
guarantors. The Notes contain certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness; pay dividends or make other distributions in respect to
their capital stock; enter into certain transactions with shareholders and
affiliates; make certain investments and other restricted payments; create
liens; enter into certain sale and leaseback transactions and sell assets. The
covenants are, however, subject to a number of exceptions and qualifications. In
November 1999, the Company received notification from one of the holders of the
Notes informing it that they believe that the Company is not in compliance with
certain covenants of the Note indenture. The Company is currently reviewing the
claim made in the notification.
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC.
ET. AL. pending in the United States District Court for the Southern District of
Florida This complaint and others were purportedly filed on behalf of those
security holders of the Company who purchased such securities during specified
time frames. The complaints, which purport to be class action complaints,
generally allege that the Company and certain of its officers violated federal
securities laws (including Rule 10b-5 promulgated pursuant to the Securities
Exchange Act of 1934) in connection with financial reporting and disclosure.
Among other things, the plaintiffs allege that the Company and certain of its
officers and directors materially overstated financial disclosures. The
plaintiffs seek, among other relief, to be declared a class and to be awarded
compensatory damages and attorney's fees and costs. By order dated June 23,
1999, the Court consolidated the above-referenced cases and appointed lead
plaintiffs and approved the selection of lead counsel for the lead plaintiffs.
On December 8, 1999, the Company reached an agreement to settle this
litigation. The settlement does not reflect any admission of liability by the
Company, and there has been no finding of any violation of federal securities
laws. In the settlement, CHS has agreed to pay $11.75 million in cash, which
will be fully funded by the Company's insurance policies, and issue 1,650,000
shares of common stock. The settlement covers purchasers of common stock and
related options during the period August 7, 1997 through May 13, 1999 who
suffered a loss. The Company does not anticipate that the settlement will have
any impact on its cash flow.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its
planned sale of the Vobis Group to the Company would not be concluded. Metro
commenced suits against a bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed in the trial court, however, the appellate court reversed the lower
court's decision. The Vobis Group purchase agreement called for disputes to be
settled by arbitration in Germany and an arbitration proceeding has been
initiated by Metro. The arbitration proceeding is in an early stage and no
prediction can be made as to its outcome. The purchase agreement did not provide
for a break-up fee.
The Department of Commerce has commenced an investigation of the export
activities of one of the Company's subsidiaries and its management in relation
to alleged violations of certain Federal exportation laws and other related
violations including money laundering. Although the ultimate exposure could be
much higher if the Company were ultimately found to have violated these laws,
the Department of Commerce has offered to settle for a fine of $25 million and a
guilty plea to a representative sample of the charges. Most of the transactions
under review by the Department of Commerce occurred prior to the date that the
Company acquired the subsidiary. The Company intends to vigorously defend itself
against these claims.
DHL Airways, Inc. and DHL International, B.V. (collectively "DHL") has
made a claim against the Company for indemnification for assessments of
approximately $3.1 million made by the Dutch Government against DHL. The
assessments are for certain shipments made through DHL by certain of the
Company's European subsidiaries that have been alleged by the Dutch government
to have understated the declared values in order to reduce payments for value
added tax and custom fees. The Company intends to vigorously defend itself
against this claim.
During the last quarter of 1999, nine lawsuits were filed against CHS
to collect on CHS guarantees of its subsidiaries' debts to vendors and financial
institutions. Six of the lawsuits have
44
<PAGE>
been filed in the state court located in Miami, Florida, two lawsuits
have been filed in Federal District Court in Miami, Florida, and one lawsuit has
been filed by Quantum Corporation ("Quantum") in the United States District
Court for the Northern District of California, San Jose, Division. The aggregate
amount demanded in these suits is approximately $45 million. CHS is defending
all of the lawsuits and at the same time is engaging in settlement negotiations
with the claimants. All of the cases were recently filed, therefore, CHS is
unable to determine at this time when the cases will be resolved by the various
courts. In addition to seeking to collect approximately $10 million on CHS's
corporate guarantee, Quantum is also seeking certain equitable relief from the
court. See "Business of CHS-Legal Proceedings."
INFLATION
The Company operates in certain countries that have experienced high
rates of inflation and hyperinflation. However, inflation did not have any
meaningful impact on the Company's results of operations during any of the four
years ended December 31, 1996, 1997, 1998 or 1999.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and
maintain a low number of SKUs and thereby reduce the Company's working capital
requirements and improve return on equity. The Company's strategy to achieve
this goal is to both effectively manage its inventory and achieve high order
fill rates. The Company's current position with its vendors have adversely
affected its ability to achieve its strategy.
To reduce the risk of loss to the Company due to vendor price
reductions and slow moving or obsolete inventory, the Company's contracts with
its vendors generally provide price protection and stock rotation privileges,
subject to certain limitations. Price protection allows the Company to offset
the accounts payable owed to a particular vendor if such vendor reduces the
price of products the Company has purchased within a specified period of time
and which remain in inventory. Stock rotation permits the Company to return to
the vendor for full credit, with an offsetting purchase order for new products,
predetermined amounts of inventory purchased within a specified period of time.
Such credit is typically used to offset existing invoices due without incurring
re-stocking fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to
balance the needs of its customers to purchase on credit with its desire to
minimize its credit losses. Bad debt expense as a percentage of the Company's
net sales for each of the nine month periods ended September 30, 1999 and 1998
was 1.2% and 0.2%, respectively. The percentage for 1999 was affected by a
charge of $24 million to increase its reserve for bad debts, principally in
Latin America, and additional provisions recorded due to overall lower
collections in 1999. Beginning in the third quarter of 1999, the Company reduced
credit sales in Latin America. The Company attempts to minimize credit losses by
an extensive credit approval process and the use of credit insurance and
factoring by its Western European subsidiaries and credit issuance by certain
Latin American subsidiaries. In its sales to customers in Latin America, the
Company often receives post-dated checks at the time of sale. Customers who
qualify for credit are typically granted payment terms appropriate to the
customs of each country.
MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company principally enters into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates. Occasionally, the Company may enter into derivatives or
other financial instruments for speculative purposes. The counter parties are
major financial institutions and therefore credit risk associated with these
contracts is considered immaterial.
INTEREST RATE RISK. At December 31, 1998 and September 30, 1999, the
fair value of notes payable approximated their carrying value due to their
short-term maturities. The fair value of long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. Changes in interest rates will affect the market value but do not
impact earnings or cash flows. Conversely for floating rate debt, interest rate
changes generally do not affect the fair market value but do impact future
earnings and cash flows assuming other factors are held constant. The estimated
fair values of the Company's total long-term debt at December 31, 1998 and
September 30, 1999 was $398.4 million and $112.7 million, respectively. A 1%
increase in prevailing interest rates at December 31, 1998 and September 30,
1999 would result in a decrease in fair value of total long-term debt by
approximately $8.6 million and $0.6 million, respectively. Fair values were
determined from quoted market prices, where available, and from investment
bankers using current interest rates considering credit risk and the remaining
terms to maturity.
45
<PAGE>
CURRENCY RISK MANAGEMENT
FUNCTIONAL CURRENCY. The Company's functional currency, as defined by
Statement of Financial Accounting Standards No. 52, is the United States dollar.
Most of the Company's subsidiaries use the local currencies as their functional
currency and translate assets and liabilities using the exchange rates in effect
at the balance sheet date and results of operations using the average exchange
rates prevailing during the year. Translation effects are reflected in the
cumulative foreign currency translation adjustment in equity. The Company's
exposure under these translation rules, which is unhedged, may affect the
carrying value of its foreign net assets and therefore its equity and net
tangible book value, but not its net income or cash flow. Exchange differences
arising from transactions and balances in currencies other than the functional
currency are recorded as expense or income in the subsidiaries and the Company
and affect the Statements of Earnings.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. Due to its international
business presence, the Company transacts extensively in foreign countries and
foreign currencies. As a result, earnings may experience some volatility related
to movements in exchange rates. The Company attempts to limit its risk of
currency fluctuations through hedging where possible. In the year ended December
31, 1998, a significant amount of the purchases of products by the Company were
made in United States dollars and approximately 90% of Company sales were made
in currencies other than the United States dollar. In the nine month period
ended September 30, 1999, a significant amount of the purchases of products by
the Company were made in United States dollars and approximately 92% of Company
sales were made in currencies other than the United States dollar. The primary
currencies in which sales were made in the year ended December 31, 1998 were the
German mark (19% of sales), the French franc (11%) and the British pound (9%).
The primary currencies in which sales were made in the nine months ended
September 30, 1999 were the German mark (16% of sales), the French franc (13%)
and the British pound (9%). At December 31, 1998, approximately $436.6 million
of accounts payable were attributable to foreign currency liabilities
denominated in currencies other than the subsidiaries' functional currencies. Of
these, $357.8 million were denominated in United States dollars and $50.8
million were denominated in German marks. Approximately 80% of these liabilities
were unhedged. At September 30, 1999, approximately $267.7 million of accounts
payable were attributable to foreign currency liabilities denominated in
currencies other than the subsidiaries' functional currencies. Of these, $217.4
million were denominated in United States dollars, $3.9 million were denominated
in German marks and $36.9 million were denominated in Euros. Approximately 82%
of these liabilities were unhedged.
CHS Finance, a wholly owned subsidiary of the Company, engages in
central treasury functions including hedging activities related to foreign
currency for the Company and short-term working capital loans to the Company's
subsidiaries to enable them to take advantage of early payment discounts offered
by certain vendors. These loans are denominated in the functional currency of
the borrowing subsidiary or United States dollars. Generally, CHS Finance hedges
its receivables denominated in currencies other than its functional currency,
the Swiss franc. It attempts to limit the amount of unhedged receivables. This
limit is set by the Company taking into consideration the range of unhedged
foreign denominated liabilities. As a result, CHS Finance will take positions
from time to time, principally in US dollars, Euros and Swiss Francs, which may
expose the Company to foreign exchange risks. The Company intends to review this
policy periodically and may modify it in the future.
Through both hedging activities coordinated by CHS Finance and
subsidiary hedging activities, the Company makes forward purchases of United
States dollars in an attempt to hedge certain Western European currencies and
reduce exposure to fluctuations in exchange rates. Additionally, in certain
countries in Eastern Europe and in Latin America where it is not practical to
make forward purchases, to minimize exposure to currency devaluations, the
Company has adopted a policy of attempting to match levels of local denominated
accounts receivable with accounts payable and to limit holdings of local
currencies. In these countries, the Company attempts to sell products at the
United States dollar equivalent rate. Factors which affect exchange rates are
varied and no reliable prediction methods are available for definitively
determining future exchange rates. In general, countries make an effort to
maintain stability in rates for trade purposes. There can be no assurance that
these asset management programs will be effective in limiting the Company's
exposure to these risks.
The Company enters into foreign exchange contracts to hedge groups of
foreign currency transactions on a continuing basis for periods consistent with
its committed exposure. The foreign exchange contracts are valued at market and
generally have maturities which do not exceed three months. A portion of the
gains and losses on foreign exchange contracts are intended to offset losses and
gains on assets, liabilities and transactions being hedged. At December 31, 1998
and September 30, 1999, the face value of foreign exchange forward contracts
against trade payables was $269.3 million and $117.0 million, respectively,
which approximated fair market value of these contracts. Holding other variables
constant, if there were a 10% adverse change in foreign currency exchange rates,
the decrease in market value of these contracts at December 31, 1998 or
September 30, 1999 would be offset by decreases in trade payables.
46
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES". This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives"), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently assessing the effects of
adopting SFAS No. 133, and has not yet made a determination of the impact on its
financial position or results of operations. In June 1999, the FASB issued SFAS
No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO.133", to defer the effective
date of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, will be
effective for the Company's first quarter of fiscal year 2001.
47
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
1999 concerning the beneficial ownership of CHS common stock by: (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) the Company's
Chief Executive Officer and certain other executive officers of the Company, and
(iv) all executive officers and directors of the Company as a group. Except as
otherwise indicated, the Company believes that all beneficial owners named below
have sole voting and investment power with respect to all shares of CHS common
stock beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER(1)(2)(3) OWNED OWNED
- - --------------------------------- ------------ ------------
<S> <C> <C>
Claudio Osorio(4)(5) 5,497,906 7.7%
Carsten Frank(6) 4,380,287 6.2%
Antonio Boccalandro(5) 38,425 *
Zbynek Kraus(7) 35,000 *
Pierino Lardi(8) 35,000 *
Donald D. Winstead(9) 35,000 *
Jean-Pierre Robinot 0 *
Craig Toll 50,000 *
Burton Emmer(10) 6,000 *
All officers and directors as a group (8 persons) 10,074,620 14.2%
Comtrad(4)(11) 5,497,906 7.7%
Computer Associate International, Inc.(12) 11,579,054 16.3%
</TABLE>
- - ----------
* Less than 1%
(1) The address for each of the executive officers and directors is 2000 N.W.
84th Avenue, Miami, Florida 33122, except for Carsten Frank which is 11
Silver Crest Road, House D, Silver Strand, Clearwater Bay, Hong Kong.
(2) Except as noted, all shares are held beneficially and of record.
(3) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by
such person (and only such person) by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of Common Stock actually
outstanding as of the Record Date.
(4) Includes 1,902,255 shares held of record by Comtrad, Inc. ("Comtrad"), a
wholly-owned subsidiary of Comtrad Holdings, Inc. ("CHI"), 1,177,587 shares
held of record by CHI, 459,910 shares held of record by Penrose Trading Co.
S.A. (a shareholder of CHI and of which Mr. Osorio has effective control),
15,000 shares of Company Common Stock owned by Mr. Osorio and currently
exercisable options to purchase 1,943,154 shares held by Mr. Osorio.
Claudio Osorio owns and controls a majority of
48
<PAGE>
the issued and outstanding capital stock of CHI. Based on the foregoing
relationships and agreements, Claudio Osorio, CHI and Comtrad may be deemed
to have shared voting and investment control over the above-indicated
aggregate number of shares of Common Stock.
(5) Mr. Boccalandro holds currently exercisable options to purchase 38,125
shares of Common Stock. Mr. Boccalandro is a director of CHI, who serves at
the discretion of Mr. Osorio as the controlling shareholder of CHI.
Accordingly, Mr. Boccalandro disclaims any investment or voting control
with respect to the Common Stock owned and controlled by CHI.
(6) Mr. Frank holds currently exercisable options to purchase 90,000 shares of
Common Stock.
(7) Mr. Kraus is a shareholder of Penrose Trading Co. S.A. which is a
shareholder of CHI and the Company. Mr. Kraus disclaims beneficial
ownership of the shares of the Company held by Penrose Trading Co. S.A. and
CHI. Mr. Kraus holds currently exercisable options to purchase 35,000
shares of Common Stock.
(8) Mr. Lardi is the holder of currently exercisable options to purchase 35,000
shares of Common Stock.
(9) Mr. Winstead is the holder of currently exercisable options to purchase
35,000 shares of Common Stock.
(10) Mr. Emmer is the holder of currently exercisable options to purchase a
total of 5,000 shares of Common Stock.
(11) The address for Comtrad and CHI is P.O. Box 660708, Miami Springs, Florida
33266.
(12) The address for Computer Associates International, Inc. is One Computer
Associates Plaza Islandia, New York 11749.
49
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
The following discussion summarizes certain United States federal
income tax consequences of the Exchange Proposal to CHS and its shareholders.
The following summary is based on the Internal Revenue Code of 1986
(the "Code"), Treasury regulations thereunder, judicial decisions and published
rulings and pronouncements of the Internal Revenue Service ("IRS") as in effect
on the date hereof. Changes in these rules, or new interpretations of these
rules, may have retroactive effect and could significantly affect the federal
income tax consequences described below.
The federal income tax consequences of the Exchange Proposal are
complex and subject to uncertainties. CHS has not requested a ruling from the
IRS or an opinion of counsel with respect to any of the tax aspects of the
Exchange Proposal. Thus, no assurance can be given as to the interpretation that
the IRS will adopt. In addition, this summary does not address foreign, state or
local tax consequences of the Exchange Proposal.
ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES. ALL
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE
FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES TO THEM OF THE EXCHANGE
PROPOSAL.
TREATMENT OF CHS
The Exchange Proposal will result in a taxable disposition for federal
income tax purposes of substantially all of the European subsidiaries of CHS.
CHS believes based on preliminary computations that, for federal income tax
purposes, it will recognize a loss on the disposition of the European
subsidiaries. The amount of any such gain or loss, however, has not been fully
determined.
In addition, CHS may recognize cancellation-of-indebtedness ("COD")
income from the Exchange Proposal. In general, for federal income tax purposes,
a debtor will realize COD income if a creditor accepts less than full payment in
satisfaction of a debt. In the case of an exchange where outstanding
indebtedness is canceled in exchange for substantially all of the stock of the
European subsidiaries, the amount of such COD income is, in general, equal to
the excess of the adjusted issue price (including accrued but unpaid interest)
of the indebtedness satisfied less the amount of cash and fair market value of
other property received over the fair market value of such stock of the European
subsidiaries. Such COD income generally is recognized and included in the
corporation's taxable income, except to the extent that the taxpayer is
insolvent (or if the taxpayer is in bankruptcy). The relief accorded to COD
income by the insolvency exclusion rules is not without cost. Certain tax
attributes of the taxpayer, including net operating loss carryovers ("NOLs"),
tax credit and capital loss carryforwards and tax basis in property must be
reduced by the amount of the taxpayer's COD income that is excluded due to
insolvency. Such attribute reductions are made after the determination of the
taxpayer's tax liability for the taxable year in which the debt cancellation
occurs.
Based upon current estimates of the value, CHS believes that
consummation of the Exchange Proposal will not give rise to COD income since a
supportable position can be taken that the outstanding principal of the
indebtedness and accrued and unpaid interest related thereto (to the extent
deducted by CHS for tax purposes) relinquished by NewCo pursuant to the Exchange
Proposal will not exceed the fair market value of the European subsidiaries
received by Newco in the exchange. However, there is no assurance that the IRS
will not take a contrary position. Whether CHS will recognize COD income as a
result of the Exchange Proposal will depend upon the value of the European
subsidiaries at the time of the exchange. Any such COD income will be excluded
from CHS's taxable income to the extent, if any, of its insolvency at such time
(with correlative reduction of its NOLs and tax attributes as described above),
and the remainder will be included in CHS's taxable income.
TREATMENT OF CHS SHAREHOLDERS
The consummation of the Exchange Proposal is not expected to have any
direct federal income tax effect on the common shareholders of CHS because no
proceeds from the Exchange Proposal will be distributed to such shareholders.
DEFAULT UNDER CHS DEBENTURES
The Company failed to make an interest payment of approximately $1.7
million due on November 30, 1999 under the Debentures. The Company does not
believe the default under the Debentures will have any effect on the Exchange
Proposal.
50
<PAGE>
REGULATORY APROVALS
The proposed exchange between CHS and NewCo is subject to European
Commission competition review and cannot be consummated without compliance with
applicable rules of the European Commission.
OTHER MATTERS; SHAREHOLDER PROPOSALS
It is not expected that any matters other than those described in this
Proxy Statement will be brought before the special meeting. If any other matters
are presented, however, it is the intention of the persons named in the
appropriate proxy to vote the proxy in accordance with the discretion of the
persons named in such proxy. Shareholder proposals for inclusion in CHS's proxy
statement for its annual meeting of shareholders to be held in 2000 must be
received at CHS's principal executive offices, 2000 Northwest 84th Avenue, Miami
Florida 33122, no later than February 28, 2000.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The consolidated balance sheets of CHS as of December 31, 1998 and 1997
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998
which are included on pages F-3 through F-29 have been audited by Grant Thornton
LLP, independent certified public accountants as stated in their report
appearing herein (F-2).
WHERE TO FIND MORE INFORMATION
If you would like to request documents from CHS, please contact Richard
Kaminsky, Director for Investor Relations, at CHS's offices located at 2000
Northwest 84th Avenue, Miami, Florida 33122, by March 1, 2000 to receive them
before the special meeting.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote on the matters submitted to you. CHS
has not authorized anyone to provide you with information that is different from
what is contained in this Proxy Statement. This Proxy Statement is dated
____________, 2000. You should not assume that the information contained in the
Proxy Statement is accurate as of any date other than such date, and neither the
mailing of this Proxy Statement to shareholders nor the exchange of assets with
NewCo pursuant to the Exchange Agreement shall create any implication to the
contrary.
51
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
CHS Electronics, Inc.--Historical Financial Statements
Report of Independent Certified Public Accountants......................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............F-3
Consolidated Statements of Earnings for the three years ended
December 31, 1998.......................................................F-4
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1998...........................................F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998.......................................................F-6
Notes to the Consolidated Financial Statements..........................F-7
Condensed Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998.......................................F-30
Condensed Consolidated Statement of Operations for the three and nine
month periods ended September 30, 1999 and 1998 (Unaudited).............F-31
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 (Unaudited)...........................F-32
Notes to Condensed Consolidated Financial Statements (Unaudited)........F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders CHS Electronics, Inc.
We have audited the accompanying consolidated balance sheets of CHS Electronics,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CHS Electronics,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Miami, Florida
March 19, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 176,991 $ 68,806
Accounts receivable:
Trade, less allowance for doubtful account of $34,486 in 1998
and $18,347 in 1997 1,342,126 659,757
Affiliates 35,546 24,604
----------- -----------
1,377,672 684,361
Inventories 1,025,690 693,503
Prepaid expenses and other current assets 101,698 65,255
----------- -----------
TOTAL CURRENT ASSETS 2,682,051 1,511,925
PROPERTY AND EQUIPMENT, NET 120,201 61,468
GOODWILL, NET 737,719 381,830
OTHER ASSETS 32,172 13,599
----------- -----------
$ 3,572,143 $ 1,968,822
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 677,994 $ 309,510
Accounts payable, trade 1,345,059 771,535
Accrued liabilities 125,076 83,309
Amounts due to sellers under acquisition agreements 185,853 54,866
Income taxes payable 13,997 13,934
----------- -----------
TOTAL CURRENT LIABILITIES 2,347,979 1,233,154
LONG TERM DEBT 375,655 61,556
MINORITY INTEREST 10,466 6,348
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding - -
Common stock, authorized 100,000,000 shares at $.001 par value;
outstanding 55,619,475 shares at December 31, 1998 and
48,910,999 shares at December 31, 1997 56 49
Additional paid-in capital 732,035 621,021
Retained earnings 110,793 65,115
Accumulated other comprehensive income (4,841) (18,421)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 838,043 667,764
----------- -----------
$ 3,572,143 $ 1,968,822
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 8,545,773 $ 4,756,383 $ 1,855,540
Cost of goods sold 7,983,736 4,409,714 1,724,432
----------- ----------- -----------
Gross profit 562,037 346,669 131,108
Operating expenses 433,567 257,508 102,235
----------- ----------- -----------
Operating income 128,470 89,161 28,873
Other (income) expense:
Interest income (16,581) (11,470) (3,199)
Interest expense 71,373 35,618 11,712
----------- ----------- -----------
54,792 24,148 8,513
----------- ----------- -----------
Earnings before income taxes and minority
interest in subsidiaries 73,678 65,013 20,360
Income taxes 23,871 13,988 6,086
Minority interest in subsidiaries 4,129 2,634 2,108
----------- ----------- -----------
Net earnings $ 45,678 $ 48,391 $ 12,166
=========== =========== ===========
Net earnings per common share--basic $ 0.88 $ 1.44 $ 0.80
=========== =========== ===========
Net earnings per common share--diluted $ 0.82 $ 1.32 $ 0.78
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(In thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL INCOME
------ --------- --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 11 $ 24,973 $ 4,558 $ 350 $ 29,892
Common stock or other consideration
issued in acquisitions - 16,982 - - 16,982
Common stock issued in public offering 7 50,607 - - 50,614
Stock options exercised 1 281 - - 282
Comprehensive income:
Net earnings - - 12,166 - 12,166 $ 12,166
Foreign currency translation adjustment (5,403) (5,403) (5,403)
--------
Total comprehensive income $ 6,763
---- --------- --------- -------- --------- ========
Balance at December 31, 1996 19 92,843 16,724 (5,053) 104,533
Common stock issued in acquisitions 8 95,720 - - 95,728
Common stock issued in public offering 21 428,195 - - 428,216
Stock options exercised 1 4,263 - - 4,264
Comprehensive income:
Net earnings - - 48,391 - 48,391 $ 48,391
Foreign currency translation adjustment - - - (13,368) (13,368) (13,368)
--------
Total comprehensive income - - $ 35,023
---- --------- --------- -------- --------- ========
Balance at December 31, 1997 49 621,021 65,115 (18,421) 667,764
Common stock issued in acquisitions 7 108,153 - - 108,160
Stock options exercised - 3,233 - - 3,233
Common stock repurchased - (372) - - (372)
Comprehensive income:
Net earnings - - 45,678 - 45,678 $ 45,678
Foreign currency translation adjustment - - - 13,580 13,580 13,580
--------
Total comprehensive income $ 59,258
---- --------- --------- -------- --------- ========
Balance at December 31, 1998 $ 56 $ 732,035 $ 110,793 $ (4,841) $ 838,043
==== ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings $ 45,678 $ 48,391 $ 12,166
Adjustments to reconcile net earnings to net cash
(used in) operating activities:
Depreciation and amortization 46,611 21,789 6,632
Minority interest in net earnings 4,128 2,634 2,108
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net (427,899) (121,163) (118,694)
Accounts receivable-affiliates, net (41,230) (21,363) (2,398)
Inventories (141,159) (139,923) (129,357)
Prepaid expenses and other assets (13,744) 5,404 (22,345)
Accounts payable, trade 277,815 (10,773) 173,244
Accrued liabilities and income taxes 9,709 (33,511) (20,481)
--------- --------- ---------
Net cash (used in) operating activities (240,091) (248,515) (99,125)
--------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets (52,490) (19,511) (11,624)
Cash used in acquisitions, net (189,671) (201,517) (26,876)
--------- --------- ---------
Net cash (used in) investing activities (242,161) (221,028) (38,500)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from public offering - 428,216 50,614
Proceeds from issuance of Senior Notes 200,000 - -
Proceeds from long-term debt 138,961 - -
Proceeds from stock options exercised 3,233 4,263 281
Net borrowing from banks 246,823 74,699 112,453
Repurchase of shares (372) - -
--------- --------- ---------
Net cash provided by financing activities 588,645 507,178 163,348
Effect of exchange rate changes on cash 1,792 (3,966) (1,757)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 108,185 33,669 23,966
Cash at beginning of year 68,806 35,137 11,171
--------- --------- ---------
Cash at end of year $ 176,991 $ 68,806 $ 35,137
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 62,555 $ 30,454 $ 10,064
Income taxes $ 13,900 $ 10,585 $ 3,892
</TABLE>
F-6
<PAGE>
Non-cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
The components of the transactions in each year are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fair value of assets acquired including cash $655,938 $689,550 $ 14,691
Less: Common stock or other consideration issued 173,812 232,748 3,278
-------- -------- --------
Liabilities assumed $482,126 $456,802 $ 11,413
======== ======== ========
</TABLE>
In 1996, $13.7 million was credited to additional paid-in capital representing
additional consideration paid by an affiliated company under acquisition
agreements for subsidiaries now held by the Company and accounted for as an
exchange between entities under common control. Furthermore, these statements of
cash flows exclude the non-cash impact on the net increase of amounts due to
sellers under acquisition agreements of $89.6 million in 1998, $5.7 million
in 1997 and $49.2 million in 1996.
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. NATURE OF OPERATIONS
The Company is an international distributor of computer equipment, peripherals
and software. The products are sold, principally to resellers, in Western
Europe, Eastern Europe, Latin America and Asia.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, wholly owned and majority owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. FOREIGN CURRENCY TRANSLATION
For purposes of preparation of its financial statements, the Company uses the
local currency as the functional currency except in highly inflationary
countries. For subsidiaries where the local currency is the functional currency,
assets and liabilities are translated into United States dollars at the exchange
rate in effect at the end of the year. Revenues and expenses of these
subsidiaries are translated at the average exchange rate during the year. The
aggregate effect of translating the financial statements of foreign subsidiaries
is included in a separate component of shareholders' equity entitled accumulated
other comprehensive income. In the normal course of business, the Company
advances funds to certain of its foreign subsidiaries, which are not expected to
be repaid in the foreseeable future. Translation adjustments resulting from
these advances are included in accumulated other comprehensive income. For
entities in highly inflationary countries, the U.S. dollar is considered the
functional currency and a combination of current and historical rates are used
in translating assets, liabilities, revenues and expenses. The related exchange
adjustments are included in earnings. The Company's operations in Bulgaria,
Mexico, Russia, Turkey and Venezuela are considered to operate in highly
inflationary economies.
4. CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
5. CONCENTRATION OF CREDIT RISK
The Company's credit risk on trade receivables is diversified over several
geographic areas and many customers. The largest customer accounts for less than
1% of sales. The Company performs ongoing credit evaluations of its customers.
In South America, the Company obtains personal guarantees from its customers in
some cases. The Company uses credit insurance in several locations (covering
$694.1 million in receivables at December 31, 1998) and factoring without
recourse in other locations to mitigate risk. The Company provides for estimated
credit losses at time of sale based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
6. INVENTORIES
Inventories, consisting of finished products, are stated at the lower of cost or
market, with cost being determined principally by the first-in first-out method.
F-8
<PAGE>
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. Leasehold improvements and
capital leases are amortized over the lives of respective leases or the service
lives of the improvements whichever is shorter.
The straight-line and accelerated methods of depreciation are followed for
financial reporting purposes. The useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................... 10-50
Leasehold improvements....................... 3-10
Computer equipment........................... 2-5
Office equipment and furniture............... 3-10
Vehicles..................................... 3-10
</TABLE>
Expenditures for renewals and improvements that significantly extend the useful
life of an asset are capitalized. The costs of software used in business
operations are capitalized and amortized over their expected useful lives.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are removed from the accounts and any gain or loss is
recognized at such time.
8. INCOME TAXES
The Company utilizes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability
method specified by SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the current enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is the
result of changes in deferred tax assets and liabilities.
The Company intends to invest the undistributed earnings of substantially all of
its foreign subsidiaries indefinitely. At December 31, 1998 and 1997, the
cumulative amount of undistributed earnings on which the Company has not
recognized United States income taxes was approximately $84 million and $53
million, respectively. However, it is anticipated that United States income
taxes on such amounts would be partially offset by available foreign income tax
credits.
9. REVENUE RECOGNITION
The Company recognizes sales upon shipment, as there is no significant post-sale
obligation and collectibility is reasonably assured. Income from vendor rebates,
discounts, and cooperative advertising is recognized when earned, as a reduction
of the cost of inventory sold or as a reduction of operating expenses.
10. GOODWILL, NET
Goodwill is being amortized on a straight-line basis to earnings over periods
ranging from 20 to 35 years to reflect the Company's current expectation of
future benefit. The Company evaluates the realizability of its goodwill when an
event occurs that indicates that impairment may have occurred. The Company
determines potential impairment by comparing the carrying value to the
undiscounted future cash flows of the related assets. The Company adjusts the
value of goodwill related to a subsidiary if an impairment is indicated by the
difference between the undiscounted cash flows and the carrying value. The
Company considers a history of operating losses
F-9
<PAGE>
to be a primary indicator of potential impairment. Assets are grouped and
evaluated for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of cash flows of other groups of assets.
Assets are generally grouped at the country level of operations. The Company
deems an asset to be impaired if a forecast of undiscounted future operating
cash flows directly related to the asset, including disposal value if any, is
less than its carrying amount. All of the Company's goodwill is identified with
the assets acquired. As of December 31, 1998 and 1997, no impairment was
indicated. Accumulated amortization was $37.0 million and $10.8 million at
December 31, 1998 and 1997, respectively.
11. EARNINGS PER COMMON SHARE
In calculating earnings per common share, basic earnings per share is computed
by dividing net earnings by the weighted averaged number of common shares
outstanding. Diluted earnings per share includes the dilution caused by common
stock options and warrants and the shares that would be issued in existing earn
outs based upon applying the earn out multiple to actual earnings to date and
dividing by the market price at period end. In certain earn outs where the
Company has the option of settling the earn out in cash or shares, the Company's
current presumption is it will use cash and therefore, such shares have not been
included in the calculation of diluted earnings per share. The weighted average
number of shares for basic earnings per share was 51,616,109, 33,527,256, and
15,243,672 in 1998, 1997, and 1996, respectively. The weighted average number of
shares used in the diluted computation was 55,917,007, 36,592,368, and
15,656,178 in 1998, 1997, and 1996, respectively.
The following table presents a reconciliation of the income and weighted average
number of shares of the basic and diluted earnings per share computations
(amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $45,678
-------
Net earnings per share--basic 45,678 51,616 $0.88
------- ------- =====
Effect of dilutive shares:
Stock options and warrants outstanding - 1,152
Earnout contingencies - 3,149
------- -------
Net earnings per share--diluted $45,678 55,917 $0.82
======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $48,391
-------
Net earnings per share--basic 48,391 33,527 $1.44
------- ------ =====
Effect of dilutive shares:
Stock options and warrants outstanding - 1,434
Earnout contingencies - 1,631
------- ------
Net earnings per share--diluted $48,391 36,592 $1.32
======= ====== =====
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $12,166
-------
Net earnings per share--basic 12,166 15,244 $0.80
------- ------ =====
Effect of dilutive shares:
Stock options and warrants outstanding - 412
------- ------
Net earnings per share--diluted $12,166 15,656 $0.78
======= ====== =====
</TABLE>
Options to purchase approximately 4.0 million shares of common stock at a range
from $15.75 to $25.46 were not included in the computation of the diluted
earnings per share for the year ended December 31, 1998 since they would have
had an anti-dilutive effect.
12. STOCK OPTIONS
Options granted under the Company's 1994 Stock Incentive Plan, the 1996 and 1997
Chief Executive Officer stock option plans and the Directors and Officers 1997
stock option plan are accounted for under APB Opinion 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES". As to grants requiring shareholder approval, the Company
considers the date of grant to be the date of action by the Board of Directors
when, on such date, shareholder approval is deemed to be perfunctory.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Company operates internationally with distribution facilities in various
locations around the world. The Company reduces its exposure to fluctuations in
foreign exchange rates by creating offsetting positions through the use of
derivative financial instruments, primarily foreign exchange forward contracts.
The market risk related to the foreign exchange agreements is offset by changes
in the valuation of the underlying items being hedged. The majority of the
Company's derivative financial instruments have terms of 90 days or less.
Occasionally, the Company may enter into derivative financial instruments for
speculative purposes. The Company is not party to leveraged derivatives.
The notional amount of forward exchange contracts and options is the amount of
foreign currency bought or sold at maturity. Notional amounts are indicative of
the extent of the Company's involvement in the various types and uses of
derivative financial instruments and are not a measure of the Company's exposure
to credit or market risks through its use of derivatives. The estimated fair
value of derivative financial instruments represents the amount required to
enter into like off-setting contracts with similar remaining maturities based on
the end of year spot rates, which approximate quoted market rates. As of
December 31, 1998, the notional amount of foreign exchange forward contracts
outstanding against trade payables was $269.3 million, which approximated fair
value.
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these items.
The carrying amounts of debt issued pursuant to bank credit agreements
approximate fair value because interest rates on those instruments approximate
current market interest rates. The fair value of long-term fixed interest rate
debt is subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. Changes in interest rates will affect the market value but do not
impact earnings or cash flows. Conversely for floating rate debt, interest rate
changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant. The estimated
fair value of the Company's total long-term debt (including current portion) at
December 31, 1998 was $398.4 million. Fair values were determined from quoted
market prices, where available, and from investment bankers using current
interest rates considering credit risk and the remaining terms to maturity.
F-11
<PAGE>
14. NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company is currently assessing the effects of adopting SFAS
No. 133, and has not yet made a determination of the impact on its financial
position or results of operations. SFAS No. 133 will be effective for the
Company's first quarter of fiscal year 2000.
15. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
NOTE B--ACQUISITIONS
On July 1, 1998, the Company acquired a majority of the outstanding shares of
Metrologie International SA ("Metrologie"), a distributor of hardware and
software to more than 15,000 resellers in France, the United Kingdom and Spain
(all outstanding shares of Metrologie were acquired before the end of 1998). The
purchase price for the entire equity interests of Metrologie was approximately
$93.7 million. Metrologie had sales of $433.4 million for the six months ended
June 30, 1998 and $883.2 million for the year ended December 31, 1997.
Metrologie is ISO-9001 certified to perform configurations of high-end network
solutions and work stations which the Company believes will be strategically
important in strengthening the Company's ability to provide high-end platforms
in Europe. As a result of this acquisition, the Company has become the largest
distributor of microcomputer products in France and Spain.
On March 9, 1998, the Company acquired an 80% interest in the Hong Kong,
Malaysia and Singapore subsidiaries of SiS Distribution Ltd. ("SiS"), a Hong
Kong based distributor, for $70.4 million, and paid $28.2 million of such amount
on such date (representing 40% of the purchase price). Under the terms of the
agreement, as modified, the remainder of the purchase price is due in cash in
the second quarter of 1999. SiS had sales of $346.8 million during 1997.
During 1998, the Company completed 14 other acquisitions which were considered
not to be significant. All acquisitions have been accounted for under the
purchase method and accordingly, the results of such acquired entities have been
included in the consolidated operating results since their acquisition dates.
In 1997 the Company made 15 acquisitions, of which three were significant.
Effective October 1997, the Company completed the acquisition of Santech Micro
Group ASA ("Santech"), for approximately $125 million. Santech was the largest
distributor of microcomputer products in Scandinavia with operations in Norway,
Sweden and Denmark and had revenues of $718 million in 1996. Santech distributes
the products of the same vendors as other subsidiaries of the Company. The
acquisition of Santech has been accounted for under the purchase method and,
accordingly the results of Santech have been included in the consolidated
operating results since the date of acquisition. The acquisition of Santech
resulted in the recognition of $107.3 million of goodwill.
Santech's operating results during 1997, included in the pro-forma amounts at
the end of this note, were adversely impacted as a result of restructuring its
operations after a July 1996 merger.
F-12
<PAGE>
Operating results were also impacted adversely by the implementation of a new
computer system in the first six months of 1997. The adverse impact included
costs associated with reduction in the number of its product lines and the
number of employees from 450 to 320. The Company accrued approximately $2
million for the costs of consolidating former Santech operations. The reserve
consists of inventory reserves, severance costs, lease termination costs and
other costs. As of December 31, 1998, $1.3 million had been charged against such
reserve.
Effective August 1997, the Company completed the acquisition of Karma
International S.A. ("Karma"). Karma was a distributor of personal computer
components to over 10,000 customers in Europe, the Middle East and Asia. The
purchase price for Karma was $160 million and was funded through (i) $74 million
in cash and (ii) 4,813,432 shares of unregistered common stock. Karma's product
line includes mass storage products, CPUs, memory chips, motherboards, sound,
video and other cards and monitors. Karma operated in 18 countries through 28
offices in Europe, the Middle East and Asia. Karma had net sales of
approximately $700 million in 1996. The acquisition of Karma has been accounted
for under the purchase method and, accordingly the results of Karma have been
included in the consolidated operating results since the date of acquisition.
The acquisition of Karma resulted in the recognition of $126.4 million of
goodwill.
Effective January 1997, the Company completed the acquisition of Frank & Walter
Computer GmbH ("Frank & Walter") for 3,300,000 unregistered shares of common
stock. Frank & Walter had net sales of approximately $686 million in 1996. The
Company believes that Frank & Walter was, at the time of acquisition, the fourth
largest computer distributor in Germany with over 10,000 active dealers. The
acquisition of Frank & Walter has been accounted for under the purchase method
and, accordingly the results of Frank & Walter have been included in the
consolidated operating results since the date of acquisition. The amounts
allocated to assets acquired and liabilities assumed resulted in a recognition
of $26.9 million of goodwill.
The Company completed other acquisitions during 1997 which were considered not
to be significant. Such acquisitions have been accounted for under the purchase
method and accordingly, the results of such acquired entities have been included
in the consolidated operating results since their acquisition dates.
In 1996 the Company acquired 18 companies. The largest acquisition was of seven
companies comprising the European and Latin American businesses of a competitor,
Merisel, Inc. These seven companies were acquired for cash and debt assumptions.
The total consideration paid was approximately $148 million consisting of $30
million of cash and $118 million of debt assumed or refinanced. The Company
financed the acquisition primarily through borrowing or factoring at each
subsidiary acquired. The acquisition has been accounted for as a purchase,
effective as of September 30, 1996. The cost of the acquisition has been
allocated to the assets acquired based on their fair values. This initially
resulted in approximately $10.5 million of goodwill. In the second and third
quarters of 1997, certain reserves initially established were determined not to
be required, resulting in a reduction of goodwill to $4.6 million.
The Company originally accrued approximately $12.8 million for the consolidation
of former Merisel and CHS operations. The reserve consisted of lease
termination--$4.1 million, write-off of leasehold improvements and computer
systems--$4.9 million, and accounts receivable and other costs--$3.8 million.
Through December 31, 1998, $11.0 million has been charged against this accrual.
In June 1996, the Company acquired 100% of an unaffiliated company in Russia for
consideration based on a multiple of that company's net income in 1996. The
acquisition was initially recorded at no consideration, which approximated the
value of net assets acquired. Subsequently, the agreement was modified to
measure the value of the Company based 50% on 1996 results and 50% on 1997
results. The 1996 portion was paid in cash in 1997 and the 1997 portion was paid
in 1998 by issuing 1,426,191 shares of common stock. In 1996 and 1997, $20.6 and
$25.3 million was recorded as purchase price and goodwill.
F-13
<PAGE>
In April 1996, the Company acquired 100% of an unaffiliated company in
Switzerland for consideration based on a multiple of 1996 net earnings but not
less than $1.7 million. The acquisition was initially recorded at $1.7 million
resulting in no goodwill. Subsequently, the agreement was modified to base the
price on results through September 30, 1996. In the 1996 fourth quarter, 274,855
shares of common stock were issued and goodwill of $870,000 was recorded.
In March 1996, the Company acquired six companies from Comtrad, Inc., an
affiliate, for a reduction of indebtedness of $7.8 million. These acquisitions
have been accounted for as an exchange between entities under common control in
a manner similar to a pooling of interests. Accordingly, these acquisitions have
been included in the accompanying financial statements from the date acquired by
Comtrad. The companies in Bulgaria, Croatia, Lithuania and Romania were started
by Comtrad in 1993 and 1994 for a minimal investment and had insignificant
operations. They are treated as if Comtrad acquired them on December 31, 1994.
Sixty-five percent of a company in Slovakia was acquired in early 1994 for a
minimal investment and 1994 results were insignificant. The remaining 35% was
acquired by Comtrad for a contingent payment which was insignificant and was
recorded in 1997. Comtrad acquired the Brazil company in November 1994 for
Comtrad common shares valued at $762,000. The acquisition was recorded by the
Company as of December 31, 1994 at this value, resulting in goodwill of $2.5
million. An additional amount of $240,000 was paid by Comtrad in 1996 to
complete its acquisition of this company, which had the effect of increasing
goodwill to $2.8 million.
In February 1996, the Company acquired 51% of an unaffiliated company in Hungary
for consideration based on 51% of the book value of equity at December 31, 1996
plus a multiple of 51% of 1996 net earnings. Based on 1996 results, the purchase
price was fixed at $17.6 million resulting in goodwill of $15.8 million. The
sellers elected to receive the proceeds in cash rather than stock. In the second
quarter of 1997 the agreement was modified to measure the value of the company
based 75% on 1996 results and 25% on 1997 results. The 1996 amount was paid in
1997. As a result, goodwill in 1996 was reduced by $3.8 million. The 1997
amount, estimated at $5.6 million, was recorded in 1997 and paid in 1998 and
increased goodwill.
The following represents the unaudited pro forma results of operations assuming
all significant 1998 and 1997 acquisitions had taken place on January 1, 1997
(amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $9,461,281 $8,247,223
Net earnings 19,083 13,403
Net earnings per share--basic $0.37 $0.40
Net earnings per share--diluted $0.34 $0.37
</TABLE>
Pro forma adjustments have been made to add goodwill amortization. The pro forma
information is not necessarily indicative of the actual results of operations
that would have occurred had the acquisitions taken place on January 1, 1997, or
of results which may occur in the future.
F-14
<PAGE>
NOTE C--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts:
Beginning balance $ 18,347 $ 14,830 $ 4,388
Provision for bad debt 20,683 11,636 3,412
Write-offs (17,324) (14,162) (3,775)
Acquired through acquisition 12,780 6,043 10,805
-------- -------- --------
Ending balance $ 34,486 $ 18,347 $ 14,830
======== ======== ========
</TABLE>
NOTE D--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings $ 41,451 $ 19,358
Office equipment and furniture 44,129 22,047
Leasehold improvements 23,931 7,330
Computer equipment 55,645 43,470
Vehicles and other 6,332 3,497
------------ ------------
171,488 95,702
Less accumulated depreciation and amortization 51,287 34,234
--------- --------
$ 120,201 $ 61,468
========= ========
</TABLE>
NOTE E--INCOME TAXES
The components of earnings (loss) before income taxes and minority interest in
subsidiaries consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic $ (2,364) $ 3,450 $ 1,361
Foreign 76,041 61,563 18,999
-------- -------- --------
Total $ 73,677 $ 65,013 $ 20,360
======== ======== ========
</TABLE>
F-15
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Current:
<S> <C> <C> <C>
U.S. Federal $ 1,444 $ 2,243 $ 1,721
U.S. State 167 329 228
Foreign 16,878 8,493 4,520
-------- -------- --------
18,489 11,065 6,469
-------- -------- --------
Deferred:
U.S. Federal (111) (569) (258)
U.S. State (18) (92) (47)
Foreign 5,511 3,584 (78)
-------- -------- --------
5,382 2,923 (383)
-------- -------- --------
Total $ 23,871 $ 13,988 $ 6,086
======== ======== ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating losses of foreign subsidiaries $ 47,587 $ 16,839
Accruals not currently deductible 2,820 1,896
Allowances for bad debts 2,061 1,115
Other - 27
-------- --------
Total deferred tax assets 52,468 19,877
-------- --------
Deferred tax liabilities:
Inventory differences (7,861) (7,424)
Other (461) -
-------- --------
Total deferred tax liabilities (8,322) (7,424)
-------- --------
44,146 12,453
Valuation allowance (41,884) (13,676)
-------- --------
Total $ 2,262 $ (1,223)
======== ========
</TABLE>
The net deferred tax asset (liability) is reflected in the accompanying
consolidated balance sheets in other assets as of December 31, 1998 and in
income taxes payable as of December 31, 1997.
F-16
<PAGE>
The major elements contributing to the difference between taxes at the U.S.
federal statutory tax rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at the United States statutory rate $ 25,050 $ 22,104 $ 6,922
Foreign income subject to tax at other than U.S. statutory rate (11,630) (15,690) (1,356)
Losses without tax benefit 4,693 5,127 1,329
Non deductible goodwill amortization 8,563 2,834 255
Utilizations of net operating losses of foreign subsidiaries (2,181) (759) (1,196)
Other (624) 372 132
-------- -------- --------
Income taxes at the effective tax rate $ 23,871 $ 13,988 $ 6,086
======== ======== ========
</TABLE>
At December 31, 1998, the Company has net operating loss carry forwards in
certain foreign jurisdictions that expire as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 15,248
2000 2,003
2001 1,013
2002 12,557
2003 1,705
2004 - 2008 13,634
No expiration 82,832
---------
Total $ 128,992
=========
</TABLE>
In assessing the realization of net operating loss carry forwards, management
considers whether it is more likely than not that some portion or all of these
net operating loss carry forwards will not be realized. The ultimate realization
of these net operating loss carry forwards and other deferred tax assets are
dependent upon the generation of future taxable income during the periods prior
to the expiration of the operating loss carry forwards. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
operating loss carry forward periods, management believes it is more likely than
not the Company will not realize the benefits of all of these net operating loss
carry forwards and other deferred tax assets. Accordingly, a valuation allowance
has been established since the full realization of such benefits is not likely.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1998 will be allocated to income from
continuing operations or reduce goodwill. In the event that the tax benefits
relating to net operating losses are realized, $24.0 million of such benefits
would reduce future provision for income taxes and $23.6 million would reduce
goodwill.
NOTE F--NOTES PAYABLE AND LONG TERM DEBT
Several of the Company's subsidiaries have short-term credit lines with local
banks. As of December 31, 1998, of the $882.5 million aggregate amount available
under these agreements, $648.3 million was outstanding. Generally, borrowings
under such lines are collateralized by receivables or inventory. The lines are
principally of one year duration and are renewable by the banks. Some of these
lines contain restrictions on dividends to the parent company. In 1998, the
maximum and average amounts outstanding were $777.0 million and $614.5 million,
respectively. The weighted average interest rate at December 31, 1998 was 6.5%.
F-17
<PAGE>
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes ("Senior Notes") due 2005. The Notes
bear interest of 9.875% per annumn and interest is
payable semi-annually on April 15 and October 15
beginning October 15, 1998. The Senior Notes are
redeemable at the option of the Company, in whole
or in part, at any time on or after April 15,
2002, initially at 104.938% of their principal
amount, plus accrued and unpaid interest, on or
after April 15, 2004. Certain of the Company's
direct and indirect wholly-owned subsidiaries
fully and unconditionally jointly and severally
guaranteed the Senior Notes on an unsecured
basis. $200,000 $ -
Three subsidiaries in Germany share a revolving
credit agreement of DM 325 million ($195 million
at December 31, 1998) with a financial
institution. The agreement, which expires December
2001, provides for advances based upon eligible
accounts receivable and inventories. Interest is
at a variable market rate based on a German base
rate (5.2% at December 31, 1998). The debt is
secured by the borrowers' receivables, inventories
and intangible assets amounting to $376.5 million
at December 31, 1998. The agreement contains
certain restrictive covenants, including the
ability by the borrowers to incur additional
indebtedness. 138,961 -
Two subsidiaries serving Latin America share a $60
million revolving credit agreement with a
financial institution. The agreement, which
expires in October 1999, provides for advances and
letters of credit based upon eligible accounts
receivable and inventories. Interest is at a
variable market rate based on the prime rate of
the lender or LIBOR, at the borrowers' option
(9.5% at December 31, 1998). All of the borrowers'
assets, including accounts receivable and
inventories totaling $83.3 million at December 31,
1998, are pledged as collateral. The agreement
contains certain restrictive covenants, including
limitations on transactions with affiliated
companies and employee loans. The agreement also
limits the ability of these companies to pay
dividends to the Company to 50% of the borrowers'
net income. 21,019 $46,286
Mortgages on buildings, interest ranging
from 3.9% to 11.0% with maturities
through 2009, collateralized by
buildings, accounts receivables and
inventories with net book value at
December 31, 1998 of $91.7 million. 15,262 11,318
Capitalized leases, collateralized by
computer equipment, bearing interest
ranging from 4% to 22% with maturities
through September 2002. 13,655 10,983
Industrial bonds, unsecured, bearing
interest rate of 2%, due August 2000 9,462 -
Other debt 6,996 484
-------- -------
Total 405,355 69,071
Less current portion of long-term debt,
included in notes payable 29,700 7,515
-------- -------
Total long-term debt $375,655 $61,556
======== =======
</TABLE>
F-18
<PAGE>
Scheduled maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- - ------------------------
<S> <C>
1999 $29,700
2000 23,657
2001 143,709
2002 1,524
2003 693
Thereafter 206,072
</TABLE>
In April 1998, the Company issued the Senior Notes. The Notes are effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries that are not guarantors. The guarantor subsidiaries are principally
non-operating subsidiaries in the United States. The Senior Notes contain
certain covenants which, among other things, restrict the ability of the Company
and certain of its subsidiaries to incur additional indebtedness; pay dividends
or make distributions in respect to their capital stock; enter into certain
transactions with shareholders and affiliates; make certain investments and
other restricted payments; create liens; enter into certain sale and leaseback
transactions and sell assets. The covenants are, however, subject to a number of
exceptions and qualifications.
The following condensed consolidated financial information presents the results
of operations, financial position and cash flows of the Company (on a stand
alone basis), the guarantor subsidiaries (on a combined basis), the
non-guarantor subsidiaries (on a combined basis) and the eliminations necessary
to arrive at the consolidated results for the Company. The results of operations
and cash flows are presented below as if the guarantor subsidiaries were in
place for all periods presented. The Company and subsidiary guarantors have
accounted for investments in their respective subsidiaries on an unconsolidated
basis using the equity method of accounting.
F-19
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 2,063 $ (1,245) $ 176,173 $ - $ 176,991
Accounts receivable 199 131,392 1,246,081 - 1,377,672
Intercompany receivables 179,574 34,295 262,332 (476,201) -
Inventories - 5,598 1,020,092 - 1,025,690
Other current assets 814 2,038 98,846 - 101,698
----------- ----------- ----------- ----------- -----------
Total current assets 182,650 172,078 2,803,524 (476,201) 2,682,051
Property and equipment, net 1,538 7,015 111,648 - 120,201
Cost in excess of assets acquired, net - - 737,719 - 737,719
Investments in affiliated companies 1,037,660 1,364,888 - (2,402,548) -
Other assets 10,873 771 20,528 - 32,172
----------- ----------- ----------- ----------- -----------
Total assets $ 1,232,721 $ 1,544,752 $ 3,673,419 $(2,878,749) $ 3,572,143
=========== =========== =========== =========== ===========
Notes payable $ - $ 8,782 $ 669,212 $ - $ 677,994
Intercompany payables 2,343 291,179 182,679 (476,201) -
Accounts payable 5,092 14,736 1,325,231 - 1,345,059
Accrued expenses 4,663 893 119,520 - 125,076
Amounts due to sellers 185,853 - - - 185,853
Income taxes payable and other
current liabilities (3,273) (150) 17,420 - 13,997
----------- ----------- ----------- ----------- -----------
Total current liabilities 194,678 315,440 2,314,062 (476,201) 2,347,979
Long term debt 200,000 4,904 170,751 - 375,655
Minority interests - - - 10,466 10,466
Shareholders' equity 838,043 1,224,408 1,188,606 (2,413,014) 838,043
----------- ----------- ----------- ----------- -----------
$ 1,232,721 $ 1,544,752 $ 3,673,419 $(2,878,749) $ 3,572,143
=========== =========== =========== =========== ===========
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
Cash $ 2,367 $ 83 $ 66,356 $ - $ 68,806
Accounts receivable 17,356 1 667,004 - 684,361
Intercompany receivables 191,627 - 251,010 (442,637) -
Inventories - - 693,503 - 693,503
Other current assets 1,454 316 69,806 (6,321) 65,255
----------- ----------- ----------- ----------- -----------
Total current assets 212,804 400 1,747,679 (448,958) 1,511,925
Property and equipment, net 2,247 24 59,197 - 61,468
Cost in excess of assets acquired, net - - 381,830 - 381,830
Investments in affiliated companies 517,774 289,244 - (807,018) -
Other assets - - 13,599 - 13,599
----------- ----------- ----------- ----------- -----------
Total assets $ 732,825 $ 289,668 $ 2,202,305 $(1,255,976) $ 1,968,822
=========== =========== =========== =========== ===========
Notes payable $ - $ - $ 309,510 $ - $ 309,510
Intercompany payables 1,835 145,217 295,199 (442,251) -
Accounts payable 1,207 - 770,328 - 771,535
Accrued expenses 7,153 44 76,112 - 83,309
Amounts due to sellers 54,866 - - - 54,866
Income taxes payable and other
current liabilities - - 14,607 (673) 13,934
----------- ----------- ----------- ----------- -----------
Total current liabilities 65,061 145,261 1,465,756 (442,924) 1,233,154
Long term debt - - 70,134 (8,578) 61,556
Minority interests - - - 6,348 6,348
Shareholders' equity 667,764 144,407 666,415 (810,822) 667,764
----------- ----------- ----------- ----------- -----------
$ 732,825 $ 289,668 $ 2,202,305 $(1,255,976) $ 1,968,822
=========== =========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 105,827 $8,439,946 $ - $8,545,773
Cost of goods sold - 98,275 7,885,461 - 7,983,736
---------- ---------- ---------- ---------- ----------
Gross profit - 7,552 554,485 - 562,037
Operating expenses 4,812 5,266 423,489 - 433,567
---------- ---------- ---------- ---------- ----------
Operating income (4,812) 2,286 130,996 - 128,470
Other (income) expense, net 10,435 884 43,473 - 54,792
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries (15,247) 1,402 87,523 - 73,678
Provision for income taxes (2,627) 1,671 24,827 - 23,871
Equity in (earnings) of affiliated
companies, net of tax (58,298) (62,282) - 120,580 -
Minority interest - - - 4,129 4,129
---------- ---------- ---------- ---------- ----------
Net earnings $ 45,678 $ 62,013 $ 62,696 $ (124,709) $ 45,678
========== ========== ========== ========== ==========
<CAPTION>
1997
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ - $5,026,155 $ (269,772) $4,756,383
Cost of goods sold - - 4,684,548 (274,834) 4,409,714
---------- ---------- ---------- ---------- ----------
Gross profit - - 341,607 5,062 346,669
Operating expenses 1,375 181 255,952 - 257,508
---------- ---------- ---------- ---------- ----------
Operating income (1,375) (181) 85,655 5,062 89,161
Other (income) expense, net (2,771) 892 25,647 380 24,148
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries 1,396 (1,073) 60,008 4,682 65,013
Provision for income taxes 308 (313) 12,623 1,370 13,988
Equity in (earnings) of affiliated -
companies, net of tax (47,303) (47,351) - 94,654 -
Minority interest - - - 2,634 2,634
---------- ---------- ---------- ---------- ----------
Net earnings $ 48,391 $ 46,591 $ 47,385 $ (93,976) $ 48,391
========== ========== ========== ========== ==========
<CAPTION>
1996
-------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net sales $ - $ - $1,879,707 $ (24,167) $1,855,540
Cost of goods sold - - 1,748,599 (24,167) 1,724,432
---------- ---------- ---------- ---------- ----------
Gross profit - - 131,108 - 131,108
Operating expenses 1,408 1 103,027 (2,201) 102,235
---------- ---------- ---------- ---------- ----------
Operating income (1,408) (1) 28,081 2,201 28,873
Other (income) expense, net 1,197 - 7,316 - 8,513
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries (2,605) (1) 20,765 2,201 20,360
Provision for income taxes 560 - 5,526 - 6,086
Equity in (earnings) of affiliated -
companies, net of tax (15,331) (15,246) - 30,577 -
Minority interest - - - 2,108 2,108
---------- ---------- ---------- ---------- ----------
Net earnings $ 12,166 $ 15,245 $ 15,239 $ (30,484) $ 12,166
========== ========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in
operating activities $ - $ - $(240,091) $ - $(240,091)
Net cash provided (used) in
investing activitie $(203,165) $ (1,245) $ (37,751) $ - $(242,161)
Net cash provided (used) in
financing activities $ 202,861 $ - $ 385,784 $ - $ 588,645
Effect of exchange rate $ - $ - $ 1,792 $ - $ 1,792
Cash at beginning $ 2,367 $ - $ 66,439 $ - $ 68,806
Cash at end $ 2,063 $ (1,245) $ 176,173 $ - $ 176,991
<CAPTION>
1997
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $(248,515) $ - $(248,515)
Net cash provided (used) in
investing activitie $(201,517) $ - $ (19,511) $ - $(221,028)
Net cash provided (used) in
financing activities $ 203,308 $ - $ 303,870 $ - $ 507,178
Effect of exchange rate $ - $ - $ (3,966) $ - $ (3,966)
Cash at beginning $ 576 $ - $ 34,561 $ - $ 35,137
Cash at end $ 2,367 $ - $ 66,439 $ - $ 68,806
<CAPTION>
1996
--------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ---------- ---------- ------------ ------------
Net cash provided (used) in
operating activities $ - $ - $ (99,125) $ - $ (99,125)
Net cash provided (used) in
investing activities $ (26,876) $ - $ (11,624) $ - $ (38,500)
Net cash provided (used) in
financing activities $ 27,367 $ - $ 135,981 $ - $ 163,348
Effect of exchange rate $ - $ - $ (1,757) $ - $ (1,757)
Cash at beginning $ 85 $ - $ 11,086 $ - $ 11,171
Cash at end $ 576 $ - $ 34,561 $ - $ 35,137
</TABLE>
As discussed above, borrowings of certain of the Company's subsidiaries contain
restrictions on dividends to the Company. For the year ended December 31, 1998,
earnings before interest expense, income taxes and depreciation and amortization
("EBITDA") of such subsidiaries represented 7.6% of the Company's consolidated
EBITDA. The Company has not presented separate financial statements and other
disclosures concerning the guarantors and non-guarantor subsidiaries because it
has determined they would not be material to investors.
At December 31, 1998, the Company was not in compliance with a minimum tangible
net worth covenant contained in a short term credit facility. The Company
obtained a waiver from the lender.
NOTE G--COMPREHENSIVE INCOME
In 1998 the Company adopted Statement of Financial Accounting Standards No. 130,
"REPORTING COMPREHENSIVE Income". SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income and its components in the
Company's consolidated financial statements. Comprehensive income is defined in
SFAS No. 130 as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The primary difference from net income as reported is the
change in cumulative foreign currency translation adjustment.
NOTE H--CONCENTRATIONS
Substantially all of the Company's operations are outside the United States with
most of the Company's sales made in local currencies other than the U.S. dollar.
In 1998, the largest amount of sales occurred in Germany (in German marks),
which comprised 19% of total sales. The Company also had sales of approximately
11% in France (in French francs) and 9% in England (in British pounds). While
these countries are considered politically stable, there is risk that economic
difficulties in any of these countries could adversely affect the Company's
business. The Company also has operations in less politically stable countries.
In some countries, certain purchases and the resulting payables are in
currencies (principally the U.S. dollar) different than the functional currency.
Further, certain subsidiaries have loans receivable or payable denominated in
currencies other than their functional currency. Transaction gains and losses on
these receivables and liabilities are included in the determination of earnings
for
F-22
<PAGE>
the relevant periods. In 1998, 1997 and 1996 foreign currency gains were
$5,232,000, $1,219,000, and $1,559,000, respectively, which are included in
operating expenses in the accompanying consolidated statements of earnings.
At December 31, 1998, the face value of foreign exchange forward contracts
against trade payables was $269.3 million, which approximated the fair market
value of the contracts. At December 31, 1998, approximately $436.6 million of
accounts payable were attributable to foreign currency liabilities denominated
in currencies other than the subsidiaries' functional currencies (principally
$357.8 million in U.S. dollars and $50.8 million in German marks). The largest
unhedged amounts of trade payables were in subsidiaries in Czech Republic, Hong
Kong, Poland, Argentina and Mexico.
In some countries there are risks of continuing periodic devaluations or of
large devaluations. In these countries, no hedging mechanism exists. The Company
has risks in these countries that such devaluations could cause economic loss
and negatively impact future sales since its product cost would increase in
local terms after such devaluations. The Company attempts to limit its economic
loss through structural mechanisms of limiting its holdings of local currency
and receivables to the amount of its local currency payables.
Products of Hewlett-Packard (HP), accounted for 16%, 19%, and 34% of the
Company's sales for 1998, 1997 and 1996, respectively. Sales of products
supplied by Microsoft accounted for 10%, 10% and 12% during 1998, 1997 and 1996,
respectively. The third largest supplier in 1998 was IBM with 10% of the
Company's net sales. HP has the right to terminate its distribution agreement
with any Company subsidiary if the subsidiary is unable to cure, within a
reasonable period of time, any violation of the agreement after having received
notice from HP of the violation. Each Company subsidiary has the right to
terminate the HP agreement on 90 days notice. Each Company subsidiary believes
that its relationship with HP is good, and has no reason to believe that its
distribution arrangement will not be a long-term relationship. No assurance can
be given, however, that HP will renew each Company subsidiary's agreement at the
time of its annual review or in subsequent years. Management has not formulated
alternative plans of action in the event the HP contracts are terminated.
NOTE I--LEASE OBLIGATIONS AND OTHER CONTINGENCIES
The Company leases equipment and office and warehouse space under non-cancelable
operating leases. The following is a schedule by year of the minimum rental
commitments remaining on leased property and equipment (in thousands) with terms
greater than one year:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, TOTAL
- - ------------------------ -----
<S> <C>
1999 $19,617
2000 17,382
2001 15,474
2002 12,415
2003 10,658
Subsequent years 16,957
</TABLE>
Total rental expense was $25,281,000, $14,542,000 and $6,715,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
In March 1999, DARBY V. CHS ELECTRONICS, INC. ET AL., case No. 99-8186, was
filed in the United States District Court, Southern District of Florida. The
complaint, which purports to be a class action complaint, alleges that the
Company and two of its officers violated federal securities laws in connection
with financial reporting and disclosure during the period February 27, 1997
through March 10, 1999. The suit purports to be on behalf of those who purchased
CHS Electronics common stock during that time frame. The Company, in connection
with its legal counsel, is in the process of carefully reviewing the allegations
of the complaint. However, the Company believes that the claims are without
merit and intends to vigorously defend the suit. The Company is aware that
certain other purported class actions have been filed. However, the Company has
not received service of any such other suits.
F-23
<PAGE>
On October 12, 1998 Metro AG of Germany announced that its planned sale of the
Vobis Group to the Company would not be concluded. Metro has attempted to draw
under a DM 20 million (approximately $12 million) letter of credit provided to
Metro by the Company in connection with the transaction. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met. Metro has also announced that it may seek damages for an unspecified amount
against the Company as a result of the transaction not being consummated. The
purchase agreement calls for disputes to be settled by arbitration in Germany.
The purchase agreement does not provide for a break-up fee. Although no
prediction as to the outcome of either the attempted draw on the letter of
credit or any actions which may be commenced in connection with the purchase
agreement can be made at this time, the Company believes that it has defenses to
any potential claims of Metro and intends to assert them vigorously. As of the
date of this filing, no arbitration proceedings had been commenced by Metro.
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
NOTE J--RELATED PARTY TRANSACTIONS
A member of the Board of Directors, who is a more than 5% shareholder and
officer of the Company has ownership interests and control over other companies
that do business with the Company. The accompanying financial statements include
the following transactions and balances which relate to this individual or his
related entities (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Sales to such related parties $57,034 $102,724
Purchases from such related parties 5,004 57,376
Commissions paid to such related parties 2,054 10,116
Rebates received from such related parties 4,000 11,163
Due from the individual above 2,178 -
Net amount due the Company 8,088 12,193
</TABLE>
The rebates received pertain to vendor rebates passed from such related parties
to the Company.
In an agreement dated December 1998 and subsequently amended in March 1999, CHS
acquired certain of these companies for the net of 1.7 million shares of common
stock and $4.0 million in cash. In connection with the acquisitions, the Company
recorded goodwill of $32.7 million. In January 1999, the Company acquired for
$5.4 million the remaining entity which had transactions with the Company. The
Company expects a significant reduction in such transactions in the future.
During 1998, the Company sold two companies and rights to entities in which the
above individual has a minority ownership interest. The companies and rights
sold were ancillary operations acquired as part of the acquisition of Frank &
Walter in January 1997. The companies were sold for cash of $6.7 million, all of
which was collected during 1999. The gain of $6.9 million was included in
operating expenses in the accompanying consolidated statement of earnings. The
after tax profit on the sales was $3.8 million.
At December 31, 1998 and 1997, the Company carried a receivable from Comtrad
and Comtrad
F-24
<PAGE>
Holdings, Inc. (CHI) in an amount of $20.7 million and $17.4 million,
respectively. CHI, and its wholly owned subsidiary, Comtrad, are controlled by
the Chief Executive Officer of the Company and a member of the Board of
Directors has a minority interest. This receivable is in the form of a
promissory note which Comtrad and CHI have collateralized with all of their net
assets. The principal asset of CHI and Comtrad is shares of CHS common stock.
Interest is charged on the promissory note at prime rate. The amount is due on
demand. Interest charged to Comtrad was $1,393,000, $684,000, and $86,000 in
1998, 1997 and 1996, respectively. At December 31, 1998, the collateral was
sufficient to liquidate the indebtedness due the Company. On March 19, 1999, the
market value of the CHS shares was computed to be insufficient and in the event
market conditions do not improve, the Company will have to arrange for
additional collateral or establish a valuation reserve up to the full amount of
the receivable.
In 1996, the Company purchased a company in Romania from Comtrad for $375,000.
Subsequently, the Company loaned $800,000 to the subsidiary to enable it to
purchase an office building. In December 1996, the Company sold this subsidiary
back to Comtrad for the original purchase price plus an amount equal to the
losses from April to date of sale ($200,000). No gain was recognized on the
sale, which had the impact of increasing the amount due from Comtrad by $1.4
million.
A director of the Company served the Company as a management consultant under a
consulting agreement specifying payments of $4,000 per month. The agreement was
terminated at the end of 1996. In 1996, $48,000 was paid under this agreement.
NOTE K--SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
In September 1997, the Board approved a 3 for 2 stock split. In March 1996, the
shareholders approved a reincorporation as a Florida company, a reverse 1 for 2
stock split and the authorization of 5,000,000 shares of preferred stock in such
class or series and with such rights as approved by the Board of Directors. All
share information has been restated to reflect all stock splits. Under Florida
law, a majority vote by the holders of the preferred stock as well as the
holders of common stock is necessary to vote affirmatively on matters of
mergers, sales of substantially all the Company's assets, exchanges of stock or
changes in the articles of incorporation.
In August 1997, the Company completed a public offering of common shares in
which the Company sold 21,208,134 shares and selling shareholders sold 1,216,866
shares. The Company's shares were sold at $21.17 per share which raised $428.2
million for the Company net of expenses and commissions.
In June 1996, the Company completed a public offering of common shares in which
the Company sold 6,887,308 shares and selling shareholders sold 2,600,191
shares. The Company shares were sold at $8 per share which raised $50.6 million
for the Company net of expenses and commissions. As part of the offering the
underwriter received warrants entitling the purchase of 450,000 shares of stock
in a 4 year period beginning in June 1997 at a price starting at $8.80 and
increasing each year.
In August 1994, the Board of Directors, and subsequently the shareholders,
approved the 1994 Stock Incentive Plan. The maximum number of shares issuable
under the Plan has been amended several times and is 4,620,500 at December 31,
1998. Certain of the grants (363,787 at December 31, 1998) are intended to
qualify as incentive stock options and the remaining are non-qualified options.
All options were issued with an exercise price equal to the market price and
have a life of 10 years. Vesting periods are generally 25% a year for four
years.
In 1997 the Board of Directors, and subsequently the shareholders, approved the
Directors and Officers 1997 Stock Option Plan. The Plan, as amended, authorizes
options covering up to 2,150,000 shares of CHS Stock to be granted to executive
officers and Directors. The options are to be granted at fair market value and
generally vest over 3 years. In 1998 and 1997, 255,000 and 1,275,000 options,
respectively, were granted under this Plan.
In 1997 the Board of Directors, and subsequently the shareholders, approved the
1997 Chief Executive Officer Stock Option Plan. The Plan, as amended, authorizes
options covering up to 1,250,000 shares of CHS Stock to be issued to the CEO
upon approval by the Board of a business
F-25
<PAGE>
acquisition. The options are granted at market value and vest based on the
earnings of the acquired company. In 1998 and 1997, 500,000 and 750,000 options,
respectively, were granted.
In June 1996, the Board of Directors, and subsequently the shareholders,
approved the 1996 Chief Executive Officer Stock Option Plan. The Plan provides
for options covering up to 750,000 shares of CHS stock to be issued to the CEO
upon the approval by the Board of Directors of a qualifying acquisition, as
defined or of any acquisition if recommended by the Compensation Committee and
approved by the Board. A qualifying acquisition is one where greater than 50% of
the purchase price is comprised of common stock calculated by an earn out
formula. The options are granted at market value and vest based on the earnings
of the acquired company. In 1997 and 1996, all the options authorized by this
plan were granted.
The Company accounts for its stock options under APB 25. No compensation cost
has been recognized as the exercise price of each option is not less than the
fair value of the underlying stock at the date of grant. Had compensation cost
for the plan been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", the Company's net earnings per share would have been reduced to
the pro forma amounts indicated below (amounts in thousands, except per share
date).
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings As reported $45,678 $48,391 $12,166
Pro forma 39,820 44,362 11,777
Net earnings per share--basic As reported $0.88 $1.44 $0.80
Pro forma 0.77 1.32 0.77
Net earnings per share--diluted As reported $0.82 $1.32 $0.78
Pro forma 0.71 1.21 0.75
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively; dividend yield of 0%
for each year; expected volatility of 67% in 1998 and 67.9% in 1997; risk-free
interest rates ranging from 4.49% to 5.67% in 1998 and ranging from 5.68% to
6.47% in 1997; and expected lives of 4.5 years for each year.
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,617,813 $ 15.17 2,314,299 $ 8.01 846,132 $ 4.60
Granted 1,570,480 20.73 3,191,381 18.09 1,583,720 9.75
Exercised (200,592) 6.80 (705,469) 10.40 (61,611) 4.57
Cancelled (397,430) 12.01 (182,398) 8.36 (53,942) 10.28
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 5,590,271 $ 16.86 4,617,813 $ 15.17 2,314,299 $ 8.01
========= ========= ========= ========= ========= =========
Options exercisable at year end 2,502,712 $ 13.35 1,095,037 $ 4.58 773,442 $ 5.89
Weighted-average fair value of
options granted during the year $ 11.64 $10.61 $ 5.89
</TABLE>
F-26
<PAGE>
The following information applies to options outstanding at December 31, 1998:
<TABLE>
<S> <C>
Number outstanding $4.00-$6.00 $6.67-$8.42 $10.50-$12.41 $15.75-$19.75 $21.69-$25.46
Range of exercise prices 187,992 316,280 1,523,184 1,490,597 2,072,219
Weighted-average exercise price $ 4.92 $ 7.55 $ 11.42 $ 17.52 $ 22.90
Currently exercisable 161,283 173,324 679,331 815,335 673,439
Weighted average remaining contractual life 6.3 years 7.5 years 8.1 years 8.6 years 9.2 years
</TABLE>
In January 1998, the Company implemented a Preferred Stock Purchase Rights Plan
and distributed one right (a "Right") for each share of the Company's Common
Stock outstanding. Each Right has an initial exercise price of $100 for one-one
thousandth of a share of the Company's Series A junior participating preferred
stock. The Rights are not exercisable or transferable apart from the Company's
Common Stock, until after a person or group acquires, or has the right to
acquire, beneficial ownership of 15% or more of the Company's Common Stock
(which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the Company's
Common Stock. Upon such occurrence, each Right (other than Rights owned by such
person or group) will entitle the holder to purchase from the Company, or the
particular acquiring person or group under certain circumstances and conditions,
the number of shares of the Company's, or such person's or group's, Common Stock
having a market value equal to twice the exercise price of the Right. The Rights
are redeemable by the Company's Board of Directors under certain circumstances.
NOTE L--SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standard 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" ("SFAS
131"), which establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. SFAS 131 requires that the definition of operating segments
align with the measurements used internally to assess performance. These
financial statements reflect the adoption of SFAS 131.
The Company's business activities involve the operating segments of distribution
of microcomputer equipment and software products. The operating segments are the
distribution to resellers and the distribution to assemblers. The former
involves both universal products (products that represent the basic components
of a personal computer without regard to the specific local language, regulatory
and technical factors of individual markets) and localized products while the
latter is principally universal products. In addition, another operating segment
is the Company's central treasury functions. The accounting policies of the
segments are the same as those described in the Summary of Accounting Policies
(Note A). The segments are managed separately since each requires different
business and marketing strategies. The geographic areas in which the localized
product segments operate are Western Europe, Eastern Europe, Latin America and
Asia/Middle East. Net sales, gross profit, operating income (before interest and
income taxes) and total assets by segment were as follows (in thousands):
F-27
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION TO RESELLERS
-------------------------------------------------------
ASIA/ DISTRIBUTION
WESTERN EASTERN LATIN MIDDLE TO TOTAL
EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY SEGMENTS
---------- ---------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Net sales $4,572,505 $ 730,205 $1,516,528 $ 365,507 $1,361,028 $ - $8,545,773
Gross profit 301,764 62,653 105,982 19,300 72,338 - $ 562,037
Operating income 79,272 23,370 30,669 4,721 22,619 711 $ 161,362
Total assets 1,900,257 232,651 527,018 129,941 449,561 238,317 $3,477,745
1997
Net sales $2,676,905 $ 389,553 $1,118,504 $ - $ 571,421 $ - $4,756,383
Gross profit 197,400 36,329 82,393 - 30,547 - $ 346,669
Operating income 42,867 18,871 17,891 - 14,501 3,185 $ 97,315
Total assets 768,087 125,447 349,159 - 372,713 147,150 $1,762,556
1996
Net sales $1,063,997 $ 215,518 $ 576,025 $ - $ - $ - $1,855,540
Gross profit 69,088 22,522 39,498 - - - $ 131,108
Operating income 9,559 11,440 10,663 - - 1,539 $ 33,201
Total assets 727,406 70,405 216,031 - - 81,659 $1,095,501
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating income:
Total operating income for reportable segments $ 161,362 $ 97,315 $ 33,201
Corporate expenses (7,173) 710 (3,364)
Unallocated goodwill amortization (25,719) (8,864) (964)
----------- ----------- -----------
Earnings before income taxes and minority
interest in subsidiaries $ 128,470 $ 89,161 $ 28,873
=========== =========== ===========
Assets:
Total assets for reportable segments $ 3,477,745 $ 1,762,556 $ 1,095,501
Elimination of intercompany receivables (759,636) (442,637) (369,798)
Goodwill not allocated 737,719 381,830 78,780
Other assets 116,315 267,073 57,466
----------- ----------- -----------
Total consolidated assets $ 3,572,143 $ 1,968,822 $ 861,949
=========== =========== ===========
</TABLE>
<TABLE>
GEOGRAPHIC INFORMATION: 1998 1997 1996
<S> <C> <C> <C>
Net sales:
Western Europe $5,534,829 $3,051,641 $1,063,997
Eastern Europe 984,265 524,273 215,518
Latin America 1,516,528 1,118,504 576,025
Asia and Middle East 510,151 61,965 -
---------- ---------- ----------
Consolidated Total $8,545,773 $4,756,383 $1,855,540
========== ========== ==========
</TABLE>
The Company's product mix by category was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mass storage 25% 21% 10%
Personal computers 20% 17% 22%
Printers 12% 15% 28%
Software 11% 10% 18%
Components 8% 10% 4%
Networking and multimedia 8% 10% 8%
Peripherals 7% 9% 0%
Other 9% 8% 10%
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
The Company's customers typically rely on distributors as their principal source
of microcomputer products and financing. The Company's backlog of orders is not
considered material to an understanding of its business. No single customer
accounted for more than one percent of the Company's net sales in the years
ended December 31, 1998, 1997 and 1996.
F-28
<PAGE>
NOTE M--SUMMARIZED QUARTERLY FINANCIAL DATA FOR 1998 AND 1997 (UNAUDITED)
The Company recently announced the discovery of discrepancies related to the
amount of vendor incentives recorded in the fourth quarter of 1998. In
coordination with the Company's independent auditors and an investigation by
outside attorneys, the Company found that vendor rebates were overstated in the
second, third and fourth quarters of 1998. Some of the fourth quarter rebates
were supported with invalid documentation and all of the overstated rebates have
been reversed. As a result of the discovery, the consolidated financial
statements for the second and third quarters of 1998 were restated. The senior
executive officer responsible for the European office has resigned from the
Company.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
------------- -------------- ------------- -------------- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
1998
Net sales $1,751,338 $1,769,494 $2,166,943 $2,857,998 $8,545,773
Gross profit 122,594 113,924 141,337 184,182 562,037
Net earnings 20,567 5,508 6,643 12,960 45,678
Earnings per share--basic 0.42 0.11 0.13 0.24 0.88
Earnings per share--diluted 0.38 0.10 0.12 0.23 0.82
1997
Net sales $ 877,103 $ 946,955 $1,097,567 $1,834,758 $4,756,383
Gross profit 62,463 70,173 84,944 129,089 346,669
Net earnings 6,710 6,401 11,436 23,844 48,391
Earnings per share--basic 0.30 0.29 0.28 0.49 1.44
Earnings per share--diluted 0.29 0.28 0.26 0.45 1.32
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash (including restricted cash of $79,727 in 1999) $ 163,475 $ 176,991
Accounts receivable:
Trade, less allowance for doubtful accounts
of $61,791 in 1999 and $34,486 in 1998 1,020,225 1,342,126
Affiliates 4,617 35,546
----------- -----------
1,024,842 1,377,672
Inventories 487,306 1,025,690
Prepaid expenses and other current assets 81,331 101,698
----------- -----------
TOTAL CURRENT ASSETS 1,756,954 2,682,051
PROPERTY AND EQUIPMENT, NET 119,084 120,201
COST IN EXCESS OF ASSETS ACQUIRED, NET 677,345 737,719
OTHER ASSETS 67,198 32,172
----------- -----------
$ 2,620,581 $ 3,572,143
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 586,244 $ 620,067
Accounts payable, trade 811,462 1,345,059
Accrued liabilities 106,619 125,076
Amounts due to sellers under acquisition agreements 275,267 185,853
Income taxes payable 16,477 13,997
----------- -----------
TOTAL CURRENT LIABILITIES 1,796,069 2,290,052
LONG TERM DEBT 280,670 433,582
MINORITY INTEREST 8,507 10,466
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding -- --
Common stock, authorized 100,000,000 shares at $.001 par value;
64,815,416 and 55,619,475 shares outstanding at September
30, 1999 and December 31, 1998, respectively 64 56
Additional paid-in capital 768,227 732,035
Retained earnings (losses) (203,410) 110,793
Cumulative foreign currency translation adjustment (29,546) (4,841)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 535,335 838,043
----------- -----------
$ 2,620,581 $ 3,572,143
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-30
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,066,026 $ 2,166,943 $ 6,879,372 $ 5,687,775
Cost of goods sold 1,956,766 2,025,607 6,499,702 5,309,921
----------- ----------- ----------- -----------
Gross profit 109,260 141,336 379,670 377,854
Operating expenses:
Selling, general & administrative 153,437 113,976 461,553 294,619
Restructuring & asset impairment 170,410 -- 184,372 --
----------- ----------- ----------- -----------
323,847 113,976 645,925 294,619
----------- ----------- ----------- -----------
Operating income (loss) (214,587) 27,360 (266,255) 83,235
Other (income) expense:
Interest income (4,972) (3,966) (15,565) (10,964)
Interest expense 24,075 20,346 75,995 47,813
Gain on sale of Sun Microsystems
distribution business (32,658) -- (32,658) --
Foreign currency (gain) loss (2,958) (1,846) (1,178) (6,943)
----------- ----------- ----------- -----------
(16,513) 14,534 26,594 29,906
----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (198,074) 12,826 (292,849) 53,329
Income taxes 27,232 5,357 21,237 17,968
Minority interest in subsidiaries (24) 826 117 2,643
----------- ----------- ----------- -----------
Net earnings (loss) $ (225,282) $ 6,643 $ (314,203) $ 32,718
=========== =========== =========== ===========
Net earnings (loss) per common share:
Basic $ (3.71) $ 0.13 $ (5.40) $ 0.64
=========== =========== =========== ===========
Diluted $ (3.71) $ 0.12 $ (5.40) $ 0.61
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-31
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
1999 1998
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net earnings (loss) $(314,203) $ 32,718
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Goodwill write-off 169,392 --
Gain on sale of Sun Microsystems distribution business (32,658) --
Depreciation and amortization 45,123 29,150
Minority interest in net earnings 117 2,643
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable-trade, net 314,744 (22,884)
Accounts receivable-affiliates, net 30,598 (22,203)
Inventories 525,785 50,412
Prepaids and other assets (7,397) (16,561)
Accounts payable (556,882) (50,036)
Accrued liabilities and income taxes (11,550) (8,920)
--------- ---------
Net cash provided by (used in) operating activities 163,069 (5,681)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (26,914) (33,045)
Net proceeds from dispositions 29,803 --
Acquisitions, net of cash received (6,707) (177,931)
--------- ---------
Net cash used in investing activities (3,818) (210,976)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Convertible Debentures 50,000 --
Proceeds from the issuance of Senior Notes -- 200,000
Net borrowings from (repayments to) banks (212,895) 129,665
Proceeds from exercising stock options 617 1,171
Repurchase of shares -- (371)
--------- ---------
Net cash provided by (used in) financing activities (162,278) 330,465
Effect of exchange rate changes on cash (10,489) 1,613
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,516) 115,421
Cash and cash equivalents at beginning of period 176,991 68,806
--------- ---------
Cash and cash equivalents at end of period $ 163,475 $ 184,227
========= =========
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
CHS ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
(continued)
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
1999 1998
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 50,839 $ 35,109
Income taxes $ 7,626 $ 10,454
Non cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-33
<PAGE>
CHS ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements were prepared from the books and
records of the Company without audit or verification. In the opinion of
management, all adjustments, which are of a normal recurring nature, and
necessary to present fairly the financial position, results of operations and
cash flows for all the periods presented have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the operating results for the full fiscal year. Sales
in Europe in the first and fourth quarters of each year are typically higher
than sales in the second and third quarters. In South America sales in the third
and fourth quarters are typically higher than sales in the first and second
quarters. Due to assets sales in the third quarter of 1999, and divestiture
activities and subsidiaries being placed in receiverships and voluntary creditor
protection in the fourth quarter of 1999, the results of the fourth quarter of
1999 are expected to differ significantly from those in prior years.
2. RESTRUCTURING AND ASSET IMPAIRMENT COSTS
On May 1, 1999 the Company implemented a restructuring plan with the goal of
reducing future operating costs. The restructuring has and will continue to
result in the writing-off of certain assets, a planned 10% reduction in the
number of employees and the closure of redundant warehouses. The restructuring
plan will be implemented throughout 1999. As of September 30, 1999,
approximately $8.0 million is accrued for restructuring costs and this amount is
included in accrued liabilities.
Additionally, prior to the issuance of this report, there have been dispositions
and closings of certain subsidiaries and certain other subsidiaries have been
placed in receivership or voluntary creditor protection in the fourth quarter of
1999. As a result, the Company has determined that goodwill, to the extent of
losses to be incurred with respect to these subsidiaries, is impaired and,
accordingly, has written off such amounts as of September 30, 1999. See Notes 4
and 6 for further discussion.
The components of the restructuring and asset impairment costs for the three and
nine months ended September 30, 1999 are as follows (in thousands):
3 MONTHS 9 MONTHS
-------- --------
Goodwill write-off $169,392 $169,392
Write-off of leasehold improvements and other
property and equipment 489 6,402
Lease payments in excess of sublease income 177 6,196
Employee severance costs 187 1,768
Other 165 614
-------- --------
Total $170,410 $184,372
======== ========
F-34
<PAGE>
3. ACQUISITIONS
In the nine month period ended September 30, 1999, the Company made four
insignificant acquisitions. During 1998, in addition to SiS Distribution Ltd.,
the Company completed 14 other acquisitions, which were considered not to be
significant. All acquisitions have been accounted for under the purchase method
and accordingly, the results of such acquired entities have been included in the
consolidated operating results since their acquisition dates.
Presented below is pro forma operating data showing selected operating results
for the Company as if the companies acquired in 1998 were acquired on January 1,
1998. The pro forma effect of the 1999 acquisitions is immaterial. Pro forma
adjustments were made to include goodwill amortization in the nine month period
ended September 30, 1998 based on 1998 actual results. Pro forma net earnings
per share is based on the net earnings (loss) divided by the weighted average
number of shares plus contingent shares actually issued.
Nine Months Ended September 30,
(in thousands, except per share data)
1999 1998
----------- -----------
Net sales $6,879,372 $6,494,821
Net earnings (loss) $ (314,203) $ 15,737
Net earnings (loss) per share - basic $ (5.40) $ 0.31
Net earnings (loss) per share - diluted $ (5.40) $ 0.29
The amounts above are not necessarily indicative of results of operations that
would have occurred, had the transactions been effected as of January 1, 1998 or
of future results of the combined companies.
4. DISPOSITIONS
In September 1999, the Company 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. The Company
owned approximately 75% of this business and received approximately $36.7
million from the sale. The Company 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 and working
capital purposes. The business generated sales of approximately $81.7 million
and net losses of $1.1 million for 1999 through the date of sale.
As of September 30, 1999, the Company owed approximately $275.3 million to the
sellers of certain businesses that the Company had purchased. The Company has
commenced a program designed to eliminate such amounts owed by disposing of all
or a portion of the Company's interests in those operations.
In October 1999, the Company agreed to submit to arbitration the issue of the
portion of Memory Set that the Company will retain as a result of the
cancellation of the Company's purchase agreement for Memory Set. Memory Set is a
subsidiary of the Company operating in Spain. The Company originally agreed to
purchase Memory Set in July 1998. The Company was in default under the purchase
agreement because the Company had not paid the balance of the purchase price of
approximately $74.4 million. The Company believes the unpaid balance of the
purchase price represents approximately 91.5% of Memory Set and the amounts
already paid represent approximately 8.5%. The Company may cure its default by
paying the balance of the purchase price
F-35
<PAGE>
at any point prior to the completion of the arbitration. The Company does not
expect to cure the default. During the nine months ended September 30, 1999,
this subsidiary contributed $139.4 million in revenues. The estimated loss on
the disposition is $19.9 million. The Company recognized the loss as impairment
to goodwill as of September 30, 1999 as such amount is no longer deemed to be
realizable. In the fourth quarter of 1999, the Company will be offsetting the
unpaid purchase price of $74.4 million against its investment in the former
subsidiary that includes $49.5 million of goodwill. The Company will treat the
ongoing interest in this subsidiary under the cost method of accounting.
On October 4, 1999, the Company conveyed 80% of the shares of Arena Bilgisayar
Sanayi Ve Ticaret A.S. and Armada Bilgisayar A.S., the Company's subsidiaries
operating in Turkey, to the original owners of those companies in exchange for a
release of the Company's obligation to pay them the balance of the purchase
price for those subsidiaries of approximately $46.0 million. The sellers granted
back to the Company an option to reacquire those interests at any time prior to
the earlier of October 4, 2000 or a 60-day period beginning after the Company
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 estimated loss on the disposition is $21.1 million which includes
approximately $2.2 million of amounts due from the former subsidiary to the
Company that will not be realized. The Company recognized a goodwill impairment
loss of $18.9 million on this transaction as of September 30, 1999 as such
amount is no longer deemed to be realizable. In the fourth quarter of 1999, the
Company will be offsetting the unpaid purchase price of $46.0 million against
its investment in the former subsidiaries that includes an additional $31.5
million of goodwill.
The Company also conveyed all of the Company's interest in ARC Espana Cartera,
S.A., another of the Company's subsidiaries operating in Spain, to the original
owners in exchange for a release of the Company's 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. The Company will realize a loss on the sale of this
subsidiary of $7.0 million, which includes a fee of approximately $3.9 million
to be paid to the original owners of the subsidiary. The Company recognized a
goodwill impairment loss of $3.1 million as of September 30, 1999 as such amount
is no longer deemed to be realizable. In the fourth quarter of 1999, the Company
will be offsetting the unpaid purchase price of $29.3 million against its
investment in the former subsidiary that includes an additional $21.8 million of
goodwill.
On October 20, 1999, the Company 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, the Company
conveyed an aggregate 77.83% interest in these companies to the original owners
in exchange for a release of the Company's obligation to pay them the balance of
the purchase price of approximately $49.8 million. In addition, the original
owners granted the Company 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 the Company receives new cash investments of $200
million or more. The Company also granted the original owners an option to
purchase the 22.17% interest that the Company retained in these companies for a
total purchase price of $15.6 million at any time that the Company'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 estimated loss on the transfer is $8.6 million. The Company
recognized the loss as impairment to goodwill as of September 30, 1999 as such
amount is no longer deemed to be realizable. In the fourth quarter of 1999, the
Company will be offsetting the unpaid purchase price of $49.8 million against
its investment in the former subsidiary that includes an additional $41.4
million of goodwill. The Company will treat the ongoing interest in these
companies under the equity method of accounting.
On October 20, 1999, the Company also amended the terms of its purchase
agreement for Cornejo Informatica, S.A. ("Cornejo"), another subsidiary
operating in Latin America. Under the
F-36
<PAGE>
amendment, the Company conveyed 86.55% interest in Cornejo to the original
owners in exchange for a release of its obligation to pay them the balance of
the purchase price of approximately $13.0 million. In addition, the original
owners granted the Company an option to repurchase the 86.55% interest for a
total purchase price of approximately $13.0 million any time before the earlier
of (1) October 20, 2000 or (2) 60 days after the Company receives a new cash
investment of $200 million or more. The Company also granted the original owners
the option to purchase the 13.45% interest that was retained in Cornejo by the
Company for a total purchase price of approximately $2.0 million at any time
that the Company's option to repurchase their interest is in effect. During the
nine months ended September 30, 1999, the revenues attributed to Cornejo totaled
approximately $33.0 million. The estimated loss on the transfer is estimated to
be $1.9 million. The Company recognized the loss as impairment to goodwill as of
September 30, 1999 as such amount is no longer deemed to be realizable. In the
fourth quarter of 1999, the Company will be offsetting the unpaid purchase price
of $13.0 million against its investment in the former subsidiary that includes
an additional $11.1 million of goodwill. The Company will treat the ongoing
interest in Cornejo under the cost method of accounting.
On October 27, 1999, the Company also conveyed its interest in Brightstar Corp.,
a subsidiary based in the United States, to the original owners 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. The
Company will realize a loss of $3.2 on the sale of this subsidiary. The Company
wrote-off its goodwill of $25 thousand related to Brightstar as impairment to
goodwill as of September 30, 1999 as such amount is no longer deemed to be
realizable. In the fourth quarter of 1999, the Company will be offsetting the
unpaid purchase price of $1.3 million against its investment in the former
subsidiary and recognizing the remainder of the loss.
On October 31, 1999, the Company rescinded the purchase agreement with
MicroInformatica Corp. The Company had previously paid cash of $3.2 million and
issued shares with a value of $20.3 million in settlement of the acquisition of
MicroInformatica Corp. The rescission agreement provides for the return of the
cash and shares in exchange for the Company returning ownership of
MicroInformatica Corp. to its original owners. During the nine months ended
September 30, 1999, the revenues attributed to this subsidiary were $111.7
million. The Company will realize a loss of $21.8 million on the transaction.
The Company recognized the loss as impairment to goodwill as of September 30,
1999 as such amount is no longer deemed to be realizable.
The Company is currently in similar negotiations with the original owners of
seven other subsidiaries to reduce earn-out obligations by an additional $58
million. These subsidiaries include SiS Distribution Limited for which the
Company owes $42.4 million and is in default under the purchase agreement. If
the negotiations are successful, the amount due to sellers would be essentially
eliminated. For the nine months ended September 30, 1999, the seven subsidiaries
generated combined sales of approximately $556.6 million. The Company acquired
the companies in separate transactions during 1998. Four of the operations in
negotiation are located in Latin America, two in Asia and the Middle East and
one in Europe.
The Company has also closed a subsidiary located in Miami, Florida that serves
the Latin America market and that contributed revenues of $22.6 million during
the nine months ended September 30, 1999. Goodwill of approximately $6.3 million
was written of as of September 30, 1999 related to this subsidiary.
On November 10, 1999, the Company completed the sale of a 60% interest in its
subsidiary in Poland for $2 million. The Company retains a 40% interest in the
former subsidiary. During the nine months ended September 30, 1999, the revenues
attributed to this subsidiary was $89.6 million. The Company will treat its
ongoing interest in this subsidiary under the equity method of accounting.
No gain or loss is expected on the transaction.
F-37
<PAGE>
On November 12, 1999, the Company executed an agreement with a group of its
senior managers in Latin America for the Company to sell for $13 million in
cash, a 51% interest in certain of its operations in Latin America. Under the
terms of the agreement, the Company would retain a 49% interest in the
operations. As part of the agreement, the e-commerce component of the Latin
American operations would be transferred to a newly formed entity to be jointly
owned by the Company (51%) and the management group (49%). The transaction is
expected to be finalized prior to December 31, 1999
The following Pro Forma Condensed Consolidated Balance Sheet is presented to
reflect the effect of the seven transactions described above for the
subsidiaries disposed of in October 1999, in order to reduce the Company's
liability for amounts due to sellers under acquisition agreements, as if they
had occurred on September 30, 1999.
F-38
<PAGE>
CHS ELECTRONICS, INC.
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
Subsidiaries Pro Forma Pro Forma
Consolidated Disposed Adjustments Consolidated
------------ -------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 163,475 $ (8,019) $ -- $ 155,456
Accounts receivable:
Trade, less allowance for doubtful accounts
of $61,791 1,020,225 (135,874) 1,098 (a) 885,449
Affiliates 4,617 (622) -- 3,995
----------- ----------- ----------- -----------
1,024,842 (136,496) 1,098 889,444
Inventories 487,306 (62,399) -- 424,907
Prepaid expenses and other current assets 81,331 (34,428) 22,765 (a) 69,668
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 1,756,954 (241,342) 23,863 1,539,475
PROPERTY AND EQUIPMENT, NET 119,084 (12,379) -- 106,705
COST IN EXCESS OF ASSETS ACQUIRED, NET 677,345 -- (155,265)(b) 522,080
OTHER ASSETS 67,198 (4,679) 18,946 (c) 81,465
----------- ----------- ----------- -----------
$ 2,620,581 $ (258,400) $ (112,456) $ 2,249,725
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 586,244 $ (44,723) $ -- $ 541,521
Accounts payable, trade 811,462 (103,031) 20,235 (a) 728,666
Accrued liabilities 106,619 (4,424) 6,066 108,261
Amounts due to sellers under acquisition agreements 275,267 -- (213,878)(d) 61,389
Income taxes payable 16,477 (10,337) -- 6,140
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,796,069 (162,515) (187,577) 1,445,977
LONG TERM DEBT 280,670 (5,995) -- 274,675
MINORITY INTEREST 8,507 -- -- 8,507
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; -- -- -- --
0 shares outstanding
Common stock, authorized 100,000,000 shares at
$.001 par value; 64,815,416 shares outstanding
at September 30, 1999 64 (5,729) 5,723 (e) 58
Additional paid-in capital 768,227 (38,293) 32,773 (e) 762,707
Retained earnings (203,410) (47,568) 38,325 (f) (212,653)
Accumulated other comprehensive income (29,546) 1,700 (1,700)(g) (29,546)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 535,335 (89,890) 75,121 520,566
----------- ----------- ----------- -----------
$ 2,620,581 $ (258,400) $ (112,456) $ 2,249,725
=========== =========== =========== ===========
</TABLE>
PRO FORMA ADJUSTMENTS
(a) To reclassify the net intercompany receivable/payable to accounts
receivables.
(b) To record the write-off of the goodwill related to the entities disposed of.
(c) To record the minority interest investment retained.
(d) To reduce the amounts due to sellers.
(e) To restore common stock and additional paid-in capital removed and the
effect of taking back and retiring 6,314,899 shares valued at $5.5 million
related to the MicroInformatica Corp. transaction.
(f) To restore retained earnings removed of $47.6 million and reflect losses
on the transactions of $9.2 million
(g) To restore cumulative foreign currency translation adjustment removed.
F-39
<PAGE>
5. PER SHARE DATA
The Company adopted Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. In accordance with this statement, basic earnings per share
is computed by dividing net earnings or loss by the weighted average number of
common shares outstanding. Diluted earnings per share includes the dilution
caused by common stock options and warrants. The weighted average number of
shares for basic earnings per share was 60,779,730 and 52,439,025 for the three
month periods ended September 30, 1999 and 1998, respectively, and 58,154,044
and 51,134,884 for the nine month periods ended September 30, 1999 and 1998,
respectively. The weighted average number of shares used in the diluted
computation was 60,779,730 and 55,848,719 for the three month periods ended
September 30, 1999 and 1998, respectively, and 58,154,044 and 53,933,927, for
the nine month periods ended September 30, 1999 and 1998, respectively.
Since the Company had a loss for the three and nine months ended September 30,
1999, all potentially dilutive securities were excluded from diluted earnings
per share during such period since the effect would be anti-dilutive. Such
potentially dilutive securities consist of the following: (i) unexercised stock
options and warrants to purchase 4,454,573 million shares of the Company's
common stock; and (ii) the floating rate convertible debentures due May 31,
2003, which is convertible into 9,090,909 shares of the Company's common stock.
The floating rate convertible debentures would require the issuance of
additional shares upon conversion if the average closing price of the Company's
common stock for the twenty trading days prior to the date of conversion is less
than $5.50 and under certain other conditions.
The following table illustrates, for periods with income, the reconciliation of
the income and weighted average number of shares of the basic and diluted
earnings per share computations (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $6,643
------
Net earnings per share - basic 6,643 52,439 $0.13
=====
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,007
Earn out contingencies -- 2,403
------ ------
Net earnings per share - diluted $6,643 55,849 0.12
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
Net earnings $32,718
-------
Net earnings per share - basic 32,718 51,135 $ 0.64
======
Effect of dilutive shares:
Stock options and warrants outstanding -- 1,330
Earn out contingencies -- 1,469
-------- ------
Net earnings per share - diluted $ 32,718 53,934 $ 0.61
======== ====== ======
</TABLE>
6. NOTES PAYABLE AND LONG TERM DEBT
The Company has been in violation of a covenant in a certain short term credit
facility since the first quarter of 1999. The amount outstanding on this
facility was approximately $19.8 million as of September 30, 1999. As a result
of the default, on October 22, 1999, CHS Electronics Plc, a
F-40
<PAGE>
subsidiary operating in the United Kingdom, was placed in receivership by the
lender. The loan was secured by approximately $33.5 million of receivables as of
September 30, 1999. The receiver has subsequently closed CHS Electronics Plc and
is liquidating its net assets. The Company has additionally sold certain assets
of Metrologie Ltd. and Karma UK Ltd., other United Kingdom based subsidiaries.
In the first nine months of 1999 these companies generated sales of $612.4
million and had a net loss of $17.0 million. The Company is presently unable to
determine if proceeds of the assets of such companies will be sufficient to pay
all liabilities. To the extent that there is a shortfall and the liabilities are
guaranteed by the Company, there may be additional charges incurred.
The Company is in violation of various requirements of a different short-term
credit facility at September 30, 1999. The Company has closed the subsidiary
that is the primary obligor under the loan and has arranged with the lender to
repay the credit facility through collections of receivables of the subsidiary.
The total amount outstanding at September 30, 1999 under such facility was $9.7
million. This subsidiary contributed revenues of $95.4 million for the nine
months ended September 30, 1999. The Company wrote-off goodwill of $26.5 million
as of September 30, 1999 related to this subsidiary. The Company is a guarantor
of this credit facility.
A Swiss subsidiary of the Company has two separate credit facilities providing
for advances for working capital needs based upon eligible inventory. The credit
facilities are secured by a lien on certain assets of the subsidiary and contain
covenants requiring certain levels of net worth and profitability. The
subsidiary was not in compliance with certain of the covenants as of September
30, 1999 and was consequently in default of the credit facilities. One of the
lenders has taken steps to seize the receivables, inventory and cash of the
subsidiary. At September 30, 1999 the amounts outstanding under the facilities
were $22.4 million. The Company is a guarantor of these credit facilities.
On December 30, 1998, CHS Frank & Walter, CHS Germany and CHS Austria
(collectively, the "Borrowers") entered into a three year DM 325 million
(approximately $180 million) Facility Agreement with a bank. Advances under the
agreement may be used for working capital needs of the Borrowers and are based
upon a borrowing base equal to the aggregate of 85% of eligible accounts
receivable, 50% of eligible inventory and 100% of inventory of a specific
vendor. The debt is secured by a lien on the receivables, inventories and
intangible assets of the Borrowers and two Austrian subsidiaries of the Company,
and a lien on the receivables of a Swiss subsidiary of the Company
(collectively, the "Pledgors"), and a pledge of the shares of the Borrowers and
the Pledgors. The indebtedness has been guaranteed by the Company, the Pledgors,
and certain other subsidiaries of the Company. Interest is at a variable rate
based on Euro LIBOR. At September 30, 1999, the interest rate on this credit
facility was 6.02%. The loan agreement was amended on August 31, 1999 which
changed the maturity date to November 30, 1999. In addition to limitations on
the ability of
F-41
<PAGE>
the Borrowers to incur additional indebtedness, the amendment reduced the amount
available under the loan to DM 310 million (approximately $170 million), which
amount will be further reduced upon certain events and requiring the lender's
consent for the Company to make future acquisitions or to transfer funds from
the Borrowers to other companies in the organization. The Borrowers were in
default of certain of the financial covenants in the loan agreement as of
September 30, 1999 and the Company is currently in default under certain
provisions of its guarantee.
On October 26, 1999, CHS Frank & Walter, CHS Germany and CHS Austria voluntarily
filed for creditor protection under German and Austrian law. The filing was
necessitated by continuing losses in the operations due to competitive industry
conditions in the region, restricted credit from the subsidiaries' vendors, a
reduced bank line and the inability to remedy the events of default in the
Facility Agreement. Insolvency administrators have been appointed by the court
to oversee each operation. Under German and Austrian insolvency laws, each of
the subsidiaries are required to prepare a recovery plan to be evaluated by the
insolvency administrator. The administrator will make a determination within
thirty days of the filing of whether to sell or close the businesses or return
them to their owner. During the thirty day period, the subsidiaries will be
under creditor protection. In the first nine months of 1999, CHS Frank & Walter,
CHS Germany and CHS Austria generated sales of $1,033.1 million and had a net
loss of $31.6 million. Although the subsidiaries have tangible book value, the
Company is presently unable to determine the ultimate results of the filing, and
if the businesses are closed, whether the proceeds of the assets of such
companies will be sufficient to pay all liabilities. To the extent that there is
a shortfall and the liabilities are guaranteed by the parent, there may be
additional charges incurred. At September 30, 1999, the total amount outstanding
under this credit facility was $99.9 million. The Company wrote-off goodwill of
$62.4 million as of September 30, 1999 related to these subsidiaries.
The Company's subsidiaries typically enter into short-term credit agreements
with financial institutions in their countries of operations. At September 30,
1999, of the $507.1 million aggregate amount available under these agreements,
$432.3 million was outstanding. Such agreements are usually for a term of one
year and are secured by the receivables of the borrower and, in certain
instances, inventories of the borrower. The weighted average interest rate at
September 30, 1999 was 6.1%. Certain of these agreements contain financial
covenants requiring, among other things, the maintenance of certain net worth
and loan-to-collateral value terms. The Company typically guarantees these
loans. The Company has also guaranteed the obligations of certain of its
subsidiaries to certain vendors. The Company has received demands on payments
under guarantees from many of its vendors, creditors and lenders.
The Company's long-term debt at September 30, 1999, consists principally of $50
million of floating rate convertible debentures ("Debentures") due May 31, 2003
and $200 million of Senior Notes ("Notes") due 2005.
In June, 1999 the Company issued the Debentures to Computer Associates
International, Inc. ("CA"). The interest rate on the debentures is the six month
LIBOR rate plus 2%, (7.17% for the initial interest period), adjusted
semiannually. The Company is using the proceeds for working capital purposes.
The Debentures are convertible into the Company's common stock at any time at a
conversion price of $5.50 per share. The conversion price is subject to
adjustment under certain conditions, including upon the average closing price of
the Company's common stock falling below $5.50 during the twenty days preceding
any conversion date or upon new issuance of shares at a price lower than $5.50.
In connection with the financing, the Company issued to CA a warrant expiring
May 31, 2004 for two million shares of common stock at an exercise price of
$5.50 per share. The exercise price of the warrant is reduced if new shares are
issued at a lower price. The warrant has been recorded at a fair value of $3
million as a discount to the Debentures and this amount is being amortized over
the life of the Debentures. The Company is currently not in compliance with
certain covenants of the Debentures and is exploring all available options to
remedy the situation.
F-42
<PAGE>
The Company issued the Notes on April 10, 1998. The Notes bear interest at
9.875% per annum and interest is payable semi-annually on April 15 and October
15. The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after April 15, 2002, initially at 104.938% of their principal
amount, plus accrued and unpaid interest, declining to 100% of their principal
amount, plus accrued and unpaid interest, on or after April 15, 2004.
Certain of the Company's direct and indirect subsidiaries fully and
unconditionally jointly and severally guarantee the Notes on an unsecured basis.
The guarantor subsidiaries are principally non-operating holding companies. The
Notes are effectively subordinated to all existing and future liabilities of the
Company's subsidiaries that are not guarantors. The Notes contain certain
covenants which, among other things, restrict the ability of the Company and
certain of its subsidiaries to incur additional indebtedness; pay dividends or
make other distributions in respect to their capital stock; enter into certain
transactions with shareholders and affiliates; make certain investments and
other restricted payments; create liens; enter into certain sale and leaseback
transactions and sell assets. The covenants are, however, subject to a number of
exceptions and qualifications. In November 1999, the Company received
notification from one of the holders of the Notes informing it that they believe
that the Company is not in compliance with certain covenants of the Note
indenture. The Company is currently reviewing the claim made in the
notification.
The following condensed financial information presents the results of
operations, financial position and cash flows of the Company (on a stand alone
basis), the guarantor subsidiaries (on a combined basis), the non-guarantor
subsidiaries (on a combined basis) and the eliminations necessary to arrive at
the consolidated results for the Company. The results of operations and cash
flow presented below assume that the guarantor subsidiaries were in place for
all periods presented. The Company and guarantor subsidiaries have accounted for
investments in their respective subsidiaries on an unconsolidated basis using
the equity method of accounting. The Company has not presented separate
financial statements and other disclosures concerning the guarantors and
non-guarantor subsidiaries because it has determined they would not be material
to investors (amounts in thousands).
F-43
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 1,512 $ (64) $ 162,027 $ -- $ 163,475
Accounts receivable 2 18,779 1,006,061 -- 1,024,842
Intercompany receivables 157,526 19,934 210,381 (387,841) --
Inventories -- 11,634 475,672 -- 487,306
Other current assets 1,332 3,470 76,529 -- 81,331
----------- ----------- ----------- ----------- -----------
Total current assets 160,372 53,753 1,930,670 (387,841) 1,756,954
Property and equipment, net 1,501 8,284 109,299 -- 119,084
Cost in excess of assets acquired, net -- -- 677,345 -- 677,345
Investments in affiliated companies 903,891 1,438,559 -- (2,342,450) --
Other assets 7,977 13,114 46,107 -- 67,198
----------- ----------- ----------- ----------- -----------
Total assets $ 1,073,741 $ 1,513,710 $ 2,763,421 $(2,730,291) $ 2,620,581
=========== =========== =========== =========== ===========
Notes payable $ -- $ 10,647 $ 575,597 $ -- $ 586,244
Intercompany payables 8,576 168,812 210,453 (387,841) --
Accounts payables 13,553 30,725 767,184 -- 811,462
Accrued expenses 4,813 1,076 100,730 -- 106,619
Amounts due to sellers 275,267 -- -- -- 275,267
Income taxes payable and other (11,053) 1,148 26,382 -- 16,477
----------- ----------- ----------- ----------- -----------
Total current liabilities 291,156 212,408 1,680,346 (387,841) 1,796,069
Long term debt 247,250 4,291 29,129 -- 280,670
Minority interests -- -- (2,100) 10,607 8,507
Shareholders' equity 535,335 1,297,011 1,056,046 (2,353,057) 535,335
----------- ----------- ----------- ----------- -----------
$ 1,073,741 $ 1,513,710 $ 2,763,421 $(2,730,291) $ 2,620,581
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash $ 2,882 $ 39 $ 181,306 $ -- $ 184,227
Accounts receivable 20,206 521 964,814 -- 985,541
Intercompany receivables 333,838 1,133 -- (334,971) --
Inventories -- -- 830,263 -- 830,263
Other current assets 2,338 711 86,986 -- 90,035
----------- ----------- ----------- ----------- -----------
Total current assets 359,264 2,404 2,063,369 (334,971) 2,090,066
Property and equipment, net 3,030 2,094 100,532 -- 105,656
Cost in excess of assets acquired, net -- -- 620,452 -- 620,452
Investments in affiliated companies 782,738 1,416,287 -- (2,199,025) --
Other assets 16,663 -- 23,750 -- 40,413
----------- ----------- ----------- ----------- -----------
Total assets $ 1,161,695 $ 1,420,785 $ 2,808,103 $(2,533,996) $ 2,856,587
=========== =========== =========== =========== ===========
Notes payable $ -- $ 479 $ 519,408 $ -- $ 519,887
Intercompany payables 3,275 149,017 182,679 (334,971) --
Accounts payables 10,731 78 1,013,979 -- 1,024,788
Accrued expenses 13,837 143 86,611 -- 100,591
Amounts due to sellers 141,215 -- -- -- 141,215
Income taxes payable and other 553 (1,427) 19,687 -- 18,813
----------- ----------- ----------- ----------- -----------
Total current liabilities 169,611 148,290 1,822,364 (334,971) 1,805,294
Long term debt 200,000 1,551 70,282 -- 271,833
Minority interests -- -- -- 8,991 8,991
Shareholders' equity 792,084 1,270,944 915,457 (2,208,016) 770,469
----------- ----------- ----------- ----------- -----------
$ 1,161,695 $ 1,420,785 $ 2,808,103 $(2,533,996) $ 2,856,587
=========== =========== =========== =========== ===========
</TABLE>
F-44
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 181,967 $ 6,697,405 $ -- $ 6,879,372
Cost of goods sold -- 165,228 6,334,474 -- 6,499,702
----------- ----------- ----------- ----------- -----------
Gross profit -- 16,739 362,931 -- 379,670
Operating expenses 21,696 22,023 602,206 -- 645,925
----------- ----------- ----------- ----------- -----------
Operating loss (21,696) (5,284) (239,275) -- (266,255)
Other (income) expense, net 18,174 888 7,532 -- 26,594
----------- ----------- ----------- ----------- -----------
Loss before income taxes and
minority interest in subsidiaries (39,870) (6,172) (246,807) -- (292,849)
Provision for income taxes (7,225) 2,624 25,838 -- 21,237
Equity in loss of affiliated
companies, net of tax 281,558 108,737 -- (390,295) --
Minority interest -- -- -- 117 117
----------- ----------- ----------- ----------- -----------
Net loss $ (314,203) $ (117,533) $ (272,645) $ 390,178 $ (314,203)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 31 $ 5,687,744 $ -- $ 5,687,775
Cost of goods sold -- (352) 5,310,273 -- 5,309,921
----------- ----------- ----------- ----------- -----------
Gross profit -- 383 377,471 -- 377,854
Operating expenses 3,182 652 290,785 -- 294,619
----------- ----------- ----------- ----------- -----------
Operating income (loss) (3,182) (269) 86,686 -- 83,235
Other (income) expense, net 5,854 254 23,798 -- 29,906
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (9,036) (523) 62,888 -- 53,329
Provision for income taxes (109) (201) 18,278 -- 17,968
Equity in (earnings) of affiliated
companies, net of tax (72,962) (73,474) -- 146,436 --
Minority interest -- -- -- 2,643 2,643
----------- ----------- ----------- ----------- -----------
Net earnings $ 64,035 $ 73,152 $ 44,610 $ (149,079) $ 32,718
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 65,460 $ 2,000,566 $ -- $ 2,066,026
Cost of goods sold -- 58,348 1,898,418 -- 1,956,766
----------- ----------- ----------- ----------- -----------
Gross profit -- 7,112 102,148 -- 109,260
Operating expenses 366 13,726 309,755 -- 323,847
----------- ----------- ----------- ----------- -----------
Operating income (loss) (366) (6,614) (207,607) -- (214,587)
Other (income) expense, net 6,814 388 (23,715) -- (16,513)
----------- ----------- ----------- ----------- -----------
Loss before income taxes and
minority interest in subsidiaries (7,180) (7,002) (183,892) -- (198,074)
Provision for income taxes (2,822) 1,435 28,619 -- 27,232
Equity in loss of affiliated
companies, net of tax 220,924 62,129 -- (283,053) --
Minority interest -- -- -- (24) (24)
----------- ----------- ----------- ----------- -----------
Net loss $ (225,282) $ (70,566) $ (212,511) $ 283,077 $ (225,282)
=========== =========== =========== =========== ===========
</TABLE>
F-45
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $2,166,943 $ -- $2,166,943
Cost of goods sold -- -- 2,025,607 -- 2,025,607
--------- ---------- ---------- ---------- ----------
Gross profit -- -- 141,336 -- 141,336
Operating expenses 2,851 279 110,846 -- 113,976
--------- ---------- ----------- ---------- ----------
Operating income (loss) (2,851) (279) 30,490 -- 27,360
Other (income) expense, net 4,004 54 10,476 -- 14,534
--------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes and
minority interest in subsidiaries (6,855) (333) 20,014 -- 12,826
Provision for income taxes (490) (128) 5,975 -- 5,357
Equity in (earnings) of affiliated
companies, net of tax (29,535) (28,199) -- 57,734 --
Minority interest -- -- -- 826 826
--------- ---------- ---------- ---------- ----------
Net earnings $ 23,170 $ 27,994 $ 14,039 $ (58,560) $ 6,643
========= ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ 163,069 $-- $ 163,069
Net cash provided (used) in investing activities (50,551) 1,181 45,552 -- (3,818)
Net cash provided (used) in financing activities 50,000 -- (212,278) -- (162,278)
Effect of exchange rate -- -- (10,489) -- (10,489)
Cash at beginning 2,063 (1,245) 176,173 -- 176,991
Cash at end $ 1,512 $ (64) $ 162,027 $-- $ 163,475
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) in operating activities $ -- $ -- $ (5,681) $-- $ (5,681)
Net cash provided (used) in investing activties (200,286) (127) (10,563) -- (210,976)
Net cash provided (used) in financing activities 200,801 166 129,498 -- 330,465
Effect of exchange rate -- -- 1,613 -- 1,613
Cash at beginning 2,367 -- 66,439 -- 68,806
Cash at end $ 2,882 $ 39 $ 181,306 $-- $ 184,227
</TABLE>
F-46
<PAGE>
7. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME, ("SFAS 130"). SFAS 130 establishes
standards for reporting and displaying of comprehensive income and its
components in the Company's consolidated financial statements. Comprehensive
income (loss) is defined in SFAS 130 as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Total comprehensive income (loss) was
$(338.9)million and $41.4 million for the nine months ended September 30, 1999
and 1998, respectively, and $(206.5) million and $22.1 million for the three
months ended September 30, 1999 and 1998 respectively. The primary difference
from net income (loss) as reported is the change in cumulative foreign currency
translation adjustment.
8. CONTINGENCIES
The Company is party to a case entitled DARBY V. CHS ELECTRONICS, INC. ET. AL.
pending in the United States District Court for the Southern District of
Florida. This complaint and others were purportedly filed on behalf of those
security holders of the Company who purchased such securities during specified
time frames. The complaints, which purports to be class action complaints,
generally allege that the Company and certain of its officers violated federal
securities laws (including Rule 10b-5 promulgated pursuant to the Securities
Exchange Act of 1934) in connection with financial reporting and disclosure.
Among other things, the plaintiffs allege that the Company and certain of its
officers and directors materially overstated financial disclosures. The
plaintiffs seek, among other relief, to be declared a class and to be awarded
compensatory damages and attorney's fees and costs. By order dated June 23,
1999, the Court consolidated the above-referenced cases and appointed lead
plaintiffs and approved the selection of lead counsel for the lead plaintiffs.
Pursuant to the direction of the Court, the parties have submitted a proposed
pre-trial schedule which is pending consideration with the Court.
On October 12, 1998 Metro AG of Germany ("Metro") announced that its planned
sale of the Vobis Group to the Company would not be concluded. Metro commenced
suits against a Bank which had issued a DM 20 million letter of credit
(approximately $11 million) provided by the Company as part of the transaction
in an attempt to force payment on the letter of credit. The Company believes
that the conditions permitting Metro to draw on the letter of credit were not
met and intervened in the litigation. In both cases Metro's claims were
dismissed, however, appeals have subsequently been filed. The Vobis Group
purchase agreement called for disputes to be settled by arbitration in Germany
and an arbitration proceeding has been initiated by Metro. The arbitration
proceeding is in an early stage and no prediction can be made as to its outcome.
The purchase agreement did not provide for a break-up fee.
The Department of Commerce has commenced an investigation of the export
activities of one of the Company's subsidiaries and its management in relation
to alleged violations of certain Federal exportation laws and other related
violations including money laundering. Although the ultimate exposure could be
much higher if the Company were ultimately found to have violated these laws,
the Department of Commerce has offered to settle for a fine of $25 million and a
guilty plea to a representative sample of the charges. Most of the transactions
under review by the Department of Commerce occurred prior to the date that the
Company acquired the subsidiary. The Company intends to vigorously defend itself
against these claims.
DHL Airways, Inc. and DHL International, B.V. (collectively "DHL") has made a
claim against the Company for indemnification for assessments of approximately
$3.1 million made by the Dutch Government against DHL. The assessments are for
certain shipments made through DHL by certain of the Company's European
subsidiaries that have been alleged by the Dutch government to have understated
the declared values in order to reduce payments for value added tax and custom
fees. The Company intends to vigorously defend itself against this claim.
F-47
<PAGE>
The Company is involved in other litigation relating to claims arising in the
normal course of its business. None of these legal proceedings are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
9. RELATED PARTY TRANSACTIONS
A member of the Board of Directors, who is a more than 5% shareholder and
officer of the Company, had ownership interests and control over other companies
that did business with the Company. The accompanying financial statements
include the following transactions and balances which relate to this individual
or his related entities during the nine months ended September 30, 1999 and 1998
(amounts in thousands):
1999 1998
------- -------
Sales to such related parties $ 56 $53,600
Purchases from such related parties 163 4,300
Net amount due the Company 1,782 25,400
By agreement dated December 1998 and subsequently amended in March 1999, CHS
acquired certain of these companies for a net amount of 1.7 million shares of
common stock and $4.0 million in cash. In January 1999, the Company acquired,
for $5.4 million in cash, the remaining entity which had transactions with the
Company. In connection with the acquisitions, the Company recorded goodwill of
$38.5 million. As a result of these acquisitions, the Company expects no
significant transactions in the future.
During 1998, the Company sold two companies and rights to entities in which the
above individual has a minority ownership interest. The companies and rights
sold were ancillary operations acquired as part of the acquisition of Frank &
Walter in January 1997. The companies were sold for cash of $6.7 million, all of
which was collected during 1999.
The Company has a receivable from Comtrad Holdings, Inc. ("CHI") and its wholly
owned subsidiary, Comtrad, Inc. ("Comtrad"), of $20.7 million at September 30,
1999 and $19.2 million at September 30, 1998. CHI is controlled by the Chief
Executive Officer of the Company and an additional member of the Board of
Directors also has a minority interest in CHI. This receivable is in the form of
a promissory note which Comtrad and CHI have collateralized with all of their
net assets. The principal asset of CHI and Comtrad is shares of the Company's
common stock which is pledged on a loan. The principal liabilities of these
companies is an amount due of approximately $10 million to a financial
institution and the amount due to the Company. Interest accrues on the
promissory note at prime rate and is due together with the principal amount
outstanding 180 days after demand. Interest charged to Comtrad and CHI during
the nine months ended September 30, 1999 and 1998 was $0.7 million and $1.0
million, respectively. The market value of the Company's shares currently and at
June 30, 1999 would have been insufficient to liquidate the indebtedness.
Therefore management established a valuation reserve of $20.7 million as of June
30, 1999 by a charge to operating expenses and discontinued accrual of interest
as of that date.
10. SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standard 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" ("SFAS
131"), which establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. SFAS 131 requires that the definition of operating segments
align with the measurements used internally to assess performance.
The Company's business activities involve the operating segments of distribution
of microcomputer equipment and software products. The operating segments are the
distribution to resellers and the
F-48
<PAGE>
distribution to assemblers. The former involves both universal products
(products that represent the basic components of a personal computer without
regard to the specific local language, regulatory and technical factors of
individual markets) and localized products while the latter is principally
universal products. In addition, another operating segment is the Company's
central treasury function. The accounting policies of the segments are the same
as those described in the Summary of Accounting Policies to the Company's
audited consolidated financial statements for the year ended December 31, 1998
(Note A). The segments are managed separately since each requires different
business and marketing strategies. The geographic areas in which the
distribution to resellers segment operates are Western Europe, Eastern Europe,
Latin America and Asia/Middle East. Net sales, gross profit, operating income
(loss) (before interest and income taxes) and total assets by segment were as
follows (in thousands):
<TABLE>
<CAPTION>
DISTRIBUTION TO RESELLERS
------------------------------------------------------
ASIA/ DISTRIBUTION
NINE MONTHS ENDED WESTERN EASTERN LATIN MIDDLE TO TOTAL
SEPTEMBER 30, EUROPE EUROPE AMERICA EAST ASSEMBLERS TREASURY SEGMENTS
- - ----------------------- ---------- ---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Net sales $3,880,313 $ 636,641 $1,121,278 $ 413,592 $ 827,548 $ -- $6,879,372
Gross profit 195,455 42,055 82,606 22,540 37,014 -- $ 379,670
Operating income (loss) (20,457) 7,651 (26,944) 1,793 (23,212) (3,887) $ (65,056)
Total assets 1,334,304 180,449 588,459 139,606 277,810 162,046 $2,682,674
1998
Net sales $3,019,038 $ 402,400 $1,095,016 $ 238,562 $ 932,759 $ -- $5,687,775
Gross profit 203,096 33,756 72,464 15,338 53,200 -- $ 377,854
Operating income (loss) 58,283 13,441 21,326 4,331 13,382 (842) $ 109,921
Total assets 1,318,977 159,643 531,196 119,773 471,218 208,111 $2,808,918
</TABLE>
Reconciliation of total segments to consolidated total:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING INCOME:
Total operating income for reportable segments $ (65,147) $ 109,921
Corporate (expenses) income (6,154) (9,671)
Goodwill write-off not allocated (169,392) --
Goodwill amortization not allocated (25,562) (17,015)
----------- -----------
Total operating income (loss) $ (266,255) $ 83,235
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------
ASSETS: 1999 1998
----------- -----------
<S> <C> <C>
Total segments $ 2,682,674 $ 2,808,918
Elimination of intercompany receivables (620,402) (521,980)
Goodwill not allocated 677,345 620,452
Other assets, including reclassifications (119,036) (50,803)
----------- -----------
Total consolidated assets $ 2,620,581 $ 2,856,587
----------- -----------
</TABLE>
F-49
<PAGE>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
GEOGRAPHIC INFORMATION: 1999 1998
---------- ----------
Net sales:
Western Europe $4,456,260 $3,681,743
Eastern Europe 767,611 575,170
Latin America 1,121,278 1,081,086
Asia, Africa and Middle East 534,223 349,776
---------- ----------
Consolidated Total $6,879,372 $5,687,775
========== ==========
The Company's product mix by category was:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------ ------
Personal computers 23.5% 17.3%
Mass storage 19.7% 26.7%
Printers 11.5% 11.8%
Software 10.7% 10.6%
Components 6.8% 8.7%
Networking and multimedia 9.0% 8.6%
Peripherals 7.4% 7.8%
Other 11.4% 8.5%
------ ------
Total 100% 100%
====== ======
The Company's customers typically rely on distributors as their principal source
of microcomputer products and financing. The Company's backlog of orders is not
considered material to an understanding of its business. No single customer
accounted for more than one percent of the Company's net sales in the nine
months ended September 30, 1999 and 1998.
F-50
<PAGE>
ANNEX A
EXCHANGE AGREEMENT
EXCHANGE AGREEMENT, dated as of December 14, 1999 between JOURNEY
HOLDINGS, LTD., a company formed under the laws of the British Virgin Islands
(the "Buyer"), and CHS ELECTRONICS, INC., a Florida corporation having its
principal address at 2000 NW 84th Avenue, Miami, Florida (the "Seller").
RECITALS
A. Seller, directly or indirectly through its subsidiaries, owns the
issued and outstanding shares of capital stock of those companies listed on
Schedule 1 (the "Companies") in the amounts indicated therein, and is the
beneficiary of options to acquire stock of certain companies as described in
Schedule 1;
B. Mark Keough, an authorized officer and a shareholder of Buyer, is
also the Chief Operating Officer of Seller and is currently responsible for,
among other things, the day to day management of Seller's European subsidiaries,
including the Companies and their subsidiaries, and has been actively involved
in the affairs of Seller since July 15, 1999;
C. Seller has issued $200,000,000 aggregate principal amount of nine
and seven-eighths percent Senior Notes due 2005 (the "Fixed Rate Notes")
pursuant to an Indenture dated as of April 9, 1998 among Seller, CHS
Electronics, Inc. (Nevada), CHS Delaware Inc., CHS Delaware L.L.C., CHS
Americas, Inc. and The Chase Manhattan Bank, as trustee (the "Indenture");
D. Seller has issued $50,000,000 aggregate principal amount of floating
rate convertible debentures due 2003 (the "Floating Rate Notes") pursuant to a
Debenture Purchase Agreement dated May 26, 1999 between Seller and Computer
Associates International, Inc., as amended pursuant to a letter agreement dated
June 15, 1999 (the "Computer Associates Debenture Agreement");
E. The following subsidiaries of Seller are the subject of a
receivership in the United Kingdom (the "UK Receivership"): Metrologie Ltd., CHS
UK Holdings, Ltd., CHS Electronics PLC and Karma (UK) Ltd.;
F. CHS Frank & Walter, CHS Electronic Deutschland GmbH and CHS
Electronics Austria GesmbH have voluntarily filed for creditor protection under
German and Austrian law (the "German/Austrian Bankruptcy");
G. Pursuant to the UK Receivership and the German/Austrian Bankruptcy,
creditors of the parties to those proceedings have asserted claims against
Seller under purported corporate guarantees issued by Seller (the "Guarantees");
<PAGE>
H. Buyer will form NewCo (as defined below) and cause NewCo to conduct
an exchange offer for the Fixed Rate Notes and the Floating Rate Notes and to
obtain a release of the Guarantees as set forth herein; and
I. Seller desires to exchange the options and the outstanding capital
stock of the Companies identified in Schedule 1 for the Fixed Rate Notes and the
Floating Rate Notes and for the cash consideration and other consideration as
set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1 CERTAIN DEFINITIONS. As used herein the following terms
have the following meanings:
AFFILIATE: With respect to any Person, any other Person that directly
or indirectly, or through one or more intermediaries, controls, is controlled
by, or is under common control with such Person. For the purposes of this
definition, "control", as used with respect to any Person, shall mean the
possession, directly or indirectly through or with one or more intermediaries,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise. The terms "controlled by" and "under common control with" shall have
correlative meanings.
AGREEMENT: This Exchange Agreement and the Schedules attached hereto.
BUSINESS DAY: Any day that is not a Saturday or a Sunday and on which
banks are open for the conduct of normal banking business in Miami, Florida.
BUYER: As defined in the preamble to this Agreement.
CASH CONSIDERATION: As defined in Section 2.2.
CLOSING DATE: That date on which the exchange of the Shares and
assignment of the options, and other actions described in Article II, shall be
consummated, which shall be no later than five (5) days following the
satisfaction of the conditions described in Articles VII and VIII (or the waiver
thereof by the party entitled to the condition).
CODE: The Internal Revenue Code of 1986, as amended.
CONTRACT: Any contract, mortgage, deed of trust, bond, indenture,
lease, license, note, franchise, certificate, option, warrant, right, or other
instrument, document or written agreement and any oral obligation, right or
agreement.
2
<PAGE>
EXCHANGE OFFER: As defined in Section 3.1.
GOVERNMENTAL AUTHORITY: Any nation or government, any state, or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
INDEMNIFIED PARTY: As defined in Section 6.3.
INDEMNIFYING PARTY: As defined in Section 6.3.
JUDGMENT: Any judgment, writ, order or decree of or by any court,
judge, justice or magistrate, including any bankruptcy court or judge, and any
order of or by any other Governmental Authority.
LAW: The common law and any statute, ordinance, code or other law,
rule, regulation, order, technical or other standard, requirement or procedure
enacted, adopted, applied or followed by any Governmental Authority (including
any court).
LIEN: Any security agreement, financing statement (whether or not
filed), conditional sale or other title retention agreement, any lease,
consignment or bailment given for security purposes, any lien, charge,
limitation, restrictive agreement, mortgage, pledge, option, encumbrance,
adverse interest, constructive trust or other trust, claim, attachment,
exception to or defect in title or other ownership interest (including, without
limitation, reservations, rights of entry, possibilities of reverter,
encroachments, easements, rights of way, restrictive covenants, leases and
licenses) of any kind, which (i) creates or confers or purports to create or
confer an interest in property to secure payment or performance of a liability,
obligation or claim, or which retains or reserves or purports to retain or
reserve such an interest for such purpose; (ii) grants to any person the right
to purchase or otherwise acquire, or obligates any person to sell or otherwise
dispose of, or otherwise results or may result in any person acquiring, any
property or interest therein; (iii) restricts or may restrict the transfer of,
or the exercise of any rights or the enjoyment of any benefits arising by reason
of ownership of, any property; or (iv) otherwise constitutes an interest or a
purported interest in or claim or purported claim against property, whether
arising pursuant to any Law, Contract, Title Document or Judgment.
MATERIAL ADVERSE EFFECT: As to any Person, any effect which is or could
reasonably be expected to be materially adverse to the business, assets,
liabilities, results of operations or financial condition of any such Person.
PARTIES: Seller and Buyer.
PERSON: Any natural person, corporation, general or limited
partnership, joint venture, trust, association, unincorporated entity of any
kind or Governmental Authority.
PLAN: Any pension, profit sharing, thrift or other retirement plan,
medical, hospitalization, vision, dental, life, disability or other insurance or
benefit plan, deferred compensation, stock
3
<PAGE>
ownership, stock purchase, stock option, performance share, bonus, fringe
benefit, savings or other incentive plan, severance plan or other similar plan,
agreement, arrangement or understanding.
SELLER: As defined in the preamble to this Agreement.
SHARES: As defined in Section 2.1.
TITLE DOCUMENT: Any deed, grant or easement, certificate of title or
other document which confirms and vests title or ownership of any property or
any interest in property, real, personal or intangible, in the Companies.
Section 1.2 TERMS GENERALLY. The definitions in Section 1.1 and
elsewhere in this Agreement shall apply equally to both the singular and plural
forms of the terms defined. Whenever the context may require, any pronoun shall
include the corresponding masculine, feminine and neuter forms. The words
"include", "includes" and "including" shall be deemed to be followed by the
phrase "without limitation." The words "herein", "hereto" and "hereunder" and
words of similar import refer to this Agreement (including the Schedules) in its
entirety and not to any part hereof unless the context shall otherwise require.
All references herein to Articles, Sections and Schedules shall be deemed
references to Articles and Sections of, and Schedules to, this Agreement unless
the context shall otherwise require. Unless the context shall otherwise require,
any references to any agreement or other instrument or statute or regulation are
to it as amended and supplemented from time to time (and, in the case of a
statute or regulation, to any corresponding provisions of successor statutes or
regulations). Any reference in this Agreement to a "day" or number of "days"
(without the explicit qualification of "Business") shall be interpreted as a
reference to a calendar day or number of calendar days. If any action or notice
is to be taken or given on or by a particular calendar day, and such calendar
day is not a Business Day, then such action or notice shall be deferred until,
or may be taken or given on, the next Business Day.
ARTICLE II
EXCHANGE
Section 2.1 EXCHANGE OF SHARES. At the Closing, Seller shall cause a
wholly-owned foreign entity to entities to convey, transfer, assign and deliver
the options and the issued and outstanding shares of the capital stock of the
Companies (collectively, the "Shares") described in Schedule 1 to a legal entity
to be formed and capitalized by Buyer ("NewCo"). At the Closing, Seller shall
also assign to NewCo any of the options to acquire capital stock that are
described in Schedule 1, to the extent such options have not expired. Such
conveyance, transfer and assignment shall be effected by delivery to NewCo at
the Closing of such documents or instruments which may be necessary, or which
NewCo may have reasonably requested, in order to effectively vest in NewCo good
and marketable title to the Shares, free and clear of all Liens. If Seller is
unable to deliver good and marketable title to any of the Shares at the Closing,
the Parties agree to mutually negotiate an equitable reduction to the
consideration described in this Article II and to exclude such Shares from the
exchange with NewCo.
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Section 2.2 CASH CONSIDERATION. At the Closing, Buyer shall cause NewCo
to deliver to Seller U.S.$11,000,000 (the "Cash Consideration") in immediately
available funds to an account designated by Seller. Subject to the prior written
consent of Seller, which may be refused in the sole discretion of Seller, Buyer
may deliver to Seller at the Closing, instead of the cash payment described in
the preceding sentence, releases of existing indebtedness of Seller in the
aggregate amount of at least U.S.$11,000,000. Such releases shall relate to
indebtedness of Seller specifically identified by Seller, and shall be
indebtedness other than that indebtedness described in Sections 2.3 and 2.4
hereof. Such releases shall be in a form satisfactory to Seller.
Section 2.3 NOTES AND DEBENTURES. At the Closing, Buyer shall cause
NewCo to convey, transfer, assign and deliver to Seller all of the Fixed Rate
Notes and Floating Rate Notes that have been procured by NewCo pursuant to the
Exchange Offer.
Section 2.4 GUARANTEES. At the Closing, Buyer shall cause NewCo to
deliver to Seller releases from the beneficiaries of the Guarantees related to
the entirety of the Guarantees that have been released pursuant to the Exchange
Offer. Such releases shall be in a form satisfactory to Seller, as notified in
writing to Buyer prior to the Exchange Offer.
Section 2.5 NEWCO STOCK. At the Closing, NewCo shall issue and deliver
to Seller shares (or limited partnership interests, if applicable) of NewCo
equal to 10% of the outstanding capital stock (or limited partnership interests,
if applicable) on a fully diluted basis, subject to the Warrants, as defined
below. At Seller's discretion, it may contribute a portion of the Shares to
NewCo in exchange for such capital stock. In such case, Seller and Buyer shall
cooperate to minimize adverse tax consequences to Seller associated with such
contribution.
Section 2.6 INTERCOMPANY DEBTS, MANAGEMENT FEES. Buyer acknowledges
that, as of the date of this Agreement, the Companies and their subsidiaries
have outstanding intercompany debts and management fees owed to Seller of
U.S.$4,800,000. Beginning in the week in which this Agreement is executed, Buyer
agrees that all Available Cash of the Companies and their subsidiaries shall be
used to repay that indebtedness over a 14 week period in equal installments of
U.S.$342,857. Calculation by Buyer of Available Cash shall be performed by Buyer
reasonably and in good faith as of Thursday of each week and a report detailing
such calculation shall be delivered to Seller. "Available Cash" shall equal the
excess of cash balances and available borrowings over projected cash needs for
the next 10 days. Projected cash needs means cash required to meet operating
expenses and accounts payable on normal terms. If Available Cash is greater than
U.S.$2,000,000 as of the date of any payment under this section, such payment
shall equal U.S.$750,000.
ARTICLE III
PRECLOSING COVENANTS
Section 3.1 EXCHANGE OFFER. As soon as reasonably practicable following
the execution of this Agreement, Buyer agrees to constitute NewCo and to cause
NewCo to conduct an exchange offer (the "Exchange Offer"). Such obligation shall
be conditioned on the delivery
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by Seller of a list of the Guarantees, including the total claim amount under
each Guarantee that will be entitled to participate in the Exchange Offer. The
terms and conditions of the Exchange Offer shall be as described in this
Agreement. Neither Buyer nor NewCo shall modify the terms of the Exchange Offer
without the prior written consent of Seller, which shall not be unreasonably
held to the extent that terms or conditions of the Exchange Offer are not
described herein, Seller shall have the right to prior approval of such terms
and conditions not to be unreasonably withheld.
Section 3.2 TERMS OF EXCHANGE OFFER. The Exchange Offer shall be
conditioned on acceptance by the holders of at least 95% of the outstanding
principal amount of the Fixed Rate Notes and 95% of the claims under the
Guarantees, (as identified in writing by Seller prior to the Exchange Offer).
Under the Exchange Offer, NewCo will offer to all of the holders of the Fixed
Rate Notes and the Floating Rate Notes and to holders of the Guarantees
identified in writing by Seller representing a maximum amount of U.S.$47,000,000
(the Fixed Rate Notes, the Floating Rate Notes and up to U.S.$47,000,000 of
guaranteed indebtedness are referred to in this Agreement collectively as the
"Seller Obligations") the opportunity to exchange Seller Obligations for the
following consideration: (i) U.S.$19,000,000 in cash; (ii) U.S.$75,000,000
aggregate principal amount of senior notes of NewCo (the "NewCo Notes"); (iii)
Series A Warrants for 10% of NewCo's equity exercisable when the Equity Value of
NewCo exceeds U.S.$200,000,000 (the "Series A Warrants"); and (iv) Series B
Warrants for 10% of NewCo's equity exercisable when the Equity Value of NewCo
exceeds U.S.$350,000,000 (the "Series B Warrants" and, together with the Series
A Warrants, the "Warrants"). The "Equity Value" of NewCo shall be determined
annually within 120 days of the close of the fiscal year, based upon NewCo's
audited consolidated financial statements for the year then ended, and shall
equal six times the consolidated net earnings before interest, taxes,
depreciation and amortization of NewCo, less indebtedness for borrowed money of
NewCo determined in accordance with generally accepted accounting principles, as
reflected on such consolidated financial statements. The Exchange Offer will be
consummated and consideration exchanged thereunder on the Closing Date of this
Agreement. The terms of the Warrants shall provide that they will be cancelled
if the NewCo Notes are repaid prior to the fourth anniversary of the issue date
of the NewCo Notes.
Section 3.3 PARTICIPATION IN THE CASH PORTION OF THE EXCHANGE OFFER.
Under the Exchange Offer, NewCo will offer to purchase for cash 100% of the
amounts outstanding under the Fixed Rate Notes, the Floating Rate Notes, and up
to U.S.$47,000,000 of Guarantees (as identified by Seller pursuant to Section
3.1) at a purchase price of 12.5% of the total claim amount. The total claim
amount in the case of the Fixed Rate Notes and the Floating Rate Notes shall be
the outstanding principal amount of such notes. No more than U.S.$152,000,000 of
claims will be permitted to participate in the cash portion of the Exchange
Offer. If more than U.S.$152,000,000 of claims elect to receive cash, only the
first U.S.$152,000,000 to tender will be permitted to participate.
Section 3.4 THE NEWCO NOTES AND THE WARRANTS. The NewCo Notes shall be
repayable 6 years from issuance, shall bear interest at 10% per annum, with
semi-annual payments of interest payable in cash or payment in kind, and may be
repaid any time at par
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without penalty. The NewCo Notes shall be allocated among the holders of the
Fixed Rate Notes, the Floating Rate Notes and the holders of up to
U.S.$47,000,000 of Guarantees on a pro rata basis, after taking into account the
total claims to be purchased under the cash portion of the Exchange Offer. The
Series A Warrants and the Series B Warrants shall be issued to the holders of
the NewCo Notes on a pro rata basis, based on their respective shares of the
face amount of the NewCo Notes. If Computer Associates International, Inc. does
not elect to participate in the Exchange Offer, then Seller shall have the right
to receive the amount of cash, NewCo Notes and Warrants that Computer Associates
International, Inc. would have received had it participated. If Computer
Associates International, Inc. elects to participate in the Exchange Offer, it
may not tender less than the full amount of the Variable Rate Notes.
Section 3.5 EXCHANGE OFFER INDEMNIFICATION. From and after the Closing,
Seller covenants and agrees to indemnify, defend and hold harmless Buyer and its
shareholders, employees, officers, directors and agents (collectively, the
"Exchange Offer Indemnified Parties") from and against all losses, damages,
liabilities, deficiencies, obligations, costs and expenses, including reasonable
legal fees and expenses (collectively, "Losses") to which any of the Exchange
Offer Indemnified Parties may become subject under the Securities Exchange Act
of 1934, as amended, or otherwise, insofar as such Losses arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the disclosure documents delivered to the participants in the
Exchange Offer, provided that such misstatement or omission was based on or
omitted from information provided by Seller in writing to Buyer for inclusion in
the Exchange Offer disclosure documents. The defense of any action under this
Section 3.5 shall be conducted in accordance with the provisions of Section 6.3
hereof. Notwithstanding anything to the contrary in this Agreement, the
cumulative indemnity obligations of Seller under this Section 3.5 shall not
exceed the Cash Consideration.
Section 3.6 DUE DILIGENCE. Buyer shall conduct a due diligence review
of the Companies within 60 days following the execution of this Agreement, which
must be completed within 10 Business Days, and which review shall be limited to
tax matters, litigation and intercompany transactions only.
Section 3.7 MANAGEMENT AGREEMENT. Simultaneously with this Agreement,
Seller and Buyer have entered into a Management Agreement providing for the
management of the Companies prior to the Closing. As an inducement to Seller to
enter into this Agreement, Mark Keough hereby agrees to the immediate
termination of his employment agreement with Seller (including the cancellation
of all outstanding options issued to Keough by the Seller) and agrees to provide
Seller with a release of all liabilities of Seller under such employment
agreement and any outstanding option agreements (other than salary under the
employment agreement accrued through the date hereof), such release to be in a
form reasonably satisfactory to Seller.
Section 3.8 SHAREHOLDERS AGREEMENT. Promptly following the execution of
this Agreement, the Parties shall negotiate a form of agreement among the
shareholders of NewCo to be signed at the Closing, which shall include, among
other things, anti-dilution protections, preemptive rights, rights of first
refusal, drag-along/tag-along rights, and a covenant by Seller not to sell its
shares of NewCo to a competitor of NewCo. In addition, Buyer agrees that Seller
shall
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be entitled to appoint at least one of the members of the board of directors of
NewCo, or other body performing similar functions, and shall so agree in the
agreement among shareholders.
Section 3.9 ADVANCE FOR LEGAL EXPENSES. Seller shall immediately
advance to Buyer 68,000 British Pounds to be used by Buyer to pay legal expenses
incurred in connection with this Agreement, such amount to be refunded to Seller
at the earlier of the termination of this Agreement or the Closing. Buyer,
acting under the Management Agreement referred to in Section 3.7, may take up to
U.S.$75,000 per month of additional advances for legal expenses related to this
transaction from the Available Cash of the Companies, to the extent not needed
to make payments to Seller pursuant to Section 2.6, such additional advances to
be refunded to Seller on the Closing Date.
Section 3.10 SERVICE AGREEMENT. As soon as reasonably practicable after
the date hereof, Buyer and Seller shall enter into a Service Agreement, pursuant
to which Seller, at its actual cost, will provide Buyer with telecommunications
and financial and accounting information services and other similar services
mutually agreed to by the Parties.
Section 3.11 OWNERS OF BUYER. Within 10 days after the date of this
Agreement, Buyer shall provide Seller for its approval (which shall not be
unreasonably withheld) with the names of all of the potential beneficial owners
of NewCo's capital stock.
Section 3.12 CUSTOMER LISTS. Buyer agrees to make available to Seller,
at all times up to the Closing Date and for a period of 30 days following the
Closing Date, updated copies of all of the customer lists of the Companies and
their subsidiaries.
Section 3.13 OTHER INTERESTS. The following companies are the subjects
of disputes between Seller and third parties regarding amounts to be paid by the
Seller to the sellers of those companies: Merisel Russia, CHS Slovenia, Memory
Set and Raphael Informatica. As to each of those companies for which NewCo is
able to negotiate a complete release of the Seller by all of the parties to the
dispute, in a form satisfactory to Seller, Seller agrees to assign to NewCo at
the Closing all of its interest in such company; provided, however, that, in the
case of Raphael Informatica, such assignment shall be subject to the receipt by
the Seller of an additional U.S.$2,000,000 in immediately available funds, as
well as a release from all of the parties to the Raphael Informatica dispute.
Section 3.14 SOFTWARE LICENSES. To the extent permitted by the terms of
agreements with the licensors of software currently used by the Companies,
Seller will provide all reasonable cooperation with the Buyer to vest in the
Companies the right to continue to use such software on the same terms and
conditions.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
To induce Buyer to enter into this Agreement, Seller-hereby represents
and warrants to Buyer as follows:
Section 4.1 ORGANIZATION AND AUTHORITY. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida and has all requisite corporate power and authority to conduct its
business as it is now being conducted.
Section 4.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. Other than the
shareholder approval of a disposition of substantially all of the assets of the
corporation, Seller has all requisite corporate power and authority to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Seller. This
Agreement has been duly and validly executed and delivered by Seller and
constitutes a legal, valid and binding obligation of Seller enforceable against
Seller in accordance with its terms, except insofar as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights generally or by principles governing the
availability of equitable remedies.
Section 4.3 TITLE, EFFECT OF TRANSFER OF SHARES. Seller or a subsidiary
of Seller has good and valid title to the Shares, and, to the knowledge of
Seller, the Shares are free and clear of any Liens. On the Closing Date, good
and valid title to the Shares will pass to Buyer, free and clear of any Liens,
other than those (i) arising from acts of Buyer or its affiliates or (ii) known
to Buyer or its affiliates.
Section 4.4 BROKERS AND FINDERS. Neither Seller, nor any of its
affiliates or any of their respective officers, directors or employees have
entered into any Contract, arrangement or understanding with any Person which
will result in the obligation of Buyer to pay any finder's fees, brokerage or
agents commission or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
Section 4.5 MEETING OF THE SHAREHOLDERS OF SELLER. Seller will take all
action necessary in accordance with the Florida Business Corporation Act
("FBCA") and Seller's Articles of Incorporation and Bylaws, to duly call, give
notice of, convene and hold a meeting of its shareholders as promptly as
practicable, to consider and vote upon the adoption and approval of this
Agreement and the transactions described herein, to the extent such approval is
required by the FBCA and the Articles of Incorporation and Bylaws of Seller.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
Section 5.1 ORGANIZATION AND AUTHORITY. Buyer is a company duly
organized, validly existing and in good standing under the laws of the British
Virgin Islands and has all requisite power and authority to carry on its
businesses as now being conducted.
Section 5.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. Buyer has all
requisite power and authority to execute, deliver and perform this Agreement and
to consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement by Buyer and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of Buyer. This Agreement has been duly and validly executed
and delivered by Buyer and constitutes a legal, valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms, except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights generally or by
principles governing the availability of equitable remedies.
Section 5.3 INVESTMENT INTENT. Buyer or its advisors have such
knowledge and experience in financial and business matters to be capable of
evaluating the merits of the purchase of the Shares. Buyer is indirectly
acquiring the Shares through NewCo for investment, for its own account, and not
with a view to the distribution, transfer or resale thereof in violation of the
Securities Act of 1933, as amended, or any applicable state securities law and
Buyer does not have any contract, understanding, agreement or arrangement to
dispose of the Shares.
Section 5.4 ACCESS TO INFORMATION. Buyer has been furnished with or
given access to all information that it has requested regarding Seller's current
operations and business plans, in addition to the information contained herein.
Buyer has received or been afforded the opportunity to review prior to the date
hereof all written materials, if any, which Seller was required to deliver or
make available, as the case may be, to Buyer pursuant to this Agreement on or
prior to the date hereof, or which Buyer requested the opportunity to review.
Section 5.5 NO KNOWLEDGE OF MISREPRESENTATIONS OR OMISSIONS. Buyer has
no knowledge that any of the representations and warranties of Seller made in
this Agreement are not true and correct and Buyer has no knowledge of any
material errors in, or material omissions from, the Schedules to this Agreement.
Section 5.6 NO ADDITIONAL REPRESENTATIONS. Buyer acknowledges that it
and its representatives have been permitted full and complete access to the
books and records, facilities, equipment, tax returns, contracts, insurance
policies and other properties and assets of Seller which they and their
representatives have desired or requested to see and/or review, and that they
and their representatives have had a full opportunity to meet with the officers,
employees and agents of Seller and to discuss the businesses and assets of the
Companies. Buyer acknowledges that none of Seller, the Companies, their
respective affiliates or any other person has made any
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representation or warranty, express or implied, as to the accuracy or
completeness of any information regarding the Companies furnished or made
available to Buyer or its affiliates or representatives, except as set forth in
this Agreement or the Schedules hereto, and none of Seller or its affiliates or
any other person shall have or be subject to any liability to Buyer or any other
person resulting from the distribution to Buyer or its affiliates or
representatives, or their use of, any such information.
Section 5.7 FINDERS AND BROKERS. Neither Buyer, nor any of its
affiliates or any of their respective officers, directors or employees as such
have entered into any Contract, arrangement or understanding with any Person
which will result in the obligation of Seller to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
Section 5.8 DEFINITION OF BUYER'S KNOWLEDGE. Any reference in this
Agreement to "Buyer's knowledge" or any similar term relating to the knowledge
of Buyer, shall mean the knowledge of Mark Keough and any of the officers or
directors of Buyer.
ARTICLE VI
INDEMNIFICATION AND SURVIVAL; COVENANTS
Section 6.1 INDEMNIFICATION BY SELLER. From and after the Closing,
Seller covenants and agrees to indemnify, defend and hold harmless Buyer,
including Buyer's affiliates, directors, officers, employees, agents, successors
and assigns (each, a "Buyer Indemnified Party") from and against all losses,
damages, liabilities, deficiencies, obligations, costs and expenses (including
reasonable legal fees and expenses) to the extent resulting from or arising out
of (i) any breach of a representation or warranty of Seller contained in this
Agreement or (ii) the nonperformance or breach of any covenant or agreement of
Seller contained in this Agreement requiring performance after the Closing.
Notwithstanding anything to the contrary contained herein, (A) Seller shall not
have any liability under this section for any breach if Buyer had actual
knowledge of such breach at the Closing Date; (B) Seller's total liability under
this section shall in no event exceed the Cash Consideration; and (C) Seller
shall not have any liability under this section to the extent the liability or
obligation arises as a result of any action taken or omitted to be taken by
Buyer.
Buyer further acknowledges and agrees that following the Closing, its
sole and exclusive remedy with respect to any and all claims relating to this
Agreement and the transactions contemplated hereby (other than claims of, or
causes of action arising from, fraud) shall be pursuant to the indemnification
provisions set forth in this section. In furtherance of the foregoing, Buyer
hereby waives, from and after the Closing Date, to the fullest extent permitted
under applicable law, any and all rights, claims and causes of action (other
than claims of, or causes of action arising from, fraud) it may have against
Seller and its affiliates arising under or based upon any Federal, state, local
or foreign statute, law, ordinance, rule or regulation or otherwise (except
pursuant to the indemnification provisions set forth in this Section 6.1).
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Section 6.2 INDEMNIFICATION BY BUYER. From and after the Closing Date,
Buyer covenants and agrees to indemnify, defend and hold harmless Seller, its
affiliates and each of their respective officers, directors, employees, members,
agents, successors and assigns from and against all losses, damages,
liabilities, deficiencies, obligations, costs and expenses (including reasonable
legal fees and expenses) to the extent resulting from or arising out of (i) any
breach of a representation or warranty of Buyer contained in this Agreement, or
(ii) any nonperformance or breach of any covenant or agreement of Buyer
contained in this Agreement requiring performance after the Closing.
Notwithstanding anything to the contrary contained herein, (A) Buyer shall not
have any liability under this section for any breach if Seller had actual
knowledge of such breach at the Closing Date; and (B) Buyer shall not have any
liability under this section to the extent the liability or obligation arises as
a result of any action taken or omitted to be taken by Seller or any of its
affiliates.
Seller further acknowledges and agrees that following the Closing, its
sole and exclusive remedy with respect to any and all claims relating to this
Agreement and the transactions contemplated hereby (other than claims of, or
causes of action arising from, fraud) shall be pursuant to the indemnification
provisions set forth in this section. In furtherance of the foregoing, Seller
hereby waives, from and after the Closing Date, to the fullest extent permitted
under applicable law, any and all rights, claims and causes of action (other
than claims of, or causes of action arising from, fraud) it or any of its
affiliates may have against Buyer and its affiliates arising under or based upon
any Federal, state, local or foreign statute, law, ordinance, rule or regulation
or otherwise (except pursuant to the indemnification provisions set forth in
this section).
Section 6.3 DEFENSE OF ACTION. Any Person seeking indemnification under
the preceding sections hereof and Section 3.5 hereof will give the party from
whom such indemnification is sought prompt notice of any third-party claim,
investigation, action, suit or proceeding with respect to which such
indemnification is sought. In the case of any such third-party claim, such
Person (the "Indemnified Party") shall be entitled, at the sole expense and
liability of the party from whom indemnification is sought (the "Indemnifying
Party"), to exercise full control of the defense, compromise or settlement of
any third-party claim, investigation, action, suit or proceeding unless the
Indemnifying Party within a reasonable time after the giving of such notice by
the Indemnified Party shall: (a) deliver a written confirmation to such
Indemnified Party that the indemnification provisions of this Agreement are
applicable to such claim, investigation, action, suit or proceeding and that the
Indemnifying Party will indemnify such Indemnified Party in respect of such
claim, action or proceeding pursuant to the terms of this Agreement, (b) notify
such Indemnified Party in writing of the Indemnifying Party's intention to
assume the defense thereof, and (c) retain legal counsel reasonably satisfactory
to such Indemnified Party to conduct the defense of such claim, investigation,
action, suit or proceeding. If the Indemnifying Party so assumes the defense of
any such claim, investigation, action, suit or proceeding in accordance
herewith, then such Indemnified Party shall cooperate with the Indemnifying
Party in any manner that the Indemnifying Party reasonably may request in
connection with the defense, compromise or settlement thereof. If the
Indemnifying Party so assumes the defense of any such claim, investigation,
action, suit or proceeding, the Indemnified Party shall (i) have the right to
employ separate counsel and to participate in (but not control) the
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defense, compromise, or settlement thereof, but the fees and expenses of such
counsel shall be the expense of such Indemnified Party unless (i) the
Indemnifying Party has agreed to pay such fees and expenses, (ii) any relief
other than the payment of money damages is sought against the Indemnified Party
or (iii) such Indemnified Party shall have been advised by its counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, and in any such case
the reasonable fees and expenses of such separate counsel shall be borne by the
Indemnifying Party. The Indemnifying Party shall not, without the written
consent of such Indemnified Party, settle or compromise or consent to entry of
any judgment with respect to any such claim, investigation, action, suit or
proceeding (x) in which any relief other than the payment of money damages is or
may be sought against such Indemnified Party or (y) which does not include as an
unconditional term thereof the giving by the claimant, Person conducting such
investigation, plaintiff or petitioner to such Indemnified Party of a release
from all liability with respect to such claim, action, suit or proceeding.
Section 6.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties made by Buyer or Seller in or pursuant to this
Agreement shall survive for a period of 18 months from the Closing Date. All
covenants and agreements of Buyer and Seller contained in or made pursuant to
this Agreement shall survive the Closing indefinitely and without limitation
(except as may otherwise be expressly provided for by their terms). Any
representation, warranty, covenant or agreement which is the subject of a claim
or dispute asserted in writing prior to the expiration of the applicable
above-stated periods shall survive with respect to such claim or dispute until
the final resolution thereof.
Section 6.5 EXPENSES. Except as set forth in Section 3.9 hereof, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby will be paid by the party incurring such costs
and expenses.
Section 6.6 FURTHER ASSURANCES. From time to time after the Closing
Date, without further consideration, each of the Parties will, at its own
expense, execute and deliver or cause to be executed and delivered, such other
instruments of conveyance, assignment, transfer and delivery as any other Party
may reasonably request to effect the purposes of this Agreement.
Section 6.7 PUBLIC ANNOUNCEMENTS. Seller and Buyer agree to consult
with each other prior to issuing any press release or otherwise making any
public statement with respect to the transactions contemplated hereby.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller to consummate the transactions contemplated
herein shall be subject to the satisfaction of the following conditions at or
before the Closing Date or the waiver in writing of such conditions by Seller at
or before the Closing Date.
Section 7.1 SHAREHOLDER APPROVAL. Seller shall have received the
approval of its shareholders of this Agreement and the transactions described
herein.
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Section 7.2 EXCHANGE OFFER. Buyer shall have successfully completed the
Exchange Offer in accordance with terms set forth in this Agreement.
Section 7.3 FAIRNESS OPINION. Prior to submitting this Agreement and
the transactions described herein to the shareholders of Seller for approval,
Seller shall have received an opinion from an investment banking firm of its
choice that this Agreement and the transactions described herein are fair to the
shareholders of Seller from a financial point of view.
Section 7.4 REGULATORY APPROVALS. Seller shall have received all
applicable approvals of Governmental Authorities required for the consummation
of this transaction, including review of the transaction by U.S. or European
competition authorities.
Section 7.5 THIRD PARTY CONSENTS. All material approvals and consents
of third parties including approvals of Governmental Authorities required for
the consummation of this transaction shall have been obtained, including,
without limitation, consents under the Indenture and the Computer Associates
Debenture Agreement, and consents required to be received from the vendors and
lenders of Seller and the Companies.
Section 7.6 KEOUGH EMPLOYMENT AGREEMENT. Keough's employment agreement
with Seller shall have been terminated with no liability to Seller, and Keough
shall have provided Seller with a release from any obligation thereunder.
Section 7.7 SHAREHOLDERS AGREEMENT. The Parties shall have entered into
a shareholders agreement, as described in Section 3.8.
Section 7.8 INTERCOMPANY DEBTS, MANAGEMENT FEES. The U.S.$4,800,000 of
payments described in Section 2.6 shall have been made.
Section 7.9 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer set forth in this Agreement are true in all material
respects when made and at and as of the Closing Date as if made at and as of
such time.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to consummate the transactions contemplated
herein shall be subject to the satisfaction of the following conditions at or
before the Closing or the waiver in writing of such conditions by Buyer at or
before the Closing.
Section 8.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller set forth in this Agreement are true in all material
respects when made and at and as of the Closing Date as if made at and as of
such time.
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Section 8.2 EXCHANGE OFFER. Buyer shall have completed the Exchange
Offer in accordance with terms set forth in this Agreement.
ARTICLE IX
TERMINATION
Section 9.1 FIDUCIARY DUTY TERMINATION. Notwithstanding any provision
contained herein to the contrary, from the date of this Agreement through the
Closing, Seller shall remain free to participate in any discussions or
negotiations with, furnish any information with respect to, assist or
participate in, or facilitate in any other manner, any unsolicited proposal by
any person or entity to do or seek a transaction involving the capital stock or
assets of Seller, if (a) counsel to the Board of Directors of Seller advises the
Board of Directors that the failure to participate in such discussions or
negotiations or provide any information could involve the members of the Board
of Directors in a breach of their fiduciary duties to the stockholders of
Seller, or (b) the Board of Directors determines at its discretion, after
consultation with its financial advisors, that any such proposal is more
favorable to the stockholders of Seller from a financial point of view than the
transactions contemplated in this Agreement.
Section 9.2 DUE DILIGENCE TERMINATION. In the event that Buyer's due
diligence review of the Companies described in Section 3.6 hereof reveals a
Material Adverse Effect to the Companies as to which Buyer and its owners,
directors and Affiliates had no actual knowledge, Buyer may terminate this
Agreement, which right to terminate shall expire five (5) Business Days after
the timely completion of such review under Section 3.6. This termination right
shall only apply if the Material Adverse Effect relates to the subject of the
due diligence defined in Section 3.6.
Section 9.3 OTHER TERMINATION RIGHTS. This Agreement may be terminated
at any time prior to the Closing Date:
(i) by mutual written agreement of the Parties;
(ii) by either Party in the event of a material breach by the
other Party of the representations and warranties or any
covenant under this Agreement which is not cured within thirty
(30) days after written notice of such breach;
(iii) by any Party on written notice to the other, if a
Governmental Authority (including any court) issues an order
that disapproves the exchange of the stock of the Companies
with NewCo;
(iv) by any Party if the Closing has not taken place on or
before June 30, 2000; or
(v) by any Party on written notice to the other party, if
there is in effect any stay or injunction prohibiting the
consummation of the transactions contemplated by this
Agreement.
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ARTICLE X
BANKRUPTCY
Section 10.1 BANKRUPTCY PETITIONS. If (a) Buyer and Seller determine
the Exchange Offer has failed, (b) Seller fails to obtain timely shareholder
approval of this Agreement or (c) a petition under Title 11, U.S.C. ("Bankruptcy
Code") is filed by or against Seller, or the United States subsidiaries of
Seller that directly own any of the Companies (the "Subsidiaries"), then Seller
shall file a voluntary petition under Chapter 11 of the Bankruptcy Code and
cause the Subsidiaries to file a voluntary petition under Chapter 11 of the
Bankruptcy Code. If involuntary Chapter 7 petitions have been filed against
Seller or Subsidiaries, then Seller shall cause the debtor in these cases to
convert the cases to Chapter 11.
Section 10.2 REORGANIZATION PLAN TREATMENT OF CREDITORS. Seller shall
file a reorganization plan and cause the Subsidiaries to file reorganization
plans (collectively, the "Reorganization Plans") that provide for classification
and treatment of creditors' claims consistent with the terms of this Agreement.
Section 10.3 REORGANIZATION PLAN FUNDING. The Reorganization Plans
shall be funded on the effective date of the plans, by NewCo transferring to
Seller the NewCo stock described in Section 2.5 hereof and the consideration
described in Articles II and III hereof and in exchange, Seller and the
Subsidiaries shall transfer their interest in the Companies to NewCo.
Section 10.4 SUBSTANTIVE CONSOLIDATION. Seller reserves the right to
seek an order from the Bankruptcy Court substantively consolidating the estates
of Seller and the Subsidiaries.
Section 10.5 CREDITOR SOLICITATION. Seller agrees to prepare the
Reorganization Plans immediately after execution of this Agreement and begin
solicitation of creditor acceptances consistent with 11 U.S.C. /section/ 1126(b)
and Bankruptcy Rule 3018(b).
Section 10.6 SECURITIES LAWS. Seller reserves the right to provide in
the Reorganization Plans for the modification of the transactions described in
this Agreement if it is necessary to do so to obtain the "safe harbor"
protection of 11 U.S.C. /sections/l125(e) and 1145.
ARTICLE XI
MISCELLANEOUS
Section 11.1 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or mailed, certified or registered mail with postage prepaid, or sent by
telegram or telecopier, as follows:
(a) if to Seller:
CHS Electronics, Inc.
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2000 N.W. 84TH Avenue
Miami, Florida 33122
Attention: Chief Executive Officer
(b) if to Buyer:
Journey Holdings, Ltd.
c/o Mark Keough
CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
or to such other Person or address as any Party shall specify by notice in
writing to each of the other Parties. All such notices, requests, demands,
waivers and communications shall be deemed to have been given and received on
the date of delivery (or the date delivery is refused by the addressee upon
presentation) or on the third business day after the mailing thereof, except
that any notice of a change of address shall be effective only upon actual
receipt thereof.
Section 11.2 ACCESS TO BOOKS, RECORDS, ETC. From the date hereof until
the earlier to occur of (i) the termination of this Agreement in accordance with
its terms and (ii) five years from the Closing Date, Buyer shall, at the sole
cost and expense of the Companies, provide, and cause its agents (including
counsel and accountants) to provide, to the officers and agents of Seller
(including without limitation Seller's auditors) and any requesting Governmental
Authority full and complete access to and the right to inspect and copy all or
any portion of books and records of each Company for all periods prior and
through the Closing Date, and shall, at the sole cost and expense of the
Companies, furnish and cause to be furnished to Buyer all material information
concerning each of the Companies and the business of each of the Companies and
such additional financial, operating and other data and information regarding
each of the Companies and the business of each of the Companies (in accordance
with generally accepted accounting principles in the United States when
requested) as Seller may from time to time reasonably request, without regard to
where such information may be located, in each case for all periods prior and
through and including the Closing Date, in order that Seller may incorporate
such information in management and financial reports, including without
limitation audited reports and reports made available to the public or filed
with any governmental agency and in order that Seller may comply with the
requests of any governmental authority. In addition, each party shall cooperate
with, and shall permit and use its best efforts to cause its respective former
and present directors, officers and employees to cooperate with, the other party
on and after Closing in furnishing information, evidence, testimony and other
assistance in connection with any action, proceeding, arrangement or dispute of
any nature with respect to the subject matters of this Agreement and pertaining
to periods prior to the Closing Date.
Section 11.3 CERTAIN TAXES. Buyer shall pay all documentary, sales,
use, stamp, registration, value added, business, goods and services, transfer,
recording, conveyancing, transmittal, and other such taxes and fees (including
any penalties, interest and additions to tax with respect thereto) incurred in
connection with this Agreement, and Buyer shall, at its own
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expense, file all necessary tax returns and other documentation with respect to
all such taxes and fees, and if required by applicable law, each seller of
Shares shall, and shall cause its Affiliates to, join in the execution of any
such tax returns and other documentation.
Section 11.4 ALLOCATION OF THE PURCHASE PRICE; REDUCTION IN PRINCIPAL
AMOUNT. The consideration received by Seller pursuant to this Agreement for the
Shares (the "Purchase Price") shall be allocated among the Shares as set forth
on the Purchase Price Allocation Schedule. Seller shall deliver the Purchase
Price Allocation Schedule to Buyer not less than 30 days prior to the Closing
Date. It is understood that the Purchase Price on such schedule shall include an
amount of the Fixed Rate Notes and Floating Rate Notes equal to the fair market
value of the Shares, as reasonably determined by Seller. If requested by Seller,
on or before the Closing Date, Buyer shall agree to reduce the principal amount
of the Fixed Rate Notes and Floating Rate Notes that have been procured by NewCo
pursuant to the Exchange Offer to an amount equal to the fair market value of
Shares referenced in the preceding sentence. The allocation of the Purchase
Price among the Shares shall be used by the Parties in preparing all tax returns
of Buyer and Seller. The Parties agree that all allocations made pursuant to
this Section 11.4 are binding upon them and upon each of their successors and
assigns, and that they will report the transaction herein in accordance with
such allocations.
Section 11.5 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties hereto and supersedes all prior agreements and
understandings, oral and written, among the parties hereto with respect to the
subject matter hereof.
Section 11.6 BINDING EFFECT, BENEFIT. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
Section 11.7 AMENDMENT AND MODIFICATION. This Agreement cannot be
changed or terminated orally and no waiver of compliance with any provision or
condition hereof and no consent provided for herein shall be effective unless
evidenced by an instrument in writing duly executed by the party hereto sought
to be charged with such waiver or consent. No waiver of any term or provision
hereof shall be construed as a further or continuing waiver of such term or
provision or any other term or provision. Subject to the foregoing and to
applicable Law, this Agreement may be amended, modified and supplemented in any
and all respects by written agreement of the parties hereto at any time prior to
the Closing Date with respect to any of the terms contained herein.
Section 11.8 FURTHER ACTIONS. Each of the parties hereto agrees that,
subject to its legal obligations and except as otherwise provided herein, it
will use its diligent efforts to fulfill all conditions precedent specified
herein, to the extent that such conditions are within its control, and to do.
all things reasonably necessary to consummate the transactions contemplated
hereby and to otherwise cooperate with each other to facilitate a tax efficient
transaction.
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Section 11.9 JOINT PARTICIPATION IN DRAFTING THIS AGREEMENT. The
Parties acknowledge and confirm that each of their respective attorneys have
participated jointly in the drafting, review and revision of this Agreement and
that it has not been written solely by counsel for one party and that each party
has had the benefit of its independent legal counsel's advice with respect to
the terms and provisions hereof and its rights and obligations hereunder. Each
Party hereto, therefore, stipulates and agrees that the rule of construction to
the effect that any ambiguities are to be or may be resolved against the
drafting party shall not be employed in the interpretation of this Agreement to
favor any Party against another and that no Party shall have the benefit of any
legal presumption or the detriment of any burden of proof by reason of any
ambiguity or uncertain meaning contained in this Agreement.
Section 11.10 CONSTRUCTION. The Article and Section headings contained
in this Agreement are inserted for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
Section 11.11 COUNTERPARTS. This Agreement maybe executed in
counterparts, each of which shall be deemed to be an original, and all of which,
together shall be deemed to be one and the same instrument.
Section 11.12 APPLICABLE LAW. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in accordance with
the laws of the State of Florida, without regard to the conflict of laws rules
thereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CHS ELECTRONICS, INC.
By: ________________________
JOURNEY HOLDINGS, LTD.
By: ________________________
By signing below, MARK KEOUGH joins in this Agreement in his individual capacity
solely for the purposes of Section 3.7.
__________________________
MARK KEOUGH
<PAGE>
SCHEDULE 1
1. FULLY OWNED SUBSIDIARIES
W. EUROPE
CHS Benelux CHS Portugal (Next)
CHS Denmark (Denmark Subs) CHS Romak
CHS Finland Santech-Norway
CHS France Santech-Sweden
Metrologie France CHS Sweden
Metrologie Spain Metrologie Gmbh
Metrologie OH
E. EUROPE
Access & Agora Czechia CHS Estonia
CHS Baltic (Lithuania & Riga) CHS Russia
CHS Bulgaria CHS Trading
CHS Croatia TH Systems Czechia
CHS & DNS Czechia (Czech Subs)
KARMA
Karma Austria Karma Portugal
Karma Belgium Karma ROW
Karma Benelux Karma Russia
Karma Czech Karma Singapore
Karma Dubai Karma Slovakia
Karma Finland Karma Spain
Karma France Karma Switzerland
Karma Germany Karma Turkey
Karma Greece Karma Viewpoint
Karma Hong Kong KIAG
Karma Italy Karma Udas
Karma Norway Karma International S.A.
Karma Poland
2. MINORITY INTERESTS AND OPTIONS
ABC & DNS Poland (40% plus option) Arena (20% plus option)
CHS Hungary/Kventa (49% plus option) Armada (20% plus option)
<PAGE>
ANNEX B
FAIRNESS OPINION OF CAPITALINK
As of January 6, 2000
Board of Directors
CHS Electronics, Inc.
2000 Northwest 84th Avenue
Miami, Florida 33122
Members of the Board:
We understand that there is an Exchange Agreement, dated as of December 14, 1999
(the "Exchange Agreement"), between Journey Holdings, Ltd. ("Journey") and CHS
Electronics, Inc. ("CHS" or the "Company"), whereby CHS will transfer
substantially all of its European subsidiaries ( for purposes of this opinion,
companies in Schedule I of the Exchange Agreement are referred to collectively
as "EuroCos") to a to-be-formed subsidiary of Journey ("NewCo") in exchange for
the consideration set forth below:
(i) $11 million in cash to the Company, or in the alternative,
release of existing indebtedness in the amount of $11 million;
(ii) Forgiveness of $200 million aggregate principal amount 9 7/8%
Senior Notes due 2005 (the "Fixed Rate Notes");
(iii) Forgiveness of floating rate convertible debentures due May
31, 2003 (the "Floating Rate Notes"), which, as of the date
hereof, are $40.5 million principal amount;
(iv) Release of claims in the aggregate of $47 million that have
been made against the Company by creditors based upon
purported corporate guarantees (the "Guarantees"); and
(v) The issuance by NewCo of shares equal to 10% of its
outstanding capital stock, on a fully diluted basis.
The transaction described above is referred to as the "Proposed Transaction,"
and items (i) through (v) are referred to, collectively, as the "Purchase
Consideration."
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of the Company of the Purchase Consideration. We have
not been requested to opine as to, and our opinion does not in any manner
address, the underlying business decision of the Company to proceed with or
effect the Proposed Transaction. In addition, we have not been
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<PAGE>
requested to explore any alternatives to the Proposed Transaction.
In arriving at our opinion, we, among other things: (i) reviewed the Exchange
Agreement; (ii) reviewed the Management Agreement dated as of December 14, 1999,
between Journey and CHS; (iii) reviewed publicly available financial information
and other data with respect to CHS, including the Form 10-K for the fiscal year
ended December 31, 1998, the Form 10-Q for the quarterly period ended September
30, 1999, the Current Reports on Form 8-K, dated October 19, 1999, June 17,
1999, and March 29, 1999, and certain other relevant financial and operating
data relating to CHS made available from published sources and from the internal
records of CHS; (iv) considered the historical financial results and present
financial condition of CHS and EuroCos with those of other companies that we
deemed relevant; (v) reviewed and analyzed the financial terms of certain
transactions that we deemed comparable to the Proposed Transaction; (vi)
reviewed certain publicly available information concerning the trading of, and
the trading market for, the common stock of CHS; (vii) reviewed and analyzed
certain publicly available information concerning the trading of, and the
trading market for, companies that we believed to be comparable to EuroCos;
(viii) reviewed and discussed with representatives of the managements of CHS and
EuroCos certain financial and operating information furnished to us; (ix)
inquired about and discussed the Proposed Transaction with CHS management; and
(x) performed such other analyses and examinations as were deemed appropriate.
In arriving at our opinion, we relied upon and assumed the accuracy and
completeness of all of the financial and other information that was used without
assuming any responsibility for any independent verification of any such
information and further relied upon the assurances of CHS' and EuroCos'
management that they were not aware of any facts or circumstances that would
make any such information inaccurate or misleading. In arriving at our opinion,
we did not make a physical inspection of the properties and facilities of
EuroCos and have not made or obtained any evaluations or appraisals of the
assets and liabilities (contingent or otherwise) of EuroCos. We assumed that the
Proposed Transaction will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and all other
applicable federal and state statutes, rules and regulations. In addition, we
assumed that the Proposed Transaction will comply, in all respects, with the
securities laws, trade regulations and other applicable statutes and regulations
of the various foreign jurisdictions under which the Proposed Transaction is
governed. Our opinion was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, January 6, 2000.
Accordingly, although subsequent developments may affect our opinion, we do not
assume any obligation to update, review or reaffirm our opinion.
We have also assumed, with your consent, that the Proposed Transaction will be
consummated in accordance with the terms described in the Exchange Agreement,
without any further amendments thereto, and without waiver by the Company of any
of the conditions to any obligations thereunder.
In connection with our services, we have previously received a retainer and will
receive the balance of our fee for rendering this opinion. In addition, the
Company has agreed to indemnify us for certain liabilities that may arise out of
the rendering this opinion. This opinion is not
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<PAGE>
intended to be and does not constitute a recommendation to any shareholder of
the Company as to how such shareholder should vote, if required to, with respect
to the Proposed Transaction.
Our opinion is for the use and benefit of the Board of Directors of the Company
and is rendered to the Board of Directors in connection with its consideration
of the Proposed Transaction and may not be used by the Company for any other
purpose or reproduced, disseminated, quoted or referred to by the Company at any
time, in any manner or for any purpose, without the prior written consent of
Capitalink, except that this opinion may be reproduced in full in, and
references to the opinion and to Capitalink and its relationship with the
Company may be included in any proxy statement relating to the Proposed
Transaction that the Company files with the U.S. Securities and Exchange
Commission and distributes to holders of the Company's common stock in
connection with the Proposed Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the date
of this letter, the Purchase Consideration is fair, from a financial point of
view, to the shareholders of CHS.
Very truly yours,
CAPITALINK, L.C.
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<PAGE>
ANNEX C
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT (this "Agreement"), dated as of this 14th day
of December 1999, is between CHS Electronics, Inc., a Florida corporation having
its offices at 2000 N.W. 84th Avenue, Miami, Florida 33122 ("CHS") and Journey
Holdings, Ltd., a Gibraltar company ("Journey").
RECITALS
A. CHS desires to retain Journey to perform supervisory and managerial
services relating to all aspects of the business and affairs of the European
operating subsidiaries of CHS set forth on Schedule 1 attached hereto and
incorporated herein (the "European Subsidiaries").
B. Journey is willing to be retained to provide such supervisory and
managerial services in accordance with the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
consideration herein described, the parties hereto agree as follows:
1. RETENTION OF JOURNEY.
CHS hereby retains Journey on the terms and conditions set forth
herein, to render and perform all of the services described herein, and Journey
hereby agrees to render and perform all of such services. Journey shall retain
the services of Mark Keough, on a full-time basis, to manage the business
affairs of Journey.
2. SUPERVISORY AND MANAGERIAL SERVICES.
(a) Subject to the terms hereof, Journey shall exercise
complete and exclusive management and control of the affairs and
business of the European Subsidiaries and shall possess all powers
necessary, convenient or appropriate thereto. Without limitation of any
power that may be conferred upon it hereunder, Journey shall have the
power to:
(i) make and enter into such contracts as Journey
deems reasonably necessary for the efficient conduct
and operation of the business of the European
Subsidiaries;
(ii) appoint and remove the managing directors,
directors and principal executive officers of each of
the European Subsidiaries and make such other
decisions with respect to employees and senior
management of each of the European Subsidiaries as
Journey may deem appropriate or advisable; provided
that to the extent practicable, managing directors,
directors and persons holding comparable positions in
the European Subsidiaries shall be personnel of a
European corporate trust company(s)
<PAGE>
selected by the parties which personnel are bound to
perform their duties in accordance with the terms of
this Management Agreement, and provided further that
CHS shall consent to the chief financial officer of
the European Subsidiaries, which consent will not be
unreasonably withheld (Mr. Ross Mullins shall be
deemed acceptable to CHS);
(iii) manage all receipts and monies arising from the
operations of each of the European Subsidiaries and
make disbursements on account of each of the European
Subsidiaries in such amounts and at such times as
required;
(iv) execute on behalf of each of the European
Subsidiaries any documents or instruments of any kind
that Journey may deem appropriate or advisable in
connection with the business of each of the European
Subsidiaries;
(v) prepare, execute and file all tax returns and pay
any taxes on behalf of the European Subsidiaries;
(vi) engage such independent attorneys, investment
bankers, accountants (which accountants shall be
reasonably acceptable to CHS), appraisers or such
other experts and advisers for the account of each of
the European Subsidiaries as Journey may deem
necessary or advisable;
(vii) commence or defend litigation that pertains to
any of the European Subsidiaries or any assets of the
European Subsidiaries, and assist in the settlement
of any pending or threatened litigation, by or
against the European Subsidiaries, through
compromise, arbitration or otherwise; and
(viii) to engage in all other activities as may be
necessary or advisable to provide management services
to the European Subsidiaries.
3. SIGNIFICANT DECISIONS.
Notwithstanding any provision hereof to the contrary, Journey shall not
be permitted to undertake any of the following activities on behalf of any of
the European Subsidiaries without the express prior consent of CHS:
(a) enter into any new business, partnership or other venture;
(b) approve any consolidation, merger or amalgamation with, or
the acquisition of any interest in, any third party or its assets,
other than acquisitions of goods and services in the ordinary course of
business;
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(c) issue (whether by way of dividends, distribution or
otherwise), sell or grant to any third party, commit or otherwise
undertake to issue, sell or grant to any third party (i) any shares,
interests, derivatives, participations or other equivalents (however
designated) of capital stock of any of the European Subsidiaries and
any warrants, options or other rights to purchase any of the foregoing
("Equity Interest") or (ii) any securities convertible into or
exchangeable for or carrying any rights to acquire any Equity Interest;
(d) enter into any purchase or sale agreement relating to any
property, real or personal, that requires payments to or from any
European Subsidiary or permit any European Subsidiary to issue any
contractual commitment of more than four (4) months in duration;
(e) except in the ordinary course of business, (i) cancel or
compromise any debts owed to, or claims held by, any of the European
Subsidiaries, (ii) make any capital expenditure, or (iii) waive or
release any rights of any European Subsidiary;
(f) initiate any proceedings with respect to the filing of a
petition of bankruptcy under applicable bankruptcy laws relating to any
European Subsidiary, unless required by applicable law and so long as
at least 10 days prior written notice of such action is provided by
Journey to CHS;
(g) admit any judgment against any European Subsidiary;
(h) make any substantive modification of this Agreement; or
(i) agree or otherwise commit to do any of the foregoing.
4. COMPENSATION.
From and after the date hereof, there shall be payable by CHS to
Journey as cash compensation for services rendered hereunder a fee in an amount
equal to U.S.$100.00 per annum. Journey shall be responsible to cover all of its
expenses associated with providing the management services hereunder to CHS.
5. TERM.
(a) The Term of this Agreement shall commence as of the date
hereof and shall expire on June 30, 2000 (the "Term"), unless
terminated pursuant to the terms hereof or extended or renewed by
mutual agreement of the parties hereto.
(b) CHS may terminate this Agreement upon 30 days prior
written notice to Journey upon any change in the control of CHS. For
purposes of this Section 5(b), a change in control of CHS shall be
deemed to have occurred if securities of CHS representing more than 50%
of CHS's securities having the right to vote on the election of
directors is acquired by any third party or group (as defined in
Section 13(d)(3) of the
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Securities Exchange Act of 1934) who do not presently own in excess of
5% of CHS's outstanding voting securities.
(c) If an involuntary or voluntary case or proceeding is
commenced against or by CHS under the United States Bankruptcy Reform
Act of 1978, as amended, or any similar federal or state statute,
either CHS or Journey may terminate this Agreement upon 30 days prior
written notice.
(d) CHS shall have the right immediately to terminate this
Agreement in the event of (i) the negligence or willful misconduct of
Journey relating to its performance of services hereunder, (ii) the
conviction of Journey of any material criminal offense involving
dishonesty or moral depravity, and (iii) any material breach by Journey
of any agreement or covenant set forth in this Agreement or any
material breach by Journey of that certain Exchange Agreement, dated as
of the date hereof, among CHS and Journey if such breach has not been
cured for a period of 30 days following Journey's receipt of written
notice thereof from CHS.
(e) This Agreement shall automatically terminate on the
"Closing Date," as such term is defined in that certain Exchange
Agreement, dated as of the date hereof, among CHS and Journey.
(f) If this Agreement is terminated pursuant to this Section
5, Journey shall promptly return to CHS all files, information and
materials belonging to the European Subsidiaries in its possession and
control and take such other actions as may be reasonably requested by
CHS to vest control of the European Subsidiaries in CHS; provided,
however, that a1l such files, information and materials shall be made
available to CHS for inspection and photocopying during normal business
hours; and provided further that at CHS's sole cost and expense,
Journey will make available to CHS Journey's employees, at cost, to
facilitate an orderly transfer of such files, information and materials
and to take such other actions as may be reasonably requested.
6. NO JOINT VENTURE OR PARTNERSHIP.
Nothing expressed or implied in this Agreement is intended or shall be
construed (i) to create or establish a joint venture or a partnership between
the parties hereto or (ii) to give rise to a fiduciary, trustee or similar
obligation to CHS on the part of Journey.
7. CONFIDENTIAL INFORMATION.
(a) Journey acknowledges that during the term of this
Agreement, it will be furnished with or have access to proprietary or
confidential information regarding the European Subsidiaries, including
without limitation, intellectual property, financial plans or
projections and other confidential and proprietary technical, financial
or business information (collectively, "Confidential Information").
Journey acknowledges that all
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Confidential Information, whether in oral, written, encoded, graphic or
other tangible or intangible form, is subject to the terms of this
Agreement.
(b) Notwithstanding the foregoing, the following shall not be
considered Confidential Information subject to this Agreement:
(i) information that is or becomes generally
available to and known by the public other than as a
result of an authorized disclosure by Journey or any
of its affiliates; or
(ii) information which is received by a party hereto
on a non-confidential basis from a third person who
is not under any obligation to maintain the
confidentiality thereof.
(c) For as long as this Agreement is in effect and for a
period of eighteen (18) months thereafter, Journey agrees to hold all
Confidential Information in confidence and protected from disclosure
with a reasonable degree of care and in any event with at least the
same degree of care by which Journey protects its own proprietary or
confidential information, provided however that Journey may disclose
Confidential Information relating to the European Subsidiaries to
prospective financial partners and other sources of financing provided
each such party first executes and delivers to CHS and Journey a
confidentiality agreement in form and substance reasonably satisfactory
to CHS and Journey.
8. NO WAIVER.
No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
9. CAPTIONS.
The captions or headings in this Agreement are for convenience and
reference only, and in no way define, describe, extend, or limit the scope or
intent of this Agreement.
10. SEVERABILITY.
If any term or provision of this Agreement or the application thereof
to any person or circumstance shall be invalid or unenforceable, to any extent,
the remainder of this Agreement, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Agreement shall be valid and enforced to the fullest extent permitted by
law.
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<PAGE>
11. NOTICES.
All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given or made (and shall be deemed to
have been duly given or made) upon the earliest to occur of (a) receipt, if made
by personal service, (b) two days after delivery, if made by reputable overnight
international courier service, (c) upon the delivering party's receipt of
written confirmation of a transmission made by cable, by telecopy, by telegram
or by telex, or (d) three days after being mailed by registered or certified
international or air mail (postage prepaid, return receipt requested) to the
respective parties at the following addresses (or at such other address for a
party as shall be specified in a notice given in accordance with this Section
12):
(a) if to CHS: CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
Attn: Chief Executive Officer
(b) if to Journey: Journey Holdings Ltd.
c/o CHS Electronics, Inc.
2000 N.W. 84th Avenue
Miami, Florida 33122
Attn: Mr. Mark Keough
12. GOVERNING LAW AND VENUE.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Florida (without regard to its principles regarding
conflicts of law).
13. CHOICE OF FORUM.
All actions and proceedings initiated by either party hereto and
arising directly or indirectly out of this Agreement which are brought to
judicial proceedings shall be litigated in the United States District Court for
the Southern District of Florida or, if such court cannot or will not exercise
jurisdiction, in the Florida State Circuit Court sitting in Miami-Dade County,
Florida. Each of the parties hereto expressly submits to the exclusive
jurisdiction of the above-referenced courts.
14. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which when taken together shall
constitute one and the same agreement.
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<PAGE>
15. ATTORNEYS' FEES.
If any legal action or any other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach, default
or other misrepresentation in connection with any of the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in such action or proceeding, in
addition to any other relief to which such party may be entitled.
16. ASSIGNMENT.
Neither party hereto may assign, pledge, encumber or hypothecate its
interest in this Agreement without the express prior written consent of the
other party.
17. SUCCESSORS AND ASSIGNS.
All of the covenants, conditions and obligations contained in this
Agreement shall be binding upon and inure to the benefit of the respective
permitted successors and assigns of CHS and Journey to the same extent as if
each such permitted successor and assign were in each case named as a party to
this Agreement.
18. MODIFICATION AND AMENDMENT.
This Agreement may not be changed, modified, discharged or amended
except by an instrument signed by the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CHS ELECTRONICS, INC.
By: ___________________________
JOURNEY HOLDINGS, LTD.
By: ___________________________
<PAGE>
SCHEDULE 1
W. EUROPE
CHS Benelux CHS Portugal (Next)
CHS Denmark (Denmark Subs) CHS Romak
CHS Finland Santech-Norway
CHS France Santech-Sweden
Metrologie France CHS Sweden
Metrologie Spain Metrologie Gmbh
Metrologie OH
E. EUROPE
Access & Agora Czechia CHS Estonia
CHS Baltic (Lithuania & Riga) CHS Russia
CHS Bulgaria CHS Trading
CHS Croatia TH Systems Czechia
CHS & DNS Czechia (Czech Subs)
KARMA
Karma Austria Karma Portugal
Karma Belgium Karma ROW
Karma Benelux Karma Russia
Karma Czech Karma Singapore
Karma Dubai Karma Slovakia
Karma Finland Karma Spain
Karma France Karma Switzerland
Karma Germany Karma Turkey
Karma Greece Karma Viewpoint
Karma Hong Kong KIAG
Karma Italy Karma Udas
Karma Norway Karma International S.A.
Karma Poland
Merisel Russia
CHS Slovenia
Memory Set
Raphael Informatica
<PAGE>
FORM OF PROXY CARD
[CHS LOGO]
SPECIAL MEETING OF SHAREHOLDERS
MARCH 22, 2000
THIS PROXY CARD MUST BE RECEIVED PRIOR TO 10:00 A.M. (LOCAL TIME) ON
MARCH 22, 2000.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF CHS ELECTRONICS,
INC., A FLORIDA CORPORATION, FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
ON MARCH 22, 2000 AT 10:00 A.M. (LOCAL TIME).
The undersigned, being a holder of shares of common stock, par value
$.001 per share (the "Common Stock"), of CHS Electronics, Inc. ("CHS"), hereby
appoints Claudio Osorio and Burton Emmer, or if only one is present, then that
individual, and each such person with full power of substitution and
resubstitution, as his, her or its proxy at the Special Meeting to be held on
March __, 2000 (and any adjournment or postponement thereof) and to vote on
behalf of the undersigned (or abstain from voting) as indicated on the reverse
of this card or, to the extent that no such indication is given, as set forth
herein. The Special Meeting has been convened to consider a proposal to approve
the Exchange Agreement, dated as of December 14, 1999, between Journey Holdings,
Ltd. ("Journey") and CHS, and the transactions contemplated thereby, which,
among other matters, provides for the transfer by CHS of substantially all of
its European subsidiaries to Journey in exchange for cash, stock and forgiveness
of debt. In his/her discretion, the proxy is authorized to vote upon such other
business as may properly come before the meeting or any adjournment or
postponement thereof. The undersigned hereby revokes any previously dated forms
of proxy with respect to the Special Meeting.
THE CHS BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL. IF THIS
CARD IS RETURNED SIGNED BUT NOT MARKED WITH ANY INDICATION AS TO HOW TO VOTE,
THE UNDERSIGNED WILL BE DEEMED TO HAVE DIRECTED THE PROXY TO VOTE FOR THE
PROPOSAL.
PLEASE INDICATE ON THE REVERSE OF THIS CARD HOW YOUR SHARES ARE TO BE
VOTED. PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN AND DATE ON REVERSE SIDE.
*FOLD AND DETACH HERE*
<PAGE>
Please mark your votes as
indicated in this example. [X]
PROPOSALS
THE BOARD OF DIRECTORS OF CHS ELECTRONICS, INC. UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE FOLLOWING PROPOSALS OF CHS ELECTRONICS, INC.:
1. To approve the Exchange Agreement, dated as of FOR AGAINST ABSTAIN
December 14,1999, by and between Journey [ ] [ ] [ ]
and CHS and the transactions contemplated thereby,
which, among other matters, provides for the
transfer by CHS of substantially all of its
European subsidiaries to a subsidiary of Journey
in exchange for cash, stock and forgiveness of debt.
Signature(s)(and Title(s), if any)_________________ Date: _____________, 2000
Please sign your name above exactly as it appears hereon. When signing
as attorney, executor, administrator, trustee or other representative capacity,
please give full title as such. If a corporation, please sign in full corporate
name by a duly authorized director or other officer, indicating title, or
execute under the corporation's common seal. In the case of joint holders, any
one may sign but the first-named in the share register may exclude the voting
rights of the other joint holder(s) by voting in person or by proxy.
*FOLD AND DETACH HERE*
