EXHIBIT 2.2
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
Miami Division
In re: Case No. 00-12731-BKC-RAM
CHS ELECTRONICS, INC., Chapter 11 Proceeding
Debtor.
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CHS ELECTRONICS, INC.'S DISCLOSURE STATEMENT
IN SUPPORT OF AMENDED LIQUIDATING PLAN OF REORGANIZATION
MAY 12, 2000
CHS ELECTRONICS, INC., Debtor in Possession (the "Debtor" or "CHS"),
files its Disclosure Statement in support of its Amended Liquidating Plan of
Reorganization (the "Plan") dated May 12, 2000.
PLEASE ADDRESS ALL INQUIRIES CONCERNING THE DEBTOR, THE PLAN AND THIS
DISCLOSURE
STATEMENT AND VOTING TO:
TEW CARDENAS REBAK KELLOGG
LEHMAN DEMARIA & TAGUE L.L.P.
ATTORNEY FOR THE DEBTOR
201 SOUTH BISCAYNE BOULEVARD
MIAMI CENTER, SUITE 2600
MIAMI, FL 33131-4336
TEL: (305) 536-1112
FAX: (305) 536-1116
ATTN: THOMAS R. LEHMAN, P.A. OR
LYNN MAYNARD GOLLIN, ESQ.
Case No. 00-12731-BKC-RAM
NO PERSON MAY GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER
THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DISCLOSURE STATEMENT,
REGARDING THE PLAN OR THE SOLICITATION OF ITS ACCEPTANCE.
ALL CREDITORS AND INTEREST HOLDERS ARE HEREBY ADVISED AND ENCOURAGED TO
READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO
ACCEPT OR REJECT THE PLAN. THE SUMMARIES AND STATEMENTS IN THIS DISCLOSURE
STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCES TO THE PLAN, THE
EXHIBITS HERETO, AND OTHER DOCUMENTS REFERENCED AS FILED WITH THE COURT PRIOR TO
OR CONCURRENT WITH THE FILING OF THIS DISCLOSURE STATEMENT. SUBSEQUENT TO THE
DATE HEREOF, THERE CAN BE NO ASSURANCE MADE THAT (A) THE INFORMATION AND
REPRESENTATIONS CONTAINED HEREIN ARE MATERIALLY ACCURATE; OR (B) THIS DISCLOSURE
STATEMENT CONTAINS ALL MATERIAL INFORMATION.
AFTER THE EFFECTIVE DATE OF THE PLAN, A PORTION OF CERTAIN
DISTRIBUTIONS UNDER THE PLAN MAY BE SUBJECT TO SUBSTANTIAL DELAYS FOR CREDITORS
AND INTEREST HOLDERS WHOSE CLAIMS AND INTERESTS ARE CLASSIFIED IN CLASSES THAT
CONTAIN DISPUTED CLAIMS OR INTERESTS. THE AMOUNT OF ANY DISTRIBUTION MAY VARY
SUBSTANTIALLY DEPENDING UPON THE TOTAL AMOUNT OF ALLOWED GENERAL UNSECURED
CLAIMS.
THIS DISCLOSURE STATEMENT HAS BEEN REQUIRED TO BE PREPARED IN
ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND NOT IN ACCORDANCE WITH
FEDERAL OR STATE SECURITIES LAWS OR OTHER APPLICABLE NON-BANKRUPTCY LAW. PERSONS
OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING, OR TRANSFERRING
INTERESTS IN CHS SHOULD EVALUATE THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH IT
WAS PREPARED.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
THE FINANCIAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS
BEEN PREPARED BY THE DEBTOR WITH INFORMATION FROM THE DEBTOR'S BOOKS AND RECORDS
AND FROM INFORMATION FROM THE DEBTOR'S MANAGEMENT COMPANY, JOURNEY HOLDINGS,
LTD., OR
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EUROPA IT ApS, AND HAS NOT BEEN SUBJECT TO CERTIFIED AUDIT. THE DEBTOR HAS MADE
EVERY EFFORT TO ENSURE THAT THE INFORMATION CONTAINED HEREIN IS COMPLETE AND
ACCURATE; HOWEVER, THE DEBTOR IS UNABLE TO WARRANT OR REPRESENT THAT THIS
INFORMATION IS WITHOUT ANY INACCURACY.
A BALLOT ACCOMPANIES THIS DISCLOSURE STATEMENT FOR THE USE OF CREDITORS
IN VOTING ON THE PLAN. YOUR VOTE IS IMPORTANT. YOU ARE URGED TO CAREFULLY REVIEW
THE PLAN, THIS DISCLOSURE STATEMENT, AND THE BALLOT.
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TABLE OF CONTENTS
PAGE
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SECTION I - INTRODUCTION......................................................1
A. Purpose of Disclosure Statement..................................1
B. Source of Information............................................1
C. Important Highlights of the Plan.................................2
D. Summary of Plan..................................................3
E. Recommendation...................................................4
F. Voting...........................................................4
SECTION II - HISTORICAL BACKGROUND INFORMATION................................7
A. History and Organization of the Debtor...........................7
B. Pre-Petition Financial History and Results of Operations........11
C. Events Leading to Chapter 11 Filing.............................16
D. Pre-Petition Litigation.........................................28
SECTION III - SUMMARY OF THE DEBTOR'S BANKRUPTCY CASE........................29
A. Post-Petition Financial/Operations..............................29
B. Significant Events During Chapter 11 Case.......................29
SECTION IV - INFORMATION REGARDING CLAIMS AND SUMMARY
OF PLAN OF REORGANIZATION.......................................31
A. Administrative Claims...........................................31
B. Class 1 - Priority Tax Claims...................................33
C. Class 2 - Other Priority Claims.................................34
D. Class 3 - Unsecured Claims Other than Guarantee Claims..........34
E. Class 4 - Guarantee Claims......................................36
F. Class 5 - Secured Claims........................................37
G. Class 6 - Administrative Convenience Unsecured Claims...........38
H. Class 7 - Subordinated Securities Claims........................38
I. Class 8 - Old Common Stock Interestholders .....................39
SECTION V - SOURCE OF FUNDING AND MEANS FOR IMPLEMENTING PLAN................39
SECTION VI - EXECUTORY CONTRACTS AND LEASES ................................73
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SECTION VII - VOIDABLE TRANSFERS AND OTHER CAUSES OF ACTION................. 74
SECTION VIII - CERTAIN FEDERAL INCOME TAX CONSEQUENCES ..................... 75
SECTION IX - ALTERNATIVES TO THE PLAN ...................................... 76
SECTION X - CONCLUSION ..................................................... 77
EXHIBITS TO DISCLOSURE STATEMENT
Exhibit "1" Debtor's Amended Plan of Reorganization
Exhibit "2" List of Companies in which Debtor has Interest
Composite
Exhibit "3" Financial Information Regarding the European Subsidiaries
Composite
Exhibit "4" Pro Formas for European Subsidiaries
Exhibit "5" List of Subsidiaries placed in Receiverships or Voluntary
Creditor Proceedings
Exhibit "6" EuropaIT Opening Balance Sheet
Exhibit "7" EuropaIT's Incorporation Documents and By-Laws
Composite
Exhibit "8" Profile of European Subsidiaries
Exhibit "9" Form of Securities
Exhibit "10" Indenture for the Notes
Exhibit "11" EuropaIT Business Plan
Exhibit "12" Pre-Petition Litigation
Exhibit "13" Liquidation Analysis
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SECTION I
INTRODUCTION
A. PURPOSE OF DISCLOSURE STATEMENT
Pursuant to section 1125 of the Bankruptcy Code, the Debtor submits
this Disclosure Statement to the holders of claims against or interests in the
Debtor's estate, in order to disclose adequate information deemed material,
important and necessary for the Debtor's Creditors and interested parties to
arrive at a reasonably informed decision in exercising their right to vote to
accept, reject or object to the Amended Liquidating Plan of Reorganization (the
"Plan"). This Disclosure Statement discusses, among other things, voting
instructions, recovery information, classification and treatment of Claims and
Interests, the Debtor's history, business, assets, causes of action, results of
operations, projections of future operations and a summary and analysis of the
Plan. All Creditors and Interest holders are advised to read this Disclosure
Statement, including the Plan attached hereto as EXHIBIT "1" and the other
exhibits in their entirety before voting to accept or reject the Plan.
This Disclosure Statement has been approved by the Bankruptcy Court for
use in the solicitation of acceptances of the Plan. The Bankruptcy Court's
approval of the Disclosure Statement does not constitute an endorsement of any
of the representations contained either in this Disclosure Statement nor the
Plan, nor does it constitute an endorsement of the Plan itself.
B. SOURCE OF INFORMATION
Except as otherwise expressly indicated, the exhibits to and portions
of this Disclosure Statement describing the Debtor, the Debtor's business, and
the Plan have been prepared by the Debtor and Europa IT ApS. Financial
information, forecast, and operating data have been
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provided by the Debtor's and Journey Holdings, Ltd.'s management and
representatives and from reports filed with the Securities and Exchange
Commission (the "SEC"). Where applicable, financial data has been compiled using
generally accepted accounting principles and standards based upon information
derived from the Debtor's and its subsidiaries' business records. However, the
information contained in this Disclosure Statement has not been subject to a
certified audit and may be subject to correction.
No representation concerning the Debtor, particularly the value of the
Debtor's assets, other than as set forth in this Statement, is authorized by the
Debtor. Any representations or inducements made to secure your acceptance or
rejection of the Plan which are other than as contained in this Statement should
not be relied upon in arriving at a decision whether to vote for or against the
Plan; and any such additional representations and inducements should be reported
to counsel for the Debtor or the United States Trustee, who in turn shall seek
such relief from the Court as may be deemed appropriate under the circumstances.
CAPITALIZED TERMS USED IN THIS STATEMENT AND NOT EXPRESSLY DEFINED
HEREIN ARE DEFINED IN THE PLAN. A REFERENCE IN THIS STATEMENT TO AN "ARTICLE"
REFERS TO AN ARTICLE OF THE PLAN. A REFERENCE IN THIS STATEMENT TO A "SECTION"
REFERS TO A SECTION OF THIS STATEMENT.
C. IMPORTANT HIGHLIGHTS OF THE PLAN
The Plan provides for the liquidation and the distribution of the
Debtor's Assets to Creditors in two ways. First, the Plan provides for the sale
of the Debtor's European Assets to a non-affiliated entity, Europa ITApS, a
Danish corporation, pursuant to the Stock Purchase Agreement, free and clear of
all liens, claims, encumbrances and interests, pursuant to the Letter
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Agreement entered into by CHSE, Europa, the Holders, and the Stock Purchase
Agreement. Subject to Court approval, some or all of the European Assets may be
sold to an entity other than Europa. Second, the Excepted Assets shall be
transferred to the Liquidating Trust and the proceeds from the liquidation of
the Excepted Assets shall be distributed to Creditors.
The European Assets represent a very substantial portion of the
Debtor's total assets. In exchange for the transfer of the Debtor's European
Assets, the Debtor will receive 20% of the fully diluted Europa Common Stock,
Europa Thirty Month Notes and Europa Preferred Stock. All the foregoing
consideration transferred by Europa in exchange for the European Assets shall be
distributed to Creditors under this Plan. If another entity is approved by the
Court to purchase all or some of the European Assets, the consideration of such
sale will be distributed to Creditors under the Plan.
This Plan provides for distributions only to Claimholders (other than
the holders of Subordinated Securities Claims) who hold Claims as of the Record
Date. There will not be a distribution to holders of Subordinated Securities
Claims or Interestholders and the latter's Interests shall be canceled.
The Plan cannot become effective until after it is confirmed by the
Court. The Debtor estimates that the Effective Date will occur approximately
thirty (30) days after the Court confirms the Plan.
D. SUMMARY OF PLAN
The classification and treatment of Creditors and Interest holders
under the Plan are discussed in Articles III, IV and V of the Plan and are
generally summarized in Section IV of the
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Disclosure Statement. Section of the Disclosure Statement does not include
estimates for unresolved, unreconciled or Disputed Claims. The Debtor believes
that resolution of such claims is likely to materially decrease the estimated
amount of Unsecured Claims in Class 3 of the Plan.
E. RECOMMENDATION
The Debtor recommends that all Creditors and Interest holders entitled
to vote on the Plan cast their ballots to accept the Plan based on the belief
that the Plan provides the greatest and earliest possible recoveries to the
Debtor's Creditors. The Debtor further believes that acceptance of the Plan is
in the best interests of all parties in interest and any alternative plan or
sale would result in further delay, uncertainty and expense to the Debtor's
Estate and a significantly reduced recovery by Creditors.
F. VOTING
1. ELIGIBILITY TO VOTE. Classes of claims or equity interests that are
not "impaired" under a plan of reorganization are conclusively presumed to have
accepted the plan of reorganization and, therefore, are not entitled to vote.
Acceptances of the Plan in this Case are being solicited only from those persons
who hold Claims in an impaired class. A class is "impaired" if the legal,
equitable, or contractual rights attaching to the claims or equity interests of
that class are modified. Modification for purpose of determining impairment,
however, does not include curing defaults and reinstating maturity or payment in
full in cash.
The Debtor's Plan divides Creditors' Claims against and Interests in
the Debtor into various classes and provides separate treatment for each Class.
Under the Plan, Classes 1, 2, and 5 are not unimpaired and not entitled to vote.
Holders of Administrative Claims under the Plan
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are not entitled to vote. Classes 3, 4, and 6 are impaired under the Plan, and
holders of Claims in such Classes are entitled to vote pursuant to Article IV of
the Plan. Classes 7 and 8 will not receive a Distribution under the Plan, are
deemed to have rejected the Plan and are not entitled to vote.
The record date for determining any Creditor's or Interest holders'
eligibility to vote on the Plan shall be the Confirmation Date. Only those
Creditors and Interest holders entitled to vote on the Plan will receive a
Ballot with this Statement.
The Creditors and Interest holders whose Claims and Interests are
objected to prior to the Ballot Date are not eligible to vote unless the
objection is resolved, or after notice and hearing pursuant to Bankruptcy Rule
3018(a), the Court allows the Claim or interest temporarily for the purpose of
voting to accept or reject the Plan. Any Creditor or Interest holder that wants
its Claim or Interest to be allowed temporarily for the purpose of voting must
take the steps necessary to arrange an appropriate hearing with the Court under
Rule 3018(a). Creditors and Interest holders whose Claims and Interests are
being objected to will be sent notice of same pursuant to the Rules.
2. BALLOTS In voting for or against the Plan, please use only the
Ballot or Ballots sent to you with this Disclosure Statement. You may receive
more than one Ballot, and if you do, you should assume each Ballot is for a
Claim in a different Class in which you are entitled to vote. Votes cast to
accept or reject the Plan will be counted by Class. You are not required to vote
all of your Claims in different Classes in the same way. However, you are
required to vote all of your Claims within a Class the same way. Please read the
voting
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instructions contained within the Ballot for a thorough explanation of voting
procedures applicable to your Claim.
PLEASE COMPLETE AND RETURN EACH BALLOT YOU RECEIVE. ANY EXECUTED BALLOT
THAT DOES NOT INDICATE ACCEPTANCE OR REJECTION WILL BE DEEMED AN ACCEPTANCE.
PUT YOUR TAXPAYER IDENTIFICATION (OR SOCIAL SECURITY) NUMBER ON YOUR
BALLOT IN THE PLACE INDICATED. THE DISBURSING AGENT AND THEREAFTER, THE
LIQUIDATING TRUSTEE CANNOT MAKE DISTRIBUTIONS WITHOUT YOUR NUMBER.
IF YOU BELIEVE THAT YOU ARE A MEMBER OF A VOTING CLASS FOR WHICH YOU
DID NOT RECEIVE A BALLOT, IF YOUR BALLOT IS DAMAGED OR LOST, OR IF YOU HAVE ANY
QUESTIONS CONCERNING VOTING PROCEDURES, PLEASE CONTACT COUNSEL FOR THE DEBTOR.
3. VOTING PROCEDURE Mail completed Ballots in the stamped, self
addressed envelope to attached to the Ballot to: Clerk of the United States
Bankruptcy Court, 51 S.W. 1st Avenue, Miami, Florida 33130 (Attn. Chapter 11
Balloting) (CHS Electronic, Inc.). You may enclose a self-addressed postage
prepaid envelope and a copy of your Ballot to be returned stamped "filed" from
the Clerk of the Court confirming the delivery and filing of your Ballot. You
may not change your vote after it is cast unless the Court permits you to do so
after notice and a hearing to determine whether sufficient cause exists to
permit the change. DO NOT RETURN ANY STOCK CERTIFICATES OR INSTRUMENTS
EVIDENCING YOUR
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CLAIM WITH YOUR BALLOT.
4. DEADLINE FOR VOTING. BALLOTS MUST BE FILED WITH THE COURT BY 5:00
P.M. EASTERN DAYLIGHT SAVINGS TIME, JULY__, 2000 IN ORDER TO BE COUNTED.
5. IMPORTANCE OF VOTE. Your vote as a Creditor is important to the
Case. Section 1129(a)(10) of the Code requires, with certain exceptions, that at
least one impaired class of claims under a proposed plan of reorganization
accept the plan. The Code defines acceptance by a class to be acceptance of the
plan by at least two-thirds (2/3) in amount and a majority in number of claims
in that class that vote. ONLY THOSE CREDITORS WHO ACTUALLY VOTE ARE COUNTED FOR
THE PURPOSE OF DETERMINING WHETHER A PLAN HAS BEEN ACCEPTED. YOUR FAILURE TO
VOTE WILL LEAVE THE OTHER CREDITORS WITH THE DECISION TO ACCEPT OR REJECT THE
PLAN. TO HAVE YOUR VOTE COUNT YOU MUST COMPLETE AND RETURN THE BALLOT BY THE
DEADLINE INDICATED ABOVE.
SECTION II
HISTORICAL BACKGROUND INFORMATION
A. HISTORY AND ORGANIZATION OF THE DEBTOR
1. BACKGROUND AND OPERATIONAL HISTORY
CHS was a leading international distributor of microcomputer products,
including personal computers, peripherals, networking products and software. It
is a publicly traded company with approximately 17,000 to 20,000 stockholders.
In 1999, CHS operated in
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approximately 30 countries primarily in Western Europe, Eastern Europe and Latin
America, and serviced an active customer base of approximately 100,000
resellers. A list of all companies in which CHS has an interest is attached as
EXHIBIT "2" to the Disclosure Statement. Approximately 78% of the products which
CHS sold were manufactured by 20 equipment and software vendors, including such
market leaders as Hewlett-Packard, IBM, Microsoft, Seagate, Compaq, Intel,
Quantum, Western Digital, 3Com, Toshiba, Acer, Yakumo, Epson and Sung. CHS was a
focused distributor, as opposed to a broad line distributor, and sought to
represent leading vendors within specific product categories. CHS was among the
top five (5) largest distributors of microcomputer products in the world and the
largest distributor in Western Europe, Latin America and Eastern Europe. CHS had
no significant sales in the United States.
CHS' sales consisted of hardware and software products such as local
area networks, disk drives, personal computers and printers to an active
customer base. CHS' products also included components such as random access
memory chips, central processing units and integrated circuit boards. CHS
purchased its products directly from hardware manufacturers and software
publishers in large quantities. As a focused distributor, CHS focused on a small
number of high volume items of that manufacturer or publisher. As a result, CHS
carried fewer individual products than broad line distributors and worked with
fewer vendors.
CHS marketed its products to resellers, who either packaged CHS'
products with other computer equipment or sold the products on an individual
basis to end-users. CHS' customers typically relied on distributors as their
principal source of microcomputer products and financing. No single customer
accounted for more than one percent of CHS' net sales in the year ended
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December 31, 1998.
CHS obtained its products from its vendors under non-exclusive
distribution agreements, which agreements were subject to renewal annually and
could be canceled by either party on short notice. Under these agreements, CHS
had the right to purchase products at discounts from the list prices. The
amounts of the discounts were determined each year at the time of renewal on the
basis of the projected sales of the Company for the following year and varied
for each vendor. CHS was not required to make additional product payments if it
failed to achieve its projected sales level for the year, but its product
discounts in the following year could be reduced because of the lower sales
levels. Hewlett-Packard, Microsoft and IBM were CHS' three (3) largest vendors.
CHS also had stock rotation arrangements with substantially all of its
vendors. Stock rotation permitted CHS to return inventory for full credit in an
amount equal to a certain percentage of CHS' purchases from the supplier over a
specific period. In certain cases, CHS was required to purchase inventory at
least equal in value to that returned. These agreements permitted CHS to
maintain higher inventory levels while limiting the amount of committed working
capital related to slow-moving items.
In 1998, CHS' vendors had increased available credit to CHS
commensurate with its growth. Many of CHS' vendors provided discounts for prompt
payment. CHS was required to make payments to vendors within 14 to 90 days
following delivery of products. Certain vendors allowed CHS to earn a discount
for early payment of between 1% and 3% of the invoice amount to the extent
sufficient funds are available.
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2. MANAGEMENT/EMPLOYEES/OWNERSHIP STRUCTURE
CHS operated under a decentralized structure in which managers familiar
with the customs and needs of a particular country were delegated the authority
to make daily decisions necessary to satisfy the particular demands of their
respective markets. Unlike its competitors which operate under a more
centralized system, CHS believed that its business model of focused distribution
through locally managed full service facilities integrating, warehousing,
purchasing, sales, credit and accounting services provided competitive and
operating advantages. Oversight and strategic direction were provided by senior
management of CHS.
The corporate headquarters of CHS were located in Miami, Florida, which
also served as the principal operational facility for its Latin America regional
operations and the operations of CHS Latin America, Inc. CHS' subsidiaries
operated through approximately 110 locations totaling approximately four million
square feet. Most locations consisted of an administrative office utilized by
the subsidiary and an adjoining or nearby warehouse and distribution facility.
Claudio Osorio served as the Chairman of the Board of CHS, Chief
Executive Officer and President from 1993 through April 1, 2000 when he
resigned. In 1998, Carsten Frank was Executive Vice President of Logistics and
Director; Clifford Dyer was Executive Vice President of the Latin American
Region; and Craig Toll was Executive Vice President of Finance, Chief Financial
Officer and Treasurer. All of these officers and directors resigned or were
terminated in 1999. From July 1999 through December 14, 1999 Mark Keough was the
Chief Operating Officer of CHS. Antonio Boccalandro was CHS' Chief Officer of
Mergers and Acquisitions, Secretary and Director until March 31, 1999.
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As of the Petition Date, CHS' Operations were managed by the following
people:
a. BURTON EMMER: Mr. Emmer is the Acting Chief Financial Officer of
CHS. Mr. Emmer has been employed by CHS for 1 1/2years. His annual compensation
is $250,000.
b. RICHARD KAMINSKY: Mr. Kaminsky is CHS' Acting Assistant Treasurer.
He has been employed by CHS for two years and is paid an annual salary of
$140,000.
c. ANDREW CHUNG: Mr. Chung is CHS' Director of Financial Reporting. He
has been employed by CHS for one year and is paid an annual salary of $100,000.
B. PRE-PETITION FINANCIAL HISTORY AND RESULTS OF OPERATIONS
1. FINANCIAL HISTORY
For selected financial data and a general discussion and analysis of
the Debtor's historical financial condition and results of operations prior to
the Petition Date see COMPOSITE EXHIBIT "3" to this Disclosure Statement.(1) As
of September 30, 1999, CHS had a tangible book deficit of approximately $142
million.(2)
a. Comparison of 1998 to 1999 Income Statement and Working
Capital for THE EUROPEAN BUSINESSES
For the full year 1998 compared to 1999 (after adjusting for
the full-year effect of the Metrologie acquisition in mid 1998), sales show a
decline of approximately 11%, while the
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(1) The financial statements presented here are based on data supplied
by CHS for periods prior to Q4 1999 and Journey's best estimates for Q4-99 and
Q1-00. These statements are unaudited. Furthermore, 1998 statements have been
adjusted to reflect full year operations for Metrologie France, which was
acquired in mid-1998, thereby facilitating year to year comparisons.
(2) CHS does not have historical information regarding its remaining
Latin American Subsidiaries at this time. When such information is obtained by
CHS it will amend the Disclosure Statement.
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overall market for IT equipment distribution was forecast to grow by 18% during
the same period, according to International Dade Corporation (IDC).(3) In
management's opinion, the decline in CHS' sales was primarily due to the massive
withdrawal of credit from the CHS European subsidiaries following a press
release by CHS in February 1999 regarding its investigation of certain rebate
issues and the subsequent earnings restatement released by CHS in March 1999 and
a $90 million loss in the second quarter of 1999. From December 1998 to December
1999, CHS' accounts payable were more than halved and short term debt was
reduced by approximately 25% for the France, Scandinavia, Eastern Europe,
Portugal and Ireland (the "European Assets"). The total loss of cash from credit
lines approximated $170 million during this period. There were multiple effects
on CHS' subsidiaries' revenues attributable to the credit crunch, including
weaker inventories (from 37 days to 21 days), loss of key sales people, loss of
some franchises and an inability to participate in quarter-end purchasing
opportunities and new product launches. The loss of revenues and generally
weaker financial performance led to poorer payment patterns, thereby propagating
a vicious cycle of further credit reductions. Other factors contributed to the
loss of revenue by CHS during 1999, including the integration of operations in
Denmark and Sweden which led to a loss of sales people and customers.
Notwithstanding, these problems, two of the largest subsidiaries, Norway and
Metrologie France actually managed to show a growth in revenues during this
tumultuous period.
Gross margins for this period declined by nearly one full point (14%
decline in the
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(3) Overview of IT Distribution Channels in Western Europe: Country
Reviews and Cannel Outlook, 1997-2003 by Brian Pearce, published October 1999.
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margin rate). Specific factors drove the decline: 1) the pressure to keep
revenue flow at any cost, since revenue was directly related to short-term cash
flow through factoring arrangements; 2) the loss of "extra" margin opportunities
available from vendors to reward growth in specific product categories and
quarter-end buy-in due to cash pressures; 3) reduced availability of private
label products, which tend to be higher margin, since these manufacturers
typically operate on a cash basis; 4) loss of cash discount for those
subsidiaries unable to make timely payments; 5) a loss of focus by management on
the day-to-day battle to maintain margins due to extreme credit pressures.
Operating expense shows a decline during this period, but the decline
was not fast enough to make up for the loss of revenue, resulting in a higher
operating expense as a percentage of sales. Furthermore, operating expense was
affected by restructuring charges related to cost reduction and integration
efforts. In addition, CHS' interest expense increased considerably as a
percentage of sales as a result of penalty interest rates, fees, etc. related to
technical defaults of credit lines or simply the higher risk inherent in the
situation.
The resulting profitability from the above factors was disappointing,
with a decline of over $30 million in net profit and a loss for 1999 of 0.7% of
sales. CHS believe the primary force behind the dramatic shift in CHS' fortunes
was the catastrophic loss in credit.
b. Q1-99 VS Q1-00
Comparing the first quarter of 1999 to the first quarter of
2000, the striking difference is the significant decline in sales, 35% overall.
Exchange rate movements can explain part of this. During the first quarter of
this year, the Euro had declined against the dollar by about 12%
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compared to the same period in 1999. However, most of the decline in sales,
decline can be attributed to the loss of credit and the consequent detrimental
effects on inventory. For most of the first quarter of 1999, trade credit was at
normal levels. Following CHS's announcement of possible rebate problems in
February 1999 and a restatement of earnings in March 1999, trade credit began to
be reduced. By the end of the first quarter of 1999, payable days had declined
to 28 (compared to 41 days at the end of 1998). By the end of the first quarter
of this year, trade credit had declined to 20 days. The actual decline in dollar
terms was significantly worse, with a 53% decline in payables from March 31,
1999 to March 31 2000. This equates to a cash withdrawal from these businesses
of over $80, million by trade creditors. By the end of March 2000, inventory
fell to half the level it was in March 1999.
The decline in sales was particularly noticeable in Scandinavia and CHS
France. Metrologie managed to stay even in Euro terms, but declined by 12% in
dollar terms. Eastern Europe generally did better, with several countries,
including the Baltic States, showing growth over this period despite the credit
pressures. The decline in Scandinavia was also impacted by overall market
declines when government-subsidized PC purchase programs came to an end.
Gross margin rate declined by a full point (-17%) from the first
quarter of 1999 Q1-99 to the first quarter of 2000. Management believes that
this decline is primarily attributable to the dynamics caused by reduced credit,
i.e. less efficient purchasing, sell-off of old inventory at a discount, loss of
rebates and loss of private label products.
The decline in operating expense (-9%) was insufficient to avoid a
significant decline in operating profits. Many of the key expenses are
relatively fixed, for example systems and
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logistics centers. Despite an improvement in interest and other expense, net
income was severely affected by the loss in sales volume with a decline of
nearly 200%.
In terms of the capital structure, the equity of the combined
subsidiaries is significantly weakened by the losses incurred during the
remainder of 1999 through the first quarter of 2000. Availability of credit
lines from short-term lending facilities also declined by $50 million, through
interest expense improved and the debt to equity ratio was reduced from 1.91 to
1.67.
In summary, CHS' credit crisis began by late in the first quarter of
1999, though not early enough in the quarter of dampen sales performance. By the
first quarter of 2000, the credit crisis was in full swing, and worsening. The
impact on sales volume, inventory and payable levels has been devastating,
though the equity bas of the combined European subsidiaries is still largely
intact.
2. MANAGEMENT AGREEMENT
By December, 1999, CHS' relationships with vendors and its subsidiaries
was severely damaged. CHS' subsidiaries had stopped virtually all required
reporting of finances to CHS and further, ceased making payments owed to CHS.
Vendors and lenders tightened credit terms to the subsidiaries to the extent
that continuing operations at the local subsidiary level became increasingly
difficult. In an attempt to distance CHS from its subsidiaries' operations and
restore good will and vendor/lender relationships, CHS turned over management of
substantially all of its European subsidiaries' operations to Journey Holdings,
Ltd., a Gibraltar company ("Journey"). Journey is 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
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entered into a management contract for the purpose of engaging Journey to manage
these European subsidiaries (the "Management Contract"), a copy of which
Management Contract was filed with the Securities and Exchange Commission.(4)
The compensation to Journey under the management agreement is $100.00 per year.
Financial reporting by the subsidiaries to Journey has only recently begun
again.
C. EVENTS LEADING TO CHAPTER 11 FILING
CHS' business suffered serious deterioration from April 1, 1999 through
the Petition Date due to a number of factors, including (1) a reduction of
incentive programs by vendors, such as price protection, volume rebates and
inventory protection rebates which caused reductions in CHS' gross margins; (2)
the industry trend by manufacturers to increase direct sales and eliminate
wholesale distributors for their products; and (3) the reduction in the amount
of credit extended to CHS by vendors and third party lenders.
CHS discovered discrepancies related to the amount of vendor incentives
recorded in the the last three quarters 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.
All of the overstated rebates were reversed and CHS restated its results for the
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(4) Simultaneous to the Management Contract, CHS entered into an
Exchange Agreement whereby Journey would acquire substantially all of the
European subsidiaries of CHS, which agreement was also filed with the SEC and is
described in more detail in Section C of the Disclosure Statement. Journey's
interest in the Exchange Agreement and the Management Agreement were assigned to
EuropaIT ApS ("EuropaIT"), a Danish Company, in mid-February 2000.
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second and third quarters of 1998. As a result of this rebate issue, the senior
executive officer responsible for our European operations resigned. This
information was made public and CHS was severely impacted.
1. CHS' DOWNSIZED OPERATIONS
On May 1, 1999 CHS implemented a restructuring plan with the goal of
reducing future operating costs. The restructuring resulted in the writing-off
of certain assets, a reduction in the number of employees and the closure of
redundant warehouses. The restructuring plan was implemented through 1999. As of
September 30, 1999, approximately $8.0 million was accrued for restructuring
costs and this amount was included in accrued liabilities.
2. CHS SOLD ASSETS(5)
Additionally, there were disposition and closing of certain
subsidiaries and certain other subsidiaries were placed in receivership or
voluntary creditor protection proceedings in the fourth quarter of 1999. As a
result, CHS determined that goodwill, to the extent of losses to be incurred
with respect to these subsidiaries, was impaired and, accordingly, wrote off
such amounts as of September 30, 1999.
In September 1999, CHS completed the sale of a non-core business that
distributes Sun Microsystems products in Germany, Austria, Denmark, and Sweden
to UBS Capital, the private equity division of UBS AC. Under the terms of the
agreement, the business was sold for approximately $49.0 million. CHS owned
approximately 75% of this business and received
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(5) Several of CHS' subsidiaries were placed in receiverships or
voluntary creditor protection proceedings as reflected in Exhibit "5" attached
to the Disclosure Statement.
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approximately $36.7 million from the sale. CHS realized a pre-tax gain of
approximately $32.7 million from the sale. Proceeds from the sale were placed in
escrow and classified as restricted cash as of September 30, 1999. The proceeds
were released in early October 1999 and were used for debt repayment (IBMCC) and
working capital purposes ($1 million). The business generated sales of
approximately $81.7 million and net losses of $1.1 million for 1999 through the
date of sale.
As of September 30, 1999, CHS owed approximately $275.3 million to the
sellers of certain businesses that CHS had purchased. CHS commenced a program
designed to eliminate such amounts owed by disposing of all or a portion of
CHS's interests in those operations.
In October 1999, CHS agreed to submit to arbitration the issue of the
portion of Memory Set that CHS would retain as a result of the cancellation of
CHS' purchase agreement for Memory Set. Memory Set was a subsidiary of CHS
operating in Spain. CHS originally agreed to purchase Memory Set in July 1998.
CHS was in default under the purchase agreement because CHS had not paid the
balance of the purchase price of approximately $74.4 million. CHS did not cure
the default. During the nine months ended September 30, 1999, this subsidiary
contributed $139.4 million in revenue. The loss on the disposition was $19.9
million.
On October 4, 1999, CHS conveyed 80% of the shares of Arena Bilgisayer
Sanayi Ve Ticaret A.S. and Armada Bilfisayer A.S., CHS' subsidiaries operating
in Turkey, to the original owners of those companies in exchange for a release
of CHS' obligation to pay them the balance of the purchase price for those
subsidiaries of approximately $46.0 million. The sellers granted back to CHS an
option to reacquire those interest at any time prior to the earlier of October
4,
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2000 or a 60-day period beginning after CHS receives new cash investments of
$200 million or more. During the nine months ended September 30, 1999, these
subsidiaries contributed $115.3 million in revenues. The loss on the disposition
of this asset was $21.1 million which includes approximately $2.2 million of
amounts due from the former subsidiary to CHS that will not be realized.
CHS conveyed all of CHS's interest in ARC Espana Cartera, S.A., another
of CHS' subsidiaries operating in Spain, to the original owners in exchange for
a release of CHS' obligation to pay them the balance of the purchase price of
approximately $29.3 million. During the nine months ended September 30, 1999,
the revenue attributed to this subsidiary was approximately $67.2 million. CHS
realized a loss on the sale of this subsidiary of $7.0 million, which included a
fee of approximately $3.9 million to be paid to the original owners of the
subsidiary.
On October 20, 1999, CHS amended the terms of its purchase agreements
for International Corporation Services, Ltd. and related companies, subsidiaries
operating in seven locations in Latin America. Under the amendment, CHS conveyed
an aggregate 77.83% interest in these companies to the original owners in
exchange for a release of CHS' obligation to pay them the balance of the
purchase price of approximately $49.8 million. In addition, the original owners
granted CHS an option to repurchase the 77.83% interest for a total purchase
price of $55.0 million any time before the earlier of (1) October 20, 2000 or
(2) 60 days after CHS received new cash investment of $200 million or more. CHS
also granted the original owners an option to purchase the 22.17% interest that
CHS retained in these companies for a total purchase
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price of $15.6 million at any time that CHS's option to repurchase their
interest is in effect. During the nine months ended September 30, 1999, the
revenues attributed to these subsidiaries totaled approximately $180.4 million.
The loss on the transfer was $8.6 million. Thereafter, in April, 2000, 22.17% of
the International Corporation Services subsidiary, which operates in seven Latin
American countries, was returned to sellers, Michael Shalom, Anthony Shalom, and
Esther Shalom in exchange for forgiveness of approximately $4.8 million owed to
sellers and $3.5 million, of which $1.5 million remains outstanding. The value
of the percentage of the subsidiary is unknown, however, CHS' investment in the
22.17% returned as of September 30, 1999 was estimated to be approximately $5.6
million.
On October 20, 1999, CHS amended the terms of its purchase agreement
for Cornejo Informatica, S.A. ("Cornejo"), another subsidiary operating in Latin
America. Under the amendment, CHS conveyed an 86.55% interest in Cornejo to the
original owners in exchange for a release of it obligation to pay them the
balance of the purchase price of approximately $13.0 million. In addition, the
original owners granted CHS an option to repurchase the 86.55% interest for a
total purchase price of approximately $2.0 million at any time before the
earlier of (1) October 20, 2000 or (2) 60 days after CHS receives a new cash
investment of $200 million or more. CHS also granted the original owners the
option to purchase the 13.45% interest that was retained in Cornejo by CHS for a
total purchase price of approximately $2.0 million at any time that CHS's option
to repurchase their interest is in effect. During the nine months ended
September 30, 1999, the revenues attributed to Cornejo by CHS totaled
approximately $33.0 million. The estimated loss on the transfer was $1.9
million.
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On October 27, 1999, CHS conveyed its interest in Brightstar Corp., a
subsidiary based in the United States, to the original owner in exchange for a
release of its obligation to pay the balance of the purchase price of
approximately $1.3 million. During the nine months ended September 30, 1999, the
revenues attributed to this subsidiary were approximately $94.1 million. CHS
realized a loss of $3.2 million the sale of this subsidiary.
On October 31, 1999, CHS rescinded the purchase agreement with
MicroInformatica Corp. CHS had previously paid cash of $3.2 million and issued
6,314,899 shares of CHS with a value of $20.3 million in settlement of the
acquisition of MicroInformatica Corp. The rescission agreement provided for the
return of the cash (offset against intercompanies) and shares in exchange for
CHS returning ownership of MicroInformatica Corp. to is original owners. During
the nine months ended September 30, 1999, the revenue attributed to this
subsidiary were $111.7 million.
On November 10, 1999, CHS completed the sale of a 60% interest in its
subsidiary in Poland for $2 million. CHS retained a 40% interest in the former
subsidiary. During the nine months ended September 30, 1999, the revenues
attributed to this subsidiary were $89.6 million. No gain or loss was attributed
to this transaction. Subsequently, in March 2000, CHS sold its remaining 40% in
the subsidiary and received $1,300,000.
In November, 1999, the former owners of Kventa Kft, the parent company
of CHS Hungary, acquired 2% of Kventa from CHS and CHS retained a 49% interest
in the subsidiary. CHS received $445,000 as a result of this transaction. CHS
has an option to buy back the 2% interest until December 2000 for $445,000.
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On November 18, 1999, CHS completed the sale of CHS Switzerland to
Actebeis, a competing distribution company. CHS received net proceeds from the
sale of approximately $5.3 million, $4.7 million of which was paid directly to
IBMCC.
On November 22, 1999, CHS conveyed its interest in CHS Aptec, a
subsidiary based in the Middle East, to the original owner in exchange for the
return of approximately $2 million that had been previously paid by CHS. CHS
realized a loss of $1.6 million on the sale of this subsidiary in the fourth
quarter of 1999.
On December 2, 1999, the Acron subsidiary in Buenos Aires, Argentina,
was returned to sellers, Fabian Dido Sherman, Alexandra Perez Dutch, Gustav
Guillermo Geldart, and Hugo Sergio Lombardo in exchange for the return of
approximately $2 million previously paid. The value of the subsidiary is
unknown, however, CHS' investment in the subsidiary as of September 30, 1999 was
estimated to be approximately $3.5 million.
On December 9, 1999, CHS completed the sold certain of its Latin
America operations to a newly formed company, DistributionTech.com for $23.5
million, with a substantial portion of the purchase price consisting of a
promissory note to CHS in the amount of $16,235,809 million. Under the terms of
the agreement, CHS received 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. As part of the agreement, the
e-commerce component of the Latin American operations was transferred to a newly
formed entity jointly owned by CHS (51%) and DistributionTech.com (49%), known
as e-LatinCo.com. The value of CHS' interest this entity is believed to be di
minimus
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On December 17, 1999, CHS conveyed its 65% interest in Ledakon Ltda., a
subsidiary based in Colombia, South America, to the original owner in exchange
for a release of its obligation to pay the balance of the purchase price of
approximately $582 thousand and the return of 211,417 of CHS' shares previously
issued. The shares were valued at approximately $300 thousand at the date of
return to CHS. During the nine months ended September 30, 1999, the revenue
attributed to this subsidiary were approximately $6.8 million. CHS realized a
loss of approximately $1.5 million on the sale of this subsidiary in the fourth
quarter of 1999.
As a result of CHS being in default on $42.4 million of the purchase
price owed for the acquisition of SiS Distribution Limited, a susidiary based in
Asia, the original owners declared CHS in default of the purchase agreement in
December 1999 and obtained a judgment for the return of the shares of SiS
Distribution Limited out of escrow. Although CHS realized a loss of
approximately $36.6 million on the possible return of this subsidiary in the
fourth quarter of 1999, the return of the subsidiary is still disputed and CHS
intends to pursue recovery of all or some of its cash investment of $29 million.
During the nine months ended September 30, 1999, the revenues attributed to this
subsidiary were approximately $296.8 million.
CHS closed a subsidiary located in Miami, Florida that served the Latin
America market and contributed to revenues of $22.6 million during the nine
months ended September 30, 1999.
In December 1999 and January 2000, two subsidiaries of CHS, Metrologie
and Iberica, S.A. and CHS Benelux voluntarily filed for creditor protection
under Spanish and Belgian 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
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inability to remedy events of default under their credit facility totaling $6.7
million as of September 30, 1999. In Belgium, certain Belgian banks who were
also creditors of CHS Finance took action to block the accounts of the Belgian
subsidiary, because CHS Benelux had co-signed certain CHS finance loans that
were then in default. CHS had guaranteed the debt owed to the creditors of both
these subsidiaries.
On February 10, 2000, CHS' Nexsys subsidiary in Bogata, Colombia, was
returned to sellers, Gilbert Chalem, Samuel Burzstyn, Diana Perez, Dallyz
Montenegro and Sandra Horowitz in exchange for the return of 245,911 shares of
CHS previously issued with a value of $1.3 million at issuance and forgiveness
of amounts owned to sellers of $520,000. The value of the subsidiary is unknown,
however, CHS' investment in the subsidiary as of September 30, 1999 was
estimated to be approximately $1.5 million.
On February 25, 2000, CHS's Slovenia subsidiary was returned to seller,
Borut Rismal for forgiveness of approximately $1.1 million owed to seller. The
value of the subsidiary is unknown, however, CHS' investment in the subsidiary
as of September 30, 1999 was estimated to be approximately $1.5 million.
In March, 2000, the Raphael Informatica subsidiary was returned to
sellers, Marino Arzilli, Claudio Antoniotto, Aldo Mei, and Vittorio Carones in
exchange for the forgiveness of approximately $12 million owed to sellers. The
value of the subsidiary is unknown, however, CHS' investment in the subsidiary
as of September 30, 1999 was estimated to be approximately $13.7 million.
In March, 2000 CHS' subsidiaries, CHS Finland and Karma Finland were
transferred to
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the former owner and manager of CHS Finland. This sale was forced by the
withdrawal of secured lending facilities following the mass resignation of
Finland's management, which resignations were announced on December 17, 1999.
CHS received $1.3 million and $200,000 respectively for this transaction.
EuropaIT, a successor company to Journey was paid $250,000 in connection with
the transaction.
In August 1997, CHS acquired a group of companies known as the "Karma
Group" which was a network of distributors with operations in Europe, the Middle
East and Asia. For the nine months ended September 30, 1999, the Karma Group
contributed $506 million to the consolidated revenues of CHS and was responsible
for $4.7 million of the consolidated net losses of CHS. In November 1999, the
managing director of Karma International, S.a.r.l. ("Karma International"), a
Luxembourg company which directly or indirectly owned substantially all of the
Karma Group, cause Karma International to transfer ownership of 10 Karma Group
companies and their subsidiaries (German, Benelux, Swiss, Czech, Portuguese,
Italian, Austrian, Turkish, Greek and Belgian) to Austin Commercial Enterprises,
Ltd. (unaffiliated with CHS). The transferred Karma companies accounted for
substantially all of the revenue of the Karma Group. The transfer of these Karma
companies was done without the knowledge or consent of CHS's board of directors
or the shareholders of Karma International Karma International was credited with
$4.7 million from this transfer, which amount was used to retire indebtedness of
the Karma Group guaranteed by Karma International. CHS believes that it has a
cause of action against those parties responsible for this transaction, which
cause of action has value (the "Karma Action").
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In December, 1999, 51% of CHS Brazil, CHS Promark Colombia, CHS Promark
Uruguay, CHS Latin America and CHS Mexico was transferred to
DistributionTech.com, Ltd. for cash of $2 million and a note for $16,235,809.
Finally, in March 2000, CHS transferred its rights to use a corporate
jet to Bombadier Aerospace in exchange for the payment of $293,872 and in April
2000, CHS transferred its rights to use another corporate jet to Claudio Osorio
in exchange for the payment to CHS of $454,529 and the payment of liabilities
owed by CHS connected with the corporate jet of $74,378.
3. THE EXCHANGE AGREEMENT
On December 13, 1999 CHS entered into an Exchange Agreement (the
"Exchange Agreement") with Journey, a predecessor organization of EuropaIT,
whereby it agreed to sell to Journey virtually all of its operating subsidiaries
in Europe in exchange for Journey's assumption of CHS debt, a cash payment of
$11 million and issuance of stock to CHS in EuropaIT. The Exchange Agreement
also provided for a cash payment and issuance of securities by EuropaIT to
certain creditors of CHS. A copy of the Exchange Agreement was filed with the
Securities and Exchange Commission (the "SEC") by CHS as an exhibit to CHS'
proposed Shareholders Proxy dated January 7, 2000 (the "Proxy Statement").
The Exchange Agreement was entered into as a result of approximately
two month of negotiation among CHS, an informal Committee of Senior Subordinated
Noteholders (the "Noteholders") represented by Alliance Capital Management, and
Mark Keough, on behalf of the European management team. The parties agreed that
separating the European subsidiaries from CHS offered the best hope for these
assets in light of the severe credit restrictions imposed on
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Case No. 00-12731-BKC-RAM
CHS and all of its subsidiaries as a result of the companies financial
deterioration. Furthermore, CHS, the Noteholders and Journey believed that a
viable European-scale business would provide better value to creditors than a
slow liquidation of the European assets.
At the time the Exchange Agreement was signed, the European
subsidiaries represented substantially all of the assets of CHS. Under Florida
law, the transaction required a shareholder vote. Therefore, in accordance with
the agreement, CHS submitted a Proxy Statement for approval by the SEC in early
January 7, 2000. Also, as contemplated by the Exchange Agreement, Mr. Keough
formed a new European entity to serve as the parent company for the European
subsidiaries: EuropaIT ApS, a Danish corporation. Journey's rights to the
December Exchange Agreement and Management Contract were assigned to EuropaIT in
mid-February 2000.
By late February 2000, it became apparent that the contemplated
transaction had met several roadblocks: 1) the SEC had extensive comments on the
proposed Proxy Statement, including a requirement to submit audited financial
statements for 1999 (CHS did not believe the audited statements could be
completed in a timely fashion); 2) several key assets, to be included in the
deal, were either sold, filed for bankruptcy, or were involved in ownership
disputes; 3) key trade creditors were not receptive to the proposed financial
structure in the Exchange Agreement, particularly the resulting debt to equity
ratios; 4) due to the fragile financial condition of CHS there were significant
legal risks to a transaction that did not address the concerns of all creditors.
As a result of these problems, in March 2000 a decision was made to change the
terms of the Exchange Agreement to create a financial structure capable of
attracting trade credit, reduce the
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Case No. 00-12731-BKC-RAM
transaction price to reflect the lost assets and proceed with the transaction as
part of a voluntary bankruptcy reorganization by CHS under Chapter 11.
Furthermore, discussions with certain large guarantee-holders were initiated in
an effort to broaden creditor participation in the process, including IBM,
Seagate, and Computer Associates. A letter agreement (the "Letter Agreement")
was drafted in anticipation of the Chapter 11 process to encourage a fast-track
procedure (a copy of the Letter Agreement is attached as Exhibit "1" to the
Plan). A rapid resolution of a bankruptcy proceeding was critical in view of the
continuing deterioration of the assets. Several creditors signed the Letter
Agreement to signal their support for the transaction, including IBM, Microsoft,
Computer Associates, and approximately 80% of the face value of the Noteholders.
One significant creditor, Seagate initially participated in negotiating the
terms of the Letter Agreement, but subsequently declined to sign the agreement.
D. PRE-PETITION LITIGATION
In March 1999, a purported class action complaint was filed against CHS
alleging that CHS and certain of its officers violated federal securities laws
in connection with financial reporting and disclosure. The suit purported to be
on behalf of those who purchased CHS common stock during certain time frames.
The class action case is styled IN RE: CHS ELECTRONICS, INC. SECURITIES
LITIGATION pending as Case No. 99-8186-CIV-Gold/Simonton in the United States
District Court for the Southern District of Florida, Miami Division.
Other litigation pending against CHS as of Petition Date is reflected
on EXHIBIT "12" attached to the Disclosure Statement.
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Case No. 00-12731-BKC-RAM
SECTION III
SUMMARY OF THE DEBTOR' S BANKRUPTCY CASE
A. POST-PETITION FINANCIAL/OPERATIONS
CHS' operations have been dramatically scaled back since filing
bankruptcy. Journey continues to manage the European subsidiaries. Financial
reporting by the subsidiaries is erratic. To the extent that the subsidiaries
are reporting the information regarding operations, the results of such
operations are in the exhibits attached to the disclosure statement. CHS in
Miami continues to manage CHS' assets other than the European subsidiaries,
however activity is limited to pursuing collection of Accounts Receivables,
marshaling assets, procuring possible purchasers for the Excluded Assets and
participating in the negotiation for the sale of the European assets to
EuropaIT. CHS' Miami operation has moved to a significantly smaller office space
with three employees. Expenses of operation are approximately $65,000 per month.
B. SIGNIFICANT EVENTS DURING CHAPTER 11 CASE
Since the Petition Date, the Debtor has remained in possession of its
assets and in control of its operations as a debtor-in-possession pursuant to
sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has
been sought or appointed in the Debtor's Case. The following is a summary of
significant events which have occurred since the Petition Date.
1. Appointment of Official Committee of Creditors Holding
Unsecured Claims and COMMITTEE OF NOTEHOLDERS
The Official Committee of Creditors Holding Unsecured Claims and the
Official Committee of Noteholders were formed pursuant to an Appointment issued
by the Office of the United States Trustee on April 19, 2000. Both committees
have taken active roles in the Case
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Case No. 00-12731-BKC-RAM
and have been and continue to be instrumental in attempting to achieve a
favorable outcome for creditors.
2. FAST TRACK PLAN AND DISCLOSURE STATEMENT
The sale to EuropaIT includes the Debtor's interest in eighteen
operating European subsidiaries. The Debtor's European subsidiaries was
negatively impacted by the Debtor's bankruptcy filing. Credit terms previously
extended by vendors to the Debtor's European subsidiaries were terminated or
severely limited. As a result EuropaIT requested that the sale of these assets
occur by June 30, 1999. CHS requested that the Court schedule an early hearings
on approval of the Disclosure Statement and Plan of Reorganization. The Court
granted CHS' motion and scheduled the hearing on approval of the Disclosure
Statement for Jun 8, 2000 and if the Disclosure Statement is approved by the
Court, the confirmation hearing will be heard commencing July 11, 2000.
3. EARLY CLAIMS BAR DATE
In connection with the confirmation of the Plan, the Debtor needs to
know and establish the extent and magnitude of claims asserted against the
Debtor's estate. Therefore, CHS requested that the Court fix a claims bar date
for a date prior to confirmation. Upon motion by the Debtor, the Court fixed the
deadline for filing proofs of Claims for May 31, 2000.
4. STAY BONUSES - The Court has authorized management stay bonuses of
up to $150,000 for Burton Emmer (Acting CFO), $100,000 for Richard Kaminsky
(Acting Assistant Treasurer) and $80,000 for Andrew Chung (Director of Financial
Operations).
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Case No. 00-12731-BKC-RAM
5. COMPETING BIDS FOR EUROPEAN ASSETS - The Court ordered that
competing offers to purchase all or some of the European Assets be filed by July
3, 2000 with a nonrefundable deposit of $1,000,000.
6. BREAK UP/TOPPING FEE - The Court authorized the Debtor to pay
EuropaIT a Break-Up Fee of up to $500,000 or a Topping Fee of up to $850,000,
under the terms of the Court's Order authorizing payment of these fees.
7. INTENTION TO PROSECUTE CLAIMS POST CONFIRMATION/PRESERVATION OF
CLAIMS - The Retained Actions will be transferred to the Liquidating Trust and
prosecuted by the Liquidating Trustee.
SECTION IV
INFORMATION REGARDING CLAIMS
AND SUMMARY OF PLAN OF REORGANIZATION
A. ADMINISTRATIVE CLAIMS
Administrative Claims are entitled to priority in payment pursuant to
Sections 503 and 507(a)(1) of the Bankruptcy Code. The Plan provides for the
payment of each Allowed Administrative Claim, to the extent not previously paid,
in full, and in cash ten (10) days after the Confirmation Date.
The Debtor contemplates payment of the following Administrative Claims:
8. PROFESSIONAL FEES: These Administrative Claims include the fees of
accountants and bankruptcy counsel and any other professionals retained by the
Debtor and the Creditors' Committee.
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9. UNITED STATES TRUSTEE'S FEES: These Administrative Claims are fees
required by the United States Trustee's office to be paid by all debtors on a
quarterly basis based upon the disbursements made by the Debtor during the
quarter.
10. EUROPA BREAK-UP OR TOPPING FEES: If the conditions for payment of
Europa's Break-Up or Topping Fees occur, these fees shall be Administrative
Expenses of the Estate.
11. SUBSTANTIAL CONTRIBUTION COMPENSATION AND EXPENSES BAR DATE. Any
Person or entity who requests compensation or expense reimbursement for making a
substantial contribution in this Case pursuant to Sections 503(b)(3), (4),
and(5) of the Bankruptcy Code must file an application with the Clerk of the
Bankruptcy Court, on or before a date that is ten (10) days after the
Confirmation Date (the "503 Deadline"), and serve such application on counsel
for the Debtor, and as otherwise required by the Bankruptcy Court, the
Bankruptcy Code, and the Bankruptcy Rules, on or before the 503 Deadline, or be
forever barred from seeking such compensation or expense reimbursement.
12. STAY BONUS CLAIMS. All amounts owed the holders of Stay Bonus
Claims shall be paid in accordance with the Stay Bonus Order.
The Debtor estimates that Administrative Claims, other than the
Break-Up and Topping Fees, will aggregate approximately $1,000,000.
Ten days after the Confirmation Order is entered, or as soon thereafter
as is practicable, the Disbursing Agent will distribute to each holder of an
Allowed Administrative Claim, other than the U.S. Trustee, the Allowed amount of
each Administrative Claim; provided however, that any holder of an
Administrative Claim which represents compensation or reimbursement
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Case No. 00-12731-BKC-RAM
awarded or to be awarded by the Court under Sections 503(b)(2), 503(b)(3), or
503(b)(4) of the Code shall be paid such amount as allowed by the Court (a) upon
the later of (i) ten days after the Confirmation Order is entered; or (ii) the
date upon which the Court enters an Order allowing such Administrative Claim; or
(b) thereafter upon such other terms as may be mutually agreed upon between the
Debtor and the holder of such Administrative Claim. The U.S. Trustee's Claim
shall be paid by the Debtor within thirty (30) days of the conclusion of each
calendar year quarter subsequent to the Confirmation Date until a Final Order
closing the Case is entered by Order of the Court.
B. CLASS 1 - PRIORITY TAX CLAIMS
Tax Claims which are Allowed Priority Claims, at the sole option of the
Debtor, will be entitled to receive on account of such Allowed Priority Tax
Claim, (a) equal Cash payments made on the last Business Day of every
three-month period following the Effective Date, over a period not exceeding six
(6) years after the assessment of the tax on which such Claim is based, totaling
the principal amount of such Claim plus simple interest on any outstanding
balance from the Effective Date calculated at the interest rate available on
ninety (90) day United States Treasury Securities on the Effective Date, (b)
such other treatment agreed to by the holder of an Allowed Priority Tax Claim
and the Debtor, provided such treatment is on more favorable terms to the
Debtor, as the case may be, than the treatment set forth in clause (a) hereof,
or (c) payment in full.
The Debtor estimates the total amount of Tax Priority Claims to be
$0.00.
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C. CLASS 2 - OTHER PRIORITY CLAIMS
Other Priority Claims consist of claims of employees accrued, but
unpaid employment benefits. The Debtor estimates the total amount of the Other
Priority Claims to be $13,500.
On the Effective Date, or as soon as practicable thereafter, each
holder of an Allowed Priority Claim shall receive, in full satisfaction,
settlement release, and discharge of and in exchange for such Allowed Other
Priority Claim, (a) Cash equal to the amount of such Allowed Other Priority
Claim, or (b) such other treatment as to which the Debtor and such holder of an
Allowed Other Priority Claim shall have agreed upon in writing.
D. CLASS 3 - UNSECURED CLAIMS OTHER THAN GUARANTEE CLAIMS
Unsecured Claims Other than Guarantee Claims consists of the holders of
all general Unsecured Claims other than Guarantee Claims. All Unsecured Claims
Other than Guarantee Claims shall be Allowed or Disallowed in accordance with
the provisions for resolving Disputed Claims as set forth in Article VII of the
Plan.
The Debtor estimates the total amount of Allowed Unsecured Claims Other
than Guarantee Claims to be approximately $250,000,000.
The holders of Class 3 Claims and Class 4 Claims shall be treated
together for the purpose of pro rating Distributions to these Classes under the
Plan. Each holder of a Class 3 or 4 Claim, must select on their Ballot one of
the following types of treatment to be afforded Class 3 and 4 Claims: a) the
Debt Package; b) the Equity Package; or c) a combination of the two where the
holder of a Class 3 or 4 Claim elects to subdivide the treatment of its Claim
between the Debt Package and the Equity Package (the "Selected Treatment"). On
the Effective Date, or as soon
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thereafter as practicable, each holder of a Class 3 or 4 Claim will receive, in
full satisfaction, settlement, release and discharge of and in exchange for each
and every Class 3 and 4 Claim, its Pro Rata share of the securities issued
pursuant to that holder of a Class 3 or 4 Claim's Selected Treatment of its
Class 3 or 4 Claim such that the ratio of distribution under the Debt Package
shall be no less than $7.50 principal amount of Europa Thirty Month Notes per
$100 of Class 3 and 4 Claims and that the ratio of Distribution under the Equity
Package shall be no less than $22.50 par value of Europa Preferred Stock per
$100 of Class 3 and 4 Claims (the "Class 3 and 4 Distribution Ratio"). If the
Selected Treatment would result in a Distribution under the Debt Package or the
Equity Package of less than the Class 3 and 4 Distribution Ratio (the
"Oversubscribed Package"), the Distribution will be made to holders of a Class 3
or 4 Claim selecting such Oversubscribed Package at the Class 3 and 4
Distribution Ratio on a Pro Rata basis, and the Claims not satisfied in such
Distribution shall be allocated to the Debt Package or Equity Package, as the
case may be, that is not the Oversubscribed Package. Notwithstanding the
foregoing, if total amount of Allowed Class 3 and 4 Claims exceeds $500,000,000,
the minimum distribution ratios for the Debt Package and Equity Package set
forth above shall be reduced commensurate with the amount by which total Allowed
Class 3 and 4 Claims exceed $500,000,000. In addition, on the Effective Date,
each holder of a Class 3 or 4 Claim shall receive its Pro Rata share of any Cash
recoveries from or in connection with the Excepted Assets prior to the Effective
Date, and the consideration paid the Debtor by any entity other than Europa who
purchases some or all of the European Assets. Each holder of a Class 3 Claim or
Class 4 Claim is hereby deemed to have received a beneficial interest in the
Liquidating Trust and be
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entitled to participate in subsequent Distributions therefrom. Intercompany
Claims, if any, between the corporations constituting the European Assets and
the Debtor shall be canceled and deemed null and void on the Effective Date and
receive no Distributions under the Plan. Intercompany Claims between the
corporations constituting the European Assets and Affiliates of the Debtor shall
be canceled and deemed null and void on the Effective Date and receive no
Distributions under the Plan, but only to the extent the Debtor controls an
Affiliate and such action is lawful under applicable law. Distributions to
holders of Fixed Rate Notes shall be made by the Disbursing Agent to the
Indenture Trustee for the benefit of holders of Fixed Rate Notes. The Indenture
Trustee shall in turn be authorized and directed to make distributions under the
Plan and the Indenture to holders of the Fixed Rate Notes who hold such Fixed
Rate Notes as of the Record Date. The Form of the Securities to be issued and
the Indenture for the Notes are attached as EXHIBITS "9" AND "10", respectively
to the Disclosure Statement.
E. CLASS 4 - GUARANTEE CLAIMS
Class 4 consists of all unsecured creditors holding Guarantee Claims.
All Guarantee Claims shall be Allowed or Disallowed in accordance with the
provisions for resolving Disputed Claims as set forth in Article VII of the
Plan.
The Debtor estimates the total amount of Guarantee Claims will be
between $250,000,000 and $300,000,000.
The treatment of Allowed Guarantee Claims is the same treatment as that
afforded holders of Allowed Class 3 Claims.
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F. CLASS 5 - SECURED CLAIMS
All Secured Claims shall be Allowed or Disallowed in accordance with
the provisions for resolving Disputed Claims as set forth in Article VII of the
Plan. The Debtor estimates the total amount of Secured Claims to be $0.00.
For all purposes, including voting, confirmation and Distribution under
the Plan, the amount of any Allowed Secured Claim will be determined based on
the value of the Collateral securing such Claim to the extent that such
Collateral is part of the Excepted Assets to be transferred by the Debtor to the
Liquidating Trust. Any Claim that is secured by an unavoidable Lien on Property
of the Debtor that is to be surrendered by the Debtor prior to the Effective
Date shall be treated as a Class 3 Claim, but shall be reduced by the extent of
the value of the surrendered Collateral securing such Claim, as determined by
the Court pursuant to Section 506(a) of the Code. With respect to Property that
is transferred to the Liquidating Trust that is Collateral subject to an Allowed
Secured Claim, the legal, equitable and contractual rights of the holder of the
Allowed Secured Claim shall be Reinstated on the Effective Date and all payments
required to be made to effectuate Reinstatement shall be made by the Liquidating
Trust. The Debtor's failure to object to such Secured Claim in the Case shall be
without prejudice. The Liquidating Trustee's right to contest or otherwise
defend against such Claim, in the appropriate forum, when and if such Claim is
sought to be enforced by a holder of an Allowed Secured Claim is hereby
reserved. Notwithstanding Section 1141(c) or any other provision of the
Bankruptcy Code, all Pre-Petition Date Liens on Property of the Debtor held by
or on behalf of the holders of Allowed Secured Claims with respect to such
Claims shall survive the Effective
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Date and continue in accordance with the contractual terms of the underlying
agreements with such holders of an Allowed Secured Claim until, as to each such
holder of an Allowed Secured Claim, the Allowed Claims of such holders of
Secured Claims are paid in full.
G. CLASS 6 - ADMINISTRATIVE CONVENIENCE UNSECURED CLAIMS
All Administrative Convenience Unsecured Claims shall be Allowed or
Disallowed in accordance with the provisions for resolving Disputed Claims as
set forth in Article VII of the Plan. The Debtor estimates the total amount of
Administrative Convenience Unsecured Claims to be $20,000.
The holders of Allowed Administrative Convenience Unsecured Claims will
receive payment in Cash on the Effective Date or as soon thereafter as is
practicable in an amount equal to 100% of the Face Amount of such Allowed amount
of such Claims, not to exceed $1,000. Any holder of an Allowed Unsecured Claim
(or Claims) in excess of $1,000 that desires treatment of such Claim (or Claims)
as an Allowed Administrative Convenience Unsecured Claim shall make an
irrevocable election to reduce its Claim (or aggregate Claims) to $1,000 in
writing on the Ballot and return such Ballot on or prior to the Ballot Date. Any
election made after the Ballot Date shall not be binding on the Debtor unless
the Ballot Date deadline is expressly waived in writing by the Debtor for the
express benefit of any holder.
H. CLASS 7 - SUBORDINATED SECURITIES CLAIMS
The holders of Subordinated Securities Claims, including Federal
Securities Litigation Claims, shall receive no Distribution on their Claims.
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I. CLASS 8 - OLD COMMON STOCK INTERESTHOLDERS
Old Common Stock Interestholders shall receive no Distributions under
the Plan. All Old Common Stock Interests shall be deemed to be canceled and
extinguished on the Effective Date.
SECTION V
SOURCE OF FUNDING AND
MEANS FOR IMPLEMENTING THE PLAN
A. MANAGEMENT/OWNERSHIP OF EUROPAIT
As described earlier, EuropaIT is a newly formed entity incorporated in
Denmark (EuropaIT's incorporation documents and by-laws are attached as EXHIBIT
"7" to the Disclosure Statement). EuropaIT has no significant business
activities apart from its Management Contract with CHS. EuropaIT has entered
into management fee arrangements with most European subsidiaries, which are
nearly identical to those previously maintained by CHS in 1999. However, due to
the current shortage of cash in the subsidiaries, EuropaIT has collected less
than $50,000 from the subsidiaries, to date.
EuropaIT's opening balance sheet is attached as EXHIBIT "6" to the
Disclosure Statement. The balance sheet reflects no assets apart from cash and
receivables (management fees payable) from the European subsidiaries.
Currently, 100% of the capital stock of EuropaIT is owned by Plectrum
Holdings, a Gibraltar company, which was formed, in late 1999 to serve as the
vehicle for management's equity interest. After the proposed transaction is
completed, Plectrum will own 80% of the fully diluted common stock of EuropaIT,
with the creditors of CHS owning the remaining 20%. At present, Mark Keough is
the sole Director of Plectrum, and Mark Keough and Ross Mullins are
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the Directors ("Managers" according to company by-laws) of EuropaIT. After the
transaction, management will have the following five representatives on the
Boards of both Plectrum and EuropaIT. A brief description of their backgrounds
is as follows:
1. MARK E. KEOUGH - Mr. Keough, who is 45 years old and a dual national
of the US and Ireland, will serve as Chief Executive of EuropaIT. For the period
July 15, 1999 through December 14, 1999, Mr. Keough was the Chief Operating
Officer of CHS Electronics, where he was primarily responsible for the operation
of the European subsidiaries. Effective December 14, 1999, the date on which the
December 1999 Exchange Agreement with Journey was signed, Mr. Keough resigned
from CHS.
For several months prior to his role at CHS, Mr. Keough worked with
several prominent private equity firms to identify appropriate acquisitions in
the distribution sector in Europe. He participated in the due diligence efforts
at a large European plumbing distributor and a major electrical wholesaler based
in Germany. From March 1994 to June 1998, Mr. Keough was Vice- President of
Product Management and Supply at Wesco Distribution, the no. 2 electrical
wholesaler in North America. At Wesco, he was responsible for relationships with
manufacturers, operation of central distribution centers and inventory policy.
Wesco was formerly the distribution subsidiary of the Westinghouse Electric
Company, who sold it to an investor group led by Clayton, Dubilier & Rice (CD&R)
in February 1994. Mr. Keough was recruited to Wesco by CD&R. From 1994 to 1998,
Wesco's sales grew from $1.5 billion to $2.5 billion and operating profit
improved from an $11 million loss to an $89 million profit. In June 1998 Wesco
was sold for $1.1 billion, which represented an equity gain approximately $550
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million on the $100 million invested in 1994. It was one of the most successful
leveraged buy- outs of the 1990's, yielding an IRR of over 50% per annum. Prior
to his post at Wesco, Mr. Keough was a partner (Principal) with McKinsey &
Company, the management consulting firm. Most of Mr. Keough's experience at
McKinsey (1982-1994) was in Europe (Spain, UK, Italy, Portugal, Holland), where
he focused on manufacturing and supply chain management. As a partner he was the
world-wide leader of the firm's supply management practice and authored several
articles on strategic purchasing. Mr. Keough received two undergraduate degrees
from the Massachusetts Institute of Technology, in Urban Planning and System
Dynamics. In 1982 he received an M.B.A. from the Graduate School of Business
Administration at Harvard, where he was elected by the faculty as a Tutor in
Managerial Economics.
2. ROSS H. MULLINS - Mr. Mullins will serve as the Chief Financial
Officer of EuropaIT. Mr. Mullins, who is 51 years old and a U.S. citizen, has
been resident in Europe since 1973. He is currently Managing Director of a
corporate finance boutique, RCF Corporate Finance S.A., based in Geneva,
Switzerland. Mr. Mullins founded RCF in 1994 to provide out- sourced capital
markets and banking expertise to high growth companies and financial
institutions. Using his banking experience with Chase Manhattan, Mr. Mullins has
built a business at RCF which has advised on approximately $1.5 billion in
financing. RCF specializes in advising its clients on asset securitization, high
yield bond issues and syndicated loans. From an industry perspective it
concentrates on the telecoms, computer and banking (Eastern European financial
institutions) segments. Prior to setting up RCF, Mr. Mullins was employed from
1992 to 1994 by the Swiss subsidiary of Merisel Inc. (at that time a FORTUNE 500
computer products
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distributor) as Managing Director in a turnaround situation. Prior to Merisel,
Mr. Mullins founded, operated and subsequently sold a financial consulting
business which marketed risk management software to banks in the period 1987 to
1992. During this period he also did some venture capital investing in Russia,
creating two companies on whose Boards of Directors he still sits. Earlier in
his career, Mr. Mullins spent almost 10 years with Digital Equipment in Spain
(as Financial Director) and in Geneva (as Financial Controller for the
Laboratory Data Products Group), before joining Chase Manhattan and working with
Chase as a Vice President and Manager of Corporate Banking in French-speaking
Switzerland from 1984 to 1987. Mr. Mullins holds a B.A. in Economics from
Wesleyan University in Connecticut, U.S.A. and was awarded a Thomas J. Watson
Fellowship upon graduation from Wesleyan.
3. F. ROBERT MOUNTAIN - Mr. Mountain is the Director of Business
Development for Europa IT, which includes responsibility for strategic vendor
relationships, mergers & acquisitions, market research, and the Romak computer
assembly business. Mr. Mountain is 56 and is a UK citizen based in Paris.
Originally qualifying as an Industrial and Mechanical Engineer he moved quickly
into General Management. Early in his career he gained experience in a variety
of manufacturing and distribution businesses including FMCG and electronic toys
and games and held a number of management position with ITT (STC) in their Power
Components Division in UK. He entered the Computer Industry in 1983 and in 1985
founded a new value-added distribution company, Trinitec, PLC which, after five
years of rapid growth in sales and profits, became part of the Metrologie Group
in 1990. He was first Managing Director and then chairman of the Metrologie
operations in the UK between 1990 and mid - 1998.
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Metrologie had acquired two businesses in the UK, and at the start of the
recession in the early 90's, Mr. Mountain implemented a program of
rationalization and cost reduction, which resulted in operating costs being
reduced by more than 60%. He then saw the UK Company through a period of fast,
profitable growth to a turnover of some $300m. Metrologie UK had approximately
80% of its sales in Value Added Distribution and was the biggest European
customer for Digital (subsequently Compaq) Alpha products. He sat on the Main
Board of Metrologie International S.A., (listed on the Paris Bourse) from 1992
until its acquisition by CHS in 1998. He played a significant role in the
operational and financial restructuring of the Group. Metrologie International
was recapitalized in 1995 through an investment by APAX Partners and the
Managers. The share price doubled during the three years leading up to the sale.
He has considerable experience in both Volume and Value Added Distribution in
many countries throughout Europe.
4. RENE-LUC CAILLUD - Mr. Caillud is the general Manager of Metrologie
France and has been recently appointed as General Manager of CHS France, thereby
uniting the two key subsidiaries in France and supervising approximately 60% of
EuropaIT's total business. Mr. Caillud has been with the Metrologie group
(acquired by CHS in 1998) for seven years. For four of those years he was
General Manager of Metrologie France, the largest unit of the Metrologie Group.
Prior to that he spent one year as Managing Director of Metrologie Germany, and
two years as a General Manager responsible for integration of acquisitions.
Before joining the Metrologie Group, Mr. Caillud was General Manager of CMG, a
French corporate reseller. Earlier in his career he worked in the finance
function at Matra and ICL France.
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Mr. Caillud earned an undergraduate degree in Mathematics and graduate
degrees in law and business (M.B.A.) from the H.E.C. (Haute Etudes
Commerciales), a leading French business school. Mr. Caillud is fluent in
English and German in addition to his native tongue.
5. ALEXIS LOPE-BELLO - Mr. Lope-Bello is the Director responsible for
EuropaIT's Eastern European businesses. Mr. Lope-Bello brings to EuropaIT
in-depth experience in the Eastern European and Russian market place, where he
has worked since 1998 ("before the wall came down"). During this period, he also
resided in Russia for three years. Mr. Lope-Bello played the leading role in
building CHS's Eastern European presence to $800 million in sales through
acquisitions and aggressive development of new and existing businesses. He has
also developed an extensive network of contacts with vendor management in
Eastern Europe.
Mr. Lope Bello, a citizen of Venezuela, is 34 years old and was
graduated from IUNP in Caracas with a degree in Computer Science. He has also
attended several vendor-sponsored training courses in general management.
B. ASSETS TO BE PURCHASED BY EUROPA
The transaction now proposed to the creditors of CHS is essentially
what was agreed to in a letter agreement, a copy of which is attached as Exhibit
"1" to the Plan (the "Letter Agreement"). The assets to be included in the
transaction are the capital stock of the European operating subsidiaries. (A
detailed profile of CHS' European subsidiaries, including summary financials,
number of employees, market size, etc. is presented in COMPOSITE EXHIBIT "8"
attached to the Disclosure Statement.) The combined subsidiaries had sales of
approximately $1.9 billion in 1999 and total assets of $454 million as of
December 31, 1999 (unaudited).
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Attached as COMPOSITE EXHIBIT "4" to the Disclosure Statement are Pro Forma for
the European Assets. In addition to the capital stock of the operating
subsidiaries, certain other assets will also be transferred to EuropaIT, where
the companies involved are inactive, have the rights to certain legal actions,
or have ownership disputes.
1. FRANCE - the two French operating subsidiaries represent about 60%
of the total sales of the entities included in the transaction. Metrologie
France is approximately 25% bigger in sales than CHS France, but CHS France is
the better capitalized company. Both companies are located in the Paris region.
Metrologie was acquired in mid 1998 by CHS and has been run as a separate
company since then. More recently, a plan has been developed to combine the
"back office" of the two entities while maintaining multiple front-ends to serve
the needs of targeted customer segments, including, retail, large VAR's, smaller
VAR's/dealers, and higher end product segments ("value-added" business).
2. SCANDINAVIA - Scandinavia is comprised of 3 principal operating
entities: SMG Norway, SMG Sweden and SMG Denmark. The Scandinavian region
accounts for approximately 30% of total sales of the combined subsidiaries, with
Sweden and Norway approximately equal in size and Denmark considerably smaller.
The companies represent various combinations of three previous acquisitions of
CHS, including Santech Micro Group, Biltek Sweden, and Lars Krull. Over the past
2 years, these acquisitions were gradually combined to form the three current
entities. Historically, all three companies have been well financed and viewed
as solid performers, though operating cost has tended to be higher than
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elsewhere in Europe. Another distinguishing feature of the Scandinavian
operation is their success with component sales to OEM customers.
3. EASTERN EUROPE - The IT distribution industry is considerably less
developed in Eastern Europe and market information is difficult to obtain. The
market is generally viewed as substantially smaller than Western Europe, perhaps
10% of the total, but with potential for rapid growth. CHS has had a strong
presence in Eastern Europe, which is viewed as an attractive feature by leading
IT vendors. Whereas distribution is relatively easy to find in Western Europe
for the leading manufacturers, reliable channel partners are more difficult to
identify n the developing markets of Eastern Europe and Russia. The Eastern
Europe subsidiaries included in the transaction cover the three Baltic states,
Russia, Croatia, Slovakia, Hungary and Czech Republic. Eastern Europe
subsidiaries represent approximately 8% of the sales of the combined total.
There are some special circumstances to take into account in Hungary
and Czech Republic. In Hungary, the CHS operation (CHS Hungary) is owned by
Kventa Kft, a Hungarian company owned in turn 51% by local management and 49% by
CHS Electronics, Inc. CHS also owns an option to purchase back the controlling
2% of Kventa Kft, which was sold to the local management in October 1999.
EuropaIT is proposing to purchase both the 49% ownership interest and the option
for the further 2%, either separately, or as a 51% interest after the option is
exercised by CHS. The sale of CHS' 49% ownership interest to EuropaIT is subject
to a right of first refusal by Kventa Kft, the owner of the 51% interest.
Exercising the option prematurely could result in a damaging reduction in credit
for the Hungarian operation.
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In the Czech Republic, the principal entity is TH Systems, which enjoys
a strong presence in the Czech market. Following the announcement of the
December 1999 Exchange Agreement, TH Systems management announced that their
company was not actually owned by CHS, in the first instance. CHS and EuropaIT
believe that local management indirectly established a new company (TH Systems
Czech) and have taken action to transfer TH Systems employees and customers to
this similar-sounding company. CHS filed a criminal complaint against local
management in the Czech Republic. EuropaIT believes that it may be possible to
negotiate a solution to this situation and recover the business of TH Systems.
Financial information for TH Systems is not included in EuropaIT's pro forma
because of the uncertainty surrounding the outcome of the Czech situation.
4. PORTUGAL AND IRELAND - Portugal represents approximately 2% of the
total sales of the combined entities and distributes a relatively broad range of
IT products. The operation in Ireland, called Romak, focuses on PC assembly
rather than IT equipment distribution. EuropaIT believes that while Romak is
small in sales today, it could play a larger role in the group by providing
private-label PC's and participating in channel assembly programs sponsored by
the larger PC manufacturers.
5. KARMA - The proposed transaction includes the sale of the capital
stock of Karma International, S.a.r.l. (KISA) and Karma International AG (KIAG).
KISA is the Luxembourg holding company of the Karma operation, which was
acquired by CHS in 1997. Karma was viewed as the world's leading component
distributor, particularly for hard drives, operating primarily in Europe. In
1998, the Karma Group had sales of approximately $1.3 billion. The
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Karma organization was distinctive in its operating approach: product was
purchased centrally (instead of within each operating subsidiary) with most
administrative functions located in Istanbul. Another important feature was the
culture of "partnership" in Karma. Each local office manager was treated like a
partner and a substantial portion of the compensation was derived from the
profits of the local office. The company prospered with this centralized, low
cost, partnership and for this reason, CHS generally kept a "hands-off" attitude
towards the company, allowing it to operate with some independence from other
CHS subsidiaries located in the same geographic territory. As previously
disclosed, in October and November 1999, several of the Karma managers,
including a former CHS Board member, Bernd Karre and the manager of Karma
Germany, Gottfried Hackbarth, developed a plan to purchase the sales
subsidiaries of Karma, but leaving behind the central purchasing entity, CHS-CPO
S.A., a Swiss company. EuropaIT believes the plan was developed with the
assistance of Deutsche Financial Services (DFS), who held a lien on the shares
of the Karma subsidiaries for the unpaid balance of a loan to KISA of
approximately $4.7 million. On November 24,1999 KISA sold to Austin Commercial
Enterprises, a British Virgin Islands company ("Austin"), the 10 largest sales
subsidiaries of Karma, representing over 80% of Karma's revenue stream. An
eleventh subsidiary was added shortly thereafter. One Director of KISA approved
the sale: Gottfried Hackbarth, who was also named Chief Executive of the
spinoff. Under Luxembourg law, one Director can authorize the sale of
substantially all the assets of an S.a.r.L. (a particular corporate form
typically used for small businesses). The consideration was approximately $9
million, of which $4.7 m was paid immediately and the balance was to be paid at
a time to be agreed by both parties. The $4.7
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million was then sent to DFS to release the lien on the Karma subsidiary shares.
Neither the Boards of KISA nor CHS were aware of these transactions at the time.
Senior management of CHS only found out about the transaction through an obscure
Internet press release announcing a Karma MBO in December 1999. As of September
30, 1999, the total Karma Group had $294 million in assets. As a result, CHS was
left with CHS-CPO, SA a Swiss Company used as the central purchasing entity of
Karma, and a subsidiary of KISA. This company has total debts of approximately
$90 million and its principal asset is receivables against the Karma sales
subsidiaries which were sold to Austin. Austin denies responsibility for these
receivables. CHS- CPO is under the supervision of the bankruptcy court in
Switzerland. CHS, through KISA, has filed a criminal complaint against Hackbarth
and a civil complaint against Austin. In anticipation of possible legal
problems, Karma managers are creating "mirror" companies, presumably to be used
for transferring employees and assets from the legal entities in dispute (e.g.
Karma Portugal was newly formed and there are rumors that similar action was
taken in Switzerland).
With regard to the Karma situation, EuropaIT proposes the following
approach. 1) negotiate with Austin for the return of the Karma subsidiaries,
pursuing legal avenues as necessary; and 2) negotiate with the creditors of
CHS-CPO to resolve the debt problem, possibly through a restart of the
centralized component business mode pioneered successfully by Karma. Several
EuropaIT entities have significant component sales. This would only be feasible
with the support of the CHS-CPO creditors, since they are also the major
suppliers to the component industry. Resolution of the debt at CHS-CPO could
reduce the claims against CHS, since the major CHS-CPO creditors (Seagate,
Quantum, Maxtor, Iomega) also hold CHS guarantees for
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the CHS-CPO debt. Because of uncertainty of the outcome of the negotiations with
Austin and the CHS-CPO creditors, no Karma financial data is included in the
pro-forma statements of EuropaIT.
C. PC WAY
Although not included as an asset being purchased in the Letter
Agreement, EuropaIT has proposed including PC Way in this transaction as a
substitute asset for CHS' 40% interest in Poland which is included in the Letter
Agreement. As previously disclosed, CHS' 40% interest in Poland was sold in
March 2000 for $1.3 million, subsequent to the development of the Letter
Agreement. CHS has not yet agreed to this proposed substitution.
CHS has a shareholding in a joint venture to assemble private label
PC's called PCWay, operating out of a warehouse in Holland. The net book value
of this business is approximately $1.3 million. In 1999, the company had sales
of $16 million and generated a net loss of $200,000. CHS owns a 49% stake in
PCWay, with an option to purchase and additional 1% share. The joint venture
partner is Trigem, one of the world's leading manufacturers of PC's and
components. EuropaIT believes that this entity could offer potentially
attractive synergies with the PC Distribution business. The future of PC Way is
in some doubt, however, as the company operated in a small area of a warehouse
that was rented by CHS for its Karma components business. CHS is now in default
on the rent for the warehouse and PCWay may not be able or willing to transfer
its assembly fixtures to another location.
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D. OTHER SUBSIDIARIES
In addition to the Karma and Czech subsidiaries described above,
EuropaIT proposes to purchase the assets of other inactive companies, as listed
the Letter Agreement. In EuropaIT's opinion, these companies have no book value,
but may have some residual value as owners of useful trading names (e.g.
Metrologie Germany).
E. CONSIDERATION OFFERED BY EUROPAIT
In exchange for the assets described above, EuropaIT proposes to offer
securities with a face value of $67 million plus a 20% interest in EuropaIT's
common stock. Under the proposed transaction, creditors will be asked to choose
their share of either the equity or debt securities paid to CHS by the EuropaIT.
Holders may make more than one election by subdividing their claims. If either
the debt securities or the equity securities paid to CHS by the EuropaIT are
over-subscribed, the over-subscribed portion of the claims will be allocated
under-subscribed securities on a pro rata basis. The terms of the equity and
debt securities being offered are as follows (assumes $500 million in claims all
distributions adjust proportionately if claims are other than $500 million):
1. DEBT PACKAGE
30 Month Notes Distribution by CHS: $7.50 per $100 claim
Issue Size $22.5 million
Interest Rate: 10% p.a.,
Maturity: 30 months
Principal Repayments: 5 equal installments on each 6
month anniversary of issue date
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Registration Rights: Demand rights after 18 months
Callable: at any time at par plus accrued
interest
2. EQUITY PACKAGE
Redeemable Con- Distribution by CHS: $22.50 per $100 claim
veritable Preferred
Stock Issue Size: $45 million
Dividend Rate: 10% if paid in cash;
alternatively, at the option
of EuropaIT, payable in kind
at 12% for first two years,
13% in year 3, and 14% in year 4
Conversion Date: Fourth anniversary
Redeemable: Anytime at par plus accrued
interest
Registration Rights: Demand rights after 18 months
Conversion Rate: Each $1.0 million of preferred
is convertible into 2% of
EuropaIT Common Stock (i.e.
convertible to 90% of equity)
Common Stock 20% of the fully diluted equity
capital of Europa IT as of the
closing date
Further details on the securities, including the form of the securities
and the indenture for the notes are included as Exhibits "9" and "10",
respectively, attached to the Disclosure Statement.
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F. MARKET CONTEXT, EUROPAIT BUSINESS PLAN AND RISK FACTORS
1. INDUSTRY STRUCTURE
According to the International Data Corporation ("IDC Report") the
total expenditure on IT hardware and software in 1999 in Western Europe was $254
billion, up from $192 billion in 1996. This product flows through to end users
via two generic routes: direct from the manufacturer, and indirectly, through
various intermediaries, including distributors such as CHS. According to the IDC
data, the portion flowing through the direct route has declined from about 56%
in 1996 to 49% by 1999. IDC forecasts that the indirect sales will grow at 10.3%
per annum for the period 1998-2003, which is twice the rate of growth of the
direct sales approach, resulting in only 45% of sales through the direct route
by 2003.
The IDC report defines five types of intermediaries in the channel, who
collectively comprise the indirect route to market, as follows:
a. RETAILERS/MASS MARKET - $22.9 billion through this
channel in 1999 according to IDC. Retailers sell stand-alone systems to home and
small business users. They are forecast to grow at a rate of 17.9% per year
through 2003, the fastest growing of any channel partner.
b. PC DEALERS - These intermediaries are the traditional
distribution route for small to medium business end users, representing an
estimated $29.3 billion in IT equipment sales in 1999. PC dealers may or may not
have a 'shop front' and can often sell to home users. This channel is expected
to remain essentially flat over the next few years, with a growth rate of just
under 1% per year.
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c. VALUE-ADDED RESELLERS/SYSTEM INTEGRATORS - This channel
focuses on more complex installations, usually (by definition) adding their own
hardware, software, or consulting services to manufacturer's hardware package.
The total channel sales were estimated by IDC to be $38.7 billion in 1999, and
forecast to grow at an above-average rate of 11.7% per year through 2003.
d. MAJOR RESELLERS - This channel focuses on the needs of
large business and government customers, providing hardware, software,
installation, and project management services on a large scale. This channel
represents $39 billion in sales and is expected to grow at 10.9% per year
through 2003.
e. DISTRIBUTION - Distributors are by far the largest
intermediary in the IT channel, with total sales of $69 billion in 1999
according to IDC. The role of the distributor is to essentially sell to the
other intermediaries (an estimated 65,000 - 100,000 in total) and simplify the
interface to the market for the manufacturer. The trend has been for
manufacturers to reduce their direct relationships with intermediaries, focusing
on the larger relationships. This has tended to favor distributors, who are
forecast to grow their sales at a rate of 14.7% per year according to IDC,
nearly double the rate of the overall growth for total IT expenditure in Western
Europe.
In early 1999, CHS was on track to be the market share leader within
the IT equipment distribution industry in Western Europe, with an estimated
market share of 10% followed by Ingram Micro at 8% and Tech Data (Computer 2000)
at about 6%. With the bankruptcies in Germany, Austria, Spain, Belgium and the
UK, the sale of Poland, Finland, DNS and
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Switzerland, the ownership disputes of Karma, TH Systems (Czech Republic) and
finally the loss of the companies with unpaid earn-outs (Arena Turkey, Armada
Turkey, Raphael Informatica Italy, Memory Set Spain, ARC Spain, BGS Slovakia,
CAT Holdings Russia), CHS's position has been reduced to number four in the
market, with a share of 2.8% (still one of the largest distributors in Europe).
The third-ranking distributor is Scribona (Scandinavia focus) with half the
sales of the current CHS subsidiaries in Europe. In this market the top five
entities only account for 20-25% of the total, which suggests the market is
still quite fragmented.
In summary, the IT equipment distribution market appears to be large
and growing at an above average rate and relatively fragmented.
2. FUTURE ROLE OF DISTRIBUTION
The declining importance of direct selling seems at odds with today's
conventional wisdom to "go direct". Direct selling can assume several less
efficient and more traditional forms than e-commerce. In classical marketing
analysis, manufacturers sell directly to customers in the early stages of a
product's life cycle when a high-margin, technical sale is required (usually
with an expensive outside sales force) to move the product to a small "early
adopter" group of customers. As the product matures, margins decline and the
product becomes more standardized and widely accepted. The need for a direct
sales force diminishes. Consequently, more mature products (like PC's) are sold
indirectly, to share selling and logistics costs with other manufacturers
through an intermediary such as a wholesaler. This is at the heart of a
wholesaler's economic role. As a bundling agent offering one stop shopping to a
broad range of customers, wholesalers reduce the overall channel cost because
they are in a position to share
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distribution costs across many manufacturers which brings economics that no one
manufacturer is able to match. Wholesalers also significantly reduce the number
of transactions required to move product to the customer. For example, 10
manufacturers shipping once a month to 100,000 customers results in 1,000,000
transactions per month (customer placing an order, manufacturer checking credit,
warehouse picking, packing and delivery, issuance of an invoice, and payment by
the customer). With a distributor as an intermediary, the number of transactions
drops geometrically since each manufacturer ships once to the wholesaler (10
transactions) then the wholesaler ships once to each customer (100,000
transactions) for a total of 110,000 transactions, an order of magnitude less
than the direct method. It is this economic reality that pays for the existence
of wholesalers in even highly commoditized industries. Wholesalers are the least
expensive avenue to the customer.
There are two factors that could erode or eliminate the role of the
wholesaler: 1) consolidation of either the manufacturers or the customers; and
2) reduction in transaction costs such that the order-of-magnitude difference in
the number of transactions still does not pay for the existence of the
wholesaler, i.e. a frictionless economy. There are several examples of
consolidation forcing the disappearance of wholesalers, particularly in relation
to the US retail industry. Toy wholesalers have been almost eliminated in the US
because of the emergence of retail category-killers such as Toys-R-Us, that have
eliminated the wholesaler's traditional customer: the small toy shop. Similar
trends have forced dramatic consolidation of office supply wholesalers due to
competition from alternative channels such as Office Depot reaching out to small
business users. The consolidation of the US grocery retail industry will
continue to put
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pressure on food wholesalers, since the larger retail chains can effectively
self distribute. At this stage, EuropaIT does not see evidence of consolidation
among either the customer base (resellers) or the manufacturers, either one of
which could be detrimental to the viability of the wholesaler.
In the 1980's one of the popular business mantras was
"'re-engineering", and a favorite target of this exercise was to reduce or
eliminate transactions such as placing an order, which consultants claimed could
cost between $50 and $200 per transaction. Many of these re- engineering
exercises resulted in "out-sourcing" often to distributors, particularly for the
purchase of material that was not central to the business. With the advent of
e-commerce in the new century, the traditional view of transaction cost is being
challenged, and in some cases reshaping the industrial landscape. The rationale
is if transaction can be automated by the e- commerce engine, the economics of
direct sales is more attractive. Certain aspects of the order- delivery-payment
cycle will undoubtedly be dramatically improved with an e-commerce approach,
e.g. information gathering by the customer on price and availability, the actual
order placement and probably credit checking and payment. The physical aspects
of the cycle are not impacted, e.g. pick, pack, ship, handling of returns and
customer service inquiries. The e- commerce technology available to the
manufacturers is also available to distributors who are then in a position to
reduce their own transaction cost. Whether applied by the distributor, the
manufacturer, or both, e-commerce will reduce transaction cost somewhat, which
will impact margins. If distributors keep pace with e-commerce developments they
should be in a position to
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match the reduction in margins with a corresponding reduction in cost
attributable to this phenomenon.
While there is a great deal of pressure today from Wall Street to "go
direct" (like Dell), the lowest cost method for getting product to the customer
will be the method that survives. EuropaIT believes that distributors have a
strong opportunity to compete because of a distributor's natural economy of
scale advantage over manufacturers acting on their own. In the European market,
a distributor with a 20% market share ($14 billion in sales) surpasses the large
manufacturer in Europe in terms of economies of scale and these economies are
still important to achieve a low cost position. The need to achieve lower and
lower cost will continue to drive consolidation in the IT equipment distribution
industry and provide a sustainable role for distribution.
In summary despite the challenges faced by distributors in this
industry, independent industry experts (IDC) have concluded that distribution
will benefit from the changes in the industry, with sales through distributors
rising from 29% to 24% by 2003. See EuropaIT's Business Plan attached as EXHIBIT
"11" to the Disclosure Statement.
3. THE TURNAROUND PLAN
After executing the proposed transaction, the short-term priority for
EuropaIT is to focus on correcting the disastrous consequences of the credit
crisis. EuropaIT's approach to this issue will be to develop specific
initiatives for each element of the ROCE tree, i.e. the components of Return on
Capital Employed:
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a. REVENUE - The prime method for restarting the revenue
flow is to re- establish normal credit lines as quickly as possible. Such an
action will reassure customers, employees and local vendor sales managers that
"EuropaIT is back in business". EuropaIT has been in close communication with
key suppliers for months regarding this issue. EuropaIT has been given
reassurances, mostly verbal and some in writing, that the moment the
subsidiaries are no longer owned by CHS, normal credit will return. EuropaIT has
specifically structured this transaction to assure the return of credit lines.
Furthermore, EuropaIT believes that European legislation on fair trading
requires the provision of a consistent credit lien policy to all authorized
distributors. The financial condition of the subsidiaries that are included in
this transaction is generally sound and capable of attracting credit. The
financial pressures on the subsidiaries are a result of the unresolved debt
problems of the parent company, CHS which, in turn, affects the credit
worthiness of the operating subsidiaries. Once the Plan is confirmed and
EuropaIT owns the assets, EuropaIT expects a substantial improvement in credit.
EuropaIT has been conservative in its forecast of how quickly credit lines will
come back. The business plan calls a gradual increase in credit lines from the
current level of 21 days payable to 30 days in the third quarter of 2000 and 35
days in fourth quarter of 2000. Traditionally, the fourth quarter represents
about a one-third of total sales for the year and manufacturers tend to have
more credit flexibility at this time of the year to allow the ramp-up in sales.
Beyond 2000, EuropaIT expects a slower return to normal credit, achieving 40
days payable by the end of 2001.
b. MARGIN RATE - In addition to the crucial issue of credit
lines, EuropaIT believes that better management of price and near-price factors
(order minimums, delivery
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minimums, cash discounts, etc.) will lead to improved revenue and margins.
Currently, EuropaIT believes that there is a "cost-plus" mentality in the
price-setting approach which can be modified by sales training, incentives based
on margin improvement, smarter systems interfaces and tighter customer
segmentation.
Another short-term lever on margin rate is the ability to shift the
product mix towards more profitable private label products. These products
typically require cash up-front, but often turn margins that are double the
margin on branded product. More flexibility in working capital will enable a
return to this business.
EuropaIT also believes that the company will soon be in a position to
participate in special offers by manufacturers (e.g. new product launch, end of
quarter deals) that will provide further margin rate opportunities in the short
term.
c. OPERATING EXPENSE - An important component of EuropaIT's
near-term focus will be to continue efforts to reduce operating expense,
primarily through the consolidation of facilities and back office operations.
The French companies (which comprise 60% of the total) are now in consultation
with employee representatives to implement a plan to create a single back office
and a logistics platform for the French businesses. Currently, the combined
French businesses operate two administrative facilities and two warehouses with
two separate management teams and system platforms. All of these activities
occur within the Paris region. Under the plan, EuropaIT will move to a single
back office and warehouse by the end of 2000. The French management team
believes that operating expense can be driven below 4% of sales. In Scandinavia,
management is beginning to explore the possibility of consolidating some back
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office and logistic activities on a region-wide basis. Recent developments in
infrastructure (road links to Denmark, cross-agreements with the various Postal
authorities) may facilitate this transition.
In addition to the efforts underway to consolidate back office
activities, EuropaIT has continued the initiative begun by CHS to reduce
European headquarters cost. In particular, European product management,
marketing, and finance functions have been reduced significantly. Most recently,
EuropaIT has eliminated a layer of management (regions) which operated as
"span-breakers" between the European headquarters and the subsidiary P&L's. The
subsidiaries in Western Europe now report directly to the center, instead of
through a European sub-regional structure.
d. CAPITAL - The increase in credit lines to normal levels
will reduce working capital requirements significantly. EuropaIT's principal
challenge is to ensure that any capital increases are closely monitored.
EuropaIT expects to increase inventory in particular, but does not believe that
it is necessary to return to CHS' 1998 levels to ensure competitive levels of
customer service. EuropaIT does not see any significant fixed capital
requirements in the short term.
EuropaIT also sees near term opportunity to improve the company's
access to secured credit facilities. Today, the European subsidiaries have
access to over $100 million in secured credit lines, but because of CHS'
financial problems, the lenders have imposed restrictions on these lines,
including extra fees, higher interest and more importantly, lower advance rates
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against the security (usually accounts receivable). Once the proposed
transaction is complete, secured credit lines will improve.
In summary, the objective of the turnaround plan is to return to CHS'
1998 levels of profitability and revenue generation (with a more efficient usage
of working capital). EuropaIT believes these targets are realistic in that these
same entities were able to demonstrate this level of performance in the recent
past, especially since the levels of profitability demonstrated by CHS in 1998
were still below those shown by competitors such as Ingram Micro and Tech Data
during the same period. This provides further comfort that the short-term
objectives are reasonable and achievable.
e. STRATEGIC DIRECTION
While the short-term focus is necessarily on an operational turnaround,
EuropaIT is developing the key principles that will define its strategy and
sustainable competitive advantage. As a consequence, EuropaIT's plan is to move
the company in the following directions simultaneous to the turnaround
activities described above:
i. EXPLOIT E-COMMERCE - EuropaIT believes that e-commerce
technologies represent an opportunity to reduce transaction cost for certain
elements of the order processing cycle. Already, the European subsidiaries have
developed extensive experience with these technologies. For example in Sweden,
over 30% of order lines received from customers are via the web. In France, the
integration plan mentioned above, includes the development of a stand-alone pure
e-commerce entity to focus on developing the "next generation" business process
for IT equipment distribution.
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EuropaIT plans to take further, more radical steps to develop
green-field pure e- commerce distribution operations in those geographies where
CHS has no presence today (e.g. Germany). In many of these geographies, EuropaIT
has, or can get access to, the customer databases of former CHS companies
operating in that country market. Based on rough, back-of the-envelope
calculations, EuropaIT believes that a pure e-commerce distribution business can
operate at the 2-3% cost level; less than half the cost level of a traditional
distribution business.
ii. INCREASE VALUE-ADD - An important component of
EuropaIT's strategic direction will be to seek ways to sensibly add greater
value in the supply chain. In particular, EuropaIT will be looking for ways to
build stronger, multi-faceted relationships with its customers (the resellers)
and, indirectly, the end users. As a consequence, EuropaIT hopes to build higher
and more sustainable margins and provide better value to the vendors. EuropaIT
sees four methods for implementing this initiative:
iii. LOGISTICS SERVICES - EuropaIT is going to place more
focus on providing more sophisticated and useful logistics services to its
customers, possibly including direct deliver to end users, emergency service, 24
by 7 availability, special labeling and packaging capabilities. EuropaIT has
also begun discussions with third party logistics companies for possible joint
venture activities. Providing logistics services to its vendors, particularly
channel assembly and configuration will also be a feature of its value add
offering. In the Scandinavian region, EuropaIT is already offering logistics
services to third parties and is considering whether to set up the logistics
function as a stand-alone profit center. The U.S. mail-
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order fulfillment houses have successfully developed logistics services for
web-based companies. This might also be an opportunity for EuropaIT in Europe.
iv. MARKETING SERVICES - While distribution has
traditionally had a logistics role in the supply chain, the most successful
distributors have also developed as effective marketers. EuropaIT intends to
develop a sharper and more professional marketing focus through better
segmentation of the customer base, alignment of its business offering to focus
on priority segments, and development of products and programs to satisfy the
specific needs of those segments. EuropaIT will encourage the development of
customer-focused sales and marketing teams (as opposed to product-focused
teams). This organization is already being implemented in France as part of the
back-office integration project, now under discussion with employee committees.
EuropaIT also believes that product integration (from multiple manufacturers)
may offer marketing opportunities that are not available to any one
manufacturer.
v. NEW GEOGRAPHIES - EuropaIT has developed in depth
experience in emerging markets, particularly in the former Soviet Union and
Eastern Europe. These markets are difficult for manufacturers to penetrate and
competition is much reduced compared to the developed markets of Western Europe,
resulting in higher margins, generally. As part of its strategy, EuropaIT
expects to apply this expertise to low risk entry into new merging markets (e.g.
Ukraine), thereby offering a distinctive distribution service to vendors.
vi. CLOSER TO THE CUSTOMER - EuropaIT will encourage its
operations to move up the value chain towards the end user. EuropaIT is already
in discussions with resellers on co-operative ventures. EuropaIT would not rule
out the possibility of acquiring specialized
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resellers, if this were compatible with its marketing strategy. So-called
"hybrid" distributors, such as Computacenter and SCH in the UK have managed to
build successful and well-regarded business models through the combination of
distribution and reseller functions. EuropaIT will be alert and receptive to
these opportunities if this can be done without damaging relationships with its
existing base of reseller customers.
f. ACHIEVE SCALE - A fundamental component to EuropaIT's strategy is to
continue the drive to achieve scale. The distribution of IT equipment is still
quite fragmented in the European market, which presents excellent opportunities
for consolidation. Driving for scale is essential to develop a sustainable
competitive advantage, but the scale can be developed at several levels, each of
which has its cost benefits:
i. ORDER SCALE - Much of the cost of distribution is driven
by order size. Within reasonable limits, the cost to process a small order is
comparable to the cost of processing a large order. These costs extend through
to transportation, since drop size is a key component of transportation unit
costs. Increasing order size through greater product breadth, order minimums and
enhanced customer relationships will be high on EuropaIT's list of priorities.
ii. NATIONAL SCALE - Scale within a country operation can be
beneficial to the overall cost and effectiveness of a distribution operation.
Most products in the IT industry in Europe are still country-specific, which
limits the benefits of centralized European stocking. Today, vendors and
distributors are very much organized on a country by country basis. Scale within
a country can reduce the per unit cost of country level headquarters, warehouse
cost and
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marketing expense. Country level scale also leads to better utilization of
inventory since larger volumes tend to reduce the level of safety stock required
to meet a given level of customer service. The French subsidiaries enjoy a
significant scale advantage in France, where EuropaIT will be twice the size of
the nearest competitor. Scale on a European level does not necessarily translate
into benefit at the national level. A distributor who has mediocre operations in
all European countries can appear to have more scale, but having scale in
Germany does not help to reduce cost of operations in France. It will be
EuropaIT's intention to develop national scale in key markets, where EuropaIT
will seek to have twice the volume of its nearest competitor.
iii. EUROPEAN SCALE - While European scale does not
necessarily help with in-country operations, it is still strategically important
for other reasons. Vendors, in particular, are seeking to reduce the complexity
of their relationships with channel partners, which drives them towards large
multi-country distributors, even if this is considered sub- optimal for some
country markets. As the No. 4 distributor in Europe, it will be EuropaIT's
intention is to stay at the forefront of vendor programs and initiatives, to
participate in their strategic processes. To make progress in this area,
EuropaIT believes it will be necessary to acquire or merge with high quality
local distributors in key country markets, such as UK, Italy, Finland, and
Spain. EuropaIT's intention is to enter into a joint venture in Germany. In
addition to the strategic vendor advantages of scale, pan-European scale can
lead to more effective operations for universal products, i.e., products that
are not country-specific, such as monitors, motherboards, and hard drives.
EuropaIT's believes there will be an increasing trend towards universal
products, or assemble-to-order products with universal components. In addition
to the
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benefits of vendor strategy and universal product scale, European size gives
advantages in several cost areas such as IT systems and group headquarters
expense, that are, or can be, shared across country operations.
4. FINANCIAL PROJECTIONS
Taking into account the actions described above for the short-term
turnaround and the longer term strategy, EuropaIT developed an estimate for the
financial performance of the new company for the period 2000-2004. This is
presented in Exhibit 11 attached to the Disclosure Statement. EuropaIT has also
included in the exhibit unaudited internal accounts for 1998, and Q1 2000 on an
apples to apples basis to facilitate comparison. Note also, that EuropaIT has an
"adjusted 1998" to give a pro-forma full year effect for the acquisition of
Metrologie in mid- 1998.
The financial projections are presented in three pieces: 1) an income
statement; 2) a statement of working capital and capital structure; and 3) a
cash flow statement.
a. INCOME STATEMENT - with the return of credit lines,
EuropaIT expects the acquired businesses to rapidly recover revenue. The same
forces at work that caused the vicious cycle of credit reduction and revenue
loss can be reversed and work in the opposite direction. Better credit lines
will enable better inventories, and vendor marketing and sales efforts will once
again be applied. The fourth quarter is crucial in any year, but particularly
the first year of operation for the new company. Typically 35% of the year is
sold in the fourth quarter. Overall for 2000, Europa expects to reach revenues
that are slightly above levels experienced in 1999.
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Beyond 2000, the revenues are projected to grow at 10% per year, less than the
forecasted market growth rate of 14.7% per year.
In light of the return in credit and the turnaround actions on pricing
and mix, EuropaIT expects the margin rate to improve slowly from Q1 2000 levels.
The first quarter is traditionally a low margin period whereas the fourth
quarter has higher than average margins. Beyond 2000, EuropaIT is forecasting a
slow in increase in margin rate through initiative to add value to the supply
chain, as described above. EuropaIT does not, however, expect margin rate to
reach the levels experienced in 1998 due to the general downward pressure on
industry margins as a result of e-commerce and other forces at work.
The principal task of management is to get the operating expense under
control. Several important initiatives are already underway to effect the
consolidation of facilities, as outlined above. Most of the cost for
implementing this consolidation had been reserved in the 1999 income statements.
Longer term, with aggressive implementation of e-commerce and other cost savings
approaches, EuropaIT expects to drive the cost towards the 4% mark. This level
is already being achieved by some of its more efficient operations.
The total operation will lose money in 2000 but develop the necessary
momentum to move into profitability in the following year. By 2004 EuropaIT
expects, conservatively, to achieve between 0.5% and 1% net profit. This is
still below profit levels reported by publicly quoted competitors, which gives
reason to believe that these targets are realistically achievable.
b. CAPITAL - Working capital is by far the most important
financial asset in the distribution business. Management of the working capital
flows is crucial to financial
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stability, particularly as these flows are far larger than the operating expense
of the business. EuropaIT believes that the critical element to the turnaround
is the return of normal trade credit. The business plan projects a gradual
return of credit from the current level of about 20 days to 25 days in Q2 and 35
days for the big fourth quarter sales push. While EuropaIT works with its key
vendors to increase the trade credit levels, it needs to exercise restraint on
inventory increases to keep cash flows under control. EuropaIT is confident that
the business can operate longer-term at the 25 day level for inventory,
particularly in light of its plans to consolidate warehouses. At this stage
EuropaIT does not expect any significant improvement in receivables management
from current levels of about 50 days.
Secured credit lines will fluctuate with receivables levels at an
advance rate of approximately 65%. As the financial situation begins to show
signs of a turnaround, EuropaIT believes it will be possible to increase the
advance rate to 70% of receivables in 2001 and beyond. The business plan also
takes into account the need to repay Metrologie public bonds, due in early
August 2000. Management has begun a procedure to renegotiate the maturity of the
bonds to allow a bit more breathing room in the early days of the new company.
The acquisition debt of $22.5 million is included in the financial
projections, with semi- annual repayments of principal, as specified in the
description of the notes. With the consolidation into EuropaIT of the
acquisition debt, the book value of the equity declines to approximately $54
million (including preferred equity). The debt to equity ratio peaks at 4 to 1
by late 2000 and declines gradually thereafter.
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c. CASH FLOW - The cash flow statement is a consequence of
the assumptions described above for the income statement and the working capital
plan. The statement shows a positive cash flow, after financing from secured
credit lines, from the fourth quarter forward. We do not expect any significant
investment in fixed capital beyond the depreciation allowance.
The financial projections described above do not take into account any
acquisitions, as was mentioned in the strategy description earlier. EuropaIT
believes that it will be possible to attract a new equity investor who will
provide the funds to expand the business and help meet the strategic targets
described earlier. First, in EuropaIT's view, it will be necessary to effect the
transaction contemplated and then demonstrate reasonable evidence that a
turnaround in operations is underway. At that stage a new investor could view
EuropaIT as an attractive "buy and build" platform, given the favorable industry
characteristics of size, growth, and fragmentation. EuropaIT has been in
discussion with several private equity firms on these matters and expects those
discussions to continue, with the interested parties monitoring the progress of
the recovery.
5. RISK FACTORS - The creditors of CHS are being asked to accept the
securities of EuropaIT in exchange for their claims. As with any investment of
this sort, there are numerous risk factors:
a. LEVERAGE - The opening balance sheet of EuropaIT
indicates a debt-to- equity ratio of approximately three to one. This is more
highly leveraged than larger competitors such as Ingram Micro or Tech Data, but
it is within the range of financial leverage observed
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within the industry, according to vendors. Financial leverage increases the risk
of default and makes the enterprise more susceptible to interest rate increases.
b. LOSS OF FRANCHISES - As described earlier, distributors
rely on agreements with manufacturers to get access to product and discounts
allowed to authorized distributors. These contracts can be terminated at
relatively short notice (30-90 days) and, due to the credit crisis of the past
several months, the European subsidiaries have lost several franchises,
including 3Com, HP PC's in Sweden, HP in Croatia, and Compaq in Russia.
c. LOSS OF KEY PERSONNEL - The European companies rely on
the skills of its senior managers. The loss of any senior employee does create a
risk for the entity. This would be particularly true for the loss of any senior
EuropaIT executives or the senior managers of the French subsidiaries.
d. CHANGE IN DISTRIBUTION METHOD/INDUSTRY STRUCTURE -
Several vendors have publicly announced changes in their channel strategy that
could worsen the business climate for some distributors. Such changes include
the reduction in number of distributors, the shift to a fee-based compensation
model, and efforts to develop a direct-to-end user approach.
e. EXCHANGE RATE - The vast majority of EuropaIT's
activities are conducted in Western Europe, whereas the securities offered by
EuropaIT are dollar-based. This could represent an exchange risk.
f. FRENCH BONDS AND BETTER FORTUNE CLAUSE - One of the
French subsidiaries, CHS France, has long-term bonds outstanding in the public
market, totaling $8 million approximately. These bonds were issued by Metrologie
International prior to the acquisition by
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CHS. The bonds mature on August 4, 2000. The company is attempting to
renegotiate the maturity of these bonds. Without a negotiated solution, the
maturity of the bonds presents a difficult financial challenge for the company.
In addition, as a result of a previous restructuring of the Metrologie business,
certain banks in France are beneficiaries of a "better fortune" clause, whereby
certain repayments of previously forgiven loans are required if Metrologie net
income exceeds specified levels. The company is renegotiating these
arrangements.
g. RE-ESTABLISHMENT OF CREDIT LINES - EuropaIT has relied on
verbal and some written assurances that credit lines will be re-established once
the transfer of assets to EuropaIT is complete. However, these assurances have
not been specific in the amount of credit to be granted. Over the next several
weeks, EuropaIT will be seeking more specific written assurances on this point.
The company's business plan relies on the re-establishment of at least some
trade credit.
h. TAX MATTERS AND DISPUTES - Several of the entities included
in the transaction are embroiled in tax disputes in their local jurisdictions.
Management has set aside provisions for these disputes in most cases (with the
exception of Portugal, where a $3 million provision is likely to be posted in
the near future). In making these provisions, there is a risk that management
may have underestimated the true impact of these tax matters.
i. NO MARKET FOR SECURITIES - There is currently no market for
the securities of EuropaIT and there is unlikely to be one in the near future.
Holders of the securities do have demand rights for registration of the
securities after 18 months.
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j. BETTER PLAN ASSUMPTIONS - EuropaIT has made several
assumptions about the future in developing its five year plan. These assumptions
were made in good faith, based on the best available data and management
judgment. There is a risk, of course, that these assumptions turn out to be
incorrect.
G. THE LIQUIDATING TRUST
On the Effective Date of the Plan, the Excluded Assets (those assets
not being purchased by EuropaIT or other successful bidder) will transferred to
a Liquidating Trust. The Liquidating Trust Agreement is attached as Exhibit "B"
to the Plan. The Liquidating Trustee will be Burton Emmer.
SECTION VI
EXECUTORY CONTRACTS AND LEASES
A. ASSUMED EXECUTORY CONTRACTS AND UNEXPIRED LEASES.
Executory contracts and unexpired leases not assumed or rejected
pursuant to the Plan or by Order of the Court shall be deemed to have been
rejected by the Debtor upon the Effective Date. The executory contracts and
unexpired leases which are to be assumed by CHS are reflected in Exhibit "D" of
the Plan. CHS reserves the right to amend this exhibit prior to the Confirmation
Date.
B. REJECTION CLAIMS.
The Plan provides that each person who is a party to the executory
contract or unexpired lease whose executory contract or unexpired lease is
rejected shall be entitled to file a proof of claim no later than thirty (30)
days after the entry of the Order authorizing such rejection if
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rejection is made through the terms of the Plan and not by specific motion, then
thirty (30) days after the entry of the Confirmation Order. If a proof of Claim
is not filed within the thirty (30) day period, the right to file a proof of
Claim is waived unless otherwise ordered by the Court.
C. TREATMENT OF REJECTION CLAIMS
Unless otherwise ordered by the Court, all Allowed Claims arising from
the rejection of executory contracts or unexpired leases shall be treated as
Class 3 General Unsecured Claims.
SECTION VII
VOIDABLE TRANSFERS AND OTHER CAUSES OF ACTION
The Debtor will retain and transfer to the Liquidating Trust under the
Plan all claims and causes of actions to recover transfers of Property of the
Debtor under 11 U.S.C. ss.ss.548, 542, 543, 545, 549, 547, 553, 544 and 550,
and, if necessary, to recover damages and obtain equitable relief under federal
and state law against third parties. See Exhibit "C" attached to the Plan for a
list of all retained causes of actions. CHS is presently investigating whether
any claims exist against Insiders and/or Interest holders of the Debtor who may
have received fraudulent or preferential transfer(s) of the Debtor's Property
prior to the Petition Date and claims against other Insiders of the Debtor for
having authorized or directed payments to these parties and in this respect,
reserve the right to amend the Plan to include such causes of action in the Plan
once the investigation is concluded.
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Case No. 00-12731-BKC-RAM
SECTION VIII
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
AND
SECURITIES ISSUES
A. TAX ISSUES
The following discussion briefly summarizes some of the more
significant federal income tax consequences of the Plan to the Debtor, the
Creditors and the Interest holders based upon the Internal Revenue Code of 1986,
as amended (the "Tax Code"), the Treasury regulations promulgated thereunder,
the judicial authorities and current administrative rulings. In addition,
certain aspects of the following discussion are based on proposed Treasury
regulations. The tax consequences of certain aspects of the Plan are uncertain
due to the lack of applicable legal authority and may be subject to
administrative or judicial interpretations that differ from the discussion
below. The Debtor has not requested a ruling from the Internal Revenue Service
(the "IRS"), nor will any opinion of counsel be obtained by the Debtor, with
respect to the federal income tax consequences of the Plan. There can be no
assurance that the IRS will not challenge any or all of the tax consequences of
the Plan, or that if such challenge is asserted, would not be sustained.
Further, the federal income tax consequences to the Debtor, the Creditors and
the interest holders may be affected by matters not discussed below. The
following discussion does not address state, local or foreign tax considerations
that may be applicable to the Debtor, the Creditors or the Interest holders, and
the discussion does not address the tax consequences of the Plan to certain
types of creditors and stockholders (including foreign persons, life insurance
companies and tax-exempt organizations).
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THE DEBTOR'S MANAGEMENT AND THEIR RESPECTIVE COUNSEL AND FINANCIAL
ADVISORS ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR
TAX CONSEQUENCES OF CONFIRMATION AND CONSUMMATION OF THE PLAN, WITH
RESPECT TO THE DEBTOR, CREDITORS OR INTEREST HOLDERS, NOR ARE THEY
RENDERING ANY FORM OF LEGAL OPINION OR TAX ADVICE ON SUCH TAX
CONSEQUENCES. THE TAX LAWS APPLICABLE TO CORPORATIONS IN BANKRUPTCY ARE
EXTREMELY COMPLEX. CREDITORS AND INTEREST HOLDERS ARE STRONGLY URGED TO
CONSULT THEIR TAX ADVISORS REGARDING TAX CONSEQUENCES OF THE PLAN,
INCLUDING FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES.
The Debtor will be supplementing or amending the Disclosure Statement
with a summary of the possible tax consequences of the Plan.
B. SECURITIES ISSUES
The Debtor does not anticipate the payment of dividends on the stock to
be issued pursuant to the Plan in the foreseeable future. No trading market
currently exists for the stock. The Debtor will supplement the Disclosure
Statement with additional information regarding securities when it becomes
available.
SECTION IX
ALTERNATIVES TO THE PLAN
One alternative to CHS' Plan is a bankruptcy liquidation of its assets.
CHS believes that in a forced liquidation of its assets, Creditors would receive
little or no distribution. In a chapter 7 liquidation no monies would remain for
the distribution to Unsecured Creditors after payment of Administrative
expenses. To support this conclusion, attached as EXHIBIT "13" is a Liquidation
Analysis of the European Assets. At this time, the Debtor is uncertain what
value, if
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any, may be attributed to the Excluded Assets, but will supplement the
Disclosure Statement with this information when it is determined.
SECTION X
CONCLUSION
[THIS SECTION INTENTIONALLY LEFT BLANK]
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Case No. 00-12731-BKC-RAM
CHS believes that the Plan provides Creditors with the best possible
Distribution given the circumstances.
Respectfully submitted,
Tew Cardenas Rebak Kellogg
Lehman DeMaria & Tague L.L.P.
Attorneys for the Debtor
201 South Biscayne Boulevard
Miami Center, Suite 2600
Miami, FL 33131-4336
Tel: (305) 536-1112
Fax: (305) 536-1116
By: ___________________________________
THOMAS R. LEHMAN, P.A.
Fla. Bar. No. 260746
LYNN MAYNARD GOLLIN, ESQ.
Fla. Bar. No. 621668
CHS Electronics, Inc., the Debtor
By: ___________________________________
BURTON EMMER
Acting Chief Financial Officer
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